<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
--------------------------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
----------- -------------------------------------
Commission File Number: 0-15568
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MICHAEL FOODS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 41-1579532
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Suite 324, Park National Bank Building
5353 Wayzata Boulevard
Minneapolis, MN 55416
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
(612) 546-1500
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
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
The number of shares outstanding of the registrant's Common Stock, $.01 par
value, as of August 13, 1996 was 19,395,731 shares.
1
<PAGE>
PART I - FINANCIAL INFORMATION
MICHAEL FOODS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
================================================================================
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1996 1995
- ------ ------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 650,000 $ 1,921,000
Accounts receivable, less allowances 47,181,000 40,583,000
Inventories 60,835,000 58,845,000
Prepaid expenses and other 2,002,000 1,622,000
------------ ------------
Total current assets 110,668,000 102,971,000
PROPERTY PLANT AND EQUIPMENT-AT COST
Land 4,114,000 4,117,000
Buildings and improvements 97,109,000 95,109,000
Machinery and equipment 213,763,000 203,557,000
------------ ------------
314,986,000 302,783,000
Less accumulated depreciation 129,427,000 118,642,000
------------ ------------
185,559,000 184,141,000
OTHER ASSETS
Goodwill, net 56,977,000 57,829,000
Net assets held for sale 3,267,000 4,431,000
Other 9,650,000 9,855,000
------------ ------------
69,894,000 72,115,000
------------ ------------
$366,121,000 $359,227,000
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 40,200,000 $ --
Current maturities of long-term debt 12,722,000 11,731,000
Accounts payable 35,918,000 27,362,000
Accrued compensation 4,236,000 6,543,000
Accrued insurance 6,899,000 6,945,000
Other accrued expenses 8,620,000 8,295,000
------------ ------------
Total current liabilities 108,595,000 60,876,000
LONG-TERM DEBT, less current maturities 43,000,000 89,690,000
DEFERRED INCOME TAXES 29,572,000 28,566,000
CONTINGENCIES -- --
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 19,395,731 at June 30, 1996
and 19,332,001 at December 31, 1995 194,000 193,000
Additional paid-in capital 112,613,000 112,374,000
Retained earnings 72,147,000 67,528,000
------------ ------------
184,954,000 180,095,000
------------ ------------
$366,121,000 $359,227,000
------------ ------------
------------ ------------
</TABLE>
================================================================================
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
MICHAEL FOODS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
Three Months Ended June 30, (Unaudited)
================================================================================
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Net sales $151,678,000 $130,872,000
Cost of sales 133,480,000 110,921,000
------------ ------------
Gross profit 18,198,000 19,951,000
Selling, general and administrative expenses 10,917,000 11,122,000
------------ ------------
Operating profit 7,281,000 8,829,000
Other (income) expense
Interest expense 2,006,000 2,050,000
Interest capitalized (166,000) (32,000)
------------ ------------
1,840,000 2,018,000
Interest income (16,000) (52,000)
------------ ------------
1,824,000 1,966,000
------------ ------------
Earnings before income taxes 5,457,000 6,863,000
Income tax expense 2,180,000 2,640,000
------------ ------------
NET EARNINGS $ 3,277,000 $ 4,223,000
------------ ------------
------------ ------------
NET EARNINGS PER SHARE $ .17 $ .22
------------ ------------
------------ ------------
DIVIDENDS PER SHARE $ .05 $ .05
------------ ------------
------------ ------------
Weighted average shares outstanding 19,389,000 19,332,000
------------ ------------
------------ ------------
</TABLE>
================================================================================
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
MICHAEL FOODS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
Six Months Ended June 30, (Unaudited)
================================================================================
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Net sales $295,550,000 $257,564,000
Cost of sales 258,439,000 217,670,000
------------ ------------
Gross profit 37,111,000 39,894,000
Selling, general and administrative expenses 22,442,000 22,925,000
------------ ------------
Operating profit 14,669,000 16,969,000
Other (income) expense
Interest expense 4,034,000 4,235,000
Interest capitalized (262,000) (52,000)
------------ ------------
3,772,000 4,183,000
Interest income (28,000) (79,000)
------------ ------------
3,744,000 4,104,000
------------ ------------
Earnings before income taxes 10,925,000 12,865,000
Income tax expense 4,370,000 4,950,000
------------ ------------
NET EARNINGS $ 6,555,000 $ 7,915,000
------------ ------------
------------ ------------
NET EARNINGS PER SHARE $ .34 $ .41
------------ ------------
------------ ------------
DIVIDENDS PER SHARE $ .10 $ .10
------------ ------------
------------ ------------
Weighted average shares outstanding 19,371,000 19,323,000
------------ ------------
------------ ------------
</TABLE>
================================================================================
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
MICHAEL FOODS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, (Unaudited)
================================================================================
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Net cash provided by operating activities $ 18,814,000 $ 27,580,000
Cash flows from investing activities:
Capital expenditures (12,458,000) (10,671,000)
Other assets 95,000 (1,535,000)
------------ ------------
Net cash used in investing activities (12,363,000) (12,206,000)
Cash flows from financing activities:
Purchase of shares (500,000) --
Proceeds from issuance of common stock 213,000 --
Payments on notes payable and long-term debt (62,699,000) (40,732,000)
Proceeds from notes payable and long-term debt 57,200,000 28,103,000
Cash dividends (1,936,000) (1,932,000)
------------ ------------
Net cash used in financing activities (7,722,000) (14,561,000)
------------ ------------
Net increase (decrease) in cash
and cash equivalents (1,271,000) 813,000
Cash and cash equivalents at beginning of year 1,921,000 1,641,000
------------ ------------
Cash and cash equivalents at end of period $ 650,000 $ 2,454,000
------------ ------------
------------ ------------
</TABLE>
================================================================================
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
MICHAEL FOODS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
June 30, 1996 and 1995
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with Regulation S-X pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although management believes that the
disclosures are adequate to make the information presented not misleading.
The Company utilizes a fiscal year consisting of either 52 or 53 weeks, ending
on the Saturday nearest to December 31 each year. The quarters ended June 30,
1996 and June 30, 1995 each include thirteen weeks of operations. For clarity
of presentation, the Company has described all periods presented as if the three
month and six month periods ended on June 30.
In the opinion of management, the unaudited condensed consolidated financial
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the financial position as of June 30,
1996, the results of operations for the three and six month periods ended June
30, 1996 and 1995, and cash flows for the six month periods ended June 30, 1996
and 1995. The results of operations for the six months ended June 30, 1996 are
not necessarily indicative of the results for the full year.
NOTE B - 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 market. The cost of purchasing and raising flocks to laying
maturity is capitalized to inventory, then amortized, assuming no salvage value,
over the estimated productive life of each flock. Inventories consist of the
following:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
------------ ------------
<S> <C> <C>
Work in process and finished goods $ 23,457,000 $ 19,848,000
Raw materials and supplies 13,798,000 16,597,000
Flocks 23,580,000 22,400,000
------------ ------------
$ 60,835,000 $ 58,845,000
------------ ------------
------------ ------------
</TABLE>
NOTE C - NOTES PAYABLE
The Company has an unsecured revolving line of credit with its principal banks
for $55,000,000 with interest payable at the banks' reference rates, or
alternative variable rates, at the Company's option. At June 30, 1996, the
Company had $5,200,000 outstanding at the reference rate of 8.25% and
$35,000,000 outstanding at an average variable rate of 5.9%. This revolving
line of credit, which matures on March 31, 1997, contains certain restrictive
covenants similar to the covenants contained in the Company's senior promissory
notes. At June 30, 1996, $14,800,000 of this line was unused.
6
<PAGE>
MICHAEL FOODS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
June 30, 1996 and 1995
(Unaudited)
NOTE D - CONTINGENCIES
USE OF ESTIMATES
In preparation of the Company's consolidated financial statements, management is
required to make estimates and assumptions that affect reported amounts of
assets and liabilities and related revenues and expenses. Actual results could
differ from the estimates used by management.
PATENT LITIGATION
The Company had prepaid royalty payments of approximately $8,200,000 at June 30,
1996 and $8,300,000 as of December 31, 1995 included in other assets related to
an exclusive license agreement for the production and sale of extended shelf-
life liquid egg products. These amounts have arisen as a result of the Company
making payments to prosecute and defend the patents related to the exclusive
license agreement. The Company has the right to offset up to 50% of otherwise
payable royalties for the legal costs which it has incurred to defend patents
underlying the exclusive license agreement. In January, 1996, the Company was
informed by the U.S. Patent and Trademark Office that a patent examiner rejected
the claims under one of the four process patents, which are the subject of the
license agreement, in a non-final action. Subsequently, non-final actions have
been received in reexamination proceedings on the other three process patents
which are the subject of the license agreement and these actions included
similar rejections of the claims. Management and the licensor intend to present
additional arguments and evidence to the examiner pointing out reasons why the
rejections should be withdrawn. Furthermore, should the examiner choose not to
withdraw the rejections, management intends to appeal the decision of the
examiner and believes the validity of the patents will ultimately be upheld.
During the appeal process, the patents remain valid and in full force and
effect. Based upon current and expected product volume levels, the Company
expects to fully recover the remaining prepaid royalties over the useful life of
the exclusive license agreement. However, there can be no assurance that the
Company will be able to fully recover its prepaid royalty payments. If the
patents are ultimately denied after all appeals have been concluded, the Company
would continue to produce and market the products currently subject to the
license agreement without incurring royalty cost.
PRODUCT LITIGATION
In the fall of 1994, a customer of the Company recalled product which was
potentially contaminated and is settling claims with consumers who became ill
after eating the product before the recall. The customer has filed a suit,
whereby the Company is a co-defendant with other companies alleged to have
supplied contaminated product to the customer's plant. The customer is seeking
damages for losses incurred, as well as alleged loss of past and future profits.
Management and its counsel believe the Company has substantial defenses to the
allegations and believe it is unlikely the Company will incur a loss from this
claim materially in excess of its insurance coverage.
OTHER LITIGATION
The Company is also engaged in routine litigation incidental to its business,
which management believes will not have a material effect upon its results of
operations, liquidity or consolidated financial position.
NOTE E - SIGNIFICANT ACQUISITION
The Company has entered into an agreement to purchase Papetti's Hygrade Egg
Products, Inc. and its affiliates ("Papetti's") in a cash and stock
transaction valued at approximately $85 million. Additionally, the Company
is to assume approximately $28 million in debt issued by Papetti's. Papetti's
is a producer of further processed egg products with annual sales in excess
of $275 million. Pending completion of the due diligence review process and
finalization of governmental reviews of the proposed transaction, it is
expected that the acquisition will close in the fourth quarter of 1996.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
THREE MONTHS ENDED JUNE 30, 1996 VS THREE MONTHS ENDED JUNE 30, 1995
RESULTS OF OPERATIONS
The following table sets forth the percentage of net sales accounted for by each
of the Company's operating divisions for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
1996 1995
---- ----
<S> <C> <C>
Eggs and Egg Products 43% 39%
Refrigerated Distribution 32 33
Potato Products 14 16
Dairy Products 16 17
Intercompany Sales (5) (5)
---- ----
TOTAL 100% 100%
---- ----
---- ----
</TABLE>
The following table sets forth the percentage of divisional operating earnings
(before corporate, interest and income tax expenses) accounted for by each of
the Company's operating divisions for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
1996 1995
---- ----
<S> <C> <C>
Eggs and Egg Products 54% 50%
Refrigerated Distribution 19 15
Potato Products 5 15
Dairy Products 22 20
---- ----
TOTAL 100% 100%
---- ----
---- ----
</TABLE>
The Egg Products Division had higher dollar sales and lower dollar earnings
in the period ended June 30, 1996, as compared to the results of the same
period in 1995. The shell egg product line operated at a loss in both
periods. Feed costs, which typically represent roughly two-thirds of the cost
of producing an egg, were sharply higher in the 1996 period than in the 1995
period, reflecting substantially higher market prices for corn and soybean
meal. This more than offset an approximate 27% year-over-year increase in
egg prices as reported by Urner Barry Publications - a widely quoted industry
pricing service. Significant sales increases were recorded for certain
non-commodity and less commodity-sensitive egg products, notably Easy
Eggs-Registered Trademark-(extended shelf-life liquid whole eggs), MicroFresh
(frozen omelets, patties and curds) and dried products, which helped mitigate
the impact of high feed costs on earnings.
The Refrigerated Distribution Division had higher dollar sales and relatively
stable dollar earnings in the period ended June 30, 1996, as compared to the
results of the same period in 1995. Unit sales increased in the period for
distributed products, although sales growth and earnings were constrained by
their comparison to the second quarter of 1995, which contained favorable volume
impacts from the seasonal Easter holiday period. The 1996 Easter impact was in
the first quarter. Additionally, sourcing costs for items such as cheese and
butter rose sharply during the quarter and, given normal delays in being able to
pass on selling price adjustments, this constrained earnings growth.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
================================================================================
THREE MONTHS ENDED JUNE 30, 1996 VS THREE MONTHS ENDED JUNE 30, 1995
RESULTS OF OPERATIONS, CONT.
The Potato Products Division had higher dollar sales and lower dollar earnings
in the period ended June 30, 1996, as compared to the results of the same period
in 1995. While a competitive environment in the french fry processing industry
and a loss of market share depressed unit sales for frozen potato products,
value-added refrigerated potato product unit sales increased. Cost pressures,
from procuring more expensive open market potatoes to complement potatoes
delivered under contract, and processing yield pressures, from the utilization
of large amounts of under-sized potatoes, primarily resulted in a significant
reduction in divisional earnings.
The Dairy Products Division had higher dollar sales and lower dollar earnings in
the period ended June 30, 1996, as compared to the results of the same period in
1995. While unit sales increased, growth was constrained by declining same-
store sales at certain major restaurant accounts and by less-than-favorable
weather in much of the division's trade area. Dairy ingredient market prices
rose sharply during the quarter. Divisional pricing changes occur on a delayed
basis and were insufficient to offset cost increases during the quarter.
The decline in the gross profit margin of the Company for the period ended June
30, 1996, as compared to the results of the same period in 1995, reflected the
factors discussed above, particularly the significant raw material issues
evident in the Egg Products and Potato Products divisions. It is management's
strategy to increase value-added product sales as a percent of total sales over
time, while decreasing commodity-sensitive products' contribution to
consolidated sales. These efforts historically have been beneficial to gross
profit margins. However, in the 1996 period finished product pricing did not
increase rapidly enough to offset the pressures from raw material cost and
potato quality issues. Selling, general and administrative expenses decreased
as a percent of sales in the period ended June 30, 1996, as compared to the
results of the same period in 1995, due to the significant sales increase and
effective management of operating expenses across the Company.
SIX MONTHS ENDED JUNE 30, 1996 VS SIX MONTHS ENDED JUNE 30, 1995
RESULTS OF OPERATIONS
The following table sets forth the percentage of net sales accounted for by each
of the Company's operating divisions for the periods indicated:
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1996 1995
---- ----
<S> <C> <C>
Eggs and Egg Products 43% 41%
Refrigerated Distribution 34 33
Potato Products 15 16
Dairy Products 14 15
Intercompany Sales (6) (5)
---- ----
TOTAL 100% 100%
---- ----
---- ----
</TABLE>
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
================================================================================
SIX MONTHS ENDED JUNE 30, 1996 VS SIX MONTHS ENDED JUNE 30, 1995
RESULTS OF OPERATIONS, CONT.
The following table sets forth the percentage of divisional operating earnings
(before corporate, interest and income tax expenses) accounted for by each of
the Company's operating divisions for the periods indicated:
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1996 1995
---- ----
<S> <C> <C>
Eggs and Egg Products 59% 55%
Refrigerated Distribution 21 14
Potato Products 4 16
Dairy Products 16 15
---- ----
TOTAL 100% 100%
---- ----
---- ----
</TABLE>
The Egg Products Division had higher dollar sales and lower dollar earnings
in the six months ended June 30, 1996, as compared to the results of the same
period in 1995. The shell egg product line operated at a loss in both
periods. Feed costs, which typically represent roughly two-thirds of the
cost of producing an egg, were sharply higher in the 1996 period than in the
1995 period, more than offsetting increased egg prices, which were
approximately 32% higher in the first six months of 1996 as compared to the
same period in 1995, as reported by Urner Barry Publications - a widely
quoted industry pricing service. Sales increased for certain value-added egg
products, notably Easy Eggs-Registered Trademark- and MicroFresh, which
helped mitigate the impact of high feed costs on earnings.
The Refrigerated Distribution Division had higher dollar sales and higher dollar
earnings in the six months ended June 30, 1996, as compared to the results of
the same period in 1995. Unit sales increased compared to the levels of the
first six months of 1995. The combination of volume growth, pricing
improvements in certain product lines and tight expense management allowed for
divisional profit improvement.
The Potato Products Division had higher dollar sales and lower dollar earnings
in the six months ended June 30, 1996, as compared to the results of the same
period in 1995. While a competitive environment in the french fry processing
industry and a loss of market share depressed unit sales for frozen potato
products, value-added refrigerated potato product unit sales increased. Cost
pressures, from procuring more expensive open market potatoes to complement
potatoes delivered under contract, and processing yield pressures, from the
utilization of large amounts of under-sized potatoes, primarily resulted in a
significant reduction in divisional earnings.
The Dairy Products Division had higher dollar sales and lower dollar earnings in
the six months ended June 30, 1996, as compared to the results of the same
period in 1995. While unit sales increased, growth was constrained by declining
same-store sales at certain major restaurant accounts and by less-than-favorable
weather in much of the division's trade area during the seasonally important
second quarter. Dairy ingredient market prices rose sharply during the second
quarter. Divisional pricing changes are made on a delayed basis and did not
occur rapidly enough to offset the cost increases.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
================================================================================
SIX MONTHS ENDED JUNE 30, 1996 VS SIX MONTHS ENDED JUNE 30, 1995
RESULTS OF OPERATIONS, CONT.
The decline in the gross profit margin of the Company for the period ended June
30, 1996, as compared to the results of the same period in 1995, reflected the
factors discussed above, particularly the significant raw material issues
evident in the Egg Products and Potato Products divisions. It is management's
strategy to increase value-added product sales as a percent of total sales over
time, while decreasing commodity-sensitive products' contribution to
consolidated sales. These efforts historically have been beneficial to gross
profit margins. However, in the 1996 period finished product pricing did not
increase rapidly enough to offset the pressures from raw material cost and
potato quality issues. Selling, general and administrative expenses decreased
as a percent of sales in the period ended June 30, 1996, as compared to the
results of the same period in 1995, due to the significant sales increase and
effective management of operating expenses across the Company.
GENERAL
Certain of the Company's products are sensitive to changes in commodity prices.
The Company's egg products operations derive approximately 15% - 20% of that
division's net sales from shell eggs, which are sensitive to commodity price
swings. The Easy Eggs-Registered Trademark- product line accounts for
approximately 45% of the Egg Products Division's net sales and was a comparable
percent of sales in the first half of 1995. The remainder of Egg Products
Division sales are derived from the sale of other value-added egg products.
Gross profit from shell eggs is primarily dependent upon the relationship
between shell egg prices and the cost of feed, both of which can fluctuate
significantly. Shell egg pricing in the first half of 1996 was approximately
32% above first half 1995 levels as measured by a widely quoted pricing service.
Gross profit margins from value-added egg products are less sensitive to
commodity price fluctuations.
The Company's refrigerated distribution operations derive approximately 70% of
that division's net sales from refrigerated products produced by others, thereby
reducing the effect of commodity price swings. The balance of refrigerated
distribution sales are from shell eggs, some of which are produced by the Egg
Products Division and are sold on a distribution, or non-commodity, basis by the
Refrigerated Distribution Division.
The Potato Products Division derives approximately 65% of its net sales from the
refrigerated potato products line. The potato products division typically
purchases 80%-90% of its raw potatoes from contract producers under annual
contracts. The remainder is purchased at open market prices to satisfy short-
term production requirements or to take advantage of market prices when they are
lower than contracted prices. Small variations in the purchase price of raw
materials or the selling price per pound of end products can have a significant
effect on potato products division operating results. The impact of raw
material costs within the Potato Products Division has been reduced in recent
years due to significant increases in higher value-added refrigerated potato
products sales.
The Dairy Products Division sells its products primarily on a cost-plus basis
and, therefore, the division's earnings are not typically affected greatly by
raw ingredient price fluctuations.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
================================================================================
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.
CAPITAL RESOURCES AND LIQUIDITY
Acquisitions and capital expenditures have been, and will likely continue to be,
a capital requirement. The Company plans to continue to invest in state-of-the-
art production facilities to enhance its competitive position, although the
annual rate of spending has declined in recent years. 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 has entered into an agreement to purchase Papetti's Hygrade Egg
Products, Inc. and its affiliates ("Papetti's") in a cash and stock transaction
valued at approximately $85 million. Additionally, the Company is to assume
approximately $28 million in debt issued by Papetti's. Papetti's is a
producer of further processed egg products with annual sales in excess of
$275 million. The acquisition is expected to close in the fourth quarter.
Approximately 60% of the purchase price is to be in the form of cash and the
Company is exploring financing alternatives to fund this outlay, as well as the
possible refinancing of the debt to be assumed. It is expected that these
financing needs will be met through a combination of senior debt issuance and
modifying the Company's unsecured line of credit.
The Company invested approximately $13,200,000 in capital expenditures during
the six months ended June 30, 1996. The Company's 1996 plan calls for
approximately $31,000,000 in total capital expenditures.
The Company has an unsecured line of credit for $55,000,000 with its principal
banks. As of June 30, 1996, approximately $40,200,000 was borrowed under this
line of credit.
SEASONALITY
Consolidated quarterly operating results are affected by the seasonality of the
Company's net sales and operating profits. Specifically, shell egg prices
typically rise seasonally in the first and fourth quarters of the year due to
increased demand during holiday periods. Generally, the Refrigerated
Distribution Division experiences higher net sales and operating profits in the
fourth quarter. Operating profits from potato products are less seasonal, but
tend to be higher in the second half of the year coinciding with the potato
harvest. Operating profits from dairy operations typically are significantly
higher in the second and third quarters due to increased consumption of ice milk
and ice cream products during the summer months.
12
<PAGE>
================================================================================
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.107 Resolution adopted by the Board of Directors on June 26, 1996,
amending the Severance Plan for Eligible Employees of Michael Foods,
Inc. and Subsidiaries and extending its termination date for one
additional year.
27.1 Financial Data Schedule
(b) There were no reports on Form 8-K filed during the quarter ended June 30,
1996.
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.
-------------------------------------------
(Registrant)
Date: August 13, 1996 By: /s/ Gregg A. Ostrander
----------------------------------
Gregg A. Ostrander
(President and Chief
Executive Officer)
Date: August 13, 1996 By: /s/ John D. Reedy
----------------------------------
John D. Reedy
(Vice President - Finance,
Treasurer, Chief Financial
Officer and Principal
Accounting Officer)
13
<PAGE>
Exhibit 10.107
MICHAEL FOODS, INC.
CONSENT RESOLUTION
SEVERANCE PLAN EXTENSION
The undersigned, being all of the members of the Board of Directors of Michael
Foods, Inc. (the "Company"), do hereby consent to and adopt the following
resolution as of the 26th day of June, 1996, and do attest to the due and valid
adoption thereof by affixing their signatures hereto:
WHEREAS, Compensation Committee of the Company's Board of Directors passed the
following resolution on February 20, 1996:
RESOLVED, THAT THE COMPENSATION COMMITTEE RECOMMENDS TO THE FULL BOARD OF
DIRECTORS THAT THE SEVERANCE PAY PLAN FOR ELIGIBLE EMPLOYEES OF MICHAEL FOODS,
INC. AND ITS SUBSIDIARIES (THE "SEVERANCE PLAN"), AS APPROVED AND IMPLEMENTED IN
ACCORDANCE WITH THE DIRECTIVES OF THE BOARD OF DIRECTORS ON JULY 26, 1990 AND
EXTENDED THROUGH JULY 1, 1996, BE HEREBY EXTENDED FOR A PERIOD OF ONE ADDITIONAL
YEAR TO A NEW TERMINATION DATE OF JULY 1, 1997.
NUMBER OF EMPLOYEES COVERED UNDER THE SEVERANCE PLAN
FROM JULY 1, 1995 TO JULY 1, 1996. . . . . . . . . . . . . . . . . . . 20
EMPLOYEES REMOVED:
CHARLES YAHNKE - M. G. WALDBAUM (PREVIOUSLY REMOVED)
BILL GOUCHER - M. G. WALDBAUM
DAVID SWANSON - MICHAEL FOODS DISTRIBUTION
DAVID PORTER - MICHAEL FOODS SALES
EMPLOYEES ADDED:
JAMES MOHR - MICHAEL FOODS DISTRIBUTION
MAX HOFFMANN - NORTHERN STAR
NUMBER OF EMPLOYEES COVERED UNDER THE SEVERANCE PLAN
FROM JULY 1, 1996 TO JULY 1,1997 . . . . . . . . . . . . . . . . . 18
and
WHEREAS, the Compensation Committee stated it would present the above
recommendation to the Board of Directors in June 1996 for action at that time;
therefore be it
RESOLVED, that the Board of Directors hereby ratifies the actions of the
Compensation Committee of February 20, 1996 and approves the extension of and
modifications to the Severance Plan as specified in the Compensation Committee
resolution of the same date.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONDENSED CONSOLIDATED BALANCE SHEETS AND CONDENSED CONSOLIDATED
STATEMENTS OF EARNINGS ON PAGES 2 AND 4 OF THE COMPANY'S FORM 10Q FOR
THE QUARTERLY PERIOD ENDING JUNE 30, 1996, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 650
<SECURITIES> 0
<RECEIVABLES> 47,181
<ALLOWANCES> 0
<INVENTORY> 60,835
<CURRENT-ASSETS> 110,668
<PP&E> 314,986
<DEPRECIATION> 129,427
<TOTAL-ASSETS> 366,121
<CURRENT-LIABILITIES> 108,595
<BONDS> 43,000
0
0
<COMMON> 194
<OTHER-SE> 184,760
<TOTAL-LIABILITY-AND-EQUITY> 366,121
<SALES> 295,550
<TOTAL-REVENUES> 295,550
<CGS> 258,439
<TOTAL-COSTS> 258,439
<OTHER-EXPENSES> 22,442
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,744
<INCOME-PRETAX> 10,925
<INCOME-TAX> 4,370
<INCOME-CONTINUING> 6,555
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,555
<EPS-PRIMARY> .34
<EPS-DILUTED> .34
</TABLE>
