UNITED STATES SECURITIES AND EXCHANGE COMMISSION

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
For the quarterly period ended June 30, 2003
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 333-63722

MICHAEL FOODS, INC.
(Exact name of registrant as specified in its charter)
Minnesota		41-0498850
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
401 Carlson Parkway Suite 300 Minnetonka, MN		55305
(Address of principal executive offices)		(Zip code)
(952) 258-4000
(Registrant’s telephone number, including area code)

MICHAEL FOODS, INC.

~~Indicate by check mark whether the registrant~~ (1)Exact ~~has filed~~name ~~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~~as ~~required~~specified toin ~~file~~its ~~such reports~~charter)~~, and (2) has been subject to such filing requirements for the past 90 days. ý Yes o No~~

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

401 Carlson Parkway Suite 300 Minnetonka, MN		55305
(Address of principal executive offices)		(Zip code)

(952) 258-4000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (“Exchange Act”) 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. ý Yes o No

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

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MICHAEL FOODS, INC.

(A ~~WHOLLY~~wholly-~~OWNED~~owned ~~SUBSIDIARY~~subsidiary OFof M-~~FOODS~~Foods ~~HOLDINGS~~Holdings, ~~INC~~Inc.)

~~CONDENSED CONSOLIDATED~~Condensed ~~BALANCE~~Consolidated ~~SHEETS~~Balance Sheets

(Unaudited, dollars in thousands)

	September 30, 2002			December 31, 2001
	June 30, 2003			December 31, 2002
ASSETS
CURRENT ASSETS
Current assets
Cash and equivalents	$	5724,~~126,000~~245		$	2720,~~660,000~~572
Accounts receivable, less allowances	9692,~~171,000~~475			~~102~~101,~~317,000~~579
Inventories	9386,~~367,000~~224			7895,~~941,000~~807
Prepaid expenses and other	119,~~637,000~~561			1113,~~370,000~~571
Total current assets	258,301,000			220,288,000
Assets held for sale	59,533			—
PROPERTY, PLANT AND EQUIPMENT-AT COST
Total current assets	272,038			231,529
Land	3,873,000			3,873,000
Property, plant and equipment, net	238,387			282,353
Buildings and improvements	104,964,000			99,561,000
Other assets
Machinery and equipment	257,301,000			226,759,000
Goodwill	338,944			341,028
	366,138,000			330,193,000
Joint ventures and other assets	33,200			38,112
Less accumulated depreciation	78,751,000			39,039,000
	372,144			379,140
	287,387,000			291,154,000
	$	882,569		$	893,022
OTHER ASSETS
LIABILITIES AND SHAREHOLDER’S EQUITY
Goodwill, net	345,746,000			341,021,000
Current liabilities
Joint ventures and other assets	39,882,000			44,670,000
Current maturities of long-term debt	$	16,101		$	17,671
	385,628,000			385,691,000
Accounts payable	57,002			65,990
	$	931,316,000		$	897,133,000
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt	$	18,458,000		$	12,962,000
Accounts payable	63,522,000			64,492,000
Accrued liabilities
Compensation	1410,~~585,000~~820			1215,~~582,000~~251
Insurance	8,~~738,000~~163			87,~~191,000~~855
Customer programs	2334,~~567,000~~372			2126,~~996,000~~484
Income taxes	128,~~220,000~~329			97,~~853,000~~403
Interest	169,~~122,000~~148			109,~~619,000~~336
Other	24,318,000			14,116,000
Hedging derivative liability	8,930			11,001
Total current liabilities	181,530,000			154,811,000
Other	10,760			11,393
LONG-TERM DEBT, less current maturities	527,902,000			540,132,000
Liabilities related to business to be sold	9,869			—
DEFERRED INCOME TAXES	48,605,000			48,725,000
Total current liabilities	173,494			172,384
COMMITMENTS AND CONTINGENCIES	—			—
Long-term debt, less current maturities	458,463			493,718
NON-CONTROLLING INTEREST	475,000			475,000
Deferred income taxes	51,519			47,119
SHAREHOLDERS’ EQUITY
Commitments and contingencies	—			—
Common stock	—			—
Non-controlling interest	—			475
Additional paid-in capital	147,448,000			146,792,000
Shareholder’s equity
Retained earnings	29,858,000			9,815,000
Common stock, $0.01 par value, 1,000 shares authorized, issued and outstanding	—			—
Accumulated other comprehensive loss	(4,502,000		)	(3,617,000		)
Additional paid-in capital	147,498			147,498
	172,804,000			152,990,000
Retained earnings	54,222			39,476
	$	931,316,000		$	897,133,000
Accumulated other comprehensive loss	(2,627		)	(7,648		)
	199,093			179,326
	$	882,569		$	893,022

~~See~~The accompanying notes are toan integral part of the unaudited condensed consolidated financial statements.

MICHAEL FOODS, INC.

(A ~~WHOLLY~~wholly-~~OWNED~~owned ~~SUBSIDIARY~~subsidiary OFof M-~~FOODS~~Foods ~~HOLDINGS~~Holdings, ~~INC~~Inc.)

~~CONDENSED CONSOLIDATED~~Condensed ~~STATEMENTS~~Consolidated OFStatements ~~EARNINGS~~of Earnings

Three ~~Months~~months ~~Ended September~~ended June 30,

(Unaudited, dollars in thousands)

	2002		2001
	2003		2002
Net sales	$	~~293~~323,~~954,000~~931	$	~~299~~289,~~225,000~~753
Cost of sales	~~239~~266,~~777,000~~555		~~248~~235,~~436,000~~549
Gross profit	5457,~~177,000~~376		5054,~~789,000~~204
Selling, general and administrative expenses	2930,~~207,000~~884		3029,~~066,000~~826
Operating profit	2426,~~970,000~~492		2024,~~723,000~~378
Interest expense, net	12,~~844,000~~095		1312,~~416,000~~332
Earnings before income taxes	1214,~~126,000~~397		712,~~307,000~~046
Income tax expense	45,~~760,000~~549		4,~~010,000~~730
NET EARNINGS	$	7,366,000	$	3,297,000
Net earnings	$	8,848	$	7,316

~~See~~The accompanying notes are toan integral part of the unaudited condensed consolidated financial statements.

MICHAEL FOODS, INC.

(A ~~WHOLLY~~wholly-~~OWNED~~owned ~~SUBSIDIARY~~subsidiary OFof M-~~FOODS~~Foods ~~HOLDINGS~~Holdings, ~~INC~~Inc.)

~~CONDENSED CONSOLIDATED~~Condensed ~~STATEMENTS~~Consolidated OFStatements ~~EARNINGS~~of Earnings

~~(Unaudited)~~Six months ended June 30,

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

(Unaudited, dollars in thousands)

See accompanying notes to condensed consolidated financial statements.

	2003		2002
Net sales	$	622,144	$	568,182

Cost of sales	513,853		462,862

Gross profit	108,291		105,320

Selling, general and administrative expenses	60,318		59,449

Operating profit	47,973		45,871

Interest expense, net	23,967		24,996

Earnings before income taxes	24,006		20,875

Income tax expense	9,259		8,200

Net earnings	$	14,747	$	12,675

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

MICHAEL FOODS, INC.

(A ~~WHOLLY~~wholly-~~OWNED~~owned ~~SUBSIDIARY~~subsidiary OFof M-~~FOODS~~Foods ~~HOLDINGS~~Holdings, ~~INC~~Inc.)

~~CONDENSED CONSOLIDATED~~Condensed ~~STATEMENTS~~Consolidated OFStatements ~~CASH~~of ~~FLOWS~~Cash Flows

~~(Unaudited)~~Six months ended June 30,

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

(Unaudited, dollars in thousands)

See accompanying notes to condensed consolidated financial statements.

	2003			2002

Net cash provided by operating activities	$	58,115		$	48,233

Cash flows from investing activities:
Capital expenditures	(16,359		)	(14,263		)
Investments in joint ventures and other assets	—			397

Net cash used in investing activities	(16,359		)	(13,866		)

Cash flows from financing activities:
Payments on notes payable and revolving line of credit	—			(5,000		)
Payments on long-term debt	(38,179		)	(18,057		)
Net cash used in financing activities	(38,179		)	(23,057		)

Effect of exchange rate changes on cash	96			—

Net increase in cash and equivalents	3,673			11,310

Cash and equivalents at beginning of period	20,572			27,660

Cash and equivalents at end of period	$	24,245		$	38,970

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

MICHAEL FOODS, INC.

(A ~~WHOLLY~~wholly-~~OWNED~~owned ~~SUBSIDIARY~~subsidiary OFof M-~~FOODS~~Foods ~~HOLDINGS~~Holdings, ~~INC~~Inc.)

~~NOTES~~Notes TOto ~~CONDENSED~~Condensed ~~CONSOLIDATED~~Consolidated ~~FINANCIAL~~Financial ~~STATEMENTS~~Statements

(Unaudited)

NOTE A -– 2001 MERGER ~~AGREEMENT~~

On April 10, 2001, Michael Foods, Inc. and its subsidiaries (“Michael Foods”, “Company”, “we”, “us”, “our”) was acquired in a transaction (the “Merger”) led by an 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 ~~Predecessor’s~~board ~~Board~~ of ~~Directors,~~directors; and affiliates of two private equity investment firms, Vestar Capital Partners and Goldner Hawn Johnson & Morrison Incorporated, (collectively, “M-Foods Investors, LLC”). Michael Foods, Inc. is a wholly-owned subsidiary of M-Foods Holdings, Inc., which is a wholly-owned subsidiary of M-Foods Investors, LLC. Under the terms of the ~~Merger~~ Merger agreement, all outstanding shares of Michael Foods common stock were ~~converted~~ 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~~ senior secured credit facility of up to $470,000,000 at market-based variable ~~interest~~ ~~rates~~interest ~~(effective rate of approximately 6.8% as of September 30~~rates, ~~2002),~~ 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, we contributed the assets of our Dairy ~~division~~Products Division into two limited liability ~~corporations~~companies, 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 ~~were approximately~~was approximately $35,800,000. The preferred units issued to us by the Dairy LLCs have an annual 10% preferred return guarantee and represent 100% of the preferred units issued ~~and~~ and outstanding. In addition, we received 5% of the common units issued by the ~~Dairy~~ Dairy LLCs, with the common units held by the Company representing 100% of the ~~voting~~ 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, another entity which is owned by the same owners or affiliates of such owners, in the same proportion, as the unit holders of M-Foods Investors, LLC. The common unit interests owned by M-Foods ~~Dairy~~ Dairy Holdings, LLC were issued in exchange for $475,000 and are reflected as non-controlling interest in the accompanying consolidated balance sheet. See also Note D.

The 2001 Merger was accounted for as a purchase in accordance with Accounting Principles Board Opinion 16, Business Combinations and ~~EITF~~Emerging Issues Task Force Issue No. 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 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~~ continuing affiliate investors of the Michael family, and the new interests acquired by the new investors. The amount of carryover basis was reflected as a ~~deemed~~ deemed dividend of $66,631,000.

~~For~~NOTE ~~ease~~B of– ~~presentation,~~BASIS ~~the Merger was accounted for as if it had~~OF occurred on April 1, 2001. Management determined that results of operations were not significant and no material transactions occurred during the period from April 1 through April 9, 2001. Our consolidated financial statements have been presented on a comparative basis with the Predecessor’s historical consolidated financial statements prior to the date of Merger. Different bases of accounting have been used to prepare the Company and Predecessor consolidated financial statements. The primary differences relate to additional interest expense for new debt and depreciation and amortization of fixed assets and other intangible assets recorded at fair value at the date of Merger.PRESENTATION

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 of $66,631,000. These allocations were based on a valuation 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 the extraordinary item related to the early extinguishment of debt resulting from the change-in-control. In addition, we 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 our consolidated balance sheet.

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

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

NOTE B – ASSET PURCHASE

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

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

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

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

NOTE C – BASIS OF PRESENTATION

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

We utilize, ~~and the Predecessor utilized,~~ a fiscal year consisting of either 52 or 53 weeks, ending on the Saturday nearest to December 31 each year. The quarters ended ~~September~~June 30, ~~2002~~2003 and ~~2001~~2002 each included ~~thirteen~~13 weeks of of operations. For clarity of presentation, the Company ~~and~~has ~~Predecessor have~~ described both periods presented as if the quarters ended on ~~September~~June 30th.

~~The~~In ~~accompanying~~the ~~unaudited~~opinion ~~financial statements and footnote~~of ~~information~~management, ~~as of and for~~ the ~~three~~unaudited ~~month~~financial ~~period~~statements ~~ended~~contain ~~March~~all ~~31, 2001 were~~adjustments ~~prepared~~(consisting ~~in accordance with Regulation S-X pursuant to the rules and regulations~~ of ~~the~~only ~~Securities~~normal ~~and~~recurring ~~Exchange Commission (“SEC”~~adjustments) ~~using~~necessary ~~the historical~~to ~~books~~present ~~and~~fairly ~~records of~~ the ~~Predecessor and reflect the historical cost~~ ~~basis~~results of ~~assets~~operations ~~and~~for ~~liabilities of~~ the ~~Predecessor~~periods indicated. The ~~accompanying~~results ~~unaudited financial~~of ~~statements~~operations and cash ~~footnote~~flows ~~information~~ of the Company ~~as of and~~ for the ~~six~~ ~~month~~ period ended ~~September~~June 30, ~~2001~~2003 ~~and~~are ~~the~~not necessarily ~~three~~indicative ~~and~~of ~~nine~~the ~~month~~results ~~periods ended~~expected ~~September~~for ~~30,~~the ~~2002~~full ~~have been~~ year.

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

In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 143, “Accounting for Asset Retirement Obligations” which provides accounting requirements for retirement obligations associated with tangible long-lived assets. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002 and was adopted by the Company effective January 1, 2003. The adoption of SFAS No. 143 did not have a material effect on our consolidated financial statements.

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred. Prior to the adoption of this standard, a liability for an exit cost, as defined by Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring), was recognized at the date of an entity’s commitment to an exit plan. SFAS No. 146 was effective for the Company for exit plans or disposal activities initiated after December 31, 2002. Effective January 1, 2003, we adopted the provisions of SFAS 146, which had no impact on our financial statements.

In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” This interpretation elaborates on the disclosure requirements in the financial statements concerning obligations under certain guarantees. It also clarifies the requirements related to the recognition of liabilities by a guarantor at the inception of certain guarantees. The disclosure requirements of this interpretation were effective for us on December 31, 2002. The adoption of this standard did not impact our financial statements.

In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46). This interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements, addresses consolidation by business enterprises of variable interest entities that possess certain characteristics. FIN 46 requires that if a business enterprise has a controlling financial interest in a variable interest entity, the assets, liabilities, and results of the activities of the variable interest entity must be included in the consolidated financial statements with those of the business enterprise. FIN 46 applies immediately to variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date. We do not have ownership in any variable interest entities and will apply the consolidation requirements of FIN 46 in future periods should an interest in a variable interest entity be acquired.

In May 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. We do not believe that the adoption of SFAS No. 149 will have a material impact on our financial position or results of operations.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” The statement requires that an issuer classify financial instruments that are within its scope as a liability. Many of those instruments were classified as equity under previous guidance. SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003. Otherwise, it is effective on July 1, 2003. We do not believe that the adoption of SFAS No. 150 will have a material effect on our financial position or results of operations.

NOTE C – ASSET PURCHASE

On August 26, 2002, we acquired the egg products assets of Canadian Inovatech Inc. for approximately $18.0 million. The total purchase price was allocated to the acquired assets and liabilities based on their fair values at the acquisition date as determined by a third party appraisal firm. The allocation of the purchase price resulted in goodwill of $4.8 million. We also entered into long-term leases for two plants operated by the seller. This entity’s results of operations have been included in our operating results since the date of the asset purchase. Also, as a result of this asset purchase, we now own 67%, rather than 33%, of a Canadian egg products joint venture, Trilogy Egg Products, Inc. Hence, Trilogy became a consolidated entity under our financial reporting as of the date of the asset purchase.

The following unaudited pro forma statement of earnings information has been prepared assuming the asset purchase had occurred on January 1, 2002. The net sales and earnings before income taxes for the six months ended June 30, 2003 represent actual results for the period (dollars in thousands):

	Six months ended June 30, 2003		Six months ended June 30, 2002
Net sales	$	622,144	$	593,721
Earnings before income taxes	24,006		22,514

This unaudited pro forma information is not necessarily indicative of the combined results of operations that would have occurred had the transaction occurred on the noted date, nor is it indicative of the results which may occur in the future.

~~prepared~~NOTE inD ~~accordance~~– ~~with Regulation S-X pursuant to the rules and~~OPERATING ~~regulations~~SEGMENT ofHELD ~~the~~FOR SEC using the new basis of assets and liabilities of the Company. In the opinion of management, the unaudited financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the results of operations for the periods indicated. The historical financial results of the Company and Predecessor are not necessarily indicative of their results for a full year.SALE

~~These~~In ~~unaudited~~May ~~interim~~2003, ~~consolidated~~we ~~financial~~signed ~~statements~~a letter ~~should~~of beintent for the sale of our dairy products division operating segment to Dean Foods Company. The dairy ~~read~~products indivision ~~conjunction~~is ~~with~~substantially ~~our~~made ~~consolidated~~up ~~financial~~of ~~statements~~the assets of M-Foods Dairy, LLC and ~~notes~~M-Foods Dairy TXCT, LLC. The dairy products division processes and sells ice milk and ice cream mixes, creamers, ~~thereto~~milk and specialty dairy products. The transaction is expected to close during the third quarter of 2003. Completion of the transaction is dependent upon several items, ~~contained~~including completion of due diligence, execution of a securities purchase agreement, approval by both companies’ Boards of Directors, and regulatory approval. As a part of the transaction, we may be compensated for certain transition services expected to be provided to the buyer for a period currently anticipated to be 12 to 18 months after the close of the transaction. These transition services will include services such as information technology, sales, customer service and procurement. By providing these transition services, we will be deemed to have “significant continuing involvement” in ~~our~~the ~~Annual~~dairy ~~Report~~products ondivision ~~Form~~operating segment. Therefore, ~~10-K~~we have determined that the sale, as currently contemplated, would not meet the accounting criteria for “discontinued operations”, but does meet the ~~fiscal~~accounting ~~year~~criteria for ~~ended~~classification as “held for sale.” Accordingly, the related assets and liabilities of the dairy products ~~December~~division 31operating segment have been classified as current assets and liabilities held for sale at June 30, ~~2001~~2003. The operations of the dairy products division operating segment continue to be included in the earnings statement of the Company.

~~Use~~External net sales and earnings from the dairy products division operating segment held for sale as of June ~~Estimates~~30, 2003 were as follows:

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

	Six months ended June 30, 2003		Six months ended June 30, 2002
External net sales	$	92,878	$	96,302
Earnings before income taxes	6,026		5,115

~~NOTE~~Assets Dand –liabilities ~~ADOPTION~~of the OFdairy ~~NEW~~products ~~ACCOUNTING~~division ~~POLICIES~~operating segment classified as held for sale in the Consolidated Balance Sheet as of June 30, 2003 are as follows:

Goodwill and Intangible Assets

	June 30, 2003
Assets
Accounts receivable, less allowances	$	14,705
Inventories	7,260
Property, plant and equipment, net	34,858
Other assets	2,710
	$	59,533

In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) 141, Business Combinations, and SFAS 142, Goodwill and Other Intangible Assets. SFAS 141 is effective for all business combinations completed after June 30, 2001. SFAS 142 is effective for fiscal years beginning after December 15, 2001; however, certain provisions of this Statement apply to goodwill and other intangible assets acquired between July 1, 2001 and the effective date of SFAS 142. We adopted the provisions of SFAS 142 as of January 1, 2002 and had no acquisitions between July 1, 2001 and January 1, 2002.

Liabilities
Accounts payable	$	8,054
Accrued liabilities	1,340
Non-controlling interest	475
	$	9,869

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

Goodwill and Intangible Assets with Indefinite Lives

We recognize the excess cost of an acquired entity over the net amount assigned to assets acquired, including intangible assets with indefinite lives, and liabilities assumed, as goodwill. Goodwill and intangible assets with indefinite lives will be tested for impairment on an annual basis and between annual tests whenever there is an impairment indicated. Impairment losses will be recognized whenever the implied fair value is less than the carrying value of the related asset. Prior to January 1, 2002, goodwill and intangible assets with indefinite lives were amortized over 40 years. Beginning January 1, 2002, goodwill and intangible assets with indefinite lives are no longer amortized.

Other Intangibles

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

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

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

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

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

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

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

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

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

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

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

Other New Pronouncements:

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

In addition, we adopted Emerging Issues Task Force (EITF) Issue No. 00-25, Vendor Income Statement Characterization of Consideration to a Reseller on the Vendors Products, effective January 1, 2002. The adoption of EITF Issue 00-25 did not have a material effect on our consolidated financial statements. In addition, we adopted EITF Issue No. 01-09, Accounting for Consideration given by a Vendor to a Customer (including a Reseller of the Vendor's Products), effective January 1, 2002. The adoption of EITF Issue No. 01-09 did not have a material effect on our consolidated financial statements.

NOTE E – INVENTORIES

Inventories, other than flocks, are stated at the lower of cost (determined on a first-in, first-out basis) or market. Flock 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 life of generally one to two years, assuming no salvage value.

Inventories consisted of the following (dollars in thousands):

	September 30, 2002		December 31, 2001
	June 30, 2003		December 31, 2002
Raw materials and supplies	$	1715,~~911,000~~802	$	1518,~~347,000~~552
Work in process and finished goods	5449,~~402,000~~177		4354,~~027,000~~574
Flocks	21,~~054,000~~245		2022,~~567,000~~681
	$	9386,~~367,000~~224	$	7895,~~941,000~~807

NOTE F – COMMITMENTS AND CONTINGENCIES

Potato Procurement Contract

We have a contract to purchase potatoes which expires in 2004 and which will supply approximately 45% and 40% of the Potato Products Division’s raw material needs in 2003 and 2004, respectively, at an approximate cost of $5.3 million each year.

Egg Procurement Contracts

We maintain egg procurement contracts with numerous cooperatives and egg producers throughout the Midwestern and Eastern United States, and Canada which supply ~~approximately~~ 55approximately 50% of our egg requirements. Most ~~These~~of 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 our egg requirements. Based upon the best estimates available to us for grain and egg prices, we project that our purchases from our top five long-term contracted egg suppliers will approximate $141 million in 2003, $138 million in 2004, $82 million in 2005, $20 million in 2006, and $16 million in 2007, and that the 2003 amount will account for approximately 60% of our contracted egg purchases this year.

requirements.

Patent Litigation

We have an exclusive license agreement for a patented process for the production and sale of extended shelf-life liquid egg products. Under the license agreement, we have the right to defend and prosecute infringement of the underlying patents. We may ~~apply~~offset 50% of our costs of defending the patents against royalty payments due to the patent holder - North Carolina State University. 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 ~~future~~expire ~~royalty~~beginning ~~payments~~in 2006.

~~The~~In ~~U.S.~~2000, ~~Federal~~litigation ~~Court~~was settled ofwith ~~Appeals~~one ~~has~~party ~~upheld~~related to the ~~validity~~infringement of these patents and a sub-license was issued to the infringing party granting them the right to manufacture and distribute extended shelf-life liquid whole egg product subject ~~patents~~to a royalty payable to us and the patent holder on ~~two~~all ~~separate~~future ~~occasions~~product sold. In connection ~~September~~with ~~2000~~this settlement, the ~~U.S.~~patent ~~Patent~~holder ~~and~~received a lump sum payment ~~Trademark~~for ~~Office~~the ~~allowed~~past production and sale of the product ~~claims~~and ~~beyond~~other matters related to the ~~process~~infringement. ~~claims~~We ~~previously~~are continuing to pursue litigation related to other ~~allowed~~parties ~~for~~who ~~the~~we ~~extended~~believe ~~shelf-life~~are ~~egg~~infringing the product. ~~These~~and process patents, including ~~are~~Sunny ~~scheduled~~Fresh Foods, Inc., a subsidiary of Cargill, Inc. The patent infringement trial with Sunny Fresh Foods, Inc. commenced with a jury on June 30, 2003 and is expected to continue ~~expire~~into ~~beginning~~the inthird ~~2006~~quarter of 2003.

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 royalties payable to us 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. We are 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

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

NOTEOther G – COMPREHENSIVE INCOME (LOSS)Matter

~~The~~As of ~~components~~June ~~and~~30, ~~changes~~2003, inwe ~~accumulated~~have ~~other~~an ~~comprehensive~~approximate ~~loss~~$4 million investment recorded for Belovo S.A. (~~AOCL~~Belovo), ~~net~~a ofBelgium ~~taxes~~egg products company, ~~during~~which represents our approximate 36% interest accounted for under the ~~nine~~equity ~~months~~method. Belovo recently ~~ended~~notified ~~September~~the ~~30,~~Belgium ~~2002~~government ~~were~~of asa potential finished products inventory matter and is currently working with the Belgium government to ~~follows:~~address the situation. The potential loss, if any, related to this matter has not yet been determined.

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

NOTE G – COMPREHENSIVE INCOME (LOSS)

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

The components and changes in accumulated other comprehensive loss (AOCL), net of taxes, during the six months ended June 30, 2003 were as follows (dollars in thousands):

	Cash Flow Hedges			Foreign Currency Translation		Total AOCL

Balance at January 1, 2003	$	(7,799	)	$	151	$	(7,648	)
Foreign currency translation adjustment	2,066			629		2,695
Net unrealized change on cash flow hedges	2,326			—		2,326
Balance at June 30, 2003	$	(3,407	)	$	780	$	(2,627	)

Comprehensive income (loss), net of taxes, for the ~~nine months ended September 30, 2002 and for the~~ six months ended ~~September~~June 30, ~~2001~~2003 and ~~for~~2002 ~~the predecessor’s three months ended March 31, 2001~~ was as follows (dollars in thousands):

COMPANY
Net income for the six months ended June 30, 2003			$	14,747
Net income for the nine months ended September 30, 2002			$	20,041,000
Net gains arising during the period from cash flow hedges:
Net gains (loss) arising during the period from cash flow hedges:
Net unrealized derivative gains during period	2,326
Net unrealized derivative losses during period	(1,211,000	)
Foreign currency translation adjustment	2,695
Foreign currency translation adjustment	326,000
Other comprehensive income			5,021
Other comprehensive loss			(885,000		)
Comprehensive income for the six months ended June 30, 2003			$	19,768
Comprehensive income for the nine months ended September 30, 2002			$	19,156,000
Net income for the six months ended June 30, 2002			$	12,675
Net income for the six months ended September 30, 2001			$	4,966,000
Net gains (losses) arising during the period from cash flow hedges:
Net unrealized derivative losses during period	(~~4,995,000~~262	)
Reclassification adjustment	92,000
Foreign currency translation adjustment	1,326
Foreign currency translation adjustment	26,000
Other comprehensive income			1,064
Other comprehensive loss			(4,877,000		)
Comprehensive income for the six months ended June 30, 2002			$	13,739
Comprehensive income for the six months ended September 30, 2001			$	89,000
PREDECESSOR
Net loss for the three months ended March 31, 2001			$	(5,653,000	)
Net gains (losses) arising during the period from cash flow hedges:
Net derivative transition gain	775,000
Net unrealized derivative losses during period	(2,651,000	)
Reclassification adjustment	244,000
Foreign currency translation adjustment	(47,000	)
Foreign currency loss realized	1,135,000
Other comprehensive loss			(544,000		)
Comprehensive loss for the three months ended March 31, 2001			$	(6,197,000	)

119

NOTE H – BUSINESS SEGMENTS

We operate in four reportable segments – Egg Products, Refrigerated Distribution, Dairy Products and Potato Products. See ~~The~~Note ~~Merger, as more fully~~D ~~described~~regarding inthe ~~Note~~sale A,of ~~did~~the ~~not~~Dairy ~~have~~Products andivision ~~impact~~operating ~~on our~~ segment ~~classification or the interaction between the segments~~. Certain financial information on our ~~operating~~ operating segments, ~~and the Predecessor’s,~~ is as follows (unaudited, dollars in thousands):

Company

Egg Products

Refrigerated Distribution

Dairy Products

Potato Products

Corporate

Total

THREE MONTHS ENDED SEPTEMBER 30, 2002:

THREE MONTHS ENDED JUNE 30, 2003:

External net sales

~~165~~189,~~944~~206

5863,~~409~~932

5152,~~425~~276

18,~~176~~517

N/A

~~293~~323,~~954~~931

Intersegment sales

3,~~030~~559

—

—34

~~932~~871

N/A

34,~~962~~464

Operating profit (loss)

17,~~718~~356

34,~~748~~430

24,~~305~~753

31,~~120~~958

(12,~~921~~005

)

2426,~~970~~492

Depreciation and amortization

1011,~~681~~235

~~564~~731

~~1,182~~887

1,~~165~~170

1314,~~600~~031

THREE MONTHS ENDED SEPTEMBER 30, 2001:

THREE MONTHS ENDED JUNE 30, 2002:

External net sales

~~163~~161,~~334~~888

6357,~~692~~202

5453,~~889~~122

17,~~310~~541

N/A

~~299~~289,~~225~~753

Intersegment sales

21,~~829~~728

—

~~861~~731

N/A

32,~~690~~459

Operating profit (loss)

1718,~~292~~002

~~170~~2,265

23,~~634~~778

12,~~914~~117

(1,~~287~~784

)

2024,~~723~~378

Depreciation and amortization

1210,~~647~~877

~~680~~546

1,~~090~~166

1,~~612~~165

910

1613,~~038~~764

NINE MONTHS ENDED SEPTEMBER 30, 2002:

SIX MONTHS ENDED JUNE 30, 2003:

External net sales

~~483~~367,~~018~~774

~~178~~125,~~617~~279

~~147~~92,~~727~~878

5236,~~774~~213

N/A

~~862~~622,~~136~~144

Intersegment sales

86,~~803~~833

—

—62

21,~~555~~766

N/A

118,~~358~~661

Operating profit (loss)

5232,~~712~~582

8,~~306~~902

76,~~914~~560

73,~~551~~583

(53,~~642~~654

)

7047,~~841~~973

Depreciation and amortization

3222,~~436~~438

1,~~547~~439

32,~~388~~200

32,~~494~~340

2815

4028,~~893~~432

SIX MONTHS ENDED SEPTEMBER 30, 2001:

SIX MONTHS ENDED JUNE 30, 2002:

External net sales

~~325~~317,~~916~~074

~~128~~120,~~123~~208

~~106~~96,~~710~~302

3334,~~585~~598

N/A

~~594~~568,~~334~~182

Intersegment sales

5,~~691~~773

1—

—

1,~~706~~623

N/A

7,~~398~~396

Operating profit (loss)

3234,~~822~~994

24,~~405~~558

45,~~633~~609

34,~~473~~431

(23,~~650~~721

)

4045,~~683~~871

Depreciation and amortization

2521,~~027~~755

~~1,322~~983

2,~~100~~206

32,~~173~~329

1920

3127,~~641~~293

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

NOTE I – SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION

~~NOTE~~Our Irevolving –line ~~SUPPLEMENTAL~~of credit, ~~GUARANTOR~~A ~~FINANCIAL~~and ~~INFORMATION~~B term loans and senior subordinated notes have been guaranteed, on a joint and several basis, by us and our domestic subsidiaries. The revolving line of credit and A and B term loans are also guaranteed by our parent, M-Foods Holdings, Inc.

~~Our~~The ~~revolving~~following ~~line~~condensed consolidating financial information presents our consolidated balance sheet as of ~~credit~~June 30, A2003 and BDecember ~~term~~31, ~~loans~~2002 and ~~senior~~the statements of earnings for the three and six month periods ended June 30, 2003 and 2002 and statements of cash ~~subordinated~~flows ~~notes~~for ~~have~~the ~~been~~six ~~guaranteed~~month periods ended June 30, 2003 and 2002. These financial statements reflect Michael Foods, Inc. (the Parent), the wholly owned guarantor subsidiaries (on a combined ~~joint~~basis), ~~and~~the ~~several~~non-wholly ~~basis~~owned guarantor subsidiaries, byand uselimination entries necessary to combine such entities on a consolidated basis. Included ~~and~~elsewhere ~~our~~in ~~domestic~~this Form 10-Q are the unaudited financial statements of the non-wholly owned guarantor subsidiaries. The ~~revolving~~assets ~~line~~and liabilities of ~~credit~~the ~~and~~Dairy AProducts ~~and~~segment Bare ~~term~~presented ~~loans~~in ~~are~~current ~~also~~assets ~~guaranteed~~held byfor ~~our~~sale ~~parent,~~and ~~M-Foods~~liabilities ~~Holdings,~~related ~~Inc~~to business to be sold (see Note D).

The following condensed consolidating financial information presents our consolidated balance sheet as of September 30, 2002 and December 31, 2001, the statements of earnings for the three months ended September 30, 2002 and 2001 and for the nine months ended September 30, 2002 and the six months ended September 30, 2001, and the statements of cash flows for the nine months ended September 30, 2002 and the six months ended September 30, 2001; and the Predecessor’s consolidated statements of earnings and cash flows for the three months ended March 31, 2001. 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 Form 10~~-Q are the unaudited financial statements of the non-wholly owned guarantor subsidiaries.~~

12Condensed Consolidating Balance Sheets

~~COMPANY~~June 30, 2003

~~UNAUDITED~~(Unaudited, ~~CONDENSED CONSOLIDATING~~dollars ~~BALANCE~~in ~~SHEETS~~thousands)

SEPTEMBER 30, 2002

	Parent			Wholly owned Guarantor Subsidiaries			Non-wholly owned Guarantor Subsidiaries				Eliminations			Consolidated
							M-Foods Dairy, LLC		M-Foods Dairy TXCT, LLC
Assets
Current assets
Cash and equivalents	$	26,414		$	(2,169	)	$	—	$	—	$	—		$	24,245
Accounts receivable, less allowances	18			93,153			8,456		6,248		(15,400		)	92,475
Inventories	—			86,224			3,502		3,758		(7,260		)	86,224
Prepaid expenses and other	249			9,312			458		67		(525		)	9,561
Assets held for sale	—			—			—		—		59,533			59,533
Total current assets	26,681			186,520			12,416		10,073		36,348			272,038
Property, plant and equipment, net	29			238,358			21,110		10,688		(31,798		)	238,387
Other assets
Goodwill	2,410			336,534			1,763		—		(1,763		)	338,944
Joint ventures and other assets	13,315			22,544			116		264		(3,039		)	33,200
Preferred return receivable for subs	—			23,018			—		—		(23,018		)	—
Investment in subsidiaries	604,254			—			—		—		(604,254		)	—
	619,979			382,096			1,879		264		(632,074		)	372,144
	$	646,689		$	806,974		$	35,405	$	21,025	$	(627,524	)	$	882,569

Liabilities and shareholder’s equity
Current liabilities
Current maturities of long-term debt	$	15,541		$	560		$	—	$	—	$	—		$	16,101
Accounts payable	145			57,553			3,386		4,668		(8,750		)	57,002
Accrued liabilities	33,830			56,692			2,717		1,118		(3,835		)	90,522
Liabilities related to business to be sold	—			—			—		—		9,869			9,869
Total current liabilities	49,516			114,805			6,103		5,786		(2,716		)	173,494
Long-term debt, less current maturities	400,022			58,441			—		—		—			458,463
Deferred income taxes	(2,417		)	51,441			—		—		2,495			51,519
Total liabilities	447,121			224,687			6,103		5,786		(221		)	683,476
Non-controlling interest	475			—			—		—		(475		)	—
Preferred unit holder return payable	—			—			17,482		5,536		(23,018		)	—
Shareholder’s equity	199,093			582,287			11,820		9,703		(603,810		)	199,093
	$	646,689		$	806,974		$	35,405	$	21,025	$	(627,524	)	$	882,569

~~(in thousands)~~11

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

Condensed Consolidating Balance Sheets

13December 31, 2002

~~COMPANY~~(Unaudited, dollars in thousands)

UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEETS

	Parent			Wholly owned Guarantor Subsidiaries		Non-wholly owned Guarantor Subsidiaries				Eliminations			Consolidated
						M-Foods Dairy, LLC		M-Foods Dairy TXCT, LLC
Assets
Current assets
Cash and equivalents	$	19,665		$	907	$	—	$	—	$	—		$	20,572
Accounts receivable, less allowances	314			90,108		7,836		4,399		(1,078		)	101,579
Inventories	—			88,376		3,412		4,019		—			95,807
Prepaid expenses and other	202			12,704		600		65		—			13,571
Total current assets	20,181			192,095		11,848		8,483		(1,078		)	231,529
Property, plant and equipment, net	44			252,825		18,104		11,380		—			282,353
Other assets
Goodwill	—			339,265		1,763		—		—			341,028
Joint ventures and other assets	15,362			22,082		139		529		—			38,112
Preferred return receivable for subs	—			17,170		—		—		(17,170		)	—
Investment in subsidiaries	639,819			—		—		—		(639,819		)	—
	655,181			378,517		1,902		529		(656,989		)	379,140
	$	675,406		$	823,437	$	31,854	$	20,392	$	(658,067	)	$	893,022

Liabilities and shareholder’s equity
Current liabilities
Current maturities of long-term debt	$	14,714		$	557	$	—	$	2,400	$	—		$	17,671
Accounts payable	426			60,933		2,836		2,873		(1,078		)	65,990
Accrued liabilities	35,372			49,953		2,352		1,046		—			88,723
Total current liabilities	50,512			111,443		5,188		6,319		(1,078		)	172,384
Long-term debt, less current maturities	448,734			44,984		—		—		—			493,718
Deferred income taxes	(3,641		)	50,760		—		—		—			47,119
Total liabilities	495,605			207,187		5,188		6,319		(1,078		)	713,221
Non-controlling interest	475			—		—		—		—			475
Preferred unit holder return payable	—			—		12,442		4,728		(17,170		)	—
Shareholder’s equity	179,326			616,250		14,224		9,345		(639,819		)	179,326
	$	675,406		$	823,437	$	31,854	$	20,392	$	(658,067	)	$	893,022

~~DECEMBER 31, 2001~~12

~~(in~~Condensed ~~thousands)~~Consolidating Statements of Earnings

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

Three months ended June 30, 2003

14(Unaudited, dollars in thousands)

COMPANY

	Parent			Wholly owned Guarantor Subsidiaries			Non-wholly owned Guarantor Subsidiaries						Eliminations			Consolidated
							M-Foods Dairy, LLC			M-Foods Dairy TXCT, LLC
Net sales	$	—		$	276,086		$	28,254		$	24,055		$	(4,464	)	$	323,931
Cost of sales	—			225,811			23,649			21,949			(4,854		)	266,555
Gross profit	—			50,275			4,605			2,106			390			57,376
Selling, general and administrative expenses	2,005			27,457			1,415			1,290			(1,283		)	30,884
Operating profit (loss)	(2,005		)	22,818			3,190			816			1,673			26,492
Interest expense, net	11,277			802			10			6			—			12,095
Other income	1,229			—			—			—			(1,229		)	—
Earnings (loss) before equity in earnings of subsidiaries and income taxes	(12,053		)	22,016			3,180			810			444			14,397
Equity in earnings of subsidiaries	15,826			3,990			(3,180		)	(810		)	(15,826		)	—
Earnings (loss) before income taxes	3,773			26,006			—			—			(15,382		)	14,397
Income tax expense (benefit)	(4,631		)	10,180			—			—			—			5,549
Net earnings (loss)	8,404			15,826			—			—			(15,382		)	8,848
Other comprehensive income (loss)
Foreign currency translation adjustment	2,066			(237		)	—			—			—			1,829
Change in cash flow hedges	644			1,249			—			—			—			1,893
Comprehensive income (loss)	$	11,114		$	16,838		$	—		$	—		$	(15,382	)	$	12,570

~~UNAUDITED~~Condensed ~~CONDENSED CONSOLIDATING~~Consolidating ~~STATEMENTS~~Statements ~~OF EARNINGS~~ of Earnings

~~THREE~~Three ~~MONTHS~~months ~~ENDED SEPTEMBER~~ended June 30, 2002

(Unaudited, dollars in thousands)

	PARENT			WHOLLY OWNED GUARANTOR SUBSIDIARIES			NON-WHOLLY OWNED GUARANTOR SUBSIDIARIES						ELIMINATIONS			CONSOLIDATED
	Parent			Wholly owned Guarantor Subsidiaries			Non-wholly owned Guarantor Subsidiaries						Eliminations			Consolidated
							M-FOODS DAIRY, LLC			M-FOODS DAIRY TXCT, LLC
							M-Foods Dairy, LLC			M-Foods Dairy TXCT, LLC
Net sales	$	—		$	~~246~~239,~~491~~090		$	2827,~~016~~975		$	2325,~~409~~147		$	(32,~~962~~459	)	$	~~293~~289,~~954~~753
Cost of sales	—			~~196~~190,~~733~~879			2624,~~325~~277			2022,~~681~~852			(32,~~962~~459		)	~~239~~235,~~777~~549
Gross profit	—			4948,~~758~~211			13,~~691~~698			2,~~728~~295			—			54,~~177~~204
Selling, general and administrative expenses	1,~~921~~784			26,~~175~~802			1,~~325~~442			~~992~~976			(1,~~206~~178		)	29,~~207~~826
Operating profit (loss)	(1,~~921~~784		)	2321,~~583~~409			~~366~~2,256			1,~~736~~319			1,~~206~~178			24,~~970~~378
Interest expense, net	11,~~995~~500			~~889~~773			~~(29~~35		)	~~(11~~24		)	—			12,~~844~~332
Other income	1,~~206~~178			—			—			—			(1,~~206~~178		)	—
Earnings (loss) before equity in earnings of subsidiaries and income taxes	(12,~~710~~106		)	2220,~~694~~636			~~395~~2,221			1,~~747~~295			—			12,~~126~~046
Equity in earnings of subsidiary	15,776			2,142			(395		)	(1,747		)	(15,776		)	—
Equity in earnings of subsidiaries	14,682			3,516			(2,221		)	(1,295		)	(14,682		)	—
Earnings before income taxes	3,066			24,836			—			—			(15,776		)	12,126
Earnings (loss) before income taxes	2,576			24,152			—			—			(14,682		)	12,046
Income tax expense (benefit)	(4,~~300~~740		)	9,~~060~~470			—			—			—			4,~~760~~730
NET EARNINGS (LOSS)	7,366			15,776			—			—			(15,776		)	7,366
Net earnings (loss)	7,316			14,682			—			—			(14,682		)	7,316
Other comprehensive income (loss):
Other comprehensive income (loss)
Change in foreign currency translation	—			(1,000		)	—			—			—			(1,000		)
Foreign currency translation adjustment	—			1,315			—			—			—			1,315
Change in cash flow hedges	(2,~~511~~499		)	1,~~562~~350			—			—			—			(~~949~~1,149		)
Comprehensive income (loss)	$	4,~~855~~817		$	1617,~~338~~347		$	—		$	—		$	(1514,~~776~~682	)	$	57,~~417~~482

~~COMPANY~~13

~~UNAUDITED~~Condensed ~~CONDENSED CONSOLIDATING~~Consolidating ~~STATEMENTS~~Statements ~~OF EARNINGS~~ of Earnings

~~THREE~~Six ~~MONTHS~~months ~~ENDED SEPTEMBER~~ended June 30, ~~2001~~2003

(Unaudited, dollars in thousands)

	PARENT			WHOLLY OWNED GUARANTOR SUBSIDIARIES			NON-WHOLLY OWNED GUARANTOR SUBSIDIARIES						ELIMINATIONS			CONSOLIDATED
	Parent			Wholly owned Guarantor Subsidiaries			Non-wholly owned Guarantor Subsidiaries						Eliminations			Consolidated
							M-FOODS DAIRY, LLC			M-FOODS DAIRY TXCT, LLC
							M-Foods Dairy, LLC			M-Foods Dairy TXCT, LLC
Net sales	$	—		$	~~248~~537,~~027~~866		$	2452,~~542~~674		$	3040,~~346~~265		$	(38,~~690~~661	)	$	~~299~~622,~~225~~144
Cost of sales	—			~~201~~440,~~990~~932			2144,~~126~~480			2937,~~010~~492			(39,~~690~~051		)	~~248~~513,~~436~~853
Gross profit	—			4696,~~037~~934			38,~~416~~194			12,~~336~~773			—390			50108,~~789~~291
Selling, general and administrative expenses	13,~~287~~655			2753,~~711~~798			13,~~093~~112			12,~~255~~244			(12,~~280~~491		)	3060,~~066~~318
Operating profit (loss)	(13,~~287~~655		)	1843,~~326~~136			25,~~323~~082			81529			12,~~280~~881			2047,~~723~~973
Interest expense, net	1322,~~433~~317			~~117~~1,621			~~(145~~42		)	11(13		)	—			1323,~~416~~967
Other income	12,~~280~~437			—			2—			(2—		)	(12,~~280~~437		)	—
Earnings (loss) before equity in earnings of subsidiaries and income taxes	(1323,~~440~~535		)	1841,~~209~~515			25,~~470~~040			68542			—444			724,~~307~~006
Equity in earnings of subsidiary	9,342			2,538			(2,470		)	(68		)	(9,342		)	—
Equity in earnings of subsidiaries	28,787			5,582			(5,040		)	(542		)	(28,787		)	—
Earnings before income taxes	(4,098		)	20,747			—			—			(9,342		)	7,307
Earnings (loss) before income taxes	5,252			47,097			—			—			(28,343		)	24,006
Income tax expense (benefit)	(79,~~395~~051		)	1118,~~405~~310			—			—			—			49,~~010~~259
NET EARNINGS (LOSS)	3,297			9,342			—			—			(9,342		)	3,297
Net earnings (loss)	14,303			28,787			—			—			(28,343		)	14,747
Other comprehensive income (loss):
Other comprehensive income (loss)
Change in foreign currency translation	—			53			—			—			—			53
Foreign currency translation adjustment	2,066			629			—			—			—			2,695
Change in cash flow hedges	(31,~~364~~159		)	(1,~~913~~167		)	—			—			—			(52,~~277~~326		)
Comprehensive income (loss)	$	~~(67~~17,528	)	$	730,~~482~~583		$	—		$	—		$	(928,~~342~~343	)	$	(119,~~927~~768	)

15Condensed Consolidating Statements of Earnings

~~COMPANY~~Six months ended June 30, 2002

~~UNAUDITED~~(Unaudited, ~~CONDENSED CONSOLIDATING~~dollars ~~STATEMENTS~~in ~~OF EARNINGS~~ thousands)

NINE MONTHS ENDED SEPTEMBER 30, 2002

	Parent			Wholly owned Guarantor Subsidiaries		Non-wholly owned Guarantor Subsidiaries						Eliminations			Consolidated
						M-Foods Dairy, LLC			M-Foods Dairy TXCT, LLC
Net sales	$	—		$	479,276	$	51,825		$	44,477		$	(7,396	)	$	568,182
Cost of sales	—			384,014		44,905			41,339			(7,396		)	462,862
Gross profit	—			95,262		6,920			3,138			—			105,320
Selling, general and administrative expenses	3,721			53,261		2,857			1,994			(2,384		)	59,449
Operating profit (loss)	(3,721		)	42,001		4,063			1,144			2,384			45,871
Interest expense, net	23,300			1,604		63			29			—			24,996
Other income	2,384			—		—			—			(2,384		)	—
Earnings (loss) before equity in earnings of subsidiaries and income taxes	(24,637		)	40,397		4,000			1,115			—			20,875
Equity in earnings of subsidiaries	27,662			5,115		(4,000		)	(1,115		)	(27,662		)	—
Earnings (loss) before income taxes	3,025			45,512		—			—			(27,662		)	20,875
Income tax expense (benefit)	(9,650		)	17,850		—			—			—			8,200
Net earnings (loss)	12,675			27,662		—			—			(27,662		)	12,675
Other comprehensive income (loss)
Foreign currency translation adjustment	—			1,326		—			—			—			1,326
Change in cash flow hedges	(2,707		)	2,445		—			—			—			(262		)
Comprehensive income (loss)	$	9,968		$	31,433	$	—		$	—		$	(27,662	)	$	13,739

~~(in thousands)~~14

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

Condensed Consolidating Statements of Cash Flows

~~COMPANY~~Six months ended June 30, 2003

~~UNAUDITED~~(Unaudited, ~~CONDENSED CONSOLIDATING~~dollars ~~STATEMENTS~~in ~~OF EARNINGS~~ thousands)

SIX MONTHS ENDED SEPTEMBER 30, 2001

	Parent			Wholly Owned Guarantor Subsidiaries			Non-wholly owned Guarantor Subsidiaries						Consolidated
							M-Foods Dairy, LLC			M-Foods Dairy TXCT, LLC

Net cash provided by operating activities	$	17,193		$	31,782		$	6,590		$	2,550		$	58,115

Cash flows from investing activities:
Capital expenditures	—			(11,665		)	(4,186		)	(508		)	(16,359		)

Net cash used in investing activities	—			(11,665		)	(4,186		)	(508		)	(16,359		)

Cash flows from financing activities:
Payments on long-term debt	(35,417		)	(362		)	—			(2,400		)	(38,179		)
Distribution to preferred unit holders	—			2,046			(2,404		)	358			—
Investment in subsidiaries	24,973			(24,973		)	—			—			—
Net cash used in financing activities	(10,444		)	(23,289		)	(2,404		)	(2,042		)	(38,179		)

Effect of exchange rate changes on cash	—			96			—			—			96
Net increase (decrease) in cash and equivalents	6,749			(3,076		)	—			—			3,673
Cash and equivalents at beginning of period	19,665			907			—			—			20,572
Cash and equivalents at end of period	$	26,414		$	(2,169	)	$	—		$	—		$	24,245

~~(in~~Condensed ~~thousands)~~Consolidating Statements of Cash Flows

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

Six Months ended June 30, 2002

16(Unaudited, dollars in thousands)

PREDECESSOR

	Parent			Wholly Owned Guarantor Subsidiaries			Non-wholly owned Guarantor Subsidiaries						Consolidated
							M-Foods Dairy, LLC			M-Foods Dairy TXCT, LLC

Net cash provided by operating activities	$	15,431		$	24,125		$	4,943		$	3,734		$	48,233

Cash flows from investing activities:
Capital expenditures	—			(10,192		)	(3,124		)	(947		)	(14,263		)
Investments in joint ventures and other assets	(156		)	714			(161		)	—			397

Net cash used in investing activities	(156		)	(9,478		)	(3,285		)	(947		)	(13,866		)

Cash flows from financing activities:
Payments on revolving line of credit	(5,000		)	—			—			—			(5,000		)
Payments on long-term debt	(15,507		)	(150		)	—			(2,400		)	(18,057		)
Distribution to preferred unit holders	—			2,045			(1,658		)	(387		)	—
Investment in subsidiaries	13,599			(13,599		)	—			—			—
Net cash used in financing activities	(6,908		)	(11,704		)	(1,658		)	(2,787		)	(23,057		)
Net increase in cash and equivalents	8,367			2,943			—			—			11,310
Cash and equivalents at beginning of period	33,947			(6,287		)	—			—			27,660
Cash and equivalents at end of period	$	42,314		$	(3,344	)	$	—		$	—		$	38,970

~~UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF EARNINGS~~ 15

~~THREE~~M-FOODS ~~MONTHS ENDED MARCH 31~~DAIRY, ~~2001~~LLC

(inA ~~thousands~~Majority Owned Subsidiary of Michael Foods, Inc.)

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

Index to Financial Statements

17Balance Sheets Statements of Earnings Statements of Cash Flows Notes to Financial Statements

~~COMPANY~~16

~~UNAUDITED~~M-FOODS ~~CONDENSED CONSOLIDATING~~DAIRY, ~~STATEMENTS OF CASH FLOWS~~LLC

~~NINE~~(A ~~MONTHS~~Majority ~~ENDED~~Owned ~~SEPTEMBER~~Subsidiary ~~30,~~of ~~2002~~Michael Foods, Inc.)

~~(in~~Condensed ~~thousands)~~Balance Sheets

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

(Unaudited, dollars in thousands)

COMPANY

	June 30, 2003		December 31, 2002
ASSETS
Current assets
Accounts receivable, less allowances	$	8,456	$	7,836
Inventories	3,502		3,412
Prepaid expenses and other	458		600
Total current assets	12,416		11,848
Property, plant and equipment
Land	855		855
Buildings and improvements	4,748		4,648
Machinery and equipment	19,938		15,852
	25,541		21,355
Less accumulated depreciation	4,431		3,251
	21,110		18,104
Other assets
Goodwill	1,763		1,763
Other assets	116		139
	1,879		1,902
	$	35,405	$	31,854

LIABILITIES AND UNIT HOLDER AND OPERATING UNIT EQUITY
Current liabilities
Accounts payable	$	3,386	$	2,836
Accrued liabilities
Compensation	734		841
Insurance	126		144
Customer programs	1,246		884
Other	611		483
Total current liabilities	6,103		5,188

Commitments and contingencies	—		—
Preferred unit holder return payable	17,482		12,442
Unit holder equity	11,820		14,224
	$	35,405	$	31,854

~~UNAUDITED~~The ~~CONDENSED~~accompanying notes ~~CONSOLIDATING~~are ~~STATEMENTS~~an OFintegral ~~CASH~~part ~~FLOWS~~of the unaudited condensed financial statements.

~~SIX MONTHS ENDED SEPTEMBER 30, 2001~~17

~~(in~~M-FOODS ~~thousands)~~DAIRY, LLC

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

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

18Condensed Statements of Earnings

~~PREDECESSOR~~For the three months ended June 30,

~~UNAUDITED CONDENSED~~(Unaudited, ~~CONSOLIDATING~~dollars ~~STATEMENTS~~in ~~OF CASH FLOWS~~thousands)

THREE MONTHS ENDED MARCH 31, 2001

	2003		2002
Net sales	$	28,254	$	27,975

Cost of sales	23,649		24,277

Gross profit	4,605		3,698

Selling, general and administrative expenses	1,415		1,442

Operating profit	3,190		2,256

Other expense	10		35

Net earnings	$	3,180	$	2,221

~~(in~~The ~~thousands)~~accompanying notes are an integral part of the unaudited condensed financial statements.

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

19M-FOODS DAIRY, LLC

~~M-FOODS~~(A ~~DAIRY~~Majority Owned Subsidiary of Michael Foods, ~~LLC~~Inc.)

~~(A MAJORITY OWNED~~Condensed ~~SUBSIDIARY~~Statements OFof ~~MICHAEL FOODS, INC.)~~Earnings

~~INDEX~~For TOthe ~~FINANCIAL~~six months ~~STATEMENTS~~ended June 30,

~~Balance~~(Unaudited, ~~Sheets~~dollars in ~~Statements of Earnings Statements of Cash Flows Notes to Financial Statements~~thousands)

	2003		2002
Net sales	$	52,674	$	51,825

Cost of sales	44,480		44,905

Gross profit	8,194		6,920

Selling, general and administrative expenses	3,112		2,857

Operating profit	5,082		4,063

Other expense	42		63

Net earnings	$	5,040	$	4,000

~~M-FOODS~~The ~~DAIRY,~~accompanying ~~LLC~~notes are an integral part of the unaudited condensed financial statements.

~~(A MAJORITY OWNED SUBSIDIARY OF MICHAEL FOODS, INC.)~~19

~~BALANCE~~M-FOODS ~~SHEETS~~DAIRY, LLC

(~~unaudited,~~A inMajority ~~thousands~~Owned Subsidiary of Michael Foods, Inc.)

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

Condensed Statements of Cash Flows

~~The~~For ~~accompanying~~the ~~notes~~Six ~~are~~Months ended anJune ~~integral part of these financial statements.~~30,

21(Unaudited, dollars in thousands)

M-FOODS DAIRY, LLC

	2003			2002
Net cash provided by operating activities	$	6,590		$	4,943

Cash flows from investing activities:
Capital expenditures	(4,186		)	(3,124		)
Investments in joint ventures and other assets	—			(161		)

Net cash used in investing activities	(4,186		)	(3,285		)

Cash flows from financing activities:
Dividends paid to Michael Foods, Inc.	(2,404		)	(1,658		)

Net cash used in financing activities	(2,404		)	(1,658		)

Net increase (decrease) in cash and equivalents	—			—

Cash and equivalents at beginning of period	—			—

Cash and equivalents at end of period	$	—		$	—

(AThe ~~MAJORITY~~accompanying ~~OWNED~~notes ~~SUBSIDIARY~~are OFan ~~MICHAEL~~integral ~~FOODS,~~part ~~INC~~of the unaudited condensed financial statements.)

~~STATEMENTS OF EARNINGS~~20

~~FOR~~M-FOODS ~~THE THREE MONTHS ENDED SEPTEMBER 30~~DAIRY, LLC

(~~unaudited,~~A inMajority ~~thousands~~Owned Subsidiary of Michael Foods, Inc.)

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

Notes to Condensed Financial Statements

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

22NOTE A—2001 MERGER

On April 10, 2001, Michael Foods, Inc. and its subsidiaries (“Michael Foods”, “Company”, “we”, “us”, “our”) was acquired in a transaction (the “Merger”) led by an 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 board of directors; and affiliates of two private equity investment firms, Vestar Capital Partners and Goldner Hawn Johnson & Morrison Incorporated, (collectively, “M-~~FOODS~~Foods ~~DAIRY~~Investors, LLC”). Michael Foods, Inc. is a wholly-owned subsidiary of M-Foods Holdings, Inc., which is a wholly-owned subsidiary of 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 equity financing of approximately $175,000,000, a senior secured credit facility of up to $470,000,000 at market-based variable interest rates, and $200,000,000 of senior subordinated notes at an 11.75% annual interest rate. As a result of the Merger, the stock of pre-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, we contributed the assets of our Dairy Products Division into two limited liability companies, M-Foods Dairy, LLC and M-Foods Dairy TXCT, LLC (Acollectively, ~~MAJORITY~~the ~~OWNED~~“Dairy LLCs”) and in exchange received voting preferred and voting common units from these entities equal to the fair value ~~SUBSIDIARY~~of OFthe ~~MICHAEL~~net ~~FOODS~~assets contributed, ~~INC~~which collectively was approximately $35,800,000.) The preferred units issued to us by the Dairy LLCs have an annual 10% preferred return guarantee and represent 100% of the preferred units issued and outstanding. In addition, we received 5% of the common units issued by the Dairy LLCs, 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, another entity which is owned by the same owners or affiliates of such owners, in the same proportion, as the unit holders of M-Foods Investors, LLC. The common unit interests owned by M-Foods Dairy Holdings, LLC were issued in exchange for $475,000 and are reflected as non-controlling interest in the accompanying consolidated balance sheet. See also Note D.

~~STATEMENTS~~The OF2001 ~~EARNINGS~~Merger was accounted for as a purchase in accordance with Accounting Principles Board Opinion 16, Business Combinations and Emerging Issues Task Force Issue No. 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 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 carryover basis was reflected as a deemed dividend of $66,631,000.

~~(unaudited,~~NOTE inB ~~thousands)~~— BASIS OF PRESENTATION

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

The accompanying unaudited financial statements and footnote information of the Company as of and for the three and six month periods ended June 30, 2003 and 2002 have been prepared in accordance with Regulation S-X pursuant to the rules and regulations of the SEC using the adjusted cost basis of assets and liabilities of the Company. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principals have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the unaudited financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the results of operations and cash flows for the periods indicated. For the period ended June 30, 2003, the Operating Unit’s financial statements include an allocation for general and administrative costs of approximately $1,266 incurred by Michael Foods. Management believes its allocations to these Operating Unit financial statements are reasonable. Additionally, 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 historical results of the Company for the periods indicated are not necessarily indicative of the results expected for the full year.

~~The~~These ~~accompanying~~unaudited ~~notes~~interim financial ~~are~~statements anshould ~~integral~~be ~~part~~read ofin ~~these~~conjunction with our financial statements and notes thereto, contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2002.

2321

~~M-FOODS~~NOTE ~~DAIRY,~~C ~~LLC~~— ORGANIZATION AND BUSINESS

~~(A MAJORITY OWNED SUBSIDIARY OF MICHAEL FOODS, INC.)~~Organization

~~STATEMENTS~~M-Foods OFDairy, ~~CASH~~LLC ~~FLOWS~~(the “Company” or “Operating Unit”) is a majority owned subsidiary of Michael Foods, Inc., a wholly owned subsidiary of M-Foods Holdings, Inc.

~~(unaudited, in thousands)~~Business

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

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

~~The~~NOTE ~~accompanying~~D ~~notes~~– ~~are~~SALE anOF ~~integral part of these financial~~THE ~~statements.~~COMPANY

24In May 2003, we signed a letter of intent for the sale of our dairy products division operating segment, which includes M-Foods Dairy, LLC, to Dean Foods Company. The dairy products division is substantially made up of the assets of M-Foods Dairy, LLC and M-Foods Dairy TXCT, LLC. The transaction is expected to close during the third quarter of 2003. Completion of the transaction is dependent upon several items, including completion of due diligence, execution of a securities purchase agreement, approval by both companies’ Boards of Directors, and regulatory approval.

~~M-FOODS~~NOTE ~~DAIRY,~~E ~~LLC~~— INVENTORIES

(AInventories ~~MAJORITY~~are ~~OWNED~~stated at ~~SUBSIDIARY~~the OFlower ~~MICHAEL~~of ~~FOODS~~cost (determined on a first-in, ~~INC.~~first-out basis) or market.

~~NOTES~~Inventories TOconsisted ~~FINANCIAL~~of the ~~STATEMENTS~~following (dollars in thousands):

UNAUDITED

	June 30, 2003		December 31, 2002
Raw materials and supplies	$	1,639	$	1,682
Work in process and finished goods	1,863		1,730
	$	3,502	$	3,412

NOTE AF — ~~ORGANIZATION,~~INCOME ~~BUSINESS AND MERGER~~TAXES

~~Organization~~The Company is a limited liability company and, accordingly, no provision or liability for U.S. income taxes is reflected in the Company’s financial statements. The U.S. taxable income of the Company and related deductions are allocated to and reported in the individual income tax returns of the owners of the Company.

~~M-Foods~~NOTE ~~Dairy,~~G ~~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~~ — MNCOMMITMENTS ~~(the “Predecessor,” “Operating Unit” or the “Unit”) was an operating~~AND ~~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.~~CONTINGENCIES

~~Business~~Litigation

The Company ~~processes~~is ~~and~~engaged ~~distributes~~in routine ~~soft~~litigation ~~serve~~incidental ~~ice~~to ~~cream~~its ~~mix, frozen~~business. ~~yogurt~~Management ~~mix,~~believes ~~milk~~the ~~and~~ultimate ~~specialty~~outcome ~~dairy~~of ~~products,~~this ~~many~~litigation ofwill ~~which~~not have ~~are~~a ~~ultra-high temperature~~material ~~pasteurized,~~effect ~~from~~on ~~its~~the ~~facility~~Operating inUnit’s ~~Minnesota~~financial position, liquidity or results of operations.

~~Merger~~22

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 Predecessor Board of Directors, and affiliates of two private equity investment firms, Vestar Capital Partners and Goldner Hawn Johnson & Morrison Incorporated, collectively, M-~~Foods~~FOODS ~~Investors, LLC. Under the terms of the Merger agreement, all~~DAIRY ~~outstanding shares of Michael Foods common stock were converted into the right to receive $30.10 per share in cash~~TXCT, 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 approximately 6.8% as of September 30, 2002), and $200,000,000 of senior subordinated notes at an 11.75% annual interest rate.LLC

~~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,~~A ~~the~~Majority ~~“Dairy LLCs”)~~Owned ~~and~~Subsidiary ~~in exchange received voting preferred and voting common units from these entities equal to the fair value~~ of ~~the net assets contributed, which collectively were approximately $35,800,000 (the approximate fair value contributed to M-Foods Dairy, LLC was $26,850,000). The preferred units issued to~~ Michael Foods ~~have an annual 10% preferred return guarantee and represent 100% of the preferred units issued 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~~Inc. 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 as of April 1, 2001.)

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

~~The~~Balance ~~Merger~~Sheets ~~was~~Statements 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~~Earnings ~~interests~~Statements ~~retained by the continuing management investors and continuing affiliate investors~~ of ~~the~~Cash ~~Michael~~Flows ~~family~~Notes ~~and the new interests acquired by the new investors. The deemed dividend related~~ to ~~the~~Financial 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.Statements

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.23

25M-FOODS DAIRY TXCT, LLC

~~The~~(A ~~fair~~Majority ~~value~~Owned ~~contributed~~Subsidiary byof 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. ~~The fair values of long-term assets were obtained from a valuation report issued by a third party appraisal firm~~Inc. ~~The allocations were as follows:~~)

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

Condensed Balance Sheets

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

	Nine months ended
	June 30, 2003		December 31, 2002
	September 30, 2002		September 30, 2001
ASSETS
Net sales	$	79,841,000	$	65,168,000
Current assets
Net earnings	4,395,000		7,405,000
Accounts receivable	$	6,248	$	4,399
Inventories	3,758		4,019
Prepaid expenses and other	67		65
Total current assets	10,073		8,483
Property, plant and equipment
Leasehold improvements	3,176		3,176
Machinery and equipment	12,300		11,792
	15,476		14,968
Less accumulated depreciation	4,788		3,588
	10,688		11,380
Other assets
Non-compete agreement, net	264		529
	$	21,025	$	20,392
LIABILITIES AND UNIT HOLDER AND OPERATING UNIT EQUITY
Current liabilities
Current maturities of non-compete commitment	$	—	$	2,400
Accounts payable	4,668		2,873
Accrued liabilities
Compensation	206		250
Insurance	6		1
Customer programs	424		240
Other	482		555
Total current liabilities	5,786		6,319
Commitments and contingencies	—		—
Preferred unit holder return payable	5,536		4,728
Unit holder and operating unit equity	9,703		9,345
	$	21,025	$	20,392

~~NOTE~~The Baccompanying —notes are ~~BASIS~~an OFintegral ~~PRESENTATION~~part of the unaudited condensed financial statements.

The Predecessor Statements of Earnings and Cash Flows for the three months ended March 31, 2001 have been prepared from the historical books and records of Michael Foods. 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. The accompanying unaudited financial statements and footnote information of the Company as of and for the six month period ended September 30, 2001 and the three and nine month periods ended September 30, 2002, have been prepared in accordance with Regulation S-X pursuant to the rules and regulations of the SEC using the adjusted cost basis of assets and liabilities of the Company. In the opinion of management, the unaudited financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the results of operations and cash flows for the periods indicated. The Unit’s financial statements include an allocation for general and administrative costs incurred by Michael Foods. Management believes its allocations to these Operating Unit financial statements are reasonable. Additionally, 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 historical results of the Company and Predecessor for the periods indicated are not necessarily indicative of the results of the Company for a full year.24

~~Use~~M-FOODS ofDAIRY ~~Estimates~~TXCT, LLC

~~Preparation~~(A ofMajority ~~the accompanying financial statements in conformity with~~Owned ~~accounting~~Subsidiary ~~principles generally accepted in the United States~~ of ~~America requires~~Michael ~~management to make estimates and assumptions that affect reported amounts of assets and liabilities~~Foods, ~~related revenues and expenses and disclosure about contingent assets and liabilities at the date of the financial statements~~Inc. ~~Actual results could differ from the estimates used by management.~~)

~~NOTE~~Condensed Statements Cof ~~— INVENTORIES~~Earnings

~~Inventories~~For ~~are stated at~~ the ~~lower of cost (determined on a first-in,~~three ~~first-out~~months ~~basis)~~ended orJune ~~market.~~30,

~~Inventories~~(Unaudited, ~~consisted~~dollars ofin ~~the following:~~thousands)

	September 30, 2002		December 31, 2001
	2003		2002
Raw materials and supplies	$	2,204,000	$	1,625,000
Net sales	$	24,055	$	25,147
Work in process and finished goods	2,662,000		1,967,000
Cost of sales	21,949		22,852
	$	4,866,000	$	3,592,000
Gross profit	2,106		2,295
Selling, general and administrative expenses	1,290		976
Operating profit	816		1,319
Other expense	6		24
Net earnings	$	810	$	1,295

26The accompanying notes are an integral part of the unaudited condensed financial statements.

~~NOTE D – ADOPTION OF NEW ACCOUNTING POLICIES~~25

~~Goodwill~~M-FOODS ~~and~~DAIRY TXCT, ~~Intangible Assets~~LLC

~~In July 2001, the Financial Accounting Standards Board~~ (~~FASB)~~A ~~issued Statement~~Majority ~~of Financial Accounting Standards (SFAS) 141, Business Combinations, and~~Owned ~~SFAS~~Subsidiary 142, Goodwill and Other Intangible Assets. SFAS 141 is effective for all business combinations completed after June 30, 2001. SFAS 142 is effective for fiscal years beginning after December 15, 2001; however, certain provisions of ~~this~~ ~~Statement~~Michael ~~apply to goodwill and other intangible assets acquired between July 1~~Foods, ~~2001 and the effective date of SFAS 142~~Inc. ~~The Company adopted the provisions of SFAS 142 as of January 1, 2002 and had no acquisitions between July 1, 2001 and January 1, 2002.~~)

AsCondensed Statements ~~a result~~ of ~~adopting SFAS No. 141 and SFAS No. 142, the Company’s accounting policies for goodwill and intangible assets changed effective January 1, 2002 as described below:~~Earnings

~~Goodwill~~For the six months ended June 30,

The Company recognizes the excess cost of an acquired entity over the net amount assigned to assets acquired and liabilities assumed as goodwill. Goodwill will be tested for impairment on an annual basis and between annual tests whenever there is an impairment indicated. Impairment losses will be recognized whenever the implied fair value is less than the carrying value of the related asset. Prior to January 1(Unaudited, ~~2002,~~dollars ~~goodwill~~in ~~was amortized over 40 years. Beginning January 1, 2002, goodwill is no longer amortized.~~thousands)

During the second quarter of fiscal 2002, the Company completed the transitional impairment test of goodwill with no impairment indicated at January 1, 2002.

	2003			2002
Net sales	$	40,265		$	44,477

Cost of sales	37,492			41,339

Gross profit	2,773			3,138

Selling, general and administrative expenses	2,244			1,994

Operating profit	529			1,144

Other expense (income)	(13		)	29

Net earnings	$	542		$	1,115

The ~~Company’s~~accompanying ~~carrying~~notes are ~~amount,~~an ~~net~~integral ofpart ~~accumulated amortization, for goodwill as~~ of ~~September~~the ~~30,~~unaudited ~~2002~~condensed ~~and~~financial ~~December 31, 2001 was $1,763,000~~statements.

The following table presents a reconciliation of net earnings, as reported in the financial statements, to those amounts adjusted for goodwill as determined in accordance with the provisions of SFAS 142:26

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

M-FOODS DAIRY TXCT, LLC

~~Other~~(A ~~New~~Majority ~~Pronouncements~~Owned Subsidiary of Michael Foods, Inc.)

OnCondensed ~~January~~Statements ~~1, 2002, the Company adopted SFAS 144, Accounting for the Impairment or Disposal~~ of ~~Long-Lived~~Cash ~~Assets. The adoption of SFAS 144 did not have a material effect on the Company’s financial statements.~~Flows

InFor ~~addition,~~ the ~~Company~~ ~~adopted~~six ~~Emerging Issues Task Force (EITF) Issue No. 00-25, Vendor~~months ~~Income~~ended ~~Statement~~June ~~Characterization of Consideration to a Reseller on the Vendors Products~~30, effective January 1, 2002. The adoption of EITF Issue 00-25 did not have a material effect on the Company’s financial statements. In addition, we adopted EITF Issue No. 01-09, Accounting for Consideration given by a Vendor to a Customer (including a Reseller of the Vendor's Products), effective January 1, 2002. The adoption of EITF Issue No. 01-09 did not have a material effect on our consolidated financial statements.

~~NOTE~~(Unaudited, Edollars —in ~~SETTLEMENT OF RECALL INSURANCE CLAIM~~thousands)

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.

	2003			2002

Net cash provided by operating activities	$	2,550		$	3,734

Cash flows from investing activities:
Capital expenditures	(508		)	(947		)

Net cash used in investing activities	(508		)	(947		)

Cash flows from financing activities:
Payments on long-term debt	(2,400		)	(2,400		)
Dividends paid to Michael Foods, Inc.	358			(387		)
Net cash used in financing activities	(2,042		)	(2,787		)

Net increase (decrease) in cash and equivalents	—			—

Cash and equivalents at beginning of period	—			—

Cash and equivalents at end of period	$	—		$	—

~~NOTE~~The Faccompanying —notes are ~~INCOME~~an ~~TAXES~~integral part of the unaudited condensed financial statements.

~~Predecessor~~27

~~The~~M-FOODS ~~activity of the Operating Unit has been included in the income tax~~DAIRY ~~return of Michael Foods~~TXCT, 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.LLC

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

~~For~~Notes ~~income~~to ~~tax purposes, the Company is a pass-through entity. Therefore, income taxes have not been~~Condensed ~~reflected~~Financial ~~on the Company’s financial statements.~~Statements

27Unaudited

NOTE G A—2001 ~~COMMITMENTS AND CONTINGENCIES~~MERGER

~~Litigation~~On April 10, 2001, Michael Foods, Inc. and its subsidiaries (“Michael Foods”, “Company”, “we”, “us”, “our”) was acquired in a transaction (the “Merger”) led by an 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 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”). Michael Foods, Inc. is a wholly-owned subsidiary of M-Foods Holdings, Inc., which is a wholly-owned subsidiary of 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 equity financing of approximately $175,000,000, a senior secured credit facility of up to $470,000,000 at market-based variable interest rates, and $200,000,000 of senior subordinated notes at an 11.75% annual interest rate. As a result of the Merger, the stock of pre-merger Michael Foods (“Predecessor”) is no longer publicly traded and, therefore, earnings per share calculations are no longer included for financial statement presentation.

~~The~~Immediately ~~Company~~after isthe close ~~engaged~~of the Merger, we contributed the assets of our Dairy Products Division into two limited liability companies, M-Foods Dairy, LLC and M-Foods Dairy TXCT, LLC (collectively, the “Dairy LLCs”) and in ~~routine~~exchange ~~litigation~~received ~~incidental~~voting preferred and voting common units from these entities equal to ~~its~~the fair value of the net assets contributed, which collectively was approximately ~~business~~$35,800,000. ~~Management~~ ~~believes~~The preferred units issued to us by the Dairy LLCs have an annual 10% preferred return guarantee and represent 100% of the preferred units issued ~~ultimate~~and ~~outcome~~outstanding. In addition, we received 5% of ~~this~~the ~~litigation~~common ~~will~~units ~~not~~issued by the Dairy LLCs, with the common units held by the Company representing 100% of the voting common units issued and outstanding. These common units have a ~~material~~stated value ~~effect~~of on$25,000. The remaining 95% of the common units, which are non-voting, ~~Unit’s~~are ~~financial~~owned ~~position~~by M-Foods Dairy Holdings, ~~liquidity~~LLC, another entity which is owned by the same owners or ~~results~~affiliates of ~~operations~~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 non-controlling interest in the accompanying consolidated balance sheet. See also Note D.

28The 2001 Merger was accounted for as a purchase in accordance with Accounting Principles Board Opinion 16, Business Combinations and Emerging Issues Task Force Issue No. 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 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 carryover basis was reflected as a deemed dividend of $66,631,000.

~~M-FOODS~~NOTE ~~DAIRY~~B ~~TXCT,~~— ~~LLC~~BASIS OF PRESENTATION

The accompanying unaudited financial statements and footnote information of the Company as of and for the three and six month periods ended June 30, 2003 and 2002 have been prepared in accordance with Regulation S-X pursuant to the rules and regulations of the SEC using the adjusted cost basis of assets and liabilities of the Company. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principals have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the unaudited financial statements contain all adjustments (Aconsisting ~~MAJORITY~~of ~~OWNED~~only normal recurring adjustments) necessary to present fairly the results of operations and cash flows for the periods indicated. For the period ended June 30, 2003, the ~~SUBSIDIARY~~Operating OFUnit’s ~~MICHAEL~~financial ~~FOODS~~statements include an allocation for general and administrative costs of approximately $955 incurred by Michael Foods. Management believes its allocations to these Operating Unit financial statements are reasonable. Additionally, ~~INC~~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 historical results of the Company for the periods indicated are not necessarily indicative of the results expected for the full year.

~~INDEX~~These TOunaudited ~~FINANCIAL~~interim financial statements should be read in conjunction with our financial statements ~~STATEMENTS~~and notes thereto, contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2002.

~~Balance~~NOTE ~~Sheets~~C ~~Statements~~— ofORGANIZATION ~~Earnings Statements of Cash Flows Notes to Financial Statements~~AND BUSINESS

29Organization

M-~~FOODS~~Foods ~~DAIRY~~Dairy TXCT, LLC (the “Company” or “Operating Unit”) is a majority owned subsidiary of Michael Foods, Inc., a wholly owned subsidiary of M-Foods Holdings, Inc.

~~(A MAJORITY OWNED SUBSIDIARY OF MICHAEL FOODS, INC.)~~28

~~BALANCE SHEETS~~Business

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

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

NOTE D – SALE OF THE COMPANY

In May 2003, we signed a letter of intent for the sale of our dairy products division operating segment, which includes M-Foods Dairy TXCT, LLC, to Dean Foods Company. The ~~accompanying~~dairy ~~notes~~products ~~are~~division anis ~~integral~~substantially made ~~part~~up of ~~these~~the ~~financial~~assets of M-Foods Dairy, LLC and M-Foods Dairy TXCT, LLC. The transaction is expected to close during the third quarter of 2003. Completion ~~statements~~of the transaction is dependent upon several items, including completion of due diligence, execution of a securities purchase agreement, approval by both companies’ Boards of Directors, and regulatory approval.

30NOTE E – INVENTORIES

~~M-FOODS~~Inventories ~~DAIRY~~are ~~TXCT~~stated at the lower of cost (determined on a first-in, ~~LLC~~first-out basis) or market.

(AInventories ~~MAJORITY~~consisted ~~OWNED~~of ~~SUBSIDIARY~~the OFfollowing ~~MICHAEL~~(dollars ~~FOODS,~~in ~~INC.~~thousands):

STATEMENTS OF EARNINGS

	June 30, 2003		December 31, 2002
Raw materials and supplies	$	2,017	$	3,014
Work in process and finished goods	1,741		1,005
	$	3,758	$	4,019

~~FOR~~NOTE ~~THE~~F ~~THREE~~— ~~MONTHS~~NON-COMPETE ~~ENDED~~AGREEMENT ~~SEPTEMBER~~AND ~~30,~~COMMITMENT

~~(unaudited~~During 1999, as part of the consideration for its Connecticut dairy asset purchase, the Operating Unit entered into a $12 million non-compete agreement. Under the agreement, the Operating Unit agreed to make five annual $2.4 million payments beginning in ~~thousands)~~1999. As of June 30, 2003 the commitment has been fulfilled.

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

Our acquired intangible non-compete asset that has been determined to have a definite life and continues to be amortized as of June 30, 2003 is as follows (dollars in thousands):

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

	Gross Carrying Amount		Accumulated Amortization
Non-compete	$	1,398	$	(1,134	)

31NOTE G — INCOME TAXES

~~M-FOODS~~The ~~DAIRY~~Company ~~TXCT~~is a limited liability company and, ~~LLC~~accordingly, no provision or liability for U.S. income taxes is reflected in the Company’s financial statements. The U.S. taxable income of the Company and related deductions are allocated to and reported in the individual income tax returns of the owners of the Company.

(ANOTE ~~MAJORITY~~H ~~OWNED SUBSIDIARY~~— OFCOMMITMENTS ~~MICHAEL FOODS, INC.)~~AND CONTINGENCIES

~~STATEMENTS OF EARNINGS~~Litigation

~~(unaudited,~~The Company is engaged in routine ~~thousands)~~litigation incidental to its business. Management believes the ultimate outcome of this litigation will not have a material effect on the Operating Unit’s financial position, liquidity or results of operations.

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

~~The~~ITEM ~~accompanying~~2 ~~notes~~- ~~are~~MANAGEMENT’S anDISCUSSION ~~integral~~AND ~~part~~ANALYSIS ofOF ~~these financial~~FINANCIAL ~~statements.~~CONDITION AND RESULTS OF OPERATIONS

32GENERAL

MMichael Foods, Inc. and its subsidiaries (the “Company”, “we”, “us”, “our”) is a diversified producer and distributor of food products in four areas -~~FOODS~~ ~~DAIRY~~egg ~~TXCT~~products, ~~LLC~~refrigerated distribution, dairy products, and potato products. We believe, through our Egg Products Division, we are the largest producer of processed egg products in North America. 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 quick service businesses and other foodservice outlets, ice cream manufacturers and others. We have an agreement to sell the Dairy Products Division and we expect the transaction to close in the third quarter of 2003 (see Note D to the financial statements). The Potato Products Division processes and distributes refrigerated potato products sold to the foodservice and retail grocery markets in the United States. Please see Note H to our consolidated financial statements for additional information about our business segments.

(AOur ~~MAJORITY~~strategy ~~OWNED~~is to grow value-added food product sales, primarily in the foodservice market, by focusing on developing, ~~SUBSIDIARY~~marketing OFand ~~MICHAEL~~distributing ~~FOODS~~innovative, ~~INC~~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.

~~STATEMENTS~~THREE OFMONTHS ~~CASH~~ENDED ~~FLOWS~~JUNE 30, 2003 AS COMPARED TO THREE MONTHS ENDED JUNE 30, 2002

~~(unaudited,~~RESULTS inOF ~~thousands)~~OPERATIONS

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

Readers are directed to Note H - Business Segments for data on the unaudited financial results of our four business segments for the three months ended June 30, 2003 and June 30, 2002.

~~The~~Net ~~accompanying~~sales ~~notes~~for ~~are~~the 2003 period were $323.9 million, an ~~integral~~increase ~~part~~of 12%, compared to net sales of ~~these~~$289.8 million ~~financial~~in ~~statements~~the 2002 period. Net sales increased because of the factors discussed in the below divisional reviews, but were higher in the 2003 period due largely to significant sales growth at our largest division, Egg Products, which saw strong unit sales growth and the positive impact of the Canadian company acquired in 2002.

33Egg Products Division external net sales for the 2003 period increased $27.3 million, or 17%, to $189.2 million from $161.9 million in the 2002 period. Net sales reflected increased unit sales from core operations, related to increased sales efforts which increased market penetration, and the impact of an egg products acquisition (see Note C to the financial statements). Unit sales rose in all categories, except for frozen items and shell eggs. Frozen product sales declined due to our decision to not pursue unprofitable sales and shell egg units declined as part of our on-going plan to reduce this commodity-sensitive business over time. Unit sales rose 9% for higher value-added items. Graded shell egg prices increased approximately 24% compared to second quarter 2002 levels, as reported by Urner Barry Publications - a widely quoted industry pricing service. Related egg market increases raised the cost of purchased eggs, which was not fully reflected in our selling prices, reducing margins for many of our egg products.

MApproximately two-~~FOODS~~thirds of ~~DAIRY~~the ~~TXCT~~Egg Products Division’s annual egg needs are purchased under contracts or in the spot market. A substantial majority of these eggs are priced according to the cost of grain inputs or to egg market prices as reported by Urner Barry. Approximately one-third of annual egg needs are sourced from internal flocks, ~~LLC~~where feed costs typically represent roughly two-thirds of the cost of producing such eggs. Feed costs were moderately higher in the 2003 period compared to the 2002 period, particularly for corn, which increased by roughly one-fourth. Because of higher open market egg costs and higher feed costs, overall egg costs increased significantly in the 2003 period as compared to the 2002 period. Operating earnings for the 2003 period included a gain of approximately $1.6 million from a partial settlement of litigation. Overall, the Division’s operating earnings decreased by approximately $0.6 million in the 2003 period.

(ARefrigerated ~~MAJORITY~~Distribution Division ~~OWNED~~external net sales for the 2003 period increased $6.7 million, or 12%, to $63.9 million from $57.2 million in the 2002 period. Net sales reflected ~~SUBSIDIARY~~significantly OFhigher ~~MICHAEL~~unit ~~FOODS~~sales for distributed products and slightly lower prices, ~~INC~~related to market conditions, for the key product categories of cheese and butter.) Also, both unit sales and average selling prices rose for shell

~~NOTES~~eggs. TOThe ~~FINANCIAL~~shift ~~STATEMENTS~~of the important Easter selling period from 2002’s first quarter to 2003’s second quarter accounted for some of the improvement in both distributed products sales and shell egg sales, particularly the latter. Divisional operating earnings increased by approximately $2.2 million, with the important cheese category accounting for much of the improvement. Cheese unit sales rose year-over-year, while a decline in product costs, combined with favorable wholesale price points, allowed for gross margin and operating earnings expansion. Also, we increased the allowance for doubtful accounts in the 2003 period by approximately $1.4 million in recognition of the bankruptcy filing by a major customer.

~~UNAUDITED~~30

~~NOTE~~Dairy AProducts —Division external ~~ORGANIZATION~~net sales for the 2003 period decreased $0.8 million, ~~BUSINESS~~or ~~AND~~2%, ~~MERGER~~to $52.3 million from $53.1 million in the 2002 period. Net sales reflected slightly lower unit sales, reflecting lower cartoned product sales that were not fully offset by unit sales gain from creamers. Selling prices during the 2003 period modestly exceeded 2002 period levels. Ingredient and production costs compared favorably to those experienced in 2002. This caused operating earnings to increase by approximately $1.0 million in the 2003 period.

~~Organization~~Potato Products Division external net sales for the 2003 period increased $1.0 million, or 6%, to $18.5 million from $17.5 million in the 2002 period. Net sales reflected modest increases in both volume and selling prices. Sales were particularly strong for mashed items – both at retail and at foodservice. Mashed unit sales, in total, rose over 20% year-over-year. New account activity, same-account sales growth, expanded distribution and higher marketing spending levels all contributed to the sales gain. Operating earnings for the 2003 period decreased approximately $0.2 million due to lower processing yields, which resulted from a lower quality 2002 potato harvest, and increased sales and marketing spending related to raising customer awareness of our mashed potato products.

~~M-Foods~~Gross ~~Dairy~~profit ~~TXCT~~in the 2003 period increased $3.2 million, ~~LLC~~or ~~(the~~6%, ~~“Company”)~~to is$57.4 amillion ~~majority~~from ~~owned~~$54.2 ~~subsidiary~~million in the 2002 period. Our gross profit margin was 17.7% of ~~Michael~~net ~~Foods,~~sales ~~Inc.,~~in athe ~~wholly~~2003 ~~owned~~period ~~subsidiary~~compared ofto ~~M-Foods~~18.7% ~~Holdings,~~in the 2002 ~~Inc~~period. ~~Prior~~The todecrease ~~the~~in ~~Merger~~our ~~described~~gross ~~below,~~profit ~~Kohler~~margin ~~Mix~~for —the ~~TXCT~~2003 (period compared to the ~~“Predecessor~~2002 period reflected the factors discussed above,” ~~“Operating~~particularly ~~Unit”~~increased orraw material costs in the ~~“Unit”)~~Egg Products ~~was~~and anPotato ~~operating~~Products ~~unit~~divisions. ofIt ~~Michael~~is ~~Foods,~~our ~~Inc.~~ strategy to increase value-added ~~The~~product ~~change~~sales inas ~~control~~a percent of ~~Michael~~total ~~Foods~~sales over time, ~~Inc.~~while ~~and~~decreasing commodity-sensitive ~~the~~products’ ~~reorganization~~contribution ~~of the~~to ~~operating~~consolidated ~~unit~~sales. ~~into~~These ~~M-Foods~~efforts historically ~~Dairy~~have ~~TXCT,~~been ~~LLC~~beneficial ~~are~~to ~~more~~gross ~~fully~~profit ~~described~~margins ~~below~~in most periods.

~~Business~~Selling, general and administrative expenses in the 2003 period increased $1.1 million, or 4%, to $30.9 million from $29.8 million in the 2002 period and reflected the partial litigation settlement gain noted above. Such expenses were 9.5% of net sales in the 2003 period compared to 10.3% of net sales in the 2002 period, and were reflective of the relatively strong sales growth we achieved, our cost control efforts across all divisions and the approximate $1.6 million litigation gain.

~~The~~Operating ~~Company~~profit ~~processes~~in ~~and~~the 2003 ~~distributes~~period ~~soft~~increased ~~serve~~$2.1 ~~ice~~million, ~~cream~~or ~~mix~~9%, ~~frozen~~to $26.5 from $24.4 million in the ~~yogurt~~2002 ~~mix~~period., ~~milk~~with ~~and~~approximately ~~specialty~~$1.6 ~~dairy~~million ~~products,~~of ~~many~~the increase related to the litigation settlement. Our operating profit margin was 8.2% of ~~which~~net ~~are~~sales ~~ultra-high~~in the 2003 period compared to 8.4% in the 2002 period. The decline in gross ~~temperature~~profit ~~pasteurized,~~margin ~~from~~more ~~its~~than ~~facilities~~offset the improvements seen in ~~Texas~~selling, general and administrative ~~Connecticut~~expenses in the 2003 period, resulting in the lower operating profit margin.

~~Merger~~Interest expense declined slightly in the 2003 period, reflecting lower debt levels and lower short-term interest rates. Our tax rate declined to 38.5% from 39.3% due to higher income levels and the implementation of tax planning strategies.

OnSIX ~~April~~MONTHS ~~10,~~ENDED ~~2001,~~JUNE 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 Predecessor 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~~2003 ~~all~~AS ~~outstanding~~COMPARED ~~stock~~TO ~~options~~SIX ~~were~~MONTHS ~~converted~~ENDED ~~into~~JUNE ~~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 approximately 6.8% as of September 30,~~ 2002~~), and $200,000,000 of senior subordinated notes at an 11.75% annual interest rate.~~

~~Immediately~~RESULTS ~~after~~OF 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 were approximately $35,800,000 (the approximate fair value contributed to M-Foods Dairy TXCT, LLC was $8,950,000). The preferred units issued to Michael Foods have an annual 10% preferred return guarantee and 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 as of April 1, 2001.OPERATIONS

~~Following~~Readers ~~the~~are ~~Merger,~~directed ~~Michael~~to Note ~~Foods,~~H ~~Inc.~~- ~~became~~Business ~~an indirect~~Segments ~~wholly-owned~~for ~~subsidiary~~data ofon ~~M-Foods~~the ~~Investors,~~unaudited ~~LLC~~financial ~~and~~results ~~M-Foods~~of ~~Dairy~~our ~~TXCT,~~four ~~LLC~~business ~~became~~segments afor ~~majority~~the ~~owned~~six ~~subsidiary~~months ofended ~~Michael~~June ~~Foods~~30, ~~Inc~~2003 and June 30, 2002.

~~The~~Net ~~Merger~~sales ~~was accounted~~ for asthe ~~a purchase in~~2003 ~~accordance~~period ~~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~~$622. As1 ~~a result~~million, ~~the~~ ~~assets~~an ~~and~~increase ~~liabilities~~of ~~were assigned new values~~10%, ~~which~~compared ~~are~~to ~~part~~net ~~Predecessor cost~~sales ~~and part fair value, in the same proportions as the carryover basis~~ of ~~the~~ ~~residual~~$568.2 ~~interests~~million ~~retained~~in by the ~~continuing~~2002 ~~management investors and continuing affiliate investors of the Michael family and the new interests acquired by the new investors~~period. ~~The~~Net ~~deemed~~sales ~~dividend~~increased ~~related~~because toof the ~~Michael~~factors ~~Foods~~discussed ~~investment~~ in the ~~assets~~below ~~and~~divisional ~~liabilities of the Dairy LLCs was pushed down to these majority owned subsidiaries~~reviews, ~~as if~~but ~~they~~ were ~~wholly~~higher ~~owned~~in ~~subsidiaries since Michael Foods owns all of~~ the ~~voting stock~~2003 ~~and~~period ~~the~~due ~~Dairy~~largely ~~LLCs~~to ~~are~~significant ~~being~~sales ~~operated~~growth byat ~~the management of Michael~~our ~~Foods. The~~largest ~~amount of the deemed dividend at Michael Foods was $66~~division,~~631,000. However,~~ ~~the~~Egg ~~historical cost basis equity of the continuing investors of the Company was $21~~Products,~~623,000,~~ which ~~exceeded~~saw ~~the~~strong ~~Company’s~~unit ~~fair~~sales ~~market~~growth ~~value~~and bythe ~~$12,673,000. This~~positive ~~resulted~~impact ~~in an allocation~~ of ~~carryover~~a ~~basis~~2002 ~~in excess of the fair market value of the Company in the amount of $3,928,000~~acquisition.

~~For~~Egg ~~ease~~Products ofDivision external ~~presentation,~~net ~~the~~sales ~~Merger~~for ~~has~~the ~~been reflected~~2003 inperiod ~~the~~increased ~~accompanying~~$50.7 ~~financial~~million, ~~statements~~or as16%, ifto $367.8 itmillion ~~had~~from ~~occurred on April~~ $317.1, ~~2001. Management determined~~million ~~that~~in nothe ~~material~~2002 ~~transactions~~period. Sales ~~occurred~~reflected ~~during~~increased ~~the~~unit ~~period~~sales from ~~April~~ 1core ~~through~~operations ~~April~~and 9,the ~~2001.~~sales ~~The~~impact ~~Company’s~~of ~~financial~~a ~~statements~~Canadian ~~have~~egg ~~been~~products ~~presented~~company onacquisition a(see ~~comparative~~Note ~~basis~~C ~~with~~to the ~~Predecessor’s historical operating unit~~ financial statements,). ~~prior~~Unit tosales ~~the~~rose ~~date~~in ofall categories, ~~Merger. Different~~except ~~bases~~for offrozen ~~accounting~~items, ~~have~~and ~~been~~rose ~~used~~8% tofor ~~prepare~~higher ~~the~~value-added ~~Company~~items. Graded ~~and~~shell ~~Predecessor~~egg ~~financial~~prices ~~statements.~~ increased ~~The~~approximately ~~primary~~17% ~~differences~~compared ~~relate~~ to ~~the~~first ~~10%~~half ~~yield~~2002 onlevels, ~~preferred~~as ~~units, depreciation~~reported ~~and~~by ~~amortization~~Urner Barry. ofRelated ~~fixed~~egg ~~assets~~market ~~and~~increases ~~other~~raised ~~intangible~~the ~~assets recorded~~cost atof ~~fair~~purchased ~~value~~eggs, atwhich was ~~the~~not ~~date~~fully ofreflected ~~acquisition,~~in ~~and~~our ~~income~~selling ~~taxes~~prices, ~~which~~reducing ~~are payable~~margins byfor ~~the~~many ~~Company’s~~of ~~unit~~our egg products.

3431

~~holders~~Approximately two-thirds of the Egg Products Division’s annual egg needs are purchased under contracts or in the spot market. A substantial majority of these eggs are priced according to the cost of grain inputs or to egg market prices as reported by Urner Barry. Approximately one-third of annual egg needs are sourced from internal flocks, where feed costs typically represent roughly two-thirds of the cost of producing such eggs. Feed costs were moderately higher in the 2003 period compared to the 2002 period, particularly for corn, which increased by nearly 30%. Because of higher open market egg prices and higher feed costs, overall egg costs increased significantly in the 2003 period as compared to the 2002 period. As a result, the Division’s operating earnings decreased by $2.4 million in the 2003 period. Operating earnings for the 2003 period included a gain of approximately $2.7 million from the partial settlements of two litigation matters.

~~The~~Refrigerated ~~fair~~Distribution Division ~~value~~external ~~contributed~~net bysales ~~Michael~~for ~~Foods~~the to2003 ~~M-Foods Dairy~~period ~~TXCT~~increased $5.1 million, ~~LLC~~or ~~was~~4%, to $~~8,950,000~~125.3 ~~and~~million ~~this~~from ~~amount,~~$120.2 ~~plus~~million anin ~~additional~~the ~~carryover~~2002 period. Net sales reflected higher unit sales for ~~basis~~distributed ofproducts ~~$3,928,000,~~and ~~was~~lower ~~allocated~~prices, related to market conditions, for the key ~~acquired~~product ~~assets~~categories of cheese and ~~liabilities~~butter. ~~based on~~However, ~~their~~shell ~~fair~~egg ~~values~~average atselling prices ~~April~~rose 1significantly, ~~2001~~reflecting market conditions. Divisional operating Inearnings ~~addition,~~increased by approximately $~~118~~4.3 million,~~750~~ ~~was~~with ~~contributed~~the byimportant ~~new~~cheese category ~~investors~~accounting infor ~~exchange~~much ~~for Class~~of Bthe improvement. Cheese unit sales rose year-over-year, ~~non~~while ~~voting~~a ~~common~~decline ~~units. The~~in product costs, combined with favorable ~~fair~~wholesale ~~values~~price ofpoints, ~~long-term~~allowed ~~assets~~for ~~were~~gross ~~obtained~~margin ~~from~~and aoperating ~~valuation~~earnings improvements. ~~report~~Also, ~~issued~~we byincreased the allowance for doubtful accounts in the a2003 ~~third~~period ~~party~~by ~~appraisal~~approximately ~~firm~~$1. ~~The~~7 million in recognition of the bankruptcy ~~allocations~~filing ~~were~~by asa ~~follows:~~major customer.

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

Dairy Products Division external net sales for the 2003 period decreased $3.4 million, or 4%, to $92.9 million from $96.3 million in the 2002 period. Net sales reflected slightly lower unit sales, due to lower cartoned product sales, related to a customer diversifying its supplier base, that were not fully offset by unit sales gains from creamers. Pricing was comparable to 2002 period levels. Ingredient costs improved related to national dairy market conditions. Also, production costs were more favorable than those experienced in 2002. These factors caused operating earnings to increase by approximately $1.0 million from 2002 period levels.

~~The~~Potato ~~following~~Products ~~unaudited~~Division external ~~pro forma~~ net sales ~~and~~for ~~net~~the ~~earnings~~2003 ~~(loss)~~period ~~for the~~increased ~~nine~~$1.6 ~~months~~million, ~~ended~~or ~~September 30~~5%, ~~2001~~to ~~include~~$36.2 million from $34.6 ~~results~~million ~~for~~in the ~~three~~2002 ~~months ended~~period. ~~March~~Net ~~31,~~sales ~~2001,~~reflected ~~which~~modest ~~were~~increases ~~derived~~in ~~from~~both volume ~~the~~and ~~application~~selling ofprices. Sales ~~pro forma~~were ~~adjustments~~particularly tostrong ~~the~~for ~~Predecessor’s~~mashed ~~historical~~items ~~statement~~– ofboth ~~earnings,~~at retail and ~~assumes~~at foodservice. ~~the~~Mashed ~~Merger~~unit ~~had~~sales, ~~occurred~~in ontotal, ~~January~~rose 1,over ~~2001~~20% year-over-year. New account ~~The~~activity, ~~net~~same-account sales growth, expanded distribution and ~~net~~higher marketing spending levels all contributed to the sales gain. Operating earnings for the ~~nine~~2003 ~~months~~period ~~ended~~decreased ~~September~~approximately $0.8 30million due to lower processing yields, which resulted from a lower quality 2002 ~~represent~~potato ~~actual~~harvest, ~~results~~and ~~for~~increased ~~the~~sales ~~period~~and marketing spending related to raising customer awareness of our mashed potato products.

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

Gross profit in the 2003 period increased $3.0 million, or 3%, to $108.3 million from $105.3 million in the 2002 period. Our gross profit margin was 17.4% of net sales in the 2003 period compared to 18.5% in the 2002 period. The decrease in our gross profit margin for the 2003 period compared to the 2002 period reflected the factors discussed above, particularly increased raw material costs in the Egg Products and Potato Products divisions. It is our strategy to increase value-added product sales as a percent of total sales over time, while decreasing commodity-sensitive products’ contribution to consolidated sales. These efforts historically have been beneficial to gross profit margins in most periods.

~~NOTE~~Selling, Bgeneral —and administrative ~~BASIS~~expenses OFin the 2003 period increased $0.9 million, or 1%, to $60.3 million from $59.4 million in the 2002 period and reflected the partial ~~PRESENTATION~~litigation settlements gain noted above. Such expenses were 9.7% of net sales in the 2003 period compared to 10.5% of net sales in the 2002 period, and were reflective of the relatively strong sales growth we achieved, our cost control efforts across all divisions and the approximate $2.7 million litigation gain.

The Predecessor Statements of Earnings and Cash Flows for the three months ended March 31, 2001 have been prepared from the historical books and records of Michael Foods. The respective Statements of Earnings include an allocation of general and administrative costs incurred by Michael Foods and allocations from this Operating ~~Unit~~profit toin the ~~other~~2003 ~~Dairy~~period ~~LLC~~increased ~~operating unit, M-Foods Dairy, LLC~~$2.1 ~~The accompanying unaudited financial statements and footnote information of the Company as of and for the six month period ended September 30~~million, ~~2001~~or ~~and the three and nine month periods ended September 30~~5%, ~~2002, have been prepared in accordance with Regulation S-X pursuant~~ to ~~the~~$48.0 ~~rules~~from ~~and~~$45.9 ~~regulations~~million ofin the ~~SEC using the adjusted cost basis~~ of2002 ~~assets and liabilities of the Company~~period. In All ~~the opinion~~ of ~~management,~~ the ~~unaudited financial statements contain~~increase ~~all~~year-over-year ~~adjustments~~is ~~(consisting~~attributable ~~of only normal recurring adjustments) necessary~~ to ~~present~~ ~~fairly~~ the ~~results~~litigation ~~of operations and cash flows for the periods indicated~~gain. ~~The~~Our ~~Unit’s~~operating ~~financial statements~~profit ~~include~~margin anwas ~~allocation for general and administrative costs incurred by Michael Foods~~7. ~~Management~~7% ~~believes its~~of ~~allocations to these Operating Unit financial statements are~~net ~~reasonable. Additionally,~~sales ~~Operating Unit~~in ~~equity includes~~ the ~~cumulative~~2003 ~~net~~period ~~advances~~compared ~~between the Operating Unit and Michael Foods, which are considered additional capital invested from or, constructive dividends~~ to, ~~Michael Foods~~8. ~~Accordingly,~~1% ~~the~~in ~~accompanying financial statements may not necessarily be indicative of~~ the ~~results~~2002 ~~that~~period. ~~could~~The ~~have~~decline ~~been obtained if the Operating~~in ~~Unit~~gross ~~had~~profit ~~been~~margin ~~operated~~more asthan aoffset ~~stand-alone entity. The historical results of~~ the ~~Company~~improvements ~~and~~seen ~~Predecessor~~in ~~for~~selling, ~~the~~general ~~periods~~and ~~indicated~~administrative ~~are~~expenses ~~not~~in ~~necessarily~~the ~~indicative~~2003 ofperiod, ~~the~~resulting ~~results~~in of the ~~Company~~lower ~~for~~operating aprofit ~~full year~~margin.

~~Use~~Interest expense declined by approximately $1.0 million in the 2003 period, reflecting lower debt levels and lower short-term interest rates. Our tax rate declined to 38.5% from 39.3% due to higher income levels and the implementation of ~~Estimates~~tax planning strategies.

~~Preparation~~Earnings before interest, taxes, depreciation and amortization (“EBITDA”, as defined in our credit agreement) for the six months ended June 30, 2003 were $77.6 million, an increase of 4%, compared to $74.8 million for the ~~accompanying~~six ~~financial~~months ~~statements~~ended June 30, in2002. ~~conformity~~EBITDA ~~with~~increased ~~accounting~~because ~~principles~~of ~~generally~~the ~~accepted~~factors discussed in the ~~United~~above results of operations divisional reviews. We believe that EBITDA is a relevant indication ~~States~~of the strength of ~~America~~our ~~requires~~operating ~~management~~performance toas ~~make~~measured ~~estimates~~in ~~and~~terms ~~assumptions~~of ~~that~~operating ~~affect~~cash ~~reported~~earnings ~~amounts~~capabilities. ofWe ~~assets~~believe ~~and~~it ~~liabilities,~~is ~~related~~the ~~revenues~~key ~~and~~measurement used by our ~~expenses~~debtholders ~~and~~to ~~disclosure~~assess ~~about~~our ~~contingent~~operating ~~assets~~performance. Because ~~and~~of ~~liabilities~~this, atwe use EBITDA as the ~~date~~primary ofinternal ~~the~~measurement ~~financial~~of ~~statements.~~our ~~Actual~~operating ~~results~~performance ~~could~~and ~~differ~~it ~~from~~is the ~~estimates~~main ~~used~~focus of our byemployee ~~management~~incentive compensation programs.

~~NOTE C – INVENTORIES~~32

~~Inventories~~We ~~are~~believe ~~stated~~EBITDA atis a widely accepted financial indicator used to analyze and compare companies on the ~~lower~~basis of ~~cost~~operating ~~(determined~~performance. onIt should not be considered in isolation or as a ~~first-~~substitute for measures of performance prepared in, ~~first-out~~accordance ~~basis)~~with generally oraccepted ~~market~~accounting principles nor as an alternative to cash flows as a source of liquidity and is not indicative of operating profit as determined under generally accepted accounting principles. The following table reconciles our net earnings to EBITDA as most commonly defined, and then to EBITDA as we are required to define it per our credit agreement, for the six months ended June 30 (dollars in thousands):

Inventories consisted of the following:

	2003			2002

Net earnings	$	14,747		$	12,675

Total interest expense, excluding amortization of debt issuance costs	21,902			23,686

Amortization of debt issuance costs	2,180			1,574

Income taxes	9,259			8,200

Depreciation and amortization	28,432			27,293
EBITDA (as commonly defined)	76,520			73,428

Equity sponsor management fee	634			546

Industrial revenue bonds related expenses	470			465

Other	(13		)	328
EBITDA (as defined in our credit agreement)	$	77,611		$	74,767

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

Under our credit agreement we are required to report quarterly on our compliance with three financial covenants, with the calculations based primarily on EBITDA as defined in the credit agreement and done on a trailing twelve month basis. As of June 30, 2003 our leverage ratio was 2.93:1.00, versus a requirement of less than or equal to 4.50:1.00, our interest coverage ratio was 3.53:1.00, versus a requirement of greater than or equal to 2.00:1.00, and our fixed charge coverage ratio was 1.91:1.00, versus a requirement of greater than or equal to 1.00:1.00.

~~NOTE~~COMMODITIES DAND ~~– ADOPTION OF NEW ACOUNTING POLICIES~~PRODUCT PRICING

~~Goodwill~~Certain of our products are sensitive to changes in commodity prices. Value-added egg products, such as extended shelf-life liquid and ~~Intangible~~precooked ~~Assets~~products, account for approximately 60% of the Egg Products Division’s net sales. The remainder of Egg Products Division sales is derived from the sale of other egg products and shell eggs, which are commodity-sensitive. Gross profit from shell eggs is primarily dependent upon the relationship between shell egg prices and the cost of feed, both of which can fluctuate significantly. Graded shell egg pricing in the 2003 period was higher than in the 2002 period as measured by a widely quoted pricing service, and feed costs rose significantly year-over-year. Gross profit margins for extended shelf-life liquid eggs, egg substitutes, and precooked and hardcooked egg products are less sensitive to commodity price fluctuations than are other egg products or shell eggs. Our Refrigerated Distribution Division derives approximately 80% of its net sales from refrigerated products produced by others, thereby somewhat reducing the effects of commodity price swings. However, a majority of the 80% represents cheese and butter, and the costs for both fluctuate with national dairy markets. Time lags between cost changes for these lines and wholesale/retail pricing changes can result in margin expansion or compression which can be significant. The balance of Refrigerated Distribution sales are mainly from shell eggs, some of which are produced by the Egg Products Division, sold on a distribution, or non-commodity, basis.

InThe ~~July~~Dairy ~~2001,~~Products Division ~~the~~sells ~~Financial~~its ~~Accounting~~products ~~Standards~~primarily ~~Board~~on ~~(FASB)~~a ~~issued Statement~~cost-plus ofbasis ~~Financial~~and, ~~Accounting~~therefore, ~~Standards~~the Division’s ~~(SFAS)~~earnings ~~141,~~are ~~Business~~not ~~Combinations,~~typically ~~and SFAS~~affected ~~142,~~greatly ~~Goodwill and~~by ~~Other~~raw ~~Intangible~~ingredient ~~Assets.~~ price ~~SFAS~~fluctuations, ~~141~~except isover ~~effective~~short ~~for~~time ~~all business combinations~~periods.

35The Potato Products Division typically purchases 75%-95% of its raw potatoes from contract producers under annual contracts. The remainder is purchased at market prices to satisfy short-term production requirements or to take advantage of market prices when they are lower than contracted prices. Moderate variations in the purchase price of raw materials or the selling price per pound of finished products can have a significant effect on Potato Products Division operating results.

~~completed~~Inflation ~~after~~is ~~June~~not ~~30, 2001.~~ expected ~~SFAS~~to ~~142~~have isa ~~effective~~significant ~~for~~impact ~~fiscal~~on ~~years~~our ~~beginning~~business. ~~after~~We ~~December~~have ~~15, 2001;~~generally ~~however,~~been ~~certain~~able ~~provisions of this Statement apply~~ to ~~goodwill and other~~ ~~intangible~~offset ~~assets acquired between July 1, 2001 and~~ the ~~effective~~impact ~~date~~ of ~~SFAS 142. The~~inflation ~~Company~~through ~~adopted~~a ~~the~~combination ~~provisions~~ of ~~SFAS~~productivity ~~142~~gains ~~as of January 1, 2002~~ and ~~had no acquisitions between July 1, 2001~~ ~~and~~price ~~January 1, 2002~~increases.

~~As a result of adopting SFAS No. 141 and SFAS No. 142, the Company’s accounting policies for goodwill and intangible assets changed effective January 1, 2002 as described below:~~33

~~Goodwill~~CAPITAL RESOURCES AND LIQUIDITY

~~The~~We ~~Company~~have ~~recognizes~~a ~~the~~credit agreement ~~excess~~with ~~cost~~various oflenders, anincluding ~~acquired~~commercial ~~entity~~banks, ~~over~~other ~~the~~financial ~~net~~institutions ~~amount~~and ~~assigned~~investment togroups, ~~assets~~which ~~acquired~~expires in 2007 and ~~liabilities~~2008 ~~assumed~~and asprovides ~~goodwill. The~~credit ~~Company~~facilities ~~had~~which nooriginally ~~goodwill~~provided $470 million. Within these credit asfacilities ofthere ~~September~~is ~~30,~~a ~~2002~~$100 ormillion ~~December~~revolving ~~31,~~line ~~2001~~of credit. At June 30, 2003, Ifthere ~~goodwill~~was isapproximately ~~acquired~~$6.5 inmillion utilized under the ~~future~~revolving line of credit for letters of credit, itwhile ~~will~~the beoutstanding ~~tested~~balance ~~for~~of ~~impairment on~~the anterm ~~annual~~A portion ~~basis~~of ~~and~~the ~~between~~credit ~~annual~~facility ~~tests~~approximated ~~whenever~~$61.0 ~~there~~million isand anthe ~~impairment~~term B ~~indicated. Impairment~~portion ~~losses~~approximated ~~will~~$203.9 bemillion. We ~~recognized~~reduced ~~whenever~~our debt under the ~~implied~~credit ~~fair~~agreement ~~value~~by isapproximately ~~less~~$38.5 ~~than~~million in the ~~carrying~~first ~~value~~half of 2003 through a combination of scheduled payments and voluntary prepayments. There is also ~~the~~$200 ~~related~~million ~~asset~~outstanding on our 11 ¾% senior subordinated notes due 2011.

~~Other~~The ~~Intangibles~~weighted average interest rate for our borrowings under the credit agreement, adjusted for the effects of hedging activities, was approximately 7.01% at June 30, 2003. Given our business trends and cash flow forecast, we do not anticipate a significant use of the revolving line of credit during 2003.

The ~~Company~~credit ~~recognizes~~agreement contains anvarious ~~acquired~~restrictive ~~intangible~~covenants. ~~apart~~The agreement prohibits us from prepaying ~~goodwill~~other indebtedness, including the subordinated notes, and it requires us to maintain specified financial ratios. ~~whenever~~In addition, the ~~asset~~credit ~~arises~~agreement prohibits us from ~~contractual~~declaring or ~~other~~paying any ~~legal~~dividends ~~rights~~and prohibits us from making any payments with respect to the notes if we fail to perform our obligations under, or ~~whenever it~~fail isto ~~capable~~meet the conditions of, ~~being~~the ~~separated~~credit agreement or ~~divided~~if ~~from~~payment creates a default under the credit ~~acquired~~agreement. ~~entity~~The ~~and~~indenture ~~sold~~governing the subordinated notes, among other things: (i) restricts our ability and the ability of our subsidiaries to incur ~~transferred~~additional indebtedness, ~~licensed~~issue shares of preferred stock, ~~rented~~incur liens, pay dividends or ~~exchanged,~~make ~~either~~certain ~~individually~~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 inmake certain payments to us; and (iii) places restrictions on our ability and the ability of ~~combination~~our subsidiaries to merge or consolidate with aany ~~related~~other ~~contract~~person or sell, ~~asset~~assign, transfer, lease, convey or ~~liability. An~~otherwise ~~intangible~~dispose ~~other~~of ~~than~~all ~~goodwill~~or issubstantially all of our ~~amortized~~assets. ~~over~~The ~~its~~indenture ~~estimated~~related ~~useful~~to ~~life~~the ~~unless~~notes ~~that~~and ~~life~~the iscredit ~~determined~~agreement toalso contains bevarious covenants which limit our discretion in the operation of our ~~indefinite~~businesses. ~~Impairment~~ ~~losses~~We ~~are recognized~~were ifin compliance with all of the ~~carrying~~covenants ~~amount~~in the indenture and the credit agreement (see above) as of anand ~~intangible~~for ~~subject~~the tosix ~~amortization~~months isended June ~~not~~30, ~~recoverable~~2003. The Company, principal shareholders or their affiliates may, from time ~~expected~~to ~~future~~time, ~~cash~~enter ~~flows~~the ~~and~~market ~~its~~to ~~carrying~~purchase ~~amount~~or ~~exceeds~~sell our subordinated notes, in ~~its~~compliance ~~fair~~with ~~value~~applicable securities laws.

~~Acquired~~Our ~~intangible~~ability ~~assets~~to ofmake payments on and to refinance our debt, including the ~~Company~~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 ~~have~~are ~~been~~beyond ~~determined~~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 ~~have~~belief, aincluding, ~~definite~~among ~~life~~other ~~and~~things, that we will continue to be ~~amortized~~successful in asimplementing ofour ~~September~~business 30strategy and that there will be no material adverse developments in our business, ~~2002~~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 ~~follows:~~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 can provide no assurances 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 subordinated notes and our credit agreement, may limit our ability to pursue any of these alternatives.

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

We invested $16.4 million in capital expenditures during the six months ended June 30, 2003. We plan to spend approximately $21 million on capital expenditures during the balance of 2003. Our principal sources of funds are anticipated to be cash flows from operating activities and borrowings under our senior credit facility. We believe that these funds will provide us with sufficient liquidity and capital resources for us to meet our current year and longer-term plans, including the working capital and capital expenditure needs such plans may generate. In executing these plans, we expect to reduce debt over the coming years.

The aggregate amortization expense for the nine months ended September 30, 2002 was approximately $398,000 and was approximately $256,000 for the six months ended September 30, 2001. The Predecessor had amortization expense of $500,000 during the period ended March 31, 2001. The estimated amortization expense for the years ended December 31, 2002 through December 31, 2003 is as follows:SEASONALITY

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

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. Generally, refrigerated distribution operations experience 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 dairy operations typically are significantly higher in the second and third quarters due to increased consumption of ice milk and ice cream products during the summer months. Operating profits from potato products are less seasonal, but tend to be higher in the second half of the year coinciding with the potato harvest.

~~Other New Pronouncements~~34

~~On January 1, 2002, the Company adopted SFAS 144, Accounting for the Impairment or Disposal of Long~~FORWARD-~~Lived~~LOOKING ~~Assets. The adoption of SFAS 144 did not have a material effect on the Company’s financial statements.~~STATEMENTS

InCertain ~~addition,~~items ~~the~~in this ~~Company~~Form ~~adopted~~10-Q ~~Emerging~~may ~~Issues~~be ~~Task~~forward-looking ~~Force~~statements, ~~(EITF)~~which ~~Issue~~are ~~No.~~made ~~00-25,~~in ~~Vendor~~reliance upon ~~Income~~the ~~Statement~~safe ~~Characterization~~harbor provisions of ~~Consideration~~the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to anumerous ~~Reseller~~risks onand uncertainties, including variances in the ~~Vendors~~demand for our products due to ~~Products~~consumer, ~~effective~~industry ~~January~~and 1broad economic developments, ~~2002. The~~as ~~adoption~~well ofas ~~EITF~~variances ~~Issue~~in ~~00-25~~the costs ~~did~~to ~~not~~produce ~~have~~such aproducts, ~~material~~including ~~effect~~normal onvolatility in egg, feed and ~~the~~dairy ~~Company’s~~ingredients costs. Our actual financial ~~statements. In~~results could differ materially ~~addition~~from the results estimated by, weforecasted ~~adopted~~by, ~~EITF~~or ~~Issue~~implied ~~No.~~by 01us in such forward-~~09,~~looking ~~Accounting~~statements. ~~for~~Forward-looking ~~Consideration~~statements ~~given~~contained byin athis ~~Vendor~~Form to10-Q aspeak ~~Customer~~only ~~(including~~as aof the ~~Reseller~~date ofhereof. We ~~the~~disclaim any ~~Vendor's~~obligation ~~Products),~~or ~~effective~~understanding ~~January~~to 1publicly release updates to, ~~2002. The adoption~~or revisions of, forward-looking ~~EITF~~statements ~~Issue~~to ~~No.~~reflect ~~01-09~~changes ~~did~~in ~~not~~our ~~have~~expectations aor ~~material~~events, conditions ~~effect~~or circumstances on ~~our consolidated~~which ~~financial~~any ~~statements~~such statement is made.

~~NOTE~~ITEM E3. QUANTITATIVE —AND ~~INCOME~~QUALITATIVE ~~TAXES~~DISCLOSURES ABOUT MARKET RISK

~~Predecessor~~There were no material changes in our market risk during the six month period ended June 30, 2003.

~~The~~ITEM ~~activity of the Operating Unit has been included in the income tax return of Michael Foods, Inc~~4. CONTROLS ~~for~~AND 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.PROCEDURES

~~Company~~a. Evaluation of disclosure controls and procedures.

~~For~~Under the ~~income~~supervision, ~~tax~~and ~~purposes~~with the ~~Company~~participation isof, aour ~~pass~~management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-~~through~~14(c)/15d-14(c) under the Exchange Act) as of a date (the “Evaluation Date”) within 90 days prior to the filing date of ~~entity~~this report. ~~Therefore~~Based upon that evaluation, ~~income~~the ~~taxes~~Chief ~~have~~Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures are ~~not~~effective ~~been~~in ~~reflected~~timely onalerting them to the ~~Company’s~~material ~~financial~~information ~~statements~~relating to us (or our consolidated subsidiaries) required to be included in our periodic SEC filings.

~~NOTE~~b. Changes Fin —internal ~~COMMITMENTS AND CONTINGENCIES~~controls.

~~Litigation~~There were no significant changes made in our internal controls during the period covered by this report or, to our knowledge, in other factors that could significantly affect these controls subsequent to the date of their evaluation.

~~The~~PART ~~Company~~II is- ~~engaged in routine litigation incidental to its business. Management believes the ultimate outcome of~~OTHER ~~this litigation will not have a material effect on the accompanying statements of financial position, liquidity or results of operations.~~INFORMATION

36ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

~~ITEM~~(a) Exhibits 2and ~~- MANAGEMENT’S~~Exhibit ~~DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~Index.

~~THREE~~The ~~MONTHS~~following ~~ENDED~~exhibits are ~~SEPTEMBER~~filed ~~30,~~as ~~2002~~part ASof ~~COMPARED~~this ~~TO THREE MONTHS ENDED SEPTEMBER 30, 2001~~report:

RESULTS OF OPERATIONS

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)

~~Readers are directed to Note H - Business Segments for data on the unaudited financial results of our four business segments for the three months ended September 30, 2002 and September 30, 2001.~~35

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

4.6		Collateral Pledge and Security Agreement, dated March 27, 2001, between Michael Foods Acquisition Corp., and Banc of America Securities, LLC and Bear, Stearns & Co. and BNY Midwest Trust Company as collateral agent and securities intermediary(1)
10.1		Credit Agreement, dated April 10, 2001, among Michael Foods, Inc., M-Foods Holdings, Inc., the Guarantors, Bank of America, N.A., as Agent, Banc of America Securities, LLC, as Sole Lead Arranger and Sole Book Running Manager, and Bear, Stearns & Co., as Syndication Agent(1)
10.2		Pledge Agreement, dated April 10, 2001, between Michael Foods, Inc., Bank of America, N.A. and Banc of America Securities, LLC(1)
*10.3		M-Foods Holdings, Inc. 2001 Stock Option Plan(1)
*10.4		Form of M-Foods Holdings 2001 Stock Option Plan Stock Option Award Agreement(1)
*10.5		Employment Agreement, dated April 10, 2001, by and among Michael Foods, Inc., M-Foods Holdings, Inc. and Gregg A. Ostrander(1)
*10.6		Employment Agreement, dated April 10, 2001, by and among Michael Foods, Inc., M-Foods Holdings, Inc. and John D. Reedy(1)
*10.7		Employment Agreement, dated April 10, 2001, by and among Michael Foods, Inc., M-Foods Holdings, Inc. and James D. Clarkson(1)
*10.8		Employment Agreement, dated April 10, 2001, by and among Michael Foods, Inc., M-Foods Holdings, Inc. and Bill L. Goucher(1)
*10.9		Severance and Deferred Compensation Agreement, dated April 10, 2001, by and among Michael Foods, Inc., M-Foods Holdings, Inc. and James Mohr(1)
*10.10		Severance and Deferred Compensation Agreement, dated April 10, 2001, by and among Michael Foods, Inc., M-Foods Holdings, Inc. and Harold D. Sprinkle(1)
*10.11		Severance and Deferred Compensation Agreement, dated April 10, 2001, by and among Michael Foods, Inc., M-Foods Holdings, Inc. and Max Hoffmann(1)
*10.12		Severance and Deferred Compensation Agreement, dated April 10, 2001, by and among Michael Foods, Inc., M-Foods Holdings, Inc. and Bradley Cook(1)
10.13		Amended and Restated Limited Liability Company Agreement of M-Foods Investors, LLC(1)
*10.14		Securityholders Agreement, dated April 10, 2001, between M-Foods Dairy Holdings, LLC, Marathon Dairy Investment Corp., Vestar Capital Partners IV, L.P., 4J2R1C Limited Partnership, 3J2R Limited Partnership, Gregg A. Ostrander, John D. Reedy, Bill L. Goucher, James D. Clarkson, James Mohr, Harold D. Sprinkle, Bradley Cook, and Max Hoffmann(1)
*10.15		Management Stock Purchase and Unit Subscription Agreement, dated April 10, 2001, among M-Foods Investors, LLC, M-Foods Holdings, Inc., and Gregg A. Ostrander(1)
*10.16		Management Stock Purchase and Unit Subscription Agreement, dated April 10, 2001, among M-Foods Investors, LLC, M-Foods Holdings, Inc., and John D. Reedy(1)
*10.17		Management Stock Purchase and Unit Subscription Agreement, dated April 10, 2001, among M-Foods Investors, LLC, M-Foods Holdings, Inc., and James D. Clarkson(1)
*10.18		Management Stock Purchase and Unit Subscription Agreement, dated April 10, 2001, among M-Foods Investors, LLC, M-Foods Holdings, Inc., and Bill L. Goucher(1)
*10.19		Management Stock Purchase and Unit Subscription Agreement, dated April 10, 2001, among M-Foods Investors, LLC, M-Foods Holdings, Inc., and Max Hoffmann(1)
*10.20		Management Stock Purchase and Unit Subscription Agreement, dated April 10, 2001, among M-Foods Investors, LLC, M-Foods Holdings, Inc., and Harold D. Sprinkle(1)
*10.21		Management Stock Purchase and Unit Subscription Agreement, dated April 10, 2001, among M-Foods Investors, LLC, M-Foods Holdings, Inc., and Bradley Cook(1)
*10.22		Management Stock Purchase and Unit Subscription Agreement, dated April 10, 2001, among M-Foods Investors, LLC, M-Foods Holdings, Inc., and James Mohr(1)
*10.23		Management Unit Subscription Agreement, dated April 10, 2001, between M-Foods Dairy Holdings, LLC, and Gregg A. Ostrander(1)
*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)

Egg Products Division net sales for the 2002 period reflected slightly decreased core unit sales, which were offset by the sales impact of an egg products acquisition (see Note B). Two of our largest categories, extended shelf-life liquid eggs and precooked items, saw unit sales decline slightly, reflecting generally soft foodservice sales. Egg substitutes, hard cooked items and frozen eggs all experienced unit sales increases, though such gains did not offset the declines elsewhere. Pricing for our egg products was slightly lower than 2001 period levels. Graded shell egg prices increased approximately 10% compared to third quarter 2001 levels, as reported by Urner Barry Publications - a widely quoted industry pricing service. Related egg market increases raised the cost of purchased eggs moderately.36

Approximately two-thirds of the Egg Products Division’s annual egg needs are purchased under contracts or in the spot market. A substantial majority of these eggs are priced according to the cost of grain inputs or to egg market prices as reported by Urner Barry. Approximately one-third of annual egg needs are sourced from internal flocks, where feed costs typically represent roughly two-thirds of the cost of producing such eggs. Feed costs were higher in the 2002 period, compared to the 2001 period, particularly for corn. Because of higher open market egg prices and higher feed costs, overall egg costs increased moderately in the 2002 period, as compared to the 2001 period. Despite these factors, production efficiencies and cost controls held egg products margins close to 2001 period levels. Also, improvements were seen with industrial products collectively, which had been experiencing weak margins and, at times, losses, but which showed a margin recovery in the 2002 period. In total, divisional operating earnings increased slightly in the 2002 period, with a contribution from the acquired business.

*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)

~~Refrigerated~~* Management ~~Distribution~~Contract ~~Division~~or ~~net~~Compensation ~~sales~~Plan for the 2002 period reflected lower unit sales. However, excluding the intentional decline in shell egg sales, unit sales rose slightly for distributed products. Deflation was also a factor in the divisional dollar sales decline, with butter prices, in particular, down sharply (approximately 50%) from 2001 period levels. Despite lower dollar sales, divisional earnings rose sharply from depressed 2001 levels, with the important cheese category accounting for much of the improvement. Cheese unit sales rose year-over-year, while a decline in product costs, combined with favorable wholesale price points, allowed for improved gross, and operating profit, margins.Arrangement

~~Dairy~~(1) Incorporated ~~Products Division net sales for the 2002 period reflected higher unit sales, due mainly to strong creamer and ice cream mix product sales, which were more than offset~~ by ~~deflationary~~reference ~~impacts~~ from the ~~national butterfat~~ ~~market.~~Company’s ~~Along~~Registration ~~with~~Statement ~~the~~on ~~lower~~Form ~~divisional~~S-4 ~~sales,~~filed ~~operating~~July ~~costs were higher than expected at one of our three dairy plants~~18, ~~which resulted in reduced margins and earnings for the division~~2001. ~~Operating cost matters are being addressed, with improvements expected in the current quarter and thereafter.~~

~~Potato Products Division net sales for the 2002 period reflected unit~~(b) Reports ~~sales~~on ~~increases~~Form ~~in all product categories. Sales were particularly strong for mashed items – both at retail and at foodservice. New account activity, same~~8-account sales growth and higher marketing spending levels all contributed to the sales gain. The operating profit increase reflected the sales growth, improved operating costs and a recovery of foodservice category earnings from near break-even levels in the 2001 period to meaningful profitability in the 2002 period.K

~~The~~Reference ~~strong~~is ~~increase~~made ~~in our gross profit margin for the 2002 period, compared~~ to ~~the 2001 period, reflected the factors discussed above, particularly~~a ~~sales~~report ~~mix~~filed ~~improvements,~~on ~~decreased~~Form ~~raw material costs in certain divisions and generally improved operating costs. It is our strategy to increase value~~8-~~added product~~K ~~sales~~dated asApril ~~a percent of total sales over time~~24, ~~while~~2003 ~~decreasing commodity-sensitive~~pertaining ~~products’ contribution~~ to ~~consolidated~~our ~~sales. These efforts~~financial ~~historically~~results ~~have~~for ~~been~~the ~~beneficial~~three tomonths ~~gross~~ended ~~profit~~March ~~margins~~31, ~~in most periods~~2003.

~~Selling,~~Reference ~~general~~is ~~and~~made ~~administrative~~to ~~expenses declined slightly as~~ a ~~percent~~report offiled ~~sales~~on inForm ~~the~~8-K ~~2002~~dated ~~period~~June 5, as2003 ~~compared~~pertaining to ~~the~~an ~~results~~announcement ofthat our ~~the 2001~~Dairy ~~period,~~Products ~~reflective~~Division ofwill ~~our~~be ~~cost~~sold ~~control efforts~~to ~~across~~Dean ~~all~~Foods ~~divisions~~Company.

37Reference is made to a report filed on Form 8-K dated July 25, 2003 pertaining to our financial results for the three months and six months ended June 30, 2003.

~~NINE MONTHS ENDED SEPTEMBER 30, 2002 AS COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2001~~37

~~RESULTS OF OPERATIONS~~SIGNATURES

~~Readers~~Pursuant ~~are directed~~ to ~~Note~~the requirements Hof -Section ~~Business~~13 ~~Segments~~or ~~for~~15(d) ~~data~~of on the ~~unaudited~~ ~~financial~~Securities ~~results~~Exchange Act of ~~the~~1934, ~~Company’s and~~ the ~~Predecessor’s four~~ ~~business~~Registrant ~~segments~~has ~~and~~duly ~~must~~caused ~~combine~~this ~~2001~~report ~~periods~~ to ~~evaluate~~be ~~the~~signed ~~nine~~on ~~months ended~~its ~~September~~behalf ~~30,~~by ~~2001 as compared to~~ the undersigned ~~nine~~thereunto ~~months~~duly ~~ended September 30, 2002~~authorized.

Net sales in the 2002 period were $862,136,000, a decrease of less than 1% compared to net sales of $869,961,000 for the Company and the Predecessor in the 2001 period. Net sales decreased because of the factors discussed in the below divisional reviews, but were slightly lower in the 2002 period due largely to lower unit sales in two divisions.

	MICHAEL FOODS, INC.
	(Registrant)

Date: July 25, 2003		By:	/s/ Gregg A. Ostrander
			Gregg A. Ostrander
			(Chairman, President and Chief Executive Officer)


Date: July 25, 2003		By:	/s/ John D. Reedy
			John D. Reedy
			(Executive Vice President, Chief Financial Officer and Principal Accounting Officer)

Egg Products Division net sales for the 2002 period reflected decreased unit sales and slight deflation for industrial egg products, with the former related mainly to planned shell egg sales decreases and the latter tied to weaker pricing in the national industrial egg products market. Unit sales rose for egg substitutes, hard cooked items and precooked products, and declined slightly for other products. Graded shell egg prices were unchanged compared to levels in the 2001 period, as reported by Urner Barry Publications.38

~~Approximately~~CERTIFICATION ~~two-thirds~~OF ofCHIEF ~~the Egg Products Division’s annual egg~~EXECUTIVE needs are purchased under contracts or in the spot market. A substantial majority of these eggs are priced according to the cost of grain inputs or to egg market prices as reported by Urner Barry. Approximately one-third of annual egg needs are sourced from internal flocks, where feed costs typically represent roughly two-thirds of the cost of producing such eggs. Feed costs were higher in the 2002 period, compared to the 2001 period, due mainly to higher prices for corn. Overall, egg costs increased slightly in the 2002 period. Production efficiencies and cost controls helped raise margins for certain egg products, particularly egg substitutes, precooked products, hard cooked products and dried products, and increased divisional margins and operating earnings in total.OFFICER

~~Refrigerated Distribution Division net sales for the 2002 period reflected lower unit sales~~I, ~~especially~~Gregg ~~in the key cheese category~~A. ~~Unit sales were down due to several factors~~Ostrander, ~~including a national trend whereby private label~~ ~~cheeses~~certify are taking market share from branded cheeses, generally weak retail grocery sales, and store closures by certain grocery chains served by the Division. Cheese pricing increased year-over-year, but our cheese sourcing costs rose more rapidly than did our selling prices during the first half of 2002. This was largely due to hedging activities that resulted in significant cheese ownership at above-market levels. During the third quarter of the current year, such excess hedging no longer existed and cheese margins recovered significantly. This improvement was sufficient to increase divisional operating earnings and margins for the 2002 nine month period, as compared to 2001 period levels.:

Dairy Products Division net sales for the 2002 period reflected higher unit sales, due mainly to strong creamer and specialty cartoned product sales, which more than offset a slight decline in per gallon selling prices1. I ~~The combination~~have ofreviewed ~~sales~~this ~~growth~~quarterly ~~and~~report ~~reduced ingredient costs raised gross profit~~on ~~margins~~Form ~~significantly.~~10-Q ~~However, operating profit declined in the 2002 period compared to the 2001 period due to the inclusion~~ of anMichael ~~insurance settlement of approximately $3~~Foods,~~217,000~~ ~~in the 2001 period~~Inc.;

~~Potato~~2. Based ~~Products~~on ~~Division~~my ~~net~~knowledge, ~~sales~~this ~~for~~quarterly ~~the 2002 period reflected unit~~report ~~sales~~does ~~increases~~not incontain ~~all~~any ~~product~~untrue ~~categories.~~statement ~~Sales~~of ~~were~~a ~~particularly~~material ~~strong~~fact ~~for mashed~~or ~~items~~omit –to ~~both~~state ~~at retail and at foodservice. New account activity,~~a ~~same-account~~material ~~sales~~fact ~~growth~~necessary ~~and higher marketing spending levels all contributed~~ to ~~the~~make ~~sales gain. The operating profit increase in~~ the ~~2002~~statements ~~period reflected improved operating costs~~made, ~~the~~in ~~impact~~light of ~~a favorable sales mix, with retail~~the ~~sales~~circumstances ~~rising~~under aswhich asuch ~~percent~~statements ofwere ~~the divisional total~~made, ~~and~~not amisleading ~~recovery of~~with ~~foodservice~~respect ~~category~~to ~~earnings from modest profitability in~~ the ~~2001~~ period, ~~to meaningful~~covered ~~profitability~~by inthis ~~the~~quarterly ~~2002 period.~~report;

~~The~~3. Based ~~increase~~on inmy ~~our~~knowledge, ~~gross profit margin for~~ the ~~2002~~financial ~~period~~statements, as ~~compared~~and toother ~~the~~financial ~~results~~information ofincluded ~~the~~in ~~2001~~this ~~period~~quarterly report, ~~reflected~~fairly present ~~the~~in ~~factors~~all ~~discussed above,~~material ~~particularly~~respects ~~sales~~the ~~mix~~financial ~~improvements~~condition, ~~decreased~~results ~~raw~~of ~~material costs in~~operations ~~certain divisions~~ and ~~generally~~cash ~~improved~~flows ~~operating~~of ~~costs.~~the Itregistrant ~~is our strategy to increase value-added product sales~~ as ~~a percent~~ of, ~~total~~and ~~sales over time~~for, ~~while decreasing~~the ~~commodity-sensitive~~periods ~~products’~~presented ~~contribution to consolidated sales. These efforts historically have been beneficial to gross profit margins~~ in ~~most~~this ~~periods.~~quarterly report;

~~Selling, general and administrative expenses decreased as a percent of sales in the 2002 period, as compared to the results of the 2001 period~~4. ~~However, within the 2001 period the Predecessor recorded non-recurring~~ ~~expenses~~The ~~related~~registrant’s toother ~~the~~certifying ~~Merger for~~officers ~~financial, legal, advisory~~ and ~~regulatory~~I ~~filing fees. These expenses of $11,050,000~~ are ~~reflected~~responsible ~~in the Predecessor Consolidated Statement of Earnings~~ for ~~the~~establishing ~~three~~and ~~months~~maintaining ~~ended~~disclosure ~~March~~controls ~~31, 2001 as~~and ~~transaction~~procedures ~~expenses. Exclusive of these one-time transaction expenses, selling, general and administrative expenses increased slightly~~ (as adefined ~~percent of sales~~ in ~~the~~Exchange ~~2002~~Act ~~period~~Rules as13a-14 ~~compared~~and to15d-14) ~~the~~for ~~2001 period. This increased expense~~the ~~ratio~~registrant ~~reflected higher expenses to support retail~~ and ~~foodservice marketing efforts and broadened sales efforts, and for our centralized purchasing department.~~have:

38a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

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

~~Certain~~c) presented ~~of our products are sensitive to changes~~ in ~~commodity~~this ~~prices. Value-added~~quarterly ~~egg~~report ~~products, such as extended shelf-life liquid and precooked~~our ~~products,~~conclusions ~~account~~about ~~for approximately 60% of~~ the ~~Egg~~effectiveness ~~Products Division’s net sales. The remainder~~ of ~~Egg Products Division sales is derived from~~ the ~~sale~~disclosure ~~of other~~controls ~~egg products~~ and ~~shell eggs, which vary from being very~~procedures ~~commodity-sensitive~~based toon ~~somewhat~~our ~~value-added.~~evaluation Gross profit from shell eggs is primarily dependent upon the relationship between shell egg prices and the cost of feed, both of which can fluctuate significantly. Graded shell egg pricing in the 2002 nine month period was approximately unchanged from 2001 levels, as ~~measured~~ by a widely quoted pricing service, while feed costs rose moderately year-over-year. Gross profit margins for extended shelf-life liquid eggs, egg substitutes, and precooked and hard cooked egg products are less sensitive to commodity price fluctuations than are other egg products or shell eggs. Our Refrigerated Distribution Division derives approximately 75% of ~~its net sales from refrigerated products produced by others, thereby reducing~~ the ~~effects~~Evaluation of commodity price swings. The balance of refrigerated distribution sales are mainly from shell eggs, some of which are produced by the Egg Products Division, sold on a distribution, or non-commodity, basis.Date;

5. The ~~Dairy~~registrant’s ~~Products~~other ~~Division~~certifying ~~sells~~officers and ~~its~~I ~~products~~have ~~primarily~~disclosed, based on aour ~~cost-plus basis~~most ~~and,~~recent ~~therefore~~evaluation, to the ~~Division~~registrant’s auditors ~~earnings~~and ~~are~~the ~~not~~audit ~~typically~~committee ~~affected greatly~~of byregistrant’s ~~raw~~board ~~ingredient~~of ~~price~~directors ~~fluctuations,~~(or ~~except~~persons performing ~~over~~the ~~short~~equivalent ~~time periods.~~functions):

~~The~~a) all ~~Potato~~significant ~~Products~~deficiencies ~~Division~~in ~~typically~~the ~~purchases~~design or ~~75%-95%~~operation of ~~its~~internal ~~raw potatoes~~controls ~~from~~which ~~contract~~could ~~producers~~adversely ~~under~~affect ~~annual~~the ~~contracts. The remainder is~~registrant’s ~~purchased~~ability ~~at market prices~~ to ~~satisfy~~record, ~~short-term~~process, ~~production~~summarize ~~requirements~~and orreport ~~to take~~financial ~~advantage~~data ofand ~~market prices when they are lower than contracted prices.~~have ~~Moderate~~identified ~~variations~~for in the ~~purchase~~registrant’s ~~price~~auditors ofany ~~raw~~material ~~materials~~weaknesses orin ~~the selling price~~internal ~~per~~controls; ~~pound of finished products can have a significant effect on Potato Products Division operating results.~~and

~~Inflation~~b) any isfraud, ~~not~~whether ~~expected~~or tonot ~~have~~material, athat involves ~~significant~~management ~~impact~~or onother ~~our~~employees ~~business. We~~who have ~~generally~~a ~~been~~significant ~~able~~role toin ~~offset~~ the ~~impact of inflation through a~~ ~~combination~~registrant’s ofinternal ~~productivity~~controls; ~~gains~~ and ~~price increases.~~

~~CAPITAL~~6. The ~~RESOURCES~~registrant’s ~~AND~~other ~~LIQUIDITY~~certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

~~Acquisitions~~Date: ~~and~~July ~~capital expenditures have been~~25, ~~and~~2003 ~~will~~/s/ ~~likely continue~~Gregg ~~to be, a significant capital requirement~~A. WeOstrander ~~plan to continue to invest in state-of-the-art production facilities to enhance our competitive position. Historically~~Chairman, wePresident ~~have financed our growth principally from internally generated funds, bank borrowings,~~ and ~~the~~Chief ~~issuance~~Executive ~~of senior debt. We believe such sources remain viable financing alternatives to meet our anticipated needs.~~Officer

We invested $4,991,000 in capital expenditures during the three months ended September 30, 2002 and $19,255,000 during the nine months ended September 30, 2002. We plan to spend approximately $10,000,000 on capital expenditures in the fourth quarter of 2002.39

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

WeI, ~~believe~~John ~~EBITDA is a widely accepted financial indicator used to analyze and compare companies on the basis of operating performance~~D. ItReedy, ~~should~~certify not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles and is not indicative of operating profit or cash flow from operations as determined under generally accepted accounting principles.that:

We1. I have areviewed senior secured credit facility with numerous banks, other financial institutions and investment groups, which totaled $470,000,000 at the time of the Merger. At September 30, 2002, there was $10,000,000 borrowed under the $100,000,000 line of credit portion of this ~~facility,~~quarterly ~~while~~report ~~the term A portion therein approximated $79,400,000 and the term B portion approximated $245,600,000. Subsequent to the period reported~~ on ~~herein, we made a voluntary prepayment of our term debt (both the~~ ~~term~~Form A10-Q ~~and B portions) in the combined amount~~ of ~~$21,900,000~~Michael ~~on October 1~~Foods, ~~2002~~Inc.;

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

~~The senior credit facility contains various restrictive covenants~~3. Based ~~It prohibits~~on usmy ~~from prepaying other indebtedness~~knowledge, ~~including~~ the ~~notes~~financial statements, and ~~it requires~~other ~~us to maintain specified~~ financial ~~ratios,~~information ~~such~~included asin athis ~~minimum~~quarterly ~~ratio of EBITDA to interest expense~~report, ~~a minimum fixed charge coverage ratio and a maximum~~ ~~ratio~~fairly ofpresent ~~total~~in ~~debt~~all tomaterial ~~EBITDA,~~respects ~~and~~the ~~satisfy~~ financial condition ~~tests. In addition~~, ~~the~~results ~~senior credit facility prohibits us from declaring or paying any~~of ~~dividends~~operations and ~~prohibits~~cash usflows ~~from~~of ~~making any payments with respect to~~ the ~~notes if~~registrant weas ~~fail~~of, toand ~~perform our obligations under~~for, ~~or fail to meet~~ the ~~conditions of,~~periods ~~the~~presented ~~senior~~in ~~credit~~this ~~facility~~quarterly ~~or if payment creates a default under the senior credit facility.~~report;

4. The ~~indenture~~registrant’s ~~governing the notes, among~~ other ~~things,~~certifying ~~(a) restricts~~officers ~~the ability of the issuer~~ and ~~its~~I ~~subsidiaries,~~are ~~including~~responsible ~~the~~for ~~guarantors~~establishing ofand ~~the notes,~~maintaining todisclosure ~~incur~~controls ~~additional indebtedness, issue shares of preferred stock, incur liens, pay dividends or make certain other restricted payments~~ and ~~enter into~~ ~~certain~~procedures ~~transactions with affiliates,~~ (b)as ~~prohibits~~defined ~~certain~~in ~~restrictions~~Exchange onAct ~~the ability~~Rules of13a-14 ~~certain of the issuer’s subsidiaries, including the guarantors of the notes, to pay dividends or make certain payments to the issuer~~ and (c15d-14) ~~places~~ ~~restrictions~~for on the ~~ability of the issuer and its subsidiaries,~~ ~~including~~registrant the guarantors of the notes, to merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the issuer. The indenture related to these notes and ~~the senior credit facility also contain various covenants, which limit our discretion in the operation of our businesses.~~have:

~~Our~~a) designed ~~principal~~such ~~sources~~disclosure ofcontrols ~~funds are anticipated to be cash flows from operating activities~~ and ~~borrowings under our senior credit facility. We~~ ~~believe~~procedures ~~that these funds will provide us with sufficient liquidity and capital resources for us~~ to ~~meet~~ensure ~~our~~that ~~current~~material ~~and~~information ~~future~~relating ~~financial obligations, as well as~~ to ~~provide~~the ~~funds for our working capital~~registrant, ~~capital expenditures and other~~ ~~needs~~including ~~for~~its atconsolidated ~~least the next 12 months. No assurance can be given~~subsidiaries, ~~however,~~is ~~that this~~made ~~will~~known beto ~~the~~us ~~case.~~by Weothers ~~may require additional equity or debt financing to~~within ~~meet~~those ~~our working capital requirements or to fund our acquisition activities~~entities, ~~if any.~~particularly ~~There~~during ~~can~~the beperiod noin ~~assurance~~which ~~that~~this ~~additional~~quarterly ~~financing will be available when~~report ~~required~~is ~~or,~~being ~~if available, will be on terms satisfactory to us.~~prepared;

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

~~Consolidated~~c) presented ~~quarterly~~in ~~operating~~this ~~results~~quarterly ~~are~~report ~~affected by the seasonality of~~ our ~~net sales and operating profits. Specifically, shell egg~~ ~~prices~~conclusions ~~typically~~about ~~rise seasonally in~~ the ~~first~~effectiveness ~~and fourth quarters~~ of the ~~year due~~disclosure tocontrols ~~increased demand during holiday periods. Generally, refrigerated distribution operations experience higher net sales~~ and ~~operating profits in~~procedures ~~the~~based ~~fourth~~on ~~quarter,~~our ~~coinciding~~evaluation ~~with~~as incremental consumer demand during the holiday season. Net sales and operating profits from dairy operations typically are significantly higher in the second and third quarters due to increased consumption of ~~ice milk and ice cream products during~~ the ~~summer~~Evaluation ~~months. Operating profits from potato products are less seasonal, but tend to be higher in the second half of the year coinciding with the potato harvest.~~Date;

~~FORWARD-LOOKING~~5. The ~~STATEMENTS~~registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

~~Certain~~a) all ~~items~~significant indeficiencies ~~this Form 10-Q may be forward-looking statements, which are made~~ in ~~reliance upon~~ the ~~safe harbor provisions of the Private~~design ~~Securities~~or ~~Litigation~~operation ~~Reform Act~~ of ~~1995.~~internal ~~Such~~controls ~~forward-looking~~which ~~statements~~could ~~are subject~~adversely toaffect ~~numerous risks and uncertainties, including variances in~~ the ~~demand~~registrant’s ~~for~~ability ~~our products due~~ to ~~consumer developments and industry developments~~record, ~~as well as variances in the costs to produce such products~~process, ~~including~~summarize ~~normal volatility~~and inreport ~~egg,~~financial ~~feed~~data and ~~dairy ingredients costs. Our actual financial~~have ~~results~~identified ~~could~~for ~~differ materially from~~ the ~~results~~registrant’s ~~estimated~~auditors ~~by,~~any ~~forecasted~~material ~~by, or~~weaknesses ~~implied by us~~ in ~~such~~internal controls; ~~forward-looking statements.~~and

~~ITEM 3.~~b) ~~QUANTITATIVE~~any ~~AND~~fraud, whether or not material, that ~~QUALITATIVE~~involves ~~DISCLOSURES~~management ~~ABOUT~~or ~~MARKET~~other ~~RISK~~employees who have a significant role in the registrant’s internal controls; and

~~There~~6. The ~~were~~registrant’s noother ~~material~~certifying officers and I have indicated in this quarterly report whether there were significant changes in ~~our~~internal ~~market~~controls ~~risk~~or ~~during~~in ~~the~~other ~~nine~~factors ~~month~~that could significantly ~~period~~affect ~~ended~~internal ~~September~~controls 30subsequent to the date of our most recent evaluation, including ~~2002~~any corrective actions with regard to significant deficiencies and material weaknesses.

~~PART~~Date: IIJuly -25, ~~OTHER INFORMATION~~2003 /s/ John D. Reedy Executive Vice President and Chief Financial Officer

~~ITEM 4. CONTROLS AND PROCEDURES~~40

a. Evaluation of disclosure controls and procedures.

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

b. Changes in internal controls.

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

ITEM 5. OTHER INFORMATION

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

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

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(b) Reports on Form 8-K

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

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

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

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

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

Subsequent to the reporting period herein, we filed a Form 8-K on November 8, 2002 regarding a news release issued to our debt holders pertaining to our financial results for the three months and nine months ended September 30, 2002.

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

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

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

I, Gregg A. Ostrander, certify that:

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

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

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

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

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

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

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

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

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

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

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

CERTIFICATION OF CHIEF FINANCIAL OFFICER

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

I, John D. Reedy, certify that:

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

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

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

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

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

Filing Compare · MICHAEL FOODS INC /MN