Washington, D.C. 20549
SECURITIES AND EXCHANGE COMMISSION
Form
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 SeptemberJune 30, 2000
2001 ------------------------------------------------- or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period fromto
--------------- --------------------------------- Commission File Number: 0-15638
Michael Foods, Inc.(Exact
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MICHAEL FOODS, INC.
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(Exact name of registrant as specified in its charter)
Minnesota 41-0498850
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Suite 324, Signal Bank Building
5353 Wayzata Boulevard
Minneapolis, MN 55416
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(Address of principal executive offices) (Zip code)
(952) 546-1500(Registrant's
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(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. [ ] Yes /x/[X] No
/ /
The number of shares outstanding of the registrant's Common Stock, $.01 par value, as of November 6, 2000 was 18,284,991 shares.
I—I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MICHAEL FOODS, INC.
AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF M-FOODS HOLDINGS, INC.) CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| | September 30, 2000 | December 31, 1999 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| ASSETS | ||||||||||
| CURRENT ASSETS | ||||||||||
| Cash and equivalents | $ | 7,682,000 | $ | 4,961,000 | ||||||
| Accounts receivable, less allowances | 98,895,000 | 92,493,000 | ||||||||
| Inventories | 82,721,000 | 71,197,000 | ||||||||
| Prepaid expenses and other | 4,668,000 | 4,604,000 | ||||||||
| Total current assets | 193,966,000 | 173,255,000 | ||||||||
| PROPERTY, PLANT AND EQUIPMENT-AT COST | | | | | | | | |||
| Land | 4,106,000 | 4,104,000 | ||||||||
| Buildings and improvements | 133,890,000 | 133,778,000 | ||||||||
| Machinery and equipment | 376,741,000 | 357,724,000 | ||||||||
| 514,737,000 | 495,606,000 | |||||||||
| Less accumulated depreciation | 233,992,000 | 208,807,000 | ||||||||
| 280,745,000 | 286,799,000 | |||||||||
| OTHER ASSETS | | | | | | | | |||
| Goodwill, net | 114,146,000 | 116,729,000 | ||||||||
| Joint ventures and other assets | 18,660,000 | 21,134,000 | ||||||||
| 132,806,000 | 137,863,000 | |||||||||
| $ | 607,517,000 | $ | 597,917,000 | |||||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | | |||||||||
| CURRENT LIABILITIES | ||||||||||
| Current maturities of long-term debt | $ | 2,881,000 | $ | 3,130,000 | ||||||
| Accounts payable | 51,076,000 | 47,009,000 | ||||||||
| Accrued liabilities | ||||||||||
| Compensation | 13,071,000 | 13,143,000 | ||||||||
| Insurance | 7,292,000 | 7,229,000 | ||||||||
| Customer programs | 18,567,000 | 20,999,000 | ||||||||
| Income taxes | 11,643,000 | 11,805,000 | ||||||||
| Other | 13,432,000 | 18,176,000 | ||||||||
| Total current liabilities | 117,962,000 | 121,491,000 | ||||||||
| LONG-TERM DEBT, less current maturities | | | 203,370,000 | | | 175,404,000 | | |||
| DEFERRED INCOME TAXES | 37,507,000 | 36,423,000 | ||||||||
| COMMITMENTS AND CONTINGENCIES | — | — | ||||||||
| SHAREHOLDERS' EQUITY | | | | | | | | |||
| Common stock | 182,000 | 203,000 | ||||||||
| Additional paid-in capital | 58,390,000 | 102,777,000 | ||||||||
| Retained earnings | 191,696,000 | 162,577,000 | ||||||||
| Accumulated comprehensive income (loss) | (1,590,000 | ) | (958,000 | ) | ||||||
| 248,678,000 | 264,599,000 | |||||||||
| $ | 607,517,000 | $ | 597,917,000 | |||||||
2
AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF M-FOODS HOLDINGS, INC.) CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
Three Months Ended SeptemberJune 30,
(Unaudited)
| | 2000 | 1999 | ||||||
|---|---|---|---|---|---|---|---|---|
| Net sales | $ | 276,568,000 | $ | 269,911,000 | ||||
| Cost of sales | 228,820,000 | 223,162,000 | ||||||
| Gross profit | 47,748,000 | 46,749,000 | ||||||
| Selling, general and administrative expenses | 25,506,000 | 25,355,000 | ||||||
| Operating profit | 22,242,000 | 21,394,000 | ||||||
| Interest expense, net | 3,524,000 | 3,241,000 | ||||||
| Earnings before income taxes | 18,718,000 | 18,153,000 | ||||||
| Income tax expense | 6,900,000 | 7,440,000 | ||||||
| NET EARNINGS | $ | 11,818,000 | $ | 10,713,000 | ||||
| Net Earnings Per Share | ||||||||
| Basic | $ | 0.65 | $ | 0.53 | ||||
| Diluted | $ | 0.64 | $ | 0.52 | ||||
| Weighted average shares outstanding | ||||||||
| Basic | 18,278,000 | 20,251,000 | ||||||
| Diluted | 18,516,000 | 20,522,000 | ||||||
==============================================================================
3
AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF M-FOODS HOLDINGS, INC.) CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
Nine Months Ended September 30,
(Unaudited)
| | 2000 | 1999 | ||||||
|---|---|---|---|---|---|---|---|---|
| Net sales | $ | 795,110,000 | $ | 781,320,000 | ||||
| Cost of sales | 650,872,000 | 642,301,000 | ||||||
| Gross profit | 144,238,000 | 139,019,000 | ||||||
| Selling, general and administrative expenses | 79,168,000 | 77,831,000 | ||||||
| Operating profit | 65,070,000 | 61,188,000 | ||||||
| Interest expense, net | 9,778,000 | 8,862,000 | ||||||
| Earnings before income taxes | 55,292,000 | 52,326,000 | ||||||
| Income tax expense | 21,710,000 | 21,450,000 | ||||||
| NET EARNINGS | $ | 33,582,000 | $ | 30,876,000 | ||||
| Net Earnings Per Share | ||||||||
| Basic | $ | 1.75 | $ | 1.50 | ||||
| Diluted | $ | 1.73 | $ | 1.48 | ||||
| Weighted average shares outstanding | ||||||||
| Basic | 19,172,000 | 20,574,000 | ||||||
| Diluted | 19,394,000 | 20,818,000 | ||||||
==============================================================================
4
AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF M-FOODS HOLDINGS, INC.) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30,
(Unaudited)
| | 2000 | 1999 | |||||||
|---|---|---|---|---|---|---|---|---|---|
| Net cash provided by operating activities | $ | 50,179,000 | $ | 73,327,000 | |||||
| Cash flows from investing activities: | |||||||||
| Capital expenditures | (25,967,000 | ) | (60,918,000 | ) | |||||
| Investments in joint ventures and other assets | 835,000 | (20,976,000 | ) | ||||||
| Net cash used in investing activities | (25,132,000 | ) | (81,894,000 | ) | |||||
| Cash flows from financing activities: | | | | | | | | ||
| Payments on long-term debt | (130,383,000 | ) | (138,696,000 | ) | |||||
| Proceeds from long-term debt | 158,100,000 | 177,200,000 | |||||||
| Proceeds from issuance of common stock | 545,000 | 755,000 | |||||||
| Repurchase of common stock | (46,125,000 | ) | (18,927,000 | ) | |||||
| Dividends | (4,463,000 | ) | (4,127,000 | ) | |||||
| Net cash provided by (used in) financing activities | | | (22,326,000 | ) | | 16,205,000 | | ||
| Net increase in cash and equivalents | | | 2,721,000 | | | 7,638,000 | | ||
| Cash and equivalents at beginning of year | | | 4,961,000 | | | 2,047,000 | | ||
| Cash and equivalents at end of period | | $ | 7,682,000 | | $ | 9,685,000 | | ||
==============================================================================
5
AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF M-FOODS HOLDINGS, INC.) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
================================================================================ (Unaudited)
NOTE A—A - MERGER AGREEMENT
On April 10, 2001, Michael Foods, Inc. and its subsidiaries ("Michael Foods",
"Company", "we", "us", "our") was acquired in a transaction (the "Merger")
led by an investor group comprised of a management group led by Michael
Foods' Chairman, President and Chief Executive Officer, Gregg Ostrander,
affiliates of Jeffrey Michael, a member of the Michael Foods Board of
Directors, and affiliates of two private equity investment firms, Vestar
Capital Partners and Goldner Hawn Johnson & Morrison Incorporated,
(collectively, "M-Foods Investors, LLC"). Under the terms of the Merger
agreement, all outstanding shares of Michael Foods common stock were
converted into the right to receive $30.10 per share in cash, or value equal
thereto, and all outstanding stock options were converted into the right to
receive, in cash, $30.10 per share reduced by the exercise price per share
for all shares subject to such stock options. The purchase of the outstanding
shares was financed through new equity financing of approximately
$175,000,000, a senior secured credit facility of up to $470,000,000 at
market-based variable interest rates (effective rate of 7.5% at April 10,
2001), and $200,000,000 of senior subordinated notes at an 11.75% annual
interest rate. As a result of the Merger, the stock of pre-merger Michael
Foods ("Predecessor") is no longer publicly traded and, therefore, earnings
per share calculations are no longer included for financial statement
presentation.
Immediately after the close of the Merger, the Company contributed the assets
of its Dairy division into two limited liability corporations, M-Foods Dairy,
LLC and M-Foods Dairy TXCT, LLC (collectively, the "Dairy LLCs") and in
exchange received voting preferred and voting common units from these
entities equal to the fair value of the net assets contributed, which
collectively were approximately $40,000,000. The preferred units issued to
the Company have an annual 10% preferred return guarantee and represent 100%
of the preferred units issued and outstanding. In addition, the Company
received 5% of the common units issued by the Dairy LLCs, with the common
units held by the Company representing 100% of the voting common units issued
and outstanding. These common units have a stated value of $25,000. The
remaining 95% of the common units, which are non-voting, are owned by M-Foods
Dairy Holdings, LLC, which is owned by the same owners or affiliates of such
owners, in the same proportion, as the unit holders of M-Foods Investors,
LLC. The common unit interests owned by M-Foods Dairy Holdings, LLC were
issued in exchange for $475,000 and are reflected as minority interest in the
accompanying consolidated balance sheet as of June 30, 2001.
The Merger was accounted for as a purchase in accordance with Accounting
Principles Board Opinion 16, Business Combinations and EITF 88-16, Basis in
Leveraged Buyout Transactions. Accordingly, the acquired assets and liabilities
have been recorded at fair value for the interests acquired by new investors and
at the carryover basis for continuing investors. As a result, the assets and
liabilities were assigned new values, which are part Predecessor cost and part
fair value in the same proportions as the carryover basis of the residual
interests retained by the continuing management investors and continuing
affiliate investors of the Michael family, and the new interests acquired by the
new investors. The amount of carryover basis was reflected as a deemed dividend
of $66,631,000.
For ease of presentation, the Merger was accounted for as if it had occurred
on April 1, 2001. Management determined that results of operations were not
significant and no material transactions occurred during the period from
April 1 through April 9, 2001. The Company's consolidated financial
statements have been presented on a comparative basis with the Predecessor's
historical consolidated financial statements prior to the date of Merger.
Different bases of accounting have been used to prepare the Company and
Predecessor consolidated financial statements. The primary differences relate
to additional interest expense for new debt and depreciation and amortization
of fixed assets and other intangible assets recorded at fair value at the
date of Merger.
6
These allocations were based primarily on a preliminary valuation by a third
party appraisal firm. Accordingly, the allocations related to property, plant
and equipment and intangible assets, including goodwill, could change when the
final valuation report is received. However, management believes the final
allocations will not vary significantly from the allocations indicated above.
In connection with the Merger, the Predecessor incurred transaction expenses of
approximately $26,600,000 associated with the Merger and change-in-control
provisions of various compensation, debt and other agreements, which have been
reflected in the Predecessor financial statements. These transaction expenses
include the extraordinary item related to the early extinguishment of debt
resulting from the change-in-control. In addition, the Company incurred other
merger related and debt issuance costs of approximately $40,000,000, which have
been capitalized as direct costs of the Merger and deferred financing costs in
the Company's consolidated balance sheet.
The following unaudited pro forma revenue and net earnings for the year ended
December 31, 2000 and six months ended June 30, 2001 are derived from the
application of pro forma adjustments to the Predecessor historical statements of
earnings, and assumes the Merger had occurred on January 1, 2000:
NOTE B - 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 accounting principles generally accepted in the United States of America 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.
Michael Foods Inc. (the "Company") utilizes, and the Predecessor utilized, a fiscal year
consisting of either 52 or 53 weeks, ending on the Saturday nearest to
December 31 each year. The quarters ended SeptemberJune 30, 20002001 and 19992000 each
included thirteen weeks of operations. For clarity of presentation, the
Company hasand Predecessor have described both periods presented as if the
quarters ended on SeptemberJune 30.
7
condensed consolidated financial statements
contain all adjustments (consisting of only normal recurring adjustments)
necessary to present fairly the financial position as of September 30, 2000 and the results of operations for the three and nine month periods
ended September 30, 2000 and 1999 and cash flows for the nine months ended September 30, 2000 and 1999.indicated. The historical financial results of operations for the nine months ended September 30, 2000Company and Predecessor
are not necessarily indicative of thetheir results for thea full year.
USE OF ESTIMATES
Preparation of the Company's consolidated financial statements requires
management 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.
NEWLY ADOPTED ACCOUNTING STANDARDS
Effective January 1, 2001, the Company adopted Statement of Financial Accounting
Standard No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended. This standard establishes accounting and reporting
standards for derivative financial instruments and hedge activities. Certain of
our operating segments, most notably our Egg Products Division, hold derivative
instruments, such as exchange traded corn and soybean meal grain futures that we
believe provide an economic hedge of future transactions and are designated as
cash flow hedges. As the commodities being hedged are grain ingredients fed to
the Company's flocks, the changes in the market value of such contracts have
historically been, and are expected to continue to be, highly effective at
offsetting changes in price movements of these feed components. The amount of
hedge ineffectiveness was immaterial for the three months ended March 31, 2001
and the three months ended June 30, 2001.
The Company actively monitors its exposure to commodity price risks and uses
derivative commodity instruments to manage the impact of certain of these risks.
We use derivatives only for the purpose of managing risks associated with
underlying exposures, primarily exchange-traded futures contracts to manage its
exposure to changes in corn and soybean meal prices. Our commodity contracts are
cash flow hedges of firm purchase commitments and anticipated production
requirements, as they reduce our exposure to changes in the cash price of grain
and generally extend for less than one year.
The Company does not trade or use instruments with the objective of earning
financial gains on the commodity price, nor does it use instruments where there
are not underlying exposures. Gains and losses on futures contracts are deferred
as a component of Accumulated Other Comprehensive Loss ("AOCL") in the
Company's basic net earnings per shareequity section of the balance sheet and recognized as an adjustment to
the cost of the related inventory item, and subsequently recognized in cost of
sales when the associated products are sold. The cost or benefit of contracts
closed prior to the execution of the underlying purchase is computed by dividing net earningsdeferred until the
anticipated grain purchase occurs. As a result of the volatility of the grain
markets, deferred gains and losses in AOCL may fluctuate until the related
contract is closed.
8
weighted average numberstandard on the date new derivatives are
entered into, we formally document all relationships between hedging
instruments and hedged items, as well as our risk management objectives and
strategy for undertaking the hedge. This process includes specific
identification of outstanding common shares. The Company's diluted netthe hedging instrument and the hedge transaction, the
nature of the risk being hedged and how the hedging instrument's
effectiveness will be assessed. Both at the inception of the hedge and on an
ongoing basis, we assess whether the derivatives that are used in hedging
transactions are highly effective in offsetting changes in cash flows of
hedged items. If it is determined that a derivative ceases to be a highly
effective hedge or the forecasted transaction being hedged will no longer
occur, we will discontinue hedge accounting, and any gains or losses on the
derivative instrument would be recognized in earnings per share is computed by dividing net earnings by the weighted average number of outstanding common shares and common share equivalents relating to stock options, when dilutive. Options to purchase 657,676 and 681,878 shares of Common Stock, with weighted average exercise prices of $24.91 and $24.87, which were outstanding during the three and nine month periods ended September 30, 2000, were excluded from the computation of common share equivalents for those periods because they were anti-dilutive. Options to purchase 390,275 and 734,824 shares of common stock, withperiod it no
longer qualifies as a weighted average exercise price of $25.56 and $24.80, were outstanding duringhedge. No such instances occurred in the three months
ended March 31, 2001 and nine month periodsthe three months ended SeptemberJune 30, 1999, but were excluded from the computation of common share equivalents for those periods because they were anti-dilutive.
2001.
NOTE B—C - INVENTORIES
Inventories, other than flocks, are stated at the lower of cost (determined on a first-in, first-out basis) or market. Flock inventory represents the cost of purchasing and raising flocks to laying maturity, at which time their cost is amortized to operations over their expected useful life of generally one to two years, assuming no salvage value.
Inventories consist
| | September 30, 2000 | December 31, 1999 | |||||
|---|---|---|---|---|---|---|---|
| Raw materials and supplies | $ | 16,152,000 | $ | 15,720,000 | |||
| Work in process and finished goods | 42,885,000 | 35,447,000 | |||||
| Flocks | 23,684,000 | 20,030,000 | |||||
| $ | 82,721,000 | $ | 71,197,000 | ||||
6
total acquisition costs over the fair value of the net assets
acquired were recorded as goodwill. Goodwill is amortized on a straight-line
basis over 40 years. Predecessor accumulated amortization was $23,549,000 at
December 31, 2000, while the Company had accumulated amortization of $2,191,000
at June 30, 2001. At April 1, 2001, goodwill was recorded for the excess of the
purchase price of the Merger over the fair value of net assets acquired. The
Company amortizes its goodwill over a 40 year period. Goodwill has been assigned
to each of the operating subsidiaries down to the reporting unit level. The
Company evaluates its goodwill annually to determine potential impairment by
comparing its carrying value to the undiscounted future cash flows of the
related assets.
In July 2001, the FASB issued two statements: Statement 141 BUSINESS
COMBINATIONS and Statement 142 GOODWILL AND INTANGIBLE ASSETS. These
pronouncements, among other things, eliminated the pooling-of-interests
method of accounting for business combinations, requires intangible assets
acquired in business combinations be recorded separately from goodwill if
certain requirements are met, and eliminates the amortization of goodwill for
financial reporting purposes effective for the Company beginning in January
2002. However, thereafter goodwill will be tested for impairment annually
or whenever an impairment indicator arises. The amount of goodwill
amortization expense for the three months ended June 30, 2001 was $2,191,000.
Goodwill amortization for the nine months ending December 31, 2001 is
expected to be approximately $6,600,000.
9
C—E - COMMITMENTS AND CONTINGENCIES
Use of Estimates
Preparation of the Company's consolidated financial statements requires management 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.
License Agreement
The Company has
LICENSE AGREEMENT
We have an exclusive license agreement for a patented process for the production
and sale of extended shelf-life liquid egg products. Under the license
agreement, the Company haswe have the right to defend and prosecute infringement of the
licensed patents. We may apply 50% of our costs of defending the patents to future
royalty payments under the license agreements.
The U.S. Federal Court of Appeals has upheld the validity of the four patents which
are the subject toof the license agreement. However, subsequentlySubsequently, a patent examiner at the
U.S. Patent and Trademark Office ("PTO") rejected the patents. In August 1999, the examiner's rejections were largely overturned by the Board of Appeals and Interferences of the PTO. Reexamination certificates for three of the patents have since been issued by the PTO. In August 2000, the CompanyWe and the patent holder
received a Notice of Allowability, followed by a Notice of Allowance, regardingappealed the reissuancedecision of the fourth patent, which includedexaminer and the allowancevalidity of the patents was
upheld. In September 2000, the U.S. Patent and Trademark Office allowed product
claims beyond the process claims previously allowed.allowed under the patents for the
extended shelf-life egg product. The patents remain valid and in full force and
effect. These patents are scheduled to expire beginning in 2006.
In 2000, we settled litigation with one party related to the second quarterinfringement of
2000,these patents and issued a sub-license to the Companyinfringing party granting them the
right to manufacture and distribute extended shelf-life liquid whole egg
products subject to a royalty payable to us and the patent holder completedon all future
product sold. In connection with this settlement the patent holder received a
new royalty arrangement wherebylump sum payment for the past production and sale of the product and other
matters related to the infringement. We continue to pursue litigation related to
other parties who are infringing these product and process patents.
LITIGATION
We are engaged in routine litigation incidental to our business. Our management
believes the ultimate outcome of this litigation will not have a material
adverse effect upon our consolidated financial position, liquidity or results of
operations.
NOTE F - COMPREHENSIVE INCOME (LOSS)
The components and changes in accumulated other comprehensive loss, net of
taxes, during the six months ended June 30, 2001 were as follows:
Litigation
Company's financial statements.
NOTE E - COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is engaged in routine litigation incidental to its business.
Management believes itthe ultimate outcome of such litigation will not have a
material adverse effect upon its consolidatedon the Unit's financial position, liquidity or
results of operations.
30
31
The accompanying notes are an integral part of these statements.
32
The accompanying notes are an integral part of these statements.
33
The accompanying notes are an integral part of these statements.
34
D—SHAREHOLDERS' EQUITY
DuringA - ORGANIZATION, BUSINESS AND MERGER
ORGANIZATION
M-Foods Dairy TXCT, LLC (the "Company") is a majority owned subsidiary of
Michael Foods, Inc., a wholly owned subsidiary of M-Foods Holdings, Inc. Prior
to the Merger described below, Kohler Mix - TXCT (the "Predecessor," "Operating
Unit" or the "Unit") was an operating unit of Michael Foods, Inc. The change in
control of Michael Foods, Inc. and the reorganization of the operating unit into
the Company are more fully described below.
BUSINESS
The Company processes and distributes soft serve ice cream mix, frozen yogurt
mix, milk and specialty dairy products, many of which are ultra-high temperature
pasteurized, from its facilities in Texas and Connecticut.
MERGER
On April 10, 2001, Michael Foods, Inc. and its subsidiaries ("Michael Foods")
was acquired in a transaction (the Merger") led by an investor group
comprised of a management group led by Michael Foods' Chairman, President and
Chief Executive Officer, Gregg Ostrander, affiliates of Jeffrey Michael, a
member of the Michael Foods Board of Directors, and affiliates of two private
equity investment firms, Vestar Capital Partners and Goldner Hawn Johnson &
Morrison Incorporated, (collectively, "M-Foods Investors, LLC"). Under the
terms of the Merger agreement, all outstanding shares of Michael Foods common
stock were converted into the right to receive $30.10 per share in cash, or
value equal thereto, and all outstanding stock options were converted into
the right to receive, in cash, $30.10 per share reduced by the exercise price
per share for all shares subject to such stock options. The purchase of the
outstanding shares was financed through new equity financing of approximately
$175,000,000, a senior secured credit facility of up to $470,000,000 at
market-based variable interest rates (effective rate of 7.5% at April 10,
2001), and $200,000,000 of senior subordinated notes at an 11.75% annual
interest rate.
Immediately after the close of the Merger, Michael Foods contributed the
assets of its Dairy division into two limited liability corporations, M-Foods
Dairy, LLC and the Company (collectively, the "Dairy LLCs") and in exchange
received voting preferred and voting common units from the Dairy LLCs equal
to the fair value of the net assets contributed, which collectively were
approximately $40,000,000 (the approximate fair value contributed to the
Company was $10,000,000). The preferred units issued to Michael Foods have an
annual 10% preferred return guarantee and represent 100% of the preferred
units issued and outstanding. In addition, Michael Foods received 5% of the
common units issued by each of the Dairy LLCs with the common units held by
Michael Foods representing 100% of the voting common units issued and
outstanding. These common units have a stated value of $25,000. The remaining
95% of the common units, which are non-voting, are owned by M-Foods Dairy
Holdings, LLC, which is owned by the same owners, or affiliates of such
owners, in the same proportion, as the unit holders of M-Foods Investors,
LLC. The Dairy LLCs common unit interest owned by M-Foods Dairy Holdings, LLC
was purchased for $475,000 as of April 1, 2001.
Following the Merger, Michael Foods, Inc. became an indirect wholly-owned
subsidiary of M-Foods Investors, LLC and the Company became a majority owned
subsidiary of Michael Foods, Inc.
35
quarters ofparty appraisal firm. The allocations were as follows:
36
1999 the Company repurchased no shares of Common Stock under the share repurchase program which began in July 1998 and was expanded in February and May 2000. Repurchases for the first ninesix months ended June 30, 2001 are derived from
the application of 2000 and 1999 were 2,109,400 and 920,100 sharespro forma adjustments to the Predecessor historical
statements of Common Stock.
NOTE E—COMPREHENSIVE INCOME
Comprehensive income consists of net earnings and foreign currency translation adjustments. Total comprehensive income was $11,644,000assumes the Merger had occurred on January 1, 2000:
7
regulations of the Securities and Exchange Commission
("SEC") using the historical cost basis of assets and liabilities of the
Predecessor. The accompanying unaudited financial statements and footnote
information as of and for the three month period ended June 30, 2001 have
been prepared in accordance with Regulation S-X pursuant to the rules and
regulations of the SEC using the adjusted cost basis of assets and
liabilities of the Company. In the opinion of management, the unaudited
financial statements contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the results of operations
and cash flows for the periods indicated. The Unit's financial statements
include an allocation for general and administrative costs incurred by
Michael Foods. Management believes its allocations to these Operating Unit
financial statements are reasonable. Additionally, Operating Unit equity
includes the cumulative net advances between the Operating Unit and Michael
Foods, which are considered additional capital invested from or, constructive
dividends to, Michael Foods. Accordingly, the accompanying financial
statements may not necessarily be indicative of the results that could have
been obtained if the Operating Unit had been operated during the periods
presented as a stand-alone entity. The historical results of the Company and
Predecessor for the periods indicated are not necessarily indicative of their
results for a full year.
The accounting policies of the Predecessor have been adopted by the Company.
USE OF ESTIMATES
Preparation of the accompanying financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect reported
amounts of assets and liabilities, related revenues and expenses and disclosure
about contingent assets and liabilities at the date of the financial statements.
Actual results could differ from the estimates used by management.
37
NOTE F—BUSINESS SEGMENTS
C - INCOME TAXES
PREDECESSOR
The activity of the Operating Unit has been included in the income tax return of
Michael Foods, Inc. for financial reporting purposes. The Unit has been
allocated a provision for income taxes in an amount generally equivalent to the
provision that would have resulted had the Unit filed a separate income tax
return.
COMPANY
For income tax purposes the Company operates in four reportable segments—Egg Products, Refrigerated Distribution, Dairy Products and Potato Products. Certain financial informationis a pass-through entity, therefore, income
taxes have not been reflected on the Company's operating segmentsfinancial statements.
NOTE D - COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is as follows (unaudited,engaged in thousands):
| | Egg Products | Refrigerated Distribution | Dairy Products | Potato Products | Corporate | Total | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Three Months ended September 30, 2000: | |||||||||||||||||
| External net sales | $ | 162,461 | $ | 57,636 | $ | 41,305 | $ | 15,166 | N/A | $ | 276,568 | ||||||
| Intersegment sales | 2,849 | 10 | 22 | 632 | N/A | 3,513 | |||||||||||
| Operating profit (loss) | 16,665 | 3,829 | 1,329 | 1,548 | (1,129 | ) | 22,242 | ||||||||||
| Three Months ended September 30, 1999: | |||||||||||||||||
| External net sales | $ | 157,843 | $ | 55,833 | $ | 41,498 | $ | 14,737 | N/A | $ | 269,911 | ||||||
| Intersegment sales | 3,235 | 24 | 415 | 577 | N/A | 4,251 | |||||||||||
| Operating profit (loss) | 17,935 | 2,462 | 319 | 2,006 | (1,328 | ) | 21,394 | ||||||||||
| Nine Months ended September 30, 2000: | |||||||||||||||||
| External net sales | $ | 472,849 | $ | 169,073 | $ | 109,237 | $ | 43,951 | N/A | $ | 795,110 | ||||||
| Intersegment sales | 8,676 | 68 | 507 | 1,800 | N/A | 11,051 | |||||||||||
| Operating profit (loss) | 50,757 | 11,962 | 2,271 | 4,534 | (4,454 | ) | 65,070 | ||||||||||
| Nine Months ended September 30, 1999: | |||||||||||||||||
| External net sales | $ | 460,481 | $ | 166,382 | $ | 112,251 | $ | 42,206 | N/A | $ | 781,320 | ||||||
| Intersegment sales | 12,723 | 69 | 993 | 1,775 | N/A | 15,560 | |||||||||||
| Operating profit (loss) | 52,537 | 7,046 | 3,272 | 4,565 | (6,232 | ) | 61,188 | ||||||||||
8
Item 2—Management's Discussion and Analysisroutine litigation incidental to its business.
Management believes the ultimate outcome of Financial Condition and Resultssuch litigation will not have a
material adverse effect on the accompanying statements of Operations
financial position,
liquidity or results of operations.
38
SEPTEMBERJUNE 30, 2001 AS COMPARED TO THREE MONTHS ENDED JUNE 30, 2000
VS THREE MONTHS ENDEDSEPTEMBER 30, 1999
Results of Operations
RESULTS OF OPERATIONS
Readers are directed to Note F—G - Business Segments for data on the unaudited
financial results of the Company's four business segments for the three months
ended SeptemberJune 30, 2001 and for data on the unaudited financial results of the
Predecessor's four business segments for the three months ended June 30, 2000.
Net sales for the 2001 period were $295,109,000, an increase of 11% compared
to the Predecessor's net sales of $266,616,000 in the 2000 period. Net sales
increased because of the factors discussed in the below divisional reviews,
but were higher in the 2001 period due largely to strong unit sales growth in
three divisions and 1999.
inflationary impacts in two divisions.
Egg Products Division net sales for the 20002001 period reflected approximately
flat unit sales and slight price increases particularly for value-added products, which more than offset significant deflationary pricing impacts on industrial products. Significant unit sales increases were recorded for extended shelf-life liquid eggs, egg substitutes and driedcertain egg products. Unit
sales rose for egg substitutes, hardcooked items and precooked products, and
declined in two categories—frozen and short shelf-life eggs—as the Division chose not to pursue sales with little or no profit margin. Eggslightly for other products, except for dried products, where a
moderate decline was recorded. Graded shell egg prices increased
approximately 1%2% compared to thirdsecond quarter 19992000 levels, as reported by Urner
Barry Publications—Publications - a widely quoted industry pricing service. This increaseRelated egg
market increases raised the cost of purchased eggs slightly during a period
where prices for industrial egg products were generally lower than normal. Moreover, extreme volatility in egg prices occurred during the quarter, making it difficult to realize typical spreads between raw material costs and finished industrial egg products prices for any significant length of time. However, earnings increases from value-added egg products largely off-set the margin weakness seen from industrial egg product sales.
weak. Approximately
two-thirds of the Division's annual egg needs are purchased under contracts
or in the spot market. While a portionA substantial majority of these eggs are secured under fixed price contracts, a majority are priced
according to the cost of grain inputs or to egg market prices as reported by
Urner Barry. Approximately one-third of annual egg needs are sourced from
internal flocks, where feed costs typically represent roughly two-thirds of
the cost of producing such eggs. Feed costs were slightly higher in the 20002001 period,
compared to the 19992000 period, due mainly to higher prices for corn and soybean meal.
Increased egg costs, for both internally and externally procured eggs, in the
20002001 period as compared to the 19992000 period, were generally not met with
comparable price changes in egg products prices, creating margin pressure for
certain industrial egg products. Egg Products results in the 1999 period were impacted by two non-recurring items. First, a gain was recorded on the sale of a shell egg production facility. Second, a Belgium animal feed contamination scare resulted in losses at the Company's two European egg products, joint ventures. The net effectparticularly frozen products. Also contributing to the
divisional operating profit decline was the impact of these items was a modest additionincremental
depreciation and amortization related to earnings.
the Merger completed in April 2001.
Refrigerated Distribution Division net sales for the 20002001 period reflected strong unit
sales increases for several product lines, with cheese, butter, bagels, and
butterethnic items showing particular strength. SalesUnit sales growth resulted primarily
from a brand repositioningnew customers gained over the past two yearsyear, as the Crystal Farms brand
continues to expand beyond its traditionally Midwestern core business base.
Margins declined in the key cheese category and for butter items, in both cases
as a broadening consumer advertising campaign in selected markets, along with notable new account activity and new product introductions. The volume growth, along with more normalresult of product costs for items related torising more rapidly than the nationalDivision's selling
prices, particularly butterfat, market, resulted in margin expansionwhich rose sharply in the first half of 2001.
These impacts decreased divisional operating profit margins and dollars compared
to strong 2000 period.
Thelevels when the relationship between product costs and retail
pricing was more favorable.
Dairy Products Division's flatDivision net sales for the 20002001 period reflected lowerhigher unit
sales volumes for the core dairy mix business, in part due to strong creamer and specialty cartoned products sales. Further,
sales of the loss ofdivision's main product line, ultra-high
39
major industrial (tanker) customerunit basis.
Inflationary impacts from a year-over-year rise in late 1999, which offset increased volumes for cartoned specialty products and creamer products, and slightly higher unit pricing comparedthe national dairy
ingredient markets added to the 1999 period. Divisionaldollar sales growth. The divisional
operating profit margin increased in the 2000 period as a result of the higherstrong volume growth,
improved sales of specialty products,mix, and improvements in overhead expenses and operating expenses.
more efficient plant operations.
Potato Products Division net sales for the 20002001 period reflected increased unit sales
increases in all product categories. Sales were particularly strong for both retail and foodservice mashed potato
items. New account activity, and same-account sales growth and higher marketing
spending levels all contributed to the sales gain. The operating profit decrease
in the 20002001 period resulted from a less favorable sales mix, reflecting a slight sales decrease for retail shredded products, andreflected increased marketing spending.
9
spending and the impact of
incremental depreciation and amortization related to the Merger completed in
April 2001.
The decrease in our gross profit margin of the Company for the period ended SeptemberJune 30, 2000 was comparable2001, as
compared to thatthe results of the same2000 period, in 1999, reflectingreflected the factors discussed
above, particularly the margin pressuresincreased raw material costs, which were not able to be
fully recovered within the industrial egg products categoryEgg Products and the margin increases within the Refrigerated Distribution Division.segments.
It is management'sour 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 in most periods.
Selling, general and administrative expenses decreased slightlyincreased as a percent of sales in
the period ended SeptemberJune 30, 2000,2001, as compared to the results of the same period in 1999. Favorable impacts from effective2000 period.
This increased expense management more than offset increased expensesratio reflected the impact of incremental amortization
related to amortizationthe Merger completed in April 2001. Without such Merger effects,
operating expenses would have been a comparable percentage of the costs associated with the Company's information systems upgrade project and additional marketing efforts.
NINEnet sales between
periods.
SIX MONTHS ENDED SEPTEMBERJUNE 30, 2001 AS COMPARED TO SIX MONTHS ENDED JUNE 30, 2000
VS NINE MONTHS ENDEDSEPTEMBER 30, 1999
Results of Operations
RESULTS OF OPERATIONS
Readers are directed to Note F—G - Business Segments for data on the unaudited
financial results of the Company's and the Predecessor's four business segments
and must combine three month periods to evaluate the six months ended June 30,
2001 with six months ended June 30, 2000.
Net sales for the nine months ended September 30,Company and the Predecessor in the 2001 period were
$570,736,000, an increase of 10% compared to the Predecessor's net sales of
$518,542,000 in the 2000 period. Net sales increased because of the factors
discussed in the below divisional reviews, but were higher in the 2001 period
due largely to strong unit sales growth in three divisions and 1999.
inflationary
impacts in two divisions.
40
20002001 period reflected higher unit sales
and price increases particularly for value-addedcertain egg products. Unit sales rose for most product
categories, though dried products which more than offset significant deflationary pricing impacts on certain products and an approximate 40% decline inshowed a moderate decline. Graded shell egg
sales. The latter was by plan and reflects, in part, the sale of a small shell egg facility in the summer of 1999. Sales were particularly strong for extended shelf-life liquid eggs, dried egg products and precooked frozen omelets, patties and curds. Egg prices decreasedincreased approximately 3%10% compared to 1999first half 2000 levels, as
reported by Urner Barry Publications. This decrease loweredBarry. Related egg market increases raised the cost of
purchased eggs but this occurred during a period where prices for industrial egg products were
generally depressed. Moreover, extreme volatility in egg prices occurred during the 2000 period, making it difficult to realize typical spreads between raw material costs and finished industrial egg products prices for any significant length of time. However, earnings increases from value-added egg products largely off-set the margin weakness seen from industrial egg product sales.
weak. Approximately two-thirds of the Division's annual egg needs are
purchased under contracts, or in the spot market. While a portionA substantial majority of
these eggs are secured under fixed price contracts, a majority are priced according to the cost of grain inputs or to egg market
prices as reported by Urner Barry. Approximately one-third of annual egg needs
are sourced from internal flocks, where feed costs typically represent roughly
two-thirds of the cost of producing such eggs. Feed costs were higher in the
2001 period, compared to the 2000 period, were comparabledue mainly to the 1999 period. Decreasedhigher prices for
soybean meal. Increased egg costs, for both internally and externally procured
eggs, in the 20002001 period as compared to the 19992000 period, and improved value-addedwere generally not met
with comparable price changes in egg products earnings, were more than offset by pricing andprices, creating margin weakness inpressure
for certain industrial egg products.
Divisional Also contributing to the divisional operating profit
fordecline was the 2000 period also reflected the benefitimpact of reduced royalty expense, a portion of which was a retroactive adjustment to January 1, 1999. Under an agreement reached during the second quarter of 2000 period, royaltiesincremental depreciation and amortization related to
products produced and sold by the Company under a license with NCSU are limited to a fixed portion of the annual production. In consideration of the reduced royalty arrangement, the Company is responsible for one-half of any future litigation expense incurred to defend the patented egg ultra-pasteurization processing technology. Egg Products resultsMerger completed in the 1999 period were impacted by two non-recurring items.
First, a gain was recorded on the sale of a shell egg production facility. Second, a Belgium animal feed contamination scare resulted in losses at the Company's two European egg products joint ventures. The net effect of these items was a modest addition to earnings.
10
April 2001.
Refrigerated Distribution Division net sales for the 20002001 period reflected strong unit
sales increases for several product lines, with cheese, bagels, potato products
and butterethnic items showing particular strength. SalesUnit sales growth resulted
primarily from a brand repositioningnew customers gained over the past two yearsyear, as the Crystal Farms
brand continues to expand beyond its traditionally Midwestern core business
base. Margins declined in the key cheese category and for butter items, in both
cases as a broadening consumer advertising campaign in selected markets, along with notable new account activity and new product introductions. The volume growth, along with more normalresult of product costs rising more rapidly than the Division's
selling prices. Dairy ingredient costs, particularly for items related to the national butterfat, market, resulted in margin expansionrose sharply
in the first half of 2001. These impacts decreased divisional operating profit
margins and dollars compared to strong 2000 period.
Thelevels when the relationship between
product costs and retail pricing was more favorable.
Dairy Products Division net sales decline for the 20002001 period reflected lowerhigher unit
sales volumes for the core dairy mix business, in part due to strong creamer, and specialty cartoned, products sales. Further,
sales of the loss ofdivision's main product line, UHT dairy mixes, rose on a major industrial (tanker) customerunit
basis. Inflationary impacts from a year-over-year rise in late 1999, which offset increased volumes for cartoned specialty products and creamer products. Divisionalthe national dairy
ingredient markets added to dollar sales growth. The divisional operating profit
declined in the 2000 periodmargin increased as a result of the reducedstrong volume growth, an improved sales volumes, high overhead expensesmix,
and above average operating expenses.
more efficient plant operations.
Potato Products Division net sales for the 20002001 period reflected a strong unit sales
increase,increases in all product categories. Sales were particularly strong for mashed items and retail
shredded products.items. New account activity, same-account sales growth and new product introductionshigher marketing
spending levels all contributed to the sales gain. The flat operating profitsprofit increase
in the 20002001 period comparedreflected the benefits of rising sales in the higher margin
retail segment, which offset increased marketing spending and the impact of
incremental depreciation and amortization related to the 1999 period reflect benefits from the volume growth, as plant operations at the main potato processing facility benefited from the increased production throughput, which were offset by increased marketing spending.
Merger completed in
April 2001.
The increasedecrease in our gross profit margin of the Company for the period ended SeptemberJune 30, 2000,2001, as
compared to the results of the same2000 period, in 1999, reflected the factors discussed
above, particularly the strength inincreased raw material costs within the Egg Products and
Refrigerated Distribution Division.segments. It is management'sour strategy to increase value-addedvalue- 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 in most periods.
41
remained approximately constantdecreased slightly as a percent of
sales infor the period ended SeptemberJune 30, 2000,2001, as compared to the results of the same period in 1999. Expenses increased due2000
period. Operating expenses reflected the impact of incremental amortization
related to amortizationthe Merger of the costsCompany (see Note A) completed in April 2001 and
expenses associated with terminating our investment in a Egg Products
Division joint venture, which were offset by the Company's information systems upgrade project, amortization of a non-compete agreementfinal insurance settlement
related to a May 1999 Dairy Products acquisition, increasesDivision product recall in bad debt expense resulting1999. Separate from
a foodservice distributor's bankruptcyselling, general and administrative expenses in the 2001 period, the
Predecessor recorded non-recurring expenses related to the Merger for
financial, legal, advisory and regulatory filing and additional marketing efforts. However, these increasedfees. These expenses were offset by effective expense controlsof
$11,050,000 are reflected in other areas and the favorable impactPredecessor Consolidated Statements of
the reduced egg products royalty arrangement, including a one-time retroactive benefit.
General
Earnings as transaction expenses.
GENERAL
Certain of the Company'sour products are sensitive to changes in commodity prices.
The Company's Egg Products Division derived less than 3% of the Division's net sales for the first nine months of 2000 from shell eggs, which are sensitive to commodity price swings. Value-added egg products, such as extended shelf-life liquid egg products lines and precooked
egg products, accountedaccount for approximately 50%60% of the Egg Products Division's net
sales. The remainder of Egg Products Division sales is derived from the sale of
other egg products and shell eggs, which vary from being very
commodity-sensitive to somewhat value-added. 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. ShellGraded shell egg pricing in
the 20002001 period was approximately 3% below 199910% above 2000 levels, as measured by Urner Barry Publications.a widely
quoted pricing service, and feed costs also rose year-over-year. Gross profit
margins for extended shelf-life liquid eggs, egg substitutes, and precooked and
hardcooked egg products are less sensitive to commodity price fluctuations than
are other egg products or shell eggs.
The Company's
Our Refrigerated Distribution Division derives approximately 70%75% of its net
sales from refrigerated products produced by others, thereby reducing the
effects of commodity price swings. The balance of refrigerated distribution
sales are mainly from shell eggs, some of which are produced by the Egg
11
Products
Division, and are sold on a distribution, or non-commodity, basis by the Refrigerated Distribution Division.
basis. 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, except over short time periods.
The Potato Products Division typically purchases 70%-90%75%-95% of its raw potatoes
from contract producers under annual contracts. The remainder is purchased at
market prices to satisfy short-term production requirements or to take advantage
of market prices when they are lower than contracted prices. Moderate variations
in the purchase price of raw materials or the selling price per pound of
finished products can have a significant effect on Potato Products Division
operating results.
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
CAPITAL RESOURCES AND LIQUIDITY
Acquisitions and capital expenditures have been, and will likely continue to be,
a significant capital requirement. The Company plansWe plan to continue to invest in
state-of-the-art production facilities to enhance itsour competitive position.
Historically, the Company haswe have financed itsour growth principally from internally generated
funds, bank borrowings, and the issuance of senior debt and the sale of Common Stock. The Company believes that thesedebt. We believe such sources
remain viable financing alternatives will continue to meet itsour anticipated needs.
The Company
42
$25,967,000approximately $6,300,000 in capital expenditures during the ninethree
months ended SeptemberJune 30, 2000.2001. The Company plansPredecessor invested approximately
$10,800,000 in capital expenditures during the three months ended March 31,
2001. On a combined basis, we plan to spend approximately $45,000,000 in total$43,000,000 on
capital expenditures in 2000,2001, the majority of which is to expand or update
production capacity for value-added products.
The
Earnings before interest, taxes, depreciation and amortization ("EBITDA") in
the three month 2001 period were $37,033,000, an increase of 4% compared to
the Predecessor's EBITDA of $35,755,000 in the three month 2000 period.
EBITDA for the Company has two unsecured linesand the Predecessor in the six month 2001 period was
$68,777,000, an increase of 3% compared to the Predecessor's EBITDA of
$66,907,000 in the six month 2000 period. EBITDA increased because of the
factors discussed in the above results of operations divisional reviews. Our
management believes that EBITDA is a relevant measurement of the Company's
financial results, as it is indicative of the relative strength of the
Company's cash flows and is a key measurement contained in the financial
covenants of our senior indebtedness. In addition, as a highly leveraged
company, the holders of the Company's debt have a significant interest in our
cash flows. We compute EBITDA as it is defined in our senior credit agreement
(see Exhibit 10.1 of our Amendment No. 1 to Form S-4 filed with the
Securities and Exchange Commission on July 18, 2001). This definition may not
be comparable to that used by other companies reporting similar financial
information.
We believe EBITDA is a widely accepted financial indicator used to analyze
and compare companies on the basis of operating performance. It should not be
considered in isolation or as a substitute for measures of performance
prepared in accordance with generally accepted accounting principles and is
not indicative of operating profit or cash flow from operations as determined
under generally accepted accounting principles.
We have senior secured credit facilities in the amount of $470,000,000 with
numerous banks, other financial institutions and investment groups, which
includes a $100,000,000 line of credit for $80,000,000 and $20,000,000 with its principal banks. As of Septemberexpiring in 2007. At June 30, 2000, $73,000,000 was outstanding2001, there
were no borrowings under these linesthe line of credit.
The senior credit facility contains various restrictive covenants. It
prohibits us from prepaying other indebtedness, including the notes, and it
requires us to maintain specified financial ratios, such as a minimum ratio
of EBITDA to interest expense, a minimum fixed charge coverage ratio and a
maximum ratio of total debt to EBITDA, and satisfy financial condition tests.
In July 1998,addition, the Company's Boardsenior credit facility prohibits us from declaring or paying
any dividends and prohibits us from making any payments with respect to the
notes if we fail to perform our obligations under, or fail to meet the
conditions of, Directors authorized the purchasesenior credit facility or if payment create a default under
the senior credit facility.
The indenture governing the notes, among other things, (a) restricts the
ability of upthe issuer and its subsidiaries, including the guarantors of the
notes, to 2,000,000incur additional indebtedness, issue shares of Common Stockpreferred stock,
incur liens, pay dividends or make certain other restricted payments and
enter into certain transactions with affiliates, (b) prohibits certain
restrictions on the open marketability of certain of the issuer's subsidiaries,
including the guarantors of the notes, to pay dividends or in privately negotiated transactions. In February 2000,make certain
payments to the Board authorized an additional purchase of up to 2,000,000 shares of Common Stockissuer and (c) places restrictions on the open marketability of the
issuer and its subsidiaries, including the guarantors of the notes, to merge
or consolidate with any other person or sell, assign, transfer,lease, convey
or otherwise dispose of all or substantially all of the assets of the issuer.
The indenture related to these notes and the senior credit facility also
contain various covenants which limit our discretion in privately negotiated transactions,the operation of our
businesses.
Our principal sources of funds are anticipated to be cash flows from
operating activities and borrowings under our senior credit facility. We
believe that these funds will provide us with ansufficient liquidity and
capital resources for us to meet our current and future financial
obligations, as well as to provide funds for our working capital, capital
expenditures and other needs for at least the next 12 months. No assurance
can be given, however, that this will be the case. We may require additional
500,000 share authorization made in May 2000. Through September 30, 2000, the Company had repurchased 4,012,200 shares of Common Stock for $89,121,000. During the third quarter of 2000 the Company did not repurchase any shares of Common Stock.
Seasonality
equity or debt financing to meet our working capital requirements or to fund our acquisition activities, if any. There can be no assurance that additional financing will be available when required or, if available, will be on terms satisfactory to us. 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, refrigerated distribution operations experience higher net sales and operating profits in the fourth quarter, coinciding with incremental consumer demand during the holiday season. Net sales and 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. 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.
12
Forward-Looking Statements
FORWARD-LOOKING STATEMENTS
Certain items in this Form 10-Q may be forward-looking statements, which are
made in reliance upon the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements are subject to
numerous risks and uncertainties, including variances in the demand for the
Company's products due to consumer developments and industry developments, as
well as variances in the costs to produce such products, including normal
volatility in egg and feed costs. The Company'sOur actual financial results could differ
materially from the results estimated by, forecasted by, or implied by the Companyus in
such forward-looking statements.
Item
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no material changes in the Company's or the Predecessor's market risk
during the ninesix month period ended SeptemberJune 30, 2000.
13
2001.
PART II—II - OTHER INFORMATION
Item 5—Other Information
On November 3, 2000,
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A Special Meeting of Shareholders of Michael Foods, Inc. (Predecessor) was held
on April 9, 2001. The items voted upon and the Company's Crystal Farms Refrigerated Distribution Company ("Crystal Farms") subsidiary initiated a voluntary recall of two cheese items after learning of their possible contamination with Listeria monocytogenes. It is estimated that less than 80,000 pounds of Crystal Farms cheese are affected by the recall. The cheese was produced by a Wisconsin-based dairy cooperative and packaged for Crystal Farms by a contract packaging company. Management believes the ultimate outcome of this recall will not have a material effect on the Company's consolidated financial position, liquidity or results of operations.
Item 6—the vote follow:
1. To approve and adopt the merger agreement as described in the Proxy
Statement dated March 12, 2001:
For Against Abstain
--- ------- -------
15,249,659 40,428 34,288
2. To transact other business:
For Against Abstain
--- ------- -------
10,845,432 3,320,268 1,158,675
43
andNone.
(b) Reports on Form 8-K
There were no reports on
The Company filed a Form 8-K inon July 26, 2001 regarding a news release issued to
the Company's debtholders pertaining to the Company's financial results for the
three month periodmonths and six months ended SeptemberJune 30, 2000.
14
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.