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 September 30, 2000
2001 ----------------------------------------- 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: 0-15638
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. /X/ Yes /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.
No
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 September 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 7.3% at
September 30, 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 September 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
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.
7
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 September 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 September 30.
The accompanying Predecessor Balance Sheet as of December 31, 2000, the
Predecessor Statements of Earnings for the three and nine months ended September
30, 2000 and the three months ended March 31, 2001, and the Predecessor
Statements of Cash Flows for the nine months ended September 30, 2000 and the
three months ended March 31, 2001 have been prepared from the historical books
and records of the Predecessor. The accompanying unaudited financial statements
and footnote information for the three and nine month periods ended September
30, 2000 have been prepared in accordance with Regulation S-X pursuant to the
rules and 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 of the
Company as of and for the three and six month periods ended September 30, 2001
have been prepared in accordance with Regulation S-X pursuant to the rules and
regulations of the SEC using the new basis of assets and liabilities of the
Company. 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 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.
8
Company's basic net earnings per share is computed by dividing net earnings byamount of hedge
ineffectiveness was immaterial for the weighted average number of outstanding common shares. The Company's diluted net earnings per share is computed by dividing net earnings by the weighted average number of outstanding common shares and common share equivalents relating to stock options, when dilutive. Options to purchase 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 periodssix months ended September 30, 2000, were excluded from2001.
The Company actively monitors its exposure to commodity price risks and uses
derivative commodity instruments to manage the computationimpact of common share equivalentscertain of these
risks. We use derivatives only for those periods becausethe purpose of managing risks associated
with underlying exposures, primarily futures contracts, to manage our
exposures. Our futures contracts are cash flow hedges of firm purchase
commitments and anticipated production requirements, as they were anti-dilutive. Optionsreduce our
exposure to purchase 390,275 and 734,824 shares of common stock, with a weighted average exercisechanges in the cash price of $25.56the respective items and $24.80, were outstandinggenerally
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 equity section of the balance sheet and recognized as an
adjustment to current assets or liabilities, 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
deferred until the anticipated purchase occurs. As a result of the volatility
of the markets, deferred gains and losses in AOCL may fluctuate until the
related contract is closed.
Initially, upon adoption of the new derivative accounting standard, and
prospectively as required by the standard 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 the
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
9
and nine month periodsmonths
ended September 30, 1999, but were excluded from2001 and the computation of common share equivalents for those periods because they were anti-dilutive.
six months ended September 30, 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
$4,383,000 at September 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 six months ended September 30, 2001 was $4,383,000. Goodwill
amortization for the nine months ending December 31, 2001 is expected to be
approximately $6,600,000.
10
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. We believe
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 nine months ended September 30, 2001 were as follows:
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 this litigation will not have a
material effect upon its consolidatedon the Unit's financial position, liquidity or results of
operations.
32
33
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The accompanying notes are an integral part of these statements.
34
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The accompanying notes are an integral part of these statements.
35
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The accompanying notes are an integral part of these statements.
36
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The accompanying notes are an integral part of these statements.
37
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
M-Foods Dairy TXCT, LLC 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 7.3% at September 30, 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 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 approximate fair value contributed to M-Foods
Dairy TXCT, LLC 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.
38
quarters ofparty
appraisal firm. The allocations were as follows:
39
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 nine months ended September 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 $11,644,000 and $10,713,000assumes the Merger had occurred on January 1, 2000:
7
the three months ended March 31, 2001 have been prepared from the
historical books and records of Michael Foods. The respective Statements of
Operations include an allocation of general and administrative costs incurred by
Michael Foods and allocations from this Operating Unit to the other Dairy LLC
operating unit, M-Foods Dairy, LLC. The accompanying unaudited financial
statements and footnote information for the three and nine month periods ended
September 30, 2000 have been prepared in accordance with Regulation S-X pursuant
to the rules and 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 and six month periods ended September 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 as
a stand-alone entity. The historical results of the Company and Predecessor for
the periods indicated are not necessarily indicative of the results of the
Company for a full year.
The accounting policies of the Predecessor have been adopted by the Company.
40
F—BUSINESS SEGMENTS
B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (cont.) 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. Inventories Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market.
| | 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 Resultsthis litigation will not have a
material effect on the accompanying statements of Operations
financial position, liquidity
or results of operations.
41
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 September 30, 2001 and for data on the unaudited financial results of the
Predecessor's four business segments for the three months ended September 30,
2000.
Net sales for the 2001 period were $299,225,000, an increase of 8% compared to
the Predecessor's net sales of $276,568,000 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 unit sales growth in three
divisions and 1999.
inflationary impacts in two divisions.
Egg Products Division net sales for the 20002001 period reflected slightly decreased
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 increaseddecreased approximately 1%8% compared to
third quarter 19992000 levels, as reported by Urner Barry Publications—Publications - a widely
quoted industry pricing service. This increase raisedRelated egg market decreases lowered the cost
of purchased eggs 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.
slightly. 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 higherlower in
the 20002001 period, compared to the 19992000 period, due mainly to higherlower prices for
corn and soybean meal. Increasedcorn. Decreased egg costs forfrom both internallyinternal and externally procured eggs,external sources in the 2001
period, as compared to the 2000 period, compared to the 1999 period, were generally not met with
comparable price changes inflat-to-modestly-higher egg products prices, creating margin pressurehigher margins 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 effect of these items was a modest addition to earnings.
particularly egg substitutes and dried products, and higher
divisional margins in total.
Refrigerated Distribution Division net sales for the 20002001 period reflected strong unit
sales increases for several product lines, with cheesemargarine, 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. Higher retail
price points for dairy-related products also contributed to the dollar sales
gain in the 2001 period. Margins declined in the key cheese category and for
butter items. A combination of high demand and a broadening consumer advertising campaignlow milk supply, due to weather
impacts, caused dairy-related ingredient costs to rise sharply in selected markets, along with notable new account activitythe first nine
months of 2001. The lack of commensurate increases in selling prices caused
divisional operating profit margins and new product introductions. The volume growth, along with more normaldollars to weaken considerably compared
to strong 2000 levels, when the relationship between product costs for items related to the national butterfat market, resulted in margin expansion in the 2000 period.
Theand retail
pricing was more favorable.
42
Division's flatDivision net sales for the 20002001 period reflected lowerhigher unit
sales, volumes fordue mainly to strong creamer and specialty cartoned products sales.
Further, sales of the coredivision's main product line, ultra-high temperature
pasteurized("UHT") dairy mix business,mixes, rose on a unit basis. Inflationary impacts from
a year-over-year rise in part duethe national dairy ingredient markets added to the loss of a major industrial (tanker) customer in late 1999, which offset increased volumes for cartoned specialty products and creamer products, and slightly higher unit pricing compared to the 1999 period. Divisionaldollar
sales growth. The divisional operating profit margin and dollars increased in the 2000 period as a
result of the higherstrong volume growth, an 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 decreaseincrease
in the 20002001 period resulted fromreflected improved operating costs and the impact of a less
favorable sales mix, reflectingwith retail sales rising as a slight salespercent of the divisional
total.
The decrease for retail shredded products, and increased marketing spending.
9
Thein our gross profit margin of the Company for the period ended September 30, 2000 was comparable2001,
as compared to thatthe results of the samePredecessor in the 2000 period, in 1999, reflectingreflected the
factors discussed above, particularly the margin pressures within the industrial egg products category and the margin increasesincreased raw material costs, which were
not able to be fully recovered within the Refrigerated Distribution Division.segment. 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 September 30, 2000,2001, as compared to the results of the
same periodPredecessor in 1999. Favorable impacts from effectivethe 2000 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 roughly
comparable percentage of the costs associated with the Company's information systems upgrade project and additional marketing efforts.
net sales between periods.
NINE MONTHS ENDED SEPTEMBER 30, 2001 AS COMPARED TO NINE MONTHS ENDED SEPTEMBER
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
forand must combine three month and six month periods to evaluate the nine months
ended September 30, 2001 with nine months ended September 30, 2000.
Net sales for the Company and the Predecessor in the 2001 period were
$869,961,000, an increase of 9% compared to the Predecessor's net sales of
$795,110,000 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 unit sales growth in three divisions and 1999.
inflationary impacts in
two divisions.
43
20002001 period reflected flat unit sales
and price increases particularly for value-added products, which more than offset significant deflationary pricing impacts on certain products and an approximate 40% decline in 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 precookedfor shell eggs. Unit sales
rose for several product categories, though frozen omelets, patties and curds. Eggdried products showed
a moderate decline. Graded shell egg prices decreasedincreased approximately 3%4%
compared to 1999 levels in the first nine months of 2000, 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.
eggs.
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 lower in the
2000 period were comparable to the 1999 period. Decreased egg costs, for externally procured eggs, in the 20002001 period, compared to the 19992000 period, and improved value-addeddue mainly to lower prices for
corn. In total, combining the higher cost external eggs with the lower cost
internal eggs, divisional egg costs rose slightly in the 2001 period as
compared to the 2000 period. Such increased egg costs were 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.
Divisionalproducts, particularly frozen items. 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 most product lines, with cheesebagels, 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. Higher retail price points for dairy-related products also contributed to
the dollar sales gain in the 2001 period. Margins declined in the key cheese
category and for butter items. A combination of high demand and a broadening consumer advertising campaignlow milk
supply, due to weather impacts, caused dairy-related ingredient costs to rise
sharply in selected markets, along with notable new account activitythe first nine months of 2001. The lack of commensurate increases in
selling prices caused divisional operating profit margins and new product introductions. The volume growth, along with more normaldollars to weaken
considerably compared to strong 2000 levels, when the relationship between
product costs for items related to the national butterfat market, resulted in margin expansion in the 2000 period.
Theand retail pricing was more favorable.
Dairy Products Division net sales decline for the 20002001 period reflected lowerhigher unit
sales volumes fordue mainly to strong creamer and specialty cartoned products sales.
Further, sales of the coredivision's main product line, UHT dairy mix business,mixes, rose on a
unit basis. Inflationary impacts from a year-over-year rise in part duethe national
dairy ingredient markets added to the loss of a major industrial (tanker) customer in late 1999, which offset increased volumes for cartoned specialty products and creamer products. Divisionaldollar sales growth. The divisional operating
profit declined in the 2000 periodmargin and dollars 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.44
new product introductionshigher marketing
spending levels all contributed to the sales gain. The flat operating profitsprofit increase
in the 20002001 period comparedreflected improved operating costs and the impact of a
favorable sales mix, with retail sales rising as a percent of the divisional
total. These favorable developments offset the impacts of increased marketing
spending and 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 September 30, 2000,2001,
as compared to the results of the samePredecessor in the 2000 period, in 1999, reflected the
factors discussed above, particularly the strength inincreased raw material costs within
the Refrigerated Distribution Division.segment. 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.
Selling, general and administrative expenses remained approximately constantincreased as a percent of sales infor
the period ended September 30, 2000,2001, as compared to the results of the
same periodPredecessor in 1999. Expenses increased duethe 2000 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. Separate from selling, general and administrative expenses in bad debt expense resulting from a foodservice distributor's bankruptcythe
2001 period, the Predecessor recorded non-recurring expenses related to the
Merger for financial, legal, advisory and regulatory filing fees. These
expenses of $11,050,000 are reflected in the Predecessor Consolidated
Statements of Earnings as transaction expenses. Exclusive of such Merger
expenses, selling, general and additional marketing efforts. However, these increasedadministrative expenses were offset by effective expense controlsa comparable
percentage of net sales in other areas and the favorable impact of2001 period as compared to the reduced egg products royalty arrangement, including a one-time retroactive benefit.
General
2000 period.
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 19994% above 2000 levels, as
measured by Urner Barry Publications.a widely quoted pricing service, while feed costs declined
slightly 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
45
70%75% of its net
sales from refrigerated products produced by others, thereby reducing the
effects of commodity price swings. However, in periods of sharp and
accelerated cost increases there is typically a lag in retail pricing
adjustments, which can result in margin compression. 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
We invested $25,967,000approximately $13,528,000 in capital expenditures during the ninesix
months ended September 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$40,000,000 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") for
the three months ended September 30, 2001 period were $37,393,000, an increase
of 6% compared to the Predecessor's EBITDA of $35,362,000 in the comparable
three month 2000 period. EBITDA for the Company has two unsecured linesand the Predecessor in the
nine month 2001 period was $106,169,000, an increase of 4% compared to the
Predecessor's EBITDA of $102,269,000 in the nine 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
46
for $80,000,000 and $20,000,000 with its principal banks. As ofexpiring in 2007. At September 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) places 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 an additional 500,000 share authorization made in May 2000. Through Septembersufficient liquidity and
47
Company had repurchased 4,012,200 shares of Common Stock for $89,121,000. Duringnext 12 months. No assurance can be given, however,
that this will be the third quarter of 2000 the Company did not repurchase any shares of Common Stock.
Seasonality
case. We may require additional 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 nine month period ended September 30, 2000.
13
2001.
PART II—II - OTHER INFORMATION
Item 5—Other Information
On November 3, 2000, 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—
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
andNone
48
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 months ended June 30, 2001 and the pro forma financial results for the six
month period ended June 30, 2001.
Subsequent to the reporting period herein, the Company filed a Form 8-K on
November 8, 2001 regarding a news release issued to the Company's debtholders
pertaining to the Company's financial results for the three months ended
September 30, 2001 and the pro forma financial results for the nine month period
ended September 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.