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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

~~Form~~FORM 10-Q

ý~~/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~~

~~/ /~~
For the quarterly period ended March 31, 2002

	or

o	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: 333-63722

~~For the transition period from~~to

~~Commission File Number: 0-15638~~MICHAEL FOODS, INC.

~~Michael Foods, Inc.~~
(Exact name of registrant as specified in its charter)

Minnesota		41-0498850
(State or other jurisdiction of incorporation or organization)		~~41-0498850~~ (I.R.S. Employer Identification No.)

Suite 324, ~~Park National~~Signal Bank Building
5353 Wayzata Boulevard
Minneapolis, MN		55416
(Address of principal executive offices)		~~55416~~ (Zip code)

(952) 546-1500
(Registrant’s telephone number, including area code)

~~(952) 546-1500~~
~~(Registrant's telephone number, including area code)~~

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ýYes ~~/x/~~o No ~~/ /~~

PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
~~The number of shares outstanding of the registrant's Common Stock, $.01 par value, as of November 6, 2000 was 18,284,991 shares.~~
~~PART I—FINANCIAL INFORMATION~~
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

March 31,
2002

December 31,
2001

ASSETS

CURRENT ASSETS

Cash and equivalents

$
38,213,000

$
27,660,000

Accounts receivable, less allowances

101,154,000

102,317,000

Inventories

81,983,000

78,941,000

Prepaid expenses and other

9,572,000

11,370,000

Total current assets

230,922,000

220,288,000

PROPERTY, PLANT AND EQUIPMENT-AT COST

Land

3,873,000

3,873,000

Buildings and improvements

99,561,000

99,561,000

Machinery and equipment

233,626,000

226,759,000

337,060,000

330,193,000

Less accumulated depreciation

52,382,000

39,039,000

284,678,000

291,154,000

OTHER ASSETS

Goodwill, net

341,021,000

341,021,000

Joint ventures and other assets

43,288,000

44,670,000

384,309,000

385,691,000

$
899,909,000

$
897,133,000

LIABILITIES AND SHAREHOLDERS’ EQUITY

CURRENT LIABILITIES

Current maturities of long-term debt

$
14,204,000

$
12,962,000

Accounts payable

59,239,000

64,492,000

Accrued liabilities

Compensation

9,903,000

12,582,000

Insurance

9,330,000

8,191,000

Customer programs

25,993,000

21,996,000

Income taxes

12,915,000

9,853,000

Interest

15,948,000

10,619,000

Other

13,862,000

14,116,000

Total current liabilities

161,394,000

154,811,000

LONG-TERM DEBT, less current maturities

529,309,000

540,132,000

DEFERRED INCOME TAXES

49,484,000

48,725,000

COMMITMENTS AND CONTINGENCIES

NON-CONTROLLING INTEREST

475,000

475,000

SHAREHOLDERS’ EQUITY

Common stock

—

—

Additional paid-in capital

146,792,000

146,792,000

Retained earnings

15,174,000

9,815,000

Accumulated other comprehensive loss

(2,719,000
)
(3,617,000
)

159,247,000

152,990,000

$
899,909,000

$
897,133,000

See accompanying notes to condensed consolidated financial statements.
2

MICHAEL FOODS, INC. ~~AND SUBSIDIARIES~~
(A WHOLLY-OWNED SUBSIDIARY OF M-FOODS HOLDINGS, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
Three Months Ended ~~September 30,~~ March 31,
(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

Company

Predecessor

2002

2001

Net sales

$
278,429,000

$
275,627,000

Cost of sales

227,313,000

227,707,000

Gross profit

51,116,000

47,920,000

Selling, general and administrative expenses

29,623,000

27,376,000

Transaction expenses

—

11,050,000

Operating profit

21,493,000

9,494,000

Interest expense, net

12,664,000

3,293,000

Earnings before income taxes

8,829,000

6,201,000

Income tax expense

3,470,000

2,430,000

Earnings before extraordinary item

5,359,000

3,771,000

Extraordinary item - early extinguishment of debt, net of taxes

—

(9,424,000
)

NET EARNINGS (LOSS)

$
5,359,000

$
(5,653,000
)
See accompanying notes to condensed consolidated financial statements.
3

MICHAEL FOODS, INC. ~~AND SUBSIDIARIES~~
(A WHOLLY-OWNED SUBSIDIARY OF M-FOODS HOLDINGS, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF ~~EARNINGS~~CASH FLOWS
~~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

Company

Predecessor

Three Months
Ended March 31,
2002

Three Months
Ended March 31,
2001

Net cash provided by operating activities

$
26,590,000

$
14,016,000

Cash flows from investing activities:

Capital expenditures

(6,878,000
)
(10,837,000
)
Investments in joint ventures and other assets

422,000

3,888,000

Net cash used in investing activities

(6,456,000
)
(6,949,000
)

Cash flows from financing activities:

Payments on notes payable

(5,000,000
)
(52,000,000
)
Proceeds from notes payable

—

45,500,000

Payments on long-term debt and other

(4,581,000
)
(109,000
)
Extension of stock options

—

310,000

Proceeds from issuance of common stock

—

546,000

Dividends

—

(1,465,000
)
Net cash used in financing activities

(9,581,000
)
(7,218,000
)

Net increase (decrease) in cash and equivalents

10,553,000

(151,000
)

Cash and equivalents at beginning of period

27,660,000

4,421,000

Cash and equivalents at end of period

$
38,213,000

$
4,270,000

See accompanying notes to condensed consolidated financial statements.
4

MICHAEL FOODS, INC. ~~AND SUBSIDIARIES~~
~~CONDENSED CONSOLIDATED STATEMENTS~~(A WHOLLY-OWNED SUBSIDIARY OF ~~CASH FLOWS~~M-FOODS HOLDINGS, INC.)
~~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

~~See accompanying notes to condensed consolidated financial statements.~~
5
~~MICHAEL FOODS, INC. AND SUBSIDIARIES~~
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 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 Predecessor’s 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 approximately 6.0% as of March 31, 2002), 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, we contributed the assets of our 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 $35,800,000. The preferred units issued to us have an annual 10% preferred return guarantee and represent 100% of the preferred units issued and outstanding. In addition, we 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 non-controlling interest in the accompanying consolidated balance sheet as of March 31, 2002.
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
~~(Unaudited)~~
5

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. Our 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.
For accounting purposes the Merger was considered a leveraged buyout. The total purchase price of approximately $562,881,000 was allocated to the acquired assets and assumed liabilities based on their fair values at April 1, 2001, net of the deemed dividend. These allocations were based on a valuation by a third party appraisal firm. The allocation of the purchase price was as follows:
Working capital

$
88,663,000

Property, plant & equipment

307,544,000

Other assets

42,816,000

Goodwill

347,537,000

Long-term debt

588,426,000

Other liabilities

51,474,000

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, we 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 our consolidated balance sheet.
The following unaudited pro forma net sales and net earnings for the three months ended March 31, 2001 are derived from the application of pro forma adjustments to the Predecessor’s historical statement of earnings, and assumes the Merger had occurred on January 1, 2001. The pro forma net earnings for the three months ended March 31, 2001 is also adjusted for goodwill amortization determined in accordance with the provisions of SFAS 142 (see Note C). The net sales and net earnings for the three months ended March 31, 2002 represent actual results for the period.

Three months ended

March 31, 2002

March 31, 2001

Net sales

$
278,429,000

$
275,627,000

Net earnings before extraordinary item

5,359,000

3,115,000

6

NOTE A—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~~
We utilize, 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, 2000~~March 31, 2002 and ~~1999~~2001 each included thirteen weeks of operations. For clarity of presentation, the Company ~~has~~and Predecessor have described both periods presented as if the quarters ended on ~~September 30.~~March 31st.
The accompanying unaudited financial statements and footnote information as of and for the three month period ended March 31, 2001 were prepared in accordance with Regulation S-X pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) using the historical books and records of the Predecessor and reflect 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 month period ended March 31, 2002 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, 2000~~Company and Predecessor are not necessarily indicative of ~~the~~their results for ~~the~~a 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.
NOTE C - ADOPTION OF NEW ACCOUNTING POLICIES
Goodwill and Intangible Assets:
In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) 141, “Business Combinations”, and SFAS 142, “Goodwill and Other Intangible Assets”. SFAS 141 is effective for all business combinations completed after June 30, 2001. SFAS 142 is effective for fiscal years beginning after December 15, 2001; however, certain provisions of this Statement apply to goodwill and other intangible assets acquired between July 1, 2001 and the effective date of SFAS 142. We adopted the provisions of SFAS 142 as of January 1, 2002 and had no acquisitions between July 1, 2001 and January 1, 2002.
As a result of adopting SFAS No. 141 and SFAS No. 142, our accounting policies for goodwill and intangible assets changed effective January 1, 2002 as described below:
7

Goodwill and Intangible Assets with Indefinite Lives:
We recognize the excess cost of an acquired entity over the net amount assigned to assets acquired, including intangible assets with indefinite lives, and liabilities assumed, as goodwill. Goodwill and intangible assets with indefinite lives will be tested for impairment on an annual basis and between annual tests whenever there is an impairment indicated. Impairment losses will be recognized whenever the implied fair value is less than the carrying value of the related asset. Prior to January 1, 2002, goodwill and intangible assets with indefinite lives were amortized over 40 years. Beginning January 1, 2002, goodwill and intangible assets with indefinite lives were no longer amortized.
Other Intangibles:
We recognize an acquired intangible apart from goodwill whenever the asset arises from contractual or other legal rights, or whenever it is capable of being separated or divided from the acquired entity and sold, transferred, licensed, rented, or exchanged, either individually or in combination with a related contract, asset, or liability. An intangible other than goodwill is amortized over its estimated useful life unless that life is determined to be indefinite. Impairment losses are recognized if the carrying amount of an intangible subject to amortization is not recoverable from expected future cash flows and its carrying amount exceeds its fair value.
During the first quarter of fiscal 2002, we completed the transitional impairment test of indefinite-lived intangible assets with no impairment indicated. During the second quarter of fiscal 2002, we will complete the transitional impairment test of goodwill and other intangibles. We do not believe the impairment testing will have a material effect on our results of operations or financial position.
Our carrying amount, net of accumulated amortization, for goodwill as of March 31, 2002 and December 31, 2001 was $341,021,000. Each segment’s share of this goodwill at these dates was as follows:
Egg Products

$
254,182,000

Refrigerated Distribution

35,560,000

Potato Products

49,515,000

Dairy Products

1,764,000

The ~~Company's basic~~carrying amounts, net of accumulated amortization, for other indefinite-lived intangible assets (trademarks) as of March 31, 2002 and December 31, 2001 was $13,406,000. The Predecessor had no indefinite-lived intangible assets.
The following table presents a reconciliation of net earnings ~~per share is computed by dividing net earnings by~~(loss), as reported in the ~~weighted average number~~financial statements, to those amounts adjusted for goodwill and intangible amortization determined in accordance with the provisions of ~~outstanding common shares.~~ SFAS 142.

Three months ended March 31,

2002

2001

(Company)

(Predecessor)

Reported net earnings (loss)

$
5,359,000

$
(5,653,000
)
Add back: goodwill amortization

—

885,000

Adjusted net earnings (loss)

$
5,359,000

$
(4,768,000
)
8

Our acquired intangible assets that have been determined to have a definite life and continue to be amortized as of March 31, 2002 are as follows:

Gross Carrying
Amount

Accumulated
Amortization

Licenses and non-compete

$
2,526,000

$
(811,000
)
The ~~Company's diluted net earnings per share is computed by dividing net earnings by~~aggregate amortization expense for the ~~weighted average number~~three months ended March 31, 2002 was approximately $180,000. The Predecessor had amortization expense 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$500,000 during the ~~three and nine month periods~~period ended ~~September 30, 2000, were excluded from~~March 31, 2001. The estimated amortization expense for the ~~computation~~years ended December 31, 2002 through December 31, 2006 is as follows:

For the Years
Ended December 31,

2002

$
715,000

2003

715,000

2004

186,000

2005

186,000

2006

87,000

Other New Pronouncements:
On January 1, 2002 we adopted SFAS 144 Accounting for the Impairment or Disposal of ~~common share equivalents for those periods because they were anti-dilutive. Options to purchase 390,275 and 734,824 shares~~Long-Lived Assets. The adoption of ~~common stock, with~~SFAS 144 did not have a weighted average exercise price of $25.56 and $24.80, were outstanding during the three and nine month periods ended September 30, 1999, but were excluded from the computation of common share equivalents for those periods because they were anti-dilutive.
~~NOTE B—INVENTORIES~~material effect on our consolidated financial statements.

In addition, we adopted Emerging Issues Task Force (EITF) Issue No. 00-25 Vendor Income Statement Characterization of Consideration to a Reseller on the Vendors Products, effective January 1, 2002. The adoption of EITF Issue 00-25 did not have a material effect on our consolidated financial statements.
NOTE D - 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~~consisted of the following:

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

March 31,
2002

December 31,
2001

Raw materials and supplies

$
18,154,000

$
15,347,000

Work in process and finished goods

44,466,000

43,027,000

Flocks

19,363,000

20,567,000

$
81,983,000

$
78,941,000

NOTE C—E - COMMITMENTS AND CONTINGENCIES
~~Use of Estimates~~
~~Preparation~~
Egg Procurement Contracts:
We maintain egg procurement contracts with numerous cooperatives and egg producers throughout the Midwestern and Eastern United States, which supply approximately 50% of ~~the Company's consolidated financial statements requires management~~our egg requirements. These contracts vary in length from
9

18 to ~~make estimates and assumptions that affect reported amounts~~72 months with prices primarily indexed to grain or Urner Barry market indices. No single egg supplier provides more than 10% of ~~assets and liabilities and related revenues and expenses. Actual results could differ from the estimates used by management.~~
~~License Agreement~~our egg requirements.
~~The Company has~~
Patent Litigation:
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 has~~we have the right to defend and prosecute infringement of the ~~licensed~~underlying patents. We may apply 50% of our costs of defending the patents to future royalty payments.
The U.S. Federal Court of Appeals has upheld the validity of the ~~four~~ patents ~~subject to the license agreement. However, subsequently a patent examiner at~~on two separate occasions. In September 2000, 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 Company and the patent holder received a Notice of Allowability, followed by a Notice of Allowance, regarding the reissuance of the fourth patent, which included the allowance ofallowed product claims beyond the process claims previously ~~allowed.~~allowed for the extended shelf-life egg product. These patents are scheduled to expire beginning in 2006.
In 2000, the Predecessor settled litigation with one party related to the infringement of these patents and issued a sub-license to the infringing party granting them the right to manufacture and distribute extended shelf-life liquid whole egg product subject to a royalty payable to us and the patent holder on all future product sold. In connection with this settlement, the patent holder received a lump sum payment for the past production and sale of the product and other matters related to the infringement. We are continuing to pursue litigation related to other parties who are infringing the product and process patents, including Sunny Fresh Foods, Inc., a subsidiary of Cargill, Inc.
Other Litigation:
We are engaged in routine litigation incidental to our business. We believe the ultimate outcome of this litigation will not have a material effect on our consolidated financial position, liquidity or results of operations.
NOTE F - COMPREHENSIVE INCOME (LOSS)
The components and changes in accumulated other comprehensive loss (AOCL), net of taxes, during the three months ended March 31, 2002 were as follows:

Cash Flow
Hedges

Foreign Currency
Translation

Total
AOCL

COMPANY

Balance at January 1, 2002

$
(3,556,000
)
$
(61,000
)
$
(3,617,000
)

Foreign currency translation adjustment

—

11,000

11,000

Net unrealized change on cash flow hedges

887,000

—

887,000

Balance at March 31, 2002

$
(2,669,000
)
$
(50,000
)
$
(2,719,000
)

Cash Flow
Hedges

Foreign Currency
Translation

Total
AOCL

PREDECESSOR

Balance at January 1, 2001

$
—

$
(1,317,000
)
$
(1,317,000
)
Foreign currency translation adjustment

—

(47,000
)
(47,000
)
Translation loss realized on termination of joint venture

—

1,135,000

1,135,000

Transition adjustment

775,000

—

775,000

Net unrealized change on cash flow hedges

(2,651,000
)
—

(2,651,000
)
Less reclassification adjustments

244,000

—

244,000

Balance at March 31, 2001

$
(1,632,000
)
$
(229,000
)
$
(1,861,000
)
10

Comprehensive income (loss), net of taxes, for the three months ended March 31, 2002 and 2001 was as follows:
COMPANY

Net income for the three months ended March 31, 2002

$
5,359,000

Net gains arising during the period from cash flow hedges:

Net unrealized derivative gains during period

887,000

Foreign currency translation adjustment

11,000

Other comprehensive income

898,000

Comprehensive income for the three months ended March 31, 2002

$
6,257,000

PREDECESSOR

Net loss for the three months ended March 31, 2001

$
(5,653,000
)
Net gains (losses) arising during the period from cash flow hedges:

Net derivative transition gain

775,000

Net unrealized derivative losses during period

(2,651,000
)

Reclassification adjustment

244,000

Foreign currency translation adjustment

(47,000
)

Foreign currency loss realized

1,135,000

Other comprehensive loss

(544,000
)

Comprehensive loss for the three months ended March 31, 2001

$
(6,197,000
)
NOTE G - BUSINESS SEGMENTS
We operate in four reportable segments - Egg Products, Refrigerated Distribution, Dairy Products and Potato Products. The Merger, as more fully described in Note A, did not have an impact on our segment classification or the interaction between the segments. Certain financial information on our operating segments, and the Predecessor’s, is as follows (unaudited, in thousands):

Company

Egg
Products

Refrigerated
Distribution

Dairy
Products

Potato
Products

Corporate

Total

THREE MONTHS ENDED March 31, 2002:

External net sales

$
155,186

$
63,006

$
43,180

$
17,057

N/A

$
278,429

Intersegment sales

4,045

—

—

892

N/A

4,937

Operating profit (loss)

16,992

2,293

1,831

2,314

(1,937
)
21,493

Depreciation and amortization

10,878

437

1,040

1,164

10

13,529

Predecessor

THREE MONTHS ENDED March 31, 2001:

External net sales

$
163,529

$
61,185

$
35,328

$
15,585

N/A

$
275,627

Intersegment sales

4,246

—

—

1,003

N/A

5,249

Operating profit (loss)

12,915

3,639

3,958

1,688

(12,706
)
9,494

Depreciation and amortization

9,611

339

1,274

1,278

33

12,535

NOTE H - SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION
Our revolving line of credit, A and B term loans and senior subordinated notes have been guaranteed, on a joint and several basis, by us and our domestic subsidiaries. The revolving line of credit and A and B term loans are also guaranteed by our parent, M-Foods Holdings, Inc.
The following condensed consolidating financial information presents our consolidated balance sheet as of March 31, 2002 and December 31, 2001 and the statements of earnings and cash flows for the three months ended March 31, 2002; and the Predecessor’s consolidated statements of earnings and cash flows for the three months ended March 31, 2001. These financial statements reflect Michael
11

Foods, Inc. (the parent), the wholly owned guarantor subsidiaries (on a combined basis), the non-wholly owned guarantor subsidiaries, and elimination entries necessary to combine such entities on a consolidated basis. Included elsewhere in this Form 10-Q are the unaudited financial statements of the non-wholly owned guarantor subsidiaries.
COMPANY
UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEETS
MARCH 31, 2002
(in thousands)

NON-WHOLLY OWNED
GUARANTOR SUBSIDIARIES

PARENT

WHOLLY
OWNED
GUARANTOR
SUBSIDIARIES

M-FOODS
DAIRY,
LLC

M-FOODS
DAIRY
TXCT, LLC

ELIMINATIONS

CONSOLIDATED

ASSETS

Current Assets:

Cash and equivalents

$
41,322

$
(3,109
)
$
—

$
—

$
—

$
38,213

Accounts receivable, less allowances

213

90,826

7,531

5,720

(3,136
)
101,154

Inventories

—

72,447

4,806

4,730

—

81,983

Notes receivable - related party

—

3,354

—

—

(3,354
)
—

Prepaid expenses and other

830

8,283

389

70

—

9,572

Total current assets

42,365

171,801

12,726

10,520

(6,490
)
230,922

Property, Plant and Equipment - net

69

256,080

17,150

11,379

—

284,678

Other assets:

Goodwill, net

—

339,258

1,763

—

—

341,021

Preferred return receivable for subs

—

10,208

—

—

(10,208
)
—

Joint ventures and other assets

18,740

23,446

173

929

—

43,288

Investment in subsidiaries

632,224

—

—

—

(632,224
)
—

650,964

372,912

1,936

929

(642,432
)
384,309

$
693,398

$
800,793

$
31,812

$
22,828

$
(648,922
)
$
899,909

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current Liabilities:

Current maturities of long-term debt

$
11,497

$
307

$
—

$
2,400

$
—

$
14,204

Accounts payable

172

54,981

2,752

4,470

(3,136
)
59,239

Notes payable - related party

—

—

2,831

556

(3,387
)
—

Accrued liabilities

38,078

46,258

2,611

971

33

87,951

Total current liabilities

49,747

101,546

8,194

8,397

(6,490
)
161,394

Long-term debt, less current maturities

485,182

41,727

—

2,400

—

529,309

Deferred income taxes

(1,253
)
50,737

—

—

—

49,484

Preferred shareholder return payable

—

—

9,279

929

(10,208
)
—

Non-controlling interest

475

—

—

—

—

475

Total liabilities

534,151

194,010

17,473

11,726

(16,698
)
740,662

Shareholders’ Equity

159,247

606,783

14,339

11,102

(632,224
)
159,247

$
693,398

$
800,793

$
31,812

$
22,828

$
(648,922
)
$
899,909

12

COMPANY
CONDENSED CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 2001
(in thousands)

NON-WHOLLY OWNED
GUARANTOR SUBSIDIARIES

PARENT

WHOLLY
OWNED
GUARANTOR
SUBSIDIARIES

M-FOODS
DAIRY,
LLC

M-FOODS
DAIRY
TXCT, LLC

ELIMINATIONS

CONSOLIDATED

Assets

Current Assets

Cash and equivalents

$
33,947

$
(6,287
)
$
—

$
—

$
—

$
27,660

Accounts receivable, net

223

91,744

6,535

5,765

(1,950
)
102,317

Inventories

—

72,034

3,592

3,315

—

78,941

Prepaid expenses and other

972

9,850

496

52

—

11,370

Total current assets

35,142

167,341

10,623

9,132

(1,950
)
220,288

Property, Plant and Equipment - net

78

263,893

15,657

11,526

—

291,154

Other assets:

Goodwill, net

—

339,258

1,763

—

—

341,021

Joint ventures and other assets

19,521

24,091

—

1,058

—

44,670

Preferred unit holder return receivable.

—

8,188

—

—

(8,188
)
—

Investment in subsidiaries

675,556

—

—

—

(675,556
)
—

695,077

371,537

1,763

1,058

(683,744
)
385,691

Total assets

$
730,297

$
802,771

$
28,043

$
21,716

$
(685,694
)
$
897,133

Liabilities and Shareholders’ Equity

Current Liabilities

Current maturities of long-term debt

$
10,255

$
307

$
—

$
2,400

$
—

$
12,962

Accounts payable

265

60,223

2,612

3,342

(1,950
)
64,492

Accrued liabilities

30,210

44,020

2,151

976

—

77,357

Total current liabilities

40,730

104,550

4,763

6,718

(1,950
)
154,811

Long-term debt, less current maturities

537,395

337

—

2,400

—

540,132

Deferred income taxes

(1,293
)
50,018

—

—

—

48,725

Total liabilities

576,832

154,905

4,763

9,118

(1,950
)
743,668

Non-controlling interest

475

—

—

—

—

475

Preferred unit holder return payable

—

—

7,500

688

(8,188
)
—

Shareholders’ Equity

152,990

647,866

15,780

11,910

(675,556
)
152,990

Total liabilities and shareholders’ equity

$
730,297

$
802,771

$
28,043

$
21,716

$
(685,694
)
$
897,133

COMPANY
UNAUDITED CONDENSED CONSOLIDATING EARNINGS STATEMENTS
THREE MONTHS ENDED MARCH 31, 2002
(in thousands)

NON-WHOLLY OWNED
GUARANTOR SUBSIDIARIES

PARENT

WHOLLY
OWNED
GUARANTOR
SUBSIDIARIES

M-FOODS
DAIRY,
LLC

M-FOODS
DAIRY
TXCT, LLC

ELIMINATIONS

CONSOLIDATED

Net sales

$
—

$
240,186

$
23,850

$
19,330

$
(4,937
)
$
278,429

Cost of sales

—

193,135

20,628

18,487

(4,937
)
227,313

Gross profit

—

47,051

3,222

843

—

51,116

Selling, general and administrative expenses

1,937

26,459

1,415

1,018

(1,206
)
29,623

Operating profit (loss)

(1,937
)
20,592

1,807

(175
)
1,206

21,493

Interest expense, net

11,800

831

28

5

—

12,664

Other income

1,206

—

—

—

(1,206
)
—

Earnings (loss) before equity in earnings
of subsidiaries and income taxes

(12,531
)
19,761

1,779

(180
)
—

8,829

Equity in earnings of subsidiary

12,980

1,599

(1,779
)
180

(12,980
)
—

Earnings before income taxes

449

21,360

—

—

(12,980
)
8,829

Income tax expense (benefit)

(4,910
)
8,380

—

—

—

3,470

NET EARNINGS (LOSS)

5,359

12,980

—

—

(12,980
)
5,359

Other comprehensive income (loss):

Change in foreign currency translation

—

11

—

—

—

11

Change in cash flow hedges

(208
)
1,095

—

—

—

887

Comprehensive income (loss)

$
5,151

$
14,086

$
—

$
—

$
(12,980
)
$
6,257

13

PREDECESSOR
CONDENSED CONSOLIDATING EARNINGS STATEMENTS
THREE MONTHS ENDED MARCH 31, 2001
(in thousands)

NON-WHOLLY OWNED
GUARANTOR SUBSIDIARIES

PARENT

WHOLLY
OWNED
GUARANTOR
SUBSIDIARIES

M-FOODS
DAIRY,
LLC

M-FOODS
DAIRY
TXCT, LLC

ELIMINATIONS

CONSOLIDATED

Net sales

$
—

$
245,548

$
17,684

$
17,644

$
(5,249
)
$
275,627

Cost of sales

—

200,854

14,994

17,108

(5,249
)
227,707

Gross profit

—

44,694

2,690

536

—

47,920

Selling, general and administrative expenses

1,656

27,720

1,027

1,712

(1,522
)
30,593

Recall insurance settlement

—

—

(3,217
)
—

—

(3,217
)
Transaction costs

11,050

—

—

—

—

11,050

Operating profit (loss)

(12,706
)
16,974

4,880

(1,176
)
1,522

9,494

Interest (income) expense, net

3,308

(14
)
(1
)
—

—

3,293

Other income

1,522

—

—

—

(1,522
)
—

Earnings (loss) before equity in earnings of subsidiaries, income taxes, and extraordinary item

(14,492
)
16,988

4,881

(1,176
)
—

6,201

Equity in earnings of subsidiaries

12,573

—

—

—

(12,573
)
—

Earnings (loss) before income taxes and extraordinary item

(1,919
)
16,988

4,881

(1,176
)
(12,573
)
6,201

Income tax expense (benefit)

(5,690
)
6,649

1,918

(447
)
—

2,430

Earnings (loss) before extraordinary item

3,771

10,339

2,963

(729
)
(12,573
)
3,771

Extraordinary item - early extinguishment of debt, net of taxes

(9,424
)
—

—

—

—

(9,424
)
NET EARNINGS (LOSS)

(5,653
)
10,339

2,963

(729
)
(12,573
)
(5,653
)
Other comprehensive income (loss):

Change in foreign currency translation

—

1,088

—

—

—

1,088

Change in cash flow hedges

—

(1,632
)
—

—

—

(1,632
)
Comprehensive income (loss)

$
(5,653
)
$
9,795

$
2,963

$
(729
)
$
(12,573
)
$
(6,197
)
14

COMPANY
UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2002
(in thousands)

NON-WHOLLY OWNED
GUARANTOR SUBSIDIARIES

PARENT

WHOLLY
OWNED
GUARANTOR
SUBSIDIARIES

M-FOODS
DAIRY,
LLC

M-FOODS
DAIRY
TXCT, LLC

CONSOLIDATED

Net cash provided by operating activities

$
13,915

$
8,418

$
3,568

$
689

$
26,590

Cash flows from investing activities:

Capital expenditures

—

(4,620
)
(1,955
)
(303
)
(6,878
)
Investments in joint ventures and other assets

(5
)
600

(173
)
—

422

Net cash used in investing activities

(5
)
(4,020
)
(2,128
)
(303
)
(6,456
)

Cash flows from financing activities:

Payments on notes payable

(5,000
)
—

—

—

(5,000
)
Proceeds on notes payable

—

—

—

—

—

Payments on long-term debt

(4,506
)
(75
)
—

—

(4,581
)
Investment in subsidiaries

2,971

(1,145
)
(1,440
)
(386
)
—

Net cash used in financing activities

(6,535
)
(1,220
)
(1,440
)
(386
)
(9,581
)
Net increase (decrease) in cash and equivalents

7,375

3,178

—

—

10,553

Cash and equivalents at beginning of period

33,947

(6,287
)
—

—

27,660

Cash and equivalents at end of period

$
41,322

$
(3,109
)
$
—

$
—

$
38,213

PREDECESSOR
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2001
(in thousands)

NON-WHOLLY OWNED
GUARANTOR SUBSIDIARIES

PARENT

WHOLLY
OWNED
GUARANTOR
SUBSIDIARIES

M-FOODS
DAIRY,
LLC

M-FOODS
DAIRY
TXCT, LLC

CONSOLIDATED

Net cash provided by (used in) operating activities

$
12,000

$
4,487

$
(2,440
)
$
(31
)
$
14,016

Cash flows from investing activities:

Capital expenditures

—

(4,923
)
(3,664
)
(2,250
)
(10,837
)
Investments in joint ventures and other assets

434

3,454

—

—

3,888

Net cash provided by (used in) investing activities

434

(1,469
)
(3,664
)
(2,250
)
(6,949
)
Cash flows from financing activities:

Payments on notes payable

(52,000
)
—

—

—

(52,000
)
Proceeds on notes payable

45,500

—

—

—

45,500

Payments on long-term debt

—

(109
)
—

—

(109
)
Proceeds from issuance of stock

546

—

—

—

546

Extension of stock options

310

—

—

—

310

Dividends

(1,465
)
—

—

—

(1,465
)
Investment in subsidiaries

(9,785
)
1,393

6,111

2,281

—

Net cash provided by (used in) financing activities

(16,894
)
1,284

6,111

2,281

(7,218
)
Net increase (decrease) in cash and equivalents

(4,460
)
4,302

7

—

(151
)
Cash and equivalents at beginning of period

8,787

(4,366
)
—

—

4,421

Cash and equivalents at end of period

$
4,327

$
(64
)
$
7

$
—

$
4,270

15

M-FOODS DAIRY, LLC
(A MAJORITY OWNED SUBSIDIARY OF MICHAEL FOODS, INC.)
INDEX TO FINANCIAL STATEMENTS
Balance Sheets
Statements of Earnings
Statements of Cash Flows
Notes to Financial Statements
16

M-FOODS DAIRY, LLC
(A MAJORITY OWNED SUBSIDIARY OF MICHAEL FOODS, INC.)
BALANCE SHEETS
(unaudited, in thousands)

MARCH 31,
2002

DECEMBER 31,
2001

ASSETS

CURRENT ASSETS

Cash and equivalents

$
—

$
—

Accounts receivable, less allowances

7,531

6,535

Inventories

4,806

3,592

Prepaid expenses and other

389

496

Total current assets

12,726

10,623

PROPERTY, PLANT AND EQUIPMENT - AT COST

Land

855

855

Buildings and improvements

3,999

3,999

Machinery and equipment

14,006

12,051

18,860

16,905

Less accumulated depreciation

1,710

1,248

17,150

15,657

OTHER ASSETS

Goodwill, net

1,763

1,763

Other assets

173

—

1,936

1,763

$
31,812

$
28,043

LIABILITIES AND UNIT HOLDER AND
OPERATING UNIT EQUITY
CURRENT LIABILITIES

Accounts payable

$
2,752

$
2,612

Note payable - related party

2,831

—

Accrued liabilities:

Compensation

494

688

Insurance

115

124

Customer programs

1,331

836

Other

671

503

Total current liabilities

8,194

4,763

COMMITMENTS AND CONTINGENCIES

—

—

PREFERRED UNIT HOLDER RETURN PAYABLE

9,279

7,500

UNIT HOLDER AND OPERATING UNIT EQUITY

14,339

15,780

$
31,812

$
28,043

The accompanying notes are an integral part of these statements.
17

M-FOODS DAIRY, LLC
(A MAJORITY OWNED SUBSIDIARY OF MICHAEL FOODS, INC.)
STATEMENTS OF EARNINGS
FOR THE THREE MONTHS ENDED MARCH 31,
(unaudited, in thousands)

Company

Predecessor

2002

2001

Net sales

$
23,850

$
17,684

Cost of sales

20,628

14,994

Gross profit

3,222

2,690

Selling, general and administrative expenses

1,415

1,027

Recall insurance settlement

—

(3,217
)

Operating profit

1,807

4,880

Other income (expense)

(28
)
1

Earnings before income taxes

1,779

4,881

Income tax expense

—

1,918

NET EARNINGS

$
1,779

$
2,963

The accompanying notes are an integral part of these statements.
18

M-FOODS DAIRY, LLC
(A MAJORITY OWNED SUBSIDIARY OF MICHAEL FOODS, INC.)
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
(unaudited, in thousands)

COMPANY

PREDECESSOR

2002

2001

Net cash provided by (used in) operating activities

$
3,568

$
(2,440
)

Cash flows from investing activities:

Capital expenditures

(1,955
)
(3,664
)
Other assets

(173
)
—

Net cash used in investing activities

(2,128
)
(3,664
)

Cash flows from financing activities:

Net additional capital invested or (dividends paid)

(1,440
)
6,111

Net cash provided (used in) by financing activities

(1,440
)
6,111

Net increase (decrease) in cash and equivalents

—

7

Cash and equivalents at beginning of period

—

—

Cash and equivalents at end of period

$
—

$
7

The accompanying notes are an integral part of these statements.
19

M-FOODS DAIRY, LLC
(A MAJORITY OWNED SUBSIDIARY OF MICHAEL FOODS, INC.)
NOTES TO FINANCIAL STATEMENTS
NOTE A — ORGANIZATION, BUSINESS AND MERGER
Organization
M-Foods Dairy, 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 — MN (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, 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 facility in Minnesota.
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 Predecessor 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 approximately 6.0% as of March 31, 2002), 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 $35,800,000 (the approximate fair value contributed to M-Foods Dairy, LLC was $26,850,000). 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.
20

Following the Merger, Michael Foods, Inc. became an indirect wholly-owned subsidiary of M-Foods Investors, LLC and M-Foods Dairy LLC became a majority owned subsidiary of Michael Foods, Inc.
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 were 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 deemed dividend related to the Michael Foods investment in the assets and liabilities of the Dairy LLCs was pushed down to these majority owned subsidiaries, as if they were wholly owned subsidiaries since Michael Foods owns all of the voting stock and the Dairy LLCs are being operated by the management of Michael Foods. The amount of the deemed dividend at Michael Foods was $66,631,000.
For ease of presentation, the Merger has been reflected in the accompanying financial statements as if it had occurred on April 1, 2001. Management determined that no material transactions occurred during the period from April 1 through April 9, 2001. The Company’s financial statements have been presented on a comparative basis with the Predecessor’s historical operating unit financial statements, prior to the date of Merger. Different bases of accounting have been used to prepare the Company and Predecessor financial statements. The primary differences relate to the 10% yield on preferred units, depreciation and amortization of fixed assets and other intangible assets recorded at fair value at the date of acquisition, and income taxes which are payable by the Company’s unit holders.
The fair value contributed by Michael Foods to M-Foods Dairy, LLC was $26,850,000. In addition, $356,250 was contributed by new investors in exchange for Class B non-voting common units. This combined amount was allocated to the acquired assets and liabilities based on their fair values at April 1, 2001, net of the deemed dividend. The fair values of long-term assets were obtained from a valuation report issued by a third party appraisal firm. The allocations were as follows:
Working capital

$
10,426,000

Property, plant & equipment

15,135,000

Other assets, including goodwill

3,962,000

The following unaudited pro forma net sales and net earnings for the three months ended March 31, 2001 are derived from the application of pro forma adjustments to the Predecessor’s historical statement of earnings, and assumes the Merger had occurred on January 1, 2001. The pro forma net earnings for the three months ended March 31, 2001 is also adjusted for goodwill amortization determined in accordance with the provisions of SFAS 142 (see Note B). The net sales and net earnings for the three months ended March 31, 2002 represent actual results for the period.
21

Three months ended

March 31, 2002

March 31, 2001

Net sales

$
23,850,000

$
17,684,000

Net earnings

1,779,000

2,980,000

NOTE B — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Predecessor Statements of Earnings and Cash Flows for the three months ended March 31, 2001 have been prepared from the historical books and records of Michael Foods. The respective Statements of Earnings 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 TXCT, LLC. The accompanying Company unaudited financial statements and footnote information as of and for the three month period ended March 31, 2002, and as of December 31, 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.
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.
Inventories consisted of the following:

March 31,
2002

December 31,
2001

Raw materials and supplies

$
2,537,000

$
1,625,000

Work in process and finished goods

2,269,000

1,967,000

$
4,806,000

$
3,592,000

22

Adoption of New Accounting Policies
Goodwill and Intangible Assets:
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 141, “Business Combinations”, and SFAS 142, “Goodwill and Other Intangible Assets”. SFAS 141 is effective for all business combinations completed after June 30, 2001. SFAS 142 is effective for fiscal years beginning after December 15, 2001; however, certain provisions of this Statement apply to goodwill and other intangible assets acquired between July 1, 2001 and the effective date of SFAS 142. The Company adopted the provisions of SFAS 142 as of January 1, 2002 and had no acquisitions between July 1, 2001 and January 1, 2002.
As a result of adopting SFAS No. 141 and SFAS No. 142, the Company’s accounting policies for goodwill and intangible assets changed effective January 1, 2002 as described below:
Goodwill:
The Company recognizes the excess cost of an acquired entity over the net amount assigned to assets acquired and liabilities assumed as goodwill. Goodwill will be tested for impairment on an annual basis and between annual tests whenever there is an impairment indicated. Impairment losses will be recognized whenever the implied fair value is less than the carrying value of the related asset. Prior to January 1, 2002, goodwill was amortized over 40 years. Beginning January 1, 2002, goodwill is no longer amortized.
During the second quarter of ~~2000,~~fiscal 2002, the Company will complete the transitional impairment test of goodwill. The Company does not believe the impairment testing will have a material effect on the results of operations or the financial position of the Company.
The Company’s carrying amount, net of accumulated amortization, for goodwill as of March 31, 2002 and December 31, 2001 was $1,764,000.
The following table presents a reconciliation of net earnings, as reported in the ~~patent holder completed a new royalty arrangement whereby~~financial statements, to those amounts adjusted for goodwill as determined in accordance with the provisions of SFAS 142.

Three months ended March 31,

2002

2001

(Company)

(Predecessor)

Reported net earnings

$
1,778,000

$
2,963,000

Add back: goodwill amortization

—

26,000

Adjusted net earnings

$
1,778,000

$
2,989,000

Other New Pronouncements:
On January 1, 2002 the Company ~~pays~~adopted SFAS 144 Accounting for the Impairment or Disposal of Long-Lived Assets. The adoption of SFAS 144 did not have a ~~reduced amount of royalties and, in turn, is responsible for one-half of any litigation expense incurred to defend~~material effect on the ~~patents.~~
~~Litigation~~Company’s financial statements.

In addition, the Company adopted Emerging Issues Task Force (EITF) Issue No. 00-25 Vendor Income Statement Characterization of Consideration to a Reseller on the Vendors Products, effective January 1, 2002. The adoption of EITF Issue 00-25 did not have a material effect on the Company’s financial statements.
23

NOTE C — SETTLEMENT OF RECALL INSURANCE CLAIM
During the three months ended March 31, 2001, the Unit settled its insurance claim related to a product recall, which occurred in early 1999. The settlement reimbursed the Unit for recall related costs incurred, as well as a partial reimbursement for lost business as a result of the recall.
NOTE D — 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 is a pass-through entity, therefore, income taxes have not been reflected on the 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 consolidated~~on the Unit’s financial position, liquidity or results of operations.
24

M-FOODS DAIRY TXCT, LLC
(A MAJORITY OWNED SUBSIDIARY OF MICHAEL FOODS, INC.)
INDEX TO FINANCIAL STATEMENTS
Balance Sheets
Statements of Earnings
Statements of Cash Flows
Notes to Financial Statements
25

M-FOODS DAIRY TXCT, LLC
(A MAJORITY OWNED SUBSIDIARY OF MICHAEL FOODS, INC.)
BALANCE SHEETS
(unaudited, in thousands)

MARCH 31,
2002

DECEMBER 31,
2001

ASSETS

CURRENT ASSETS

Cash and equivalents

$
—

$
—

Accounts receivable, less allowances

5,720

5,765

Inventories

4,730

3,315

Prepaid expenses and other

70

52

Total current assets

10,520

9,132

PROPERTY, PLANT AND EQUIPMENT— AT COST

Leasehold improvements

3,023

3,023

Machinery and equipment

10,300

9,997

13,323

13,020

Less accumulated depreciation

1,944

1,494

11,379

11,526

OTHER ASSETS

Non-compete agreement, net

929

1,058

$
22,828

$
21,716

LIABILITIES AND UNIT HOLDER AND OPERATING UNIT EQUITY

CURRENT LIABILITIES

Current maturities of non-compete commitment

$
2,400

$
2,400

Accounts payable

4,470

3,342

Note payable — related party

556

—

Accrued liabilities:

Compensation

306

292

Insurance

109

37

Customer programs

25

200

Other

531

447

Total current liabilities

8,397

6,718

NON-COMPETE COMMITMENT, less current maturities

2,400

2,400

COMMITMENTS AND CONTINGENCIES

—

—

PREFERRED UNIT HOLDER RETURN PAYABLE

929

688

UNIT HOLDER AND OPERATING UNIT EQUITY

11,102

11,910

$
22,828

$
21,716

The accompanying notes are an integral part of these statements.
26

M-FOODS DAIRY TXCT, LLC
(A MAJORITY OWNED SUBSIDIARY OF MICHAEL FOODS, INC.)
STATEMENTS OF EARNINGS
FOR THE THREE MONTHS ENDED MARCH 31,
(unaudited, in thousands)

COMPANY

PREDECESSOR

2002

2001

Net sales

$
19,330

$
17,644

Cost of sales

18,487

17,108

Gross profit

843

536

Selling, general and administrative expenses

1,018

1,712

Operating loss

(175
)
(1,176
)

Other expense

(5
)
��

Loss before income taxes

(180
)
(1,176
)
Income tax benefit

—

(447
)

NET LOSS

$
(180
)
$
(729
)
The accompanying notes are an integral part of these statements.
27

M-FOODS DAIRY TXCT, LLC
(A MAJORITY OWNED SUBSIDIARY OF MICHAEL FOODS, INC.)
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
(unaudited, in thousands)

COMPANY

PREDECESSOR

2002

2001

Net cash provided by (used in) operating activities

$
689

$
(31
)
Cash flows from investing activities:

Capital expenditures

(303
)
(2,250
)
Net cash used in investing activities

(303
)
(2,250
)

Cash flows from financing activities:

Net additional capital invested or (dividends paid)

(386
)
2,281

Net cash provided by (used in) financing activities

(386
)
2,281

Net decrease in cash and equivalents

—

—

Cash and equivalents at beginning of period

—

—

Cash and equivalents at end of period

$
—

$
—

The accompanying notes are an integral part of these statements.
28

M-FOODS DAIRY TXCT, LLC
(A MAJORITY OWNED SUBSIDIARY OF MICHAEL FOODS, INC.)
NOTES TO FINANCIAL STATEMENTS
NOTE ~~D—SHAREHOLDERS' EQUITY~~A — 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.
~~During~~
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 ~~third quarters~~Predecessor Board of ~~2000~~Directors, and ~~1999~~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 approximately 6.0% as of March 31, 2002), 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 $35,800,000 (the approximate fair value contributed to M-Foods Dairy TXCT, LLC was $8,950,000). 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.
29

Following the Merger, Michael Foods, Inc. became an indirect wholly-owned subsidiary of M-Foods Investors, LLC and M-Foods Dairy TXCT, LLC became a majority owned subsidiary of Michael Foods, Inc.
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 were 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 deemed dividend related to the Michael Foods investment in the assets and liabilities of the Dairy LLCs was pushed down to these majority owned subsidiaries, as if they were wholly owned subsidiaries since Michael Foods owns all of the voting stock and the Dairy LLCs are being operated by the management of Michael Foods. The amount of the deemed dividend at Michael Foods was $66,631,000. However, the historical cost basis equity of the continuing investors of the Company ~~repurchased~~was $21,623,000, which exceeded the Company’s fair market value by $12,673,000. This resulted in an allocation of carryover basis in excess of the fair market value of the Company in the amount of $3,928,000.
For ease of presentation, the Merger has been reflected in the accompanying financial statements as if it had occurred on April 1, 2001. Management determined that no ~~shares~~material transactions occurred during the period from April 1 through April 9, 2001. The Company’s financial statements have been presented on a comparative basis with the Predecessor’s historical operating unit financial statements, prior to the date of ~~Common Stock under~~Merger. Different bases of accounting have been used to prepare the ~~share repurchase program~~Company and Predecessor financial statements. The primary differences relate to the 10% yield on preferred units, depreciation and amortization of fixed assets and other intangible assets recorded at fair value at the date of acquisition, and income taxes which ~~began~~are payable by the Company’s unit holders.
The fair value contributed by Michael Foods to M-Foods Dairy TXCT, LLC was $8,950,000 and this amount, plus an additional carryover basis of $3,928,000, was allocated to the acquired assets and liabilities based on their fair values at April 1, 2001. In addition, $118,750 was contributed by new investors in ~~July 1998~~exchange for Class B - non voting common units. The fair values of long-term assets was obtained from a valuation report issued by a third party appraisal firm. The allocations were as follows:
Working capital

$
7,420,000

Property, plant & equipment

8,980,000

Other assets, including goodwill

1,397,000

Other liabilities

4,800,000

The following unaudited pro forma net sales and ~~was expanded in February and May 2000. Repurchases for the first nine months of 2000 and 1999 were 2,109,400 and 920,100 shares 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 $10,713,000~~loss for the three months ended ~~September 30, 2000~~March 31, 2001 are derived from the application of pro forma adjustments to the Predecessor’s historical statement of earnings, and ~~1999.~~assumes the Merger had occurred on January 1, 2001. The ~~total comprehensive income was $32,950,000~~net sales and ~~$30,876,000~~net loss for the ~~nine~~three months ended ~~September~~March 31, 2002 represent actual results for the period.
30

Three months ended

March 31, 2002

March 31, 2001

Net sales

$
19,330,000

$
17,644,000

Net loss

(180,000
)
(573,000
)
NOTE B — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Predecessor Statements of Earnings and Cash Flows for the three months ended March 31, 2001 have been prepared from the historical books and records of Michael Foods. The respective Statements of Earnings 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 Company unaudited financial statements and footnote information as of and for the three month period ended March 31, 2002, and as of December 31, 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.
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.
Inventories consisted of the following:

March 31,
2002

December 31,
2001

Raw materials and supplies

$
2,651,000

$
1,880,000

Work in process and finished goods

2,079,000

1,435,000

$
4,730,000

$
3,315,000

31

Adoption of New Accounting Policies
Goodwill and Intangible Assets:
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 141, “Business Combinations”, and SFAS 142, “Goodwill and Other Intangible Assets”. SFAS 141 is effective for all business combinations completed after June 30, ~~2000~~2001. SFAS 142 is effective for fiscal years beginning after December 15, 2001; however, certain provisions of this Statement apply to goodwill and ~~1999.~~other intangible assets acquired between July 1, 2001 and the effective date of SFAS 142. The Company adopted the provisions of SFAS 142 as of January 1, 2002 and had no acquisitions between July 1, 2001 and January 1, 2002.
7
As a result of adopting SFAS No. 141 and SFAS No. 142, the Company’s accounting policies for goodwill and intangible assets changed effective January 1, 2002 as described below:
Goodwill:
The Company recognizes the excess cost of an acquired entity over the net amount assigned to assets acquired and liabilities assumed as goodwill. The Company had no goodwill as of March 31, 2002 or December 31, 2001. If goodwill is acquired in the future, it will be tested for impairment on an annual basis and between annual tests whenever there is an impairment indicated. Impairment losses will be recognized whenever the implied fair value is less than the carrying value of the related asset.
Other Intangibles:
The Company recognizes an acquired intangible apart from goodwill whenever the asset arises from contractual or other legal rights, or whenever it is capable of being separated or divided from the acquired entity and sold, transferred, licensed, rented, or exchanged, either individually or in combination with a related contract, asset, or liability. An intangible other than goodwill is amortized over its estimated useful life unless that life is determined to be indefinite. Impairment losses are recognized if the carrying amount of an intangible subject to amortization is not recoverable from expected future cash flows and its carrying amount exceeds its fair value.
Acquired intangible assets of the Company that have been determined to have a definite life and continue to be amortized as of March 31, 2002 are as follows:

Gross Carrying
Amount

Accumulated
Amortization

Non-compete

$
1,398,000

$
(468,000
)
The aggregate amortization expense for the three months ended March 31, 2002 was approximately $130,000. The Predecessor had amortization expense of $500,000 during the period ended March 31, 2001. The estimated amortization expense for the years ended December 31, 2002 through December 31, 2003 is as follows:

For the Years
Ended December 31,

2002

$
529,000

2003

529,000

32

Other New Pronouncements:
~~NOTE F—BUSINESS SEGMENTS~~On January 1, 2002 the Company adopted SFAS 144 Accounting for the Impairment or Disposal of Long-Lived Assets. The adoption of SFAS 144 did not have a material effect on the Company’s financial statements.

In addition, the Company adopted Emerging Issues Task Force (EITF) Issue No. 00-25 Vendor Income Statement Characterization of Consideration to a Reseller on the Vendors Products, effective January 1, 2002. The adoption of EITF Issue 00-25 did not have a material effect on the Company’s financial statements.
NOTE 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 is a pass through entity, therefore, income taxes have not been reflected on the Company’s financial statements.
NOTE D — COMMITMENTS AND CONTINGENCIES
Litigation
The Company ~~operates~~is engaged in ~~four reportable segments—Egg Products, Refrigerated Distribution, Dairy Products and Potato Products. Certain financial information~~routine litigation incidental to its business. Management believes the ultimate outcome of this litigation will not have a material effect on the ~~Company's operating segments is as follows (unaudited, 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 Analysis~~accompanying statements of ~~Financial Condition and Results~~financial position, liquidity or results of ~~Operations~~operations.
33

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

THREE MONTHS ENDED ~~SEPTEMBER 30, 2000 VS~~MARCH 31, 2002 AS COMPARED TO PREDECESSOR’S THREE MONTHS ENDED
~~SEPTEMBER 30, 1999~~

~~Results of Operations~~ MARCH 31, 2001

RESULTS OF OPERATIONS

Readers are directed to Note F—G - Business Segments for data on the unaudited financial results of ~~the Company's~~our four business segments for the three months ended ~~September 30, 2000~~March 31, 2002 and ~~1999.~~for data on the unaudited financial results of the Predecessor’s four business segments for the three months ended March 31, 2001.

Net sales for the 2002 period were $278,429,000, an increase of 1% compared to the Predecessor’s net sales of $275,627,000 in the 2001 period. Net sales increased because of the factors discussed in the below divisional reviews, but were higher in the 2002 period due largely to unit sales growth in two divisions.

Egg Products Division net sales for the ~~2000~~2002 period reflected slightly decreased unit sales ~~increases, particularly~~and slight deflation for ~~value-added~~industrial egg products, ~~which more than offset significant deflationary~~with the latter tied to weaker pricing ~~impacts on industrial products. Significant unit~~in the national egg market. Unit sales ~~increases were recorded~~rose for ~~extended shelf-life liquid eggs,~~ egg substitutes, hardcooked items and ~~dried~~precooked products, and declined slightly for other products. Graded shell egg ~~products. Unit sales declined in two categories—frozen and short shelf-life eggs—as the Division chose not to pursue sales with little or no profit margin. Egg~~ prices ~~increased~~decreased approximately 1%5% compared to ~~third~~first quarter ~~1999~~2001 levels, as reported by Urner Barry ~~Publications—~~Publications - a widely quoted industry pricing service. ~~This increase raised~~Related 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~~Division’s annual egg needs are purchased under contracts or in the spot market. ~~While a portion~~A 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 ~~2000~~2002 period, compared to the ~~1999~~2001 period, due mainly to higher prices for ~~corn and soybean meal. Increased~~corn. Overall, decreased egg costs ~~for both internally and externally procured eggs,~~ in the ~~2000~~2002 period, as compared to the ~~1999~~2001 period, were generally ~~not~~ met with ~~comparable price changes in~~flat egg products ~~prices, creating margin pressure~~prices. This resulted in higher 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, hardcooked products and dried products, and higher divisional margins in total.

Refrigerated Distribution Division net sales for the ~~2000~~2002 period reflected ~~strong~~generally higher pricing, which more than offset slightly lower unit sales. Unit sales rose for butter and ethnic items, while cheese, margarine, and baked goods showed weaker unit sales. Unit sales trends reflected, in part, a change in national dairy market conditions year-over-year, with butterfat pricing significantly reduced. This caused consumers to “trade-up” to butter from margarine, reversing the trend of twelve months prior. Regarding cheese unit sales, ~~increases, with~~we believe a combination of weak economic conditions, the relative value of private label cheeses compared to branded cheeses, such as we sell, and store closures by certain retail customers all affected results. Margins declined in the key cheese category. A more rapid decline than expected in national cheese prices, as compared to our costs for inventoried cheese and ~~butter showing particular strength. Sales growth resulted from a brand repositioning over~~ the past two years and a broadening consumer advertising campaign in selected markets, along with notable new account activity and new product introductions. The volume growth, along with more normal product costs for items related to the national butterfat market, resulted inDivision’s cheese ownership via hedging, caused margin ~~expansion in the 2000 period.~~compression.

~~The~~

Dairy Products ~~Division's flat~~Division net sales for the ~~2000~~2002 period reflected ~~lower~~higher unit sales, ~~volumes~~due mainly to strong creamer and specialty cartoned product sales. Improved pricing for certain product categories also added to dollar sales growth. Excluding an insurance settlement of approximately $3,218,000 in the ~~core dairy mix business, in part due to~~2001 period, 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. Divisionaldivisional operating profit margin and dollars increased ~~in the 2000 period~~ as a result of the ~~higher~~strong 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 ~~2000~~2002 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~~increase in the ~~2000~~2002 period ~~resulted from~~reflected improved operating costs and the impact of a ~~less~~ favorable sales mix, ~~reflecting~~with retail sales rising as a ~~slight sales decrease for retail shredded products, and increased marketing spending.~~percent of the divisional total.

The increase in our gross profit margin for the 2002 period, as compared to the results of the ~~Company for~~Predecessor in the 2001 period, ~~ended September 30, 2000 was comparable to that of the same period in 1999, reflecting~~reflected the factors discussed above, particularly ~~the margin pressures within the industrial egg products category~~sales mix improvements, decreased raw material costs and ~~the margin increases within the Refrigerated Distribution Division.~~improved processing yields. It is ~~management's~~our strategy to increase value-added product sales as a percent of total sales over time, while decreasing commodity-sensitive ~~products'~~products’ contribution to consolidated sales. These efforts historically have been beneficial to gross profit margins in most periods.

Selling, general and administrative expenses ~~decreased slightly~~increased as a percent of sales in the ~~period ended September 30, 2000,~~2002, as compared to the results of the same period in 1999. Favorable impacts from effective expense management more than offset increased expenses related to amortization of the costs associated with the Company's information systems upgrade project and additional marketing efforts.

~~NINE MONTHS ENDED SEPTEMBER 30, 2000 VS NINE MONTHS ENDED~~
~~SEPTEMBER 30, 1999~~

~~Results of Operations~~

~~Readers are directed to Note F—Business Segments for data on the unaudited financial results of the Company's four business segments for the nine months ended September 30, 2000 and 1999.~~

Egg Products Division net sales for the 2000 period reflected unit sales 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 facilityPredecessor in the ~~summer of 1999. Sales were particularly strong~~2001 period. This increased expense ratio reflected higher expenses to support retail and foodservice marketing efforts and broadened sales efforts, and for extended shelf-life liquid eggs, dried egg products and precooked frozen omelets, patties and curds. Egg prices decreased approximately 3% compared to 1999 levels, as reported by Urner Barry Publications. This decrease lowered 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 increasesour centralized purchasing department. Separate from ~~value-added egg products largely off-set the margin weakness seen from industrial egg product sales.~~

Approximately two-thirds of the Division's annual egg needs are purchased under contracts, or in the spot market. While a portion 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 in the 2000 period were comparable to the 1999 period. Decreased egg costs, for externally procured eggs, in the 2000 period, compared to the 1999 period, and improved value-added egg products earnings, were more than offset by pricing and margin weakness in certain industrial egg products.

Divisional operating profit for the 2000 period also reflected the benefit 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, royalties 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 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.

Refrigerated Distribution Division net sales for the 2000 period reflected strong unit sales increases, with cheese and butter showing particular strength. Sales growth resulted from a brand repositioning over the past two years and a broadening consumer advertising campaign in selected markets, along with notable new account activity and new product introductions. The volume growth, along with more normal product costs for items related to the national butterfat market, resulted in margin expansion in the 2000 period.

The Dairy Products Division net sales decline for the 2000 period reflected lower unit sales volumes for the core dairy mix business, in part due to the loss of a major industrial (tanker) customer in late 1999, which offset increased volumes for cartoned specialty products and creamer products. Divisional operating profit declined in the 2000 period as a result of the reduced sales volumes, high overhead expenses and above average operating expenses.

Potato Products Division net sales for the 2000 period reflected a strong unit sales increase, particularly for mashed items and retail shredded products. New account activity, same-account sales growth and new product introductions all contributed to the sales gain. The flat operating profits in the 2000 period compared 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.

The increase in gross profit margin of the Company for the period ended September 30, 2000, as compared to the results of the same period in 1999, reflected the factors discussed above, particularly the strength in the Refrigerated Distribution Division. It is management's strategy to increase value-added product sales as a percent of total sales over time, while decreasing commodity-sensitive products' contribution to consolidated sales. These efforts historically have been beneficial to gross profit margins in most periods.

~~Selling,~~selling, general and administrative expenses ~~remained approximately constant as a percent of sales~~ in the 2001 period, ~~ended September 30, 2000, as compared~~the Predecessor recorded non-recurring expenses related to the ~~results~~Merger for financial, legal, advisory and regulatory filing fees. These expenses of approximately $11.1 million are reflected in the ~~same period in 1999. Expenses increased due to amortization~~Predecessor’s Consolidated Statements of the costs associated with the Company's information systems upgrade project, amortization of a non-compete agreement related to a May 1999 Dairy Products acquisition, increases in bad debt expense resulting from a foodservice distributor's bankruptcy filing, and additional marketing efforts. However, these increased expenses were offset by effective expense controls in other areas and the favorable impact of the reduced egg products royalty arrangement, including a one-time retroactive benefit.

~~General~~Earnings as transaction expenses.

GENERAL

Certain of ~~the Company's~~our 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, ~~accounted~~account for approximately ~~50%~~60% of the Egg Products ~~Division's~~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. ~~Shell~~Graded shell egg pricing in the ~~2000~~2002 period was approximately 3%5% below ~~1999~~2001 levels, as measured by ~~Urner Barry Publications.~~a widely quoted

pricing service, while feed costs rose 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~~ 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

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~~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~~our business. ~~The Company~~We have 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 plans~~We plan to continue to invest in state-of-the-art production facilities to enhance ~~its~~our competitive position. Historically, ~~the Company has~~we have financed ~~its~~our growth principally from internally generated funds, bank borrowings, and the issuance of senior ~~debt and the sale of Common Stock. The Company believes that these~~debt. We believe such sources remain viable financing alternatives ~~will continue~~ to meet ~~its~~our anticipated needs.

~~The Company~~

We invested ~~$25,967,000~~$6,878,000 in capital expenditures during the ~~nine~~three months ended ~~September 30, 2000.~~March 31, 2002. The ~~Company plans~~Predecessor invested $10,837,000 in capital expenditures during the three months ended March 31, 2001. We plan to spend approximately ~~$45,000,000 in total~~$42,000,000 on capital expenditures in ~~2000,~~2002, the majority of which is to expand or update production capacity for value-added products.

~~The Company has two unsecured lines~~

Earnings before interest, taxes, depreciation and amortization (“EBITDA”) in the 2002 period were $35,845,000, an increase of 13% compared to the Predecessor’s EBITDA of $31,745,000 in the 2001 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 our financial results, as it is indicative of the relative strength of our 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 our 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 a senior secured credit facility with numerous banks, other financial institutions and investment groups, which totaled $470,000,000 at the time of the Merger. At March 31, 2002, there were no borrowings under the $100,000,000 line of credit ~~for $80,000,000~~portion of this facility, while the term A portion therein approximated $84,200,000 and ~~$20,000,000~~the term B portion approximated $253,800,000.

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 addition, the senior credit facility prohibits us from declaring or paying any dividends and prohibits us from making any payments with ~~its principal banks. As~~respect to the notes if we fail to perform our obligations under, or fail to meet the conditions of, ~~September 30, 2000, $73,000,000 was outstanding~~the senior credit facility or if payment creates a default under ~~these lines of credit.~~the senior credit facility.

~~In July 1998,~~

The indenture governing the ~~Company's Board~~notes, among other things, (a) restricts the ability of ~~Directors authorized~~ the ~~purchase~~issuer and its subsidiaries, including the guarantors of upthe notes, to ~~2,000,000~~incur additional indebtedness, issue shares of ~~Common Stock~~preferred 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 market~~ability 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 Stock~~issuer and (c) places restrictions on the ~~open market~~ability 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, with an additional 500,000 share authorization made in May 2000. Through September 30, 2000,~~ the ~~Company had repurchased 4,012,200 shares~~operation of ~~Common Stock for $89,121,000. During the third quarter of 2000 the Company did not repurchase any shares of Common Stock.~~

~~Seasonality~~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 sufficient 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 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~~our 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.

~~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~~our products due to consumer developments and industry developments, as well as variances in the costs to produce such products, including normal volatility in egg, feed and ~~feed~~dairy ingredients costs. ~~The Company's~~Our actual financial results could differ materially from the results estimated by, forecasted by, or implied by ~~the Company~~us 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~~our market risk during ~~the nine month period ended September 30, 2000.~~

~~PART 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—Exhibits and Reports on Form 8-K~~


~~(a)~~		~~Exhibits~~
~~10.77~~		~~Consolidated, restated and amended License Agreement by and between North Carolina State University and Michael Foods, Inc.~~
~~10.78~~		~~Settlement Agreement and Mutual Release entered into by and between Nulaid Foods, Inc., Valley Fresh Foods, Inc., and Nulaid Nest-Best, and North Carolina State University and Michael Foods, Inc.~~
~~27.1~~		~~Financial Data Schedule~~
~~(b)~~		~~Reports on Form 8-K~~

~~There were no reports on Form 8-K in~~ the three month period ended ~~September 30, 2000.~~

~~SIGNATURES~~March 31, 2002.

PART II - OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

None

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K, CONT.

(b) Reports on Form 8-K

We filed a Form 8-K on February 21, 2002 regarding a news release issued to our debtholders pertaining to our financial results for the three months ended December 31, 2001 and the pro forma financial results for the year ended December 31, 2001.

Subsequent to the reporting period herein, we filed a Form 8-K on April 26, 2002 regarding a news release issued to our debtholders pertaining to our financial results for the three months ended March 31, 2002.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


				MICHAEL FOODS, INC. ~~(Registrant)~~
	(Registrant)

Date: ~~November~~May 13, ~~2000~~2002		By:		/s/ ~~GREGG A. OSTRANDER~~ Gregg A. Ostrander
			Gregg A. Ostrander
			(Chairman, President and Chief Executive ~~Officer~~)Officer)


Date: ~~November~~May 13, ~~2000~~2002		By:		/s/ ~~JOHN D. REEDY~~ John D. Reedy
			John D. Reedy
			(Executive Vice President, Treasurer, Chief Financial Officer and Principal Accounting ~~Officer~~)Officer)

QuickLinks

~~PART II—OTHER INFORMATION~~
~~SIGNATURES~~

				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

	March 31, 2002			December 31, 2001
ASSETS

CURRENT ASSETS
Cash and equivalents	$	38,213,000		$	27,660,000
Accounts receivable, less allowances	101,154,000			102,317,000
Inventories	81,983,000			78,941,000
Prepaid expenses and other	9,572,000			11,370,000
Total current assets	230,922,000			220,288,000

PROPERTY, PLANT AND EQUIPMENT-AT COST
Land	3,873,000			3,873,000
Buildings and improvements	99,561,000			99,561,000
Machinery and equipment	233,626,000			226,759,000
	337,060,000			330,193,000
Less accumulated depreciation	52,382,000			39,039,000
	284,678,000			291,154,000

OTHER ASSETS
Goodwill, net	341,021,000			341,021,000
Joint ventures and other assets	43,288,000			44,670,000
	384,309,000			385,691,000
	$	899,909,000		$	897,133,000

LIABILITIES AND SHAREHOLDERS’ EQUITY

CURRENT LIABILITIES
Current maturities of long-term debt	$	14,204,000		$	12,962,000
Accounts payable	59,239,000			64,492,000
Accrued liabilities
Compensation	9,903,000			12,582,000
Insurance	9,330,000			8,191,000
Customer programs	25,993,000			21,996,000
Income taxes	12,915,000			9,853,000
Interest	15,948,000			10,619,000
Other	13,862,000			14,116,000
Total current liabilities	161,394,000			154,811,000

LONG-TERM DEBT, less current maturities	529,309,000			540,132,000
DEFERRED INCOME TAXES	49,484,000			48,725,000
COMMITMENTS AND CONTINGENCIES
NON-CONTROLLING INTEREST	475,000			475,000

SHAREHOLDERS’ EQUITY
Common stock	—			—
Additional paid-in capital	146,792,000			146,792,000
Retained earnings	15,174,000			9,815,000
Accumulated other comprehensive loss	(2,719,000		)	(3,617,000		)
	159,247,000			152,990,000
	$	899,909,000		$	897,133,000

		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

	Company		Predecessor
	2002		2001
Net sales	$	278,429,000	$	275,627,000

Cost of sales	227,313,000		227,707,000

Gross profit	51,116,000		47,920,000

Selling, general and administrative expenses	29,623,000		27,376,000
Transaction expenses	—		11,050,000

Operating profit	21,493,000		9,494,000

Interest expense, net	12,664,000		3,293,000

Earnings before income taxes	8,829,000		6,201,000

Income tax expense	3,470,000		2,430,000
Earnings before extraordinary item	5,359,000		3,771,000

Extraordinary item - early extinguishment of debt, net of taxes	—		(9,424,000		)

NET EARNINGS (LOSS)	$	5,359,000	$	(5,653,000	)

		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

	Company			Predecessor
	Three Months Ended March 31, 2002			Three Months Ended March 31, 2001

Net cash provided by operating activities	$	26,590,000		$	14,016,000

Cash flows from investing activities:
Capital expenditures	(6,878,000		)	(10,837,000		)
Investments in joint ventures and other assets	422,000			3,888,000

Net cash used in investing activities	(6,456,000		)	(6,949,000		)

Cash flows from financing activities:
Payments on notes payable	(5,000,000		)	(52,000,000		)
Proceeds from notes payable	—			45,500,000
Payments on long-term debt and other	(4,581,000		)	(109,000		)
Extension of stock options	—			310,000
Proceeds from issuance of common stock	—			546,000
Dividends	—			(1,465,000		)
Net cash used in financing activities	(9,581,000		)	(7,218,000		)

Net increase (decrease) in cash and equivalents	10,553,000			(151,000		)

Cash and equivalents at beginning of period	27,660,000			4,421,000

Cash and equivalents at end of period	$	38,213,000		$	4,270,000

		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

Working capital	$	88,663,000
Property, plant & equipment	307,544,000
Other assets	42,816,000
Goodwill	347,537,000
Long-term debt	588,426,000
Other liabilities	51,474,000

	Three months ended
	March 31, 2002		March 31, 2001
Net sales	$	278,429,000	$	275,627,000
Net earnings before extraordinary item	5,359,000		3,115,000

Egg Products	$	254,182,000
Refrigerated Distribution	35,560,000
Potato Products	49,515,000
Dairy Products	1,764,000

	Three months ended March 31,
	2002		2001
	(Company)		(Predecessor)
Reported net earnings (loss)	$	5,359,000	$	(5,653,000	)
Add back: goodwill amortization	—		885,000
Adjusted net earnings (loss)	$	5,359,000	$	(4,768,000	)

	Gross Carrying Amount		Accumulated Amortization
Licenses and non-compete	$	2,526,000	$	(811,000	)

	For the Years Ended December 31,
2002	$	715,000
2003	715,000
2004	186,000
2005	186,000
2006	87,000

	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

	Cash Flow Hedges			Foreign Currency Translation			Total AOCL
COMPANY

Balance at January 1, 2002	$	(3,556,000	)	$	(61,000	)	$	(3,617,000	)

Foreign currency translation adjustment	—			11,000			11,000
Net unrealized change on cash flow hedges	887,000			—			887,000
Balance at March 31, 2002	$	(2,669,000	)	$	(50,000	)	$	(2,719,000	)

	Cash Flow Hedges			Foreign Currency Translation			Total AOCL
PREDECESSOR

Balance at January 1, 2001	$	—		$	(1,317,000	)	$	(1,317,000	)
Foreign currency translation adjustment	—			(47,000		)	(47,000		)
Translation loss realized on termination of joint venture	—			1,135,000			1,135,000
Transition adjustment	775,000			—			775,000
Net unrealized change on cash flow hedges	(2,651,000		)	—			(2,651,000		)
Less reclassification adjustments	244,000			—			244,000
Balance at March 31, 2001	$	(1,632,000	)	$	(229,000	)	$	(1,861,000	)

COMPANY
Net income for the three months ended March 31, 2002			$	5,359,000
Net gains arising during the period from cash flow hedges:
Net unrealized derivative gains during period	887,000
Foreign currency translation adjustment	11,000

Other comprehensive income			898,000

Comprehensive income for the three months ended March 31, 2002			$	6,257,000

PREDECESSOR
Net loss for the three months ended March 31, 2001			$	(5,653,000	)
Net gains (losses) arising during the period from cash flow hedges:
Net derivative transition gain	775,000
Net unrealized derivative losses during period	(2,651,000	)
Reclassification adjustment	244,000
Foreign currency translation adjustment	(47,000	)
Foreign currency loss realized	1,135,000

Other comprehensive loss			(544,000		)

Comprehensive loss for the three months ended March 31, 2001			$	(6,197,000	)

	Company
	Egg Products		Refrigerated Distribution		Dairy Products		Potato Products		Corporate		Total
THREE MONTHS ENDED March 31, 2002:
External net sales	$	155,186	$	63,006	$	43,180	$	17,057	N/A		$	278,429
Intersegment sales	4,045		—		—		892		N/A		4,937
Operating profit (loss)	16,992		2,293		1,831		2,314		(1,937	)	21,493
Depreciation and amortization	10,878		437		1,040		1,164		10		13,529

	Predecessor
THREE MONTHS ENDED March 31, 2001:
External net sales	$	163,529	$	61,185	$	35,328	$	15,585	N/A		$	275,627
Intersegment sales	4,246		—		—		1,003		N/A		5,249
Operating profit (loss)	12,915		3,639		3,958		1,688		(12,706	)	9,494
Depreciation and amortization	9,611		339		1,274		1,278		33		12,535

							NON-WHOLLY OWNED GUARANTOR SUBSIDIARIES
	PARENT			WHOLLY OWNED GUARANTOR SUBSIDIARIES			M-FOODS DAIRY, LLC		M-FOODS DAIRY TXCT, LLC		ELIMINATIONS			CONSOLIDATED
ASSETS
Current Assets:
Cash and equivalents	$	41,322		$	(3,109	)	$	—	$	—	$	—		$	38,213
Accounts receivable, less allowances	213			90,826			7,531		5,720		(3,136		)	101,154
Inventories	—			72,447			4,806		4,730		—			81,983
Notes receivable - related party	—			3,354			—		—		(3,354		)	—
Prepaid expenses and other	830			8,283			389		70		—			9,572
Total current assets	42,365			171,801			12,726		10,520		(6,490		)	230,922
Property, Plant and Equipment - net	69			256,080			17,150		11,379		—			284,678
Other assets:
Goodwill, net	—			339,258			1,763		—		—			341,021
Preferred return receivable for subs	—			10,208			—		—		(10,208		)	—
Joint ventures and other assets	18,740			23,446			173		929		—			43,288
Investment in subsidiaries	632,224			—			—		—		(632,224		)	—
	650,964			372,912			1,936		929		(642,432		)	384,309
	$	693,398		$	800,793		$	31,812	$	22,828	$	(648,922	)	$	899,909

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Current maturities of long-term debt	$	11,497		$	307		$	—	$	2,400	$	—		$	14,204
Accounts payable	172			54,981			2,752		4,470		(3,136		)	59,239
Notes payable - related party	—			—			2,831		556		(3,387		)	—
Accrued liabilities	38,078			46,258			2,611		971		33			87,951
Total current liabilities	49,747			101,546			8,194		8,397		(6,490		)	161,394
Long-term debt, less current maturities	485,182			41,727			—		2,400		—			529,309
Deferred income taxes	(1,253		)	50,737			—		—		—			49,484
Preferred shareholder return payable	—			—			9,279		929		(10,208		)	—
Non-controlling interest	475			—			—		—		—			475
Total liabilities	534,151			194,010			17,473		11,726		(16,698		)	740,662
Shareholders’ Equity	159,247			606,783			14,339		11,102		(632,224		)	159,247
	$	693,398		$	800,793		$	31,812	$	22,828	$	(648,922	)	$	899,909

Working capital	$	10,426,000
Property, plant & equipment	15,135,000
Other assets, including goodwill	3,962,000

Working capital	$	7,420,000
Property, plant & equipment	8,980,000
Other assets, including goodwill	1,397,000
Other liabilities	4,800,000

NOTE D—SHAREHOLDERS' EQUITYA — ORGANIZATION, BUSINESS AND MERGER

Organization

Business

Merger

Basis of Presentation

Inventories

NOTE C — INCOME TAXES

Predecessor

Company

NOTE D — COMMITMENTS AND CONTINGENCIES

Litigation

QuickLinks

	Gross Carrying Amount		Accumulated Amortization
Non-compete	$	1,398,000	$	(468,000	)

	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