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.

24

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.

25

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.

27

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.
28

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:

32

In addition, upon the closing of the Merger, all shares of Predecessor common
stock awarded under its executive incentive plan in prior years that were not
vested became vested in accordance with the terms of such plan. Because the
Predecessor achieved the 15% average annual earnings per share growth over
the three year period ended December 31, 2000, the executives listed below
received the value of the shares (see summary compensation table, LTIP
payouts) of Predecessor common stock indicated below. The Predecessor
executive incentive plan was terminated in connection with the Merger.

In addition to the deferred compensation arrangements described above, certain
members of our management entered into stock purchase and unit subscription
agreements with M-Foods Investors pursuant to which each:

- sold to M-Foods Investors a portion of such executive's shares of
Predecessor common stock; and

- contributed the remainder of his Predecessor common stock to
M-Foods Investors in exchange for a number of Class B Units and
Class C Units of M-Foods Investors based on a $2.00 per unit
price.

For more information on these arrangements, see Item 13 - Certain
Relationships and Related Transactions--Certain Agreements Relating to the
Merger--Management Stock Purchase and Unit Subscription Agreements, and
Item 12 - Security Ownership of Certain Beneficial Owners and Management.

33

M-FOODS HOLDINGS STOCK OPTION PLAN

In order to provide additional financial incentives to our management, certain
members of our management and other key employees may be granted stock options
to, collectively, purchase up to five percent of the common stock of M-Foods
Holdings, our parent company. The exercise price of options granted reflects the
fair market value of the underlying shares, as determined by the compensation
committee in its best judgment.

Fifty percent of the options reserved for issuance under this stock option plan
were issued to Messrs. Ostrander, Reedy, Goucher, Clarkson, Cook, Hoffmann,
Sprinkle and Mohr in July 2001. The exercise price is payable (1) in cash, (2)
after an initial public offering of Michael Foods' common stock, through
simultaneous sales of underlying shares by brokers or (3) through the exchange
of M-Foods Holdings securities held by the optionee for longer than six months.

Options vest ratably over a five-year period starting at the Merger date, for
those grants made in 2001, or the date of grant for subsequent grants. On
termination of employment for any reason, all unvested options of the terminated
employee are cancelled. Vested options not exercised within 90 days after
termination are cancelled, unless such employee is terminated for cause or
leaves without good reason, in which case such vested options shall be cancelled
upon termination. If employment is terminated for any reason other than for
cause or a termination without good reason, M-Foods Holdings will provide a
notice setting forth the fair market value of the common stock within 90 days of
such termination. In the event of a change in control of M-Foods Holdings or
M-Foods Investors, all options which have not become vested will automatically
become vested. The options are subject to other customary restrictions and
repurchase rights.

OPTION GRANTS IN LAST YEAR

- ----------
(1) Options are granted by M-Foods Holdings, Inc. and not by Michael Foods, Inc.
All options granted are exercisable in cumulative 20% installments
commencing one year from date of grant, with full vesting occurring on the
fifth anniversary date. Vesting may be accelerated in certain events
relating to a change in control.

(2) Potential gains are reported net of the option exercise price, but before
taxes associated with an exercise. These amounts represent certain assumed
rates of appreciation only. Actual gains, if any, on stock option exercises
are dependent on the future performance of the Company, as well as the
optionholder's continued employment through the vesting period. The amounts
reflected in this table may not necessarily be realized.

34

OPTION EXERCISES IN LAST YEAR AND YEAR-END OPTION VALUES

The following table provides information related to the number of shares of the
common stock of the Predecessor exercised under options in 2001 as a result of
the Merger, and the number of shares of common stock of M-Foods Holdings
represented by options, held at December 31, 2001 by the named executive
officers.

- ----------
(1) There is no public market for M-Foods Holdings' common stock. Hence, the
value of options granted is not readily available.

ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Michael Foods, Inc. is a wholly owned subsidiary of M-Foods Holdings, Inc., a
corporation owned, in part, by M-Foods Investors, LLC, whose members include
affiliates of Vestar Capital Partners and Goldner Hawn Morrison & Johnson,
certain members of our management and affiliates of the Michael family. After
giving effect to the exercise of all options reserved for issuance in connection
with M-Foods Holdings' stock option plan, M-Foods Investors owns approximately
95% of M-Foods Holdings' common stock.

The following table sets forth certain information regarding beneficial
ownership of M-Foods Investors by: (i) each person or entity known to us to own
more than 5% of any class of M-Foods Investors' outstanding securities and (ii)
each member of M-Foods Investors' management committee (which functions as did
the Predecessor's board of directors), each of our named executive officers and
all members of the management committee and executive officers as a group.
M-Foods Investors' outstanding securities consist of approximately 2,134,697
Class A Units, 99,078 Class B Units and 100,000 Class C Units. The Class A
Units, Class B Units and Class C Units generally have identical rights and
preferences, except the Class C Units are nonvoting and as to certain
distributions described in Item 13 - Certain Relationships and Related
Transactions--Certain Agreements Relating to the Merger - Limited Liability
Company Agreement. To our knowledge, each of such securityholders has sole
voting and investment power as to the units shown unless otherwise noted.
Beneficial ownership of the securities listed in the table has been determined
in accordance with the applicable rules and regulations promulgated under the
Exchange Act.

35

- -----------
* Less than 1%.

(1) The address for Vestar Capital Partners IV, L.P. is c/o Vestar Capital
Partners, 1225 Seventeenth Street, Suite 1660, Denver, Colorado 80202.

(2) The address for Marathon Fund Limited Partnership IV is c/o Goldner Hawn
Johnson & Morrison, 5250 Wells Fargo Center, Minneapolis, Minnesota 55402.

(3) Each of 4J2R1C and 3J2R are Minnesota limited partnerships. The general
partners of 4J2R1C are James H. Michael, Jeffrey J. Michael and 2JM
Enterprises, Inc., a Minnesota corporation. The directors of 2JM
Enterprises are James H. Michael and Jeffrey J. Michael, and the officers
of 2JM Enterprises are Jeffrey J. Michael, President and Treasurer, and
James H. Michael, Vice President and Secretary. The general partners of
3J2R are Jeffrey J. Michael, as managing general partner, and 2JM
Enterprises. As a general partner of 4J2R1C and 3J2R, Mr. Michael may be
deemed to beneficially own the securities held by such partnerships. Mr.
Michael disclaims beneficial ownership except to the extent of his
pecuniary interest as a partner in the limited partnerships' assets. The
address for each of 4J2R1C Limited Partnership, 3J2R Limited Partnership
and Jeffrey J. Michael is 10851 Louisiana Avenue South, Bloomington,
Minnesota 55438.

(4) The address for each of the named executive officers is c/o Michael Foods,
Inc., Suite 324, Signal Bank Building, 5353 Wayzata Boulevard, Minneapolis,
Minnesota 55416.

ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Pursuant to a management agreement with Vestar and GHJM, the Company pays them a
combined annual fee of $1,000,000 or .75% of consolidated earnings before
interest, taxes, depreciation and amortization, whichever is greater. The
management fee for the nine month period ended December 31, 2001 was
approximately $800,000 (see MANAGEMENT

36

AGREEMENT). In addition, these affiliates were paid approximately $10,500,000 by
us for services rendered and expenses incurred in connection with the Merger.

We acquired Papetti's in February 1997 and certain members of the Papetti family
were shareholders of the Predecessor up until the time of the Merger. The
Predecessor had, and we continue to have, six separate leases for the principal
properties used by Papetti's in its operations. The properties are owned by six
separate partnerships, of which four are wholly owned by Papetti family members
and two are 50% owned by Papetti family members. Five of the leases expire in
2007 and are renewable for two successive five-year terms. One of the leases
expires in 2017. Annual minimum rental commitments under these leases
approximate $2,100,000 through early 2007. The aggregate annual net rent paid by
us under the leases was approximately $2,100,000 in 2001, $2,100,000 in 2000,
and $2,300,000, including a lease termination payment, in 1999. In addition, we
pay all real estate taxes, utilities, insurance and other operating expenses
associated with the properties, and we are required to maintain the properties.

In addition, our Egg Products Division purchases eggs under an egg supplier
agreement with a partnership in which certain members of the Papetti family are
general partners. Such purchases totaled approximately $10,000,000 in 2001,
$9,800,000 in 2000, and $10,100,000 in 1999. Papetti Farms, Inc. is a 50%
general partner in the partnership, Sunbest-Papetti Farms, and is owned as
follows: Arthur J. Papetti, 50%; Alfred Papetti, 25%; Stephen T. Papetti, 25%.
As of the Merger, the Papetti family no longer owns equity interests in Michael
Foods or any of its affiliates, including M-Foods Investors.

CERTAIN AGREEMENTS RELATING TO THE MERGER

LIMITED LIABILITY COMPANY AGREEMENT

The amended and restated limited liability company agreement of M-Foods
Investors authorizes it to issue Class A Units, Class B Units and Class C Units.
The Class A Units, Class B Units and Class C Units generally have identical
rights and preferences, except as to certain distributions described below,
and the Class C Units are nonvoting. M-Foods Investors also has the authority
to create and issue preferred units, with the terms and provisions more fully
described in the management stock purchase and unit subscription agreements, in
connection with certain repurchases by M-Foods Investors of Class B Units and
Class C Units held by executives of the Company and its subsidiaries.

Distributions of property of M-Foods Investors shall be made in the following
order:

- First, holders of Class A Units, Class B Units and Class C Units
will receive a return of their invested capital.

- Second, the holders of the Class A Units will receive an 8%
cumulative preferred return on their invested capital.

- Thereafter, holders of the Class A Units and Class B Units, on
the one hand, and the holders of the Class C Units on the other,
will receive certain percentages of all remaining distributions,
based on satisfaction of certain minimum internal rate of return
or multiple of investment hurdles.

A management committee has the exclusive authority to manage and control the
business and affairs of M-Foods Investors. The management committee's
composition was

37

determined in accordance with the provisions of the securityholders agreement
described below.

SECURITYHOLDERS AGREEMENT

Pursuant to the securityholders agreement entered into in connection with the
acquisition, units of M-Foods Investors (or common stock following a change in
corporate form) beneficially owned by certain of our executives and any other
employees of M-Foods Investors and its subsidiaries, which we collectively refer
to as the management investors, Marathon Fund Limited Partnership IV, a limited
partnership associated with Goldner Hawn Johnson & Morrison, and 4J2R1C Limited
Partnership and 3J2R Limited Partnership, each of which are associated with the
Michael family, are subject to certain restrictions on transfer, other than
certain exempt transfers as defined in the securityholders agreement, as well as
the other provisions described below. When reference is made to "units" of
M-Foods Investors in the discussion that follows, it includes common stock of
M-Foods Investors following a change in corporate form, whether in preparation
for an initial public offering or otherwise.

The securityholders agreement provides that Vestar Capital Partners IV, L.P.,
Marathon Fund Limited Partnership IV, 4J2R1C Limited Partnership, 3J2R Limited
Partnership, the management investors and all other parties to the agreement
will vote all of their units to elect and continue in office management
committees or boards of directors of M-Foods Investors and each of its
subsidiaries, other than subsidiaries of Michael Foods, consisting of up to nine
members or directors composed of:

- five (5) persons designated by Vestar Capital Partners IV, L.P.;

- one (1) person designated by Marathon Fund Limited Partnership
IV;

- one (1) person designated by 4J2R1C Limited Partnership and 3J2R
Limited Partnership, which are associated with the Michael
family;

- the chief executive officer of Michael Foods; and

- one (1) independent person designated by the chief executive
officer of Michael Foods.

The securityholders agreement also provides:

- Marathon Fund Limited Partnership IV, 4J2R1C Limited Partnership,
3J2R Limited Partnership and the management investors with
customary "tag-along" rights with respect to transfers of M-Foods
Investors units beneficially owned by Vestar Capital Partners IV,
L.P., its partners or their transferees; and

- Vestar Capital Partners IV, L.P. with "drag-along" rights with
respect to M-Foods Investors units owned by Marathon Fund Limited
Partnership IV, 4J2R1C Limited Partnership, 3J2R Limited
Partnership and the management investors in a sale of M-Foods
Investors. In addition, Vestar Capital Partners IV, L.P., and,
after M-Foods Investors' first public offering, Marathon Fund
Limited Partnership IV and 4J2R1C Limited Partnership and 3J2R
Limited Partnership, have certain rights to require M-Foods
Investors to register units held by them under the Securities
Act, up to four, two and two times, respectively.

38

In addition, Vestar Capital Partners IV, L.P., Marathon Fund Limited Partnership
IV, 4J2R1C Limited Partnership, 3J2R Limited Partnership and the management
investors have certain rights to participate in publicly registered offerings of
common equity of M-Foods Investors initiated by it or other third parties. For
example, each of Vestar Capital Partners IV, L.P., Marathon Fund Limited
Partnership IV, 4J2R1C Limited Partnership, 3J2R Limited Partnership and the
management investors may elect to participate in a demand registration initiated
by another party to the securityholders agreement. If M-Foods Investors issues
or sells any new units to Vestar Capital Partners IV, L.P., subject to certain
exceptions, each management investor and each of Marathon Fund Limited
Partnership IV, 4J2R1C Limited Partnership and 3J2R Limited Partnership shall
have the right to subscribe for a sufficient number of new M-Foods Investors
units to maintain its respective ownership percentage in M-Foods Investors.

MANAGEMENT STOCK PURCHASE AND UNIT SUBSCRIPTION AGREEMENTS

Under the management stock purchase and unit subscription agreements, each of
the executives listed in the table below sold to M-Foods Investors that number
of shares of Predecessor common stock indicated below in exchange for $30.10 per
share. In addition, each such executive contributed the remainder of his
Predecessor common stock to M-Foods Investors in exchange for a number of Class
B Units and Class C Units of M-Foods Investors based on a $2.00 per unit price,
with the exception of Max R. Hoffmann who, in addition, purchased Class A Units.
All units held by each executive vest 20% each year beginning on the first
anniversary of the closing of the acquisition. The executives listed in the
table below hold approximately 4.5% of the outstanding Class A and Class B units
combined, and 100% of the outstanding Class C units. In addition, a small
portion of the proceeds from the sale of Predecessor common stock to M-Foods
Investors was used to purchase indirect interests in the two dairy limited
liability companies.

M-Foods Investors may be required to purchase all of an executive's units in the
event of such executive's termination of employment due to death, disability or
retirement. In addition, in certain circumstances M-Foods Investors will have
the right to purchase all or a portion of an executive's units, if an
executive's employment is terminated or such executive is deemed to be engaging
in certain competitive activities. However, if M-Foods Investors elects or is
required to purchase any units pursuant to the call and put options described in
the preceding sentences, and such payment would result in a violation of law
applicable to M-Foods Investors or a default under certain of its financing
arrangements, M-Foods

39

Investors may make the portion of the cash payment so affected by the delivery
of preferred units of M-Foods Investors with a liquidation preference equal to
the amount of the cash payment affected.

In addition, each management stock purchase and unit subscription agreement
contains customary representations, warranties and covenants.

STOCK PURCHASE AND UNIT SUBSCRIPTION AGREEMENT

The stock purchase and unit subscription agreement required each of 4J2R1C
Limited Partnership and 3J2R Limited Partnership to sell, immediately prior to
the acquisition, to M-Foods Investors the number of shares of Predecessor common
stock indicated below at a price per share of $30.10, and to contribute to
M-Foods Investors the number of shares of Predecessor common stock indicated
below in exchange for the number of Class A units indicated below. Each Class A
unit is valued at $100.00. In addition, a small portion of the proceeds from the
sale of Predecessor common stock to M-Foods Investors was used to purchase
indirect interests in the two dairy limited liability companies.

In addition, the stock purchase and unit subscription agreements contain
customary representations, warranties and covenants. There are no put rights or
call options in the stock purchase and unit subscription agreements.

MANAGEMENT AGREEMENT

Pursuant to the management agreement entered into in connection with the
acquisition, Vestar Capital Partners and Goldner Hawn Johnson & Morrison
Incorporated will render to each of M-Foods Investors, M-Foods Holdings and
Michael Foods, and each of their subsidiaries, certain advisory and consulting
services. In consideration of those services, M-Foods Investors, M-Foods
Holdings and Michael Foods jointly and severally will pay to Vestar Capital
Partners and Goldner Hawn Johnson & Morrison Incorporated, semi-annually in
advance, an aggregate per annum management fee equal to the greater of:

- $1,000,000 and

- an amount equal to 0.75% of the consolidated earnings before
interest, taxes, depreciation and amortization of M-Foods
Investors and its subsidiaries for such fiscal year, but before
deduction of any such fee, determined as set forth in documents
related to the proposed senior credit facility.

M-Foods Investors, M-Foods Holdings and the Predecessor also jointly and
severally agreed to pay Vestar Capital Partners and Goldner Hawn Johnson &
Morrison Incorporated at the closing of the acquisition an aggregate transaction
fee equal to 1.25% of total transaction value plus all out-of-pocket expenses
incurred by Vestar Capital Partners and Goldner Hawn Johnson & Morrison
Incorporated prior to the closing of the acquisition for services rendered by
them in connection with the acquisition.

40

M-Foods Investors, M-Foods Holdings and Michael Foods also jointly and severally
agreed to indemnify Vestar Capital Partners and Goldner Hawn Johnson & Morrison
Incorporated and their respective affiliates from and against all losses,
claims, damages and liabilities arising out of the performance by Vestar Capital
Partners and Goldner Hawn Johnson & Morrison Incorporated of their services
pursuant to the management agreement. The management agreement will terminate at
such time as Vestar Capital Partners IV, L.P. and Marathon Fund Limited
Partnership IV and their respective partners and the respective affiliates
thereof hold, directly or indirectly in the aggregate, less than 20% of the
voting power of our outstanding voting stock.

41

PART IV

ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) The following consolidated financial statements of the Company and the
Predecessor, the financial statements of the Company's non-wholly-owned
guarantor subsidiaries, and the related Reports of Independent
Certified Public Accountants, are included in this report:

1. Financial Statements

42

3. Exhibits

Reference is made to Item 14 (c) footnote (2) for exhibits filed with
this form.

(b) Reports on Form 8-K

Reference is made to reports filed on Form 8-K dated November 8, 2001 and
February 21, 2002, regarding news releases to our debtholders pertaining to our
interim financial results.

(c) Exhibits and Exhibit Index

EXHIBIT
NO. DESCRIPTION
--- -----------
2.1 Agreement and Plan of Merger, dated December 21, 2000, by and
among Michael Foods Acquisition Corp., Michael Foods, Inc. and
M-Foods Holdings, Inc. (1)
2.2 Amendment Number One to Agreement and Plan of Merger, dated
March 6, 2001, by and among Michael Foods Acquisition Corp.,
Michael Foods, Inc. and M-Foods Holdings, Inc. (1)
3.1 Amended and Restated Articles of Incorporation of Michael
Foods, Inc. (1)
3.2 Bylaws of Michael Foods, Inc. (1)
4.1 Purchase Agreement, dated March 16, 2001, between Michael
Foods Acquisition Corp., Michael Foods, Inc., and Banc of
America Securities, LLC and Bear, Stearns & Co. (1)
4.2 Indenture, dated March 27, 2001, between Michael Foods
Acquisition Corp. and BNY Midwest Trust Company, as trustee
(1)
4.3 Supplemental Indenture, dated as of April 10, 2001, by and
among Michael Foods, Inc., M-Foods Holdings, Inc., Michael
Foods of Delaware, Inc., Northern Star Co., Minnesota
Products, Inc., Farm Fresh Foods, Inc., Crystal Farms
Refrigerated Distribution Company, WFC, Inc., Wisco Farm
Cooperative, M. G. Waldbaum Company, Papetti's Hygrade Egg
Products, Inc., Casa Trucking, Inc., Papetti Electroheating
Corporation, Kohler Mix Specialties, Inc., Midwest Mix, Inc.,
Kohler Mix Specialties of Connecticut, Inc. and Midwest Mix,
Inc. and BNY Midwest Trust Company (1)
4.4 Second Supplemental Indenture, dated as of May 2, 2001, by and
among M-Foods Dairy, LLC and M-Foods Dairy TXCT, LLC, Michael
Foods, Inc. and BNY Midwest Trust Company (1)
4.5 Registration Rights Agreement, dated March 27, 2001, by and
among Michael Foods Acquisition Corp., and Banc of America
Securities, LLC and Bear, Stearns & Co. (1)
4.6 Collateral Pledge and Security Agreement, dated March 27,
2001, between Michael Foods Acquisition Corp., and Banc of
America Securities, LLC and Bear, Stearns & Co. and BNY
Midwest Trust Company as collateral agent and securities
intermediary (1)
10.1 Credit Agreement, dated April 10, 2001, among Michael Foods,
Inc., M-Foods Holdings, Inc., the Guarantors, Bank of America,
N.A., as Agent, Banc of America Securities, LLC, as Sole Lead
Arranger and Sole Book Running Manager, and Bear, Stearns &
Co., as Syndication Agent (1)
10.2 Pledge Agreement, dated April 10, 2001, between Michael Foods,
Inc., Bank of America, N.A. and Banc of America Securities,
LLC (1)
*10.3 M-Foods Holdings, Inc. 2001 Stock Option Plan (1)
*10.4 Form of M-Foods Holdings 2001 Stock Option Plan Stock Option
Award Agreement (1)
*10.5 Employment Agreement, dated April 10, 2001, by and among
Michael Foods, Inc., M-Foods Holdings, Inc. and Gregg A.
Ostrander (1)
*10.6 Employment Agreement, dated April 10, 2001, by and among
Michael Foods, Inc., M-Foods Holdings, Inc. and John D. Reedy
(1)
*10.7 Employment Agreement, dated April 10, 2001, by and among
Michael Foods, Inc., M-Foods Holdings, Inc. and James D.
Clarkson (1)
*10.8 Employment Agreement, dated April 10, 2001, by and among
Michael Foods, Inc., M-Foods Holdings, Inc. and Bill L.
Goucher (1)

43

*10.9 Severance and Deferred Compensation Agreement, dated April 10,
2001, by and among Michael Foods, Inc., M-Foods Holdings, Inc.
and James Mohr (1)
*10.10 Severance and Deferred Compensation Agreement, dated April 10,
2001, by and among Michael Foods, Inc., M-Foods Holdings, Inc.
and Harold D. Sprinkle (1)
*10.11 Severance and Deferred Compensation Agreement, dated April 10,
2001, by and among Michael Foods, Inc., M-Foods Holdings, Inc.
and Max Hoffmann (1)
*10.12 Severance and Deferred Compensation Agreement, dated April 10,
2001, by and among Michael Foods, Inc., M-Foods Holdings, Inc.
and Bradley Cook (1)
10.13 Amended and Restated Limited Liability Company Agreement of
M-Foods Investors, LLC (1)
*10.14 Securityholders Agreement, dated April 10, 2001, between
M-Foods Dairy Holdings, LLC, Marathon Dairy Investment Corp.,
Vestar Capital Partners IV, L.P., 4J2R1C Limited Partnership,
3J2R Limited Partnership, Gregg A. Ostrander, John D. Reedy,
Bill L. Goucher, James D. Clarkson, James Mohr, Harold D.
Sprinkle, Bradley Cook, and Max Hoffmann (1)
*10.15 Management Stock Purchase and Unit Subscription Agreement,
dated April 10, 2001, among M-Foods Investors, LLC, M-Foods
Holdings, Inc., and Gregg A. Ostrander (1)
*10.16 Management Stock Purchase and Unit Subscription Agreement,
dated April 10, 2001, among M-Foods Investors, LLC, M-Foods
Holdings, Inc., and John D. Reedy (1)
*10.17 Management Stock Purchase and Unit Subscription Agreement,
dated April 10, 2001, among M-Foods Investors, LLC, M-Foods
Holdings, Inc., and James D. Clarkson (1)
*10.18 Management Stock Purchase and Unit Subscription Agreement,
dated April 10, 2001, among M-Foods Investors, LLC, M-Foods
Holdings, Inc., and Bill L. Goucher (1)
*10.19 Management Stock Purchase and Unit Subscription Agreement,
dated April 10, 2001, among M-Foods Investors, LLC, M-Foods
Holdings, Inc., and Max Hoffmann (1)
*10.20 Management Stock Purchase and Unit Subscription Agreement,
dated April 10, 2001, among M-Foods Investors, LLC, M-Foods
Holdings, Inc., and Harold D. Sprinkle (1)
*10.21 Management Stock Purchase and Unit Subscription Agreement,
dated April 10, 2001, among M-Foods Investors, LLC, M-Foods
Holdings, Inc., and Bradley Cook (1)
*10.22 Management Stock Purchase and Unit Subscription Agreement,
dated April 10, 2001, among M-Foods Investors, LLC, M-Foods
Holdings, Inc., and James Mohr (1)
*10.23 Management Unit Subscription Agreement, dated April 10, 2001,
between M-Foods Dairy Holdings, LLC, and Gregg A. Ostrander
(1)
*10.24 Management Unit Subscription Agreement, dated April 10, 2001,
between M-Foods Dairy Holdings, LLC, and John D. Reedy (1)
*10.25 Management Unit Subscription Agreement, dated April 10, 2001,
between M-Foods Dairy Holdings, LLC, and James D. Clarkson (1)
*10.26 Management Unit Subscription Agreement, dated April 10, 2001,
between M-Foods Dairy Holdings, LLC, and Bill L. Goucher (1)
*10.27 Management Unit Subscription Agreement, dated April 10, 2001,
between M-Foods Dairy Holdings, LLC, and Max Hoffmann (1)
*10.28 Management Unit Subscription Agreement, dated April 10, 2001,
between M-Foods Dairy Holdings, LLC, and Harold D. Sprinkle
(1)
*10.29 Management Unit Subscription Agreement, dated April 10, 2001,
between M-Foods Dairy Holdings, LLC, and Bradley Cook (1)
*10.30 Management Unit Subscription Agreement, dated April 10, 2001,
between M-Foods Dairy Holdings, LLC, and James Mohr (1)
*10.31 Securityholders Agreement, dated April 10, 2001, between
M-Foods Investors, LLC, M-Foods Holdings, Inc., Marathon Fund
Limited Partnership IV, Vestar Capital Partners IV, L.P.,
4J2R1C Limited Partnership, 3J2R Limited Partnership, Gregg A.
Ostrander, John D. Reedy, Bill L. Goucher, James D. Clarkson,
James Mohr, Harold D. Sprinkle, Bradley Cook, and Max Hoffmann
(1)
12.1 Computation of Ratio of Earnings to Fixed Charges (2)
21.1 Subsidiaries of Michael Foods, Inc. (2)

44

* Management Contract or Compensation Plan Arrangement

(1) Incorporated by reference from the Company's Registration Statement on Form
S-4 filed July 18, 2001.
(2) Filed as an exhibit to this Form 10-K.

45

(d) Schedules SCHEDULE II

MICHAEL FOODS, INC. AND SUBSIDIARIES
(A wholly owned subsidiary of M-Foods Holdings, Inc.)

VALUATION AND QUALIFYING ACCOUNTS

- ----------
(a) Write-offs of accounts deemed uncollectible

46

SCHEDULE II

M-FOODS DAIRY, LLC
(A majority owned subsidiary of Michael Foods, Inc.)

- ----------
(a) Write-offs of accounts deemed uncollectible

47

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

MICHAEL FOODS, INC.

Date: March 28, 2002 By: /s/ Gregg A. Ostrander
------------------------------------------
Gregg A. Ostrander
(Chairman, President and Chief Executive
Officer)

Date: March 28, 2002 By: /s/ John D. Reedy
------------------------------------------
John D. Reedy
(Executive Vice President, Chief Financial
Officer, Treasurer and Principal
Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:

/s/ J. Christopher Henderson March 28, 2002
- ----------------------------
J. Christopher Henderson (Director)

/s/ Jerome J. Jenko March 28, 2002
- -------------------
Jerome J. Jenko (Director)

/s/ James P. Kelley March 28, 2002
- -------------------
James J. Kelley (Director)

/s/ Leonard Lieberman March 28, 2002
- ---------------------
Leonard Lieberman (Director)

/s/ Jeffrey J. Michael March 28, 2002
- ----------------------
Jeffrey J. Michael (Director)

/s/ John L. Morrison March 28, 2002
- --------------------
John L. Morrison (Director)

/s/ Kevin A. Mundt March 28, 2002
- ------------------
Kevin A. Mundt (Director)

48

SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT.

No annual report or proxy statement has been sent to security holders during the
Registrant's last fiscal year.

EXHIBIT INDEX

49

MICHAEL FOODS, INC.
(A wholly owned subsidiary of M-Foods Holdings, Inc.)

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

BOARD OF DIRECTORS
MICHAEL FOODS, INC.

We have audited the accompanying consolidated balance sheet of Michael
Foods, Inc. and subsidiaries (a wholly-owned subsidiary of M-Foods Holdings,
Inc.) as of December 31, 2001 and the related consolidated statements of
earnings, shareholders' equity, and cash flows for the nine months then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.

We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe our audit provides a reasonable
basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Michael
Foods, Inc. and subsidiaries (a wholly-owned subsidiary of M-Foods Holdings,
Inc.) as of December 31, 2001, and the results of its operations and its cash
flows for the nine months then ended in conformity with accounting principles
generally accepted in the United States of America.

We have also audited Schedule II for the nine months ended December 31,
2001. In our opinion, this schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information therein.

/s/ GRANT THORNTON LLP

Minneapolis, Minnesota
February 8, 2002

F-1-1

MICHAEL FOODS, INC.
(A wholly owned subsidiary of M-Foods Holdings, Inc.)

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

BOARD OF DIRECTORS
MICHAEL FOODS, INC.

We have audited the accompanying consolidated balance sheet of Michael
Foods, Inc. and subsidiaries (the "Predecessor") as of December 31, 2000 and the
related consolidated statements of earnings, shareholders' equity, and cash
flows for each of the two years in the period ended December 31, 2000 and the
three months ended March 31, 2001. These financial statements are the
responsibility of the Predecessor's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe our audits provide a reasonable
basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Michael
Foods, Inc. and subsidiaries as of December 31, 2000 and the results of its
operations and its cash flows for each of the two years in the period ended
December 31, 2000 and for the three months ended March 31, 2001, in conformity
with accounting principles generally accepted in the United States of America.

We have also audited Schedule II for each of the two years in the period
ended December 31, 2000 and for the three months ended March 31, 2001. In our
opinion, this schedule, when considered in relation to the basic financial
statement taken as a whole, presents fairly, in all material respects, the
information therein.

/s/ GRANT THORNTON LLP

Minneapolis, Minnesota
May 15, 2001

F-1-2

MICHAEL FOODS, INC.
(A wholly owned subsidiary of M-Foods Holdings, Inc.)

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these statements.

F-1-3

MICHAEL FOODS, INC.
(A wholly owned subsidiary of M-Foods Holdings, Inc.)

CONSOLIDATED STATEMENTS OF OPERATIONS

The accompanying notes are an integral part of these statements.

F-1-4

MICHAEL FOODS, INC.
(A wholly owned subsidiary of M-Foods Holdings, Inc.)

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

The accompanying notes are an integral part of these statements.

F-1-5

MICHAEL FOODS, INC.
(A wholly owned subsidiary of M-Foods Holdings, Inc.)

CONSOLIDATED STATEMENTS OF CASH FLOWS

The accompanying notes are an integral part of these statements.

F-1-6

MICHAEL FOODS, INC.
(A wholly owned subsidiary of M-Foods Holdings, Inc.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A--MERGER AGREEMENT

On April 10, 2001, Michael Foods, Inc. and its subsidiaries ("Michael
Foods", the "Company") was acquired in a transaction (the "Merger") led by an
investor group comprised of a management group led by Michael Foods' Chairman,
President and Chief Executive Officer, Gregg Ostrander, affiliates of Jeffrey
Michael, a member of the Michael Foods Board of Directors, and affiliates of two
private equity investment firms, Vestar Capital Partners ("Vestar") and Goldner
Hawn Johnson & Morrison Incorporated ("GHJM"), collectively, M-Foods Investors,
LLC. Under the terms of the Merger agreement, all outstanding shares of Michael
Foods common stock were converted into the right to receive $30.10 per share in
cash, or value equal thereto, and all outstanding stock options were converted
into the right to receive, in cash, $30.10 per share reduced by the exercise
price per share for all shares subject to such stock options. The purchase of
the outstanding shares was financed through new equity financing of
approximately $175,000,000, a senior secured credit facility of up to
$470,000,000 at market-based variable interest rates (effective rate of 6.5% at
December 31, 2001), and $200,000,000 of senior subordinated notes at an 11.75%
annual interest rate. As a result of the Merger, the stock of pre-merger Michael
Foods ("Predecessor") is no longer publicly traded and, therefore, earnings per
share calculations are no longer included for financial statement presentation.

Immediately after the close of 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 (collectively, the "Dairy LLCs")
and in exchange received voting preferred and voting common units from these
entities equal to the fair value of the net assets contributed, which
collectively had a revised valuation of approximately $35,800,000. The preferred
units issued to the Company have an annual 10% preferred return guarantee and
represent 100% of the preferred units issued and outstanding. In addition, the
Company received 5% of the common units issued by each of the entities with the
common units held by the Company representing 100% of the voting common units
issued and outstanding. These common units have a stated value of $25,000. The
remaining 95% of the common units, which are non-voting, are owned by M-Foods
Dairy Holdings, LLC, which is owned by the same owners or affiliates of such
owners, in the same proportion, as the unit holders of M-Foods Investors, LLC.
The common unit interests owned by M-Foods Dairy Holdings, LLC were issued in
exchange for $475,000 and are reflected as a non-controlling interest in the
accompanying consolidated balance sheet.

The Merger was accounted for as a purchase in accordance with Accounting
Principles Board Opinion 16, BUSINESS COMBINATIONS and EITF 88-16, BASIS IN
LEVERAGED BUYOUT TRANSACTIONS. Accordingly, the acquired assets and liabilities
were recorded at fair value for the interests acquired by new investors and at
the carryover basis for continuing investors. As a result, the assets and
liabilities were assigned new values, which are part Predecessor cost and part
fair value in the same proportions as the carryover basis of the residual
interests retained by the continuing management investors and continuing
affiliate investors of the Michael family and the new interests acquired by the
new investors. The amount of fair value not able to be reflected on the
Company's books due to the carryover basis is reflected as a deemed dividend and
was $66,631,000.

For ease of presentation, the Merger has been reflected in the accompanying
financial statements as if it had occurred on April 1, 2001. Management
determined that no material transactions occurred during the period from April 1
through April 9, 2001. The Company's consolidated financial statements as of and
for the nine months ended December 31, 2001 have been presented on a comparative
basis with the Predecessor's historical financial statements prior to the date
of the Merger. Different bases of accounting have been used to prepare the
Company and Predecessor consolidated financial statements, which has resulted in
additional interest expense for new debt and higher depreciation and
amortization of fixed assets and other intangible assets recorded at fair value
at the date of Merger.

F-1-7

MICHAEL FOODS, INC.
(A wholly owned subsidiary of M-Foods Holdings, Inc.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A--MERGER AGREEMENT, CONT.

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

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

In connection with the Merger, the Predecessor incurred transaction
expenses of approximately $26,600,000 associated with the Merger and change in
control provisions of various compensation, debt and other agreements, which
have been reflected in the Predecessor financial statements. These transaction
expenses include an extraordinary item related to the early extinguishment of
debt resulting from the change in control, which is described in Note C. In
addition, the Company incurred other merger related and debt issuance costs of
approximately $40,000,000, which have been capitalized as direct costs of the
Merger and deferred financing costs in the Company's consolidated balance sheet.

The following unaudited pro forma net sales and net earnings for the year
ended December 31, 2000 are derived from the application of pro forma
adjustments to the Predecessor historical statements of earnings, and assumes
the Merger had occurred on January 1, 2000. The unaudited pro forma net sales
and net earnings before extraordinary item for the year ended December 31, 2001
are derived by combining the application of the pro forma adjustments to the
Predecessor's historical statement of earnings for the quarter ended March 31,
2001, which assumes the Merger had occurred on January 1, 2001, with the
Company's actual results for the nine months ended December 31, 2001.

The most significant of the pro forma adjustments reflected in the above
amounts were to reverse the impact of the one-time transaction-related charges
recorded during the three months ended March 31, 2001, to record the incremental
interest on the additional debt incurred in connection with the Merger and to
record additional depreciation and amortization charges resulting from the fair
value adjustments made to fixed assets and the recording of additional
intangible assets. The pro forma financial information should be read in
conjunction with the related historical information and is not necessarily
indicative of the results that would have been obtained had the transaction
actually taken place at the beginning of the periods presented.

F-1-8

MICHAEL FOODS, INC.
(A wholly owned subsidiary of M-Foods Holdings, Inc.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

THE COMPANY
The Company is a diversified producer and distributor of food products in
four areas--egg products, refrigerated distribution, dairy products, and potato
products. The Company believes it is the largest producer of processed egg
products in the United States, and is a leading producer and distributor of
specialty potato and dairy products to the foodservice, retail and industrial
markets. The Company also distributes refrigerated grocery items, primarily
cheese and other dairy items, to the retail grocery market in the central United
States.

The Company adopted the accounting policies of the Predecessor.

PRINCIPLES OF CONSOLIDATION AND FISCAL YEAR
The consolidated financial statements include the accounts of Michael
Foods, Inc. and all majority owned subsidiaries in which it has control. All
significant inter-company accounts and transactions have been eliminated. The
Company's investments in non-controlled entities in which it has the ability to
exercise significant influence over operating and financial policies are
accounted for by the equity method. The Company utilizes a fifty-two,
fifty-three week fiscal year ending on the Saturday nearest to December 31, but
for clarity of presentation, describes all periods as if the year end is
December 31. The years ended December 31, 2001, 2000 and 1999 each consisted of
fifty-two weeks.

BASIS OF PRESENTATION
The accompanying consolidated financial statements as of December 31, 2000
and for the two years then ended and for the three months ended March 31, 2001
have been taken from the historical books and records of the Predecessor.

USE OF ESTIMATES
Preparation of the Company's consolidated financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
reported amounts of assets and liabilities, related revenues and expenses and
disclosure about contingent assets and liabilities at the date of the financial
statements. Actual results could differ from the estimates used by management.

CASH AND EQUIVALENTS
The Company considers all highly liquid temporary investments with original
maturities of three months or less to be cash equivalents.

ACCOUNTS RECEIVABLE
The Company grants credit to customers in the normal course of business,
but generally does not require collateral or any other security to support
amounts due. Management performs on-going credit evaluations of customers. The
Company maintains an allowance for potential credit losses which, when realized,
have been within management's expectations. The allowance was $2,650,000 and
$2,232,000 at December 31, 2001 and 2000.

F-1-9

MICHAEL FOODS, INC.
(A wholly owned subsidiary of M-Foods Holdings, Inc.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONT.

INVENTORIES
Inventories, other than flocks, are stated at the lower of cost (determined
on a first-in, first-out basis) or market. Flock inventory represents the cost
of purchasing and raising flocks to laying maturity, at which time their cost is
amortized to operations over their expected useful lives of generally one to two
years.

Inventories consisted of the following at December 31:

ACCOUNTING FOR HEDGE ACTIVITIES
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standard ("SFAS") No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES, as amended. This standard establishes accounting and
reporting standards for derivative financial instruments and hedge activities.
Certain of the Company's operating segments hold derivative instruments, such as
corn, soybean meal, cheese and natural gas futures that the Company believes
provide an economic hedge of future transactions and are designated as cash flow
hedges. As the commodities being hedged are either grain ingredients fed to the
Company's flocks, raw materials or production inputs, the changes in the market
value of such contracts have historically been, and are expected to continue to
be, highly effective at offsetting changes in price movements of these items. In
addition, the Company has also entered into interest rate swap agreements, which
correspond with the interest payment terms of a portion of the Company's
variable rate senior secured credit facility. As the significant components of
the swap agreements and the credit facility are highly correlative, the Company
expects the swaps to be highly effective over the terms of the agreements. The
amount of hedge ineffectiveness was immaterial for the nine months ended
December 31, 2001 and the Predecessor's three months ended March 31, 2001.

The Company actively monitors its exposure to commodity price risks and
uses derivative commodity instruments to manage the impact of certain of these
risks. The Company uses derivatives, primarily futures contracts, only for the
purpose of managing risks associated with underlying exposures. The Company's
futures contracts are cash flow hedges of firm purchase commitments and
anticipated production requirements, as they reduce the Company's exposure to
changes in the cash price of the respective items and generally extend for less
than one year.

The Company does not trade or use instruments with the objective of earning
financial gains on the commodity price, nor does it use instruments where there
are not underlying exposures. Gains and losses on futures contracts are deferred
as a component of Accumulated Other Comprehensive Loss ("AOCL") in the Company's
equity section of the balance sheet and a corresponding amount is recorded in
other current assets or liabilities, as appropriate. The amounts deferred are
subsequently recognized in cost of sales when the associated products are sold.

F-1-10

MICHAEL FOODS, INC.
(A wholly owned subsidiary of M-Foods Holdings, Inc.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONT.

The cost or benefit of contracts closed prior to the execution of the underlying
purchase is deferred until the anticipated purchase occurs. As a result of the
volatility of the markets, deferred gains and losses in AOCL may fluctuate until
the related contract is closed.

Initially, upon adoption of the new derivative accounting standard, and
prospectively as required by the standard on the date new derivatives are
entered into, the Company formally documents all relationships between hedging
instruments and hedged items, as well as the Company's risk management
objectives and strategy for undertaking the hedge. This process includes
specific identification of the hedging instrument and the hedge transaction, the
nature of the risk being hedged and how the hedging instrument's effectiveness
will be assessed. Both at the inception of the hedge and on an ongoing basis,
the Company assesses whether the derivatives that are used in hedging
transactions are highly effective in offsetting changes in cash flows of hedged
items. If it is determined that a derivative ceases to be a highly effective
hedge or the forecasted transaction being hedged will no longer occur, the
Company will discontinue hedge accounting, and any gains or losses on the
derivative instrument will be recognized in earnings during the period in which
it no longer qualifies as a hedge. No such instances occurred in the nine months
ended December 31, 2001 or during the Predecessor's three months ended March 31,
2001.

PROPERTY, PLANT AND EQUIPMENT
Depreciation is provided in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives, principally
on the straight-line basis. Estimated service lives range from 10-40 years for
buildings and improvements and 3-10 years for machinery and equipment.
Accelerated and straight-line methods are used for income tax purposes. The
Company and Predecessor capitalized interest costs relating to the construction
and installation of property, plant and equipment of $196,000, $224,000 and
$1,054,000 for the nine months ended December 31, 2001 and years ended December
31, 2000 and 1999, respectively. No interest was capitalized during the three
months ended March 31, 2001.

GOODWILL
The Predecessor's acquisitions were accounted for as purchases and the
excess of the total acquisition costs over the fair value of the net assets
acquired was recorded as goodwill, which was being amortized on a straight-line
basis over 40 years. Accumulated amortization was $23,549,000 at December 31,
2000. At April 1, 2001, the Company recorded goodwill for the excess of the
purchase price of the Merger over the fair value of net assets acquired. The
Company amortized its goodwill over a 40 year period, which resulted in
accumulated amortization of $6,516,000 at December 31, 2001. Goodwill has been
assigned to each of the operating subsidiaries at the reporting unit level. The
Company evaluates its goodwill annually to determine potential impairment by
comparing its carrying value to the undiscounted future cash flows of the
related assets. See also Newly Adopted Accounting Standards.

DEFERRED FINANCING COSTS

In connection with the Merger financing, deferred financing costs of
$21,035,000 were capitalized. These costs are included in other assets and are
being amortized using the interest method over the lives of the respective debt
agreements. Accumulated amortization was $2,359,000 at December 31, 2001.

F-1-11

MICHAEL FOODS, INC.
(A wholly owned subsidiary of M-Foods Holdings, Inc.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONT.

FOREIGN JOINT VENTURES AND CURRENCY TRANSLATION

The Company has investments in foreign joint ventures in Europe and Canada
related to its Egg Products Division. These investments are accounted for using
the equity method of accounting. The financial statements for these entities are
measured in their local currency and then translated into U.S. dollars. Their
balance sheet accounts are translated using the current exchange rate at the
balance sheet date and their operating results are translated using the average
rates prevailing throughout the reporting period. Accumulated translation gains
or losses are recorded in AOCL and are included as a component of comprehensive
income (loss).

REVENUE RECOGNITION
Sales are recognized when goods are shipped to customers and are recorded
net of estimated customer programs and returns.

STOCK-BASED COMPENSATION
The Predecessor utilized the intrinsic value method of accounting for its
stock-based employee compensation plans. Pro forma information related to the
fair value method of accounting is provided in Note H. The Company does not have
any stock-based compensation plans.

NEWLY ADOPTED ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141 BUSINESS COMBINATIONS, which was effective for all business combinations
initiated after June 30, 2001. The statement requires that all business
combinations be accounted for under the purchase method and certain intangible
assets acquired in business combinations be recorded separately from goodwill if
certain requirements are met. The Company does not expect SFAS No. 141 to have
an impact on its consolidated financial statements.

In July 2001, the FASB issued SFAS No. 142 GOODWILL AND OTHER INTANGIBLE
ASSETS. This pronouncement, among other things, eliminates the amortization of
goodwill for financial reporting purposes. This pronouncement became effective
for the Company in January 2002, with goodwill now tested for impairment
annually or whenever an impairment indicator arises. SFAS No. 142 also requires
the Company to complete a transitional goodwill impairment test six months from
the date of adoption. The Company is currently assessing the impact of this new
statement on its consolidated financial position and does not believe the
statement will have a significant impact on the Company, other than the
cessation of goodwill amortization. The amount of goodwill amortization expense
for the nine months ended December 31, 2001 was $6,516,000.

ADVERTISING
Advertising costs are expensed as incurred. Advertising expense was
$3,779,000 during the nine months ended December 31, 2001 and $3,011,000 during
the three months ended March 31, 2001. During the years ended December 31, 2000
and 1999 advertising expense was $9,132,000 and $8,616,000.

RECLASSIFICATIONS
Certain 2000 and 1999 amounts have been reclassified to conform to the
December 31, 2001 presentation. The reclassifications had no effect on net
earnings or shareholders' equity as previously reported.

F-1-12

MICHAEL FOODS, INC.
(A wholly owned subsidiary of M-Foods Holdings, Inc.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE C--LONG-TERM DEBT

Long-term debt consisted of the following on December 31:

(a) At December 31, 2000, the Predecessor had unsecured revolving lines of
credit with its principal banks for $100,000,000. These lines were due
February 2002 with interest at the principal bank's reference rate, or at
Eurodollar rates at the Predecessor's option (effective rates of 7.46% at
December 31, 2000). In addition, the Predecessor also had $125,000,000 in
senior promissory notes due in five equal annual installments beginning in
2005.

In connection with the Merger, the Company repaid both the revolving lines
of credit and the senior promissory notes payable. The senior promissory
notes contained a change in control provision, which resulted in the
Predecessor incurring a mandatory early retirement premium. This retirement
premium payment was approximately $15,513,000 and is shown, net of the
related tax benefit of $6,089,000, in the Predecessor's consolidated
statement of earnings as an extraordinary item in the three months ended
March 31, 2001.

(b) Concurrent with the Merger, the Company entered into a new senior credit
agreement, which consists of a $100,000,000 revolving credit facility, a
$100,000,000 senior term loan A, both of which are due April 2007, and a
$270,000,000 senior term loan B due April 2008. The Company's senior credit
facility bears interest at a floating base rate plus an applicable margin,
as defined in the agreement (effective rate of 6.5% at December 31, 2001).
In addition, the Company also issued $200,000,000 of 11.75% senior
subordinated notes due April 2011, which are subordinated to the senior
credit agreement.

The revolving credit and senior term loans are secured by substantially all
of the assets of the Company. The revolving credit loan, the A and B term
loans and senior subordinated notes contain restrictive covenants,
including restrictions on dividends and distributions to shareholders and
unit holders, a minimum fixed charge coverage ratio, a maximum leverage
ratio, and a minimum interest coverage ratio, in addition to limitations on
additional indebtedness and liens. Covenants related to operating
performance are primarily based on earnings before income tax, interest
expense and depreciation and amortization expense. In addition, the
revolving credit, A and B term loans and senior subordinated note
agreements also include guarantees by substantially all of the Company's
domestic subsidiaries. The fair value of the Company's long-term debt at
December 31, 2001 approximated the carrying value.

F-1-13

MICHAEL FOODS, INC.
(A wholly owned subsidiary of M-Foods Holdings, Inc.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE C--LONG-TERM DEBT, CONT.

Aggregate maturities of the Company's long-term debt are as follows:

Years Ending December 31,
2002..................................... $ 12,962,000
2003..................................... 22,019,000
2004..................................... 17,949,000
2005..................................... 15,371,000
2006..................................... 23,664,000
Thereafter............................... 461,129,000
-------------
$ 553,094,000
=============

NOTE D--INCOME TAXES

The Merger was accomplished through a cash-for-stock transaction. As a
result, the basis of the Company's assets and liabilities did not change for
income tax reporting purposes. Goodwill arising through the Merger is not
deductible and is considered a permanent difference. A portion of Predecessor
goodwill, which was deductible for tax purposes prior to the Merger, will
continue to be deductible.

The taxable income or loss of the Dairy LLCs will be distributed primarily
to the Company until it has received payment for its preferred units and a 10%
cumulative return on the preferred units, and all senior secured and
subordinated debt has been retired.

Income tax expense (benefit) consists of the following:

F-1-14

MICHAEL FOODS, INC.
(A wholly owned subsidiary of M-Foods Holdings, Inc.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE D--INCOME TAXES, CONT.

Tax effects of the cumulative temporary differences between the tax bases
of assets and liabilities and their carrying amounts for financial reporting
purposes are as follows:

The following is a reconciliation of the Federal statutory income tax rate
to the consolidated effective tax rate:

NOTE E--EMPLOYEE RETIREMENT PLAN

Full-time employees who meet certain service requirements are eligible to
participate in a defined contribution retirement plan. The Company matches up to
4% of each participant's eligible compensation. Company contributions for the
nine months ended December 31, 2001 were $1,964,000. Predecessor contributions
totaled $1,194,000 for the three months ended March 31, 2001 and $2,692,000 and
$2,491,000 in the years ended December 31, 2000 and 1999.

NOTE F--RELATED PARTY TRANSACTIONS

Pursuant to management agreements with Vestar and GHJM, the Company pays
them a combined annual fee of $1,000,000 or .75% of consolidated earnings before
interest, taxes, depreciation and amortization, whichever is greater. The
management fee for the nine month period ended December 31, 2001 was
approximately $800,000. In addition, these affiliates were paid approximately
$10,500,000 by the Company for services rendered and expenses incurred in
connection with the Merger.

F-1-15

MICHAEL FOODS, INC.
(A wholly owned subsidiary of M-Foods Holdings, Inc.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE F--RELATED PARTY TRANSACTIONS, CONT.

In February 1997, the Predecessor acquired Papetti's Hygrade Egg Products,
Inc. and affiliated companies (collectively, "Papetti's"). In connection with
this acquisition, the Predecessor entered into various operating leases with the
previous owners of Papetti's for the majority of Papetti's operating facilities.
The future annual minimum rental commitments under these leases are
approximately $2,100,000 through February 2007, with the exception of one lease
that expires in February 2017. In addition, the Company and Predecessor purchase
eggs under an annual egg supply agreement with a partnership in which various
Papetti family members own a 50% interest. Annual purchases from this
partnership total approximately $10,000,000. See also Note H, "Repurchases of
Common Stock," for additional related party disclosure. Following the Merger,
the previous owners of Papetti's are no longer considered to be related parties,
as these individuals no longer own Company stock. The Company continues to be
obligated under the operating lease obligations and egg supply contracts
described above.

NOTE G--COMMITMENTS AND CONTINGENCIES

LEASE COMMITMENTS
The Company's corporate offices and several of its manufacturing facilities
are leased under operating leases expiring at various times through February
2017. The leases provide that real estate taxes, insurance, and maintenance
expenses are obligations of the Company. In addition, the Company leases some of
its transportation and manufacturing equipment under operating leases. Rent
expense, including real estate taxes and maintenance expenses, was approximately
$8,795,000 for the nine months ended December 31, 2001. Predecessor rent expense
was $2,002,000 for the three months ended March 31, 2001 and $8,639,000 and
$7,200,000 for the years ended December 31, 2000 and 1999. The following is a
schedule of minimum rental commitments for base rent for the years ending
December 31:

2002........................... $ 7,740,000
2003........................... 6,266,000
2004........................... 5,756,000
2005........................... 4,150,000
2006........................... 3,655,000
Thereafter..................... 10,089,000

DEBT GUARANTEES
The Company has guaranteed the repayment of certain industrial revenue
bonds used for the expansion of the wastewater treatment facilities of several
municipalities where the Company has manufacturing 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, the Company has agreed to pay any shortfall. The
remaining principal balance of these bonds at December 31, 2001 was
approximately $6,900,000.

EGG PROCUREMENT CONTRACTS
The Company maintains egg procurement contracts with numerous cooperatives
and egg producers throughout the Midwestern and Eastern United States, which
supply approximately 50% of the Company's egg requirements. These contracts vary
in length from 18 to 72 months with prices primarily indexed to grain or Urner
Barry market indices. No single egg supplier provides more than 10% of the
Company's egg requirements.

F-1-16

MICHAEL FOODS, INC.
(A wholly owned subsidiary of M-Foods Holdings, Inc.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE G--COMMITMENTS AND CONTINGENCIES, CONT.

PATENT LITIGATION
The Company has an exclusive license agreement for a patented process for
the production and sale of extended shelf-life liquid egg products. Under the
license agreement, the Company has the right to defend and prosecute
infringement of the underlying patents. The Company may apply 50% of its costs
of defending the patents to future royalty payments.

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

In 2000, the Predecessor settled litigation with one party related to the
infringement of these patents and issued a sub-license to the infringing party
granting them the right to manufacture and distribute extended shelf-life liquid
whole egg product subject to a royalty payable to the Company and the patent
holder on all future product sold. In connection with this settlement, the
patent holder received a lump sum payment for the past production and sale of
the product and other matters related to the infringement. The Company is
continuing to pursue litigation related to other parties who are infringing the
product and process patents, including Sunny Fresh Foods, Inc., a subsidiary of
Cargill, Inc.

OTHER LITIGATION
The Company is engaged in routine litigation incidental to its business.
Management believes the ultimate outcome of this litigation will not have a
material effect on the Company's consolidated financial position, liquidity or
results of operations.

NOTE H--SHAREHOLDERS' EQUITY

COMPANY - COMMON STOCK
The Company has authorized, issued and outstanding common stock of 1,000
shares with a $.01 par value. All common shares were issued to M-Foods Holdings,
Inc., a wholly owned subsidiary of M-Foods Investors, LLC, in connection with
the Merger.

PREDECESSOR - CAPITAL STOCK
The Predecessor had authorized capital stock of 50,000,000 shares
consisting of 40,000,000 shares of $.01 par value common stock and 10,000,000
shares of undesignated stock. The Board of Directors had the authority to
determine voting, conversion and other rights of the undesignated stock. There
were no shares of undesignated stock issued or outstanding at December 31, 2000
or 1999.

REPURCHASES OF COMMON STOCK

During 1998, the Predecessor's Board of Directors authorized the repurchase
of up to 2,000,000 shares of common stock. During 1999, the Predecessor
repurchased and retired 920,100 shares for $18,928,000. In February and May of
2000, the Board of Directors authorized the repurchase of an additional
2,500,000 shares under the repurchase program. During the year ended December
31, 2000, the Predecessor repurchased 2,109,400 shares for $46,125,000,
including 1,500,000 shares from a related party for $21.77 per share. No shares
were repurchased during the three months ended March 31, 2001.

F-1-17

MICHAEL FOODS, INC.
(A wholly owned subsidiary of M-Foods Holdings, Inc.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE H--SHAREHOLDERS' EQUITY, CONT.

INCENTIVE PLAN
The Predecessor had an incentive compensation plan for certain key
employees. The Predecessor utilized unissued common stock for a portion of the
incentive compensation in this plan. The Predecessor accrued for all incentive
compensation as earned. In connection with the Merger, this Plan was terminated
and all shares of common stock previously awarded under the plan were retired
through the Merger.

STOCK OPTION PLANS
The Predecessor maintained non-qualified stock option plans. The officer
and key employee plans had 911,400 shares of common stock available for issue at
December 31, 2000 and the non-employee director plan had 42,800 shares available
for issue at December 31, 2000. The stock options granted under these plans
generally had a ten year term, vested ratably over five years, and had an
exercise price equal to the fair market value of the stock on the date of grant.
Stock options totaling 957,740 and 766,434 shares with weighted average exercise
prices of $16.39 and $14.86 were exercisable at December 31, 2000 and 1999. In
connection with the Merger, all options for common stock previously awarded
became fully vested in accordance with the terms of the respective plans and the
option holders, except for certain options held by senior members of management,
were paid the difference between the $30.10 per share consideration and the
exercise price of their respective options (See Note A).

Option transactions under these plans for each of the two years ended
December 31, 2000 and 1999, and the three months ended March 31, 2001, are
summarized as follows:

F-1-18

MICHAEL FOODS, INC.
(A wholly owned subsidiary of M-Foods Holdings, Inc.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE H--SHAREHOLDERS' EQUITY, CONT.

The following tables summarize information concerning outstanding and
exercisable stock options at March 31, 2001:

Pro forma net earnings would have been $43,037,000 and $42,630,000 had the
fair value method been used for valuing options granted in the years ending 2000
and 1999. The pro forma effect on net earnings for 1999 is not representative of
the pro forma effect on net earnings of future years because it does not take
into consideration pro forma compensation expense related to grants made prior
to 1995.

The weighted average fair value of options granted in the years ending 2000
and 1999 were $9.49 and $9.53 per share, computed by applying the following
weighted average assumptions to the Black Scholes options pricing model:
dividend yield of 1% in 2000 and 1999; risk-free rate of return of 5.1% in 2000
and 6.5% in 1999; volatility of 40% in 2000 and 1999, and an average term of 7
years. There were no options granted during the three months ended March 31,
2001.

F-1-19

MICHAEL FOODS, INC.
(A wholly owned subsidiary of M-Foods Holdings, Inc.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE I--BUSINESS SEGMENTS

The Company operates in four reportable segments:

Egg Products processes and distributes numerous egg products and shell eggs
primarily through its facilities in the Midwest and Eastern United States. Sales
of egg products are made through an internal sales force and independent brokers
to the foodservice, industrial and retail markets primarily throughout the
United States.

Refrigerated Distribution distributes a wide range of refrigerated grocery
products, including various cheese products packaged at its Wisconsin cheese
packaging facility. Sales of refrigerated grocery products are made through an
internal sales force to retail and wholesale markets primarily throughout the
central United States.

Dairy Products processes and distributes soft serve ice cream mix, frozen
yogurt mix, milk and specialty dairy products, many of which are ultra-high
temperature pasteurized, from its facilities in Connecticut, Minnesota and
Texas. Sales of dairy products are made through an internal sales force to
domestic quick service restaurants, other foodservice outlets and independent
retailers throughout the United States.

Potato Products processes and distributes refrigerated potato products from
its manufacturing facilities in Minnesota and Nevada. Sales of potato products
are made through an internal sales force to foodservice and retail markets
throughout the United States.

The Company identifies its segments based on its organizational structure,
which is primarily by principal products. Operating profit represents earnings
before interest expense, interest income, income taxes, and allocations of
corporate costs to the respective divisions. Intersegment sales are made at
market prices. The Company's corporate office maintains a majority of the
Company's cash under its cash management policy.

Sales to two customers, primarily by the Egg Products segment, accounted
for approximately 18% and 15% of consolidated net sales for the nine months
ended December 31, 2001. The Predecessor had sales to one customer, which
accounted for approximately 12% of consolidated net sales for the three months
ended March 31, 2001 and 15% and 12% of consolidated net sales for the years
ending December 31, 2000 and 1999.

F-1-20

MICHAEL FOODS, INC.
(A wholly owned subsidiary of M-Foods Holdings, Inc.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE I--BUSINESS SEGMENTS, CONT.

Certain financial information for the Company's operating segments is as follows
(in thousands):

F-1-21

MICHAEL FOODS, INC.
(A wholly owned subsidiary of M-Foods Holdings, Inc.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE J--SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION
The Company's revolving credit facility, A and B term loans and senior
subordinated notes have been guaranteed, on a joint and several basis, by the
Company and its domestic subsidiaries. The revolving credit facility and A and B
term loans are also guaranteed by the Company's parent, M-Foods Holdings, Inc.

The following condensed consolidating financial information presents the
consolidated balance sheet and statements of earnings and cash flows of the
Company as of December 31, 2001 and the nine months then ended, and the
Predecessor's consolidated balance sheet as of December 31, 2000 and the
consolidated statements of earnings and cash flows for the three months ended
March 31, 2001 and for the years ended December 31, 2000 and 1999. These
financial statements reflect Michael Foods, Inc. (the parent), the wholly owned
guarantor subsidiaries (on a combined basis), the non-wholly owned guarantor
subsidiaries, and elimination entries necessary to combine such entities on a
consolidated basis. Included elsewhere in this annual report on Form 10-K are
the audited financial statements of the non-wholly owned guarantor subsidiaries.

COMPANY
CONDENSED CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 2001
(IN THOUSANDS)

F-1-22

MICHAEL FOODS, INC.
(A wholly owned subsidiary of M-Foods Holdings, Inc.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PREDECESSOR
CONDENSED CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 2000
(IN THOUSANDS)

F-1-23

MICHAEL FOODS, INC.
(A wholly owned subsidiary of M-Foods Holdings, Inc.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMPANY
CONDENSED CONSOLIDATING EARNINGS STATEMENTS
NINE MONTHS ENDED DECEMBER 31, 2001
(IN THOUSANDS)

F-1-24

MICHAEL FOODS, INC.
(A wholly owned subsidiary of M-Foods Holdings, Inc.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PREDECESSOR
CONDENSED CONSOLIDATING EARNINGS STATEMENTS
THREE MONTHS ENDED MARCH 31, 2001
(IN THOUSANDS)

F-1-25

MICHAEL FOODS, INC.
(A wholly owned subsidiary of M-Foods Holdings, Inc.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PREDECESSOR
CONDENSED CONSOLIDATING EARNINGS STATEMENTS
YEAR ENDED DECEMBER 31, 2000
(IN THOUSANDS)

F-1-26

MICHAEL FOODS, INC.
(A wholly owned subsidiary of M-Foods Holdings, Inc.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PREDECESSOR
CONDENSED CONSOLIDATING EARNINGS STATEMENTS
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS)

F-1-27

MICHAEL FOODS, INC.
(A wholly owned subsidiary of M-Foods Holdings, Inc.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMPANY
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED DECEMBER 31, 2001
(IN THOUSANDS)

F-1-28

MICHAEL FOODS, INC.
(A wholly owned subsidiary of M-Foods Holdings, Inc.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PREDECESSOR
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2001
(IN THOUSANDS)

F-1-29

MICHAEL FOODS, INC.
(A wholly owned subsidiary of M-Foods Holdings, Inc.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PREDECESSOR
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2000
(IN THOUSANDS)

NON-WHOLLY OWNED
GUARANTOR SUBSIDIARIES
--------------------------

F-1-30

MICHAEL FOODS, INC.
(A wholly owned subsidiary of M-Foods Holdings, Inc.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PREDECESSOR
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS)

NON-WHOLLY OWNED
GUARANTOR SUBSIDIARIES
--------------------------

F-1-31

MICHAEL FOODS, INC.
(A wholly owned subsidiary of M-Foods Holdings, Inc.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

QUARTERLY FINANCIAL DATA (UNAUDITED) (In thousands)

As a result of the Merger, the stock of the Predecessor is no longer
publicly traded and, therefore, earnings per share information is no longer
included for financial statement presentation.

F-1-32

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

BOARD OF DIRECTORS
MICHAEL FOODS, INC.

We have audited the accompanying balance sheet of M-Foods Dairy, LLC (a
majority owned subsidiary of Michael Foods, Inc.) as of December 31, 2001 and
the related statements of earnings, unit holder and operating unit equity, and
cash flows for the nine months then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe our audit provides a reasonable
basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of M-Foods Dairy, LLC (a
majority owned subsidiary of Michael Foods, Inc.) as of December 31, 2001, and
the results of its operations and its cash flows for the nine months then ended
in conformity with accounting principles generally accepted in the United States
of America.

We have also audited Schedule II for the nine months ended December 31,
2001. In our opinion, this schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information therein.

/s/ GRANT THORNTON LLP

Minneapolis, Minnesota
February 8, 2002

F-2-1

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

BOARD OF DIRECTORS
MICHAEL FOODS, INC.

We have audited the accompanying balance sheet of Kohler Mix - MN (an
operating unit of Michael Foods, Inc.) (the "Predecessor") as of December 31,
2000 and the related statements of earnings, unit holder and operating unit
equity, and cash flows for each of the two years in the period ended December
31, 2000 and the three months ended March 31, 2001. These financial statements
are the responsibility of the Predecessor's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe our audits provide a reasonable
basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Kohler Mix - MN (an
operating unit of Michael Foods, Inc.) as of December 31, 2000 and the results
of its operations and its cash flows for each of the two years in the period
ended December 31, 2000 and for the three months ended March 31, 2001, in
conformity with accounting principles generally accepted in the United States of
America.

We have also audited Schedule II for each of the two years in the period
ended December 31, 2000 and for the three months ended March 31, 2001. In our
opinion, this schedule, when considered in relation to the basic financial
statement taken as a whole, presents fairly, in all material respects, the
information therein.

/s/ GRANT THORNTON LLP

Minneapolis, Minnesota
May 15, 2001

F-2-2

M-FOODS DAIRY, LLC
(A MAJORITY OWNED SUBSIDIARY OF MICHAEL FOODS, INC.)
BALANCE SHEETS
(in thousands)

LIABILITIES AND UNIT HOLDER AND
OPERATING UNIT EQUITY

CURRENT LIABILITIES
Accounts payable....................................................... $ 2,612 $ 1,962
Accrued liabilities:
Compensation......................................................... 688 419
Insurance............................................................ 124 208
Customer programs.................................................... 836 550
Other................................................................ 503 204
--------------- ----------------
Total current liabilities.......................................... 4,763 3,343
DEFERRED INCOME TAXES.................................................... - 690
COMMITMENTS AND CONTINGENCIES............................................ - -
PREFERRED UNIT HOLDER RETURN PAYABLE..................................... 7,500 -
UNIT HOLDER AND OPERATING UNIT EQUITY.................................... 15,780 18,243
--------------- ----------------
$28,043 $22,276
=============== ================

The accompanying notes are an integral part of these statements.

F-2-3

M-FOODS DAIRY, LLC
(A MAJORITY OWNED SUBSIDIARY OF MICHAEL FOODS, INC.)
STATEMENTS OF EARNINGS
(in thousands)

The accompanying notes are an integral part of these statements.

F-2-4

M-FOODS DAIRY, LLC
(A MAJORITY OWNED SUBSIDIARY OF MICHAEL FOODS, INC.)
STATEMENTS OF UNIT HOLDER AND OPERATING UNIT EQUITY
(in thousands)

F-2-5

M-FOODS DAIRY, LLC
(A MAJORITY OWNED SUBSIDIARY OF MICHAEL FOODS, INC.)
STATEMENTS OF CASH FLOWS
(in thousands)

During the nine months ended December 31, 2001, the Company recorded a non-cash
guaranteed preferred unit holder return payable equal to the net earnings for
the period, which reduced unit holder equity by a like amount.

The accompanying notes are an integral part of these statements.

F-2-6

M-FOODS DAIRY, LLC
(A MAJORITY OWNED SUBSIDIARY OF MICHAEL FOODS, INC.)
NOTES TO FINANCIAL STATEMENTS

NOTE A - ORGANIZATION, BUSINESS AND MERGER

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

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

MERGER
On April 10, 2001, Michael Foods, Inc. and its subsidiaries ("Michael
Foods") was acquired in a transaction (the Merger") led by an investor group
comprised of a management group led by Michael Foods' Chairman, President and
Chief Executive Officer, Gregg Ostrander, affiliates of Jeffrey Michael, a
member of the Michael Foods Board of Directors, and affiliates of two private
equity investment firms, Vestar Capital Partners and Goldner Hawn Johnson &
Morrison Incorporated, collectively, M-Foods Investors, LLC. Under the terms of
the Merger agreement, all outstanding shares of Michael Foods common stock were
converted into the right to receive $30.10 per share in cash, or value equal
thereto, and all outstanding stock options were converted into the right to
receive, in cash, $30.10 per share reduced by the exercise price per share for
all shares subject to such stock options. The purchase of the outstanding shares
was financed through new equity financing of approximately $175,000,000, a
senior secured credit facility of up to $470,000,000 at market-based variable
interest rates (effective rate of 6.5% at December 31, 2001), and $200,000,000
of senior subordinated notes at an 11.75% annual interest rate.

Immediately after the close of the Merger, Michael Foods contributed the
assets of its Dairy division into two limited liability corporations, M-Foods
Dairy, LLC and M-Foods Dairy TXCT, LLC (collectively, the "Dairy LLCs") and in
exchange received voting preferred and voting common units from these entities
equal to the fair value of the net assets contributed, which collectively had a
revised valuation of approximately $35,800,000 (the revised fair value
contributed to M-Foods Dairy, LLC was approximately $26,850,000). The preferred
units issued to Michael Foods have an annual preferred return guarantee of the
greater of 10% or net earnings through the second anniversary of the agreement
and 10% thereafter. These units represent 100% of the preferred units issued and
outstanding. In addition, Michael Foods received 5% of the common units issued
by each of the Dairy LLCs with the common units held by Michael Foods
representing 100% of the voting common units issued and outstanding. These
common units have a stated value of $25,000. The remaining 95% of the common
units, which are non-voting, are owned by M-Foods Dairy Holdings, LLC, which is
owned by the same owners, or affiliates of such owners, in the same proportion,
as the unit holders of M-Foods Investors, LLC. The Dairy LLCs common unit
interest owned by M-Foods Dairy Holdings, LLC was purchased for $475,000.

F-2-7

M-FOODS DAIRY, LLC
(A MAJORITY OWNED SUBSIDIARY OF MICHAEL FOODS, INC.)
NOTES TO FINANCIAL STATEMENTS

NOTE A - ORGANIZATION, BUSINESS AND MERGER, (cont.)

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

The Merger was accounted for as a purchase in accordance with Accounting
Principles Board Opinion 16, BUSINESS COMBINATIONS and EITF 88-16, BASIS IN
LEVERAGED BUYOUT TRANSACTIONS. Accordingly, the acquired assets and liabilities
have been recorded at fair value for the interests acquired by new investors and
at the carryover basis for continuing investors. As a result, the assets and
liabilities are assigned new values, which are part Predecessor cost and part
fair value, in the same proportions as the carryover basis of the residual
interests retained by the continuing management investors and continuing
affiliate investors of the Michael family and the new interests acquired by the
new investors. The deemed dividend related to the Michael Foods investment in
the assets and liabilities of the Dairy LLCs was pushed down to these majority
owned subsidiaries, as if they were wholly owned subsidiaries since Michael
Foods owns all of the voting stock and the Dairy LLCs are being operated by the
management of Michael Foods. The amount of the deemed dividend at Michael Foods
was $66,631,000.

For ease of presentation, the Merger has been reflected in the accompanying
financial statements as if it had occurred on April 1, 2001. Management
determined that no material transactions occurred during the period from April 1
through April 9, 2001. The Company's financial statements have been presented on
a comparative basis with the Predecessor's historical operating unit financial
statements, prior to the date of the Merger. Different bases of accounting have
been used to prepare the Company and Predecessor financial statements. The
primary differences relate to the 10% yield on preferred units, depreciation and
amortization of fixed assets and other intangible assets recorded at fair value
at the date of acquisition, and income taxes which are payable by the Company's
unit holders.

For accounting purposes the Merger was considered a leveraged buyout. The
fair value contributed by Michael Foods to M-Foods Dairy, LLC was $26,850,000.
In addition, $356,250 was contributed by new investors in exchange for Class B
non-voting common units. This combined amount was allocated to the acquired
assets and liabilities based on their fair values at April 1, 2001, net of the
deemed dividend. These allocations were based preliminary on a valuation report
by a third party appraisal firm. The allocation of the purchase price was as
follows (in thousands):

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

F-2-8

M-FOODS DAIRY, LLC
(A MAJORITY OWNED SUBSIDIARY OF MICHAEL FOODS, INC.)
NOTES TO FINANCIAL STATEMENTS

NOTE A - ORGANIZATION, BUSINESS AND MERGER, (cont.)

The following unaudited pro forma revenue and pre-tax net earnings for the
year ended December 31, 2000 are derived from the application of pro forma
adjustments to the Predecessor historical statements of earnings and assume the
Merger had occurred on January 1, 2000. The unaudited pro forma revenue and
pre-tax net earnings for the year ended December 31, 2001, which assumes the
Merger had occurred on January 1, 2001, are derived by combining the application
of the pro forma adjustments to the Predecessor's historical statement of
earnings for the three months ended March 31, 2001, with the Company's actual
results for the nine months ended December 31, 2001.

The most significant of the pro forma adjustments reflected in the above
amounts were to record additional amortization charges resulting from increased
intangible assets. The pro forma financial information should be read in
conjunction with the related historical information and is not necessarily
indicative of the results that would have been obtained had the transaction
actually taken place at the beginning of the periods presented.

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION
The accompanying consolidated financial statements as of December 31, 2000
and for the two years then ended and for the three months ended March 31, 2001
have been taken from the historical books and records of the Predecessor. The
respective Statements of Earnings include an allocation of general and
administrative costs incurred by Michael Foods and allocations from this
Operating Unit to the other Dairy LLC operating unit, M-Foods Dairy TXCT, LLC.
Management believes its allocations to, and between, these Operating Unit
financial statements are reasonable. Additionally, Predecessor Operating Unit
equity includes the cumulative net advances between the Operating Unit and
Michael Foods, which are considered additional capital invested from, or
constructive dividends to, Michael Foods. Accordingly, the accompanying
financial statements may not necessarily be indicative of the results that could
have been obtained if the Operating Unit had been operated as a stand-alone
entity.

The Company adopted the accounting policies of the Predecessor.

USE OF ESTIMATES
Preparation of the accompanying financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect reported
amounts of assets and liabilities, related revenues and expenses and disclosure
about contingent assets and liabilities at the date of the financial statements.
Actual results could differ from the estimates used by management.

F-2-9

M-FOODS DAIRY, LLC
(A MAJORITY OWNED SUBSIDIARY OF MICHAEL FOODS, INC.)
NOTES TO FINANCIAL STATEMENTS

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (cont.)

ACCOUNTS RECEIVABLE
The company grants credit to customers in the normal course of business,
but generally does not require collateral or any other security to support
amounts due. Management performs on-going credit evaluations of customers. The
company maintains an allowance for potential credit losses which, when realized,
have been within management's expectations. The allowance was $200,000 and
$153,000 at December 31, 2001 and 2000.

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

Inventories consisted of the following (in thousands):

PROPERTY, PLANT AND EQUIPMENT
Depreciation is provided in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives, principally
on the straight-line basis. Estimated service lives range from 10-40 years for
buildings and improvements and 3-10 years for machinery and equipment.
Accelerated and straight-line methods are used for income tax purposes.

GOODWILL
The Predecessor's acquisitions were accounted for as purchases and the
excess of the total acquisition costs over the fair value of the net assets
acquired was recorded as goodwill, which was being amortized on a straight-line
basis over 40 years. Accumulated amortization was $1,800,000 at December 31,
2000. At April 1, 2001, the Company recorded goodwill for the excess of the
purchase price of the Merger over the fair value of net assets acquired.
Goodwill was assigned to each of the operating subsidiaries at the reporting
unit level. The Company amortizes its goodwill over a 40 year period, which
resulted in accumulated amortization of $34,000 at December 31, 2001. The
Company evaluates its goodwill annually to determine potential impairment by
comparing its carrying value to the undiscounted future cash flows of the
related assets.

In July 2001, the FASB issued SFAS No. 142 GOODWILL AND OTHER INTANGIBLE
ASSETS. This pronouncement, among other things, eliminates the amortization of
goodwill for financial reporting purposes. This pronouncement becomes effective
for the Company beginning in January 2002, after which goodwill will be tested
for impairment annually or whenever an impairment indicator arises. SFAS No. 142
also requires the Company to complete a transitional goodwill impairment test
six months from the date of adoption. The Company is currently assessing the
impact of this new statement on its consolidated financial position and does not
believe the statement will have a significant impact on the Company, other than
the cessation of goodwill amortization. The amount of goodwill amortization
expense for the nine months ended December 31, 2001 was $34,000.

F-2-10

M-FOODS DAIRY, LLC
(A MAJORITY OWNED SUBSIDIARY OF MICHAEL FOODS, INC.)
NOTES TO FINANCIAL STATEMENTS

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (cont.)

REVENUE RECOGNITION

Sales are recognized when goods are shipped to customers and are recorded
net of estimated customer programs and returns.

RECLASSIFICATIONS

Certain 2000 and 1999 amounts have been reclassified to conform to the
December 31, 2001 presentation. The reclassifications had no effect on net
earnings or operating unit equity as previously reported.

NOTE C - SETTLEMENT OF RECALL INSURANCE CLAIM

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

NOTE D - INCOME TAXES

COMPANY
For income tax purposes the Company is a pass-through entity and,
therefore, income taxes have not been reflected in the Company's financial
statements.

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

NOTE E - EMPLOYEE RETIREMENT PLANS

Full-time non-union employees who meet certain service requirements are
eligible to participate in a defined contribution retirement plan of Michael
Foods, Inc. Under the Plan, the Company matches up to 4% of each
participant's eligible compensation. The Company's union employees are also
covered by a defined benefit plan sponsored by the Company. Company
contributions under these plans for the nine months ended December 31, 2001
were $105,000. The Predecessor's contributions totaled $190,000 and $136,000
for the years ended December 31, 2000 and 1999 and $48,000 for the three
months ended March 31, 2001.

F-2-11

M-FOODS DAIRY, LLC
(A MAJORITY OWNED SUBSIDIARY OF MICHAEL FOODS, INC.)
NOTES TO FINANCIAL STATEMENTS

NOTE F - COMMITMENTS AND CONTINGENCIES

LEASES
The Company leases certain equipment and property under operating lease
agreements expiring at various dates through 2004. Rent expense totaled
$689,000, $527,000, and $400,000 in the years ending December 31, 2001, 2000 and
1999 and $146,000 for the three months ended March 31, 2001.

Minimum future lease obligations under these operating leases are as follows for
the years ending December 31 (in thousands):

2002 $354
2003 354
2004 314

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

NOTE G - UNIT HOLDER RETURN PREFERENCES

The income or loss resulting from the Company's operations will be allocated as
follows:

- Losses will first be allocated to the common unit holders to the
extent of their capital accounts. The maximum loss allocation is,
therefore, limited to $375,000 which would be allocated $18,750 to
Michael Foods, Inc. and $356,250 to the non-voting common unit
holders; thereafter, all losses are allocated to Michael Foods, Inc.;

- The Company's income will be allocated to Michael Foods, Inc. until
all preferred units and return on preferred units of both Dairy LLCs
have been recovered. The Dairy LLC's combined preferred units have a
value of approximately $26,850,000 and earn the greater of a 10%
cumulative return on the capital contribution or the Company's net
earnings through the second anniversary of the agreement and a 10%
cumulative return thereafter. The preferred unit holder return payable
for the nine months ended December 31, 2001 was $7,500,000, which
represented the net earnings for the period;

- Income in excess of the preferred unit amount and preferred unit
return is distributed, subject to various limitations, to the common
unit holders. Michael Foods, Inc. will receive 5% of this income, for
their portion of the common units outstanding and the other common
unit holders will receive 95%. The other common unit holders are
permitted to keep an amount of this distribution equal to the tax due
on the income they receive. Any additional distribution, in excess of
the taxes due, must be contributed in exchange for capital stock of
M-Foods Holdings, Inc. until such time as all of the revolving credit
facility, term loans A and B, and senior subordinated notes have been
repaid;

F-2-12

M-FOODS DAIRY, LLC
(A MAJORITY OWNED SUBSIDIARY OF MICHAEL FOODS, INC.)
NOTES TO FINANCIAL STATEMENTS

NOTE G - UNIT HOLDER RETURN PREFERENCES, (cont.)

- In the event the Company is sold while Michael Foods, Inc.'s revolving
credit facility, senior term loans A and B or subordinated debt is
outstanding, the gain or loss on the sale will follow the allocation
methods described above and gains must be contributed in exchange for
capital stock of M-Foods Holdings, Inc. until all of the revolving
credit facility, term loans A and B, and senior subordinated notes
have been retired. The total amount of Michael Foods, Inc. outstanding
debt subject to this distribution restriction is approximately
$548,000,000 at December 31, 2001.

NOTE H - STOCK OPTION PLANS

Certain officers and employees of the Predecessor participated in various
stock option plans sponsored by the Michael Foods Predecessor. The Michael Foods
Predecessor followed Accounting Principal Board No. 25 ("APB 25") in accounting
for stock options issued under its plans. Under APB 25, no compensation expense
was recognized by the Michael Foods Predecessor related to the Unit's officers
or employees for any of the periods presented. At the time of the Merger, all
stock options issued and outstanding under these plans vested and were retired.
For information related to the Michael Foods Predecessor's stock option plans,
refer to Note H of its financial statements contained elsewhere in this
document.

F-2-13

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

BOARD OF DIRECTORS
MICHAEL FOODS, INC.

We have audited the accompanying balance sheet of M-Foods Dairy TXCT, LLC
(a majority owned subsidiary of Michael Foods, Inc.) as of December 31, 2001 and
the related statements of operations, unit holder and operating unit equity, and
cash flows for the nine months then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe our audit provides a reasonable
basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of M-Foods Dairy TXCT, LLC (a
majority owned subsidiary of Michael Foods, Inc.) as of December 31, 2001, and
the results of its operations and its cash flows for the nine months then ended
in conformity with accounting principles generally accepted in the United States
of America.

/s/ GRANT THORNTON LLP

Minneapolis, Minnesota
February 8, 2002

F-3-1

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

BOARD OF DIRECTORS
MICHAEL FOODS, INC.

We have audited the accompanying balance sheet of Kohler Mix - TXCT (an
operating unit of Michael Foods, Inc.) (the "Predecessor") as of December 31,
2000 and the related statements of operations, unit holder and operating unit
equity, and cash flows for each of the two years in the period ended December
31, 2000 and the three months ended March 31, 2001. These financial statements
are the responsibility of the Predecessor's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe our audits provide a reasonable
basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Kohler Mix - TXCT (an
operating unit of Michael Foods, Inc.) as of December 31, 2000 and the results
of its operations and its cash flows for each of the two years in the period
ended December 31, 2000 and for the three months ended March 31, 2001, in
conformity with accounting principles generally accepted in the United States of
America.

/s/ GRANT THORNTON LLP

Minneapolis, Minnesota
May 15, 2001

F-3-2

M-FOODS DAIRY TXCT, LLC
(A MAJORITY OWNED SUBSIDIARY OF MICHAEL FOODS, INC.)
BALANCE SHEETS
(in thousands)

The accompanying notes are an integral part of these statements.

F-3-3

M-FOODS DAIRY TXCT, LLC
(A MAJORITY OWNED SUBSIDIARY OF MICHAEL FOODS, INC.)
STATEMENTS OF OPERATIONS
(in thousands)

The accompanying notes are an integral part of these statements.

F-3-4

M-FOODS DAIRY TXCT, LLC
(A MAJORITY OWNED SUBSIDIARY OF MICHAEL FOODS, INC.)
STATEMENTS OF UNIT HOLDER AND OPERATING UNIT EQUITY
(in thousands)

The accompanying notes are an integral part of these statements.

F-3-5

M-FOODS DAIRY TXCT, LLC
(A MAJORITY OWNED SUBSIDIARY OF MICHAEL FOODS, INC.)
STATEMENTS OF CASH FLOWS
(in thousands)

During the nine months ended December 31, 2001, the Company recorded a non-cash
guaranteed preferred unit holder return payable of $688 representing the
cumulative 10% guaranteed preferred unit holder return, which reduced unit
holder equity by a like amount.

In conjunction with the purchase of the Connecticut facility during 1999, the
company recorded a non-compete agreement of $12,000 and a related non-compete
commitment for $12,000 of which $2,400 was paid in 2001, 2000 and 1999. (See
Note D).

The accompanying notes are an integral part of these statements.

F-3-6

M-FOODS DAIRY TXCT, LLC
(A MAJORITY OWNED SUBSIDIARY OF MICHAEL FOODS, INC.)
NOTES TO FINANCIAL STATEMENTS

NOTE A - ORGANIZATION, BUSINESS AND MERGER

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

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

MERGER
On April 10, 2001, Michael Foods, Inc. and its subsidiaries ("Michael
Foods") was acquired in a transaction (the Merger") led by an investor group
comprised of a management group led by Michael Foods' Chairman, President and
Chief Executive Officer, Gregg Ostrander, affiliates of Jeffrey Michael, a
member of the Michael Foods Board of Directors, and affiliates of two private
equity investment firms, Vestar Capital Partners and Goldner Hawn Johnson &
Morrison Incorporated, collectively, M-Foods Investors, LLC. Under the terms of
the Merger agreement, all outstanding shares of Michael Foods common stock were
converted into the right to receive $30.10 per share in cash, or value equal
thereto, and all outstanding stock options were converted into the right to
receive, in cash, $30.10 per share reduced by the exercise price per share for
all shares subject to such stock options. The purchase of the outstanding shares
was financed through new equity financing of approximately $175,000,000, a
senior secured credit facility of up to $470,000,000 at market-based variable
interest rates (effective rate of 7.5% at April 10, 2001), and $200,000,000 of
senior subordinated notes at an 11.75% annual interest rate.

Immediately after the close of the Merger, Michael Foods contributed the
assets of its Dairy division into two limited liability corporations, M-Foods
Dairy, LLC and M-Foods Dairy TXCT, LLC (collectively, the "Dairy LLCs") and in
exchange received voting preferred and voting common units from these entities
equal to the fair value of the net assets contributed, which collectively had a
revised valuation of approximately $35,800,000 (the fair value contributed to
M-Foods Dairy TXCT, LLC was approximately $8,950,000). The preferred units
issued to Michael Foods have an annual preferred return guarantee of the greater
of 10% or net earnings through the second anniversary of the agreement and 10%
thereafter. These units represent 100% of the preferred units issued and
outstanding. In addition, Michael Foods received 5% of the common units issued
by each of the Dairy LLCs with the common units held by Michael Foods
representing 100% of the voting common units issued and outstanding. These
common units have a stated value of $25,000. The remaining 95% of the common
units, which are non-voting, are owned by M-Foods Dairy Holdings, LLC, which is
owned by the same owners, or affiliates of such owners, in the same proportion,
as the unit holders of M-Foods Investors, LLC. The Dairy LLCs common unit
interest owned by M-Foods Dairy Holdings, LLC was purchased for $475,000.

Following the Merger, Michael Foods, Inc. became an indirect wholly-owned
subsidiary of M-Foods Investors, LLC and M-Foods Dairy TXCT, LLC became a
majority owned subsidiary of Michael Foods, Inc.

F-3-7

M-FOODS DAIRY TXCT, LLC
(A MAJORITY OWNED SUBSIDIARY OF MICHAEL FOODS, INC.)
NOTES TO FINANCIAL STATEMENTS

NOTE A - ORGANIZATION, BUSINESS AND MERGER, (cont.)

The Merger has been accounted for as a purchase in accordance with
Accounting Principles Board Opinion 16, BUSINESS COMBINATIONS and EITF 88-16,
BASIS IN LEVERAGED BUYOUT TRANSACTIONS. Accordingly, the acquired assets and
liabilities have been recorded at fair value for the interests acquired by new
investors and at the carryover basis for continuing investors. As a result, the
assets and liabilities are assigned new values, which are part Predecessor cost
and part fair value, in the same proportions as the carryover basis of the
residual interests retained by the continuing management investors and
continuing affiliate investors of the Michael family and the new interests
acquired by the new investors. The deemed dividend related to the Michael Foods
investment in the assets and liabilities of the Dairy LLCs was pushed down to
these majority owned subsidiaries, as if they were wholly owned subsidiaries
since Michael Foods owns all of the voting stock and the Dairy LLCs are being
operated by the management of Michael Foods. The amount of the deemed dividend
at Michael Foods was $66,631,000. However, the historical cost basis equity of
the continuing investors of the Company was $21,623,000, which exceeded the
Company's fair market value by $12,673,000. This resulted in an allocation of
carryover basis in excess of the fair market value of the Company in the amount
of $3,928,000.

For ease of presentation, the Merger has been reflected in the accompanying
financial statements as if it had occurred on April 1, 2001. Management
determined that no material transactions occurred during the period from April 1
through April 9, 2001. The Company's financial statements have been presented on
a comparative basis with the Predecessor's historical operating unit financial
statements, prior to the date of Merger. Different bases of accounting have been
used to prepare the Company and Predecessor financial statements. The primary
differences relate to the 10% yield on preferred units, depreciation and
amortization of fixed assets and other intangible assets recorded at fair value
at the date of acquisition, and income taxes which are payable by the Company's
unit holders.

For accounting purposes the Merger was considered a leveraged buyout. The
fair value contributed by Michael Foods to M-Foods Dairy TXCT, LLC was
$8,950,000 and this amount, plus an additional carryover basis of $3,928,000 was
allocated to the acquired assets and liabilities based on their fair values at
April 1, 2001. In addition, $118,750 was contributed by new investors in
exchange for Class B - non voting common units. These allocations were based
preliminary on a valuation report by a third party appraisal firm. The
allocation of the purchase price was as follows (in thousands):

The following unaudited pro forma revenue and pre-tax net earnings for the
year ended December 31, 2000 are derived from the application of pro forma
adjustments to the Predecessor historical statements of earnings and assume the
Merger had occurred on January 1, 2000. The unaudited pro forma revenue and
pre-tax net earnings for the year ended December 31, 2001, which assumes the
Merger had occurred on January 1, 2001, are derived by combining the application
of the pro forma adjustments to the Predecessor's historical statement of
earnings for the three months ended March 31, 2001, with the Company's actual
results for the nine months ended December 31, 2001.

F-3-8

M-FOODS DAIRY TXCT, LLC
(A MAJORITY OWNED SUBSIDIARY OF MICHAEL FOODS, INC.)
NOTES TO FINANCIAL STATEMENTS

NOTE A - ORGANIZATION, BUSINESS AND MERGER, (cont.)

Year ended Year ended
December 31, 2001 December 31, 2000
-------------------------------------- --------------------------------------
(in thousands)

Revenue $94,250 $73,814
Pre-tax net loss (351) (1,622)

The most significant of the pro forma adjustments reflected in the above
amounts were to record a reduction in depreciation and amortization charges
resulting from write-down of long-term assets. The pro forma financial
information should be read in conjunction with the related historical
information and is not necessarily indicative of the results that would have
been obtained had the transaction actually taken place at the beginning of the
periods presented.

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION
The accompanying consolidated financial statements as of December 31, 2000
and for the two years then ended and for the three months ended March 31, 2001
have been taken from the historical books and records of the Predecessor. The
respective Statements of Earnings include an allocation of general and
administrative costs incurred by Michael Foods and allocations to this Operating
Unit from the other Dairy LLC operating unit, M-Foods Dairy, LLC. Management
believes its allocations to, and between, these Operating Unit financial
statements are reasonable. Additionally, Predecessor Operating Unit equity
includes the cumulative net advances between the Operating Unit and Michael
Foods, which are considered additional capital invested from, or constructive
dividends to, Michael Foods. Accordingly, the accompanying financial statements
may not necessarily be indicative of the results that could have been obtained
if the Operating Unit had been operated as a stand-alone entity.

The Company adopted the accounting policies of the Predecessor.

USE OF ESTIMATES
Preparation of the accompanying financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect reported
amounts of assets and liabilities, related revenues and expenses and disclosure
about contingent assets and liabilities at the date of the financial statements.
Actual results could differ from the estimates used by management.

ACCOUNTS RECEIVABLE
The company grants credit to customers in the normal course of business,
but generally does not require collateral or any other security to support
amounts due. Management performs on-going credit evaluations of customers. The
company considers accounts receivable to be fully collectible; accordingly, no
allowance for doubtful accounts is provided. If amounts become uncollectible,
they will be charged to operations when that determination is made.

F-3-9

MICHAEL FOODS, INC.
(A wholly owned subsidiary of M-Foods Holdings, Inc.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (cont.)

INVENTORIES

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

Inventories consisted of the following (in thousands):

PROPERTY, PLANT AND EQUIPMENT
Depreciation is provided in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives, principally
on the straight-line basis. Estimated service lives range from 3-10 years for
machinery and equipment. Leasehold improvements are amortized over the shorter
of the lease term or the useful life of the improvement. Accelerated and
straight-line methods are used for income tax purposes.

REVENUE RECOGNITION
Sales are recognized when goods are shipped to customers and are recorded
net of estimated customer programs and returns.

RECLASSIFICATIONS
Certain 2000 and 1999 amounts have been reclassified to conform to the
December 31, 2001 presentation. The reclassifications had no effect on net
earnings or operating unit equity as previously reported.

NOTE C - INCOME TAXES

COMPANY
For income tax purposes the Company is a pass through entity, therefore,
income taxes have not been reflected on the Company's financial statements.

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

F-3-10

M-FOODS DAIRY TXCT, LLC
(A MAJORITY OWNED SUBSIDIARY OF MICHAEL FOODS, INC.)
NOTES TO FINANCIAL STATEMENTS

NOTE D - NON-COMPETE AGREEMENT AND COMMITMENT

During 1999, as part of the consideration for its Connecticut dairy asset
purchase, the Operating Unit entered into a $12,000,000 non-compete agreement.
Under the agreement, the Operating Unit agreed to make five annual $2,400,000
payments beginning in 1999. The total remaining commitment at December 31, 2001
and 2000 was $4,800,000 and $7,200,000. Additionally, a related asset of
$12,000,000 was recorded in 1999 and was being amortized over the term of the
six-year non-compete agreement. At April 1, 2001, based upon the assessment of a
third party appraisal firm, no fair value was allocated to the non-compete
agreement. However, its carryover basis value, net of a negative goodwill
adjustment, was approximately $1,400,000 and will be amortized over the
agreement's remaining term. Accumulated amortization was $342,000 and $3,333,000
at December 31, 2001 and 2000.

NOTE E - EMPLOYEE RETIREMENT PLAN

Full-time employees who meet certain service requirements are eligible to
participate in a defined contribution retirement plan of Michael Foods, Inc.
Under the Plan, the Company matches up to 4% of each participant's eligible
compensation. Company contributions under the plan for the nine months ended
December 31, 2001 were $82,000. The Predecessor's contributions related to the
Unit's eligible employees totaled $104,000 and $69,000 for the years ended
December 31, 2000 and 1999 and $33,000 for the three months ended March 31,
2001.

NOTE F - COMMITMENTS AND CONTINGENCIES

LEASES

The Company leases certain equipment and property under operating lease
agreements expiring at various dates through 2007. Rent expense, including real
estate taxes and maintenance expenses, was approximately $1,754,000 for the nine
months ended December 31, 2001. Predecessor rent expense was $527,000 for the
three months ended March 31, 2001 and $2,593,000 and $1,496,000 for the years
ended December 31, 2000 and 1999.

Minimum future lease obligations under these operating leases are as
follows for the years ending December 31 (in thousands):

2002 $2,320
2003 2,320
2004 2,320
2005 1,511
2006 1,266
Thereafter 1,854

F-3-11

M-FOODS DAIRY TXCT, LLC
(A MAJORITY OWNED SUBSIDIARY OF MICHAEL FOODS, INC.)
NOTES TO FINANCIAL STATEMENTS

NOTE F - COMMITMENTS AND CONTINGENCIES, (cont.)

LITIGATION

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

NOTE G - UNIT HOLDER RETURN PREFERENCES

The income or loss resulting from the Company's operations will be
allocated as follows:

- Losses will first be allocated to the common unit holders to the
extent of their capital accounts. The maximum loss allocation is,
therefore, limited to $125,000 which would be allocated $6,250 to
Michael Foods, Inc. and $118,750 to the non-voting common unit
holders; thereafter, all losses are allocated to Michael Foods, Inc.;

- The Company's income will be allocated to Michael Foods, Inc. until
all preferred units and return on preferred units of both Dairy LLCs
have been recovered. The Dairy LLC's combined preferred units have a
value of approximately $26,850,000 and earn the greater of a 10%
cumulative return on the capital contribution or the Company's net
earnings through the second anniversary of the agreement and a 10%
cumulative return thereafter. The preferred unit holder return payable
for the nine months ended December 31, 2001 was $688,000, which
represented the 10% cumulative return for the period;

- Income in excess of the preferred unit amount and preferred unit
return is distributed, subject to various limitations, to the common
unit holders. Michael Foods, Inc. will receive 5% of this income, for
their portion of the common units outstanding and the other common
unit holders will receive 95%. The other common unit holders are
permitted to keep an amount of this distribution equal to the tax due
on the income they receive. Any additional distribution, in excess of
the taxes due, must be contributed in exchange for capital stock of
M-Foods Holdings, Inc. until such time as all of the revolving credit
facility, term loans A and B, and senior subordinated notes have been
repaid;

- In the event the Company is sold while Michael Foods, Inc.'s revolving
credit facility, senior term loans A and B or subordinated debt is
outstanding, the gain or loss on the sale will follow the allocation
methods described above and gains must be contributed in exchange for
capital stock of M-Foods Holdings, Inc. until all of the revolving
credit facility, term loans A and B, and senior subordinated notes
have been retired. The total amount of Michael Foods, Inc. outstanding
debt subject to this distribution restriction is approximately
$548,000,000 at December 31, 2001.

F-3-12

M-FOODS DAIRY TXCT, LLC
(A MAJORITY OWNED SUBSIDIARY OF MICHAEL FOODS, INC.)
NOTES TO FINANCIAL STATEMENTS

NOTE H - STOCK OPTION PLANS

Certain officers and employees of the Predecessor participated in various
stock option plans sponsored by the Michael Foods Predecessor. The Michael Foods
Predecessor followed Accounting Principal Board No. 25 ("APB 25") in accounting
for stock options issued under its plans. Under APB 25, no compensation expense
was recognized by the Michael Foods Predecessor related to the Unit's officers
or employees for any of the periods presented. At the time of the Merger, all
stock options issued and outstanding under these plans vested and were retired.
For information related to the Michael Foods Predecessor's stock option plans,
refer to Note H of its financial statements contained elsewhere in this
document.

F-3-13