UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended January 2, 2010

Commission file number 333-112714

MICHAEL FOODS, INC.

(Exact name of registrant as specified in its charter)

Delaware

13-4151741

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification No.)

301 Carlson Parkway

Suite 400

Minnetonka, Minnesota

55305

(Address of principal executive offices)

(Zip Code)

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

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

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ Yes x No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 of Section 15(d) of the Act. x Yes ¨ No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ¨ Yes ¨ No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No

The registrant’s common stock is not publicly traded. There were 3,000 shares of the registrant’s common stock outstanding as of March 25, 2010.

Documents incorporated by reference: None

PART I

ITEM 1—BUSINESS

Forward-looking Statements

Certain items herein are “forward-looking statements.” Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future sales or performance, capital expenditures, financing needs, intentions relating to acquisitions, our competitive strengths and weaknesses, our business strategy and the trends we anticipate in the industries and economies in which we operate and other information that is not historical information and, in particular, appear under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” When used herein, the words “estimates,” “expects,” “anticipates,” “projects,” “plans,” “intends,” “believes” and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith, and we believe there is a reasonable basis for them, but there can be no assurance that our expectations, beliefs and projections will be realized.

There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this report (please see Item 1A – RISK FACTORS). Important factors that could cause our actual results to differ materially from the forward-looking statements we make in this Form 10-K include changes in domestic and international economic conditions. Additional risks and uncertainties include variances in the demand for our products due to consumer and industry developments, as well as variances in the costs to produce such products, including normal volatility in egg, feed, potato and cheese costs. If any of these risks or uncertainties materialize, or if any of our underlying assumptions are incorrect, our actual results may differ significantly from the results that we express in or imply by any of our forward-looking statements. We do not undertake any obligation to revise these forward-looking statements to reflect future events or circumstances.

General

Michael Foods, Inc. and its subsidiaries (together, the “Company,” “we,” “us,” and “our”) is a diversified producer and distributor of food products in three areas—egg products, cheese and other dairy case products and potato products. Our parent company is M-Foods Holdings, Inc. (“Parent”). Our Egg Products Division produces and distributes egg products to the foodservice, retail and food ingredient markets. Our Potato Products Division processes and distributes refrigerated potato products to the foodservice and retail grocery markets in North America. Our Crystal Farms Division markets a broad line of refrigerated grocery products to U. S. retail grocery outlets, including branded and private-label cheese, shell eggs, bagels, butter, muffins, potato products and ethnic foods. Please see Note J to our consolidated financial statements for additional information about our business segments.

We have a strategic focus on value-added processing of food products. The strategy is designed to capitalize on key food industry trends, such as (i) the desire for improved safety and convenience, (ii) the focus by foodservice operators on reducing labor and waste, and (iii) the long-term trend toward food consumption away from home, which has been slowed somewhat by the current economic conditions. We believe our operational scale, product breadth and geographic scope make us an attractive and important strategic partner for our customers.

Egg Products Division

The Egg Products Division, comprised of our wholly owned subsidiaries M. G. Waldbaum Company (“Waldbaum”), Papetti’s Hygrade Egg Products, Inc. (“Papetti’s”), Abbotsford Farms, Inc., and MFI Food Canada Ltd., produces, processes and distributes numerous egg products and shell eggs. Collectively, the entities are also referred to as the Michael Foods Egg Products Company. We believe that our Egg Products Division is the largest processed egg products producer and one of the largest egg producers in North America. Principal value-added egg products are ultrapasteurized, extended shelf-life liquid eggs (“Easy Eggs®” and “Excelle™”), egg white based egg products (“Better ‘n Eggs®” and “All Whites®”), and hardcooked and precooked egg products (“Table Ready®”). Other egg products include frozen, liquid and dried egg whites, yolks and whole eggs, and various organic and cage free egg products. We believe our Egg Products Division is the largest supplier of extended shelf-life liquid eggs, precooked egg patties and omelets, dried eggs and hardcooked eggs in North America and is a leading supplier of frozen and liquid whole eggs, whites and yolks.

Our Egg Products Division distributes its egg products to food processors and foodservice customers primarily throughout North America, with limited international sales in the Far East, South America and Europe. The largest selling product line within the Division, which is extended shelf-life liquid eggs, and other egg products are marketed to a wide variety of foodservice and food ingredients customers. The Division also is a leading supplier of egg white-based egg products sold in the U.S. retail and foodservice markets. Most of the Division’s annual shell egg sales are made to our Crystal Farms Division.

In 2009, the Division derived approximately 98% of net sales from egg products, with 2% of net sales coming from shell eggs. Pricing for shell eggs and certain egg products in the United States and Canada reflects levels reported by Urner Barry Spot Egg Market Quotations (“Urner Barry”), a recognized industry publication. Prices of certain higher value-added products, such as precooked, extended shelf-life liquid eggs, low/no cholesterol, natural/organic and cage free eggs, typically are not significantly affected by Urner Barry quoted price levels. Prices for the Division’s other products, including short shelf-life liquid, certain dried and frozen products and, particularly, shell eggs, are affected by market prices as reported by Urner Barry. Approximately 67% of the Egg Products Division’s annual net sales come from higher value-added egg products, such as extended shelf-life liquid and precooked products, with the remainder coming from products mainly used in the food ingredients market and shell eggs.

The Division’s principal egg processing plants are located in New Jersey, Minnesota, Nebraska, Pennsylvania, Iowa, Wisconsin and Manitoba, Canada. Certain of the Division’s facilities are fully integrated from the production and maintenance of laying flocks through the processing of egg products. In 2009, approximately 26% of the Division’s egg needs were satisfied by production from our owned hens, with the balance being purchased under third-party egg procurement contracts and in the spot market. The cost of eggs from our owned facilities is largely dependent upon the cost of feed. Additionally, for an increasing portion of eggs purchased under third-party egg procurement contracts, the egg cost is determined by the cost of feed, as the contracts are priced using a formula based upon the underlying feed costs. For the remaining portion of eggs purchased under third-party egg procurement contracts and for eggs purchased in the spot market, the egg cost is determined by normal market forces. Such costs are largely determined by reference to Urner Barry quotations. Historically, feed costs have generally been less volatile than have egg market prices, and internally produced eggs generally have been lower in cost than externally sourced eggs. Key feed costs, such as corn and soybean meal costs, are partially hedged through the use of futures and other purchase contracts. There is no market mechanism for hedging egg prices.

The Division has endeavored to moderate the effects of egg market commodity factors through an emphasis on value-added products. Further, the Division attempts to match market-affected egg sourcing with the production of egg products whose selling prices are also market-affected, and cost-affected egg sourcing, as best can be managed, with higher value-added products priced over longer terms, generally 6-12 months. The former typically allows the Division to realize a modest processing margin on such sales, even though there are notable commodity influences on both egg sourcing costs and egg products pricing, each changing as frequently as daily. Pricing of shell eggs is also typically affected by seasonal demand related to increased consumption during holiday periods.

Crystal Farms Division

Our Crystal Farms Division, comprised of our wholly owned subsidiaries Crystal Farms Refrigerated Distribution Company and Wisco Farm Cooperative, markets a wide range of refrigerated grocery products directly to retailers and wholesale warehouses. We believe that the Division’s strategy of offering quality branded products at a good value relative to national brands has contributed to the Division’s growth. These distributed refrigerated products, which consist principally of cheese, shell eggs, bagels, butter, muffins, potato products and ethnic foods, are supplied by various vendors, or our other divisions, to Crystal Farms’ specifications. Cheese accounted for approximately 71% of the Division’s 2009 sales. While we do not produce cheese, we operate a cheese packaging facility in Lake Mills, Wisconsin, which processes and packages various cheese products for our Crystal Farms brand cheese business and for various private-label customers.

The Division has expanded its market area using both company-owned and leased facilities and independent distributors. The Division’s market area is the United States, with a large customer concentration in the central United States. Over 11,000 retail stores carry the Division’s products. A majority of these retail stores are served via customers’ warehouses. The Division maintains a fleet of refrigerated tractor-trailers to deliver products daily to its retail customers from nine distribution centers centrally located in its key marketing areas.

Potato Products Division

Refrigerated potato products are produced and sold by our wholly owned subsidiaries Northern Star Co. (“Northern Star”) and Farm Fresh Foods, Inc. (“Farm Fresh”) to both the foodservice and retail markets. This Division’s products consist of shredded hash browns and diced, sliced, mashed and other specialty potato products. In 2009, approximately 50% of the Potato Products Division’s net sales were to the foodservice market, with the balance to the retail market.

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

Sales, Marketing and Customer Service

Each of our three divisions has developed a marketing strategy that emphasizes high quality products and customer service. An internal sales group at Michael Foods, Inc., coordinates the foodservice sales of the Egg Products and Potato Products Divisions, primarily for national and regional accounts, and is supported by a centralized order entry and customer service staff. A group of foodservice brokers is used by us to supplement its internal sales efforts. Furthermore, the Egg Products Division maintains a small sales group which handles certain food ingredient and international egg product sales. The sales activities related to our nationally branded egg and potato retail products are executed by the Crystal Farms Division’s direct sales personnel and brokers to affect a more efficient retail selling effort. Our foodservice marketing staff executes egg and potato products marketing plans in the foodservice market. A separate retail marketing staff executes plans for national retail egg and potato products brands and Crystal Farms, utilizing additional resources from outside marketing and advertising agencies and consultants as needed.

The Crystal Farms Division’s internal and external sales personnel obtain orders from retail stores for next-day delivery, and warehouse accounts for delivery usually within 14 days. This Division’s marketing efforts are primarily focused on in-store, co-op, and select media advertising programs, which are executed with grocers on a market-by-market basis.

Customers

The Egg Products Division has long-standing preferred supplier relationships with many of its customers. Our customers include many of the major broad-line foodservice distributors and national restaurant chains that serve breakfast. As the largest processed egg producer in the industry, we offer our customers a broad product selection, large-scale multi-plant manufacturing capabilities and specialized service. The Egg Products Division’s major customers in each of its market channels include leading foodservice distributors, with Sysco Corporation and U.S. Foodservice accounting for more than 10% of our consolidated 2009 net sales. Some of the Division’s other major customers are national restaurant chains, major retail grocery store chains and major food processors.

The Crystal Farms Division has customer relationships with large food store chains that rely on us to deliver a variety of dairy case products in a timely and efficient manner. The Division serves over 11,000 retail locations, inclusive of stores receiving products through warehouse delivery. SUPERVALU, the grocery industry’s largest distributor, was Crystal Farms’ largest customer in 2009 and accounted for more than 10% of the Division’s 2009 net sales.

The Potato Products Division leverages existing relationships with national foodservice distributor customers of the Egg Products Division. Hence, many of the Potato Products Division’s top customers are also long-standing customers of the Egg Products Division. The Division provides foodservice distributors the convenience of centrally sourcing many different types of refrigerated potato and egg products. The Potato Products Division’s largest customers include major foodservice distributors and major retail grocery store chains.

Competition

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

The egg-processing industry is particularly competitive, owing to the large number of national players, the wide variety of product offerings, and the fact that egg products compete in the first instance with shell eggs. Cargill Kitchen Solutions, a division of Cargill, Incorporated, is our largest higher value-added egg products competitor. We also compete with other egg products processors, including Sonstegard Foods Company, Rose Acre Farms, Inc., Echo Lake Farm Produce, Rembrandt Enterprises, Inc. and ConAgra Foods, Inc.

The Crystal Farms Division competes with the refrigerated products of larger suppliers such as Kraft Foods, Inc., Dairy Farmers of America, Sargento Foods, Inc., and Sorrento Lactalis, Inc. We position Crystal Farms products as an alternative mid-priced brand, operating at price points below national brands and above store (private-label) brands. Crystal Farms’ emphasis on a high level of service and lower-priced branded products has enabled it to compete effectively with larger national-brand companies.

Through our Potato Products Division, we were the first company to introduce nationally branded refrigerated potato products in the late 1980s to the United States’ foodservice and retail markets. We believe we are the largest processor and distributor of refrigerated potato products in the U.S. The Potato Products Division’s major retail competitors are Shedd’s Country Crock Side Dishes (licensed by Unilever N. V. to Hormel Foods Corp.), Bob Evans Farms, Inc. and Reser’s Fine Foods, Inc. Other competitors include smaller local and regional processors, including I&K Distributors, Inc. (Yoder’s) and Naturally Potatoes in the foodservice sector. Certain companies, such as Ore-Ida Foods, Inc. (a subsidiary of H. J. Heinz Co.) and Lamb-Weston, Inc. (a subsidiary of ConAgra Foods, Inc.), sell frozen versions of potato products that are sold by the Division in refrigerated form.

Proprietary Technologies and Trademarks

We use a combination of patent, trademark and trade secrets laws to protect the intellectual property for our products. We own patents and have exclusive license agreements for several patents and technologies.

The Egg Products Division maintains numerous trademarks and/or trade names for its products, including “Michael Foods™,” “Better ‘n Eggs®,” “All Whites®,” “Papetti’s®,” “Quaker State Farms®,” “Broke N’ Ready®,” “Abbotsford Farms®,” “Inovatech®”, “Excelle™”, “Trilogy™” and “Emulsa®”.” Ultrapasteurized liquid eggs are marketed using the “Easy Eggs®” trade name and hardcooked and precooked egg products are marketed using the “Table Ready®” trade name. Crystal Farms Division products are marketed principally under the “Crystal Farms™” trade name. Other Crystal Farms Division trademarks include “Crescent Valley®”, “Westfield Farms®”, and “David’s Deli®.” Within the Potato Products Division, we market our refrigerated potato products to foodservice customers under a variety of brands, including “Northern Star™” and “Farm Fresh™.” The “Simply Potatoes®” and “Diner’s Choice®” brands are used for retail refrigerated products.

Food Safety

We take extensive precautions to ensure the safety of our products. In addition to routine inspections by state and federal regulatory agencies, including continuous United States Department of Agriculture (“USDA”) inspection of many facilities, we have instituted quality systems plans in each of our divisions which address topics such as supplier control; ingredient, packaging and product specifications; preventive maintenance; pest control and sanitation. Each of our facilities also has in place a hazard analysis critical control points plan which identifies critical pathways through which contaminants may enter our facilities and mandates control measures that must be used to prevent, eliminate or reduce all relevant food-borne hazards. Each of our divisions has also instituted a product recall plan, including lot identifiability and traceability measures that allows us to act quickly to reduce the risk of consumption of any product that we suspect may be a problem.

We maintain general liability insurance, including product liability coverage, which we believe to be sufficient to cover potential product liabilities.

Government Regulation

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

Crystal Farms cheese and butter products are affected by milk price supports established by the USDA. The support price serves as an artificial minimum price for these products, which may not be indicative of market conditions that would prevail if these supports were abolished.

Environmental Regulation

We are subject to federal and state environmental regulations and requirements, including those governing discharges to air and water, the management of hazardous substances, the disposal of solid and hazardous wastes, and the remediation of contamination. Our environmental management and compliance programs are led by our Director of Environmental Engineering. Additionally, we have an ongoing relationship with an environmental consulting firm, and we use other consultants as may be required. As a result of our efforts, we believe we are currently in material compliance with all environmental regulations and requirements.

We have made, and will continue to make, expenditures to ensure environmental compliance. For example, in early 2008 we completed a new mechanical wastewater treatment facility in Wakefield, Nebraska.

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

Employees

At January 2, 2010, we had 3,762 employees. The Egg Products Division had 2,548 full-time and 249 part-time employees, none of whom are represented by a union. The Potato Products Division employed 313 persons, 223 of whom were represented by the Bakery, Laundry, Allied Sales Drivers and Warehousemen Union, which is affiliated with the Teamsters. The Crystal Farms Division employed 421 persons, none of whom are represented by a union. Our corporate, sales, supply chain logistics and information systems groups collectively had 231 employees. We believe our employee relations to be good.

Executive Officers of the Registrant

See Item 10—Directors and Executive Officers of the Registrant.

Availability of SEC Reports

We make available, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practical after they are filed or furnished to the U.S. Securities and Exchange Commission (“SEC”). The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100F Street NE, Washington, DC, 20549. The public may obtain information on the operation of the Public Reference Room by calling 1-800- SEC-0330. Such reports are also available electronically at the SEC’s website (http://www.sec.gov) as well as on our website (http://www.michaelfoods.com) on the Newsroom tab. Information included on our website is not deemed to be incorporated into this Form 10-K.

ITEM 1A—RISK FACTORS

Our operating results are significantly affected by egg, potato and cheese market prices, the prices of other raw materials, such as grain, which can fluctuate widely, and energy and energy related costs.

Our operating results are affected by egg, potato and cheese prices and the prices of corn and soybean meal, which are the primary feedstock used in the production of eggs. Historically, the prices of these raw materials have fluctuated widely. Changes in the price of such items may have a material adverse effect on our business, prospects, and results of operations or financial condition. In general, the pricing of eggs is affected by an inelasticity of supply and demand, often resulting in small changes in production or demand having a large effect on prices. Historically, our operating profit has been, at times, adversely affected when egg and grain prices rise significantly. In addition, our operating profit has historically been negatively affected during extended periods of low egg prices. We can experience similar negative effects on our results of operations because of increases in the price of potatoes and cheese. Although we can take steps to mitigate the effects of changes to our raw material costs, fluctuations in prices are outside of our control. For example, the prices of corn and soybean meal rose dramatically from the summer of 2006 through the summer of 2008. We viewed much of the corn price rise as relating to significant incremental demand from ethanol producers. With the rapid rise in grain costs, we were unable to adjust our egg products selling prices rapidly and extensively enough to offset the significant raw material cost increases in those years. Our operating results can also be affected by other input costs such as energy and energy related costs. While we endeavor to keep our selling prices in-line with our input costs, we are not always able to do so and this may result in abnormally low operating profit margins for extended periods of time.

We produce and distribute food products that are susceptible to microbial contamination.

Many of our food products, particularly egg products, are vulnerable to contamination by disease producing organisms, or pathogens, contained in food, such as Salmonella, which are found in the environment. Shipment of adulterated products, even if inadvertent, is typically a violation of law and may lead to an increased risk of exposure to product liability claims (as discussed below), product recalls and increased scrutiny by federal and state regulatory agencies. Any shipment of adulterated products may have a material adverse effect on our reputation, business, prospects, results of operations and financial condition. The risk may be controlled, but not eliminated, by adherence to good manufacturing practices and finished product testing. Also, products purchased from others for repacking or distribution may contain contaminants that may be inadvertently redistributed by us. Once contaminated products have been shipped for distribution, illness and death may result if the pathogens are not eliminated by thorough processing and cooking at the foodservice or consumer level.

As a result of selling food products, we face the risk of exposure to product liability claims.

We face the risk of exposure to product liability claims and adverse public relations in the event that our quality control procedures fail and the consumption of our products cause injury or illness. If a product liability claim is successful, our insurance may not be adequate to cover all liabilities we may incur, and we may not be able to continue to maintain such insurance, or obtain comparable insurance at a reasonable cost, if at all. We generally seek contractual indemnification and insurance coverage from parties supplying us products, but this indemnification or insurance coverage is limited by the creditworthiness of the indemnifying party, and their insurance carriers, if any, as well as the limits of any insurance provided by suppliers. We believe we have adequate product liability coverage but if we did not have adequate insurance or contractual indemnification available, product liability claims relating to defective products could have a material adverse effect on our business reputation and earnings. In addition, even if a product liability claim is not successful or is not fully pursued, the negative publicity surrounding any assertion that our products caused illness or injury could have a material adverse effect on our reputation with existing and potential customers and on our business, prospects, results of operations and financial condition.

A decline in egg consumption or in the consumption of processed food products in total could have a material adverse effect on our net sales and results of operations.

Adverse publicity relating to health concerns and the nutritional value of eggs and egg products could adversely affect egg consumption and consequently demand for our processed egg products, which could have a material adverse effect on our business, prospects, and results of operations or financial condition. In addition, as almost all of our operations consist of the production and distribution of processed food products, a change in consumer preferences relating to processed food products or in consumer perceptions regarding the nutritional value of processed food products could adversely affect demand, which would have a material adverse effect on our business, prospects, results of operations, liquidity and financial condition. Further, weak or recessionary economic conditions can affect food consumption patterns, particularly in the foodservice market, with a potentially negative effect on our sales volumes and margins.

The categories of the food industry in which we operate are highly competitive, and our inability to compete successfully could adversely affect our business, prospects, results of operations and financial condition.

Competition in each of the categories of the food industry within which we operate is notable. Increased competition against any of our products could result in price reduction, reduced margins and loss of market share, which could negatively affect our business, prospects, results of operations and financial condition. In particular, we compete with major companies such as Cargill, Incorporated, Kraft Foods, Inc., Hormel Foods Corp. and ConAgra Foods, Inc. Each of these companies has substantially greater financial resources, name recognition, research and development, marketing and human resources than we have. In addition, our competitors may succeed in developing new or enhanced products which could be preferred over our products. These companies may also prove to be more successful than we are in marketing and selling these products. We may not be able to compete successfully with any or all of these companies.

Our largest customers have historically accounted for a significant portion of our net sales volume. Accordingly, our business may be adversely affected by the loss of, or reduced purchases by, one or more of our large customers.

Our largest customers have historically accounted for a significant portion of the net sales volume of each of our three divisions. If, for any reason, one of our key customers were to purchase significantly less of our products in the future or were to terminate its purchases from us altogether, and we are not able to sell our products to new customers at comparable or greater levels, our business, prospects, financial condition and results of operations may be materially adversely effected. This concentration of sales to these customers increases the risk that if one, or more, large customers encounter financial difficulties, especially during economic recession, it may impact our associated accounts receivable.

Trademarks and patents have historically been important to our business. The loss or expiration of a patent, whether licensed or owned, or the loss of any registered trademark, could negatively impact our ability to produce and sell the products associated with such patent or trademark, which could have a material adverse effect on our sales volume and net income.

We utilize trademarks, patents, trade secrets and other intellectual property in our business, the loss or expiration of which could negatively impact our ability to produce and sell the associated products, which could have a material adverse effect on our results of operations. We also own many registered and unregistered trademarks that are used in the marketing and sale of our products. We have invested a substantial amount of money in establishing and promoting our trademarked brands. However, the degree of protection that these trademarks afford us is uncertain.

Government regulation could increase our costs of production and increase our legal and regulatory expenses.

Our manufacturing, processing, packaging, storage, distribution and labeling of food products are subject to extensive federal, state and local regulation, including regulation by the FDA, the USDA, and various health and agricultural agencies. Some of our facilities are subject to continuous on-site inspections. Applicable statutes and regulations governing food products include rules for identifying the content of specific types of foods, the nutritional value of that food and its serving size. Many jurisdictions also provide that food manufacturers adhere to good manufacturing practices (the definition of which may vary by jurisdiction) with respect to production processes, which include proper personal hygiene, wearing and proper handling of company-issued uniforms and footwear, using footbaths, proper hand washing procedures, proper storage of equipment, not wearing jewelry, not eating or drinking in production areas, and not carrying objects above the waist so as to prevent anything from falling into products. In addition, our production and distribution facilities are subject to various federal, state and local environmental and workplace regulations. Failure to comply with all applicable laws and regulations could subject us to civil remedies, including fines, injunctions, recalls or seizures, and criminal sanctions, which could have a material adverse effect on our business, financial condition and results of operations. Furthermore, compliance with current or future laws or regulations could require us to make material expenditures or otherwise adversely affect the way we operate our business, our prospects, results of operations and financial condition.

We may incur unexpected costs associated with compliance with environmental regulations.

We are subject to federal, state, and local environmental requirements, including those governing discharges to air and water, the management of hazardous substances, the disposal of solid and hazardous wastes, and the remediation of contamination. If we do not fully comply with environmental regulations, or if a release of hazardous substances occurs at or from one of our facilities, we may be subject to penalties and fines, and/or be held liable for the cost of remedying the condition. The operational and financial effects associated with compliance with the variety of environmental regulations could require us to make material expenditures or otherwise adversely affect the way we operate our business and our prospects, results of operations and financial condition.

Extreme weather conditions, disease (such as avian influenza) and pests could harm our business.

Many of our business activities are subject to a variety of agricultural risks. Unusual weather conditions, disease and pests can materially and adversely affect the quality and quantity of the raw materials we use and, hence, the food products we produce and distribute. In particular, avian influenza occasionally affects the domestic poultry industry, leading to hen deaths. A virulent form of avian influenza emerged in Southeast Asia over the past several years and has spread elsewhere in the Eastern Hemisphere in recent years. It has caused deaths in wild bird populations and, in limited instances, domesticated fowl flocks. It has also been linked to illness and death among some persons who have been in contact with diseased fowl. It is unclear if this form of avian influenza will manifest itself in North America, or if sheltered flocks, such as ours, have significant exposure risk. However, to protect against this risk, we have intensified biosecurity measures at our layer locations. Weather, disease and pest matters could affect a substantial portion of our production facilities in any year and could have a material adverse effect on our business, prospects, and results of operations or financial condition.

Ability to fund debt and maintain debt instruments covenant compliance.

We believe that, based on current levels of operations, we will be able to meet our debt service and other obligations when due and maintain compliance with our covenants. Significant assumptions underlie this belief, including, among other things, that we will continue to be successful in implementing our business strategy and that there will be no material adverse developments in our business, liquidity or capital requirements. If our future cash flows from operations and other capital resources are insufficient to pay our obligations as they mature or we fail to comply with our debt covenants, we may be forced to reduce or delay our business activities and capital expenditures, sell assets, obtain additional debt or equity capital or restructure or refinance all or a portion of our debt, including the subordinated notes, on or before maturity. We cannot assure our investors 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 senior subordinated notes and the credit agreement, may limit our ability to pursue any of these alternatives.

ITEM 1B—UNRESOLVED STAFF COMMENTS

Not applicable

ITEM 2—PROPERTIES

FACILITIES

Corporate. We maintain leased space for our corporate headquarters in suburban Minneapolis, Minnesota. Leased space within the same building houses the headquarters, financial and administrative service staffs of the Egg Products, Potato Products and Crystal Farms divisions, as well as our customer service, distribution, sales, marketing and information services groups. This lease expires in 2013 and the annual base rent is approximately $1,020,000.

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


Location	Principal Use	Size (square feet)	Owned/Leased	Lease Expiration	Annual Payments
Elizabeth, New Jersey (a)	Processing	75,000	Leased	2012	$	583,000
Elizabeth, New Jersey (a)	Processing	125,000	Leased	2012		911,000
Bloomfield, Nebraska	Processing	80,000	Owned	—		—
LeSueur, Minnesota	Processing	29,000	Owned	—		—
Wakefield, Nebraska	Processing	380,000	Owned	—		—
Klingerstown, Pennsylvania (b)	Processing and Distribution	158,000	Leased	2017		681,000
Lenox, Iowa	Processing and Distribution	151,000	Owned	—		—
Gaylord, Minnesota	Processing and Distribution	230,000	Owned	—		—
Elizabeth, New Jersey (a)	Distribution	80,000	Leased	2012		648,000
Bloomfield, Nebraska	Egg Production	619,000	Owned	—		—
Wakefield, Nebraska	Egg Production	658,000	Owned	—		—
LeSueur, Minnesota	Egg Production	345,000	Owned	—		—
Gaylord, Minnesota	Egg Production	349,000	Owned	—		—
Gaylord, Minnesota	Pullet Houses	130,000	Owned	—		—
Wakefield, Nebraska	Pullet Houses	432,000	Owned	—		—
Plainview, Nebraska	Pullet Houses	112,000	Owned	—		—
Winnipeg, Manitoba (c)	Processing	102,000	Capital Lease	2012		533,000
Winnipeg, Manitoba (c)	Processing	32,000	Leased	2013		147,000
St. Marys, Ontario (c)	Processing	42,000	Capital Lease	2012		302,000
Mississauga, Ontario (c)	Distribution	8,000	Leased	2011		53,000
Montreal, Quebec (d)	Office space	700	Leased	2010		15,000
Abbotsford, Wisconsin	Processing	20,000	Owned	—		—

(a)	There is a five year extension available on these leases.

(b)	There is a ten year and a five year extension available on this lease.

(c)	There are four five year extensions available on these leases. The St. Marys, Ontario plant closed as of March 31, 2007, but remains under lease. See Note G to our consolidated financial statements.

(d)	This lease renews annually.

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

Potato Products Division. The Potato Products Division owns a processing plant and land located in Minneapolis, Minnesota, consisting of approximately 162,000 square feet of production area. This Division leases a building in North Las Vegas, Nevada, consisting of approximately 31,000 square feet. This lease expires in 2011 and we have the option to extend the lease for two successive five year periods. The annual payment amount on this lease is approximately $388,000. The division purchased a 230,000 square foot building in Chaska, Minnesota in December 2008. This building has been converted into a potato products plant, with initial production occurring in 2010 and is expected to offer more efficient production output and incremental capacity, which the Division needs to expand its sales. We plan to close the Minneapolis plant once the new plant is fully functional.

Crystal Farms Division. The Crystal Farms Division leases office space in suburban Minneapolis and several small warehouses across the United States. The leases expire between 2010 and 2012. The annual base rent for all of the leases is approximately $135,000. The Division owns a distribution center located near LeSueur, Minnesota, which is approximately 33,000 square feet. The Division also owns and operates an 85,000 square foot refrigerated warehouse with offices and a 30,000 square foot cheese packaging facility on a 13-acre site in Lake Mills, Wisconsin.

The total annual lease payments for the facilities described above is approximately $5.4 million. The leases for these facilities have varying length terms ranging from month-to-month to 2017. We believe that our owned and leased facilities, together with budgeted capital projects in each of our three operating divisions, are adequate to meet anticipated requirements for our current lines of business for the foreseeable future. All of our owned property is pledged to secure repayment of our credit agreement.

For additional information on contractual obligations relating to operating leases see “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

ITEM 3—LEGAL PROCEEDINGS

In late 2008 and early 2009, some 22 class-action lawsuits were filed in various federal courts against us and approximately 20 other defendants (producers of shell eggs, manufacturers of processed egg products, and egg industry organizations) alleging violations of federal and state antitrust laws in connection with the production and sale of shell eggs and processed-egg products. Plaintiffs seek to represent nationwide classes of direct and indirect purchasers, and allege that defendants conspired to reduce the supply of eggs by participating in animal husbandry, egg-export and other programs of various egg-industry associations. In December 2008, the Judicial Panel on Multidistrict Litigation ordered the transfer of all cases to the Eastern District of Pennsylvania for coordinated and/or consolidated pretrial proceedings. We currently have two motions to dismiss pending before the Court: (1) a motion to dismiss the direct-purchaser plaintiffs’ Second Consolidated Amended Complaint against Michael Foods, Inc.; and (2) a motion to dismiss the indirect-purchaser plaintiffs’ Consolidated Amended Complaint against Michael Foods, Inc. and subsidiary Papetti’s Hygrade Egg Products, Inc. We are also a party to various other motions, filed by multiple defendants, to dismiss portions of the complaints. A decision on these motions is not expected until June 2010 or later.

We received a Civil Investigative Demand (“CID”) issued by the Florida Attorney General on November 17, 2008, regarding an investigation of possible anticompetitive activities “relating to the production and sale of eggs or egg products.” The CID requests information and documents related to the pricing and supply of shell eggs and egg products, as well as our participation in various programs of United Egg Producers. We are fully cooperating with the Florida Attorney General’s office.

We and Sodexo (formerly Sodexho, Inc.) were named as defendants in a suit commenced in 2004 by Feesers, Inc., alleging violation of the Robinson-Patman Act. In 2006, we were awarded summary judgment by the United States District Court for the Middle District of Pennsylvania; that judgment was reversed in 2007 by the U.S. Court of Appeals for the Third Circuit and the case was remanded to the District Court for fact-finding. Following a bench trial in January 2008, the District Court ruled on April 27, 2009 that we violated the Robinson-Patman Act because it found that certain of our products were sold to Feesers and Sodexo at different prices. No damages were sought or awarded in the case; the District Court issued an injunction prohibiting us from charging different prices to Feesers and Sodexo. We appealed the District Court’s decision to the Third Circuit; on January 7, 2010, the Third Circuit reversed the District Court and directed that judgment be entered in favor of Sodexo and us. On January 21, 2010, Feesers petitioned the Third Circuit for a rehearing en banc; the third circuit denied the petition on March 4, 2010. Following the District Court’s ruling on April 27, 2009, Feesers petitioned to have its attorneys’ fees and costs paid by Sodexo and us; we recorded a liability of $5.1 million in June 2009 relating to the fees petition. Based on the latest ruling, that liability was reversed in the fourth quarter of 2009.

In addition, we are from time to time party to litigation, administrative proceedings and union grievances that arise in the ordinary course of business, and occasionally pay non-material amounts to resolve claims and alleged violations of regulatory requirements. There is no pending litigation that, separately or in the aggregate, would, in the opinion of management, have a material adverse effect on our operations or financial condition.

We cannot predict what, if any, impact these matters and any results from such matters could have on future results of operations.

ITEM 4—RESERVED

PART II

ITEM 5—MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

(a)

Our common equity is not traded in any market. We had one holder of our common equity as of March 25, 2010. No securities are authorized for issuance under equity compensation plans. No unregistered sales of securities were made during 2009.

(b)

Not applicable.

(c)

Not applicable.

ITEM 6—SELECTED FINANCIAL DATA

The following table sets forth selected consolidated historical financial data for the years ended January 2, 2010, January 3, 2009, December 29, 2007, December 30, 2006 and December 31, 2005. The data presented below was derived from the Company’s Consolidated Financial Statements. This information should be read in conjunction with the Company’s Consolidated Financial Statements and Notes thereto included elsewhere herein and Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations.


(In thousands)	2009		2008		2007		2006		2005
Statement of Earnings Data
Net sales	$	1,542,779	$	1,804,373	$	1,467,762	$	1,247,348	$	1,242,498
Cost of sales		1,241,613		1,528,420		1,223,416		1,016,832		1,005,418

Gross profit		301,166		275,953		244,346		230,516		237,080
Selling, general and administrative expenses		145,883		165,938		147,375		133,287		130,833
Plant closing expenses		—		—		1,525		3,139		—

Operating profit		155,283		110,015		95,446		94,090		106,247
Interest expense, net		44,338		42,008		52,490		55,928		47,119
Loss on early extinguishment of debt		3,237		—		—		—		5,548

Earnings before income taxes and equity in losses of unconsolidated subsidiary		107,708		68,007		42,956		38,162		53,580
Income tax expense		38,244		21,129		15,391		16,294		14,266

Earnings before equity in losses of unconsolidated subsidiary		69,464		46,878		27,565		21,868		39,314
Equity in losses of unconsolidated subsidiary		—		—		—		2,713		455

Net earnings	$	69,464	$	46,878	$	27,565	$	19,155	$	38,859


At Period End
Balance Sheet Data
Working capital	$	173,961	$	157,128	$	94,581	$	78,358	$	79,923
Total assets		1,306,866		1,298,858		1,273,861		1,263,763		1,333,576
Long-term debt, including current maturities		553,037		597,384		601,783		645,794		709,723
Shareholder’s equity		478,362		403,988		360,089		324,794		304,015

ITEM 7—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

General

Overview. We are a producer and distributor of egg products to the foodservice, retail and food ingredient markets. We are also a producer and distributor of refrigerated potato products to the foodservice and retail grocery markets. Additionally, we distribute refrigerated food items, primarily cheese and other products sold in the dairy case, to the retail grocery market, predominantly in the central United States. We focus our growth efforts on the specialty sectors within our food categories and strive to be a market leader in product innovation and efficient production. We have a strategic focus on value-added processing of food products, which is designed to capitalize on key food industry trends, such as (i) the desire for improved safety and convenience, (ii) the focus by foodservice operators on reducing labor and waste, and (iii) the long-term trend toward food consumption away from home, which has been slowed somewhat by the current economic conditions. We believe our operational scale, product breadth and geographic scope make us an attractive and important strategic partner for our customers, which include foodservice distributors, major restaurant chains, food ingredient companies and the retail grocery market.

Acquisitions/Joint Ventures. We have focused, in recent years, on making small acquisitions that expand our current product offerings and/or geographic scope and broaden our technological expertise. We continue to evaluate potential acquisitions and they remain a part of our growth plans. Effective January 11, 2008, we purchased the assets of Mr. B’s of Abbotsford, Inc. and related entities for $8.7 million. The acquisition of Mr. B’s of Abbotsford, Inc., renamed Abbotsford Farms, Inc. in 2009, a processor of organic and cage-free egg products, expanded our presence in the specialty egg products market.

Commodity Risk Management. Our principal exposure to market risks that may adversely affect our results of operations and financial position include changes in future commodity prices and interest rates. We seek to minimize or manage these market risks through normal operating and financing activities and through the use of commodity futures contracts, when appropriate. We do not trade or use instruments with the objective of earning financial gains on commodity prices, nor do we use instruments where there are not underlying exposures. See “—Market Risk —Commodity Hedging—Commodity Risk Management.”

Results of Operations

The following table summarizes the historical results of our divisional operations and such data as a percentage of total net sales. The information contained in this table should be read in conjunction with “Item 6—Selected Financial Data” and the consolidated financial statements and related notes included elsewhere in this Form 10-K.


	2009				2008				2007
	$		%		$		%		$		%
	(In thousands)
Statement of Earnings Data:
External net sales:
Egg products division	1,046,791		67.9		1,265,641		70.1		1,014,588		69.1
Potato products division	119,219		7.7		125,059		6.9		119,033		8.1
Crystal Farms division	376,769		24.4		413,673		23.0		334,141		22.8

Total net sales	1,542,779		100.0		1,804,373		100.0		1,467,762		100.0
Cost of sales	1,241,613		80.5		1,528,420		84.7		1,223,416		83.4

Gross profit	301,166		19.5		275,953		15.3		244,346		16.6
Selling, general and administrative expenses	145,883		9.5		165,938		9.2		147,375		10.0
Plant closing expenses	—		—		—		—		1,525		0.1

Operating profit (loss):
Egg products division	133,162		8.6		95,442		5.3		75,539		5.1
Potato products division	710		0.0		13,719		0.8		18,941		1.3
Crystal Farms division	34,823		2.3		17,267		0.9		11,495		0.8
Corporate	(13,412	)	(0.9	)	(16,413	)	(0.9	)	(10,529	)	(0.7	)

Total operating profit	155,283		10.1		110,015		6.1		95,446		6.5

Interest expense, net	44,338		2.9		42,008		2.3		52,490		3.6

Net earnings	69,464		4.5		46,878		2.6		27,565		1.9

Results for the Year Ended January 2, 2010 Compared to results for the Year Ended January 3, 2009

Net Sales. Net sales for 2009 decreased $261.6 million, or 14.5%, to $1,542.8 million from $1,804.4 million in 2008. The decreased net sales reflected volume declines of 6.5% primarily due to volume decreases in foodservice and food ingredient egg products as a result of the economic slowdown and, to a lesser extent, the impact of the Potato Products Division voluntary recall of retail cut potato products and increased competition. Commodity prices have also declined, resulting in net sales reductions exceeding volume reductions. The decrease in sales was also affected by the $19 million of sales associated with the additional 53rd week in 2008.

Egg Products Division Net Sales. Egg Products Division external net sales for 2009 decreased $218.8 million, or 17%, to $1,046.8 million from $1,265.6 million in 2008. External net sales in 2009 decreased for all of our egg product categories as compared to 2008. Overall, the division’s unit sales decreased by 8% in 2009, as compared to 2008, mainly due to weak economic conditions and increased competition. Pricing decreased in most categories, reflecting lower egg, corn and soybean meal markets as compared to 2008, resulting in lower market-related pricing.

Potato Products Division Net Sales. Potato Products Division external net sales for 2009 decreased $5.9 million, or 5%, to $119.2 million from $125.1 million in 2008. On February 20, 2009, we voluntarily recalled certain varieties of our retail cut potato products manufactured in early January at our Minneapolis plant. The Potato Products Division, in both the foodservice and retail markets, unit sales were impacted by the voluntary recall. The division’s unit sales decreased 8% in 2009, due to decreased volumes in the foodservice market, reflecting reduced demand due to weak economic conditions, and the February voluntary recall.

Crystal Farms Division Net Sales. Crystal Farms Division external net sales for 2009 decreased $36.9 million, or 9%, to $376.8 million from $413.7 million in 2008. This decrease was due primarily to pricing actions taken as a result of lower cheese costs, as compared to 2008 when the market saw significantly higher cheese costs. Branded cheese net sales declined 9% despite volume growth of 2%, year-over-year. Unit sales for distributed products (excluding shell eggs) increased 6% in 2009, primarily reflecting growth in branded and private-label cheese.

Gross Profit. Gross profit for 2009 increased $25.2 million, or 9%, to $301.2 million from $276.0 million in 2008. Our gross profit margin increased to 19.5% in 2009 as compared to 15.3% in 2008. The higher gross profit margin percentage reflected a $16.6 million decrease in depreciation related to plant assets. The plant assets re-valued at the time of our 2003 private equity transaction became fully depreciated by the end of 2008. The gross profit margin increase also reflected improved gross margin contributions from the Crystal Farms Division and the Egg Products Division, as pricing came more in line with costs, as compared to 2008. Offsetting those margin contributions were declines in the Potato Products Division due to increased raw material and manufacturing costs, and the impact of the February 2009 voluntary recall of retail cut potato products.

Selling, General and Administrative Expenses. Selling, general and administrative expenses for 2009 decreased $20.0 million, or 12%, to $145.9 million from $165.9 million in 2008. The decrease was due primarily to decreases in compensation, depreciation, legal and sales and marketing costs compared to those incurred in 2008, including a $7.6 million reduction in marketing expense due to changes in marketing programs recorded in net sales in 2009 compared to selling expense in 2008.

Operating Profit. Operating profit for 2009 increased $45.3 million, or 41%, to $155.3 million from $110.0 million in 2008, due to the increased gross profits and reduced selling, general and administrative expenses discussed above.

Egg Products Division Operating Profit. Egg Products Division operating profit for 2009 increased $37.8 million, or 40%, to $133.2 million from $95.4 million in 2008. Operating profits for egg products increased, reflecting our continued focus on moving our customers to more convenient, higher margin value-added products, offset by shell eggs pricing declines coinciding with lower Urner Barry markets and an intense competitive environment.

Potato Products Division Operating Profit. Potato Products Division operating profit for 2009 decreased $13.0 million, or 95%, to $0.7 million, compared to $13.7 million in 2008. The decrease in operating profit reflected increases in raw material and manufacturing costs, and the costs associated with the February 2009 voluntary recall.

Crystal Farms Division Operating Profit. Crystal Farms Division operating profit for 2009 increased $17.5 million, or 102%, to $34.8 million from $17.3 million in 2008. Operating profits improved mainly due to increases in volumes and gross margin for the cheese category, as pricing was more favorably aligned with the lower 2009 cheese costs.

Interest Expense. Net interest expense increased by approximately $2.3 million in 2009 compared to 2008, reflecting lower interest rates during the first four months of 2009 compared to 2008, offset by changing debt levels and higher interest rates coinciding with the financing transaction completed May 1, 2009.

Loss on early extinguishment of debt. In conjunction with the extinguishment of the 2003 term loan B in 2009, we incurred costs of $66,000 and wrote-off $3,171,000 of non-cash deferred financing costs.

Income Taxes. Our effective tax rate on earnings before income taxes was 35.5% for 2009 compared to 31.1% in 2008. The effective rate was impacted by the amount of permanent differences between book and taxable income, including the qualified production activities deduction created by The American Jobs Creation Act of 2004. Additionally, the rate for 2008 was favorably affected by improved results in one of our foreign subsidiaries, impacting the valuation allowance against their deferred tax assets.

Results for the Year Ended January 3, 2009 Compared to results for the Year Ended December 29, 2007

Net Sales. Net sales for 2008 increased $336.6 million, or 23%, to $1,804.4 million from $1,467.8 million in 2007. The increased sales reflected higher market-related pricing to cover increased costs, $19 million of sales associated with the additional 53rd week in 2008 and volume growth of 3%.

Egg Products Division Net Sales. Egg Products Division external net sales for 2008 increased $251.0 million, or 25%, to $1,265.6 million from $1,014.6 million in 2007. External net sales in 2008 increased for all of our egg product categories as compared to 2007. Pricing increased in all categories, reflecting the high egg markets and significantly higher corn and soybean meal markets, which resulted in higher market-related pricing of our products. Volume rose in 2008 for our higher value-added lines, while the more commodity based product lines like frozen, dried and short shelf-life liquid items showed declines. Growth was particularly driven by unit volume gains in extended shelf-life liquid, retail egg white based and precooked egg products. Overall, the division’s unit sales increased by 2% in 2008, as compared to 2007, but slowed from a higher growth rate in the first half of 2008, primarily in foodservice, due to worsening economic conditions.

Potato Products Division Net Sales. Potato Products Division external net sales for 2008 increased $6.1 million, or 5%, to $125.1 million from $119.0 million in 2007. The division’s unit sales increased 4% in 2008, led by retail unit sales, as compared to 2007 levels. The potato products growth rate, primarily in foodservice, also slowed in the second half of the year.

Crystal Farms Division Net Sales. Crystal Farms Division external net sales for 2008 increased $79.6 million, or 24%, to $413.7 million from $334.1 million in 2007. This increase was due primarily to pricing actions taken as a result of significantly higher cheese costs, along with the growth of a national private-label cheese account. The core branded cheese net sales and volume growth were 24% and 7%, year-over-year. Unit sales for distributed products (excluding shell eggs) increased 12% in 2008, primarily reflecting significant growth in branded and private-label cheese, and potato products.

Gross Profit. Gross profit for 2008 increased $31.7 million, or 13%, to $276.0 million from $244.3 million in 2007. Our gross profit margin decreased to 15.3% in 2008 as compared to 16.6% in 2007. The lower gross profit margin percentage reflected margin declines in the Potato Products Division due to increased raw material and manufacturing costs; increases in grain costs which impacted the foodservice egg product lines; and increases in energy, packaging and transportation costs that impacted all of our businesses. We were unable to fully pass through these cost increases to our customers in a timely manner through selective price increases. Offsetting some of this gross margin pressure was positive gross margin contributions from the Crystal Farms Division cheese category, as pricing came more in line with the higher costs, as compared to 2007 and both food ingredient and retail egg products, which experienced margin improvement.

Selling, General and Administrative Expenses. Selling, general and administrative expenses for 2008 increased $18.5 million, or 13%, to $165.9 million from $147.4 million in 2007. The increase was due primarily to increases in legal and compensation costs incurred in 2008.

Plant Closing Expenses. In March 2007, we closed our plant in St. Marys, Ontario. During 2007, we recorded $0.2 million of employee termination costs and $1.3 million of asset impairment charges related to plant equipment write-offs.

Operating Profit. Operating profit for 2008 increased $14.6 million, or 15%, to $110.0 million from $95.4 million in 2007, due to the increased gross profits discussed above.

Egg Products Division Operating Profit. Egg Products Division operating profit for 2008 increased $19.9 million, or 26%, to $95.4 million from $75.5 million in 2007. Operating profits for foodservice egg products decreased, reflecting higher egg costs due to higher grain and increased other costs which we were unable to fully pass through to our customers in a timely manner. Offsetting that decline, operating profits improved for food ingredient egg products as a result of pricing execution throughout higher Urner Barry markets. Operating profits increased for retail egg products as a result of volume growth.

Potato Products Division Operating Profit. Potato Products Division operating profit for 2008 decreased $5.2 million, or 28%, to $13.7 million, compared to $18.9 million in 2007. The decrease in operating profit reflected increased raw material and manufacturing costs, which we were unable to fully pass through to our customers. Those cost increases were partially offset by unit volume growth, particularly for our retail potato products.

Crystal Farms Division Operating Profit. Crystal Farms Division operating profit for 2008 increased $5.8 million, or 50%, to $17.3 million from $11.5 million in 2007. Operating profits improved mainly due to increased gross margin in the cheese category, as pricing caught up with the cheese costs in the last half of the year and margins returned to more historical levels. The division also experienced strong unit growth in private-label cheese.

Interest Expense. Net interest expense decreased by approximately $10.5 million in 2008 compared to 2007, reflecting reduced interest rates and a $50 million voluntary debt repayment in December of 2007.

Income Taxes. Our effective tax rate on earnings before income taxes was 31.1% for 2008 compared to 35.8% in 2007. The effective rate was impacted by the amount of permanent differences between book and taxable income, including the qualified production activities deduction created by The American Jobs Creation Act of 2004. Additionally, the rate for 2008 was affected by improved results in one of our foreign subsidiaries, impacting the valuation allowance against their deferred tax assets.

Seasonality and Inflation

Our consolidated quarterly operating results are affected by the seasonal fluctuations of our net sales and operating profits. Specifically, shell egg prices typically rise seasonally in the first and fourth quarters of the year due to increased demand during holiday periods. Consequently, net sales in the Egg Products Division may increase in the first and fourth quarters. Generally, the Crystal Farms Division has higher net sales and operating profits in the fourth quarter, coinciding with incremental consumer demand during the holiday season. Operating profits from the Potato Products Division are less seasonal, but tend to be higher in the second half of the year coinciding with the potato harvest and incremental consumer demand.

Generally, other than fluctuations in certain raw material costs, largely related to short-term supply and demand variances, inflation has not been a significant factor in our operations, since we can generally offset the impact of inflation through a combination of productivity gains and price increases over time. However, we had unusual inflationary impacts to our operations at times during the past three years, as we experienced notable inflation for key purchased items such as corn, soybean meal, cheese, natural gas, diesel fuel and packaging materials.

Liquidity and Capital Resources

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

Cash flow provided by operating activities was $142.8 million for 2009, compared to $99.1 million for 2008, reflecting higher earnings in 2009 and more effective working capital management. Cash flow provided by operating activities was $99.1 million for 2008, compared to $98.0 million for 2007, reflecting increased earnings in 2008, offset by uses for working capital needs.

On May 1, 2009, we entered into an amended and restated credit agreement (“Credit Agreement”), which consisted of a $75,000,000 revolving credit facility, a $200,000,000 term A loan and a $250,000,000 term B loan. The revolving credit facility and the term A loan mature November 1, 2012 and the term B loan matures May 1, 2014. Our Credit Agreement bears interest at floating base rates plus an applicable margin, as defined in the agreement. The effective interest rates at January 2, 2010 for term A loan and term B loan were 6.00% and 6.50%. At January 2, 2010, approximately $350,000 of capacity was used under the revolving credit facility for letters of credit. We made $71.1 million in voluntary prepayments of debt during the second half of 2009. We also have outstanding $150 million from the November 2003 issuance of 8% senior subordinated notes due 2013.

Our Credit Agreement requires us to meet a minimum interest coverage ratio and a maximum leverage ratio. The Credit Agreement also allows for the funding of the semi-annual interest payments of M-Foods Holdings, Inc. The first of such payments was made on October 1, 2009. In addition, the Credit Agreement and the indenture relating to the 8% senior subordinated notes due 2013 contain certain restrictive covenants which, among other things, limit the incurrence of additional indebtedness, investments, dividends, transactions with affiliates, asset sales, acquisitions, mergers and consolidations, prepayments of other indebtedness, liens and encumbrances and other matters customarily restricted in these agreements. Our failure to comply with these covenants could result in an event of default, which, if not cured or waived, could have a material adverse effect on our results of operations, financial position and cash flow. In general, the debt covenants limit our discretion in the operation of our businesses. We were in compliance with all of the covenants under the Credit Agreement and the indenture as of January 2, 2010.

The following is a calculation of the minimum interest coverage and maximum leverage ratios under the Credit Agreement as at January 2, 2010 and January 3, 2009, respectively. The maximum permitted leverage ratio and minimum permitted interest coverage ratio thresholds were tightened in the May 1, 2009 Credit Agreement. The minimum interest coverage covenant was tightened due to the change in calculation, as we now include the cash interest for M-Foods Holdings, Inc. The terms and related calculations are defined in the Credit Agreement. The 2008 comparative calculations and thresholds are presented under the terms of our old credit agreement.


	2009			2008
	(Unaudited, In thousands)
Calculation of Interest Coverage Ratio:
Consolidated EBITDA (1)	$	214,401		$	200,016
Adjusted Consolidated Interest Charges (2)		56,685			38,829
Interest Coverage Ratio (Ratio of EBITDA to interest charges)		3.78x			5.15x
Minimum Permitted Interest Coverage Ratio		2.25x			2.75x

Calculation of Leverage Ratio:
Funded Indebtedness (3)	$	571,502		$	610,089
Less: Cash and equivalents		(87,061	)		(78,054	)

	$	484,441		$	532,035
Consolidated EBITDA (1)		214,401			200,016
Leverage Ratio (Ratio of funded indebtedness less cash and equivalents to EBITDA)		2.26x			2.66x
Maximum Permitted Leverage Ratio		3.50x			4.25x

(1)	Consolidated EBITDA (earnings before interest expense, taxes, depreciation and amortization) is defined in the Credit Agreement as follows:


	2009			2008
	(Unaudited, In thousands)
Net earnings	$	69,464		$	46,878
Interest expense, excluding amortization of financing costs		36,937			37,277
Amortization of financing costs		6,145			3,824
Income tax expense		38,244			21,129
Depreciation and amortization		63,272			77,321
Equity sponsor management fee		2,144			2,000
Expenses related to industrial revenue bonds guaranteed by certain of our subsidiaries		978			976
Other (a)		5,637			2,762

		222,821			192,167
Plus: Unrealized losses (gains) on swap contracts		(8,420	)		7,849

Consolidated EBITDA, as defined in the Credit Agreement	$	214,401		$	200,016

(a)	Other reflects the following:


	2009		2008
	(Unaudited, In thousands)
Non-cash compensation	$	2,006	$	2,123
Letter of credit fees		172		121
Other non-cash expenses (write-off of 2003 deferred financing costs)		3,171		—
Other non-recurring charges		288		518

	$	5,637	$	2,762

(2)	Adjusted consolidated interest charges, as calculated in the Credit Agreement, was as follows:


	2009		2008
	(Unaudited, In thousands)
Gross interest expense	$	49,020	$	42,653
Minus: Amortization of financing costs		7,356		3,824

Consolidated interest charges		41,664	$	38,829

Plus: M-Foods Holdings, Inc. interest expense on 9.75% Subordinated Notes		15,021

Adjusted consolidated interest charges	$	56,685

(3)	Funded Indebtedness was as follows:


	2009		2008
	(Unaudited, In thousands)
Term loans	$	378,950	$	427,300
Subordinated notes		150,050		150,050
Insurance bonds		2,009		1,330
Guarantee obligations (see Debt Guarantees below)		17,248		18,840
Capital leases		14,197		3,743
Standby letters of credit		350		6,574
MFI Food Canada, Ltd. note payable		2,607		2,252
Northern Star Co. note payable		6,091		—

	$	571,502	$	610,089

We use EBITDA as a measurement of our financial results because we believe it is indicative of the relative strength of our operating performance, it is used to determine incentive compensation levels and it is a key measurement contained in the financial covenants of our indebtedness.

In December 2008, we entered into a $15.6 million variable-rate lease agreement to fund a portion of the equipment purchases at our new potato products facility (see Capital Spending below). The lease agreement matures on December 30, 2014. As of January 2, 2010, we had borrowed $10.9 million on this facility and the outstanding balance effective rate was 3.74%. We anticipate full use of the available lease funds in early 2010. On November 25, 2009, we entered into a variable-rate note for up to $7.5 million for additional financing for equipment for the new potato products facility. The $7.5 million note is due November 25, 2014. As of January 2, 2010, we had borrowed $6.1 million on the loan and the effective interest rate on the outstanding balance was 2.88%. We anticipate full use of the available funds in early 2010.

Our parent, M-Foods Holdings, Inc., has outstanding 9.75% senior subordinated notes due October 1, 2013. The fully accreted balance of these notes as of January 2, 2010 was $154.1 million. Beginning October 1, 2009 M-Foods Holdings, Inc. began making semi-annual interest payments on the senior subordinated notes. As the sole wholly-owned subsidiary of M-Foods Holdings, Inc., we intend to provide our parent the funds sufficient to service these notes.

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

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

Contractual Obligations

The aggregate maturities of our long-term debt, our lease commitments and our long-term purchase commitments for the years subsequent to 2009, are as follows:


	Payments Due by Period
	(In thousands)
	Total		Less Than 1 Year		1-3 Years		3-5 Years		More Than 5 Years
Contractual Obligations (3)
Long-term debt (1)	$	550,544	$	3,221	$	160,040	$	382,361	$	4,922
Capital lease obligations		15,527		2,997		7,872		4,658		—
Operating lease obligations		21,444		6,752		8,663		3,324		2,705
Purchase obligations (2)		1,526,615		233,227		409,099		306,155		578,134
Deferred compensation		20,502		—		—		20,502		—
Interest on fixed rate debt and other		48,000		12,000		24,000		12,000		—

Total	$	2,182,632	$	258,197	$	609,674	$	729,000	$	585,761

(1)	Does not include variable interest.

(2)	A substantial portion relates to egg contracts. Estimates of future open market egg prices and feed costs were used to derive these figures. Hence, most of our purchase obligations are subject to notable market price risk.

(3)

The Company does not have any current obligations related to uncertain tax positions under applicable accounting rules. Due to the uncertainty of the nature of its long-term positions, the Company is not able to reasonably estimate the timing of the long-term payments or the amount by which the liability will increase or decrease over time; therefore, the long-term portion of the tax liability of $3.2 million is excluded from the preceding table. See Note C to our consolidated financial statements.

We have entered into substantial purchase obligations to fulfill our egg and potato requirements. We maintain long-term egg procurement contracts with numerous cooperatives and egg producers throughout the Midwestern and Eastern United States and Canada, which supply approximately 53% of our annual external egg requirements. Most of these contracts vary in length from 18 to 120 months. The egg prices are primarily indexed to grain or Urner Barry market indices. One egg supplier provides more than 10% of our annual egg requirements. Based upon the best estimates available to us for grain and egg prices, we project our purchases from our top four contracted egg suppliers under existing contracts will approximate $181.2 million in 2010, $190.8 million in 2011, $177.3 million in 2012 and $162.8 million in 2013. The 2010 amount represents approximately 44% of our anticipated total egg purchases for the year. In addition, we have contracts to purchase potatoes that expire in 2010. These contracts will supply approximately 53% of the Potato Products Division’s raw potato needs in 2010. One potato supplier is expected to provide more than 10% of our 2010 potato requirements. Please see our Contractual Obligations chart above for our estimated breakdown of these obligations during the coming year, one to three year, three to five year, and more than five year periods.

Capital Spending

We invested approximately $64.1 million in capital expenditures in 2009, $39.1 million in 2008, and $38.1 million in 2007. For each of these years capital expenditures related to expanding capacity for higher value-added products, maintaining existing production facilities, and replacing tractors and trailers, among other projects. In late 2008 and in 2009, a major new project was the replacement of the existing Northern Star potato plant in Minneapolis with a new plant in Chaska, Minnesota. The new building was purchased in December 2008 and has been converted to a food processing facility that will have greater processing efficiencies and capacity than our existing facility. Upon completion of the Chaska, Minnesota plant we intend to sell the potato plant in Minneapolis. Capital spending in 2010 is expected to be funded by a combination of operating cash flows, capital lease and secured note financing. We expect these investments to improve manufacturing efficiencies, customer service and product quality.

Debt Guarantees

We have guaranteed, through our Waldbaum subsidiary, the repayment of certain industrial revenue bonds used for the expansion of the wastewater treatment facilities of three municipalities where we have food processing facilities. In May 2007, a $6.0 million bond financing was completed by one of the three municipalities, the City of Wakefield, Nebraska, at an annual interest rate of 8.22%, with such proceeds used for the construction of the wastewater treatment facility. The wastewater treatment facility became operational in early 2008. We are required to pay the principal and interest payments related to these bonds, which mature September 15, 2017. These bonds, along with the original $10.25 million guaranteed in September 2005, are included in current maturities of long-term debt and long-term debt. The remaining principal balance for all guaranteed bonds at January 2, 2010 was approximately $17.2 million.

Insurance

We maintain property, casualty, product liability and other general insurance programs which we expect will have little change in premiums. We have experienced, and expect to continue to experience, rising premiums for our portion of health and dental insurance benefits offered to our employees.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based upon the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate estimates, including those related to the allowance for doubtful accounts, goodwill and intangible assets, accrued promotion costs, accruals for insurance, accruals for environmental matters, valuation of financial instruments and the income tax provision. We base these estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies reflect the significant judgments and estimates used in the preparation of our consolidated financial statements.

Allowance for Doubtful Accounts

We estimate the uncollectibility of our accounts receivable and record an allowance for uncollectible accounts. In determining the adequacy of the allowance, we analyze the value of our customer’s financial statements, historical collection experience, aging of receivables and other economic and industry factors. It is possible that the accuracy of the estimation process could be materially impacted by different judgments as to collectibility based on the information considered and further deterioration of accounts.

Goodwill, Customer Relationships and Other Intangibles

We assess the impairment of identifiable intangibles, long-lived assets and related goodwill whenever events or changes in circumstances indicate the carrying value may not be recoverable. Factors which could trigger an impairment review include significant under-performance relative to expected historical or projected future operating results, significant changes in the use of acquired assets or our strategy, and significant negative industry or economic trends.

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 (trademarks) are tested for impairment on an annual basis during the fourth quarter, and between annual tests whenever there is an impairment indicated. Fair values are estimated based on our best assessment of market value compared with the corresponding carrying value of the reporting unit, including goodwill. Impairment losses will be recognized whenever the implied fair value is less then the carrying value of the related asset.

Accrued Promotion Costs

The amount and timing of expense recognition for customer promotion activities involve management judgment related to estimated participation, performance levels, and historical promotion data and trends. The vast majority of year-end liabilities associated with these activities are resolved within the following fiscal year and, therefore, do not require highly uncertain long-term estimates.

Customer incentive programs include customer rebates, volume discounts and allowance programs. We have contractual arrangements with our customers and utilize agreed-upon discounts to determine the accrued promotion costs related to these customers. In addition, we have contractual arrangements with end-user customers and utilize historical experience to estimate this accrual.

Accruals for Insurance

We are primarily self-insured for our medical and dental liability costs. We maintain high deductible insurance policies for our workers compensation, general liability and automobile liability costs. It is our policy to record our self-insurance liabilities based on claims filed and an estimate of claims incurred but not yet reported. Any projection of losses concerning medical, dental, workers compensation, general liability and automobile liability is subject to a considerable degree of variability. Among the causes of this variability are unpredictable external factors affecting future rates; including inflation (particularly for medical costs), litigation trends, legal interpretations, benefit level changes and claim settlement patterns.

Accruals for Environmental Matters

We review environmental matters on a quarterly basis. Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based on current law and existing technologies. Accruals are adjusted periodically as assessment and remediation efforts progress or when additional technical or legal information becomes available. Accruals for environmental liabilities are included in the balance sheet at undiscounted amounts and exclude claims for recoveries from insurance or other third parties.

Financial Instruments

Income Taxes

Income tax expense involves management judgment as to the ultimate resolution of any tax issues. Historically, our assessments of the ultimate resolution of tax issues have been reasonably accurate. The current open issues are not dissimilar from historical items.

Deferred income taxes are computed using the asset and liability method, such that deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between financial reporting amounts and the tax bases of existing assets and liabilities based on currently enacted tax laws and tax rates in effect for the periods in which the differences are expected to reverse. Income tax expense is the tax payable for the period plus the change during the period in deferred income taxes. Valuation allowances are established when necessary to reduce deferred tax assets to the amount more likely than not expected to be realized. We are included in a consolidated federal income tax return with our Parent. State income taxes are generally filed on either a combined or separate company basis.

We account for the uncertainty in income taxes in our consolidated financial statements when evaluating our tax positions. The evaluation of a tax position under applicable accounting rules is a two-step process, the first step being recognition. We determine whether it is more likely than not that a tax position will be sustained upon tax examination, including resolution of any related appeals or litigation, based on only the technical merits of the position. If a tax position does not meet the more-likely-than-not threshold, the benefit of that position is not recognized in our financial statements. The second step is measurement. The tax position is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate resolution with a taxing authority.

Recent Accounting Pronouncements

There were no accounting pronouncements issued during the year ended January 2, 2010 that are expected to have a material impact on our future financial position, operating results or disclosures. See Note A to the consolidated financial statements for discussion on recent accounting pronouncements.

Market Risk

Commodity Risk Management

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

The primary raw materials used in the production of eggs are corn and soybean meal. We purchase these materials to feed our hens, which produce approximately 26% of our annual egg requirements. Shell and liquid eggs are purchased from third-party suppliers and in the spot market for the remainder of the Egg Products Division’s needs. Eggs, corn and soybean meal are commodities that are subject to significant price fluctuations due to market conditions which, in certain circumstances, can adversely affect the results of our operations.

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

•

We seek to align our procurement and sales volumes by matching the percentage of variable pricing contracts that we have with our customers with the percentage of raw materials procured on a variable basis. This matching of our variable-priced procurement contracts with variable-priced sales contracts provides us with a natural hedge during times of grain and egg market volatility. As part of this effort, we are attempting to transition customers to variable-pricing contracts that are priced off the same index used to purchase shell and liquid eggs. These efforts have generally been successful over the past few years. To the extent that the contracts are based upon grain inputs, we try to cover a majority of the grain needed to supply that volume from either internal egg production or third-party procurement contracts, which are generally priced based upon grain indexes. The goal of this activity is to protect against unexpected increases in grain prices and provides predictability with respect to a portion of future raw materials costs, but there is no assurance that our risk management activities will provide sufficient protection from price fluctuations. Hedging can diminish the opportunity to benefit from the improved margins that would result from an unanticipated decline in grain prices.

•

We attempt to limit our exposure to fixed-price agreements due to the unprecedented volatility in grain costs the past few years. For those customers on fixed-price contracts, we try to limit them to one year in duration and typically hedge the grain costs associated with them to lock in the negotiated margin.

•

We are continuing to transition customers from lower value-added egg products to higher margin, higher value-added specialty products. These products are less sensitive to fluctuations in underlying commodity prices because the raw material component is a smaller percentage of total cost and we generally have the ability to pass through certain cost increases related to our higher value-added egg products to customers.

We analyzed the estimated exposure to market risk associated with corn and soybean meal futures contracts we had at January 2, 2010. These futures contracts had a notional value of $11.3 million for open commodity positions at January 2, 2010. Market risk of $1.1 million is estimated as the potential loss in fair value resulting from a hypothetical 10% adverse change in commodity prices of the futures contracts held at January 2, 2010.

We partially mitigate some of our natural gas requirements for producing our products by fixing the price for a portion of our natural gas usage, when appropriate. At January 2, 2010, we had no open futures contracts for natural gas. We also partially mitigate the risk of variability of our transportation-related fuel costs through the use of home heating oil futures contracts. We had futures contracts for home heating oil at January 2, 2010 to cover approximately 13% of our estimated annual diesel usage for 2010. At January 2, 2010 the notional value of the futures contracts for home heating oil was approximately $2.7 million, with a market risk of $0.3 million. Market risk is estimated as the potential loss in fair value resulting from a hypothetical 10% adverse change in price.

Additionally, there is market risk with interest rates. Our Credit Agreement debt obligations of approximately $379.0 million carry a variable rate of interest. The interest paid on these obligations floats with market changes in interest rates; a majority of the credit agreement debt is presently tied to one month LIBOR rates. However, the amended and restated credit agreement placed a floor of 2% on LIBOR contracts. A change in the interest rate on the Credit Agreement debt could impact our earnings. The effect on pretax earnings in the next twelve months resulting from a hypothetical 1% increase to the 6.0% term A loan and 6.5% term B loan interest rates in effect as of January 2, 2010 would approximate $3.8 million.

Additional information is provided in Note A to the consolidated financial statements.

ITEM 7A—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Market Risk, above.

ITEM 8—FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements and related notes and schedules required by this Item are set forth in Part IV, Item 15 herein.

ITEM 9—CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A—CONTROLS AND PROCEDURES

Conclusions Regarding the Effectiveness of Disclosure Controls and Procedures

We maintain disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e), that are designed to ensure that information required to be disclosed by the company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the company’s management, including its chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure. Our management evaluated, with the participation of the Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures as of January 2, 2010. Based on this evaluation, our principal executive and principal financial officers concluded that our disclosure controls and procedures were effective as of January 2, 2010, the end of the period covered by this annual report.

Management’s Report on Internal Control Over Financial Reporting

Michael Foods’ management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f) of the Securities Exchange Act of 1934. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation under these criteria, management concluded that our internal control over financial reporting was effective as of January 2, 2010, the end of the period covered by this annual report.

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting that occurred during our fiscal quarter ended January 2, 2010, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B—OTHER INFORMATION

We do not have any information that was required to be reported on Form 8-K during the fourth quarter that was not reported.

PART III

ITEM 10—DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

We are a wholly owned subsidiary of M-Foods Holdings, Inc., a corporation owned by Michael Foods Investors, LLC, whose members include affiliates of Thomas H. Lee Partners, L.P. and members of our senior management. Each member of the management committee of Michael Foods Investors, LLC is also a director of the Company. Charles D. Weil is not on the management committee of Michael Foods Investors, LLC.

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


Name	Age	Position
Gregg A. Ostrander (1)	57	Executive Chairman of the Board
James E. Dwyer, Jr.	51	Chief Executive Officer, President and Director
John D. Reedy	64	Vice Chairman
Mark W. Westphal	44	Chief Financial Officer and Senior Vice President
Thomas J. Jagiela	53	Senior Vice President – Operations and Supply Chain
Carolyn V. Wolski	52	Vice President, General Counsel and Secretary
Mark D. Witmer	52	Treasurer
Joshua D. Bresler (2)	32	Director
Anthony J. DiNovi (1)	47	Director
Jerome J. Jenko (2)	72	Director
Charles D. Weil (2)	65	Director
Kent R. Weldon (1)	42	Director

(1)	Member of our compensation committee.

(2)	Member of our audit committee.

Gregg A. Ostrander is our Executive Chairman of the Board, a position held since January 1, 2008. He held the office of Chief Executive Officer from 1994 through 2007 and from April 2009 through October 2009. He was President from 1994 through January 2006 and August 2006 through April 2007. In 1993, Mr. Ostrander served as our Chief Operating Officer. Mr. Ostrander has been a director of Michael Foods since 1994, serving as Chairman since 2001. Mr. Ostrander is also a director of Arctic Cat Inc., a recreational vehicle manufacturer and Carlisle Companies Inc., a construction materials firm. Mr. Ostrander was a director of Birds Eye Foods, Inc., a food company, from 2003-2009.

James E. Dwyer, Jr. is our Chief Executive Officer and President and was hired into those positions in October 2009. He was elected as a director in December 2009. Previously Mr. Dwyer held various executive positions with Ahold USA, a division of Ahold N.V., from January 2008 through October 2009. He was President of Single Step Consulting, Inc. from October 2006 through December 2007 and was President, Global Bath and Kitchen Products, for American Standard Companies from 2004 through October 2006.

John D. Reedy is our Vice Chairman, a position held since January 1, 2008. He was our Chief Financial Officer and Executive Vice President from 2000 through 2007. From 1988 to 2000, Mr. Reedy was our Chief Financial Officer and Vice President—Finance.

Mark W. Westphal is our Chief Financial Officer, a position held since January 1, 2008, and a Senior Vice President. He was Senior Vice President— Finance in 2007. Mr. Westphal has served us in various financial positions since 1995.

Thomas J. Jagiela is our Senior Vice President—Operations and Supply Chain, a position held since his hiring in March 2008. From 2005-2008 he was Executive Vice President and Chief Operating Officer of Nellson Nutraceutical, Inc. a food co-packer. Previously Mr. Jagiela held various manufacturing-related positions at Pillsbury, Inc. and General Mills, Inc.

Carolyn V. Wolski is our Vice President, General Counsel and Secretary. Ms. Wolski joined the Company as General Counsel in October 2008 and was elected Secretary and Vice President in 2009. Prior to joining us she was a shareholder in the Minneapolis law firm of Leonard, Street and Deinard, PA. She was with that law firm since 1988.

Mark D. Witmer is our Treasurer, a position held since 2003. Mr. Witmer was previously Assistant Treasurer and Secretary, and joined us as the Director of Corporate Communications in 1989.

Joshua D. Bresler has been a director of Michael Foods since December 2008. Mr. Bresler is a Principal at Thomas H. Lee Partners, L.P., where he has been employed from 2002-2004 and 2006-present. He previously worked at Goldman, Sachs & Co. in its Investment Banking Division.

Anthony J. DiNovi has been a director of Michael Foods since 2003. Mr. DiNovi is Co-President of Thomas H. Lee Partners, L.P., where he has been employed since 1988. Prior to Thomas H. Lee Partners, L.P., Mr. DiNovi held various positions in the corporate finance departments of Goldman, Sachs & Co. and Wertheim Schroder & Co., Inc. Mr. DiNovi is a director of Dunkin’ Brands, Inc., a quick service restaurant franchisor, and West Corporation, a provider of business process outsourcing solutions and voice-related services. In the last five years Mr. DiNovi has been a director of Nortek, Inc. (through December 2009), a manufacturer and distributor of building products, Endurance Specialty Insurance, Ltd., an insurance and reinsurance services company, Eye Care Centers of America, Inc., an eyewear chain, FairPoint Communications, Inc., a communications services company, Fisher Scientific International, Inc., a biotechnology company, and National Waterworks, Inc., a distributor of water and wastewater transmission products.

Jerome J. Jenko has been a director of Michael Foods since 1998. He has been a Senior Advisor with Lazard Middle Market LLC, an investment banking firm, since 1997. Mr. Jenko is a director of Ocean Spray Cranberries, Inc., a cranberry growing and processing cooperative, DecoPak, Inc., a privately-held cake decorating company, and Commodity Specialists Co., Inc., a privately-held commodity trading company.

Charles D. Weil has been a director of Michael Foods since 2004. He is President, Chief Executive Officer and a Director of the M. A. Gedney Company (“Gedney”), a consumer goods company largely focused on pickles. Previously, he was Acting President and Chief Executive Officer of Gedney from February 2003-October 2003. Prior to joining Gedney, Mr. Weil was founder and Chief Executive Officer of C.E.O. Advisors, Inc., a consulting company, from January 2001-February 2003, and was President and Chief Operating Officer of Young America Corporation, a fulfillment and customer service company, from 1993-2000.

Kent R. Weldon has been a director of Michael Foods since 2003. Mr. Weldon is a Managing Director of Thomas H. Lee Partners, L.P, where he has been employed from 1991-1993 and 1995-present. Prior to Thomas H. Lee Partners, L.P., Mr. Weldon held a position in the corporate finance department of Morgan Stanley & Co. Incorporated. Mr. Weldon is a director of C. C. Media Holdings, Inc., a global owner and operator of radio stations and broadcasting and related media businesses. Mr. Weldon was a director of Nortek, Inc., a manufacturer and distributor of building products, from 2004-2009, CMP Susquehanna Corp. and CMP Susquehanna Holdings Corp., both radio broadcasting companies, from 2006-2008, FairPoint Communications, Inc., a communications services company, from 2000-2007 and Syratech Corporation, a producer of home products from 1997-2005.

Report of the Audit Committee

The Audit Committee reviews the Company’s consolidated financial statements, financial reporting process and internal control over financial reporting on behalf of the Board of Directors.

We meet with management periodically to consider, among other things, the adequacy of the Company’s financial disclosures and internal control over financial reporting. We discuss these matters with the Company’s independent registered public accounting firm, PricewaterhouseCoopers LLP, and with appropriate Company financial personnel, including the Company’s internal auditor.

We regularly meet privately with the independent registered public accounting firm, which has unrestricted access to the Audit Committee.

We also appoint the independent registered public accounting firm, approve the scope of their audit services, approve the performance of non-audit services by the independent registered public accounting firm and review periodically their performance and independence from management.

The Board has adopted a written charter which describes the functions of the Audit Committee. Each year, we review the actions required to be taken by the Audit Committee under the charter, confirm that they have been taken, and report the same to the full Board.

Management has primary responsibility for the Company’s consolidated financial statements and the overall reporting process, including the Company’s system of internal controls.

The independent registered public accounting firm audits the annual consolidated financial statements prepared by management, expresses an opinion as to whether those consolidated financial statements fairly present the consolidated financial position, results of operations and cash flows of the Company in conformity with generally accepted accounting principles and discusses with us any issues they believe should be raised with us.

We have reviewed the Company’s audited consolidated financial statements and met with both management and PricewaterhouseCoopers LLP to discuss these financial statements. Management has represented to us that these financial statements were prepared in accordance with United States generally accepted accounting principles. We also considered the report of the independent registered public accounting firm.

We have also reviewed management’s assessment of the effectiveness of the Company’s internal control over financial reporting. Management has represented to us that the Company’s internal control over financial reporting was effective as of January 2, 2010.

We have received from and discussed with PricewaterhouseCoopers LLP the written disclosures and the letter required by the Public Company Accounting Oversight Board Rule 3526, related to the independence of PricewaterhouseCoopers LLP. We have also considered the compatibility of non-audit services with the independence of PricewaterhouseCoopers LLP. In addition, we discussed with PricewaterhouseCoopers LLP any matters required to be discussed by Statement on Auditing Standards No. 61, as amended by Statement on Auditing Standards No. 90, Communication with Audit Committees.

Based on our review and discussions described above, we recommended to the Board that the Company’s audited consolidated financial statements be included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 2, 2010, filed with the SEC.

Jerome J. Jenko, Chairperson

Charles D. Weil

Joshua D. Bresler

Audit Committee Financial Expert

The Board of Directors is satisfied that the members of our audit committee each have sufficient expertise and business and financial experience necessary to perform their duties as the Company’s audit committee effectively. As such, no one member of our audit committee has been named by our Board of Directors as an “audit committee financial expert” as that term is defined in Item 407(d)(5) of Regulation S-K.

Code of Ethics

We have a Business Conduct Policy that applies to all of our employees. We have determined that this policy complies with Item 406 of Regulation S-K. We will provide, without charge, a copy of the Business Conduct Policy to any person who so requests in writing. Written requests may be made to Michael Foods, Inc., 301 Carlson Parkway, Suite 400, Minnetonka, Minnesota 55305; Attention: Secretary. Our Internet website at www.michaelfoods.com also contains the Business Conduct Policy.

ITEM 11—EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

The goal of our executive compensation program is to ensure that our executives are compensated effectively in a manner consistent with our strategy and competitive considerations, and based on management’s performance in achieving our corporate goals and objectives. Our executive compensation program is overseen by the compensation committee of our Board of Directors, which is composed of three members, one of whom was our Executive Chairman of the Board in 2009 and was Chief Executive Officer for approximately seven months in 2009. The committee determines the compensation of our executive officers, reviews and approves our incentive, equity and other employee benefit plans and programs, and administers their application to our executive officers. Some aspects of the compensation of our Chief Executive Officer and other of our executives are determined by their employment agreements with the Company, as further discussed below. The committee generally meets twice yearly.

Compensation Philosophy and Objectives

We believe that the skill, talent, judgment and dedication of our executive officers are critical factors affecting the long-term value of our company. Therefore, our goal is to maintain an executive compensation program that will fairly compensate our executives, attract and retain qualified executives who are able to contribute to our long-term success, induce performance consistent with clearly defined corporate goals and align our executives’ long-term interests with those of our equity holders. Our current executive compensation program is mainly focused on EBITDA (earnings before interest, taxes, depreciation and amortization, as defined in our credit agreement) growth.

Our goal is to provide overall compensation (assuming that targeted levels of performance are achieved) that is at least above the median compensation of comparable companies. The elements of compensation included in any competitive analysis generally are base salaries, annual cash incentive opportunities, and long-term incentives in the form of stock options in our parent and direct equity ownership in our parent’s parent.

Each year, our management provides the compensation committee with historical and prospective breakdowns of the total compensation components for each executive officer. Our decisions regarding compensation for our executive officers are based primarily upon our assessment of each individual’s performance and potential to enhance long-term equity holder value. We rely upon judgment and not upon rigid guidelines or formulas in determining the amount and mix of compensation elements for each executive officer. Factors affecting our judgment include performance compared to goals established for the individual and the company at the beginning of the year and/or over a multi-year period, the nature and scope of the executive’s responsibilities, and their effectiveness in leading our initiatives to achieve corporate goals.

When we make executive compensation decisions, we review individual performance and corporate performance. The compensation committee measures performance against the specific goals established at the beginning of the fiscal year and determines the overall budget and targeted compensation for our executive officers. Our Chief Executive Officer, as the manager of the members of the executive team, assesses the executives’ individual contributions to our goals, as well as achievement of their individual goals, and makes a recommendation to the compensation committee with respect to any merit increase in salary and stock option grants for each member of the executive team, other than himself. Annual incentive opportunity is set forth at the start of each year, with the actual payment determined upon the relative achievement of our annual EBITDA target. Incentive payments are formula-driven using a pre-established grid (i.e., percentages over or under the target EBITDA level for the year). The committee has discretion to adjust the formula-derived incentive payments to take into account unusual factors that may have inhibited, or enhanced, achievement of the annual EBITDA target. The compensation committee evaluates, discusses and modifies or approves these recommendations and conducts a similar evaluation of the Chief Executive Officer’s contributions to our corporate goals and achievement of his or her individual goals.

Role of Executive Officers and Compensation Consultants

Our Chief Executive Officer, Chief Financial Officer and Vice President of Human Resources support the compensation committee in its work by providing information relating to our financial plans, performance assessments of our executive officers and other personnel-related data. In addition, the committee has the authority under its charter to engage the services of outside advisors, experts and others to assist it, but has not done so in recent years, other than relative to executive recruitment matters.

Principal Elements of Executive Compensation

Our executive compensation program consists of the three components discussed below. In general, the compensation committee’s determination with regard to one component does not affect its determinations with regard to the other components.

Base Salaries. The minimum annual base salaries of our Chief Executive Officer and certain of our other executive officers are established under employment agreements, as described elsewhere herein. These agreements are negotiated with the compensation committee, but give consideration to the scope of each executive’s responsibilities, taking into account competitive market compensation based on occasional market surveys and salaries paid by comparable companies for similar positions. We conduct performance reviews of our employees, including our executive officers, annually. Based on the performance assessments, and considering changes in salaries provided comparable personnel of companies with whom we compete for management talent, any changes in job duties and responsibilities and our overall financial results, we make adjustments, usually on an annual basis, in base salary rates.

Annual Incentive Compensation. Annual cash incentives for our executive officers are designed to reward performance that furthers profitable growth. In 2009, the compensation committee approved an annual EBITDA target for the year. The annual incentive awards for executive officers are determined on the basis of our relative achievement of this target. Our executive officers participate in our executive officer incentive program which is designed to motivate management to achieve, or exceed, an EBITDA level relatively consistent with our annual operating plan. We do not use any mitigating incentive compensation features (such as claw-backs, bonus banks, or multi-year performance-drive criteria). Our incentive awards are based only on annual EBITDA target achievement and are paid in cash in the following year. Incentive payments for the past fiscal year are made on, or before, March 15^th of the subsequent year. Incentive payments for 2009 were made on March 15, 2010.

The compensation committee has at times exercised discretion to increase or reduce the incentive amounts that resulted from the application of the formula in our executive officer incentive plan. While the committee made no such adjustments relative to amounts paid for 2009 performance, it has the authority to do so in the future if it determines that an adjustment would serve our interests and the goals of the executive officer incentive plan.

Long-Term Incentive Compensation. Generally, a significant stock option grant (at the M-Foods Holdings level) is made in the year when an executive officer commences employment. The Chief Executive Officer makes a recommendation relative to each individual under consideration for a stock option grant, other than for themselves. The size of each grant is generally set at a level that the compensation committee deems appropriate to create a meaningful opportunity for equity ownership based upon past grant guidelines, the individual’s position with us and the individual’s potential for future responsibility and promotion. The relative weight given to each of these factors will vary from individual to individual at the compensation committee’s discretion based upon past grant levels for comparable positions, the individual’s potential to contribute to the growth of the Company’s business, and the individual’s potential for future promotion or to otherwise take on additional management responsibilities, as well as to induce a candidate’s acceptance of a position given the competition for management talent.

When a new executive officer is hired, an option grant will typically be made at the first regularly scheduled meeting of the compensation committee after the officer commences employment or by the committee’s consent resolution. The exercise price of stock options is always equal to the price of our common stock, as determined by a set formula, at the most recent quarter’s end, as there is no public market for our equity.

Subsequent option grants may be made at varying times and in varying amounts at the discretion of the compensation committee based upon the input of the Chief Executive Officer. Historically, they have been made during our annual performance reviews in January or February. Changes in titles and responsibilities are considered when follow-on options are granted, as are other considerations taken into account in making grants when employment commences. Our policy is to have option awards vest over five years, on a pro rata basis, and for the number of shares for which options are awarded to be sufficient to provide the recipient with a meaningful incentive to remain in our employment on an on-going basis.

Executives are also given an opportunity to invest directly in our parent’s parent. This generally occurs at the time of hiring or at the time of a change-in-control. An opportunity is offered to buy units in Michael Foods Investors, LLC, with the determination of the equity opportunity based upon the executive’s responsibilities and value to us, and his or her perceived ability to enhance equity values over time. There are guidelines that have been used historically by our parent’s parent in considering the level of management co-investment, but there is discretion in determining the direct equity opportunity offered to any executive or other management team member. Generally, the individuals have agreed to fund the maximum equity amount they are offered.

Perquisites

Our executive officers participate in the same group insurance and employee benefit plans as our other employees. The Executive Chairman of the Board is provided a club membership, at our expense, to facilitate business development. The Executive Chairman of the Board, Vice Chairman, Chief Executive Officer and Chief Financial Officer are offered reimbursement for an annual executive physical, the usage of which varies by officer and by year, and have their income tax preparation expenses paid by us. Our use of perquisites as an element of compensation is limited and is largely based on our historical practices and policies. We do not view perquisites as a significant element of our comprehensive compensation structure, but do believe that they can be used in conjunction with our general compensation program to attract, motivate and retain desirable managers in a competitive environment.

Compensation Committee Report

The compensation committee has discussed and reviewed the Compensation Discussion and Analysis with management. Based upon this review and discussion, the compensation committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this report.

The compensation committee,

Anthony J. DiNovi, Chairman

Gregg A. Ostrander

Kent R. Weldon

Compensation Table

The following table sets forth information concerning the compensation of our Chief Executive Officer, Chief Financial Officer and each of our three most highly compensated executive officers, referred to as the named executive officers, during 2009.

Summary Compensation Table


Name and Principal Position	Year	Salary		(4) Option Awards		(2) Non-equity Incentive Plan		(3) Change in Pension Value and Non-qualified Deferred Compensation		(1) All Other		Total
James E. Dwyer, Jr. (5) President and Chief Executive Officer	2009	$	144,231	$	—	$	144,231	$	—	$	250,000	$	538,462
	2008		—		—		—		—		—		—
	2007		—		—		—		—		—		—

Mark W. Westphal Senior Vice President and Chief Financial Officer	2009		311,538		—		364,780		4,125		10,721		691,164
	2008		297,692		162,081		297,692		3,665		10,280		771,410
	2007		200,000		—		105,880		3,248		8,791		317,919

Gregg A. Ostrander Executive Chairman of the Board	2009		833,654		—		798,891		253,681		42,642		1,928,868
	2008		751,731		—		751,731		225,398		41,550		1,770,410
	2007		825,000		—		582,368		199,778		30,972		1,638,118

John D. Reedy Vice Chairman	2009		311,539		—		293,376		90,792		16,816		712,523
	2008		304,616		—		304,616		80,670		16,328		706,230
	2007		500,000		—		352,950		71,500		10,873		935,323

Thomas J. Jagiela Senior Vice President—Operations and Supply Chain	2009		290,442		—		205,139		—		11,773		507,354
	2008		222,115		108,900		166,586		—		75,311		572,912
	2007		—		—		—		—		—		—
David S. Johnson (6) President and Chief Executive Officer	2009		360,703		—		—		—		—		360,703
	2008		772,116		—		772,116		—		5,520		1,549,752
	2007		475,000		—		335,303		—		125,489		935,792

(1)

Reflects the value of contributions made under the Retirement Savings Plan (a defined contribution plan) and the value of life insurance premiums paid by us. Mr. Dwyer received a sign-on bonus of $250,000 upon hiring. Mr. Ostrander’s other compensation also includes perquisites, such as club membership, executive physicals, cellular telephone service and tax preparation fees. The tax preparation fees for Mr. Ostrander were $11,801 during 2009. Mr. Jagiela received a sign-on bonus of $75,000 upon hiring. Mr. Johnson received a Relocation, Commuting and Living Expenses payment of $125,000 in 2007 pursuant to his employment agreement.

(2)	Payments for 2009, 2008 and 2007 performance were made in the following March under our incentive plans.

(3)

The amounts in this column reflect amounts recorded by us for accounting purposes in connection with the M-Foods Holdings, Inc. 2003 Deferred Compensation Plan. The amounts in this column are not currently receivable or accessible, nor do they necessarily reflect actual amounts that may become receivable. While an 8% return is recorded on funds contributed to the Deferred Compensation Plan for accounting purposes, the proceeds, if any, that the individuals listed in this table actually receive in the future in connections with the Deferred Compensation Plan will not necessarily track the recorded return and instead will depend n the amount of distributions to the holders of Class A Units of Michael Foods Investors, LLC. The amounts reflected in this column represent the difference between the 8% recorded return and 5.88%, which percentage is equal to 120% of the 4.9% federal long-term interest rate as of the adoption of the Deferred Compensation Plan.

(4)	Aggregate grant date fair value of options granted. Please see the Outstanding Equity Awards table for detail regarding these stock option grants. Please also see Note I for assumptions used.

(5)	James E. Dwyer, Jr. was hired in late October 2009.

(6)	David S. Johnson was our President and Chief Executive Officer until April 10, 2009.

Outstanding Equity Awards at January 2, 2010


	Option Awards (1)					Stock Awards
Name	Number of Securities Underlying Unexercised Options Exercisable	Number of Securities Underlying Unexercised Options Unexercisable	Option Exercise Price		Option Expiration Date	Number of Shares or Units of Stock That Have Not Vested	Market Value of Shares or Units of Stock That Have Not Vested
James E. Dwyer, Jr.	—	—	$	—		—	—
Mark W. Westphal	268	—		626.99	11/20/2013	—	—
Mark W. Westphal	120	80		1,115.60	1/3/2016	—	—
Mark W. Westphal	180	270		1,184.19	1/1/2018	—	—
Gregg A. Ostrander	8,569	—		626.99	11/20/2013	—	—
John D. Reedy	3,039	—		626.99	11/20/2013	—	—
Thomas J. Jagiela	60	240		1,272.10	4/1/2018	—	—
David S. Johnson	—	—		—		—	—

(1)	Stock options are granted by our parent, M-Foods Holdings, Inc., but are accounted for by us. All stock options vest ratably over a five year period from date of grant.

In 2009, no named executive officer exercised any stock options and there was no restricted stock vesting. There were no stock options granted in 2009.

Employment Agreements

General Provisions. The employment agreement with James E. Dwyer, Jr. was effective as of October 26, 2009 and provides for automatic one year renewals beginning with the second anniversary of the agreement’s effective date. The Dwyer employment agreement provides that Mr. Dwyer’s employment (i) shall terminate automatically upon his death or disability, (ii) may terminate at the option of the Company with or without cause and (iii) may terminate at the option of Mr. Dwyer. The Dwyer employment agreement provides that Mr. Dwyer will receive an annual base salary of at least $750,000 and he will participate in certain bonus arrangements, long-term incentive plans and employee benefit plans of Michael Foods. For 2009, Mr. Dwyer was eligible to receive up to 100% of his salary as an incentive bonus under the Michael Foods, Inc. Executive Officers Incentive Plan, prorated for his time of service. Mr. Dwyer also received a $250,000 sign-on bonus when he joined us. Mr. Dwyer is subject to noncompetition covenant, nonsolicitation and no-hire agreements.

The employment agreement with Mark W. Westphal provides for automatic one year renewals beginning with the first anniversary of the agreement’s effective date. The Westphal employment agreement provides that Mr. Westphal’s employment (i) shall terminate automatically upon his death or disability, (ii) may terminate at the option of the Company with or without cause and (iii) may terminate at the option of Mr. Westphal. The Westphal employment agreement provides that Mr. Westphal will receive an annual base salary of at least $300,000 and he will participate in certain bonus arrangements, long-term incentive plans and employee benefit plans of Michael Foods. For 2009, Mr. Westphal was eligible to receive up to 100% of his salary as an incentive bonus under the Michael Foods, Inc. Executive Officers Incentive Plan. In addition, for 2009, Mr. Westphal was eligible to receive up to 25% of his salary as incremental incentive. Mr. Westphal is subject to a noncompetition covenant and a nonsolicitation provision.

The employment agreement with Gregg A. Ostrander provides for automatic one year renewals. The Ostrander employment agreement provides that Mr. Ostrander’s employment (i) shall terminate automatically upon his death or disability, (ii) may terminate at the option of the Company with or without cause and (iii) may terminate at the option of Mr. Ostrander. The Ostrander employment agreement provides that Mr. Ostrander will receive an annual base salary of at least $715,000 and that he will participate in certain bonus arrangements, long-term incentive plans and employee benefit plans of Michael Foods on a basis no less favorable than available to any other executive officer. The Ostrander employment agreement provides that Mr. Ostrander’s annual base salary is subject to periodic review, and once increased, the increased base salary becomes a minimum. For 2009, Mr. Ostrander was eligible to receive up to 100% of his salary as an incentive bonus under the Michael Foods, Inc. Executive Officers Incentive Plan. Mr. Ostrander is subject to a noncompetition covenant and a nonsolicitation provision.

The employment agreement with John D. Reedy provides for automatic one year renewals. The Reedy employment agreement provides that Mr. Reedy’s employment (i) shall terminate automatically upon his death or disability, (ii) may terminate at the option of the Company with or without cause and (iii) may terminate at the option of Mr. Reedy. The Reedy employment agreement provides that Mr. Reedy will receive an annual base salary of at least $400,000 and that he will participate in certain bonus arrangements, long-term incentive plans and employee benefit plans of Michael Foods. For 2009, Mr. Reedy was eligible to receive up to 100% of his salary as an incentive bonus under the Michael Foods, Inc. Executive Officers Incentive Plan. In 2008, Mr. Reedy moved to less-than-full-time status and his base salary was prorated accordingly. He remained at the same status during 2009. Mr. Reedy is subject to a noncompetition covenant and a nonsolicitation provision.

The employment agreement with Thomas J. Jagiela expires on the second anniversary of the effective date of April 9, 2008. The Jagiela employment agreement provides that Mr. Jagiela’s employment (i) shall terminate automatically upon his death or disability, (ii) may terminate at the option of the Company with or without cause and (iii) may terminate at the option of Mr. Jagiela. The Jagiela employment agreement provides that Mr. Jagiela will receive an annual base salary of at least $275,000 and that he will participate in certain bonus arrangements, long-term incentive plans and employee benefit plans of Michael Foods. For 2009, Mr. Jagiela was eligible to receive up to 75% of his salary as an incentive bonus under the Michael Foods, Inc. Senior Officer and Key Employee Incentive Plan. Mr. Jagiela is subject to a noncompetition covenant and a nonsolicitation provision.

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

If Mr. Dwyer’s employment is terminated for cause or he terminates without good reason, Mr. Dwyer will receive his annual base salary through the date of termination and other eligible unpaid welfare benefits. If Mr. Dwyer terminates his employment for good reason, which in all of our executive employment agreements includes, among other things, any diminution in position, authority, duties and responsibilities or any requirement to relocate or travel extensively, or if Michael Foods terminates his employment other than for cause, death or disability, Mr. Dwyer will receive a lump sum in an amount equal to any annual base salary through the date of termination not yet paid, plus the target bonus for the year prorated for the months of employment in that year, plus any eligible unpaid welfare benefits, plus two times the total of Mr. Dwyer’s current annual base salary and target bonus. In addition, Mr. Dwyer will receive for 18 months following the termination date or until such earlier time as Mr. Dwyer becomes eligible to receive comparable benefits, certain medical, dental, and life insurance benefits for himself and his family.

The Westphal employment agreement provides that if Mr. Westphal’s employment is terminated by his death or disability, Mr. Westphal, or his estate or beneficiaries, will receive a payment equal to any annual base salary through the date of termination not yet paid, plus the target bonus for the year prorated for the months of employment in that year, plus any eligible unpaid other benefits, plus one time the total of Mr. Westphal’s current annual base salary and target bonus. In addition, Mr. Westphal will receive for one year following the termination date or until such earlier time as Mr. Westphal becomes eligible to receive comparable benefits, certain medical, dental, and life insurance benefits for himself and his family.

If Mr. Westphal’s employment is terminated for cause or he terminates without good reason, Mr. Westphal will receive his annual base salary through the date of termination and other benefits not yet paid under any plan, program, policy, contract or agreement with or practice of Michael Foods. If Mr. Westphal terminates his employment for good reason or if Michael Foods terminates his employment other than for cause, death or disability, Mr. Westphal will receive a lump sum in an amount equal to any annual base salary through the date of termination not yet paid, plus the target bonus for the year prorated for the months of employment in that year, plus any eligible unpaid other benefits, plus one time the total of Mr. Westphal’s current annual base salary and target bonus. In addition, Mr. Westphal will receive for one year following the termination date or until such earlier time as Mr. Westphal becomes eligible to receive comparable benefits, certain medical, dental, and life insurance benefits for himself and his family.

Mr. Westphal may also be eligible to receive an additional payment of any excise tax imposed by Section 4999 of the Internal Revenue Code in connection with payments made in connection with any future transactions, as well as an additional payment to cover any applicable taxes such that he will retain an amount equal to the excise taxes, after all income taxes, interest and penalties associated with all such payments. With respect to any such tax-related payments in connection with any future transactions, the Company shall not be obligated to pay any amount in excess, in the aggregate, of $16,300,000.

The Ostrander employment agreement provides that if Mr. Ostrander’s employment is terminated by his death or disability, Mr. Ostrander, or his estate or beneficiaries, will receive a payment equal to any annual base salary through the date of termination not yet paid, plus the target bonus for the year prorated for the months of employment in that year, plus any eligible unpaid other benefits, plus three times the total of Mr. Ostrander’s current annual base salary and target bonus. In addition, Mr. Ostrander will receive for three years following the termination date or until such earlier time as Mr. Ostrander becomes eligible to receive comparable benefits, certain medical, dental, and life insurance benefits for himself and his family.

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

Mr. Ostrander may also be eligible to receive an additional payment of any excise tax imposed by Section 4999 of the Internal Revenue Code in connection with payments made in connection with any future transactions, as well as an additional payment to cover any applicable taxes such that he will retain an amount equal to the excise taxes, after all income taxes, interest and penalties associated with all such payments. With respect to any such tax-related payments in connection with any future transactions, the Company shall not be obligated to pay any amount in excess, in the aggregate, of $16,300,000.

The Reedy employment agreement provides that if Mr. Reedy’s employment is terminated by his death or disability, Mr. Reedy, or his estate or beneficiaries, will receive a payment equal to any annual base salary through the date of termination not yet paid, plus the target bonus for the year prorated for the months of employment in that year, plus any eligible unpaid other benefits, plus two times the total of Mr. Reedy’s current annual base salary and target bonus. In addition, Mr. Reedy will receive for two years following the termination date or until such earlier time as Mr. Reedy becomes eligible to receive comparable benefits, certain medical, dental, and life insurance benefits for himself and his family.

If Mr. Reedy’s employment is terminated for cause or he terminates without good reason, Mr. Reedy will receive his annual base salary through the date of termination and other benefits not yet paid under any plan, program, policy, contract or agreement with or practice of Michael Foods. If Mr. Reedy terminates his employment for good reason or if Michael Foods terminates his employment other than for cause, death or disability, Mr. Reedy will receive a lump sum in an amount equal to any annual base salary through the date of termination not yet paid, plus the target bonus for the year prorated for the months of employment in that year, plus any eligible unpaid other benefits, plus two times the total of Mr. Reedy’s current annual base salary and target bonus. In addition, Mr. Reedy will receive for two years following the termination date or until such earlier time as Mr. Reedy becomes eligible to receive comparable benefits, certain medical, dental, and life insurance benefits for himself and his family.

Mr. Reedy may, under certain circumstances, also be eligible to receive an additional payment of any excise tax imposed by Section 4999 of the Internal Revenue Code in connection with payments made in connection with any future transactions, as well as an additional payment to cover any applicable taxes such that he will retain an amount equal to the excise taxes, after all income taxes, interest and penalties associated with all such payments. With respect to any such tax-related payments in connection with any future transactions, the Company shall not be obligated to pay any amount in excess, in the aggregate, of $16,300,000.

The Jagiela employment agreement provides that if Mr. Jagiela’s employment is terminated for cause or he terminates his employment with us without good reason, Mr. Jagiela will receive his annual base salary through the date of termination and other benefits not yet paid under any plan, program, policy, contract or agreement with or practice of Michael Foods. If Mr. Jagiela terminates his employment for good reason or if Michael Foods terminates his employment other than for cause, death or disability, Mr. Jagiela will receive a lump sum in an amount equal to his annual base salary plus any eligible unpaid other benefits. If Mr. Jagiela’s employment is terminated on his part for good reason, other than due to death or disability, or by us other than for cause, death or disability, within 12 months of a change in control of Michael Foods or its parent, Mr. Jagiela will receive a sum equal to his annual base salary plus any eligible unpaid other benefits. In addition, Mr. Jagiela will receive for one year following the termination date or until such earlier time as Mr. Jagiela becomes eligible to receive comparable benefits, certain medical, dental, and life insurance benefits for himself and his family.

Mr. Johnson’s employment terminated effective April 10, 2009 and he received his annual base salary through the date of termination per the termination provisions of his employment agreement.

Ms. Wolski has a letter agreement that provides for, among other employment-related matters, her receiving one year’s annual salary, an incentive payment equal to 50% of her annual salary, as appropriately prorated, and a lump sum equal to 12 months of health benefits should she leave our employment under certain circumstances following a change-in-control, if such change-in-control occurs within 36 months of her hiring date. Mr. Witmer is not subject to any severance agreement. Our executive employment agreements were amended in 2008 to comply with Section 409A of the Internal Revenue Code.

Compensation Committee Interlocks and Insider Participation

The members of the compensation committee are Gregg A. Ostrander, Anthony J. DiNovi and Kent R. Weldon. The compensation arrangements for our Chief Executive Officer and certain of our executive officers were established pursuant to the terms of the respective employment agreements between us and each executive officer. The terms of the employment agreements were established pursuant to arms-length negotiations between representatives of Thomas H. Lee Partners, L.P. and each executive officer. Mr. Ostrander was our Chief Executive Officer for approximately seven months in 2009 and was our Executive Chairman in 2009. No compensation committee interlock relationships existed in 2009.

Deferred Compensation Plan

Certain members of management are participants in the M-Foods Holdings, Inc. (“Holdings”) 2003 Deferred Compensation Plan. Each participant contributed certain proceeds to the Deferred Compensation Plan. The Deferred Compensation Plan is a nonqualified, unfunded obligation of Holdings. Each participant’s deferred compensation account under the plan will track certain distributions to be made to the Class A Units of Michael Foods Investors, LLC, though the plan will not hold actual Class A Units of Michael Foods Investors, LLC. Participants in the plan will be entitled to a distribution from their deferred compensation account upon the earlier of (i) a change of control of Holdings (ii) the tenth anniversary of the date of the plan and (iii) upon the exercise of any put or call of the participants Class B Units of Michael Foods Investors, LLC. All payments made under the plan shall be made in cash by Holdings.

Incentive Plans

Each of the named executive officers is a participant in the Michael Foods, Inc. Executive Officers Incentive Plan or the Michael Foods, Inc. Senior Management, Officers and Key Employee Incentive Plan, which provide for cash bonuses of up to 100% of base salary, subject to our achieving certain financial performance objectives in any given fiscal year. The target goals set forth in these incentive plans change from year to year and are determined by our compensation committee.

Director Compensation

All members of our Board of Directors are reimbursed for their usual and customary expenses incurred in connection with attending all Board and other committee meetings. Members of the Board of Directors who are also our employees, or employees of Thomas H. Lee Partners, L.P., do not receive remuneration for serving as members of the board. Our non-employee outside directors who are not employees of Thomas H. Lee Partners, L.P. (“the non-employee/non-THL outside directors”) receive a quarterly retainer of $8,000 and are paid $3,000 for each Board meeting attended, or $500 for a meeting held telephonically. The audit committee chair, who is a non-employee/non-THL outside director, receives a quarterly retainer of $2,500.

For all committees except the audit committee, non-employee/non-THL outside directors are paid $1,000 for each regular committee meeting they attend, except for committee chairs who are paid $1,500 for each committee meeting they attend and chair. Non-employee/non-THL outside directors are paid $1,500 for each regular audit committee meeting they attend, and the audit committee chair is paid $2,000 for each audit committee meeting they attend and chair.

For all committees except the audit committee, non-employee/non-THL outside directors are paid $500 for each telephonic committee meeting in which they participate, except for committee chairs who are paid $1,000 for each telephonic committee meeting in which they participate and chair. Non-employee/non-THL outside directors are paid $1,000 for each telephonic audit committee meeting in which they participate, except for the audit committee chair who is paid $1,500 for each telephonic audit committee meeting in which they participate and chair.

Directors’ fees and travel and reimbursed meeting expenses incurred by us in 2009 totaled $204,410. Fees earned or paid in cash by us to non-employee outside directors in 2009 were as follows:


Name	Fees Earned or Paid in Cash		Other Compensation		Total
Mr. Bresler	$	—	$	—	$	—
Mr. DiNovi		—		—		—
Mr. Jenko		57,500		—		57,500
Mr. Weil		42,000		—		42,000
Mr. Weldon		—		—		—

M-Foods Holdings, Inc. Amended and Restated 2003 Stock Option Plan

In order to provide additional financial incentives to our management, certain members of our management and other key employees may be granted stock options to, collectively, purchase up to 6.36% of the common stock of M-Foods Holdings, Inc., our parent company. The exercise price of options granted reflects the fair market value of the underlying shares, as determined by the compensation committee in its best judgment.

As amended in 2004, the plan provides for a total of 31,707 shares being reserved (including the 25,000 initially reserved). The plan provides that the exercise price is payable (1) in cash, (2) after an initial public offering of Michael Foods’ common stock, through simultaneous sales of underlying shares by brokers or (3) through the exchange of M-Foods Holdings, Inc. securities held by the optionee for longer than six months.

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

ITEM 12—SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

M-Foods Holdings, Inc. is a corporation owned, in part, by Michael Foods Investors, LLC, whose members include affiliates of Thomas H. Lee Partners, L.P. and certain members of our management.

The following table sets forth certain information, as of March 25, 2010, regarding beneficial ownership of Michael Foods Investors, LLC by: (i) each person or entity owning more than five percent of any class of Michael Foods Investors, LLC’s outstanding securities and (ii) each member of Michael Foods Investors, LLC’s board of directors (which, with the exception of Charles Weil and Joshua Bresler, is identical to the board of directors of Michael Foods), each of our currently serving named executive officers and all members of the board of directors and executive officers as a group. Michael Foods Investors, LLC’s outstanding securities consist of approximately 2,966,818.01 Class A Units, 263,681.99 Class B Units, 330,000 Class C Units, no Class D Units, 1,000 Class E Units, 1,500 Class F Units, 2,000 Class G Units and 500 Class H Units. The Class A Units, Class B Units, Class C Units, Class E Units, Class F Units, Class G Units and Class H Units generally have identical rights and preferences, except that the Class C, E, F, G and H Units are non-voting and have different rights with respect to certain distributions as described, relative to the Class C Units, in our Form 10-K for 2003. To our knowledge, each of these securityholders has sole voting and investment power as to the units shown unless otherwise noted. Beneficial ownership of the securities listed in the table has been determined in accordance with the applicable rules and regulations promulgated under the Securities Exchange Act of 1934.


	Securities Beneficially Owned
Name and Address	Title of Class	Number of Units	Percent (1)

Principal Security holders:
Thomas H. Lee Partners L.P. and affiliates (2)	A Units	2,900,000	89.8	%

Board of Directors and Named Executive Officers:
Gregg A. Ostrander (3)(4)	A Units	22,806	2.9	%
	B Units	70,917
	C Units	84,600	25.6	%
John D. Reedy (3)(5)	A Units	7,708	0.8	%
	B Units	17,292
	C Units	25,000	7.6	%
James E. Dwyer (3)(6)	G Units	2,000	100.0	%
Mark Westphal (3)(7)	A Units	84	0.1	%
	B Units	1,916
	C Units	2,000	0.6	%
	F Units	1,000	66.7	%
Thomas J. Jagiela (3)(8)	E Units	1,000	100.0	%
David S. Johnson (3)(9)	—	—	—
Anthony J. DiNovi (2)	—	—	—
Kent R. Weldon (2)	—	—	—
Joshua D. Bresler (2)	—	—	—
Charles D. Weil (10)	—	—	—
Jerome J. Jenko (11)	A Units	500	0.0	%
All directors and executive officers (not including prior officers) as a group (12 persons)
	A Units	31,112	4.0	%
	B Units	95,111
	C Units	116,600	35.3	%
	E Units	1,000	100.0	%
	F Units	1,500	100.0	%
	G Units	2,000	100.0	%

(1)	The percent for the Class A Units is a combined percent of ownership for Class A Units and Class B Units.

(2)

Includes interests owned by each of Thomas H. Lee Equity Fund V, L.P., Thomas H. Lee Parallel Fund V, L.P., Thomas H. Lee Equity (Cayman) Fund V, L.P., Thomas H. Lee Investors Limited Partnership, 1997 Thomas H. Lee Nominee Trust, Great-West Investors LP. Thomas H. Lee Equity Fund V, L.P. and Thomas H. Lee Parallel Fund V, L.P. are Delaware limited partnerships, whose general partner is THL Equity Advisors V, LLC, a Delaware limited liability company. Thomas H. Lee Equity (Cayman) Fund V, L.P. is an exempted limited partnership formed under the laws of the Cayman Islands, whose general partner is THL Equity Advisors V, LLC, a Delaware limited liability company registered in the Cayman Islands as a foreign company. Thomas H. Lee Advisors, LLC, a Delaware limited liability company, is the general partner of Thomas H. Lee Partners, L.P., a Delaware limited partnership, which is the sole member of THL Equity Advisors V, LLC. Thomas H. Lee Investors Limited Partnership (f/k/a THL-CCI Limited Partnership) is a Massachusetts limited partnership, whose general partner is THL Investment Management Corp., a Massachusetts corporation. The 1997 Thomas H. Lee Nominee Trust is a trust with U.S. Bank, N.A. serving as Trustee. Thomas H. Lee has voting and investment control over common shares owned of record by the 1997 Thomas H. Lee Nominee Trust. Each of Anthony J. DiNovi, Kent R. Weldon and Joshua D. Bresler is a managing director or vice president of Thomas H. Lee Advisors, LLC. As managing directors of Thomas H. Lee Advisors, LLC, each of Mr. DiNovi and Mr. Weldon has shared voting and investment power over, and therefore, may be deemed to beneficially own member units of Michael Foods Investors, LLC held of record by Thomas H. Lee Equity Fund V, L.P., Thomas H. Lee Parallel Fund V, L.P. and Thomas H. Lee Equity (Cayman) Fund V, L.P. Each of these individuals disclaims beneficial ownership of these units except to the extent of their pecuniary interest therein. The address of Thomas H. Lee Equity Fund V, L.P., Thomas H. Lee Parallel Fund V, L.P., Thomas H. Lee Equity (Cayman) Fund V, L.P., Thomas H. Lee Investors Limited Partnership, the 1997 Thomas H. Lee Nominee Trust, Anthony J. DiNovi, Kent R. Weldon and Joshua D. Bresler is 100 Federal Street, 35th Floor, Boston, MA 02110. Great-West Investors LP is a co-investment entity of Thomas H. Lee Partners and disclaims beneficial ownership of any securities other than the securities held directly by it. The address for Great-West Investors LP is c/o Great-West Life and Annuity Company, 8515 E. Orchard Road, 3T2, Greenwood Village, CO 80111.

(3)	The address for Messrs. Ostrander, Reedy, Dwyer, Westphal, Jagiela and Johnson is c/o Michael Foods, Inc., 301 Carlson Parkway, Suite 400, Minnetonka, MN 55305.

(4)	In 2004, Mr. Ostrander placed 47,277 Class B units and 56,400 Class C units into irrevocable trusts for two adult children and one minor child. Mr. Ostrander disclaims beneficial ownership of these units.

(5)	In 2003, Mr. Reedy gifted 15,000 Class B units and 15,000 Class C units to his two adult children. In 2004, Mr. Reedy gifted 10,000 Class B units and 10,000 Class C units to his two adult children. Mr. Reedy disclaims beneficial ownership of these units.

(6)	In October 2009, Mr. Dwyer was hired as our President and Chief Executive Officer. He concurrently purchased Class G units which vest one-fifth each year over the subsequent five years.

(7)	In October 2009, Mr. Westphal purchased Class F units which vest one-fifth each year over the subsequent five years.

(8)	In April 2008, Mr. Jagiela was hired as our Senior Vice President - Operations and Supply Chain. He concurrently purchased Class E units which vest one-third each year over the subsequent three years.

(9)	Mr. Johnson’s employment terminated April 10, 2009. The Class D Units held by him were repurchased by Michael Foods Investors, LLC in August 2009.

(10)	The address for Mr. Weil is c/o M.A. Gedney Company, 2100 Stoughton Ave., Chaska, MN 55318.

(11)	The address for Mr. Jenko is c/o Lazard Middle Market LLC, First Bank Place, Suite 4600, 601 Second Avenue South, Minneapolis, MN 55402.

Securities Authorized for Issuance Under Equity Compensation Plans

The following table sets forth information as of January 2, 2010.


Plan Category	Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights	Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights		Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (2)
	(a)	(b)		(c)

Equity compensation plans approved by securityholders (1)	28,871	$	726.09	357

Equity compensation plans not approved by securityholders	—		—	—


Total	28,871	$	726.09	357

(1)	Stock options are granted by our parent, M-Foods Holdings, Inc.

(2)	Excludes securities reflected in column (a)

ITEM 13—CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

Director Independence Statement

We are not a listed issuer, but have evaluated the independence of our Board of Directors and committee members using the independence standards of the New York Stock Exchange. Our Board has determined that Jerome J. Jenko and Charles D. Weil are independent directors within the meaning of the rules of the New York Stock Exchange. Messrs. Jenko and Weil are members of our audit committee. In addition, Mr. Bresler is a member of our audit committee, but as a result of his position with Thomas H. Lee Partners, L.P., Mr. Bresler has not been determined by our Board of Directors to be independent within the meaning of the applicable rules. Messrs. DiNovi and Weldon are non-management members of our compensation committee, but as a result of their positions with Thomas H. Lee Partners, L P., Messrs. DiNovi and Weldon have not been determined by our Board of Directors to be independent within the meaning of the applicable rules.

Certain Agreements between Management Investors and our Equity Sponsor

Securityholders Agreement

Pursuant to the 2003 securityholders agreement, units of Michael Foods Investors, LLC (or common stock following change in corporate form) beneficially owned by our executives and any other employees of Michael Foods Investors and its subsidiaries, which we collectively refer to as the management investors, are subject to certain restrictions on transfer, other than certain exempt transfers as defined in the securityholders agreement, as well as the other provisions described below. When reference is made to “units” of Michael Foods Investors in the discussion that follows, that reference is deemed to include common stock of Michael Foods Investors following a change in corporate form, whether in preparation for an initial public offering or otherwise.

The securityholders agreement provides that Thomas H. Lee Partners, L.P., the management investors and all other parties to the agreement will vote all of their units to elect and continue in office management committees or boards of directors of Michael Foods Investors and each of its subsidiaries, other than subsidiaries of the Company, consisting of up to five members or directors composed of:

•

one person designated by Thomas H. Lee Equity Fund V, L.P.;

•

one person designated by Thomas H. Lee Parallel Fund V, L.P.;

•

one person designated by Thomas H. Lee Cayman Fund V, L.P.;

•

the chief executive officer of Michael Foods Investors, LLC; and

•

one person designated by the chief executive officer of Michael Foods Investors, LLC.

The securityholders agreement also provides:

•

the management investors with the right to participate proportionally in transfers of Michael Foods Investors units beneficially owned by Thomas H. Lee Partners, L.P., its partners or their transferees, except in connection with transfers (i) in a public sale, (ii) among the partners of Thomas H. Lee Partners, L.P. and the partners, securityholders and employees of such partners, (iii) incidental to the conversion of securities or any recapitalization or reorganization, (iv) to employees, directors and/or consultants of Michael Foods Investors and its subsidiaries, (v) that are exempt individual transfers and (vi) pursuant to a pledge of securities to an unaffiliated financial institution;

•

Thomas H. Lee Partners, L.P. with the right to notify management investors that it shall cause Michael Foods Investors to effect a sale and the management investors shall consent to and raise no objection with respect to Michael Foods Investors units owned by the management investors in a sale of Michael Foods Investors; and

•

Thomas H. Lee Partners, L.P. with registration rights to require Michael Foods Investors to register units held by them under the Securities Act.

If Michael Foods Investors issues or sells any new units to Thomas H. Lee Partners, L.P., subject to certain exceptions, each management investor shall have the right to subscribe for a sufficient number of new Michael Foods Investors units to maintain its respective ownership percentage in Michael Foods Investors.

Management Unit Subscription Agreements

Under the management unit subscription agreements, management contributed to Michael Foods Investors shares of common stock for Class A Units, Class B Units and Class C Units of Michael Foods Investors based on a $100 per Class A Unit price and a $2.00 per Class B and Class C Unit price. The executives hold approximately 10% of the outstanding Class A and Class B units combined, and 100% of the outstanding Class C units. The Class E units for Mr. Jagiela vest one-third each year on the anniversary date of his hiring, with the first one-third vested on April 9, 2009. The Class F units for Mr. Westphal and Ms. Wolski vest one-fifth each year on the anniversary date of their investment, with the first one-fifth vesting on October 23, 2010. The Class G units for Mr. Dwyer vest one-fifth each year on the anniversary date of his hiring, with the first one-fifth vesting on October 23, 2010.

Upon the death, disability or retirement of the executive prior to the earlier of a public offering or sale of Michael Foods Investors, Michael Foods Investors may be required to purchase all of an executive’s units. However, with respect to Mr. Reedy, if Mr. Reedy’s employment is terminated due to his retirement, Mr. Reedy may require Michael Foods Investors to purchase his units after he turns age 65. Michael Foods Investors has the right to purchase all or a portion of an executive’s units if an executive’s employment is terminated or that executive is deemed to be engaging in certain competitive activities. However, with respect to Mr. Reedy, if Mr. Reedy’s employment is terminated due to retirement, Michael Foods Investors will have the right to purchase his units only after Mr. Reedy turns 65. However, if Michael Foods Investors elects or is required to purchase any units pursuant to the call and put options described in the preceding sentences, and that payment would result in a violation of law applicable to Michael Foods Investors or a default under certain of its financing arrangements, Michael Foods Investors may make the portion of the cash payment so affected by the delivery of preferred units of Michael Foods Investors with a liquidation preference equal to the amount of the cash payment affected.

In addition, each management stock purchase and unit subscription agreement contains customary representations, warranties and covenants made by the respective executive or party thereto.

Management Agreement

Pursuant to the management agreement entered into in connection with the transactions, THL Managers V, LLC, an affiliate of Thomas H. Lee Partners, L.P., renders to Michael Foods and each of its subsidiaries, certain advisory and consulting services. In consideration of those services, we pay to THL Managers V, LLC semi-annually an aggregate per annum management fee equal to the greater of:

•

$1,500,000; or

•

An amount equal to 1.0% of our consolidated earnings before interest, taxes, depreciation and amortization for that fiscal year, but before deduction of any such fee.

We also indemnify THL Managers V, LLC and its affiliates from and against all losses, claims, damages and liabilities arising out of, or related to, the performance by THL Managers V, LLC of the services pursuant to the management agreement.

Policies and Procedures for Reviewing Related Party Transactions

We have not adopted any written policies or procedures governing the review, approval or ratification of related party transactions. However, our Board of Directors reviews, approves or ratifies, when necessary, all transactions with related parties. We did not enter into any new related party transactions during 2009.

ITEM 14—PRINCIPAL ACCOUNTANT FEES AND SERVICES

Audit Fees

PricewaterhouseCoopers LLP (“PricewaterhouseCoopers”) was our principal accountant for the years ended January 2, 2010 and January 3, 2009. Total fees paid to PricewaterhouseCoopers for audit services rendered during 2009 and 2008 were $384,667 and $385,000.

Audit-Related Fees

Total fees paid to PricewaterhouseCoopers for audit-related services rendered during 2009 and 2008 were $108,000 and $7,200, consisting primarily of Sarbanes-Oxley 404 readiness services.

Tax Fees

Total fees paid to PricewaterhouseCoopers for tax services rendered during 2009 and 2008 were $137,025 and $115,500 related primarily to tax planning, compliance and consultation.

All Other Fees

There were no fees paid to PricewaterhouseCoopers under this category during 2009 or 2008.

Audit Committee Pre-Approval Policy

Under policies and procedures adopted by the audit committee of our Board of Directors, our principal accountant may not be engaged to provide non-audit services that are prohibited by law or regulation to be provided by it, nor may our principal accountant be engaged to provide any other non-audit service unless the audit committee or its Chairman pre-approve the engagement of our accountant to provide both audit and permissible non-audit services. If the Chairman pre-approves any engagement or fees, he is to make a report to the full audit committee at its next meeting. All services provided by our principal accountant in 2009 were pre-approved by the audit committee or its’ Chairman.

PART IV

ITEM 15—EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) The following consolidated financial statements of the Company, and the related Report of Independent Registered Public Accounting Firm, are included in this report:

1. Financial Statements

MICHAEL FOODS, INC.

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of January 2, 2010 and January 3, 2009

Consolidated Statements of Earnings for the fiscal years ended January 2, 2010, January 3, 2009 and December 29, 2007

Consolidated Statements of Shareholder’s Equity and Comprehensive Income for the fiscal years ended January 2, 2010, January 3, 2009 and December 29, 2007

Consolidated Statements of Cash Flows for the fiscal years ended January 2, 2010, January 3, 2009 and December 29, 2007

Notes to Consolidated Financial Statements

2. Financial Statement Schedules

The following financial statement schedule is included in this report and should be read in conjunction with the financial statements and Report of Independent Registered Public Accounting Firm referred to above:

Michael Foods, Inc. and Subsidiaries—Valuation and Qualifying Accounts

All other schedules are omitted, as the required information is not applicable or the information is presented in the financial statements or related notes.

3. Exhibits

Reference is made to Item 15 (b) for exhibits filed with this form. Exhibits 10.3, 10.4, 10.45, 10.51, 10.52, 10.54, 10.55, 10.56 and 10.58 are management contracts. Exhibits 10.13, 10.14, 10.18, 10.28, 10.29, 10.30, 10.31 and 10.50 are compensatory plans.

(b) Exhibits and Exhibit Index


Ex. No.		Description

2.1		Agreement and Plan of Merger, dated October 10, 2003, by and among M-Foods Investors, LLC, THL Food Products Holdings Co., THL Food Products Co., M-Food Holdings, Inc. and certain shareholders of M-Foods Holdings, Inc. (1)

2.2		Letter Agreement, Amending Merger Agreement dated October 17, 2003, by and among M-Foods Investors, LLC, THL Food Products Holdings Co., THL Food Products Co. and M-Foods Holdings, Inc. (5)

2.3		Letter Agreement, Amending Merger Agreement dated October 24, 2003, by and among M-Foods Investors, LLC, THL Food Products Holdings Co., THL Food Products Co. and M-Foods Holdings, Inc. (5)

2.4		Letter Agreement, Amending Merger Agreement dated November 17, 2003, by and among M-Foods Investors, LLC, THL Food Products Holdings Co., THL Food Products Co. and M-Foods Holdings, Inc. (5)

3.1		Amended and Restated Certificate of Incorporation of Michael Foods, Inc. (f/k/a M-Foods Holdings, Inc.) (2)

3.2		Certificate of Merger of THL Food Products Co. with and into M-Foods Holdings, Inc., dated November 20, 2003 (2)

3.3		Agreement and Plan of Merger, dated November 20, 2003, by and among M-Foods Holdings, Inc. and Michael Foods, Inc.(2)

3.4		Certificate of Merger of Michael Foods, Inc. with and into M-Foods Holdings, Inc., dated November 20, 2003 (2)

3.5		Bylaws of Michael Foods, Inc. (f/k/a M-Foods Holdings, Inc.) (2)

4.1		Indenture, dated March 27, 2001, between Michael Foods Acquisition Corp. and BNY Midwest Trust Company, as trustee (3)

4.2		Supplemental Indenture, dated as of April 10, 2001, by and among M-Foods Holdings, Inc., and BNY Midwest Trust Company, as trustee (3)

4.3		Fourth Supplemental Indenture, dated as of October 31, 2003, by and among Michael Foods, Inc. and BNY Midwest Trust Company (2)



4.4		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 (3)

4.5		Indenture, dated November 20, 2003, among Michael Foods, Inc., the Guarantors party thereto and Wells Fargo Bank Minnesota, National Association, as trustee (2)

4.6		Registration Rights Agreement, dated November 20, 2003, among Michael Foods, Inc., the Subsidiary Guarantors party thereto and Banc of America Securities LLC, Deutsche Bank Securities Inc. and UBS Securities LLC (2)

10.3		Employment Agreement, dated November 20, 2003, by and among Michael Foods, Inc. and Gregg A. Ostrander (5)

10.4		Employment Agreement, dated November 20, 2003, by and among Michael Foods, Inc. and John D. Reedy (5)

10.8		Senior Management Unit Subscription Agreement, dated November 20, 2003, between Michael Foods Investors, LLC, (f/k/a THL-MF Investors, LLC) and Gregg A. Ostrander (5)

10.9		Senior Management Unit Subscription Agreement, dated November 20, 2003, between Michael Foods Investors, LLC, (f/k/a THL-MF Investors, LLC) and John D. Reedy (5)

10.13		Stock Option Agreement, dated November 20, 2003, between Gregg A. Ostrander and M-Foods Holdings, Inc. (f/k/a THL Food Products Holding Co.) (5)

10.14		Stock Option Agreement, dated November 20, 2003, between John D. Reedy and M-Foods Holdings, Inc. (f/k/a THL Food Products Holding Co.) (5)

10.18		M-Foods Holdings, Inc. Amended and Restated 2003 Stock Option Plan (6)

10.19		Management Agreement, dated November 20, 2003, by and among Michael Foods, Inc. and THL Managers V, LLC (5)

10.20		Securityholders Agreement, dated November 20, 2003, between Michael Foods Investors, LLC, (f/k/a THL-MF Investors, LLC) and the other parties thereto (5)

10.22		Subscription and Share Purchase Agreement, dated November 20, 2003, between M-Foods Holdings, Inc. (formerly known as THL Food Products Holding Co.) and Michael Foods Investors, LLC, (f/k/a THL-MF Investors, LLC) (5)

10.23		Lease, dated as of February 26, 1997, by and between Michael Foods of Delaware, Inc., as successor to Michael Foods, Inc., a Delaware corporation and A&A Urban Renewal, relating to the lease of a facility located at 100 Trumbull St., Elizabeth, NJ (4)

10.24		Lease, dated as of February 26, 1997, by and between Michael Foods of Delaware, Inc., as successor to Michael Foods, Inc., a Delaware corporation, and Papetti Holding Company, et al., relating to the lease of a facility located at 877-879 E. North Ave., Elizabeth, NJ (4)

10.25		Lease, dated as of February 26, 1997, by and between Michael Foods of Delaware, Inc., as successor to Michael Foods, Inc., a Delaware corporation, and Papetti Holding Company, relating to the lease of a facility located at 847-855 E. North Ave., Elizabeth, NJ (4)

10.26		Lease, dated as of February 26, 1997, by and between Michael Foods of Delaware, Inc. as successor to Michael Foods, Inc., a Delaware corporation, and Jersey Pride Urban Renewal, relating to the lease of a facility located at One Papetti Plaza, Elizabeth, NJ (4)

10.28		Form of Stock Option Agreement pursuant to the M-Foods Holdings, Inc. (f/k/a THL Food Products Holding Co.) 2003 Stock Option Plan (5)

10.29		M-Foods Holdings, Inc. (f/k/a THL Food Products Holding Co.) Deferred Compensation Plan, dated November 20, 2003 (5)

10.30		Michael Foods, Inc. Executive Officers Incentive Plan (5)

10.31		Michael Foods, Inc. Senior Management, Officers and Key Employees Incentive Plan (5)

10.36		First Amendment, dated as of September 30, 2006, to Lease, dated as of February 26, 1997, by and between Michael Foods of Delaware, Inc., as successor to Michael Foods, Inc., a Delaware corporation and A&A Urban Renewal, relating to the lease of a facility located at 100 Trumbull St., Elizabeth, NJ (7)

10.37		First Amendment, dated as of September 30, 2006, to Lease, dated as of February 26, 1997, by and between Michael Foods of Delaware, Inc., as successor to Michael Foods, Inc., a Delaware corporation, and Papetti Holding Company, et al., relating to the lease of a facility located at 877-879 E. North Ave., Elizabeth, NJ (7)



10.38		First Amendment, dated as of September 30, 2006, to Lease, dated as of February 26, 1997, by and between Michael Foods of Delaware, Inc., as successor to Michael Foods, Inc., a Delaware corporation, and Papetti Holding Company, relating to the lease of a facility located at 847-855 E. North Ave., Elizabeth, NJ (7)

10.39		First Amendment, dated as of September 30, 2006, to Lease, dated as of February 26, 1997, by and between Michael Foods of Delaware, Inc. as successor to Michael Foods, Inc., a Delaware corporation, and Jersey Pride Urban Renewal, relating to the lease of a facility located at One Papetti Plaza, Elizabeth, NJ (7)

10.42		First Amendment to Michael Foods Investors, LLC Securityholders Agreement (8)

10.45		Employment Agreement dated as of April 9, 2008, by and among Michael Foods, Inc., Thomas J. Jagiela and Michael Foods Investors, LLC (10)

10.46		Senior Management Unit Subscription Agreement dated as of April 9, 2008, by and among Michael Foods Investors, LLC and Thomas J. Jagiela (10)

10.47		Thomas J. Jagiela Indemnity Agreement (10)

10.49		Second Amendment to Michael Foods Investors, LLC Securityholders Agreement (10)

10.50		Amendment No. 1 to M-Foods Holdings, Inc. Amended and Restated 2003 Stock Option Plan (10)

10.51		Employment Agreement, dated as of the 1st day of July, 2008, by and among Michael Foods, Inc. and Mark W. Westphal (11)

10.52		Addendum to Ostrander Employment Agreement dated December 9, 2008 (11)

10.54		Addendum to Reedy Employment Agreement dated December 9, 2008 (11)

10.55		Addendum to Westphal Employment Agreement dated December 9, 2008 (11)

10.56		Addendum to Jagiela Employment Agreement dated December 9, 2008 (11)

10.57		Amended and Restated Credit Agreement dated as of May 1, 2009 among Michael Foods, Inc., as the Borrower, M-Foods Holdings, Inc., Bank of America, N.A. as Administrative Agent, Swing Line Lender and L/C Issuer. The other Lenders Party Hereto, Banc of America Securities LLC as Lead Arranger and Book Manager, Cooperative Centrale Raiffeisen – Boerenleenbank B.A., “Rabobank International”, New York Branch, as Syndication Agent and Bank of Tokyo-Mitsubishi UFJ Trust Company and Northwest Farm Credit Services, PCA, as Co-Documentation Agents (12)

10.58		Employment Agreement dated October 23, 2009 by and among Michael Foods, Inc., James E. Dwyer, Jr. and Michael Foods Investors, LLC (13)

10.59		Senior Management Class G Unit Subscription Agreement dated October 23, 2009 between Michael Foods Investors, LLC and James E. Dwyer, Jr. (13)

10.60		Senior Management Class F Unit Subscription Agreement dated October 23, 2009 between Michael Foods Investors, LLC and Mark W. Westphal (13)

10.61		Senior Management Class F Unit Subscription Agreement dated October 23, 2009 between Michael Foods Investors, LLC and Carolyn V. Wolski (13)

10.62		Indemnity Agreement dated October 23, 2009 between Michael Foods, Inc. and James E. Dwyer, Jr. (13)

10.64		Third Amendment to Michael Foods Investors, LLC Securityholders Agreement (13)

10.65		Third Amended and Restated Limited Liability Company Agreement

10.66		Fourth Amendment to Michael Foods Investors, LLC Securityholders Agreement

12.1		Computation of ratio of earnings to fixed charges

21.1		Subsidiaries of Michael Foods, Inc.

31.1		Certification of Chief Executive Officer

31.2		Certification of Chief Financial Officer

(1)	Incorporated by reference from Michael Foods Inc /MN current report on Form 8-K filed with the Commission on October 16, 2003.

(2)	Incorporated by reference from the Company’s Form S-4 Registration Statement (Registration No. 333-112714) filed with the Commission on February 11, 2004.

(3)	Incorporated by reference from Amendment No. 1 to Michael Foods Inc /MN Form S-4 Registration Statement (Registration No. 333-63722) filed with the Commission on July 18, 2001.

(4)	Incorporated by reference from Michael Foods Inc /MN current report on Form 8-K filed with the Commission on November 22, 2000.

(5)	Incorporated by reference from the Company’s report on Form 10-K filed with the Commission on March 30, 2004.

(6)	Incorporated by reference from the Company’s report on Form 10-K filed with the Commission on March 23, 2006.

(7)	Incorporated by reference from the Company’s report on Form 10-K filed with the Commission on March 29, 2007.

(8)	Incorporated by reference from the Company’s report on Form 10-Q filed with the Commission on May 14, 2007.

(9)	Incorporated by reference from the Company’s report on Form 10-K filed with the Commission on March 24, 2008.

(10)	Incorporated by reference from the Company’s report on Form 10-Q filed with the Commission on May 12, 2008.

(11)	Incorporated by reference from the Company’s report on Form 10-K filed with the Commission on March 24, 2009.

(12)	Incorporated by reference from the Company’s report on Form 8-K filed with the Commission on May 5, 2009.

(13)	Incorporated by reference from the Company’s report on Form 10-Q filed with the Commission on November 13, 2009.

SCHEDULE II

MICHAEL FOODS, INC. AND SUBSIDIARIES

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

VALUATION AND QUALIFYING ACCOUNTS

(In thousands)


Column A	Column B		Column C		Column D			Column E
Description	Balance at Beginning of Period		Additions		Deductions			Balance at End of Period
Allowance for Doubtful Accounts
2007	$	4,150	$	—	$	230		$	3,920
2008		3,920		308		186			4,042
2009		4,042		—		1,832	(a)		2,210

(a)	Represents a reclassification of certain preference claims to current liabilities.

SIGNATURES

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


MICHAEL FOODS, INC.

Date: March 25, 2010	By:	/S/ JAMES E. DWYER, JR.
		James E. Dwyer, Jr. (Chief Executive Officer, President and Director)

Date: March 25, 2010	By:	/S/ MARK W. WESTPHAL
		Mark W. Westphal (Chief Financial Officer, Senior Vice President, and Principal Accounting Officer)

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


/S/ JOSHUA D. BRESLER				March 25, 2010
Joshua D. Bresler (Director)

/S/ ANTHONY J. DINOVI				March 25, 2010
Anthony J. DiNovi (Director)

/S/ JEROME J. JENKO				March 25, 2010
Jerome J. Jenko (Director)

/S/ CHARLES D. WEIL				March 25, 2010
Charles D. Weil (Director)

/S/ KENT R. WELDON				March 25, 2010
Kent R. Weldon (Director)

/S/ GREGG A. OSTRANDER				March 25, 2010
Gregg A. Ostrander (Executive Chairman)

MICHAEL FOODS, INC.

(A Wholly Owned Subsidiary of M-Foods Holdings, Inc.)

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholder

of Michael Foods, Inc.:

In our opinion, the consolidated financial statements listed in the index appearing under Item 15 (a)(1) present fairly, in all material respects, the financial position of Michael Foods, Inc. and its subsidiaries, a wholly owned subsidiary of M-Foods Holdings, Inc., at January 2, 2010 and January 3, 2009, and the results of their operations and their cash flows for each of the three years in the period ended January 2, 2010 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15 (a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

Minneapolis, MN

March 25, 2010

MICHAEL FOODS, INC.

(A Wholly Owned Subsidiary of M-Foods Holdings, Inc.)

CONSOLIDATED BALANCE SHEETS

For the Years Ended January 2, 2010 and January 3, 2009

(In thousands, Except Share and Per Share Data)


	2009		2008
ASSETS
Current Assets
Cash and equivalents	$	87,061	$	78,054
Accounts receivable, less allowances		124,520		124,518
Inventories		125,976		127,153
Prepaid expenses and other		8,139		18,248

Total Current Assets		345,696		347,973

Property, Plant And Equipment
Land		7,279		7,279
Buildings and improvements		159,111		146,923
Machinery and equipment		401,059		355,406

		567,449		509,608
Less accumulated depreciation		317,784		278,058

		249,665		231,550

Other Assets
Goodwill		522,916		522,916
Intangible assets, net		171,076		186,318
Other assets		17,513		10,101

		711,505		719,335

	$	1,306,866	$	1,298,858


LIABILITIES AND SHAREHOLDER’S EQUITY
Current Liabilities
Current maturities of long-term debt	$	5,667	$	4,306
Accounts payable		71,793		90,507
Accrued liabilities
Compensation		24,112		24,265
Customer programs		37,846		39,556
Other		32,317		32,211

Total Current Liabilities		171,735		190,845
Long-term debt, less current maturities		547,370		593,078
Deferred income taxes		85,699		88,554
Other long-term liabilities		23,700		22,393
Commitments and contingencies		—		—
Shareholder’s Equity
Common stock, $0.01 par value, 3,000 shares authorized, issued and outstanding in 2009 and 2008		—		—
Additional paid-in capital		276,843		271,261
Retained earnings		197,224		135,271
Accumulated other comprehensive income (loss)		4,295		(2,544	)

		478,362		403,988

	$	1,306,866	$	1,298,858

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

MICHAEL FOODS, INC.

(A Wholly Owned Subsidiary of M-Foods Holdings, Inc.)

CONSOLIDATED STATEMENTS OF EARNINGS

For the Years Ended January 2, 2010, January 3, 2009 and December 29, 2007

(In thousands)


	2009		2008		2007
Net sales	$	1,542,779	$	1,804,373	$	1,467,762
Cost of sales		1,241,613		1,528,420		1,223,416

Gross profit		301,166		275,953		244,346
Selling, general and administrative expenses		145,883		165,938		147,375
Plant closing expenses		—		—		1,525

Operating profit		155,283		110,015		95,446
Interest expense, net		44,338		42,008		52,490
Loss on early extinguishment of debt		3,237		—		—

Earnings before income taxes		107,708		68,007		42,956
Income tax expense		38,244		21,129		15,391

Net earnings	$	69,464	$	46,878	$	27,565

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

MICHAEL FOODS, INC.

(A Wholly Owned Subsidiary of M-Foods Holdings, Inc.)

CONSOLIDATED STATEMENTS OF SHAREHOLDER’S EQUITY

AND COMPREHENSIVE INCOME

For the Years Ended January 2, 2010, January 3, 2009 and December 29, 2007

(In thousands)


	Shares Issued	Amount		Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Comprehensive Income			Total Shareholder’s Equity
Balance at December 30, 2006	3	$	—	$	260,935	$	61,466		$	2,393					$	324,794
Capital invested by parent	—		—		4,806		—			—						4,806
Non-cash stock option compensation	—		—		78		—			—						78
Adoption of FASB Interpretation No. 48	—		—		—		(638	)		—						(638	)
Net earnings	—		—		—		27,565			—		$	27,565
Foreign currency translation adjustment	—		—		—		—			3,124			3,124
Futures gain	—		—		—		—			360			360

Comprehensive income												$	31,049			31,049

Balance at December 29, 2007	3		—		265,819		88,393			5,877						360,089
Capital invested by parent	—		—		4,750		—			—						4,750
Non-cash stock option compensation	—		—		692		—			—						692
Net earnings	—		—		—		46,878			—		$	46,878
Foreign currency translation adjustment	—		—		—		—			(3,616	)		(3,616	)
Futures loss	—		—		—		—			(4,805	)		(4,805	)

Comprehensive income												$	38,457			38,457

Balance at January 3, 2009	3		—		271,261		135,271			(2,544	)					403,988
Capital invested by (dividend paid to) parent	—		—		5,095		(7,511	)		—						(2,416	)
Non-cash stock option compensation	—		—		487		—			—						487
Net earnings	—		—		—		69,464			—		$	69,464
Foreign currency translation adjustment	—		—		—		—			1,954			1,954
Futures gain	—		—		—		—			4,885			4,885

Comprehensive income												$	76,303			76,303

Balance at January 2, 2010	3	$	—	$	276,843	$	197,224		$	4,295					$	478,362

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

MICHAEL FOODS, INC.

(A Wholly Owned Subsidiary of M-Foods Holdings, Inc.)

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended January 2, 2010, January 3, 2009 and December 29, 2007

(In thousands)


	2009			2008			2007
Cash flow from operating activities:
Net earnings	$	69,464		$	46,878		$	27,565
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		47,841			61,890			59,712
Amortization of intangibles		15,431			15,431			15,331
Amortization of deferred financing costs		3,774			3,824			4,435
Write-off of deferred financing costs		3,171			—			—
Amortization of original issue discount on long-term debt		2,371			—			—
Write-off of assets related to plant closing		—			—			1,293
Deferred income taxes		(364	)		(16,046	)		(15,578	)
Preferred return on deferred compensation		1,519			1,431			1,300
Non-cash stock option compensation		487			692			78
Changes in operating assets and liabilities:
Accounts receivable		785			8,024			(26,551	)
Inventories		2,035			(13,368	)		(9,833	)
Prepaid expenses and other		4,495			(4,562	)		548
Accounts payable		(19,260	)		(4,122	)		20,597
Accrued liabilities		11,098			(983	)		19,065

Net cash provided by operating activities		142,847			99,089			97,962
Cash flows from investing activities:
Capital expenditures		(64,133	)		(39,062	)		(38,120	)
Business acquisition		—			(8,652	)		—
Investment in other assets		(5,543	)		—			(102	)

Net cash used in investing activities		(69,676	)		(47,714	)		(38,222	)
Cash flows from financing activities:
Payments on revolving line of credit		—			(10,700	)		(18,000	)
Proceeds from revolving line of credit		—			10,700			18,000
Payments on long-term debt		(500,629	)		(2,070	)		(51,777	)
Proceeds from long-term debt		467,017			—			—
Original issue discount on long-term debt		(14,075	)		—			—
Payments on stock option exercises/share repurchases		(222	)		(517	)		(93	)
Additional capital invested by (dividend paid to) parent		(7,611	)		125			500
Deferred financing costs		(9,095	)		(463	)		(162	)

Net cash used in financing activities		(64,615	)		(2,925	)		(51,532	)
Effect of exchange rate changes on cash		451			(473	)		293

Net increase in cash and equivalents		9,007			47,977			8,501
Cash and equivalents at beginning of period		78,054			30,077			21,576

Cash and equivalents at end of period	$	87,061		$	78,054		$	30,077

Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	37,530		$	37,845		$	45,383
Income taxes		33,964			34,620			22,618

Non-cash industrial revenue bond guarantees	$	—		$	—		$	6,000
Non-cash capital investment by parent		5,195			4,625			4,306
Reclassification of non-current other assets to property, plant and equipment		—			16,250			—

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

NOTE A—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company

The Company is a diversified producer and distributor of food products in three areas—egg products, cheese and other dairy case products, and potato products.

Michael Foods, Inc. is a wholly-owned subsidiary of M-Foods Holdings, Inc. (“Holdings” or “Parent”). M-Foods Holdings, Inc. is a wholly-owned subsidiary of Michael Foods Investors, LLC, whose members include affiliates of Thomas H. Lee Partners L.P. and certain members of our past and current management.

Principles of Consolidation and Fiscal Year

The consolidated financial statements include the accounts of Michael Foods, Inc. and all wholly and majority owned subsidiaries in which it has control. All significant intercompany accounts and transactions have been eliminated. The Company’s investments in non-controlled entities in which it has the ability to exercise significant influence over operating and financial policies are accounted for by the equity method. The Company utilizes a fifty-two, fifty-three week fiscal year ending on the Saturday nearest to December 31. The periods presented are as follows:

Fiscal year 2009 contained a fifty-two week period and ended January 2, 2010.

Fiscal year 2008 contained a fifty-three week period and ended January 3, 2009.

Fiscal year 2007 contained a fifty-two week period and ended December 29, 2007.

Use of Estimates

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

Cash and Equivalents

We consider all highly liquid temporary investments with original maturities of three months or less to be cash equivalents.

Accounts Receivable

We grant credit to our customers in the normal course of business, but generally do not require collateral or any other security to support amounts due. Management performs on-going credit evaluations of customers. We maintain an allowance for potential credit losses based on historical write-off experience which, when realized, have been within management’s expectations. The allowance was $2,210,000 and $4,042,000 at January 2, 2010 and January 3, 2009.

Inventories

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

Inventories consisted of the following as of the years ended, (In thousands):


	2009		2008
Raw materials and supplies	$	20,928	$	19,312
Work in process and finished goods		75,479		77,604
Flocks		29,569		30,237

	$	125,976	$	127,153

Financial Instruments and Fair Value Measurements

We are exposed to market risks from changes in commodity prices, which may adversely affect our operating results and financial position. When appropriate, we seek to minimize our risks from commodity price fluctuations through the use of derivative financial instruments, such as commodity purchase contracts which are classified as derivatives along with other instruments relating primarily to corn, soybean meal, cheese and energy related needs. We estimate fair values based on exchange quoted prices, adjusted as appropriate for differences in local markets. These differences are generally valued using inputs from broker or dealer quotations, or market transactions in either the listed or over-the-counter commodity markets. In such cases, these derivative contracts are classified within Level 2 of the fair value hierarchy. Changes in the fair values of these contracts are recognized in the consolidated financial statements as a component of cost of sales or other comprehensive income (loss). At January 2, 2010, our hedging-related financial assets, measured on a recurring basis, were carried at a fair value of $739,000 and are included in prepaid expenses and other current assets.

We have two financial debt instruments. For both instruments, we utilize debt securities market trading prices to compute the fair value of our financial debt instruments owed to our lenders. The first debt instrument is our Credit Agreement facilities that include two term loans, a term A loan and a term B loan. The fair value of the term A loan was $201.0 million compared to issuance value of $200.0 million at period end. The fair value of the term B loan was $251.3 million compared to its issuance value of $250.0 million. The second debt instrument is our senior subordinated notes. The fair value of our senior notes was $152.6 million compared to the issuance value of $150.0 million. See Note B for additional information.

Accounting for Hedging Activities

Certain of our operating segments enter into derivative instruments, such as corn and soybean meal futures and cheese commitments, which we believe provide an economic hedge on future transactions and are designated as cash flow hedges. As the commodities being hedged are either grain ingredients fed to our flocks or raw material production inputs, the changes in the market value of such contracts have historically been, and are expected to continue to be, highly effective at offsetting changes in price movements of these items.

We actively monitor exposure to commodity price risks and use derivative commodity instruments to manage the impact of certain of these risks. We use derivatives, primarily futures contracts, only for the purpose of managing risks associated with underlying exposures. Our futures contracts for grains and raw materials are cash flow hedges of firm purchase commitments and anticipated production requirements, as they reduce our exposure to changes in the cash price of the respective items and generally extend for less than one year. We expect that within the next twelve months we will reclassify, as earnings or losses, substantially all of the amount recorded in accumulated other comprehensive income (loss) related to futures at period end.

In addition, we use derivative instruments to mitigate some of the risk associated with our energy related needs. We do not treat those futures contracts as hedging instruments and, therefore, record the gains or losses related to them as a component of earnings in the period of change.

We do not trade or use instruments with the objective of earning financial gains on the commodity price, nor do we use instruments where there are not underlying exposures. All derivatives are recognized at their fair value. For derivative instruments designated and qualifying as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income or (loss) (“AOCI” or “AOCL”) in the equity section of our balance sheet and a corresponding amount is recorded in prepaid and other current assets or other current liabilities, as appropriate. We offset certain derivative asset and liability amounts where a legal right of offset exists. The amounts deferred are subsequently recognized in cost of sales when the associated products are sold. The cost or benefit of contracts closed prior to the execution of the underlying purchase is deferred until the anticipated purchase occurs. As a result of the volatility of the markets, deferred gains and losses in AOCI or AOCL may fluctuate until the related contract is closed. Gains and losses on the derivative representing hedge ineffectiveness are recognized in current earnings. We do not exclude any items from our assessment of ineffectiveness. During the fiscal year ended January 2, 2010, we did not discontinue any cash flow hedges, therefore no reclassification of gains or losses into earnings were made during the period.

On January 2, 2010, we had the following outstanding commodity-forward contracts that were entered into to hedge forecasted purchases of grain:


Commodity		Quantity
Corn (bushels)		1,370,000
Soybean Meal (tons)		20,400

The following table represents our derivative assets and (liabilities) at January 2, 2010 (In thousands):


		Fair Value
	Balance Sheet Location	Asset		Liability
Derivatives designated as hedging instruments:

Commodity contracts – Grain	Prepaid expenses and other	$	682	$	(28	)


Derivatives not designated as hedging instruments:

Commodity contracts – Energy	Prepaid expenses and other	$	293	$	—

The following tables represent the effect of derivative instruments on our Consolidated Statement of Earnings for the period ended January 2, 2010 (In thousands, net of tax impact):

Gain (Loss)
Recognized in
AOCI on
Derivative

Location of
Gain (Loss)
Reclassified
from AOCI
into Earnings

Gain (Loss)
Reclassified
from AOCI
into Earnings

Location of Gain
(Loss)
Recognized in
Earnings on
Derivative

Gain (Loss)
Recognized in
Earnings on
Derivative

(Effective Portion)

(Ineffective Portion)

Derivatives in Cash Flow Hedging Relationships:

Commodity contracts – Grain

469

Cost of sales

(4,416

)

Cost of sales

520

Property, Plant and Equipment

The Company’s property consists mainly of plants and equipment used in manufacturing activities. These assets are recorded at cost, which includes interest on significant projects. Depreciation is provided in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives, principally on the straight-line basis. Estimated service lives range from 10-30 years for buildings and improvements and 3-15 years for machinery and equipment. Leasehold improvements are depreciated over the life of the lease including any extensions, the estimated service lives range from 5-15 years. Maintenance and repairs are charged to expense in the year incurred and renewals and betterments are capitalized. The costs and accumulated depreciation of assets sold or disposed of are removed from the accounts and the resulting gain or loss is reflected in earnings. Plant and equipment are reviewed for impairment on an annual basis and when conditions indicate an impairment or future impairment, the assets are either written down or the useful life is adjusted to the remaining period of usefulness, as was done on the Northern Star equipment that is not intended to be transferred to the new facility.

We capitalized interest of $468,000 in 2009 and $93,000 in 2007 relating to the construction and installation of property, plant and equipment.

Goodwill and Intangible Assets

Each segment’s share of goodwill as of the years ended, (In thousands):


	2009								2008
	Egg Products		Potato Products		Crystal Farms		Total		Egg Products		Potato Products		Crystal Farms		Total
Balance as of beginning of year
Goodwill	$	430,992	$	59,856	$	32,068	$	522,916	$	426,340	$	59,856	$	32,068	$	518,264
Accumulated impairment losses		—		—		—		—		—		—		—		—

		430,992		59,856		32,068		522,916		426,340		59,856		32,068		518,264

Goodwill acquired during the year		—		—		—		—		4,652		—		—		4,652


Balance as of end of year
Goodwill		430,992		59,856		32,068		522,916		430,992		59,856		32,068		522,916
Accumulated impairment losses		—		—		—		—		—		—		—		—

	$	430,992	$	59,856	$	32,068	$	522,916	$	430,992	$	59,856	$	32,068	$	522,916

The increase in goodwill for the Egg Products Division is the result of our acquisition of certain assets of Mr. B’s of Abbotsford, Inc. and related entities on January 11, 2008. The purchase price of $8,652,000 was financed through available cash and was accounted for during the period ended March 29, 2008 as a business combination. The acquired net assets, which consisted primarily of accounts receivable and property, plant and equipment, were recorded at fair value as of the date of the acquisition.

We recognize an acquired intangible asset 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 asset other than goodwill is amortized over its estimated useful life unless that life is determined to be indefinite. Straight-line amortization reflects an appropriate allocation of the cost of intangible assets to earnings in proportion to the amount of economic benefit obtained by the Company in each reporting period. Impairment losses are recognized if the carrying amount of an intangible asset subject to amortization is not recoverable from expected future cash flows, and its carrying amount exceeds its fair value.

Our intangible assets, other than goodwill, as of the years ended, (In thousands):


	2009			2008
Amortized intangible assets, principally customer relationships	$	230,215		$	230,215
Accumulated amortization		(93,453	)		(78,022	)

		136,762			152,193

Indefinite lived intangible assets, trademarks		34,314			34,125

	$	171,076		$	186,318

The amortization expense was $15,431,000, $15,431,000 and $15,331,000 in 2009, 2008, and 2007. The estimated amortization expense for years 2010 through 2014 is as follows (In thousands):


2010	$	15,431
2011		15,331
2012		15,331
2013		15,331
2014		15,331

The above amortization expense forecast is an estimate. Actual amounts may change from such estimated amounts due to additional intangible asset acquisitions, potential impairment, accelerated amortization, or other events.

Deferred Financing Costs

Deferred financing costs are included in other assets and are being amortized using the effective interest rate method over the lives of the respective debt agreements. Our deferred financing costs are as follows for the years ended (In thousands):


	2009			2008
Deferred financing costs	$	37,984		$	32,060
Accumulated amortization		(26,305	)		(22,531	)

	$	11,679		$	9,529

In connection with the May 1, 2009 amended and restated credit agreement financing, deferred financing costs of $9,083,000 were capitalized. These costs are included in other assets and are being amortized using the effective interest rate method over the lives of the respective debt agreements. In conjunction with the extinguishment of the 2003 term loan B portion of our prior credit facility, we incurred costs of $66,000 and wrote-off $3,171,000 of non-cash deferred financing costs during 2009.

Restricted Cash

In October 2009, we and our principal insurance carrier entered into a pledge and security and escrow agreements for the guarantee of deductible and/or loss limit reimbursement on workers compensation, automobile and general liability claims. Previously we secured this guarantee through a letter of credit with our insurance carrier as the beneficiary. In October 2009, we funded $5,350,000 to an escrow collateral money market account at Bank of New York Mellon. The funds in this account are restricted cash and the carrying value is included in other long-term assets on our balance sheet.

Foreign Joint Ventures and Currency Translation

Our Egg Products Division previously invested in a foreign joint venture in Canada. During the fourth quarter of 2009, we purchased the remaining non-controlling interest. Its financial statements were included in our consolidated financial statements for all periods presented, as we previously owned a 67% controlling interest. The financial statements for the Canadian entity are measured in the local currency and then translated into U.S. dollars. The balance sheet accounts, with the exception of long-lived intangible asset and equity accounts, are translated using the current exchange rate at the balance sheet date and the operating results are translated using the average rates prevailing throughout the reporting period. The long-lived intangible asset and equity accounts are translated at historical rates. Accumulated translation gains or losses are recorded in AOCI or AOCL and are included as a component of comprehensive income. Transactional gains and losses are reported in the statement of earnings.

Our Egg Products Division has previously invested in a foreign joint venture in Europe. We exited the European joint venture in late 2009, by selling our shares of Belovo S.A. to BNL Food Investments Limited, which had no affect on our statement of earnings, as we adjusted the value of our investment in Belovo to zero in 2006.

Revenue Recognition

Sales to our customers are recognized when proof of delivery is received from our carriers and are recorded net of estimated customer programs and returns. We recognize revenue when all of the following conditions have been met:

(1) Persuasive evidence of an arrangement exists - A revenue transaction is initiated and evidenced by receipt of a purchase order from our customer.

(2) Delivery has occurred or services have been rendered - An invoice is created from the bill of lading at our shipping plant and revenue is recognized when proof of delivery of the receipt of goods is received from our carriers.

(3) The seller’s price to the buyer is fixed or determinable - Our sales invoice includes an agreed upon selling price.

(4) Collectibility is reasonably assured - We have a documented credit and collection policy and procedure manual for determining collectibility from our customers.

Our shipping policy is FOB destination; therefore, title to goods remains with us until delivered by the carrier to our customer.

Only a minor portion of our sales result in customer returns. An accrual is estimated based on historical trends and reviewed periodically for adequacy. Revenue is appropriately reduced to reflect estimated returns. We are able to make a reasonable estimate of customer returns based upon historical trends due to the fact that our sales are not susceptible to significant external factors, the return period is short, and our sales are high volume and homogeneous in nature.

Marketing and Advertising Costs

The Company promotes its products with advertising, consumer incentives, and trade promotions. Such programs include, but are not limited to, discounts, coupons, and fixed and volume-based incentive programs. Advertising costs are expensed as incurred and included in selling expenses. At retail, we predominately use in-store promotional spending, discounts and coupons. Such spending is recorded as a reduction to sales based on amounts estimated as being due to customers and consumers at the end of a period. In foodservice, we predominately use fixed and volume-based programs. Fixed marketing programs are expensed over the period to which sales relate and are included in selling expenses. Volume–based programs are recorded as a reduction to sales based on amounts estimated as being due to customers at the end of a period. Late in fiscal 2008, a marketing program with one of our foodservice customers changed from a fixed-dollar marketing program recorded as selling expense to a volume-based allowance program, which was recorded in net sales in the current period. This effect and other program changes resulted in reductions in selling expenses and net sales of $7.6 million for 2009 as compared to 2008. Our advertising expense was $12,101,000, $12,762,000 and $11,406,000 in 2009, 2008, and 2007.

Income Taxes

Deferred income taxes are computed using the asset and liability method, such that deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between financial reporting amounts and the tax bases of existing assets and liabilities based on currently enacted tax laws and tax rates in effect for the periods in which the differences are expected to reverse. Income tax expense is the tax payable for the period plus the change during the period in deferred income taxes. Valuation allowances are established when necessary to reduce deferred tax assets to the amount more likely than not expected to be realized. We are included in a consolidated federal income tax return with our Parent. State income taxes are filed on either a combined or separate company basis.

We account for the uncertainty in income taxes in our consolidated financial statements when evaluating our tax positions. The evaluation of a tax position is a two-step process, the first step being recognition. We determine whether it is more-likely-than-not that a tax position will be sustained upon tax examination, including resolution of any related appeals or litigation, based on only the technical merits of the position. If a tax position does not meet the more-likely-than-not threshold, the benefit of that position is not recognized in our financial statements. The second step is measurement. The tax position is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate resolution with a taxing authority. See Note C for additional information.

Comprehensive Income (Loss)

Total comprehensive income (loss) is disclosed in the consolidated statements of shareholder’s equity and included in net earnings and other comprehensive income (loss), which is comprised of unrealized gains (losses) on cash flow hedges and foreign currency translation adjustments.

The components of and changes in accumulated other comprehensive income, net of taxes, were as follows (In thousands):


	Cash Flow Hedges			Foreign Currency Translation			Total AOCI/AOCL
Balance at December 30, 2006	$	—		$	2,393		$	2,393
Foreign currency translation adjustment		—			3,124			3,124
Change due to cash flow hedges		360			—			360

Balance at December 29, 2007		360			5,517			5,877
Foreign currency translation adjustment		—			(3,616	)		(3,616	)
Change due to cash flow hedges		(4,805	)		—			(4,805	)

Balance at January 3, 2009		(4,445	)		1,901			(2,544	)
Foreign currency translation adjustment		—			1,954			1,954
Change due to cash flow hedges		4,885			—			4,885

Balance at January 2, 2010	$	440		$	3,855		$	4,295

Recently Adopted Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance on fair value measurements. This guidance defines fair value and establishes a framework for measuring fair value and expanded disclosures about fair value measurement. In February 2008, the FASB deferred the effective date of this guidance for one year for nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis and amended to add a scope exception for leasing transactions. We adopted this guidance effective January 1, 2008 for financial assets and liabilities measured on a recurring basis and effective January 4, 2009 for non-financial assets and liabilities. The adoption did not have an impact on our consolidated results of operations and financial position.

In December 2007, the FASB issued new guidance on business combinations. The revised guidance establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. The guidance also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. We adopted this guidance effective January 4, 2009. The adoption did not have an impact on our consolidated results of operations and financial position.

In December 2007, the FASB issued new guidance on noncontrolling interests which establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. This guidance also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. We adopted this guidance effective January 4, 2009. The adoption did not have a material impact on our consolidated results of operations and financial position.

In March 2008, the FASB issued new guidance on disclosures about derivative instruments and hedging activities. This guidance requires companies to provide greater transparency through disclosures about how and why we use derivative instruments. This includes how derivative instruments and related hedged items are accounted for, the level of derivative activity entered into by us and how derivative instruments and related hedged items affect our financial position, results of operations, and cash flows. We adopted this guidance in the first quarter of 2009 and have included the required disclosures in Note A.

In May 2009, the FASB issued new guidance on subsequent events. This guidance establishes a formal standard of accounting for and disclosures of events that occur after the balance sheet date, but before the financial statements are issued. This guidance includes a new requirement to disclose the date events were evaluated and the basis for that date. We adopted this guidance in the second quarter of 2009. The FASB amended this guidance to remove the date disclosure requirement for SEC filers (as defined) effective February 25, 2010.

In June 2009, the FASB issued the FASB Accounting and Standards Codification (Codification). The Codification will become the single source for all authoritative GAAP recognized by the FASB to be applied for financial statements issued for periods ending after September 15, 2009. We have implemented the Codification, which does not change GAAP and will not have an effect on our determination or reporting of our financial results.

Recent Accounting Pronouncements to be Adopted

In June 2009, the FASB issued guidance which amends the consolidation criteria for variable interest entities (“VIE”). This guidance changes the model for determining who consolidates the VIE and addresses how often this analysis is performed. The guidance is effective for fiscal years and interim periods beginning after November 15, 2009 and is not expected to have a material impact on our consolidated financial statements.

There were no other accounting pronouncements issued during the year ended January 2, 2010 that are expected to have a material impact on our financial position, operating results or disclosures.

NOTE B—DEBT

Long-term debt consisted of the following as of the years ended (In thousands):


	2009		2008
Revolving credit facility	$	—	$	—
Term loans		378,950		427,300
Senior subordinated notes payable		150,050		150,050
Guaranteed bonds		12,846		14,039
Capital leases		14,197		3,743
MFI Food Canada, Ltd note payable		2,607		2,252
Northern Star Co. note payable		6,091		—

		564,741		597,384

Less:
Current maturities		5,667		4,306
Unamortized original issue discount		11,704		—

	$	547,370	$	593,078

On May 1, 2009, we entered into an amended and restated credit agreement (“Credit Agreement”), which consisted of a $75,000,000 revolving credit facility, a $200,000,000 term A loan and a $250,000,000 term B loan. The revolving credit facility and the term A loan mature November 1, 2012 and the term B loan matures May 1, 2014. Both the term A loan and term B loan were issued at a discount. The original issue discount on the term A loan was $4,075,000 and on the term B loan it was $10,000,000. The original issue discount is being amortized using the effective interest rate method over the respective lives of the loans. In conjunction with the extinguishment of the 2003 term loan B, we incurred costs of $66,000 and wrote-off $3,171,000 of non-cash deferred financing costs. The facilities within the Credit Agreement bear interest at a floating base rate plus an applicable margin, as defined in the agreement. The effective interest rates at January 2, 2010 for the term A loan and term B loan were 6.00% and 6.50%. At January 2, 2010, approximately $350,000 of capacity was used under the revolving credit facility for letters of credit.

On July 31, 2009, we made voluntary prepayments of $30,000,000 on the term A loan and $3,750,000 on the term B loan. On December 31, 2009, we made voluntary prepayments of $20,300,000 on the term A loan and $17,000,000 on the term B loan. As a result of the prepayments, the next scheduled principal payment on the term loans is scheduled for September 2011.

The covenants and collateral on the Credit Agreement are substantially unchanged. However, the maximum leverage ratio and minimum interest coverage ratio thresholds were adjusted. The Credit Agreement also allows for the funding of the semi-annual interest payments to M-Foods Holdings, Inc. The Credit Agreement is collateralized by substantially all of our assets. The Credit Agreement and senior subordinated notes contain restrictive covenants, including restrictions on dividends and distributions to shareholders and unit holders, a maximum leverage ratio, and a minimum interest coverage ratio, in addition to limitations on additional indebtedness and liens. Covenants related to operating performance are primarily based on earnings before interest expense, income taxes, and depreciation and amortization expense. Our failure to comply with these covenants could result in an event of default, which if not cured or waived could have a material adverse effect on our results of operations, financial position and cash flow. In general, the debt covenants limit our discretion in the operation of our businesses. We were in compliance with all of the financial covenants in the Credit Agreement and the senior subordinated notes as of January 2, 2010. In addition, the Credit Agreement includes guarantees by our domestic subsidiaries.

In December 2008, we entered into a $15.6 million variable-rate lease agreement to fund a portion of the equipment purchases at our new potato products facility in Chaska, Minnesota. The lease agreement matures on December 30, 2014. As of January 2, 2010, we had borrowed $10.9 million on this facility and the outstanding balance effective rate was 3.74%. We anticipate full use of the available lease funds in early 2010. On November 25, 2009, we entered into a variable-rate loan for up to $7.5 million for additional financing for equipment for the new potato products facility. The $7.5 million loan is due November 25, 2014. As of January 2, 2010, we had borrowed $6.1 million on the loan and the effective interest rate on the outstanding balance was 2.88%. We anticipate full use of the available funds in early 2010.

The following is an analysis of the property under capital leases by major classes (In thousands):


	2009			2008
Buildings and improvements	$	6,015		$	5,196
Machinery and equipment		13,789			2,477

		19,804			7,673
Accumulated depreciation		(5,432	)		(4,284	)

	$	14,372		$	3,389

The amortization of leased property is included in depreciation expense.

Aggregate maturities of our long-term debt and capital leases are as follows (In thousands):


Year Ending,	Capital Leases		Debt		Total
2010	$	2,997	$	3,221	$	6,218
2011		4,203		13,903		18,106
2012		3,670		146,137		149,807
2013		2,690		155,914		158,604
2014		1,967		226,447		228,414
Thereafter		—		4,922		4,922

		15,527		550,544		566,071

Less: Amounts representing interest and original issue discount amortization		1,330		11,704		13,034

	$	14,197	$	538,840	$	553,037

The components of net interest expense for the years ended is as follows (In thousands):


	2009			2008			2007
Interest expense	$	39,095		$	38,829		$	49,624
Amortization of financing costs		6,145			3,824			4,435
Capitalized interest		(468	)		—			(93	)
Interest income		(434	)		(645	)		(1,476	)

Interest expense, net	$	44,338		$	42,008		$	52,490

NOTE C—INCOME TAXES

Income tax expense consists of the following for the years ended (In thousands):


	2009			2008			2007
Current:
Federal	$	34,636		$	33,134		$	27,831
State		3,972			4,041			3,138

		38,608			37,175			30,969


Deferred:
Federal		(540	)		(11,802	)		(14,125	)
Foreign		238			(2,895	)		161
State		(62	)		(1,349	)		(1,614	)

		(364	)		(16,046	)		(15,578	)

	$	38,244		$	21,129		$	15,391

The components of the deferred tax assets and (liabilities) associated with the cumulative temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes follows for the years ended (In thousands):


	2009			2008
Current deferred income taxes:
Flock inventories	$	(6,537	)	$	(6,636	)
Hedging		(396	)		5,923
Other, primarily accrued expenses		7,219			6,658

Total current deferred income taxes		286			5,945

Non-current deferred income taxes:
Depreciation		(23,957	)		(21,800	)
Customer relationships		(51,248	)		(56,997	)
Trademarks and licenses		(11,618	)		(11,558	)
Goodwill		(7,351	)		(6,427	)
Deferred compensation		7,601			7,032
Net operating loss carryforwards		583			255
Other		3,002			3,205

		(82,988	)		(86,290	)
Valuation allowance		(2,711	)		(2,264	)

Total non-current deferred income taxes		(85,699	)		(88,554	)

Total deferred income taxes	$	(85,413	)	$	(82,609	)

A valuation allowance was recorded in 2006 against the deferred tax assets of certain of our foreign joint ventures and subsidiaries. The valuation allowance was recorded based on management’s judgment that it is more likely than not that the benefits of those deferred tax assets will not be realized in the future. At the end of 2009, that determination had not changed. The 2009 change in the valuation allowance relating to those deferred tax assets was due to a combination of currency rate fluctuations and income and the wind-up of one of our foreign subsidiaries during 2009. The table below summarizes the change in the valuation allowance:


	2009		2008
Valuation allowance at beginning of year	$	2,264	$	5,071
Change related to current year items		292		(2,066	)
Change related to foreign currency fluctuation		155		(741	)

Valuation allowance at end of year	$	2,711	$	2,264

The following is a reconciliation of the federal statutory income tax rate to the consolidated effective tax rate based on earnings before equity in losses of unconsolidated subsidiary for the years ended:


	2009		2008		2007
Federal statutory rate	35.0	%	35.0	%	35.0	%
State taxes, net of federal impact	2.4	%	2.6	%	2.3	%
Qualified production activities deduction	(1.8	)%	(2.8	)%	(3.8	)%
Other permanent differences	(0.1	)%	0.1	%	0.5	%
Valuation allowance	0.3	%	(3.0	)%	0.6	%
Other	(0.3	)%	(0.8	)%	1.2	%

	35.5	%	31.1	%	35.8	%

The American Jobs Creation Act of 2004 created a new tax deduction equal to the applicable percentage of the qualified production activities income for tax years beginning after December 31, 2004. The applicable percentage for 2007, 2008 and 2009 was 6%, and it rises to 9% thereafter.

We have foreign net operating loss carryforwards of approximately $1,880,000 which expire from 2026 through 2029.

Accounting for Uncertainty in Income Taxes

We adopted the accounting for uncertain tax positions effective January 1, 2007. As a result of the adoption, we recognized a charge of approximately $0.7 million to the January 1, 2007 retained earnings balance.

Following is a roll-forward of our 2009 and 2008 unrecognized tax benefits (In thousands):


	2009			2008
Total unrecognized tax benefits at beginning of year	$	3,409		$	4,670
Gross increase (decrease) for tax positions taken in prior periods		40			(1,325	)
Gross increase for tax positions taken in current period		127			404
Reductions as a result of a lapse of applicable statute of limitations		(378	)		(340	)

Total unrecognized tax benefits at end of year	$	3,198		$	3,409

The total liability associated with unrecognized tax benefits that, if recognized, would impact the effective tax rate was $2,309,000 at January 2, 2010.

The company accrues interest and penalties associated with unrecognized tax benefits as interest expense in the consolidated statement of earnings, and the corresponding liability in accrued interest in the consolidated balance sheet. An expense of approximately $213,000 and $182,000 for interest and penalties was reflected in the consolidated statement of earnings for 2009 and 2007. In 2008, we had a benefit of approximately $780,000 reflecting the affect of the closing of statutes of limitations. The corresponding liabilities in the consolidated balance sheets were approximately $979,000 and $830,000 at January 2, 2010 and January 3, 2009.

Included in the balance of unrecognized tax benefits for 2009 are tax positions for which it is reasonably possible that the total amounts could significantly change during the next twelve months. We estimate that it is reasonably possible that $400,000 to $800,000 of unrecognized tax benefits could significantly change during the next twelve months. This amount represents a decrease in unrecognized tax benefits comprised of items related to state income tax audits and expiring statutes.

Our uncertain tax positions are related to tax years that remain subject to examination. As of January 2, 2010, the United States jurisdiction remains subject to examination for tax years 2006 through 2009, and the Minnesota and the New Jersey jurisdictions for tax years 2005 through 2009. During 2009, we concluded the examination by the Internal Revenue Service for tax year 2007. There were no adjustments made during the examination. While the examination has been completed, the normal statute of limitations for that year remains open.

NOTE D—EMPLOYEE RETIREMENT PLAN

Employees who meet certain service requirements are eligible to participate in a defined contribution retirement plan. We match up to 4% of each participant’s eligible compensation. Our matching contributions were $3,131,000, $3,120,000 and $3,058,000 in 2009, 2008 and 2007.

We also contribute to one union defined contribution retirement plan which totaled $40,000, $65,000 and $44,000 for the years ended 2009, 2008 and 2007.

NOTE E—RELATED PARTY TRANSACTIONS

Pursuant to a management agreement with THL Managers V, LLC, an affiliate of Thomas H. Lee Partners, L.P., we pay them an annual fee of $1,500,000 or 1.0% of consolidated earnings before interest, taxes, depreciation and amortization, whichever is greater. The management fees were $2,144,010, $2,000,160 and $1,759,080 in 2009, 2008 and 2007 and were included in selling, general and administrative expenses.

NOTE F—COMMITMENTS AND CONTINGENCIES

Lease Commitments

Our corporate offices and several of our manufacturing facilities are leased under operating leases expiring at various times through February 2017. The leases provide that real estate taxes, insurance, and maintenance expenses are our obligations. In addition, we lease some of our transportation and manufacturing equipment under operating leases.

Rent expense, including real estate taxes and maintenance expenses, was approximately $9,774,000, $9,232,000 and $8,803,000 for the years ended 2009, 2008 and 2007.

The following is a schedule of minimum rental commitments for base rent for the years ending (In thousands):


2010	$	6,752
2011		5,635
2012		3,028
2013		1,877
2014		1,447
Thereafter		2,705

	$	21,444

Debt Guarantees

We have guaranteed the repayment of certain industrial revenue bonds used for the expansion of the wastewater treatment facilities of several municipalities where we have manufacturing facilities. The repayment of these bonds is funded through the wastewater treatment charges paid by us. However, should those charges not be sufficient to pay the bond payments as they become due, we have agreed to pay any shortfall. The remaining principal balance of these bonds at January 2, 2010 was approximately $17,248,000, of which $12,846,000 was included in our debt balance ($1.3 million in current maturities and $11.5 million in long-term debt) (see Note B).

Procurement Contracts

We have entered into substantial purchase obligations to fulfill our egg and potato requirements. We maintain long-term egg procurement contracts with numerous cooperatives and egg producers throughout the Midwestern and Eastern United States and Canada, which supply approximately 53% of our annual external egg requirements. Most of these contracts vary in length from 18 to 120 months. The egg prices are primarily indexed to grain or Urner Barry market indices. One egg supplier provides more than 10% of our annual egg requirements. Based upon the best estimates available to us for grain and egg prices, we project our purchases from our top four contracted egg suppliers will approximate $181.2 million in 2010, $190.8 million in 2011, $177.3 million in 2012 and $162.8 million in 2013. The 2010 amount represents approximately 44% of our total egg purchases for the year. In addition, we have contracts to purchase potatoes that expire in 2010. These contracts will supply approximately 53% of the Potato Products Division’s raw potato needs in 2010. Three potato suppliers are each expected to provide more than 10% of our 2010 potato requirements.

Deferred Compensation Plan

M-Foods Holdings, Inc. (“Holdings”) sponsors a 2003 Deferred Compensation Plan (“Plan”) covering certain current and former members of management of the Company. Under terms of the Plan, certain members of management were allowed to roll-over approximately $25,181,000 of option and bonus value from the company and its parent into Holdings. The Plan is nonqualified and unfunded. Each participant’s deferred compensation account under the Plan will accrue an annual 8% return, which is included in Other long-term liabilities. Participants in the Plan will be entitled to a distribution from their deferred compensation account upon the earlier of (i) a change in control of Holdings (ii) the tenth anniversary of the date of the Plan and (iii) upon the termination or death of a participant. We recorded approximately $1,519,000, $1,431,000 and $1,300,000 of preferred return on the deferred compensation for the years ended 2009, 2008 and 2007.

Legal Matters

We cannot predict what, if any, impact these matters and any results from such matters could have on future results of operations.

NOTE G—PLANT CLOSING

In November 2006, we announced our decision to close the St. Marys, Ontario egg processing plant due to rising operating costs. The facility was closed on March 31, 2007. The costs related to the closing have been reflected in the Egg Products Division’s operating income. Costs were recorded as follows (In thousands):


	2009		2008		2007		Cumulative
Asset impairment charges	$	—	$	—	$	1,293	$	4,187
Employee termination costs		—		—		232		477

Total plant closing costs	$	—	$	—	$	1,525	$	4,664

During 2007, we paid all of the St. Marys employee termination costs. No additional plant closing costs were incurred.

NOTE H—SHAREHOLDER’S EQUITY

Common Stock

At January 2, 2010 and January 3, 2009, we had authorized, issued and outstanding common stock of 3,000 shares with a $.01 par value. All common shares were issued to M-Foods Holdings, Inc., a wholly owned subsidiary of Michael Foods Investors, LLC.

Additional Paid In Capital

We recorded non-cash capital investments from our parent, M-Foods Holdings, Inc. (“Holdings”), of $5.2 million in 2009 and $4.6 million in 2008 related to the tax benefit the Company receives on Holdings’ interest deduction due to filing a consolidated Federal tax return with Holdings.

On October 23, 2009, we entered into an employment agreement with James E. Dwyer, Jr. as our President and Chief Executive Officer. Mr. Dwyer also entered into a Senior Management Class G Unit Subscription Agreement with Michael Foods Investors, LLC (the “LLC”) under which Mr. Dwyer purchased 2,000 Class G Units of the LLC for an aggregate purchase price of $200,000. Concurrently, the LLC entered into Senior Management Class F Unit Subscription Agreements with Mark W. Westphal, Chief Financial Officer and Senior Vice President of the Company, under which Mr. Westphal purchased 1,000 Class F Units of the LLC for an aggregate purchase price of $100,000 and with Carolyn V. Wolski, Vice President, General Counsel and Secretary of the Company, under which Ms. Wolski purchased 500 Class F Units of the LLC for an aggregate purchase price of $50,000.

On April 10, 2009, our then Chief Executive Officer and President, David S. Johnson, resigned from the Company. The D Units owned by Mr. Johnson were callable at cost by the LLC. The call notice for Mr. Johnson’s D Units was delivered in July 2009 and the payment for and repurchase of the D Units was completed in August 2009.

Dividend

We are responsible for servicing Holdings’ 9.75% subordinated notes. On October 1, 2009, we made the $7.5 million semi-annual interest payment due on the notes. This $7.5 million payment was recorded as a dividend to Holdings.

NOTE I—STOCK-BASED COMPENSATION

In November 2003, Holdings adopted the 2003 Stock Option Plan (the “Plan”). Under the Plan, Holdings may grant incentive stock options to our employees. The accounting and disclosure for the Holdings Plan are included in our financial statements. A total of 31,707 shares are reserved for issuance under the Plan and 357 shares are available for issuance. Any unexercised options will expire ten years after the grant date. Options are granted with option prices based on the estimated fair market value of Holdings common stock at the date of grant as determined by Michael Foods Investors LLC.

Effective January 1, 2006, we began accounting for new and modified stock option awards using the modified prospective application method. This methodology yields an estimate of fair value based in part on a number of management assumptions, the most significant of which include future volatility and expected term. Changes in these assumptions could significantly impact the estimated fair value of the options granted and the related expense amortized over the vesting period. The estimated fair value of options, including the effect of estimated forfeitures, is recognized as expense on the straight-line basis over the options’ vesting periods. We recorded expenses of $487,000, $692,000, and $78,000 in 2009, 2008 and 2007 due to accounting charges related to stock-based compensation.

As there is no established market for Holdings common stock, the value is determined by a formula and fixed periodically by the Board of Directors. Our options have a term of 10 years and vest over five years, with potential for earlier vesting upon a change in control of the Company. Employees forfeit unvested options when they terminate their employment with the Company and must

exercise their vested options at that time or they will also be forfeited. Per the Plan, the options have a put right and a call right. If a participant’s employment is terminated under certain circumstances (i.e., disability or death) the participant has a limited right to sell any exercised shares to the Company and if the participant is terminated for any reason the Company has certain rights to purchase any exercised shares. The intrinsic value of shares exercised was $222,000, $517,000 and $93,000 in 2009, 2008 and 2007. In 2009, we realized tax benefits of $83,000 from the exercise of stock options. The fair value of shares vesting in the respective periods was $286,000, $1,330,000 and $1,059,000 in 2009, 2008 and 2007.

As of January 2, 2010, the total compensation cost for nonvested awards not yet recognized in our statements of earnings was $868,000. This amount will be expensed over the balance of the vesting periods, approximately three years. Information regarding our outstanding stock options is as follows:


							2009
	2009		2008		2007		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at period beginning	29,206		27,195		27,731
Granted	—		3,650		150
Exercised	(201	)	(859	)	(202	)
Cancelled	(134	)	(780	)	(484	)


Outstanding at period end	28,871		29,206		27,195		4.52	$	34,480,000


Exercisable at period end	26,001		25,516		20,562		4.19	$	32,322,000


Weighted-Average Exercise Price Per Share
Granted	$	—	$	1,193.82	$	1,089.69
Exercised		626.99		626.99		626.99
Cancelled		626.99		841.30		750.31

At period end,
Outstanding		726.09		724.95		662.27
Exercisable		677.26		661.35		637.41

Nonvested shares:
Number at period end		2,870		3,690

Weighted-Average Grant-date Fair Value	$	356.14	$	354.53


Vested shares:
Number		820

Weighted-Average Grant-date Fair Value	$	348.87


Cancelled shares:
Number		134

Weighted-Average Grant-date Fair Value	$	184.58

There were no options granted during 2009. The weighted-average grant-date fair value of options granted under the Plan was $360.49 and $325.69 in 2008 and 2007. The weighted-average grant-date fair value of options under the Plan was determined by using the fair value of each option grant on the date of grant, utilizing the Black-Scholes option-pricing model and the following key assumptions:


	2008		2007
Risk-free interest rate	1.77 – 3.11	%	4.99	%
Expected term (in years)	5		5
Expected volatility	27.65 – 28.67	%	21.17	%
Expected dividends	None		None

The risk-free interest rate for periods within the expected term of the option is based on the U.S. Treasury yield curve in effect at the grant date. Expected volatility used is based on the historical volatility of the stock of companies within our peer group.

NOTE J—BUSINESS SEGMENTS

Our business activities are organized around three business segments as follows:

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

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

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

Both internal and external reporting conforms to this organizational structure, with no significant differences in accounting policies applied. We evaluate the performance of our business segments and allocated resources to them based primarily on operating profit, defined as earnings before interest expense, interest income, income taxes and allocations of corporate costs to the respective divisions. Intersegment sales are made at market prices. Our corporate office maintains a majority of our cash under our cash management policy. The value of our long-lived assets in Canada as of January 2, 2010 was $18,339,000.

We have the following concentrations in sales and accounts receivable for major customers:


	Sales						Accounts Receivable
	2009		2008		2007		2009		2008
Customer A	16	%	15	%	17	%	12	%	7	%
Customer B	18	%	13	%	15	%	16	%	16	%

Certain financial information for our operating segments is as follows (In thousands):


	Egg Products		Potato Products		Crystal Farms		Corporate & Eliminations			Total
2009
External net sales	$	1,046,791	$	119,219	$	376,769	$	—		$	1,542,779
Intersegment sales		12,979		6,609		—		(19,588	)		—
Operating profit (loss)		133,162		710		34,823		(13,412	)		155,283
Total assets		934,363		169,106		114,236		89,161			1,306,866
Depreciation and amortization		47,587		11,366		4,315		4			63,272
Capital expenditures		22,040		39,984		2,109		—			64,133

2008
External net sales	$	1,265,641	$	125,059	$	413,673	$	—		$	1,804,373
Intersegment sales		16,607		20,950		—		(37,557	)		—
Operating profit (loss)		95,442		13,719		17,267		(16,413	)		110,015
Total assets		968,845		136,955		121,474		71,584			1,298,858
Depreciation and amortization		65,906		6,856		4,555		4			77,321
Capital expenditures		23,177		13,670		2,215		—			39,062

2007
External net sales	$	1,014,588	$	119,033	$	334,141	$	—		$	1,467,762
Intersegment sales		16,190		18,122		—		(34,312	)		—
Operating profit (loss)		75,539		18,941		11,495		(10,529	)		95,446
Total assets		970,408		130,105		125,527		47,821			1,273,861
Depreciation and amortization		64,392		6,240		4,401		10			75,043
Capital expenditures		28,469		7,022		2,629		—			38,120

NOTE K—SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION

Our Credit Agreement and senior subordinated notes have been guaranteed, on a joint and several basis, by us and our domestic subsidiaries. The Credit Agreement is also guaranteed by our parent, M-Foods Holdings, Inc.

The following condensed consolidating financial information presents our consolidated balance sheets at January 2, 2010 and January 3, 2009, and the condensed consolidating statements of earnings and cash flows for the years ended January 2, 2010, January 3, 2009 and December 29, 2007. These financial statements reflect Michael Foods, Inc. (Corporate), the wholly-owned guarantor subsidiaries (on a combined basis), the non-guarantor subsidiary (MFI Food Canada, Ltd.), and elimination entries necessary to combine such entities on a consolidated basis.

Condensed Consolidating Balance Sheet

January 2, 2010

(In thousands)


	Corporate			Guarantor Subsidiaries		Non-Guarantor Subsidiary		Eliminations			Consolidated
Assets
Current Assets
Cash and equivalents	$	86,189		$	—	$	872	$	—		$	87,061
Accounts receivable, less allowances		17,103			152,565		6,080		(51,228	)		124,520
Inventories		—			117,872		8,104		—			125,976
Prepaid expenses and other		663			7,377		99		—			8,139

Total current assets		103,955			277,814		15,155		(51,228	)		345,696

Property, Plant and Equipment—net		5			236,946		12,714		—			249,665

Other assets:
Goodwill		—			519,890		3,026		—			522,916
Intangibles and other assets		17,513			183,352		2,599		(14,875	)		188,589
Investment in subsidiaries		903,214			82		—		(903,296	)		—

		920,727			703,324		5,625		(918,171	)		711,505

Total assets	$	1,024,687		$	1,218,084	$	33,494	$	(969,399	)	$	1,306,866

Liabilities and Shareholder’s Equity
Current Liabilities
Current maturities of long-term debt	$	—		$	3,982	$	1,685	$	—		$	5,667
Accounts payable		65			118,654		4,302		(51,228	)		71,793
Accrued liabilities		14,241			78,190		1,844		—			94,275

Total current liabilities		14,306			200,826		7,831		(51,228	)		171,735
Long-term debt, less current maturities		517,296			25,881		22,145		(17,952	)		547,370
Deferred income taxes		(8,977	)		94,676		—		—			85,699
Other long-term liabilities		23,700			—		—		—			23,700
Shareholder’s equity		478,362			896,701		3,518		(900,219	)		478,362

Total liabilities and shareholder’s equity	$	1,024,687		$	1,218,084	$	33,494	$	(969,399	)	$	1,306,866

Condensed Consolidating Balance Sheet

January 3, 2009

(In thousands)


	Corporate			Guarantor Subsidiaries		Non-Guarantor Subsidiary			Eliminations			Consolidated
Assets
Current Assets
Cash and equivalents	$	76,260		$	—	$	1,794		$	—		$	78,054
Accounts receivable, less allowances		231			135,794		5,780			(17,287	)		124,518
Inventories		—			120,908		6,245			—			127,153
Prepaid expenses and other		1,278			16,846		124			—			18,248

Total current assets		77,769			273,548		13,943			(17,287	)		347,973

Property, Plant and Equipment—net		10			219,918		11,622			—			231,550

Other assets:
Goodwill		—			519,890		3,026			—			522,916
Intangibles and other assets		10,101			198,866		2,410			(14,958	)		196,419
Investment in subsidiaries		924,829			200		—			(925,029	)		—

		934,930			718,956		5,436			(939,987	)		719,335

Total assets	$	1,012,709		$	1,212,422	$	31,001		$	(957,274	)	$	1,298,858

Liabilities and Shareholder’s Equity
Current Liabilities
Current maturities of long-term debt	$	2,203		$	1,186	$	917		$	—		$	4,306
Accounts payable		1,194			103,012		3,588			(17,287	)		90,507
Accrued liabilities		16,508			77,812		1,712			—			96,032

Total current liabilities		19,905			182,010		6,217			(17,287	)		190,845
Long-term debt, less current maturities		575,147			12,853		21,024			(15,946	)		593,078
Deferred income taxes		(8,724	)		97,552		(382	)		108			88,554
Other long-term liabilities		22,393			—		—			—			22,393
Shareholder’s equity		403,988			920,007		4,142			(924,149	)		403,988

Total liabilities and shareholder’s equity	$	1,012,709		$	1,212,422	$	31,001		$	(957,274	)	$	1,298,858

Condensed Consolidating Statement of Earnings

For the Year Ended January 2, 2010

(In thousands)


	Corporate			Guarantor Subsidiaries			Non-Guarantor Subsidiary			Eliminations			Consolidated
Net sales	$	—		$	1,538,892		$	52,363		$	(48,476	)	$	1,542,779
Cost of sales		—			1,243,551			46,538			(48,476	)		1,241,613

Gross profit		—			295,341			5,825			—			301,166
Selling, general and administrative expenses		13,412			139,124			4,135			(10,788	)		145,883

Operating profit (loss)		(13,412	)		156,217			1,690			10,788			155,283
Interest expense (income), net		43,415			(647	)		1,570			—			44,338
Loss on early extinguishment of debt		3,237			—			—			—			3,237
Other expense (income)		(10,788	)		—			—			10,788			—

Earnings (loss) before equity in earnings (loss) of subsidiaries and income taxes		(49,276	)		156,864			120			—			107,708
Equity in earnings (loss) of subsidiaries		101,179			(118	)		—			(101,061	)		—

Earnings (loss) before income taxes		51,903			156,746			120			(101,061	)		107,708
Income tax expense (benefit)		(17,561	)		55,567			238			—			38,244

Net earnings (loss)	$	69,464		$	101,179		$	(118	)	$	(101,061	)	$	69,464

Condensed Consolidating Statement of Earnings

For the Year Ended January 3, 2009

(In thousands)


	Corporate			Guarantor Subsidiaries			Non-Guarantor Subsidiary			Eliminations			Consolidated
Net sales	$	—		$	1,785,993		$	68,879		$	(50,499	)	$	1,804,373
Cost of sales		—			1,520,053			58,866			(50,499	)		1,528,420

Gross profit		—			265,940			10,013			—			275,953
Selling, general and administrative expenses		16,413			155,935			3,554			(9,964	)		165,938

Operating profit (loss)		(16,413	)		110,005			6,459			9,964			110,015
Interest expense (income), net		40,250			(36	)		1,794			—			42,008
Other expense (income)		(9,964	)		—			—			9,964			—

Earnings (loss) before equity in earnings (loss) of subsidiaries and income taxes		(46,699	)		110,041			4,665			—			68,007
Equity in earnings (loss) of subsidiaries		75,867			7,560			—			(83,427	)		—

Earnings (loss) before income taxes		29,168			117,601			4,665			(83,427	)		68,007
Income tax expense (benefit)		(17,710	)		41,734			(2,895	)		—			21,129

Net earnings (loss)	$	46,878		$	75,867		$	7,560		$	(83,427	)	$	46,878

Condensed Consolidating Statement of Earnings

For the Year Ended December 29, 2007

(In thousands)


	Corporate			Guarantor Subsidiaries			Non-Guarantor Subsidiary			Eliminations			Consolidated
Net sales	$	—		$	1,452,148		$	65,833		$	(50,219	)	$	1,467,762
Cost of sales		—			1,214,933			58,702			(50,219	)		1,223,416

Gross profit		—			237,215			7,131			—			244,346
Selling, general and administrative expenses		10,529			139,266			4,495			(6,915	)		147,375
Plant closing expenses		—			—			1,525			—			1,525

Operating profit (loss)		(10,529	)		97,949			1,111			6,915			95,446
Interest expense (income), net		51,414			(779	)		1,855			—			52,490
Other expense (income)		(6,915	)		—			—			6,915			—

Earnings (loss) before equity in earnings (loss) of subsidiaries and income taxes		(55,028	)		98,728			(744	)		—			42,956
Equity in earnings (loss) of subsidiaries		63,415			(905	)		—			(62,510	)		—

Earnings (loss) before income taxes		8,387			97,823			(744	)		(62,510	)		42,956
Income tax expense (benefit)		(19,178	)		34,408			161			—			15,391

Net earnings (loss)	$	27,565		$	63,415		$	(905	)	$	(62,510	)	$	27,565

Condensed Consolidating Statement of Cash Flows

For the Year Ended January 2, 2010

(In thousands)


	Corporate			Guarantor Subsidiaries			Non-Guarantor Subsidiary			Consolidated

Net cash provided by operating activities	$	111,251		$	30,200		$	1,396		$	142,847

Cash flows from investing activities:
Capital expenditures		—			(62,731	)		(1,402	)		(64,133	)
Investment in other assets		(5,262	)		—			(281	)		(5,543	)

Net cash used in investing activities		(5,262	)		(62,731	)		(1,683	)		(69,676	)

Cash flows from financing activities:
Payments on revolving line of credit		—			—			—			—
Proceeds from revolving line of credit		—			—			—			—
Payments on long-term debt		(498,350	)		(1,193	)		(1,086	)		(500,629	)
Proceeds from long-term debt		450,000			17,017			—			467,017
Original issue discount on long-term debt		(14,075	)		—			—			(14,075	)
Payments on stock option exercises/share repurchases		(222	)		—			—			(222	)
Additional capital invested by (dividend paid to) parent		(7,611	)		—			—			(7,611	)
Deferred financing costs		(9,095	)		—			—			(9,095	)
Investment in subsidiaries		(16,707	)		16,707			—			—

Net cash (used in) provided by financing activities		(96,060	)		32,531			(1,086	)		(64,615	)
Effect of exchange rate changes on cash		—			—			451			451

Net increase (decrease) in cash and equivalents		9,929			—			(922	)		9,007
Cash and equivalents at beginning of year		76,260			—			1,794			78,054

Cash and equivalents at end of year	$	86,189		$	—		$	872		$	87,061


Supplemental Disclosures:
Non-cash capital investment by parent	$	5,195		$	—		$	—		$	5,195

Condensed Consolidating Statement of Cash Flows

For the Year Ended January 3, 2009

(In thousands)


	Corporate			Guarantor Subsidiaries			Non-Guarantor Subsidiary			Consolidated

Net cash provided by operating activities	$	41,605		$	53,659		$	3,825		$	99,089

Cash flows from investing activities:
Capital expenditures		—			(36,905	)		(2,157	)		(39,062	)
Business acquisition		—			(8,652	)		—			(8,652	)

Net cash used in investing activities		—			(45,557	)		(2,157	)		(47,714	)

Cash flows from financing activities:
Payments on revolving line of credit		(10,700	)		—			—			(10,700	)
Proceeds from revolving line of credit		10,700			—			—			10,700
Payments on long-term debt		—			(1,097	)		(973	)		(2,070	)
Payments on stock option exercises/share repurchases		(517	)		—			—			(517	)
Additional capital invested by parent		125			—			—			125
Deferred financing costs		(463	)		—			—			(463	)
Investment in subsidiaries		7,005			(7,005	)		—			—

Net cash (used in) provided by financing activities		6,150			(8,102	)		(973	)		(2,925	)
Effect of exchange rate changes on cash		—			—			(473	)		(473	)

Net increase in cash and equivalents		47,755			—			222			47,977
Cash and equivalents at beginning of year		28,505			—			1,572			30,077

Cash and equivalents at end of year	$	76,260		$	—		$	1,794		$	78,054


Supplemental Disclosures:
Non-cash capital investment by parent	$	4,625		$	—		$	—		$	4,625
Reclassification of non-current other assets to property, plant and equipment		—			16,250			—			16,250

Condensed Consolidating Statement of Cash Flows

For the Year Ended December 29, 2007

(In thousands)


	Corporate			Guarantor Subsidiaries			Non-Guarantor Subsidiary			Consolidated

Net cash provided by (used in) operating activities	$	(1,707	)	$	97,369		$	2,300		$	97,962

Cash flows from investing activities:
Capital expenditures		—			(37,702	)		(418	)		(38,120	)
Other assets		—			(102	)		—			(102

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

MICHAEL FOODS INC/NEW 10-K