-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Gyn4T+Upu35rMta0H1GoEUZyv7XKe5oX0kiLCmvBYjIFnV8n+zjcYNwsG5WVSrdG IFvGVIj1tSphMZz/xbYjIQ== 0000897101-99-000521.txt : 19990517 0000897101-99-000521.hdr.sgml : 19990517 ACCESSION NUMBER: 0000897101-99-000521 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MICHAEL FOODS INC /MN CENTRAL INDEX KEY: 0000768158 STANDARD INDUSTRIAL CLASSIFICATION: AGRICULTURE PRODUCTION - LIVESTOCK & ANIMAL SPECIALTIES [0200] IRS NUMBER: 410498850 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-15638 FILM NUMBER: 99621663 BUSINESS ADDRESS: STREET 1: 5353 WAYZATA BLVD STREET 2: PARK NATIONAL BANK BLDG STE 324 CITY: MINNEAPOLIS STATE: MN ZIP: 55416 BUSINESS PHONE: 6125461500 MAIL ADDRESS: STREET 1: 610 PARK NATIONAL BANK BUILDING STREET 2: 5353 WAYZATA BOULEVARD CITY: MINNEAPOLIS STATE: MN ZIP: 55416 FORMER COMPANY: FORMER CONFORMED NAME: NORTH STAR UNIVERSAL INC DATE OF NAME CHANGE: 19920703 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to ________________ Commission File Number: 0-15638 MICHAEL FOODS, INC. (Exact name of registrant as specified in its charter) Minnesota 41-0498850 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) Suite 324, Park National Bank Building 5353 Wayzata Boulevard Minneapolis, MN 55416 (Address of principal executive offices) (Zip code) (612) 546-1500 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No The number of shares outstanding of the registrant's Common Stock, $.01 par value, as of May 3, 1999 was 20,586,924 shares. PART I - FINANCIAL INFORMATION MICHAEL FOODS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) ================================================================================ March 31, December 31, ASSETS 1999 1998 - ------ ------------ ------------ CURRENT ASSETS Cash and equivalents $ 4,679,000 $ 2,047,000 Accounts receivable, less allowances 92,116,000 97,639,000 Inventories 77,249,000 74,250,000 Prepaid expenses and other 3,727,000 3,884,000 ------------ ------------ Total current assets 177,771,000 177,820,000 PROPERTY, PLANT AND EQUIPMENT-AT COST Land 4,336,000 4,336,000 Buildings and improvements 105,246,000 105,567,000 Machinery and equipment 341,958,000 328,067,000 ------------ ------------ 451,540,000 437,970,000 Less accumulated depreciation 195,939,000 187,759,000 ------------ ------------ 255,601,000 250,211,000 OTHER ASSETS Goodwill, net 119,311,000 120,172,000 Investments in Joint Ventures and other assets 12,440,000 3,313,000 ------------ ------------ 131,751,000 123,485,000 ------------ ------------ $565,123,000 $551,516,000 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ CURRENT LIABILITIES Current maturities of long-term debt $ 10,667,000 $ 10,663,000 Accounts payable 49,426,000 44,376,000 Accrued Liabilities Compensation 7,483,000 11,034,000 Insurance 8,016,000 7,369,000 Customer programs 19,641,000 19,624,000 Other 23,688,000 23,457,000 ------------ ------------ Total current liabilities 118,921,000 116,523,000 LONG-TERM DEBT, less current maturities 170,914,000 155,444,000 DEFERRED INCOME TAXES 32,669,000 35,400,000 COMMITMENTS AND CONTINGENCIES - - SHAREHOLDERS' EQUITY Common stock 206,000 211,000 Additional paid-in capital 111,195,000 119,871,000 Retained earnings 131,218,000 124,067,000 ------------ ------------ 242,619,000 244,149,000 ------------ ------------ $565,123,000 $551,516,000 ============ ============ ================================================================================ See accompanying notes to condensed consolidated financial statements. 2 MICHAEL FOODS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS Three Months Ended March 31, (Unaudited) ================================================================================ 1999 1998 ------------ ------------ Net sales $253,378,000 $245,589,000 Cost of sales 212,067,000 205,433,000 ------------ ------------ Gross profit 41,311,000 40,156,000 Selling, general and administrative expenses 24,224,000 23,144,000 ------------ ------------ Operating profit 17,087,000 17,012,000 Interest expense, net 2,820,000 2,764,000 ------------ ------------ Earnings before income taxes 14,267,000 14,248,000 Income tax expense 5,850,000 5,990,000 ------------ ------------ NET EARNINGS $ 8,417,000 $ 8,258,000 ============ ============ Net Earnings Per Share Basic $ 0.40 $ 0.38 Diluted $ 0.40 $ 0.37 ============ ============ Weighted average shares outstanding Basic 21,009,000 21,846,000 Diluted 21,230,000 22,208,000 ============ ============ ================================================================================ See accompanying notes to condensed consolidated financial statements. 3 MICHAEL FOODS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended March 31, (Unaudited) ================================================================================
1999 1998 ------------ ------------ Net cash provided by operating activities $ 22,199,000 $ 20,425,000 Cash flows from investing activities: Capital expenditures (15,308,000) (19,514,000) Investments in joint ventures and other assets (9,169,000) 366,000 ------------ ------------ Net cash used in investing activities (24,477,000) (19,148,000) Cash flows from financing activities: Payments on long-term debt (36,526,000) (795,000) Proceeds from long-term debt 52,000,000 700,000 Proceeds from issuance of common stock 219,000 766,000 Repurchase of common stock (9,518,000) -- Dividends (1,265,000) (1,095,000) ------------ ------------ Net cash provided by (used in) financing activities 4,910,000 (424,000) ------------ ------------ Net increase in cash and equivalents 2,632,000 853,000 Cash and equivalents at beginning of year 2,047,000 4,038,000 ------------ ------------ Cash and equivalents at end of period $ 4,679,000 $ 4,891,000 ============ ============
================================================================================ See accompanying notes to condensed consolidated financial statements. 4 MICHAEL FOODS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ (Unaudited) NOTE A - BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with Regulation S-X pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading. Michael Foods, Inc. (the "Company") utilizes a fiscal year consisting of either 52 or 53 weeks, ending on the Saturday nearest to December 31 each year. The quarters ended March 31, 1999 and 1998 each included thirteen weeks of operations. For clarity of presentation, the Company has described both periods presented as if the quarter ended on March 31. In the opinion of management, the unaudited condensed consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position as of March 31, 1999 and the results of operations for the three months ended March 31, 1999 and 1998 and cash flows for the three months ended March 31, 1999 and 1998. The results of operations for the three months ended March 31, 1999 are not necessarily indicative of the results for the full year. The Company's basic net earnings per share is computed by dividing net earnings by the weighted average number of outstanding common shares. The Company's diluted net earnings per share is computed by dividing net earnings by the weighted average number of outstanding common shares and common share equivalents relating to stock options, when dilutive. Options to purchase 769,165 shares of Common Stock, with a weighted average exercise price of $24.83, which were outstanding during the three month period ended March 31, 1999, were excluded from the computation of common share equivalents for that period because they were anti-dilutive. There were no anti-dilutive options outstanding during the three month period ended March 31, 1998. NOTE B - INVENTORIES Inventories, other than flocks, are stated at the lower of cost (determined on a first-in, first-out basis) or market. Flock inventory represents the cost of purchasing and raising flocks to laying maturity, at which time their cost is amortized to operations over their expected useful life of generally one to two years, assuming no salvage value. Inventories consist of the following: March 31, December 31, 1999 1998 ------------- ------------ Raw materials and supplies $19,814,000 $15,389,000 Work in process and finished goods 38,004,000 36,977,000 Flocks 19,431,000 21,884,000 ------------- ------------ $77,249,000 $74,250,000 ============ =========== NOTE C - COMMITMENTS AND CONTINGENCIES Use of Estimates - ---------------- Preparation of the Company's consolidated financial statements requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and related revenues and expenses. Actual results could differ from the estimates used by management. 5 MICHAEL FOODS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ (Unaudited) NOTE C - COMMITMENTS AND CONTINGENCIES, cont. License Agreement - ----------------- The Company has an exclusive license agreement for a patented process for the production and sale of extended shelf-life egg products. Under the license agreement, the Company has the right to defend and prosecute infringement of the licensed patents. The U.S. Federal Court of Appeals has upheld the validity of the patents subject to the license agreement, but, subsequently, a patent examiner at the U.S. Patent and Trademark Office rejected the patents. The Company is appealing the decision of the examiner and believes the validity of the patents will ultimately be upheld. During the appeal process, the patents remain valid and in full force and effect. These patents are scheduled to expire in 2006. Litigation - ---------- The Company is engaged in routine litigation incidental to its business. Management believes it will not have a material effect upon its consolidated financial position, liquidity or results of operations. NOTE D - SHAREHOLDERS' EQUITY During the three months ended March 31, 1999, the Company repurchased 444,800 shares of Common Stock under a share repurchase program. Such repurchases began in July 1998. Through March 31, 1999, the Company had repurchased 1,488,000 shares of Common Stock. NOTE E - RISKS AND UNCERTAINTIES The Year 2000 issue relates to limitations in computer systems and applications that may prevent proper recognition of the year 2000. The potential effect of the Year 2000 issue on the Company and its business partners will not be fully determinable until 2000 and thereafter. If Year 2000 modifications are not properly completed either by the Company, or entities the Company conducts business with, the Company's net sales and financial condition could be adversely effected. NOTE F - INTERNATIONAL INVESTMENTS AND SUBSEQUENT EVENT During the three months ended March 31, 1999, the Company made two investments in Europe to further its leadership in global egg products processing. The first investment was a 25% interest in Belovo, S. A., a specialty egg products company based in Belgium. The second investment was a 50/50 joint venture with the founding shareholders of Belovo forming The Lipid Company, a company involved in the extraction of phospholipids from egg yolks for use in the field of nutraceuticals. In May 1999, the Company's Kohler Mix Specialties, Inc. subsidiary completed an acquisition of certain operating assets, customer list and the long-term lease of a dairy mix plant from H. P. Hood Inc. The Company has an option to purchase the building and land at the lease's termination. The plant mainly produces ultra-high temperature pasteurized dairy mixes for foodservice customers in the eastern United States. The facility generated 1998 net sales of approximately $37 million. 6 MICHAEL FOODS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ (Unaudited) NOTE G - BUSINESS SEGMENTS The Company has adopted Statement of Financial Accounting Standards No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. The Company operates in four reportable segments - Egg Products, Refrigerated Distribution, Dairy Products and Potato Products. Certain financial information on the Company's operating segments is as follows (unaudited, in thousands):
Egg Refrigerated Dairy Potato Products Distribution Products Products Corporate Total -------------------------------------------------------------------------------- QUARTER ENDED MARCH 31, 1999: External net sales $152,150 $59,122 $28,662 $13,444 N/A $253,378 Intersegment sales 5,694 21 268 607 N/A 6,590 Operating profit (loss) 14,982 2,050 896 1,192 (2,033) 17,087 QUARTER ENDED MARCH 31, 1998: External net sales $151,807 $53,025 $28,148 $12,609 N/A $245,589 Intersegment sales 5,930 31 455 479 N/A 6,895 Operating profit (loss) 15,330 1,794 1,082 625 (1,819) 17,012
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - -------------------------------------------------------------------------------- OF OPERATIONS - ------------- THREE MONTHS ENDED MARCH 31, 1999 VS THREE MONTHS ENDED MARCH 31, 1998 RESULTS OF OPERATIONS Readers are directed to Note G - Business Segments for data on the unaudited financial results of the Company's four business segments for the three months ended March 31, 1999 and 1998. Egg Products Division net sales for the 1999 period reflected unit sales increases, particularly for value-added products, which more than offset deflationary pricing impacts on certain products. Sales were particularly strong for precooked frozen omelets, patties and curds. Egg prices decreased approximately 5% compared to first quarter 1998 levels, as reported by Urner Barry Publications - a widely quoted industry pricing service. This decrease helped reduce the cost of purchased eggs, while also reducing selling prices for certain egg products and shell eggs. Approximately two-thirds of the Division's annual egg needs are purchased under contracts, or in the spot market. While a portion of these eggs are secured under fixed price contracts, a majority are priced according to the cost of grain inputs or to egg market prices as reported by Urner Barry. Approximately one-third of annual egg needs are sourced from internal flocks, where feed costs typically represent roughly two-thirds of the cost of producing such eggs. Feed costs were lower in the 1999 period, compared to the 1998 period, due to lower prices for both corn and soybean meal. Decreased egg costs, for both internally and externally procured eggs, in the 1999 period, compared to the 1998 period, were more than offset by pricing weakness, creating margin pressure for certain egg products. The most effected were egg products sold to industrial users such as bakeries and other food processors. Refrigerated Distribution Division net sales for the 1999 period reflected strong unit sales increases, with cheese, butter, and potato products showing particular strength. Sales growth resulted from a brand repositioning over the past two years and a more recent consumer advertising campaign in selected markets, along with new account activity and new product introductions. The volume growth, along with a decline in product costs related to the national butterfat market, resulted in margin expansion in the 1999 period. 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED ================================================================================ THREE MONTHS ENDED MARCH 31, 1999 VS THREE MONTHS ENDED MARCH 31, 1998, CONT. RESULTS OF OPERATIONS, CONT. The modest Dairy Products Division net sales increase for the 1999 period reflected strong unit sales gains for core dairy mix and creamer products, which more than offset the effects of a recall of certain cartoned specialty dairy products early in the period. As a result of the recall, sales volumes for cartoned products (approximately 15-20% of annual sales) for the main dairy products facility were well below normal levels for the 1999 period. The recall has effectively been completed and production and sales of cartoned products from the main plant have resumed. However, to date, such production and sales have not returned to pre-recall levels. Divisional operating profit declined in the 1999 period as a result of incremental expenses incurred during the recall period which were outside of the scope of insurance coverage. Potato Products Division net sales for the 1999 period reflected a strong unit sales increase, particularly for foodservice mashed items. New account activity, same-account sales growth and new product introductions all contributed to the sales gain. The significant operating profit increase in the 1999 period resulted primarily from the volume growth, as plant operations at the main potato processing facility benefited from the increased production throughput. The decrease in gross profit margin of the Company for the period ended March 31, 1999, as compared to the results of the same period in 1998, reflected the factors discussed above, particularly the weakness in the industrial segment of the Egg Products Division. It is management's strategy to increase value-added product sales as a percent of total sales over time, while decreasing commodity-sensitive products' contribution to consolidated sales. These efforts historically have been beneficial to gross profit margins in most periods. Selling, general and administrative expenses increased as a percent of sales in the period ended March 31, 1999, as compared to the results of the same period in 1998. Expenses increased due to amortization of the costs associated with the Company's information systems upgrade project and due to additional sales and marketing efforts. GENERAL Certain of the Company's products are sensitive to changes in commodity prices. The Company's Egg Products Division derived approximately 6% of the Division's first three months of 1999 net sales from shell eggs, which are sensitive to commodity price swings. Value-added extended shelf-life liquid egg products lines and precooked egg products accounted for approximately 50% of the Egg Products Division's net sales. The remainder of Egg Products Division sales is derived from the sale of other egg products, which vary from being commodity-sensitive to value-added. Gross profit from shell eggs is primarily dependent upon the relationship between shell egg prices and the cost of feed, both of which can fluctuate significantly. Shell egg pricing in the 1999 period was approximately 5% below 1998 levels as measured by a widely quoted pricing service. Gross profit margins for extended shelf-life liquid eggs, egg substitutes, and precooked egg products are less sensitive to commodity price fluctuations than are other egg products or shell eggs. The Company's Refrigerated Distribution Division derives approximately 70% of its net sales from refrigerated products produced by others, thereby reducing the effects of commodity price swings. The balance of refrigerated distribution sales are from shell eggs, some of which are produced by the Egg Products Division and are sold on a distribution, or non-commodity, basis by the Refrigerated Distribution Division. 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED ================================================================================ THREE MONTHS ENDED MARCH 31, 1999 VS THREE MONTHS ENDED MARCH 31, 1998, CONT. GENERAL, CONT. The Dairy Products Division sells its products primarily on a cost-plus basis and, therefore, the Division's earnings are not typically affected greatly by raw ingredient price fluctuations, except over short time periods. The Potato Products Division typically purchases 70%-90% of its raw potatoes from contract producers under annual contracts. The remainder is purchased at market prices to satisfy short-term production requirements or to take advantage of market prices when they are lower than contracted prices. Moderate variations in the purchase price of raw materials or the selling price per pound of end products can have a significant effect on Potato Products Division operating results. Inflation is not expected to have a significant impact on the Company's business. The Company generally has been able to offset the impact of inflation through a combination of productivity gains and price increases. CAPITAL RESOURCES AND LIQUIDITY Acquisitions and capital expenditures have been, and will likely continue to be, a significant capital requirement. The Company plans to continue to invest in state-of-the-art production facilities to enhance its competitive position. Historically, the Company has financed its growth principally from internally generated funds, bank borrowings, issuance of senior debt and the sale of Common Stock. The Company believes that these financing alternatives will continue to meet its anticipated needs. During the 1999 period, the Company made two investments in Europe. The first investment was a 25% interest in Belovo, S. A., a specialty egg products company based in Belgium. The second investment was a 50/50 joint venture with the founding shareholders of Belovo forming The Lipid Company, a company involved in the extraction of phospholipids from egg yolks for use in the field of nutraceuticals. The cash paid at the time of closing the transactions was approximately $9.3 million, which was funded through the Company's bank line of credit. The investments will expand the Company's leadership position in global egg products processing. Subsequent to the end of the 1999 period, the Company completed a previously announced acquisition of certain operating assets and the long-term lease of a dairy products plant in Connecticut (see Part II - Item 5). The cash paid at time of closing was approximately $5.7 million, which was funded through the Company's bank line of credit. This transaction will greatly expand the Company's Dairy Products business in the eastern United States. The Company invested $15,308,000 in capital expenditures during the three months ended March 31, 1999. The Company plans to spend approximately $75,000,000 in total capital expenditures in 1999, the majority of which is to expand production capacity for value-added products. The Company has an unsecured line of credit for $80,000,000 with its principal banks. As of March 31, 1999, $44,400,000 was outstanding under this line of credit. In July 1998, the Company's Board of Directors authorized the purchase of up to two million shares of Common Stock on the open market. Through March 31, 1999, the Company had repurchased 1,488,000 shares of Common Stock. The line of credit may be used to finance additional repurchases. 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED ================================================================================ THREE MONTHS ENDED MARCH 31, 1999 VS THREE MONTHS ENDED MARCH 31, 1998, CONT. SEASONALITY Consolidated quarterly operating results are affected by the seasonality of the Company's net sales and operating profits. Specifically, shell egg prices typically rise seasonally in the first and fourth quarters of the year due to increased demand during holiday periods. Generally, refrigerated distribution operations experience higher net sales and operating profits in the fourth quarter, coinciding with incremental consumer demand during the holiday season. Net sales and operating profits from dairy operations typically are significantly higher in the second and third quarters due to increased consumption of ice milk and ice cream products during the summer months. Operating profits from potato products are less seasonal, but tend to be higher in the second half of the year coinciding with the potato harvest. YEAR 2000 The Company's Year 2000 initiative is separated into several projects: legacy systems, personal computer components, wide area network components, local area network components, and non-computer components. The approach for each of these projects includes an inventory of possible Year 2000 components, an assessment of Year 2000 compliance of each component, and identification and execution of corrective actions for items that fail the assessment phase. In 1995, the Company undertook implementation of the SAP Enterprise Resource Planning system as a means to present a single interface with customers and to have better information available for management to make more effective decisions. The SAP system encompasses all significant processes and has been certified Year 2000 compliant by an outside party. This project addresses and replaces a majority of the Company's legacy systems and is scheduled for completion before the end of 1999, except for the Refrigerated Distribution Division. That division's legacy systems are currently being addressed and are expected to be Year 2000 compliant by September 1999. Beyond the SAP project, several non-critical legacy systems are being addressed throughout 1999. The costs to modify and test any remaining legacy systems, if necessary, would not be material to the consolidated financial position, liquidity or results of operations of the Company. The Company completed corrective actions for all personal computer hardware in late 1998. An evaluation and any needed remediation of personal computer software is expected to be completed by July 1999. The remaining information technology systems for wide area networking and local area networking are currently being assessed for Year 2000 compliance, with corrective action to be completed by June 1999. The Company's overall business risk from these systems is not significant. The Company's non-computer components are now being assessed for Year 2000 compliance. The assessment of these systems will be completed by spring 1999. Any corrective actions are expected to be completed by September 1999. The Year 2000 projects also include an evaluation of critical vendors, suppliers and customers relative to their Year 2000 readiness. Electronic data communications with customers will be tested. Information is being solicited from these important business partners and will be evaluated as it is received. 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED ================================================================================ THREE MONTHS ENDED MARCH 31, 1999 VS THREE MONTHS ENDED MARCH 31, 1998, CONT. YEAR 2000, CONT. Based upon the assessment completed at this time, the Company does not anticipate any significant Year 2000 issues. All Year 2000 projects are generally proceeding according to management's expectations. However, if there are significant delays in their completion, or if major suppliers or customers experience Year 2000 issues with their systems, such issues could adversely affect the operations of the Company. After assessing the information received from customers and suppliers and evaluating the status of the Year 2000 projects, the Company will develop an appropriate contingency plan, as required. It is anticipated that this plan will be developed by September 1999. Achieving Year 2000 compliance for the Company will largely be a by-product of the SAP system installation. The costs of achieving Year 2000 compliance for software not affected by the SAP system, computer components, and non-computer components is estimated to be less than $3,000,000, of which approximately $2,300,000 has already been incurred and expensed through March 31, 1999. FORWARD-LOOKING STATEMENTS Certain items in this Form 10-Q are forward-looking statements, which are made in reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to numerous risks and uncertainties, including the possibility that capital projects and the Year 2000 initiative may not be completed as rapidly as management expects. Additional risks and uncertainties include variances in the demand for the Company's products due to consumer developments and industry developments, as well as variances in the costs to produce such products, including normal volatility in egg and feed costs. The Company's actual financial results could differ materially from the results estimated by, forecasted by, or implied by the Company in such forward-looking statements. Item 3. Quantitative and Qualitative Disclosures about Market Risk - ------------------------------------------------------------------- There were no material changes in the Company's market risk during the three month period ended March 31, 1999. PART II - OTHER INFORMATION Item 5. Other Information - -------------------------- On May 3, 1999 the Company announced it had completed the acquisition of certain operating assets, customer list and the long-term lease of a dairy mix plant from H. P. Hood Inc. The Newington, CT facility is now controlled by the Company's Kohler Mix Specialties, Inc. subsidiary. The Company has an option to purchase the building and land at the lease's termination. The cash paid at closing was approximately $5.7 million. The plant mainly produces ultra-high temperature pasteurized dairy mixes for foodservice customers in the eastern United States. 11 Item 6. Exhibits and Reports on Form 8-K - ----------------------------------------- (a) Exhibits 10.68* Resolution adopted by the Board of Directors on April 29, 1999, amending the Severance Plan for Eligible Employees of Michael Foods, Inc. and Subsidiaries and extending its termination date for one additional year. 10.69* 1997 Stock Incentive Plan of Michael Foods, Inc. and Affiliated Companies as Amended Effective April 29, 1999. 27.1 Financial Data Schedule * Management Contract or Compensation Plan Arrangement (b) Reports on Form 8-K The Company filed a Form 8-K on February 25, 1999 disclosing a voluntary recall of certain cartoned dairy products by its Kohler Mix Specialties, Inc. subsidiary. Signatures - ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MICHAEL FOODS, INC. ------------------------------------------------- (Registrant) Date: March 14, 1999 By: /s/ Gregg A. Ostrander --------------------------------------- Gregg A. Ostrander (President and Chief Executive Officer) Date: March 14, 1999 By: /s/ John D. Reedy --------------------------------------- John D. Reedy (Vice President - Finance, Treasurer, Chief Financial Officer and Principal Accounting Officer) 12 EX-10.68 2 SEVERANCE PLAN EXTENSION RESOLUTION SEVERANCE PLAN EXTENSION RESOLUTION RESOLVED, that the Severance Pay Plan for Eligible Employees of Michael Foods, Inc. and its subsidiaries (the "Severance Plan"), as approved and implemented in accordance with the directives of the Board of Directors on July 26, 1990 and extended through July 1, 1999, be hereby extended for a period of one additional year to a new Termination Date of July 1, 2000. Number of employees covered under the Severance Plan from July 1, 1998 to July 1, 1999......................17 Employees added: Pres Colwell - Vice President U.S. Bus. Development Erich Fritz - Vice President of Operations - Kohler Mix James Kohler - President - Kohler Mix Ken Neishi - Vice President of Operations - M. G. Waldbaum Terry Baker - Vice President of Procurement - M. G. Waldbaum Tim Bebee - Vice President of Live Production - M. G. Waldbaum Thomas Rechsteiner - Vice President Industrial/Export Sales - M. G. Waldbaum James Haynes - Vice President of Operations - Northern Star Vicky Wass - Vice President Regional Sales/National Accts. - Papetti's Toby Catherman - Vice President of Operations - Papetti's Employees deleted: Jeffrey Walker - M. G. Waldbaum (resigned) Robert Banken - Kohler Mix Specialties (resigned) Steven Goldstein - Kohler Mix Specialties (resigned) Number of employees covered under the Severance Plan from July 1, 1999 to July 1, 2000..........................24 EX-10.69 3 STOCK INCENTIVE PLAN 1997 STOCK INCENTIVE PLAN OF MICHAEL FOODS, INC. AND AFFILIATED COMPANIES (AS AMENDED APRIL 29, 1999) I. PURPOSE The purpose of the 1997 Stock Incentive Plan (the "Plan") is to afford an incentive to key employees of Michael Foods, Inc. (the "Company") and its affiliates to acquire an equity interest in the Company, to encourage such employees to increase their efforts on behalf of the Company and remain in its employ, and to more closely align the interests of such key employees with those of the Company's shareholders. II. DEFINITIONS As used in the Plan, the following terms shall have the meanings set forth below: A. "Affiliate" shall mean any entity that, directly or through one or more intermediaries, is controlled by the Company. B. "Award" shall mean any Option, Stock Appreciation Right, Restricted Stock, Restricted Stock Unit, Performance Award or other stock-based award granted under the Plan. C. "Award Agreement" shall mean any written agreement, contract or other instrument or document evidencing any Award granted under the Plan. D. "Board of Directors" shall mean the board of directors of the Company. E. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. F. "Committee" shall mean the committee appointed by the Board of Directors to administer the Plan pursuant to Section III. If the Board fails to appoint a committee, the Committee shall be the Board of Directors. -1- G. "Common Stock" shall mean common stock, par value $.01, of the Company. H. "Eligible Employee" shall be any key employee, officer, consultant or independent contractor providing services to the Company or an Affiliate as determined by the Committee. I. "Fair Market Value" of Common Stock on any day shall mean the fair market value of the Common Stock determined by such methods or procedures as shall be established from time to time by the Committee. Notwithstanding the foregoing, for purposes of the Plan, the fair market value of the Common Stock on a given date, if there shall be a public market for the Common Stock, shall be the closing price of the Common Stock as reported by any exchange on which the Common Stock is then traded or the closing price on such date as reported by any generally recognized inter-dealer quotation system. J. "Incentive Stock Option" shall mean a stock option granted under Section VI.A. of the Plan that is intended to meet the requirements of Section 422 of the Code or any successor provision. K. "Non-Qualified Stock Option" shall mean a stock option granted under Section VI.A. which is not intended to be an Incentive Stock Option. L. "Option" shall mean an Incentive Stock Option or a Non-Qualified Stock Option. M. "Optionee" shall mean a Participant who is granted an Option. N. "Participant" shall mean an Eligible Employee who has been granted an Option or other Award under the Plan. O. "Performance Award" shall mean any right granted under Section VI.D. of the Plan. P. "Restricted Stock" shall mean any Share granted under Section VI.C. of the Plan. -2- Q. "Restricted Stock Unit" shall mean any unit granted under Section VI.C. of the Plan evidencing the right to receive a Share (or a cash payment equal to the Fair Market Value of a Share) at some future date. R. "Rule 16b-3" shall mean Rule 16b-3 promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934. S. "Shares" shall mean shares of Common Stock. T. "Stock Appreciation Right" shall mean any right granted under Section VI.B. of the Plan. III. ADMINISTRATION The Plan shall be administered by the Committee. Subject to the terms of the Plan and applicable law, the Committee shall have full power and authority to: (i) designate Participants; (ii) determine the type or types of Awards to be granted to each Participant under the Plan; (iii) determine the number of Shares to be covered by (or with respect to which payments, rights or other matters are to be calculated in connection with) each Award; (iv) determine the terms and conditions of any Award or Award Agreement; (v) amend the terms and conditions of any Award or Award Agreement and accelerate the exercisability of Options or the lapse of restrictions relating to Restricted Stock or Restricted Stock Units; (vi) determine whether, to what extent and under what circumstances Awards may be exercised in cash or Shares, or canceled, forfeited or suspended; (vii) determine whether, to what extent, and under what circumstances cash, Shares or other Awards or amounts payable with respect to an Award under the Plan shall be deferred either automatically or at the election of the holder thereof or the Committee; (viii) interpret and administer the Plan and any instrument or agreement relating to, an Award made under, the Plan; (ix) establish, amend, suspend or waive such rules and regulations and appoint such agents as it -3- shall deem proper for the administration of the Plan; and (x) make any other determination and take any other action that the Committee deems necessary or desirable for the administration of the Plan. Unless otherwise expressly provided in the Plan, all designations, determinations, interpretations and other decisions under or with respect to the Plan or any Award shall be within the sole discretion of the Committee whose determination shall be final, conclusive and binding upon any Participant, beneficiary of any Award and any employee of the Company or any Affiliate. IV. SHARES AVAILABLE FOR AWARDS A. SHARES AVAILABLE. Subject to adjustment as provided in Section VII.C., 2,000,000 shares shall be available for granting Awards under the Plan. If any Shares covered by an Award or to which an Award relates are not purchased or are forfeited, or if an Award otherwise terminates without delivery of any Shares, then the number of Shares counted against the aggregate number of Shares available under the Plan with respect to such Award, to the extent of any such forfeiture or termination, shall again be available for granting Awards under the Plan. In addition, any Shares that are used by a Participant as full or partial payment to the Company of the purchase price relating to an Award, or in connection with the satisfaction of tax obligations relating to an Award in accordance with the provisions of Section VIII of the Plan, shall again be available for granting Awards under the Plan. B. ACCOUNTING FOR AWARDS. For purposes of this Section IV, if an Award entitles the holder thereof to receive or purchase Shares, the number of Shares covered by such Award or to which such Award relates shall be counted on the date of grant of such Award against the aggregate number of Shares available to granting Awards under the Plan. V. ELIGIBILITY -4- Employees eligible to participate in the Plan and receive Options and Awards under the Plan shall consist of key employees of the Company and Affiliates as determined by the Committee. VI. AWARD A. OPTIONS. The Committee is hereby authorized to grant Options to Participants with the following terms and conditions and with such additional terms and conditions not inconsistent with the provisions of the Plan as the Committee shall determine: 1. EXERCISE PRICE. The exercise price per Share purchasable under an Option shall be determined by the Committee; provided, however, that such purchase price shall not be less than one hundred percent (100%) of the Fair Market Value of a Share on the date of grant of such Option. 2. OPTION TERM. The term of each Option shall be fixed by the Committee, but in no event shall the term exceed ten (10) years from the date the Option is granted. 3. TIME AND METHOD OF EXERCISE. The Committee shall determine the time or times at which an Option may be exercised in whole or in part and the method or methods by which, and the form or forms (including, without limitation, cash, Shares, other awards or other property, or any combination thereof, having a Fair Market Value on the exercise date equal to the exercise price) in which, payment of the exercise price with respect thereto may be made or deemed to have been made, but in no event shall any Option be exercisable earlier than one year from the date the Option is granted. -5- 4. TRANSFERABILITY OF OPTIONS. Except as provided below, an Option may not be sold, assigned, transferred, pledged, hypothecated or otherwise disposed of, except by will or the laws of descent and distribution and, during the lifetime of the Optionee, may be exercised only by such Optionee. Notwithstanding the foregoing, the Committee may determine that an Option may be transferred by the Optionee to one or more members of the Optionee's immediate family, to a partnership of which the only partners are members of the Optionee's immediate family, or to a trust established by the Optionee for the benefit of one or more members of the Optionee's immediate family. The Optionee's immediate family shall be limited to the Optionee's spouse, parents, children, grandchildren and the spouses of such persons. No further transfers of an Option may be made beyond the transfers permitted above and a transferred Option shall remain subject to the provisions of the Plan and any Award Agreement evidencing any Award granted under the Plan. 5. RELOAD OPTIONS. The Committee may grant "reload" options separately or together with another Option, pursuant to which, subject to the terms and conditions established by the Committee and any applicable requirements of Rule 16b-3 or any other applicable law, the Participant would be granted a new Option when the payment of the exercise price of a previously granted Option is made by the delivery of Shares of the Company's Common Stock owned by the Participant; or when Shares are tendered or forfeited as payment of the amount to be withheld under applicable income tax laws in connection with the exercise of an Option, which new Option would be an Option to purchase the number of Shares -6- not exceeding the sum of (a) the number of Shares provided as consideration upon the exercise of the previously granted Option to which such "reload" Option relates; and (b) the number of Shares tendered or forfeited as payment of the amount to be withheld under applicable income tax laws in connection with the exercise of the Option to-which such "reload" Option relates. Such "reload" Options shall have a per share exercise price equal to the Fair Market Value as of the date of grant of the new Option. B. STOCK APPRECIATION RIGHTS. The Committee is hereby authorized to grant Stock Appreciation Rights to Participants subject to the terms of the Plan and any applicable Award Agreement. A Stock Appreciation Right granted under the Plan shall confer on the holder thereof a right to receive upon exercise thereof the excess of: (i) the Fair Market Value of one (1) Share on the date of exercise (or, if the Committee shall so determine, at any time during a specified period before or after the date of exercise) over (ii) the grant price of the Stock Appreciation Right as specified by the Committee, which price shall be not less than one hundred percent (100%) of the Fair Market Value of one (1) Share on the date of the grant of the Stock Appreciation Right. Subject to the terms of the Plan and any applicable Award Agreement, the grant price, term, methods of exercise, dates of exercise, methods of settlement and any other terms and conditions of any Stock Appreciation Rights shall be as determined by the Committee. The Committee may impose such conditions or restrictions on the exercise of any Stock Appreciation Right as it may deem appropriate. C. RESTRICTED STOCK AND RESTRICTED STOCK UNITS. The Committee is hereby authorized to grant Awards of Restricted Stock and Restricted Stock Units to Participants with the -7- following terms and conditions and with such additional terms and conditions not inconsistent with the provisions of the Plan as the Committee shall determine: 1. RESTRICTIONS. Shares of Restricted Stock and Restricted Stock Units shall be subject to such restrictions as the Committee may impose (including, without limitation, any limitation on the right to vote a share of Restricted Stock or the right to receive any dividend or other right or property with respect thereto), which restrictions may lapse separately or in combination at such time or times, in such installments or otherwise as the Committee may deem appropriate. 2. STOCK CERTIFICATES. Any Restricted Stock granted under the Plan shall be evidenced by the issuance of a stock certificate or certificates, which certificate or certificates shall be held by the Company. Such certificate or certificates shall be registered in the name of the Participant and shall bear the appropriate legend referring to the restrictions applicable to such Restricted Stock. In the case of Restricted Stock Units, no certificates shall be issued at the time such Awards are granted. 3. FORFEITURES; DELIVERY OF SHARES. Except as otherwise determined by the Committee, upon termination of employment (as determined under criteria established by the Committee), during the applicable restriction period, all shares of Restricted Stock and all Restricted Stock Units at such time subject to restriction, shall be forfeited and reacquired by the Company; provided, however, that the Company may, when it finds that waiver would be in the best interest of the Company, waive in whole or in part any or all remaining restrictions with respect to Shares of Restricted Stock or Restricted Stock Units. Certificates representing -8- Shares of Restricted Stock that are no longer subject to restriction shall be delivered to the holder thereof promptly after the applicable restrictions lapse or are waived. Upon the lapse or waiver of restrictions and the restricted stock period relating to Restricted Stock Units evidencing the right to receive Shares, certificates for such Shares shall be issued and delivered to the holders of the Restricted Stock Units. D. PERFORMANCE AWARDS. The Committee is hereby authorized to grant Performance Awards to Participants subject to the terms of the Plan and any applicable Award Agreement. A Performance Award granted under the Plan: (i) may be denominated or payable in cash, Shares (including, without limitation, Restricted Stock), other securities or Awards or other property; and (ii) shall confer upon the holder the right to receive payments, in whole or in part, upon the achievement of such performance goals during such performance period as the Committee may establish. E. OTHER STOCK BASED AWARDS. The Committee is hereby authorized to grant to Participants such other Awards that are denominated or payable in, valued in whole or in part by reference to, or otherwise based upon or related to, Shares (including without limitation, securities convertible into Shares), as are deemed by the Committee to be consistent with the purpose of the Plan; provided, that if at the time of such grant the Company has a class of securities registered under the Securities Exchange Act of 1934, such grants must comply with Rule 16b-3 and applicable laws. The Committee shall determine the terms and conditions of such Awards. In no event shall the purchase price for any Shares purchasable in connection with any such Award be less than one hundred percent (100%) of the Fair Market Value of such Shares or other securities as of the date such purchase right is granted. F. GENERAL PROVISIONS. -9- 1. AWARDS MAY BE GRANTED SEPARATELY OR TOGETHER. Awards may, in the discretion of the Committee, be granted alone or in addition to, in tandem with or in substitution for any other Award. 2. FORM OF PAYMENT UNDER AWARD. Subject to the terms of the Plan and of any applicable Award Agreement, payments or transfers to be made by the Company or an Affiliate upon the grant, exercise or payment of an Award may be made in such form or forms as the Committee may determine (including, without limitation, cash, Shares, other securities, other Awards or other property or any combination thereof). 3. RESTRICTIONS. All certificates for Shares or other securities delivered under the Plan pursuant to any Award or the exercise thereof shall be subject to such transfer restrictions as the Committee may deem advisable under the Plan and any applicable federal or state securities laws, and the Committee may cause a legend or legends to be placed on any such certificates to make appropriate reference to such restrictions. VII. AMENDMENT AND TERMINATION; ADJUSTMENT Except to the extent prohibited by applicable law and unless otherwise expressly provided in an award agreement or in the Plan: A. AMENDMENTS TO THE PLAN. The Board of Directors of the Company may amend, alter, suspend, discontinue or terminate the Plan at any time; provided, however, that without the approval of the shareholders of the Company, no such amendment, alteration, suspension, discontinuation or termination shall be made that, absent such approval: (i) would cause Rule 16b-3 -10- to become unavailable with respect to the Plan; or (ii) would cause the Company to be unable, under the Code, to grant Incentive Stock Options under the Plan. B. AMENDMENTS TO AWARDS. The Committee may waive any condition of, or rights of the Company under any outstanding Award, prospectively or retroactively. The Committee may not alter, suspend, discontinue or terminate any outstanding Award, prospectively or retroactively, without the consent of the Participant or holder or beneficiary thereof, except as otherwise provided herein. C. ADJUSTMENTS. In the event that any dividend or other distribution, whether in the form of cash, Shares, other securities or other property, recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-off, spin-off, combination, repurchase or exchange of Shares or other securities of the Company or other similar corporate transaction or event affecting the Shares would be reasonably likely to result in the diminution or enlargement or any of the benefits or potential benefits intended to be made available under the Plan or under an Award, the Committee shall, in such manner as it shall deem equitable or appropriate in order to prevent such diminution or enlargement of any such benefits or potential benefits, adjust any or all of: (i) the number and type of Shares (or other securities or other property) which thereafter may be made the subject of Awards; (ii) the number and type of Shares (or other securities or other property) subject to outstanding awards; and (iii) the purchase or exercise price with respect to any Award; provided, however, that the number of Shares covered by any Award or to which such Award relates shall always be a whole number. D. CORRECTION OF DEFECTS, OMISSIONS AND INCONSISTENCIES. The Committee may correct any defect, supply any omission or reconcile any inconsistency in the Plan or in any Award in the manner and to the extent it shall deem desirable to carry the Plan into effect. -11- VIII. INCOME TAX WITHHOLDING In order to comply with applicable federal or state income tax laws or regulations, the Company may take such action as it deems appropriate to ensure that all applicable federal or state payroll, withholding, income or other taxes, which are the sole and absolute responsibility of a Participant, are withheld or collected from such Participant. In order to assist the Participant in paying all federal and state taxes to be withheld or collected upon exercise or receipt of (or the lapse of restrictions relating to) an Award, the Committee in its discretion and subject to such additional terms and conditions as it may adopt, may permit the Participant to satisfy such tax obligation by: (i) electing to have the Company withhold a portion of Shares otherwise to be delivered upon exercise or receipt of (or the lapse of restrictions relating to) such Award with a Fair Market Value equal to the amount of such taxes; or (ii) delivering to the Company Shares other than Shares issuable upon exercise or receipt of (or the lapse of restrictions relating to) such Award with a Fair Market Value equal to the amount of such taxes. The election, if any, must be made on or before the date that the amount of tax to be withheld is determined. IX. GENERAL PROVISIONS A. NO RIGHT TO AWARD. No employee, Participant, or other person shall have any claim to be granted any Award under the Plan, and there is no obligation for uniformity of treatment of Eligible Employees, Participants or holders or beneficiaries of Awards under the Plan. B. DELEGATION. The Committee may delegate to one or more officers of the Company or a committee of such officers the authority, subject to such terms and limitations as the Committee shall determine, to grant awards to key employees who are not officers or directors of the Company for purposes of Section 16 of the Securities Exchange Act of 1934, as amended. -12- C. AWARD AGREEMENTS. No Participant shall have rights under an Award granted to such Participant unless and until an Award Agreement shall have been duly executed on behalf of the Company. D. NO LIMIT ON OTHER COMPENSATION AGREEMENTS. Nothing contained in the Plan shall prevent the Company from adopting or continuing in effect other or additional compensation arrangements and such arrangements may be either generally applicable or applicable only in specific cases. E. NO RIGHT TO EMPLOYMENT. The grant of an Award shall not be construed as giving the Participant the right to be retained in the employ of the Company or its Affiliates. In addition, the Company or its Affiliates may, at any time, dismiss a Participant from employment. F. GOVERNING LAW. The validity, construction and effect of the Plan and any rules and regulations relating to the Plan shall be determined in accordance with the internal laws of the State of Minnesota without consideration of any conflict of law rules. G. NO TRUST FUND CREATED. Neither the Plan nor any Award shall create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Company and a Participant or any other person. To the extent that any person acquires a right to receive payment from the Company pursuant to an Award, such right shall be no greater than the right of any unsecured creditor of the Company. H. NO FRACTIONAL SHARES. No fractional Shares shall be issued or delivered pursuant to the Plan or any Award. X. EFFECTIVE DATE AND TERM Subject to approval by the shareholders of the Company at the regular meeting of shareholders next following approval of the Plan by the Board of Directors of the Company, the -13- Plan shall be effective as of the date of its adoption by the Board of Directors of the Company and shall continue in effect for a period of ten (10) years thereafter unless earlier terminated as provided herein. -14- EX-27.1 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF EARNINGS INCLUDED HEREIN AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 4,679 0 94,501 2,384 77,249 177,771 451,540 195,939 565,123 118,921 170,914 0 0 206 242,413 565,123 253,378 253,378 212,067 212,067 24,224 0 2,820 14,267 5,850 8,417 0 0 0 8,417 .40 .40
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