UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended | |
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or | |
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o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to | |
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Commission File Number: 333-63722 |
MICHAEL FOODS, INC.
(Exact name of registrant as specified in its charter)
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Minnesota |
| 41-0498850 |
(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) |
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401 Carlson Parkway |
| 55305 |
(Address of principal executive offices) |
| (Zip code) |
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(952) 258-4000 | ||
(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 (“Exchange Act”) 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. ý Yes o No
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). o Yes ý No
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MICHAEL FOODS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF M-FOODS HOLDINGS, INC.wholly-owned subsidiary of M-Foods Holdings, Inc.)
CONDENSED CONSOLIDATED BALANCE SHEETSCondensed Consolidated Balance Sheets
(Unaudited)(Unaudited, dollars in thousands)
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| September 30, |
| December 31, |
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| June 30, |
| December 31, |
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ASSETS |
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CURRENT ASSETS |
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Current assets |
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Cash and equivalents |
| $ | 57,126,000 |
| $ | 27,660,000 |
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| $ | 24,245 |
| $ | 20,572 |
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Accounts receivable, less allowances |
| 96,171,000 |
| 102,317,000 |
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| 92,475 |
| 101,579 |
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Inventories |
| 93,367,000 |
| 78,941,000 |
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| 86,224 |
| 95,807 |
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Prepaid expenses and other |
| 11,637,000 |
| 11,370,000 |
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| 9,561 |
| 13,571 |
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Assets held for sale |
| 59,533 |
| — |
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Total current assets |
| 258,301,000 |
| 220,288,000 |
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| 272,038 |
| 231,529 |
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PROPERTY, PLANT AND EQUIPMENT-AT COST |
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Land |
| 3,873,000 |
| 3,873,000 |
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Buildings and improvements |
| 104,964,000 |
| 99,561,000 |
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Machinery and equipment |
| 257,301,000 |
| 226,759,000 |
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| 366,138,000 |
| 330,193,000 |
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Less accumulated depreciation |
| 78,751,000 |
| 39,039,000 |
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| 287,387,000 |
| 291,154,000 |
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OTHER ASSETS |
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Goodwill, net |
| 345,746,000 |
| 341,021,000 |
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Property, plant and equipment, net |
| 238,387 |
| 282,353 |
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Other assets |
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Goodwill |
| 338,944 |
| 341,028 |
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Joint ventures and other assets |
| 39,882,000 |
| 44,670,000 |
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| 33,200 |
| 38,112 |
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| 385,628,000 |
| 385,691,000 |
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| 372,144 |
| 379,140 |
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| $ | 931,316,000 |
| $ | 897,133,000 |
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| $ | 882,569 |
| $ | 893,022 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
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CURRENT LIABILITIES |
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LIABILITIES AND SHAREHOLDER’S EQUITY |
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Current liabilities |
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Current maturities of long-term debt |
| $ | 18,458,000 |
| $ | 12,962,000 |
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| $ | 16,101 |
| $ | 17,671 |
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Accounts payable |
| 63,522,000 |
| 64,492,000 |
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| 57,002 |
| 65,990 |
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Accrued liabilities |
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Compensation |
| 14,585,000 |
| 12,582,000 |
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| 10,820 |
| 15,251 |
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Insurance |
| 8,738,000 |
| 8,191,000 |
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| 8,163 |
| 7,855 |
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Customer programs |
| 23,567,000 |
| 21,996,000 |
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| 34,372 |
| 26,484 |
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Income taxes |
| 12,220,000 |
| 9,853,000 |
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| 8,329 |
| 7,403 |
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Interest |
| 16,122,000 |
| 10,619,000 |
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| 9,148 |
| 9,336 |
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Hedging derivative liability |
| 8,930 |
| 11,001 |
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Other |
| 24,318,000 |
| 14,116,000 |
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| 10,760 |
| 11,393 |
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Liabilities related to business to be sold |
| 9,869 |
| — |
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Total current liabilities |
| 181,530,000 |
| 154,811,000 |
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| 173,494 |
| 172,384 |
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LONG-TERM DEBT, less current maturities |
| 527,902,000 |
| 540,132,000 |
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DEFERRED INCOME TAXES |
| 48,605,000 |
| 48,725,000 |
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COMMITMENTS AND CONTINGENCIES |
| — |
| — |
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NON-CONTROLLING INTEREST |
| 475,000 |
| 475,000 |
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SHAREHOLDERS’ EQUITY |
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Common stock |
| — |
| — |
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Long-term debt, less current maturities |
| 458,463 |
| 493,718 |
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Deferred income taxes |
| 51,519 |
| 47,119 |
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Commitments and contingencies |
| — |
| — |
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Non-controlling interest |
| — |
| 475 |
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Shareholder’s equity |
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Common stock, $0.01 par value, 1,000 shares authorized, issued and outstanding |
| — |
| — |
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Additional paid-in capital |
| 147,448,000 |
| 146,792,000 |
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| 147,498 |
| 147,498 |
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Retained earnings |
| 29,858,000 |
| 9,815,000 |
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| 54,222 |
| 39,476 |
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Accumulated other comprehensive loss |
| (4,502,000 | ) | (3,617,000 | ) |
| (2,627 | ) | (7,648 | ) | ||||
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| 172,804,000 |
| 152,990,000 |
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| 199,093 |
| 179,326 |
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| $ | 931,316,000 |
| $ | 897,133,000 |
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| $ | 882,569 |
| $ | 893,022 |
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SeeThe accompanying notes toare an integral part of the unaudited condensed consolidated financial statements.
2
MICHAEL FOODS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF M-FOODS HOLDINGS, INC.wholly-owned subsidiary of M-Foods Holdings, Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGSCondensed Consolidated Statements of Earnings
Three Months Ended Septembermonths ended June 30,
(Unaudited)(Unaudited, dollars in thousands)
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| 2002 |
| 2001 |
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| 2003 |
| 2002 |
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Net sales |
| $ | 293,954,000 |
| $ | 299,225,000 |
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| $ | 323,931 |
| $ | 289,753 |
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Cost of sales |
| 239,777,000 |
| 248,436,000 |
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| 266,555 |
| 235,549 |
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Gross profit |
| 54,177,000 |
| 50,789,000 |
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| 57,376 |
| 54,204 |
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Selling, general and administrative expenses |
| 29,207,000 |
| 30,066,000 |
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| 30,884 |
| 29,826 |
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Operating profit |
| 24,970,000 |
| 20,723,000 |
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| 26,492 |
| 24,378 |
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Interest expense, net |
| 12,844,000 |
| 13,416,000 |
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| 12,095 |
| 12,332 |
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Earnings before income taxes |
| 12,126,000 |
| 7,307,000 |
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| 14,397 |
| 12,046 |
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Income tax expense |
| 4,760,000 |
| 4,010,000 |
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| 5,549 |
| 4,730 |
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NET EARNINGS |
| $ | 7,366,000 |
| $ | 3,297,000 |
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Net earnings |
| $ | 8,848 |
| $ | 7,316 |
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SeeThe accompanying notes toare an integral part of the unaudited condensed consolidated financial statements.
3
MICHAEL FOODS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF M-FOODS HOLDINGS, INC.wholly-owned subsidiary of M-Foods Holdings, Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGSCondensed Consolidated Statements of Earnings
Six months ended June 30,
(Unaudited, dollars in thousands)
(Unaudited)
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| Company |
| Predecessor |
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| Nine Months |
| Six Months |
| Three Months |
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| 2003 |
| 2002 |
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Net sales |
| $ | 862,136,000 |
| $ | 594,334,000 |
| $ | 275,627,000 |
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| $ | 622,144 |
| $ | 568,182 |
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Cost of sales |
| 702,639,000 |
| 493,291,000 |
| 227,707,000 |
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| 513,853 |
| 462,862 |
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Gross profit |
| 159,497,000 |
| 101,043,000 |
| 47,920,000 |
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| 108,291 |
| 105,320 |
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Selling, general and administrative expenses |
| 88,656,000 |
| 60,360,000 |
| 27,376,000 |
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| 60,318 |
| 59,449 |
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Transaction expenses |
| — |
| — |
| 11,050,000 |
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Operating profit |
| 70,841,000 |
| 40,683,000 |
| 9,494,000 |
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| 47,973 |
| 45,871 |
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Interest expense, net |
| 37,840,000 |
| 29,657,000 |
| 3,293,000 |
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| 23,967 |
| 24,996 |
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Earnings before income taxes |
| 33,001,000 |
| 11,026,000 |
| 6,201,000 |
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| 24,006 |
| 20,875 |
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Income tax expense |
| 12,960,000 |
| 6,060,000 |
| 2,430,000 |
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| 9,259 |
| 8,200 |
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Earnings before extraordinary item |
| 20,041,000 |
| 4,966,000 |
| 3,771,000 |
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Extraordinary item - early extinguishment of debt, net of taxes |
| — |
| — |
| (9,424,000 | ) | ||||||||||
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NET EARNINGS (LOSS) |
| $ | 20,041,000 |
| $ | 4,966,000 |
| $ | (5,653,000 | ) | |||||||
Net earnings |
| $ | 14,747 |
| $ | 12,675 |
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SeeThe accompanying notes toare an integral part of the unaudited condensed consolidated financial statements.
4
MICHAEL FOODS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF M-FOODS HOLDINGS, INC.wholly-owned subsidiary of M-Foods Holdings, Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSCondensed Consolidated Statements of Cash Flows
(Unaudited)Six months ended June 30,
(Unaudited, dollars in thousands)
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| Company |
| Predecessor |
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| Nine Months |
| Six Months |
| Three Months |
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| 2003 |
| 2002 |
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Net cash provided by operating activities |
| $ | 78,577,000 |
| $ | 84,290,000 |
| $ | 14,016,000 |
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| $ | 58,115 |
| $ | 48,233 |
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Cash flows from investing activities: |
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Capital expenditures |
| (19,242,000 | ) | (13,528,000 | ) | (10,837,000 | ) |
| (16,359 | ) | (14,263 | ) | |||||
Business acquisition |
| (17,593,000 | ) | (626,925,000 | ) | — |
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Investments in joint ventures and other assets |
| 2,336,000 |
| (3,949,000 | ) | 3,888,000 |
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| — |
| 397 |
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Net cash used in investing activities |
| (34,499,000 | ) | (644,402,000 | ) | (6,949,000 | ) |
| (16,359 | ) | (13,866 | ) | |||||
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Cash flows from financing activities: |
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Payments on notes payable and revolving line of credit |
| (5,000,000 | ) | (46,450,000 | ) | (52,000,000 | ) |
| — |
| (5,000 | ) | |||||
Proceeds from notes payable and revolving line of credit |
| 10,000,000 |
| 29,500,000 |
| 45,500,000 |
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Payments on long-term debt and other |
| (20,268,000 | ) | (131,225,000 | ) | (109,000 | ) | ||||||||||
Proceeds from long-term debt and other |
| — |
| 570,000,000 |
| — |
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Extension of stock options |
| — |
| — |
| 310,000 |
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Capital contribution from parent |
| 656,000 |
| 174,800,000 |
| 546,000 |
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Dividends |
| — |
| — |
| (1,465,000 | ) | ||||||||||
Net cash (used in) provided by financing activities |
| (14,612,000 | ) | 596,625,000 |
| (7,218,000 | ) | ||||||||||
Payments on long-term debt |
| (38,179 | ) | (18,057 | ) | ||||||||||||
Net cash used in financing activities |
| (38,179 | ) | (23,057 | ) | ||||||||||||
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Net increase (decrease) in cash and equivalents |
| 29,466,000 |
| 36,513,000 |
| (151,000 | ) | ||||||||||
Effect of exchange rate changes on cash |
| 96 |
| — |
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Net increase in cash and equivalents |
| 3,673 |
| 11,310 |
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Cash and equivalents at beginning of period |
| 27,660,000 |
| 4,270,000 |
| 4,421,000 |
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| 20,572 |
| 27,660 |
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Cash and equivalents at end of period |
| $ | 57,126,000 |
| $ | 40,783,000 |
| $ | 4,270,000 |
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| $ | 24,245 |
| $ | 38,970 |
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SeeThe accompanying notes toare an integral part of the unaudited condensed consolidated financial statements.
5
MICHAEL FOODS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF M-FOODS HOLDINGS, INC.wholly-owned subsidiary of M-Foods Holdings, Inc.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE A -– 2001 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,Ostrander; affiliates of Jeffrey Michael, a member of the Predecessor’s Boardboard of Directors,directors; and affiliates of two private equity investment firms, Vestar Capital Partners and Goldner Hawn Johnson & Morrison Incorporated, (collectively, “M-Foods Investors, LLC”). Michael Foods, Inc. is a wholly-owned subsidiary of M-Foods Holdings, Inc., which is a wholly-owned subsidiary of 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 6.8% as of September 30, 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 divisionProducts Division into two limited liability corporations,companies, 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 werewas approximately $35,800,000. The preferred units issued to us by the Dairy LLCs 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, another entity 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. See also Note D.
The 2001 Merger was accounted for as a purchase in accordance with Accounting Principles Board Opinion 16, Business Combinations and EITFEmerging Issues Task Force Issue No. 88-16, Basis in Leveraged Buyout Transactions. Accordingly, the acquired assets and liabilities have been recorded at fair value for the interests acquired by new investors and at the carryover basis for continuing investors. As a result, the assets and liabilities were assigned new values, which are part Predecessor cost and part fair value in the same proportions as the carryover basis of the residual interests retained by the continuing management investors and continuing affiliate investors of the Michael family, and the new interests acquired by the new investors. The amount of carryover basis was reflected as a deemed dividend of $66,631,000.
For ease of presentation, the Merger was accounted for as if it had occurred on April 1, 2001. Management determined that results of operations were not significant and no material transactions occurred during the period from April 1 through April 9, 2001. 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 of $66,631,000. 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 |
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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 |
|
6
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 nine months ended September 30, 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 nine months ended September 30, 2001 are also adjusted for goodwill amortization determined in accordance with the provisions of SFAS 142 (see Note D). The net sales and net earnings for the nine months ended September 30, 2002 represent actual results for the period.
|
| Nine months ended |
| ||||
|
| September 30, 2002 |
| September 30, 2001 |
| ||
Net sales |
| $ | 862,136,000 |
| $ | 869,961,000 |
|
Net earnings before extraordinary item |
| 20,041,000 |
| 10,272,000 |
| ||
NOTE B – ASSET PURCHASE
On August 26, 2002, we acquired the egg products assets of Canadian Inovatech Inc. for approximately $18,000,000. We also entered into long-term leases for two plants operated by the seller. This entity’s results of operations have been included in our operating results since the date of the asset purchase. Also, as a result of this asset purchase, we now own 67%, rather than 33%, of a Canadian egg product’s joint venture — Trilogy Egg Products, Inc. Hence, Trilogy became a consolidated entity under our financial reporting as of the date of the asset purchase.
The following unaudited pro forma statement of earnings information has been prepared assuming the asset purchase and the merger transaction described in Note A had occurred on January 1, 2002 and 2001:
|
| Nine months ended |
| ||||
|
| September 30, 2002 |
| September 30, 2001 |
| ||
Net sales |
| $ | 896,491,000 |
| $ | 897,141,000 |
|
Net earnings before extraordinary item |
| 21,396,000 |
| 11,403,000 |
| ||
This unaudited pro forma information is not necessarily indicative of the combined results of operations that would have occurred had the asset purchase occurred on the noted dates, nor is it indicative of the results which may occur in the future.
NOTE C – 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.
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 SeptemberJune 30, 20022003 and 20012002 each included thirteen13 weeks of operations. For clarity of presentation, the Company and Predecessor havehas described both periods presented as if the quarters ended on SeptemberJune 30th.
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 six month period ended September 30, 2001 and the three and nine month periods ended September 30, 2002 have been
7
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 financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the results of operations for the periods indicated. The historical financial results of operations and cash flows of the Company and Predecessorfor the period ended June 30, 2003 are not necessarily indicative of theirthe results expected for athe full year.
These unaudited interim consolidated financial statements should be read in conjunction with our consolidated financial statements and notes thereto, contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2001.2002.
Use of Estimates6
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 D – ADOPTION OF NEW ACCOUNTING POLICIES
Goodwill and Intangible Assets
In July 2001, the Financial Accounting Standards Board (“FASB”)(FASB) issued Statement of Financial Accounting Standards (“SFAS”) 141, Business Combinations, and(SFAS) No. 143, “Accounting for Asset Retirement Obligations” which provides accounting requirements for retirement obligations associated with tangible long-lived assets. SFAS 142, Goodwill and Other Intangible Assets. SFAS 141 is effective for all business combinations completed after June 30, 2001. SFAS 142No. 143 is effective for fiscal years beginning after DecemberJune 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 changedwas adopted by the Company effective January 1, 2002 as described below:
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 are 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 half of 2002, we completed the transitional impairment tests of goodwill and intangibles with no impairment indicated at January 1, 2002.
Our carrying amounts, net of accumulated amortization, for goodwill as of September 30, 2002 was $345,746,000 and at December 31, 2001 was $341,021,000. Each segment’s share of this goodwill at these dates was as follows:
|
| September 30, |
| December 31, |
| ||
Egg Products |
| $ | 258,907,000 |
| $ | 254,182,000 |
|
Refrigerated Distribution |
| 35,560,000 |
| 35,560,000 |
| ||
Potato Products |
| 49,516,000 |
| 49,516,000 |
| ||
Dairy Products |
| 1,763,000 |
| 1,763,000 |
| ||
The carrying amounts, net of accumulated amortization, for other indefinite-lived intangible assets (trademarks) as of September 30, 2002, and December 31, 2001 were $13,406,000. The Predecessor had no indefinite-lived intangible assets.
8
The following table presents a reconciliation of net earnings (loss), as reported in the financial statements, to those amounts adjusted for goodwill and intangible amortization determined in accordance with the provisions of SFAS 142.
|
| Company |
| Predecessor |
| |||||
|
| Nine months ended |
| Six months ended |
| Three months ended |
| |||
Reported net earnings (loss) |
| $ | 20,041,000 |
| $ | 4,966,000 |
| $ | (5,653,000 | ) |
Add back: goodwill amortization |
| — |
| 4,383,000 |
| 885,000 |
| |||
Adjusted net earnings (loss) |
| $ | 20,041,000 |
| $ | 9,349,000 |
| $ | (4,768,000 | ) |
Our acquired intangible assets that have been determined to have a definite life and continue to be amortized as of September 30, 2002, are as follows:
|
| Gross Carrying |
| Accumulated |
| ||
Licenses and non-compete |
| $ | 2,526,000 |
| $ | (1,173,000 | ) |
The aggregate amortization expense for the nine months ended September 30, 2002 was approximately $540,000 and $310,000 for the six months ended September 30, 2001. The Predecessor had amortization expense of approximately $500,000 during the three months ended March 31, 2001. The estimated amortization expense for the years ended December 31, 2002 through December 31, 2006 is as follows:
For the Years |
|
|
| |
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 Long-Lived Assets.2003. The adoption of SFAS 144No. 143 did not have a material effect on our consolidated financial statements.
In addition, we adoptedJune 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred. Prior to the adoption of this standard, a liability for an exit cost, as defined by Emerging Issues Task Force (EITF) Issue No. 00-25, Vendor Income Statement Characterization94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring), was recognized at the date of Considerationan entity’s commitment to a Reselleran exit plan. SFAS No. 146 was effective for the Company for exit plans or disposal activities initiated after December 31, 2002. Effective January 1, 2003, we adopted the provisions of SFAS 146, which had no impact on our financial statements.
In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” This interpretation elaborates on the Vendors Products,disclosure requirements in the financial statements concerning obligations under certain guarantees. It also clarifies the requirements related to the recognition of liabilities by a guarantor at the inception of certain guarantees. The disclosure requirements of this interpretation were effective January 1,for us on December 31, 2002. The adoption of EITF Issue 00-25this standard did not impact our financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46). This interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements, addresses consolidation by business enterprises of variable interest entities that possess certain characteristics. FIN 46 requires that if a business enterprise has a controlling financial interest in a variable interest entity, the assets, liabilities, and results of the activities of the variable interest entity must be included in the consolidated financial statements with those of the business enterprise. FIN 46 applies immediately to variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date. We do not have ownership in any variable interest entities and will apply the consolidation requirements of FIN 46 in future periods should an interest in a variable interest entity be acquired.
In May 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. We do not believe that the adoption of SFAS No. 149 will have a material impact on our financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” The statement requires that an issuer classify financial instruments that are within its scope as a liability. Many of those instruments were classified as equity under previous guidance. SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003. Otherwise, it is effective on July 1, 2003. We do not believe that the adoption of SFAS No. 150 will have a material effect on our consolidated financial statements. In addition,position or results of operations.
NOTE C – ASSET PURCHASE
On August 26, 2002, we adopted EITF Issue No. 01-09, Accountingacquired the egg products assets of Canadian Inovatech Inc. for Consideration givenapproximately $18.0 million. The total purchase price was allocated to the acquired assets and liabilities based on their fair values at the acquisition date as determined by a Vendor to a Customer (including a Resellerthird party appraisal firm. The allocation of the Vendor's Products)purchase price resulted in goodwill of $4.8 million. We also entered into long-term leases for two plants operated by the seller. This entity’s results of operations have been included in our operating results since the date of the asset purchase. Also, as a result of this asset purchase, we now own 67%, effective rather than 33%, of a Canadian egg products joint venture, Trilogy Egg Products, Inc. Hence, Trilogy became a consolidated entity under our financial reporting as of the date of the asset purchase.
The following unaudited pro forma statement of earnings information has been prepared assuming the asset purchase had occurred on January 1, 2002. The adoptionnet sales and earnings before income taxes for the six months ended June 30, 2003 represent actual results for the period (dollars in thousands):
|
| Six months ended |
| Six months ended |
| ||
Net sales |
| $ | 622,144 |
| $ | 593,721 |
|
Earnings before income taxes |
| 24,006 |
| 22,514 |
| ||
This unaudited pro forma information is not necessarily indicative of EITF Issue No. 01-09 didthe combined results of operations that would have occurred had the transaction occurred on the noted date, nor is it indicative of the results which may occur in the future.
7
NOTE D – OPERATING SEGMENT HELD FOR SALE
In May 2003, we signed a letter of intent for the sale of our dairy products division operating segment to Dean Foods Company. The dairy products division is substantially made up of the assets of M-Foods Dairy, LLC and M-Foods Dairy TXCT, LLC. The dairy products division processes and sells ice milk and ice cream mixes, creamers, milk and specialty dairy products. The transaction is expected to close during the third quarter of 2003. Completion of the transaction is dependent upon several items, including completion of due diligence, execution of a securities purchase agreement, approval by both companies’ Boards of Directors, and regulatory approval. As a part of the transaction, we may be compensated for certain transition services expected to be provided to the buyer for a period currently anticipated to be 12 to 18 months after the close of the transaction. These transition services will include services such as information technology, sales, customer service and procurement. By providing these transition services, we will be deemed to have “significant continuing involvement” in the dairy products division operating segment. Therefore, we have determined that the sale, as currently contemplated, would not meet the accounting criteria for “discontinued operations”, but does meet the accounting criteria for classification as “held for sale.” Accordingly, the related assets and liabilities of the dairy products division operating segment have a material effect on our consolidated financial statements.been classified as current assets and liabilities held for sale at June 30, 2003. The operations of the dairy products division operating segment continue to be included in the earnings statement of the Company.
External net sales and earnings from the dairy products division operating segment held for sale as of June 30, 2003 were as follows:
|
| Six months ended |
| Six months ended |
| ||
External net sales |
| $ | 92,878 |
| $ | 96,302 |
|
Earnings before income taxes |
| 6,026 |
| 5,115 |
| ||
Assets and liabilities of the dairy products division operating segment classified as held for sale in the Consolidated Balance Sheet as of June 30, 2003 are as follows:
|
| June 30, |
| |
Assets |
|
|
| |
Accounts receivable, less allowances |
| $ | 14,705 |
|
Inventories |
| 7,260 |
| |
Property, plant and equipment, net |
| 34,858 |
| |
Other assets |
| 2,710 |
| |
|
| $ | 59,533 |
|
Liabilities |
|
|
| |
Accounts payable |
| $ | 8,054 |
|
Accrued liabilities |
| 1,340 |
| |
Non-controlling interest |
| 475 |
| |
|
| $ | 9,869 |
|
NOTE E – 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 consisted of the following:following (dollars in thousands):
|
| September 30, |
| December 31, |
|
| June 30, |
| December 31, |
| ||||
Raw materials and supplies |
| $ | 17,911,000 |
| $ | 15,347,000 |
|
| $ | 15,802 |
| $ | 18,552 |
|
Work in process and finished goods |
| 54,402,000 |
| 43,027,000 |
|
| 49,177 |
| 54,574 |
| ||||
Flocks |
| 21,054,000 |
| 20,567,000 |
|
| 21,245 |
| 22,681 |
| ||||
|
| $ | 93,367,000 |
| $ | 78,941,000 |
|
| $ | 86,224 |
| $ | 95,807 |
|
8
NOTE F – COMMITMENTS AND CONTINGENCIES
Potato Procurement Contract
We have a contract to purchase potatoes which expires in 2004 and which will supply approximately 45% and 40% of the Potato Products Division’s raw material needs in 2003 and 2004, respectively, at an approximate cost of $5.3 million each year.
Egg Procurement Contracts
We maintain egg procurement contracts with numerous cooperatives and egg producers throughout the Midwestern and Eastern United States and Canada which supply approximately 55%50% of our egg requirements. TheseMost of these contracts vary in length from 18 to 72 months with prices primarily indexed to grain or Urner Barry market indices. No single egg supplier provides more than 10% of our egg requirements. Based upon the best estimates available to us for grain and egg prices, we project that our purchases from our top five long-term contracted egg suppliers will approximate $141 million in 2003, $138 million in 2004, $82 million in 2005, $20 million in 2006, and $16 million in 2007, and that the 2003 amount will account for approximately 60% of our contracted egg purchases this year.
9
requirements.
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, we have the right to defend and prosecute infringement of the underlying patents. We may applyoffset 50% of our costs of defending the patents against royalty payments due to future royalty payments.
the patent holder - North Carolina State University. The U.S. Federal Court of Appeals has upheld the validity of the patents on two separate occasions. In September 2000, the U.S. Patent and Trademark Office allowed product claims beyond the process claims previously allowed for the extended shelf-life egg product. These patents are scheduled to expire beginning in 2006.
In 2000, the Predecessorlitigation was settled litigation with one party related to the infringement of these patents and issued a sub-license was issued to the infringing party granting them the right to manufacture and distribute extended shelf-life liquid whole egg product subject to royaltiesa 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 we believe are infringing the product and process patents, including Sunny Fresh Foods, Inc., a subsidiary of Cargill, Inc. The patent infringement trial with Sunny Fresh Foods, Inc. commenced with a jury on June 30, 2003 and is expected to continue into the third quarter of 2003.
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.
As of June 30, 2003, we have an approximate $4 million investment recorded for Belovo S.A. (Belovo), a Belgium egg products company, which represents our approximate 36% interest accounted for under the equity method. Belovo recently notified the Belgium government of a potential finished products inventory matter and is currently working with the Belgium government to address the situation. The potential loss, if any, related to this matter has not yet been determined.
NOTE G – COMPREHENSIVE INCOME (LOSS)
The components and changes in accumulated other comprehensive loss (AOCL), net of taxes, during the ninesix months ended SeptemberJune 30, 20022003 were as follows:follows (dollars in thousands):
|
| Cash Flow |
| Foreign Currency |
| Total |
| |||
COMPANY |
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
| |||
Balance at January 1, 2002 |
| $ | (3,556,000 | ) | $ | (61,000 | ) | $ | (3,617,000 | ) |
Foreign currency translation adjustment |
| — |
| 326,000 |
| 326,000 |
| |||
Net unrealized change on cash flow hedges |
| (1,211,000 | ) | — |
| (1,211,000 | ) | |||
Balance at September 30, 2002 |
| $ | (4,767,000 | ) | $ | 265,000 |
| $ | (4,502,000 | ) |
|
|
|
|
|
|
|
| |||
Balance at April 1, 2001 |
| $ | — |
| $ | — |
| $ | — |
|
Predecessor carry-over basis |
| (506,000 | ) | (71,000 | ) | (577,000 | ) | |||
Foreign currency translation adjustment |
| — |
| 26,000 |
| 26,000 |
| |||
Net unrealized change on cash flow hedges |
| (4,995,000 | ) | — |
| (4,995,000 | ) | |||
Less reclassification adjustments |
| 92,000 |
| — |
| 92,000 |
| |||
Balance at September 30, 2001 |
| $ | (5,409,000 | ) | $ | (45,000 | ) | $ | (5,454,000 | ) |
|
| Cash Flow |
| Foreign Currency |
| Total |
| |||
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
|
| Cash Flow |
| Foreign Currency |
| Total |
| |||
|
|
|
|
|
|
|
| |||
Balance at January 1, 2003 |
| $ | (7,799 | ) | $ | 151 |
| $ | (7,648 | ) |
Foreign currency translation adjustment |
| 2,066 |
| 629 |
| 2,695 |
| |||
Net unrealized change on cash flow hedges |
| 2,326 |
| — |
| 2,326 |
| |||
Balance at June 30, 2003 |
| $ | (3,407 | ) | $ | 780 |
| $ | (2,627 | ) |
Comprehensive income (loss), net of taxes, for the nine months ended September 30, 2002 and for the six months ended SeptemberJune 30, 20012003 and for the predecessor’s three months ended March 31, 20012002 was as follows:follows (dollars in thousands):
COMPANY |
|
|
|
|
| |
Net income for the nine months ended September 30, 2002 |
|
|
| $ | 20,041,000 |
|
Net gains (loss) arising during the period from cash flow hedges: |
|
|
|
|
| |
Net unrealized derivative losses during period |
| (1,211,000 | ) |
|
| |
Foreign currency translation adjustment |
| 326,000 |
|
|
| |
|
|
|
|
|
| |
Other comprehensive loss |
|
|
| (885,000 | ) | |
|
|
|
|
|
| |
Comprehensive income for the nine months ended September 30, 2002 |
|
|
| $ | 19,156,000 |
|
|
|
|
|
|
| |
Net income for the six months ended September 30, 2001 |
|
|
| $ | 4,966,000 |
|
Net gains (losses) arising during the period from cash flow hedges: |
|
|
|
|
| |
Net unrealized derivative losses during period |
| (4,995,000 | ) |
|
| |
Reclassification adjustment |
| 92,000 |
|
|
| |
Foreign currency translation adjustment |
| 26,000 |
|
|
| |
|
|
|
|
|
| |
Other comprehensive loss |
|
|
| (4,877,000 | ) | |
|
|
|
|
|
| |
Comprehensive income for the six months ended September 30, 2001 |
|
|
| $ | 89,000 |
|
|
|
|
|
|
| |
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 | ) |
Net income for the six months ended June 30, 2003 |
|
|
| $ | 14,747 |
|
Net gains arising during the period from cash flow hedges: |
|
|
|
|
| |
Net unrealized derivative gains during period |
| 2,326 |
|
|
| |
Foreign currency translation adjustment |
| 2,695 |
|
|
| |
Other comprehensive income |
|
|
| 5,021 |
| |
Comprehensive income for the six months ended June 30, 2003 |
|
|
| $ | 19,768 |
|
|
|
|
|
|
| |
Net income for the six months ended June 30, 2002 |
|
|
| $ | 12,675 |
|
Net gains (losses) arising during the period from cash flow hedges: |
|
|
|
|
| |
Net unrealized derivative losses during period |
| (262 | ) |
|
| |
Foreign currency translation adjustment |
| 1,326 |
|
|
| |
Other comprehensive income |
|
|
| 1,064 |
| |
Comprehensive income for the six months ended June 30, 2002 |
|
|
| $ | 13,739 |
|
119
NOTE H – BUSINESS SEGMENTS
We operate in four reportable segments – Egg Products, Refrigerated Distribution, Dairy Products and Potato Products. The Merger, as more fully described inSee Note A, did not have an impact on our segment classification orD regarding the interaction betweensale of the segments.Dairy Products division operating segment. Certain financial information on our operating segments and the Predecessor’s, is as follows (unaudited, dollars in thousands):
|
| Company |
| |||||||||||||||
|
| Egg |
| Refrigerated |
| Dairy |
| Potato |
| Corporate |
| Total |
| |||||
THREE MONTHS ENDED SEPTEMBER 30, 2002: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
External net sales |
| $ | 165,944 |
| $ | 58,409 |
| $ | 51,425 |
| $ | 18,176 |
| N/A |
| $ | 293,954 |
|
Intersegment sales |
| 3,030 |
| — |
| — |
| 932 |
| N/A |
| 3,962 |
| |||||
Operating profit (loss) |
| 17,718 |
| 3,748 |
| 2,305 |
| 3,120 |
| (1,921 | ) | 24,970 |
| |||||
Depreciation and amortization |
| 10,681 |
| 564 |
| 1,182 |
| 1,165 |
| 8 |
| 13,600 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
THREE MONTHS ENDED SEPTEMBER 30, 2001: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
External net sales |
| $ | 163,334 |
| $ | 63,692 |
| $ | 54,889 |
| $ | 17,310 |
| N/A |
| $ | 299,225 |
|
Intersegment sales |
| 2,829 |
| — |
| — |
| 861 |
| N/A |
| 3,690 |
| |||||
Operating profit (loss) |
| 17,292 |
| 170 |
| 2,634 |
| 1,914 |
| (1,287 | ) | 20,723 |
| |||||
Depreciation and amortization |
| 12,647 |
| 680 |
| 1,090 |
| 1,612 |
| 9 |
| 16,038 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
NINE MONTHS ENDED SEPTEMBER 30, 2002: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
External net sales |
| $ | 483,018 |
| $ | 178,617 |
| $ | 147,727 |
| $ | 52,774 |
| N/A |
| $ | 862,136 |
|
Intersegment sales |
| 8,803 |
| — |
| — |
| 2,555 |
| N/A |
| 11,358 |
| |||||
Operating profit (loss) |
| 52,712 |
| 8,306 |
| 7,914 |
| 7,551 |
| (5,642 | ) | 70,841 |
| |||||
Depreciation and amortization |
| 32,436 |
| 1,547 |
| 3,388 |
| 3,494 |
| 28 |
| 40,893 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
SIX MONTHS ENDED SEPTEMBER 30, 2001: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
External net sales |
| $ | 325,916 |
| $ | 128,123 |
| $ | 106,710 |
| $ | 33,585 |
| N/A |
| $ | 594,334 |
|
Intersegment sales |
| 5,691 |
| 1 |
| — |
| 1,706 |
| N/A |
| 7,398 |
| |||||
Operating profit (loss) |
| 32,822 |
| 2,405 |
| 4,633 |
| 3,473 |
| (2,650 | ) | 40,683 |
| |||||
Depreciation and amortization |
| 25,027 |
| 1,322 |
| 2,100 |
| 3,173 |
| 19 |
| 31,641 |
|
|
| Predecessor |
|
| Company |
| ||||||||||||||||||||||||||||||
THREE MONTHS ENDED MARCH 31, 2001: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
|
| Egg |
| Refrigerated |
| Dairy |
| Potato |
| Corporate |
| Total |
| |||||||||||||||||||||||
THREE MONTHS ENDED JUNE 30, 2003: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
External net sales |
| $ | 163,529 |
| $ | 61,185 |
| $ | 35,328 |
| $ | 15,585 |
| N/A |
| $ | 275,627 |
|
| $ | 189,206 |
| $ | 63,932 |
| $ | 52,276 |
| $ | 18,517 |
| N/A |
| $ | 323,931 |
|
Intersegment sales |
| 4,246 |
| — |
| — |
| 1,003 |
| N/A |
| 5,249 |
|
| 3,559 |
| — |
| 34 |
| 871 |
| N/A |
| 4,464 |
| ||||||||||
Operating profit (loss) |
| 12,915 |
| 3,639 |
| 3,958 |
| 1,688 |
| (12,706 | ) | 9,494 |
|
| 17,356 |
| 4,430 |
| 4,753 |
| 1,958 |
| (2,005 | ) | 26,492 |
| ||||||||||
Depreciation and amortization |
| 9,611 |
| 339 |
| 1,274 |
| 1,278 |
| 33 |
| 12,535 |
|
| 11,235 |
| 731 |
| 887 |
| 1,170 |
| 8 |
| 14,031 |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
THREE MONTHS ENDED JUNE 30, 2002: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
External net sales |
| $ | 161,888 |
| $ | 57,202 |
| $ | 53,122 |
| $ | 17,541 |
| N/A |
| $ | 289,753 |
| ||||||||||||||||||
Intersegment sales |
| 1,728 |
| — |
| — |
| 731 |
| N/A |
| 2,459 |
| |||||||||||||||||||||||
Operating profit (loss) |
| 18,002 |
| 2,265 |
| 3,778 |
| 2,117 |
| (1,784 | ) | 24,378 |
| |||||||||||||||||||||||
Depreciation and amortization |
| 10,877 |
| 546 |
| 1,166 |
| 1,165 |
| 10 |
| 13,764 |
| |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
SIX MONTHS ENDED JUNE 30, 2003: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
External net sales |
| $ | 367,774 |
| $ | 125,279 |
| $ | 92,878 |
| $ | 36,213 |
| N/A |
| $ | 622,144 |
| ||||||||||||||||||
Intersegment sales |
| 6,833 |
| — |
| 62 |
| 1,766 |
| N/A |
| 8,661 |
| |||||||||||||||||||||||
Operating profit (loss) |
| 32,582 |
| 8,902 |
| 6,560 |
| 3,583 |
| (3,654 | ) | 47,973 |
| |||||||||||||||||||||||
Depreciation and amortization |
| 22,438 |
| 1,439 |
| 2,200 |
| 2,340 |
| 15 |
| 28,432 |
| |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
SIX MONTHS ENDED JUNE 30, 2002: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
External net sales |
| $ | 317,074 |
| $ | 120,208 |
| $ | 96,302 |
| $ | 34,598 |
| N/A |
| $ | 568,182 |
| ||||||||||||||||||
Intersegment sales |
| 5,773 |
| — |
| — |
| 1,623 |
| N/A |
| 7,396 |
| |||||||||||||||||||||||
Operating profit (loss) |
| 34,994 |
| 4,558 |
| 5,609 |
| 4,431 |
| (3,721 | ) | 45,871 |
| |||||||||||||||||||||||
Depreciation and amortization |
| 21,755 |
| 983 |
| 2,206 |
| 2,329 |
| 20 |
| 27,293 |
|
NOTE I – 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 SeptemberJune 30, 20022003 and December 31, 2001,2002 and the statements of earnings for the three monthsand six month periods ended SeptemberJune 30, 2003 and 2002 and 2001 and for the nine months ended September 30, 2002 and the six months ended September 30, 2001, and the statements of cash flows for the nine monthssix month periods ended SeptemberJune 30, 20022003 and the six months ended September 30, 2001; and the Predecessor’s consolidated statements of earnings and cash flows for the three months ended March 31, 2001.2002. These financial statements reflect Michael Foods, Inc. (the parent)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. The assets and liabilities of the Dairy Products segment are presented in current assets held for sale and liabilities related to business to be sold (see Note D).
10
Condensed Consolidating Balance Sheets
June 30, 2003
(Unaudited, dollars in thousands)
|
| Parent |
| Wholly |
| Non-wholly owned |
| Eliminations |
| Consolidated |
| ||||||||
M-Foods |
| M-Foods | |||||||||||||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Current assets |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Cash and equivalents |
| $ | 26,414 |
| $ | (2,169 | ) | $ | — |
| $ | — |
| $ | — |
| $ | 24,245 |
|
Accounts receivable, less allowances |
| 18 |
| 93,153 |
| 8,456 |
| 6,248 |
| (15,400 | ) | 92,475 |
| ||||||
Inventories |
| — |
| 86,224 |
| 3,502 |
| 3,758 |
| (7,260 | ) | 86,224 |
| ||||||
Prepaid expenses and other |
| 249 |
| 9,312 |
| 458 |
| 67 |
| (525 | ) | 9,561 |
| ||||||
Assets held for sale |
| — |
| — |
| — |
| — |
| 59,533 |
| 59,533 |
| ||||||
Total current assets |
| 26,681 |
| 186,520 |
| 12,416 |
| 10,073 |
| 36,348 |
| 272,038 |
| ||||||
Property, plant and equipment, net |
| 29 |
| 238,358 |
| 21,110 |
| 10,688 |
| (31,798 | ) | 238,387 |
| ||||||
Other assets |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Goodwill |
| 2,410 |
| 336,534 |
| 1,763 |
| — |
| (1,763 | ) | 338,944 |
| ||||||
Joint ventures and other assets |
| 13,315 |
| 22,544 |
| 116 |
| 264 |
| (3,039 | ) | 33,200 |
| ||||||
Preferred return receivable for subs |
| — |
| 23,018 |
| — |
| — |
| (23,018 | ) | — |
| ||||||
Investment in subsidiaries |
| 604,254 |
| — |
| — |
| — |
| (604,254 | ) | — |
| ||||||
|
| 619,979 |
| 382,096 |
| 1,879 |
| 264 |
| (632,074 | ) | 372,144 |
| ||||||
|
| $ | 646,689 |
| $ | 806,974 |
| $ | 35,405 |
| $ | 21,025 |
| $ | (627,524 | ) | $ | 882,569 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Liabilities and shareholder’s equity |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Current maturities of long-term debt |
| $ | 15,541 |
| $ | 560 |
| $ | — |
| $ | — |
| $ | — |
| $ | 16,101 |
|
Accounts payable |
| 145 |
| 57,553 |
| 3,386 |
| 4,668 |
| (8,750 | ) | 57,002 |
| ||||||
Accrued liabilities |
| 33,830 |
| 56,692 |
| 2,717 |
| 1,118 |
| (3,835 | ) | 90,522 |
| ||||||
Liabilities related to business to be sold |
| — |
| — |
| — |
| — |
| 9,869 |
| 9,869 |
| ||||||
Total current liabilities |
| 49,516 |
| 114,805 |
| 6,103 |
| 5,786 |
| (2,716 | ) | 173,494 |
| ||||||
Long-term debt, less current maturities |
| 400,022 |
| 58,441 |
| — |
| — |
| — |
| 458,463 |
| ||||||
Deferred income taxes |
| (2,417 | ) | 51,441 |
| — |
| — |
| 2,495 |
| 51,519 |
| ||||||
Total liabilities |
| 447,121 |
| 224,687 |
| 6,103 |
| 5,786 |
| (221 | ) | 683,476 |
| ||||||
Non-controlling interest |
| 475 |
| — |
| — |
| — |
| (475 | ) | — |
| ||||||
Preferred unit holder return payable |
| — |
| — |
| 17,482 |
| 5,536 |
| (23,018 | ) | — |
| ||||||
Shareholder’s equity |
| 199,093 |
| 582,287 |
| 11,820 |
| 9,703 |
| (603,810 | ) | 199,093 |
| ||||||
|
| $ | 646,689 |
| $ | 806,974 |
| $ | 35,405 |
| $ | 21,025 |
| $ | (627,524 | ) | $ | 882,569 |
|
11
Condensed Consolidating Balance Sheets
December 31, 2002
(Unaudited, dollars in thousands)
|
| Parent |
| Wholly |
| Non-wholly owned |
| Eliminations |
| Consolidated |
| ||||||||
M-Foods |
| M-Foods | |||||||||||||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Current assets |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Cash and equivalents |
| $ | 19,665 |
| $ | 907 |
| $ | — |
| $ | — |
| $ | — |
| $ | 20,572 |
|
Accounts receivable, less allowances |
| 314 |
| 90,108 |
| 7,836 |
| 4,399 |
| (1,078 | ) | 101,579 |
| ||||||
Inventories |
| — |
| 88,376 |
| 3,412 |
| 4,019 |
| — |
| 95,807 |
| ||||||
Prepaid expenses and other |
| 202 |
| 12,704 |
| 600 |
| 65 |
| — |
| 13,571 |
| ||||||
Total current assets |
| 20,181 |
| 192,095 |
| 11,848 |
| 8,483 |
| (1,078 | ) | 231,529 |
| ||||||
Property, plant and equipment, net |
| 44 |
| 252,825 |
| 18,104 |
| 11,380 |
| — |
| 282,353 |
| ||||||
Other assets |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Goodwill |
| — |
| 339,265 |
| 1,763 |
| — |
| — |
| 341,028 |
| ||||||
Joint ventures and other assets |
| 15,362 |
| 22,082 |
| 139 |
| 529 |
| — |
| 38,112 |
| ||||||
Preferred return receivable for subs |
| — |
| 17,170 |
| — |
| — |
| (17,170 | ) | — |
| ||||||
Investment in subsidiaries |
| 639,819 |
| — |
| — |
| — |
| (639,819 | ) | — |
| ||||||
|
| 655,181 |
| 378,517 |
| 1,902 |
| 529 |
| (656,989 | ) | 379,140 |
| ||||||
|
| $ | 675,406 |
| $ | 823,437 |
| $ | 31,854 |
| $ | 20,392 |
| $ | (658,067 | ) | $ | 893,022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Liabilities and shareholder’s equity |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Current maturities of long-term debt |
| $ | 14,714 |
| $ | 557 |
| $ | — |
| $ | 2,400 |
| $ | — |
| $ | 17,671 |
|
Accounts payable |
| 426 |
| 60,933 |
| 2,836 |
| 2,873 |
| (1,078 | ) | 65,990 |
| ||||||
Accrued liabilities |
| 35,372 |
| 49,953 |
| 2,352 |
| 1,046 |
| — |
| 88,723 |
| ||||||
Total current liabilities |
| 50,512 |
| 111,443 |
| 5,188 |
| 6,319 |
| (1,078 | ) | 172,384 |
| ||||||
Long-term debt, less current maturities |
| 448,734 |
| 44,984 |
| — |
| — |
| — |
| 493,718 |
| ||||||
Deferred income taxes |
| (3,641 | ) | 50,760 |
| — |
| — |
| — |
| 47,119 |
| ||||||
Total liabilities |
| 495,605 |
| 207,187 |
| 5,188 |
| 6,319 |
| (1,078 | ) | 713,221 |
| ||||||
Non-controlling interest |
| 475 |
| — |
| — |
| — |
| — |
| 475 |
| ||||||
Preferred unit holder return payable |
| — |
| — |
| 12,442 |
| 4,728 |
| (17,170 | ) | — |
| ||||||
Shareholder’s equity |
| 179,326 |
| 616,250 |
| 14,224 |
| 9,345 |
| (639,819 | ) | 179,326 |
| ||||||
|
| $ | 675,406 |
| $ | 823,437 |
| $ | 31,854 |
| $ | 20,392 |
| $ | (658,067 | ) | $ | 893,022 |
|
12
COMPANYCondensed Consolidating Statements of Earnings
UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEETSThree months ended June 30, 2003
SEPTEMBER(Unaudited, dollars in thousands)
|
| Parent |
| Wholly |
| Non-wholly owned |
| Eliminations |
| Consolidated |
| ||||||||
M-Foods |
| M-Foods | |||||||||||||||||
Net sales |
| $ | — |
| $ | 276,086 |
| $ | 28,254 |
| $ | 24,055 |
| $ | (4,464 | ) | $ | 323,931 |
|
Cost of sales |
| — |
| 225,811 |
| 23,649 |
| 21,949 |
| (4,854 | ) | 266,555 |
| ||||||
Gross profit |
| — |
| 50,275 |
| 4,605 |
| 2,106 |
| 390 |
| 57,376 |
| ||||||
Selling, general and administrative expenses |
| 2,005 |
| 27,457 |
| 1,415 |
| 1,290 |
| (1,283 | ) | 30,884 |
| ||||||
Operating profit (loss) |
| (2,005 | ) | 22,818 |
| 3,190 |
| 816 |
| 1,673 |
| 26,492 |
| ||||||
Interest expense, net |
| 11,277 |
| 802 |
| 10 |
| 6 |
| — |
| 12,095 |
| ||||||
Other income |
| 1,229 |
| — |
| — |
| — |
| (1,229 | ) | — |
| ||||||
Earnings (loss) before equity in earnings of subsidiaries and income taxes |
| (12,053 | ) | 22,016 |
| 3,180 |
| 810 |
| 444 |
| 14,397 |
| ||||||
Equity in earnings of subsidiaries |
| 15,826 |
| 3,990 |
| (3,180 | ) | (810 | ) | (15,826 | ) | — |
| ||||||
Earnings (loss) before income taxes |
| 3,773 |
| 26,006 |
| — |
| — |
| (15,382 | ) | 14,397 |
| ||||||
Income tax expense (benefit) |
| (4,631 | ) | 10,180 |
| — |
| — |
| — |
| 5,549 |
| ||||||
Net earnings (loss) |
| 8,404 |
| 15,826 |
| — |
| — |
| (15,382 | ) | 8,848 |
| ||||||
Other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Foreign currency translation adjustment |
| 2,066 |
| (237 | ) | — |
| — |
| — |
| 1,829 |
| ||||||
Change in cash flow hedges |
| 644 |
| 1,249 |
| — |
| — |
| — |
| 1,893 |
| ||||||
Comprehensive income (loss) |
| $ | 11,114 |
| $ | 16,838 |
| $ | — |
| $ | — |
| $ | (15,382 | ) | $ | 12,570 |
|
Condensed Consolidating Statements of Earnings
Three months ended June 30, 2002
(Unaudited, dollars in thousands)
|
| PARENT |
| WHOLLY |
| NON-WHOLLY OWNED |
| ELIMINATIONS |
| CONSOLIDATED |
| ||||||||
|
|
|
| M-FOODS |
| M-FOODS |
|
|
| ||||||||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Current Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Cash and equivalents |
| $ | 60,579 |
| $ | (3,453 | ) | $ | — |
| $ | — |
| $ | — |
| $ | 57,126 |
|
Accounts receivable, less allowances |
| 68 |
| 85,140 |
| 6,995 |
| 5,116 |
| (1,148 | ) | 96,171 |
| ||||||
Inventories |
| — |
| 84,099 |
| 4,866 |
| 4,402 |
| — |
| 93,367 |
| ||||||
Notes receivable – related party |
| — |
| — |
| 814 |
| 579 |
| (1,393 | ) | — |
| ||||||
Prepaid expenses and other |
| 707 |
| 10,538 |
| 329 |
| 63 |
| — |
| 11,637 |
| ||||||
Total current assets |
| 61,354 |
| 176,324 |
| 13,004 |
| 10,160 |
| (2,541 | ) | 258,301 |
| ||||||
Property, Plant and Equipment – net |
| 51 |
| 257,750 |
| 18,031 |
| 11,555 |
| — |
| 287,387 |
| ||||||
Other assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Goodwill, net |
| — |
| 343,983 |
| 1,763 |
| — |
| — |
| 345,746 |
| ||||||
Preferred return receivable for subs |
| — |
| 13,295 |
| — |
| — |
| (13,295 | ) | — |
| ||||||
Joint ventures and other assets |
| 16,776 |
| 22,295 |
| 150 |
| 661 |
| — |
| 39,882 |
| ||||||
Investment in subsidiaries |
| 633,951 |
| — |
| — |
| — |
| (633,951 | ) | — |
| ||||||
|
| 650,727 |
| 379,573 |
| 1,913 |
| 661 |
| (647,246 | ) | 385,628 |
| ||||||
|
| $ | 712,132 |
| $ | 813,647 |
| $ | 32,948 |
| $ | 22,376 |
| $ | (649,787 | ) | $ | 931,316 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Current Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Current maturities of long-term debt |
| $ | 15,886 |
| $ | 172 |
| $ | — |
| $ | 2,400 |
| $ | — |
| $ | 18,458 |
|
Accounts payable |
| 72 |
| 56,645 |
| 4,128 |
| 3,825 |
| (1,148 | ) | 63,522 |
| ||||||
Notes payable – related party |
| — |
| 1,444 |
| — |
| — |
| (1,444 | ) | — |
| ||||||
Accrued liabilities |
| 46,181 |
| 49,704 |
| 2,507 |
| 1,107 |
| 51 |
| 99,550 |
| ||||||
Total current liabilities |
| 62,139 |
| 107,965 |
| 6,635 |
| 7,332 |
| (2,541 | ) | 181,530 |
| ||||||
Long-term debt, less current maturities |
| 480,729 |
| 47,173 |
| — |
| — |
| — |
| 527,902 |
| ||||||
Deferred income taxes |
| (4,015 | ) | 52,620 |
| — |
| — |
| — |
| 48,605 |
| ||||||
Preferred shareholder return payable |
| — |
| — |
| 11,866 |
| 1,429 |
| (13,295 | ) | — |
| ||||||
Non-controlling interest |
| 475 |
| — |
| — |
| — |
| — |
| 475 |
| ||||||
Total liabilities |
| 539,328 |
| 207,758 |
| 18,501 |
| 8,761 |
| (15,836 | ) | 758,512 |
| ||||||
Shareholders’ Equity |
| 172,804 |
| 605,889 |
| 14,447 |
| 13,615 |
| (633,951 | ) | 172,804 |
| ||||||
|
| $ | 712,132 |
| $ | 813,647 |
| $ | 32,948 |
| $ | 22,376 |
| $ | (649,787 | ) | $ | 931,316 |
|
|
| Parent |
| Wholly |
| Non-wholly owned |
| Eliminations |
| Consolidated |
| ||||||||
M-Foods |
| M-Foods | |||||||||||||||||
Net sales |
| $ | — |
| $ | 239,090 |
| $ | 27,975 |
| $ | 25,147 |
| $ | (2,459 | ) | $ | 289,753 |
|
Cost of sales |
| — |
| 190,879 |
| 24,277 |
| 22,852 |
| (2,459 | ) | 235,549 |
| ||||||
Gross profit |
| — |
| 48,211 |
| 3,698 |
| 2,295 |
| — |
| 54,204 |
| ||||||
Selling, general and administrative expenses |
| 1,784 |
| 26,802 |
| 1,442 |
| 976 |
| (1,178 | ) | 29,826 |
| ||||||
Operating profit (loss) |
| (1,784 | ) | 21,409 |
| 2,256 |
| 1,319 |
| 1,178 |
| 24,378 |
| ||||||
Interest expense, net |
| 11,500 |
| 773 |
| 35 |
| 24 |
| — |
| 12,332 |
| ||||||
Other income |
| 1,178 |
| — |
| — |
| — |
| (1,178 | ) | — |
| ||||||
Earnings (loss) before equity in earnings of subsidiaries and income taxes |
| (12,106 | ) | 20,636 |
| 2,221 |
| 1,295 |
| — |
| 12,046 |
| ||||||
Equity in earnings of subsidiaries |
| 14,682 |
| 3,516 |
| (2,221 | ) | (1,295 | ) | (14,682 | ) | — |
| ||||||
Earnings (loss) before income taxes |
| 2,576 |
| 24,152 |
| — |
| — |
| (14,682 | ) | 12,046 |
| ||||||
Income tax expense (benefit) |
| (4,740 | ) | 9,470 |
| — |
| — |
| — |
| 4,730 |
| ||||||
Net earnings (loss) |
| 7,316 |
| 14,682 |
| — |
| — |
| (14,682 | ) | 7,316 |
| ||||||
Other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Foreign currency translation adjustment |
| — |
| 1,315 |
| — |
| — |
| — |
| 1,315 |
| ||||||
Change in cash flow hedges |
| (2,499 | ) | 1,350 |
| — |
| — |
| — |
| (1,149 | ) | ||||||
Comprehensive income (loss) |
| $ | 4,817 |
| $ | 17,347 |
| $ | — |
| $ | — |
| $ | (14,682 | ) | $ | 7,482 |
|
13
COMPANYCondensed Consolidating Statements of Earnings
UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEETSSix months ended June 30, 2003
DECEMBER 31, 2001
(Unaudited, dollars in thousands)
|
| PARENT |
| WHOLLY |
| NON-WHOLLY OWNED |
| ELIMINATIONS |
| CONSOLIDATED |
| ||||||||
|
|
|
| M-FOODS |
| M-FOODS |
|
|
| ||||||||||
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 |
|
|
| Parent |
| Wholly |
| Non-wholly owned |
| Eliminations |
| Consolidated |
| ||||||||
M-Foods |
| M-Foods | |||||||||||||||||
Net sales |
| $ | — |
| $ | 537,866 |
| $ | 52,674 |
| $ | 40,265 |
| $ | (8,661 | ) | $ | 622,144 |
|
Cost of sales |
| — |
| 440,932 |
| 44,480 |
| 37,492 |
| (9,051 | ) | 513,853 |
| ||||||
Gross profit |
| — |
| 96,934 |
| 8,194 |
| 2,773 |
| 390 |
| 108,291 |
| ||||||
Selling, general and administrative expenses |
| 3,655 |
| 53,798 |
| 3,112 |
| 2,244 |
| (2,491 | ) | 60,318 |
| ||||||
Operating profit (loss) |
| (3,655 | ) | 43,136 |
| 5,082 |
| 529 |
| 2,881 |
| 47,973 |
| ||||||
Interest expense, net |
| 22,317 |
| 1,621 |
| 42 |
| (13 | ) | — |
| 23,967 |
| ||||||
Other income |
| 2,437 |
| — |
| — |
| — |
| (2,437 | ) | — |
| ||||||
Earnings (loss) before equity in earnings of subsidiaries and income taxes |
| (23,535 | ) | 41,515 |
| 5,040 |
| 542 |
| 444 |
| 24,006 |
| ||||||
Equity in earnings of subsidiaries |
| 28,787 |
| 5,582 |
| (5,040 | ) | (542 | ) | (28,787 | ) | — |
| ||||||
Earnings (loss) before income taxes |
| 5,252 |
| 47,097 |
| — |
| — |
| (28,343 | ) | 24,006 |
| ||||||
Income tax expense (benefit) |
| (9,051 | ) | 18,310 |
| — |
| — |
| — |
| 9,259 |
| ||||||
Net earnings (loss) |
| 14,303 |
| 28,787 |
| — |
| — |
| (28,343 | ) | 14,747 |
| ||||||
Other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Foreign currency translation adjustment |
| 2,066 |
| 629 |
| — |
| — |
| — |
| 2,695 |
| ||||||
Change in cash flow hedges |
| 1,159 |
| 1,167 |
| — |
| — |
| — |
| 2,326 |
| ||||||
Comprehensive income (loss) |
| $ | 17,528 |
| $ | 30,583 |
| $ | — |
| $ | — |
| $ | (28,343 | ) | $ | 19,768 |
|
Condensed Consolidating Statements of Earnings
Six months ended June 30, 2002
(Unaudited, dollars in thousands)
|
| Parent |
| Wholly |
| Non-wholly owned |
| Eliminations |
| Consolidated |
| ||||||||
M-Foods |
| M-Foods | |||||||||||||||||
Net sales |
| $ | — |
| $ | 479,276 |
| $ | 51,825 |
| $ | 44,477 |
| $ | (7,396 | ) | $ | 568,182 |
|
Cost of sales |
| — |
| 384,014 |
| 44,905 |
| 41,339 |
| (7,396 | ) | 462,862 |
| ||||||
Gross profit |
| — |
| 95,262 |
| 6,920 |
| 3,138 |
| — |
| 105,320 |
| ||||||
Selling, general and administrative expenses |
| 3,721 |
| 53,261 |
| 2,857 |
| 1,994 |
| (2,384 | ) | 59,449 |
| ||||||
Operating profit (loss) |
| (3,721 | ) | 42,001 |
| 4,063 |
| 1,144 |
| 2,384 |
| 45,871 |
| ||||||
Interest expense, net |
| 23,300 |
| 1,604 |
| 63 |
| 29 |
| — |
| 24,996 |
| ||||||
Other income |
| 2,384 |
| — |
| — |
| — |
| (2,384 | ) | — |
| ||||||
Earnings (loss) before equity in earnings of subsidiaries and income taxes |
| (24,637 | ) | 40,397 |
| 4,000 |
| 1,115 |
| — |
| 20,875 |
| ||||||
Equity in earnings of subsidiaries |
| 27,662 |
| 5,115 |
| (4,000 | ) | (1,115 | ) | (27,662 | ) | — |
| ||||||
Earnings (loss) before income taxes |
| 3,025 |
| 45,512 |
| — |
| — |
| (27,662 | ) | 20,875 |
| ||||||
Income tax expense (benefit) |
| (9,650 | ) | 17,850 |
| — |
| — |
| — |
| 8,200 |
| ||||||
Net earnings (loss) |
| 12,675 |
| 27,662 |
| — |
| — |
| (27,662 | ) | 12,675 |
| ||||||
Other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Foreign currency translation adjustment |
| — |
| 1,326 |
| — |
| — |
| — |
| 1,326 |
| ||||||
Change in cash flow hedges |
| (2,707 | ) | 2,445 |
| — |
| — |
| — |
| (262 | ) | ||||||
Comprehensive income (loss) |
| $ | 9,968 |
| $ | 31,433 |
| $ | — |
| $ | — |
| $ | (27,662 | ) | $ | 13,739 |
|
14
COMPANYCondensed Consolidating Statements of Cash Flows
UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF EARNINGSSix months ended June 30, 2003
THREE MONTHS ENDED SEPTEMBER(Unaudited, dollars in thousands)
|
| Parent |
| Wholly |
| Non-wholly owned |
| Consolidated |
| |||||||
M-Foods |
| M-Foods | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net cash provided by operating activities |
| $ | 17,193 |
| $ | 31,782 |
| $ | 6,590 |
| $ | 2,550 |
| $ | 58,115 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Capital expenditures |
| — |
| (11,665 | ) | (4,186 | ) | (508 | ) | (16,359 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net cash used in investing activities |
| — |
| (11,665 | ) | (4,186 | ) | (508 | ) | (16,359 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Payments on long-term debt |
| (35,417 | ) | (362 | ) | — |
| (2,400 | ) | (38,179 | ) | |||||
Distribution to preferred unit holders |
| — |
| 2,046 |
| (2,404 | ) | 358 |
| — |
| |||||
Investment in subsidiaries |
| 24,973 |
| (24,973 | ) | — |
| — |
| — |
| |||||
Net cash used in financing activities |
| (10,444 | ) | (23,289 | ) | (2,404 | ) | (2,042 | ) | (38,179 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Effect of exchange rate changes on cash |
| — |
| 96 |
| — |
| — |
| 96 |
| |||||
Net increase (decrease) in cash and equivalents |
| 6,749 |
| (3,076 | ) | — |
| — |
| 3,673 |
| |||||
Cash and equivalents at beginning of period |
| 19,665 |
| 907 |
| — |
| — |
| 20,572 |
| |||||
Cash and equivalents at end of period |
| $ | 26,414 |
| $ | (2,169 | ) | $ | — |
| $ | — |
| $ | 24,245 |
|
Condensed Consolidating Statements of Cash Flows
Six Months ended June 30, 2002
(Unaudited, dollars in thousands)
|
| PARENT |
| WHOLLY |
| NON-WHOLLY OWNED |
| ELIMINATIONS |
| CONSOLIDATED |
| ||||||||
|
|
|
| M-FOODS |
| M-FOODS |
|
|
| ||||||||||
Net sales |
| $ | — |
| $ | 246,491 |
| $ | 28,016 |
| $ | 23,409 |
| $ | (3,962 | ) | $ | 293,954 |
|
Cost of sales |
| — |
| 196,733 |
| 26,325 |
| 20,681 |
| (3,962 | ) | 239,777 |
| ||||||
Gross profit |
| — |
| 49,758 |
| 1,691 |
| 2,728 |
| — |
| 54,177 |
| ||||||
Selling, general and administrative expenses |
| 1,921 |
| 26,175 |
| 1,325 |
| 992 |
| (1,206 | ) | 29,207 |
| ||||||
Operating profit (loss) |
| (1,921 | ) | 23,583 |
| 366 |
| 1,736 |
| 1,206 |
| 24,970 |
| ||||||
Interest expense, net |
| 11,995 |
| 889 |
| (29 | ) | (11 | ) | — |
| 12,844 |
| ||||||
Other income |
| 1,206 |
| — |
| — |
| — |
| (1,206 | ) | — |
| ||||||
Earnings (loss) before equity in earnings of subsidiaries and income taxes |
| (12,710 | ) | 22,694 |
| 395 |
| 1,747 |
| — |
| 12,126 |
| ||||||
Equity in earnings of subsidiary |
| 15,776 |
| 2,142 |
| (395 | ) | (1,747 | ) | (15,776 | ) | — |
| ||||||
Earnings before income taxes |
| 3,066 |
| 24,836 |
| — |
| — |
| (15,776 | ) | 12,126 |
| ||||||
Income tax expense (benefit) |
| (4,300 | ) | 9,060 |
| — |
| — |
| — |
| 4,760 |
| ||||||
NET EARNINGS (LOSS) |
| 7,366 |
| 15,776 |
| — |
| — |
| (15,776 | ) | 7,366 |
| ||||||
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Change in foreign currency translation |
| — |
| (1,000 | ) | — |
| — |
| — |
| (1,000 | ) | ||||||
Change in cash flow hedges |
| (2,511 | ) | 1,562 |
| — |
| — |
| — |
| (949 | ) | ||||||
Comprehensive income (loss) |
| $ | 4,855 |
| $ | 16,338 |
| $ | — |
| $ | — |
| $ | (15,776 | ) | $ | 5,417 |
|
COMPANY
UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF EARNINGS
THREE MONTHS ENDED SEPTEMBER 30, 2001
(in thousands)
|
| PARENT |
| WHOLLY |
| NON-WHOLLY OWNED |
| ELIMINATIONS |
| CONSOLIDATED |
| ||||||||
|
|
|
| M-FOODS |
| M-FOODS |
|
|
| ||||||||||
Net sales |
| $ | — |
| $ | 248,027 |
| $ | 24,542 |
| $ | 30,346 |
| $ | (3,690 | ) | $ | 299,225 |
|
Cost of sales |
| — |
| 201,990 |
| 21,126 |
| 29,010 |
| (3,690 | ) | 248,436 |
| ||||||
Gross profit |
| — |
| 46,037 |
| 3,416 |
| 1,336 |
| — |
| 50,789 |
| ||||||
Selling, general and administrative expenses |
| 1,287 |
| 27,711 |
| 1,093 |
| 1,255 |
| (1,280 | ) | 30,066 |
| ||||||
Operating profit (loss) |
| (1,287 | ) | 18,326 |
| 2,323 |
| 81 |
| 1,280 |
| 20,723 |
| ||||||
Interest expense, net |
| 13,433 |
| 117 |
| (145 | ) | 11 |
| — |
| 13,416 |
| ||||||
Other income |
| 1,280 |
| — |
| 2 |
| (2 | ) | (1,280 | ) | — |
| ||||||
Earnings (loss) before equity in earnings of subsidiaries and income taxes |
| (13,440 | ) | 18,209 |
| 2,470 |
| 68 |
| — |
| 7,307 |
| ||||||
Equity in earnings of subsidiary |
| 9,342 |
| 2,538 |
| (2,470 | ) | (68 | ) | (9,342 | ) | — |
| ||||||
Earnings before income taxes |
| (4,098 | ) | 20,747 |
| — |
| — |
| (9,342 | ) | 7,307 |
| ||||||
Income tax expense (benefit) |
| (7,395 | ) | 11,405 |
| — |
| — |
| — |
| 4,010 |
| ||||||
NET EARNINGS (LOSS) |
| 3,297 |
| 9,342 |
| — |
| — |
| (9,342 | ) | 3,297 |
| ||||||
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Change in foreign currency translation |
| — |
| 53 |
| — |
| — |
| — |
| 53 |
| ||||||
Change in cash flow hedges |
| (3,364 | ) | (1,913 | ) | — |
| — |
| — |
| (5,277 | ) | ||||||
Comprehensive income (loss) |
| $ | (67 | ) | $ | 7,482 |
| $ | — |
| $ | — |
| $ | (9,342 | ) | $ | (1,927 | ) |
|
| Parent |
| Wholly |
| Non-wholly owned |
| Consolidated |
| |||||||
M-Foods |
| M-Foods | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net cash provided by operating activities |
| $ | 15,431 |
| $ | 24,125 |
| $ | 4,943 |
| $ | 3,734 |
| $ | 48,233 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Capital expenditures |
| — |
| (10,192 | ) | (3,124 | ) | (947 | ) | (14,263 | ) | |||||
Investments in joint ventures and other assets |
| (156 | ) | 714 |
| (161 | ) | — |
| 397 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net cash used in investing activities |
| (156 | ) | (9,478 | ) | (3,285 | ) | (947 | ) | (13,866 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Payments on revolving line of credit |
| (5,000 | ) | — |
| — |
| — |
| (5,000 | ) | |||||
Payments on long-term debt |
| (15,507 | ) | (150 | ) | — |
| (2,400 | ) | (18,057 | ) | |||||
Distribution to preferred unit holders |
| — |
| 2,045 |
| (1,658 | ) | (387 | ) | — |
| |||||
Investment in subsidiaries |
| 13,599 |
| (13,599 | ) | — |
| — |
| — |
| |||||
Net cash used in financing activities |
| (6,908 | ) | (11,704 | ) | (1,658 | ) | (2,787 | ) | (23,057 | ) | |||||
Net increase in cash and equivalents |
| 8,367 |
| 2,943 |
| — |
| — |
| 11,310 |
| |||||
Cash and equivalents at beginning of period |
| 33,947 |
| (6,287 | ) | — |
| — |
| 27,660 |
| |||||
Cash and equivalents at end of period |
| $ | 42,314 |
| $ | (3,344 | ) | $ | — |
| $ | — |
| $ | 38,970 |
|
15
COMPANY
UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF EARNINGS
NINE MONTHS ENDED SEPTEMBER 30, 2002
(in thousands)
|
| PARENT |
| WHOLLY |
| NON-WHOLLY OWNED |
| ELIMINATIONS |
| CONSOLIDATED |
| ||||||||
|
|
|
| M-FOODS |
| M-FOODS |
|
|
| ||||||||||
Net sales |
| $ | — |
| $ | 725,767 |
| $ | 79,841 |
| $ | 67,886 |
| $ | (11,358 | ) | $ | 862,136 |
|
Cost of sales |
| — |
| 580,747 |
| 71,230 |
| 62,020 |
| (11,358 | ) | 702,639 |
| ||||||
Gross profit |
| — |
| 145,020 |
| 8,611 |
| 5,866 |
| — |
| 159,497 |
| ||||||
Selling, general and administrative expenses |
| 5,642 |
| 79,436 |
| 4,182 |
| 2,986 |
| (3,590 | ) | 88,656 |
| ||||||
Operating profit (loss) |
| (5,642 | ) | 65,584 |
| 4,429 |
| 2,880 |
| 3,590 |
| 70,841 |
| ||||||
Interest expense, net |
| 35,295 |
| 2,493 |
| 34 |
| 18 |
| — |
| 37,840 |
| ||||||
Other income |
| 3,590 |
| — |
| — |
| — |
| (3,590 | ) | — |
| ||||||
Earnings (loss) before equity in earnings of subsidiaries and income taxes |
| (37,347 | ) | 63,091 |
| 4,395 |
| 2,862 |
| — |
| 33,001 |
| ||||||
Equity in earnings of subsidiary |
| 43,438 |
| 7,257 |
| (4,395 | ) | (2,862 | ) | (43,438 | ) | — |
| ||||||
Earnings before income taxes |
| 6,091 |
| 70,348 |
| — |
| — |
| (43,438 | ) | 33,001 |
| ||||||
Income tax expense (benefit) |
| (13,950 | ) | 26,910 |
| — |
| — |
| — |
| 12,960 |
| ||||||
NET EARNINGS (LOSS) |
| 20,041 |
| 43,438 |
| — |
| — |
| (43,438 | ) | 20,041 |
| ||||||
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Change in foreign currency translation |
| — |
| 326 |
| — |
| — |
| — |
| 326 |
| ||||||
Change in cash flow hedges |
| (5,218 | ) | 4,007 |
| — |
| — |
| — |
| (1,211 | ) | ||||||
Comprehensive income (loss) |
| $ | 14,823 |
| $ | 47,771 |
| $ | — |
| $ | — |
| $ | (43,438 | ) | $ | 19,156 |
|
COMPANY
UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF EARNINGS
SIX MONTHS ENDED SEPTEMBER 30, 2001
(in thousands)
|
| PARENT |
| WHOLLY |
| NON-WHOLLY OWNED |
| ELIMINATIONS |
| CONSOLIDATED |
| ||||||||
|
|
|
| M-FOODS |
| M-FOODS |
|
|
| ||||||||||
Net sales |
| $ | — |
| $ | 495,023 |
| $ | 47,484 |
| $ | 59,225 |
| $ | (7,398 | ) | $ | 594,334 |
|
Cost of sales |
| — |
| 402,866 |
| 41,254 |
| 56,569 |
| (7,398 | ) | 493,291 |
| ||||||
Gross profit |
| — |
| 92,157 |
| 6,230 |
| 2,656 |
| — |
| 101,043 |
| ||||||
Selling, general and administrative expenses |
| 2,650 |
| 55,563 |
| 2,058 |
| 2,660 |
| (2,571 | ) | 60,360 |
| ||||||
Operating profit (loss) |
| (2,650 | ) | 36,594 |
| 4,172 |
| (4 | ) | 2,571 |
| 40,683 |
| ||||||
Interest expense, net |
| 29,680 |
| 217 |
| (198 | ) | (42 | ) | — |
| 29,657 |
| ||||||
Other income |
| 2,571 |
| — |
| 2 |
| (2 | ) | (2,571 | ) | — |
| ||||||
Earnings (loss) before equity in earnings of subsidiaries and income taxes |
| (29,759 | ) | 36,377 |
| 4,372 |
| 36 |
| — |
| 11,026 |
| ||||||
Equity in earnings of subsidiary |
| 18,354 |
| 4,408 |
| (4,372 | ) | (36 | ) | (18,354 | ) | — |
| ||||||
Earnings before income taxes |
| (11,405 | ) | 40,785 |
| — |
| — |
| (18,354 | ) | 11,026 |
| ||||||
Income tax expense (benefit) |
| (16,371 | ) | 22,431 |
| — |
| — |
| — |
| 6,060 |
| ||||||
NET EARNINGS (LOSS) |
| 4,966 |
| 18,354 |
| — |
| — |
| (18,354 | ) | 4,966 |
| ||||||
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Change in foreign currency translation |
| — |
| 26 |
| — |
| — |
| — |
| 26 |
| ||||||
Change in cash flow hedges |
| (3,364 | ) | (1,539 | ) | — |
| — |
| — |
| (4,903 | ) | ||||||
Comprehensive income (loss) |
| $ | 1,602 |
| $ | 16,841 |
| $ | — |
| $ | — |
| $ | (18,354 | ) | $ | 89 |
|
16
PREDECESSOR
UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF EARNINGS
THREE MONTHS ENDED MARCH 31, 2001
(in thousands)
|
| PARENT |
| WHOLLY |
| NON-WHOLLY OWNED |
| ELIMINATIONS |
| CONSOLIDATED |
| ||||||||
|
|
|
| M-FOODS |
| M-FOODS |
|
|
| ||||||||||
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 | ) |
17
COMPANY
UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2002
(in thousands)
|
| PARENT |
| WHOLLY |
| NON-WHOLLY OWNED |
| CONSOLIDATED |
| |||||||
|
|
|
| M-FOODS |
| M-FOODS |
|
| ||||||||
Net cash provided by operating activities |
| $ | 31,229 |
| $ | 37,684 |
| $ | 5,243 |
| $ | 4,421 |
| $ | 78,577 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Capital expenditures |
| — |
| (13,847 | ) | (3,760 | ) | (1,635 | ) | (19,242 | ) | |||||
Business acquisitions |
| — |
| (17,593 | ) | — |
| — |
| (17,593 | ) | |||||
Investments in joint ventures and other assets |
| (156 | ) | 2,642 |
| (150 | ) | — |
| 2,336 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net cash used in investing activities |
| (156 | ) | (28,798 | ) | (3,910 | ) | (1,635 | ) | (34,499 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Payments on notes payable and Revolving line of credit |
| (5,000 | ) | — |
| — |
| — |
| (5,000 | ) | |||||
Proceeds on notes payable and revolving line of credit |
| 10,000 |
| — |
| — |
| — |
| 10,000 |
| |||||
Payments on long-term debt |
| (17,641 | ) | (227 | ) | — |
| (2,400 | ) | (20,268 | ) | |||||
Proceeds on long-term debt |
| — |
| — |
| — |
| — |
| — |
| |||||
Capital contribution from parent |
| 656 |
| — |
| — |
| — |
| 656 |
| |||||
Investment in subsidiaries |
| 7,544 |
| (5,825 | ) | (1,333 | ) | (386 | ) | — |
| |||||
Net cash used in financing activities |
| (4,441 | ) | (6,052 | ) | (1,333 | ) | (2,786 | ) | (14,612 | ) | |||||
Net increase in cash and equivalents |
| 26,632 |
| 2,834 |
| — |
| — |
| 29,466 |
| |||||
Cash and equivalents at beginning of period |
| 33,947 |
| (6,287 | ) | — |
| — |
| 27,660 |
| |||||
Cash and equivalents at end of period |
| $ | 60,579 |
| $ | (3,453 | ) | $ | — |
| $ | — |
| $ | 57,126 |
|
COMPANY
UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED SEPTEMBER 30, 2001
(in thousands)
|
| PARENT |
| WHOLLY |
| NON-WHOLLY OWNED |
| CONSOLIDATED |
| |||||||
|
|
|
| M-FOODS |
| M-FOODS |
|
| ||||||||
Net cash provided by operating activities |
| $ | 27,384 |
| $ | 50,870 |
| $ | 1,196 |
| $ | 4,840 |
| $ | 84,290 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Capital expenditures |
| (9 | ) | (9,876 | ) | (1,203 | ) | (2,440 | ) | (13,528 | ) | |||||
Business acquisition |
| (626,925 | ) | — |
| — |
| — |
| (626,925 | ) | |||||
Investments in joint ventures and other assets |
| (339 | ) | (3,610 | ) | — |
| — |
| (3,949 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net cash used in investing activities |
| (627,273 | ) | (13,486 | ) | (1,203 | ) | (2,440 | ) | (644,402 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Payments on notes payable |
| (46,450 | ) | — |
| — |
| — |
| (46,450 | ) | |||||
Proceeds on notes payable |
| 29,500 |
| — |
| — |
| — |
| 29,500 |
| |||||
Payments on long-term debt |
| (128,675 | ) | (150 | ) | — |
| (2,400 | ) | (131,225 | ) | |||||
Proceeds from long-term debt |
| 570,000 |
| — |
| — |
| — |
| 570,000 |
| |||||
Proceeds from issuance of stock |
| 174,800 |
| — |
| — |
| — |
| 174,800 |
| |||||
Investment in subsidiaries |
| 41,167 |
| (41,167 | ) | — |
| — |
| — |
| |||||
Net cash provided by (used in) financing activities |
| 640,342 |
| (41,317 | ) | — |
| (2,400 | ) | 596,625 |
| |||||
Net increase (decrease) in cash and equivalents |
| 40,453 |
| (3,933 | ) | (7 | ) | — |
| 36,513 |
| |||||
Cash and equivalents at beginning of period |
| 4,327 |
| (64 | ) | 7 |
| — |
| 4,270 |
| |||||
Cash and equivalents at end of period |
| $ | 44,780 |
| $ | (3,997 | ) | $ | — |
| $ | — |
| $ | 40,783 |
|
18
PREDECESSOR
UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2001
(in thousands)
|
| PARENT |
| WHOLLY |
| NON-WHOLLY OWNED |
| CONSOLIDATED |
| |||||||
|
|
|
| M-FOODS |
| M-FOODS |
|
| ||||||||
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 |
|
19
M-FOODS DAIRY, LLC
(A MAJORITY OWNED SUBSIDIARY OF MICHAEL FOODS, INC.Majority Owned Subsidiary of Michael Foods, Inc.)
INDEX TO FINANCIAL STATEMENTSIndex to Financial Statements
16
M-FOODS DAIRY, LLC
(A Majority Owned Subsidiary of Michael Foods, Inc.)
Condensed Balance Sheets
(Unaudited, dollars in thousands)
|
| June 30, |
| December 31, |
| ||
ASSETS |
|
|
|
|
| ||
Current assets |
|
|
|
|
| ||
Accounts receivable, less allowances |
| $ | 8,456 |
| $ | 7,836 |
|
Inventories |
| 3,502 |
| 3,412 |
| ||
Prepaid expenses and other |
| 458 |
| 600 |
| ||
Total current assets |
| 12,416 |
| 11,848 |
| ||
Property, plant and equipment |
|
|
|
|
| ||
Land |
| 855 |
| 855 |
| ||
Buildings and improvements |
| 4,748 |
| 4,648 |
| ||
Machinery and equipment |
| 19,938 |
| 15,852 |
| ||
|
| 25,541 |
| 21,355 |
| ||
Less accumulated depreciation |
| 4,431 |
| 3,251 |
| ||
|
| 21,110 |
| 18,104 |
| ||
Other assets |
|
|
|
|
| ||
Goodwill |
| 1,763 |
| 1,763 |
| ||
Other assets |
| 116 |
| 139 |
| ||
|
| 1,879 |
| 1,902 |
| ||
|
| $ | 35,405 |
| $ | 31,854 |
|
|
|
|
|
|
| ||
LIABILITIES AND UNIT HOLDER AND OPERATING UNIT EQUITY |
|
|
|
|
| ||
Current liabilities |
|
|
|
|
| ||
Accounts payable |
| $ | 3,386 |
| $ | 2,836 |
|
Accrued liabilities |
|
|
|
|
| ||
Compensation |
| 734 |
| 841 |
| ||
Insurance |
| 126 |
| 144 |
| ||
Customer programs |
| 1,246 |
| 884 |
| ||
Other |
| 611 |
| 483 |
| ||
Total current liabilities |
| 6,103 |
| 5,188 |
| ||
|
|
|
|
|
| ||
Commitments and contingencies |
| — |
| — |
| ||
Preferred unit holder return payable |
| 17,482 |
| 12,442 |
| ||
Unit holder equity |
| 11,820 |
| 14,224 |
| ||
|
| $ | 35,405 |
| $ | 31,854 |
|
The accompanying notes are an integral part of the unaudited condensed financial statements.
17
M-FOODS DAIRY, LLC
(A Majority Owned Subsidiary of Michael Foods, Inc.)
Condensed Statements of Earnings
For the three months ended June 30,
(Unaudited, dollars in thousands)
|
| 2003 |
| 2002 |
| ||
Net sales |
| $ | 28,254 |
| $ | 27,975 |
|
|
|
|
|
|
| ||
Cost of sales |
| 23,649 |
| 24,277 |
| ||
|
|
|
|
|
| ||
Gross profit |
| 4,605 |
| 3,698 |
| ||
|
|
|
|
|
| ||
Selling, general and administrative expenses |
| 1,415 |
| 1,442 |
| ||
|
|
|
|
|
| ||
Operating profit |
| 3,190 |
| 2,256 |
| ||
|
|
|
|
|
| ||
Other expense |
| 10 |
| 35 |
| ||
|
|
|
|
|
| ||
Net earnings |
| $ | 3,180 |
| $ | 2,221 |
|
The accompanying notes are an integral part of the unaudited condensed financial statements.
18
M-FOODS DAIRY, LLC
(A Majority Owned Subsidiary of Michael Foods, Inc.)
Condensed Statements of Earnings
For the six months ended June 30,
(Unaudited, dollars in thousands)
|
| 2003 |
| 2002 |
| ||
Net sales |
| $ | 52,674 |
| $ | 51,825 |
|
|
|
|
|
|
| ||
Cost of sales |
| 44,480 |
| 44,905 |
| ||
|
|
|
|
|
| ||
Gross profit |
| 8,194 |
| 6,920 |
| ||
|
|
|
|
|
| ||
Selling, general and administrative expenses |
| 3,112 |
| 2,857 |
| ||
|
|
|
|
|
| ||
Operating profit |
| 5,082 |
| 4,063 |
| ||
|
|
|
|
|
| ||
Other expense |
| 42 |
| 63 |
| ||
|
|
|
|
|
| ||
Net earnings |
| $ | 5,040 |
| $ | 4,000 |
|
The accompanying notes are an integral part of the unaudited condensed financial statements.
19
M-FOODS DAIRY, LLC
(A Majority Owned Subsidiary of Michael Foods, Inc.)
Condensed Statements of Cash Flows
For the Six Months ended June 30,
(Unaudited, dollars in thousands)
|
| 2003 |
| 2002 |
| ||
Net cash provided by operating activities |
| $ | 6,590 |
| $ | 4,943 |
|
|
|
|
|
|
| ||
Cash flows from investing activities: |
|
|
|
|
| ||
Capital expenditures |
| (4,186 | ) | (3,124 | ) | ||
Investments in joint ventures and other assets |
| — |
| (161 | ) | ||
|
|
|
|
|
| ||
Net cash used in investing activities |
| (4,186 | ) | (3,285 | ) | ||
|
|
|
|
|
| ||
Cash flows from financing activities: |
|
|
|
|
| ||
Dividends paid to Michael Foods, Inc. |
| (2,404 | ) | (1,658 | ) | ||
|
|
|
|
|
| ||
Net cash used in financing activities |
| (2,404 | ) | (1,658 | ) | ||
|
|
|
|
|
| ||
Net increase (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 the unaudited condensed financial statements.
20
M-FOODS DAIRY, LLC
(A MAJORITY OWNED SUBSIDIARY OF MICHAEL FOODS, INC.Majority Owned Subsidiary of Michael Foods, Inc.)
BALANCE SHEETSNotes to Condensed Financial Statements
(unaudited, in thousands)
|
| SEPTEMBER 30, |
| DECEMBER 31, |
| ||
ASSETS |
|
|
|
|
| ||
CURRENT ASSETS |
|
|
|
|
| ||
Accounts receivable, less allowances |
| $ | 6,995 |
| $ | 6,535 |
|
Inventories |
| 4,866 |
| 3,592 |
| ||
Notes receivable – related party |
| 814 |
| — |
| ||
Prepaid expenses and other |
| 329 |
| 496 |
| ||
Total current assets |
| 13,004 |
| 10,623 |
| ||
PROPERTY, PLANT AND EQUIPMENT – AT COST |
|
|
|
|
| ||
Land |
| 855 |
| 855 |
| ||
Buildings and improvements |
| 4,291 |
| 3,999 |
| ||
Machinery and equipment |
| 15,519 |
| 12,051 |
| ||
|
| 20,665 |
| 16,905 |
| ||
Less accumulated depreciation |
| 2,634 |
| 1,248 |
| ||
|
| 18,031 |
| 15,657 |
| ||
OTHER ASSETS |
|
|
|
|
| ||
Goodwill, net |
| 1,763 |
| 1,763 |
| ||
Other assets |
| 150 |
| — |
| ||
|
| 1,913 |
| 1,763 |
| ||
|
| $ | 32,948 |
| $ | 28,043 |
|
|
|
|
|
|
| ||
LIABILITIES AND UNIT HOLDER AND |
|
|
|
|
| ||
|
|
|
|
|
| ||
CURRENT LIABILITIES |
|
|
|
|
| ||
Accounts payable |
| $ | 4,128 |
| $ | 2,612 |
|
Accrued liabilities: |
|
|
|
|
| ||
Compensation |
| 733 |
| 688 |
| ||
Insurance |
| 144 |
| 124 |
| ||
Customer programs |
| 945 |
| 836 |
| ||
Other |
| 685 |
| 503 |
| ||
Total current liabilities |
| 6,635 |
| 4,763 |
| ||
COMMITMENTS AND CONTINGENCIES |
| — |
| — |
| ||
PREFERRED UNIT HOLDER RETURN PAYABLE |
| 11,866 |
| 7,500 |
| ||
UNIT HOLDER AND OPERATING UNIT EQUITY |
| 14,447 |
| 15,780 |
| ||
|
| $ | 32,948 |
| $ | 28,043 |
|
The accompanying notes are an integral part of these financial statements.
21
M-FOODS DAIRY, LLC
(A MAJORITY OWNED SUBSIDIARY OF MICHAEL FOODS, INC.)
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
(unaudited, in thousands)
|
| 2002 |
| 2001 |
| ||
Net sales |
| $ | 28,016 |
| $ | 24,542 |
|
|
|
|
|
|
| ||
Cost of sales |
| 26,325 |
| 21,126 |
| ||
|
|
|
|
|
| ||
Gross profit |
| 1,691 |
| 3,416 |
| ||
|
|
|
|
|
| ||
Selling, general and administrative expenses |
| 1,325 |
| 1,093 |
| ||
|
|
|
|
|
| ||
Operating profit |
| 366 |
| 2,323 |
| ||
|
|
|
|
|
| ||
Other income (expense) |
| 29 |
| 147 |
| ||
|
|
|
|
|
| ||
Earnings before income taxes |
| 395 |
| 2,470 |
| ||
Income tax expense |
| — |
| — |
| ||
|
|
|
|
|
| ||
NET EARNINGS |
| $ | 395 |
| $ | 2,470 |
|
The accompanying notes are an integral part of these financial statements.
22
M-FOODS DAIRY, LLC
(A MAJORITY OWNED SUBSIDIARY OF MICHAEL FOODS, INC.)
STATEMENTS OF EARNINGS
(unaudited, in thousands)
|
| Company |
| Predecessor |
| |||||
|
| Nine Months |
| Six Months |
| Three Months |
| |||
Net sales |
| $ | 79,841 |
| $ | 47,484 |
| $ | 17,684 |
|
|
|
|
|
|
|
|
| |||
Cost of sales |
| 71,230 |
| 41,254 |
| 14,994 |
| |||
|
|
|
|
|
|
|
| |||
Gross profit |
| 8,611 |
| 6,230 |
| 2,690 |
| |||
|
|
|
|
|
|
|
| |||
Selling, general and administrative expenses |
| 4,182 |
| 2,058 |
| 1,027 |
| |||
Recall insurance settlement |
| — |
| — |
| (3,217 | ) | |||
|
|
|
|
|
|
|
| |||
Operating profit |
| 4,429 |
| 4,172 |
| 4,880 |
| |||
|
|
|
|
|
|
|
| |||
Other income (expense) |
| (34 | ) | 200 |
| 1 |
| |||
|
|
|
|
|
|
|
| |||
Earnings before income taxes |
| 4,395 |
| 4,372 |
| 4,881 |
| |||
|
|
|
|
|
|
|
| |||
Income tax expense |
| — |
| — |
| 1,918 |
| |||
|
|
|
|
|
|
|
| |||
NET EARNINGS |
| $ | 4,395 |
| $ | 4,372 |
| $ | 2,963 |
|
The accompanying notes are an integral part of these financial statements.
23
M-FOODS DAIRY, LLC
(A MAJORITY OWNED SUBSIDIARY OF MICHAEL FOODS, INC.)
(unaudited, in thousands)
|
| Company |
| Predecessor |
| |||||
|
| Nine Months |
| Six Months |
| Three Months |
| |||
|
|
|
|
|
|
|
| |||
Net cash provided by (used in) operating activities |
| $ | 5,243 |
| $ | 1,196 |
| $ | (2,440 | ) |
|
|
|
|
|
|
|
| |||
Cash flows from investing activities: |
|
|
|
|
|
|
| |||
Capital expenditures |
| (3,760 | ) | (1,203 | ) | (3,664 | ) | |||
Investments in joint ventures and other assets |
| (150 | ) | — |
| — |
| |||
|
|
|
|
|
|
|
| |||
Net cash used in investing activities |
| (3,910 | ) | (1,203 | ) | (3,664 | ) | |||
|
|
|
|
|
|
|
| |||
Cash flows from financing activities: |
|
|
|
|
|
|
| |||
Net additional capital invested or (dividends paid) |
| (1,333 | ) | — |
| 6,111 |
| |||
Net cash provided by (used in) financing activities |
| (1,333 | ) | — |
| 6,111 |
| |||
|
|
|
|
|
|
|
| |||
Net increase (decrease) in cash and equivalents |
| — |
| (7 | ) | 7 |
| |||
|
|
|
|
|
|
|
| |||
Cash and equivalents at beginning of period |
| — |
| 7 |
| — |
| |||
|
|
|
|
|
|
|
| |||
Cash and equivalents at end of period |
| $ | — |
| $ | — |
| $ | 7 |
|
The accompanying notes are an integral part of these financial statements.
24
M-FOODS DAIRY, LLC
(A MAJORITY OWNED SUBSIDIARY OF MICHAEL FOODS, INC.)
UNAUDITEDUnaudited
NOTE A — ORGANIZATION, BUSINESS ANDA—2001 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”, “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,Ostrander; affiliates of Jeffrey Michael, a member of the Predecessor Boardboard of Directors,directors; and affiliates of two private equity investment firms, Vestar Capital Partners and Goldner Hawn Johnson & Morrison Incorporated, collectively,(collectively, “M-Foods Investors, LLC”). Michael Foods, Inc. is a wholly-owned subsidiary of M-Foods Holdings, Inc., which is a wholly-owned subsidiary of M-Foods Investors, LLC. Under the terms of the Merger agreement, all outstanding shares of Michael Foods commoncommon 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 outstandingoutstanding 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 6.8% as of September 30, 2002), and $200,000,000 of senior subordinated notes at an 11.75% annual interestinterest 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, Michael Foodswe contributed the assets of itsour Dairy divisionProducts Division into two limited liability corporations,companies, 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).approximately $35,800,000. The preferred units issued to Michael Foodsus by the Dairy LLCs have an annual 10% preferred return guarantee and represent 100% of the preferred units issued and outstanding. In addition, Michael Foodswe received 5% of the common units issued by each of the Dairy LLCs, with the common units held by Michael Foodsthe 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, another entity 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 interestinterests owned by M-Foods Dairy Holdings, LLC was purchasedwere issued in exchange for $475,000 and are reflected as of April 1, 2001.
Followingnon-controlling interest in 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.accompanying consolidated balance sheet. See also Note D.
The 2001 Merger was accounted for as a purchase in accordance with Accounting Principles Board Opinion 16, Business Combinations and EITFEmerging Issues Task Force Issue No. 88-16, Basis in Leveraged Buyout TransactionsTransactions. Accordingly, the acquired assets and liabilities werehave been recorded at fair value for the interests acquired by new investors and at the carryover basis for continuing investors. As a result, the assets and liabilities were assigned new values, which are part Predecessor cost and part fair value in the same proportions as the carryover basis of the residual interests retained by the continuing management investors and continuing affiliate investors of the Michael family, and the new interests acquired by the new investors. The amount of carryover basis was reflected as a deemed dividend 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.
25
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 nine months ended September 30, 2001 include results for the three months ended March 31, 2001, which were 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 nine months ended September 30, 2001 are 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 nine months ended September 30, 2002 represent actual results for the period.
|
| Nine months ended |
| ||||
|
| September 30, |
| September 30, |
| ||
Net sales |
| $ | 79,841,000 |
| $ | 65,168,000 |
|
Net earnings |
| 4,395,000 |
| 7,405,000 |
| ||
NOTE B — 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 unaudited financial statements and footnote information of the Company as of and for the six month period ended September 30, 2001 and the three and ninesix month periods ended SeptemberJune 30, 2003 and 2002 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. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principals have been condensed or omitted pursuant to such rules and regulations. 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. TheFor the period ended June 30, 2003, the Operating Unit’s financial statements include an allocation for general and administrative costs of approximately $1,266 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 ofexpected for the Company for a full year.
Use of Estimates
Preparation of the accompanyingThese unaudited interim financial statements should be read in conformityconjunction with accounting principles generally acceptedour financial statements and notes thereto, contained in our Annual Report on Form 10-K for the United Statesfiscal year ended December 31, 2002.
21
NOTE C — ORGANIZATION AND BUSINESS
Organization
M-Foods Dairy, LLC (the “Company” or “Operating Unit”) is a majority owned subsidiary of America requires management to make estimatesMichael Foods, Inc., a wholly owned subsidiary of M-Foods Holdings, Inc.
Business
The Company processes and assumptions that affect reported amountsdistributes soft serve ice cream mix, frozen yogurt mix, milk, creamers and other specialty dairy products, many 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 differwhich are ultra-high temperature pasteurized, from the estimates used by management.its facility in Minnesota.
NOTE CD – SALE OF THE COMPANY
In May 2003, we signed a letter of intent for the sale of our dairy products division operating segment, which includes M-Foods Dairy, LLC, to Dean Foods Company. The dairy products division is substantially made up of the assets of M-Foods Dairy, LLC and M-Foods Dairy TXCT, LLC. The transaction is expected to close during the third quarter of 2003. Completion of the transaction is dependent upon several items, including completion of due diligence, execution of a securities purchase agreement, approval by both companies’ Boards of Directors, and regulatory approval.
NOTE E — INVENTORIES
Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market.
Inventories consisted of the following:following (dollars in thousands):
|
| September 30, |
| December 31, |
| ||
Raw materials and supplies |
| $ | 2,204,000 |
| $ | 1,625,000 |
|
Work in process and finished goods |
| 2,662,000 |
| 1,967,000 |
| ||
|
| $ | 4,866,000 |
| $ | 3,592,000 |
|
26
NOTE D – 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 fiscal 2002, the Company completed the transitional impairment test of goodwill with no impairment indicated at January 1, 2002.
The Company’s carrying amount, net of accumulated amortization, for goodwill as of September 30, 2002 and December 31, 2001 was $1,763,000.
The following table presents a reconciliation of net earnings, as reported in the financial statements, to those amounts adjusted for goodwill as determined in accordance with the provisions of SFAS 142:
|
| Company |
| Predecessor |
| |||||
|
| Nine months |
| Six months |
| Three months |
| |||
Reported net earnings |
| $ | 4,395,000 |
| $ | 4,372,000 |
| $ | 2,963,000 |
|
Add back: goodwill amortization |
| — |
| 53,000 |
| 26,000 |
| |||
Adjusted net earnings |
| $ | 4,395,000 |
| $ | 4,425,000 |
| $ | 2,989,000 |
|
Other New Pronouncements
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. In addition, we adopted EITF Issue No. 01-09, Accounting for Consideration given by a Vendor to a Customer (including a Reseller of the Vendor's Products), effective January 1, 2002. The adoption of EITF Issue No. 01-09 did not have a material effect on our consolidated financial statements.
NOTE E — 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.
|
| June 30, |
| December 31, |
| ||
Raw materials and supplies |
| $ | 1,639 |
| $ | 1,682 |
|
Work in process and finished goods |
| 1,863 |
| 1,730 |
| ||
|
| $ | 3,502 |
| $ | 3,412 |
|
NOTE F — 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,limited liability company and, accordingly, no provision or liability for U.S. income taxes have not beenis reflected onin the Company’s financial statements. The U.S. taxable income of the Company and related deductions are allocated to and reported in the individual income tax returns of the owners of the Company.
27
NOTE G — COMMITMENTS AND CONTINGENCIES
Litigation
The Company is engaged in routine litigation incidental to its business. Management believes the ultimate outcome of this litigation will not have a material effect on the Operating Unit’s financial position, liquidity or results of operations.
2822
M-FOODS DAIRY TXCT, LLC
(A MAJORITY OWNED SUBSIDIARY OF MICHAEL FOODS, INC.Majority Owned Subsidiary of Michael Foods, Inc.)
INDEX TO FINANCIAL STATEMENTSIndex to Financial Statements
2923
M-FOODS DAIRY TXCT, LLC
(A MAJORITY OWNED SUBSIDIARY OF MICHAEL FOODS, INC.Majority Owned Subsidiary of Michael Foods, Inc.)
BALANCECondensed Balance Sheets SHEETS
(unaudited,Unaudited, dollars in thousands)
|
| SEPTEMBER 30, |
| DECEMBER 31, |
|
| June 30, |
| December 31, |
| ||||
ASSETS |
|
|
|
|
|
|
|
|
|
| ||||
CURRENT ASSETS |
|
|
|
|
| |||||||||
Accounts receivable, less allowances |
| $ | 5,116 |
| $ | 5,765 |
| |||||||
Current assets |
|
|
|
|
| |||||||||
Accounts receivable |
| $ | 6,248 |
| $ | 4,399 |
| |||||||
Inventories |
| 4,402 |
| 3,315 |
|
| 3,758 |
| 4,019 |
| ||||
Notes receivable – related party |
| 579 |
| — |
| |||||||||
Prepaid expenses and other |
| 63 |
| 52 |
|
| 67 |
| 65 |
| ||||
Total current assets |
| 10,160 |
| 9,132 |
|
| 10,073 |
| 8,483 |
| ||||
PROPERTY, PLANT AND EQUIPMENT— AT COST |
|
|
|
|
| |||||||||
Property, plant and equipment |
|
|
|
|
| |||||||||
Leasehold improvements |
| 3,023 |
| 3,023 |
|
| 3,176 |
| 3,176 |
| ||||
Machinery and equipment |
| 11,632 |
| 9,997 |
|
| 12,300 |
| 11,792 |
| ||||
|
| 14,655 |
| 13,020 |
|
| 15,476 |
| 14,968 |
| ||||
Less accumulated depreciation |
| 3,100 |
| 1,494 |
|
| 4,788 |
| 3,588 |
| ||||
|
| 11,555 |
| 11,526 |
|
| 10,688 |
| 11,380 |
| ||||
OTHER ASSETS |
|
|
|
|
| |||||||||
Other assets |
|
|
|
|
| |||||||||
Non-compete agreement, net |
| 661 |
| 1,058 |
|
| 264 |
| 529 |
| ||||
|
| $ | 22,376 |
| $ | 21,716 |
|
| $ | 21,025 |
| $ | 20,392 |
|
|
|
|
|
|
| |||||||||
LIABILITIES AND UNIT HOLDER AND OPERATING UNIT EQUITY |
|
|
|
|
|
|
|
|
|
| ||||
CURRENT LIABILITIES |
|
|
|
|
| |||||||||
Current liabilities |
|
|
|
|
| |||||||||
Current maturities of non-compete commitment |
| $ | 2,400 |
| $ | 2,400 |
|
| $ | — |
| $ | 2,400 |
|
Accounts payable |
| 3,825 |
| 3,342 |
|
| 4,668 |
| 2,873 |
| ||||
Accrued liabilities: |
|
|
|
|
| |||||||||
Accrued liabilities |
|
|
|
|
| |||||||||
Compensation |
| 348 |
| 292 |
|
| 206 |
| 250 |
| ||||
Insurance |
| 1 |
| 37 |
|
| 6 |
| 1 |
| ||||
Customer programs |
| 122 |
| 200 |
|
| 424 |
| 240 |
| ||||
Other |
| 636 |
| 447 |
|
| 482 |
| 555 |
| ||||
Total current liabilities |
| 7,332 |
| 6,718 |
|
| 5,786 |
| 6,319 |
| ||||
NON-COMPETE COMMITMENT, less current maturities |
| — |
| 2,400 |
| |||||||||
COMMITMENTS AND CONTINGENCIES |
| — |
| — |
| |||||||||
PREFERRED UNIT HOLDER RETURN PAYABLE |
| 1,429 |
| 688 |
| |||||||||
UNIT HOLDER AND OPERATING UNIT EQUITY |
| 13,615 |
| 11,910 |
| |||||||||
|
| $ | 22,376 |
| $ | 21,716 |
|
|
|
|
|
| ||
Commitments and contingencies |
| — |
| — |
| |||||||||
Preferred unit holder return payable |
| 5,536 |
| 4,728 |
| |||||||||
Unit holder and operating unit equity |
| 9,703 |
| 9,345 |
| |||||||||
|
| $ | 21,025 |
| $ | 20,392 |
|
The accompanying notes are an integral part of thesethe unaudited condensed financial statements.
24
(A Majority Owned Subsidiary of Michael Foods, Inc.)
Condensed Statements of Earnings
For the three months ended June 30,
(Unaudited, dollars in thousands)
|
| 2003 |
| 2002 |
| ||
Net sales |
| $ | 24,055 |
| $ | 25,147 |
|
|
|
|
|
|
| ||
Cost of sales |
| 21,949 |
| 22,852 |
| ||
|
|
|
|
|
| ||
Gross profit |
| 2,106 |
| 2,295 |
| ||
|
|
|
|
|
| ||
Selling, general and administrative expenses |
| 1,290 |
| 976 |
| ||
|
|
|
|
|
| ||
Operating profit |
| 816 |
| 1,319 |
| ||
|
|
|
|
|
| ||
Other expense |
| 6 |
| 24 |
| ||
|
|
|
|
|
| ||
Net earnings |
| $ | 810 |
| $ | 1,295 |
|
The accompanying notes are an integral part of the unaudited condensed financial statements.
25
M-FOODS DAIRY TXCT, LLC
(A MAJORITY OWNED SUBSIDIARY OF MICHAEL FOODS, INC.Majority Owned Subsidiary of Michael Foods, Inc.)
STATEMENTS OF EARNINGSCondensed Statements of Earnings
FOR THE THREE MONTHS ENDED SEPTEMBERFor the six months ended June 30,
(unaudited,Unaudited, dollars in thousands)
|
| 2002 |
| 2001 |
| ||
Net sales |
| $ | 23,409 |
| $ | 30,346 |
|
|
|
|
|
|
| ||
Cost of sales |
| 20,681 |
| 29,010 |
| ||
|
|
|
|
|
| ||
Gross profit |
| 2,728 |
| 1,336 |
| ||
|
|
|
|
|
| ||
Selling, general and administrative expenses |
| 992 |
| 1,255 |
| ||
|
|
|
|
|
| ||
Operating profit (loss) |
| 1,736 |
| 81 |
| ||
|
|
|
|
|
| ||
Other income (expense) |
| 11 |
| (13 | ) | ||
|
|
|
|
|
| ||
Earnings (loss) before income taxes |
| 1,747 |
| 68 |
| ||
Income tax benefit |
| — |
| — |
| ||
|
|
|
|
|
| ||
NET EARNINGS (LOSS) |
| $ | 1,747 |
| $ | 68 |
|
|
| 2003 |
| 2002 |
| ||
Net sales |
| $ | 40,265 |
| $ | 44,477 |
|
|
|
|
|
|
| ||
Cost of sales |
| 37,492 |
| 41,339 |
| ||
|
|
|
|
|
| ||
Gross profit |
| 2,773 |
| 3,138 |
| ||
|
|
|
|
|
| ||
Selling, general and administrative expenses |
| 2,244 |
| 1,994 |
| ||
|
|
|
|
|
| ||
Operating profit |
| 529 |
| 1,144 |
| ||
|
|
|
|
|
| ||
Other expense (income) |
| (13 | ) | 29 |
| ||
|
|
|
|
|
| ||
Net earnings |
| $ | 542 |
| $ | 1,115 |
|
The accompanying notes are an integral part of thesethe unaudited condensed financial statements.
3126
M-FOODS DAIRY TXCT, LLC
(A MAJORITY OWNED SUBSIDIARY OF MICHAEL FOODS, INC.Majority Owned Subsidiary of Michael Foods, Inc.)
STATEMENTS OF EARNINGSCondensed Statements of Cash Flows
For the six months ended June 30,
(unaudited,Unaudited, dollars in thousands)
|
| Company |
| Predecessor |
| |||||
|
| Nine Months |
| Six Months |
| Three Months |
| |||
Net sales |
| $ | 67,886 |
| $ | 59,225 |
| $ | 17,644 |
|
|
|
|
|
|
|
|
| |||
Cost of sales |
| 62,020 |
| 56,569 |
| 17,108 |
| |||
|
|
|
|
|
|
|
| |||
Gross profit |
| 5,866 |
| 2,656 |
| 536 |
| |||
|
|
|
|
|
|
|
| |||
Selling, general and administrative expenses |
| 2,986 |
| 2,660 |
| 1,712 |
| |||
|
|
|
|
|
|
|
| |||
Operating profit (loss) |
| 2,880 |
| (4 | ) | (1,176 | ) | |||
|
|
|
|
|
|
|
| |||
Other income (expense) |
| (18 | ) | 40 |
| — |
| |||
|
|
|
|
|
|
|
| |||
Earnings (loss) before income taxes |
| 2,862 |
| 36 |
| (1,176 | ) | |||
|
|
|
|
|
|
|
| |||
Income tax expense |
| — |
| — |
| (447 | ) | |||
|
|
|
|
|
|
|
| |||
NET EARNINGS (LOSS) |
| $ | 2,862 |
| $ | 36 |
| $ | (729 | ) |
|
| 2003 |
| 2002 |
| ||
|
|
|
|
|
| ||
Net cash provided by operating activities |
| $ | 2,550 |
| $ | 3,734 |
|
|
|
|
|
|
| ||
Cash flows from investing activities: |
|
|
|
|
| ||
Capital expenditures |
| (508 | ) | (947 | ) | ||
|
|
|
|
|
| ||
Net cash used in investing activities |
| (508 | ) | (947 | ) | ||
|
|
|
|
|
| ||
Cash flows from financing activities: |
|
|
|
|
| ||
Payments on long-term debt |
| (2,400 | ) | (2,400 | ) | ||
Dividends paid to Michael Foods, Inc. |
| 358 |
| (387 | ) | ||
Net cash used in financing activities |
| (2,042 | ) | (2,787 | ) | ||
|
|
|
|
|
| ||
Net increase (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 thesethe unaudited condensed financial statements.
3227
M-FOODS DAIRY TXCT, LLC
(A MAJORITY OWNED SUBSIDIARY OF MICHAEL FOODS, INC.)
STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
|
| Company |
| Predecessor |
| |||||
|
| Nine Months |
| Six Months |
| Three Months |
| |||
|
|
|
|
|
|
|
| |||
Net cash provided by (used in) operating activities |
| $ | 4,421 |
| $ | 4,840 |
| $ | (31 | ) |
|
|
|
|
|
|
|
| |||
Cash flows from investing activities: |
|
|
|
|
|
|
| |||
Capital expenditures |
| (1,635 | ) | (2,440 | ) | (2,250 | ) | |||
|
|
|
|
|
|
|
| |||
Net cash used in investing activities |
| (1,635 | ) | (2,440 | ) | (2,250 | ) | |||
|
|
|
|
|
|
|
| |||
Cash flows from financing activities: |
|
|
|
|
|
|
| |||
Payments on long-term debt |
| (2,400 | ) | (2,400 | ) | — |
| |||
Net additional capital invested or (dividends paid) |
| (386 | ) | — |
| 2,281 |
| |||
Net cash provided by (used in) by financing activities |
| (2,786 | ) | (2,400 | ) | 2,281 |
| |||
|
|
|
|
|
|
|
| |||
Net increase (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 financial statements.
33
M-FOODS DAIRY TXCT, LLC
(A MAJORITY OWNED SUBSIDIARY OF MICHAEL FOODS, INC.)
NOTES TO FINANCIAL STATEMENTS
UNAUDITED
M-Foods Dairy TXCT, LLC (the “Company”) is a majority owned subsidiaryMajority Owned Subsidiary of Michael Foods, Inc., a wholly owned subsidiary of M-Foods Holdings, Inc. Prior)
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.Unaudited
NOTE A—2001 MERGER
��
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,Ostrander; affiliates of Jeffrey Michael, a member of the Predecessor Boardboard of Directors,directors; and affiliates of two private equity investment firms, Vestar Capital Partners and Goldner Hawn Johnson & Morrison Incorporated, collectively,(collectively, “M-Foods Investors, LLC”). Michael Foods, Inc. is a wholly-owned subsidiary of M-Foods Holdings, Inc., which is a wholly-owned subsidiary of M-Foods Investors, LLC. Under the terms of the Merger agreement, all outstanding shares of Michael Foods commoncommon 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 outstandingoutstanding 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 6.8% as of September 30, 2002), and $200,000,000 of senior subordinated notes at an 11.75% annual interestinterest 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, Michael Foodswe contributed the assets of itsour Dairy divisionProducts Division into two limited liability corporations,companies, 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).approximately $35,800,000. The preferred units issued to Michael Foodsus by the Dairy LLCs have an annual 10% preferred return guarantee and represent 100% of the preferred units issued and outstanding. In addition, Michael Foodswe received 5% of the common units issued by each of the Dairy LLCs, with the common units held by Michael Foodsthe 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, another entity 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 interestinterests owned by M-Foods Dairy Holdings, LLC was purchasedwere issued in exchange for $475,000 and are reflected as of April 1, 2001.non-controlling interest in the accompanying consolidated balance sheet. See also Note D.
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 2001 Merger was accounted for as a purchase in accordance with Accounting Principles Board Opinion 16, Business Combinations and EITFEmerging Issues Task Force Issue No. 88-16, Basis in Leveraged Buyout TransactionsTransactions. Accordingly, the acquired assets and liabilities werehave been recorded at fair value for the interests acquired by new investors and at the carryover basis for continuing investors. As a result, the assets and liabilities were assigned new values, which are part Predecessor cost and part fair value in the same proportions as the carryover basis of the residual interests retained by the continuing management investors and continuing affiliate investors of the Michael family, and the new interests acquired by the new investors. The 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 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 excesswas reflected as a deemed dividend of the fair market value of the Company in the amount of $3,928,000.$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
34
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 exchange for Class B - non voting common units. 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 |
| $ | 7,420,000 |
|
Property, plant & equipment |
| 8,980,000 |
| |
Other assets, including intangibles |
| 1,397,000 |
| |
Other liabilities |
| 4,800,000 |
|
The following unaudited pro forma net sales and net earnings (loss) for the nine months ended September 30, 2001 include results for the three months ended March 31, 2001, which were 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 net sales and net earnings for the nine months ended September 30, 2002 represent actual results for the period.
|
| Nine months ended |
| ||||
|
| September 30, |
| September 30, |
| ||
Net sales |
| $ | 67,886,000 |
| $ | 76,869,000 |
|
Net earnings (loss) |
| 2,862,000 |
| (537,000 | ) | ||
NOTE B — 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 unaudited financial statements and footnote information of the Company as of and for the six month period ended September 30, 2001 and the three and ninesix month periods ended SeptemberJune 30, 2003 and 2002 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. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principals have been condensed or omitted pursuant to such rules and regulations. 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. TheFor the period ended June 30, 2003, the Operating Unit’s financial statements include an allocation for general and administrative costs of approximately $955 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 ofexpected for the Company for a full year.
UseThese unaudited interim financial statements should be read in conjunction with our financial statements and notes thereto, contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2002.
NOTE C — ORGANIZATION AND BUSINESS
Organization
M-Foods Dairy TXCT, LLC (the “Company” or “Operating Unit”) is a majority owned subsidiary of EstimatesMichael Foods, Inc., a wholly owned subsidiary of M-Foods Holdings, Inc.
Preparation
28
Business
The Company processes and distributes soft serve ice cream mix, frozen yogurt mix, milk, creamers and other specialty dairy products, many of which are ultra-high temperature pasteurized, from its facilities in Texas and Connecticut.
NOTE D – SALE OF THE COMPANY
In May 2003, we signed a letter of intent for the sale of our dairy products division operating segment, which includes M-Foods Dairy TXCT, LLC, to Dean Foods Company. The dairy products division is substantially made up of the accompanying financial statements in conformity with accounting principles generally accepted inassets of M-Foods Dairy, LLC and M-Foods Dairy TXCT, LLC. The transaction is expected to close during the United Statesthird quarter 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 date2003. Completion of the financial statements. Actual results could differ from the estimates usedtransaction is dependent upon several items, including completion of due diligence, execution of a securities purchase agreement, approval by management.both companies’ Boards of Directors, and regulatory approval.
NOTE C
Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market.
Inventories consisted of the following:following (dollars in thousands):
|
| September 30, |
| December 31, |
|
| June 30, |
| December 31, |
| ||||
Raw materials and supplies |
| $ | 2,416,000 |
| $ | 1,880,000 |
|
| $ | 2,017 |
| $ | 3,014 |
|
Work in process and finished goods |
| 1,986,000 |
| 1,435,000 |
|
| 1,741 |
| 1,005 |
| ||||
|
| $ | 4,402,000 |
| $ | 3,315,000 |
|
| $ | 3,758 |
| $ | 4,019 |
|
NOTE D – ADOPTION OF NEW ACOUNTING POLICIESF — NON-COMPETE AGREEMENT AND COMMITMENT
Goodwill and Intangible Assets
In July 2001,During 1999, as part of the Financial Accounting Standards Board (FASB) issued Statementconsideration for its Connecticut dairy asset purchase, the Operating Unit entered into a $12 million non-compete agreement. Under the agreement, the Operating Unit agreed to make five annual $2.4 million payments beginning in 1999. As of Financial Accounting Standards (SFAS) 141, Business Combinations, and SFAS 142, Goodwill and Other Intangible Assets. SFAS 141 is effective for all business combinationsJune 30, 2003 the commitment has been fulfilled.
35
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. The Company had no goodwill as of September 30, 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 anOur acquired intangible apart from goodwill whenever thenon-compete 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 havehas been determined to have a definite life and continuecontinues to be amortized as of SeptemberJune 30, 2002 are2003 is as follows:follows (dollars in thousands):
|
| Gross Carrying |
| Accumulated |
| ||
Non-compete |
| $ | 1,397,000 |
| $ | (738,000 | ) |
|
| Gross Carrying |
| Accumulated |
| ||
Non-compete |
| $ | 1,398 |
| $ | (1,134 | ) |
NOTE G — INCOME TAXES
The aggregate amortization expenseCompany is a limited liability company and, accordingly, no provision or liability for the nine months ended September 30, 2002 was approximately $398,000 and was approximately $256,000 for the six months ended September 30, 2001. 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, 2003U.S. income taxes is as follows:
For the Years |
|
|
| |
2002 |
| $ | 529,000 |
|
2003 |
| 529,000 |
| |
Other New Pronouncements
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 onreflected in the Company’s financial statements. The U.S. taxable income of the Company and related deductions are allocated to and reported in the individual income tax returns of the owners of the Company.
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. In addition, we adopted EITF Issue No. 01-09, Accounting for Consideration given by a Vendor to a Customer (including a Reseller of the Vendor's Products), effective January 1, 2002. The adoption of EITF Issue No. 01-09 did not have a material effect on our consolidated financial statements.
For income tax purposes the Company is a pass-through entity. Therefore, income taxes have not been reflected on the Company’s financial statements.
Litigation
The Company is engaged in routine litigation incidental to its business. Management believes the ultimate outcome of this litigation will not have a material effect on the accompanying statements ofOperating Unit’s financial position, liquidity or results of operations.
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ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Michael Foods, Inc. and its subsidiaries (the “Company”, “we”, “us”, “our”) is a diversified producer and distributor of food products in four areas - egg products, refrigerated distribution, dairy products, and potato products. We believe, through our Egg Products Division, we are the largest producer of processed egg products in North America. The Refrigerated Distribution Division distributes a broad line of refrigerated grocery products to retail grocery outlets, including cheese, shell eggs, bagels, butter, margarine, muffins, potato products, juice and ethnic foods. The Dairy Products Division processes and distributes soft-serve mix, ice cream mix, and extended shelf-life ultrapasteurized milk, creamers and other specialty dairy products to domestic quick service businesses and other foodservice outlets, ice cream manufacturers and others. We have an agreement to sell the Dairy Products Division and we expect the transaction to close in the third quarter of 2003 (see Note D to the financial statements). The Potato Products Division processes and distributes refrigerated potato products sold to the foodservice and retail grocery markets in the United States. Please see Note H to our consolidated financial statements for additional information about our business segments.
Our strategy is to grow value-added food product sales, primarily in the foodservice market, by focusing on developing, marketing and distributing innovative, refrigerated products. The key to this strategy is “value-added”, whether that is in the product, the distribution channel or in the service provided to customers.
THREE MONTHS ENDED SEPTEMBERJUNE 30, 20022003 AS COMPARED TO THREE MONTHS ENDED SEPTEMBERJUNE 30, 20012002
RESULTS OF OPERATIONS
Readers are directed to Note H - Business Segments for data on the unaudited financial results of our four business segments for the three months ended SeptemberJune 30, 20022003 and SeptemberJune 30, 2001.2002.
Net sales for the 20022003 period were $293,954,000, a decrease$323.9 million, an increase of 2%12%, compared to net sales of $299,225,000$289.8 million in the 2001 period. 2002 period. Net sales decreasedincreased because of the factors discussed in the below divisional reviews, but were lowerhigher in the 20022003 period due largely to deflationary impacts in two divisions, lowersignificant sales growth at our largest division, Egg Products, which saw strong unit sales growth and the positive impact of the Canadian company acquired in another division, and intentionally lower Company-wide shell egg unit sales.2002.
Egg Products Division external net sales for the 2003 period increased $27.3 million, or 17%, to $189.2 millionfrom $161.9 million in the 2002 periodperiod. Net sales reflected slightly decreased coreincreased unit sales from core operations, related to increased sales efforts which were offset byincreased market penetration, and the sales impact of an egg products acquisition (see Note B)C to the financial statements). TwoUnit sales rose in all categories, except for frozen items and shell eggs. Frozen product sales declined due to our decision to not pursue unprofitable sales and shell egg units declined as part of our largest categories, extended shelf-life liquid eggs and precooked items, saw uniton-going plan to reduce this commodity-sensitive business over time. Unit sales decline slightly, reflecting generally soft foodservice sales. Egg substitutes, hard cooked items and frozen eggs all experienced unit sales increases, though such gains did not offset the declines elsewhere. Pricingrose 9% for our egg products was slightly lower than 2001 period levels.higher value-added items. Graded shell egg prices increased approximately 10%24% compared to thirdsecond quarter 20012002 levels, as reported by Urner Barry Publications - - a widely quoted industry pricing service. Related egg market increases raised the cost of purchased eggs, moderately.which was not fully reflected in our selling prices, reducing margins for many of our egg products.
Approximately two-thirds of the Egg Products Division’s annual egg needs are purchased under contracts or in the spot market. A substantial majority of these eggs 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 moderately higher in the 20022003 period compared to the 20012002 period, particularly for corn.corn, which increased by roughly one-fourth. Because of higher open market egg pricescosts and higher feed costs, overall egg costs increased moderatelysignificantly in the 20022003 period as compared to the 20012002 period. Despite these factors, production efficiencies and cost controls held egg products margins close to 2001Operating earnings for the 2003 period levels. Also, improvements were seen with industrial products collectively, which had been experiencing weak margins and, at times, losses, but which showedincluded a margin recoverygain of approximately $1.6 million from a partial settlement of litigation. Overall, the Division’s operating earnings decreased by approximately $0.6 million in the 20022003 period. In total, divisional operating earnings increased slightly in the 2002 period, with a contribution from the acquired business.
Refrigerated Distribution Division external net sales for the 2003 period increased $6.7 million, or 12%, to $63.9 million from $57.2 million in the 2002 period. Net sales reflected significantly higher unit sales for distributed products and slightly lower prices, related to market conditions, for the key product categories of cheese and butter. Also, both unit sales and average selling prices rose for shell
eggs. The shift of the important Easter selling period reflected lower unit sales. However, excludingfrom 2002’s first quarter to 2003’s second quarter accounted for some of the intentional declineimprovement in both distributed products sales and shell egg sales, unit sales rose slightly for distributed products. Deflation was also a factor inparticularly the divisional dollar sales decline, with butter prices, in particular, down sharply (approximately 50%) from 2001 period levels. Despite lower dollar sales, divisionallatter. Divisional operating earnings rose sharply from depressed 2001 levels,increased by approximately $2.2 million, with the important cheese category accounting for much of the improvement. Cheese unit sales rose year-over-year, while a decline in product costs, combined with favorable wholesale price points, allowed for improved gross margin and operating profit, margins.earnings expansion. Also, we increased the allowance for doubtful accounts in the 2003 period by approximately $1.4 million in recognition of the bankruptcy filing by a major customer.
30
Dairy Products Division external net sales for the 2003 period decreased $0.8 million, or 2%, to $52.3 million from $53.1 million in the 2002 period. Net sales reflected slightly lower unit sales, reflecting lower cartoned product sales that were not fully offset by unit sales gain from creamers. Selling prices during the 2003 period modestly exceeded 2002 period reflected higher unit sales, due mainlylevels. Ingredient and production costs compared favorably to strong creamer and ice cream mix product sales, which were more than offsetthose experienced in 2002. This caused operating earnings to increase by deflationary impacts from the national butterfat market. Along with the lower divisional sales, operating costs were higher than expected at one of our three dairy plants, which resulted in reduced margins and earnings for the division. Operating cost matters are being addressed, with improvements expectedapproximately $1.0 million in the current quarter and thereafter.2003 period.
Potato Products Division external net sales for the 2003 period increased $1.0 million, or 6%, to $18.5 million from $17.5 million in the 2002 periodperiod. Net sales reflected unit salesmodest increases in all product categories.both volume and selling prices. Sales were particularly strong for mashed items – both at retail and at foodservice. Mashed unit sales, in total, rose over 20% year-over-year. New account activity, same-account sales growth, expanded distribution and higher marketing spending levels all contributed to the sales gain. The operatingOperating earnings for the 2003 period decreased approximately $0.2 million due to lower processing yields, which resulted from a lower quality 2002 potato harvest, and increased sales and marketing spending related to raising customer awareness of our mashed potato products.
Gross profit increase reflected the sales growth, improved operating costs and a recovery of foodservice category earnings from near break-even levels in the 20012003 period increased$3.2 million, or 6%, to meaningful profitability$57.4 million from $54.2 million in the 2002 period.
Our gross profit margin was 17.7% of net sales in the 2003 period compared to 18.7% in the 2002 period. The strong increasedecrease in our gross profit margin for the 20022003 period compared to the 20012002 period reflected the factors discussed above, particularly sales mix improvements, decreasedincreased raw material costs in certain divisionsthe Egg Products and generally improved operating costs.Potato Products divisions. It is our strategy to increase value-added product sales as a percent of total sales over time, while decreasing commodity-sensitive products’ contribution to consolidated sales. These efforts historically have been beneficial to gross profit margins in most periods.
Selling, general and administrative expenses declined slightly as a percentin the 2003 period increased $1.1 million, or 4%, to $30.9 million from $29.8 million in the 2002 period and reflected the partial litigation settlement gain noted above.Such expenses were 9.5% of net sales in the 2003 period compared to 10.3% of net sales in the 2002 period, as compared to the resultsand were reflective of the 2001 period, reflective ofrelatively strong sales growth we achieved, our cost control efforts across all divisions.divisions and the approximate $1.6 million litigation gain.
37Operating profit in the 2003 period increased $2.1 million, or 9%, to $26.5 from $24.4 million in the 2002 period., with approximately $1.6 million of the increase related to the litigation settlement. Our operating profit margin was 8.2% of net sales in the 2003 period compared to 8.4% in the 2002 period. The decline in gross profit margin more than offset the improvements seen in selling, general and administrative expenses in the 2003 period, resulting in the lower operating profit margin.
NINEInterest expense declined slightly in the 2003 period, reflecting lower debt levels and lower short-term interest rates. Our tax rate declined to 38.5% from 39.3% due to higher income levels and the implementation of tax planning strategies.
SIX MONTHS ENDED SEPTEMBERJUNE 30, 20022003 AS COMPARED TO NINESIX MONTHS ENDED SEPTEMBERJUNE 30, 20012002
RESULTS OF OPERATIONS
Readers are directed to Note H - Business Segments for data on the unaudited financial results of the Company’s and the Predecessor’sour four business segments and must combine 2001 periods to evaluatefor the ninesix months ended SeptemberJune 30, 2001 as compared to the nine months ended September2003 and June 30, 2002.
Net sales infor the 20022003 period were $862,136,000, a decrease$622.1 million, an increase of less than 1%10%, compared to net sales of $869,961,000 for the Company and the Predecessor$568.2 million in the 2001 period. 2002 period. Net sales decreasedincreased because of the factors discussed in the below divisional reviews, but were slightly lowerhigher in the 20022003 period due largely to lowersignificant sales growth at our largest division, Egg Products, which saw strong unit sales in two divisions.growth and the positive impact of a 2002 acquisition.
Egg Products Division external net sales for the 2003 period increased $50.7 million, or 16%, to $367.8 million from $317.1 million in the 2002 periodperiod. Sales reflected decreasedincreased unit sales from core operations and slight deflation for industrialthe sales impact of a Canadian egg products withcompany acquisition (see Note C to the former related mainly to planned shell egg sales decreases and the latter tied to weaker pricing in the national industrial egg products market.financial statements). Unit sales rose in all categories, except for egg substitutes, hard cookedfrozen items, and precooked products, and declined slightlyrose 8% for other products.higher value-added items. Graded shell egg prices were unchangedincreased approximately 17% compared to first half 2002 levels, in the 2001 period, as reported by Urner Barry Publications.Barry. Related egg market increases raised the cost of purchased eggs, which was not fully reflected in our selling prices, reducing margins for many of our egg products.
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Approximately two-thirds of the Egg Products Division’s annual egg needs are purchased under contracts or in the spot market. A substantial majority of these eggs 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 moderately higher in the 20022003 period compared to the 20012002 period, due mainly toparticularly for corn, which increased by nearly 30%. Because of higher open market egg prices for corn. Overall,and higher feed costs, overall egg costs increased slightlysignificantly in the 2003 period as compared to the 2002 period. Production efficiencies and cost controls helped raise margins for certain egg products, particularly egg substitutes, precooked products, hard cooked products and dried products, and increased divisional margins andAs a result, the Division’s operating earnings decreased by $2.4 million in total.the 2003 period. Operating earnings for the 2003 period included a gain of approximately $2.7 million from the partial settlements of two litigation matters.
Refrigerated Distribution Division external net sales for the 2003 period increased $5.1 million, or 4%, to $125.3 million from $120.2 million in the 2002 periodperiod. Net sales reflected lowerhigher unit sales especiallyfor distributed products and lower prices, related to market conditions, for the key product categories of cheese and butter. However, shell egg average selling prices rose significantly, reflecting market conditions. Divisional operating earnings increased by approximately $4.3 million, with the important cheese category accounting for much of the improvement. Cheese unit sales rose year-over-year, while a decline in product costs, combined with favorable wholesale price points, allowed for gross margin and operating earnings improvements. Also, we increased the allowance for doubtful accounts in the key cheese category. Unit sales were down due to several factors, including a national trend whereby private label cheeses are taking market share from branded cheeses, generally weak retail grocery sales, and store closures2003 period by certain grocery chains served by the Division. Cheese pricing increased year-over-year, but our cheese sourcing costs rose more rapidly than did our selling prices during the first half of 2002. This was largely due to hedging activities that resultedapproximately $1.7 million in significant cheese ownership at above-market levels. During the third quarterrecognition of the current year, such excess hedging no longer existed and cheese margins recovered significantly. This improvement was sufficient to increase divisional operating earnings and margins for the 2002 nine month period, as compared to 2001 period levels.bankruptcy filing by a major customer.
Dairy Products Division external net sales for the 2003 period decreased $3.4 million, or 4%, to $92.9 million from $96.3 million in the 2002 periodperiod. Net sales reflected higherslightly lower unit sales, due mainly to strong creamer and specialtylower cartoned product sales, which more thanrelated to a customer diversifying its supplier base, that were not fully offset a slight decline in per gallon selling prices. The combination ofby unit sales growth and reduced ingredient costs raised gross profit margins significantly. However, operating profit declined in thegains from creamers. Pricing was comparable to 2002 period comparedlevels. Ingredient costs improved related to the 2001national dairy market conditions. Also, production costs were more favorable than those experienced in 2002. These factors caused operating earnings to increase by approximately $1.0 million from 2002 period due to the inclusion of an insurance settlement of approximately $3,217,000 in the 2001 period.levels.
Potato Products Division external net sales for the 2003 period increased $1.6 million, or 5%, to $36.2 millionfrom $34.6 million in the 2002 periodperiod. Net sales reflected unit salesmodest increases in all product categories.both volume and selling prices. Sales were particularly strong for mashed items – both at retail and at foodservice. Mashed unit sales, in total, rose over 20% year-over-year. New account activity, same-account sales growth, expanded distribution and higher marketing spending levels all contributed to the sales gain. The operatingOperating earnings for the 2003 period decreased approximately $0.8 million due to lower processing yields, which resulted from a lower quality 2002 potato harvest, and increased sales and marketing spending related to raising customer awareness of our mashed potato products.
Gross profit increasein the 2003 period increased $3.0 million, or 3%, to $108.3 million from $105.3 million in the 2002 period reflected improved operating costs, the impactperiod. Our gross profit margin was 17.4% of a favorablenet sales mix, with retail sales rising as a percent of the divisional total, and a recovery of foodservice category earnings from modest profitability in the 20012003 period compared to meaningful profitability18.5% in the 2002 period.
The increasedecrease in our gross profit margin for the 20022003 period as compared to the results of the 20012002 period reflected the factors discussed above, particularly sales mix improvements, decreasedincreased raw material costs in certain divisionsthe Egg Products and generally improved operating costs.Potato Products divisions. It is our strategy to increase value-added product sales as a percent of total sales over time, while decreasing commodity-sensitive products’ contribution to consolidated sales. These efforts historically have been beneficial to gross profit margins in most periods.
Selling, general and administrative expenses decreased as a percentin the 2003 period increased $0.9 million, or 1%, to $60.3 million from $59.4 million in the 2002 period and reflected the partial litigation settlements gain noted above. Such expenses were 9.7% of net sales in the 2003 period compared to 10.5% of net sales in the 2002 period, asand were reflective of the relatively strong sales growth we achieved, our cost control efforts across all divisions and the approximate $2.7 million litigation gain.
Operating profit in the 2003 period increased $2.1 million, or 5%, to $48.0 from $45.9 million in the 2002 period. All of the increase year-over-year is attributable to the litigation gain. Our operating profit margin was 7.7% of net sales in the 2003 period compared to the results of the 2001 period. However, within the 2001 period the Predecessor recorded non-recurring expenses related to the Merger for financial, legal, advisory and regulatory filing fees. These expenses of $11,050,000 are reflected8.1% in the Predecessor Consolidated Statement of Earnings for2002 period. The decline in gross profit margin more than offset the three months ended March 31, 2001 as transaction expenses. Exclusive of these one-time transaction expenses,improvements seen in selling, general and administrative expenses increased slightly as a percent of sales in the 20022003 period, as compared toresulting in the 2001 period. This increased expense ratio reflected higher expenses to support retail and foodservice marketing efforts and broadened sales efforts, and for our centralized purchasing department.lower operating profit margin.
38Interest expense declined by approximately $1.0 million in the 2003 period, reflecting lower debt levels and lower short-term interest rates. Our tax rate declined to 38.5% from 39.3% due to higher income levels and the implementation of tax planning strategies.
Earnings before interest, taxes, depreciation and amortization (“EBITDA”, as defined in our credit agreement) for the six months ended June 30, 2003 were $77.6 million, an increase of 4%, compared to $74.8 million for the six months ended June 30, 2002. EBITDA increased because of the factors discussed in the above results of operations divisional reviews. We believe that EBITDA is a relevant indication of the strength of our operating performance as measured in terms of operating cash earnings capabilities. We believe it is the key measurement used by our debtholders to assess our operating performance. Because of this, we use EBITDA as the primary internal measurement of our operating performance and it is the main focus of our employee incentive compensation programs.
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GENERALWe 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 nor as an alternative to cash flows as a source of liquidity and is not indicative of operating profit as determined under generally accepted accounting principles. The following table reconciles our net earnings to EBITDA as most commonly defined, and then to EBITDA as we are required to define it per our credit agreement, for the six months ended June 30 (dollars in thousands):
|
| 2003 |
| 2002 |
| ||
|
|
|
|
|
| ||
Net earnings |
| $ | 14,747 |
| $ | 12,675 |
|
|
|
|
|
|
| ||
Total interest expense, excluding amortization of debt issuance costs |
| 21,902 |
| 23,686 |
| ||
|
|
|
|
|
| ||
Amortization of debt issuance costs |
| 2,180 |
| 1,574 |
| ||
|
|
|
|
|
| ||
Income taxes |
| 9,259 |
| 8,200 |
| ||
|
|
|
|
|
| ||
Depreciation and amortization |
| 28,432 |
| 27,293 |
| ||
EBITDA (as commonly defined) |
| 76,520 |
| 73,428 |
| ||
|
|
|
|
|
| ||
Equity sponsor management fee |
| 634 |
| 546 |
| ||
|
|
|
|
|
| ||
Industrial revenue bonds related expenses |
| 470 |
| 465 |
| ||
|
|
|
|
|
| ||
Other |
| (13 | ) | 328 |
| ||
EBITDA (as defined in our credit agreement) |
| $ | 77,611 |
| $ | 74,767 |
|
Under our credit agreement we are required to report quarterly on our compliance with three financial covenants, with the calculations based primarily on EBITDA as defined in the credit agreement and done on a trailing twelve month basis. As of June 30, 2003 our leverage ratio was 2.93:1.00, versus a requirement of less than or equal to 4.50:1.00, our interest coverage ratio was 3.53:1.00, versus a requirement of greater than or equal to 2.00:1.00, and our fixed charge coverage ratio was 1.91:1.00, versus a requirement of greater than or equal to 1.00:1.00.
COMMODITIES AND PRODUCT PRICING
Certain of our products are sensitive to changes in commodity prices. Value-added egg products, such as extended shelf-life liquid and precooked products, account for approximately 60% of the Egg Products Division’s net sales. The remainder of Egg Products Division sales is derived from the sale of other egg products and shell eggs, which vary from being very commodity-sensitive to somewhat value-added.are commodity-sensitive. 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. Graded shell egg pricing in the 2002 nine month2003 period was approximately unchanged from 2001 levels,higher than in the 2002 period as measured by a widely quoted pricing service, whileand feed costs rose moderatelysignificantly year-over-year. Gross profit margins for extended shelf-life liquid eggs, egg substitutes, and precooked and hard cookedhardcooked egg products are less sensitive to commodity price fluctuations than are other egg products or shell eggs. Our Refrigerated Distribution Division derives approximately 75%80% of its net sales from refrigerated products produced by others, thereby somewhat reducing the effects of commodity price swings. However, a majority of the 80% represents cheese and butter, and the costs for both fluctuate with national dairy markets. Time lags between cost changes for these lines and wholesale/retail pricing changes can result in margin expansion or compression which can be significant. The balance of refrigerated distributionRefrigerated Distribution sales are mainly from shell eggs, some of which are produced by the Egg Products Division, sold on a distribution, or non-commodity, basis.
The Dairy Products Division sells its products primarily on a cost-plus basis and, therefore, the Division’s earnings are not typically affected greatly by raw ingredient price fluctuations, except over short time periods.
The Potato Products Division typically purchases 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 our business. We have generally been able to offset the impact of inflation through a combination of productivity gains and price increases.
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CAPITAL RESOURCES AND LIQUIDITY
Acquisitions and capital expenditures have been, and will likely continue to be, a significant capital requirement. We plan to continue to invest in state-of-the-art production facilities to enhance our competitive position. Historically, we have financed our growth principally from internally generated funds, bank borrowings, and the issuance of senior debt. We believe such sources remain viable financing alternatives to meet our anticipated needs.
We invested $4,991,000 in capital expenditures during the three months ended September 30, 2002 and $19,255,000 during the nine months ended September 30, 2002. We plan to spend approximately $10,000,000 on capital expenditures in the fourth quarter of 2002.
Earnings before interest, taxes, depreciation and amortization (“EBITDA”) in the 2002 nine month period were $113,871,000, an increase of 7% compared to the Company’s and Predecessor’s combined $106,194,000 in the comparable 2001 period. EBITDA increased because of the factors discussed in the above results of operations divisional reviews. We believe 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 facilityagreement with numerousvarious lenders, including commercial banks, other financial institutions and investment groups, which totaled $470,000,000 at the timeexpires in 2007 and 2008 and provides credit facilities which originally provided $470 million. Within these credit facilities there is a $100 million revolving line of the Merger.credit. At SeptemberJune 30, 2002,2003, there was $10,000,000 borrowedapproximately $6.5 million utilized under the $100,000,000revolving line of credit portionfor letters of this facility,credit, while the outstanding balance of the term A portion thereinof the credit facility approximated $79,400,000$61.0 million and the term B portion approximated $245,600,000. Subsequent to$203.9 million. We reduced our debt under the period reported on herein, we made a voluntary prepayment of our term debt (both the term A and B portions)credit agreement by approximately $38.5 million in the combined amountfirst half of $21,900,0002003 through a combination of scheduled payments and voluntary prepayments. There is also $200 million outstanding on October 1, 2002.our 11 ¾% senior subordinated notes due 2011.
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The seniorweighted average interest rate for our borrowings under the credit facilityagreement, adjusted for the effects of hedging activities, was approximately 7.01% at June 30, 2003. Given our business trends and cash flow forecast, we do not anticipate a significant use of the revolving line of credit during 2003.
The credit agreement contains various restrictive covenants. ItThe agreement prohibits us from prepaying other indebtedness, including the subordinated 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.ratios. In addition, the senior credit facilityagreement prohibits us from declaring or paying any dividends and prohibits us from making any payments with respect to the notes if we fail to perform our obligations under, or fail to meet the conditions of, the senior credit facilityagreement or if payment creates a default under the senior credit facility.
agreement. The indenture governing the subordinated notes, among other things, (a)things: (i) restricts our ability and the ability of the issuer and itsour subsidiaries including the guarantors of the notes, to incur additional indebtedness, issue shares of preferred stock, incur liens, pay dividends or make certain other restricted payments and enter into certain transactions with affiliates, (b)affiliates; (ii) prohibits certain restrictions on the ability of certain of the issuer’sour subsidiaries including the guarantors of the notes, to pay dividends or make certain payments to the issuerus; and (c)(iii) places restrictions on our ability and the ability of the issuer and itsour 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.our assets. The indenture related to thesethe notes and the senior credit facilityagreement also containcontains various covenants which limit our discretion in the operation of our businesses. We were in compliance with all of the covenants in the indenture and the credit agreement (see above) as of and for the six months ended June 30, 2003. The Company, principal shareholders or their affiliates may, from time to time, enter the market to purchase or sell our subordinated notes, in compliance with applicable securities laws.
Our ability to make payments on and to refinance our debt, including the subordinated notes, and to fund planned capital expenditures will depend on our ability to generate sufficient cash in the future. This, to some extent, is subject to general economic, financial, competitive and other factors that are beyond our control. We believe that, based on current levels of operations, we will be able to meet our debt service obligations when due. Significant assumptions underlie this belief, including, among other things, that we will continue to be successful in implementing our business strategy and that there will be no material adverse developments in our business, liquidity or capital requirements. If our future cash flows from operations and other capital resources are insufficient to pay our obligations as they mature or to fund our liquidity needs, we may be forced to reduce or delay our business activities and capital expenditures, sell assets, obtain additional debt or equity capital or restructure or refinance all or a portion of our debt, including the notes, on or before maturity. We can provide no assurances that we would be able to accomplish any of these alternatives on a timely basis or on satisfactory terms, if at all. In addition, the terms of our existing and future indebtedness, including the subordinated notes and our credit agreement, may limit our ability to pursue any of these alternatives.
We invested $16.4 million in capital expenditures during the six months ended June 30, 2003. We plan to spend approximately $21 million on capital expenditures during the balance of 2003. 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 year and future financial obligations, as well as to provide funds for ourlonger-term plans, including the working capital and capital expenditures and otherexpenditure needs for at leastsuch plans may generate. In executing these plans, we expect to reduce debt over 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.coming years.
SEASONALITY
Consolidated quarterly operating results are affected by the seasonality of 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.
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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 our products due to consumer, developmentsindustry and industrybroad economic developments, as well as variances in the costs to produce such products, including normal volatility in egg, feed and dairy ingredients costs. Our actual financial results could differ materially from the results estimated by, forecasted by, or implied by us in such forward-looking statements. Forward-looking statements contained in this Form 10-Q speak only as of the date hereof. We disclaim any obligation or understanding to publicly release updates to, or revisions of, forward-looking statements to reflect changes in our expectations or events, conditions or circumstances on which any such statement is made.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no material changes in our market risk during the ninesix month period ended SeptemberJune 30, 2002.2003.
PART II - OTHER INFORMATION
ITEM 4. CONTROLS AND PROCEDURES
a. Evaluation of disclosure controls and procedures.
Under the supervision, and with the participation of, our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-14(c)/15d-14(c) under the Exchange Act) as of a date (the “Evaluation Date”) within 90 days prior to the filing date of this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective in timely alerting them to the material information relating to us (or our consolidated subsidiaries) required to be included in our periodic SEC filings.
b. Changes in internal controls.
There were no significant changes made in our internal controls during the period covered by this report or, to our knowledge, in other factors that could significantly affect these controls subsequent to the date of their evaluation.
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ITEM 5.PART II - OTHER INFORMATION
On August 26, 2002, we acquired the egg products assets of Canadian Inovatech Inc. This entity’s results of operations have been included in our operating results since the date of the asset purchase. Also, as a result of this asset purchase, we now own 67%, rather than 33%, of a Canadian egg products joint venture – Trilogy Egg Products, Inc. Hence, Trilogy became a consolidated entity under our financial reporting as of the date of the asset purchase.
On September 24, 2002, we announced the retention of U.S. Bancorp Piper Jaffray to assist in the possible sale of our Crystal Farms Refrigerated Distribution Company subsidiary.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits and Exhibit Index.
The following exhibits are filed as part of this report:
EXHIBIT | DESCRIPTION | |
2.1 | Agreement and Plan of Merger, dated December 21, 2000, by and among Michael Foods Acquisition Corp., Michael Foods, Inc. and M-Foods Holdings, Inc.(1) | |
2.2 | Amendment Number One to Agreement and Plan of Merger, dated March 6, 2001, by and among Michael Foods Acquisition Corp., Michael Foods, Inc. and M-Foods Holdings, Inc.(1) | |
3.1 | Amended and Restated Articles of Incorporation of Michael Foods, Inc.(1) | |
3.2 | Bylaws of Michael Foods, Inc.(1) | |
4.1 | Purchase Agreement, dated March 16, 2001, between Michael Foods Acquisition Corp., Michael Foods, Inc., and Banc of America Securities, LLC and Bear, Stearns & Co.(1) | |
4.2 | Indenture, dated March 27, 2001, between Michael Foods Acquisition Corp. and BNY Midwest Trust Company, as trustee(1) | |
4.3 | Supplemental Indenture, dated as of April 10, 2001, by and among Michael Foods, Inc., M-Foods Holdings, Inc., Michael Foods of Delaware, Inc., Northern Star Co., Minnesota Products, Inc., Farm Fresh Foods, Inc., Crystal Farms Refrigerated Distribution Company, WFC, Inc., Wisco Farm Cooperative, M. G. Waldbaum Company, Papetti’s Hygrade Egg Products, Inc., Casa Trucking, Inc., Papetti Electroheating Corporation, Kohler Mix Specialties, Inc., Midwest Mix, Inc., Kohler Mix Specialties of Connecticut, Inc. and Midwest Mix, Inc. and BNY Midwest Trust Company(1) | |
4.4 | Second Supplemental Indenture, dated as of May 2, 2001, by and among M-Foods Dairy, LLC and M-Foods Dairy TXCT, LLC, Michael Foods, Inc. and BNY Midwest Trust Company(1) | |
4.5 | Registration Rights Agreement, dated March 27, 2001, by and among Michael Foods Acquisition Corp., and Banc of America Securities, LLC and Bear, Stearns & Co.(1) |
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4.6 | Collateral Pledge and Security Agreement, dated March 27, 2001, between Michael Foods Acquisition Corp., and Banc of America Securities, LLC and Bear, Stearns & Co. and BNY Midwest Trust Company as collateral agent and securities intermediary(1) | |
10.1 | Credit Agreement, dated April 10, 2001, among Michael Foods, Inc., M-Foods Holdings, Inc., the Guarantors, Bank of America, N.A., as Agent, Banc of America Securities, LLC, as Sole Lead Arranger and Sole Book Running Manager, and Bear, Stearns & Co., as Syndication Agent(1) | |
10.2 | Pledge Agreement, dated April 10, 2001, between Michael Foods, Inc., Bank of America, N.A. and Banc of America Securities, LLC(1) | |
*10.3 | M-Foods Holdings, Inc. 2001 Stock Option Plan(1) | |
*10.4 | Form of M-Foods Holdings 2001 Stock Option Plan Stock Option Award Agreement(1) | |
*10.5 | Employment Agreement, dated April 10, 2001, by and among Michael Foods, Inc., M-Foods Holdings, Inc. and Gregg A. Ostrander(1) | |
*10.6 | Employment Agreement, dated April 10, 2001, by and among Michael Foods, Inc., M-Foods Holdings, Inc. and John D. Reedy(1) | |
*10.7 | Employment Agreement, dated April 10, 2001, by and among Michael Foods, Inc., M-Foods Holdings, Inc. and James D. Clarkson(1) | |
*10.8 | Employment Agreement, dated April 10, 2001, by and among Michael Foods, Inc., M-Foods Holdings, Inc. and Bill L. Goucher(1) | |
*10.9 | Severance and Deferred Compensation Agreement, dated April 10, 2001, by and among Michael Foods, Inc., M-Foods Holdings, Inc. and James Mohr(1) | |
*10.10 | Severance and Deferred Compensation Agreement, dated April 10, 2001, by and among Michael Foods, Inc., M-Foods Holdings, Inc. and Harold D. Sprinkle(1) | |
*10.11 | Severance and Deferred Compensation Agreement, dated April 10, 2001, by and among Michael Foods, Inc., M-Foods Holdings, Inc. and Max Hoffmann(1) | |
*10.12 | Severance and Deferred Compensation Agreement, dated April 10, 2001, by and among Michael Foods, Inc., M-Foods Holdings, Inc. and Bradley Cook(1) | |
10.13 | Amended and Restated Limited Liability Company Agreement of M-Foods Investors, LLC(1) | |
*10.14 | Securityholders Agreement, dated April 10, 2001, between M-Foods Dairy Holdings, LLC, Marathon Dairy Investment Corp., Vestar Capital Partners IV, L.P., 4J2R1C Limited Partnership, 3J2R Limited Partnership, Gregg A. Ostrander, John D. Reedy, Bill L. Goucher, James D. Clarkson, James Mohr, Harold D. Sprinkle, Bradley Cook, and Max Hoffmann(1) | |
*10.15 | Management Stock Purchase and Unit Subscription Agreement, dated April 10, 2001, among M-Foods Investors, LLC, M-Foods Holdings, Inc., and Gregg A. Ostrander(1) | |
*10.16 | Management Stock Purchase and Unit Subscription Agreement, dated April 10, 2001, among M-Foods Investors, LLC, M-Foods Holdings, Inc., and John D. Reedy(1) | |
*10.17 | Management Stock Purchase and Unit Subscription Agreement, dated April 10, 2001, among M-Foods Investors, LLC, M-Foods Holdings, Inc., and James D. Clarkson(1) | |
*10.18 | Management Stock Purchase and Unit Subscription Agreement, dated April 10, 2001, among M-Foods Investors, LLC, M-Foods Holdings, Inc., and Bill L. Goucher(1) | |
*10.19 | Management Stock Purchase and Unit Subscription Agreement, dated April 10, 2001, among M-Foods Investors, LLC, M-Foods Holdings, Inc., and Max Hoffmann(1) | |
*10.20 | Management Stock Purchase and Unit Subscription Agreement, dated April 10, 2001, among M-Foods Investors, LLC, M-Foods Holdings, Inc., and Harold D. Sprinkle(1) | |
*10.21 | Management Stock Purchase and Unit Subscription Agreement, dated April 10, 2001, among M-Foods Investors, LLC, M-Foods Holdings, Inc., and Bradley Cook(1) | |
*10.22 | Management Stock Purchase and Unit Subscription Agreement, dated April 10, 2001, among M-Foods Investors, LLC, M-Foods Holdings, Inc., and James Mohr(1) | |
*10.23 | Management Unit Subscription Agreement, dated April 10, 2001, between M-Foods Dairy Holdings, LLC, and Gregg A. Ostrander(1) | |
*10.24 | Management Unit Subscription Agreement, dated April 10, 2001, between M-Foods Dairy Holdings, LLC, and John D. Reedy(1) | |
*10.25 | Management Unit Subscription Agreement, dated April 10, 2001, between M-Foods Dairy Holdings, LLC, and James D. Clarkson(1) | |
*10.26 | Management Unit Subscription Agreement, dated April 10, 2001, between M-Foods Dairy Holdings, LLC, and Bill L. Goucher(1) | |
*10.27 | Management Unit Subscription Agreement, dated April 10, 2001, between M-Foods Dairy Holdings, LLC, and Max Hoffmann(1) | |
*10.28 | Management Unit Subscription Agreement, dated April 10, 2001, between M-Foods Dairy Holdings, LLC, and Harold D. Sprinkle(1) |
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*10.29 | Management Unit Subscription Agreement, dated April 10, 2001, between M-Foods Dairy Holdings, LLC, and Bradley Cook(1) | |
*10.30 | Management Unit Subscription Agreement, dated April 10, 2001, between M-Foods Dairy Holdings, LLC, and James Mohr(1) | |
*10.31 | Securityholders Agreement, dated April 10, 2001, between M-Foods Investors, LLC, M-Foods Holdings, Inc., Marathon Fund Limited Partnership IV, Vestar Capital Partners IV, L.P., 4J2R1C Limited Partnership, 3J2R Limited Partnership, Gregg A. Ostrander, John D. Reedy, Bill L. Goucher, James D. Clarkson, James Mohr, Harold D. Sprinkle, Bradley Cook, and Max Hoffmann(1) |
* Management Contract or Compensation Plan Arrangement
(1) Incorporated by reference from the Company’s Registration Statement on Form S-4 filed July 18, 2001.
(b) Reports on Form 8-K
WeReference is made to a report filed aon Form 8-K dated April 24, 2003 pertaining to our financial results for the three months ended March 31, 2003.
Reference is made to a report filed on Form 8-K dated June 5, 2003 pertaining to an announcement that our Dairy Products Division will be sold to Dean Foods Company.
Reference is made to a report filed on Form 8-K dated July 25, 2002 regarding a news release issued to our debt holders2003 pertaining to our financial results for the three months and six months ended June 30, 2002.2003.
We filed a Form 8-K on August 14, 2002 regarding a news release issued to our debt holders pertaining to our announcement that we had a pending acquisition of an egg products business.37
We filed a Form 8-K on August 23, 2002 regarding a change to our independent accountant.
We filed a Form 8-K on September 24, 2002 regarding the retention of U. S. Bancorp Piper Jaffray to assist in the possible sale of our Crystal Farms Refrigerated Distribution Company subsidiary.
We filed a Form 8-K/A on September 25, 2002 regarding a change to our independent accountant.
Subsequent to the reporting period herein, we filed a Form 8-K on November 8, 2002 regarding a news release issued to our debt holders pertaining to our financial results for the three months and nine months ended September 30, 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) | |||
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Date: | By: | /s/ Gregg A. Ostrander | ||
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| Gregg A. Ostrander | ||
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| (Chairman, President and | ||
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Date: | By: | /s/ John D. Reedy | ||
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| John D. Reedy | ||
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| (Executive Vice President, | ||
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CERTIFICATION OF CHIEF EXECUTIVE OFFICER
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)
I, Gregg A. Ostrander, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Michael Foods, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function)functions):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknessweaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: | ||
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/s/ Gregg A. Ostrander |
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Chairman, President and Chief Executive Officer |
4239
CERTIFICATION OF CHIEF FINANCIAL OFFICER
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)
I, John D. Reedy, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Michael Foods, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function)functions):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknessweaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: | ||
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/s/ John D. Reedy |
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Executive Vice President | ||
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