1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 ---------------------------------------------------- Commission file number 0-15638 ---------------------------------------------------- MICHAEL FOODS, INC. - ------------------------------------------------------------------------------ (Exact name of registrant as specified in its charter) Minnesota 41-0498850 - ------------------------------------------------------------------------------ (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) Suite 324, Park National Bank Building 5353 Wayzata Boulevard Minneapolis, Minnesota 55416 - ------------------------------------------------------------------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (612) 546-1500 --------------------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock $.01 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of voting stock held by non-affiliates of the registrant as of March 3, 2000 was approximately $318 million based on the last price of such stock as reported by the Nasdaq National Market. The number of shares outstanding of the registrant's Common Stock, $.01 par value, as of March 3, 2000, was 20,062,823 shares. 2 DOCUMENTS INCORPORATED BY REFERENCE Pursuant to General Instructions G (2) and G (3), the financial information about industry segments under Item 1 of Part I and the responses to Items 5, 6, 7, and 8 of Part II of this report are incorporated herein by reference to the Company's 1999 Annual Report to Shareholders (see Exhibit 13.1), and the responses to Items 10, 11, 12 and 13 of Part III of this report are incorporated herein by reference to the information contained in the Company's Proxy Statement for its 2000 Annual Meeting of Shareholders to be held on April 26, 2000, to be filed with the Securities and Exchange Commission on or about March 27, 2000. PART I ITEM 1 - BUSINESS FORWARD-LOOKING STATEMENTS Certain items in this Form 10-K are forward-looking statements, which are made in reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to numerous risks and uncertainties, including changes in domestic and international economic conditions. Additional risks and uncertainties include variances in the demand for the Company's products due to consumer and industry developments, as well as variances in the costs to produce such products, including normal volatility in egg and feed costs. The Company's actual financial results could differ materially from the results estimated by, forecasted by, or implied by the Company in such forward-looking statements. GENERAL Michael Foods, Inc. (the "Company") is a diversified producer and distributor of food products in four areas egg products, refrigerated distribution, dairy products, and potato products. The Company, through its Egg Products Division, is the largest producer, processor and distributor of extended shelf-life liquid eggs and precooked, dried, hard-cooked and frozen egg products in the United States. The Refrigerated Distribution Division distributes a broad line of refrigerated grocery products directly to supermarkets, including cheese, shell eggs, bagels, butter, margarine, muffins, potato products, juice and ethnic foods. The Dairy Products Division processes and distributes soft serve mix, ice cream mix, and extended shelf-life ultrapasteurized milk and specialty dairy products to domestic fast food businesses and other foodservice outlets, independent retailers, ice cream manufacturers and others. The Potato Products Division processes and distributes refrigerated potato products sold to the foodservice and retail grocery markets in the United States. Financial information about the Company's business segments is incorporated by reference to "Note H" in the "Notes to Consolidated Financial Statements" on page 24 of the Company's 1999 Annual Report to Shareholders (see Exhibit 13.1). The Company's strategy is to grow value-added food product sales, primarily in the foodservice market, by focusing on developing, marketing and distributing innovative, refrigerated products. The key to this strategy is "value-added", whether that is in the product, the distribution channel or in the service provided to customers. EGG PRODUCTS The Egg Products Division, comprised of M. G. Waldbaum Company ("Waldbaum") and Papetti's Hygrade Egg Products, Inc. ("Papetti's"), produces, processes and distributes numerous egg products and shell eggs. Management believes that the Egg Products Division is the largest egg products producer in the United States and is believed to be the third largest egg producer 2 3 in the United States. Principal value-added egg products are ultrapasteurized, extended shelf-life liquid eggs ("Easy Eggs(R)" and "Table Ready(TM)"), egg white-based egg substitutes ("Better 'n Eggs(TM)", "Table Ready(TM)", and "All Whites(TM)") and precooked egg products. Other egg products include frozen, liquid and dried egg whites, yolks and whole eggs, and hardcooked eggs. The Division is the largest supplier of extended shelf-life liquid eggs, precooked egg patties and omelets, dried, and hardcooked eggs in the United States and is a leading supplier of frozen and liquid whole eggs, whites and yolks. The Division distributes its egg products to food processors and foodservice customers primarily throughout the United States with some international sales in the Far East and Europe. The largest selling product line within the Division, extended shelf-life liquid eggs, and other egg products are marketed nationally to a wide variety of foodservice and industrial customers. The Division also is a leading supplier of egg white-based egg substitutes sold in the U. S. retail and foodservice markets. Most of the Division's annual shell egg sales are made to the Company's Refrigerated Distribution Division, which, in turn, distributes them throughout its 23 state territory. In 1999, the Division derived approximately 97% of net sales from egg products, with 3% of net sales coming from shell eggs. Pricing for shell eggs and certain egg products in the United States reflects levels reported by Urner Barry Spot Egg Market Quotations ("Urner Barry"), a recognized industry publication. Prices of certain valued-added products, such as extended shelf-life liquid eggs, egg substitutes, and precooked egg products, typically are not significantly affected by Urner Barry quoted price levels. Such products accounted for approximately 64% of the Division's 1999 sales. Prices for the Division's other products, including frozen, short shelf-life liquid, certain dried products, hard-cooked items and, particularly, shell eggs, are significantly affected by frequently changing market levels as reported by Urner Barry. In 1999, approximately 35% of the Division's egg needs were satisfied by production from Company-owned hens, with the balance being purchased under grower contracts and in the spot market. The cost of eggs from Company-owned facilities is largely dependent upon the cost of feed. Additionally, for a small, but increasing, proportion of eggs purchased under grower contracts, the egg cost is determined largely by the cost of feed. For a larger proportion of eggs purchased under grower contracts, plus eggs purchased in the spot market, the egg cost is determined by normal market forces. Such costs are largely determined by reference to Urner Barry quotations. Historically, feed costs have generally been less volatile than have egg market prices and internally produced eggs generally are lower in cost than are externally sourced eggs. Key feed costs, such as corn and soybean meal, are partially hedged through the use of futures and other purchase contracts. There is no market mechanism for hedging egg prices. The Division has endeavored to moderate the effects of egg market commodity factors through an emphasis on value-added products and the internal production of eggs, where the egg cost is somewhat controllable. Further, the Division attempts to match market-affected egg sourcing with the production of egg products whose selling prices are also market-affected, and cost-affected egg sourcing, as best can be managed, with higher value-added products priced over longer terms, such as 6-12 months, or more. The former allows the Division to typically realize a modest processing margin on such sales, even though there are notable commodity influences on both the egg sourcing cost and the egg products pricing, with each changing as frequently as daily. Shell eggs are essentially a commodity and are sold based upon reported egg prices. Egg prices are significantly influenced by modest shifts in supply and demand. Pricing of shell eggs is also typically affected by seasonal demand related to increased consumption during holiday periods. The Division's principal egg processing plants are located in New Jersey, Minnesota, Nebraska, Pennsylvania and Iowa. Certain of the Division's facilities are fully integrated from the production and maintenance of laying flocks through the processing of egg products. Fully automated laying barns, housing approximately 13,000,000 producing hens, are located in 3 4 Nebraska and Minnesota, of which approximately 1,500,000 are housed in contract facilities. Major laying facilities also maintain their own grain and feed storage facilities. Further, the production of approximately 4,250,000 hens is under long-term supply agreements, with an additional 22,250,000 hens under shorter-term agreements. The Division also maintains facilities with approximately 2,800,000 pullets located in Nebraska and Minnesota. REFRIGERATED DISTRIBUTION The Refrigerated Distribution Division, comprised of Crystal Farms Refrigerated Distribution Company ("Crystal Farms") and Wisco Farm Cooperative, distributes a wide range of refrigerated grocery products directly to retailers and to wholesale warehouses. The Division believes that its strategy of offering quality branded products at a good value relative to national brands has contributed to its growth. These distributed refrigerated products, which consist principally of cheese, eggs, bagels, butter, margarine, muffins, potato products, juice and ethnic foods, are supplied by vendors, or other divisions of the Company, to the Division's specifications. Cheese accounts for approximately 62% of divisional annual sales. The Company operates a cheese packaging facility in Lake Mills, Wisconsin, which processes and wraps various cheese products for its Crystal Farms brand cheese business and for private label customers. The Division has expanded its market area using both company-owned and leased resources and independent distributors. The Division's market area includes 23 states primarily in the Midwest and Southwest. Retail locations served by the Division number over 1,600. In 1999, sales to the warehouse operations of a major national food wholesaler, and to its owned and franchised stores, represented approximately 43% of divisional sales. The Division maintains a fleet of refrigerated tractor-trailers to deliver products daily to its retail customers from ten distribution centers located centrally in its key marketing areas. DAIRY PRODUCTS The Dairy Products Division, comprised of Kohler Mix Specialties, Inc. ("Kohler"), processes and sells soft serve mix, ice cream mix, frozen yogurt mix, milk and specialty dairy products, many of which are ultra-high temperature ("UHT") pasteurized products. The Division sells its products throughout much of the United States from processing facilities in Minnesota, Texas and Connecticut. UHT processing is designed to produce bacteria-free products with delicate flavors, such as milk, ice cream mixes and specialty dairy products such as coffee creamers, whipping cream, half and half and cordials. Many of the Division's products have an extended shelf-life of up to ninety days, which extends the trade territory which can be effectively served by the Division to include most of the United States. Soft serve, frozen yogurt and ice cream mixes are made to customers' specifications. Currently, the Division produces approximately 100 different formulations. The Division believes that the customization of high quality products and high customer service levels are critical to their business. The Division has approximately 325 customers, including branded ice cream manufacturers, quick service restaurants, other foodservice outlets and independent ice cream retailers. The Division's top three customers represented approximately 52% of 1999 Divisional sales. Most of the Division's sales are to customers who purchase products on a cost-plus basis. This includes sales to most of the large quick-service restaurant chains operating in its market areas. Sales of soft serve, milk shake, and ice cream mixes are more seasonal than the Company's other products, with higher sales volume occurring between April and October. The addition of other 4 5 specialty dairy products in recent years, such as coffee creamers and cartoned items, has somewhat offset the impact on the Division's sales and earnings from this seasonality. POTATO PRODUCTS Refrigerated potato products are produced and sold by Northern Star Co. ("Northern Star") and Farm Fresh Foods, Inc. ("Farm Fresh") to both the foodservice and retail markets. Products consist of shredded hash browns and diced, sliced, mashed, and other specialty potato products. In 1999, approximately 67% of the Potato Products Division's net sales were to the foodservice market, with the balance to the retail market. The Division maintains its main processing facility in Minnesota, with a smaller facility located in California. The Division typically purchases approximately 90%-95% of its annual potato requirements from contract producers. The balance of potato requirements are purchased on the spot market. The Division maintains a high percentage of its contracted supply from irrigated fields and also has geographical diversification of its potato sources. However, weather remains an important factor in determining raw potato prices and quality. Variations in the purchase price and/or quality of potatoes can effect the Potato Products Division's operating results. SALES, MARKETING AND CUSTOMER SERVICE Each of the Company's four divisions has developed a marketing strategy, which emphasizes high quality products and customer service. Michael Foods Sales, an internal sales group, coordinates the sales of Waldbaum, Kohler and Northern Star, primarily for national and regional accounts, and is supported by a centralized order entry and customer service staff. A group of foodservice brokers is used by Michael Foods Sales to supplement its internal sales efforts. Further, the Egg Products Division utilizes two separate nationwide systems of brokers, one for the foodservice market and one for the retail market, and maintains a small sales group which handles certain industrial egg product sales. The Company has a small marketing staff, which executes marketing plans in the foodservice market, with additional resources available from outside agencies and consultants as needed. The Refrigerated Distribution Division's internal and external sales personnel obtain orders from retail stores which are usually placed no more than one day ahead of the requested delivery date. The Division's marketing efforts are primarily focused on in-store and co-op advertising programs, which are executed with grocers on a market-by-market basis. During 1999, Crystal Farms increased its consumer support programs, with largely favorable sales volume results. Also, the Egg Products Division has a consumer support program to support various of its egg products sold in the retail market. ACQUISITIONS The Company has made acquisitions in prior years and anticipates that it will continue to make acquisitions as part of its strategic plan. In May 1999, the Company's Dairy Products Division acquired a dairy products business in Connecticut, allowing for a broader expansion of the dairy mix and creamer business into the eastern United States. This transaction involved an acquisition of certain production assets and a customer list, and a long-term lease for the land and building, with an option to purchase the land and building upon the termination of the lease. The facility generated 1999 net sales of approximately $40 million. In early 1999, the Company made two investments in Europe. The first investment was a 25% interest in Belovo S.A., a specialty egg products company, based in Belgium. The second investment was a 50/50 joint venture with the founding shareholders of Belovo. The joint 5 6 venture is involved in the extraction of phospholipids from egg yolks for use in the field of nutraceuticals. PROPRIETARY TECHNOLOGIES In 1988, the Company acquired an exclusive license to use a patented process, developed by North Carolina State University, for the ultrapasteurization of liquid eggs. The patents are scheduled to expire in 2006. The process results in liquid eggs that are salmonella and listeria negative, pursuant to United States Department of Agriculture ("USDA") regulations. Salmonella and listeria are bacteria, which can contaminate shell eggs. The process also extends the shelf-life of liquid eggs from less than two weeks to over ten weeks. The Company has an aseptic plant in Gaylord, Minnesota, which processes the ultrapasteurized liquid egg needs of Waldbaum. The Company and the patent holder have initiated litigation against several processors of competing liquid egg products, claiming infringement of the original and subsequent related process patents with respect to ultrapasteurized liquid egg production. In 1992, a jury for the United States District Court for the Middle District of Florida found the original patent to be valid and that a processor, Bartow Food Co., willfully and deliberately infringed the patent. In another action, the United States District Court for the District of New Jersey found in 1992 and 1993 that Papetti's had infringed the patents and that the licensed patents are valid and enforceable. In 1994, the Court of Appeals for the Federal Circuit upheld this judgment. In 1996 and 1999 there were other developments regarding the patentability of the claims under the patents. See Item 3 "Legal Proceedings." As a result of the 1997 acquisition of Papetti's, the Company also owns an exclusive sublicense to use a patented process for the electro-heating of liquid eggs, which is scheduled to expire in 2006. The process results in liquid eggs that are salmonella and listeria negative, pursuant to USDA regulations. This process also extends the shelf-life of refrigerated liquid eggs from less than two weeks to over ten weeks. The Company has an aseptic plant in Elizabeth, New Jersey, which processes the ultrapasteurized liquid egg needs of Papetti's. TRADENAMES The Egg Products Division maintains numerous tradenames for its products, including "Logan Valley", "Wakefield", "Sunny Side Up(R)", "Michael Foods", "Deep Chill(TM)", "MicroFresh", "MGW", "Simply Eggs(R) Brand", "Better `n Eggs(TM)", "All Whites(TM)", "Chef's Omelet(TM) Brand", "Express Eggs", "Quaker State Farms", and "Broke N' Ready". Ultrapasteurized liquid eggs are marketed using the "Easy Eggs(R)" and "Table Ready(TM)" tradenames. Refrigerated Distribution Division products are marketed principally under the "Crystal Farms(R)" tradename. In addition, the Division is the principal distributor of "Bongards" cheese in Minnesota. The Division also distributes eggs, butter, cheese, bagels, and ethnic foods under a number of other customer-owned tradenames. Within the Dairy Products Division, "Kohler" and "Midwest Mix, Inc." are the two primary tradenames. Within the Potato Products Division, Northern Star markets its refrigerated potato products to foodservice customers under a variety of brands, including "Northern Star". The "Simply Potatoes(R)" and "Diner's Choice(R)" brands are used for retail refrigerated products. Farm Fresh maintains the "Farm Fresh(TM)" tradename. The "Quality Farms" brand of Interstate Food Processing Corporation is controlled by the Potato Products Division and is used in the sale of foodservice refrigerated potato products. 6 7 COMPETITION All aspects of the Company's businesses are extremely competitive. In general, food products are price sensitive and affected by many factors beyond the control of the Company, including changes in consumer tastes, fluctuating commodity prices, changes in supply due to weather, production variances and feed costs. The Company's Egg Products Division is considered the largest egg products processor and the third largest egg producer in the United States. The Egg Products Division competes with many suppliers of egg products and eggs. While the shell egg industry is highly fragmented, and the egg products sector is fairly fragmented, there has been a trend toward consolidation in recent years and further consolidation in the industry is expected. Other major egg producers include Cal-Maine Foods, Inc. and Rose Acres Farms, Inc. The Company believes its Egg Products Division is among the lowest cost egg producers in the United States. The Company also believes that Easy Eggs'(R) and Table Ready's(TM) salmonella-negative aspects, extended shelf-lives and ease of use are significant competitive advantages in the foodservice and industrial food markets for eggs. The Company believes its largest competitor in egg products is the Sunny Fresh Foods, Inc. subsidiary of Cargill, Inc. The Company's Refrigerated Distribution Division competes with the refrigerated products of other suppliers such as Beatrice Companies, Inc. (a subsidiary of ConAgra, Inc.) , Kraft Foods, Inc., Land O' Lakes, Inc., and Sargento Cheese Company, Incorporated. The Division believes that its emphasis on a high level of service and lower-priced branded products has enabled it to compete effectively in its market area with larger national brand companies. Management believes the Dairy Products Division provides the majority of the soft serve mix, and a significant percentage of ice cream mix, sold in Minnesota and Wisconsin. Kohler also has a large percentage of the UHT soft serve mix and UHT fluid milk business with quick service restaurant chains in the central United States. Competitors include local dairies utilizing conventional pasteurization and regional dairies with UHT products. The Potato Products Division has a leading market share in refrigerated potato products sold in the United States foodservice and retail markets, where competitors are generally smaller, local or regional companies. One refrigerated potato products competitor, Reser's Fine Foods, Inc., has a national presence. Certain companies in the frozen potato products business, such as Ore-Ida Foods, Inc. (a subsidiary of H. J. Heinz Co.) and Lamb-Weston, Inc. (a subsidiary of ConAgra, Inc.), also sell frozen versions of potato products which are sold by the Division in refrigerated form. GOVERNMENT REGULATION All of the Company's subsidiaries are subject to federal and state regulations relating to grading, quality control, product branding and labeling, waste disposal and other aspects of their businesses. The subsidiaries are subject to USDA or Food and Drug Administration regulation regarding grading, quality, labeling and sanitary control. Egg Products Division egg breaking plants are subject to continuous on-site USDA inspection. All other subsidiary plants are subject to periodic USDA inspections. Crystal Farms' cheese and butter products and Kohler's mix products are affected by milk price supports established by the USDA. The support price serves as an artificial minimum price for these products, which may not be indicative of market conditions that would prevail if such supports were abolished. 7 8 All of the Company's divisions must also comply with federal, state and local waste disposal requirements. Waldbaum disposes of chicken waste primarily to farmers for use as fertilizer. Northern Star disposes of solid waste from potato processing by selling the solid waste to a processor who converts it to animal feed and disposes of effluent under a waste discharge permit issued by the Minneapolis-St. Paul Metropolitan Waste Control Commission. Farm Fresh holds a permit with the Los Angeles County Sanitation District to discharge industrial waste into the Sanitation District's sewage system. Waldbaum and Papetti's have permits to discharge waste products into available sewer systems and maintain discharge ponds for certain wastes. In February 1999, Kohler Mix Specialties, Inc. initiated a recall of certain cartoned dairy products produced at its facility in White Bear Lake, Minnesota. The plant's carton packaging room was reopened on February 17, 1999 after cleaning, inspecting and retraining. The Company worked closely with the Minnesota Department of Agriculture and the United States Food and Drug Administration in connection with the dairy product recall and the resumption of carton-filling processes. EMPLOYEES The Company employed approximately 4,530 employees at December 31, 1999. Of this total, the Egg Products Division employed approximately 2,900 full-time and 400 part-time employees. The Refrigerated Distribution Division employed approximately 430 employees, none of whom are represented by a union. The Dairy Products Division employed approximately 250 people, of which the Milk Drivers and Dairy Employees Union represented approximately 70 of its production personnel at the Minnesota facility. The Potato Products Division employed approximately 300 employees, of whom approximately 200 are represented by the Bakery, Laundry, Allied Sales Drivers and Warehousemen Union affiliated with the Teamsters. The Michael Foods Corporate, Sales, Distribution and Customer Service, and Information Systems groups collectively employed approximately 250 people at December 31, 1999. EXECUTIVE OFFICERS OF THE REGISTRANT Officer Name Age Position Since - ---------------------------------------------------------------------------------------------------------------------- Gregg A. Ostrander 47 President and Chief Executive Officer 1993 Jeffrey M. Shapiro 52 Executive Vice President and Secretary 1987 John D. Reedy 54 Executive Vice President, Chief Financial Officer and 1988 Treasurer Mark D. Witmer 42 Assistant Treasurer 1995 James D. Clarkson 47 President - Northern Star and Kohler 1995 Bill L. Goucher 53 President - Waldbaum 1993 Arthur N. Papetti 68 President - Papetti's 1997 Norman A. Rodriguez 57 President - Crystal Farms 1989 8 9 ITEM 2 - PROPERTIES FACILITIES Corporate The Company maintains leased space for its headquarters, customer service office, sales office and information services group in suburban Minneapolis, Minnesota. Egg Products Division The following table summarizes certain information concerning the Egg Products Division's principal facilities: Owned/ Location Principal Use Approx. Sq. Ft. Leased - -------- ------------- --------------- ------ Elizabeth, NJ Processing 75,000 Leased Elizabeth, NJ Processing 125,000 Leased Elizabeth, NJ Sales and Distribution 80,000 Leased Klingerstown, PA Processing and Distribution 139,000 Leased Klingerstown, PA Processing and Distribution 19,000 Leased Kansas City, MO Processing 63,000 Owned Lenox, IA Processing and Distribution 143,000 Owned Gaylord, MN Processing and Distribution 190,000 Owned LeSueur, MN Processing 29,000 Owned Wakefield, NE Processing and Distribution 380,000 Owned Bloomfield, NE Processing and Distribution 80,000 Owned Gaylord, MN Egg Production 349,000 Owned Gaylord, MN Pullet Houses 130,000 Owned LeSueur, MN Egg Production 345,000 Owned Wakefield, NE Pullet Houses 432,000 Owned Wakefield, NE Egg Production 658,000 Owned Plainview, NE Pullet Houses 112,000 Owned Bloomfield, NE Egg Production 619,000 Owned The Division leases office space for its headquarters, financial and administrative services staff in suburban Minneapolis and owns or leases, primarily for egg production operations, approximately 1,600 acres of land in Nebraska and Minnesota. Refrigerated Distribution Division Crystal Farms leases administrative and sales offices in suburban Minneapolis and several small warehouses across the U. S., and owns a 33,000 square foot distribution center located near LeSueur, Minnesota. The Division also owns and operates a 48,200 square foot refrigerated warehouse and a 19,000 square foot cheese packaging facility on a 19 acre site in Lake Mills, Wisconsin. Dairy Products Division Kohler's facilities in White Bear Lake, Minnesota consist of three owned buildings, with the main plant containing approximately 95,000 square feet. Kohler also leases two UHT dairy plants. The plant in Sulphur Springs, Texas comprises approximately 40,000 square feet and the plant in Newington, Connecticut comprises approximately 70,000 square feet. 9 10 Potato Products Division Northern Star owns a processing plant and land located in Minneapolis, Minnesota, consisting of approximately 175,000 square feet of production area. Farm Fresh leases five buildings in Bell Gardens, California, comprising approximately 28,600 square feet. Management believes that the facilities of the Company, together with budgeted capital projects in each of its four operating divisions, are adequate to meet the Company's anticipated requirements for its current lines of business over the foreseeable future. NEBRASKA CONSTITUTIONAL PROVISION A substantial portion of the egg production operations of Waldbaum are located in the State of Nebraska. With certain exceptions, a provision of the Nebraska constitution generally prohibits corporations from engaging in farming or ranching in Nebraska. Although the constitutional provision contains an exemption for agricultural land operated by a corporation for the purpose of raising poultry, the Nebraska Attorney General has, in written opinions, taken the position that facilities devoted primarily to the production of eggs do not fall within such exemption and therefore are subject to the restrictions contained in the constitutional provision. The Company believes that the egg production facilities of Waldbaum are part of Waldbaum's integrated facilities for the production, processing and distribution of egg products, and therefore, that any agricultural land presently owned by Waldbaum is being used for non-farming and non-ranching purposes. The constitution empowers the Nebraska Attorney General, or if the Attorney General fails to act, a Nebraska citizen, to obtain a court order to, among other things, force divestiture of land held in violation of the constitutional provision. If land subject to such a court order is not divested within a two-year period, the constitutional provision directs the court to declare the land escheated to the State of Nebraska. The Company is not aware of any proceedings under such constitutional provision pending or threatened against either Waldbaum or the Company. Until the scope of such provision has been clarified by further judicial, legislative, or executive action, there can be no assurance as to the effect, if any, that it may have on the business of Waldbaum or the Company. ITEM 3 - LEGAL PROCEEDINGS Four patents for ultrapasteurizing liquid eggs licensed by the Company from North Carolina State University ("NCSU") (see "Proprietary Technologies") are presently involved in proceedings before the United States Patent and Trademark Office ("PTO"). In the first commenced proceeding, a reissue proceeding initiated by NCSU to obtain product claims in addition to existing process claims, the objections of an examiner, which had been sustained by the PTO Board of Patent Appeals and Interferences, were reversed by the Court of Appeals for the Federal Circuit. Subsequently, all four patents were involved in reexamination proceedings in the PTO as requested by various egg industry competitors of the Company (see below). In addition, a second reissue proceeding was initiated by the Company with respect to the patent in which product claims were sought and, in this reissue proceeding, both process and product claims were reexamined for patentability. In 1996, the examiner rejected claims under the four patents held by NCSU. NCSU and the Company appealed the rejection to the PTO's Board of Patent Appeals and Interferences ("PTO 10 11 Board"). In September 1999, the Company and NCSU received a favorable ruling whereby the PTO Board reversed the examiner's rejections of 57 process claims under the patents. Hence, process and product claims of all four patents continue to be valid and in full force and effect. Counsel advises that the four patents will be reissued in the near future. Parties that had been infringing the patents since their original issuance may be liable for damages based upon their infringement. On December 31, 1999, the following material litigation was pending with respect to the Company: Nulaid Foods, Inc. v. Michael Foods, Inc. and North Carolina State University. U. S. District Court for the Eastern District of California, Civil Action No. CIV-S-93-1319WBSJFM. This is an action commenced by Nulaid Foods, Inc. seeking a declaratory judgment that patents, which are subject to a license between the Company and NCSU, are invalid. The Company and NCSU have counterclaimed for infringement of the patents by the plaintiff. Further proceedings in this litigation are stayed pending reissuance of the patents by the PTO as described above. The Company is also engaged in routine litigation incidental to its business, which management believes will not have a material effect on its consolidated financial position, liquidity, or results of operations. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Pursuant to General Instruction G(2), information is incorporated by reference to "Market Price Ranges" and "Listing" on the inside back cover of the Company's 1999 Annual Report to Shareholders (see Exhibit 13.1). ITEM 6 - SELECTED FINANCIAL DATA Pursuant to General Instruction G(2), information is incorporated by reference to "Summary of Consolidated Financial Data" on page 26 of the Company's 1999 Annual Report to Shareholders (see Exhibit 13.1). ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Pursuant to General Instruction G(2), information is incorporated by reference to "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 12 - 15 of the Company's 1999 Annual Report to Shareholders (see Exhibit 13.1). 11 12 ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Pursuant to General Instruction G(2), information is incorporated by reference to "Management's Discussion and Analysis of Financial Condition and Results of Operations, Market Risk" on page 15 of the Company's 1999 Annual Report to Shareholders (see Exhibit 13.1). ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Pursuant to General Instruction G (2), information is incorporated by reference to "Report of Independent Certified Public Accountants" and "Consolidated Financial Statements of Michael Foods, Inc." on pages 16 - 25, and "Quarterly Financial Data (Unaudited)" on page 27, of the Company's 1999 Annual Report to Shareholders (see Exhibit 13.1). ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Pursuant to General Instruction G(3), information is incorporated by reference to "Election of Directors" in the Proxy Statement of the Company to be filed with the Securities and Exchange Commission on or about March 27, 2000. For information with respect to executive officers, reference is made to Part I, Item 1 of this Report on Form 10-K. ITEM 11 - EXECUTIVE COMPENSATION Pursuant to General Instruction G (3), information is incorporated by reference to "Executive Compensation" in the Proxy Statement of the Company to be filed with the Securities and Exchange Commission on or about March 27, 2000. ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Pursuant to General Instruction G(3), information is incorporated by reference to "Security Ownership" in the Proxy Statement of the Company to be filed with the Securities and Exchange Commission on or about March 27, 2000. ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Pursuant to General Instruction G(3), information is incorporated by reference to "Election of Directors", "Certain Relationships and Related Party Transactions", and "Security Ownership" in the Proxy Statement of the Company to be filed with the Securities and Exchange Commission on or about March 27, 2000. 12 13 PART IV ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents filed as a part of this report: 1. The following consolidated financial statements of the Company, included in the 1999 Annual Report to Shareholders, are incorporated by reference in Item 8 and are also incorporated herein by reference (see Exhibit 13.1): Consolidated balance sheets - December 31, 1999 and 1998 Consolidated statements of earnings - Years ended December 31, 1999, 1998 and 1997 Consolidated statements of shareholders' equity - Years ended December 31, 1999, 1998 and 1997 Consolidated statements of cash flows - Years ended December 31, 1999, 1998 and 1997 Notes to consolidated financial statements Report of Independent Certified Public Accountants 2. Consolidated Financial Statement Schedules Description Report of Independent Certified Public Accountants on Schedule (see Item 14 (d)) Schedule II - Valuation and Qualifying Accounts (see Item 14(d)) All other schedules are omitted because they are not applicable, or not required, or because the required information is included in the consolidated financial statements and/or notes filed under Exhibit 13.1. 3. Exhibits Reference is made to Item 14 (c), footnote (7) for exhibits filed with this form. (b) Reports on Form 8-K There were no reports filed on Form 8-K during the fourth quarter of 1999. (c) Exhibits and Exhibit Index Exhibit No. Description 3.1 Amended and Restated Articles of Incorporation of the Company dated February 28, 1997. (1) 3.2 Amended and Restated Bylaws of the Company as of March 4, 1999. (5) 4.1 Form of Common Stock Certificate. (1) 13 14 10.2* Michael Foods, Inc. 1987 Non-Qualified Stock Option Plan and Non-Qualified Stock Option Agreement (filed as Exhibit 10.16 to Michael Foods, Inc., a Delaware corporation's Registration Statement on Form S-1 Registration No. 33-12949 and incorporated herein by reference). (1) 10.3* Form of Michael Foods, Inc. Director Stock Option Agreement (filed as Exhibit 10.25 to Michael Foods, Inc., a Delaware corporation's Registration Statement on Form S-1 Registration No. 33-12949 and incorporated herein by reference). (1) 10.5 Loan Agreement and Promissory Note between Metropolitan Life Insurance Company and Michael Foods, Inc., dated December 1, 1989 (filed as Exhibit 10.43 to Michael Foods, Inc., a Delaware corporation's Annual Report on Form 10-K for the year ended December 31, 1989 and incorporated herein by reference). (1) 10.6* Amendment to Michael Foods, Inc. Incentive and Non-Qualified Stock Option Plans, dated November 21, 1989 (filed as Exhibit 4.6 to Michael Foods, Inc., a Delaware corporation's Registration Statement on Form S-8 effective November 21, 1989, Registration No. 33-31914 and incorporated herein by reference). (1) 10.7 License Agreement between Michael Foods, Inc. and North Carolina State University, dated November 28, 1989 (filed as Exhibit 10.56 to Michael Foods, Inc., a Delaware corporation's Annual Report on Form 10-K for the year ended December 31, 1990 and incorporated herein by reference). (1) 10.8 Amendment dated December 18, 1996 to License Agreement between Michael Foods, Inc., a Delaware corporation, and North Carolina State University, dated November 28, 1989. (1) 10.9* Severance Plan for Eligible Employees of Michael Foods, Inc. and its Subsidiaries (incorporated by reference from the Michael Foods, Inc., a Delaware corporation's Form 8, Amendment No. 1 to Report on Form 10-K for the year ended December 31, 1990). (1) 10.10 First Amendment to December 1, 1989 Loan Agreement and Promissory Note between Michael Foods, Inc. and Metropolitan Life Insurance Company, dated October 14, 1992 (filed as Exhibit 10.67 to Michael Foods, Inc., a Delaware corporation's Annual Report on Form 10-K for the year ended December 31, 1992 and incorporated herein by reference). (1) 10.11* Amendment to the Michael Foods, Inc. Non-Qualified Stock Option Plan (filed as Exhibit 4.7 to the Michael Foods, Inc., a Delaware corporation's Registration Statement on Form S-8 effective June 9, 1993 Registration No. 33-64078 and incorporated by reference). (1) 10.12* Stock Option Plan for Non-Employee Directors (filed as Exhibit 4.1 to the Michael Foods, Inc., a Delaware corporation's Registration Statement on Form S-8 effective June 9, 1993 Registration No. 33-64076 and incorporated herein by reference). (1) 10.13* Michael Foods, Inc. 1994 Executive Incentive Plan (filed as Exhibit 10.76 to Michael Foods, Inc., a Delaware corporation's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference). (1) 10.14* Michael Foods, Inc. 1994 Executive Performance Stock Award Plan (filed as Exhibit 10.77 to Michael Foods, Inc., a Delaware corporation's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference). (1) 14 15 10.16 Second Amendment to December 1, 1989 Loan Agreement and Promissory Note between Michael Foods, Inc. and Metropolitan Life Insurance Company, dated February 23, 1994 (filed as Exhibit 10.81 to Michael Foods, Inc., a Delaware corporation's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference). (1) 10.17* Michael Foods, Inc. Employee Stock Purchase Plan (filed as Exhibit 10.88 to Michael Foods, Inc., a Delaware corporation's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference). (1) 10.25* Michael Foods, Inc. 1994 Executive Incentive Plan, as Amended Effective January 1, 1996 (filed as Exhibit 10.98 to Michael Foods, Inc., a Delaware corporation's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated herein by reference). (1) 10.37* Form of Employment Agreement between Michael Foods, Inc., a Delaware corporation and Arthur J. Papetti dated February 26, 1997. (2) 10.39 Form of Loan Agreement dated as of February 26, 1997 between Michael Foods, Inc., a Delaware corporation and various Lenders with regard to $125,000,000 of 7.58% Senior Notes due February 26, 2009, including form of Note and Novation and Assumption Agreement. (1) 10.40 Form of Amendment Agreement dated as of February 26, 1997 between Michael Foods, Inc., a Delaware corporation and Metropolitan Life Insurance Company regarding up to $50,000,000 of 9.5% Senior Notes due December 1, 1999, including form of Note and Novation and Assumption Agreement. (1) 10.41 Form of Revolving Loan Agreement dated as of February 28, 1997 among Michael Foods, Inc., a Delaware corporation, the Listed Banks and Bank of America National Trust, including exhibits. (1) 10.42* Form of Employment Agreement between Michael Foods, Inc., a Delaware corporation and Stephen Papetti dated February 26, 1997. (2) 10.43* Form of Employment Agreement between Michael Foods, Inc., a Delaware corporation and Arthur N. Papetti dated February 26, 1997. (1) 10.44 Lease by and between ASA Company, as Landlord and Michael Foods, Inc., a Delaware corporation as Tenant dated February 26, 1997. (1) 10.45 Lease by and between Rechsteiner/Papetti, et al., as Landlord and Michael Foods, Inc., a Delaware corporation as Tenant dated February 26, 1997. (1) 10.46 Lease by and between Jersey Pride Urban Renewal, as Landlord and Michael Foods, Inc., a Delaware corporation as Tenant dated February 26, 1997. (1) 10.47 Lease by and between Papetti Holding Company, as Landlord and Michael Foods, Inc., a Delaware corporation as Tenant dated February 26, 1997. (1) 10.48 Lease by and between Papetti Holding Company, as Landlord and Michael Foods, Inc., a Delaware corporation as Tenant dated February 26, 1997. (1) 10.49 Lease by and between Papetti Holding Company, Jack Bernstein, Sherwood Weiser and Estate of David Levinson, as Landlord and Michael Foods, Inc., a Delaware corporation as Tenant dated February 26, 1997. (1) 10.50 Lease by and between A & A Urban Renewal, as Landlord and Michael Foods, Inc., a Delaware corporation as Tenant dated February 26, 1997. (1) 15 16 10.51* Resolution adopted by the Board of Directors on May 12, 1998, amending the Severance Plan for Eligible Employees of Michael Foods, Inc. and Subsidiaries and extending its termination date for one additional year. (5) 10.53* Amended and Restated Employment Agreement between Michael Foods, Inc., and Gregg A. Ostrander, dated December 31, 1997. (3) 10.54* Amended and Restated Employment Agreement between Michael Foods, Inc. and Jeffrey M. Shapiro, dated October 31, 1997. (3) 10.58* Amended and Restated Employment Agreement between Michael Foods, Inc. and John D. Reedy, dated October 31, 1997. (3) 10.60* Michael Foods, Inc. 1997 Stock Incentive Plan (4) 10.61 Sublicense Agreement between R & P Liquid Egg Technology Limited Partnership and Papetti's Hygrade Egg Products, Inc., dated December 31, 1993. (3) 10.62 Assignment and Acceptance Agreement between Bank of America National Trust & Savings Association and Summit Bank dated November 20, 1997. (3) 10.63 Amendment No. 3 to the Agreement and Plan of Reorganization By and Among Michael Foods, Inc. and Papetti's Hygrade Egg Products, Inc., et. al., dated February 25, 1998. (3) 10.64* Michael Foods, Inc. 1994 Executive Incentive Plan, as Amended Effective January 1, 1999. (5) 10.70* Severance Plan for Eligible Employees of Michael Foods, Inc. and its Subsidiaries, revised August 8, 1999. (6) 10.71* Employment Agreement between Michael Foods, Inc., and Gregg A. Ostrander, dated as of July 15, 1999. (6) 10.72* Employment Agreement between Michael Foods, Inc. and Jeffrey M. Shapiro, dated as of July 15, 1999. (6) 10.73* Employment Agreement between Michael Foods, Inc. and John D. Reedy, dated as of July 15, 1999. (6) 10.74* Employment Agreement between Michael Foods, Inc. and Bill L. Goucher, dated as of August 6, 1999. (6) 10.75* Employment Agreement between Michael Foods, Inc. and J. D. Clarkson, dated as of August 6, 1999. (6) 10.76* Employment Agreement between Michael Foods, Inc. and Norman A. Rodriguez, dated as of August 6, 1999. (6) 10.77 Amendment to the Shareholder Agreement By and Among Michael Foods, Inc. and Certain Shareholders and Selling Shareholders of Papetti's Hygrade Egg Products, Inc., et. al., dated as of February 25, 2000. (7) 13.1 1999 Annual Report to Shareholders (7) 21.1 Schedule of Michael Foods, Inc. Subsidiaries (7) 23.1 Consent of Independent Certified Public Accountants-- Grant Thornton LLP (7) 27.1 Financial Data Schedule (7) * Management Contract or Compensation Plan Arrangement (1) Incorporated by reference from the Company's Report on Form 8-K filed March 13, 1997. 16 17 (2) Incorporated by reference from the Company's Report on Form 10-K for the year ended December 31, 1996, filed March 28, 1997. (3) Incorporated by reference from the Company's Report on Form 10-K for the year ended December 31, 1997, filed March 31, 1998. (4) Incorporated by reference from the Company's Form S-8 filed effective March 25, 1997, Registration No. 333-23949. (5) Incorporated by reference from the Company's Report on Form 10-K for the year ended December 31, 1998, filed March 25, 1999. (6) Incorporated by reference from the Company's Report on Form 10-Q for the quarterly period ended September 30, 1999, filed November 15, 1999. (7) Filed as an exhibit to this Form 10-K. 17 18 (d) Schedule SCHEDULE II MICHAEL FOODS, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS - ----------------------------- ----------------- ----------------------------------- ---------------- ----------------- Col. A Col. B Col. C Col. D Col. E - ----------------------------- ----------------- ----------------------------------- ---------------- ----------------- Additions ----------------------------------- (2) (1) Charges to Balance at Charged to Other Balance at Beginning of Costs and Accounts- Deductions- End of Description Period Expenses Describe (a) Describe (b) Period - ----------------------------- ----------------- ----------------- ----------------- ---------------- ----------------- Allowance for Doubtful Accounts For the Year Ended December 31, 1997: $898,000 $749,000 $658,000 $557,000 $1,748,000 For the Year Ended December 31, 1998: $1,748,000 $861,000 $0 $484,000 $2,125,000 For the Year Ended December 31, 1999: $2,125,000 $504,000 $0 $578,000 $2,051,000 - --------------------------------------------------- (a) Balance acquired as it relates to the Papetti's acquisition (b) Write-offs of accounts deemed uncollectible - -------------------------------------------------------------------------------- Report of Independent Certified Public Accountants on Schedule Board of Directors Michael Foods, Inc. In connection with our audit of the consolidated financial statements of Michael Foods, Inc. and subsidiaries referred to in our report dated February 11, 2000, which is included in the Michael Foods, Inc. 1999 Annual Report to Shareholders and incorporated by reference in Part II of this form, we have also audited Schedule II for each of the three years in the period ended December 31, 1999. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein. /s/GRANT THORNTON LLP Minneapolis, Minnesota February 11, 2000 18 19 Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MICHAEL FOODS, INC. Date: March 29, 2000 By: /s/ Gregg A. Ostrander ---------------------- Gregg A. Ostrander (President and Chief Executive Officer) Date: March 29, 2000 By: /s/ John D. Reedy ----------------- John D. Reedy (Vice-President-Finance, Treasurer, Chief Financial Officer and Principal Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: /s/ Arvid C. Knudtson March 29, 2000 - --------------------- Arvid C. Knudtson (Chairman of the Board) /s/ Gregg A. Ostrander March 29, 2000 - ---------------------- Gregg A. Ostrander (Director, President & Chief Executive Officer) /s/ Maureen B. Bellantoni March 29, 2000 - ------------------------- Maureen B. Bellantoni (Director) /s/ Richard A. Coonrod March 29, 2000 - ---------------------- Richard A. Coonrod (Director) /s/ Daniel P. Dillon March 29, 2000 - -------------------- Daniel P. Dillon (Director) /s/ Jerome J. Jenko March 29, 2000 - ------------------- Jerome J. Jenko (Director) /s/ Joseph D. Marshburn March 29, 2000 - ----------------------- Joseph D. Marshburn (Director) /s/ Jeffrey J. Michael March 29, 2000 - ---------------------- Jeffrey J. Michael (Director) /s/ Margaret D. Moore March 29, 2000 - --------------------- Margaret D. Moore (Director) /s/ Arthur J. Papetti March 29, 2000 - --------------------- Arthur J. Papetti (Director) 19 20 /s/ Stephen T. Papetti March 29, 2000 - ---------------------- Stephen T. Papetti (Director) 20 21 EXHIBIT INDEX Exhibit No. 10.77 Amendment to the Shareholder Agreement By and Among Michael Foods, Inc. and Certain Shareholders and Selling Shareholders of Papetti's Hygrade Egg Products, Inc., et. al., dated as of February 25, 2000 13.1 1999 Annual Report to Shareholders 21.1 Schedule of Michael Foods, Inc. Subsidiaries 23.1 Consent of Independent Certified Public Accountants -- Grant Thornton LLP 27.1 Financial Data Schedule 21