10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2005

Commission file number 333-112714

MICHAEL FOODS, INC.

(Exact name of registrant as specified in its charter)

Delaware	13-4151741
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)
301 Carlson Parkway Suite 400 Minnetonka, Minnesota	55305
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code (952) 258-4000

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    ¨   Yes    x  No

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    x  Yes    ¨  No

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Large accelerated filer  ¨    Accelerated filer  ¨    Non-accelerated filer  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No

The Registrant’s common stock is not publicly traded. There were 3,000 shares of the Registrant’s common stock outstanding as of March 15, 2006.

PART I

ITEM 1—BUSINESS

Forward-looking Statements

Certain items herein are “forward-looking statements.” Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future sales or performance, capital expenditures, financing needs, intentions relating to acquisitions, our competitive strengths and weaknesses, our business strategy and the trends we anticipate in the industries and economies in which we operate and other information that is not historical information and, in particular, appear under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” When used herein, the words “estimates,” “expects,” “anticipates,” “projects,” “plans,” “intends,” “believes” and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith, and we believe there is a reasonable basis for them, but there can be no assurance that our expectations, beliefs and projections will be realized.

There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this report (please see Item 1A – RISK FACTORS). Important factors that could cause our actual results to differ materially from the forward-looking statements we make in this Form 10-K include changes in domestic and international economic conditions. Additional risks and uncertainties include variances in the demand for our products due to consumer and industry developments, as well as variances in the costs to produce such products, including normal volatility in egg, feed, butter and cheese costs. If any of these risks or uncertainties materialize, or if any of our underlying assumptions are incorrect, our actual results may differ significantly from the results that we express in or imply by any of our forward-looking statements. We do not undertake any obligation to revise these forward-looking statements to reflect future events or circumstances.

General

Michael Foods, Inc. and its subsidiaries (the “Company,” “we,” “us,” and “our”) is a diversified producer and distributor of food products in three areas—egg products, refrigerated distribution and potato products. We believe, through our Egg Products Division, we are the largest producer of processed egg products in North America. Our 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 and ethnic foods. Our Potato Products Division processes and distributes refrigerated potato products sold to the foodservice and retail grocery markets in the United States. Please see Note J to our consolidated financial statements for additional information about our business segments.

Our strategy is to create value-added food and service solutions with our customers and suppliers to deliver profitable and sustainable growth.

In November 2003, we were acquired by an investor group comprised of a private equity firm and a management group through the merger of THL Food Products Co. with and into M-Foods Holdings, Inc. (the “Merger”), with M-Foods Holdings, Inc. being the continuing entity. M-Foods Holdings, Inc. then merged with and into Michael Foods, Inc. (Minn.). M-Foods Holdings, Inc. continued as the surviving corporation and was immediately thereafter renamed Michael Foods, Inc. (Del.) (the “Company”). Any reference to the “Predecessor” refers to Michael Foods, Inc. prior to the Merger. In April 2001, the Company was acquired (the “2001 Merger”) by an investor group comprised of two equity sponsors, members of senior management and affiliates of the Michael family. Any reference to the “2001 Predecessor” refers to Michael Foods, Inc. prior to the 2001 Merger.

Egg Products Division

The Egg Products Division, comprised of our subsidiaries M. G. Waldbaum Company (“Waldbaum”), Papetti’s Hygrade Egg Products, Inc. (“Papetti’s”), MFI Food Canada, Ltd. and Trilogy Egg Products, Inc., produces, processes and distributes numerous egg products and shell eggs. Collectively, the entities are also referred to as the Michael Foods Egg Products Company. We believe that our Egg Products Division is the largest egg products producer and the fourth largest egg producer in North America. Principal value-added egg products are ultrapasteurized, extended shelf-life liquid eggs (“Easy Eggs^®,” “Table Ready™,” “Excell”), egg white-based egg substitutes (“Better ‘n Eggs™” and “All Whites™”), hardcooked and precooked egg products. Other egg products include frozen, liquid and dried egg whites, yolks and whole eggs. We believe our Egg Products Division is the largest supplier of extended shelf-life liquid eggs, precooked egg patties and omelets, dried eggs and hardcooked eggs in North America and is a leading supplier of frozen and liquid whole eggs, whites and yolks.

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Our Egg Products Division distributes its egg products to food processors and foodservice customers primarily throughout North America, with some international sales in the Far East, South America and Europe. The largest selling product line within the Division, which is extended shelf-life liquid eggs, and other egg products are marketed to a wide variety of foodservice and food ingredients customers. The Division also is a leading supplier of egg white-based egg substitutes sold in the U.S. retail and foodservice markets. Most of the Division’s annual shell egg sales are made to our Refrigerated Distribution Division.

In 2005, the Division derived approximately 99% of net sales from egg products, with 1% of net sales coming from shell eggs. Pricing for shell eggs and certain egg products in the United States and Canada reflects levels reported by Urner Barry Spot Egg Market Quotations (“Urner Barry”), a recognized industry publication. Prices of certain valued-added products, such as extended shelf-life liquid eggs, egg substitutes, and hardcooked and precooked egg products, typically are not significantly affected by Urner Barry quoted price levels. Such products accounted for approximately 65% of the Division’s 2005 sales. Prices for the Division’s other products, including frozen, short shelf-life liquid, certain dried products and, particularly, shell eggs, are significantly affected by market prices as reported by Urner Barry.

In 2005, approximately 30% of the Division’s egg needs were satisfied by production from our owned hens, with the balance being purchased under third-party egg procurement contracts and in the spot market. The cost of eggs from our owned facilities is largely dependent upon the cost of feed. Additionally, for an increasing proportion of eggs purchased under third-party egg procurement contracts, the egg cost is determined by the cost of feed, as the contracts are priced using a formula based upon the underlying feed costs. For the remaining portion of eggs purchased under third-party egg procurement contracts and for eggs purchased in the spot market, the egg cost is determined by normal market forces. Such costs are largely determined by reference to Urner Barry quotations. Historically, feed costs have generally been less volatile than have egg market prices, and internally produced eggs generally have been lower in cost than externally sourced eggs. Key feed costs, such as corn and soybean meal costs, are partially hedged through the use of futures and other purchase contracts. There is no market mechanism for hedging egg prices.

The Division has endeavored to moderate the effects of egg market commodity factors through an emphasis on value-added products and the internal production of eggs, where the egg cost is somewhat controllable. Further, the Division attempts to match market-affected egg sourcing with the production of egg products whose selling prices are also market-affected, and cost-affected egg sourcing, as best can be managed, with higher value-added products priced over longer terms, generally 6-12 months. The former allows the Division to typically realize a modest processing margin on such sales, even though there are notable commodity influences on both the egg sourcing cost and the egg products pricing, with each changing as frequently as daily. Shell eggs are essentially a commodity and are sold based upon reported egg prices. Egg prices are significantly influenced by modest shifts in supply and demand. Pricing of shell eggs is also typically affected by seasonal demand related to increased consumption during holiday periods.

The Division’s principal egg processing plants are located in New Jersey, Minnesota, Nebraska, Pennsylvania, Iowa, Manitoba and Ontario. Certain of the Division’s facilities are fully integrated from the production and maintenance of laying flocks through the processing of egg products. Fully automated laying barns, housing approximately 13,500,000 producing hens, are located in Nebraska, Minnesota and South Dakota. Approximately 1,800,000 of these hens are housed in contract facilities. Major laying facilities also maintain their own grain and feed storage facilities. Further, the production of approximately 21,500,000 hens is under long-term supply agreements, with an additional 11,000,000 hens under shorter-term agreements. The Division also maintains facilities with approximately 3,000,000 pullets located in Nebraska and Minnesota.

Refrigerated Distribution Division

Our Refrigerated Distribution Division, comprised of our wholly-owned subsidiaries Crystal Farms Refrigerated Distribution Company (“Crystal Farms”) and Wisco Farm Cooperative, distributes a wide range of refrigerated grocery products directly to retailers and wholesale warehouses. We believe that the Division’s strategy of offering quality branded products at a good value relative to national brands has contributed to the Division’s growth. These distributed refrigerated products, which consist principally of cheese, eggs, bagels, butter, margarine, muffins, potato products and ethnic foods, are supplied by various vendors, or our other divisions, to the Division’s specifications. Cheese accounted for approximately 68% of the Division’s 2005 sales. While we do not produce cheese, we operate a cheese packaging facility in Lake Mills, Wisconsin, which processes and packages various cheese products for our Crystal Farms brand cheese business and for various private label customers.

The Division has expanded its market area using both company-owned and leased resources and independent distributors. The Division’s market area includes 42 states primarily in the central United States. Retail locations carrying the Division’s products exceed 5,000 stores. A majority of these retail stores are served via customers’ warehouses. In 2005, sales to the warehouse operations of SUPERVALU, Inc. (“SUPERVALU”) and to its owned and franchised stores, represented approximately 43% of divisional sales. The Division maintains a fleet of refrigerated tractor-trailers to deliver products daily to its retail customers from ten distribution centers centrally located in its key marketing areas.

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Potato Products Division

Refrigerated potato products are produced and sold by our wholly-owned subsidiaries Northern Star Co. (“Northern Star”) and Farm Fresh Foods, Inc. (“Farm Fresh”) to both the foodservice and retail markets. This division’s products consist of shredded hash browns and diced, sliced, mashed and other specialty potato products. In 2005, approximately 57% of the Potato Products Division’s net sales were to the foodservice market, with the balance to the retail market.

The Division maintains its main processing facility in Minnesota, with a smaller facility located in Nevada. The Division typically purchases approximately 90%-95% of its annual potato requirements from contract producers. The balance of potato requirements are purchased on the spot market. The Division maintains a high percentage of its contracted supply from irrigated fields and also has geographical diversification of its potato sources. However, weather remains an important factor in determining raw potato prices and quality. Variations in the purchase price and/or quality of potatoes can affect the Potato Products Division’s operating results.

Dairy Products Division

Previously, we had a Dairy Products Division, which we sold to Dean Foods Company effective as of September 30, 2003. Our former Dairy Products Division processed and sold soft-serve mix, ice cream mix, frozen yogurt mix, creamers, milk and specialty dairy products, many of which were ultra-high temperature (“UHT”) pasteurized products. The Division sold its products throughout much of the United States from processing facilities in Minnesota, Texas and Connecticut.

Sales, Marketing and Customer Service

Each of our three divisions has developed a marketing strategy which emphasizes high quality products and customer service. Michael Foods Sales, an internal sales group, coordinates the foodservice and retail sales of the Egg Products and Potato Products Divisions, primarily for national and regional accounts, and is supported by a centralized order entry and customer service staff. A group of foodservice brokers is used by Michael Foods Sales to supplement its internal sales efforts. Furthermore, the Egg Products Division utilizes a separate broker group for the retail market and maintains a small sales group which handles certain food ingredient egg product sales. Our marketing staff executes egg products and potato products marketing plans in the foodservice market and for related national retail brands, while the Refrigerated Distribution Division has a small marketing staff which handles that division’s retail marketing plans, along with additional resources available from outside agencies and consultants as needed.

The Refrigerated Distribution Division’s internal and external sales personnel obtain orders from retail stores for next day delivery, and warehouse accounts for delivery usually within 14 days. The Division’s marketing efforts are primarily focused on in-store and co-op advertising programs, which are executed with grocers on a market-by-market basis.

Customers

The Egg Products Division has long-standing preferred supplier relationships with many of its customers. Our customers include many of the major broad-line foodservice distributors and many national restaurant chains that serve breakfast. As the largest processed egg producer in the industry, we offer our customers a broad product selection, large-scale manufacturing capabilities and specialized service. The Egg Products Division’s major customers in each of its market channels include leading foodservice distributors, such as Sysco and U.S. Foodservice, national restaurant chains, such as Burger King, International House of Pancakes, Sonic Corp. and Dunkin’ Donuts, major retail grocery store chains, such as Costco, Wal-Mart and Ahold group stores, and major food ingredient customers, such as General Mills, Inc. and Unilever Bestfoods North America.

The Refrigerated Distribution Division has customer relationships with large food store chains that rely on us to deliver a variety of dairy case products in a timely and efficient manner. For the year ended December 31, 2005, the Division served over 5,000 retail locations, inclusive of stores receiving products through warehouse delivery. SUPERVALU, the food industry’s largest distributor, is the Refrigerated Distribution Division’s largest customer. For the year ended December 31, 2005, sales to warehouse operations of SUPERVALU and SUPERVALU-owned and franchised stores, including Cub Foods Stores, bigg’s, Shopper’s Food Warehouse and Farm Fresh, accounted for approximately 43% of the Division’s net sales. Other principal customers include Roundy’s, Inc., Coborn’s Inc., Nash Finch Company and Wal-Mart Stores, Inc.

The Potato Products Division leverages existing relationships with national foodservice distributor customers of the Egg Products Division. Hence, many of the top Potato Products Division’s customers are also long-standing customers of the Egg Products Division. The Division provides foodservice distributors the convenience of centrally sourcing many different

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types of refrigerated potato and egg products. The Potato Products Division’s largest customers include major foodservice distributors, such as Sysco and U.S. Foodservice and major retail grocery store chains, such as Kroger, Publix, Wal-Mart and Albertson’s.

Competition

All aspects of our businesses are extremely competitive. In general, food products are price sensitive and affected by many factors beyond our control, including changes in consumer tastes, fluctuating commodity prices, changes in supply due to weather, production variances and feed costs.

The egg processing industry is competitive, especially when compared to the shell egg industry. Sunny Fresh Foods, a subsidiary of Cargill, is the Company’s largest higher value-added egg products competitor. The Company also competes with other egg products processors including Sonstegard Foods Company, Rose Acre Farms, Inc., Echo Lake Farm Produce, Moark, LLC and ConAgra Foods, Inc.

The Refrigerated Distribution Division competes with the refrigerated products of larger suppliers such as Kraft Foods, Inc., Dairy Farmers of America, Sargento Foods, Inc., and Sorrento Lactalis, Inc. We position Crystal Farms as an alternative mid-priced brand, operating at price points below national brands and above retail store brands. The Refrigerated Distribution Division’s emphasis on a high level of service and lower-priced branded products has enabled it to compete effectively with much larger national brand companies.

Through our Potato Products Division, we were the first company to introduce nationally branded refrigerated potato products in the late 1980s to the United States’ foodservice and retail markets. We believe we are the largest processor and distributor of refrigerated potato products in the U. S. The Potato Products Division’s major retail competitors are Unilever N. V. (Shedd’s Country Crock Side Dishes) and Reser’s Fine Foods Inc., a national producer of refrigerated products. Other competitors include Bob Evans Farms Inc. and smaller local and regional processors, including I&K Distributors, Inc. (Yoder’s) and Naturally Potatoes in the foodservice sector. Certain companies, such as Ore-Ida Foods, Inc. (a subsidiary of H. J. Heinz Co.) and Lamb-Weston, Inc. (a subsidiary of ConAgra Foods, Inc.), sell frozen versions of potato products which are sold by the Division in refrigerated form.

Proprietary Technologies and Trademarks

We use a combination of patent, trademark and trade secrets laws to protect the intellectual property for our products. We own patents and have exclusive license agreements for several patents and technologies. In 1988, we obtained an exclusive license agreement to use patented processes developed and owned by North Carolina State University involving the ultrapasteurization of liquid eggs. Four of the five patents licensed to us under this agreement expire in 2006. Our license to use these four patents will continue until the expiration of the patents. The patented technology produces liquid eggs that are salmonella and listeria-negative, as defined by federal law, and extends the shelf-life of liquid eggs from less than two weeks to over ten weeks.

We also own an exclusive license to use a patented process, owned and developed by the University of Missouri, to eliminate salmonella from shell eggs. The licensed patents are set to expire in 2014. Our license to use these patents will also continue until the expiration of the patents. We currently use this technology for processing in-shell pasteurized eggs sold through our refrigerated distribution division. We also have acquired licenses to other patents and technology from other third parties, including the University of Nebraska.

Infringement litigation actions with respect to our egg ultrapasteurization license agreement have been settled in recent years with three egg processors – Nulaid Foods Inc., Rose Acre Farms and Cutler Egg Products (now owned by Moark, LLC). Each party has agreed that the patents are valid and enforceable, and they are now operating under sublicense agreements. For more information, see Note G – Patent Litigation. Although we believe that our competitors may in the past have been deterred from competing with us because of our active enforcement of our patent rights, we do not believe that the expiration of our patent rights will have a material adverse effect on our business or market share within the corresponding product segments because of our processing expertise, strong market position and cost-efficiencies due, in part, to scale.

The Egg Products Division maintains numerous trademarks and/or trade names for its products, including “Michael Foods,” “Better ‘n Eggs,” “All Whites,” “Express Eggs,” “Quaker State Farms,” “Broke N’ Ready,” “Canadian Inovatech,” “Centromay,” “Emulsa,” and “Inovatech.” Ultrapasteurized liquid eggs are marketed using the “Easy Eggs” and “Table Ready” trade names. Refrigerated Distribution Division products are marketed principally under the “Crystal Farms” trade name.

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Within the Potato Products Division, we market our refrigerated potato products to foodservice customers under a variety of brands, including “Northern Star” and “Farm Fresh.” The “Simply Potatoes” and “Diner’s Choice” brands are used for retail refrigerated products.

Food Safety

We believe that we take extensive precautions to ensure the safety of our products. In addition to routine inspections by state and federal regulatory agencies, including continuous United States Department of Agriculture (“USDA”) inspection of many facilities, we have instituted quality systems plans in each of our divisions which address topics such as supplier control, ingredient, packaging and product specifications, preventive maintenance, pest control and sanitation. Each of our facilities also has in place a hazard analysis critical control points plan which identifies critical pathways through which contaminants may enter our facilities and mandates control measures that must be used to prevent, eliminate or reduce all relevant food borne hazards. For example, at our Egg Products Division facilities, sanitization steps are in place to eliminate the risk of microbial contamination of our employees entering certain facilities, including the use of foot baths to reduce the risk of product contamination. Each of our divisions has also instituted a product recall plan, including lot identifiability and traceability measures, that allows us to act quickly to reduce the risk of consumption of any product which we suspect may be a problem.

In 2003, we engaged a third-party food regulatory consulting firm to assess our food regulatory compliance. This firm focused on our ability to ensure the safety of our food products for human consumption. Based on its review of our regulatory reports and documents, as well as site visits, the consulting firm concluded that no significant food safety issues have been found.

In December 2004, our Potato Products Division initiated a voluntary recall of certain hash brown potato products sold in the retail market. In February 2005, the recall matter, as it pertains to federal regulatory oversight, was closed. The financial impact of this recall was immaterial.

In March 2003, Belovo S.A., our egg products joint venture company in Belgium, of which we own 35.63%, notified the Belgian governmental health authorities of a potential processed egg powder contamination issue. Following the notification, production ceased for a month and the egg powders were recalled. The Belgian health authority placed the egg powder in quarantine. As of December 31, 2005, all of the inventory that had been quarantined has been released and has been sold. Belovo is pursuing a settlement with its insurance company regarding claims from customers for returned product. The final loss related to this matter has not been determined. Belovo’s sales decreased for the nine months ended September 30, 2005 by $4.9 million, or 16%, to $25.9 million, compared to $30.8 million in the same period of 2004. Our investment in Belovo was approximately $2.9 million as of December 31, 2005.

We maintain general liability insurance, which includes product liability coverage, which we believe to be sufficient to cover potential product liabilities.

Government Regulation

All of our divisions are subject to federal, state and local government regulations relating to grading, quality control, product branding and labeling, waste disposal and other aspects of their operations. Our divisions are also subject to USDA and Food and Drug Administration (“FDA”) regulation regarding grading, quality, labeling and sanitary control. The processing plants of our Egg Products Division that break eggs, and some of our other egg processing operations, are subject to continuous on-site USDA inspection. All of our other processing plants are subject to periodic inspections by the USDA, FDA and state regulatory authorities.

Crystal Farms cheese and butter products are affected by milk price supports established by the USDA. The support price serves as an artificial minimum price for these products, which may not be indicative of market conditions that would prevail if these supports were abolished.

A substantial portion of the egg production operations of our Egg Products Division are located in the State of Nebraska. With certain exceptions, a provision of the Nebraska constitution generally prohibits corporations from engaging in farming or ranching in Nebraska. Although the constitutional provision contains an exemption for agricultural land operated by a corporation for the purpose of raising poultry, the Nebraska Attorney General has, in written opinions, taken the position that facilities devoted primarily to the production of eggs do not fall within such exemption and therefore are subject to the restrictions contained in the constitutional provision. We believe that our egg production facilities in Nebraska are part of integrated facilities for the production, processing and distribution of egg products, and therefore, that any agricultural land presently owned by us in Nebraska is being used for non-farming and non-ranching purposes. The constitution empowers the Nebraska Attorney General, or if the Attorney General fails to act, a Nebraska citizen, to obtain a

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court order to, among other things, force a divestiture of land held in violation of this constitutional provision. If land subject to such a court order is not divested within a two-year period, the constitutional provision directs the court to declare the land escheated, or forfeited, to the State of Nebraska. We are not aware of any proceedings under this over 75 year-old constitutional provision pending or threatened against us or any other companies engaging in farming or ranching activities in Nebraska. We believe that we have adequate contingency arrangements in place in the event a determination is made that we engage in farming and/or ranching activities proscribed by the Nebraska constitution. Until the scope of such provision has been clarified by further judicial, legislative or executive action, there can be no assurance as to the effect, if any, that it may have on our Egg Products Division.

Environmental Regulation

We are subject to federal and state environmental regulations and requirements, including those governing discharges to air and water, the management of hazardous substances, the disposal of solid and hazardous wastes, and the remediation of contamination. Our environmental management and compliance programs are led by our Director of Environmental Engineering. Additionally, we have an ongoing relationship with an environmental consulting firm, and we use other consultants as may be required. As a result of our efforts, we believe we are currently in material compliance with all environmental regulations and requirements.

We have made, and will continue to make, expenditures to ensure environmental compliance. For example, in recent years we have upgraded the wastewater treatment system at our Klingerstown, Pennsylvania facility, we have paid for construction of a wastewater treatment facility in Lenox, Iowa, and we have updated the wastewater system at our egg production facility in Bloomfield, Nebraska. Additionally, in 2005 we committed to constructing a new mechanical wastewater treatment facility in Wakefield, Nebraska and have completed a financing with the City of Wakefield to allow us to do so. We await regulatory permits to proceed with the construction, which we expect to obtain in 2006. For further information on Nebraska matters please see Item 3 – LEGAL PROCEEDINGS.

Many of our facilities discharge wastewater pursuant to wastewater discharge permits. We dispose of our waste from our internal egg production primarily by providing it to farmers for use as fertilizer. We dispose of our solid waste from potato processing by selling the waste to a processor who converts it to animal feed.

Employees

At December 31, 2005, we had 4,132 employees. The Egg Products Division employed 2,966 full-time and 258 part-time employees, none of whom are represented by a union. The Potato Products Division employed 255 persons, 185 of whom were represented by the Bakery, Laundry, Allied Sales Drivers and Warehousemen Union, which is affiliated with the Teamsters. The Refrigerated Distribution Division employed 435 employees, none of whom are represented by a union. Our corporate, sales, distribution and customer service and information systems groups collectively had 218 employees at December 31, 2005. We believe our employee relations to be good.

Executive Officers of the Registrant

See Item 10—Directors and Executive Officers of the Registrant.

ITEM 1A - RISK FACTORS

Our operating results are significantly affected by egg, potato and cheese market prices and the prices of other raw materials, such as grain, which can fluctuate widely.

Our operating results are affected by egg, potato and cheese prices and the prices of corn and soybean meal, which are the primary feedstock used in the production of eggs. Historically, the prices of these raw materials have fluctuated widely. Changes in the price of such items may have a material adverse effect on our business, prospects, results of operations or financial condition. In general, the pricing of eggs is affected by an inelasticity of supply and demand, resulting often times in small changes in production or demand having a large effect on prices. Historically, our operating profit has been, at times, adversely affected when egg and grain prices rise significantly. In addition, our operating profit has historically been negatively affected during extended periods of low egg prices. We also can experience similar negative effects on our results of operations because of increases in the price of potatoes and cheese. Although we can take steps to mitigate the effects of changes to our raw material costs, fluctuations in prices are outside of our control.

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We produce and distribute food products that are susceptible to microbial contamination.

Many of our food products, particularly egg products, are vulnerable to contamination by disease producing organisms, or pathogens, contained in food, such as Salmonella, which are found in the environment. Shipment of adulterated products, even if inadvertent, is a violation of law and may lead to an increased risk of exposure to product liability claims (as discussed below), product recalls and increased scrutiny by federal and state regulatory agencies. Any shipment of adulterated products may have a material adverse effect on our reputation, business, prospects, results of operations and financial condition. The risk may be controlled, but not eliminated, by adherence to good manufacturing practices and finished product testing. Also, products purchased from others for repacking or distribution may contain contaminants that may be inadvertently redistributed by us. Once contaminated products have been shipped for distribution, illness and death may result if the pathogens are not eliminated by processing at the foodservice or consumer level.

As a result of selling food products, we face the risk of exposure to product liability claims.

We face the risk of exposure to product liability claims and adverse public relations in the event that our quality control procedures fail and the consumption of our products cause injury or illness. If a product liability claim is successful, our insurance may not be adequate to cover all liabilities we may incur, and we may not be able to continue to maintain such insurance, or obtain comparable insurance at a reasonable cost, if at all. We generally seek contractual indemnification and insurance coverage from parties supplying us products, but this indemnification or insurance coverage is limited by the creditworthiness of the indemnifying party, and their insurance carriers, if any, as well as the insured limits of any insurance provided by suppliers. If we do not have adequate insurance or contractual indemnification available, product liability claims relating to defective products could have a material adverse effect on our business reputation and earnings. In addition, even if a product liability claim is not successful or is not fully pursued, the negative publicity surrounding any assertion that our products caused illness or injury could have a material adverse effect on our reputation with existing and potential customers and on our business, prospects, results of operations and financial condition.

A decline in egg consumption or in the consumption of processed food products could have a material adverse effect on our net sales and results of operations.

Adverse publicity relating to health concerns and the nutritional value of eggs and egg products could adversely affect egg consumption and consequently demand for our processed egg products, which could have a material adverse effect on our business, prospects, results of operations and financial condition. In addition, as almost all of our operations consist of the production and distribution of processed food products, a change in consumer preferences relating to processed food products or in consumer perceptions regarding the nutritional value of processed food products could adversely affect demand, which would have a material adverse effect on our business, prospects, results of operations, liquidity and financial condition.

The categories of the food industry in which we operate are highly competitive, and our inability to compete successfully could adversely affect our business, prospects, results of operations and financial condition.

Competition in each of the categories of the food industry within which we operate is notable. Increased competition against any of our products could result in price reduction, reduced margins and loss of market share, which could negatively affect our business, prospects, results of operations and financial condition. In particular, we compete with major companies such as Cargill Incorporated, Kraft Foods, Inc., Unilever N. V. and ConAgra Foods. Each of these companies has substantially greater financial resources, name recognition, research and development, marketing and human resources than we have. In addition, our competitors may succeed in developing new or enhanced products which could be superior to our products. These companies may also prove to be more successful than we are in marketing and selling these products. We may not be able to compete successfully with any or all of these companies.

Our largest customers have historically accounted for a significant portion of our net sales volume. Accordingly, our business may be adversely affected by the loss of, or reduced purchases by, one or more of our large customers.

Our largest customers have historically accounted for a significant portion of the net sales volume of each of our three divisions. If, for any reason, one of our key customers were to purchase significantly less of our products in the future or were to terminate its purchases from us altogether, and we are not able to sell our products to new customers at comparable or greater levels, our business, prospects, financial condition and results of operations may be materially adversely effected.

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Our business relies on patents and trademarks. The loss or expiration of a patent, whether licensed or owned, or the loss of any trademark could negatively impact our ability to produce and sell the products associated with such patent or trademark, which could have a material adverse effect on our sales volume and net income.

We rely on patents, trademarks, trade secrets and other intellectual property in our business, the loss or expiration of which could negatively impact our ability to produce and sell the associated products, which could have a material adverse effect on our results of operations. In 1988, we obtained an exclusive license to use patented processes developed and owned by North Carolina State University involving the ultrapasteurization of liquid eggs. Four of the five patents under this license expire in 2006 and are used in the production of extended shelf-life liquid egg products. Our license to use each of these patents will continue until the expiration of the patents. We have competitors in the extended shelf-life liquid egg market, plus parties to whom we have granted sublicenses to, and we believe additional parties may begin to produce and market processed egg products that are similar to ours when the licensed patents expire.

We also own several registered and unregistered trademarks that are used in the marketing and sale of our products. We have invested a substantial amount of money in promoting our trademarked brands. However, the degree of protection that these trademarks afford us is uncertain.

Government regulation could increase our costs of production and increase our legal and regulatory expenses.

Our manufacture, processing, packaging, storage, distribution and labeling of food products are subject to extensive federal, state and local regulation, including regulation by the FDA, the USDA, and various state and local health and agricultural agencies. Some of our facilities are subject to continuous on-site inspections. Applicable statutes and regulations governing food products include rules for identifying the content of specific types of foods, the nutritional value of that food and its serving size. Many jurisdictions also provide that food manufacturers adhere to good manufacturing practices (the definition of which may vary by jurisdiction) with respect to production processes, which include proper personal hygiene, wearing and proper handling of company-issued uniforms and footwear, using footbaths, proper hand washing procedures, proper storage of equipment, not wearing jewelry, not eating or drinking in production areas, and not carrying objects above the waist so as to prevent anything from falling into our products. In addition, our production and distribution facilities are subject to various federal, state and local environmental and workplace regulations. Failure to comply with all applicable laws and regulations could subject us to civil remedies, including fines, injunctions, recalls or seizures, and criminal sanctions, which could have a material adverse effect on our business, financial condition and results of operations. Furthermore, compliance with current or future laws or regulations could require us to make material expenditures or otherwise adversely affect the way we operate our business, our prospects, results of operations and financial condition.

We may incur unexpected costs associated with compliance with environmental regulations.

We are subject to federal, state, and local environmental requirements, including those governing discharges to air and water, the management of hazardous substances, the disposal of solid and hazardous wastes, and the remediation of contamination. If we do not fully comply with environmental regulations, or if a release of hazardous substances occurs at or from one of our facilities, we may be subject to penalties and fines, and/or be held liable for the cost of remedying the condition. The operational and financial effects associated with compliance with the variety of environmental regulations we are subject to could require us to make material expenditures or otherwise adversely affect the way we operate our business and our prospects, results of operations and financial condition.

Extreme weather conditions, disease (such as avian influenza) and pests could harm our business.

Many of our business activities are subject to a variety of agricultural risks. Unusual weather conditions, disease and pests can materially and adversely affect the quality and quantity of the food products we produce and distribute. In particular, avian influenza occasionally affects the domestic poultry industry, leading to hen deaths. A virulent form of avian influenza has emerged in Southeast Asia over the past several years and has spread elsewhere in the Eastern Hemisphere in the past year. It has caused deaths in wild bird populations and, in limited instances, domesticated chicken and turkey flocks. It has also been linked to illness and death among some persons who have been in contact with diseased fowl. It is not clear if this form of avian influenza will manifest itself in North America, or if sheltered flocks, such as ours, have significant exposure risk. However, to protect against this risk, we have intensified biosecurity measures at our layer locations. Weather, disease and pest matters could affect a substantial portion of our production facilities in any year and could have a material adverse effect on our business, prospects, results of operations or financial condition.

9

ITEM 1B – UNRESOLVED STAFF COMMENTS

None.

ITEM 2—PROPERTIES

FACILITIES

Corporate. We maintain leased space for our corporate headquarters in suburban Minneapolis, Minnesota. Leased space within the same building houses the headquarters, financial and administrative service staffs of the egg products and potato products divisions, as well as our customer service, distribution, sales, marketing and information services groups. This lease expires in 2012 and the annual base rent is approximately $765,000.

Egg Products Division. The following table summarizes information relating to the primary facilities of our egg products division:

Location	Principal Use	Size (square feet)	Owned/ Leased	Lease Expiration	Annual Payments
Elizabeth, New Jersey (a)	Processing	75,000	Leased	2007	$	432,000
Elizabeth, New Jersey (a)	Processing	125,000	Leased	2007		681,000
Bloomfield, Nebraska	Processing	80,000	Owned	—		—
LeSueur, Minnesota	Processing	29,000	Owned	—		—
Wakefield, Nebraska	Processing	380,000	Owned	—		—
Klingerstown, Pennsylvania	Processing and Distribution	139,000	Leased	2017		526,000
Klingerstown, Pennsylvania	Processing and Distribution	19,000	Leased	2017		14,000
Lenox, Iowa	Processing and Distribution	151,000	Owned	—		—
Gaylord, Minnesota	Processing and Distribution	230,000	Owned	—		—
Elizabeth, New Jersey (a)	Distribution	80,000	Leased	2007		480,000
Bloomfield, Nebraska	Egg Production	619,000	Owned	—		—
Wakefield, Nebraska	Egg Production	658,000	Owned	—		—
LeSueur, Minnesota	Egg Production	345,000	Owned	—		—
Gaylord, Minnesota	Egg Production	349,000	Owned	—		—
Gaylord, Minnesota	Pullet Houses	130,000	Owned	—		—
Wakefield, Nebraska	Pullet Houses	432,000	Owned	—		—
Plainview, Nebraska	Pullet Houses	112,000	Owned	—		—
Winnipeg, Manitoba (b)	Processing	102,000	Capital Lease	2012		470,000
Winnipeg, Manitoba	Processing	32,000	Leased	2013		118,000
St. Mary’s, Ontario (b)	Processing	42,000	Capital Lease	2012		266,000
Mississauga, Ontario (b)	Distribution	8,000	Leased	2006		72,000
Abbotsford, British Columbia (c)	Sales Office	2,000	Leased	2006		9,000

(a) There are two five year extensions available on these leases.

(b) There are four five year extensions available on these leases.

(c) Lease has no term, only a six month notice of termination requirement.

We are in the process of extending the New Jersey leases, as provided for in the lease documents. The Egg Products Division also owns or leases, primarily for egg production operations, approximately 1,600 acres of land in Nebraska and Minnesota.

Potato Products Division. The Potato Products Division owns a processing plant and land located in Minneapolis, Minnesota, consisting of approximately 175,000 square feet of production area. This division leases a building in North Las Vegas, Nevada, consisting of approximately 31,000 square feet. This lease expires in 2006 and we have the option to extend the lease for three successive five year periods. The remaining payment amount on this lease is approximately $200,000.

Refrigerated Distribution Division. The Refrigerated Distribution Division leases administrative and sales offices in suburban Minneapolis and several small warehouses across the United States. The leases expire between 2006 and 2010. The administrative and sales office lease may be extended at our option for five years. The annual base rent for all of the leases is approximately $240,000. The division owns a distribution center located near LeSueur, Minnesota, which is approximately 33,000 square feet. The Division also owns and operates a 85,000 square foot refrigerated warehouse with offices and a 25,000 square foot cheese packaging facility on a 13-acre site in Lake Mills, Wisconsin.

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The total annual payment for the facilities described above is approximately $4.3 million. The leases for these facilities have varying length terms ranging from month-to-month to 2017. We believe that our owned and leased facilities, together with budgeted capital projects in each of our three operating divisions, are adequate to meet anticipated requirements for our current lines of business for the foreseeable future. All of our owned property is pledged to secure repayment of our senior credit facility.

For additional information on contractual obligations relating to operating leases see “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

ITEM 3—LEGAL PROCEEDINGS

In May 2004, the U.S. Environmental Protection Agency (“EPA”) issued “Findings of Violation and Order for Compliance” to the Company in connection with our discharge of wastewater to the municipal treatment facility in Wakefield, Nebraska (“City”). The findings alleged that wastewater from our Wakefield egg processing operations caused interference or process upset at the City’s facility. EPA ordered us to identify interim measures and a long-term proposal for addressing the issues that it had identified. In June 2004, we provided EPA with a proposal for improving the Wakefield facility’s performance and compliance, and we supplemented the proposal in August 2004. Concurrently, and in connection with the same matter, the Nebraska Department of Environmental Quality (“NDEQ”) issued two enforcement documents to us:

(a) In June 2004, NDEQ issued a Notice of Violation alleging that the our wastewater had contributed to upset, interference and pass-through at the City’s wastewater treatment facility. We responded to the Notice of Violation in August 2004.

(b) In June 2004, NDEQ issued a Complaint and Notice for Opportunity for Hearing alleging that our wastewater was causing interference or process upset at our pretreatment facility. In October 2004, we entered into an Administrative Consent Order with NDEQ under which we agreed to land-apply certain egg solids rather than sending them to the City’s wastewater treatment facility.

In early 2006, the United States Department of Justice notified us and the City of Wakefield that it intends to seek civil penalties and injunctive relief for violation of various environmental laws relating to the above matters and other issues. A meeting with the Department of Justice, EPA, NDEQ and the Nebraska attorney general was held in March 2006. Settlement negotiations are ongoing.

In addition, we are from time to time party to litigation, administrative proceedings and union grievances that arise in the ordinary course of our business, and we occasionally pay small penalties to resolve alleged minor violations of environmental requirements. We do not have any litigation pending that, separately or in the aggregate, would in the opinion of management have a material adverse effect on our results of operations or financial condition.

ITEM 4—SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

PART II

ITEM 5—MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

(a) Our common equity is not traded in any market. We had one holder of our common equity as of March 15, 2006. No securities are authorized for issuance under equity compensation plans. No unregistered sales of securities were made during 2005.

(b) Not applicable.

(c) Not applicable.

11

ITEM 6—SELECTED FINANCIAL DATA

The following table sets forth selected consolidated historical financial data with respect to the Company, the Predecessor and the 2001 Predecessor. The data presented below was derived from the Company’s, the Predecessor’s and the 2001 Predecessor’s Consolidated Financial Statements. Due to the Merger, which was accounted for as a purchase, different bases of accounting have been used to prepare the Company and Predecessor Consolidated Financial Statements. The Merger resulted in additional interest expense for new debt incurred and higher depreciation and amortization of property, plant and equipment and other intangible assets recorded. The 2001 Predecessor data as of and for the three months ended March 31, 2001 was prepared from the historical books and records of the 2001 Predecessor. This information should be read in conjunction with the Company’s Consolidated Financial Statements and Notes thereto included elsewhere herein and Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations.

	COMPANY							PREDECESSOR							2001 PREDECESSOR
(in thousands)	YEAR ENDED DECEMBER 31, 2005		YEAR ENDED DECEMBER 31, 2004		ONE MONTH ENDED DECEMBER 31, 2003			ELEVEN MONTHS ENDED NOVEMBER 30, 2003			YEAR ENDED DECEMBER 31, 2002		NINE MONTHS ENDED DECEMBER 31, 2001		THREE MONTHS ENDED MARCH 31, 2001
STATEMENT OF OPERATIONS DATA
Net sales	$	1,242,498	$	1,313,504	$	140,806		$	1,184,357		$	1,168,160	$	885,642	$	275,627
Cost of sales		1,005,418		1,077,126		121,442			973,004			953,333		734,008		227,707
Gross profit		237,080		236,378		19,364			211,353			214,827		151,634		47,920
Selling, general and administrative expenses		131,288		138,258		14,676			106,339			116,444		87,484		27,376
Transaction expenses		—		340		7,121			15,377			—		—		11,050
Operating profit (loss)		105,792		97,780		(2,433	)		89,637			98,383		64,150		9,494
Interest expense, net		47,119		43,285		4,932			41,670			50,179		42,335		3,293
Loss on early extinguishment of debt		5,548		—		—			61,226			—		—		15,513
Loss on Dairy disposition		—		—		—			16,288			—		—		—
Earnings (loss) before income taxes		53,125		54,495		(7,365	)		(29,547	)		48,204		21,815		(9,312	)
Income tax expense (benefit)		14,266		20,981		(2,836	)		(11,397	)		18,543		12,000		(3,659	)
Net earnings (loss)	$	38,859	$	33,514	$	(4,529	)	$	(18,150	)	$	29,661	$	9,815	$	(5,653	)
AT PERIOD END BALANCE SHEET DATA
Working capital	$	79,923	$	60,544	$	108,876		$	118,750		$	59,145	$	65,477	$	73,459
Total assets		1,333,576		1,341,555		1,416,682			844,635			893,022		897,133		619,721
Long-term debt, including current maturities		709,723		750,783		790,076			307,998			511,389		553,094		192,200
Shareholder’s equity		304,015		257,393		287,538			256,384			179,326		152,990		257,151

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ITEM 7—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES TO THOSE STATEMENTS APPEARING ELSEWHERE IN THIS FORM 10-K. THIS DISCUSSION MAY CONTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE INDICATED IN FORWARD-LOOKING STATEMENTS. SEE “ITEM 1—BUSINESS—FORWARD–LOOKING STATEMENTS.”

General

Overview. We are a leading producer and distributor of egg and refrigerated potato products to the foodservice, retail and food ingredient markets. We also distribute refrigerated food items, primarily cheese and other dairy products, to the retail grocery market predominantly in the central United States. We focus our growth efforts on the specialty segments within our food categories and strive to be a market leader in product innovation and low-cost production. Our strategic focus on value-added processing of food products is designed to capitalize on key food industry trends, such as the desire for improved safety and convenience, reduced labor and waste, and growth of food consumption away from home. We believe our operational scale, product breadth and geographic scope make us an attractive and important strategic partner for our customers, which include foodservice distributors, major restaurant chains and food ingredient companies.

Capital Expenditures. From 1998 through 2005, we invested approximately $307 million in capital expenditures, excluding capital expenditures made in the Dairy Products Division, which was sold in late 2003. More than half of this cumulative amount was used for growth investments to expand our manufacturing capacity for value-added egg products, to upgrade our potato products operations, to improve and expand our distribution centers, to install a new company-wide management information system and to otherwise position ourselves for future growth. These expenditures included the installation of new precooked egg production lines, a new dried egg facility, automated packaging machines and quality control systems. We expect these investments to improve manufacturing efficiencies, customer service and product quality. The remainder of capital spending over the past eight years was on routine major equipment and facilities betterment activities.

Acquisitions/Joint Ventures. We have grown both organically and through acquisitions. Since 1988, we have completed 17 acquisitions and three joint ventures, including the $106 million acquisition of Papetti’s in 1997. The acquisition of Papetti’s significantly increased our Egg Products Division’s market share, scale, geographic scope and product offerings. We have focused in recent years on making small acquisitions that expand our current product offerings and/or geographic scope and broaden our technological expertise. For example, in 2002, we bought the egg products division of Canadian Inovatech, Inc., one of the largest providers of processed egg products in Canada, which greatly expanded our presence in international markets, particularly in the food ingredients market. We continue to evaluate potential acquisitions and acquisitions remain a part of our growth plans.

Commodity Risk Management. Our principal exposure to market risks that may adversely affect our results of operations and financial condition include changes in future commodity prices and interest rates. We seek to minimize or manage these market risks through normal operating and financing activities and through the use of commodity contracts and interest rate cap agreements, where practicable. We do not trade or use instruments with the objective of earning financial gains on commodity prices or interest rate fluctuations, nor do we use instruments where there are not underlying exposures. See “—Market Risk —Commodity Hedging—Commodity Risk Management.”

Sale of Dairy Products Division. Effective September 30, 2003, we completed the sale of our Dairy Products Division to Dean Foods Company for approximately $155 million. In accordance with a transition services agreement, we were compensated for certain transition services we provided to the buyer through February 2004. These transition services included services such as information technology, sales, customer service and procurement. We determined that the sale did not meet the accounting criteria for “discontinued operations.” Accordingly, the results of operations of the Dairy Products Division are included in the Predecessor’s statements of operations through September 30, 2003.

Mergers and Purchase Accounting Effects. In November 2003, we were acquired by an investor group comprised of a private equity firm and a management group through the merger of THL Food Products Co. with and into M-Foods Holdings, Inc. (the “Merger”), with M-Foods Holdings, Inc. being the continuing entity. M-Foods Holdings, Inc. then merged with and into Michael Foods, Inc. (Minn.). M-Foods Holdings, Inc. continued as the surviving corporation and was immediately thereafter renamed Michael Foods, Inc. (Del.) (the “Company”). The “Predecessor” refers to Michael Foods, Inc. prior to the Merger.

13

The Merger was accounted for using the purchase method of accounting. Accounting for the Merger using this method may affect our results of operations in certain significant respects. The aggregate Merger consideration, including purchase price adjustments, the assumption of liabilities and estimated transaction expenses, of approximately $1.018 billion was allocated to the tangible and intangible assets acquired and liabilities assumed by us, based upon their respective fair values as of the date of the acquisition. The allocation of the purchase price of the assets acquired in the Merger resulted in a significant increase in our annual depreciation and amortization expense.

Results Of Operations

The following table summarizes the historical results of our divisional operations and such data as a percentage of total net sales for the periods indicated. The financial data presented for the periods below include the results of our Dairy Products Division, which the Predecessor sold effective September 30, 2003. The information contained in this table should be read in conjunction with “Item 6—Selected Financial Data” and the consolidated financial statements and related notes included elsewhere in this Form 10-K. The consolidated historical financial data presented below includes our financial data and the financial data of our Predecessor, which was also named Michael Foods, Inc. The financial data presented below for the Predecessor relates to our company and its consolidated subsidiaries for the period prior to the acquisition (Merger) of our predecessor in November 2003 by an investor group consisting of affiliates of Thomas H. Lee Partners and members of our management. Due to the Merger, which was accounted for as a purchase, different bases of accounting have been used to prepare our and the Predecessor’s consolidated financial statements. The Merger resulted in additional interest expense for incurred indebtedness and higher depreciation and amortization of fixed assets and other intangible assets recorded.

The financial data below was derived from the Company’s and Predecessor’s audited Consolidated Financial Statements included elsewhere in this report. It is suggested that readers combine 2003 one month (Company) results and 2003 11 months (Predecessor) results for comparability.

	COMPANY												PREDECESSOR
	YEAR ENDED DECEMBER 31, 2005				YEAR ENDED DECEMBER 31, 2004				ONE MONTH ENDED DECEMBER 31, 2003				ELEVEN MONTHS ENDED NOVEMBER 30, 2003
(in thousands)	$		%		$		%		$		%		$		%
STATEMENT OF OPERATIONS DATA:
External net sales:
Egg products division	860,925		69.3		941,381		71.7		95,591		67.9		730,028		61.7
Potato products division	102,245		8.2		83,838		6.4		8,496		6.0		67,925		5.7
Refrigerated distribution division	279,328		22.5		288,285		21.9		36,719		26.1		241,737		20.4
Dairy products division	—		—		—		—		—		—		144,667		12.2
Total net sales	1,242,498		100.0		1,313,504		100.0		140,806		100.0		1,184,357		100.0
Cost of sales	1,005,418		80.9		1,077,126		82.0		121,442		86.2		973,004		82.2
Gross profit	237,080		19.1		236,378		18.0		19,364		13.8		211,353		17.8
Selling, general and administrative expenses	131,288		10.6		138,258		10.5		14,676		10.4		106,339		9.0
Transaction expenses	—		—		340		—		7,121		5.1		15,377		1.2
Operating profit (loss):
Egg products division	81,557		6.5		87,116		6.7		3,972		2.8		74,575		6.3
Potato products division	17,199		1.4		6,895		0.5		905		0.6		8,452		0.7
Refrigerated distribution division	15,707		1.3		13,171		1.0		913		0.7		15,510		1.3
Dairy products division	—		—		—		—		—		—		11,918		1.0
Corporate	(8,671	)	(0.7	)	(9,402	)	(0.7	)	(8,223	)	(5.8	)	(20,818	)	(1.7	)
Total operating profit (loss)	105,792		8.5		97,780		7.5		(2,433	)	(1.7	)	89,637		7.6
Interest expense, net	47,119		3.8		43,285		3.3		4,932		3.5		41,670		3.5
Net earnings (loss)	38,859		3.1		33,514		2.6		(4,529	)	(3.2	)	(18,150	)	(1.5	)

14

Results for the Year Ended December 31, 2005 Compared to results for the Year Ended December 31, 2004

Net Sales. Net sales for the year ended December 31, 2005 decreased $71.0 million, or approximately 5%, to $1,242.5 million from $1,313.5 million for the year ended December 31, 2004, as a result of a decrease in external net sales in our Egg Products Division and our Refrigerated Distribution Division, partially offset by an increase in external net sales by our Potato Products Division.

Egg Products Division Net Sales. Egg Products Division external net sales for the year ended December 31, 2005 decreased $80.5 million, or 9%, to $860.9 million from $941.4 million for the year ended December 31, 2004. External net sales increased for most higher value-added products lines and declined for lower value-added lines. Egg market deflation had a notable impact in 2005, as the egg market declined from historically high levels in 2004 to a multi-decade low in mid-2005. During 2005, shell egg prices decreased by approximately 20% from 2004 levels, as reported by Urner Barry, resulting in weak pricing for market-sensitive (food ingredient) egg products. In late 2005, and thus far in 2006, egg prices have returned to more normal levels. Unit sales increased for most product lines in 2005, with an overall increase of 2.1% recorded for the Division as compared to 2004 levels. Sales of higher value-added egg products represented approximately 65% of the Egg Products Division’s external net sales in 2005 compared with 58% in 2004. Sales diminished for our most commodity-sensitive products – short shelf-life liquid and shell eggs.

Potato Products Division Net Sales. Potato Products Division external net sales for the year ended December 31, 2005 increased $18.4 million, or 22%, to $102.2 million from $83.8 million for the year ended December 31, 2004. This increase was primarily attributable to strong unit sales growth for retail potato products, which increased approximately 26% from 2004 levels. Foodservice unit sales increased approximately 8%. Sales to new customers, growth in sales to existing customers, increased marketing and, particularly, growth in the retail category all contributed to the sales increase. Approximately 57% of the Division’s 2005 net sales were to the foodservice market, with 43% to the retail market. The retail component has grown significantly in recent years. Pricing in both market segments was higher in 2005 than in 2004.

Refrigerated Distribution Division Net Sales. Refrigerated Distribution Division external net sales for the year ended December 31, 2005 decreased $9.0 million, or 3%, to $279.3 million from $288.3 million for the year ended December 31, 2004. This decrease was mostly due to notably lower market pricing for shell eggs. The key distributed products business was strong, with branded cheese unit sales up approximately 6%. Dollar sales for distributed products increased over 1%. In addition to eggs, deflation of markets was seen in cheese and butter sales, which are the Division’s largest product lines.

Gross Profit. Gross profit for the year ended December 31, 2005 increased $0.7 million to $237.1 million from $236.4 million for the year ended December 31, 2004. Our gross profit margin was 19.1% of net sales for 2005, compared with 18.0% for 2004. The increase in gross profit margin was due to increased gross profit margins from higher value-added egg products and potato products.

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the year ended December 31, 2005 decreased $7.0 million, or 5%, to $131.3 million from $138.3 million for the year ended December 31, 2004. Selling, general and administrative expenses were 10.6% of net sales in 2005 as compared to 10.5% in 2004. The decrease in expenses was caused by a reduction in incentive accrual based on the level of achievement of the incentive plan target and overall expense management.

Operating Profit. Operating profit for the year ended December 31, 2005 increased $8.0 million, or approximately 8%, to $105.8 million from $97.8 million for the year ended December 31, 2004. This increase is due to a notable increase in Potato Products operating profits and also an increase in Refrigerated Distribution operating profits, which more than offset a decrease from Egg Products.

Egg Products Division Operating Profit. Egg Products Division operating profit for the year ended December 31, 2005 decreased $5.5 million, or 6%, to $81.6 million from $87.1 million for the year ended December 31, 2004. Operating profit for higher value-added egg products increased by approximately $27.0 million, or 39%, from 2004, mainly reflecting lower egg costs. Operating profits from other egg products declined significantly from 2004 levels, reflecting unfavorable market-driven pricing. Shell egg profitability went from a profit in 2004 to a loss in 2005, reflecting substantially lower Urner Barry pricing levels in 2005. The 2004 period included approximately $2.0 million in income related to amounts received under patent infringement settlements. We also had other expense of approximately $0.5 million in both 2005 and 2004 related to our investment in Belovo S.A. Included in the 2004 other expense was $1.2 million related to the Belovo contamination matter. The Division incurred unusual operating expenses in 2004 related to the handling of wastewater, particularly at the Wakefield, Nebraska location (see Item 3 – LEGAL PROCEEDINGS).

15

Potato Products Division Operating Profit. Potato Products Division operating profit for the year ended December 31, 2005 increased $10.3 million to $17.2 million from $6.9 million for the year ended December 31, 2004. This increase reflected significant volume growth in our more profitable retail operations which resulted in an increase in that sector’s profitability. Also, significant profitability in the foodservice business in 2005, compared to break-even operations in 2004.

Refrigerated Distribution Division Operating Profit. Refrigerated Distribution Division operating profit for the year ended December 31, 2005 increased $2.5 million, or 19%, to $15.7 million from $13.2 million for the year ended December 31, 2004. Operating profit increased mainly due to lower market prices for our key product line, cheese, and significant volume growth for that product line.

Interest Expense and Income Taxes. Interest expense increased approximately $3.8 million in 2005 compared to 2004, reflecting higher interest rates. Our effective tax rate was 26.9% in 2005 compared to 38.5% in 2004. The reduction in the effective tax rate for 2005 was related to several factors, with a change in the tax rate used to calculate the deferred tax benefit being the most meaningful factor. The change in the tax rate is primarily due to a reduction in the Company’s state income tax rate. We expect our future effective tax rate to be approximately 36%.

Results for the Year Ended December 31, 2004 Compared to Combined Results for the Year Ended December 31, 2003

Net Sales. Net sales for the year ended December 31, 2004 decreased $11.7 million, or approximately 1%, to $1,313.5 million from $1,325.2 million for the year ended December 31, 2003. Adjusting for the 2003 sale of the Dairy Products Division, net sales increased 11% in 2004. The strongest divisional sales growth occurred in the Egg Products Division, which recorded a 14% external net sales increase. External net sales growth of 10% and 4% was recorded by the Potato Products and Refrigerated Distribution divisions, respectively.

Egg Products Division Net Sales. Egg Products Division external net sales for the year ended December 31, 2004 increased $115.8 million, or 14%, to $941.4 million from $825.6 million for the year ended December 31, 2003. External net sales increased for most products lines, with double-digit unit sales growth in all higher-value-added products and increased pricing in virtually all product lines. Consistent with our strategy to emphasize value-added egg product sales and diminish commodity sensitive sales, shell egg unit sales declined by 26% in 2004. During 2004, shell egg prices decreased by approximately 6%, as reported by Urner Barry, resulting in mixed pricing for market-sensitive products. Sales of higher value-added egg products represented approximately 58% of the Egg Products Division’s external net sales in 2004 compared with 56% in 2003. Sales diminished for our most commodity-sensitive products – short shelf-life liquid and shell eggs. Food ingredient lines showed relatively flat, or reduced, unit sales in 2004 compared to 2003 levels.

Potato Products Division Net Sales. Potato Products Division external net sales for the year ended December 31, 2004 increased $7.4 million, or 10%, to $83.8 million from $76.4 million for the year ended December 31, 2003. This increase was primarily attributable to strong unit sales growth for foodservice refrigerated potato products, which increased approximately 8% from 2003 levels. Retail unit sales increased approximately 2%. Sales to new customers, growth in sales to existing customers, increased marketing and new product introductions all contributed to the sales increase. Approximately 61% of the Division’s 2004 net sales were to the foodservice market, with 39% to the retail market. Pricing in both market segments was slightly higher in 2004 than in 2003.

Refrigerated Distribution Division Net Sales. Refrigerated Distribution Division external net sales for the year ended December 31, 2004 increased $9.8 million, or 4%, to $288.3 million from $278.5 million for the year ended December 31, 2003. This increase was due, in part, to higher sales for branded cheese. However, overall, the Division’s unit sales declined in 2004 from 2003 levels. Increased product placements and stores served helped moderate the unit sales decrease. Inflation contributed to the divisional sales increase, with significantly higher market prices prevailing for cheese and butter.

Gross Profit. Gross profit for the year ended December 31, 2004 increased $5.7 million, or approximately 2%, to $236.4 million from $230.7 million for the year ended December 31, 2003. Gross profit in 2003 included nine months of Dairy Products results. Our gross profit margin was 18% of net sales for 2004, compared with 17% for 2003. The increase in gross profit margin was due to increased gross profit margins from egg products. Increased 2004 gross profit margins from market-sensitive egg products more than offset egg sourcing costs that were higher in 2004 than in 2003 and significantly higher transportation costs than in 2003.

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the year ended December 31, 2004 increased $17.3 million, or 14%, to $138.3 million from $121.0 million for the year ended December 31, 2003. Selling, general and administrative expenses increased to 11% of net sales in 2004 versus 9% for 2003. Salaries, wages and employee benefits costs increased year-over-year as well. Additionally, amortization was approximately $14.3 million higher in the 2004 period compared to the 2003 period due to amortization of our customer relationship intangible assets recorded in purchase accounting related to the Merger.

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Operating Profit. Operating profit for the year ended December 31, 2004 increased $10.6 million, or approximately 12%, to $97.8 million from $87.2 million for the year ended December 31, 2003. This increase is attributable to a notable increase in Egg Products operating profits and a significant reduction in Corporate expenses, as 2003 included transaction expenses recorded by us and our Predecessor of $22.5 million. These factors more than offset the absence of nearly $12 million of Dairy Products operating profits recorded in 2003 prior to that division’s sale.

Egg Products Division Operating Profit. Egg Products Division operating profit for the year ended December 31, 2004 increased $8.6 million, or 11%, to $87.1 million from $78.5 million for the year ended December 31, 2003. Operating profit for higher value-added egg products decreased by $4.0 million, or 7%, from 2003, reflecting increased operating costs, largely driven by higher grain, transportation and energy costs, and record high egg white costs. While we experienced higher operating expenses, we were limited in our ability to pass-through price increases due to the longer-term fixed price nature of our customer contracts. Operating profits from other egg products rose significantly from 2003 levels, reflecting favorable market-driven pricing. Shell egg profitability declined significantly in 2004 from 2003 levels, reflecting lower Urner Barry pricing levels. The 2004 period included approximately $2.0 million related to amounts received under patent infringement settlements and the 2003 period included approximately $4.3 million related to legal settlements regarding vendor price collusion. We also had other expense of approximately $0.5 million in both 2004 and 2003 related to our investment in Belovo S.A. Also, the Division incurred unusual operating expenses in 2004 related to the handling of wastewater, particularly at the Wakefield, Nebraska location (see Item 3 – LEGAL PROCEEDINGS).

Potato Products Division Operating Profit. Potato Products Division operating profit for the year ended December 31, 2004 decreased $2.5 million, or 26%, to $6.9 million from $9.4 million for the year ended December 31, 2003. This decrease reflected break-even operations in the foodservice business in 2004, compared to a profit in 2003. Also, only modest sales volume growth and higher costs in our more profitable retail operations resulted in a decrease in that sector’s profitability. Part of the higher costs in our retail business related to a re-launch of our core Simply Potatoes^® line in the fall of 2004. Also, the Division initiated a voluntary recall of certain hash brown potato products sold in the retail market in late 2004.

Refrigerated Distribution Division Operating Profit. Refrigerated Distribution Division operating profit for the year ended December 31, 2004 decreased $3.2 million, or 20%, to $13.2 million from $16.4 million for the year ended December 31, 2003. Operating profit declined due, in part, to higher market prices for raw materials for our key product line, cheese, which we were unable to pass on entirely to our customers.

Other Expense (Income). We did not record any other expense (income) in 2004, but the Predecessor recorded an other loss of $61.2 million in 2003 to record a loss on early extinguishment of debt related to the Merger and an other loss of $16.3 million related to the Dairy Products Division disposition.

Interest Expense and Income Taxes. Interest expense declined approximately $3.3 million in 2004 compared to 2003, reflecting lower interest rates and reduced amortization of deferred financing costs. Our tax rate was 38.5% in 2004 compared to 38.5% (tax benefit) in 2003.

Seasonality and Inflation

Our consolidated quarterly operating results are affected by the seasonal fluctuations 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. Consequently, net sales in the Egg Products Division may increase in the first and fourth quarters. Generally, the Refrigerated Distribution Division has higher net sales and operating profits in the fourth quarter, coinciding with incremental consumer demand during the holiday season. Operating profits from the Potato Products Division are less seasonal, but tend to be higher in the second half of the year coinciding with the potato harvest and incremental consumer demand.

Generally, other than fluctuations in certain raw material costs, largely related to short-term supply and demand variances, inflation has not been a significant factor in our operations. Inflation is not expected to have a significant impact on our business, results of operations or financial condition since we can generally offset the impact of inflation through a combination of productivity gains and price increases. We had no unusual inflationary impacts to our operations in 2003. However, during 2004 and 2005 we experienced notable inflation for key purchased items such as natural gas, diesel fuel and packaging materials. We were unable to fully offset these impacts through selective price increases to our customers.

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Liquidity and Capital Resources

Historically, we have financed our liquidity requirements through internally generated funds, senior bank borrowings and the issuance of other indebtedness. We believe such sources remain viable financing alternatives to meet our anticipated needs. Our investments in acquisitions, joint ventures and capital expenditures have been a significant use of capital. We plan to continue to invest in advanced production facilities to enhance our competitive position.

Cash flow provided by operating activities was $104.4 million for the year ended December 31, 2005, compared to $121.6 million for the year ended December 31, 2004. The decrease in our cash flow provided by operating activities was primarily attributable to an increase in working capital, largely related to an increase in inventories, a tax receivable recorded at the time of the 2003 Merger, and changes in deferred income taxes (see Note D to consolidated financial statements). Cash flow provided by operating activities was $121.6 million for the year ended December 31, 2004, compared to a combined $107.5 million for the year ended December 31, 2003. The increase in cash flow provided by operating activities from 2003 to 2004 was primarily attributable to earnings growth and working capital management.

As a result of the Merger, in 2003 we incurred approximately $780 million of long-term debt, including $495 million of borrowings under our senior credit facility, $135 million of borrowings under a senior unsecured term loan facility and $150 million from the issuance of 8% senior subordinated notes due 2013. The senior credit facility that we entered into in connection with the Merger currently provides a $100 million revolving credit facility maturing in 2009 and a $540 million term loan facility maturing in 2010. The senior unsecured term loan facility of $135 million was to mature in 2011. The senior credit facility (“credit agreement”) and senior unsecured term loan agreement were amended as of September 17, 2004 (see our Form 8-K of September 22, 2004; incorporated by reference herein). The credit agreement was amended a second time as of May 18, 2005 (see our Form 8-K of May 23, 2005; incorporated by reference herein) and a third time as of November 22, 2005 (see our Form 8-K of November 4, 2005; incorporated by reference herein). As a result of the third amendment, which expanded the capacity of the senior credit facility, the senior unsecured term loan agreement was terminated, with the loan being paid-in-full.

As a result of the Merger, we continue to have substantial annual cash interest expense. Our senior credit facility requires us to meet a minimum interest coverage ratio and a maximum leverage ratio. In addition, the senior credit facility and the indenture relating to the 8% senior subordinated notes due 2013 contain certain restrictive covenants which, among other things, limit the incurrence of additional indebtedness, investments, dividends, transactions with affiliates, asset sales, acquisitions, mergers and consolidations, prepayments of other indebtedness, liens and encumbrances and other matters customarily restricted in these agreements. Our failure to comply with these covenants could result in an event of default, which if not cured or waived could have a material adverse effect on our results of operations, financial position and cash flow. In general, the debt covenants limit our discretion in operating our businesses. We were in compliance with all of the covenants in the credit agreement and the indenture as of December 31, 2005.

The following is a calculation of our minimum interest coverage and maximum leverage ratios under our senior credit facility. The terms and related calculations are defined in our senior credit facility agreement, as amended, which is included as Exhibit 10.35 to this Form 10-K.

	Year Ended December 31,
	2005			2004
	(in thousands)
Calculation of Interest Coverage Ratio:
Consolidated EBITDA (1)	$	180,585		$	172,940
Consolidated Cash Interest Expense (2)		46,398			41,975
Actual Interest Coverage Ratio (3)		3.89	x		4.12	x
Minimum Permitted Interest Coverage Ratio		2.25	x		2.10	x
Calculation of Leverage Ratio:
Funded Indebtedness (4)	$	722,432		$	764,302
Less: Cash and equivalents		(42,179	)		(31,816	)
		680,253			732,486
Consolidated EBITDA (1)		180,585			172,940
Actual Leverage Ratio (5)		3.77	x		4.24	x
Maximum Permitted Leverage Ratio		5.50	x		5.95	x

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(1) Consolidated EBITDA (earnings before interest expense, taxes, depreciation and amortization) is defined in our senior credit facility as follows:

	Year Ended December 31,
	2005		2004
	(in thousands)
Net earnings	$	38,859	$	33,514
Interest expense, excluding amortization of debt issuance costs		45,292		40,052
Amortization of debt issuance costs		1,993		2,046
Income tax expense		14,266		20,981
Depreciation and amortization		70,092		66,857
Equity sponsor management fee (a)		2,036		1,500
Industrial revenue bonds related expenses (b)		964		938
Other non-recurring charges related to acquisition accounting (c)		—		2,677
Transaction expenses (d)		—		340
Other (e)		7,457		4,035
		180,959		172,940
Less: Unrealized gains on swap contracts		374		—
Consolidated EBITDA, as defined in our senior credit facility	$	180,585	$	172,940

(a) Reflects management fees paid to equity sponsor.

(b) Reflects fees associated with industrial revenue bonds guaranteed by certain of our subsidiaries.

(c) Reflects loss associated with SFAS 141 purchase accounting primarily for inventories.

(d) Reflects expenses incurred in connection with our Merger.

(e) Reflects the following:

	2005		2004
Equity losses of unconsolidated subsidiaries	$	455	$	460
Losses from the sale of assets not in the ordinary course of business		350		879
Preferred return on deferred compensation		968		1,771
Letter of credit fees		138		152
Fees and expenses in connection with the exchange of the Senior Subordinated Notes for registered notes		—		291
Debt extinguishment expenses which do not represent a cash item		4,134		—
Other non-recurring charges		1,412		482
	$	7,457	$	4,035

(2) Consolidated cash interest expense for the twelve-month period ended December 31, as calculated in our senior credit facility, was as follows (in thousands):

	2005			2004
Interest expense, net	$	47,119		$	43,285
Interest income		1,272			736
Gross interest expense		48,391			44,021
minus:
Amortization of debt issuance costs		(1,993	)		(2,046	)
Consolidated cash interest expense	$	46,398		$	41,975

(3) Represents ratio of consolidated EBITDA to consolidated interest expense.

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(4) Funded Indebtedness as of December 31, was as follows (in thousands):

	2005		2004
Term loan facility	$	540,000	$	455,050
Senior unsecured term loan facility		—		135,000
8% senior subordinated notes		150,000		150,000
Insurance bonds		201		878
Guarantee obligations (see Debt Guarantees described below)		16,097		6,152
Capital leases		6,454		6,941
Standby letters of credit (primarily with our casualty insurance carrier, Liberty Mutual)		6,661		6,489
Funded indebtedness of Trilogy Egg Products, Inc.		2,785		3,540
Other		234		252
	$	722,432	$	764,302

(5) Represents ratio of funded indebtedness less cash and equivalents to consolidated EBITDA.

The aggregate maturities of our long-term debt, our lease commitments and our long-term purchase commitments for the years subsequent to December 31, 2005, are as follows:

	Payments due by period (in thousands)
Contractual Obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Long-term debt (1)	$	703,269	$	2,700	$	11,815	$	528,050	$	160,704
Capital lease obligations		6,454		784		1,722		2,010		1,938
Operating leases		32,288		4,363		9,293		8,945		9,687
Purchase obligations (2)		1,180,561		234,718		367,756		284,015		294,072
Deferred compensation		15,048		—		—		—		15,048
Interest on fixed rate debt		96,000		12,000		24,000		24,000		36,000
Total	$	2,033,620	$	254,565	$	414,586	$	847,020	$	517,449

(1) Does not include variable interest.

(2) A substantial portion relates to egg contracts. Estimates of future open market egg prices and feed costs were used to derive these figures. Approximately $1.07 billion of these purchase obligations are subject to market risks due to fluctuations in market pricing.

We have entered into substantial purchase obligations to fulfill our egg, potato and cheese requirements. We maintain long-term egg procurement contracts with numerous cooperatives and egg producers throughout the Midwestern and Eastern United States and Canada, which supply approximately 60% of our annual egg requirements. Most of these contracts vary in length from 18 to 120 months. The egg prices are primarily indexed to grain or Urner Barry market indices. One 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 our purchases from our top five long-term contracted egg suppliers will approximate $146 million in 2006, $150 million in 2007, $112 million in 2008, $99 million in 2009, and $80 million in 2010, and that the 2006 amount will account for approximately 35% of our total egg purchases this year. In addition, we have contracts to purchase potatoes that expire in 2007. These contracts will supply approximately 80% of the Potato Products Division’s raw potato needs in 2006 and 24% in 2007. One potato supplier is expected to provide more than 10% of our 2006 potato requirements. Lastly, we have forward buy contracts by which we purchased approximately $30 million of cheese in 2005, and which will cover approximately 26% of our estimated 2006 cheese requirements. Please see our Contractual Obligations chart above for our estimated breakdown of these obligations during the coming year, one to three year, three to five year, and more than five year periods.

As discussed above, we have a credit agreement with various lenders, including commercial banks, other financial institutions and investment groups, which expires in 2009 and 2010 and provides credit facilities which originally provided $595 million. As amended in 2005, the credit agreement now provides $640 million. Within the credit agreement there is a $100 million revolving line of credit. As of December 31, 2005, $540 million was outstanding under the credit agreement, plus approximately $6.7 million was used under the revolving line of credit for letters of credit. After paying our stockholder approximately $70.1 million in dividends in 2004, we made a voluntary repayment of $35 million under the credit agreement in December 2004. During 2005, we effectively made, as part of the credit agreement amendment process in November 2005,

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another voluntary repayment of approximately $49 million. At the time of the Merger, largely the same lender group provided us with a $135 million senior unsecured term loan agreement, which was to expire in 2011. The senior unsecured term loan was repaid in November 2005, at which time the senior unsecured term loan was terminated.

The weighted average interest rate for our borrowings under the credit agreement was approximately 6.7% at December 31, 2005. Given our business trends and cash flow forecast, we do not anticipate any use of the revolving line of credit during 2006, except for letters of credit purposes. However, it is possible that one or more acquisitions could arise, which could result in much of the revolving line of credit being utilized at some point.

We may repurchase from time to time a portion of our senior subordinated notes, subject to market conditions and other factors. No assurance can be given as to whether or when, or at what prices, such repurchases may occur. Any such repurchases would be limited by certain restrictions found in our credit agreement and in the indenture governing the subordinated notes. The indenture requires the Company to pay certain amounts, as set forth in the indenture, if repurchases occur before the specified dates.

Our ability to make payments on and to refinance our debt, including the senior subordinated notes, to fund planned capital expenditures and otherwise satisfy our obligations 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 and other 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 senior subordinated 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 senior subordinated notes and our senior credit facility may limit our ability to pursue any of these alternatives.

Our longer-term planning is focused on growing our sales, earnings and cash flows primarily by focusing on our existing business lines, through expanding product offerings, increasing production capacity for value-added products and broadening customer bases. We believe our financial resources are sufficient to meet the working capital and capital spending necessary to execute our longer-term plans. In executing these plans, we expect to reduce debt over the coming years. However, possible significant acquisition activity could result in us seeking additional financing resources, which we would expect would be available to us if they are sought.

Capital Spending

We invested approximately $40.7 million in capital expenditures in 2005, with approximately $37.7 million invested in capital projects in 2004. We and the Predecessor invested approximately $30.0 million in capital expenditures in 2003. Capital expenditures each year mainly related to expanding capacity for value-added products, expanding warehouse space for all of our divisions, and upgrading computer technology. Capital expenditures in 2005, 2004, and 2003 were funded from cash flow from operations and borrowings under credit facilities.

We plan to spend approximately $33.0 million in total capital expenditures for 2006, which will be used to maintain existing production facilities, to replace tractors and trailers, and to expand production capacity for value-added products, such as potato products, among other projects. This spending will be funded from operating cash flow, plus available capacity under our revolving line of credit, if need be.

Debt Guarantees

We have guaranteed, through our Waldbaum subsidiary, the repayment of certain industrial revenue bonds used for the expansion of the wastewater treatment facilities of four municipalities where we have food processing facilities. The repayment of these bonds is funded through the wastewater treatment charges paid by us. However, should those charges not be sufficient to pay the bond payments as they become due, we have agreed to pay any shortfall. The remaining principal balance of these bonds at December 31, 2005 was approximately $16.1 million.

Insurance

In general, our insurance costs have been approximately stable over the past three years. Regarding our largest insurance programs, in 2005 our property insurance premiums and casualty insurance premiums declined from 2004 levels.

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Due to an extended term on our property program, we will not have a change in premium for that coverage in 2006. We expect a flattening of casualty insurance premiums in 2006 based upon counsel from our broker. We have also experienced, and expect to continue to experience, rising premiums for our portion of health and dental insurance benefits offered to our employees, although the past three years we have succeeded in maintaining such increases below prevailing market rates.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based upon the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate estimates, including those related to the allowance for doubtful accounts, goodwill and intangible assets, accrued promotion costs, accruals for insurance, accruals for environmental matters, financial instruments and income tax provision. We base these estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies reflect the significant judgments and estimates used in the preparation of our consolidated financial statements.

Allowance for Doubtful Accounts

We estimate the uncollectibility of our accounts receivable and record an allowance for uncollectible accounts. In determining the adequacy of the allowance, we analyze the value of our customer’s financial statements, historical collection experience, aging of receivables and other economic and industry factors. It is possible that the accuracy of the estimation process could be materially impacted by different judgments as to collectibility based on the information considered and further deterioration of accounts.

Goodwill, Customer Relationships and Other Intangibles

We assess the impairment of identifiable intangibles, long-lived assets and related goodwill whenever events or changes in circumstances indicate the carrying value may not be recoverable. Factors which could trigger an impairment review include significant under-performance relative to expected historical or projected future operating results, significant changes in the use of acquired assets or our strategy and significant negative industry or economic trends. For intangible assets and long-lived assets, an assessment may occur if the carrying value of the asset exceeds the undiscounted cash flows from the asset.

When we determine that the carrying value of intangibles, long-lived assets and related goodwill may not be recoverable based upon the existence of an impairment, we measure any potential impairment based on a projected discounted cash flow method using a discount rate determined by management to be commensurate with the risk inherent in our current business model. The evaluation of fair value requires the use of projections, estimates and assumptions as to the future performance of the operations in performing a discounted cash flow analysis as well as assumptions regarding sales and earning multiples that would be applied in comparable acquisitions in the industry. We assess our goodwill for impairment issues annually.

Accrued Promotion Costs

The amount and timing of expense recognition for customer promotion activities involve management judgment related to estimated participation, performance levels, and historical promotion data and trends. The vast majority of year-end liabilities associated with these activities are resolved within the following fiscal year and, therefore, do not require highly uncertain long-term estimates.

Accruals for Insurance

We are primarily self-insured for our medical and dental liability costs. We maintain high deductible insurance policies for our workers compensation, general liability and automobile liability costs. It is our policy to record our self-insurance liabilities based on claims filed and an estimate of claims incurred but not yet reported. Any projection of losses concerning medical, dental, workers compensation, general liability and automobile liability is subject to a considerable degree of variability. Among the causes of this variability are unpredictable external factors affecting future inflation rates, litigation trends, legal interpretations, benefit level changes and claim settlement patterns.

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Accruals for Environmental Matters

We review environmental matters on a quarterly basis. Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based on current law and existing technologies. Accruals are adjusted periodically as assessment and remediation efforts progress or as additional technical or legal information becomes available. Accruals for environmental liabilities are included in the balance sheet at undiscounted amounts and exclude claims for recoveries from insurance or other third parties.

Financial Instruments

We use derivative financial instruments to manage our cash flow exposure to various market risks, including certain interest rate, cheese, grain and feed costs. The fair value of these derivative financial instruments is based on estimated amounts which may fluctuate with market conditions.

Income Taxes

Income tax expense involves management judgment as to the ultimate resolution of any tax issues. Historically, our assessments of the ultimate resolution of tax issues have been reasonably accurate. The current open issues are not dissimilar from historical items.

Recent Accounting Pronouncements

In November 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 151, “Inventory Costs—An amendment of Accounting Research Bulletin (“ARB”) No. 43, Chapter 4.” SFAS 151 clarifies that abnormal amounts of idle facility expense, freight, handling costs and spoilage should be expensed as incurred and not included in overhead. Further, SFAS 151 requires that allocation of fixed production overheads to conversion costs should be based on normal capacity of the production facilities. The provisions in SFAS 151 are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of this statement, required effective January 1, 2006, will not effect our financial condition or results of operations.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets—An Amendment of Accounting Principals Board (“APB”) Opinion No. 29.” This statement amends APB Opinion No. 29 and is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. SFAS 153 is effective for nonmonetary exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of this statement, required effective July 1, 2005, had no effect on our financial condition or results of operations.

On December 16, 2004, the FASB issued SFAS 123(R), “Share Based Payment”, which is a revision of SFAS No. 123 and supersedes APB Opinion No. 25. SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be valued at fair value on the date of grant, and to be expensed over the applicable vesting period. SFAS No. 123(R) is effective for non-public entities, as defined, on or after January 1, 2006. Non-public entities that used the minimum value method of measuring equity share options for proforma disclosure purposes under statement 123 shall apply this statement prospectively to new awards and continue to account for any portion of awards outstanding at the effective date using the accounting principles originally applied to those awards. For new awards granted, compensation expense will be recorded over the vesting period base on the fair value of the awards granted. We have assessed the impact to our consolidated results of operations of adopting SFAS No. 123(R), and we expect an immaterial impact.

In May 2005, the FASB issued SFAS 154, “Accounting Changes and Error Corrections” (SFAS 154) which replaces APB Opinion No. 20 “Accounting Changes” and SFAS 3, “Reporting Accounting Changes in Interim Financial Statements-An Amendment of APB Opinion No. 28.” SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application, or the latest practicable date, as the required method for reporting a change in accounting principle and the reporting of a correction of an error. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. We do not expect that adoption will have a material impact.

The FASB has proposed SFAS 155, “Accounting for Certain Hybrid Financial Instruments” (SFAS 155) which would amend SFAS 133 “Accounting for Derivative Instruments and Hedging Activities and SFAS 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS 155 provides accounting for certain derivatives embedded in other financial instruments. This SFAS would be effective for all financial instruments acquired, issued or subject to a remeasurement event occurring for fiscal years beginning after September 15, 2006. We do not believe it will have a material impact on us.

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Market Risk

Commodity Hedging

Commodity Risk Management. The principal market risks to which we are exposed that may adversely affect our results of operations and financial position include changes in future commodity prices and interest rates. We seek to minimize or manage these market risks through normal operating and financing activities and through the use of commodity contracts and interest rate swap agreements, where practicable. We do not trade or use instruments with the objective of earning financial gains on the commodity price or interest rate fluctuations, nor do we use instruments where there are not underlying exposures.

The primary raw materials used in the production of eggs are corn and soybean meal. We purchase these materials to feed our approximately 13.5 million hens, which produce approximately 30% of our annual egg requirements. Shell and liquid eggs are purchased from third-party suppliers and in the spot market for the remainder of the Egg Products Division’s needs. Eggs, corn and soybean meal are commodities that are subject to significant price fluctuations due to market conditions which, in certain circumstances, can adversely affect the results of operations.

In order to reduce the impact of changes in commodity prices on our operating results, we have developed a risk management strategy that includes the following elements:

• We hedge a significant percentage of our grain commodity requirements, targeting to have, on average, any given forward 12 month period’s grain-for-feed needs 50% covered. This covers both internal egg production and third-party egg procurement contracts that are priced based on grain prices, which collectively account for approximately 65% of our egg requirements. This activity protects against unexpected increases in grain prices and provides predictability with respect to a portion of future raw materials costs. Hedging can diminish the opportunity to benefit from the improved margins that would result from an unanticipated decline in grain prices.

• We seek to align our procurement and sales volumes by matching the percentage of variable pricing contracts with our customers and the percentage of raw materials procured on a variable basis. This matching of our variable priced procurement contracts with that of variable priced sales contracts provides us with a natural hedge during times of grain and egg market volatility. As part of this effort, we are attempting to transition customers to variable pricing contracts that are priced off the same index used to purchase shell and liquid eggs. These efforts have generally been successful over the past two years.

• We have negotiated agreements with certain of our fixed price customers which allow us to raise prices by giving 30 to 60 days notice in response to increased commodity prices. The majority of these contracts are with major broad-line foodservice distributor customers who are generally less sensitive to price increases because their customers purchase food products from them on a cost-plus basis.

• We are continuing to transition customers from lower value-added egg products to higher margin, higher value-added specialty products. These products are less sensitive to fluctuations in underlying commodity prices because the raw material component is a smaller percentage of total cost and we generally have the ability to pass through certain cost increases related to our higher value-added egg products to customers. This transition to higher value-added specialty products has taken place gradually over the past 5-10 years.

The following table is a sensitivity analysis that estimates our exposure to market risk associated with corn and soybean meal futures contracts. The notional value of commodity positions represents the notional value of the corn and soybean meal futures contracts for the year ended December 31, 2005. Market risk is estimated as the potential loss in fair value resulting from a hypothetical 10% adverse change in commodity prices (amounts in thousands).

	Notional value		Market risk
Corn futures contracts:
Highest position	$	27,000	$	2,700
Lowest position		4,138		414
Average position		13,300		1,330
Soybean meal futures contracts:
Highest position	$	21,184	$	2,118
Lowest position		5,787		579
Average position		14,268		1,427

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During 2003, we began using forward buy contracts to cover a portion of our Crystal Farms branded cheese procurement needs. At December 31, 2005, we had outstanding 2006 forward buy cheese contracts covering approximately 20 million pounds, or approximately 26% of our estimated 2006 requirements. The potential loss in fair market value of these contracts resulting from a 10% adverse change in the underlying commodity prices would be approximately $3.0 million.

Additionally, we hedge some of our natural gas requirements for producing our products by fixing the price for a portion of our natural gas usage. At December 31, 2005, the fair market value of such fixed price purchases was approximately $1.6 million. These monthly purchases have been made for February and March 2006 and cover approximately 50% of our estimated usage requirements during that period, or approximately 10% of our annual needs. The potential loss in fair market value of these contracts resulting from a 10% adverse change in the underlying commodity prices would be approximately $160,000.

Also, we partially mitigate the risk of variability of our transportation-related fuel costs through the use of home heating oil futures contracts from time to time. At December 31, 2005, the fair market value of such fixed price purchases was approximately $5.8 million. These monthly purchases are for February – December 2006 and cover approximately 52% of our estimated usage requirements during that period. The potential loss in fair market value of these contracts resulting from a 10% adverse change in the underlying commodity prices would be approximately $580,000.

Interest Rates

Due to our Merger, we have fixed rate debt of $150 million, which we believe had a fair value of approximately the same amount as of the end of 2005. The market risk related to this fixed rate debt, which represents the impact on the fair value from a hypothetical 100 basis point change in interest rates, is $1.5 million. Our credit agreement debt obligations of approximately $540 million carry a variable rate of interest. We believe the fair value of this debt approximated $540 million as of the end of 2005. The interest paid on these obligations floats with market changes in interest rates, though a majority of the credit agreement debt is presently tied to six month Eurodollar rates.

As part of our risk management strategy, we entered into a 6% interest cap arrangement that corresponded with the interest payment terms on $210 million borrowed under the variable portion of our credit agreement for a one-year period starting in November 2004, which declined to $180 million for one year starting in November 2005. As such, the market risk related to these interest rate caps using the same assumption as above is approximately $1.1 million.

ITEM 7A—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Market Risk, above.

ITEM 8—FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements and related notes and schedules required by this Item are set forth in Part IV, Item 15 herein.

ITEM 9—CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A—CONTROLS AND PROCEDURES

(a) Our management evaluated, with the participation of the Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of December 31, 2005. Based on their evaluation, our principal executive and principal financial officers concluded that our disclosure controls and procedures were effective as of December 31, 2005.

(b) There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during our fiscal quarter ended December 31, 2005, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B—OTHER INFORMATION

We do not have any information that was required to be reported on Form 8-K during the fourth quarter that was not reported.

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PART III

ITEM 10—DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Michael Foods is a wholly-owned subsidiary of M-Foods Holdings, Inc., a corporation owned by Michael Foods Investors, LLC, whose members include affiliates of Thomas H. Lee Partners, L.P. and members of our senior management. Each member of the management committee of Michael Foods Investors, LLC is also a director of Michael Foods (except for Charles Weil).

The names of the executive officers and directors of Michael Foods, and their ages and positions, are as follows:

Name	Age	Position
Gregg A. Ostrander (2)	53	Chairman and Chief Executive Officer
James D. Clarkson	53	President and Chief Operating Officer
John D. Reedy	60	Executive Vice President, Chief Financial Officer
James G. Mohr	54	Senior Vice President – Supply Chain
Mark W. Westphal	40	Senior Vice President – Finance
Mark D. Witmer	48	Treasurer and Secretary
Mark B. Anderson	45	President—Refrigerated Distribution Division
Todd M. Abbrecht (1)	37	Director
Anthony J. DiNovi (2)	43	Director
Jerome J. Jenko (1)	68	Director
Charles D. Weil (1)	61	Director
Kent R. Weldon (2)	38	Director

(1) Members of our Audit Committee

(2) Members of our Compensation Committee

Gregg A. Ostrander is our Chief Executive Officer and Chairman. He has held the prior office since 1994, has been our Chairman since 2001, and was President from 1994 – January 2006. Mr. Ostrander has been a director of Michael Foods since 1994. In 1993, Mr. Ostrander served as our Chief Operating Officer. Mr. Ostrander is also a director of Arctic Cat Inc., a recreational vehicle manufacturer, and Birds Eye Foods, Inc., a food company.

James D. Clarkson is our President and Chief Operating Officer. He was appointed to the Chief Operating Officer position in 2004 and the President’s position in February 2006. Prior to 2004, Mr. Clarkson was President of our Potato Products and Refrigerated Distribution divisions, positions he held since 1995 and 2002, respectively. Mr. Clarkson joined us in 1994 as Vice President and General Manager of Crystal Farms, a subsidiary of our Refrigerated Distribution Division.

John D. Reedy is our Executive Vice President and Chief Financial Officer and has held these positions since 2000. From 1988 to 2000, Mr. Reedy was our Vice President—Finance and Chief Financial Officer.

James G. Mohr is our Senior Vice President—Supply Chain and has held that position since 2004. From 1996 to 2003, Mr. Mohr was our Vice President—Supply Chain. Mr. Mohr has served us in various transportation and logistics management positions since 1994.

Mark W. Westphal is our Senior Vice President-Finance and has held that position since February 2006. Mr. Westphal has served us in various financial positions since 1995, most recently as Vice President – Customer Accounting & Analysis.

Mark D. Witmer is our Treasurer and Secretary. Mr. Witmer has held the former position since 2003 and the latter since 2001. Mr. Witmer joined us as the Director of Corporate Communications in 1989.

Mark B. Anderson is the President of our Refrigerated Distribution Division, a position he has held since 2004. From 2002 to 2003, Mr. Anderson served as Vice President/General Manager of the Division. From 1998 – 2002 Mr. Anderson held various business development and general manager positions within the Division.

Todd M. Abbrecht has been a director of Michael Foods since November 2003 following the consummation of the Merger. Mr. Abbrecht is a Managing Director of Thomas H. Lee Partners, L.P., where he has been employed since 1992. Prior to Thomas H. Lee Partners, L.P., Mr. Abbrecht held a position in the mergers and acquisitions department of Credit Suisse First Boston. Mr. Abbrecht is a director of Simmons Bedding Company, a bedding products manufacturer and distributor, and Warner Chilcott Corporation, a specialty pharmaceutical company.

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Anthony J. DiNovi has been a director of Michael Foods since November 2003 following the consummation of the Merger. Mr. DiNovi is Co-President of Thomas H. Lee Partners, L.P., where he has been employed since 1988. Prior to Thomas H. Lee Partners, L.P., Mr. DiNovi held various positions in the corporate finance departments of Goldman, Sachs & Co. and Wertheim Schroder & Co., Inc. Mr. DiNovi is a director of American Media, Inc., a consumer magazine publisher, Nortek, Inc., a manufacturer and distributor of building products, US LEC Corporation, a voice, data and Internet services provider, and Vertis, Inc., a provider of advertising, media, and marketing solutions.

Jerome J. Jenko has been a director and a member of the management committee of Michael Foods Investors since 2001 and a director of Michael Foods since 1998. Mr. Jenko had been a director and a member of the management committee of M-Foods Investor LLC, our Predecessor’s parent, prior to the 2003 Merger. He has been a Senior Advisor with Goldsmith, Agio, Helms and Company, an investment banking firm, since 1997. Mr. Jenko is a director of Ocean Spray Cranberries, Inc., a cranberry growing and processing cooperative, DecoPak, Inc., a privately-held cake decorating company, and Commodity Specialists Co., Inc., a privately-held commodity trading company.

Charles D. Weil has been a director of Michael Foods since 2004. He is President and Chief Executive Officer of M. A. Gedney Company (“Gedney”). Previously, he was Acting President and Chief Executive Officer of Gedney from February 2003 – October 2003. Prior to joining Gedney, Mr. Weil was founder and Chief Executive Officer of C.E.O. Advisors, Inc., a consulting company, from January 2001 – February 2003, and was President and Chief Operating Officer of Young America Corporation, a fulfillment and customer service company, from 1993 – 2000.

Kent R. Weldon has been a director of Michael Foods since November 2003 following the consummation of the Merger. Mr. Weldon is a Managing Director of Thomas H. Lee Partners, L.P, where he has been employed since 1991. Prior to Thomas H. Lee Partners, L.P., Mr. Weldon held a position in the corporate finance department of Morgan Stanley & Co. Incorporated. Mr. Weldon is a director of FairPoint Communications, Inc., a communications services provider, Nortek, Inc., a manufacturer and distributor of building products, and Progressive Moulded Products, Ltd., a manufacturer of plastic interior subsystems for cars and light trucks.

Audit Committee

The Board of Directors has a standing Audit Committee established in accordance with section 3(a)(58)(A) of the Exchange Act (15 U.S.C. 78c(a)(58)(A)). The members of the Audit Committee are Jerome J. Jenko, Chairman, Todd M. Abbrecht and Charles D. Weil.

Audit Committee Financial Expert

The Board of Directors is satisfied that the members of our Audit Committee have sufficient expertise and business and financial experience necessary to perform their duties as the Company’s Audit Committee effectively. As such, no one member of our Audit Committee has been named by our Board of Directors as an “audit committee financial expert” as that term is defined in Item 401(h) of Regulation S-K.

Code of Ethics

We have a Business Conduct Policy that applies to all of our employees. We have determined that this policy complies with Item 406 of Regulation S-K. We will provide, without charge, a copy of the Business Conduct Policy to any person who so requests in writing. Written requests may be made to Michael Foods, Inc., 301 Carlson Parkway, Suite 400, Minnetonka, Minnesota 55305, attention: Secretary. Our Internet website at www.michaelfoods.com also contains the Business Conduct Policy.

ITEM 11—EXECUTIVE COMPENSATION

The following table sets forth information concerning the compensation of our chief executive officer and each of our four most highly compensated executive officers, referred to as the named executive officers, during each of the last three fiscal years.

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Summary Compensation Table

		Annual Compensation
Name and Principal Position	Fiscal Year	Salary		Bonus		Securities Underlying Options(1)	All Other Compensation(2)
Gregg A. Ostrander Chairman and Chief Executive Officer	2005 2004 2003	$	733,000 733,000 682,500	$	568,075 733,000 665,438	—   2,160 7,784	$	10,218 15,932 13,433
John D. Reedy Executive Vice President and Chief Financial Officer	2005 2004 2003		450,000 418,000 310,000		308,250 418,000 299,150	—   766 2,773		9,822 14,940 14,267
James D. Clarkson President and Chief Operating Officer	2005 2004 2003		450,000 418,000 310,000		308,250 418,000 299,150	—   766 2,648		9,309 12,437 8,676
Mark B. Anderson President—Refrigerated Distribution Division	2005 2004 2003		193,000 185,000 162,663		132,205 185,000 117,448	—   135 400		8,657 8,151 8,105
James G. Mohr Senior Vice President—Supply Chain	2005 2004 2003		208,000 199,789 186,846		103,397 149,841 134,880	—   261 773		8,967 10,217 10,377

(1) Our parent (M-Foods Holdings, Inc.) issued stock options to certain named executive officers in 2003 and 2004. The 2003 figures also include option grants made by the Predecessor’s parent.

(2) Reflects the value of contributions made under the retirement savings plan and the value of life insurance premiums paid by us.

Note: All the above amounts exclude any deferred compensation arrangements with our and the Predecessor’s parent company.

None of the named executive officers received stock option grants in 2005. There were no option exercises in 2005.

Employment Agreements

General Provisions. The employment agreement with Gregg A. Ostrander provides for automatic one year renewals beginning with the second anniversary of the closing of the Merger. The Ostrander employment agreement provides that Mr. Ostrander’s employment (i) shall terminate automatically upon his death or disability, (ii) may terminate at the option of the Company with or without cause and (iii) may terminate at the option of Mr. Ostrander for good reason. The Ostrander employment agreement provides that Mr. Ostrander will receive an annual base salary of at least $715,000 and that he will participate in certain bonus arrangements, long-term incentive plans and employee benefit plans of Michael Foods. For 2005, Mr. Ostrander may receive up to 100% of his salary as an incentive bonus under the Michael Foods, Inc. Executive Officers Incentive Plan. Mr. Ostrander is subject to a noncompetition covenant and a nonsolicitation provision.

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The employment agreement with John D. Reedy provides for automatic one year renewals beginning with the second anniversary of the closing of the Merger. The Reedy employment agreement provides that Mr. Reedy’s employment (i) shall terminate automatically upon his death or disability, (ii) may terminate at the option of the Company with or without cause and (iii) may terminate at the option of Mr. Reedy for good reason. The Reedy employment agreement provides that Mr. Reedy will receive an annual base salary of at least $400,000 and that he will participate in certain bonus arrangements, long-term incentive plans and employee benefit plans of Michael Foods. For 2005, Mr. Reedy may receive up to 100% of his salary as an incentive bonus under the Michael Foods, Inc. Executive Officers Incentive Plan. Mr. Reedy is subject to a noncompetition covenant and a nonsolicitation provision.

The employment agreement with James D. Clarkson provides for automatic one year renewals beginning with the second anniversary of the closing of the Merger. The Clarkson employment agreement provides that Mr. Clarkson’s employment (i) shall terminate automatically upon his death or disability, (ii) may terminate at the option of the Company with or without cause and (iii) may terminate at the option of Mr. Clarkson for good reason. Mr. Clarkson’s annual base salary will be at least $400,000, and he will participate in certain bonus arrangements, long-term incentive plans and employee benefit plans of Michael Foods. For 2005, Mr. Clarkson may receive up to 100% of his salary as an incentive bonus under the Michael Foods, Inc. Executive Officers Incentive Plan. Mr. Clarkson is subject to a noncompetition covenant and a nonsolicitation provision.

Termination Provisions. The Ostrander employment agreement provides that if Mr. Ostrander’s employment is terminated by his death or disability, Mr. Ostrander, or his estate or beneficiaries, will receive a payment equal to any annual base salary through the date of termination not yet paid, plus the target bonus for the year prorated for the months of employment in that year, plus any eligible unpaid other benefits, plus three times the total of Mr. Ostrander’s current annual base salary and target bonus. In addition, Mr. Ostrander will receive for three years following the termination date, or until such earlier time as Mr. Ostrander becomes eligible to receive comparable benefits, certain medical, dental and life insurance benefits for himself and his family.

If Mr. Ostrander’s employment is terminated for cause or he terminates without good reason, as described below, Mr. Ostrander will receive his annual base salary through the date of termination and other benefits not yet paid under any plan, program, policy, contract or agreement with or practice of Michael Foods. “Good reason” includes, among other things, any diminution in position, authority, duties and responsibilities or any requirement to relocate or travel extensively. If Mr. Ostrander terminates his employment for good reason or if Michael Foods terminates his employment other than for cause, death or disability, Mr. Ostrander will receive a lump sum in an amount equal to any annual base salary through the date of termination not yet paid, plus the target bonus for the year prorated for the months of employment in that year, plus any eligible unpaid other benefits, plus three times the total of Mr. Ostrander’s current annual base salary and target bonus. In addition, Mr. Ostrander will receive for three years following the termination date, or until such earlier time as Mr. Ostrander becomes eligible to receive comparable benefits, certain medical, dental and life insurance benefits for himself and his family.

Mr. Ostrander may also be eligible to receive an additional payment of any excise tax imposed by Section 4999 of the Internal Revenue Code in connection with payments made in connection with the Merger and any future transactions, as well as an additional payment to cover any applicable taxes such that he will retain an amount equal to the excise taxes, after all income taxes, interest and penalties associated with all such payments. In no event shall the Company be obligated to make any such payments in connection with the acquisition in excess, in the aggregate, of $6,300,000. With respect to any such payments in connection with any future transactions, the Company shall not be obligated to pay any amount in excess, in the aggregate, of $16,300,000.

The Reedy employment agreement provides that if Mr. Reedy’s employment is terminated by his death or disability, Mr. Reedy, or his estate or beneficiaries, will receive a payment equal to any annual base salary through the date of termination not yet paid, plus the target bonus for the year prorated for the months of employment in that year, plus any eligible unpaid other benefits, plus two times the total of Mr. Reedy’s current annual base salary and target bonus. In addition, Mr. Reedy will receive for two years following the termination date, or until such earlier time as Mr. Reedy becomes eligible to receive comparable benefits, certain medical, dental and life insurance benefits for himself and his family.

If Mr. Reedy’s employment is terminated for cause or he terminates without good reason, such term having a meaning substantially similar to the meaning given such term in the Ostrander employment agreement, Mr. Reedy will receive his annual base salary through the date of termination and other benefits not yet paid under any plan, program, policy, contract or agreement with or practice of Michael Foods. If Mr. Reedy terminates his employment for good reason or if Michael Foods terminates his employment other than for cause, death or disability, Mr. Reedy will receive a lump sum in an amount equal to any annual base salary through the date of termination not yet paid, plus the target bonus for the year prorated for the months

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of employment in that year, plus any eligible unpaid other benefits, plus two times the total of Mr. Reedy’s current annual base salary and target bonus. In addition, Mr. Reedy will receive for two years following the termination date, or until such earlier time as Mr. Reedy becomes eligible to receive comparable benefits, certain medical, dental and life insurance benefits for himself and his family.

Mr. Reedy may, under certain circumstances, also be eligible to receive an additional payment of any excise tax imposed by Section 4999 of the Internal Revenue Code in connection with payments made in connection with the Merger and any future transactions, as well as an additional payment to cover any applicable taxes such that he will retain an amount equal to the excise taxes, after all income taxes, interest and penalties associated with all such payments. In no event shall the Company be obligated to make any such payments in connection with the acquisition in excess, in the aggregate, of $6,300,000. With respect to any such payments in connection with any future transactions, the Company shall not be obligated to pay any amount in excess, in the aggregate, of $16,300,000.

The Clarkson employment agreement provides that if Mr. Clarkson is terminated by his death or disability, Mr. Clarkson, or his estate or beneficiaries, will receive a payment equal to any annual base salary through the date of termination not yet paid, plus the target bonus for the year pro rated for the months of employment in that year, plus any eligible unpaid other benefits, plus two times the total of an amount equal to Mr. Clarkson’s current annual base salary and target bonus.

If Mr. Clarkson’s employment is terminated for cause or he terminates without good reason, such term having a meaning substantially similar to the meaning given such term in the Ostrander employment agreement, Mr. Clarkson will receive his annual base salary through the date of termination and other benefits not yet paid under any plan, program, policy, contract or agreement with or practice of Michael Foods. If Mr. Clarkson terminates his employment for good reason or if Michael Foods terminates his employment other than for cause, death or disability, Mr. Clarkson will receive a lump sum in an amount equal to any annual base salary through the date of termination not yet paid, plus the target bonus for the year prorated for the months of employment in that year, plus any eligible unpaid other benefits, plus two times the total of Mr. Clarkson’s current annual base salary and target bonus. In addition, Mr. Clarkson will receive for two years following the termination date, or until such earlier time as Mr. Clarkson becomes eligible to receive comparable benefits, certain medical, dental and life insurance benefits for himself and his family.

Mr. Clarkson may, under certain circumstances, also be eligible to receive an additional payment of any excise tax imposed by Section 4999 of the Internal Revenue Code, in connection with payments made in connection with the Merger and any future transactions, as well as an additional payment to cover any applicable taxes such that he will retain an amount equal to the excise taxes, after all income taxes, interest and penalties associated with all such payments. In no event shall the Company be obligated to make any such payments in connection with the acquisition in excess, in the aggregate, of $6,300,000. With respect to any such payments in connection with any future transactions, the Company shall not be obligated to pay any amount in excess, in the aggregate, of $16,300,000.

The Mohr employment agreement provides that if Mr. Mohr is terminated by his death or disability, Mr. Mohr, or his estate or beneficiaries, will receive a payment equal to any annual base salary through the date of termination not yet paid, plus the target bonus for the year pro rated for the months of employment in that year, plus any eligible unpaid other benefits, plus an amount equal to Mr. Mohr’s current annual base salary.

If Mr. Mohr’s employment is terminated for cause or he terminates without good reason, such term having a meaning substantially similar to the meaning given such term in the Ostrander employment agreement, Mr. Mohr will receive his annual base salary through the date of termination and other benefits not yet paid under any plan, program, policy, contract or agreement with or practice of Michael Foods. If Mr. Mohr terminates his employment for good reason or if Michael Foods terminates his employment other than for cause, death or disability, Mr. Mohr will receive a lump sum in an amount equal to any annual base salary through the date of termination not yet paid, plus the target bonus for the year prorated for the months of employment in that year, plus any eligible unpaid other benefits, plus a payment equal to Mr. Mohr’s current annual base salary. In addition, Mr. Mohr will receive for one year following the termination date, or until such earlier time as Mr. Mohr becomes eligible to receive comparable benefits, certain medical, dental and life insurance benefits for himself and his family.

Mr. Anderson has a severance agreement which provides for payment of his pro rated compensation through the date of termination, a lump sum payment of two years’ total annual compensation, and the continuation of certain benefits should he be terminated under certain conditions within two years of a change in control of our Crystal Farms subsidiary.

Mr. Westphal and Mr. Witmer are not subject to any severance agreement.

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Compensation Committee Interlocks and Insider Participation

The members of the Compensation Committee are Gregg A. Ostrander, Anthony J. DiNovi and Kent R. Weldon. The compensation arrangements for our chief executive officer and each of our executive officers were established pursuant to the terms of the respective employment agreements between us and each executive officer. The terms of the employment agreements were established pursuant to arms-length negotiations between representatives of Thomas H. Lee Partners, L.P. or senior executives and each executive officer. Mr. Ostrander is also our Chief Executive Officer.

No Compensation Committee interlock relationships existed in 2005.

Deferred Compensation Plan

Upon the closing of the Merger, certain members of management became participants in the M-Foods Holdings, Inc. (“Holdings”) 2003 Deferred Compensation Plan. Each participant contributed certain proceeds to the Deferred Compensation Plan. The Deferred Compensation Plan is a nonqualified, unfunded obligation of Holdings. Each participant’s deferred compensation account under the plan will track certain distributions to be made to the Class A Units of Michael Foods Investors, LLC, however, the plan will not hold actual Class A Units of Michael Foods Investors, LLC. Participants in the plan will be entitled to a distribution from their deferred compensation account upon the earlier of (i) a change of control of Holdings (ii) the tenth anniversary of the date of the plan and (iii) upon the exercise of any put or call of the participants Class B Units of Michael Foods Investors, LLC. All payments made under the plan shall be made in cash by Holdings. There were distributions of deferred compensation totaling $13.1 million in 2004 coinciding with the dividends issued by Holdings to Michael Foods Investors LLC.

Incentive Plans

Each of the named executive officers is a participant in the Michael Foods, Inc. Executive Officers Incentive Plan or the Michael Foods, Inc. Senior Management, Officers and Key Employee Incentive Plan, which provide for cash bonuses of up to 100% of base salary, subject to our achieving certain financial performance objectives in any given fiscal year. The target goals set forth in these incentive plans change from year to year and are determined by our Compensation Committee.

Director Compensation

All members of our board of directors are reimbursed for their usual and customary expenses incurred in connection with attending all board and other committee meetings. Members of the board of directors who are also our employees, or employees of Thomas H. Lee Partners, L.P., do not receive remuneration for serving as members of the board. Other non-employee directors receive a quarterly retainer of $4,000 and are paid $3,000 for each board meeting attended, or $500 for a meeting held telephonically.

For all committees except the Audit Committee, non-employee outside directors are paid $1,000 for each regular committee meeting they attend, except for committee chairs who are paid $1,500 for each committee meeting they attend and chair. Non-employee outside directors are paid $1,500 for each regular Audit Committee meeting they attend, and the Audit Committee chair is paid $2,000 for each Audit Committee meeting they attend and chair.

For all committees except the Audit Committee, non-employee outside directors are paid $500 for each telephonic committee meeting in which they participate, except for committee chairs who are paid $1,000 for each telephonic committee meeting in which they participate and chair. Non-employee outside directors are paid $1,000 for each telephonic Audit Committee meeting in which they participate, except for the Audit Committee chair who is paid $1,500 for each telephonic Audit Committee meeting in which they participate and chair.

Directors’ fees and travel expense reimbursements in 2005 totaled $146,495.

M-Foods Holdings, Inc. Amended and Restated 2003 Stock Option Plan

In order to provide additional financial incentives to our management, certain members of our management and other key employees may be granted stock options to, collectively, purchase up to 6.36% of the common stock of M-Foods Holdings, Inc., our parent company. The exercise price of options granted reflects the fair market value of the underlying shares, as determined by the Compensation Committee in its best judgment.

Fifty percent of the then 25,000 option shares initially reserved for issuance under this stock option plan were issued to Messrs. Ostrander, Reedy, Clarkson, Morh and Max Hoffmann (Vice President and Chief Financial Officer for Refrigerated Distribution Division) in 2003. As amended in 2004, the plan provides for a total of 32,277 shares being reserved (including the 25,000 initially reserved). The plan provides that the exercise price is payable (1) in cash, (2) after an initial public offering of Michael Foods’ common stock, through simultaneous sales of underlying shares by brokers or (3) through the exchange of M-Foods Holdings, Inc. securities held by the optionee for longer than six months.

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Options vest ratably over a five-year period starting at the Merger date for those grants made in 2003 and for certain grants made in 2004, or the date of grant for other grants. On termination of employment for any reason, all unvested options of the terminated employee are cancelled. Vested options not exercised within 90 days after termination are cancelled, unless such employee is terminated for cause or leaves without good reason, in which case such vested options shall be cancelled upon termination. If employment is terminated for any reason other than for cause or a termination without good reason, M-Foods Holdings will provide a notice setting forth the fair market value of the common stock within 90 days of such termination. In the event of a change in control of M-Foods Holdings, Inc. or Michael Foods Investors, LLC, all options which have not become vested will automatically become vested. The options are subject to other customary restrictions and repurchase rights.

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ITEM 12—SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

M-Foods Holdings, Inc. is a corporation owned, in part, by Michael Foods Investors LLC, whose members include affiliates of Thomas H. Lee Partners, L.P. and certain members of our management.

The following table sets forth certain information, as of February 15, 2006, regarding beneficial ownership of Michael Foods Investors, LLC by: (i) each person or entity owning any class of Michael Foods Investors, LLC’s outstanding securities and (ii) each member of Michael Foods Investors, LLC’s management committee (which, with the exception of Charles Weil, is identical to the board of directors of Michael Foods), each of our currently serving named executive officers and all members of the management committee and executive officers as a group. Michael Foods Investors, LLC’s outstanding securities consist of approximately 2,966,818.01 Class A Units, 263,681.99 Class B Units and 330,000 Class C Units. The Class A Units, Class B Units and Class C Units generally have identical rights and preferences, except that the Class C Units are non-voting and have different rights with respect to certain distributions as described in our Form 10-K for the year ended December 31, 2003. To our knowledge, each of these securityholders has sole voting and investment power as to the units shown unless otherwise noted. Beneficial ownership of the securities listed in the table has been determined in accordance with the applicable rules and regulations promulgated under the Securities Exchange Act of 1934.

	Securities Beneficially Owned
Name and Address	Number of Class A Units	Number of Class B Units	Percentage of Class A and B Units		Number of Class C Units	Percentage of Class C Units
Principal Securityholders:
Thomas H. Lee Partners L.P. and affiliates (1)	2,900,000.00	—	89.8	%	—	—
Management Committee Members and Executive Officers:
Gregg A. Ostrander (2)(3)	22,806.09	70,916.91	2.9	%	84,600	25.6	%
John D. Reedy (2)(4)	7,707.96	17,292.04	0.8	%	25,000	7.6	%
James D. Clarkson (2)(5)	16,206.50	23,653.50	1.2	%	35,000	10.6	%
James G. Mohr (2)	5,728.70	11,271.30	0.5	%	17,000	5.2	%
Mark W. Westphal (2)	84.18	1,915.82	0.1	%	2,000	0.6	%
Mark D. Witmer (2)	13.68	4,986.32	0.2	%	5,000	1.5	%
Mark B. Anderson (2)	10.95	3,989.05	0.1	%	4,000	1.2	%
Anthony J. DiNovi (1)	—	—	—		—	—
Kent R. Weldon (1)	—	—	—		—	—
Todd M. Abbrecht (1)	—	—	—		—	—
Charles D. Weil (6)	—	—	—		—	—
Jerome J. Jenko (7)	500.00	—	0.0	%	—	—
All management committee members and named executive officers as a group (12 persons)	53,058.06	134,024.94	5.8	%	172,600	52.3	%

(1) Includes interests owned by each of Thomas H. Lee Equity Fund V, L.P., Thomas H. Lee Parallel Fund V, L.P., Thomas H. Lee Equity (Cayman) Fund V, L.P., Thomas H. Lee Investors Limited Partnership, 1997 Thomas H. Lee Nominee Trust, Putnam Investments Holdings, LLC, Putnam Investments Employees’ Securities Company I, LLC, and Putnam Investments Employees’ Securities Company II, LLC. Thomas H. Lee Equity Fund V, L.P. and Thomas H. Lee Parallel Fund V, L.P. are Delaware limited partnerships, whose general partner is THL Equity Advisors V, LLC, a Delaware limited liability company. Thomas H. Lee Equity (Cayman) Fund V, L.P. is an exempted limited partnership formed under the laws of the Cayman Islands, whose general partner is THL Equity Advisors V, LLC, a Delaware limited liability company registered in the Cayman Islands as a foreign company. Thomas H. Lee Advisors, LLC, a Delaware limited liability company, is the general partner of Thomas H. Lee Partners, L.P., a Delaware limited partnership, which is the sole member of THL Equity Advisors V, LLC. Thomas H. Lee Investors Limited Partnership (f/k/a THL-CCI Limited Partnership) is a Massachusetts limited partnership, whose general partner is THL Investment Management Corp., a Massachusetts corporation. The 1997 Thomas H. Lee Nominee Trust is a trust with U.S. Bank, N.A. serving as Trustee. Thomas H. Lee, a managing director of Thomas H. Lee Advisors, LLC, has voting and investment control over common shares owned of record by the 1997 Thomas H. Lee Nominee Trust. Each of Anthony J. DiNovi, Kent R. Weldon and Todd M. Abbrecht is a managing director of Thomas H. Lee Advisors, LLC. As managing directors of Thomas H. Lee Advisors, LLC, each of Mr. DiNovi, Mr. Weldon and Mr. Abbrecht has shared voting and investment power over, and therefore, may be deemed to beneficially own member units of Michael Foods

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Investors held of record by Thomas H. Lee Equity Fund V, L.P., Thomas H. Lee Parallel Fund V, L.P. and Thomas H. Lee Equity (Cayman) Fund V, L.P. Each of these individuals disclaims beneficial ownership of these units except to the extent of their pecuniary interest therein. The address of Thomas H. Lee Equity Fund V, L.P., Thomas H. Lee Parallel Fund V, L.P., Thomas H. Lee Equity (Cayman) Fund V, L.P., Thomas H. Lee Investors Limited Partnership, the 1997 Thomas H. Lee Nominee Trust, Anthony J. DiNovi, Todd M. Abbrecht and Kent R. Weldon is 100 Federal Street, 35th Floor, Boston, MA 02110. Putnam Investments Holdings LLC, Putnam Investments Employees’ Securities Company I, LLC and Putnam Investments Employees’ Securities Company II, LLC are co-investment entities of Thomas H. Lee Partners and each disclaims beneficial ownership of any securities other than the securities held directly by such entity. The address for the Putnam entities is One Post Office Square, Boston, MA 02109.

(2) The address for Messrs. Ostrander, Reedy, Clarkson, Mohr, Westphal, Witmer and Anderson is c/o Michael Foods, Inc., 301 Carlson Parkway, Suite 400, Minnetonka, MN 55305.

(3) In 2004, Mr. Ostrander placed 47,277 Class B units and 56,400 Class C units into irrevocable trusts for two adult children and one minor child. Mr. Ostrander disclaims beneficial ownership of these units.

(4) In 2003, Mr. Reedy gifted 15,000 Class B units and 15,000 Class C units to his two adult children. In 2004, Mr. Reedy gifted 10,000 Class B units and 10,000 Class C units to his two adult children. Mr. Reedy disclaims beneficial ownership of these units.

(5) In 2004, Mr. Clarkson gifted 10,140 Class B units and 15,000 Class C units to his four adult children. Mr. Clarkson disclaims beneficial ownership of these units.

(6) The address for Mr. Weil is c/o M.A. Gedney Company, 2100 Stoughton Ave., Chaska, MN 55318.

(7) The address for Mr. Jenko is c/o Goldsmith, Agio, Helms and Company, First Bank Place, Suite 4600, 601 Second Avenue South, Minneapolis, MN 55402.

Securities Authorized for Issuance Under Equity Compensation Plans

The following table sets forth information as of December 31, 2005.

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted- average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
	(a)	(b)		(c)
Equity compensation plans approved by security holders	29,337	$	634.38	2,940
Equity compensation plans not approved by security holders	—		—	—
Total	29,337	$	634.38	2,940

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ITEM 13—CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Certain Agreements Relating to the Merger

Securityholders Agreement

Pursuant to the securityholders agreement entered into in connection with the Merger, units of Michael Foods Investors (or common stock following change in corporate form) beneficially owned by the Michael Foods executives and any other employees of Michael Foods Investors and its subsidiaries, which we collectively refer to as the management investors, are subject to certain restrictions on transfer, other than certain exempt transfers as defined in the securityholders agreement, as well as the other provisions described below. When reference is made to “units” of Michael Foods Investors in the discussion that follows, that reference is deemed to include common stock of Michael Foods Investors following a change in corporate form, whether in preparation for an initial public offering or otherwise.

The securityholders agreement provides that Thomas H. Lee Partners, L.P., the management investors and all other parties to the agreement will vote all of their units to elect and continue in office management committees or boards of directors of Michael Foods Investors and each of its subsidiaries, other than subsidiaries of Michael Foods, consisting of up to five members or directors composed of:

• one person designated by Thomas H. Lee Equity Fund V, L.P.;

• one person designated by Thomas H. Lee Parallel Fund V, L.P.;

• one person designated by Thomas H. Lee Cayman Fund V, L.P.;

• the chief executive officer of Michael Foods Investors; and

• one person designated by the chief executive officer of Michael Foods Investors.

The securityholders agreement also provides:

• the management investors with the right to participate proportionally in transfers of Michael Foods Investors units beneficially owned by Thomas H. Lee Partners, L.P., its partners or their transferees, except in connection with transfers (i) in a public sale, (ii) among the partners of Thomas H. Lee Partners, L.P. and the partners, securityholders and employees of such partners, (iii) incidental to the conversion of securities or any recapitalization or reorganization, (iv) to employees, directors and/or consultants of Michael Foods Investors and its subsidiaries, (v) that are exempt individual transfers and (vi) pursuant to a pledge of securities to an unaffiliated financial institution;

• Thomas H. Lee Partners, L.P. with the right to notify management investors that it shall cause Michael Foods Investors to effect a sale and the management investors shall consent to and raise no objection with respect to Michael Foods Investors units owned by the management investors in a sale of Michael Foods Investors; and

• Thomas H. Lee Partners, L.P. with registration rights to require Michael Foods Investors to register units held by them under the Securities Act.

If Michael Foods Investors issues or sells any new units to Thomas H. Lee Partners, L.P., subject to certain exceptions, each management investor shall have the right to subscribe for a sufficient number of new Michael Foods Investors units to maintain its respective ownership percentage in Michael Foods Investors.

Management Unit Subscription Agreements

Under the management unit subscription agreements, management, immediately prior to the Merger, contributed to Michael Foods Investors shares of prior M-Foods Holdings common stock for Class A Units, Class B Units and Class C Units of MF Investors based on a $100 per Class A Unit price and a $2.00 per Class B and Class C Unit price. Following the Merger, the executives held approximately 10% of the outstanding Class A and Class B units combined, and 100% of the outstanding Class C units.

Upon the death, disability or retirement of the executive prior to the earlier of a public offering or sale of Michael Foods Investors, Michael Foods Investors may be required to purchase all of an executive’s units. However, with respect to Mr. Reedy, if Mr. Reedy’s employment is terminated due to his retirement, Mr. Reedy may require Michael Foods Investors to purchase his units after he turns age 65. Michael Foods Investors has the right to purchase all or a portion of an executive’s units if an executive’s employment is terminated or that executive is deemed to be engaging in certain competitive activities. However, with respect to Mr. Reedy, if Mr. Reedy’s employment is terminated due to retirement, Michael Foods Investors

35

will have the right to purchase his units only after Mr. Reedy turns 65. However, if Michael Foods Investors elects or is required to purchase any units pursuant to the call and put options described in the preceding sentences, and that payment would result in a violation of law applicable to Michael Foods Investors or a default under certain of its financing arrangements, Investors may make the portion of the cash payment so affected by the delivery of preferred units of Michael Foods Investors with a liquidation preference equal to the amount of the cash payment affected.

In addition, each management stock purchase and unit subscription agreement contains customary representations, warranties and covenants made by the respective executive or party thereto.

Management Agreement

Pursuant to the management agreement entered into in connection with the transactions, THL Managers V, LLC, an affiliate of Thomas H. Lee Partners, L.P., renders to Michael Foods and each of its subsidiaries, certain advisory and consulting services. In consideration of those services, we pay to THL Managers V, LLC semi-annually an aggregate per annum management fee equal to the greater of:

• $1,500,000; and

• An amount equal to 1.0% of our consolidated earnings before interest, taxes, depreciation and amortization for that fiscal year, but before deduction of any such fee.

We also indemnify THL Managers V, LLC and its affiliates from and against all losses, claims, damages and liabilities arising out of, or related to, the performance by THL Managers V, LLC of the services pursuant to the management agreement.

ITEM 14—PRINCIPAL ACCOUNTANT FEES AND SERVICES.

Audit Fees

PricewaterhouseCoopers LLP (“PricewaterhouseCoopers”) was our principal accountant for the years ended December 31, 2005 and 2004. Total fees paid to PricewaterhouseCoopers for audit services rendered during 2004 and 2005 were $376,507 and $326,500, respectively.

Audit-Related Fees

Total fees paid to PricewaterhouseCoopers for audit-related services rendered during 2004 and 2005 were $197,376 and $102,392, respectively, consisting primarily of consultation on matters related to proposed transactions, employee benefit plans, potential acquisitions and accounting consultation.

Tax Fees

Total fees paid to PricewaterhouseCoopers for tax services rendered during 2004 and 2005 were $348,030 and $153,045, respectively, related primarily to tax planning, compliance and consultation.

All Other Fees

There were no fees paid to PricewaterhouseCoopers under this category during 2004 or 2005.

Audit Committee Pre-Approval Policy

Under policies and procedures adopted by the Audit Committee of our Board of Directors, our principal accountant may not be engaged to provide non-audit services that are prohibited by law or regulation to be provided by it, nor may our principal accountant be engaged to provide any other non-audit service unless the Audit Committee or its Chairman pre-approve the engagement of our accountant to provide both audit and permissible non-audit services. If the Chairman pre-approves any engagement or fees, he is to make a report to the full Audit Committee at its next meeting. One hundred percent (100%) of all services provided by our principal accountant in 2005 were pre-approved by the Audit Committee or its Chairman.

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PART IV

ITEM 15—EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) The following consolidated financial statements of the Company and the Predecessor, and the related Reports of Independent Registered Public Accounting Firm, are included in this report:

1. Financial Statements
MICHAEL FOODS, INC.
Reports of Independent Registered Public Accounting Firm	44
Consolidated Balance Sheets	46
Consolidated Statements of Operations	47
Consolidated Statements of Shareholder’s Equity	48
Consolidated Statements of Cash Flows	49
Notes to Consolidated Financial Statements	50

2. Financial Statement Schedules

The following financial statement schedules are included in this report and should be read in conjunction with the financial statements and Report of Independent Registered Public Accounting Firm referred to above:

Michael Foods, Inc. and Subsidiaries—Valuation and Qualifying Accounts

All other schedules are omitted, as the required information is not applicable or the information is presented in the financial statements or related notes.

3. Exhibits

Reference is made to Item 15 (b) for exhibits filed with this form. Exhibits 10.3, 10.4, 10.5, 10.6, 10.7 and 10.19 are management contracts. Exhibits 10.13, 10.14, 10.15, 10.16, 10.17, 10.18, 10.28, 10.29, 10.30 and 10.31 are compensatory plans.

(b) Exhibits and Exhibit Index

Exhibit No.	Description
2.1	Agreement and Plan of Merger, dated October 10, 2003, by and among M-Foods Investors, LLC, THL Food Products Holdings Co., THL Food Products Co., M-Foods Holdings, Inc. and certain shareholders of M-Foods Holdings, Inc. (1)
2.2	Letter Agreement, Amending Merger Agreement dated October 17, 2003, by and among M-Foods Investors, LLC, THL Food Products Holdings Co., THL Food Products Co. and M-Foods Holdings, Inc. (6)
2.3	Letter Agreement, Amending Merger Agreement dated October 24, 2003, by and among M-Foods Investors, LLC, THL Food Products Holdings Co., THL Food Products Co. and M-Foods Holdings, Inc. (6)
2.4	Letter Agreement, Amending Merger Agreement dated November 17, 2003, by and among M-Foods Investors, LLC, THL Food Products Holdings Co., THL Food Products Co. and M-Foods Holdings, Inc. (6)
3.1	Amended and Restated Certificate of Incorporation of Michael Foods, Inc. (f/k/a M-Foods Holdings, Inc.) (2)

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Exhibit No.	Description
3.2	Certificate of Merger of THL Food Products Co. with and into M-Foods Holdings, Inc., dated November 20, 2003 (2)
3.3	Agreement and Plan of Merger, dated November 20, 2003, by and among M-Foods Holdings, Inc. and Michael Foods, Inc. (2)
3.4	Certificate of Merger of Michael Foods, Inc. with and into M-Foods Holdings, Inc., dated November 20, 2003 (2)
3.5	Bylaws of Michael Foods, Inc. (f/k/a M-Foods Holdings, Inc.) (2)
4.1	Indenture, dated March 27, 2001, between Michael Foods Acquisition Corp. and BNY Midwest Trust Company, as trustee (3)
4.2	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 of Nevada, 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 BNY Midwest Trust Company, as trustee (3)
4.3	Fourth Supplemental Indenture, dated as of October 31, 2003, by and among Michael Foods, Inc. and BNY Midwest Trust Company (2)
4.4	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 (3)
4.5	Indenture, dated November 20, 2003, among Michael Foods, Inc., the Guarantors party thereto and Wells Fargo Bank Minnesota, National Association, as trustee (2)
4.6	Registration Rights Agreement, dated November 20, 2003, among Michael Foods, Inc., the Subsidiary Guarantors party thereto and Banc of America Securities LLC, Deutsche Bank Securities Inc. and UBS Securities LLC (2)
10.1	Credit Agreement dated as of November 20, 2003, among THL Food Products Co., as Borrower, THL Food Products Holding Co., Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, the other lenders party thereto, Banc of America Securities LLC and Deutsche Bank Securities Inc., as Joint Lead Arrangers and Joint Book Managers, Deutsche Bank Securities Inc. and UBS Securities LLC, as Co-Syndication Agents, and General Electric Capital Corporation and Cooperative Centrale Raiffeisen—Boerenleenbank B.A., “Rabobank International,” New York Branch, as Co-Documentation Agents (2)
10.2	Senior Unsecured Term Loan Agreement dated as of November 20, 2003, among THL Food Products Co., as Borrower, THL Food Products Holding Co., Bank of America, N.A., as Administrative Agent, the lenders party thereto, Bank of America Securities LLC and Deutsche Bank Securities, Inc., as Joint Lead Arrangers and Joint Book Managers, and Deutsche Bank Securities Inc. and UBS Securities LLC, as Co-Syndication Agents (2)
10.3	Employment Agreement, dated November 20, 2003, by and among Michael Foods, Inc. and Gregg A. Ostrander (6)
10.4	Employment Agreement, dated November 20, 2003, by and among Michael Foods, Inc. and John D. Reedy (6)
10.5	Employment Agreement, dated November 20, 2003, by and among Michael Foods, Inc. and James D. Clarkson (6)

38

Exhibit No.	Description
10.6	Employment Agreement, dated November 20, 2003, by and among Michael Foods, Inc. and James Mohr (6)
10.7	Employment Agreement, dated November 20, 2003, by and among Michael Foods, Inc. and Max R. Hoffmann (6)
10.8	Senior Management Unit Subscription Agreement, dated November 20, 2003, between Michael Foods Investors, LLC, (f/k/a THL-MF Investors, LLC) and Gregg A. Ostrander (6)
10.9	Senior Management Unit Subscription Agreement, dated November 20, 2003, between Michael Foods Investors, LLC, (f/k/a THL-MF Investors, LLC) and John D. Reedy (6)
10.10	Senior Management Unit Subscription Agreement, dated November 20, 2003, between Michael Foods Investors, LLC, (f/k/a THL-MF Investors, LLC) and James D. Clarkson (6)
10.11	Senior Management Unit Subscription Agreement, dated November 20, 2003, between Michael Foods Investors, LLC, (f/k/a THL-MF Investors, LLC) and James Mohr (6)
10.12	Senior Management Unit Subscription Agreement, dated November 20, 2003, between Michael Foods Investors, LLC, (f/k/a THL-MF Investors, LLC) and Max R. Hoffmann (6)
10.13	Stock Option Agreement, dated November 20, 2003, between Gregg A. Ostrander and M-Foods Holdings, Inc. (f/k/a THL Food Products Holding Co.) (6)
10.14	Stock Option Agreement, dated November 20, 2003, between John D. Reedy and M-Foods Holdings, Inc. (f/k/a THL Food Products Holding Co.) (6)
10.15	Stock Option Agreement, dated November 20, 2003, between James D. Clarkson and M-Foods Holdings, Inc. (f/k/a THL Food Products Holding Co.) (6)
10.16	Stock Option Agreement, dated November 20, 2003, between James Mohr and M-Foods Holdings, Inc. (f/k/a THL Food Products Holding Co.) (6)
10.17	Stock Option Agreement, dated November 20, 2003, between Max R. Hoffmann and M-Foods Holdings, Inc. (f/k/a THL Food Products Holding Co.) (6)
10.18	M-Foods Holdings, Inc. Amended and Restated 2003 Stock Option Plan (9)
10.19	Management Agreement, dated November 20, 2003, by and among Michael Foods, Inc. and THL Managers V, LLC (6)
10.20	Securityholders Agreement, dated November 20, 2003, between Michael Foods Investors, LLC, (f/k/a THL-MF Investors, LLC) and the other parties thereto (6)
10.21	Amended and Restated Limited Liability Company Agreement of Michael Foods Investors, LLC, (f/k/a THL-MF Investors, LLC), dated November 20, 2003, between THL-MF Investors, LLC and the other parties thereto (6)
10.22	Subscription and Share Purchase Agreement, dated November 20, 2003, between M-Foods Holdings, Inc. (formerly known as THL Food Products Holding Co.) and Michael Foods Investors, LLC, (f/k/a THL-MF Investors, LLC) (6)
10.23	Lease, dated as of February 26, 1997, by and between Michael Foods of Delaware, Inc., as successor to Michael Foods, Inc., a Delaware corporation and A&A Urban Renewal, relating to the lease of a facility located at 100 Trumbull St., Elizabeth, NJ (4)
10.24	Lease, dated as of February 26, 1997, by and between Michael Foods of Delaware, Inc., as successor to Michael Foods, Inc., a Delaware corporation, and Papetti Holding Company, et al., relating to the lease of a facility located at 877-879 E. North Ave., Elizabeth, NJ (4)
10.25	Lease, dated as of February 26, 1997, by and between Michael Foods of Delaware, Inc., as successor to Michael Foods, Inc., a Delaware corporation, and Papetti Holding Company, relating to the lease of a facility located at 847-855 E. North Ave., Elizabeth, NJ (4)

39

Exhibit No.	Description
10.26	Lease, dated as of February 26, 1997, by and between Michael Foods of Delaware, Inc. as successor to Michael Foods, Inc., a Delaware corporation, and Jersey Pride Urban Renewal, relating to the lease of a facility located at One Papetti Plaza, Elizabeth, NJ (4)
10.27	North Carolina State University Consolidated, Restated and Amended License Agreement, dated June 9, 2000, by and between North Carolina State University and the Company (5)
10.28	Form of Stock Option Agreement pursuant to the M-Foods Holdings, Inc. (f/k/a THL Food Products Holding Co.) 2003 Stock Option Plan (6)
10.29	M-Foods Holdings, Inc. (f/k/a THL Food Products Holding Co.) Deferred Compensation Plan, dated November 20, 2003 (6)
10.30	Michael Foods, Inc. Executive Officers Incentive Plan (6)
10.31	Michael Foods, Inc. Senior Management, Officers and Key Employees Incentive Plan (6)
10.32	Amendment No. 1 to the Senior Unsecured Term Loan Agreement dated as of September 17, 2004, among Michael Foods, Inc., M-Foods Holdings, Inc., the banks, financial institutions and other institutional lender parties to the Senior Unsecured Term Loan Agreement and Bank of America, N.A., as administrative agent (7)
10.33	Amendment No. 1 to Credit Agreement dated as of September 17, 2004, among Michael Foods, Inc., M-Foods Holdings, Inc., the banks, financial institutions and other institutional lender parties to Credit Agreement and Bank of America, N.A., as administrative agent (7)
10.34	Amendment No. 2 to Credit Agreement dated as of May 18, 2005, among Michael Foods, Inc., M-Foods Holdings, Inc., the banks, financial institutions and other institutional lender parties to Credit Agreement and Bank of America, N.A., as administrative agent (8)
10.35	Amendment No. 3 to Credit Agreement dated as of November 22, 2005, among Michael Foods, Inc., M-Foods Holdings, Inc., the banks, financial institutions and other institutional lender parties to Credit Agreement and Bank of America, N.A., as administrative agent
12.1	Computation of ratio of earnings to fixed charges
14.1	Business Conduct Policy (9)
21.1	Subsidiaries of Michael Foods, Inc.
31.1	Certification of Chief Executive Officer
31.2	Certification of Chief Financial Officer

(1) Incorporated by reference from the Predecessor’s current report on Form 8-K filed with the Commission on October 16, 2003.

(2) Incorporated by reference from the Company’s Form S-4 Registration Statement (Registration No. 333-112714) filed with the Commission on February 11, 2004.

(3) Incorporated by reference from Amendment No. 1 to the Predecessor’s Form S-4 Registration Statement (Registration No. 333-63722) filed with the Commission on July 18, 2001.

(4) Incorporated by reference from the 2001 Predecessor’s current report on Form 8-K filed with the Commission on November 22, 2000.

(5) Incorporated by reference from the 2001 Predecessor’s quarterly report on Form 10-Q filed with the Commission on November 22, 2000.

(6) Incorporated by reference from the Company’s report on Form 10-K filed with the Commission on March 30, 2004.

(7) Incorporated by reference from the Company’s current report on Form 8-K filed with the Commission on September 22, 2004.

(8) Incorporated by reference from the Company’s current report on Form 8-K filed with the Commission on May 23, 2005.

(9) Incorporated by reference from the Company’s report on Form 10-K filed with the Commission on March 29, 2005.

40

SCHEDULE II

MICHAEL FOODS, INC. AND SUBSIDIARIES

(A wholly owned subsidiary of M-Foods Holdings, Inc.)

VALUATION AND QUALIFYING ACCOUNTS

(in thousands)

Column A	Column B		Column C		Column D		Column E
Description	Balance at Beginning of Period		Additions		Deductions		Balance at End of Period
Allowance for Doubtful Accounts
PREDECESSOR
For the Eleven Months ended November 30, 2003	$	3,110	$	1,311	$	1,388	$	3,033
COMPANY
For the One Month ended December 31, 2003	$	3,033	$	18	$	76	$	2,975
For the Year ended December 31, 2004	$	2,975	$	2,590	$	883	$	4,682
For the Year ended December 31, 2005	$	4,682	$	0	$	358	$	4,324

41

SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT.

No annual report or proxy statement was sent to securityholders during the Registrant’s last fiscal year.

42

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.
Date: March 23, 2006	By:	/s/ GREGG A. OSTRANDER
		Gregg A. Ostrander (Chairman and Chief Executive Officer)
Date: March 23, 2006	By:	/s/ JOHN D. REEDY
		John D. Reedy (Executive Vice President, Chief Financial Officer, and Principal Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:

/s/ TODD M. ABBRECHT Todd M. Abbrecht	March 23, 2006
(Director)
/s/ ANTHONY J. DINOVI Anthony J. DiNovi	March 23, 2006
(Director)
/s/ JEROME J. JENKO Jerome J. Jenko	March 23, 2006
(Director)
/s/ CHARLES D. WEIL Charles D. Weil	March 23, 2006
(Director)
/s/ KENT R. WELDON Kent R. Weldon	March 23, 2006
(Director)

43

MICHAEL FOODS, INC.

(A wholly owned subsidiary of M-Foods Holdings, Inc.)

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholder

of Michael Foods, Inc.:

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of Michael Foods, Inc. and its subsidiaries (the Company), a wholly owned subsidiary of M-Foods Holdings, Inc., at December 31, 2005 and 2004, and the results of their operations and their cash flows for the years ended December 31, 2005 and 2004 and for the period from December 1, 2003 through December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

Minneapolis, MN

March 4, 2006

44

MICHAEL FOODS, INC.

(A wholly owned subsidiary of M-Foods Holdings, Inc.)

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholder

of Michael Foods, Inc.:

In our opinion, the accompanying consolidated financial statements of Michael Foods, Inc. and its subsidiaries (the Predecessor), a wholly owned subsidiary of M-Foods Holdings, Inc., listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the results of their operations and their cash flows for the period from January 1, 2003 through November 30, 2003 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Predecessor’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit. We conducted our audit of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

Minneapolis, Minnesota

March 25, 2004

45

MICHAEL FOODS, INC.

(A wholly owned subsidiary of M-Foods Holdings, Inc.)

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

	December 31,
	2005		2004
ASSETS
CURRENT ASSETS
Cash and equivalents	$	42,179	$	31,816
Accounts receivable, less allowances		103,108		101,552
Inventories		97,879		91,044
Prepaid expenses and other		8,703		7,492
Total current assets		251,869		231,904
PROPERTY, PLANT AND EQUIPMENT
Land		4,044		4,044
Buildings and improvements		114,793		112,856
Machinery and equipment		277,856		238,888
		396,693		355,788
Less accumulated depreciation		109,406		55,227
		287,287		300,561
OTHER ASSETS
Goodwill		521,435		525,035
Intangible assets, net		232,233		246,794
Other assets		40,752		37,261
		794,420		809,090
	$	1,333,576	$	1,341,555
LIABILITIES AND SHAREHOLDER’S EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt	$	3,484	$	651
Accounts payable		69,475		65,725
Accrued liabilities
Compensation		18,006		21,761
Customer programs		43,750		40,062
Interest		2,632		5,144
Other		34,599		38,017
Total current liabilities		171,946		171,360
LONG-TERM DEBT, less current maturities		706,239		750,132
DEFERRED INCOME TAXES		136,328		148,590
DEFERRED COMPENSATION		15,048		14,080
SHAREHOLDER’S EQUITY
Common stock, $0.01 par value, 3,000 shares authorized, issued and outstanding in 2005 and 2004		—		—
Additional paid-in capital		254,617		254,617
Retained earnings		45,610		6,751
Accumulated other comprehensive income (loss)		3,788		(3,975	)
		304,015		257,393
	$	1,333,576	$	1,341,555

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

46

MICHAEL FOODS, INC.

(A wholly owned subsidiary of M-Foods Holdings, Inc.)

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands)

	COMPANY							PREDECESSOR
	YEAR ENDED DECEMBER 31, 2005		YEAR ENDED DECEMBER 31, 2004		ONE MONTH ENDED DECEMBER 31, 2003			ELEVEN MONTHS ENDED NOVEMBER 30, 2003
Net sales	$	1,242,498	$	1,313,504	$	140,806		$	1,184,357
Cost of sales		1,005,418		1,077,126		121,442			973,004
Gross profit		237,080		236,378		19,364			211,353
Selling, general and administrative expenses		131,288		138,258		14,676			106,339
Transaction expenses		—		340		7,121			15,377
Operating profit (loss)		105,792		97,780		(2,433	)		89,637
Interest expense, net		47,119		43,285		4,932			41,670
Loss on early extinguishment of debt		5,548		—		—			61,226
Loss on Dairy disposition		—		—		—			16,288
Earnings (loss) before income taxes		53,125		54,495		(7,365	)		(29,547	)
Income tax expense (benefit)		14,266		20,981		(2,836	)		(11,397	)
Net earnings (loss)	$	38,859	$	33,514	$	(4,529	)	$	(18,150	)

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

47

MICHAEL FOODS, INC.

(A wholly owned subsidiary of M-Foods Holdings, Inc.)

CONSOLIDATED STATEMENTS OF SHAREHOLDER’S EQUITY

(in thousands)

	Common Stock
	Shares Issued		Amount		Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Shareholder’s Equity
Predecessor
Balance at January 1, 2003	1		$	—	$	147,498		$	39,476		$	(7,648	)	$	179,326
Additional capital invested by parent	—			—		84,419			—			—			84,419
Dairy dividend	—			—		—			(2,351	)		—			(2,351	)
Net loss	—			—		—			(18,150	)		—
Foreign currency translation adjustment income	—			—		—			—			3,653
Interest rate swap	—			—		—			—			6,590
Futures gain	—			—		—			—			2,897
Comprehensive loss	—			—		—			—			—			(5,010	)
Balance at November 30, 2003	1		$	—	$	231,917		$	18,975		$	5,492		$	256,384
Company
Balance at November 30, 2003	1		$	—	$	231,917		$	18,975		$	5,492		$	256,384
Merger with M-Foods Holdings, Inc.	(1	)		—		(231,917	)		(18,975	)		(5,492	)		(256,384	)
Proceeds from issuance of common stock, $0.01 par	3			—		292,859			—			—			292,859
Deemed dividend to continuing shareholders	—			—		(3,551	)		—			—			(3,551	)
Net loss	—			—		—			(4,529	)		—
Foreign currency translation adjustment income	—			—		—			—			329
Futures gain	—			—		—			—			2,430
Comprehensive loss	—			—		—			—			—			(1,770	)
Balance at December 31, 2003	3			—		289,308			(4,529	)		2,759			287,538
Additional capital invested by parent	—			—		13,159			—			—			13,159
Dividend to parent	—			—		(47,850	)		(22,234	)		—			(70,084	)
Net earnings	—			—		—			33,514			—
Interest rate cap	—			—		—			—			(623	)
Foreign currency translation adjustment income	—			—		—			—			2,486
Futures loss	—			—		—			—			(8,597	)
Comprehensive income	—			—		—			—			—			26,780
Balance at December 31, 2004	3			—		254,617			6,751			(3,975	)		257,393
Net earnings	—			—		—			38,859			—
Interest rate cap	—			—		—			—			64
Foreign currency translation adjustment income	—			—		—			—			590
Futures gain	—			—		—			—			7,109
Comprehensive income	—			—		—			—			—			46,622
Balance at December 31, 2005	3		$	—	$	254,617		$	45,610		$	3,788		$	304,015

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

48

MICHAEL FOODS, INC.

(A wholly owned subsidiary of M-Foods Holdings, Inc.)

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	COMPANY									PREDECESSOR
	YEAR ENDED DECEMBER 31, 2005			YEAR ENDED DECEMBER 31, 2004			ONE MONTH ENDED DECEMBER 31, 2003			ELEVEN MONTHS ENDED NOVEMBER 30, 2003
Cash flows from operating activities:
Net earnings (loss)	$	38,859		$	33,514		$	(4,529	)	$	(18,150	)
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
Depreciation		54,531			51,299			4,003			48,804
Amortization of intangibles		15,561			15,558			1,300			389
Amortization of deferred financing costs		1,993			2,046			170			3,816
Write-off of assets related to Dairy disposition		—			—			—			2,417
Write-off deferred financing costs		4,134			—			—			10,913
Deferred income taxes		(12,259	)		(2,706	)		(2,876	)		(11,596	)
Preferred return on deferred compensation		968			1,771			232			1,678
Bad debt expense		—			2,590			18			1,311
Changes in operating assets and liabilities:
Accounts receivable		(1,348	)		5,430			10,945			(30,964	)
Inventories		(6,678	)		6,198			1,509			(3,712	)
Prepaid expenses and other		6,633			17,484			(1,461	)		2,961
Accounts payable		3,532			(5,904	)		13,475			872
Accrued liabilities		(1,524	)		7,476			7,750			68,227
Deferred compensation		—			(13,109	)		—			—
Net cash provided by operating activities		104,402			121,647			30,536			76,966
Cash flows from investing activities:
Capital expenditures		(40,690	)		(37,695	)		(3,691	)		(26,281	)
Business acquisitions		—			—			(720,568	)		—
Dairy disposition		—			—			—			49,710
Other assets		(817	)		1,314			597			2,929
Net cash (used in) provided by investing activities		(41,507	)		(36,381	)		(723,662	)		26,358
Cash flows from financing activities:
Payments on revolving line of credit		—			(5,500	)		—			(34,064	)
Proceeds from revolving line of credit		—			5,500			—			34,064
Payments on long-term debt		(140,372	)		(41,483	)		(297,972	)		(206,137	)
Proceeds from long-term debt		88,188			—			780,000			—
Proceeds from issuance of common stock		—			—			290,907			—
Additional capital invested by parent		—			13,159			—			84,419
Deferred financing costs		(378	)		(824	)		(34,206	)		—
Dividends		—			(70,084	)		—			(2,351	)
Net cash (used in) provided by financing activities		(52,562	)		(99,232	)		738,729			(124,069	)
Effect of exchange rate changes on cash		30			188			(9	)		173
Net increase (decrease) in cash and equivalents		10,363			(13,778	)		45,594			(20,572	)
Cash and equivalents at beginning of period		31,816			45,594			—			20,572
Cash and equivalents at end of period	$	42,179		$	31,816		$	45,594		$	—
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	47,693		$	39,166		$	3,751		$	43,280
Income taxes		30,387			10,228			66			12,859

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

49

MICHAEL FOODS, INC.

(A wholly owned subsidiary of M-Foods Holdings, Inc.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A—MERGER

On November 20, 2003, Michael Foods, Inc. and its subsidiaries (“Michael Foods” “Company,” “we,” “us,” “our”) was acquired by an investor group comprised of a management group led by our Chairman, President and Chief Executive Officer, and affiliates of the private equity investment firm Thomas H. Lee Partners, L.P., collectively Michael Foods Investors, LLC., through the merger of THL Food Products Co. with and into M-Foods Holdings Inc. (the “Merger”), with M-Foods Holdings, Inc. being the continuing entity. M-Foods Holdings, Inc. then merged with and into Michael Foods, Inc. (Minn.). M-Foods Holdings, Inc. continued as the surviving corporation and was immediately renamed Michael Foods, Inc. (Del.).

Michael Foods, Inc is a wholly-owned subsidiary of M-Foods Holdings, Inc. (“Holdings” or “Parent”). M-Foods Holdings, Inc. is a wholly-owned subsidiary of Michael Foods Investors, LLC (Investors).

The “Predecessor” refers to Michael Foods, Inc. prior to the Merger.

Under the terms of the Merger, all outstanding shares and stock options were purchased for $1.018 billion ($1,055,000,000, less purchase price adjustments of $47,366,000, in accordance with the Merger, agreement plus direct acquisition costs of $10,788,000) and was financed through new equity cash contributions of approximately $290,907,000, a senior secured credit facility of up to $595,000,000 (of which $495,000,000 was drawn at the close of the transactions), a senior unsecured term loan of up to $135,000,000 and $150,000,000 of 8% senior subordinated notes.

For ease of presentation, the Merger has been reflected in the accompanying financial statements as if it had occurred on November 22, 2003, the Company’s fiscal month end. Management determined that no material transactions occurred during the period from November 20 through November 22, 2003. See Note B—Summary of Significant Accounting Policies—Principles of Consolidation and Fiscal Year.

In connection with the Merger, the Predecessor incurred transaction expenses and a loss on the early extinguishment of debt of approximately $76,603,000 associated with the Merger and change-in-control provisions of each of the compensation, debt and other agreements which have been reflected in the Predecessor financial statements. We incurred other direct costs of the Merger of approximately $10,788,000 and debt issuance costs of approximately $34,206,000, which were capitalized in our consolidated balance sheet. In addition, we also incurred other expenses associated with the Merger of approximately $340,000 during 2004 and $7,121,000 during the one month period ended December 31, 2003.

The following unaudited pro forma financial information reflects our consolidated results of operations, as if the acquisition had taken place on January 1, 2003 (in thousands).

	2003
Pro forma net sales	$	1,039,690
Pro forma net income		34,955

The most significant of the pro forma adjustments reflected in the above amounts were to record the incremental interest on the additional debt incurred in connection with the Merger, to record additional depreciation and amortization expense resulting from the fair value adjustments made to property, plant and equipment and intangible assets, and to remove the Dairy Products Division, which was not acquired per the Merger (see Note I). The pro forma financial information should be read in conjunction with the related historical information and is not necessarily indicative of the results that would have been obtained had the transaction actually taken place at the beginning of the periods presented.

NOTE B—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company

The Company is a diversified producer and distributor of food products in three areas—egg products, refrigerated distribution, and potato products. The Company also distributes refrigerated grocery items, primarily cheese and other dairy items, to the retail grocery market in the central United States.

50

Principles of Consolidation and Fiscal Year

The consolidated financial statements include the accounts of Michael Foods, Inc. and all majority owned subsidiaries in which it has control. All significant intercompany accounts and transactions have been eliminated. The Company’s investments in non-controlled entities in which it has the ability to exercise significant influence over operating and financial policies are accounted for by the equity method. The Company utilizes a fifty-two, fifty-three week fiscal year ending on the Saturday nearest to December 31, but for clarity of presentation, describes all periods as if the year end is December 31. The periods presented are as follows:

Year end December 31, 2005, contained a fifty-two week period ended December 31, 2005.

Year end December 31, 2004, contained a fifty-two week period ended January 1, 2005

One month ended December 31, 2003, contained a six-week period ended January 3, 2004.

Eleven months ended November 30, 2003, contained a forty-seven week period ended November 22, 2003.

Basis of Presentation

The accompanying consolidated financial statements for the eleven months ended November 30, 2003 have been taken from the historical books and records of the Predecessor.

The Company’s financial statements have been presented on a comparative basis with the Predecessor’s historical operating unit financial statements, prior to the 2003 Merger. Different bases of accounting have been used to prepare the Company and the Predecessor financial statements. The primary differences relate to depreciation and amortization of property, plant and equipment and other intangible assets recorded at fair value at the date of acquisition.

Use of Estimates

Preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, related revenues and expenses and disclosure about contingent assets and liabilities at the date of the financial statements. Actual results could differ from the estimates used by management.

Cash and Equivalents

We consider all highly liquid temporary investments with original maturities of three months or less to be cash equivalents. Substantially all of our cash and equivalents are with one bank. At times, bank deposits may be in excess of federally insured limits.

Accounts Receivable

We grant credit to our customers in the normal course of business, but generally do not require collateral or any other security to support amounts due. Management performs on-going credit evaluations of customers. We maintain an allowance for potential credit losses based on historical write-off experience which, when realized, have been within management’s expectations. The allowance was $4,324,000 and $4,682,000 at December 31, 2005 and 2004.

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 lives of generally one to two years.

Inventories consisted of the following at December 31(in thousands):

	2005		2004
Raw materials and supplies	$	17,752	$	13,661
Work in process and finished goods		57,961		54,222
Flocks		22,166		23,161
	$	97,879	$	91,044

51

Accounting for Hedge Activities

Certain of our operating segments hold derivative instruments, such as corn, soybean meal, cheese and fuel futures that we believe provide an economic hedge of future transactions and are designated as cash flow hedges. As the commodities being hedged are either grain ingredients fed to our flocks, raw materials or production inputs, the changes in the market value of such contracts have historically been, and are expected to continue to be, highly effective at offsetting changes in price movements of these items. In 2004, we entered into a 6% interest cap arrangement that corresponds with the interest payment terms on $210 million borrowed under the variable portion of our credit agreement for a one-year period starting in November 2004, then declining to $180 million for one year starting in November 2005. The amount of hedge ineffectiveness was immaterial for 2005, 2004 and 2003.

We actively monitor exposure to commodity price risks and use derivative commodity instruments to manage the impact of certain of these risks. We use derivatives, primarily futures contracts, only for the purpose of managing risks associated with underlying exposures. Our futures contracts are cash flow hedges of firm purchase commitments and anticipated production requirements, as they reduce our exposure to changes in the cash price of the respective items and generally extend for less than one year. The Company expects that within the next twelve months it will reclassify as earnings the amount recorded in accumulated other comprehensive income related to futures at year end.

We do not trade or use instruments with the objective of earning financial gains on the commodity price, nor do we use instruments where there are not underlying exposures. All derivatives are recognized at their fair value. The fair values at December 31, 2005 resulted in an asset of approximately $2,174,000 included in other current assets and a liability of $1,080,000 included in other current liabilities. Gains and losses on futures contracts are deferred as a component of Accumulated Other Comprehensive Gain or (Loss) (“AOCG” or “ACOL”) in the equity section of our balance sheet and a corresponding amount is recorded in other current assets or liabilities, as appropriate. The amounts deferred are subsequently recognized in cost of sales when the associated products are sold. The cost or benefit of contracts closed prior to the execution of the underlying purchase is deferred until the anticipated purchase occurs. As a result of the volatility of the markets, deferred gains and losses in AOCG or AOCL may fluctuate until the related contract is closed.

We document all relationships between hedging instruments and hedged items, as well as our risk management objectives and strategy for undertaking the hedge. This process includes specific identification of the hedging instrument and the hedge transaction, the nature of the risk being hedged and how the hedging instrument’s effectiveness will be assessed. Both at the inception of the hedge and on an ongoing basis, we assess whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items. If it is determined that a derivative ceases to be a highly effective hedge, the derivative expires or is sold, terminated or exercised or the forecasted transaction being hedged will no longer occur, we will discontinue hedge accounting, and any gains or losses on the derivative instrument will be recognized in earnings during the period in which it no longer qualifies as a hedge. The amount of ineffectiveness, included in cost of sales, was immaterial for 2005, 2004 and 2003.

Property, Plant and Equipment

Depreciation is provided in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives, principally on the straight-line basis. Estimated service lives range from 10-40 years for buildings and improvements and 3-15 years for machinery and equipment.

The Company capitalized $461,000 and $168,000 of interest relating to the construction and installation of property, plant and equipment during the years ended December 31, 2005 and 2004, respectively. No interest was capitalized by the Company for the one month ended December 31, 2003. The Predecessor capitalized interest costs relating to the construction and installation of property, plant and equipment of $32,000 for the eleven months ended November 30, 2003.

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 (trademarks) are tested for impairment on an annual basis during the fourth quarter, and between annual tests whenever there is an impairment indicated. Fair values are estimated based on the Company’s best estimate of the future cash flows compared with the corresponding carrying value of the reporting unit, including goodwill. Impairment losses will be recognized whenever the implied fair value is less than the carrying value of the related asset.

52

Other Intangibles

We recognize an acquired intangible asset 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 asset 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 asset subject to amortization is not recoverable from expected future cash flows, and its carrying amount exceeds its fair value. The reduction of $3,600,000 in the carrying amount of goodwill is due to resolution of certain tax contingencies recorded at the date of the merger.

Each segment’s share of goodwill as of December 31, (in thousands):

	2005		2004
Egg Products	$	428,940	$	431,891
Refrigerated Distribution		32,290		32,507
Potato Products		60,205		60,637
	$	521,435	$	525,035

Our intangible assets as of December 31, (in thousands):

	2005			2004
Amortized intangible assets (principally customer relationships)	$	230,615		$	230,615
Accumulated amortization		(32,407	)		(16,846	)
		198,208			213,769
Unamortized intangible assets (trademarks)		34,025			33,025
	$	232,233		$	246,794

The aggregate amortization expense for the years ended December 31, 2005 and 2004 and the one month ended December 31, 2003 was $15,561,000, $15,558,000 and $1,300,000, respectively. The Predecessor had aggregate amortization expense for the eleven months ended November 30, 2003 of approximately $389,000. The estimated amortization expense for the years ended December 31, 2006 through December 31, 2010 is as follows (in thousands):

2006	$	15,554
2007		15,328
2008		15,328
2009		15,328
2010		15,328

The above amortization expense forecast is an estimate. Actual amounts may change from such estimated amounts due to additional intangible asset acquisitions, potential impairment, accelerated amortization, or other events.

Deferred Financing Costs

Deferred financing costs are included in other assets and are being amortized using the interest method over the lives of the respective debt agreements. Our deferred financing costs as of December 31, 2005 and 2004 are as follows (in thousands)

	2005			2004
Deferred financing costs	$	35,407		$	35,030
Accumulated amortization		(4,209	)		(2,216	)
2005 debt extinguishment		(4,134	)		—
	$	27,064		$	32,814

53

Foreign Joint Ventures and Currency Translation

We have invested in foreign joint ventures in Europe and Canada related to our Egg Products Division. The European joint venture investment is accounted for using the equity method of accounting. The financial statements for this entity are measured in their local currency and then translated into U.S. dollars. The balance sheet accounts are translated using the current exchange rate at the balance sheet date and the operating results are translated using the average rates prevailing throughout the reporting period. Accumulated translation gains or losses are recorded in AOCG or AOCL and are included as a component of comprehensive income (loss). We own 67% of the Canadian joint venture and, therefore, its financial statements are included in our consolidated financial statements. The financial statements of the Canadian joint venture are translated using the same methodology as used for the European joint venture with the accumulated translation gains or losses being recorded in AOCG or AOCL and are included as a component of comprehensive income (loss).

In March 2003, Belovo S.A., our egg products joint venture company in Belgium, of which we own 35.63%, notified the Belgian governmental health authorities of a potential processed egg powder contamination issue. Following the notification, production ceased for a month and the egg powders were recalled. The Belgian health authority placed the egg powder in quarantine. As of December 31, 2005, all of the inventory that had been quarantined has been released and has been sold. Belovo is pursuing a settlement with its insurance company regarding claims from customers for returned product. Belovo’s 2003 financial statements included provisions to cover approximately $5 million of identified risks from the contamination matter. We recorded other expenses of $1.2 million related to this matter in mid-year 2004. The final loss related to this matter has not yet been determined. Belovo’s sales decreased for the nine months ended September 30, 2005 by $4.9 million, or 16%, to $25.9 million, compared to $30.8 million in the same period of 2004. Our investment in Belovo was approximately $2.9 million as of December 31, 2005.

Revenue Recognition

Sales are recognized when goods are received by the customer and are recorded net of estimated customer programs and returns.

Stock-Based Compensation

We measure compensation expense for our stock-based compensation plan using the intrinsic value method. Accordingly, compensation cost for the stock options granted to employees is measured as the excess, if any, of the value of Holdings stock at the date of the grant over the amount an employee must pay to acquire the stock. Had compensation cost for the Holdings stock option plan been determined based on the fair value at the grant date for awards during the years ended December 31, 2005 and 2004 and for the one month period ended December 31, 2003, our net earnings (loss) would have changed to the pro forma amounts indicated below (in thousands):

	Year Ended December 31, 2005			Year Ended December 31, 2004			One Month Ended December 31, 2003
Net earnings (loss) as reported	$	38,859		$	33,514		$	(4,529	)
Total stock-based employee compensation expense under fair value-based method		(638	)		(495	)		(40	)
Pro forma net earnings (loss)	$	38,221		$	33,019		$	(4,569	)

Note H to the financial statements contains the significant assumptions used in determining the underlying fair value of options.

Advertising

Advertising costs are expensed as incurred. Our advertising expense for the years ended December 31, 2005 and 2004 and the one month ended December 31, 2003 was $12,083,000, $9,617,000 and $737,000, respectively. The Predecessor’s advertising expense was $8,428,000 for the eleven months ended November 30, 2003.

54

Income Taxes

Deferred income taxes are computed using the asset and liability method, such that deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between financial reporting amounts and the tax bases of existing assets and liabilities based on currently enacted tax laws and tax rates in effect for the periods in which the differences are expected to reverse. Income tax expense is the tax payable for the period plus the change during the period in deferred income taxes. Valuation allowances are established when necessary to reduce deferred tax assets to the amount more likely than not expected to be realized. We are included in a consolidated federal income tax return with our Parent. State income taxes are generally filed on either a combined or separate company basis.

Fair Value of Financial Instruments

We consider that the carrying amount of financial instruments, including accounts receivable, accounts payable, accrued liabilities and notes payable, approximates fair value. Interest on our senior credit facility and senior unsecured term loan is payable at rates which approximate fair value. The fair value of the senior notes, based on the quoted market price for the same or similar issues of debt, would be approximately $150,050,000.

Comprehensive Income (Loss)

Total comprehensive income (loss) is disclosed in the consolidated statements of shareholder’s equity and included in net earnings (loss) and other comprehensive income (loss), which is comprised of unrealized gains (losses) on cash flow hedges and foreign currency translation adjustments.

The components of and changes in accumulated other comprehensive income (loss), net of taxes, were as follows (in thousands):

	Cash Flow Hedges			Foreign Currency Translation			Interest Rate Cap			Total AOCG/AOCL
Balance at November 30, 2003	$	1,687		$	3,804		$	—		$	5,491
Merger with M-Foods Holdings, Inc.		(1,687	)		(3,804	)		—			(5,491	)
Foreign currency translation adjustment		—			329			—			329
Change due to cash flow hedges		2,430			—			—			2,430
Balance at December 31, 2003		2,430			329						2,759
Foreign currency translation adjustment		—			2,486			—			2,486
Change due to cash flow hedges		(8,597	)		—			—			(8,597	)
Interest rate cap		—			—			(623	)		(623	)
Balance at December 31, 2004		(6,167	)		2,815			(623	)		(3,975	)
Foreign currency translation adjustment		—			590			—			590
Change due to cash flow hedges		7,109			—			—			7,109
Interest rate cap		—			—			64			64
Balance at December 31, 2005	$	942		$	3,405		$	(559	)	$	3,788

Recent Accounting Pronouncements

In November 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 151, “Inventory Costs—An amendment of Accounting Research Bulletin (“ARB”) No. 43, Chapter 4.” SFAS 151 clarifies that abnormal amounts of idle facility expense, freight, handling costs and spoilage should be expensed as incurred and not included in overhead. Further, SFAS 151 requires that allocation of fixed production overheads to conversion costs should be based on normal capacity of the production facilities. The provisions in SFAS 151 are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of this statement, required effective January 1, 2006, will not effect our financial condition or results of operations.

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In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets—An Amendment of Accounting Principals Board (“APB”) Opinion No. 29.” This statement amends APB Opinion No.29 and is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. SFAS 153 is effective for nonmonetary exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of this statement, required effective July 1, 2005, had no effect on our financial condition or results of operations.

On December 16, 2004, the FASB issued SFAS 123(R), “Share Based Payment”, which is a revision of SFAS No. 123 and supersedes APB Opinion No. 25. SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be valued at fair value on the date of grant, and to be expensed over the applicable vesting period. SFAS No. 123(R) is effective for non-public entities, as defined, on or after January 1, 2006. Non-public entities that used the minimum value method of measuring equity share options for proforma disclosure purposes under Statement 123 shall apply this statement prospectively to new awards and continue to account for any portion of awards outstanding at the effective date using the accounting principles originally applied to those awards. For new awards granted, compensation expense will be recorded over the vesting period base on the fair value of the awards granted. We assessed the impact to our consolidated results of operations of adopting SFAS No. 123(R), and we expect an immaterial impact.

In May 2005, the FASB issued SFAS 154, “Accounting Changes and Error Corrections” (SFAS 154) which replaces APB Opinion No. 20 “Accounting Changes” and SFAS 3, “Reporting Accounting Changes in Interim Financial Statements-An Amendment of APB Opinion No. 28.” SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application, or the latest practicable date, as the required method for reporting a change in accounting principle and the reporting of a correction of an error. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. We do not expect that adoption of this statement will have a material impact.

The FASB has proposed SFAS 155, “Accounting for Certain Hybrid Financial Instruments” (SFAS 155) which would amend SFAS 133 “Accounting for Derivative Instruments and Hedging Activities and SFAS 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”. SFAS 155 provides accounting for certain derivatives embedded in other financial instruments. This SFAS would be effective for all financial instruments acquired, issued or subject to a remeasurement event occurring for fiscal years beginning after September 15, 2006. We do not believe it will have a material impact on the Company.

NOTE C—DEBT

Long-term debt consisted of the following on December 31, (in thousands):

	2005		2004
Revolving lines of credit	$	—	$	—
Senior term loan		540,000		455,050
Senior unsecured term loan		—		135,000
Senior subordinated notes payable		150,050		150,050
Other		19,673		10,683
		709,723		750,783
Less current maturities		3,484		651
	$	706,239	$	750,132

Concurrent with the Merger, we entered into a new senior credit agreement, which consisted of a $100,000,000 revolving credit facility and $495,000,000 senior term loan. The revolving credit facility is due November 2009 and the senior term loan is due in November 2010. As amended in 2005, the credit agreement now provides $640,000,000. Our senior credit facility bears interest at a floating base rate plus an applicable margin, as defined in the agreement (effective rate of 6.7% at December 31, 2005). In addition, we issued $150,000,000 of 8.0% senior subordinated notes due April 2013 in connection with the Merger, which are subordinated to the senior credit agreement. We also issued a $135,000,000 senior unsecured term loan that was due in November 2011. All available funds from the senior unsecured term loan agreement were borrowed at the time of the Merger, but were repaid in November 2005, at which time the senior unsecured term loan was terminated. In conjunction with the repayment of the senior unsecured term loan we incurred a $1,350,000 prepayment penalty and wrote-off $4,134,000 of debt financing costs, which along with other costs were included in the $5,548,000 charged against the statement of operations. At December 31, 2005, approximately $6,661,000 was used under the revolving line of credit for letters of credit.

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The revolving credit facility and senior term loan are collateralized by substantially all of our assets. The revolving credit loan, the term loan, and senior subordinated notes contain restrictive covenants, including restrictions on dividends and distributions to shareholders and unit holders, a maximum leverage ratio, and a minimum interest coverage ratio, in addition to limitations on additional indebtedness and liens. Covenants related to operating performance are primarily based on earnings before income taxes, interest expense and depreciation and amortization expense. Our failure to comply with these covenants could result in an event of default, which if not cured or waived could have a material adverse effect on our results of operations, financial position and cash flow. In general, the debt covenants limit our discretion in the operation of our businesses. We were in compliance with all of the covenants in the credit agreement and the indenture as of December 31, 2005. In addition, the revolving credit and term loan agreements include guarantees by substantially all of our domestic subsidiaries. The fair value of our long-term debt at December 31, 2005 approximated the carrying value.

In conjunction with the Merger, the Predecessor paid-off its debt outstanding as of November 20, 2003. Included in the debt outstanding were $98,000,000 of term loans and $200,000,000 of subordinated notes. In connection with the early extinguishment of the debt the Predecessor recorded a loss of approximately $61,000,000, including a prepayment penalty of approximately $51,000,000, the write-off of deferred financing costs of $7,600,000, and the loss on the termination of the interest rate swaps of $2,400,000.

On September 30, 2005, a $10,250,000 bond financing was completed by the City of Wakefield, Nebraska at an annual interest rate of 7.6%, with such proceeds to be used for the construction of a wastewater treatment facility. We have guaranteed the principal and interest payments related to these bonds, which mature September 15, 2017. These bonds were recorded as long-term debt on our balance sheet in accordance with current accounting literature, FASB Interpretation No. 45.

Aggregate maturities of the Company’s long-term debt are as follows (in thousands):

Years Ending December 31,
2006	$	3,484
2007		6,559
2008		6,978
2009		7,104
2010		522,956
Thereafter		162,642
	$	709,723

The components of net interest expense are as follows (in thousands):

	COMPANY									PREDECESSOR
	YEAR ENDED DECEMBER 31, 2005			YEAR ENDED DECEMBER 31, 2004			ONE MONTH ENDED DECEMBER 31, 2003			ELEVEN MONTHS ENDED NOVEMBER 30, 2003
Interest expense	$	48,852		$	44,189		$	4,952		$	41,904
Capitalized interest		(461	)		(168	)		—			(32	)
Interest income		(1,272	)		(736	)		(20	)		(202	)
Interest expense, net	$	47,119		$	43,285		$	4,932		$	41,670

NOTE D—INCOME TAXES

The Merger was accomplished through a cash-for-stock transaction. As a result, the basis of our assets and liabilities did not change for income tax reporting purposes. Goodwill arising through the Merger is not deductible for tax purposes.

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Income tax expense (benefit) consists of the following (in thousands):

	COMPANY								PREDECESSOR
	YEAR ENDED DECEMBER 31, 2005			YEAR ENDED DECEMBER 31, 2004		ONE MONTH ENDED DECEMBER 31, 2003			ELEVEN MONTHS ENDED NOVEMBER 30, 2003
Current:
Federal	$	28,621		$	16,020	$	—		$	—
State		2,264			2,412		40			199
		30,885			18,432		40			199
Deferred:
Federal		(13,548	)		2,318		(2,614	)		(10,546	)
Foreign		(2,109	)		—		—			—
State		(962	)		231		(262	)		(1,050	)
		(16,619	)		2,549		(2,876	)		(11,596	)
	$	14,266		$	20,981	$	(2,836	)	$	(11,397	)

The components of the net deferred tax liability associated with the cumulative temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes follows at December 31, (in thousands):

	2005			2004
Depreciation	$	56,118		$	68,215
Flock inventories		5,684			6,128
Trademarks and licenses		11,523			11,788
Net operating loss carryforwards		(2,636	)		(668	)
Customer relationships		74,243			81,354
Other		(8,604	)		(18,227	)
	$	136,328		$	148,590

The following is a reconciliation of the federal statutory income tax rate to the consolidated effective tax rate:

	COMPANY						PREDECESSOR
	YEAR ENDED DECEMBER 31, 2005		YEAR ENDED DECEMBER 31, 2004		ONE MONTH ENDED DECEMBER 31, 2003		ELEVEN MONTHS ENDED NOVEMBER 30, 2003
Federal statutory rate	35.0	%	35.0	%	(35.0	)%	(35.0	)%
State taxes, net of federal impact	1.6		3.5		(3.5	)	(3.9	)
Qualified production activities deduction	(1.5	)	—		—		—
Tax benefit from change in tax rate on cumulative temporary differences	(7.5	)	—		—		—
Other	(0.7	)	—		—		0.4
	26.9	%	38.5	%	(38.5	)%	(38.5	)%

The American Jobs Creation Act of 2004 created a new tax deduction equal to the applicable percentage of the qualified production activities income for tax years beginning after December 31, 2004. The applicable percentage for 2005 and 2006 is 3%, for 2007, 2008 and 2009 the rate is at 6%, and 9% thereafter.

The tax rate used to calculate the tax expense or benefit on the cumulative temporary differences between the tax bases of the assets and liabilities and their carrying amounts for financial reporting purposes was reduced in 2005. This reduction was due to a change in the state tax rate as determined in the fourth quarter of 2005.

We have foreign net operating loss carry-forwards of approximately $7,000,000 which begin to expire in 2009.

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NOTE E—EMPLOYEE RETIREMENT PLAN

Employees who meet certain service requirements are eligible to participate in a defined contribution retirement plan. We match up to 4% of each participant’s eligible compensation. Our matching contributions for the years ended December 31, 2005 and 2004 and for one month ended December 31, 2003 were $2,932,000, $2,454,000 and $281,000, respectively. The Predecessor’s contributions were $2,495,000 for eleven months ended November 30, 2003.

We also contribute to one union retirement plan which totaled $31,000, $44,000 and $4,800 for the years ended December 31, 2005 and 2004 and for the one month ended December 31, 2003. The Predecessor contributed funds to two union retirement plans which totaled $209,000 for the eleven months ended November 30, 2003.

NOTE F—RELATED PARTY TRANSACTIONS

Pursuant to a management agreement with THL Managers V, LLC, an affiliate of Thomas H. Lee Partners, L.P., we pay them an annual fee of $1,500,000 or 1.0% of consolidated earnings before interest, taxes, depreciation and amortization, whichever is greater. The management fee for the year ended December 31, 2005 was $1,805,850, of which $1,729,400 was paid in 2005. The management fee for the year ended December 31, 2004 was $1,729,400, of which $1,500,000 was paid in 2004 and the balance paid in 2005. We paid a management fee of $171,000 for the one month ended December 31, 2003. We also paid THL Managers V, LLC $15 million upon closing of the Merger.

The Predecessor had a similar management agreement with Vestar and Goldner Hawn Johnson and Morrison, whereby the Predecessor paid them a combined annual fee of $1,000,000 or .75% of consolidated earnings before interest, taxes, depreciation and amortization, whichever was greater. The management fee for the eleven months ended November 30, 2003 was approximately $1,141,000. The Predecessor also paid them $3 million in aggregate upon closing of the Merger.

NOTE G—COMMITMENTS AND CONTINGENCIES

Lease Commitments

Our corporate offices and several of our manufacturing facilities are leased under operating leases expiring at various times through February 2017. The leases provide that real estate taxes, insurance, and maintenance expenses are our obligations. In addition, we lease some of our transportation and manufacturing equipment under operating leases.

Rent expense, including real estate taxes and maintenance expenses, was approximately $6,380,000, $6,663,000 and $754,000 for the years ended December 31, 2005 and 2004 and the one month ended December 31, 2003, respectively. The Predecessor had rent expense of $8,285,000 for the eleven months ended November 30, 2003.

The following is a schedule of minimum rental commitments for base rent for the years ending December 31 (in thousands):

2006	$	4,363
2007		4,574
2008		4,719
2009		4,748
2010		4,197
Thereafter		9,687
	$	32,288

Debt Guarantees

We have guaranteed the repayment of certain industrial revenue bonds used for the expansion of the wastewater treatment facilities of several municipalities where we have manufacturing facilities. The repayment of these bonds is funded through the wastewater treatment charges paid by us. However, should those charges not be sufficient to pay the bond payments as they become due, we have agreed to pay any shortfall. The remaining principal balance of these bonds at December 31, 2005 was approximately $16,100,000.

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Potato Procurement Contracts

We have contracts to purchase potatoes which expire in 2007 and which will supply approximately 80% of the Potato Products Division’s raw potato needs in 2006 and 24% in 2007. One potato supplier is expected to provide more than 10% of our 2006 potato requirements.

Cheese Purchase Commitments

We have forward buy contracts to purchase approximately $30 million of cheese in 2006, which supply approximately 26% of our estimated 2006 requirements.

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 60% of our egg requirements. Most of these contracts vary in length from 18 to 120 months with prices primarily indexed to grain or Urner Barry market indices. One 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 our purchases from our top five long-term contracted egg suppliers will approximate $146 million in 2006, $150 million in 2007, $112 million in 2008, $99 million in 2009, and $80 million in 2010, and that the 2006 amount will account for approximately 35% of our total egg purchases this year.

Fuel Commitments

We hedge some of our natural gas requirements for producing our products by fixing the price for a portion of our natural gas usage. At December 31, 2005, the fair market value of such fixed price purchases was approximately $1.6 million. These monthly purchases have been made for February and March 2006 and cover approximately 50% of our estimated usage requirements during that period, or approximately 10% of our annual needs.

We partially mitigate the risk of variability of our transportation-related fuel costs through the use of home heating oil futures contracts from time to time. At December 31, 2005, the fair market value of such fixed price purchases was approximately $5.8 million. These monthly purchases are for February – December 2006 and cover approximately 52% of our estimated usage requirements during that period.

Deferred Compensation Plan

M-Foods Holdings, Inc. (“Holdings”) sponsors a 2003 Deferred Compensation Plan (“Plan”) covering certain members of management of the Company. Under terms of the Plan certain members of management were allowed to roll-over approximately $25,181,000 of option and bonus value from the Predecessor and its parent into Holdings. The Plan is nonqualified and unfunded. Each participant’s deferred compensation account under the Plan will accrue an annual 8% return. Participants in the Plan will be entitled to a distribution from their deferred compensation account upon the earlier of (i) a change in control of Holdings (ii) the tenth anniversary of the date of the Plan and (iii) upon the termination or death of a participant. We recorded approximately $968,000, $1,771,000 and $232,000 of preferred return on the deferred compensation for the years ended December 31, 2005 and 2004 and for the one month ended December 31, 2003, respectively and the Predecessor recorded $1,678,000 for the eleven months ended November 30, 2003. There were 2004 distributions of deferred compensation totaling $13.1 million coinciding with the dividends issued by Holdings to Investors.

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.

The U.S. Federal Court of Appeals has upheld the validity of the patents on two separate occasions. In 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.

Litigation related to the infringement of these patents has been settled with three parties, one in 2000 and two in early 2004. A sublicense has been issued to each of the infringing parties, granting them the right to manufacture and distribute extended shelf-life liquid whole egg products subject to a royalty payable to us on all future product sales. In connection with each of these settlements, lump sum payments of $2.0 million were received in 2004 to cover the past production and sale of such products and other matters related to the infringements. Long-standing litigation related to the suspected infringement of the product and process patents by Sunny Fresh Foods, Inc., a subsidiary of Cargill, Inc., has concluded. Following a jury

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verdict of non-infringement in 2003 an appeal was filed and argued in front of the Federal Court of Appeals in December 2004. On April 15, 2005, we were notified that the Federal Court of Appeals rejected our appeal of the jury verdict of non-infringement of the patented extended shelf-life liquid egg technology.

Other Litigation

The Predecessor received $4.3 million during 2003 related to legal settlements regarding vendor price collusion.

We are engaged in routine litigation incidental to our business. Management believes the ultimate outcome of this litigation will not have a material effect on our consolidated financial position, liquidity or results of operations.

Other Matters

In the third quarter of 2004, our immediate parent, M-Foods Holdings, Inc., paid a dividend in the amount of approximately $98.1 million to our ultimate parent, Michael Foods Investors LLC, with the proceeds of an offering of its $100 million 9.75% Senior Discount Notes due October 1, 2013. As the wholly-owned subsidiary of M-Foods Holdings, Inc., we are responsible for servicing these notes. We then issued dividends in the amount of approximately $70.1 million to M-Foods Holdings, Inc. in the fourth quarter of 2004. The dividends were subsequently distributed to Michael Foods Investors LLC. Michael Foods Investors LLC includes members of our management.

In May of 2004, the U.S. Environmental Protection Agency (“EPA”) issued “Findings of Violation and Order for Compliance” to the Company in connection with our discharge of wastewater to the municipal treatment facility in Wakefield, Nebraska. EPA ordered us to identify interim measures and a long-term proposal for addressing the issues that it had identified. In June 2004, we provided EPA with a proposal for improving the Wakefield facility’s performance and compliance. Concurrently, and in connection with the same matter, the Nebraska Department of Environmental Quality (“NDEQ”) issued two enforcement documents, a Notice of Violation (“NOV”) and a Complaint and Notice for Opportunity for Hearing. We responded to the NOV in August of 2004 and we entered into an Administrative Consent Order with NDEQ in response to the Complaint and Notice for Opportunity for Hearing. In early 2006 the United States Department of Justice notified us and the City of Wakefield that it seeks civil penalties and injunctive relief for the various alleged violations and complaints noted above and other issues. A meeting with the Department of Justice, EPA, NDEQ and the Nebraska attorney general was held in March 2006. Settlement negotiations are ongoing.

NOTE H—SHAREHOLDER’S EQUITY

Common Stock

At December 31, 2005 and 2004, the Company had authorized, issued and outstanding common stock of 3,000 shares with a $.01 par value. All common shares were issued to M-Foods Holdings, Inc., a wholly owned subsidiary of Michael Foods Investors, LLC, in connection with the Merger.

Stock Option Plan

In November 2003, Holdings adopted the 2003 Stock Option Plan (the “Plan”). Under the Plan Holdings may grant incentive stock options to the Company’s employees. A total of 32,277 shares are reserved for issuance under the Plan. Options granted under the Plan will vest over a five year period in equal annual installments starting from the first anniversary date of the grant. Any unexercised options will terminate ten years after the grant date. Options are generally granted with option prices based on the estimated fair market value of Holdings common stock at the date of grant as determined by the parent.

Stock option activity with respect to the Plan is as follows:

	2005			2004			2003
Outstanding at January 1		28,955			21,551			—
Granted		700			7,454			21,551
Exercised		—			—			—
Cancelled		(318	)		(50	)		—
Outstanding at December 31		29,337			28,955			21,551
Exercisable at December 31		11,526			5,811			—
Weighted-Average Exercise Price Per Share
Granted	$	957.36		$	626.99		$	626.99
Exercised		—			—			—
Canceled		664.70			626.99			—
At December 31,
Outstanding		634.38			626.99			626.99
Exercisable		626.99			626.99			—

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The weighted-average grant-date fair value of options granted under the Plan was $609.96 in 2005, $420.64 in 2004 and $403.35 in 2003. The weighted-average grant-date fair value of options under the Plan was determined by using the fair value of each option grant on the date of grant, utilizing the Black-Scholes option-pricing model and the following key assumptions:

	December 31, 2005		December 31, 2004		December 31, 2003
Risk-free interest rates	4.56	%	4.47	%	4.51	%
Expected life	10 years		9-10 years		10 years
Expected volatility	0.00	%	0.00	%	0.00	%
Expected dividends	None		None		None

NOTE I—SALE OF DAIRY PRODUCTS DIVISION

Effective September 30, 2003, the Predecessor completed the sale of its Dairy Products Division operating segment to Dean Foods Company for approximately $155 million. The Dairy Products Division was substantially made up of the assets of the Dairy LLC’s. The Dairy Products Division processed and sold ice milk and ice cream mixes, creamers, milk and specialty dairy products. In accordance with the transition services agreement, the Predecessor was compensated for certain transition services provided to the buyer for a period anticipated to be 12 to 18 months after the close of the transaction. These transition services included services such as information technology, sales, customer service and procurement. By providing these transition services, the Predecessor was deemed to have significant continuing involvement in the Dairy Products Division operating segment. Therefore, the Predecessor determined that the sale did not meet the accounting criteria for discontinued operations. Accordingly, the operations of the Dairy Products Division operating segment are included in the statement of earnings of the Predecessor through the date of sale.

External net sales and earnings before income taxes from the Dairy Products Division operating segment were as follows (in thousands):

	Eleven Months ended November 30, 2003
External net sales	$	144,667
Earnings before income taxes		11,439

Under terms of the Dairy LLC’s member agreement, approximately $42.6 million of the $155 million of proceeds were allocated to the Predecessor, with the remaining amount being allocated to the other members of the LLC’s. These members were required to contribute the $84.4 million of their net after tax proceeds to the Predecessor as a capital contribution. The Predecessor recorded a loss on the disposal of the Dairy Products Division of approximately $16.3 million.

NOTE J—BUSINESS SEGMENTS

At December 31, 2005, we operated in three reportable segments:

Egg Products processes and distributes numerous egg products and shell eggs primarily through its facilities in the Midwest and Eastern United States and Canada. Sales of egg products are made through an internal sales force and independent brokers to the foodservice, food ingredient and retail markets primarily throughout North America, and to certain export markets.

Refrigerated Distribution distributes a wide range of refrigerated grocery products, including various cheese products packaged at its Wisconsin cheese packaging facility. Sales of refrigerated grocery products are made through an internal sales force to retail and wholesale markets throughout much of the United States.

Potato Products processes and distributes refrigerated potato products from its manufacturing facilities in Minnesota and Nevada. Sales of potato products are made through an internal sales force to foodservice and retail markets throughout the United States.

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We identify our segments based on its organizational structure, which is primarily by principal products. Operating profit represents earnings before interest expense, interest income, income taxes and allocations of corporate costs to the respective divisions. Intersegment sales are made at market prices. Our corporate office maintains a majority of our cash under our cash management policy.

Effective September 30, 2003, the Predecessor sold the Dairy Products Division operating segment. See Note I.

Sales to two customers, primarily by the Egg Products segment, accounted for approximately 18% and 18%, 17% and 16%, and 16% and 15% of consolidated net sales for the years ended December 31, 2005 and 2004 and for the one month ended December 31, 2003, respectively. The Predecessor had sales to two customers that accounted for 19% and 15% of consolidated net sales for the eleven months ended November 30, 2003. Accounts receivable for two of our customers were 15% and 18%, and 16% and 17%, of consolidated accounts receivable at December 31, 2005 and 2004, respectively.

Certain financial information for our operating segments is as follows (in thousands):

	EGG PRODUCTS		REFRIGERATED DISTRIBUTION		DAIRY PRODUCTS		POTATO PRODUCTS		CORPORATE			TOTAL
COMPANY
Year ended December 31, 2005
External net sales	$	860,925	$	279,328	$	—	$	102,245	$	—		$	1,242,498
Intersegment sales		9,515		—		—		4,425		—			13,940
Operating profit (loss)		81,557		15,707		—		17,199		(8,671	)		105,792
Total assets		1,005,885		118,628		—		126,691		82,372			1,333,576
Depreciation and amortization		59,214		4,624		—		6,243		11			70,092
Capital expenditures		36,874		2,552		—		1,247		17			40,690
Year ended December 31, 2004
External net sales	$	941,381	$	288,285	$	—	$	83,838	$	—		$	1,313,504
Intersegment sales		14,951		—		—		3,456		—			18,407
Operating profit (loss)		87,116		13,171		—		6,895		(9,402	)		97,780
Total assets		1,025,298		117,560		—		130,900		67,797			1,341,555
Depreciation and amortization		54,982		4,637		—		7,227		11			66,857
Capital expenditures		30,189		4,199		—		3,283		24			37,695
One month ended December 31, 2003
External net sales	$	95,591	$	36,719	$	—	$	8,496	$	—		$	140,806
Intersegment sales		2,636		—		—		387		—			3,023
Operating profit (loss)		3,972		913		—		905		(8,223	)		(2,433	)
Total assets		1,062,503		117,508		—		133,929		102,742			1,416,682
Depreciation and amortization		4,223		356		—		721		3			5,303
Capital expenditures		2,753		466		—		472		—			3,691
PREDECESSOR
Eleven months ended November 30, 2003
External net sales	$	730,028	$	241,737	$	144,667	$	67,925	$	—		$	1,184,357
Intersegment sales		14,748		—		88		3,179		—			18,015
Operating profit (loss)		74,575		15,510		11,918		8,452		(20,818	)		89,637
Total assets		631,520		79,805		—		78,154		55,156			844,635
Depreciation and amortization		40,067		2,677		2,200		4,221		28			49,193
Capital expenditures		16,202		720		6,152		3,207		—			26,281

63

NOTE K—SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION

Our senior credit agreement and senior subordinated notes have been guaranteed, on a joint and several basis, by us and our domestic subsidiaries. The senior credit agreement is also guaranteed by the Company’s parent, M-Foods Holdings, Inc.

The following condensed consolidating financial information presents our consolidated balance sheets at December 31, 2005 and 2004, and the condensed consolidating statements of earnings and cash flows for the years ended December 31, 2005 and 2004, and the one month ended December 31, 2003 and the eleven months ended November 30, 2003 for the Predecessor. These financial statements reflect Michael Foods, Inc. (the parent), the wholly-owned guarantor subsidiaries (on a combined basis), the non-guarantor subsidiary (MFI Food Canada, Ltd.), and elimination entries necessary to combine such entities on a consolidated basis.

Condensed Consolidating Balance Sheets

December 31, 2005

(in thousands)

	Parent			Guarantor Subsidiaries		Non-Guarantor Subsidiary			Eliminations			Consolidated
Assets
Current Assets
Cash and equivalents	$	41,153		$	—	$	1,026		$	—		$	42,179
Accounts receivable, less allowances		3,180			101,193		7,008			(8,273	)		103,108
Inventories		—			91,054		6,825			—			97,879
Prepaid expenses and other		605			7,954		144			—			8,703
Total current assets		44,938			200,201		15,003			(8,273	)		251,869
Property, Plant and Equipment—net		34			267,060		20,193			—			287,287
Other assets:
Goodwill		—			518,409		3,026			—			521,435
Other assets		37,903			248,192		2,410			(15,520	)		272,985
Investment in subsidiaries		932,385			4,438		—			(936,823	)		—
		970,288			771,039		5,436			(952,343	)		794,420
Total assets	$	1,015,260		$	1,238,300	$	40,632		$	(960,616	)	$	1,333,576
Liabilities and Shareholder’s Equity
Current Liabilities
Current maturities of long-term debt	$	2,700		$	—	$	784		$	—		$	3,484
Accounts payable		853			69,511		8,896			(9,785	)		69,475
Accrued liabilities		19,843			77,453		1,691			—			98,987
Total current liabilities		23,396			146,964		11,371			(9,785	)		171,946
Long-term debt, less current maturities		679,171			18,613		27,553			(19,098	)		706,239
Deferred income taxes		(6,370	)		143,926		(1,228	)		—			136,328
Deferred compensation		15,048			—		—			—			15,048
Shareholder’s equity		304,015			928,797		2,936			(931,733	)		304,015
Total liabilities and shareholder’s equity	$	1,015,260		$	1,238,300	$	40,632		$	(960,616	)	$	1,333,576

64

Condensed Consolidating Balance Sheets

December 31, 2004

(in thousands)

	Parent			Guarantor Subsidiaries		Non-Guarantor Subsidiary			Eliminations			Consolidated
Assets
Current Assets
Cash and equivalents	$	29,954		$	—	$	1,862		$	—		$	31,816
Accounts receivable, less allowances		1,704			95,632		9,086			(4,870	)		101,552
Inventories		—			84,228		6,816			—			91,044
Prepaid expenses and other		800			6,584		108			—			7,492
Total current assets		32,458			186,444		17,872			(4,870	)		231,904
Property, Plant and Equipment—net		27			279,692		20,842			—			300,561
Other assets:
Goodwill		—			522,009		3,026			—			525,035
Other assets		35,865			264,363		—			(16,173	)		284,055
Investment in subsidiaries		941,962			4,438		—			(946,400	)		—
		977,827			790,810		3,026			(962,573	)		809,090
Total assets	$	1,010,312		$	1,256,946	$	41,740		$	(967,443	)	$	1,341,555
Liabilities and Shareholder’s Equity
Current Liabilities
Current maturities of long-term debt	$	—		$	17	$	634		$	—		$	651
Accounts payable		321			65,051		5,132			(4,779	)		65,725
Accrued liabilities		25,963			77,438		1,583			—			104,984
Total current liabilities		26,284			142,506		7,349			(4,779	)		171,360
Long-term debt, less current maturities		740,100			184		30,773			(20,925	)		750,132
Deferred income taxes		(27,545	)		176,197		(62	)		—			148,590
Deferred compensation		14,080			—		—			—			14,080
Shareholder’s equity		257,393			938,059		3,680			(941,739	)		257,393
Total liabilities and shareholder’s equity	$	1,010,312		$	1,256,946	$	41,740		$	(967,443	)	$	1,341,555

65

Company

Condensed Consolidating Earnings Statements

Year ended December 31, 2005

(in thousands)

	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiary			Eliminations			Consolidated
Net sales	$	—		$	1,205,909		$	56,619		$	(20,030	)	$	1,242,498
Cost of sales		—			970,920			54,528			(20,030	)		1,005,418
Gross profit		—			234,989			2,091			—			237,080
Selling, general and administrative expenses		8,671			122,533			5,516			(5,432	)		131,288
Operating profit (loss)		(8,671	)		112,456			(3,425	)		5,432			105,792
Interest expense, net		44,970			362			1,787			—			47,119
Other (income) expense		(5,432	)		—			—			5,432			—
Loss on early extinguishment of debt		5,548			—			—			—			5,548
Earnings (loss) before equity in earnings (loss) of subsidiaries and income taxes		(53,757	)		112,094			(5,212	)		—			53,125
Equity in earnings (loss) of subsidiaries		73,874			(3,221	)		—			(70,653	)		—
Earnings (loss) before income taxes		20,117			108,873			(5,212	)		(70,653	)		53,125
Income tax expense (benefit)		(18,742	)		34,999			(1,991	)		—			14,266
Net earnings (loss)	$	38,859		$	73,874		$	(3,221	)	$	(70,653	)	$	38,859

66

Company

Condensed Consolidating Earnings Statements

Year ended December 31, 2004

(in thousands)

	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiary			Eliminations			Consolidated
Net sales	$	—		$	1,278,257		$	70,487		$	(35,240	)	$	1,313,504
Cost of sales		—			1,050,769			61,597			(35,240	)		1,077,126
Gross profit		—			227,488			8,890			—			236,378
Selling, general and administrative expenses		9,062			127,609			7,160			(5,573	)		138,258
Transaction expenses		340			—			—			—			340
Operating profit (loss)		(9,402	)		99,879			1,730			5,573			97,780
Interest expense, net		40,593			977			1,715			—			43,285
Other (income) expense		(5,573	)		—			—			5,573			—
Earnings (loss) before equity in earnings (loss) of subsidiaries and income taxes		(44,422	)		98,902			15			—			54,495
Equity in earnings (loss) of subsidiaries		60,234			(148	)		—			(60,086	)		—
Earnings (loss) before income taxes		15,812			98,754			15			(60,086	)		54,495
Income tax expense (benefit)		(17,702	)		38,520			163			—			20,981
Net earnings (loss)	$	33,514		$	60,234		$	(148	)	$	(60,086	)	$	33,514

67

Company

Condensed Consolidating Earnings Statements

One month ended December 31, 2003

(in thousands)

	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiary			Eliminations			Consolidated
Net sales	$	—		$	137,771		$	6,926		$	(3,891	)	$	140,806
Cost of sales		—			119,211			6,122			(3,891	)		121,442
Gross profit		—			18,560			804			—			19,364
Selling, general and administrative expenses		1,102			13,347			843			(616	)		14,676
Transaction expenses		7,121			—			—			—			7,121
Operating profit (loss)		(8,223	)		5,213			(39	)		616			(2,433	)
Interest expense, net		4,284			500			148			—			4,932
Other (income) expense		(616	)		—			—			616			—
Earnings (loss) before equity in earnings (loss) of subsidiaries and income taxes		(11,891	)		4,713			(187	)		—			(7,365	)
Equity in earnings (loss) of subsidiaries		747			(187	)		—			(560	)		—
Earnings (loss) before income taxes		(11,144	)		4,526			(187	)		(560	)		(7,365	)
Income tax expense (benefit)		(6,615	)		3,779			—			—			(2,836	)
Net earnings (loss)	$	(4,529	)	$	747		$	(187	)	$	(560	)	$	(4,529	)

68

Predecessor

Condensed Consolidating Earnings Statements

Eleven months ended November 30, 2003

(in thousands)

	Parent			Guarantor Subsidiaries		Non-Guarantor Subsidiaries			Eliminations			Consolidated
Net sales	$	—		$	1,057,617	$	144,755		$	(18,015	)	$	1,184,357
Cost of sales		—			865,146		125,873			(18,015	)		973,004
Gross profit		—			192,471		18,882			—			211,353
Selling, general and administrative expenses		5,441			97,779		8,242			(5,123	)		106,339
Transaction expenses		15,377			—		—			—			15,377
Operating profit (loss)		(20,818	)		94,692		10,640			5,123			89,637
Interest expense (income)		39,146			3,323		(799	)		—			41,670
Other expense (income)		5,123			—		—			(5,123	)		—
Loss on early extinguishment of debt		61,226			—		—			—			61,226
Loss on dairy disposition		16,288			—		—			—			16,288
Earnings (loss) before equity in earnings (loss) of subsidiaries and income taxes		(132,355	)		91,369		11,439			—			(29,547	)
Equity in earnings (loss) of subsidiaries		63,081			11,439		(11,439	)		(63,081	)		—
Earnings (loss) before income taxes		(69,274	)		102,808		—			(63,081	)		(29,547	)
Income tax expense (benefit)		(51,124	)		39,727		—			—			(11,397	)
Net earnings (loss)	$	(18,150	)	$	63,081	$	—		$	(63,081	)	$	(18,150	)

69

Company

Condensed Consolidating Statements of Cash Flows

Year ended December 31, 2005

(in thousands)

	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiary			Consolidated
Net cash (used in) provided by operating activities	$	(7,937	)	$	108,713		$	3,626		$	104,402
Cash flows from investing activities:
Capital expenditures		(17	)		(39,103	)		(1,570	)		(40,690	)
Investments in joint ventures and other assets		2,462			(45	)		(3,234	)		(817	)
Net cash provided by (used in) investing activities		2,445			(39,148	)		(4,804	)		(41,507	)
Cash flows from financing activities:
Proceeds (payments) on long-term debt		(43,907	)		(5,134	)		(3,143	)		(52,184	)
Additional capital invested by parent		—			(3,455	)		3,455			—
Deferred financing costs		(378	)		—			—			(378	)
Investment in subsidiaries		60,976			(60,976	)		—			—
Net cash provided by (used in) financing activities		16,691			(69,565	)		312			(52,562	)
Effect of exchange rate changes on cash		—			—			30			30
Net increase (decrease) in cash and equivalents		11,199			—			(836	)		10,363
Cash and equivalents at beginning of year		29,954			—			1,862			31,816
Cash and equivalents at end of year	$	41,153		$	—		$	1,026		$	42,179

70

Company

Condensed Consolidating Statements of Cash Flows

Year ended December 31, 2004

(in thousands)

	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiary			Consolidated
Net cash provided by operating activities	$	(15,995	)	$	136,694		$	948		$	121,647
Cash flows from investing activities:
Capital expenditures		(24	)		(36,531	)		(1,140	)		(37,695	)
Investments in joint ventures and other assets		(394	)		1,708			—			1,314
Net cash used in investing activities		(418	)		(34,823	)		(1,140	)		(36,381	)
Cash flows from financing activities:
Proceeds (payments) on long-term debt		(39,950	)		(2,202	)		669			(41,483	)
Additional capital invested by parent		13,159			111			(111	)		13,159
Deferred financing costs		(824	)		—			—			(824	)
Dividends		(70,084	)		—			—			(70,084	)
Investment in subsidiaries		99,780			(99,780	)		—			—
Net cash provided by (used in) financing activities		2,081			(101,871	)		558			(99,232	)
Effect of exchange rate changes on cash		—			—			188			188
Net increase (decrease) in cash and equivalents		(14,332	)		—			554			(13,778	)
Cash and equivalents at beginning of year		44,286			—			1,308			45,594
Cash and equivalents at end of year	$	29,954		$	—		$	1,862		$	31,816

71

Company

Condensed Consolidating Statements of Cash Flows

One month ended December 31, 2003

(in thousands)

	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiary			Consolidated
Net cash (used in) provided by operating activities	$	(12,882	)	$	42,743		$	675		$	30,536
Cash flows from investing activities:
Capital expenditures		—			(3,121	)		(570	)		(3,691	)
Business acquisitions		(720,568	)		—			—			(720,568	)
Investments in joint ventures and other assets		19			578			—			597
Net cash used in investing activities		(720,549	)		(2,543	)		(570	)		(723,662	)
Cash flows from financing activities:
Payments on long-term debt		(297,894	)		(69	)		(9	)		(297,972	)
Proceeds from long-term debt		780,000			—			—			780,000
Proceeds from issuance of stock		290,907			—			—			290,907
Deferred financing costs		(34,206	)		—			—			(34,206	)
Investment in subsidiaries		22,659			(22,659	)		—			—
Net cash provided by (used in) financing activities		761,466			(22,728	)		(9	)		738,729
Effect of exchange rate changes on cash		—			—			(9	)		(9	)
Net increase (decrease) in cash and equivalents		28,035			17,472			87			45,594
Cash and equivalents at beginning of period		16,251			(17,472	)		1,221			—
Cash and equivalents at end of period	$	44,286		$	—		$	1,308		$	45,594

72

Company

Condensed Consolidating Statements of Cash Flows

Eleven months ended November 30, 2003

(in thousands)

	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidated
Net cash (used in) provided by operating activities	$	(30,186	)	$	96,917		$	10,235		$	76,966
Cash flows from investing activities:
Capital expenditures		—			(20,128	)		(6,153	)		(26,281	)
Dairy disposition		49,710			—			—			49,710
Investments in joint ventures and other assets		(131	)		3,060			—			2,929
Net cash provided by (used in) investing activities		49,579			(17,068	)		(6,153	)		26,358
Cash flows from financing activities:
Payments on long-term debt		(236,466	)		(1,335	)		(2,400	)		(240,201	)
Proceeds from long-term debt		34,064			—			—			34,064
Additional capital contributed by parent		84,419			—			—			84,419
Dividends		(2,351	)		—			—			(2,351	)
Investment in subsidiaries		97,527			(95,845	)		(1,682	)		—
Net cash used in financing activities		(22,807	)		(97,180	)		(4,082	)		(124,069	)
Effect of exchange rate changes on cash		—			173			—			173
Net decrease in cash and equivalents		(3,414	)		(17,158	)		—			(20,572	)
Cash and equivalents at beginning of period		19,665			907			—			20,572
Cash and equivalents at end of period	$	16,251		$	(16,251	)	$	—		$	—

73

NOTE L—QUARTERLY FINANCIAL DATA

QUARTERLY FINANCIAL DATA (UNAUDITED) (In thousands)

	QUARTER
	FIRST		SECOND		THIRD		FOURTH
2005
Net sales	$	304,964	$	301,125	$	309,154	$	327,255
Gross profit		57,302		58,729		59,231		61,818
Net earnings		6,844		8,231		9,288		14,496
2004
Net sales	$	340,612	$	324,684	$	323,871	$	324,337
Gross profit		55,266		57,556		56,731		66,825
Net earnings		8,181		7,389		8,105		9,839

74

EX-10.35

Exhibit 10.35

AMENDMENT NO. 3 TO CREDIT AGREEMENT

AMENDMENT NO. 3 TO CREDIT AGREEMENT dated as of November 22, 2005 (this “Amendment”) among MICHAEL FOODS, INC., a Delaware corporation (formerly, THL Food Products Co., the “Borrower”), M-FOODS HOLDINGS, INC., a Delaware corporation (formerly, THL Food Products Holding Co., “Holdings”), the banks, financial institutions and other institutional lenders parties to the Credit Agreement referred to below (collectively, the “Lenders”) and Bank of America, N.A., as administrative agent (the “Administrative Agent”) for the Lenders.

PRELIMINARY STATEMENTS:

(1) Holdings, the Borrower, the Lenders and the Administrative Agent have entered into a Credit Agreement dated as of November 20, 2003, as amended by Amendment No. 1 to Credit Agreement dated as of September 17, 2004 and by Amendment No. 2 to Credit Agreement dated as of May 18, 2005 (the “Credit Agreement”). Capitalized terms not otherwise defined in this Amendment have the same meanings as specified in the Credit Agreement;

(2) The Borrower desires to (a) refinance, substitute and replace and convert all outstanding Term B Loans under the Credit Agreement with and into a new class of term loans (as further described in the amendments set forth in Section 1 below, the “Term B-1 Loans”) having substantially identical terms with, and having the same rights and obligations under the Loan Documents as, the Term B Loans, except as provided in the amendments set forth in Section 1 below, and (b) borrow additional Term B-1 Loans of $88,188,000, which the Borrower shall use to refinance in part the outstanding Senior Unsecured Term Loans;

(3) The Borrower has requested that each Term Lender holding Term B Loans make commitments to provide Term B-1 Loans (any Term Lender that executes and delivers this Amendment and makes such a commitment, a “Continuing Term Lender”; and, any Term Lender that does not execute and deliver this Amendment or make such a commitment, an “Exiting Term Lender”) in an amount at least equal to the aggregate principal amount of the Term B Loans held by it immediately prior to the Third Amendment Effective Date (as defined below) and that Eligible Assignees make commitments to provide Term B-1 Loans (such Eligible Assignees, together with the Continuing Term Lenders, the “Term B-1 Lenders”), and the commitment of each such Lender to provide Term B-1 Loans shall be set forth on Schedule 2.01 attached hereto (as further described in the amendments set forth in Section 1 below, its “Term B-1 Commitment”), such that the aggregate Term B-1 Commitments shall be $540,000,000; it being understood that Banc of America Securities LLC, as sole and exclusive lead arranger and bookrunning manager of the Term B-1 Loans (in such capacity, the “Arranger”), and the Administrative Agent shall arrange and allocate any assignments to effectuate such refinancing, substitution and replacement and conversion of Term B Loans and additional borrowings of Term B-1 Loans and the Administrative Agent or any of its Affiliates may (but shall not be required to), in order to better effectuate such assignments, acquire Term B Loans itself for further assignment to other Lenders or Eligible Assignees;

(4) Upon the occurrence of the Third Amendment Effective Date, each Continuing Term Lender will exchange and convert an aggregate principal amount of the Term B Loans held by it immediately prior to the Third Amendment Effective Date (the “Exchanged Term B Loans”) for and into a like principal amount in Dollars of Term B-1 Loans (such portion of the Term B-1 Loans, the “Converted Term B-1 Loans”); it being understood and agreed that the Converted Term B-1 Loans are in exchange, substitution and replacement for, but not in payment or satisfaction of, the Exchanged Term B Loans;

(5) In addition, each Term B-1 Lender severally agrees to make Term B-1 Loans to the Borrower on the Third Amendment Effective Date to the extent its Term B-1 Commitment exceeds the aggregate amount of its Converted Term B-1 Loans (if any) and any Term B Loans assigned (or to be assigned concurrently therewith) to it from any Exiting Term Lender (any such Term B Loans to be exchanged and converted for and into Converted Term B-1 Loans), in an aggregate principal amount equal to such excess and the proceeds of such Term B-1 Loans (such portion of the Term B-1 Loans, the “Funded Term B-1 Loans”) will be used by the Borrower, together with cash on hand, to (a) refinance in full the outstanding principal amount of all Term B Loans held by any Exiting Term Lender that failed to assign all of its Term B Loans to Term B-1 Lenders pursuant to one or more Assignment and Assumption, (b) refinance in full the outstanding principal amount of all outstanding Senior Unsecured Term Loans and to pay all accrued but unpaid interest and any applicable prepayment premium, penalties and costs, and (c) pay all fees, costs and expenses related to the transactions contemplated by this Amendment;

(6) The Borrower has requested that the Lenders amend the Credit Agreement to (a) effect the exchange, conversion, refinancing, substitution and replacement of the Term B Loans, (b) permit the borrowing of the additional Term B-1 Loans and the prepayment of the Senior Unsecured Term Loans, and (c) make other amendments to the Credit Agreement as set forth below;

(7) The Lenders have agreed, subject to the terms and conditions hereinafter set forth, to amend the Credit Agreement as set forth below;

NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the sufficiency and receipt of all of which is hereby acknowledged, the parties hereto hereby agree as follows:

SECTION 1. Amendments to Credit Agreement. Upon, and subject to, the satisfaction of the conditions precedent set forth in Section 3 below, the Credit Agreement is hereby amended as follows:

(a) Section 1.01 of the Credit Agreement is amended by adding in the appropriate alphabetical order the following new definitions.

“Exchanged Term B Loans” has the meaning specified in Section 2.01(a)(iv).

2

“Third Amendment” means Amendment No. 3 to this Agreement, dated as of November 22, 2005, among the Borrower, Holdings, Bank of America, N.A., as Administrative Agent and the Lenders party thereto.

“Third Amendment Effective Date” has the meaning specified in the Third Amendment.

“Term B-1 Borrowing” means a borrowing pursuant to Section 2.01(a)(iv) or (v) consisting of simultaneous Term B-1 Loans of the same Type made by the Term B-1 Lenders.

“Term B-1 Commitment” means, as to each Term B-1 Lender at any time, its obligation to exchange and convert its Term B Loans for and into Term B-1 Loans and to make Term B-1 Loans on the Third Amendment Effective Date to the Borrower pursuant to Section 2.01(a)(iv) or (v), as applicable, in an aggregate principal amount at any one time outstanding not to exceed the amount set forth opposite such Term B-1 Lender’s name on Schedule 2.01 attached to the Third Amendment under the caption “Total Term B-1 Commitment” or in the Assignment and Assumption pursuant to which such Lender becomes a party hereto, as applicable, as such amount may be adjusted from time to time in accordance with this Agreement. The aggregate Commitment of all Term B-1 Lenders shall be $540,000,000 on the Third Amendment Effective Date.

“Term B-1 Facility” means, at any time, (a) prior to initial making of Term B-1 Loans, the aggregate Term B-1 Commitments of all Term B-1 Lenders at such time, and (b) thereafter, the aggregate Term B-1 Loans of all Term B-1 Lenders at such time.

“Term B-1 Lender” means, at any time, any Lender that has a Term B-1 Commitment or a Term B-1 Loan at such time.

“Term B-1 Loan” means (a) a term loan or term loans in Dollars received in exchange for Term B Loans pursuant to Section 2.01(a)(iv) or (b) an advance made by any Term B Lender under the Term B Facility made pursuant to Section 2.01(a)(v).

“Term B-1 Note” means a promissory note of the Borrower payable to the order of any Term B-1 Lender, in substantially the form of Exhibit A to the Third Amendment, evidencing the indebtedness of the Borrower to such Term B-1 Lender resulting from the Term B-1 Loans made or held by such Term B-1 Lender.

“Wakefield Bond Guaranty” means the guaranty dated as of September 30, 2005 by the Borrower of the 7.6% Notes due September 15, 2017 issued by the City of Wakefield, Nebraska in an aggregate principal amount of $10,250,000.

“Wakefield Depot Property” means that certain property containing a train depot located in Dixon County, Nebraska owned by M.G. Waldbaum Company.

“Wakefield Property” means that undeveloped property located in Dixon County, Nebraska (other than the Wakefield Depot Property) owned by M.G. Waldbaum Company.

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(i) Section 1.01 of the Credit Agreement is further amended by amending and restating in full clause (a) in the definition of “Applicable Rate” to read as follows:

“with respect to Term B-1 Loans, (i) if the Leverage Ratio is equal to or greater than 3.00:1.00 as set forth in the most recent Compliance Certificate received by the Administrative Agent pursuant to Section 6.02(b), (A) for Eurodollar Rate Loans, 2.00% and (B) for Base Rate Loans, 1.00%, and (ii) if the Leverage Ratio is less than 3.00:1.00 as set forth in the most recent Compliance Certificate received by the Administrative Agent pursuant to Section 6.02(b), (A) for Eurodollar Rate Loans, 1.75% and (B) for Base Rate Loans, 0.75%; and”.

(b) Section 1.01 of the Credit Agreement is further amended by amending and restating in full the definition of “Term Borrowing”, “Term Commitment”, “Term Facility”, “Term Lender”, “Term Loan” and “Term Note” to read, respectively, as follows:

“Term Borrowing” means any Existing Term Borrowing, any Term B Borrowing or any Term B-1 Borrowing, as applicable.

“Term Commitment” means any Term B-1 Commitment.

“Term Facility” means the Existing Term Facility, the Term B Facility or the Term B-1 Facility, as applicable.

“Term Lender” means any Existing Term Lender, any Term B Lender or any Term B-1 Lender, as applicable.

“Term Loan” means any Existing Term Loan, any Term B Loan or any Term B-1 Loan, as applicable.

“Term Note” means any Existing Term Note, any Term B Note or any Term B-1 Note, as applicable.

(c) Section 1.02 of the Credit Agreement is hereby amended in full to read as follows:

“(e) On and after the Third Amendment Effective Date, all Term Loans shall continue to have the same terms, rights and benefits as the Term Loans immediately prior to the Third Amendment Effective Date under the Loan Documents, except as modified by the Third Amendment.”

(d) Section 2.01(a) of the Credit Agreement is hereby amended by adding the following new clauses (iv) and (v):

“(iv) Term B-1 Exchange. With respect to each Term B-1 Lender that has Term B Loans and a corresponding Term B-1 Commitment, such Term B-1 Lender severally agrees to exchange and convert on the Third Amendment Effective Date an aggregate principal amount of the Term B Loans (“Exchanged Term B Loans”) held by it immediately prior to the Third Amendment Effective Date for and into a like principal amount in Dollars of Term B-1 Loans.

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(v) Term B-1 Borrowings. Each Term B-1 Lender severally agrees to make Term B-1 Loans in Dollars to the Borrower on the Third Amendment Effective Date in a principal amount equal to the excess of (A) its Term B-1 Commitment over (B) the aggregate principal amount of its Exchanged Term B Loans, if any. The Borrower shall refinance all Term B Loans that are not Exchanged Term B Loans with the gross proceeds of such Term B-1 Loans.”

(e) Section 2.05(b)(i) of the Credit Agreement is hereby amended by adding at the end thereof the following new additional proviso:

“; provided, further, that solely for purposes of the fiscal year ended December 31, 2005, (x) any prepayment of the Senior Unsecured Term Loans on the Third Amendment Effective Date that would otherwise have been deducted from Consolidated EBITDA in determining Excess Cash Flow shall not be so deducted, and (y) the amount of any mandatory prepayment otherwise required to be made under this Section 2.05(b)(i) (after giving effect to the foregoing clause (x)) for such fiscal year shall be reduced by the amount of the Senior Unsecured Term Loans prepaid on the Third Amendment Effective Date other than with the proceeds of Funded Term B-1 Loans.”

(f) Section 2.07(a) of the Credit Agreement is hereby amended in full to read as follows:

“2.07 Repayment of Loans. (a) Term B-1 Loans. The Borrower shall repay to the Administrative Agent for the ratable account of the Term B-1 Lenders the aggregate principal amount of all Term B-1 Loans outstanding in consecutive quarterly installments as follows (which installments shall be reduced as a result of the application of prepayments in accordance with the order of priority set forth in Section 2.05 or increased as a result of any increase in the amount of Term B-1 Loans pursuant to Section 2.14 (such increased amortization payments to be calculated in the same manner (and on the same basis) as the schedule set forth below for the Term B-1 Loans made as of the Closing Date)):

Date	Term B-1 Loan Principal Amortization Payment
August 21, 2006,	$	1,350,000
November 21, 2006	$	1,350,000
February 21, 2007,	$	1,350,000
May 21, 2007,	$	1,350,000
August 21, 2007,	$	1,350,000
November 21, 2007	$	1,350,000
February 21, 2008,	$	1,350,000
May 21, 2008,	$	1,350,000

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Date	Term B-1 Loan Principal Amortization Payment
August 21, 2008,	$	1,350,000
November 21, 2008	$	1,350,000
February 21, 2009,	$	1,350,000
May 21, 2009,	$	1,350,000
August 21, 2009,	$	1,350,000
November 21, 2009	$	1,350,000
February 21, 2010,	$	130,275,000
May 21, 2010,	$	130,275,000
August 21, 2010,	$	130,275,000
November 21, 2010	$	130,275,000

provided, however, that the final principal repayment installment of the Term B-1 Loans shall be repaid on the Maturity Date and in any event shall be in an amount equal to the aggregate principal amount of all Term B-1 Loans outstanding on such date.”

(g) Section 6.02 of the Credit Agreement is hereby amended by adding at the end thereof the following new paragraph:

“The Borrower hereby acknowledges that (a) the Administrative Agent and/or the Arranger will make available to the Lenders and the L/C Issuer materials and/or information provided by or on behalf of the Borrower hereunder (collectively, “Borrower Materials”) by posting the Borrower Materials on IntraLinks or another similar electronic system (the “Platform”) and (b) certain of the Lenders may be “public-side” Lenders (i.e., Lenders that do not wish to receive material non-public information with respect to the Borrower or its securities) (each, a “Public Lender”). The Borrower hereby agrees that it will use commercially reasonable efforts to identify that portion of the Borrower Materials that may be distributed to the Public Lenders and that (w) all such Borrower Materials shall be clearly and conspicuously marked “PUBLIC” which, at a minimum, shall mean that the word “PUBLIC” shall appear prominently on the first page thereof; (x) by marking Borrower Materials “PUBLIC,” the Borrower shall be deemed to have authorized the Administrative Agent, the Arranger, the L/C Issuer and the Lenders to treat such Borrower Materials as either publicly available information or not material information (although it may be sensitive and proprietary) with respect to the Borrower or its securities for purposes of United States Federal and state securities laws; (y) all Borrower Materials marked “PUBLIC” are permitted to be made available through a portion of the Platform designated “Public Investor;” and (z) the Administrative Agent and the Arranger shall be entitled to treat any Borrower Materials that are not marked “PUBLIC” as being suitable only for posting on a portion of the Platform not designated “Public Investor.””

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(h) Section 6.11 of the Credit Agreement is hereby amended by adding at the end thereof the following new sentence:

“The Term B-1 Loans shall be used solely to (a) refinance and replace the aggregate principal amount of the Term B Loans in full, (b) refinance the outstanding principal amount of all outstanding Senior Unsecured Term Loans and pay all accrued but unpaid interest and any applicable prepayment premium, penalties and costs, and (c) pay fees, costs and expenses related to the transactions contemplated by the Third Amendment.”

(i) Section 7.02 of the Credit Agreement is hereby amended by (i) deleting the word “and” at the end of clause (n) thereof, (ii) deleting the “.” at the end of clause (o) thereof and inserting “; and” in lieu thereof, and (iii) inserting a new clause (p) as follows:

“(p) the Wakefield Bond Guaranty.”

(i) Section 7.03 of the Credit Agreement is hereby amended by (i) deleting the word “and” at the end of clause (b)(xiv) thereof, (ii) deleting the “.” at the end of clause (b)(xv) thereof and inserting “; and” in lieu thereof, and (iii) inserting a new clause (b)(xvi) as follows:

“(xvi) the Wakefield Bond Guaranty.”

(j) Section 7.05 of the Credit Agreement is hereby amended by (i) deleting the word “and” at the end of clause (1) thereof, (ii) deleting the “.” at the end of clause (m) thereof and inserting “; and” in lieu thereof, and (iii) inserting a new clause (n) as follows:

“(n) the Disposition of (i) the Wakefield Property to the City of Wakefield, Nebraska or any political subdivision or economic development authority associated therewith, and (ii) the Wakefield Depot Property to the City of Wakefield, Nebraska or any political subdivision or any charitable organization or foundation.”

SECTION 2. Effectiveness; Assignments; Waivers and Consents; Non-Consenting Lenders. This Amendment, other than the amendments contemplated by Section 1, shall become effective and in full force and effect upon the Administrative Agent’s receipt of counterparts of this Amendment by the Borrower, Holdings and the Required Lenders or, as to any of the foregoing parties, advice satisfactory to the Administrative Agent that each of the foregoing parties has executed this Amendment.

(a) Assignments. Each Term B Lender is required to assign all of its Term B Loans to one or more Term B-1 Lenders, including, without limitation, pursuant to Section 3.07 of the Credit Agreement as amended by this Amendment. Each Term B-1 Lender, the Borrower and the Administrative Agent hereby agree that the Arranger and the Administrative Agent shall arrange and allocate all such assignments and the Administrative Agent or any of its Affiliates may (but shall not be required to) acquire Term B Loans, Converted Term B-1 Loans and Funded Term B-1 Loans and further assign any such Term B Loans, Converted Term B-1 Loans or Funded Term B-1 Loans in order to better effectuate such assignments and the purposes of this Section 2(a).

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(b) Waivers and Consents. Upon the occurrence of the Waiver Effective Date (as defined below):

(i) the Required Lenders hereby consent and agree that the Borrower may incur Term B-1 Loans in an aggregate principal amount of up to $540,000,000;

(ii) the Administrative Agent and the Required Lenders hereby waive any prior notice requirements under Section 2.05(a) of the Credit Agreement in connection with the exchange, conversion, refinancing, substitution and replacement of the Term B Loans as contemplated by this Amendment;

(iii) the Required Lenders and Term B-1 Lenders (including all Continuing Term Lenders) agree that all Term B Loans that are not exchanged for and converted into Converted Term B-1 Loans may be paid in full from the proceeds of Funded Term B-1 Loans, together with all accrued and unpaid interest thereon and any other amounts owing with respect thereto, without requiring the payment in full of any other Term B Loans and hereby waive the provisions of Section 2.12(a) and Section 2.13 to the extent applicable thereto;

(iv) the Required Lenders and the Term B Lenders hereby waive the requirements of Section 10.07 of the Credit Agreement with respect to any assignment of Term B Loans of any Exiting Term B Lender to Term B-1 Lenders made to effectuate the purposes of this Amendment;

(v) each Term B-1 Lender (including each Continuing Term Lender) and the Administrative Agent agree that this Amendment constitutes a Committed Loan Notice under Section 2.02(a) of the Credit Agreement with respect to the Term B-1 Loans and hereby waive any other notice requirements under Section 2.02(a) of the Credit Agreement for purposes of the exchange and conversion of Term B Loans for and into Term B-1 Loans and the making of other Term B-1 Loans on the Third Amendment Effective Date; and

(vi) the Required Lenders hereby waive the restrictions of Section 7.14(a) as relating to the prepayment on the Third Amendment Effective of the Senior Unsecured Term Loans to the extent made from the proceeds of Funded Term B-1 Loans and cash on hand.

(c) Non-Consenting Lenders. The Required Lenders, each Term B-1 Lender and the Borrower hereby agree that, in order to better effectuate the exchange and conversion of Term B-1 Loans for and into Converted Term B-1 Loans, Section 3.07 of the Credit Agreement shall be modified as provided in this Section 2(c) and each Term B Lender that has not entered into one or more Assignment and Assumption to assign all its Term B Loans shall be deemed a Non-Consenting Lender under Section 3.07 of the Credit Agreement for purposes of this Amendment (notwithstanding requirements to the contrary in Section 3.07(d) of the Credit Agreement).

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SECTION 3. Conditions of Effectiveness of Amendments. The amendments to the Credit Agreement set forth in Section 1 shall become effective on the date (the “Third Amendment Effective Date”) when each of the conditions set forth in this Section 3 shall have been satisfied and this Amendment, including the waivers and agreements set forth in Section 2(b), shall become effective on the date (the “Waiver Effective Date”) when the conditions set forth in Section 3(a)(i) below shall have been satisfied:

(a) Execution of Counterparts. The Administrative Agent shall have received counterparts of (i) this Amendment executed by (A) the Borrower and Holdings, (B) the Administrative Agent, (C) the Required Lenders, and (D) Term B-1 Lenders providing Term B-1 Commitments in an aggregate amount equal to $540,000,000 or, as to any of the foregoing parties, advice satisfactory to the Administrative Agent that each of the foregoing parties has executed this Amendment and, if applicable, provided such Term B-1 Commitments, and (ii) the consent attached hereto (the “Consent”) executed by each Guarantor.

(b) Cash on Hand. The Borrower shall have at least $49,000,000 in unrestricted cash on hand available, together with the proceeds of the Term B-1 Loans not used to refinance the outstanding principal amount of Term B Loans held by Exiting Term Lenders, to (i) refinance in full the outstanding principal amount of all outstanding Senior Unsecured Term Loans, (ii) pay all accrued but unpaid interest and any applicable prepayment premium, penalties and costs, and (iii) pay all fees, costs and expenses related to the transactions contemplated by this Amendment.

(c) Senior Unsecured Term Loans. The Administrative Agent shall have received evidence reasonably satisfactory to it that the Senior Unsecured Term Loans shall have been repaid in full and all other amounts in respect thereof, including all accrued interest and any prepayment premium and penalties, or otherwise owing under the Senior Unsecured Term Loan Agreement shall have been paid in full or, in any such case, upon the funding of the Funded Term B-1 Loans, shall be so repaid or paid in full.

(d) Payment of Fees and Expenses. The Borrower shall have paid all fees and expenses (including the reasonable fees and expenses of Shearman & Sterling LLP) incurred by the Arranger and the Administrative Agent in connection with the preparation, negotiation and execution of this Amendment or otherwise required to be paid in connection with this Amendment or under the Loan Documents.

(e) Evidence of Debt. Each Term B-1 Lender shall have received, if requested, and if such Term B-1 Lender shall have surrendered any Term B Note or Term B Notes held by such Term B-1 Lender, one or more Notes payable to the order of such Term B-1 Lender duly executed by the Borrower, in substantially the form of Exhibit A attached hereto, evidencing the Term B-1 Loans of such Term B-1 Lender.

(f) Certain Exiting Lenders. The Borrower shall have paid to each of the Exiting Term Lenders, if any, that failed to execute and deliver one or more Assignment and Assumption in order to assign its Term B Loans pursuant to Section 2(a) an amount equal to the aggregate outstanding principal amount of such Term B Loans Dollar for Dollar from the proceeds of Funded Term B-1 Loans together with all accrued but unpaid interest to the Third Amendment Effective Date on such Term B Loans and any other amounts payable in connection therewith under the Loan Documents.

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(g) Resolutions. The Administrative Agent shall have received certified copies of (i) the resolutions of the Board of Directors of (A) Holdings and the Borrower evidencing approval of this Amendment and all matters and transactions contemplated hereby and (B) each Guarantor evidencing approval of the Consent and the matters and transactions contemplated hereby and thereby and (ii) all documents evidencing other necessary corporate action and governmental and other material third party approvals and consents, if any, with respect to this Amendment, the Consent and the matters and transactions contemplated hereby and thereby.

(h) Certificates. The Administrative Agent shall have received a certificate of the Secretary or an Assistant Secretary (or another Responsible Officer) of Holdings, the Borrower and each other Loan Party certifying (i) the names and true signatures of the officers of Holdings, the Borrower and such other Loan Party authorized to sign this Amendment and the Consent and the other documents to be delivered hereunder and thereunder, (ii) that no authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body, or any third party to any agreements and instruments of any Loan Party, is required for the due execution, delivery or performance by the Loan Parties of this Amendment and the Consent, (iii) the representations and warranties contained in Section 5 of this Amendment are true and correct in all material respects (except to the extent that such representations and warranties specifically refer to an earlier date, in which case they shall be true and correct as of such earlier date) and (iv) no Default has occurred and is continuing or would result from this Amendment and the matters and transactions contemplated hereby.

(i) Legal Opinions. An opinion of Weil, Gotshal & Manges LLP, counsel for the Loan Parties, addressed to the Administrative Agent and each Lender, in substantially the form attached as Exhibit B hereto, which shall include, among other things, opinions as to the continuing validity of the liens on, and security interests in, the Collateral created pursuant to the Loan Documents and the perfection of such liens and security interests.

(j) Legal Details, Etc. All documents executed or submitted pursuant hereto or contemplated hereby shall be reasonably satisfactory in form and substance to the Arranger, the Administrative Agent and Shearman & Sterling LLP, as counsel to the Arranger and the Administrative Agent.

(k) Conditions to Credit Extensions. All conditions precedent set forth in Section 4.02 of the Credit Agreement shall have been satisfied.

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SECTION 4. Post-Closing Requirements Relating to the Mortgaged Properties. Within thirty (30) days after the Third Amendment Effective Date (which time period may be extended for a period of an additional thirty (30) days up to two (2) times in the sole discretion of the Administrative Agent), the Borrower shall, and shall cause each Subsidiary to, furnish to the Administrative Agent:

(a) Evidence that mortgage amendments, supplements and restatements in form and substance reasonably satisfactory to the Administrative Agent (the “Mortgage Amendments”) with respect to each of the existing Mortgages have been duly executed, acknowledged and delivered by a duly authorized officer of each party thereto on or before such date and are in form suitable for filing and recording in all filing or recording offices that the Administrative Agent may deem necessary or desirable;

(b) With respect to the real properties subject to the existing Mortgages (the “Mortgaged Properties”), fully paid title searches and, with respect to any Mortgaged Properties located in Minnesota, date-down endorsements to the existing title insurance policies;

(c) Such advice from local counsel retained by the Borrower in Minnesota as may be reasonably required by the Administrative Agent; and

(d) Evidence that all fees, costs and expenses have been paid in connection with the preparation, execution, filing and recordation of the Mortgage Amendments, including, without limitation, reasonable attorneys’ fees (including the reasonable fees and expenses of Shearman & Sterling LLP), filing and recording fees, title insurance company coordination fees, documentary stamp, mortgage and intangible taxes and title search charges and other charges incurred in connection with the recordation of the Mortgage Amendments and the other matters described in this Section 4 and as otherwise required to be paid in connection therewith under Section 10.04 of the Credit Agreement.

SECTION 5. Representations and Warranties. Each of Holdings and the Borrower represents and warrants as follows:

(a) The execution, delivery and performance by each Loan Party of this Amendment are within such Loan Party’s corporate or other powers, have been duly authorized by all necessary corporate or other organizational action, and do not and will not (i) contravene the terms of any of such Person’s Organization Documents; (ii) conflict with or result in any breach or contravention of, or the creation of any Lien under (other than as permitted by Section 7.01 of the Credit Agreement), or require any payment to be made under (A) any Contractual Obligation to which such Person is a party or affecting such Person or the properties of such Person or any of its Subsidiaries or (B) any order, injunction, writ or decree of any Governmental Authority or any arbitral award to which such Person or its property is subject; or (iii) violate any Law; except with respect to any breach or contravention or payment (but not creation of Liens) referred to in clause (ii)(A), to the extent that such conflict, breach, contravention or payment could not reasonably be expected to have a Material Adverse Effect.

(b) This Amendment and the Consent have been duly executed and delivered by each Loan Party that is party hereto or thereto, as applicable. Each of this Amendment and

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the Consent and each Loan Document after giving effect to the amendments in Section 1, constitutes a legal, valid and binding obligation of each Loan Party that is party hereto or thereto, as applicable, enforceable against such Loan Party in accordance with its terms, except as such enforceability may be limited by bankruptcy insolvency, reorganization, receivership, moratorium or other laws affecting creditors’ rights generally and by general principles of equity.

(c) No Default has occurred and is continuing or will occur as a result of the transactions contemplated by this Amendment, and such transactions are permitted under the Senior Subordinated Notes Indenture and the Borrower has complied with all requirements thereunder in connection with such transactions.

(d) Each of the representations and warranties of each Loan Party contained in Article V of the Credit Agreement and each other Loan Document, immediately before and after giving effect to this Amendment and the matters and transactions contemplated hereby, is true and correct in all material respects on and as of the date first above written, except to the extent that such representations and warranties specifically refer to an earlier date, in which case they shall be true and correct in all material respects as of such earlier date.

SECTION 6. Reference to and Effect on the Credit Agreement and the Loan Documents.

(a) On and after the effectiveness of this Amendment, each reference in the Credit Agreement to “this Agreement”, “hereunder”, “hereof” or words of like import referring to the Credit Agreement, and each reference in the Notes and each of the other Loan Documents to “the Credit Agreement”, “thereunder”, “thereof” or words of like import referring to the Credit Agreement, shall mean and be a reference to the Credit Agreement, as amended by this Amendment.

(b) The Credit Agreement, the Notes and each of the other Loan Documents, as specifically amended by this Amendment (and as contemplated to be amended, modified, supplemented, restated, substituted or replaced by this Amendment) are and shall continue to be in full force and effect and is hereby in all respects ratified and confirmed. Without limiting the generality of the foregoing, the Collateral Documents and all of the Collateral described therein do and shall continue to secure the payment of all Obligations of the Loan Parties under the Loan Documents, in each case, as amended by this Amendment (and as contemplated to be amended, modified, supplemented, restated, substituted or replaced by this Amendment).

(c) The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of any Lender or the Administrative Agent under any of the Loan Documents, nor constitute a waiver of any provision of any of the Loan Documents. On and after the effectiveness of this Amendment, this Amendment shall for all purposes constitute a Loan Document.

SECTION 7. Costs and Expenses. The Borrower agrees that all costs and expenses of the Administrative Agent in connection with the preparation, execution, delivery and administration, modification and amendment of this Amendment and the other instruments and documents to be delivered hereunder or in connection herewith (including, without limitation,

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the reasonable fees and expenses of counsel for the Administrative Agent), are costs and expenses that the Borrower is required to pay or reimburse pursuant to Section 10.04 of the Credit Agreement.

SECTION 8. Execution in Counterparts. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute but one and the same agreement. Delivery of an executed counterpart of a signature page to this Amendment by telecopier shall be effective as delivery of a manually executed counterpart of this Amendment.

SECTION 9. Governing Law. This Amendment shall be governed by, and construed in accordance with, the laws of the State of New York.

[The remainder of this page is intentionally left blank]

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IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized, as of the date first above written.

MICHAEL FOODS, INC.

By

Name:

Title:

M-FOODS HOLDINGS, INC.

By

Name:

Title:

BANK OF AMERICA, N.A.,

as Administrative Agent and as Lender

By

Name:

Title:

Other Lenders:

[Please print name of lender]

By

Name:

Title:

CONSENT

Dated as of November 22, 2005

Each of the undersigned, as Guarantor under, as applicable, (i) the Parent Guaranty dated as of November 20, 2003 or (ii) the Subsidiary Guaranty dated as of November 20, 2003 (collectively, the “Guaranty”), in each case, in favor of the Administrative Agent and the Lenders parties to the Credit Agreement referred to in the foregoing Amendment, hereby consents to such Amendment and the transactions contemplated by such Amendment and hereby confirms and agrees that (a) notwithstanding the effectiveness of such Amendment, the Guaranty is, and shall continue to be, in full force and effect and is hereby ratified and confirmed in all respects, except that, on and after the effectiveness of such Amendment, each reference in the Guaranty to the “Credit Agreement”, “thereunder”, “thereof” or words of like import shall mean and be a reference to the Credit Agreement, as amended by such Amendment, and (b) the Collateral Documents to which such Guarantor is a party and all of the Collateral described therein do, and shall continue to, secure the payment of all of the obligations to be secured thereunder.

[The remainder of this page is intentionally left blank]

M-FOODS HOLDINGS, INC.

By

Name:

Title:

MICHAEL FOODS OF DELAWARE, INC.

By

Name:

Title:

CASA TRUCKING, INC.

By

Name:

Title:

CRYSTAL FARMS REFRIGERATED

DISTRIBUTION COMPANY

By

Name:

Title:

KMS DAIRY, INC.

By

Name:

Title:

MINNESOTA PRODUCTS, INC.

By

Name:

Title:

NORTHERN STAR CO.

By

Name:

Title:

PAPETTI’S HYGRADE EGG PRODUCTS, INC.

By

Name:

Title:

M.G. WALDBAUM COMPANY

By

Name:

Title:

FARM FRESH FOODS, INC.

By

Name:

Title:

WFC, INC.

By

Name:

Title:

WISCO FARM COOPERATIVE

By

Name:

Title:

EXHIBIT A

FORM OF TERM B-1 NOTE

$                                         , 2005

FOR VALUE RECEIVED, the undersigned (the “Borrower”), hereby promises to pay to                      or registered assigns (the “Lender”), in accordance with the provisions of the Agreement (as hereinafter defined), the aggregate unpaid principal amount of each Term B-1 Loan made by the Lender to the Borrower under that certain Credit Agreement dated as of November 20, 2003 (as amended by Amendment No. 1 to Credit Agreement dated as of September 17, 2004, Amendment No. 2 to Credit Agreement dated as of May 18, 2005 and Amendment No. 3 to Credit Agreement dated as of November 22, 2005 and as further amended, restated, extended, supplemented or otherwise modified in writing from time to time, the “Agreement;” the terms defined therein being used herein as therein defined), among the Borrower, Holdings, the Lenders from time to time party thereto, Bank of America, N.A., as Administrative Agent, L/C Issuer and Swing Line Lender, and the other Agents named therein.

The Borrower promises to pay interest on the aggregate unpaid principal amount of each Term B-1 Loan made by the Lender to the Borrower under the Agreement from the date of such Loan until such principal amount is paid in full, at such interest rates and at such times as provided in the Agreement. All payments of principal and interest shall be made to the Administrative Agent for the account of the Lender in Dollars in immediately available funds at the Administrative Agent’s Office. If any amount is not paid in full when due hereunder, such unpaid amount shall bear interest, to be paid upon demand, from the due date thereof until the date of actual payment (and before as well as after judgment) computed at the per annum rate set forth in the Agreement.

This Term B-1 Note is one of the Term B-1 Notes referred to in the Agreement, is entitled to the benefits thereof and may be prepaid in whole or in part subject to the terms and conditions provided therein. This Term B-1 Note is also entitled to the benefits of the Guaranty and is secured by the Collateral. Upon the occurrence and continuation of one or more of the Events of Default specified in the Agreement, all amounts then remaining unpaid on this Term B-1 Note shall become, or may be declared to be, immediately due and payable all as provided in the Agreement. Term B-1 Loans made by the Lender shall be evidenced by one or more loan accounts or records maintained by the Lender in the ordinary course of business. The Lender may also attach schedules to this Term B-1 Note and endorse thereon the date, amount and maturity of its Loans and payments with respect thereto.

The Borrower, for itself, its successors and assigns, hereby waives diligence, presentment, protest and demand and notice of protest, demand, dishonor and non-payment of this Term B-1 Note.

[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]

THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.

MICHAEL FOODS, INC.

By:

Name:

Title:

LOANS AND PAYMENTS WITH RESPECT THERETO

Date Type of
Loan Made Amount of
Loan Made End of
Interest
Period Amount of
Principal or
Interest Paid
This Date Outstanding
Principal
Balance This
Date Notation
Made By

EXHIBIT B

FORM OF LEGAL OPINION

SCHEDULE 2.01

EX-12.1

Exhibit 12.1

Michael Foods, Inc.

Computation of Ratio of Earnings to Fixed Charges

For the Periods Ended

(in thousands, except ratios)

	COMPANY									PREDECESSOR								2001 PREDECESSOR
	Year ended December 31, 2005			Year ended December 31, 2004			One month ended December 31, 2003			Eleven months ended November 30, 2003			Year ended December 31, 2002		Nine Months ended December 31, 2001			Three Months ended March 31, 2001
Earnings:
Income (loss) before income taxes	$	53,125		$	54,495		$	(7,365	)	$	(29,547	)	$	48,204	$	21,815		$	(9,312	)
Add:
Fixed charges		48,395			44,618			5,103			43,530			52,355		46,045			3,692
Amortization of capitalized interest		—			572			48			524			572		429			143
Subtract:
Interest capitalized		(461	)		(168	)		—			(32	)		—		(196	)		—
Adjusted Earnings	$	101,059		$	99,517		$	(2,214	)	$	14,475		$	101,131	$	68,093		$	(5,477	)
Fixed Charges:
Interest expensed and capitalized	$	45,126		$	41,239		$	4,782		$	38,057		$	46,737	$	40,172		$	3,292
Interest portion of rentals		1,276			1,333			151			1,657			1,400		1,155			375
Amortization of capitalized debt expense		1,993			2,046			170			3,816			4,218		2,359			25
	$	48,395		$	44,618		$	5,103		$	43,530		$	52,355	$	43,686		$	3,692
Ratio of earnings to fixed charges (1)		2.09			2.23			—			—			1.93		1.56			—

(1) Due to the Company’s loss for the one month ended December 31, 2003, and the Predecessor’s loss for the eleven months ended November 30, 2003, and the 2001 Predecessor’s loss for the three months ended March 31, 2001, the ratio coverage in the respective periods was less the 1:1. The Company, Predecessor and the 2001 Predecessor needed to generate additional earnings of $7,317,000, $29,056,000 and $9,169,000 for the one month ended December 31, 2003, the eleven months ended November 30, 2003, and the three months ended March 31, 2001, respectively, to achieve a coverage ratio of 1:1.

EX-21.1

EXHIBIT 21.1

SUBSIDIARIES OF MICHAEL FOODS, INC.

NAME	STATE OF INCORPORATION
Crystal Farms Refrigerated Distribution Company	Minnesota
Northern Star Co.	Minnesota
KMS Dairy, Inc. M. G. Waldbaum Company Papetti’s Hygrade Egg Products, Inc.	Minnesota Nebraska Minnesota
Casa Trucking, Inc.	Minnesota
Wisco Farm Cooperative	Wisconsin
WFC, Inc.	Wisconsin
Farm Fresh Foods, Inc.	Nevada
Michael Foods of Delaware, Inc. Minnesota Products, Inc.	Delaware Minnesota
MFI Food Canada, Ltd.	Canada
Trilogy Egg Products Inc.	Canada

EX-31.1

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Gregg A. Ostrander, certify that:

1. I have reviewed this annual report on Form 10-K of Michael Foods, Inc.;

2. Based on my knowledge, this annual 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 report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter of 2005 that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 23, 2006

/s/ Gregg A. Ostrander

Chairman and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, John D. Reedy, certify that:

1. I have reviewed this annual report on Form 10-K of Michael Foods, Inc.;

2. Based on my knowledge, this annual 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 report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter of 2005 that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 23, 2006

/s/ John D. Reedy

Executive Vice President and

Chief Financial Officer