**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 
| **ý**                                                                                                                                                                                                                                                                                                     | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**  |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                           |                                                                                          |
| **For  the quarterly period ended September 30, 2002**                                                                                                                                                                                                                                                         |
|                                                                                                                                                                                                                                                                                                           |
| **or**                                                                                                                                                                                                                                                                                                         |
|                                                                                                                                                                                                                                                                                                           |                                                                                          |
| **o**                                                                                                                                                                                                                                                                                                          | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                                                                                                           |                                                                                          |
| **For  the transition period  from                      to                      ** |
|                                                                                                                                                                                                                                                                                                           |
| **Commission  File Number: 333-63722**                                                                                                                                                                                                                                                                         |

 

| **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 mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.      ý     Yes     o     No

 

 

----

 

PART I - FINANCIALINFORMATION

 

**ITEM1.  FINANCIAL STATEMENTS**

 

MICHAEL FOODS, INC.

(A WHOLLY-OWNEDSUBSIDIARY OF M-FOODS HOLDINGS, INC.)

CONDENSED CONSOLIDATEDBALANCE SHEETS

(Unaudited)

 
|                                       |   | **September  30,  2002** |        | **December  31,  2001** |   |
|--------------------------------------------|--------|--------------------------|-------------|-------------------------|--------|
| ASSETS                                     |   |                     |        |                    |   |
|                                       |   |                     |        |                    |   |
| CURRENT ASSETS                             |   |                     |        |                    |   |
| Cash and  equivalents                      |   | $                        | 57,126,000  |                    | $      | 27,660,000 |   |
| Accounts  receivable, less allowances      |   | 96,171,000               |        | 102,317,000             |   |
| Inventories                                |   | 93,367,000               |        | 78,941,000              |   |
| Prepaid expenses  and other                |   | 11,637,000               |        | 11,370,000              |   |
| Total current  assets                      |   | 258,301,000              |        | 220,288,000             |   |
|                                       |   |                     |        |                    |   |
| PROPERTY, PLANT  AND EQUIPMENT-AT COST     |   |                     |        |                    |   |
| Land                                       |   | 3,873,000                |        | 3,873,000               |   |
| Buildings and  improvements                |   | 104,964,000              |        | 99,561,000              |   |
| Machinery and  equipment                   |   | 257,301,000              |        | 226,759,000             |   |
|                                       |   | 366,138,000              |        | 330,193,000             |   |
| Less accumulated  depreciation             |   | 78,751,000               |        | 39,039,000              |   |
|                                       |   | 287,387,000              |        | 291,154,000             |   |
|                                       |   |                     |        |                    |   |
| OTHER ASSETS                               |   |                     |        |                    |   |
| Goodwill, net                              |   | 345,746,000              |        | 341,021,000             |   |
| Joint ventures  and other assets           |   | 39,882,000               |        | 44,670,000              |   |
|                                       |   | 385,628,000              |        | 385,691,000             |   |
|                                       |   | $                        | 931,316,000 |                    | $      | 897,133,000 |   |
|                                       |   |                     |        |                    |   |
| LIABILITIES AND SHAREHOLDERS’  EQUITY |   |                     |        |                    |   |
|                                       |   |                     |        |                    |   |
| CURRENT  LIABILITIES                       |   |                     |        |                    |   |
| Current  maturities of long-term debt      |   | $                        | 18,458,000  |                    | $      | 12,962,000 |   |
| Accounts payable                           |   | 63,522,000               |        | 64,492,000              |   |
| Accrued  liabilities                       |   |                     |        |                    |   |
| Compensation                               |   | 14,585,000               |        | 12,582,000              |   |
| Insurance                                  |   | 8,738,000                |        | 8,191,000               |   |
| Customer  programs                         |   | 23,567,000               |        | 21,996,000              |   |
| Income taxes                               |   | 12,220,000               |        | 9,853,000               |   |
| Interest                                   |   | 16,122,000               |        | 10,619,000              |   |
| Other                                      |   | 24,318,000               |        | 14,116,000              |   |
| Total current  liabilities                 |   | 181,530,000              |        | 154,811,000             |   |
|                                       |   |                     |        |                    |   |
| LONG-TERM DEBT,  less current maturities   |   | 527,902,000              |        | 540,132,000             |   |
| DEFERRED INCOME  TAXES                     |   | 48,605,000               |        | 48,725,000              |   |
| COMMITMENTS AND  CONTINGENCIES             |   | —                   |        | —                  |   |
| NON-CONTROLLING  INTEREST                  |   | 475,000                  |        | 475,000                 |   |
|                                       |   |                     |        |                    |   |
| SHAREHOLDERS’  EQUITY                 |   |                     |        |                    |   |
| Common stock                               |   | —                   |        | —                  |   |
| Additional  paid-in capital                |   | 147,448,000              |        | 146,792,000             |   |
| Retained  earnings                         |   | 29,858,000               |        | 9,815,000               |   |
| Accumulated  other comprehensive loss      |   | (4,502,000               | )           | (3,617,000              | )      |
|                                       |   | 172,804,000              |        | 152,990,000             |   |
|                                       |   | $                        | 931,316,000 |                    | $      | 897,133,000 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

2

----

 

MICHAEL FOODS, INC.

(A WHOLLY-OWNEDSUBSIDIARY OF M-FOODS HOLDINGS, INC.)

CONDENSED CONSOLIDATEDSTATEMENTS OF EARNINGS

Three Months Ended September30,

(Unaudited)

 
|                                          |   | **2002**    |        | **2001**    |   |
|-----------------------------------------------|--------|-------------|-------------|-------------|--------|
| Net sales                                     |   | $           | 293,954,000 |        | $      | 299,225,000 |   |
|                                          |   |        |        |        |   |
| Cost of sales                                 |   | 239,777,000 |        | 248,436,000 |   |
|                                          |   |        |        |        |   |
| Gross profit                                  |   | 54,177,000  |        | 50,789,000  |   |
|                                          |   |        |        |        |   |
| Selling, general  and administrative expenses |   | 29,207,000  |        | 30,066,000  |   |
|                                          |   |        |        |        |   |
| Operating profit                              |   | 24,970,000  |        | 20,723,000  |   |
|                                          |   |        |        |        |   |
| Interest  expense, net                        |   | 12,844,000  |        | 13,416,000  |   |
|                                          |   |        |        |        |   |
| Earnings before  income taxes                 |   | 12,126,000  |        | 7,307,000   |   |
|                                          |   |        |        |        |   |
| Income tax  expense                           |   | 4,760,000   |        | 4,010,000   |   |
|                                          |   |        |        |        |   |
| NET EARNINGS                                  |   | $           | 7,366,000   |        | $      | 3,297,000 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

3

----

 

MICHAEL FOODS, INC.

(A WHOLLY-OWNEDSUBSIDIARY OF M-FOODS HOLDINGS, INC.)

CONDENSED CONSOLIDATEDSTATEMENTS OF EARNINGS

 

(Unaudited)

 
|                                                             |   | **Company**                                 |        | **Predecessor**                           |   |
|------------------------------------------------------------------|--------|---------------------------------------------|-------------|-------------------------------------------|--------|
|                                                             |   | **Nine  Months  Ended September 30,  2002** |        | **Six Months  Ended September 30,  2001** |   | **Three  Months  Ended March 31,  2001** |   |
| Net sales                                                        |   | $                                           | 862,136,000 |                                      | $      | 594,334,000 |   | $ | 275,627,000 |   |
|                                                             |   |                                        |        |                                      |   |   |   |
| Cost of sales                                                    |   | 702,639,000                                 |        | 493,291,000                               |   | 227,707,000 |   |
|                                                             |   |                                        |        |                                      |   |   |   |
| Gross profit                                                     |   | 159,497,000                                 |        | 101,043,000                               |   | 47,920,000 |   |
|                                                             |   |                                        |        |                                      |   |   |   |
| Selling, general  and administrative expenses                    |   | 88,656,000                                  |        | 60,360,000                                |   | 27,376,000 |   |
| Transaction  expenses                                            |   | —                                      |        | —                                    |   | 11,050,000 |   |
|                                                             |   |                                        |        |                                      |   |   |   |
| Operating profit                                                 |   | 70,841,000                                  |        | 40,683,000                                |   | 9,494,000 |   |
|                                                             |   |                                        |        |                                      |   |   |   |
| Interest  expense, net                                           |   | 37,840,000                                  |        | 29,657,000                                |   | 3,293,000 |   |
|                                                             |   |                                        |        |                                      |   |   |   |
| Earnings before  income taxes                                    |   | 33,001,000                                  |        | 11,026,000                                |   | 6,201,000 |   |
|                                                             |   |                                        |        |                                      |   |   |   |
| Income tax expense                                               |   | 12,960,000                                  |        | 6,060,000                                 |   | 2,430,000 |   |
| Earnings before  extraordinary item                              |   | 20,041,000                                  |        | 4,966,000                                 |   | 3,771,000 |   |
|                                                             |   |                                        |        |                                      |   |   |   |
| Extraordinary  item - early extinguishment of debt, net of taxes |   | —                                      |        | —                                    |   | (9,424,000 | ) |
|                                                             |   |                                        |        |                                      |   |   |   |
| NET EARNINGS  (LOSS)                                             |   | $                                           | 20,041,000  |                                      | $      | 4,966,000 |   | $ | (5,653,000 | ) |

 

See accompanying notes to condensed consolidated financial statements.

 

4

----

 

MICHAEL FOODS, INC.

(A WHOLLY-OWNEDSUBSIDIARY OF M-FOODS HOLDINGS, INC.)

CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS

(Unaudited)

 
|                                                      |   | **Company**                                 |       | **Predecessor**                           |   |
|-----------------------------------------------------------|--------|---------------------------------------------|------------|-------------------------------------------|--------|
|                                                      |   | **Nine  Months  Ended September 30,  2002** |       | **Six Months  Ended September 30,  2001** |   | **Three  Months  Ended March 31,  2001** |   |
|                                                      |   |                                        |       |                                      |   |   |   |
| Net cash  provided by operating activities                |   | $                                           | 78,577,000 |                                      | $      | 84,290,000 |   | $ | 14,016,000 |   |
|                                                      |   |                                        |       |                                      |   |   |   |
| Cash flows from  investing activities:                    |   |                                        |       |                                      |   |   |   |
| Capital  expenditures                                     |   | (19,242,000                                 | )          | (13,528,000                               | )      | (10,837,000 | ) |
| Business  acquisition                                     |   | (17,593,000                                 | )          | (626,925,000                              | )      | — |   |
| Investments in  joint ventures and other assets           |   | 2,336,000                                   |       | (3,949,000                                | )      | 3,888,000 |   |
|                                                      |   |                                        |       |                                      |   |   |   |
| Net cash used in  investing activities                    |   | (34,499,000                                 | )          | (644,402,000                              | )      | (6,949,000 | ) |
|                                                      |   |                                        |       |                                      |   |   |   |
| Cash flows from  financing activities:                    |   |                                        |       |                                      |   |   |   |
| Payments on  notes payable and revolving line of credit   |   | (5,000,000                                  | )          | (46,450,000                               | )      | (52,000,000 | ) |
| Proceeds from  notes payable and revolving line of credit |   | 10,000,000                                  |       | 29,500,000                                |   | 45,500,000 |   |
| Payments on  long-term debt and other                     |   | (20,268,000                                 | )          | (131,225,000                              | )      | (109,000 | ) |
| Proceeds from  long-term debt and other                   |   | —                                      |       | 570,000,000                               |   | — |   |
| Extension of  stock options                               |   | —                                      |       | —                                    |   | 310,000 |   |
| Capital  contribution from parent                         |   | 656,000                                     |       | 174,800,000                               |   | 546,000 |   |
| Dividends                                                 |   | —                                      |       | —                                    |   | (1,465,000 | ) |
| Net cash (used  in) provided by financing activities      |   | (14,612,000                                 | )          | 596,625,000                               |   | (7,218,000 | ) |
|                                                      |   |                                        |       |                                      |   |   |   |
| Net increase  (decrease) in cash and equivalents          |   | 29,466,000                                  |       | 36,513,000                                |   | (151,000 | ) |
|                                                      |   |                                        |       |                                      |   |   |   |
| Cash and  equivalents at beginning of period              |   | 27,660,000                                  |       | 4,270,000                                 |   | 4,421,000 |   |
|                                                      |   |                                        |       |                                      |   |   |   |
| Cash and  equivalents at end of period                    |   | $                                           | 57,126,000 |                                      | $      | 40,783,000 |   | $ | 4,270,000 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

5

----

 

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 (“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 Predecessor’s Boardof Directors, and affiliates of two private equity investment firms, VestarCapital Partners and Goldner Hawn Johnson & Morrison Incorporated,(collectively, “M-Foods Investors, LLC”). Under the terms of the Mergeragreement, all outstanding shares of Michael Foods common stock were convertedinto the right to receive $30.10 per share in cash, or value equal thereto, andall outstanding stock options were converted into the right to receive, incash, $30.10 per share reduced by the exercise price per share for all sharessubject to such stock options. The purchase of the outstanding shares wasfinanced through new equity financing of approximately $175,000,000, a seniorsecured credit facility of up to $470,000,000 at market-based variable interestrates (effective rate of approximately 6.8% as of September 30, 2002), and $200,000,000of senior subordinated notes at an 11.75% annual interest rate. As a result ofthe Merger, 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 division into two limited liability corporations, M-Foods Dairy, LLCand M-Foods Dairy TXCT, LLC (collectively, the “Dairy LLCs”) and in exchangereceived voting preferred and voting common units from these entities equal tothe fair value of the net assets contributed, which collectively wereapproximately $35,800,000. The preferred units issued to us have an annual 10%preferred return guarantee and represent 100% of the preferred units issued andoutstanding. 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, which is owned by the same owners oraffiliates of such owners, in the same proportion, as the unit holders ofM-Foods Investors, LLC. The common unit interests owned by M-Foods DairyHoldings, LLC were issued in exchange for $475,000 and are reflected asnon-controlling interest in the accompanying consolidated balance sheet.

 

The Merger was accounted for as a purchase in accordance withAccounting Principles Board Opinion 16, *Business Combinations* and EITF 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 Predecessorcost and 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.

 

For ease of presentation, the Merger was accounted for as if it hadoccurred on April 1, 2001. Management determined that results of operationswere not significant and no material transactions occurred during the periodfrom April 1 through April 9, 2001. Our consolidated financial statements havebeen presented on a comparative basis with the Predecessor’s historicalconsolidated financial statements prior to the date of Merger. Different basesof accounting have been used to prepare the Company and Predecessorconsolidated financial statements. The primary differences relate to additionalinterest expense for new debt and depreciation and amortization of fixed assetsand other intangible assets recorded at fair value at the date of Merger.

 

For accounting purposes, the Merger was considered a leveraged buyout.The total purchase price of approximately $562,881,000 was allocated to theacquired assets and assumed liabilities based on their fair values at April 1,2001, net of the deemed dividend of $66,631,000. These allocations were basedon a valuation by a third party appraisal firm. The allocation of the purchaseprice was as follows:

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

 

6

----

 

In connection with the Merger, the Predecessor incurred transactionexpenses of approximately $26,600,000 associated with the Merger andchange-in-control provisions of various compensation, debt and otheragreements, which have been reflected in the Predecessor financial statements.These transaction expenses include the extraordinary item related to the earlyextinguishment of debt resulting from the change-in-control. In addition, weincurred other merger related and debt issuance costs of approximately$40,000,000, which have been capitalized as direct costs of the Merger anddeferred financing costs in our consolidated balance sheet.

 

The following unaudited pro forma net sales and net earnings for thenine months ended September 30, 2001 are derived from the application of proforma adjustments to the Predecessor’s historical statement of earnings, andassumes the Merger had occurred on January 1, 2001.  The pro forma net earnings for the nine months ended September30, 2001 are also adjusted for goodwill amortization determined in accordancewith the provisions of SFAS 142 (see Note D). The net sales and net earnings for the nine months ended September 30,2002 represent actual results for the period.

 
|                                    |   | **Nine  months ended**  |        |
|-----------------------------------------|--------|-------------------------|-------------|
|                                    |   | **September  30, 2002** |        | **September  30, 2001** |   |
| Net sales                               |   | $                       | 862,136,000 |   | $ | 869,961,000 |   |
| Net earnings  before extraordinary item |   | 20,041,000              |        | 10,272,000 |   |
|                                         |        |                         |             |  |  |  |  |

 

NOTE B – ASSET PURCHASE

 

On August 26, 2002, we acquired the egg products assets of CanadianInovatech Inc. for approximately $18,000,000. We also entered into long-term leases for two plants operated by theseller.  This entity’s results ofoperations have been included in our operating results since the date of theasset purchase.  Also, as a result ofthis asset purchase, we now own 67%, rather than 33%, of a Canadian eggproduct’s joint venture — Trilogy Egg Products, Inc.  Hence, Trilogy became a consolidated entity under our financialreporting as of the date of the asset purchase.

 

The following unaudited pro forma statement of earnings information hasbeen prepared assuming the asset purchase and the merger transaction describedin Note A had occurred on January 1, 2002 and 2001:

*** ***
|                                    |   | **Nine  months ended**  |        |
|-----------------------------------------|--------|-------------------------|-------------|
|                                    |   | **September  30, 2002** |        | **September  30, 2001** |   |
| Net sales                               |   | $                       | 896,491,000 |   | $ | 897,141,000 |   |
| Net earnings  before extraordinary item |   | 21,396,000              |        | 11,403,000 |   |
|                                         |        |                         |             |  |  |  |  |

 

This unaudited pro forma information is not necessarily indicative ofthe combined results of operations that would have occurred had the assetpurchase occurred on the noted dates, nor is it indicative of the results whichmay occur in the future.

 

NOTE C – BASIS OF PRESENTATION

 

The accompanying unaudited condensed consolidated financial statementshave been prepared in accordance with Regulation S-X pursuant to the rules andregulations of the Securities and Exchange Commission. Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with accounting principles generally accepted in the United Statesof America have been condensed or omitted pursuant to such rules andregulations, although management believes that the disclosures are adequate tomake the information presented not misleading.

 

We utilize, and the Predecessor utilized, a fiscal year consisting ofeither 52 or 53 weeks, ending on the Saturday nearest to December 31 each year.The quarters ended September 30, 2002 and 2001 each included thirteen weeks ofoperations. For clarity of presentation, the Company and Predecessor havedescribed both periods presented as if the quarters ended on September 30th.

 

The accompanying unaudited financial statements and footnoteinformation as of and for the three month period ended March 31, 2001 wereprepared in accordance with Regulation S-X pursuant to the rules andregulations of the Securities and Exchange Commission (“SEC”) using thehistorical books and records of the Predecessor and reflect the historical costbasis of assets and liabilities of the Predecessor. The accompanying unauditedfinancial statements and footnote information of the Company as of and for thesix month period ended September 30, 2001 and the three and nine month periodsended September 30, 2002 have been 

 

7

----

 

prepared in accordance with Regulation S-X pursuant to the rules andregulations of the SEC using the new basis of assets and liabilities of theCompany. In the opinion of management, the unaudited financial statementscontain all adjustments (consisting of only normal recurring adjustments)necessary to present fairly the results of operations for the periodsindicated. The historical financial results of the Company and Predecessor arenot necessarily indicative of their results for a full year.

 

These unaudited interim consolidated financial statements should beread in conjunction with our consolidated financial statements and notesthereto, contained in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2001.

 

Use of Estimates

Preparation of the Company’s consolidated financial statements requiresmanagement to make estimates and assumptions that affect reported amounts ofassets and liabilities and related revenues and expenses. Actual results coulddiffer from the estimates used by management.

 

NOTE D – ADOPTION OF NEW ACCOUNTING POLICIES

 

Goodwill and Intangible Assets

In July 2001, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards (“SFAS”) 141, *Business Combinations*, andSFAS 142, *Goodwilland Other Intangible Assets*. SFAS 141 is effective for all business combinations completed after June30, 2001.  SFAS 142 is effective forfiscal years beginning after December 15, 2001; however, certain provisions ofthis Statement apply to goodwill and other intangible assets acquired betweenJuly 1, 2001 and the effective date of SFAS 142.  We adopted the provisions of SFAS 142 as of January 1, 2002 andhad no acquisitions between July 1, 2001 and January 1, 2002.

 

As a result of adopting SFAS No. 141 and SFAS No. 142, our accountingpolicies for goodwill and intangible assets changed effective January 1, 2002as described below:

 

Goodwill and Intangible Assets with Indefinite Lives

We recognize the excess cost of an acquired entity over the net amountassigned to assets acquired, including intangible assets with indefinite lives,and liabilities assumed, as goodwill. Goodwill and intangible assets with indefinite lives will be tested forimpairment on an annual basis and between annual tests whenever there is animpairment indicated.  Impairment losseswill be recognized whenever the implied fair value is less than the carryingvalue of the related asset.  Prior toJanuary 1, 2002, goodwill and intangible assets with indefinite lives wereamortized over 40 years.  BeginningJanuary 1, 2002, goodwill and intangible assets with indefinite lives are nolonger amortized.

 

Other Intangibles

We recognize an acquired intangible apart from goodwill whenever theasset arises from contractual or other legal rights, or whenever it is capableof being separated or divided from the acquired entity and sold, transferred,licensed, rented, or exchanged, either individually or in combination with arelated contract, asset, or liability. An intangible other than goodwill is amortized over its estimated usefullife unless that life is determined to be indefinite.  Impairment losses are recognized if the carrying amount of anintangible subject to amortization is not recoverable from expected future cashflows and its carrying amount exceeds its fair value.

 

During the first half of 2002, we completed the transitional impairmenttests of goodwill and intangibles with no impairment indicated at January 1,2002.

 

Our carrying amounts, net of accumulated amortization, for goodwill asof September 30, 2002 was $345,746,000 and at December 31, 2001 was$341,021,000.  Each segment’s share ofthis goodwill at these dates was as follows:

 
|                       |   | **September  30,  2002** |        | **December  31,  2001** |   |
|----------------------------|--------|--------------------------|-------------|-------------------------|--------|
| Egg Products               |   | $                        | 258,907,000 |                    | $      | 254,182,000 |   |
| Refrigerated  Distribution |   | 35,560,000               |        | 35,560,000              |   |
| Potato Products            |   | 49,516,000               |        | 49,516,000              |   |
| Dairy Products             |   | 1,763,000                |        | 1,763,000               |   |
|                            |        |                          |             |                         |        |  |  |

 

The carrying amounts, net of accumulated amortization, for otherindefinite-lived intangible assets (trademarks) as of September 30, 2002,and December 31, 2001 were $13,406,000. The Predecessor had no indefinite-livedintangible assets.

 

 

 

8

----

 

The following table presents a reconciliation of net earnings (loss),as reported in the financial statements, to those amounts adjusted for goodwilland intangible amortization determined in accordance with the provisions ofSFAS 142.

 
|                                  |   | **Company**                                 |       | **Predecessor**                            |   |
|---------------------------------------|--------|---------------------------------------------|------------|--------------------------------------------|--------|
|                                  |   | **Nine  months ended  September 30,  2002** |       | **Six months  ended  September 30,  2001** |   | **Three  months ended  March 31,  2001** |   |
| Reported net  earnings (loss)         |   | $                                           | 20,041,000 |                                       | $      | 4,966,000 |   | $ | (5,653,000 | ) |
| Add back:  goodwill amortization |   | —                                      |       | 4,383,000                                  |   | 885,000 |   |
| Adjusted net  earnings (loss)         |   | $                                           | 20,041,000 |                                       | $      | 9,349,000 |   | $ | (4,768,000 | ) |

 

Our acquired intangible assets that have been determined to have adefinite life and continue to be amortized as of September 30, 2002, are asfollows:

 
|                      |   | **Gross  Carrying  Amount** |      | **Accumulated  Amortization** |   |
|---------------------------|--------|-----------------------------|-----------|-------------------------------|--------|
| Licenses and  non-compete |   | $                           | 2,526,000 |                          | $      | (1,173,000 | ) |
|                           |        |                             |           |                               |        |  |  |

 

The aggregate amortization expense for the nine months ended September30, 2002 was approximately $540,000 and $310,000 for the six months endedSeptember 30, 2001.  The Predecessor hadamortization expense of approximately $500,000 during the three months endedMarch 31, 2001.  The estimatedamortization expense for the years ended December 31, 2002 through December 31,2006 is as follows:

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

 

Other New Pronouncements:

On January 1, 2002, we adopted SFAS 144, *Accounting for the Impairment orDisposal of Long-Lived Assets*. The adoption of SFAS 144 did not have a material effect on ourconsolidated financial statements.

 

In addition, we adopted Emerging Issues Task Force (EITF) Issue No.00-25, *VendorIncome Statement Characterization of Consideration to a Reseller on the VendorsProducts*, effective January 1, 2002.  The adoption of EITF Issue 00-25 did not have a material effecton our consolidated financial statements. In addition, we adopted EITF IssueNo. 01-09, *Accounting for Considerationgiven by a Vendor to a Customer (including a Reseller of the Vendor'sProducts),* effective January 1, 2002.  The adoption of EITF Issue No. 01-09 did not have a materialeffect on our consolidated financial statements.

 

NOTE E – INVENTORIES

 

Inventories, other than flocks, are stated at the lower of cost(determined on a first-in, first-out basis) or market. Flock inventoryrepresents the cost of purchasing and raising flocks to laying maturity, atwhich time their cost is amortized to operations over their expected usefullife of generally one to two years, assuming no salvage value.

 

Inventories consisted of the following:

 
|                                |   | **September  30,  2002** |       | **December  31,  2001** |   |
|-------------------------------------|--------|--------------------------|------------|-------------------------|--------|
| Raw materials  and supplies         |   | $                        | 17,911,000 |                    | $      | 15,347,000 |   |
| Work in process  and finished goods |   | 54,402,000               |       | 43,027,000              |   |
| Flocks                              |   | 21,054,000               |       | 20,567,000              |   |
|                                |   | $                        | 93,367,000 |                    | $      | 78,941,000 |   |

 

NOTE F – COMMITMENTS AND CONTINGENCIES

 

Egg Procurement Contracts

We maintain egg procurement contracts with numerous cooperatives andegg producers throughout the Midwestern and Eastern United States, which supplyapproximately 55% of our egg requirements. These contracts vary in length from18 to 72 months with prices primarily indexed to grain or Urner Barry marketindices. No single egg supplier provides more than 10% of our egg

 

9

----

 

requirements.

 

Patent Litigation

We have an exclusive license agreement for a patented process for theproduction and sale of extended shelf-life liquid egg products. Under thelicense agreement, we have the right to defend and prosecute infringement ofthe underlying patents. We may apply 50% of our costs of defending the patentsto future royalty payments.

 

The U.S. Federal Court of Appeals has upheld the validity of thepatents on two separate occasions. In September 2000, the U.S. Patent andTrademark Office allowed product claims beyond the process claims previouslyallowed for the extended shelf-life egg product. These patents are scheduled toexpire beginning in 2006.

 

In 2000, the Predecessor settled litigation with one party related tothe infringement of these patents and issued a sub-license to the infringingparty granting them the right to manufacture and distribute extended shelf-lifeliquid whole egg product subject to royalties payable to us and the patentholder on all future product sold. In connection with this settlement, thepatent holder received a lump sum payment for the past production and sale ofthe product and other matters related to the infringement. We are continuing topursue litigation related to other parties who are infringing the product andprocess patents, including Sunny Fresh Foods, Inc., a subsidiary of Cargill,Inc.

 

Other Litigation

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

 

NOTE G – COMPREHENSIVE INCOME (LOSS)

 

The components and changes in accumulated other comprehensive loss(AOCL), net of taxes, during the nine months ended September 30, 2002 were asfollows:

 
|                                       |   | **Cash Flow  Hedges** |       | **Foreign  Currency  Translation** |   | **Total  AOCL** |   |
|--------------------------------------------|--------|-----------------------|------------|------------------------------------|--------|-----------------|--------|
| COMPANY                                    |   |                  |       |                               |   |            |   |
|                                       |   |                  |       |                               |   |            |   |
| Balance at  January 1, 2002                |   | $                     | (3,556,000 | )                                  | $      | (61,000         | )      | $ | (3,617,000 | ) |
| Foreign currency  translation adjustment   |   | —                |       | 326,000                            |   | 326,000         |   |
| Net unrealized  change on cash flow hedges |   | (1,211,000            | )          | —                             |   | (1,211,000      | )      |
| Balance at  September 30, 2002             |   | $                     | (4,767,000 | )                                  | $      | 265,000         |   | $ | (4,502,000 | ) |
|                                       |   |                  |       |                               |   |            |   |
| Balance at April  1, 2001                  |   | $                     | —     |                               | $      | —          |   | $ | — |   |
| Predecessor  carry-over basis              |   | (506,000              | )          | (71,000                            | )      | (577,000        | )      |
| Foreign currency  translation adjustment   |   | —                |       | 26,000                             |   | 26,000          |   |
| Net unrealized  change on cash flow hedges |   | (4,995,000            | )          | —                             |   | (4,995,000      | )      |
| Less  reclassification adjustments         |   | 92,000                |       | —                             |   | 92,000          |   |
| Balance at  September 30, 2001             |   | $                     | (5,409,000 | )                                  | $      | (45,000         | )      | $ | (5,454,000 | ) |

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

 

10

----

 

Comprehensive income (loss), net of taxes, for the nine months endedSeptember 30, 2002 and for the six months ended September 30, 2001 and for thepredecessor’s three months ended March 31, 2001 was as follows:

 
| COMPANY                                                              |   |       |   |       |       |
|----------------------------------------------------------------------|--------|------------|--------|------------|------------|
| Net income for  the nine months ended September 30, 2002             |   |       |   | $          | 20,041,000 |   |
| Net gains (loss)  arising during the period from cash flow hedges:   |   |       |   |       |       |
| Net unrealized  derivative losses during period                      |   | (1,211,000 | )      |       |       |
| Foreign currency  translation adjustment                             |   | 326,000    |   |       |       |
|                                                                 |   |       |   |       |       |
| Other  comprehensive loss                                            |   |       |   | (885,000   | )          |
|                                                                 |   |       |   |       |       |
| Comprehensive  income for the nine months ended September 30, 2002   |   |       |   | $          | 19,156,000 |   |
|                                                                 |   |       |   |       |       |
| Net income for  the six months ended September 30, 2001              |   |       |   | $          | 4,966,000  |   |
| Net gains  (losses) arising during the period from cash flow hedges: |   |       |   |       |       |
| Net unrealized  derivative losses during period                      |   | (4,995,000 | )      |       |       |
| Reclassification  adjustment                                         |   | 92,000     |   |       |       |
| Foreign currency  translation adjustment                             |   | 26,000     |   |       |       |
|                                                                 |   |       |   |       |       |
| Other  comprehensive loss                                            |   |       |   | (4,877,000 | )          |
|                                                                 |   |       |   |       |       |
| Comprehensive  income for the six months ended September 30, 2001    |   |       |   | $          | 89,000     |   |
|                                                                 |   |       |   |       |       |
| PREDECESSOR                                                          |   |       |   |       |       |
| Net loss for the  three months ended March 31, 2001                  |   |       |   | $          | (5,653,000 | ) |
| Net gains  (losses) arising during the period from cash flow hedges: |   |       |   |       |       |
| Net derivative  transition gain                                      |   | 775,000    |   |       |       |
| Net unrealized  derivative losses during period                      |   | (2,651,000 | )      |       |       |
| Reclassification  adjustment                                         |   | 244,000    |   |       |       |
| Foreign currency  translation adjustment                             |   | (47,000    | )      |       |       |
| Foreign currency  loss realized                                      |   | 1,135,000  |   |       |       |
|                                                                 |   |       |   |       |       |
| Other  comprehensive loss                                            |   |       |   | (544,000   | )          |
|                                                                 |   |       |   |       |       |
| Comprehensive  loss for the three months ended March 31, 2001        |   |       |   | $          | (6,197,000 | ) |

 

11

----

 

NOTE H – BUSINESS SEGMENTS

 

We operate in four reportable segments – Egg Products, RefrigeratedDistribution, Dairy Products and Potato Products. The Merger, as more fullydescribed in Note A, did not have an impact on our segment classification orthe interaction between the segments. Certain financial information on ouroperating segments, and the Predecessor’s, is as follows (unaudited, inthousands):

 
|                                         |   | **Company**       |    |
|----------------------------------------------|--------|-------------------|---------|
|                                         |   | **Egg  Products** |    | **Refrigerated  Distribution** |   | **Dairy  Products** |   | **Potato  Products** |   | **Corporate** |   | **Total** |   |
| THREE MONTHS  ENDED SEPTEMBER 30, 2002: |   |              |    |   |   |   |   |   |   |   |   |   |   |
| External net  sales                          |   | $                 | 165,944 |   | $ | 58,409 |   | $ | 51,425 |   | $ | 18,176 |   | N/A |   | $ | 293,954 |   |
| Intersegment  sales                          |   | 3,030             |    | — |   | — |   | 932 |   | N/A |   | 3,962 |   |
| Operating profit  (loss)                     |   | 17,718            |    | 3,748 |   | 2,305 |   | 3,120 |   | (1,921 | ) | 24,970 |   |
| Depreciation and  amortization               |   | 10,681            |    | 564 |   | 1,182 |   | 1,165 |   | 8 |   | 13,600 |   |
|                                         |   |              |    |   |   |   |   |   |   |   |   |   |   |
| THREE MONTHS  ENDED SEPTEMBER 30, 2001: |   |              |    |   |   |   |   |   |   |   |   |   |   |
| External net sales                           |   | $                 | 163,334 |   | $ | 63,692 |   | $ | 54,889 |   | $ | 17,310 |   | N/A |   | $ | 299,225 |   |
| Intersegment  sales                          |   | 2,829             |    | — |   | — |   | 861 |   | N/A |   | 3,690 |   |
| Operating profit  (loss)                     |   | 17,292            |    | 170 |   | 2,634 |   | 1,914 |   | (1,287 | ) | 20,723 |   |
| Depreciation and  amortization               |   | 12,647            |    | 680 |   | 1,090 |   | 1,612 |   | 9 |   | 16,038 |   |
|                                         |   |              |    |   |   |   |   |   |   |   |   |   |   |
| NINE MONTHS  ENDED SEPTEMBER 30, 2002:  |   |              |    |   |   |   |   |   |   |   |   |   |   |
| External net  sales                          |   | $                 | 483,018 |   | $ | 178,617 |   | $ | 147,727 |   | $ | 52,774 |   | N/A |   | $ | 862,136 |   |
| Intersegment  sales                          |   | 8,803             |    | — |   | — |   | 2,555 |   | N/A |   | 11,358 |   |
| Operating profit  (loss)                     |   | 52,712            |    | 8,306 |   | 7,914 |   | 7,551 |   | (5,642 | ) | 70,841 |   |
| Depreciation and  amortization               |   | 32,436            |    | 1,547 |   | 3,388 |   | 3,494 |   | 28 |   | 40,893 |   |
|                                         |   |              |    |   |   |   |   |   |   |   |   |   |   |
| SIX MONTHS ENDED  SEPTEMBER 30, 2001:   |   |              |    |   |   |   |   |   |   |   |   |   |   |
| External net  sales                          |   | $                 | 325,916 |   | $ | 128,123 |   | $ | 106,710 |   | $ | 33,585 |   | N/A |   | $ | 594,334 |   |
| Intersegment  sales                          |   | 5,691             |    | 1 |   | — |   | 1,706 |   | N/A |   | 7,398 |   |
| Operating profit  (loss)                     |   | 32,822            |    | 2,405 |   | 4,633 |   | 3,473 |   | (2,650 | ) | 40,683 |   |
| Depreciation and  amortization               |   | 25,027            |    | 1,322 |   | 2,100 |   | 3,173 |   | 19 |   | 31,641 |   |

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

 

NOTE I – SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION

 

Our revolving line of credit, A and B term loans and seniorsubordinated notes have been guaranteed, on a joint and several basis, by usand our domestic subsidiaries. The revolving line of credit and A and B termloans are also guaranteed by our parent, M-Foods Holdings, Inc.

 

The following condensed consolidating financial information presentsour consolidated balance sheet as of September 30, 2002 and December 31, 2001,the statements of earnings for the three months ended September 30, 2002 and2001 and for the nine months ended September 30, 2002 and the six months ended September30, 2001, and the statements of cash flows for the nine months ended September30, 2002 and the six months ended September 30, 2001; and the Predecessor’sconsolidated statements of earnings and cash flows for the three months endedMarch 31, 2001. These financial statements reflect Michael Foods, Inc. (theparent), the wholly owned guarantor subsidiaries (on a combined basis), thenon-wholly owned guarantor subsidiaries, and elimination entries necessary tocombine such entities on a consolidated basis. Included elsewhere in this Form10-Q are the unaudited financial statements of the non-wholly owned guarantorsubsidiaries.

 

 

12

----

 

COMPANY

UNAUDITED CONDENSEDCONSOLIDATING BALANCE SHEETS

SEPTEMBER 30, 2002

(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                      |   | $          | 60,579  |                                       | $      | (3,453                                        | )      | $                | — |             | $      | — |   | $ | — |   | $ | 57,126 |   |
| Accounts  receivable, less allowances      |   | 68         |    | 85,140                                     |   | 6,995                                         |   | 5,116            |   | (1,148           | )      | 96,171 |   |
| Inventories                                |   | —     |    | 84,099                                     |   | 4,866                                         |   | 4,402            |   | —           |   | 93,367 |   |
| Notes receivable  – related party     |   | —     |    | —                                     |   | 814                                           |   | 579              |   | (1,393           | )      | — |   |
| Prepaid expenses  and other                |   | 707        |    | 10,538                                     |   | 329                                           |   | 63               |   | —           |   | 11,637 |   |
| Total current  assets                      |   | 61,354     |    | 176,324                                    |   | 13,004                                        |   | 10,160           |   | (2,541           | )      | 258,301 |   |
| Property, Plant  and Equipment – net  |   | 51         |    | 257,750                                    |   | 18,031                                        |   | 11,555           |   | —           |   | 287,387 |   |
| Other assets:                              |   |       |    |                                       |   |                                          |   |             |   |             |   |   |   |
| Goodwill, net                              |   | —     |    | 343,983                                    |   | 1,763                                         |   | —           |   | —           |   | 345,746 |   |
| Preferred return  receivable for subs      |   | —     |    | 13,295                                     |   | —                                        |   | —           |   | (13,295          | )      | — |   |
| Joint ventures  and other assets           |   | 16,776     |    | 22,295                                     |   | 150                                           |   | 661              |   | —           |   | 39,882 |   |
| Investment in  subsidiaries                |   | 633,951    |    | —                                     |   | —                                        |   | —           |   | (633,951         | )      | — |   |
|                                       |   | 650,727    |    | 379,573                                    |   | 1,913                                         |   | 661              |   | (647,246         | )      | 385,628 |   |
|                                       |   | $          | 712,132 |                                       | $      | 813,647                                       |   | $                | 32,948 |             | $      | 22,376 |   | $ | (649,787 | ) | $ | 931,316 |   |
|                                       |   |       |    |                                       |   |                                          |   |             |   |             |   |   |   |
| LIABILITIES AND  SHAREHOLDERS’ EQUITY |   |       |    |                                       |   |                                          |   |             |   |             |   |   |   |
| Current  Liabilities:                      |   |       |    |                                       |   |                                          |   |             |   |             |   |   |   |
| Current  maturities of long-term debt      |   | $          | 15,886  |                                       | $      | 172                                           |   | $                | — |             | $      | 2,400 |   | $ | — |   | $ | 18,458 |   |
| Accounts payable                           |   | 72         |    | 56,645                                     |   | 4,128                                         |   | 3,825            |   | (1,148           | )      | 63,522 |   |
| Notes payable –  related party        |   | —     |    | 1,444                                      |   | —                                        |   | —           |   | (1,444           | )      | — |   |
| Accrued  liabilities                       |   | 46,181     |    | 49,704                                     |   | 2,507                                         |   | 1,107            |   | 51               |   | 99,550 |   |
| Total current  liabilities                 |   | 62,139     |    | 107,965                                    |   | 6,635                                         |   | 7,332            |   | (2,541           | )      | 181,530 |   |
| Long-term debt,  less current maturities   |   | 480,729    |    | 47,173                                     |   | —                                        |   | —           |   | —           |   | 527,902 |   |
| Deferred income  taxes                     |   | (4,015     | )       | 52,620                                     |   | —                                        |   | —           |   | —           |   | 48,605 |   |
| Preferred  shareholder return payable      |   | —     |    | —                                     |   | 11,866                                        |   | 1,429            |   | (13,295          | )      | — |   |
| Non-controlling  interest                  |   | 475        |    | —                                     |   | —                                        |   | —           |   | —           |   | 475 |   |
| Total  liabilities                         |   | 539,328    |    | 207,758                                    |   | 18,501                                        |   | 8,761            |   | (15,836          | )      | 758,512 |   |
| Shareholders’  Equity                 |   | 172,804    |    | 605,889                                    |   | 14,447                                        |   | 13,615           |   | (633,951         | )      | 172,804 |   |
|                                       |   | $          | 712,132 |                                       | $      | 813,647                                       |   | $                | 32,948 |             | $      | 22,376 |   | $ | (649,787 | ) | $ | 931,316 |   |

 

13

----

 

COMPANY

UNAUDITED CONDENSEDCONSOLIDATING BALANCE SHEETS

DECEMBER 31, 2001

(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                            |   | $          | 33,947  |                                       | $      | (6,287                                        | )      | $                | — |             | $      | — |   | $ | — |   | $ | 27,660 |   |
| Accounts  receivable, net                        |   | 223        |    | 91,744                                     |   | 6,535                                         |   | 5,765            |   | (1,950           | )      | 102,317 |   |
| Inventories                                      |   | —     |    | 72,034                                     |   | 3,592                                         |   | 3,315            |   | —           |   | 78,941 |   |
| Prepaid expenses  and other                      |   | 972        |    | 9,850                                      |   | 496                                           |   | 52               |   | —           |   | 11,370 |   |
| Total current  assets                            |   | 35,142     |    | 167,341                                    |   | 10,623                                        |   | 9,132            |   | (1,950           | )      | 220,288 |   |
| Property, Plant  and Equipment – net        |   | 78         |    | 263,893                                    |   | 15,657                                        |   | 11,526           |   | —           |   | 291,154 |   |
| Other assets:                                    |   |       |    |                                       |   |                                          |   |             |   |             |   |   |   |
| Goodwill, net                                    |   | —     |    | 339,258                                    |   | 1,763                                         |   | —           |   | —           |   | 341,021 |   |
| Joint ventures  and other assets                 |   | 19,521     |    | 24,091                                     |   | —                                        |   | 1,058            |   | —           |   | 44,670 |   |
| Preferred unit  holder return receivable.        |   | —     |    | 8,188                                      |   | —                                        |   | —           |   | (8,188           | )      | — |   |
| Investment in  subsidiaries                      |   | 675,556    |    | —                                     |   | —                                        |   | —           |   | (675,556         | )      | — |   |
|                                             |   | 695,077    |    | 371,537                                    |   | 1,763                                         |   | 1,058            |   | (683,744         | )      | 385,691 |   |
| Total assets                                     |   | $          | 730,297 |                                       | $      | 802,771                                       |   | $                | 28,043 |             | $      | 21,716 |   | $ | (685,694 | ) | $ | 897,133 |   |
| Liabilities and  Shareholders’ Equity       |   |       |    |                                       |   |                                          |   |             |   |             |   |   |   |
| Current  Liabilities                             |   |       |    |                                       |   |                                          |   |             |   |             |   |   |   |
| Current  maturities of long-term debt            |   | $          | 10,255  |                                       | $      | 307                                           |   | $                | — |             | $      | 2,400 |   | $ | — |   | $ | 12,962 |   |
| Accounts payable                                 |   | 265        |    | 60,223                                     |   | 2,612                                         |   | 3,342            |   | (1,950           | )      | 64,492 |   |
| Accrued  liabilities                             |   | 30,210     |    | 44,020                                     |   | 2,151                                         |   | 976              |   | —           |   | 77,357 |   |
| Total current  liabilities                       |   | 40,730     |    | 104,550                                    |   | 4,763                                         |   | 6,718            |   | (1,950           | )      | 154,811 |   |
| Long-term debt,  less current maturities         |   | 537,395    |    | 337                                        |   | —                                        |   | 2,400            |   | —           |   | 540,132 |   |
| Deferred income  taxes                           |   | (1,293     | )       | 50,018                                     |   | —                                        |   | —           |   | —           |   | 48,725 |   |
| Total  liabilities                               |   | 576,832    |    | 154,905                                    |   | 4,763                                         |   | 9,118            |   | (1,950           | )      | 743,668 |   |
| Non-controlling  interest                        |   | 475        |    | —                                     |   | —                                        |   | —           |   | —           |   | 475 |   |
| Preferred unit  holder return payable            |   | —     |    | —                                     |   | 7,500                                         |   | 688              |   | (8,188           | )      | — |   |
| Shareholders’  Equity                       |   | 152,990    |    | 647,866                                    |   | 15,780                                        |   | 11,910           |   | (675,556         | )      | 152,990 |   |
| Total  liabilities and shareholders’ equity |   | $          | 730,297 |                                       | $      | 802,771                                       |   | $                | 28,043 |             | $      | 21,716 |   | $ | (685,694 | ) | $ | 897,133 |   |

 

14

----

 

COMPANY

UNAUDITED CONDENSEDCONSOLIDATING STATEMENTS OF EARNINGS 

THREE MONTHS ENDEDSEPTEMBER 30, 2002

(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                                                                   |   | $          | — |                                       | $      | 246,491                                       |   | $                | 28,016 |             | $      | 23,409 |   | $ | (3,962 | ) | $ | 293,954 |   |
| Cost of sales                                                               |   | —     |   | 196,733                                    |   | 26,325                                        |   | 20,681           |   | (3,962           | )      | 239,777 |   |
| Gross profit                                                                |   | —     |   | 49,758                                     |   | 1,691                                         |   | 2,728            |   | —           |   | 54,177 |   |
| Selling, general  and administrative expenses                               |   | 1,921      |   | 26,175                                     |   | 1,325                                         |   | 992              |   | (1,206           | )      | 29,207 |   |
| Operating profit  (loss)                                                    |   | (1,921     | )      | 23,583                                     |   | 366                                           |   | 1,736            |   | 1,206            |   | 24,970 |   |
| Interest  expense, net                                                      |   | 11,995     |   | 889                                        |   | (29                                           | )      | (11              | )      | —           |   | 12,844 |   |
| Other income                                                                |   | 1,206      |   | —                                     |   | —                                        |   | —           |   | (1,206           | )      | — |   |
| Earnings (loss)  before equity in earnings of subsidiaries and income taxes |   | (12,710    | )      | 22,694                                     |   | 395                                           |   | 1,747            |   | —           |   | 12,126 |   |
| Equity in  earnings of subsidiary                                           |   | 15,776     |   | 2,142                                      |   | (395                                          | )      | (1,747           | )      | (15,776          | )      | — |   |
| Earnings before  income taxes                                               |   | 3,066      |   | 24,836                                     |   | —                                        |   | —           |   | (15,776          | )      | 12,126 |   |
| Income tax  expense (benefit)                                               |   | (4,300     | )      | 9,060                                      |   | —                                        |   | —           |   | —           |   | 4,760 |   |
| NET EARNINGS (LOSS)                                                         |   | 7,366      |   | 15,776                                     |   | —                                        |   | —           |   | (15,776          | )      | 7,366 |   |
| Other  comprehensive income (loss):                                         |   |       |   |                                       |   |                                          |   |             |   |             |   |   |   |
| Change in  foreign currency translation                                     |   | —     |   | (1,000                                     | )      | —                                        |   | —           |   | —           |   | (1,000 | ) |
| Change in cash  flow hedges                                                 |   | (2,511     | )      | 1,562                                      |   | —                                        |   | —           |   | —           |   | (949 | ) |
| Comprehensive  income (loss)                                                |   | $          | 4,855  |                                       | $      | 16,338                                        |   | $                | — |             | $      | — |   | $ | (15,776 | ) | $ | 5,417 |   |

 

COMPANY

UNAUDITED CONDENSEDCONSOLIDATING STATEMENTS OF EARNINGS 

THREE MONTHS ENDEDSEPTEMBER 30, 2001

(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                                                                   |   | $          | — |                                       | $      | 248,027                                       |   | $                | 24,542 |             | $      | 30,346 |   | $ | (3,690 | ) | $ | 299,225 |   |
| Cost of sales                                                               |   | —     |   | 201,990                                    |   | 21,126                                        |   | 29,010           |   | (3,690           | )      | 248,436 |   |
| Gross profit                                                                |   | —     |   | 46,037                                     |   | 3,416                                         |   | 1,336            |   | —           |   | 50,789 |   |
| Selling, general  and administrative expenses                               |   | 1,287      |   | 27,711                                     |   | 1,093                                         |   | 1,255            |   | (1,280           | )      | 30,066 |   |
| Operating profit  (loss)                                                    |   | (1,287     | )      | 18,326                                     |   | 2,323                                         |   | 81               |   | 1,280            |   | 20,723 |   |
| Interest  expense, net                                                      |   | 13,433     |   | 117                                        |   | (145                                          | )      | 11               |   | —           |   | 13,416 |   |
| Other income                                                                |   | 1,280      |   | —                                     |   | 2                                             |   | (2               | )      | (1,280           | )      | — |   |
| Earnings (loss)  before equity in earnings of subsidiaries and income taxes |   | (13,440    | )      | 18,209                                     |   | 2,470                                         |   | 68               |   | —           |   | 7,307 |   |
| Equity in  earnings of subsidiary                                           |   | 9,342      |   | 2,538                                      |   | (2,470                                        | )      | (68              | )      | (9,342           | )      | — |   |
| Earnings before  income taxes                                               |   | (4,098     | )      | 20,747                                     |   | —                                        |   | —           |   | (9,342           | )      | 7,307 |   |
| Income tax  expense (benefit)                                               |   | (7,395     | )      | 11,405                                     |   | —                                        |   | —           |   | —           |   | 4,010 |   |
| NET EARNINGS  (LOSS)                                                        |   | 3,297      |   | 9,342                                      |   | —                                        |   | —           |   | (9,342           | )      | 3,297 |   |
| Other  comprehensive income (loss):                                         |   |       |   |                                       |   |                                          |   |             |   |             |   |   |   |
| Change in  foreign currency translation                                     |   | —     |   | 53                                         |   | —                                        |   | —           |   | —           |   | 53 |   |
| Change in cash  flow hedges                                                 |   | (3,364     | )      | (1,913                                     | )      | —                                        |   | —           |   | —           |   | (5,277 | ) |
| Comprehensive  income (loss)                                                |   | $          | (67    | )                                          | $      | 7,482                                         |   | $                | — |             | $      | — |   | $ | (9,342 | ) | $ | (1,927 | ) |

 

15

----

 

COMPANY

UNAUDITED CONDENSEDCONSOLIDATING STATEMENTS OF EARNINGS 

NINE MONTHS ENDEDSEPTEMBER 30, 2002

(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                                                                   |   | $          | — |                                       | $      | 725,767                                       |   | $                | 79,841 |             | $      | 67,886 |   | $ | (11,358 | ) | $ | 862,136 |   |
| Cost of sales                                                               |   | —     |   | 580,747                                    |   | 71,230                                        |   | 62,020           |   | (11,358          | )      | 702,639 |   |
| Gross profit                                                                |   | —     |   | 145,020                                    |   | 8,611                                         |   | 5,866            |   | —           |   | 159,497 |   |
| Selling, general  and administrative expenses                               |   | 5,642      |   | 79,436                                     |   | 4,182                                         |   | 2,986            |   | (3,590           | )      | 88,656 |   |
| Operating profit  (loss)                                                    |   | (5,642     | )      | 65,584                                     |   | 4,429                                         |   | 2,880            |   | 3,590            |   | 70,841 |   |
| Interest  expense, net                                                      |   | 35,295     |   | 2,493                                      |   | 34                                            |   | 18               |   | —           |   | 37,840 |   |
| Other income                                                                |   | 3,590      |   | —                                     |   | —                                        |   | —           |   | (3,590           | )      | — |   |
| Earnings (loss)  before equity in earnings of subsidiaries and income taxes |   | (37,347    | )      | 63,091                                     |   | 4,395                                         |   | 2,862            |   | —           |   | 33,001 |   |
| Equity in  earnings of subsidiary                                           |   | 43,438     |   | 7,257                                      |   | (4,395                                        | )      | (2,862           | )      | (43,438          | )      | — |   |
| Earnings before  income taxes                                               |   | 6,091      |   | 70,348                                     |   | —                                        |   | —           |   | (43,438          | )      | 33,001 |   |
| Income tax  expense (benefit)                                               |   | (13,950    | )      | 26,910                                     |   | —                                        |   | —           |   | —           |   | 12,960 |   |
| NET EARNINGS  (LOSS)                                                        |   | 20,041     |   | 43,438                                     |   | —                                        |   | —           |   | (43,438          | )      | 20,041 |   |
| Other  comprehensive income (loss):                                         |   |       |   |                                       |   |                                          |   |             |   |             |   |   |   |
| Change in  foreign currency translation                                     |   | —     |   | 326                                        |   | —                                        |   | —           |   | —           |   | 326 |   |
| Change in cash  flow hedges                                                 |   | (5,218     | )      | 4,007                                      |   | —                                        |   | —           |   | —           |   | (1,211 | ) |
| Comprehensive  income (loss)                                                |   | $          | 14,823 |                                       | $      | 47,771                                        |   | $                | — |             | $      | — |   | $ | (43,438 | ) | $ | 19,156 |   |

 

COMPANY

UNAUDITED CONDENSEDCONSOLIDATING STATEMENTS OF EARNINGS 

SIX MONTHS ENDEDSEPTEMBER 30, 2001

(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                                                                   |   | $          | — |                                       | $      | 495,023                                       |   | $                | 47,484 |             | $      | 59,225 |   | $ | (7,398 | ) | $ | 594,334 |   |
| Cost of sales                                                               |   | —     |   | 402,866                                    |   | 41,254                                        |   | 56,569           |   | (7,398           | )      | 493,291 |   |
| Gross profit                                                                |   | —     |   | 92,157                                     |   | 6,230                                         |   | 2,656            |   | —           |   | 101,043 |   |
| Selling, general  and administrative expenses                               |   | 2,650      |   | 55,563                                     |   | 2,058                                         |   | 2,660            |   | (2,571           | )      | 60,360 |   |
| Operating profit  (loss)                                                    |   | (2,650     | )      | 36,594                                     |   | 4,172                                         |   | (4               | )      | 2,571            |   | 40,683 |   |
| Interest  expense, net                                                      |   | 29,680     |   | 217                                        |   | (198                                          | )      | (42              | )      | —           |   | 29,657 |   |
| Other income                                                                |   | 2,571      |   | —                                     |   | 2                                             |   | (2               | )      | (2,571           | )      | — |   |
| Earnings (loss)  before equity in earnings of subsidiaries and income taxes |   | (29,759    | )      | 36,377                                     |   | 4,372                                         |   | 36               |   | —           |   | 11,026 |   |
| Equity in  earnings of subsidiary                                           |   | 18,354     |   | 4,408                                      |   | (4,372                                        | )      | (36              | )      | (18,354          | )      | — |   |
| Earnings before  income taxes                                               |   | (11,405    | )      | 40,785                                     |   | —                                        |   | —           |   | (18,354          | )      | 11,026 |   |
| Income tax  expense (benefit)                                               |   | (16,371    | )      | 22,431                                     |   | —                                        |   | —           |   | —           |   | 6,060 |   |
| NET EARNINGS  (LOSS)                                                        |   | 4,966      |   | 18,354                                     |   | —                                        |   | —           |   | (18,354          | )      | 4,966 |   |
| Other  comprehensive income (loss):                                         |   |       |   |                                       |   |                                          |   |             |   |             |   |   |   |
| Change in  foreign currency translation                                     |   | —     |   | 26                                         |   | —                                        |   | —           |   | —           |   | 26 |   |
| Change in cash  flow hedges                                                 |   | (3,364     | )      | (1,539                                     | )      | —                                        |   | —           |   | —           |   | (4,903 | ) |
| Comprehensive  income (loss)                                                |   | $          | 1,602  |                                       | $      | 16,841                                        |   | $                | — |             | $      | — |   | $ | (18,354 | ) | $ | 89 |   |

 

16

----

 

PREDECESSOR

UNAUDITED CONDENSEDCONSOLIDATING STATEMENTS OF EARNINGS 

THREE MONTHS ENDED MARCH31, 2001

(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                                                                                         |   | $          | — |                                       | $      | 245,548                                       |   | $                | 17,684 |             | $      | 17,644 |   | $ | (5,249 | ) | $ | 275,627 |   |
| Cost of sales                                                                                     |   | —     |   | 200,854                                    |   | 14,994                                        |   | 17,108           |   | (5,249           | )      | 227,707 |   |
| Gross profit                                                                                      |   | —     |   | 44,694                                     |   | 2,690                                         |   | 536              |   | —           |   | 47,920 |   |
| Selling, general  and administrative expenses                                                     |   | 1,656      |   | 27,720                                     |   | 1,027                                         |   | 1,712            |   | (1,522           | )      | 30,593 |   |
| Recall insurance  settlement                                                                      |   | —     |   | —                                     |   | (3,217                                        | )      | —           |   | —           |   | (3,217 | ) |
| Transaction  costs                                                                                |   | 11,050     |   | —                                     |   | —                                        |   | —           |   | —           |   | 11,050 |   |
| Operating profit  (loss)                                                                          |   | (12,706    | )      | 16,974                                     |   | 4,880                                         |   | (1,176           | )      | 1,522            |   | 9,494 |   |
| Interest  (income) expense, net                                                                   |   | 3,308      |   | (14                                        | )      | (1                                            | )      | —           |   | —           |   | 3,293 |   |
| Other income                                                                                      |   | 1,522      |   | —                                     |   | —                                        |   | —           |   | (1,522           | )      | — |   |
| Earnings (loss)  before equity in earnings of subsidiaries, income taxes, and extraordinary  item |   | (14,492    | )      | 16,988                                     |   | 4,881                                         |   | (1,176           | )      | —           |   | 6,201 |   |
| Equity in  earnings of subsidiaries                                                               |   | 12,573     |   | —                                     |   | —                                        |   | —           |   | (12,573          | )      | — |   |
| Earnings (loss)  before income taxes and extraordinary item                                       |   | (1,919     | )      | 16,988                                     |   | 4,881                                         |   | (1,176           | )      | (12,573          | )      | 6,201 |   |
| Income tax  expense (benefit)                                                                     |   | (5,690     | )      | 6,649                                      |   | 1,918                                         |   | (447             | )      | —           |   | 2,430 |   |
| Earnings (loss)  before extraordinary item                                                        |   | 3,771      |   | 10,339                                     |   | 2,963                                         |   | (729             | )      | (12,573          | )      | 3,771 |   |
| Extraordinary  item – early extinguishment of debt, net of taxes                             |   | (9,424     | )      | —                                     |   | —                                        |   | —           |   | —           |   | (9,424 | ) |
| NET EARNINGS  (LOSS)                                                                              |   | (5,653     | )      | 10,339                                     |   | 2,963                                         |   | (729             | )      | (12,573          | )      | (5,653 | ) |
| Other  comprehensive income (loss):                                                               |   |       |   |                                       |   |                                          |   |             |   |             |   |   |   |
| Change in  foreign currency translation                                                           |   | —     |   | 1,088                                      |   | —                                        |   | —           |   | —           |   | 1,088 |   |
| Change in cash  flow hedges                                                                       |   | —     |   | (1,632                                     | )      | —                                        |   | —           |   | —           |   | (1,632 | ) |
| Comprehensive  income (loss)                                                                      |   | $          | (5,653 | )                                          | $      | 9,795                                         |   | $                | 2,963  |             | $      | (729 | ) | $ | (12,573 | ) | $ | (6,197 | ) |

 

17

----

 

COMPANY

UNAUDITED CONDENSEDCONSOLIDATING STATEMENTS OF CASH FLOWS

NINE MONTHS ENDEDSEPTEMBER 30, 2002

(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              |   | $          | 31,229 |                                       | $      | 37,684                                        |   | $                | 5,243  |   | $ | 4,421 |   | $ | 78,577 |   |
| Cash flows from  investing activities:                  |   |       |   |                                       |   |                                          |   |             |   |   |   |
| Capital  expenditures                                   |   | —     |   | (13,847                                    | )      | (3,760                                        | )      | (1,635           | )      | (19,242 | ) |
| Business  acquisitions                                  |   | —     |   | (17,593                                    | )      | —                                        |   | —           |   | (17,593 | ) |
| Investments in  joint ventures and other assets         |   | (156       | )      | 2,642                                      |   | (150                                          | )      | —           |   | 2,336 |   |
|                                                    |   |       |   |                                       |   |                                          |   |             |   |   |   |
| Net cash used in  investing activities                  |   | (156       | )      | (28,798                                    | )      | (3,910                                        | )      | (1,635           | )      | (34,499 | ) |
|                                                    |   |       |   |                                       |   |                                          |   |             |   |   |   |
| Cash flows from  financing activities:                  |   |       |   |                                       |   |                                          |   |             |   |   |   |
| Payments on  notes payable and Revolving line of credit |   | (5,000     | )      | —                                     |   | —                                        |   | —           |   | (5,000 | ) |
| Proceeds on  notes payable and revolving line of credit |   | 10,000     |   | —                                     |   | —                                        |   | —           |   | 10,000 |   |
| Payments on  long-term debt                             |   | (17,641    | )      | (227                                       | )      | —                                        |   | (2,400           | )      | (20,268 | ) |
| Proceeds on  long-term debt                             |   | —     |   | —                                     |   | —                                        |   | —           |   | — |   |
| Capital  contribution from parent                       |   | 656        |   | —                                     |   | —                                        |   | —           |   | 656 |   |
| Investment in  subsidiaries                             |   | 7,544      |   | (5,825                                     | )      | (1,333                                        | )      | (386             | )      | — |   |
| Net cash used in  financing activities                  |   | (4,441     | )      | (6,052                                     | )      | (1,333                                        | )      | (2,786           | )      | (14,612 | ) |
| Net increase in  cash and equivalents                   |   | 26,632     |   | 2,834                                      |   | —                                        |   | —           |   | 29,466 |   |
| Cash and  equivalents at beginning of period            |   | 33,947     |   | (6,287                                     | )      | —                                        |   | —           |   | 27,660 |   |
| Cash and  equivalents at end of period                  |   | $          | 60,579 |                                       | $      | (3,453                                        | )      | $                | — |   | $ | — |   | $ | 57,126 |   |

 

COMPANY

UNAUDITED CONDENSEDCONSOLIDATING STATEMENTS OF CASH FLOWS

SIX MONTHS ENDEDSEPTEMBER 30, 2001

(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           |   | $          | 27,384 |                                       | $      | 50,870                                        |   | $                | 1,196  |   | $ | 4,840 |   | $ | 84,290 |   |
| Cash flows from  investing activities:               |   |       |   |                                       |   |                                          |   |             |   |   |   |
| Capital  expenditures                                |   | (9         | )      | (9,876                                     | )      | (1,203                                        | )      | (2,440           | )      | (13,528 | ) |
| Business  acquisition                                |   | (626,925   | )      | —                                     |   | —                                        |   | —           |   | (626,925 | ) |
| Investments in  joint ventures and other assets      |   | (339       | )      | (3,610                                     | )      | —                                        |   | —           |   | (3,949 | ) |
|                                                 |   |       |   |                                       |   |                                          |   |             |   |   |   |
| Net cash used in  investing activities               |   | (627,273   | )      | (13,486                                    | )      | (1,203                                        | )      | (2,440           | )      | (644,402 | ) |
|                                                 |   |       |   |                                       |   |                                          |   |             |   |   |   |
| Cash flows from  financing activities:               |   |       |   |                                       |   |                                          |   |             |   |   |   |
| Payments on  notes payable                           |   | (46,450    | )      | —                                     |   | —                                        |   | —           |   | (46,450 | ) |
| Proceeds on  notes payable                           |   | 29,500     |   | —                                     |   | —                                        |   | —           |   | 29,500 |   |
| Payments on  long-term debt                          |   | (128,675   | )      | (150                                       | )      | —                                        |   | (2,400           | )      | (131,225 | ) |
| Proceeds from  long-term debt                        |   | 570,000    |   | —                                     |   | —                                        |   | —           |   | 570,000 |   |
| Proceeds from  issuance of stock                     |   | 174,800    |   | —                                     |   | —                                        |   | —           |   | 174,800 |   |
| Investment in  subsidiaries                          |   | 41,167     |   | (41,167                                    | )      | —                                        |   | —           |   | — |   |
| Net cash  provided by (used in) financing activities |   | 640,342    |   | (41,317                                    | )      | —                                        |   | (2,400           | )      | 596,625 |   |
| Net increase  (decrease) in cash and equivalents     |   | 40,453     |   | (3,933                                     | )      | (7                                            | )      | —           |   | 36,513 |   |
| Cash and  equivalents at beginning of period         |   | 4,327      |   | (64                                        | )      | 7                                             |   | —           |   | 4,270 |   |
| Cash and  equivalents at end of period               |   | $          | 44,780 |                                       | $      | (3,997                                        | )      | $                | — |   | $ | — |   | $ | 40,783 |   |

 

18

----

 

PREDECESSOR

UNAUDITED CONDENSEDCONSOLIDATING STATEMENTS OF CASH FLOWS

THREE MONTHS ENDED MARCH31, 2001

(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 (used in) operating activities |   | $          | 12,000 |                                       | $      | 4,487                                         |   | $                | (2,440 | ) | $ | (31 | ) | $ | 14,016 |   |
| Cash flows from  investing activities:               |   |       |   |                                       |   |                                          |   |             |   |   |   |
| Capital  expenditures                                |   | —     |   | (4,923                                     | )      | (3,664                                        | )      | (2,250           | )      | (10,837 | ) |
| Investments in  joint ventures and other assets      |   | 434        |   | 3,454                                      |   | —                                        |   | —           |   | 3,888 |   |
| Net cash  provided by (used in) investing activities |   | 434        |   | (1,469                                     | )      | (3,664                                        | )      | (2,250           | )      | (6,949 | ) |
| Cash flows from  financing activities:               |   |       |   |                                       |   |                                          |   |             |   |   |   |
| Payments on  notes payable                           |   | (52,000    | )      | —                                     |   | —                                        |   | —           |   | (52,000 | ) |
| Proceeds on  notes payable                           |   | 45,500     |   | —                                     |   | —                                        |   | —           |   | 45,500 |   |
| Payments on  long-term debt                          |   | —     |   | (109                                       | )      | —                                        |   | —           |   | (109 | ) |
| Proceeds from  issuance of stock                     |   | 546        |   | —                                     |   | —                                        |   | —           |   | 546 |   |
| Extension of  stock options                          |   | 310        |   | —                                     |   | —                                        |   | —           |   | 310 |   |
| Dividends                                            |   | (1,465     | )      | —                                     |   | —                                        |   | —           |   | (1,465 | ) |
| Investment in  subsidiaries                          |   | (9,785     | )      | 1,393                                      |   | 6,111                                         |   | 2,281            |   | — |   |
| Net cash  provided by (used in) financing activities |   | (16,894    | )      | 1,284                                      |   | 6,111                                         |   | 2,281            |   | (7,218 | ) |
| Net increase  (decrease) in cash and equivalents     |   | (4,460     | )      | 4,302                                      |   | 7                                             |   | —           |   | (151 | ) |
| Cash and  equivalents at beginning of period         |   | 8,787      |   | (4,366                                     | )      | —                                        |   | —           |   | 4,421 |   |
| Cash and  equivalents at end of period               |   | $          | 4,327  |                                       | $      | (64                                           | )      | $                | 7      |   | $ | — |   | $ | 4,270 |   |

 

19

----

 

M-FOODS DAIRY, LLC

(A MAJORITY OWNEDSUBSIDIARY OF MICHAEL FOODS, INC.)

INDEX TO FINANCIALSTATEMENTS

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

 

20

----

 

M-FOODS DAIRY, LLC

(A MAJORITY OWNEDSUBSIDIARY OF MICHAEL FOODS, INC.)

BALANCE SHEETS

(unaudited, in thousands)

 
|                                                    |   | **SEPTEMBER  30,  2002** |   | **DECEMBER  31,  2001** |   |
|---------------------------------------------------------|--------|--------------------------|--------|-------------------------|--------|
| ASSETS                                                  |   |                     |   |                    |   |
| CURRENT ASSETS                                          |   |                     |   |                    |   |
| Accounts  receivable, less allowances                   |   | $                        | 6,995  |                    | $      | 6,535 |   |
| Inventories                                             |   | 4,866                    |   | 3,592                   |   |
| Notes receivable  – related party                  |   | 814                      |   | —                  |   |
| Prepaid expenses  and other                             |   | 329                      |   | 496                     |   |
| Total current assets                                    |   | 13,004                   |   | 10,623                  |   |
| PROPERTY, PLANT  AND EQUIPMENT – AT COST           |   |                     |   |                    |   |
| Land                                                    |   | 855                      |   | 855                     |   |
| Buildings and  improvements                             |   | 4,291                    |   | 3,999                   |   |
| Machinery and  equipment                                |   | 15,519                   |   | 12,051                  |   |
|                                                    |   | 20,665                   |   | 16,905                  |   |
| Less accumulated  depreciation                          |   | 2,634                    |   | 1,248                   |   |
|                                                    |   | 18,031                   |   | 15,657                  |   |
| OTHER ASSETS                                            |   |                     |   |                    |   |
| Goodwill, net                                           |   | 1,763                    |   | 1,763                   |   |
| Other assets                                            |   | 150                      |   | —                  |   |
|                                                    |   | 1,913                    |   | 1,763                   |   |
|                                                    |   | $                        | 32,948 |                    | $      | 28,043 |   |
|                                                    |   |                     |   |                    |   |
| LIABILITIES AND UNIT  HOLDER AND  OPERATING UNIT EQUITY |   |                     |   |                    |   |
|                                                    |   |                     |   |                    |   |
| CURRENT  LIABILITIES                                    |   |                     |   |                    |   |
| Accounts payable                                        |   | $                        | 4,128  |                    | $      | 2,612 |   |
| Accrued  liabilities:                                   |   |                     |   |                    |   |
| Compensation                                            |   | 733                      |   | 688                     |   |
| Insurance                                               |   | 144                      |   | 124                     |   |
| Customer  programs                                      |   | 945                      |   | 836                     |   |
| Other                                                   |   | 685                      |   | 503                     |   |
| Total current  liabilities                              |   | 6,635                    |   | 4,763                   |   |
| COMMITMENTS AND  CONTINGENCIES                          |   | —                   |   | —                  |   |
| PREFERRED UNIT  HOLDER RETURN PAYABLE                   |   | 11,866                   |   | 7,500                   |   |
| UNIT HOLDER AND  OPERATING UNIT EQUITY                  |   | 14,447                   |   | 15,780                  |   |
|                                                    |   | $                        | 32,948 |                    | $      | 28,043 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

21

----

 

M-FOODS DAIRY, LLC

(A MAJORITY OWNEDSUBSIDIARY OF MICHAEL FOODS, INC.)

STATEMENTS OF EARNINGS

FOR THE THREE MONTHSENDED SEPTEMBER 30,

(unaudited, in thousands)

 
|                                          |   | **2002** |   | **2001** |   |
|-----------------------------------------------|--------|----------|--------|----------|--------|
| Net sales                                     |   | $        | 28,016 |     | $      | 24,542 |   |
|                                          |   |     |   |     |   |
| Cost of sales                                 |   | 26,325   |   | 21,126   |   |
|                                          |   |     |   |     |   |
| Gross profit                                  |   | 1,691    |   | 3,416    |   |
|                                          |   |     |   |     |   |
| Selling, general  and administrative expenses |   | 1,325    |   | 1,093    |   |
|                                          |   |     |   |     |   |
| Operating profit                              |   | 366      |   | 2,323    |   |
|                                          |   |     |   |     |   |
| Other income  (expense)                       |   | 29       |   | 147      |   |
|                                          |   |     |   |     |   |
| Earnings before  income taxes                 |   | 395      |   | 2,470    |   |
| Income tax  expense                           |   | —   |   | —   |   |
|                                          |   |     |   |     |   |
| NET EARNINGS                                  |   | $        | 395    |     | $      | 2,470 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

22

----

 

M-FOODS DAIRY, LLC

(A MAJORITY OWNEDSUBSIDIARY OF MICHAEL FOODS, INC.)

STATEMENTS OF EARNINGS

 (unaudited, in thousands)

 
|                                          |   | **Company**                                  |   | **Predecessor**                            |   |
|-----------------------------------------------|--------|----------------------------------------------|--------|--------------------------------------------|--------|
|                                          |   | **Nine  Months  Ended  September 30,  2002** |   | **Six Months  Ended  September 30,  2001** |   | **Three  Months  Ended  March 31,  2001** |   |
| Net sales                                     |   | $                                            | 79,841 |                                       | $      | 47,484 |   | $ | 17,684 |   |
|                                          |   |                                         |   |                                       |   |   |   |
| Cost of sales                                 |   | 71,230                                       |   | 41,254                                     |   | 14,994 |   |
|                                          |   |                                         |   |                                       |   |   |   |
| Gross profit                                  |   | 8,611                                        |   | 6,230                                      |   | 2,690 |   |
|                                          |   |                                         |   |                                       |   |   |   |
| Selling, general  and administrative expenses |   | 4,182                                        |   | 2,058                                      |   | 1,027 |   |
| Recall insurance  settlement                  |   | —                                       |   | —                                     |   | (3,217 | ) |
|                                          |   |                                         |   |                                       |   |   |   |
| Operating profit                              |   | 4,429                                        |   | 4,172                                      |   | 4,880 |   |
|                                          |   |                                         |   |                                       |   |   |   |
| Other income  (expense)                       |   | (34                                          | )      | 200                                        |   | 1 |   |
|                                          |   |                                         |   |                                       |   |   |   |
| Earnings before  income taxes                 |   | 4,395                                        |   | 4,372                                      |   | 4,881 |   |
|                                          |   |                                         |   |                                       |   |   |   |
| Income tax  expense                           |   | —                                       |   | —                                     |   | 1,918 |   |
|                                          |   |                                         |   |                                       |   |   |   |
| NET EARNINGS                                  |   | $                                            | 4,395  |                                       | $      | 4,372 |   | $ | 2,963 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

23

----

 

M-FOODS DAIRY, LLC

(A MAJORITY OWNEDSUBSIDIARY OF MICHAEL FOODS, INC.)

STATEMENTS OF CASH FLOWS

 (unaudited, in thousands)

 
|                                                 |   | **Company**                                  |   | **Predecessor**                            |   |
|------------------------------------------------------|--------|----------------------------------------------|--------|--------------------------------------------|--------|
|                                                 |   | **Nine  Months  Ended  September 30,  2002** |   | **Six Months  Ended  September 30,  2001** |   | **Three  Months  Ended  March 31,  2001** |   |
|                                                 |   |                                         |   |                                       |   |   |   |
| Net cash provided  by (used in) operating activities |   | $                                            | 5,243  |                                       | $      | 1,196 |   | $ | (2,440 | ) |
|                                                 |   |                                         |   |                                       |   |   |   |
| Cash flows from  investing activities:               |   |                                         |   |                                       |   |   |   |
| Capital  expenditures                                |   | (3,760                                       | )      | (1,203                                     | )      | (3,664 | ) |
| Investments in  joint ventures and other assets      |   | (150                                         | )      | —                                     |   | — |   |
|                                                 |   |                                         |   |                                       |   |   |   |
| Net cash used in  investing activities               |   | (3,910                                       | )      | (1,203                                     | )      | (3,664 | ) |
|                                                 |   |                                         |   |                                       |   |   |   |
| Cash flows from  financing activities:               |   |                                         |   |                                       |   |   |   |
| Net additional  capital invested or (dividends paid) |   | (1,333                                       | )      | —                                     |   | 6,111 |   |
| Net cash  provided by (used in) financing activities |   | (1,333                                       | )      | —                                     |   | 6,111 |   |
|                                                 |   |                                         |   |                                       |   |   |   |
| Net increase  (decrease) in cash and equivalents     |   | —                                       |   | (7                                         | )      | 7 |   |
|                                                 |   |                                         |   |                                       |   |   |   |
| Cash and  equivalents at beginning of period         |   | —                                       |   | 7                                          |   | — |   |
|                                                 |   |                                         |   |                                       |   |   |   |
| Cash and  equivalents at end of period               |   | $                                            | — |                                       | $      | — |   | $ | 7 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

24

----

 

M-FOODS DAIRY, LLC

(A MAJORITY OWNEDSUBSIDIARY OF MICHAEL FOODS, INC.)

NOTES TO FINANCIAL STATEMENTS

UNAUDITED

 

NOTE A — ORGANIZATION, BUSINESS AND MERGER

 

Organization

M-Foods Dairy, LLC (the “Company”) is a majority owned subsidiary ofMichael Foods, Inc., a wholly owned subsidiary of M-Foods Holdings, Inc.  Prior to the Merger described below, KohlerMix — MN (the “Predecessor,” “Operating Unit” or the “Unit”) was an operatingunit of Michael Foods, Inc.  The changein control of Michael Foods, Inc. and the reorganization of the operating unitinto M-Foods Dairy, LLC are more fully described below.

 

Business

The Company processes and distributes soft serve ice cream mix, frozenyogurt mix, milk and specialty dairy products, many of which are ultra-hightemperature pasteurized, from its facility in Minnesota.

 

Merger

On April 10, 2001, Michael Foods, Inc. and its subsidiaries (“MichaelFoods”) was acquired in a transaction (the “Merger”) led by an investor groupcomprised of a management group led by Michael Foods’ Chairman, President andChief Executive Officer, Gregg Ostrander, affiliates of Jeffrey Michael, amember of the Predecessor Board of Directors, and affiliates of two private equityinvestment firms, Vestar Capital Partners and Goldner Hawn Johnson &Morrison Incorporated, collectively, M-Foods Investors, LLC.  Under the terms of the Merger agreement, alloutstanding shares of Michael Foods com­mon stock were converted into the rightto receive $30.10 per share in cash, or value equal thereto, and alloutstanding stock options were converted into the right to receive, in cash,$30.10 per share reduced by the exercise price per share for all shares subjectto such stock options.  The purchase ofthe outstand­ing shares was financed through new equity financing ofapproximately $175,000,000, a senior secured credit facility of up to$470,000,000 at market-based variable interest rates (effective rate ofapproximately 6.8% as of September 30, 2002), and $200,000,000 of seniorsubordinated notes at an 11.75% annual inter­est rate.

 

Immediately after the close of the Merger, Michael Foods contributedthe assets of its Dairy division into two limited liability corporations,M-Foods Dairy, LLC and M-Foods Dairy TXCT, LLC (collectively, the “Dairy LLCs”)and in exchange received voting preferred and voting common units from theseentities equal to the fair value of the net assets contributed, whichcollectively were approxi­mately $35,800,000 (the approximate fair valuecontributed to M-Foods Dairy, LLC was $26,850,000).  The preferred units issued to Michael Foods have an annual 10%preferred return guarantee and represent 100% of the preferred units issued andoutstanding.  In addition, Michael Foodsreceived 5% of the common units issued by each of the Dairy LLCs with thecommon units held by Michael Foods representing 100% of the voting common unitsissued and outstanding.  These commonunits have a stated value of $25,000. The remaining 95% of the common units, which are non-voting, are ownedby M-Foods Dairy Holdings, LLC, which is owned by the same owners, oraffiliates of such owners, in the same proportion, as the unit holders ofM-Foods Investors, LLC.  The Dairy LLCscommon unit interest owned by M-Foods Dairy Holdings, LLC was purchased for$475,000 as of April 1, 2001.

 

Following the Merger, Michael Foods, Inc. became an indirectwholly-owned subsidiary of M-Foods Investors, LLC and M-Foods Dairy LLC becamea majority owned subsidiary of Michael Foods, Inc.

 

The Merger was accounted for as a purchase in accordance withAccounting Principles Board Opinion 16, *Business Combinations* and EITF 88-16, *Basis inLeveraged Buyout Transac­tions*. Accordingly, the acquired assets and liabilities were 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 assigned new values, which are part Predecessorcost and 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.  Thedeemed dividend related to the Michael Foods investment in the assets andliabilities of the Dairy LLCs was pushed down to these majority ownedsubsidiaries, as if they were wholly owned subsidiaries since Michael Foodsowns all of the voting stock and the Dairy LLCs are being operated by themanagement of Michael Foods.  The amountof the deemed dividend at Michael Foods was $66,631,000.

 

For ease of presentation, the Merger has been reflected in theaccompanying financial statements as if it had occurred on April 1, 2001.  Management determined that no materialtransactions occurred during the period from April 1 through April 9,2001.  The Company’s financialstatements have been presented on a comparative basis with the Predecessor’shistorical operating unit financial statements, prior to the date ofMerger.  Different bases of accountinghave been used to prepare the Company and Predecessor financialstatements.  The primary differencesrelate to the 10% yield on preferred units, depreciation and amortization offixed assets and other intangible assets recorded at fair value at the date ofacquisition, and income taxes which are payable by the Company’s unit holders.

 

25

----

 

The fair value contributed by Michael Foods to M-Foods Dairy, LLC was$26,850,000.  In addition, $356,250 wascontributed by new investors in exchange for Class B non-voting commonunits.  This combined amount wasallocated to the acquired assets and liabilities based on their fair values atApril 1, 2001, net of the deemed dividend. The fair values of long-term assets were obtained from a valuationreport issued by a third party appraisal firm. The allocations were as follows:

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

 

The following unaudited pro forma net sales and net earnings for thenine months ended September 30, 2001 include results for the three months endedMarch 31, 2001, which were derived from the application of pro formaadjustments to the Predecessor’s historical statement of earnings, and assumesthe Merger had occurred on January 1, 2001. The pro forma net earnings for the nine months ended September 30, 2001are also adjusted for goodwill amortization determined in accordance with theprovisions of SFAS 142 (see Note B). The net sales and net earnings for the nine months ended September 30,2002 represent actual results for the period.

 
|         |   | **Nine  months ended**   |       |
|--------------|--------|--------------------------|------------|
|         |   | **September  30,  2002** |       | **September  30,  2001** |   |
| Net sales    |   | $                        | 79,841,000 |   | $ | 65,168,000 |   |
| Net earnings |   | 4,395,000                |       | 7,405,000 |   |
|              |        |                          |            |  |  |  |  |

 

NOTE B — BASIS OF PRESENTATION

 

The Predecessor Statements of Earnings and Cash Flows for the threemonths ended March 31, 2001 have been prepared from the historical booksand records of Michael Foods.  Therespective Statements of Earnings include an allocation of general andadministrative costs incurred by Michael Foods and allocations from thisOperating Unit to the other Dairy LLC operating unit, M-Foods Dairy TXCT, LLC.The accompanying unaudited financial statements and footnote information of theCompany as of and for the six month period ended September 30, 2001 and thethree and nine month periods ended September 30, 2002, have been prepared inaccordance with Regulation S-X pursuant to the rules and regulations of the SECusing the adjusted cost basis of assets and liabilities of the Company.  In the opinion of management, the unauditedfinancial statements contain all adjustments (consisting of only normalrecurring adjustments) necessary to present fairly the results of operationsand cash flows for the periods indicated. The Unit’s financial statements include an allocation for general andadministrative costs incurred by Michael Foods.  Management believes its allocations to these Operating Unitfinancial statements are reasonable. Additionally, Operating Unit equity includes the cumulative net advancesbetween the Operating Unit and Michael Foods, which are considered additionalcapital invested from or, constructive dividends to, Michael Foods.  Accordingly, the accompanying financialstatements may not necessarily be indicative of the results that could havebeen obtained if the Operating Unit had been operated as a stand-aloneentity.  The historical results of theCompany and Predecessor for the periods indicated are not necessarilyindicative of the results of the Company for a full year.

 

Use of Estimates

Preparation of the accompanying financial statements in conformity withaccount­ing principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect reportedamounts of assets and liabilities, related revenues and expenses and disclosureabout contingent assets and liabilities at the date of the financialstatements. Actual results could differ from the estimates used by management.

 

NOTE C — INVENTORIES

 

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

 

Inventories consisted of the following:

 
|                                |   | **September  30,  2002** |      | **December  31,  2001** |   |
|-------------------------------------|--------|--------------------------|-----------|-------------------------|--------|
| Raw materials  and supplies         |   | $                        | 2,204,000 |                    | $      | 1,625,000 |   |
| Work in process  and finished goods |   | 2,662,000                |      | 1,967,000               |   |
|                                |   | $                        | 4,866,000 |                    | $      | 3,592,000 |   |

 

26

----

 

NOTE D – ADOPTION OF NEW ACCOUNTING POLICIES

 

Goodwill and Intangible Assets

In July 2001, the Financial Accounting Standards Board (FASB) issuedStatement of Financial Accounting Standards (SFAS) 141, *Business Combinations*, andSFAS 142, *Goodwilland Other Intangible Assets*. SFAS 141 is effective for all business combinations completed after June30, 2001.  SFAS 142 is effective forfiscal years beginning after December 15, 2001; however, certain provisions ofthis Statement apply to goodwill and other intangible assets acquired betweenJuly 1, 2001 and the effective date of SFAS 142.  The Company adopted the provisions of SFAS 142 as of January 1,2002 and had no acquisitions between July 1, 2001 and January 1, 2002.

 

As a result of adopting SFAS No. 141 and SFAS No. 142, the Company’saccounting policies for goodwill and intangible assets changed effectiveJanuary 1, 2002 as described below:

 

Goodwill

The Company recognizes the excess cost of an acquired entity over thenet amount assigned to assets acquired and liabilities assumed asgoodwill.  Goodwill will be tested forimpairment on an annual basis and between annual tests whenever there is animpairment indicated.  Impairment losseswill be recognized whenever the implied fair value is less than the carryingvalue of the related asset.  Prior toJanuary 1, 2002, goodwill was amortized over 40 years.  Beginning January 1, 2002, goodwill is nolonger amortized.

 

During the second quarter of fiscal 2002, the Company completed thetransitional impairment test of goodwill with no impairment indicated atJanuary 1, 2002.

 

The Company’s carrying amount, net of accumulated amortization, forgoodwill as of September 30, 2002 and December 31, 2001 was $1,763,000.

 

The following table presents a reconciliation of net earnings, asreported in the financial statements, to those amounts adjusted for goodwill asdetermined in accordance with the provisions of SFAS 142:

 
|                                  |   | **Company**                                  |      | **Predecessor**                            |   |
|---------------------------------------|--------|----------------------------------------------|-----------|--------------------------------------------|--------|
|                                  |   | **Nine  months  Ended  September 30,  2002** |      | **Six months  Ended  September 30,  2001** |   | **Three  months  Ended  March 31,  2001** |   |
| Reported net  earnings                |   | $                                            | 4,395,000 |                                       | $      | 4,372,000 |   | $ | 2,963,000 |   |
| Add back:  goodwill amortization |   | —                                       |      | 53,000                                     |   | 26,000 |   |
| Adjusted net  earnings                |   | $                                            | 4,395,000 |                                       | $      | 4,425,000 |   | $ | 2,989,000 |   |

 

Other New Pronouncements

On January 1,2002, the Company adopted SFAS 144, *Accounting for the Impairment or Disposal ofLong-Lived Assets.*  Theadoption of SFAS 144 did not have a material effect on the Company’s financialstatements.

 

In addition, theCompany adopted Emerging Issues Task Force (EITF) Issue No. 00-25, *VendorIncome Statement Characterization of Consideration to a Reseller on the VendorsProducts,*effective January 1, 2002*.* The adoption of EITF Issue 00-25 did not have a material effect onthe Company’s financial statements.  Inaddition, we adopted EITF Issue No. 01-09, *Accountingfor Consideration given by a Vendor to a Customer (including a Reseller of theVendor's Products),*effective January 1, 2002*. *Theadoption of EITF Issue No. 01-09 did not have a material effect on ourconsolidated financial statements.

 

NOTE E — SETTLEMENT OF RECALL INSURANCE CLAIM

 

During the three months ended March 31, 2001, the Unit settled itsinsurance claim related to a product recall, which occurred in early 1999.  The settlement reimbursed the Unit forrecall related costs incurred, as well as a partial reimbursement for lostbusiness as a result of the recall.

 

NOTE F — INCOME TAXES

 

Predecessor

The activity of the Operating Unit has been included in the income taxreturn of Michael Foods, Inc. for financial reporting purposes.  The Unit has been allocated a provision forincome taxes in an amount generally equivalent to the provision that would haveresulted had the Unit filed a separate income tax return.

 

Company

For income tax purposes, the Company is a pass-through entity.  Therefore, income taxes have not beenreflected on the Company’s financial statements.

 

27

----

 

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 theUnit’s financial position, liquidity or results of operations.

 

28

----

 

M-FOODS DAIRY TXCT, LLC

(A MAJORITY OWNEDSUBSIDIARY OF MICHAEL FOODS, INC.)

INDEX TO FINANCIALSTATEMENTS

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

 

29

----

 

M-FOODS DAIRY TXCT, LLC

(A MAJORITY OWNEDSUBSIDIARY OF MICHAEL FOODS, INC.)

BALANCE SHEETS

(unaudited, in thousands)

 
|                                                   |   | **SEPTEMBER  30,  2002** |   | **DECEMBER  31,  2001** |   |
|--------------------------------------------------------|--------|--------------------------|--------|-------------------------|--------|
| ASSETS                                                 |   |                     |   |                    |   |
| CURRENT ASSETS                                         |   |                     |   |                    |   |
| Accounts  receivable, less allowances                  |   | $                        | 5,116  |                    | $      | 5,765 |   |
| Inventories                                            |   | 4,402                    |   | 3,315                   |   |
| Notes receivable  – related party                 |   | 579                      |   | —                  |   |
| Prepaid expenses  and other                            |   | 63                       |   | 52                      |   |
| Total current  assets                                  |   | 10,160                   |   | 9,132                   |   |
| PROPERTY, PLANT  AND EQUIPMENT— AT COST           |   |                     |   |                    |   |
| Leasehold  improvements                                |   | 3,023                    |   | 3,023                   |   |
| Machinery and  equipment                               |   | 11,632                   |   | 9,997                   |   |
|                                                   |   | 14,655                   |   | 13,020                  |   |
| Less accumulated  depreciation                         |   | 3,100                    |   | 1,494                   |   |
|                                                   |   | 11,555                   |   | 11,526                  |   |
| OTHER ASSETS                                           |   |                     |   |                    |   |
| Non-compete  agreement, net                            |   | 661                      |   | 1,058                   |   |
|                                                   |   | $                        | 22,376 |                    | $      | 21,716 |   |
| LIABILITIES AND  UNIT HOLDER AND OPERATING UNIT EQUITY |   |                     |   |                    |   |
| CURRENT  LIABILITIES                                   |   |                     |   |                    |   |
| Current  maturities of non-compete commitment          |   | $                        | 2,400  |                    | $      | 2,400 |   |
| Accounts payable                                       |   | 3,825                    |   | 3,342                   |   |
| Accrued  liabilities:                                  |   |                     |   |                    |   |
| Compensation                                           |   | 348                      |   | 292                     |   |
| Insurance                                              |   | 1                        |   | 37                      |   |
| Customer  programs                                     |   | 122                      |   | 200                     |   |
| Other                                                  |   | 636                      |   | 447                     |   |
| Total current  liabilities                             |   | 7,332                    |   | 6,718                   |   |
| NON-COMPETE  COMMITMENT, less current maturities       |   | —                   |   | 2,400                   |   |
| COMMITMENTS AND  CONTINGENCIES                         |   | —                   |   | —                  |   |
| PREFERRED UNIT  HOLDER RETURN PAYABLE                  |   | 1,429                    |   | 688                     |   |
| UNIT HOLDER AND  OPERATING UNIT EQUITY                 |   | 13,615                   |   | 11,910                  |   |
|                                                   |   | $                        | 22,376 |                    | $      | 21,716 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

30

----

 

M-FOODS DAIRY TXCT, LLC

(A MAJORITY OWNEDSUBSIDIARY OF MICHAEL FOODS, INC.)

STATEMENTS OF EARNINGS

FOR THE THREE MONTHSENDED SEPTEMBER 30,

(unaudited, in thousands)

 
|                                          |   | **2002** |   | **2001** |   |
|-----------------------------------------------|--------|----------|--------|----------|--------|
| Net sales                                     |   | $        | 23,409 |     | $      | 30,346 |   |
|                                          |   |     |   |     |   |
| Cost of sales                                 |   | 20,681   |   | 29,010   |   |
|                                          |   |     |   |     |   |
| Gross profit                                  |   | 2,728    |   | 1,336    |   |
|                                          |   |     |   |     |   |
| Selling, general  and administrative expenses |   | 992      |   | 1,255    |   |
|                                          |   |     |   |     |   |
| Operating profit  (loss)                      |   | 1,736    |   | 81       |   |
|                                          |   |     |   |     |   |
| Other income  (expense)                       |   | 11       |   | (13      | )      |
|                                          |   |     |   |     |   |
| Earnings (loss)  before income taxes          |   | 1,747    |   | 68       |   |
| Income tax  benefit                           |   | —   |   | —   |   |
|                                          |   |     |   |     |   |
| NET EARNINGS  (LOSS)                          |   | $        | 1,747  |     | $      | 68 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

31

----

 

M-FOODS DAIRY TXCT, LLC

(A MAJORITY OWNEDSUBSIDIARY OF MICHAEL FOODS, INC.)

STATEMENTS OF EARNINGS

(unaudited, in thousands)

 
|                                          |   | **Company**                                  |   | **Predecessor**                            |   |
|-----------------------------------------------|--------|----------------------------------------------|--------|--------------------------------------------|--------|
|                                          |   | **Nine  Months  Ended  September 30,  2002** |   | **Six Months  Ended  September 30,  2001** |   | **Three  Months  Ended  March 31,  2001** |   |
| Net sales                                     |   | $                                            | 67,886 |                                       | $      | 59,225 |   | $ | 17,644 |   |
|                                          |   |                                         |   |                                       |   |   |   |
| Cost of sales                                 |   | 62,020                                       |   | 56,569                                     |   | 17,108 |   |
|                                          |   |                                         |   |                                       |   |   |   |
| Gross profit                                  |   | 5,866                                        |   | 2,656                                      |   | 536 |   |
|                                          |   |                                         |   |                                       |   |   |   |
| Selling, general  and administrative expenses |   | 2,986                                        |   | 2,660                                      |   | 1,712 |   |
|                                          |   |                                         |   |                                       |   |   |   |
| Operating profit  (loss)                      |   | 2,880                                        |   | (4                                         | )      | (1,176 | ) |
|                                          |   |                                         |   |                                       |   |   |   |
| Other income  (expense)                       |   | (18                                          | )      | 40                                         |   | — |   |
|                                          |   |                                         |   |                                       |   |   |   |
| Earnings (loss)  before income taxes          |   | 2,862                                        |   | 36                                         |   | (1,176 | ) |
|                                          |   |                                         |   |                                       |   |   |   |
| Income tax  expense                           |   | —                                       |   | —                                     |   | (447 | ) |
|                                          |   |                                         |   |                                       |   |   |   |
| NET EARNINGS  (LOSS)                          |   | $                                            | 2,862  |                                       | $      | 36 |   | $ | (729 | ) |

 

The accompanying notes are an integral part of these financialstatements.

 

32

----

 

M-FOODS DAIRY TXCT, LLC

(A MAJORITY OWNEDSUBSIDIARY OF MICHAEL FOODS, INC.)

STATEMENTS OF CASH FLOWS

(unaudited, in thousands)

 
|                                                    |   | **Company**                                  |   | **Predecessor**                            |   |
|---------------------------------------------------------|--------|----------------------------------------------|--------|--------------------------------------------|--------|
|                                                    |   | **Nine  Months  Ended  September 30,  2002** |   | **Six Months  Ended  September 30,  2001** |   | **Three  Months  Ended  March 31,  2001** |   |
|                                                    |   |                                         |   |                                       |   |   |   |
| Net cash  provided by (used in) operating activities    |   | $                                            | 4,421  |                                       | $      | 4,840 |   | $ | (31 | ) |
|                                                    |   |                                         |   |                                       |   |   |   |
| Cash flows from  investing activities:                  |   |                                         |   |                                       |   |   |   |
| Capital  expenditures                                   |   | (1,635                                       | )      | (2,440                                     | )      | (2,250 | ) |
|                                                    |   |                                         |   |                                       |   |   |   |
| Net cash used in  investing activities                  |   | (1,635                                       | )      | (2,440                                     | )      | (2,250 | ) |
|                                                    |   |                                         |   |                                       |   |   |   |
| Cash flows from  financing activities:                  |   |                                         |   |                                       |   |   |   |
| Payments on  long-term debt                             |   | (2,400                                       | )      | (2,400                                     | )      | — |   |
| Net additional  capital invested or (dividends paid)    |   | (386                                         | )      | —                                     |   | 2,281 |   |
| Net cash  provided by (used in) by financing activities |   | (2,786                                       | )      | (2,400                                     | )      | 2,281 |   |
|                                                    |   |                                         |   |                                       |   |   |   |
| Net increase (decrease)  in cash and equivalents        |   | —                                       |   | —                                     |   | — |   |
|                                                    |   |                                         |   |                                       |   |   |   |
| Cash and  equivalents at beginning of period            |   | —                                       |   | —                                     |   | — |   |
|                                                    |   |                                         |   |                                       |   |   |   |
| Cash and  equivalents at end of period                  |   | $                                            | — |                                       | $      | — |   | $ | — |   |

 

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

 

33

----

 

M-FOODS DAIRY TXCT, LLC

(A MAJORITY OWNEDSUBSIDIARY OF MICHAEL FOODS, INC.)

NOTES TO FINANCIAL STATEMENTS

UNAUDITED

 

# **NOTE A — ORGANIZATION, BUSINESS AND MERGER**

 

###### **Organization**

M-Foods Dairy TXCT, LLC (the “Company”) is a majority owned subsidiaryof Michael Foods, Inc., a wholly owned subsidiary of M-Foods Holdings,Inc.  Prior to the Merger describedbelow, Kohler Mix — TXCT (the “Predecessor,” “Operating Unit” or the “Unit”)was an operating unit of Michael Foods, Inc. The change in control of Michael Foods, Inc. and the reorganization ofthe operating unit into M-Foods Dairy TXCT, LLC are more fully described below.

 

###### **Business**

The Company processes and distributes soft serve ice cream mix, frozenyogurt mix, milk and specialty dairy products, many of which are ultra-hightemperature pasteurized, from its facilities in Texas and Connecticut.

 

###### **Merger**

On April 10, 2001, Michael Foods, Inc. and itssubsidiaries (“Michael Foods”) was acquired in a transaction (the “Merger”) ledby 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 Predecessor Board of Directors, and affiliatesof two private equity investment firms, Vestar Capital Partners and GoldnerHawn Johnson & Morrison Incorporated, collectively, M-Foods Investors,LLC.  Under the terms of the Mergeragreement, all outstanding shares of Michael Foods com­mon stock were convertedinto the right to receive $30.10 per share in cash, or value equal thereto, andall outstanding stock options were converted into the right to receive, incash, $30.10 per share reduced by the exercise price per share for all sharessubject to such stock options.  Thepurchase of the outstand­ing shares was financed through new equity financingof approximately $175,000,000, a senior secured credit facility of up to$470,000,000 at market-based variable interest rates (effective rate ofapproximately 6.8% as of September 30, 2002), and $200,000,000 of seniorsubordinated notes at an 11.75% annual inter­est rate.

 

Immediately after the close of the Merger, MichaelFoods contributed the assets of its Dairy division into two limited liabilitycorporations, M-Foods Dairy, LLC and M-Foods Dairy TXCT, LLC (collectively, the“Dairy LLCs”) and in exchange received voting preferred and voting common unitsfrom these entities equal to the fair value of the net assets contributed,which collectively were approxi­mately $35,800,000 (the approximate fair valuecontributed to M-Foods Dairy TXCT, LLC was $8,950,000).  The preferred units issued to Michael Foodshave an annual 10% preferred return guarantee and represent 100% of thepreferred units issued and outstanding. In addition, Michael Foods received 5% of the common units issued byeach of the Dairy LLCs with the common units held by Michael Foods representing100% of the voting common units issued and outstanding.  These common units have a stated value of $25,000.  The remaining 95% of the common units, whichare non-voting, are owned by M-Foods Dairy Holdings, LLC, which is owned by thesame owners, or affiliates of such owners, in the same proportion, as the unitholders of M-Foods Investors, LLC.  TheDairy LLCs common unit interest owned by M-Foods Dairy Holdings, LLC waspurchased for $475,000 as of April 1, 2001.

 

Following the Merger, Michael Foods, Inc. became anindirect wholly-owned subsidiary of M-Foods Investors, LLC and M-Foods DairyTXCT, LLC became a majority owned subsidiary of Michael Foods, Inc.

###### ** **

The Merger was accounted for as a purchase inaccordance with Accounting Principles Board Opinion 16, *Business Combinations* andEITF 88-16, *Basisin Leveraged Buyout Transac­tions*. Accordingly, the acquired assets and liabilities were 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 assigned new values, which are part Predecessorcost and 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 deemeddividend related to the Michael Foods investment in the assets and liabilitiesof the Dairy LLCs was pushed down to these majority owned subsidiaries, as ifthey were wholly owned subsidiaries since Michael Foods owns all of the votingstock and the Dairy LLCs are being operated by the management of MichaelFoods.  The amount of the deemeddividend at Michael Foods was $66,631,000. However, the historical cost basis equity of the continuing investors ofthe Company was $21,623,000, which exceeded the Company’s fair market value by$12,673,000.  This resulted in anallocation of carryover basis in excess of the fair market value of the Companyin the amount of $3,928,000.

###### ** **

For ease of presentation, the Merger has beenreflected in the accompanying financial statements as if it had occurred onApril 1, 2001.  Managementdetermined that no material transactions occurred during the period from April1 through April 9, 2001. The Company’s financial statements have been presentedon a comparative basis with the Predecessor’s historical operating unitfinancial statements, prior to the date of Merger.  Different bases of accounting have been used to prepare theCompany and Predecessor financial statements. The primary differences relate to the 10% yield on preferred units,depreciation and amortization of fixed assets and other intangible assetsrecorded at fair value at the date of acquisition, and income taxes which arepayable by the Company’s unit

 

34

----

 

holders.

 

The fair value contributed by Michael Foods to M-FoodsDairy TXCT, LLC was $8,950,000 and this amount, plus an additional carryoverbasis of $3,928,000, was allocated to the acquired assets and liabilities basedon their fair values at April 1, 2001. In addition, $118,750 was contributed by new investors in exchange forClass B - non voting common units.  Thefair values of long-term assets were obtained from a valuation report issued bya third party appraisal firm.  Theallocations were as follows:

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

 

The following unaudited pro forma net sales and net earnings (loss) forthe nine months ended September 30, 2001 include results for the three monthsended March 31, 2001, which were derived from the application of pro formaadjustments to the Predecessor’s historical statement of earnings, and assumesthe Merger had occurred on January 1, 2001. The net sales and net earnings for the nine months ended September 30,2002 represent actual results for the period.

 
|                 |   | **Nine  months ended**   |       |
|----------------------|--------|--------------------------|------------|
|                 |   | **September  30,  2002** |       | **September  30,  2001** |   |
| Net sales            |   | $                        | 67,886,000 |   | $ | 76,869,000 |   |
| Net earnings  (loss) |   | 2,862,000                |       | (537,000 | ) |
|                      |        |                          |            |  |  |  |  |

 

NOTE B — BASIS OFPRESENTATION

 

The Predecessor Statements of Earnings and Cash Flows for the threemonths ended March 31, 2001 have been prepared from the historical booksand records of Michael Foods.  Therespective Statements of Earnings include an allocation of general and administrativecosts incurred by Michael Foods and allocations from this Operating Unit to theother Dairy LLC operating unit, M-Foods Dairy, LLC. The accompanying unauditedfinancial statements and footnote information of the Company as of and for thesix month period ended September 30, 2001 and the three and nine month periodsended September 30, 2002, have been prepared in accordance with Regulation S-Xpursuant to the rules and regulations of the SEC using the adjusted cost basisof assets and liabilities of the Company. In the opinion of management, the unaudited financial statements containall adjustments (consisting of only normal recurring adjustments) necessary topresent fairly the results of operations and cash flows for the periodsindicated.  The Unit’s financialstatements include an allocation for general and administrative costs incurredby Michael Foods.  Management believesits allocations to these Operating Unit financial statements arereasonable.  Additionally, OperatingUnit equity includes the cumulative net advances between the Operating Unit andMichael Foods, which are considered additional capital invested from or,constructive dividends to, Michael Foods. Accordingly, the accompanying financial statements may not necessarilybe indicative of the results that could have been obtained if the OperatingUnit had been operated as a stand-alone entity.  The historical results of the Company and Predecessor for theperiods indicated are not necessarily indicative of the results of the Companyfor a full year.

 

**Use of Estimates**

Preparation of the accompanying financial statementsin conformity with account­ing principles generally accepted in the UnitedStates of America requires management to make estimates and assumptions thataffect reported amounts of assets and liabilities, related revenues andexpenses and disclosure about contingent assets and liabilities at the date ofthe financial statements. Actual results could differ from the estimates usedby management.

 

# **NOTE C**– INVENTORIES

 

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

Inventories consisted ofthe following: 

 
|                                |   | **September  30,  2002** |      | **December  31,  2001** |   |
|-------------------------------------|--------|--------------------------|-----------|-------------------------|--------|
| Raw  materials and supplies         |   | $                        | 2,416,000 |                    | $      | 1,880,000 |   |
| Work  in process and finished goods |   | 1,986,000                |      | 1,435,000               |   |
|                                |   | $                        | 4,402,000 |                    | $      | 3,315,000 |   |

 

NOTE D – ADOPTION OF NEW ACOUNTING POLICIES

 

Goodwill and Intangible Assets

In July 2001, the Financial Accounting Standards Board (FASB) issuedStatement of Financial Accounting Standards (SFAS) 141, *Business Combinations*, andSFAS 142, *Goodwilland Other Intangible Assets*. SFAS 141 is effective for all business combinations

 

35

----

 

completed after June 30, 2001. SFAS 142 is effective for fiscal years beginning after December 15,2001; however, certain provisions of this Statement apply to goodwill and otherintangible assets acquired between July 1, 2001 and the effective date of SFAS142.  The Company adopted the provisionsof SFAS 142 as of January 1, 2002 and had no acquisitions between July 1, 2001and January 1, 2002.

 

As a result of adopting SFAS No. 141 and SFAS No. 142, the Company’saccounting policies for goodwill and intangible assets changed effectiveJanuary 1, 2002 as described below:

 

Goodwill

The Company recognizes the excess cost of an acquired entity over thenet amount assigned to assets acquired and liabilities assumed asgoodwill.  The Company had no goodwillas of September 30, 2002 or December 31, 2001. If goodwill is acquired in the future, it will be tested for impairmenton an annual basis and between annual tests whenever there is an impairmentindicated.  Impairment losses will berecognized whenever the implied fair value is less than the carrying value ofthe related asset.

 

Other Intangibles

The Company recognizes an acquired intangible apart from goodwillwhenever the asset arises from contractual or other legal rights, or wheneverit is capable of being separated or divided from the acquired entity and sold,transferred, licensed, rented, or exchanged, either individually or incombination with a related contract, asset, or liability.  An intangible other than goodwill isamortized over its estimated useful life unless that life is determined to beindefinite.  Impairment losses arerecognized if the carrying amount of an intangible subject to amortization isnot recoverable from expected future cash flows and its carrying amount exceedsits fair value.

 

Acquired intangible assets of the Company that have been determined tohave a definite life and continue to be amortized as of September 30, 2002 are asfollows:

 
|        |   | **Gross  Carrying  Amount** |      | **Accumulated  Amortization** |   |
|-------------|--------|-----------------------------|-----------|-------------------------------|--------|
| Non-compete |   | $                           | 1,397,000 |                          | $      | (738,000 | ) |
|             |        |                             |           |                               |        |  |  |

 

The aggregate amortization expense for the nine months ended September30, 2002 was approximately $398,000 and was approximately $256,000 for the sixmonths ended September 30, 2001.  ThePredecessor had amortization expense of $500,000 during the period ended March31, 2001.  The estimated amortizationexpense for the years ended December 31, 2002 through December 31, 2003 is asfollows:

 
| **For the Years   Ended December 31,** |   |    |    |
|----------------------------------------|--------|---------|---------|
| 2002                                   |   | $       | 529,000 |   |
| 2003                                   |   | 529,000 |    |
|                                        |        |         |         |  |

 

Other New Pronouncements

On January 1,2002, the Company adopted SFAS 144, *Accounting for the Impairment or Disposal ofLong-Lived Assets.*  Theadoption of SFAS 144 did not have a material effect on the Company’s financialstatements.

 

In addition, theCompany adopted Emerging Issues Task Force (EITF) Issue No. 00-25, *VendorIncome Statement Characterization of Consideration to a Reseller on the VendorsProducts,*effective January 1, 2002*.* The adoption of EITF Issue 00-25 did not have a material effect onthe Company’s financial statements.  Inaddition, we adopted EITF Issue No. 01-09, *Accountingfor Consideration given by a Vendor to a Customer (including a Reseller of theVendor's Products),*effective January 1, 2002*. *Theadoption of EITF Issue No. 01-09 did not have a material effect on ourconsolidated financial statements.

###### ** **

###### **NOTE E — INCOME TAXES**

 

###### **Predecessor**

# **Theactivity of the Operating Unit has been included in the income tax return of MichaelFoods, Inc. for financial reporting purposes. The Unit has been allocated a provision for income taxes in an amountgenerally equivalent to the provision that would have resulted had the Unitfiled a separate income tax return.**

 

# **Company**

For income tax purposes the Company is a pass-throughentity.  Therefore, income taxes havenot been reflected on the Company’s financial statements.

###### ** **

###### **NOTE F — COMMITMENTS AND CONTINGENCIES**

 

###### **Litigation**

The Company is engaged in routine litigation incidental to its business.  Management believes the ultimate outcome ofthis litigation will not have a material effect on the accompanying statementsof financial position, liquidity or results of operations.

 

36

----

 

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

 

THREE MONTHS ENDED SEPTEMBER 30, 2002 AS COMPARED TO THREE MONTHS ENDEDSEPTEMBER 30, 2001

 

RESULTS OF OPERATIONS

 

Readers are directed to Note H - Business Segments for data on theunaudited financial results of our four business segments for the three monthsended September 30, 2002 and September 30, 2001.

 

Net sales for the 2002 period were $293,954,000, a decrease of 2%compared to net sales of $299,225,000 in the 2001 period. Net sales decreasedbecause of the factors discussed in the below divisional reviews, but werelower in the 2002 period due largely to deflationary impacts in two divisions,lower unit sales in another division, and intentionally lower Company-wideshell egg unit sales.

 

Egg Products Division net sales for the 2002 period reflected slightlydecreased core unit sales, which were offset by the sales impact of an eggproducts acquisition (see Note B). Two of our largest categories, extendedshelf-life liquid eggs and precooked items, saw unit sales decline slightly,reflecting generally soft foodservice sales. Egg substitutes, hard cooked itemsand frozen eggs all experienced unit sales increases, though such gains did notoffset the declines elsewhere. Pricing for our egg products was slightly lowerthan 2001 period levels. Graded shell egg prices increased approximately 10%compared to third quarter 2001 levels, as reported by Urner Barry Publications- a widely quoted industry pricing service. Related egg market increases raisedthe cost of purchased eggs moderately.

 

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 higher in the 2002 period, compared to the 2001 period, particularly forcorn. Because of higher open market egg prices and higher feed costs, overallegg costs increased moderately in the 2002 period, as compared to the 2001period.  Despite these factors,production efficiencies and cost controls held egg products margins close to2001 period levels.  Also, improvementswere seen with industrial products collectively, which had been experiencingweak margins and, at times, losses, but which showed a margin recovery in the2002 period. In total, divisional operating earnings increased slightly in the2002 period, with a contribution from the acquired business.

 

Refrigerated Distribution Division net sales for the 2002 periodreflected lower unit sales.  However,excluding the intentional decline in shell egg sales, unit sales rose slightlyfor distributed products. Deflation was also a factor in the divisional dollarsales decline, with butter prices, in particular, down sharply (approximately50%) from 2001 period levels. Despite lower dollar sales, divisional earningsrose sharply from depressed 2001 levels, with the important cheese categoryaccounting for much of the improvement. Cheese unit sales rose year-over-year,while a decline in product costs, combined with favorable wholesale price points,allowed for improved gross, and operating profit, margins.

 

Dairy Products Division net sales for the 2002 period reflected higherunit sales, due mainly to strong creamer and ice cream mix product sales, whichwere more than offset by deflationary impacts from the national butterfatmarket. Along with the lower divisional sales, operating costs were higher thanexpected at one of our three dairy plants, which resulted in reduced marginsand earnings for the division. Operating cost matters are being addressed, withimprovements expected in the current quarter and thereafter.

 

Potato Products Division net sales for the 2002 period reflected unitsales increases in all product categories. Sales were particularly strong formashed items **–** both at retail and at foodservice. New account activity,same-account sales growth and higher marketing spending levels all contributedto the sales gain. The operating profit increase reflected the sales growth,improved operating costs and a recovery of foodservice category earnings fromnear break-even levels in the 2001 period to meaningful profitability in the2002 period.

 

The strong increase in our gross profit margin for the 2002 period,compared to the 2001 period, reflected the factors discussed above, particularlysales mix improvements, decreased raw material costs in certain divisions andgenerally improved operating costs. It is our strategy to increase value-addedproduct sales as a percent of total sales over time, while decreasingcommodity-sensitive products’ contribution to consolidated sales. These effortshistorically have been beneficial to gross profit margins in most periods.

 

Selling, general and administrative expenses declined slightly as apercent of sales in the 2002 period, as compared to the results of the  2001 period, reflective of our cost controlefforts across all divisions.

 

37

----

 

NINE MONTHS ENDED SEPTEMBER 30, 2002 AS COMPARED TO NINE MONTHS ENDEDSEPTEMBER 30, 2001

 

RESULTS OF OPERATIONS

 

Readers are directed to Note H - Business Segments for data on theunaudited financial results of the Company’s and the Predecessor’s fourbusiness segments and must combine 2001 periods to evaluate the nine monthsended September 30, 2001 as compared to the nine months ended September 30,2002.

 

Net sales in the 2002 period were $862,136,000, a decrease of less than1% compared to net sales of $869,961,000 for the Company and the Predecessor inthe 2001 period. Net sales decreased because of the factors discussed in thebelow divisional reviews, but were slightly lower in the 2002 period duelargely to lower unit sales in two divisions.

 

Egg Products Division net sales for the 2002 period reflected decreasedunit sales and slight deflation for industrial egg products, with the formerrelated mainly to planned shell egg sales decreases and the latter tied toweaker pricing in the national industrial egg products market. Unit sales rosefor egg substitutes, hard cooked items and precooked products, and declinedslightly for other products. Graded shell egg prices were unchanged compared tolevels in the 2001 period, as reported by Urner Barry Publications.

 

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 higher in the 2002 period, compared to the 2001 period, due mainly tohigher prices for corn. Overall, egg costs increased slightly in the 2002period.  Production efficiencies andcost controls helped raise margins for certain egg products, particularly eggsubstitutes, precooked products, hard cooked products and dried products, andincreased divisional margins and operating earnings in total.

 

Refrigerated Distribution Division net sales for the 2002 period reflectedlower unit sales, especially in the key cheese category. Unit sales were downdue to several factors, including a national trend whereby private labelcheeses are taking market share from branded cheeses, generally weak retailgrocery sales, and store closures by certain grocery chains served by theDivision. Cheese pricing increased year-over-year, but our cheese sourcingcosts rose more rapidly than did our selling prices during the first half of2002.  This was largely due to hedgingactivities that resulted in significant cheese ownership at above-marketlevels. During the third quarter of the current year, such excess hedging nolonger existed and cheese margins recovered significantly. This improvement wassufficient to increase divisional operating earnings and margins for the 2002nine month period, as compared to 2001 period levels.

 

Dairy Products Division net sales for the 2002 period reflected higherunit sales, due mainly to strong creamer and specialty cartoned product sales,which more than offset a slight decline in per gallon selling prices. Thecombination of sales growth and reduced ingredient costs raised gross profitmargins significantly. However, operating profit declined in the 2002 periodcompared to the 2001 period due to the inclusion of an insurance settlement ofapproximately $3,217,000 in the 2001 period.

 

Potato Products Division net sales for the 2002 period reflected unitsales increases in all product categories. Sales were particularly strong formashed items **–** both at retail and at foodservice. New account activity,same-account sales growth and higher marketing spending levels all contributedto the sales gain. The operating profit increase in the 2002 period reflectedimproved operating costs, the impact of a favorable sales mix, with retailsales rising as a percent of the divisional total, and a recovery offoodservice category earnings from modest profitability in the 2001 period, tomeaningful profitability in the 2002 period.

 

The increase in our gross profit margin for the 2002 period, ascompared to the results of the 2001 period, reflected the factors discussedabove, particularly sales mix improvements, decreased raw material costs incertain divisions and generally improved operating costs. It is our strategy toincrease value-added product sales as a percent of total sales over time, whiledecreasing commodity-sensitive products’ contribution to consolidated sales.These efforts historically have been beneficial to gross profit margins in mostperiods.

 

Selling, general and administrative expenses decreased as a percent ofsales in the 2002 period, as compared to the results of the 2001 period.However, within the 2001 period the Predecessor recorded non-recurring  expenses related to the Merger forfinancial, legal, advisory and regulatory filing fees. These expenses of  $11,050,000 are reflected in the PredecessorConsolidated Statement of Earnings for the three months ended March 31, 2001 astransaction expenses. Exclusive of these one-time transaction expenses,selling, general and administrative expenses increased slightly as a percent ofsales in the 2002 period as compared to the 2001 period. This increased expenseratio reflected higher expenses to support retail and foodservice marketingefforts and broadened sales efforts, and for our centralized purchasingdepartment.

 

38

----

 

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 vary from being verycommodity-sensitive to somewhat value-added. Gross profit from shell eggs isprimarily dependent upon the relationship between shell egg prices and the costof feed, both of which can fluctuate significantly. Graded shell egg pricing inthe 2002 nine month period was approximately unchanged from 2001 levels, asmeasured by a widely quoted pricing service, while feed costs rose moderatelyyear-over-year. Gross profit margins for extended shelf-life liquid eggs, eggsubstitutes, and precooked and hard cooked egg products are less sensitive tocommodity price fluctuations than are other egg products or shell eggs. OurRefrigerated Distribution Division derives approximately 75% of its net salesfrom refrigerated products produced by others, thereby reducing the effects ofcommodity price swings. The balance of refrigerated distribution sales aremainly from shell eggs, some of which are produced by the Egg ProductsDivision, sold on a distribution, or non-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

 

Acquisitions and capital expenditures have been, and will likelycontinue to be, a significant capital requirement. We plan to continue toinvest in state-of-the-art production facilities to enhance our competitiveposition. Historically, we have financed our growth principally from internallygenerated funds, bank borrowings, and the issuance of senior debt. We believesuch sources remain viable financing alternatives to meet our anticipatedneeds.

 

*** ***

We invested $4,991,000 in capital expenditures during the three monthsended September 30, 2002 and $19,255,000 during the nine months ended September30, 2002.  We plan to spendapproximately $10,000,000 on capital expenditures in the fourth quarter of2002.

 

Earnings before interest, taxes, depreciation and amortization(“EBITDA”) in the 2002 nine month period were $113,871,000, an increase of 7%compared to the Company’s and Predecessor’s combined $106,194,000 in thecomparable 2001 period. EBITDA increased because of the factors discussed inthe above results of operations divisional reviews. We believe that EBITDA is arelevant measurement of our financial results, as it is indicative of therelative strength of our cash flows and is a key measurement contained in thefinancial covenants of our senior indebtedness. In addition, as a highlyleveraged company, the holders of our debt have a significant interest in ourcash flows. We compute EBITDA as it is defined in our senior credit agreement(see Exhibit 10.1 of our Amendment No. 1 to Form S-4 filed with the Securitiesand Exchange Commission on July 18, 2001). This definition may not becomparable to that used by other companies reporting similar financialinformation.

 

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 or cash flow from operations as determined undergenerally accepted accounting principles.

 

We have a senior secured credit facility with numerous banks, otherfinancial institutions and investment groups, which totaled $470,000,000 at thetime of the Merger. At September 30, 2002, there was $10,000,000 borrowed underthe $100,000,000 line of credit portion of this facility, while the term Aportion therein approximated $79,400,000 and the term B portion approximated$245,600,000.  Subsequent to the periodreported on herein, we made a voluntary prepayment of our term debt (both theterm A and B portions) in the combined amount of $21,900,000 on October 1, 2002.

 

39

----

 

The senior credit facility contains various restrictive covenants. Itprohibits us from prepaying other indebtedness, including the notes, and itrequires us to maintain specified financial ratios, such as a minimum ratio ofEBITDA to interest expense, a minimum fixed charge coverage ratio and a maximumratio of total debt to EBITDA, and satisfy financial condition tests. Inaddition, the senior credit facility prohibits us from declaring or paying anydividends and prohibits us from making any payments with respect to the notesif we fail to perform our obligations under, or fail to meet the conditions of,the senior credit facility or if payment creates a default under the seniorcredit facility.

 

The indenture governing the notes, among other things, (a) restrictsthe ability of the issuer and its subsidiaries, including the guarantors of thenotes, to incur additional indebtedness, issue shares of preferred stock, incurliens, pay dividends or make certain other restricted payments and enter intocertain transactions with affiliates, (b) prohibits certain restrictions on theability of certain of the issuer’s subsidiaries, including the guarantors ofthe notes, to pay dividends or make certain payments to the issuer and (c)places restrictions on the ability of the issuer and its subsidiaries,including the guarantors of the notes, to merge or consolidate with any otherperson or sell, assign, transfer, lease, convey or otherwise dispose of all orsubstantially all of the assets of the issuer. The indenture related to thesenotes and the senior credit facility also contain various covenants, whichlimit our discretion in the operation of our businesses.

 

Our principal sources of funds are anticipated to be cash flows fromoperating activities and borrowings under our senior credit facility. Webelieve that these funds will provide us with sufficient liquidity and capitalresources for us to meet our current and future financial obligations, as wellas to provide funds for our working capital, capital expenditures and otherneeds for at least the next 12 months. No assurance can be given, however, thatthis will be the case. We may require additional equity or debt financing tomeet our working capital requirements or to fund our acquisition activities, ifany. There can be no assurance that additional financing will be available whenrequired or, if available, will be on terms satisfactory to us.

 

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 developments and industry 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 nine monthperiod ended September 30, 2002.

 

PART II - OTHERINFORMATION

 

ITEM 4.  CONTROLS AND PROCEDURES

 

a.  Evaluation of disclosure controls andprocedures.

 

Underthe supervision, and with the participation of, our management, including ourChief Executive Officer and Chief Financial Officer, we evaluated theeffectiveness of the design and operation of our disclosure controls andprocedures (as defined in Rules 13a-14(c)/15d-14(c) under the Exchange Act) asof a date (the “Evaluation Date”) within 90 days prior to the filing date ofthis report.  Based upon thatevaluation, the Chief Executive Officer and Chief Financial Officer concludedthat, as of the Evaluation Date, our disclosure controls and procedures areeffective in timely alerting them to the material information relating to us (orour consolidated subsidiaries) required to be included in our periodic SECfilings.

 

b.  Changes in internal controls.

 

Therewere no significant changes made in our internal controls during the periodcovered by this report or, to our knowledge, in other factors that couldsignificantly affect these controls subsequent to the date of their evaluation.

 

40

----

 

ITEM 5.  OTHER INFORMATION

 

On August 26, 2002, we acquired the egg products assets of CanadianInovatech Inc.  This entity’s results ofoperations have been included in our operating results since the date of theasset purchase.  Also, as a result ofthis asset purchase, we now own 67%, rather than 33%, of a Canadian eggproducts joint venture **–** Trilogy Egg Products, Inc.  Hence, Trilogy became a consolidated entityunder our financial reporting as of the date of the asset purchase.

 

On September 24, 2002, we announced the retention of U.S. Bancorp PiperJaffray to assist in the possible sale of our Crystal Farms RefrigeratedDistribution Company subsidiary.

 

ITEM 6.  EXHIBITS AND REPORTS ONFORM 8-K

 

(b)        Reports on Form 8-K

 

We filed a Form 8-K on July 25, 2002 regarding a news release issued toour debt holders pertaining to our financial results for the three months andsix months ended June 30, 2002.

 

We filed a Form 8-K on August 14, 2002 regarding a news release issuedto our debt holders pertaining to our announcement that we had a pendingacquisition of an egg products business.

 

We filed a Form 8-K on August 23, 2002 regarding a change to ourindependent accountant.

 

We filed a Form 8-K on September 24, 2002 regarding the retention of U.S. Bancorp Piper Jaffray to assist in the possible sale of our Crystal FarmsRefrigerated Distribution Company subsidiary.

 

We filed a Form 8-K/A on September 25, 2002 regarding a change to ourindependent accountant.

 

Subsequent to the reporting period herein, we filed a Form 8-K onNovember 8, 2002 regarding a news release issued to our debt holders pertainingto our financial results for the three months and nine months ended September30, 2002.

 

 

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:   November 12, 2002 | By:                 | /s/ Gregg A. Ostrander |   |
|                           |                | Gregg A. Ostrander |
|                           |                | (Chairman, President  and  Chief Executive Officer) |
|                           |                |   |
|                           |                |   |
| Date:   November 12, 2002 | By:                 | /s/ John D. Reedy |   |
|                           |                | John D. Reedy |
|                           |                | (Executive Vice  President, Treasurer,  Chief Financial Officer and  Principal Accounting Officer) |
|                                |                     |  |  |  |

 

41

----

 

 

**CERTIFICATION OF CHIEF EXECUTIVE OFFICER**

 

**Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18U.S.C. 1350)**

 

I, Gregg A.Ostrander, certify that:

 

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

2.                                       Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to  make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

3.                                       Based on myknowledge, the financial statements, and other 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’sother certifying officers and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

a)designed such disclosure controls and procedures to ensure that materialinformation relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularlyduring the period in which this quarterly report is being prepared;

b)evaluated the effectiveness of the registrant’s disclosure controls andprocedures as of a date within 90 days prior to the filing date of thisquarterly report (the “Evaluation Date”); and

c)presented in this quarterly report our conclusions about the effectiveness ofthe disclosure controls and procedures based on our evaluation as of theEvaluation Date;

5.                                       The registrant’sother certifying officers and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee of theregistrant’s board of directors (or persons performing the equivalentfunction):

a)all significant deficiencies in the design or operation of internal controlswhich could adversely affect the registrant’s ability to record, process,summarize and report financial data and have identified for the registrant’sauditors any material weakness in internal controls; and

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

6.                                       The registrant’sother certifying officers and I have indicated in this quarterly report whetheror not there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 
| Date:     November  12, 2002 |
|-------------------------------------------------------|
|                                                  |
| /s/  Gregg A. Ostrander                               |   |
| Gregg  A. Ostrander                                   |
| Chairman,  President and Chief Executive Officer      |

 

42

----

**CERTIFICATION OF CHIEF FINANCIAL OFFICER**

 

**Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18U.S.C. 1350)**

 

I, John D. Reedy,certify that:

 

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

2.                                       Based on my knowledge,this quarterly report does not contain any untrue statement of a material factor omit to state a material fact necessary to make the statements made, in light of the circumstances under which suchstatements were made, not misleading with respect to the period covered by thisquarterly report;

3.                                       Based on myknowledge, the financial statements, and other 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’sother certifying officers and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

a)designed such disclosure controls and procedures to ensure that materialinformation relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularlyduring the period in which this quarterly report is being prepared;

b)evaluated the effectiveness of the registrant’s disclosure controls andprocedures as of a date within 90 days prior to the filing date of thisquarterly report (the “Evaluation Date”); and

c)presented in this quarterly report our conclusions about the effectiveness ofthe disclosure controls and procedures based on our evaluation as of theEvaluation Date;

5.                                       The registrant’sother certifying officers and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee of theregistrant’s board of directors (or persons performing the equivalentfunction):

a)all significant deficiencies in the design or operation of internal controlswhich could adversely affect the registrant’s ability to record, process,summarize and report financial data and have identified for the registrant’sauditors any material weakness in internal controls; and

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

6.                                       The registrant’sother certifying officers and I have indicated in this quarterly report whetheror not there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 
| Date:    November  12, 2002 |
|-------------------------------------------------|
|                                            |
| /s/  John Reedy                                 |   |
| John  D. Reedy                                  |
| Executive  Vice President, Treasurer and        |
| Chief  Financial Officer                        |

 

43

----