MICHAEL FOODS INC /MN - 10-K Annual Report

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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, 2001
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Commission file number 333-63722
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MICHAEL FOODS, INC.
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(Exact name of registrant as specified in its charter)

Minnesota 41-0498850
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)

Suite 324, Signal Bank Building
5353 Wayzata Boulevard
Minneapolis, Minnesota 55416
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(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code (952) 546-1500
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Securities registered pursuant to Section 12(b) of the Act: None

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

Indicate by check mark 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 Registrant's common stock is not publicly traded.

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PART I

ITEM 1 - BUSINESS

FORWARD-LOOKING STATEMENTS

Certain items herein are "forward-looking statements." Forward-looking
statements include statements concerning our plans, objectives, goals,
strategies, future events, future sales or performance, capital expenditures,
financing needs, plans or intentions relating to acquisitions, our competitive
strengths and weaknesses, our business strategy and the trends we anticipate in
the industries and economies in which we operate and other information that is
not historical information and, in particular, appear under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." When used herein, the words "estimates," "expects," "anticipates,"
"projects," "plans," "intends," "believes" and variations of such words or
similar expressions are intended to identify forward-looking statements. All
forward-looking statements, including, without limitation, our examination of
historical operating trends, are based upon our current expectations and various
assumptions. Our expectations, beliefs and projections are expressed in good
faith, and we believe there is a reasonable basis for them, but there can be no
assurance that our expectations, beliefs and projections will be realized.

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

RECENT DEVELOPMENT

In April 2001, Michael Foods, Inc. was acquired by an investor group comprised
of a management group led by our Chairman, President and Chief Executive
Officer, affiliates of Jeffrey Michael, a director of the Company, and two
private equity investment firms through the merger of Michael Foods Acquisition
Corp. with and into Michael Foods, Inc. (the "Merger"). The "Predecessor" refers
to Michael Foods, Inc. prior to the Merger.

GENERAL

Michael Foods, Inc. and its subsidiaries (the "Company", "we", "us") is a
diversified producer and distributor of food products in four areas - egg
products, refrigerated distribution, dairy products, and potato products. We
believe, through our Egg Products Division, we are the largest producer of
processed egg products in the United States. The Refrigerated Distribution
Division distributes a broad line of refrigerated grocery products to retail
grocery outlets, including cheese, shell eggs, bagels, butter, margarine,
muffins, potato products, juice and ethnic foods. The Dairy Products Division
processes and distributes soft serve mix, ice cream mix, and extended shelf-life
ultrapasteurized milk, creamers and other specialty dairy products to domestic
fast food businesses and

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other foodservice outlets, 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 included elsewhere herein
(see Item 7).

Our 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 DIVISION

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. Collectively, the two
subsidiaries are also known as the Michael Foods Egg Products Company. We
believe 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 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)"), hardcooked and pre-cooked egg products. Other egg products include
frozen, liquid and dried egg whites, yolks and whole 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
our Refrigerated Distribution Division, which, in turn, distributes them
throughout its 30 state territory.

In 2001, 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 hardcooked and pre-cooked egg products, typically are not
significantly affected by Urner Barry quoted price levels. Such products
accounted for approximately 60% of the Division's 2001 sales. Prices for the
Division's other products, including frozen, short shelf-life liquid, certain
dried products and, particularly, shell eggs, are significantly affected by
frequently changing market levels as reported by Urner Barry.

In 2001, 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 an
increasing proportion of eggs purchased under grower contracts, the egg cost is
determined largely by the cost of feed, as the contracts are priced using a
formula based upon the underlying feed costs. 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

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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, generally 6-12 months. The former allows the Division to typically
realize a modest processing margin on such sales, even though there are notable
commodity influences on both the egg sourcing cost and the egg products pricing,
with each changing as frequently as daily. Shell eggs are essentially a
commodity and are sold based upon reported egg prices. Egg prices are
significantly influenced by modest shifts in supply and demand. Pricing of shell
eggs is also typically affected by seasonal demand related to increased
consumption during holiday periods.

The Division's principal egg processing plants are located in New Jersey,
Minnesota, Nebraska, Pennsylvania 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 14,000,000 producing hens, are located in Nebraska, Minnesota and
South Dakota, of which approximately 1,600,000 are housed in contract
facilities. Major laying facilities also maintain their own grain and feed
storage facilities. Further, the production of approximately 8,500,000 hens is
under long-term supply agreements, with an additional 17,500,000 hens under
shorter-term agreements. The Division also maintains facilities with
approximately 2,800,000 pullets located in Nebraska and Minnesota.

REFRIGERATED DISTRIBUTION DIVISION

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
58% of divisional annual sales. While we do not produce cheese, we operate 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 30
states primarily in the central United States. Retail locations carrying the
Division's products approximate 4,300 stores, though a majority are served via
customers' warehouses. In 2001, sales to the warehouse operations of SUPERVALU,
Inc., 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.

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DAIRY PRODUCTS DIVISION

The Dairy Products Division, comprised of Kohler Mix Specialties, Inc.
("Kohler"), Kohler Mix Specialties of Connecticut, Inc., Midwest Mix, Inc.,
M-Foods Dairy, LLC, and M-Foods Dairy TXCT, LLC, processes and sells soft serve
mix, ice cream mix, frozen yogurt mix, creamers, 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 that 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 350 customers, including branded ice cream
manufacturers, quick service restaurants, other foodservice outlets and
independent ice cream retailers. The Division's top five customers represented
approximately 61% of 2001 divisional sales volume. 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 specialty dairy products in recent
years, such as non-refrigerated dairy creamers and cartoned items, has somewhat
offset the impact on the Division's sales and earnings from this seasonality.

POTATO PRODUCTS DIVISION

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 2001,
approximately 63% of the Potato Products Division's net sales were to the
foodservice market, with the balance to the retail market.

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

SALES, MARKETING AND CUSTOMER SERVICE

Each of our 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, Papetti's, Kohler and Northern
Star, primarily for

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national and regional accounts, and is supported by a centralized order entry
and customer service staff. The consolidations of the historically distinct egg
products sales groups, and related customer service groups, were completed in
early 2001. A group of foodservice brokers is used by Michael Foods Sales to
supplement its internal sales efforts. Further, the Egg Products Division
utilizes a separate broker group for the retail market and maintains a small
sales group which handles certain industrial egg product sales. We have a
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 2001, Crystal Farms increased
its consumer support programs, with largely favorable sales volume results. The
Egg Products Division also has consumer support programs to support various of
its egg products sold in the retail market.

ACQUISITIONS

We have made acquisitions in prior years and anticipate that we will continue to
make acquisitions as part of our strategic plan. There were no acquisitions in
2001. In 2000, we acquired Ingredient Supply, LLC, a hardcooked egg products
processor located in Cokato, Minnesota. Ingredient Supply's annual sales were
approximately $10 million at the time of the acquisition.

CUSTOMERS

Our foodservice sales are primarily made under long-standing preferred supplier
relationships with a majority of our customers. Our customers include each of
the major broad-line foodservice distributors and most national restaurant
chains that serve breakfast. The major customers in each of the market channels
include leading foodservice distributors, such as U.S. Foodservice (18% of our
consolidated sales), Sysco (15%), national restaurant chains, such as Burger
King and International House of Pancakes, and major industrial ingredient
customers, such as Pillsbury and Unilever Bestfoods.

COMPETITION

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

Our 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, the egg products sector is less fragmented, as
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 Acre Farms, Inc. We believe our Egg Products
Division is among the lowest cost egg producers in the United States. We believe
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. We believe our largest
competitor in egg products is the Sunny Fresh Foods, Inc. subsidiary of Cargill,
Inc.

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Our Refrigerated Distribution Division competes with the refrigerated products
of other suppliers such as Beatrice Companies, Inc. (a subsidiary of ConAgra
Foods, 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.

We believe the Dairy Products Division provides a significant amount 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.

PROPRIETARY TECHNOLOGIES AND TRADEMARKS

We use a combination of patent, trademark and trade secrets laws to protect the
intellectual property for our products. We own proprietary patents, and we have
exclusive license agreements for several patents and technologies. In 1988, we
entered into an exclusive license agreement to use patented processes developed
and owned by North Carolina State University involving the ultra-pasteurization
of liquid eggs. The patents licensed to us under this agreement expire between
2006 and 2010. Our license to use these patents will continue until the
expiration of the patents. This patented process produces liquid eggs that are
salmonella and listeria-negative, as defined by federal law, and extend the
shelf-life of liquid eggs from less than two weeks to over ten weeks.

We also own an exclusive license to use a patented process, owned and developed
by the University of Missouri, to eliminate salmonella from shell eggs. This
patent is set to expire in 2016. Our license to use this patent will also
continue until the expiration of the patent. We currently use this technology
for processing in-shell pasteurized eggs sold through our refrigerated
distribution division. We also have acquired licenses to other patents and
technology from other third parties, including the University of Nebraska.

We believe that certain of our competitors infringe upon some of our patents and
the patents licensed to us. Along with North Carolina State University, we have
initiated litigation against several processors of competing liquid egg products
claiming infringement of the original and subsequent related process patents
licensed to us by North Carolina State University with respect to
ultra-pasteurized 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 one of the patents. In another action, the United States District
Court for the District of New Jersey found in 1992 and 1993 that Papetti's had
infringed certain of 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 1993, Nulaid Foods, Inc. sought a declaratory judgment that the
licensed patents are invalid. This action was subsequently settled and, in July
2000, Nulaid Foods conceded the validity and enforceability of the patents, as
well as their past

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infringement of the patents. Nulaid Foods is currently using the patented
process by operating under a sublicense agreement. In 1996, reissue and
reexamination proceedings were initiated by us and our competitors with the U.S.
Patent and Trademark Office, or PTO, seeking to determine the scope and validity
of some of the patents that we license from North Carolina State University. The
PTO ruled that the claims in the licensed patents are valid and in full force
and effect. In 2000, Sunny Fresh Foods, Inc., a division of Cargill, Inc., filed
an action seeking declaratory judgment that Sunny Fresh Foods does not infringe
upon the licensed patents and that the licensed patents are invalid. We have
filed a counter claim alleging that Sunny Fresh Foods has infringed the patents.
For more information, see Item 3--Legal Proceedings.

Although we actively pursue patent infringement litigation, we do not believe
that the expiration of these patents will have a material adverse affect on our
business or market share within these product segments because of our strong
market position combined with the fact that we believe our largest competitor is
currently infringing on these patents.

The Egg Products Division maintains numerous trademarks and/or trade names for
its products, including "Logan Valley," "Wakefield," "Sunny Side Up," "Michael
Foods," "Deep Chill," "MGW," "Simply Eggs Brand," "Better `n Eggs," "All
Whites," "Chef's Omelet Brand," "Express Eggs," "Quaker State Farms," and "Broke
N' Ready." Ultra-pasteurized liquid eggs are marketed using the "Easy Eggs" and
"Table Ready" trade names.

Within the Potato Products Division, Northern Star Co. markets its refrigerated
potato products to foodservice customers under a variety of brands, including
"Northern Star," "Farm Fresh" and "Quality Farms." The "Simply Potatoes" and
"Diner's Choice" brands are used for retail refrigerated products.

Within the Dairy Products Division, "Kohler" and "Midwest Mix, Inc." are the two
primary trade names.

Refrigerated Distribution Division products are marketed principally under the
"Crystal Farms" trade name.

GOVERNMENT REGULATION

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

Crystal Farms cheese and butter products and the Dairy Products Division'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.

A substantial portion of the egg production operations of our Egg Products
Division are located in the State of Nebraska. With certain exceptions, a
provision of the Nebraska constitution generally prohibits corporations from
engaging in farming or ranching in Nebraska. Although the constitutional
provision contains an exemption for agricultural land operated by a corporation
for the purpose of raising poultry, the Nebraska Attorney General

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has, in written opinions, taken the position that facilities devoted primarily
to the production of eggs do not fall within such exemption and therefore are
subject to the restrictions contained in the constitutional provision. We
believe that our egg production facilities in Nebraska are part of integrated
facilities for the production, processing and distribution of egg products, and
therefore, that any agricultural land presently owned by us in Nebraska is being
used for non-farming and non-ranching purposes.

The constitution empowers the Nebraska Attorney General, or if the Attorney
General fails to act, a Nebraska citizen, to obtain a court order to, among
other things, force a divestiture of land held in violation of this
constitutional provision. If land subject to such a court order is not divested
within a two-year period, the constitutional provision directs the court to
declare the land escheated, or forfeited, to the State of Nebraska. We are not
aware of any proceedings under this 70 year-old constitutional provision pending
or threatened against us or any other companies engaging in farming or ranching
activities in Nebraska. We believe that we have adequate contingency
arrangements in place in the event a determination is made that we engage in
farming and/or ranching activities proscribed by the Nebraska constitution.
Until the scope of such provision has been clarified by further judicial,
legislative, or executive action, there can be no assurance as to the effect, if
any, that it may have on our egg products division.

ENVIRONMENTAL REGULATION

We are subject to federal, state and local environmental regulations and
requirements, including those governing discharges to air and water, the
management of hazardous substances, the disposal of solid and hazardous wastes
and the remediation of contamination.

We use an environmental consulting firm to help us comply with environmental
requirements. In addition, a review was conducted by independent environmental
consultants in connection with the Merger, and, as a result, we believe we are
currently in material compliance with all environmental regulations and
requirements. Nonetheless, as is the case with any business, if we do not fully
comply with environmental regulations, or if a release of hazardous substances
occurs at or from one of our facilities, we may be subject to penalties and/or
held liable for the cost of remedying the condition.

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

We have made, and will continue to make, expenditures to maintain our compliance
with environmental requirements. We have upgraded the wastewater treatment
system at our Klingerstown, Pennsylvania facility and agreed to pay the city of
Lenox, Iowa the cost to construct and operate a wastewater treatment plant used
by our facility located there. Although our plants in Klingerstown and Lenox
have exceeded their permitted wastewater discharge levels in the past, we
believe that these expenditures will reduce the risk of future wastewater
violations at these facilities. In addition, we are updating our wastewater
treatment system at our egg production facility in Bloomfield, Nebraska. This
project should be completed in the fall of 2002. Assessments of our wastewater
treatment systems at the Egg Products Division's facility in Gaylord, Minnesota
and the Dairy Products Division's facility in White Bear Lake, Minnesota are
also underway. We may elect to upgrade the wastewater controls at these
facilities or we may be required to upgrade such

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controls at these or other facilities in the future. However, we do not
anticipate making any material capital expenditures for environmental controls
for the foreseeable future.

EMPLOYEES

At December 31, 2001, we had approximately 4,050 employees. Of this total, the
Egg Products Division employed approximately 2,640 full-time and 230 part-time
employees, with 22 of these employees represented by the Teamsters Union. The
Potato Products Division employed approximately 295 persons, approximately 185
of which were represented by the Bakery, Laundry, Allied Sales Drivers and
Warehousemen Union, which is affiliated with the Teamsters. The Dairy Products
Division employed approximately 265 people, approximately 85 of which were
represented by the Milk Drivers and Dairy Employees Union. The Refrigerated
Distribution Division employed approximately 500 employees, none of whom are
represented by a union. The Michael Foods corporate, sales, distribution and
customer service and information systems groups collectively employed
approximately 130 people at December 31, 2001.

EXECUTIVE OFFICERS OF THE REGISTRANT

See Item 10 appearing elsewhere herein.

ITEM 2 - PROPERTIES

FACILITIES

CORPORATE. We maintain leased space for our corporate headquarters, customer
service office, sales office and information services group in suburban
Minneapolis, Minnesota. Leased space within the same building houses the
headquarters, financial and administrative services staffs of the Egg
Products, Potato Products and Dairy Products divisions. We expect
to relocate all staff currently in this location to a new suburban Minneapolis
building during mid-2002 in order to enhance work flow and communications
among our foodservice businesses.

EGG PRODUCTS DIVISION. The following table summarizes information relating to
the primary facilities of our Egg Products Division:

The Egg Products Division also owns or leases, primarily for egg production
operations, approximately 1,600 acres of land in Nebraska and Minnesota.

POTATO PRODUCTS DIVISION. The Potato Products Division owns a processing plant
and land located in Minneapolis, Minnesota, consisting of approximately 175,000
square feet of production area. The division leases one building in North
Las Vegas, Nevada consisting of approximately 31,000 square feet.

DAIRY PRODUCTS DIVISION. The Dairy Products Division's facilities in White Bear
Lake, Minnesota, consist of three owned buildings, with the main plant measuring
approximately 95,000 square feet. It also leases a dairy plant in Sulphur
Springs, Texas, which is approximately 40,000 square feet, and a dairy plant in
Newington, Connecticut, which is approximately 70,000 square feet.

REFRIGERATED DISTRIBUTION DIVISION. The Refrigerated Distribution Division
leases administrative and sales offices in suburban Minneapolis and several
small warehouses across the United States. It owns a distribution center located
near LeSueur, Minnesota, which is approximately 33,000 square feet. The
refrigerated distribution 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.

The total annual base rent of the facilities described above is approximately
$7.7 million. The leases for these facilities have varying length terms ranging
from month-to-month to 2017. We believe that our owned and leased facilities,
together with budgeted capital projects in each of our four operating divisions,
are adequate to meet anticipated requirements for our current lines of business
for the foreseeable future.

ITEM 3 - LEGAL PROCEEDINGS

Four patents for ultrapasteurizing liquid eggs licensed to us by North Carolina
State University were involved in proceedings before the PTO. In 1996, an
examiner rejected certain claims under these patents as a result of challenges
from competitors. We and North Carolina State University appealed this rejection
to the PTO's Board of Patent Appeals and Interferences. In September 1999, the
PTO Board reversed the examiner's rejection of the claims made under the
patents. As a result of these proceedings, process claims of all four patents
continue to be valid and in full force and effect. Also, the fourth patent was
reissued in 2001 to include product claims.

In September 2000, Sunny Fresh Foods, Inc., a division of Cargill Inc., filed a
declaratory judgment action in the United States District Court for the District
of Minnesota requesting the adjudication of the unenforceability and invalidity
of those patents exclusively licensed to us by North Carolina State University.
We have filed a counter-claim against Sunny

11

Fresh Foods, claiming willful infringement by Sunny Fresh Foods of these
patents. This litigation is on-going and is expected to continue into early
2003.

Macartney Farms, a Canadian company that formerly distributed our egg products
to the Canadian market, has filed a complaint against us and our Canadian joint
venture Trilogy Egg Products, Inc., seeking damages asserting wrongful
termination of its alleged exclusive marketing and distribution rights of Easy
Eggs, intentional interference with economic relations, breach of fiduciary duty
and recoupment of monies invested for the benefit of Michael Foods. Macartney
also seeks an injunction against both Michael Foods and Trilogy from soliciting
Macartney's customers. The litigation, which is pending in the Ontario Superior
Court in Ottawa, is on-going and is expected to reach trial in the fall of 2002.

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

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

None.

PART II

ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

None. As a result of the Merger, our stock ceased to be publicly traded.

ITEM 6 - SELECTED FINANCIAL DATA

The following table sets forth selected consolidated historical financial
data with respect to the Company and the Predecessor. The data presented
below has been derived from the Company's and Predecessor's Consolidated
Financial Statements audited by Grant Thornton LLP, independent certified
public accountants. Due to the Merger, which was accounted for as a purchase,
different bases of accounting have been used to prepare the Company and
Predecessor Consolidated Financial Statements. The Merger has resulted in
additional interest expense for new debt incurred and higher depreciation and
amortization of fixed assets and other intangible assets recorded. The
accompanying Predecessor Balance Sheet and Statements of Operations data as
of and for the three months ended March 31, 2001, and for the years ended
December 31, 2000, 1999, 1998, and 1997 have been prepared from the
historical books and records of the Predecessor. Such data should be read in
conjunction with the Company's Consolidated Financial Statements and Notes
thereto included elsewhere herein and Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations.

12

ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

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

GENERAL

We are a diversified producer and distributor of specialty egg, potato and dairy
products to the foodservice, retail and industrial ingredient markets. We also
distribute refrigerated grocery items, primarily cheese and other dairy
products, to the retail grocery market in the central United States. The
following sets forth selected historical financial data with respect to the
Company and its subsidiaries, and the Predecessor. The data has been derived
from the Company's and the Predecessor's audited Consolidated Financial
Statements included elsewhere in this document. Our Merger, which was accounted
for as a purchase, has resulted in additional interest expense for new debt
incurred and higher depreciation and amortization of fixed assets and other
intangible assets recorded. It is suggested that readers combine 2001 three
month (Predecessor) and nine month

13

(Company) periods in order to compare full-year 2001 to full-year 2000.

RESULTS OF OPERATIONS

COMBINED RESULTS FOR THE YEAR ENDED DECEMBER 31, 2001 COMPARED TO PREDECESSOR'S
YEAR ENDED DECEMBER 31, 2000

NET SALES. Net sales for the year ended December 31, 2001 increased $80.7
million, or 7%, to $1,161.3 million from $1,080.6 million for the year ended
December 31, 2000. Over one-half of this increase was the result of a 31%
increase in net sales from the Dairy Products Division, with both volume growth
and higher dairy market pricing contributing to this growth. External net sales
growth of 9% and 10% was recorded by the Refrigerated Distribution and Potato
Products divisions. Refrigerated Distribution sales growth was roughly half from
unit sales growth and half from price inflation, particularly in the important
cheese category. Potato Products sales growth was primarily from increased unit
sales, with particularly strong growth seen in the retail category. Sales growth
in the Egg Products Division was minimal due to fairly stable volume and
pricing.

14

EGG PRODUCTS DIVISION SALES. Egg Products Division net sales for the year ended
December 31, 2001 increased $8.5 million, or 1%, to $645.9 million from $637.4
million for the year ended December 31, 2000. Sales growth for certain higher
value-added products, such as pre-cooked patties and omelets, egg substitutes
and hardcooked eggs, offset lower sales from commodity-sensitive lines such as
dried products. During 2001, shell egg prices declined by approximately 3% as
reported by Urner Barry, resulting in narrow margins for frozen, short-shelf
life liquid and dried egg products. As a result, we limited sales volumes for
frozen products, in particular, because of the adverse pricing and margin
environment. Sales of higher value-added egg products represented approximately
60% of the egg product division's sales in both 2001 and 2000.

POTATO PRODUCTS DIVISION SALES. Potato Products Division net sales for the year
ended December 31, 2001 increased $6.2 million, or 10%, to $66.9 million from
$60.7 million for the year ended December 31, 2000. This increase was mainly due
to a strong unit sales growth for retail refrigerated potato products, which
increased approximately 25% from 2000. Also, foodservice unit sales increased by
approximately 7%. Sales to new customers, growth in sales to existing customers,
marketing spending and new product introductions all contributed to the sales
increase.

DAIRY PRODUCTS DIVISION SALES. Dairy Products Division net sales for the year
ended December 31, 2001 increased by $44.5 million, or 31%, to $185.9 million
from $141.4 million for the year ended December 31, 2000. This increase was
mainly due to strong unit sales volumes for certain specialty cartoned items
contract packed for other dairies and notable growth in non-refrigerated creamer
sales. National dairy ingredient price increases during the year resulted in a
higher pricing environment for the products sold by the Division. Hence,
inflation was also a significant factor in the higher divisional external net
sales in 2001. Sales in 2000 were adversely impacted as a result of volume
declines and operating inefficiencies associated with the aftermath of a 1999
recall of cartoned milk.

REFRIGERATED DISTRIBUTION DIVISION SALES. Refrigerated Distribution Division net
sales for the year ended December 31, 2001 increased $21.6 million, or 9%, to
$262.7 million from $241.1 million for the year ended December 31, 2000. This
increase was mainly due to unit sales growth in cheese, margarine and bagels.
Cheese sales growth was somewhat constrained, and butter sales declined, as a
result of high retail price points during much of the year due to a high
national butterfat market. Divisional volume growth in 2001 resulted from sales
to new customers, particularly in new territories, promotional activity and
increased consumer advertising. Inflation also contributed to divisional sales
growth due to higher dairy prices.

GROSS PROFIT. Gross profit for the year ended December 31, 2001 increased $8.1
million, or approximately 4%, to $199.6 million from $191.5 million for the
Predecessor in the year ended December 31, 2000. The combined gross profit
margin was 17.2% of net sales for 2001, as compared to 17.7% of net sales for
the Predecessor in 2000. The decrease in gross profit margin was mainly due to
decreased gross profit from frozen egg products, resulting from market price
pressures, and reduced gross margins from cheese and butter sales due to the
significant rise in product costs in 2001, which outpaced our ability to adjust
our selling prices for much of the year.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the year ended December 31, 2001 increased $10.2
million, or 10%, to $114.9 million from $104.7 million for the Predecessor for
the year ended December 31, 2000. Selling, general and administrative expenses
increased as a percent of sales in 2001, as compared to Predecessor results in
2000. Higher expenses were incurred in

15

2001 to support retail and foodservice marketing efforts and broadened sales
efforts, and to establish a centralized purchasing department. Additionally,
operating expenses reflected the impact of incremental amortization related to
the Merger, of approximately $3.0 million, which resulted in the slightly higher
expense as a percentage of sales. Separate from selling, general and
administrative expenses in 2001, the Predecessor recorded non-recurring expenses
related to the Merger for financial, legal, advisory and regulatory filing fees.
These expenses of approximately $11.1 million are reflected in the Predecessor's
Consolidated Statements of Earnings as transaction expenses.

OPERATING PROFIT. Operating profit for the year ended December 31, 2001
decreased $13.2 million, or approximately 15%, to $73.6 million from $86.8
million for the Predecessor for the year ended December 31, 2000. This decrease
was mainly due to the Merger transaction expenses incurred by the Predecessor in
the first three months of 2001, as discussed above.

EGG PRODUCTS DIVISION OPERATING PROFIT. Egg Products Division operating
profit for the year ended December 31, 2001 decreased $6.1 million, or 9%, to
$61.6 million from $67.7 million for the year ended December 31, 2000.
Operating profit for higher value-added egg products decreased by $5.5
million, or 8%, from 2000, while operating profits from other egg products
remained relatively flat. The decrease in operating margins was mainly due to
an approximately $4.0 million increase in amortization of goodwill and
increased depreciation of approximately $6.2 million as a result of asset
appraisals related to the Merger. The 2001 operating profit for the Division
was also affected by an approximately $1.6 million loss from the Division's
termination of a European joint venture. A break-even return was recorded
from the same joint venture in 2000.

POTATO PRODUCTS DIVISION OPERATING PROFIT. Potato Products Division operating
profit for the year ended December 31, 2001 increased $0.7 million, or 9%, to
$8.3 million from $7.6 million for the year ended December 31, 2000. This
increase reflected benefits from volume growth, particularly from the more
profitable retail segment, and continuing improvements in plant operations.

DAIRY PRODUCTS DIVISION OPERATING PROFIT. Dairy Products Division operating
profit for the year ended December 31, 2001 increased significantly, up $10.5
million to $11.8 million from $1.3 million for the year ended December 31,
2000. Divisional operating profit increased substantially as a result of
strong unit sales growth, particularly from specialty items such as
non-refrigerated creamers, and improved plant operating costs. Operating
profits were also favorably impacted by a $3.2 million final insurance
settlement payment related to a 1999 recall and reduced amortization expense
of $1.2 million resulting from the appraisal of a non-compete agreement due
to the Merger. Divisional operating profitability was depressed in 2000 due
to the loss of a major industrial customer, increased bad debt expense
resulting from a foodservice distributor's bankruptcy filing, higher overhead
expenses and above average operating expenses as a result of a 1999 product
recall.

REFRIGERATED DISTRIBUTION DIVISION OPERATING PROFIT. Refrigerated Distribution
Division operating profit for the year ended December 31, 2001 decreased $7.4
million, or 46%, to $8.6 million from $16.0 million for the year ended December
31, 2000. Profit margins of key lines, such as cheese and butter, were depressed
due to a rapid and sustained increase in dairy market-based ingredient costs
through much of the year, without a comparable increase in retail selling
prices. These market conditions were in sharp contrast to those which prevailed
in 2000.

16

PREDECESSOR: YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31,
1999

NET SALES. Net sales for the year ended December 31, 2000 increased $27.3
million, or 3%, to $1,080.6 million from $1,053.3 million for the year ended
December 31, 1999. This increase was primarily attributable to an increase in
net sales from the Egg Products Division of $16.7 million and an increase in net
sales from the Refrigerated Distribution Division of $10.8 million.

EGG PRODUCTS DIVISION SALES. Egg Products Division net sales for the year ended
December 31, 2000 increased $16.7 million, or 3%, to $637.4 million from $620.7
million for the year ended December 31, 1999. The increase was primarily
attributable to a 7% unit sales growth for all higher value-added products, such
as extended shelf-life liquid, pre-cooked, hard cooked and egg substitutes. This
sales growth more than offset price declines on certain products, including
frozen and dried eggs. During 2000, shell egg prices dropped to a 15 year low,
which for a variety of reasons (most notably supply and demand imbalances),
resulted in narrow margins for frozen, short-shelf life liquid and dried eggs.
The Predecessor limited sales volumes for these products because of the adverse
pricing environment. Sales of higher value-added egg products represented
approximately 60% of the egg product division's sales in 2000, up from 58% in
1999.

POTATO PRODUCTS DIVISION SALES. Potato Products Division net sales for the year
ended December 31, 2000 increased $3.3 million, or 6%, to $60.7 million from
$57.4 million for the year ended December 31, 1999. This increase was primarily
attributable to a strong unit sales growth for retail refrigerated potato
products, which increased 12% from 1999. Sales to new customers, growth in sales
to existing customers and new product introductions all contributed to the
increase in sales as well.

DAIRY PRODUCTS DIVISION SALES. Dairy Products Division net sales for the year
ended December 31, 2000 decreased by $3.5 million, or 2%, to $141.4 million from
$144.9 million for the year ended December 31, 1999. This decrease was primarily
attributable to lower unit sales volumes for certain packaged mixes and the loss
of its industrial ingredient customer in late 1999, as a result of problems
related to a product recall which accounted for $15 million of our sales in
1999. These declines were offset by increased volumes as a result of the
acquisition of a Connecticut dairy facility in May 1999, which expanded the
division' geographic coverage, continued growth in non-refrigerated dairy
creamers as a result of product line extensions and customer additions and a
recovery in cartoned specialty products, one year after the 1999 recall. In
early 1999, the Division recalled milk carton products which may have been
contaminated. Sales in 2000 were adversely impacted as a result of volume
declines and operating inefficiencies associated with the recall. In response,
the Division upgraded its facilities and equipment, implemented improved quality
control, testing and operating procedures and added new senior management.

REFRIGERATED DISTRIBUTION DIVISION SALES. Refrigerated Distribution Division net
sales for the year ended December 31, 2000 increased $10.8 million, or 5%, to
$241.1 million from $230.3 million for the year ended December 31, 1999. This
increase was primarily attributable to strong unit sales growth in cheese, which
increased 11% from 1999, and butter, which increased 15% from 1999. Strong
volume growth resulted from sales to new customers, particularly in new
territories, promotional activity and increased consumer advertising.

GROSS PROFIT. Gross profit for the year ended December 31, 2000 decreased $1.5
million, or approximately 1%, to $191.5 million from $193.0 million for the year
ended December

17

31, 1999. The gross profit margin was 17.7% of net sales for 2000, as compared
to 18.3% of net sales for 1999. The decrease in gross profit was mainly
attributable to a $14.9 million decrease in gross profit from lower value-added
egg products resulting from a decrease in margins, as discussed above, and $0.8
million from the loss of the industrial dairy mix customer in late 1999 as a
result of problems related to the product recall, partially offset by increased
gross profit from our higher value-added egg products, refrigerated case items
and specialty potato products.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the year ended December 31, 2000 decreased $2.0
million, or 2%, to $104.7 million from $106.7 million for the year ended
December 31, 1999. Selling, general and administrative expenses declined as a
percent of sales in 2000, as compared to the results in 1999. Expenses
decreased due to reductions in costs associated with an information systems
upgrade project, the majority of which was completed in the third quarter of
2000, as compared to peak expense levels on this project in 1999 and reduced
payments under the executive incentive plan from 1999 levels. The Predecessor
also benefited from effective expense controls in other areas of the business
and the favorable impact of reduced egg products royalty payments arising
from a renegotiation of these payments in exchange for the assumption by us
of certain administrative expenses, including a portion of the expenses
related to litigation or other disputes in connection with some of the
patents that we license. These benefits more than offset increases in bad
debt expense resulting from a foodservice distributor's bankruptcy filing and
additional marketing efforts.

OPERATING PROFIT. Operating profit for the year ended December 31, 2000
increased $0.5 million, or approximately 1%, to $86.8 million from $86.3 million
for the year ended December 31, 1999. This increase was mainly due to increased
operating profits in the Potato Products and Refrigerated Distribution
Divisions, which were partially offset by a decline in operating profits of the
Egg Products and Dairy Products divisions.

EGG PRODUCTS DIVISION OPERATING PROFIT. Egg Products Division operating profit
for the year ended December 31, 2000 decreased $5.8 million, or 8%, to $67.7
million from $73.5 million for the year ended December 31, 1999. Operating
profit for higher value-added egg products increased by $6.2 million, or 10%,
from 1999, while operating profit from other egg products declined by 98% to
approximately break-even levels. Operating profits for our industrial ingredient
egg products declined by $14.0 million in 2000 as a result of a decrease in
margins. The operating profit for the entire Egg Products Division was impacted
by a $4.6 million increase in depreciation as a result of substantial capital
expenditures made throughout the Division in 1999.

POTATO PRODUCTS DIVISION OPERATING PROFIT. Potato Products Division operating
profit for the year ended December 31, 2000 increased $0.9 million, or 13%, to
$7.7 million from $6.8 million for the year ended December 31, 1999. This
increase reflected benefits from volume growth and continuing improvements in
plant operations, which were partially offset by increased marketing spending.

DAIRY PRODUCTS DIVISION OPERATING PROFIT. Dairy Products Division operating
profit for the year ended December 31, 2000 decreased $2.5 million, or 65%, to
$1.3 million from $3.8 million for the year ended December 31, 1999. Divisional
operating profit declined in 2000 as a result of the loss of its major
industrial customer, increased bad debt expense resulting from a foodservice
distributor's bankruptcy filing, higher overhead expenses, continued above
average operating expenses as a result of the 1999 product recall and increased
amortization related to the acquisition of a dairy facility in Connecticut.

18

REFRIGERATED DISTRIBUTION DIVISION OPERATING PROFIT. Refrigerated Distribution
Division operating profit for the year ended December 31, 2000 increased $5.3
million, or 50%, to $16.0 million from $10.7 million for the year ended December
31, 1999. Strong unit sales growth, along with a reduction in cheese supply
costs without a related reduction in selling prices, resulted in increases in
margins during 2000.

SEASONALITY AND INFLATION

Consolidated quarterly operating results are affected by the seasonality of our
net sales and operating profits. Specifically, shell egg prices typically rise
seasonally in the first and fourth quarters of the year due to increased demand
during holiday periods. Consequently, net sales in the Egg Products Division
increase in the fourth quarter. Generally, the Refrigerated Distribution
Division has higher net sales and operating profits in the fourth quarter,
coinciding with incremental consumer demand during the holiday season. Net sales
and operating profits from the Dairy Products Division typically are
significantly higher in the second and third quarters due to increased
consumption of ice cream products during the summer months. Operating profits
from the Potato Products Division are less seasonal, but tend to be higher in
the second half of the year coinciding with the potato harvest. In recent years,
other than fluctuations in raw material costs, largely related to supply and
demand variances, inflation has not been a significant factor in our operations.
Inflation is not expected to have a significant impact on the business,
financial condition or results of operations since we can generally offset the
impact of inflation through a combination of productivity gains and price
increases.

LIQUIDITY AND CAPITAL RESOURCES

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

Cash flow provided by operating activities was $114.8 million for the year ended
December 31, 2001, combining Company and Predecessor results, compared to $69.1
million and $107.7 million for the years ended December 31, 2000, and 1999,
respectively, for the Predecessor. The increase in cash flow provided by
operating activities from 2000 to 2001 was due principally to increased
depreciation and amortization, and reduced working capital. The decrease in the
Predecessor's cash flow provided by operating activities from 1999 to 2000 was
due principally to an increase in working capital.

19

As a result of the Merger, we incurred approximately $580 million of long-term
debt, including $380 million of borrowings under our senior credit agreement and
$200 million of indebtedness through the issuance of 11.75% senior subordinated
notes due 2011. Our total annual interest expenses related to the term loans
under the credit agreement and the notes are expected to be in excess of $50
million in 2002. In addition, the aggregate maturities of long-term debt, for
the years subsequent to December 31, 2001, are as follows:

2002 $ 12,962,000
2003 22,019,000
2004 17,949,000
2005 15,371,000
2006 23,664,000
2007 and thereafter 461,129,000
-------------
$553,094,000
=============

We have a credit agreement with various lenders, including commercial banks,
other financial institutions and investment groups, which expires in 2007 and
2008 and provides credit facilities which originally provided $470 million.
Within these credit facilities there is a $100 million revolving line of
credit. As of December 31, 2001, approximately $347.7 million was outstanding
under the credit agreement, inclusive of $5 million under the revolving line
of credit. The weighted average interest rate for our borrowings under the
credit agreement was 6.5% at December 31, 2001. Given our business trends and
cash flow forecast, we do not anticipate a significant use of the revolving
line of credit during 2002. However, it is possible that one or more
acquisitions could arise, which could result in much of the revolving line of
credit being utilized at some point.

The credit agreement contains various restrictive covenants. It prohibits us
from prepaying other indebtedness, including the notes, and it requires us
to maintain specified financial ratios, such as a minimum ratio of EBITDA to
interest expense, a minimum fixed charge coverage ratio, a maximum ratio of
senior debt to EBITDA and a maximum ratio of total debt to EBITDA, and satisfy
other financial condition tests including limitations on capital expenditures.
In addition, the credit agreement prohibits us from declaring or paying any
dividends and prohibits us from making any payments with respect to the notes if
we fail to perform our obligations under, or fail to meet the conditions of, the
credit agreement or if payment creates a default under the credit agreement.

The indenture governing the subordinated notes, among other things: (i)
restricts our ability and the ability of our subsidiaries to incur additional
indebtedness, issue shares of preferred stock, incur liens, pay dividends or
make certain other restricted payments and enter into certain transactions with
affiliates; (ii) prohibits certain restrictions on the ability of certain of our
subsidiaries to pay dividends or make certain payments to us; and (iii) places
restrictions on our ability and the ability of our subsidiaries to merge or
consolidate with any other person or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of our assets. The indenture
related to the notes and the credit agreement also contain various covenants
which will limit our discretion in the operation of our business. We were in
compliance with all of the covenants in the indenture and the credit agreement
as of December 31, 2001.

20

Our ability to make payments on and to refinance our debt, including the
subordinated notes, and to fund planned capital expenditures will depend on our
ability to generate sufficient cash in the future. This, to some extent, is
subject to general economic, financial, competitive and other factors that are
beyond our control. We believe that, based on current levels of operations, we
will be able to meet our debt service obligations when due. Significant
assumptions underlie this belief, including, among other things, that we will
continue to be successful in implementing our business strategy and that there
will be no material adverse developments in our business, liquidity or capital
requirements. If our future cash flows from operations and other capital
resources are insufficient to pay our obligations as they mature or to fund our
liquidity needs, we may be forced to reduce or delay our business activities and
capital expenditures, sell assets, obtain additional debt or equity capital or
restructure or refinance all or a portion of our debt, including the notes, on
or before maturity. We cannot assure you that we would be able to accomplish any
of these alternatives on a timely basis or on satisfactory terms, if at all. In
addition, the terms of our existing and future indebtedness, including the notes
and our new credit agreement, may limit our ability to pursue any of these
alternatives.

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

CAPITAL SPENDING

The Company and Predecessor invested approximately $34 million in capital
expenditures during the year ended December 31, 2001, approximately $37 million
in 2000 and approximately $74 million in 1999. Capital expenditures each year
mainly related to expanding capacity for value-added products, especially in the
egg and dairy products divisions, to expand warehouse space for all of our
divisions, and the implementation of an enterprise resource planning software
package. Also the Predecessor purchased substantially all of the assets of
Ingredient Supply LLC, a hardcooked egg products processor for approximately $2
million and acquired certain assets of a dairy products facility in Connecticut
for approximately $5.7 million. The Predecessor also invested approximately $10
million in three foreign egg products joint ventures. Capital expenditures in
2001, 2000 and 1999 were funded from cash flow from operations and borrowings
under credit facilities. We plan to spend approximately $44 million in total
capital expenditures for 2002, which will be used to maintain existing
production facilities, to expand production capacity for value-added products,
such as specialty dairy products, and to update computers. This spending will be
funded from operating cash flow and available capacity under the revolving line
of credit agreement.

DEBT GUARANTEES

We have guaranteed the repayment of certain industrial revenue bonds used for
the expansion of the wastewater treatment facilities of several
municipalities where we have food processing facilities. The repayment of
these bonds is funded through the wastewater treatment charges paid by the
Company. However, should those charges not be sufficient to pay the bond
payments as they become due, we have agreed to pay any shortfall. The
remaining principal balance of these bonds at December 31, 2001 was
approximately $6,900,000.

21

INSURANCE

In general, our insurance costs have increased over the past two years. The
insurance industry trends toward significantly higher premiums were accelerated
by global geo-political events in the fall of 2001. As a result, we anticipate
our 2002 property and casualty insurance premiums will rise by approximately 70%
from 2001 levels, with further premium increases highly likely in 2003. We have
also experienced, and expect to continue to see, rising premiums for the
Company's portion of health and dental insurance benefits offered to our
employees.

MARKET RISK

COMMODITY HEDGING

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

The primary raw materials used in the production of eggs are corn and soybean
meal. We purchase these materials to feed our approximately 14 million hens,
which produce approximately 35% of our annual egg requirements. Shell and
liquid eggs are purchased from third-party suppliers and in the spot market
for the remainder of the Egg Products Division's needs. Eggs, corn and soybean
meal are commodities that are subject to significant price fluctuations due
to market conditions which, in certain circumstances, can adversely affect
the results of operations.

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

- We hedge a significant percentage of our grain commodity
requirements for both internal egg production and third-party egg
procurement contracts that are priced based on grain prices,
which collectively account for approximately 52% of our egg
requirements. This activity protects against unexpected increases
in grain prices and provides predictability with respect to a
portion of future raw materials costs. Hedging can diminish the
opportunity to benefit from the improved margins that would
result from an unanticipated decline in grain prices. The degree
to which we are hedged varies based on our expectation of future
commodity prices.

- We seek to align our procurement and sales volumes by matching
the percentage of variable pricing contracts with our customers
and the percentage of raw materials procured on a variable basis.
This matching of our variable priced procurement contracts with
that of variable priced sales contracts provides us with a
natural hedge during times of grain and egg market volatility. As
part of this effort, we are attempting to transition customers to
variable pricing contracts that are priced off the same index

22

used to purchase shell and liquid eggs. These efforts have
generally been successful over the past two years.

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

- We are continuing to transition customers from lower value-added
egg products to higher margin, higher value-added specialty
products. These products are less sensitive to fluctuations in
underlying commodity prices because the raw material component is
a smaller percentage of total cost and we generally have the
ability to pass through certain cost increases related to our
higher value-added egg products to customers. This transition to
higher value-added specialty products has taken place gradually
over the last 4-5 years. These products represented approximately
60% of our egg products sales in 2001, up from approximately 52%
in 1997.

The following table is a sensitivity analysis that estimates our exposure to
market risk associated with corn and soybean meal futures contracts. The
notional value of commodity positions represents the notional value of the corn
and soybean meal futures contracts for the year ended December 31, 2001. Market
risk is estimated as the potential loss in fair value resulting from a
hypothetical 10% adverse change in commodity prices (amounts in thousands).

During 2001, we began entering into futures contracts to cover a portion of our
estimated cheese procurement needs. At December 31, 2001, the net fair value of
such contracts was approximately $25.7 million. These contracts expire at
various times through September 2002 and cover approximately 35% of our
estimated requirements during that period. The potential loss in fair value of
these contracts resulting from a 10% adverse change in the underlying commodity
prices would be approximately $2.6 million.

Additionally, we hedge a portion of our natural gas production requirements
through the use of futures contracts. At December 31, 2001, the net fair value
of such contracts was approximately $4.6 million. These contracts expire at
various times through March 2003 and cover varying percentages of our estimated
usage requirements during that period, up to as much a 90% in certain periods.
The potential loss in fair value of these contracts

23

resulting from a 10% adverse change in the underlying commodity prices would be
approximately $0.5 million.

INTEREST RATES

Due to our Merger, we have fixed rate debt of $200 million, which we believe has
a fair value of approximately the same amount as of the end of 2001. The market
risk related to this fixed rate debt, which represents the impact on the fair
value from a hypothetical 100 basis point change in interest rates, is $2
million. The remainder of our approximately $350 million of debt obligations
carry a variable rate of interest. Therefore, the interest paid on those
obligations floats with market changes in interest rates. As part of our risk
management strategy, we have entered into interest swap arrangements that
correspond with the interest payment terms on $215 million borrowed under the
variable portion of our credit agreement. As such, the market risk related to
these interest rate swaps using the same assumption as above would be $2.15
million.

ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Pursuant to General Instruction G(2), information is incorporated by reference
to Item 7 -Management's Discussion and Analysis of Financial Condition and
Results of Operations, Market Risk above.

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements and related notes and schedules required
by this Item are set forth in Part IV, Item 14 herein. Supplementary unaudited
consolidated quarterly financial data follows, in thousands:

Per share information has not been included in this table because our stock
ceased to be publicly traded as a result of the Merger.

ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

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PART III

ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Michael Foods, Inc. is a wholly owned subsidiary of M-Foods Holdings, Inc., a
corporation owned by M-Foods Investors, LLC, whose members include affiliates of
Vestar Capital Partners and Goldner Hawn Morrison & Johnson, members of our
senior management and affiliates of the Michael family. Each member of the
management committee of M-Foods Investors is also a director of Michael Foods.
For more information, see Item 13 - Certain Relationships and Related
Transactions.

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

(1) Members of our Audit Committee
(2) Members of our Compensation Committee

GREGG A. OSTRANDER is our President and Chief Executive Officer and has held
these positions since 1994. Mr. Ostrander has also been Chairman since 2001. Mr.
Ostrander had been a director of the Predecessor beginning in 1994. In 1993, Mr.
Ostrander served as the Predecessor's Chief Operating Officer. Mr. Ostrander is
also a director of Arctic Cat Inc.

JOHN D. REEDY is our Executive Vice President, Chief Financial Officer and
Treasurer and has held these positions since 2000. From 1988 to 2000, Mr. Reedy
was the Predecessor's Vice President--Finance and Chief Financial Officer, and
he has been Predecessor and Company Treasurer since 1990.

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MARK D. WITMER is our Assistant Treasurer and Secretary. He had held the former
Predecessor position since 1995 and the latter Company position since 2001. Mr.
Witmer joined the Predecessor as the Director of Corporate Communications in
1989.

JAMES D. CLARKSON is President of the Potato Products, Dairy Products and
Refrigerated Distribution divisions, positions he has held since 1995, 2000 and
early 2002, respectively. Mr. Clarkson joined the Predecessor in 1994 as Vice
President and General Manager of Crystal Farms.

BILL L. GOUCHER is the President of the Egg Products Division, a position he has
held since 2000. He has also been President of Waldbaum since joining the
Predecessor in 1993.

BRADLEY L. COOK is Executive Vice President and Chief Financial Officer of our
Egg Products Division. He has held this position, and the same position in the
M. G. Waldbaum Company subsidiary, since 1992.

MAX R. HOFFMANN is the Chief Financial Officer for our Potato Products, Dairy
Products and Refrigerated Distribution divisions. He has held the Potato
Products position since 1995, the Dairy Products position since 2000, and the
Refrigerated Distribution position since early 2002. He previously served as
Controller of the Refrigerated Distribution Division from 1993 to 1995.

JAMES MOHR is our Vice President--Supply Chain Logistics, a position he has held
with the Predecessor, and now the Company, since 1996.

HAROLD D. (DEAN) SPRINKLE is our Executive Vice President--Sales, a position he
has held with the Predecessor, and now the Company, since 1999. Mr. Sprinkle
joined the Predecessor in 1989 and has held various positions, including Vice
President of Foodservice Sales, National Accounts and U.S. Business Development.

J. CHRISTOPHER HENDERSON has been a director and a member of the management
committee of M-Foods Investors since 2001. Mr. Henderson is a Managing Director
of Vestar Capital Partners. Prior to joining Vestar Capital Partners in 1993,
Mr. Henderson was a member of the Mergers and Acquisitions group at The First
Boston Corporation. Mr. Henderson is also a director of St. John Knits
International, Incorporated.

JEROME J. JENKO has been a director and a member of the management committee of
M-Foods Investors since 2001. Mr. Jenko had been a director of the Predecessor
beginning in 1998. He has been Chief Executive Officer of Jenko & Associates,
and Senior Advisor--Goldsmith, Agio, Helms and Company, an investment banking
firm, since 1997. Mr. Jenko served as Senior Vice President, General Counsel and
Secretary of The Pillsbury Company from 1989 to 1997.

JAMES P. KELLEY has been a director and a member of the management committee of
M-Foods Investors since 2001. Mr. Kelley is a Managing Director of Vestar
Capital Partners and was a founding partner of Vestar Capital Partners in 1988.
Mr. Kelley is a director of Consolidated Container Company LLC, St. John Knits
International, Incorporated and Westinghouse Air Brake Technologies Corporation.

LEONARD LIEBERMAN has been a director and a member of the management
committee of M-Foods Investors since 2001. Since 1988, Mr. Lieberman has
served as a consultant to Vestar Capital Partners and its affiliates.
Currently, Mr. Lieberman is a director of Sonic Corporation, Consolidated
Container Company LLC, Nice Pak Products, Inc. and Sheridan Healthcare, Inc.

26

JEFFREY J. MICHAEL has been a director and a member of the management
committee of M-Foods Investors since 2001. Mr. Michael had been a director of
the Predecessor beginning in 1990. Mr. Michael is President, Chief Executive
Officer and director of Corstar Holdings, Inc., a holding company owning
businesses engaged in voice and data connectivity and networking products and
services. Mr Michael is a director of CorVel Corporation. Mr. Michael has
held these positions since 1997.

JOHN L. MORRISON has been director and a member of the management committee of
M-Foods Investors since 2001. Mr. Morrison is a Managing Director of Goldner
Hawn Johnson & Morrison, a position he has held since 1989. Mr. Morrison is a
director of Claire-Sprayway, Inc., Woodcraft Industries, Inc., Havco Wood
Products, Inc., American Engineered Components, Inc. and Andersen Windows
Corporation.

KEVIN A. MUNDT has been a director and a member of the management committee
of M-Foods Investors since 2001. Mr. Mundt is Vice President, a member of the
Board of Directors and head of the Retail and Consumer and Financial Services
practices of Mercer Management Consulting. Since 1982, Mr. Mundt has served
as a consultant to multinational corporations, working for Corporate
Decisions, Inc. until its merger into Mercer Management Consulting. Mr. Mundt
is a member of the board of directors of Remington Products Company, L.L.C.,
and Telephone and Data Systems.

ITEM 11 - EXECUTIVE COMPENSATION

The following table sets forth information concerning the compensation of our
chief executive officer and each of our five, inclusive of a retired executive,
most highly compensated executive officers during each of the last three fiscal
years.

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SUMMARY COMPENSATION TABLE

- ----------

(1) Mr. Rodriguez has announced his retirement as of April 1, 2002 and Mr.
Clarkson was named President of the Refrigerated Distribution Division as
of February 2002.

(2) Mr. Shapiro retired as of May 1, 2001.

(3) There were no Predecessor stock option awards made to named executives in
2001. Pursuant to the Predecessor's 1994 Executive Incentive Plan, as
amended, stock option awards were made to certain executive officers in
February 2000 based upon 1999 performance. The number of shares of common
stock purchasable under such option awards made to named executive officers
were: Mr. Ostrander--4,500 shares; Mr. Reedy--3,000 shares; Mr.
Goucher--3,000 shares; Mr. Clarkson - 3,000 shares; Mr. Rodriguez--3,000
shares; and Mr. Shapiro--3,000 shares. Incentive Plan option grants are
reflected in year earned, rather than year of grant. In addition, the
following stock option grants were made under the discretionary authority
of the Predecessor's compensation committee in the year indicated: Mr.
Ostrander--75,000 in 2000 and 40,000 in 1999; Mr. Reedy--23,000 in 2000 and
13,200 in 1999; Mr. Goucher--30,000 in 2000 and 6,800 in 1999; Mr. Clarkson
- 40,000 in 2000 and 2,500 in 1999; and Mr. Rodriguez--12,000 in 2000 and
4,700 in 1999; and Mr. Shapiro--19,000 in 2000 and 11,000 in 1999.

(4) Reflects the cash value of shares awarded under the Predecessor's 1994
Executive Incentive Plan, as amended, which vested upon the Merger
affecting a change in control. These Predecessor share awards had been
provisionally earned in previous years, but were not vested prior to the
Merger. Upon the Merger, the share awards were converted to cash based upon
the Merger price of $30.10 per share.

(5) Reflects the value of contributions made by Michael Foods under the
retirement savings plan and the value of life insurance premiums paid by
us. For Mr. Shapiro, also includes severance compensation of $695,107 paid
under the change in control provisions of his employment contract.

Note: All the above amounts exclude stock options granted and any
deferred compensation arrangements from M-Foods Holdings, Inc.,
our parent company.
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DIRECTOR COMPENSATION

All members of our board of directors are reimbursed for their usual and
customary expenses incurred in connection with attending all board and other
committee meetings. Members of the board of directors who are also our
employees, employees of Vestar Capital Partners or Goldner Hawn Johnson &
Morrison do not receive remuneration for serving as members of the board. Other
non-employee directors receive an annual retainer of $24,000 and are paid $3,000
for each board meeting attended. Non-employee directors are paid $1,000 for each
committee meeting attended, with committee chairs paid $1,500 per meeting.
Non-employee directors are paid $500 for each telephonic committee or special
board meeting attended, with committee chairs paid $1,000. Directors' fees and
travel expense reimbursements in 2001 totaled $76,732 for the current board of
directors, while such payments to directors of the Predecessor for the first
three months of 2001 totaled $100,851.

EMPLOYMENT AGREEMENTS

GENERAL PROVISIONS

The employment agreement with Gregg Ostrander provides for a term of two years,
subject to certain termination rights, and automatic one year extensions
beginning with the first anniversary of the closing of the Merger. The Ostrander
employment agreement provides that Mr. Ostrander will receive an annual base
salary of at least $595,000 and that he will participate in certain bonus
arrangements, long-term incentive plans and employee benefit plans of Michael
Foods. Mr. Ostrander would be subject to a noncompetition covenant, with respect
to the businesses of the production, distribution or sales of eggs or egg
products, and a nonsolicitation provision through the second anniversary of his
termination. As of August 1, 2001, Mr. Ostrander's annual base salary was
adjusted to $650,000.

The employment agreement with John Reedy provides for a term of two years,
subject to certain termination rights and automatic one year extensions
beginning with the first anniversary of the closing of the Merger. The Reedy
employment agreement provides that Mr. Reedy will receive an annual base salary
of at least $275,000 and that he will participate in certain bonus arrangements,
long-term incentive plans and employee benefit plans of Michael Foods. Mr. Reedy
would be subject to a noncompetition covenant with respect to the businesses of
the production, distribution or sales of eggs or egg products, and a
nonsolicitation provision through the second anniversary of his termination. As
of August 1, 2001, Mr. Reedy's annual base salary was adjusted to $295,000.

The employment agreement with Bill Goucher provides for a term beginning with
the closing of the Merger through the second anniversary of a change in control,
as defined in the Goucher employment agreement, subject to certain termination
rights. Mr. Goucher's annual base salary will be at least $275,000, and he will
participate in certain bonus arrangements and employee benefit plans of Michael
Foods. Mr. Goucher would be subject to a noncompetition covenant with respect to
the businesses of the production, distribution or sales of eggs or egg products,
and a nonsolicitation provision through the second anniversary of Mr. Goucher's
termination. As of August 1, 2001, Mr. Goucher's annual base salary was adjusted
to $295,000.

The employment agreement with James Clarkson provides for a term beginning with
the close of the Merger through the second anniversary of a change in control,
as defined in the Clarkson employment agreement, subject to certain termination
rights. Mr. Clarkson's

29

annual base salary will be at least $250,000, and he will participate in certain
bonus arrangements and employee benefit plans of Michael Foods. Mr. Clarkson
would be subject to a noncompetition covenant with respect to the businesses of
the production, distribution or sales of refrigerated potato products or
specialty dairy products and mixes, and a nonsolicitation provision through the
second anniversary of his termination. As of August 1, 2001, Mr. Clarkson's
annual base salary was adjusted to $295,000.

TERMINATION PROVISIONS

The Ostrander employment agreement provides that if Mr. Ostrander's employment
is terminated by his death or disability, Mr. Ostrander, or his estate or
beneficiaries, will receive, within 30 days, a payment equal to any annual base
salary through the date of termination not yet paid, plus the target bonus for
the year prorated for months of employment in that year, plus any eligible
unpaid other benefits, plus three times the total of Mr. Ostrander's current
annual base salary and target bonus.

If Mr. Ostrander's employment is terminated for cause or he terminates without
good reason, as described below, Mr. Ostrander will receive his annual base
salary through the date of termination and other benefits not yet paid under any
plan, program, policy, contract or agreement with or practice of Michael Foods.
"Good reason" includes, among other things, any diminution in position,
authority, duties and responsibilities or any requirement to relocate or travel
extensively. If Mr. Ostrander terminates his employment for good reason or if
Michael Foods terminates his employment other than for cause, death or
disability, Mr. Ostrander will receive a lump sum, within 30 days, in an amount
equal to any annual base salary through the date of termination not yet paid,
plus the target bonus for the year prorated for months of employment in that
year, plus any eligible unpaid other benefits, plus three times the total of Mr.
Ostrander's current annual base salary and target bonus. In addition, Mr.
Ostrander will receive for three years following the termination date, or until
such earlier time as Mr. Ostrander becomes eligible to receive comparable
benefits, certain medical, dental and life insurance benefits for himself and
his family.

Solely as such may be applicable to any severance payments deemed made in the
context of the change in ownership resulting from the acquisition, Mr. Ostrander
may also be eligible to receive an additional payment of any excise tax imposed
by Section 4999 of the Internal Revenue Code, as well as a gross-up payment such
that he will retain an amount equal to the excise taxes, after all income taxes,
interest and penalties associated with all such payments.

The Reedy employment agreement provides that if Mr. Reedy's employment is
terminated by his death or disability, Mr. Reedy, or his estate or
beneficiaries, will receive within 30 days a payment equal to any annual base
salary through the date of termination not yet paid, plus the target bonus for
the year prorated for months of employment in that year, plus any eligible
unpaid other benefits, plus two times the total of Mr. Reedy's current annual
base salary and target bonus.

If Mr. Reedy's employment is terminated for cause or he terminates without good
reason, such term having a meaning substantially similar to the meaning given
such term in the Ostrander employment agreement, Mr. Reedy will receive his
annual base salary through the date of termination and other benefits not yet
paid under any plan, program, policy, contract or agreement with or practice of
Michael Foods. If Mr. Reedy terminates his employment for good reason or if
Michael Foods terminates his employment other than for cause, death or
disability, Mr. Reedy will receive a lump sum within 30 days in an amount equal
to any annual base salary through the date of termination not yet paid, plus the
target bonus for the year prorated for months of employment in that year, plus
any eligible unpaid

30

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

Solely as such may be applicable to any severance payments deemed made in the
context of the change in ownership resulting from the acquisition, Mr. Reedy may
also be eligible to receive an additional payment of any excise tax imposed by
Section 4999 of the Internal Revenue Code, as well as a gross-up payment such
that he will retain an amount equal to the excise taxes, after all income taxes,
interest and penalties associated with all such payments.

The Goucher employment agreement provides that if Mr. Goucher is terminated by
his death or disability, Mr. Goucher, or his estate or beneficiaries, will
receive, within 30 days, a payment equal to any annual base salary through the
date of termination not yet paid, plus the target bonus for the year prorated
for months of employment in that year, plus any eligible unpaid other benefits,
plus an amount equal to Mr. Goucher's current annual base salary.

If Mr. Goucher is terminated for cause or without good reason, as defined in the
Goucher employment agreement, Mr. Goucher will receive his annual base salary
through the date of termination and other benefits not yet paid under any plan,
program, policy, contract or agreement with or practice of Michael Foods. If Mr.
Goucher's employment is terminated prior to a change in control, as described
below, by Michael Foods other than for cause, death or disability, Mr. Goucher
will receive a lump sum within 30 days equal to any annual base salary through
the date of termination not yet paid, plus any eligible unpaid other benefits,
plus an amount equal to Mr. Goucher's current annual base salary.

If Mr. Goucher is terminated by Michael Foods other than for cause, or if Mr.
Goucher terminates his employment for good reason, in anticipation of or
within two years following a change in control, Mr. Goucher will receive
within 30 days a payment equal to any annual base salary through the date of
termination not yet paid, plus the target bonus for the year prorated for
months of employment in that year, plus any eligible unpaid other benefits,
plus two times Mr. Goucher's current annual base salary. A change in control
refers to a transaction where another party acquires voting control of
Michael Foods, another party acquires substantially all of the assets of
Michael Foods, or, prior to an initial public offering of Michael Foods,
Vestar and its affiliates cease to have the ability to elect a majority of
the board of directors of Michael Foods.

The Clarkson employment agreement contains severance provisions substantially
identical to the severance provisions contained in the Goucher employment
agreement.

BENEFIT PLANS, SEVERANCE PLANS AND DEFERRED COMPENSATION ARRANGEMENTS

The Merger agreement requires us to maintain, until the first anniversary of the
closing of the Merger, employee benefit plans and arrangements with overall
employee benefits which are substantially comparable in the aggregate to the
benefits provided by the Predecessor's various plans as of December 21, 2000,
without taking into account the value of any benefits under equity-based benefit
plans.

We maintained our severance plan subsequent to the Merger, through July 1, 2001,
and each of Messrs. Witmer, Cook, Sprinkle, Mohr and Hoffmann had rights under
the severance plan pursuant to his respective severance and deferred
compensation agreement.

31

Participants in the severance plan were eligible for certain severance
arrangements should they be terminated without cause within twenty-four months
following a change in control. Generally, the severance plan defined a change in
control as occurring when a person acquires the power to elect, appoint or cause
the election or appointment of at least a majority of the board of directors or
purchases all or substantially all of the properties and assets of Michael
Foods. A change in control, however, did not include certain acquisitions
pursuant to a merger, consolidation or sale of properties and assets as defined
in the severance plan. Under the plan, certain key employees were entitled to
receive a lump sum payment equal to one times their total annual compensation,
with several key employees being entitled to a payment of two times total annual
compensation. Annual compensation was defined as the employee's highest annual
rate of salary, excluding bonuses, benefits, allowances, etc., within the three
calendar year periods prior to the date of termination of employment. However,
if an employee had been employed by Michael Foods or a predecessor for less than
three years, total annual compensation equaled the highest annualized salary
during the period of employment.

The Merger agreement provided that each outstanding option to purchase shares of
Predecessor common stock issued under the Predecessor's stock option plans,
whether or not then exercisable, including those granted to directors and
executive officers of the Predecessor, would become vested and exercisable with
respect to all shares of common stock subject thereto. Each option was cancelled
at the closing of the Merger, pursuant to option cancellation agreements
entered into with all the holders of options, and such holders were paid in
consideration of the cancellation of their options an amount in cash and/or
other consideration equal to the difference between $30.10 and the exercise
price of the option. The non-cash consideration included certain rights to
deferred compensation described below. The Predecessor stock option plans were
then terminated.

In addition, certain members of management received rights in an unfunded,
unsecured, nonqualified deferred compensation arrangement, which was assumed by
M-Foods Holdings, in exchange for the cancellation of certain of their options
in an amount equal to the spread value of such canceled options. Most of this
amount is deemed to be invested in M-Foods Investors' Class A Units. The balance
is deemed to have been invested (in the same proportion contributed to M-Foods
Investors) in the Class A Units of the M-Foods Dairy Holdings, a holding company
which holds the non-voting common units of the two dairy limited liability
companies. After closing the Merger, the Company contributed the assets of its
Dairy Products Division into two limited liability corporations, M-Foods Dairy,
LLC and M-Foods Dairy TXCT, LLC and in exchange received voting preferred and
voting common units from these entities equal to the fair value of the net
assets contributed.

M-Foods Holdings will credit each executive's deferred compensation account as
if the deferred compensation amount were actually invested in M-Foods Investors'
Class A Units and M-Foods Dairy Holdings Class A Units with respect to
distributions, whether cash or non-cash, relating only to the return of invested
capital and an 8% preferred return on the invested capital, but not with respect
to any other distributions. Actual distributions of each executive's deferred
compensation arrangements, if any, will be made upon the earliest of a change in
control, the tenth anniversary of the closing of the Merger or the purchase by
M-Foods Investors or M-Foods Dairy Holdings of that executive's Class B Units in
accordance with the terms of his severance arrangement.

The following chart indicates those executives, along with the number of
Predecessor options each held, that received deferred compensation arrangements
from M-Foods Holdings, the respective amounts of such deferred compensation, and
the amount of the cash payment received in exchange for cancellation of all of
the executive's options:

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