**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

| **ý**                                                                                                                                                                                                                                                                                                                                                                                 | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                          |
| **For the quarterly period ended March 31, 2003**                                                                                                                                                                                                                                                                                                                                          |
|                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                          |
| **or**                                                                                                                                                                                                                                                                                                                                                                                     |
|                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                          |
| **o**                                                                                                                                                                                                                                                                                                                                                                                      | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                          |
| **For  the transition period from                                to                             ** |
|                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                          |
| **Commission File Number: 333-63722**                                                                                                                                                                                                                                                                                                                                                      |

 

**MICHAEL FOODS, INC.**

(Exact name of registrant as specified in its charter)

 

| **Minnesota**                                                   |   | **41-0498850**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                            |   |                                  |
| **401 Carlson Parkway  Suite 300  Minnetonka, MN**              |   | **55305**                             |
| (Address of  principal executive offices)                       |   | (Zip code)                            |
|                                                            |   |                                  |
| **(952) 258-4000**                                              |
| (Registrant’s  telephone number, including area code)      |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 (“Exchange Act”) duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.      ý     Yes       o      No

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act). o      Yes      ý       No

 

 

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PART I - FINANCIALINFORMATION

 

**ITEM 1.  FINANCIALSTATEMENTS**

 

MICHAEL FOODS,INC.

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

CondensedConsolidated Balance Sheets

(Unaudited,dollars in thousands)

 
|                                                                            |   | **March 31,  2003** |    | **December  31,  2002** |   |
|---------------------------------------------------------------------------------|--------|---------------------|---------|-------------------------|--------|
| ASSETS                                                                          |   |                |    |                    |   |
| Current assets                                                                  |   |                |    |                    |   |
| Cash and equivalents                                                            |   | $                   | 18,127  |                    | $      | 20,572 |   |
| Accounts receivable, less  allowances                                           |   | 102,902             |    | 101,579                 |   |
| Inventories                                                                     |   | 96,423              |    | 95,807                  |   |
| Prepaid expenses and other                                                      |   | 12,228              |    | 13,571                  |   |
| Total current assets                                                            |   | 229,680             |    | 231,529                 |   |
| Property, plant and equipment,  net                                             |   | 276,994             |    | 282,353                 |   |
| Other assets                                                                    |   |                |    |                    |   |
| Goodwill                                                                        |   | 341,028             |    | 341,028                 |   |
| Joint ventures and other assets                                                 |   | 36,520              |    | 38,112                  |   |
|                                                                            |   | 377,548             |    | 379,140                 |   |
|                                                                            |   | $                   | 884,222 |                    | $      | 893,022 |   |
| LIABILITIES  AND SHAREHOLDER’S EQUITY                                      |   |                |    |                    |   |
| Current liabilities                                                             |   |                |    |                    |   |
| Current maturities of long-term  debt                                           |   | $                   | 17,764  |                    | $      | 17,671 |   |
| Accounts payable                                                                |   | 60,751              |    | 65,990                  |   |
| Accrued liabilities                                                             |   |                |    |                    |   |
| Compensation                                                                    |   | 11,242              |    | 15,251                  |   |
| Insurance                                                                       |   | 8,369               |    | 7,855                   |   |
| Customer programs                                                               |   | 32,385              |    | 26,484                  |   |
| Income taxes                                                                    |   | 10,353              |    | 7,403                   |   |
| Interest                                                                        |   | 15,111              |    | 9,336                   |   |
| Hedging derivative liability                                                    |   | 9,909               |    | 11,001                  |   |
| Other                                                                           |   | 11,161              |    | 11,393                  |   |
| Total current liabilities                                                       |   | 177,045             |    | 172,384                 |   |
| Long-term debt, less current  maturities                                        |   | 472,644             |    | 493,718                 |   |
| Deferred income taxes                                                           |   | 47,534              |    | 47,119                  |   |
| Commitments and contingencies                                                   |   | —              |    | —                  |   |
| Non-controlling interest                                                        |   | 475                 |    | 475                     |   |
| Shareholder’s equity                                                       |   |                |    |                    |   |
| Common stock, $0.01 par value,  1,000 shares authorized, issued and outstanding |   | —              |    | —                  |   |
| Additional paid-in capital                                                      |   | 147,498             |    | 147,498                 |   |
| Retained earnings                                                               |   | 45,375              |    | 39,476                  |   |
| Accumulated other comprehensive  loss                                           |   | (6,349              | )       | (7,648                  | )      |
|                                                                            |   | 186,524             |    | 179,326                 |   |
|                                                                            |   | $                   | 884,222 |                    | $      | 893,022 |   |

 

The accompanying notesare an integral part of the unaudited condensed consolidated financialstatements.

 

2

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MICHAEL FOODS,INC.

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

CondensedConsolidated Statements of Earnings

Three months endedMarch 31,

(Unaudited,dollars in thousands)

 
|                                          |   | **2003** |    | **2002** |   |
|-----------------------------------------------|--------|----------|---------|----------|--------|
| Net  sales                                    |   | $        | 298,213 |     | $      | 278,429 |   |
|                                          |   |     |    |     |   |
| Cost  of sales                                |   | 247,298  |    | 227,313  |   |
|                                          |   |     |    |     |   |
| Gross  profit                                 |   | 50,915   |    | 51,116   |   |
|                                          |   |     |    |     |   |
| Selling,  general and administrative expenses |   | 29,435   |    | 29,623   |   |
|                                          |   |     |    |     |   |
| Operating  profit                             |   | 21,480   |    | 21,493   |   |
|                                          |   |     |    |     |   |
| Interest  expense, net                        |   | 11,871   |    | 12,664   |   |
|                                          |   |     |    |     |   |
| Earnings  before income taxes                 |   | 9,609    |    | 8,829    |   |
|                                          |   |     |    |     |   |
| Income  tax expense                           |   | 3,710    |    | 3,470    |   |
|                                          |   |     |    |     |   |
| Net  earnings                                 |   | $        | 5,899   |     | $      | 5,359 |   |

 

The accompanying notesare an integral part of the unaudited condensed consolidated financialstatements.

 

3

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MICHAEL FOODS,INC.

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

CondensedConsolidated Statements of Cash Flows

Three months endedMarch 31,

(Unaudited, dollars in thousands)

 
|                                                    |   | **2003** |   | **2002** |   |
|---------------------------------------------------------|--------|----------|--------|----------|--------|
|                                                    |   |     |   |     |   |
| Net  cash provided by operating activities              |   | $        | 26,981 |     | $      | 26,590 |   |
|                                                    |   |     |   |     |   |
| Cash  flows from investing activities:                  |   |     |   |     |   |
| Capital  expenditures                                   |   | (7,845   | )      | (6,878   | )      |
| Investments  in joint ventures and other assets         |   | —   |   | 422      |   |
|                                                    |   |     |   |     |   |
| Net  cash used in investing activities                  |   | (7,845   | )      | (6,456   | )      |
|                                                    |   |     |   |     |   |
| Cash  flows from financing activities:                  |   |     |   |     |   |
| Payments  on notes payable and revolving line of credit |   | —   |   | (5,000   | )      |
| Payments  on long-term debt                             |   | (21,631  | )      | (4,581   | )      |
| Net  cash used in financing activities                  |   | (21,631  | )      | (9,581   | )      |
|                                                    |   |     |   |     |   |
| Effect  of exchange rate changes on cash                |   | 50       |   | —   |   |
|                                                    |   |     |   |     |   |
| Net  increase (decrease) in cash and equivalents        |   | (2,445   | )      | 10,553   |   |
|                                                    |   |     |   |     |   |
| Cash  and equivalents at beginning of period            |   | 20,572   |   | 27,660   |   |
|                                                    |   |     |   |     |   |
| Cash  and equivalents at end of period                  |   | $        | 18,127 |     | $      | 38,213 |   |

 

The accompanying notesare an integral part of the unaudited condensed consolidated financialstatements.

 

4

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MICHAEL FOODS,INC.

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

Notes to CondensedConsolidated Financial Statements

(Unaudited)

 

NOTE A –  MERGER AGREEMENT

 

On April 10, 2001,Michael Foods, Inc. and its subsidiaries (“Michael Foods”, “Company”, “we”,“us”, “our”) was acquired in a transaction (the “Merger”) led by an investorgroup comprised of a management group led by Michael Foods’ Chairman, Presidentand Chief Executive Officer, Gregg Ostrander; affiliates of Jeffrey Michael, amember of the board of directors; and affiliates of two private equityinvestment firms, Vestar Capital Partners and Goldner Hawn Johnson &Morrison Incorporated, (collectively, “M-Foods Investors, LLC”). Michael Foods,Inc. is a wholly-owned subsidiary of M-Foods Holdings, Inc.; M-Foods Holdings,Inc. is a wholly-owned subsidiary of M-Foods Investors, LLC. Under the terms ofthe Merger agreement, all outstanding shares of Michael Foods common stock wereconverted into the right to receive $30.10 per share in cash, or value equalthereto, and all outstanding stock options were converted into the right toreceive, in cash, $30.10 per share reduced by the exercise price per share forall shares subject to such stock options. The purchase of the outstandingshares was financed through equity financing of approximately $175,000,000, asenior secured credit facility of up to $470,000,000 at market-based variableinterest rates, and $200,000,000 of senior subordinated notes at an 11.75%annual interest rate. As a result of the Merger, the stock of pre-mergerMichael Foods (“Predecessor”) is no longer publicly traded and, therefore,earnings per share calculations are no longer included for financial statementpresentation.

 

Immediately after theclose of the Merger, we contributed the assets of our Dairy Products Divisioninto two limited liability corporations, M-Foods Dairy, LLC and M-Foods DairyTXCT, LLC (collectively, the “Dairy LLCs”) and in exchange received votingpreferred and voting common units from these entities equal to the fair valueof the net assets contributed, which collectively were approximately$35,800,000. The preferred units issued to us by the Dairy LLCs have an annual10% preferred return guarantee and represent 100% of the preferred units issuedand outstanding. In addition, we received 5% of the common units issued by theDairy LLCs, with the common units held by the Company representing 100% of thevoting common units issued and outstanding. These common units have a statedvalue of $25,000. The remaining 95% of the common units, which are non-voting,are owned by M-Foods Dairy Holdings, LLC, another entity which is owned by thesame owners or affiliates of such owners, in the same proportion, as the unitholders of M-Foods Investors, LLC. The common unit interests owned by M-FoodsDairy Holdings, LLC were issued in exchange for $475,000 and are reflected asnon-controlling interest in the accompanying consolidated balance sheet.

 

The Merger was accountedfor as a purchase in accordance with Accounting Principles Board Opinion 16, *BusinessCombinations* and Emerging Issues Task Force Issue No. 88-16, *Basis inLeveraged Buyout Transactions*. Accordingly, the acquired assets andliabilities have been recorded at fair value for the interests acquired by newinvestors and at the carryover basis for continuing investors. As a result, theassets and liabilities were assigned new values, which are part Predecessor costand part fair value in the same proportions as the carryover basis of theresidual interests retained by the continuing management investors andcontinuing affiliate investors of the Michael family, and the new interestsacquired by the new investors. The amount of carryover basis was reflected as adeemed dividend of $66,631,000.

 

NOTE B – BASIS OFPRESENTATION

 

The accompanyingunaudited condensed consolidated financial statements have been prepared inaccordance with Regulation S-X pursuant to the rules and regulations of theSecurities and Exchange Commission. Certain information and footnotedisclosures normally included in financial statements prepared in accordancewith accounting principles generally accepted in the United States of Americahave been condensed or omitted pursuant to such rules and regulations, althoughmanagement believes that the disclosures are adequate to make the informationpresented not misleading.

 

We utilize a fiscal yearconsisting of either 52 or 53 weeks, ending on the Saturday nearest to December31 each year. The quarters ended March 31, 2003 and 2002 each included 13 weeksof operations. For clarity of presentation, the Company has described bothperiods presented as if the quarters ended on March 31st.

 

In the opinion ofmanagement, the unaudited financial statements contain all adjustments(consisting of only normal recurring adjustments) necessary to present fairlythe results of operations for the periods indicated. The results of operationsand cash flows of the Company for the three months ended March 31, 2003 are notnecessarily indicative of the results expected for the full year.

 

These unaudited interimconsolidated financial statements should be read in conjunction with ourconsolidated financial statements and notes thereto, contained in our AnnualReport on Form 10-K for the fiscal year ended December 31, 2002.

 

5

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In July 2001, theFinancial Accounting Standards Board (FASB) issued Statement of Financial AccountingStandards (SFAS) No. 143, “Accounting for Asset Retirement Obligations” whichprovides accounting requirements for retirement obligations associated withtangible long-lived assets.  SFAS No.143 is effective for fiscal years beginning after June 15, 2002.  The adoption of SFAS No. 143 did not have amaterial effect on our consolidated financial statements.

 

NOTE C – ASSET PURCHASE

 

On August 26, 2002, weacquired the egg products assets of Canadian Inovatech Inc. for approximately$18.0 million.  The total purchase pricewas allocated to the acquired assets and liabilities based on their fair valuesat the acquisition date as determined by a third party appraisal firm.  The allocation of the purchase price resultedin goodwill of $4.8 million.  We alsoentered into long-term leases for two plants operated by the seller.  This entity’s results of operations havebeen included in our operating results since the date of the asset purchase.  Also, as a result of this asset purchase, wenow own 67%, rather than 33%, of a Canadian egg products joint venture, TrilogyEgg Products, Inc.  Hence, Trilogybecame a consolidated entity under our financial reporting as of the date ofthe asset purchase.

 

The following unauditedpro forma statement of earnings information has been prepared assuming theasset purchase had occurred on January 1, 2002.    Thenet sales and earnings before income taxes for the three months ended March 31,2003 represent actual results for the period (dollars in thousands):

 
|                         |   | **Three Months ended  March 31, 2003** |    | **Three Months ended  March 31, 2002** |   |
|------------------------------|--------|----------------------------------------|---------|----------------------------------------|--------|
| Net sales                    |   | $                                      | 298,213 |                                   | $      | 290,127 |   |
| Earnings before income taxes |   | 9,609                                  |    | 9,521                                  |   |
|                              |        |                                        |         |                                        |        |  |  |

 

This unaudited pro formainformation is not necessarily indicative of the combined results of operationsthat would have occurred had the transaction occurred on the noted date, nor isit indicative of the results which may occur in the future.

 

NOTE D – INVENTORIES

 

Inventories, other thanflocks, 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 flocksto laying maturity, at which time their cost is amortized to operations overtheir expected useful life of generally one to two years, assuming no salvagevalue.

 

Inventories consisted ofthe following (dollars in thousands):

 
|                                |   | **March 31,  2003** |   | **December  31,  2002** |   |
|-------------------------------------|--------|---------------------|--------|-------------------------|--------|
| Raw  materials and supplies         |   | $                   | 20,131 |                    | $      | 18,552 |   |
| Work  in process and finished goods |   | 55,318              |   | 54,574                  |   |
| Flocks                              |   | 20,974              |   | 22,681                  |   |
|                                |   | $                   | 96,423 |                    | $      | 95,807 |   |

 

NOTE E – COMMITMENTS ANDCONTINGENCIES

 

**PotatoProcurement Contract**

Wehave a contract to purchase potatoes which expires in 2004 and which willsupply approximately 45% and 40% of the Potato Products Division’s raw materialneeds in 2003 and 2004, respectively, at an approximate cost of $5.3 millioneach year.

 

**Egg ProcurementContracts**

We maintain eggprocurement contracts with numerous cooperatives and egg producers throughoutthe Midwestern and Eastern United States and Canada which supply approximately50% of our egg requirements.  Most ofthese contracts vary in length from 18 to 72 months with prices primarilyindexed to grain or Urner Barry market indices.  No single egg supplier provides more than 10% of our eggrequirements.  Based upon the bestestimates available to us for grain and egg prices, we project that ourpurchases from our top five long-term contracted egg suppliers will approximate$141 million in 2003, $138 million in 2004, $82 million in 2005, $20 million in2006, and $16 million in 2007, and that the 2003 amount will account forapproximately 60% of our contracted egg purchases this year.

 

**Patent Litigation**

Wehave an exclusive license agreement for a patented process for the productionand sale of extended shelf-life liquid egg products. Under the licenseagreement, we have the right to defend and prosecute infringement of theunderlying patents.  We may offset 50%of our costs of defending the patents against royalty payments due to thepatent holder - North Carolina State University.   The U.S. Federal Court of Appeals has upheld the validity of thepatents on two separate occasions.  InSeptember 2000, the U.S. Patent and Trademark Office allowed productclaims beyond the process claims previously allowed for the extended shelf-lifeegg product. These patents are scheduled to expire beginning in 2006.

 

6

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In2000, litigation was settled with one party related to the infringement ofthese patents and a sub-license was issued to the infringing party grantingthem the right to manufacture and distribute extended shelf-life liquid wholeegg product subject to a royalty payable to us and the patent holder on allfuture product sold. In connection with this settlement, the patent holderreceived a lump sum payment for the past production and sale of the product andother matters related to the infringement. We are continuing to pursuelitigation related to other parties who we believe are infringing the productand process patents, including Sunny Fresh Foods, Inc., a subsidiary ofCargill, Inc.  A June 2003 trial datehas been set in our litigation with Sunny Fresh Foods, Inc.

 

**Other Litigation**

Weare engaged in routine litigation incidental to our business. We believe theultimate outcome of this litigation will not have a material effect on ourconsolidated financial position, liquidity or results of operations.

 

NOTE F – COMPREHENSIVEINCOME (LOSS)

 

The components andchanges in accumulated other comprehensive loss (AOCL), net of taxes, duringthe three months ended March 31, 2003 and 2002 were as follows (dollars inthousands):

 
|                                       |   | **Cash Flow  Hedges** |       | **Foreign  Currency  Translation** |       | **Total  AOCL** |       |
|--------------------------------------------|--------|-----------------------|------------|------------------------------------|------------|-----------------|------------|
|                                       |   |                  | ** ** |                               | ** ** |            | ** ** |
| Balance  at January 1, 2003                |   | $                     | (7,799     | )                                  | $          | 151             |       | $ | (7,648 | ) |
| Foreign  currency translation adjustment   |   | —                |       | 866                                |       | 866             |       |
| Net  unrealized change on cash flow hedges |   | 433                   |       | —                             |       | 433             |       |
| Balance  at March 31, 2003                 |   | $                     | (7,366     | )                                  | $          | 1,017           |       | $ | (6,349 | ) |

 

Comprehensive income(loss), net of taxes, for the three months ended March 31, 2003 and 2002 was asfollows (dollars in thousands):

 
| Net  income for the three months ended March 31, 2003           |   |   |   | $      | 5,899  |   |
|-----------------------------------------------------------------|--------|--------|--------|--------|--------|--------|
| Net  gains arising during the period from cash flow hedges:     |   |   |   |   |   |
| Net  unrealized derivative gains during period                  |   | 433    |   |   |   |
| Foreign  currency translation adjustment                        |   | 866    |   |   |   |
|                                                            |   |   |   |   |   |
| Other  comprehensive income                                     |   |   |   | 1,299  |   |
|                                                            |   |   |   |   |   |
| Comprehensive  income for the three months ended March 31, 2003 |   |   |   | $      | 7,198  |   |
|                                                            |   |   |   |   |   |
| Net  income for the three months ended March 31, 2002           |   |   |   | $      | 5,359  |   |
| Net  gains arising during the period from cash flow hedges:     |   |   |   |   |   |
| Net  unrealized derivative gains during period                  |   | 887    |   |   |   |
| Foreign  currency translation adjustment                        |   | 11     |   |   |   |
|                                                            |   |   |   |   |   |
| Other  comprehensive income                                     |   |   |   | 898    |   |
|                                                            |   |   |   |   |   |
| Comprehensive  income for the three months ended March 31, 2002 |   |   |   | $      | 6,257  |   |

 

7

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NOTE G – BUSINESSSEGMENTS

 

We operate in fourreportable segments – Egg Products, Refrigerated Distribution, Dairy Productsand Potato Products.  Certain financialinformation on our operating segments is as follows (unaudited, dollars inthousands):

 
|                                |   | **Company**       |    |
|-------------------------------------|--------|-------------------|---------|
|                                |   | **Egg  Products** |    | **Refrigerated  Distribution** |   | **Dairy  Products** |   | **Potato  Products** |   | **Corporate** |   | **Total** |   |
| Three  months ended March 31, 2003: |   |              |    |   |   |   |   |   |   |   |   |   |   |
| External  net sales                 |   | $                 | 178,568 |   | $ | 61,347 |   | $ | 40,602 |   | $ | 17,696 |   | $ | — |   | $ | 298,213 |   |
| Intersegment  sales                 |   | 3,274             |    | — |   | 28 |   | 895 |   | — |   | 4,197 |   |
| Operating  profit (loss)            |   | 15,226            |    | 4,472 |   | 1,807 |   | 1,625 |   | (1,650 | ) | 21,480 |   |
| Depreciation  and amortization      |   | 11,203            |    | 708 |   | 1,313 |   | 1,170 |   | 7 |   | 14,401 |   |
|                                |   |              |    |   |   |   |   |   |   |   |   |   |   |
| Three  months ended March 31, 2002: |   |              |    |   |   |   |   |   |   |   |   |   |   |
| External  net sales                 |   | $                 | 155,186 |   | $ | 63,006 |   | $ | 43,180 |   | $ | 17,057 |   | $ | — |   | $ | 278,429 |   |
| Intersegment  sales                 |   | 4,045             |    | — |   | — |   | 892 |   | — |   | 4,937 |   |
| Operating  profit (loss)            |   | 16,992            |    | 2,293 |   | 1,831 |   | 2,314 |   | (1,937 | ) | 21,493 |   |
| Depreciation  and amortization      |   | 10,878            |    | 437 |   | 1,040 |   | 1,164 |   | 10 |   | 13,529 |   |

 

NOTE H – SUPPLEMENTALGUARANTOR FINANCIAL INFORMATION

 

Our revolving line ofcredit, A and B term loans and senior subordinated notes have been guaranteed,on a joint and several basis, by us and our domestic subsidiaries. Therevolving line of credit and A and B term loans are also guaranteed by ourparent, M-Foods Holdings, Inc.

 

The following condensedconsolidating financial information presents our consolidated balance sheet asof March 31, 2003 and December 31, 2002 and the statements of earnings and ofcash flows for the three months ended March 31, 2003 and 2002.  These financial statements reflect MichaelFoods, Inc. (the Parent), the wholly owned guarantor subsidiaries (on acombined basis), the non-wholly owned guarantor subsidiaries, and eliminationentries necessary to combine such entities on a consolidated basis. Includedelsewhere in this Form 10-Q are the unaudited financial statements of thenon-wholly owned guarantor subsidiaries.

 

8

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**Condensed Consolidating Balance Sheets**

**March 31, 2003**

**(Unaudited, dollars in thousands)**

** **
|                                       |   | **Parent**                    |    | **Wholly  owned  Guarantor  Subsidiaries** |   | **Non-wholly  owned  Guarantor Subsidiaries** |   | **Eliminations** |   | **Consolidated** |   |
|--------------------------------------------|--------|-------------------------------|---------|--------------------------------------------|--------|-----------------------------------------------|--------|------------------|--------|------------------|--------|
| **M-Foods  Dairy,  LLC**                   |   | **M-Foods  Dairy  TXCT, LLC** |
| Assets                                     |   |                          |    |                                       |   |                                          |   |             |   |             |   |   |   |
| Current  assets                            |   |                          |    |                                       |   |                                          |   |             |   |             |   |   |   |
| Cash  and equivalents                      |   | $                             | 21,159  |                                       | $      | (3,032                                        | )      | $                | — |             | $      | — |   | $ | — |   | $ | 18,127 |   |
| Accounts  receivable, less allowances      |   | 158                           |    | 91,219                                     |   | 7,305                                         |   | 5,016            |   | (796             | )      | 102,902 |   |
| Inventories                                |   | —                        |    | 87,801                                     |   | 4,236                                         |   | 4,386            |   | —           |   | 96,423 |   |
| Prepaid  expenses and other                |   | 370                           |    | 11,297                                     |   | 504                                           |   | 57               |   | —           |   | 12,228 |   |
| Total  current assets                      |   | 21,687                        |    | 187,285                                    |   | 12,045                                        |   | 9,459            |   | (796             | )      | 229,680 |   |
| Property,  plant and equipment, net        |   | 36                            |    | 246,475                                    |   | 19,446                                        |   | 11,037           |   | —           |   | 276,994 |   |
| Other  assets                              |   |                          |    |                                       |   |                                          |   |             |   |             |   |   |   |
| Goodwill                                   |   | —                        |    | 339,265                                    |   | 1,763                                         |   | —           |   | —           |   | 341,028 |   |
| Joint  ventures and other assets           |   | 14,416                        |    | 21,581                                     |   | 127                                           |   | 396              |   | —           |   | 36,520 |   |
| Preferred  return receivable for subs      |   | —                        |    | 19,296                                     |   | —                                        |   | —           |   | (19,296          | )      | — |   |
| Investment  in subsidiaries                |   | 633,415                       |    | —                                     |   | —                                        |   | —           |   | (633,415         | )      | — |   |
|                                       |   | 647,831                       |    | 380,142                                    |   | 1,890                                         |   | 396              |   | (652,711         | )      | 377,548 |   |
|                                       |   | $                             | 669,554 |                                       | $      | 813,902                                       |   | $                | 33,381 |             | $      | 20,892 |   | $ | (653,507 | ) | $ | 884,222 |   |
|                                       |   |                          |    |                                       |   |                                          |   |             |   |             |   |   |   |
| Liabilities  and shareholder’s equity |   |                          |    |                                       |   |                                          |   |             |   |             |   |   |   |
| Current  liabilities                       |   |                          |    |                                       |   |                                          |   |             |   |             |   |   |   |
| Current  maturities of long-term debt      |   | $                             | 14,850  |                                       | $      | 514                                           |   | $                | — |             | $      | 2,400 |   | $ | — |   | $ | 17,764 |   |
| Accounts  payable                          |   | 44                            |    | 54,042                                     |   | 2,863                                         |   | 4,598            |   | (796             | )      | 60,751 |   |
| Accrued  liabilities                       |   | 42,076                        |    | 52,862                                     |   | 2,603                                         |   | 989              |   | —           |   | 98,530 |   |
| Total  current liabilities                 |   | 56,970                        |    | 107,418                                    |   | 5,466                                         |   | 7,987            |   | (796             | )      | 177,045 |   |
| Long-term  debt, less current maturities   |   | 428,710                       |    | 43,934                                     |   | —                                        |   | —           |   | —           |   | 472,644 |   |
| Deferred  income taxes                     |   | (3,125                        | )       | 50,659                                     |   | —                                        |   | —           |   | —           |   | 47,534 |   |
| Total  liabilities                         |   | 482,555                       |    | 202,011                                    |   | 5,466                                         |   | 7,987            |   | (796             | )      | 697,223 |   |
| Non-controlling  interest                  |   | 475                           |    | —                                     |   | —                                        |   | —           |   | —           |   | 475 |   |
| Preferred  unit holder return payable      |   | —                        |    | —                                     |   | 14,302                                        |   | 4,994            |   | (19,296          | )      | — |   |
| Shareholder’s  equity                 |   | 186,524                       |    | 611,891                                    |   | 13,613                                        |   | 7,911            |   | (633,415         | )      | 186,524 |   |
|                                       |   | $                             | 669,554 |                                       | $      | 813,902                                       |   | $                | 33,381 |             | $      | 20,892 |   | $ | (653,507 | ) | $ | 884,222 |   |

 

9

----

 

**Condensed Consolidating Balance Sheets**

**December 31, 2002**

**(Unaudited, dollars in thousands)**

** **
|                                       |   | **Parent**                    |    | **Wholly  owned  Guarantor  Subsidiaries** |   | **Non-wholly  owned  Guarantor Subsidiaries** |   | **Eliminations** |   | **Consolidated** |   |
|--------------------------------------------|--------|-------------------------------|---------|--------------------------------------------|--------|-----------------------------------------------|--------|------------------|--------|------------------|--------|
| **M-Foods  Dairy,  LLC**                   |   | **M-Foods  Dairy  TXCT, LLC** |
| Assets                                     |   |                          |    |                                       |   |                                          |   |             |   |             |   |   |   |
| Current  assets                            |   |                          |    |                                       |   |                                          |   |             |   |             |   |   |   |
| Cash  and equivalents                      |   | $                             | 19,665  |                                       | $      | 907                                           |   | $                | — |             | $      | — |   | $ | — |   | $ | 20,572 |   |
| Accounts  receivable, less allowances      |   | 314                           |    | 90,108                                     |   | 7,836                                         |   | 4,399            |   | (1,078           | )      | 101,579 |   |
| Inventories                                |   | —                        |    | 88,376                                     |   | 3,412                                         |   | 4,019            |   | —           |   | 95,807 |   |
| Prepaid  expenses and other                |   | 202                           |    | 12,704                                     |   | 600                                           |   | 65               |   | —           |   | 13,571 |   |
| Total  current assets                      |   | 20,181                        |    | 192,095                                    |   | 11,848                                        |   | 8,483            |   | (1,078           | )      | 231,529 |   |
| Property,  plant and equipment, net        |   | 44                            |    | 252,825                                    |   | 18,104                                        |   | 11,380           |   | —           |   | 282,353 |   |
| Other  assets                              |   |                          |    |                                       |   |                                          |   |             |   |             |   |   |   |
| Goodwill                                   |   | —                        |    | 339,265                                    |   | 1,763                                         |   | —           |   | —           |   | 341,028 |   |
| Joint  ventures and other assets           |   | 15,362                        |    | 22,082                                     |   | 139                                           |   | 529              |   | —           |   | 38,112 |   |
| Preferred  return receivable for subs      |   | —                        |    | 17,170                                     |   | —                                        |   | —           |   | (17,170          | )      | — |   |
| Investment  in subsidiaries                |   | 639,819                       |    | —                                     |   | —                                        |   | —           |   | (639,819         | )      | — |   |
|                                       |   | 655,181                       |    | 378,517                                    |   | 1,902                                         |   | 529              |   | (656,989         | )      | 379,140 |   |
|                                       |   | $                             | 675,406 |                                       | $      | 823,437                                       |   | $                | 31,854 |             | $      | 20,392 |   | $ | (658,067 | ) | $ | 893,022 |   |
|                                       |   |                          |    |                                       |   |                                          |   |             |   |             |   |   |   |
| Liabilities  and shareholder’s equity |   |                          |    |                                       |   |                                          |   |             |   |             |   |   |   |
| Current  liabilities                       |   |                          |    |                                       |   |                                          |   |             |   |             |   |   |   |
| Current  maturities of long-term debt      |   | $                             | 14,714  |                                       | $      | 557                                           |   | $                | — |             | $      | 2,400 |   | $ | — |   | $ | 17,671 |   |
| Accounts  payable                          |   | 426                           |    | 60,933                                     |   | 2,836                                         |   | 2,873            |   | (1,078           | )      | 65,990 |   |
| Accrued  liabilities                       |   | 35,372                        |    | 49,953                                     |   | 2,352                                         |   | 1,046            |   | —           |   | 88,723 |   |
| Total  current liabilities                 |   | 50,512                        |    | 111,443                                    |   | 5,188                                         |   | 6,319            |   | (1,078           | )      | 172,384 |   |
| Long-term  debt, less current maturities   |   | 448,734                       |    | 44,984                                     |   | —                                        |   | —           |   | —           |   | 493,718 |   |
| Deferred  income taxes                     |   | (3,641                        | )       | 50,760                                     |   | —                                        |   | —           |   | —           |   | 47,119 |   |
| Total  liabilities                         |   | 495,605                       |    | 207,187                                    |   | 5,188                                         |   | 6,319            |   | (1,078           | )      | 713,221 |   |
| Non-controlling  interest                  |   | 475                           |    | —                                     |   | —                                        |   | —           |   | —           |   | 475 |   |
| Preferred  unit holder return payable      |   | —                        |    | —                                     |   | 12,442                                        |   | 4,728            |   | (17,170          | )      | — |   |
| Shareholder’s  equity                 |   | 179,326                       |    | 616,250                                    |   | 14,224                                        |   | 9,345            |   | (639,819         | )      | 179,326 |   |
|                                       |   | $                             | 675,406 |                                       | $      | 823,437                                       |   | $                | 31,854 |             | $      | 20,392 |   | $ | (658,067 | ) | $ | 893,022 |   |

 

10

----

 

**CondensedConsolidating Statements of Earnings**

**Three months ended March 31, 2003**

**(Unaudited, dollars in thousands)**

 
|                                                                        |   | **Parent**                    |   | **Wholly  Owned  Guarantor  Subsidiaries** |   | **Non-Wholly  Owned  Guarantor Subsidiaries** |   | **Eliminations** |   | **Consolidated** |   |
|-----------------------------------------------------------------------------|--------|-------------------------------|--------|--------------------------------------------|--------|-----------------------------------------------|--------|------------------|--------|------------------|--------|
| **M-Foods  Dairy,  LLC**                                                    |   | **M-Foods  Dairy  TXCT, LLC** |
| Net  sales                                                                  |   | $                             | — |                                       | $      | 261,780                                       |   | $                | 24,420 |             | $      | 16,210 |   | $ | (4,197 | ) | $ | 298,213 |   |
| Cost  of sales                                                              |   | —                        |   | 215,121                                    |   | 20,831                                        |   | 15,543           |   | (4,197           | )      | 247,298 |   |
| Gross  profit                                                               |   | —                        |   | 46,659                                     |   | 3,589                                         |   | 667              |   | —           |   | 50,915 |   |
| Selling,  general and administrative expenses                               |   | 1,650                         |   | 26,342                                     |   | 1,697                                         |   | 954              |   | (1,208           | )      | 29,435 |   |
| Operating  profit (loss)                                                    |   | (1,650                        | )      | 20,317                                     |   | 1,892                                         |   | (287             | )      | 1,208            |   | 21,480 |   |
| Interest  expense, net                                                      |   | 11,040                        |   | 818                                        |   | 32                                            |   | (19              | )      | —           |   | 11,871 |   |
| Other  income                                                               |   | 1,208                         |   | —                                     |   | —                                        |   | —           |   | (1,208           | )      | — |   |
| Earnings  (loss) before equity in earnings of subsidiaries and income taxes |   | (11,482                       | )      | 19,499                                     |   | 1,860                                         |   | (268             | )      | —           |   | 9,609 |   |
| Equity  in earnings of subsidiary                                           |   | 12,961                        |   | 1,592                                      |   | (1,860                                        | )      | 268              |   | (12,961          | )      | — |   |
| Earnings  before income taxes                                               |   | 1,479                         |   | 21,091                                     |   | —                                        |   | —           |   | (12,961          | )      | 9,609 |   |
| Income  tax expense (benefit)                                               |   | (4,420                        | )      | 8,130                                      |   | —                                        |   | —           |   | —           |   | 3,710 |   |
| Net  earnings (loss)                                                        |   | 5,899                         |   | 12,961                                     |   | —                                        |   | —           |   | (12,961          | )      | 5,899 |   |
| Other  comprehensive income (loss)                                          |   |                          |   |                                       |   |                                          |   |             |   |             |   |   |   |
| Foreign  currency translation adjustment                                    |   | —                        |   | 866                                        |   | —                                        |   | —           |   | —           |   | 866 |   |
| Change  in cash flow hedges                                                 |   | 515                           |   | (82                                        | )      | —                                        |   | —           |   | —           |   | 433 |   |
| Comprehensive  income (loss)                                                |   | $                             | 6,414  |                                       | $      | 13,745                                        |   | $                | — |             | $      | — |   | $ | (12,961 | ) | $ | 7,198 |   |

 

**Condensed Consolidating Statements of Earnings**

**Three months ended March 31, 2002**

**(Unaudited, dollars in thousands)**

 
|                                                                        |   | **Parent**                    |   | **Wholly  Owned  Guarantor  Subsidiaries** |   | **Non-Wholly  Owned  Guarantor Subsidiaries** |   | **Eliminations** |   | **Consolidated** |   |
|-----------------------------------------------------------------------------|--------|-------------------------------|--------|--------------------------------------------|--------|-----------------------------------------------|--------|------------------|--------|------------------|--------|
| **M-Foods  Dairy,  LLC**                                                    |   | **M-Foods  Dairy  TXCT, LLC** |
| Net  sales                                                                  |   | $                             | — |                                       | $      | 240,186                                       |   | $                | 23,850 |             | $      | 19,330 |   | $ | (4,937 | ) | $ | 278,429 |   |
| Cost  of sales                                                              |   | —                        |   | 193,135                                    |   | 20,628                                        |   | 18,487           |   | (4,937           | )      | 227,313 |   |
| Gross  profit                                                               |   | —                        |   | 47,051                                     |   | 3,222                                         |   | 843              |   | —           |   | 51,116 |   |
| Selling,  general and administrative expenses                               |   | 1,937                         |   | 26,459                                     |   | 1,415                                         |   | 1,018            |   | (1,206           | )      | 29,623 |   |
| Operating  profit (loss)                                                    |   | (1,937                        | )      | 20,592                                     |   | 1,807                                         |   | (175             | )      | 1,206            |   | 21,493 |   |
| Interest  expense, net                                                      |   | 11,800                        |   | 831                                        |   | 28                                            |   | 5                |   | —           |   | 12,664 |   |
| Other  income                                                               |   | 1,206                         |   | —                                     |   | —                                        |   | —           |   | (1,206           | )      | — |   |
| Earnings  (loss) before equity in earnings of subsidiaries and income taxes |   | (12,531                       | )      | 19,761                                     |   | 1,779                                         |   | (180             | )      | —           |   | 8,829 |   |
| Equity  in earnings of subsidiary                                           |   | 12,980                        |   | 1,599                                      |   | (1,779                                        | )      | 180              |   | (12,980          | )      | — |   |
| Earnings  before income taxes                                               |   | 449                           |   | 21,360                                     |   | —                                        |   | —           |   | (12,980          | )      | 8,829 |   |
| Income  tax expense (benefit)                                               |   | (4,910                        | )      | 8,380                                      |   | —                                        |   | —           |   | —           |   | 3,470 |   |
| Net  earnings (loss)                                                        |   | 5,359                         |   | 12,980                                     |   | —                                        |   | —           |   | (12,980          | )      | 5,359 |   |
| Other  comprehensive income (loss)                                          |   |                          |   |                                       |   |                                          |   |             |   |             |   |   |   |
| Foreign  currency translation adjustment                                    |   | —                        |   | 11                                         |   | —                                        |   | —           |   | —           |   | 11 |   |
| Change  in cash flow hedges                                                 |   | (208                          | )      | 1,095                                      |   | —                                        |   | —           |   | —           |   | 887 |   |
| Comprehensive  income (loss)                                                |   | $                             | 5,151  |                                       | $      | 14,086                                        |   | $                | — |             | $      | — |   | $ | (12,980 | ) | $ | 6,257 |   |

 

11

----

 

**Condensed Consolidating Statements of Cash Flows**

**Three months ended March 31, 2003**

**(Unaudited, dollars in thousands)**

** **
|                                             |   | **Parent**                    |   | **Wholly  Owned  Guarantor  Subsidiaries** |   | **Non-wholly  owned  Guarantor Subsidiaries** |   | **Consolidated** |   |
|--------------------------------------------------|--------|-------------------------------|--------|--------------------------------------------|--------|-----------------------------------------------|--------|------------------|--------|
| **M-Foods  Dairy,  LLC**                         |   | **M-Foods  Dairy  TXCT, LLC** |
|                                             |   |                          |   |                                       |   |                                          |   |             |   |   |   |
| Net  cash provided by operating activities       |   | $                             | 14,198 |                                       | $      | 8,560                                         |   | $                | 2,532  |   | $ | 1,691 |   | $ | 26,981 |   |
|                                             |   |                          |   |                                       |   |                                          |   |             |   |   |   |
| Cash  flows from investing activities:           |   |                          |   |                                       |   |                                          |   |             |   |   |   |
| Capital  expenditures                            |   | —                        |   | (5,667                                     | )      | (1,921                                        | )      | (257             | )      | (7,845 | ) |
|                                             |   |                          |   |                                       |   |                                          |   |             |   |   |   |
| Net  cash used in investing activities           |   | —                        |   | (5,667                                     | )      | (1,921                                        | )      | (257             | )      | (7,845 | ) |
|                                             |   |                          |   |                                       |   |                                          |   |             |   |   |   |
| Cash  flows from financing activities:           |   |                          |   |                                       |   |                                          |   |             |   |   |   |
| Payments  on long-term debt                      |   | (21,424                       | )      | (207                                       | )      | —                                        |   | —           |   | (21,631 | ) |
| Distribution  to preferred unit holders          |   | —                        |   | 2,045                                      |   | (611                                          | )      | (1,434           | )      | — |   |
| Investment  in subsidiaries                      |   | 8,720                         |   | (8,720                                     | )      | —                                        |   | —           |   | — |   |
| Net  cash used in financing activities           |   | (12,704                       | )      | (6,882                                     | )      | (611                                          | )      | (1,434           | )      | (21,631 | ) |
|                                             |   |                          |   |                                       |   |                                          |   |             |   |   |   |
| Effect  of exchange rate changes on cash         |   | —                        |   | 50                                         |   | —                                        |   | —           |   | 50 |   |
| Net  increase (decrease) in cash and equivalents |   | 1,494                         |   | (3,939                                     | )      | —                                        |   | —           |   | (2,445 | ) |
| Cash  and equivalents at beginning of period     |   | 19,665                        |   | 907                                        |   | —                                        |   | —           |   | 20,572 |   |
| Cash  and equivalents at end of period           |   | $                             | 21,159 |                                       | $      | (3,032                                        | )      | $                | — |   | $ | — |   | $ | 18,127 |   |

 

**Condensed Consolidating Statements of Cash Flows**

**Three Months ended March 31, 2002**

**(Unaudited, dollars in thousands)**

** **
|                                            |   | **Parent**                    |   | **Wholly  Owned  Guarantor  Subsidiaries** |   | **Non-wholly  owned  Guarantor Subsidiaries** |   | **Consolidated** |   |
|-------------------------------------------------|--------|-------------------------------|--------|--------------------------------------------|--------|-----------------------------------------------|--------|------------------|--------|
| **M-Foods  Dairy,  LLC**                        |   | **M-Foods  Dairy  TXCT, LLC** |
|                                            |   |                          |   |                                       |   |                                          |   |             |   |   |   |
| Net  cash provided by operating activities      |   | $                             | 13,915 |                                       | $      | 8,418                                         |   | $                | 3,568  |   | $ | 689 |   | $ | 26,590 |   |
|                                            |   |                          |   |                                       |   |                                          |   |             |   |   |   |
| Cash  flows from investing activities:          |   |                          |   |                                       |   |                                          |   |             |   |   |   |
| Capital  expenditures                           |   | —                        |   | (4,620                                     | )      | (1,955                                        | )      | (303             | )      | (6,878 | ) |
| Investments  in joint ventures and other assets |   | (5                            | )      | 600                                        |   | (173                                          | )      | —           |   | 422 |   |
|                                            |   |                          |   |                                       |   |                                          |   |             |   |   |   |
| Net  cash used in investing activities          |   | (5                            | )      | (4,020                                     | )      | (2,128                                        | )      | (303             | )      | (6,456 | ) |
|                                            |   |                          |   |                                       |   |                                          |   |             |   |   |   |
| Cash  flows from financing activities:          |   |                          |   |                                       |   |                                          |   |             |   |   |   |
| Payments  on revolving line of credit           |   | (5,000                        | )      | —                                     |   | —                                        |   | —           |   | (5,000 | ) |
| Payments  on long-term debt                     |   | (4,506                        | )      | (75                                        | )      | —                                        |   | —           |   | (4,581 | ) |
| Proceeds  from issuance of stock                |   | —                        |   | —                                     |   | —                                        |   | —           |   | — |   |
| Distribution  to preferred unit holders         |   | —                        |   | 1,826                                      |   | (1,440                                        | )      | (386             | )      | — |   |
| Investment  in subsidiaries                     |   | 2,971                         |   | (2,971                                     | )      | —                                        |   | —           |   | — |   |
| Net  cash used in financing activities          |   | (6,535                        | )      | (1,220                                     | )      | (1,440                                        | )      | (386             | )      | (9,581 | ) |
| Net  increase in cash and equivalents           |   | 7,375                         |   | 3,178                                      |   | —                                        |   | —           |   | 10,553 |   |
| Cash  and equivalents at beginning of period    |   | 33,947                        |   | (6,287                                     | )      | —                                        |   | —           |   | 27,660 |   |
| Cash  and equivalents at end of period          |   | $                             | 41,322 |                                       | $      | (3,109                                        | )      | $                | — |   | $ | — |   | $ | 38,213 |   |

 

12

----

 

M-FOODS DAIRY, LLC

(A Majority OwnedSubsidiary of Michael Foods, Inc.)

Index to FinancialStatements

 
| Balance Sheets                 |
|--------------------------------|
| Statements  of Earnings        |
| Statements of Cash Flows       |
| Notes to  Financial Statements |

 

13

----

M-FOODS DAIRY, LLC

(A Majority Owned Subsidiary of Michael Foods, Inc.)

Balance Sheets

(Unaudited, dollars in thousands)

 
|                                                      |   | **March 31,  2003** |   | **December  31,  2002** |   |
|-----------------------------------------------------------|--------|---------------------|--------|-------------------------|--------|
| **ASSETS**                                                |   |                |   |                    |   |
| Current assets                                            |   |                |   |                    |   |
| Accounts receivable, less allowances                      |   | $                   | 7,305  |                    | $      | 7,836 |   |
| Inventories                                               |   | 4,236               |   | 3,412                   |   |
| Prepaid expenses and other                                |   | 504                 |   | 600                     |   |
| Total current assets                                      |   | 12,045              |   | 11,848                  |   |
| Property, plant and equipment                             |   |                |   |                    |   |
| Land                                                      |   | 855                 |   | 855                     |   |
| Buildings and improvements                                |   | 4,648               |   | 4,648                   |   |
| Machinery and equipment                                   |   | 17,774              |   | 15,852                  |   |
|                                                      |   | 23,277              |   | 21,355                  |   |
| Less accumulated depreciation                             |   | 3,831               |   | 3,251                   |   |
|                                                      |   | 19,446              |   | 18,104                  |   |
| Other assets                                              |   |                |   |                    |   |
| Goodwill                                                  |   | 1,763               |   | 1,763                   |   |
| Other assets                                              |   | 127                 |   | 139                     |   |
|                                                      |   | 1,890               |   | 1,902                   |   |
|                                                      |   | $                   | 33,381 |                    | $      | 31,854 |   |
|                                                      |   |                |   |                    |   |
| **LIABILITIES AND UNIT HOLDER AND OPERATING UNIT EQUITY** |   |                |   |                    |   |
| Current liabilities                                       |   |                |   |                    |   |
| Accounts payable                                          |   | $                   | 2,863  |                    | $      | 2,836 |   |
| Accrued liabilities                                       |   |                |   |                    |   |
| Compensation                                              |   | 661                 |   | 841                     |   |
| Insurance                                                 |   | 118                 |   | 144                     |   |
| Customer programs                                         |   | 1,179               |   | 884                     |   |
| Other                                                     |   | 645                 |   | 483                     |   |
| Total current liabilities                                 |   | 5,466               |   | 5,188                   |   |
|                                                      |   |                |   |                    |   |
| Commitments and contingencies                             |   | —              |   | —                  |   |
| Preferred unit holder return payable                      |   | 14,302              |   | 12,442                  |   |
| Unit holder equity                                        |   | 13,613              |   | 14,224                  |   |
|                                                      |   | $                   | 33,381 |                    | $      | 31,854 |   |

 

The accompanying notes are an integral part of the unaudited condensedfinancial statements.

 

14

----

 

M-FOODS DAIRY, LLC

(A Majority OwnedSubsidiary of Michael Foods, Inc.)

Statements of Earnings

For the three monthsended March 31,

(Unaudited, dollars inthousands)

 
|                                          |   | **2003** |   | **2002** |   |
|-----------------------------------------------|--------|----------|--------|----------|--------|
| Net sales                                     |   | $        | 24,420 |     | $      | 23,850 |   |
|                                          |   |     |   |     |   |
| Cost of sales                                 |   | 20,831   |   | 20,628   |   |
|                                          |   |     |   |     |   |
| Gross profit                                  |   | 3,589    |   | 3,222    |   |
|                                          |   |     |   |     |   |
| Selling, general  and administrative expenses |   | 1,697    |   | 1,415    |   |
|                                          |   |     |   |     |   |
| Operating profit                              |   | 1,892    |   | 1,807    |   |
|                                          |   |     |   |     |   |
| Other expense                                 |   | 32       |   | 28       |   |
|                                          |   |     |   |     |   |
| Earnings before  income taxes                 |   | 1,860    |   | 1,779    |   |
|                                          |   |     |   |     |   |
| Income tax  expense                           |   | —   |   | —   |   |
|                                          |   |     |   |     |   |
| Net earnings                                  |   | $        | 1,860  |     | $      | 1,779 |   |

 

The accompanying notes are an integral part of the unaudited condensedfinancial statements.

 

15

----

 

M-FOODS DAIRY, LLC

(A Majority OwnedSubsidiary of Michael Foods, Inc.)

Statements of Cash Flows

For the Three Monthsended March 31,

(Unaudited, dollars inthousands)

 
|                                             |   | **2003** |    | **2002** |    |
|--------------------------------------------------|--------|----------|---------|----------|---------|
| Net cash  provided by operating activities       |   | $        | 2,532   |     | $       | 3,568 |   |
|                                             |   |     |    |     |    |
| Cash flows from  investing activities:           |   |     |    |     |    |
| Capital  expenditures                            |   | (1,921   | )       | (1,955   | )       |
| Investments in  joint ventures and other assets  |   | —   |    | (173     | )       |
|                                             |   |     |    |     |    |
| Net cash used in  investing activities           |   | (1,921   | )       | (2,128   | )       |
|                                             |   |     |    |     |    |
| Cash flows from  financing activities:           |   |     |    |     |    |
| Dividends paid                                   |   | (611     | )  | (1,440   | )       |
|                                             |   |     |    |     |    |
| Net cash used in  financing activities           |   | (611     | )  | (1,440   | )  |
|                                             |   |     |    |     |    |
| Net increase  (decrease) in cash and equivalents |   | —   |    | —   |    |
|                                             |   |     |    |     |    |
| Cash and  equivalents at beginning of period     |   | —   |    | —   |    |
|                                             |   |     |    |     |    |
| Cash and  equivalents at end of period           |   | $        | —  |     | $       | — |   |

 

The accompanying notes are an integral part of the unaudited condensedfinancial statements.

 

16

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M-FOODS DAIRY, LLC

(A Majority OwnedSubsidiary of Michael Foods, Inc.)

Notes to Financial Statements

Unaudited

 

NOTE A—MERGER AGREEMENT

 

On April 10, 2001, Michael Foods, Inc. and its subsidiaries (“MichaelFoods”, “Company”, “we”, “us”, “our”) was acquired in a transaction (the “Merger”)led by an investor group comprised of a management group led by Michael Foods’Chairman, President and Chief Executive Officer, Gregg Ostrander; affiliates ofJeffrey Michael, a member of the board of directors; and affiliates of twoprivate equity investment firms, Vestar Capital Partners and Goldner HawnJohnson & Morrison Incorporated, (collectively, “M-Foods Investors, LLC”).Michael Foods, Inc. is a wholly-owned subsidiary of M-Foods Holdings, Inc.;M-Foods Holdings, Inc. is a wholly-owned subsidiary of M-Foods Investors, LLC.Under the terms of the Merger agreement, all outstanding shares of MichaelFoods common stock were converted into the right to receive $30.10 per share incash, or value equal thereto, and all outstanding stock options were convertedinto the right to receive, in cash, $30.10 per share reduced by the exerciseprice per share for all shares subject to such stock options. The purchase ofthe outstanding shares was financed through equity financing of approximately$175,000,000, a senior secured credit facility of up to $470,000,000 atmarket-based variable interest rates, and $200,000,000 of senior subordinatednotes at an 11.75% annual interest rate. As a result of the Merger, the stockof pre-merger Michael Foods (“Predecessor”) is no longer publicly traded and,therefore, earnings per share calculations are no longer included for financialstatement presentation.

 

Immediately after the close of the Merger, we contributed the assets ofour Dairy Products Division into two limited liability corporations, M-FoodsDairy, LLC and M-Foods Dairy TXCT, LLC (collectively, the “Dairy LLCs”) and inexchange received voting preferred and voting common units from these entitiesequal to the fair value of the net assets contributed, which collectively wereapproximately $35,800,000. The preferred units issued to us by the Dairy LLCshave an annual 10% preferred return guarantee and represent 100% of thepreferred units issued and outstanding. In addition, we received 5% of thecommon units issued by the Dairy LLCs, with the common units held by theCompany representing 100% of the voting common units issued and outstanding.These common units have a stated value of $25,000. The remaining 95% of thecommon units, which are non-voting, are owned by M-Foods Dairy Holdings, LLC,another entity which is owned by the same owners or affiliates of such owners,in the same proportion, as the unit holders of M-Foods Investors, LLC. Thecommon unit interests owned by M-Foods Dairy Holdings, LLC were issued inexchange for $475,000 and are reflected as non-controlling interest in theaccompanying consolidated balance sheet.

 

The Merger was accounted for as a purchase in accordance withAccounting Principles Board Opinion 16, *Business Combinations* and Emerging IssuesTask Force Issue No. 88-16, *Basis in Leveraged Buyout Transactions*.Accordingly, the acquired assets and liabilities have been recorded at fairvalue for the interests acquired by new investors and at the carryover basisfor continuing investors. As a result, the assets and liabilities were assignednew values, which are part Predecessor cost and part fair value in the sameproportions as the carryover basis of the residual interests retained by thecontinuing management investors and continuing affiliate investors of theMichael family, and the new interests acquired by the new investors. The amountof carryover basis was reflected as a deemed dividend of $66,631,000.

 

NOTE B — BASIS OF PRESENTATION

 

The accompanying unaudited financial statements and footnoteinformation of the Company as of and for the three month periods ended March31, 2003 and 2002 have been prepared in accordance with Regulation S-X pursuantto the rules and regulations of the SEC using the adjusted cost basis of assetsand liabilities of the Company.  In theopinion of management, the unaudited financial statements contain alladjustments (consisting of only normal recurring adjustments) necessary topresent fairly the results of operations and cash flows for the periods indicated.  The Operating Unit’s financial statementsinclude an allocation for general and administrative costs incurred by MichaelFoods.  Management believes itsallocations to these Operating Unit financial statements are reasonable.  Additionally, Operating Unit equity includesthe cumulative net advances between the Operating Unit and Michael Foods, whichare considered additional capital invested from or, constructive dividends to,Michael Foods.  Accordingly, the accompanyingfinancial statements may not necessarily be indicative of the results thatcould have been obtained if the Operating Unit had been operated as astand-alone entity.  The historicalresults of the Company for the periods indicated are not necessarily indicativeof the results expected for the full year.

 

These unaudited interim financial statements should be read inconjunction with our financial statements and notes thereto, contained in ourAnnual Report on Form 10-K for the fiscal year ended December 31, 2002.

 

17

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NOTE C — ORGANIZATION AND BUSINESS

 

Organization

M-Foods Dairy, LLC (the “Company” or “Operating Unit”) is a majorityowned subsidiary of Michael Foods, Inc., a wholly owned subsidiary of M-FoodsHoldings, Inc.

 

Business

The Company processes and distributes soft serve ice cream mix, frozenyogurt mix, milk, creamers and other specialty dairy products, many of whichare ultra-high temperature pasteurized, from its facility in Minnesota.

 

NOTE D — INVENTORIES

 

Inventories are stated at the lower of cost (determined on a first-in,first-out basis) or market.

 

Inventories consisted of the following (dollars inthousands):

 
|                                |   | **March 31,  2003** |   | **December  31,  2002** |   |
|-------------------------------------|--------|---------------------|--------|-------------------------|--------|
| Raw materials  and supplies         |   | $                   | 1,539  |                    | $      | 1,682 |   |
| Work in process  and finished goods |   | 2,697               |   | 1,730                   |   |
|                                |   | $                   | 4,236  |                    | $      | 3,412 |   |

 

 

NOTE E — INCOME TAXES

 

The Company is a limited liability corporation and, accordingly, noprovision or liability for U.S. income taxes is reflected in the Company’sfinancial statements.  The U.S. taxableincome of the Company and related deductions are allocated to and reported inthe individual income tax returns of the owners of the Company.

 

NOTE F — COMMITMENTS AND CONTINGENCIES

 

Litigation

The Company is engaged in routine litigation incidental to itsbusiness.  Management believes theultimate outcome of this litigation will not have a material effect on theOperating Unit’s financial position, liquidity or results of operations.

 

18

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M-FOODS DAIRY TXCT, LLC

(A Majority OwnedSubsidiary of Michael Foods, Inc.)

Index to FinancialStatements

 
| Balance Sheets                |
|-------------------------------|
| Statements of Operations      |
| Statements of Cash Flows      |
| Notes to Financial Statements |

 

19

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M-FOODS DAIRY TXCT, LLC

(A Majority Owned Subsidiary of Michael Foods, Inc.)

Balance Sheets

(Unaudited, dollars in thousands)

 
|                                                         |   | **March 31,  2003** |   | **December  31,  2002** |   |
|--------------------------------------------------------------|--------|---------------------|--------|-------------------------|--------|
| **ASSETS**                                                   |   |                |   |                    |   |
| Current assets                                               |   |                |   |                    |   |
| Accounts receivable                                          |   | $                   | 5,016  |                    | $      | 4,399 |   |
| Inventories                                                  |   | 4,386               |   | 4,019                   |   |
| Prepaid expenses and other                                   |   | 57                  |   | 65                      |   |
| Total current assets                                         |   | 9,459               |   | 8,483                   |   |
| Property, plant and equipment                                |   |                |   |                    |   |
| Leasehold improvements                                       |   | 3,176               |   | 3,176                   |   |
| Machinery and equipment                                      |   | 12,049              |   | 11,792                  |   |
|                                                         |   | 15,225              |   | 14,968                  |   |
| Less accumulated depreciation                                |   | 4,188               |   | 3,588                   |   |
|                                                         |   | 11,037              |   | 11,380                  |   |
| Other assets                                                 |   |                |   |                    |   |
| Non-compete agreement, net                                   |   | 396                 |   | 529                     |   |
|                                                         |   | $                   | 20,892 |                    | $      | 20,392 |   |
|                                                         |   |                |   |                    |   |
| **LIABILITIES AND UNIT HOLDER AND****OPERATING UNIT EQUITY** |   |                |   |                    |   |
| Current liabilities                                          |   |                |   |                    |   |
| Current maturities of non-compete commitment                 |   | $                   | 2,400  |                    | $      | 2,400 |   |
| Accounts payable                                             |   | 4,598               |   | 2,873                   |   |
| Accrued liabilities                                          |   |                |   |                    |   |
| Compensation                                                 |   | 348                 |   | 250                     |   |
| Insurance                                                    |   | 2                   |   | 1                       |   |
| Customer programs                                            |   | 262                 |   | 240                     |   |
| Other                                                        |   | 377                 |   | 555                     |   |
| Total current liabilities                                    |   | 7,987               |   | 6,319                   |   |
|                                                         |   |                |   |                    |   |
| Commitments and contingencies                                |   | —              |   | —                  |   |
| Preferred unit holder return payable                         |   | 4,994               |   | 4,728                   |   |
| Unit holder and operating unit equity                        |   | 7,911               |   | 9,345                   |   |
|                                                         |   | $                   | 20,892 |                    | $      | 20,392 |   |

 

The accompanying notes are an integral part of the unaudited condensedfinancial statements.

 

20

----

 

M-FOODS DAIRY TXCT, LLC

(A Majority OwnedSubsidiary of Michael Foods, Inc.)

Statements of Operations

For the three monthsended March 31,

(Unaudited, dollars in thousands)

 
|                                          |   | **2003** |    | **2002** |   |
|-----------------------------------------------|--------|----------|---------|----------|--------|
| Net sales                                     |   | $        | 16,210  |     | $      | 19,330 |   |
|                                          |   |     |    |     |   |
| Cost of sales                                 |   | 15,543   |    | 18,487   |   |
|                                          |   |     |    |     |   |
| Gross profit                                  |   | 667      |    | 843      |   |
|                                          |   |     |    |     |   |
| Selling, general  and administrative expenses |   | 954      |    | 1,018    |   |
|                                          |   |     |    |     |   |
| Operating profit  (loss)                      |   | (287     | )  | (175     | )      |
|                                          |   |     |    |     |   |
| Other income  (expense)                       |   | 19       |    | (5       | )      |
|                                          |   |     |    |     |   |
| Earnings (loss)  before income taxes          |   | (268     | )       | (180     | )      |
|                                          |   |     |    |     |   |
| Income tax  benefit                           |   | —   |    | —   |   |
|                                          |   |     |    |     |   |
| Net earnings  (loss)                          |   | $        | (268    | )        | $      | (180 | ) |

 

The accompanying notes are an integral part of the unaudited condensedfinancial statements.

 

21

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M-FOODS DAIRY TXCT, LLC

(A Majority OwnedSubsidiary of Michael Foods, Inc.)

Statements of Cash Flows

For the three monthsended March 31,

(Unaudited, dollars in thousands)

 
|                                             |   | **2003** |   | **2002** |   |
|--------------------------------------------------|--------|----------|--------|----------|--------|
|                                             |   |     |   |     |   |
| Net cash  provided by operating activities       |   | $        | 1,691  |     | $      | 689 |   |
|                                             |   |     |   |     |   |
| Cash flows from  investing activities:           |   |     |   |     |   |
| Capital  expenditures                            |   | (257     | )      | (303     | )      |
|                                             |   |     |   |     |   |
| Net cash used in  investing activities           |   | (257     | )      | (303     | )      |
|                                             |   |     |   |     |   |
| Cash flows from  financing activities:           |   |     |   |     |   |
| Dividends paid                                   |   | (1,434   | )      | (386     | )      |
| Net cash used in  financing activities           |   | (1,434   | )      | (386     | )      |
|                                             |   |     |   |     |   |
| Net increase  (decrease) in cash and equivalents |   | —   |   | —   |   |
|                                             |   |     |   |     |   |
| Cash and  equivalents at beginning of period     |   | —   |   | —   |   |
|                                             |   |     |   |     |   |
| Cash and  equivalents at end of period           |   | $        | — |     | $      | — |   |

 

The accompanying notes are an integral part of the unaudited condensedfinancial statements.

 

22

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M-FOODS DAIRY TXCT, LLC

(A Majority OwnedSubsidiary of Michael Foods, Inc.)

Notes to Financial Statements

Unaudited

 

NOTE A—MERGER AGREEMENT

 

On April 10, 2001, Michael Foods, Inc. and its subsidiaries (“MichaelFoods”, “Company”, “we”, “us”, “our”) was acquired in a transaction (the“Merger”) led by an investor group comprised of a management group led byMichael Foods’ Chairman, President and Chief Executive Officer, GreggOstrander; affiliates of Jeffrey Michael, a member of the board of directors;and affiliates of two private equity investment firms, Vestar Capital Partnersand Goldner Hawn Johnson & Morrison Incorporated, (collectively, “M-FoodsInvestors, LLC”). Michael Foods, Inc. is a wholly-owned subsidiary of M-FoodsHoldings, Inc.; M-Foods Holdings, Inc. is a wholly-owned subsidiary of M-FoodsInvestors, LLC. Under the terms of the Merger agreement, all outstanding sharesof Michael Foods common stock were converted into the right to receive $30.10per share in cash, or value equal thereto, and all outstanding stock optionswere converted into the right to receive, in cash, $30.10 per share reduced bythe exercise price per share for all shares subject to such stock options. Thepurchase of the outstanding shares was financed through equity financing ofapproximately $175,000,000, a senior secured credit facility of up to$470,000,000 at market-based variable interest rates, and $200,000,000 ofsenior subordinated notes at an 11.75% annual interest rate. As a result of theMerger, the stock of pre-merger Michael Foods (“Predecessor”) is no longerpublicly traded and, therefore, earnings per share calculations are no longerincluded for financial statement presentation.

 

Immediately after the close of the Merger, we contributed the assets ofour Dairy Products Division into two limited liability corporations, M-FoodsDairy, LLC and M-Foods Dairy TXCT, LLC (collectively, the “Dairy LLCs”) and inexchange received voting preferred and voting common units from these entitiesequal to the fair value of the net assets contributed, which collectively wereapproximately $35,800,000. The preferred units issued to us by the Dairy LLCshave an annual 10% preferred return guarantee and represent 100% of thepreferred units issued and outstanding. In addition, we received 5% of thecommon units issued by the Dairy LLCs, with the common units held by theCompany representing 100% of the voting common units issued and outstanding.These common units have a stated value of $25,000. The remaining 95% of thecommon units, which are non-voting, are owned by M-Foods Dairy Holdings, LLC,another entity which is owned by the same owners or affiliates of such owners,in the same proportion, as the unit holders of M-Foods Investors, LLC. Thecommon unit interests owned by M-Foods Dairy Holdings, LLC were issued inexchange for $475,000 and are reflected as non-controlling interest in theaccompanying consolidated balance sheet.

 

The Merger was accounted for as a purchase in accordance withAccounting Principles Board Opinion 16, *Business Combinations* and Emerging IssuesTask Force Issue No. 88-16, *Basis in Leveraged Buyout Transactions*.Accordingly, the acquired assets and liabilities have been recorded at fairvalue for the interests acquired by new investors and at the carryover basisfor continuing investors. As a result, the assets and liabilities were assignednew values, which are part Predecessor cost and part fair value in the sameproportions as the carryover basis of the residual interests retained by thecontinuing management investors and continuing affiliate investors of theMichael family, and the new interests acquired by the new investors. The amountof carryover basis was reflected as a deemed dividend of $66,631,000.

 

NOTE B — BASIS OFPRESENTATION

 

The accompanying unaudited financial statements and footnoteinformation of the Company as of and for the three month periods ended March31, 2003 and 2002 have been prepared in accordance with Regulation S-X pursuantto the rules and regulations of the SEC using the adjusted cost basis of assetsand liabilities of the Company.  In theopinion of management, the unaudited financial statements contain all adjustments(consisting of only normal recurring adjustments) necessary to present fairlythe results of operations and cash flows for the periods indicated.  The Operating Unit’s financial statementsinclude an allocation for general and administrative costs incurred by MichaelFoods.  Management believes itsallocations to these Operating Unit financial statements are reasonable.  Additionally, Operating Unit equity includesthe cumulative net advances between the Operating Unit and Michael Foods, whichare considered additional capital invested from or, constructive dividends to,Michael Foods.  Accordingly, theaccompanying financial statements may not necessarily be indicative of theresults that could have been obtained if the Operating Unit had been operatedas a stand-alone entity.  The historicalresults of the Company for the periods indicated are not necessarily indicativeof the results expected for the full year.

 

These unaudited interim financial statements should be read inconjunction with our financial statements and notes thereto, contained in ourAnnual Report on Form 10-K for the fiscal year ended December 31, 2002.

 

NOTE C — ORGANIZATION, BUSINESS AND MERGER

 

Organization

M-Foods Dairy TXCT, LLC (the “Company” or “Operating Unit”) is a majorityowned subsidiary of Michael Foods, Inc., a wholly owned subsidiary of M-FoodsHoldings, Inc.

 

23

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Business

The Company processes and distributes soft serve ice cream mix, frozenyogurt mix, milk, creamers and other specialty dairy products, many of whichare ultra-high temperature pasteurized, from its facilities in Texas andConnecticut.

 

NOTE D – INVENTORIES

 

Inventories are stated atthe lower of cost (determined on a first-in, first-out basis) or market.

 

Inventories consisted ofthe following (dollars in thousands): 

 
|                                |   | **March 31,  2003** |   | **December  31,  2002** |   |
|-------------------------------------|--------|---------------------|--------|-------------------------|--------|
| Raw  materials and supplies         |   | $                   | 2,565  |                    | $      | 3,014 |   |
| Work  in process and finished goods |   | 1,821               |   | 1,005                   |   |
|                                |   | $                   | 4,386  |                    | $      | 4,019 |   |

 

NOTE E – NON-COMPETE AGREEMENT AND COMMITMENT

 

During 1999, as part of the consideration for its Connecticut dairyasset purchase, the Operating Unit entered into a $12 million non-competeagreement.  Under the agreement, theOperating Unit agreed to make five annual $2.4 million payments beginning in1999.  The total remaining commitment atMarch 31, 2003 and December 31, 2002 was $2.4 million.

 

Our acquired intangible non-compete asset that hasbeen determined to have a definite life and continues to be amortized as ofMarch 31, 2003 is as follows (dollars in thousands):

 
|        |   | **Gross Carrying  Amount** |   | **Accumulated  Amortization** |   |
|-------------|--------|----------------------------|--------|-------------------------------|--------|
| Non-compete |   | $                          | 1,398  |                          | $      | (1,002 | ) |
|             |        |                            |        |                               |        |  |  |

 

The non-compete agreement will be fully amortized by December 31, 2003.

 

NOTE F — INCOME TAXES

 

The Company is a limited liability corporation and, accordingly, noprovision or liability for U.S. income taxes is reflected in the Company’sfinancial statements.  The U.S. taxableincome of the Company and related deductions are allocated to and reported inthe individual income tax returns of the owners of the Company.

 

NOTE G — COMMITMENTS AND CONTINGENCIES

 

Litigation

The Company is engaged in routine litigation incidental to itsbusiness.  Management believes theultimate outcome of this litigation will not have a material effect on theOperating Unit’s financial position, liquidity or results of operations.

 

24

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

 

THREE MONTHS ENDED MARCH 31, 2003 AS COMPARED TO THREE MONTHS ENDEDMARCH 31, 2002

 

RESULTS OF OPERATIONS

Readers are directed to Note G - Business Segments for data on theunaudited financial results of our four business segments for the three monthsended March 31, 2003 and March 31, 2002.

 

Net sales for the 2003 period were $298.2 million, an increase of 7%,compared to net sales of $278.4 million in the 2002 period***. ***Netsales increased because of the factors discussed in the below divisionalreviews, but were higher in the 2003 period due largely to significant salesgrowth at our largest division, Egg Products, which saw strong unit salesgrowth and the positive impact of the company acquired in 2002.

 

Egg Products Division external net sales for the 2003 period increased$23.4 million, or 15%, to $178.6 million from $155.2 million in the 2002period.  Sales reflected increased unitsales from core operations and the sales impact of an egg products acquisition(see Note C). Unit sales rose in all categories, except for frozen items, androse notably for higher value-added items. Graded shell egg prices increased approximately 11% compared to firstquarter 2002 levels, as reported by Urner Barry Publications - a widely quotedindustry pricing service. Related egg market increases raised the cost ofpurchased eggs, which was not fully reflected in our selling prices, reducingmargins for many of our egg products.

 

Approximately two-thirds of the Egg Products Division’s annual eggneeds are purchased under contracts or in the spot market. A substantialmajority of these eggs are priced according to the cost of grain inputs or toegg market prices as reported by Urner Barry. Approximately one-third of annualegg needs are sourced from internal flocks, where feed costs typicallyrepresent roughly two-thirds of the cost of producing such eggs. Feed costswere moderately higher in the 2003 period compared to the 2002 period,particularly for corn. Because of higher open market egg prices and higher feedcosts, overall egg costs increased significantly in the 2003 period as comparedto the 2002 period. As a result, the Division’s operating earnings decreased by$1.8 million in the 2003 period, despite a contribution from the businessacquired in 2002. Operating earnings for the 2003 period included a gain ofapproximately $1.0 million from a partial settlement of litigation.

 

Refrigerated Distribution Division external net sales for the 2003period decreased $1.7 million, or 3%, to $61.3 million from $63.0 million inthe 2002 period.  Sales reflected higherunit sales for distributed products and lower prices, related to marketconditions, for the key product categories of cheese and butter. Despite lowerdollar sales, divisional operating earnings increased by $2.2 million, with theimportant cheese category accounting for much of the improvement. Cheese unitsales rose year-over-year, while a decline in product costs, combined withfavorable wholesale price points, allowed for gross margin and operatingearnings expansion.

 

Dairy Products Division external net sales for the 2003 perioddecreased $2.6 million, or 6%, to $40.6 million from $43.2 million in the 2002period.  Sales reflected slightly lowerunit sales and lower pricing due to impacts from the national dairy productsmarkets. Ingredient costs improved and operating costs were more favorable thanthose experienced in 2002.  This causedoperating earnings to remain nearly unchanged from 2002 period levels.

 

Potato Products Division external net sales for the 2003 period increased$0.6 million, or 4%, to $17.7 million from $17.1 million in the 2002period.  Sales reflected modestincreases in both volume and selling prices. Sales were particularly strong for mashed items – both at retail and atfoodservice. New account activity, same-account sales growth and highermarketing spending levels all contributed to the sales gain.  Operating earnings for the 2003 perioddecreased $0.7 million due to lower processing yields, which resulted from alower quality 2002 potato harvest.

 

Gross profit in the 2003 period decreased $0.2 million, or 0.4%, to$50.9 million from $51.1 million in the 2002 period.  Our gross profit margin was 17.1% of net sales in the 2003 periodcompared to 18.4% in the 2002 period. The decrease in our gross profit margin for the 2003 period compared tothe 2002 period reflected the factors discussed above, particularly increasedraw material costs in the Egg Products and Potato Products divisions. It is ourstrategy to increase value-added product sales as a percent of total sales overtime, while decreasing commodity-sensitive products’ contribution toconsolidated sales. These efforts historically have been beneficial to grossprofit margins in most periods.

 

Selling, general and administrative expenses in the 2003 perioddecreased $0.2 million, or 0.6%, to $29.4 million from $29.6 million in the2002 period and reflected the partial litigation settlement gain notedabove.  Such expenses were 9.9% of netsales in the 2003 period compared to 10.6% of net sales in the 2002 period, andwere reflective of the relatively strong sales growth we achieved and our costcontrol efforts across all divisions.

 

25

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Operating profit in the 2003 period was nearly unchanged from that ofthe 2002 period at $21.5 million.  Ouroperating profit margin was 7.2% of net sales in the 2003 period compared to7.7% in the 2002 period.  The decline ingross profit margin more than offset the improvements seen in selling, generaland administrative expenses in the 2003 period, resulting in the loweroperating profit margin.

 

GENERAL

 

Certain of our products are sensitive to changes in commodity prices.Value-added egg products, such as extended shelf-life liquid and precookedproducts, account for approximately 60% of the Egg Products Division’s netsales. The remainder of Egg Products Division sales is derived from the sale ofother egg products and shell eggs, which are commodity-sensitive. Gross profitfrom shell eggs is primarily dependent upon the relationship between shell eggprices and the cost of feed, both of which can fluctuate significantly. Gradedshell egg pricing in the 2003 period was higher than in the 2002 period asmeasured by a widely quoted pricing service, and feed costs rose significantlyyear-over-year. Gross profit margins for extended shelf-life liquid eggs, eggsubstitutes, and precooked and hardcooked egg products are less sensitive tocommodity price fluctuations than are other egg products or shell eggs. OurRefrigerated Distribution Division derives approximately 80% of its net salesfrom refrigerated products produced by others, thereby somewhat reducing theeffects of commodity price swings. However, a majority of the 80% represents cheese and butter, and thecosts for both fluctuate with national dairy markets.  Time lags between cost changes for these lines andwholesale/retail pricing changes can result in margin expansion or compressionthat can be significant.  The balance ofrefrigerated distribution sales are mainly from shell eggs, some of which areproduced by the Egg Products Division, sold on a distribution, ornon-commodity, basis.

 

The Dairy Products Division sells its products primarily on a cost-plusbasis and, therefore, the Division’s earnings are not typically affectedgreatly by raw ingredient price fluctuations, except over short time periods.

 

The Potato Products Division typically purchases 75%-95% of its rawpotatoes from contract producers under annual contracts. The remainder ispurchased at market prices to satisfy short-term production requirements or totake advantage of market prices when they are lower than contracted prices.Moderate variations in the purchase price of raw materials or the selling priceper pound of finished products can have a significant effect on Potato ProductsDivision operating results.

 

Inflation is not expected to have a significant impact on our business.We have generally been able to offset the impact of inflation through acombination of productivity gains and price increases.

 

CAPITAL RESOURCES AND LIQUIDITY

 

Earnings before interest, taxes, depreciation and amortization(“EBITDA”) for the three months ended March 31, 2003 were $36.5 million, anincrease of 2%, compared to $35.8 million for the three months ended March 31,2002. EBITDA increased because of the factors discussed in the above results ofoperations divisional reviews. We believe that EBITDA is a relevant indicationof the strength of our operating performance as measured in terms of operatingcash earnings capabilities. We believe it is the key measurement used by ourdebtholders to assess our operating performance.  Because of this, we use EBITDA as the primary internalmeasurement of our operating performance and it is the main focus of ouremployee incentive compensation programs.

 

We believe EBITDA is a widely accepted financial indicator used toanalyze and compare companies on the basis of operating performance. It shouldnot be considered in isolation or as a substitute for measures of performanceprepared in accordance with generally accepted accounting principles and is notindicative of operating profit as determined under generally acceptedaccounting principles. The following table reconciles our net earnings toEBITDA as most commonly defined, and then to EBITDA as we are required todefine it per our credit agreement, for the three months ended March 31(dollars in thousands): 

 
|                                                                   |   | **2003** |   | **2002** |   |
|------------------------------------------------------------------------|--------|----------|--------|----------|--------|
|                                                                   |   |     |   |     |   |
| Net earnings                                                           |   | $        | 5,899  |     | $      | 5,359 |   |
|                                                                   |   |     |   |     |   |
| Total interest  expense, excluding amortization of debt issuance costs |   | 10,972   |   | 12,005   |   |
|                                                                   |   |     |   |     |   |
| Amortization of  debt issuance costs                                   |   | 947      |   | 786      |   |
|                                                                   |   |     |   |     |   |
| Income taxes                                                           |   | 3,710    |   | 3,470    |   |
|                                                                   |   |     |   |     |   |
| Depreciation and  amortization                                         |   | 14,401   |   | 13,529   |   |
| EBITDA (as  commonly defined)                                          |   | 35,929   |   | 35,149   |   |
|                                                                   |   |     |   |     |   |
| Equity sponsor  management fee                                         |   | 317      |   | 273      |   |
|                                                                   |   |     |   |     |   |
| Industrial  revenue bonds  related expenses                       |   | 236      |   | 227      |   |
|                                                                   |   |     |   |     |   |
| Other                                                                  |   | 34       |   | 196      |   |
| EBITDA (as  defined in our credit agreement)                           |   | $        | 36,516 |     | $      | 35,845 |   |

 

26

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We have a credit agreement with various lenders, including commercialbanks, other financial institutions and investment groups, which expires in2007 and 2008 and provides credit facilities which originally provided $470million. Within these credit facilities there is a $100 million revolving lineof credit. At March 31, 2003, there was approximately $7.6 million utilizedunder the revolving line of credit for letters of credit, while the outstandingbalance of the term A portion of the credit facility approximated $65.3 millionand the term B portion approximated $213.6 million.

 

The weighted average interest rate for our borrowings under the creditagreement, adjusted for the effects of hedging activities, was approximately6.88% at March 31, 2003. Given our business trends and cash flow forecast, wedo not anticipate a significant use of the revolving line of credit during2003.

 

The credit agreement contains various restrictive covenants. Theagreement prohibits us from prepaying other indebtedness, including thesubordinated notes, and it requires us to maintain specified financialratios.  In addition, the creditagreement prohibits us from declaring or paying any dividends and prohibits usfrom making any payments with respect to the notes if we fail to perform ourobligations under, or fail to meet the conditions of, the credit agreement orif payment creates a default under the credit agreement. The indenturegoverning the subordinated notes, among other things: (i) restricts our abilityand the ability of our subsidiaries to incur additional indebtedness, issueshares of preferred stock, incur liens, pay dividends or make certain otherrestricted payments and enter into certain transactions with affiliates; (ii)prohibits certain restrictions on the ability of certain of our subsidiaries topay dividends or make certain payments to us; and (iii) places restrictions onour ability and the ability of our subsidiaries to merge or consolidate withany other person or sell, assign, transfer, lease, convey or otherwise disposeof all or substantially all of our assets. The indenture related to the notesand the credit agreement also contains various covenants which limit ourdiscretion in the operation of our businesses. We were in compliance with allof the covenants in the indenture and the credit agreement as of March 31,2003. The Company, principal shareholders or their affiliates may, from time totime, enter the market to purchase or sell our subordinated notes, incompliance with applicable securities laws.

 

Our ability to make payments on and to refinance our debt, includingthe subordinated notes, and to fund planned capital expenditures will depend onour ability to generate sufficient cash in the future. This, to some extent, issubject to general economic, financial, competitive and other factors that arebeyond our control. We believe that, based on current levels of operations, wewill be able to meet our debt service obligations when due. Significantassumptions underlie this belief, including, among other things, that we willcontinue to be successful in implementing our business strategy and that therewill be no material adverse developments in our business, liquidity or capitalrequirements. If our future cash flows from operations and other capital resourcesare insufficient to pay our obligations as they mature or to fund our liquidityneeds, we may be forced to reduce or delay our business activities and capitalexpenditures, sell assets, obtain additional debt or equity capital orrestructure or refinance all or a portion of our debt, including the notes, onor before maturity. We can provide no assurances that we would be able toaccomplish any of these alternatives on a timely basis or on satisfactoryterms, if at all. In addition, the terms of our existing and futureindebtedness, including the subordinated notes and our credit agreement, maylimit our ability to pursue any of these alternatives.

 

27

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We invested $7.8 million in capital expenditures during the threemonths ended March 31, 2003.  We plan tospend approximately $31 million on capital expenditures during the balance of2003.  Our principal sources of funds areanticipated to be cash flows from operating activities and borrowings under oursenior credit facility. We believe that these funds will provide us withsufficient liquidity and capital resources for us to meet our current year andlonger-term plans, including the working capital and capital expenditure needssuch plans may generate.  In executingthese plans, we expect to reduce debt over the coming years.

 

SEASONALITY

 

Consolidated quarterly operating results are affected by theseasonality of our net sales and operating profits. Specifically, shell eggprices typically rise seasonally in the first and fourth quarters of the yeardue to increased demand during holiday periods. Generally, refrigerateddistribution operations experience higher net sales and operating profits inthe fourth quarter, coinciding with incremental consumer demand during theholiday season. Net sales and operating profits from dairy operations typicallyare significantly higher in the second and third quarters due to increasedconsumption of ice milk and ice cream products during the summer months.Operating profits from potato products are less seasonal, but tend to be higherin the second half of the year coinciding with the potato harvest.

 

FORWARD-LOOKING STATEMENTS

 

Certain items in this Form 10-Q may be forward-looking statements,which are made in reliance upon the safe harbor provisions of the PrivateSecurities Litigation Reform Act of 1995. Such forward-looking statements aresubject to numerous risks and uncertainties, including variances in the demandfor our products due to consumer, industry and broad economic developments, aswell as variances in the costs to produce such products, including normalvolatility in egg, feed and dairy ingredients costs. Our actual financialresults could differ materially from the results estimated by, forecasted by,or implied by us in such forward-looking statements.

 

ITEM 3.  QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

There were no material changes in our market risk during the threemonth period ended March 31, 2003.

 

ITEM 4.  CONTROLS AND PROCEDURES

 

a. Evaluation of disclosure controls and procedures.

 

Under the supervision, and with the participationof, our management, including our Chief Executive Officer and Chief FinancialOfficer, we evaluated the effectiveness of the design and operation of ourdisclosure controls and procedures (as defined in Rules 13a-14(c)/15d-14(c)under the Exchange Act) as of a date (the “Evaluation Date”) within 90 daysprior to the filing date of this report. Based upon that evaluation, the Chief Executive Officer and ChiefFinancial Officer concluded that, as of the Evaluation Date, our disclosurecontrols and procedures are effective in timely alerting them to the materialinformation relating to us (or our consolidated subsidiaries) required to beincluded in our periodic SEC filings.

 

b. Changes in internal controls.

 

There were no significant changes made in ourinternal controls during the period covered by this report or, to ourknowledge, in other factors that could significantly affect these controlssubsequent to the date of their evaluation.

 

PART II - OTHERINFORMATION

 

ITEM 6.  EXHIBITS AND REPORTS ONFORM 8-K

 

(a)                        Exhibitsand Exhibit Index.

 

The following exhibitsare filed as part of this report:

 
| **EXHIBIT  NO.** |   | **DESCRIPTION**                                                                                                                                                              |
|------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |   |                                                                                                                                                                         |
| 2.1              |   | Agreement and Plan of Merger, dated December 21,  2000, by and among Michael Foods Acquisition Corp., Michael Foods, Inc. and  M-Foods Holdings, Inc.(1)                     |
| 2.2              |   | Amendment Number One to Agreement and Plan of  Merger, dated March 6, 2001, by and among Michael Foods Acquisition Corp.,  Michael Foods, Inc. and M-Foods Holdings, Inc.(1) |
| 3.1              |   | Amended and Restated Articles of Incorporation of  Michael Foods, Inc.(1)                                                                                                    |
| 3.2              |   | Bylaws of Michael Foods, Inc.(1)                                                                                                                                             |
| 4.1              |   | Purchase Agreement, dated March 16, 2001, between  Michael Foods Acquisition Corp., Michael Foods, Inc., and Banc of America  Securities, LLC and Bear, Stearns & Co.(1) |

 

28

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| 4.2    |   | Indenture, dated March 27, 2001, between Michael  Foods Acquisition Corp. and BNY Midwest Trust Company, as trustee(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.3    |   | Supplemental Indenture, dated as of April 10, 2001,  by and among Michael Foods, Inc., M-Foods Holdings, Inc., Michael Foods of  Delaware, Inc., Northern Star Co., Minnesota Products, Inc., Farm Fresh  Foods, Inc., Crystal Farms Refrigerated Distribution Company, WFC, Inc.,  Wisco Farm Cooperative, M. G. Waldbaum Company, Papetti’s Hygrade Egg  Products, Inc., Casa Trucking, Inc., Papetti Electroheating Corporation,  Kohler Mix Specialties, Inc., Midwest Mix, Inc., Kohler Mix Specialties of Connecticut,  Inc. and Midwest Mix, Inc. and BNY Midwest Trust Company(1) |
| 4.4    |   | Second Supplemental Indenture, dated as of May 2,  2001, by and among M-Foods Dairy, LLC and M-Foods Dairy TXCT, LLC, Michael  Foods, Inc. and BNY Midwest Trust Company(1)                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 4.5    |   | Registration Rights Agreement, dated March 27, 2001,  by and among Michael Foods Acquisition Corp., and Banc of America Securities,  LLC and Bear, Stearns & Co.(1)                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.6    |   | Collateral Pledge and Security Agreement, dated  March 27, 2001, between Michael Foods Acquisition Corp., and Banc of America  Securities, LLC and Bear, Stearns & Co. and BNY Midwest Trust Company as  collateral agent and securities intermediary(1)                                                                                                                                                                                                                                                                                                                                   |
| 10.1   |   | Credit Agreement, dated April 10, 2001, among  Michael Foods, Inc., M-Foods Holdings, Inc., the Guarantors, Bank of America,  N.A., as Agent, Banc of America Securities, LLC, as Sole Lead Arranger and  Sole Book Running Manager, and Bear, Stearns & Co., as Syndication  Agent(1)                                                                                                                                                                                                                                                                                                     |
| 10.2   |   | Pledge Agreement, dated April 10, 2001, between  Michael Foods, Inc., Bank of America, N.A. and Banc of America Securities,  LLC(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| *10.3  |   | M-Foods Holdings, Inc. 2001 Stock Option Plan(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| *10.4  |   | Form of M-Foods Holdings 2001 Stock Option Plan  Stock Option Award Agreement(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| *10.5  |   | Employment Agreement, dated April 10, 2001, by and  among Michael Foods, Inc., M-Foods Holdings, Inc. and Gregg A. Ostrander(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| *10.6  |   | Employment Agreement, dated April 10, 2001, by and  among Michael Foods, Inc., M-Foods Holdings, Inc. and John D. Reedy(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| *10.7  |   | Employment Agreement, dated April 10, 2001, by and  among Michael Foods, Inc., M-Foods Holdings, Inc. and James D. Clarkson(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| *10.8  |   | Employment Agreement, dated April 10, 2001, by and  among Michael Foods, Inc., M-Foods Holdings, Inc. and Bill L. Goucher(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| *10.9  |   | Severance and Deferred Compensation Agreement, dated  April 10, 2001, by and among Michael Foods, Inc., M-Foods Holdings, Inc. and  James Mohr(1)                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| *10.10 |   | Severance and Deferred Compensation Agreement, dated  April 10, 2001, by and among Michael Foods, Inc., M-Foods Holdings, Inc. and  Harold D. Sprinkle(1)                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| *10.11 |   | Severance and Deferred Compensation Agreement, dated  April 10, 2001, by and among Michael Foods, Inc., M-Foods Holdings, Inc. and  Max Hoffmann(1)                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| *10.12 |   | Severance and Deferred Compensation Agreement, dated  April 10, 2001, by and among Michael Foods, Inc., M-Foods Holdings, Inc. and  Bradley Cook(1)                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.13  |   | Amended and Restated Limited Liability Company  Agreement of M-Foods Investors, LLC(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| *10.14 |   | Securityholders Agreement, dated April 10, 2001,  between M-Foods Dairy Holdings, LLC, Marathon Dairy Investment Corp., Vestar  Capital Partners IV, L.P., 4J2R1C Limited Partnership, 3J2R Limited  Partnership, Gregg A. Ostrander, John D. Reedy, Bill L. Goucher, James D.  Clarkson, James Mohr, Harold D. Sprinkle, Bradley Cook, and Max Hoffmann(1)                                                                                                                                                                                                                                    |
| *10.15 |   | Management Stock Purchase and Unit Subscription  Agreement, dated April 10, 2001, among M-Foods Investors, LLC, M-Foods  Holdings, Inc., and Gregg A. Ostrander(1)                                                                                                                                                                                                                                                                                                                                                                                                                             |
| *10.16 |   | Management Stock Purchase and Unit Subscription  Agreement, dated April 10, 2001, among M-Foods Investors, LLC, M-Foods  Holdings, Inc., and John D. Reedy(1)                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| *10.17 |   | Management Stock Purchase and Unit Subscription  Agreement, dated April 10, 2001, among M-Foods Investors, LLC, M-Foods  Holdings, Inc., and James D. Clarkson(1)                                                                                                                                                                                                                                                                                                                                                                                                                              |
| *10.18 |   | Management Stock Purchase and Unit Subscription  Agreement, dated April 10, 2001, among M-Foods Investors, LLC, M-Foods  Holdings, Inc., and Bill L. Goucher(1)                                                                                                                                                                                                                                                                                                                                                                                                                                |
| *10.19 |   | Management Stock Purchase and Unit Subscription  Agreement, dated April 10, 2001, among M-Foods Investors, LLC, M-Foods  Holdings, Inc., and Max Hoffmann(1)                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| *10.20 |   | Management Stock Purchase and Unit Subscription  Agreement, dated April 10, 2001, among M-Foods Investors, LLC, M-Foods  Holdings, Inc., and Harold D. Sprinkle(1)                                                                                                                                                                                                                                                                                                                                                                                                                             |
| *10.21 |   | Management Stock Purchase and Unit Subscription  Agreement, dated April 10, 2001, among M-Foods Investors, LLC, M-Foods  Holdings, Inc., and Bradley Cook(1)                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| *10.22 |   | Management Stock Purchase and Unit Subscription  Agreement, dated April 10, 2001, among M-Foods Investors, LLC, M-Foods  Holdings, Inc., and James Mohr(1)                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| *10.23 |   | Management Unit Subscription Agreement, dated April  10, 2001, between M-Foods Dairy Holdings, LLC, and Gregg A. Ostrander(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |

 

29

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| *10.24 |   | Management Unit Subscription Agreement, dated April  10, 2001, between M-Foods Dairy Holdings, LLC, and John D. Reedy(1)                                                                                                                                                                                                                                                            |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *10.25 |   | Management Unit Subscription Agreement, dated April  10, 2001, between M-Foods Dairy Holdings, LLC, and James D. Clarkson(1)                                                                                                                                                                                                                                                        |
| *10.26 |   | Management Unit Subscription Agreement, dated April  10, 2001, between M-Foods Dairy Holdings, LLC, and Bill L. Goucher(1)                                                                                                                                                                                                                                                          |
| *10.27 |   | Management Unit Subscription Agreement, dated April  10, 2001, between M-Foods Dairy Holdings, LLC, and Max Hoffmann(1)                                                                                                                                                                                                                                                             |
| *10.28 |   | Management Unit Subscription Agreement, dated April  10, 2001, between M-Foods Dairy Holdings, LLC, and Harold D. Sprinkle(1)                                                                                                                                                                                                                                                       |
| *10.29 |   | Management Unit Subscription Agreement, dated April  10, 2001, between M-Foods Dairy Holdings, LLC, and Bradley Cook(1)                                                                                                                                                                                                                                                             |
| *10.30 |   | Management Unit Subscription Agreement, dated April  10, 2001, between M-Foods Dairy Holdings, LLC, and James Mohr(1)                                                                                                                                                                                                                                                               |
| *10.31 |   | Securityholders Agreement, dated April 10, 2001,  between M-Foods Investors, LLC, M-Foods Holdings, Inc., Marathon Fund Limited  Partnership IV, Vestar Capital Partners IV, L.P., 4J2R1C Limited Partnership,  3J2R Limited Partnership, Gregg A. Ostrander, John D. Reedy, Bill L. Goucher,  James D. Clarkson, James Mohr, Harold D. Sprinkle, Bradley Cook, and Max Hoffmann(1) |

 

----

*              ManagementContract or Compensation Plan Arrangement

(1)           Incorporatedby reference from the Company’s Registration Statement on Form S-4 filed July18, 2001.

 

(b)                         Reportson Form 8-K

 

Reference is made to a report filed on Form 8-K dated February 20, 2003pertaining to our 2002 financial results.

 

Reference is made to a report filed on Form 8-K dated April 24, 2003pertaining to our financial results for the three months ended March 31, 2003.

 

30

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SIGNATURES

 

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

 
|                     | MICHAEL FOODS, INC. |
|--------------------------|---------------------|
|                     | (Registrant)        |   |
|                     |                |   |
| Date:  May 5,  2003 |                | By: | /s/ Gregg A. Ostrander |
|                     |                | Gregg A.  Ostrander |
|                     |                | (Chairman,  President and  Chief Executive Officer) |
|                     |                |   |
|                     |                |   |
| Date:  May 5,  2003 |                | By: | /s/ John D. Reedy |
|                     |                | John D. Reedy |
|                     |                | (Executive Vice  President,  Chief Financial Officer and  Principal Accounting Officer) |

 

31

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**CERTIFICATIONOF CHIEF EXECUTIVE OFFICER**

 

I, Gregg A. Ostrander, certify that:

 

1.  I have reviewed thisquarterly report on Form 10-Q of Michael Foods, Inc.;

 

2.  Based on my knowledge, thisquarterly report does not contain any untrue statement of a material fact oromit to state a material fact necessary to make the statements made, in lightof the circumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3.  Based on my knowledge, thefinancial statements, and other financial information included in thisquarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.  The registrant’s othercertifying officers and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and have:

 

a)  designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

b)  evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)  presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.  The registrant’s othercertifying officers and I have disclosed, based on our most recent evaluation,to the registrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent functions):

 

a)  allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)  any fraud,whether or not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.  The registrant’s othercertifying officers and I have indicated in this quarterly report whether therewere significant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
| Date:  May 5,  2003 |                                            |
|--------------------------|-------------------------------------------------|
|                     |                                            |
|                     |                                            |
|                     | /s/ Gregg A. Ostrander                          |   |
|                     | Chairman, President and Chief Executive Officer |

 

32

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**CERTIFICATION OF CHIEF FINANCIAL OFFICER**

 

I, John D. Reedy, certify that:

 

1.  I have reviewed thisquarterly report on Form 10-Q of Michael Foods, Inc.;

 

2.  Based on my knowledge, thisquarterly report does not contain any untrue statement of a material fact oromit to state a material fact necessary to make the statements made, in lightof the circumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3.  Based on my knowledge, thefinancial statements, and other financial information included in thisquarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.  The registrant’s othercertifying officers and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and have:

 

a)  designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

b)  evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)  presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.  The registrant’s othercertifying officers and I have disclosed, based on our most recent evaluation,to the registrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent functions):

 

a)  allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)  any fraud,whether or not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.  The registrant’s othercertifying officers and I have indicated in this quarterly report whether therewere significant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
| Date:  May 5,  2003 |                                                  |
|--------------------------|-------------------------------------------------------|
|                     |                                                  |
|                     |                                                  |
|                     | /s/ John D. Reedy                                     |   |
|                     | Executive Vice President and  Chief Financial Officer |

 

33

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