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Michael Foods Inc/MN – ‘10-K’ for 12/31/06

On:  Thursday, 3/29/07, at 4:55pm ET   ·   For:  12/31/06   ·   Accession #:  1193125-7-68831   ·   File #:  0-15638

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 3/29/07  Michael Foods Inc/MN              10-K       12/31/06    9:1.2M                                   Donnelley … Solutions/FA

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K        Annual Report                                       HTML   1.02M 
 2: EX-10.36    First Amendment Between Michael Foods of Delaware,  HTML     12K 
                          Inc. and A&A Urban Renewal                             
 3: EX-10.37    First Amendment Between Michael Foods of Delaware,  HTML     13K 
                          Inc. and Papetti Holding                               
 4: EX-10.38    First Amendment Between Michael Foods of Delaware,  HTML     12K 
                          Inc. and Papetti Holding                               
 5: EX-10.39    First Amendment Between Michael Foods of Delaware,  HTML     12K 
                          Inc. and Jersey Pride Urban                            
 7: EX-21.1     Subsidiaries of Michael Foods, Inc.                 HTML      9K 
 6: EX-12.1     Computation of Ratio of Earnings to Fixed Charges   HTML     34K 
 8: EX-31.1     Section 302 CEO Certification                       HTML     11K 
 9: EX-31.2     Section 302 CFO Certification                       HTML     11K 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2006

Commission file number 333-112714

MICHAEL FOODS, INC.

(Exact name of registrant as specified in its charter)

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 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, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Large accelerated filer  ¨    Accelerated filer  ¨    Non-accelerated filer  x

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 15, 2007.

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, butter 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, refrigerated distribution and potato products. We believe, through our Egg Products Division, we are the largest producer of processed egg products in North America. Our Refrigerated Distribution Division distributes a broad line of refrigerated grocery products to retail grocery outlets, including cheese, shell eggs, bagels, butter, margarine, muffins, potato products and ethnic foods. Our Potato Products Division processes and distributes refrigerated potato products sold to the foodservice and retail grocery markets in the United States. Please see Note I to our consolidated financial statements for additional information about our business segments.

Our strategy is to create value-added food and service solutions with our customers and suppliers to deliver profitable and sustainable growth.

In November 2003, we were acquired by an investor group comprised of a private equity firm and a management group through the merger of THL Food Products Co. with and into the previous M-Foods Holdings, Inc. (the “Merger”), with old M-Foods Holdings, Inc. being the continuing entity. Old M-Foods Holdings, Inc. then merged with Michael Foods, Inc. Old M-Foods Holdings, Inc. continued as the surviving corporation and was immediately thereafter renamed Michael Foods, Inc. (the “Company”). Any reference to the “Predecessor” refers to Michael Foods, Inc. prior to the Merger. Our current parent, as a result of the Merger, is M-Foods Holdings, Inc.

Egg Products Division

The Egg Products Division, comprised of our subsidiaries M. G. Waldbaum Company (“Waldbaum”), Papetti’s Hygrade Egg Products, Inc. (“Papetti’s”), MFI Food Canada, Ltd. and Trilogy Egg Products, Inc., 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 egg products producer and the fourth largest egg producer in North America. Principal value-added egg products are ultrapasteurized, extended shelf-life liquid eggs (“Easy Eggs^®” and “Excell”), egg white-based egg substitutes (“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. 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.

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Our Egg Products Division distributes its egg products to food processors and foodservice customers primarily throughout North America, with some 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 substitutes sold in the U.S. retail and foodservice markets. Most of the Division’s annual shell egg sales are made to our Refrigerated Distribution Division.

In 2006, 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 valued-added products, such as extended shelf-life liquid eggs, egg substitutes, and hardcooked and precooked egg products typically are not significantly affected by Urner Barry quoted price levels. Such products accounted for approximately 74% of the Division’s 2006 sales. Prices for the Division’s other products, including short shelf-life liquid, certain dried and frozen products and, particularly, shell eggs, are significantly affected by market prices as reported by Urner Barry.

In 2006, approximately 30% 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 proportion 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 and the internal production of eggs, where the egg cost is somewhat controllable. Further, the Division attempts to match market-affected egg sourcing with the production of egg products whose selling prices are also market-affected, and cost-affected egg sourcing, as best can be managed, with higher value-added products priced over longer terms, generally 6-12 months. The former allows the Division to typically realize a modest processing margin on such sales, even though there are notable commodity influences on both egg sourcing costs and egg products pricing, with each changing as frequently as daily. Shell eggs are essentially a commodity and are sold based upon reported egg prices. Egg prices are significantly influenced by modest shifts in supply and demand. Pricing of shell eggs is also typically affected by seasonal demand related to increased consumption during holiday periods.

The Division’s principal egg processing plants are located in New Jersey, Minnesota, Nebraska, Pennsylvania, Iowa, Manitoba and Ontario. We have decided that the St. Marys, Ontario plant will close in late March 2007 (see Note G to our consolidated financial statements for more information). Certain of the Division’s facilities are fully integrated from the production and maintenance of laying flocks through the processing of egg products. Fully automated laying barns, housing approximately 13,500,000 producing hens, are located in Nebraska, Minnesota and South Dakota. Approximately 1,900,000 of these hens are housed in contract facilities. Major laying facilities also maintain their own grain and feed storage facilities. Further, the production of approximately 15,000,000 hens is under long-term supply agreements, with an additional 17,000,000 hens under shorter-term agreements. The Division also maintains facilities with approximately 3,000,000 pullets located in Nebraska and Minnesota.

Refrigerated Distribution Division

Our Refrigerated Distribution Division, comprised of our wholly-owned subsidiaries Crystal Farms Refrigerated Distribution Company (“Crystal Farms”) and Wisco Farm Cooperative, distributes 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, margarine, muffins, potato products and ethnic foods, are supplied by various vendors, or our other divisions, to the Division’s specifications. Cheese accounted for approximately 68% of the Division’s 2006 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 resources and independent distributors. The Division’s market area is the United States, with a large customer concentration in the central United States. Retail locations carrying the Division’s products exceed 10,000 stores. 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 ten distribution centers centrally located in its key marketing areas.

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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 2006, approximately 55% of the Potato Products Division’s net sales were to the foodservice market, with the balance to the retail market.

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

Sales, Marketing and Customer Service

Each of our three divisions has developed a marketing strategy which emphasizes high quality products and customer service. Michael Foods Sales, an internal sales group, coordinates the foodservice and retail 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 Michael Foods Sales to supplement its internal sales efforts. Furthermore, the Egg Products Division utilizes a separate broker group for the retail market and maintains a small sales group which handles certain food ingredient egg product sales. Our marketing staff executes egg products and potato products marketing plans in the foodservice market and for related national retail brands, while the Refrigerated Distribution Division has a small marketing staff which handles that division’s retail marketing plans, along with additional resources available from outside agencies and consultants as needed.

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

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 many 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 manufacturing capabilities and specialized service. The Egg Products Division’s major customers in each of its market channels include leading foodservice distributors, such as Sysco and U.S. Foodservice, national restaurant chains, such as Burger King, International House of Pancakes, Sonic Corp. and Dunkin’ Donuts, major retail grocery store chains, such as Costco, Wal-Mart and Ahold group stores, and major food ingredient customers, such as General Mills, Inc. and Unilever Bestfoods North America.

The Refrigerated Distribution 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. For the year ended December 31, 2006, the Division served over 10,000 retail locations, inclusive of stores receiving products through warehouse delivery. SUPERVALU, the food industry’s largest distributor, is the Refrigerated Distribution Division’s largest customer. For the year ended December 31, 2006, sales to warehouse operations of SUPERVALU and SUPERVALU-owned and franchised stores accounted for approximately 41% of the Division’s net sales and another customer, Roundy’s Inc., accounted for 13% of the Division’s net sales. Other principal customers include Coborn’s Inc., Nash Finch Company, C & S Wholesale Grocers, Inc. and Wal-Mart Stores, Inc.

The Potato Products Division leverages existing relationships with national foodservice distributor customers of the Egg Products Division. Hence, many of the top Potato Products Division’s 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, such as Sysco and U.S. Foodservice and major retail grocery store chains, such as Kroger, Publix, Wal-Mart and Albertsons.

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Competition

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

The egg processing industry is competitive, especially when compared to the shell egg industry. Sunny Fresh Foods, a subsidiary of Cargill, is the Company’s largest higher value-added egg products competitor. The Company also competes with other egg products processors including Sonstegard Foods Company, Rose Acre Farms, Inc., Echo Lake Farm Produce, Golden Oval Eggs, LLC and ConAgra Foods, Inc.

The Refrigerated Distribution 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 as an alternative mid-priced brand, operating at price points below national brands and above retail store brands. The Refrigerated Distribution Division’s emphasis on a high level of service and lower-priced branded products has enabled it to compete effectively with much 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 Unilever N. V. (Shedd’s Country Crock Side Dishes) and Reser’s Fine Foods Inc., a national producer of refrigerated products. Other competitors include Bob Evans Farms Inc. and 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 which are sold by the Division in refrigerated form.

Proprietary Technologies and Trademarks

We use a combination of patent, trademark and trade secrets laws to protect the intellectual property for our products. We own patents and have exclusive license agreements for several patents and technologies. In 1988, we obtained an exclusive license agreement to use patented processes developed and owned by North Carolina State University involving the ultrapasteurization of liquid eggs. Four of the five patents licensed to us under this agreement expired in 2006. The technology produces liquid eggs that are salmonella and listeria-negative, as defined by federal law, and extends the shelf-life of liquid eggs from less than two weeks to over ten weeks.

We also own an exclusive license to use a patented process, owned and developed by the University of Missouri, to eliminate salmonella from shell eggs. The licensed patents are set to expire in 2014. Our license to use these patents will continue until the expiration of the patents. We currently use this technology for processing in-shell pasteurized eggs sold through our Refrigerated Distribution Division. We also have acquired licenses to other patents and technology from other third parties, including the University of Nebraska.

Infringement litigation actions with respect to our egg ultrapasteurization license agreement were settled in recent years with three egg processors—Nulaid Foods Inc., Rose Acre Farms and Cutler Egg Products (now owned by Golden Oval Eggs, LLC). Each party agreed that the patents were valid and enforceable, and they operated under sublicense agreements through the summer of 2006, when the patents expired.

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,” “Canadian Inovatech,” “Centromay,” “Emulsa,” and “Inovatech.” Ultrapasteurized liquid eggs are marketed using the “Easy Eggs” trade name. Refrigerated Distribution Division products are marketed principally under the “Crystal Farms” trade name. Other Refrigerated Distribution 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 believe that 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

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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. For example, at our Egg Products Division facilities, sanitization steps are in place to eliminate the risk of microbial contamination of our employees entering certain facilities, including the use of foot baths to reduce the risk of product contamination. 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 which we suspect may be a problem.

In December 2004, our Potato Products Division initiated a voluntary recall of certain hash brown potato products sold in the retail market. In February 2005, the recall matter, as it pertains to federal regulatory oversight, was closed. The financial impact of this recall was immaterial.

We maintain general liability insurance, which includes 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 state regulatory authorities.

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 recent years, we have upgraded the wastewater treatment system at our Klingerstown, Pennsylvania facility, we have paid for construction of a wastewater treatment facility in Lenox, Iowa, and we have updated the wastewater system at our egg production facility in Bloomfield, Nebraska. Additionally, in 2005 we committed to constructing a new mechanical wastewater treatment facility in Wakefield, Nebraska and completed a financing with the City of Wakefield in 2005 to allow us to do so. We recently received lender approval to complete a related financing, which will address an increase in the project’s cost and which should be completed in mid-2007. The facility is under construction and is to be operational in late 2007. For further information on Nebraska matters, please see Item 3.

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

Employees

At December 31, 2006, we had 3,875 employees. The Egg Products Division employed 2,512 full-time and 250 part-time employees, none of whom are represented by a union. The Potato Products Division employed 267 persons, 199 of whom were represented by the Bakery, Laundry, Allied Sales Drivers and Warehousemen Union, which is affiliated with the Teamsters. The Refrigerated Distribution Division employed 437 employees, none of whom are represented by a union. Our corporate, sales, distribution and customer service and information systems groups collectively had 409 employees at December 31, 2006. We believe our employee relations to be good.

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Executive Officers of the Registrant

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

ITEM 1A—RISK FACTORS

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

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, resulting often times 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 also 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 price of corn has nearly doubled since the summer of 2006, due mainly to significant incremental demand from ethanol producers. It is unclear if we can adjust our egg products selling prices rapidly, and extensively, enough to offset this significant raw material cost increase.

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 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 processing 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 insured limits of any insurance provided by suppliers. If we do 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 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.

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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, Kraft Foods, Inc., Unilever N. V. 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 superior to 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.

Patents and trademarks have historically been important to our business. The loss or expiration of a patent, whether licensed or owned, or the loss of any 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 patents, trademarks, 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. In 1988, we obtained an exclusive license to use patented processes developed and owned by North Carolina State University for the ultrapasteurization of liquid eggs. The patents under this license expired in 2006. We use the previously patented technology in the production of extended shelf-life liquid egg products. We have competitors in the extended shelf-life liquid egg market, plus parties to whom we had granted sublicenses to, and we believe additional parties may begin to produce and market processed egg products that are similar to ours because of the patents’ expiration. Such an increase in competitive activity would be expected to negatively affect selling prices, and margins, for certain higher value-added egg products.

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 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 state and local 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 our 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

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condition. The operational and financial effects associated with compliance with the variety of environmental regulations we are subject to 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. To address wastewater issues at our Wakefield, Nebraska location, we are constructing an approximate $16 million mechanical treatment plant, which is to be operational in late 2007. The financing to build and equip the plant was secured via the City of Wakefield. However, this debt is guaranteed by us.

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 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 has emerged in Southeast Asia over the past several years and has spread elsewhere in the Eastern Hemisphere in the past two years. It has caused deaths in wild bird populations and, in limited instances, domesticated chicken and turkey flocks. It has also been linked to illness and death among some persons who have been in contact with diseased fowl. It is not clear 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.

ITEM 1B—UNRESOLVED STAFF COMMENTS

Not applicable.

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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 and Potato Products divisions, as well as our customer service, distribution, sales, marketing and information services groups. This lease expires in 2012 and the annual base rent is approximately $776,000.

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

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

Potato Products Division. The Potato Products Division owns a processing plant and land located in Minneapolis, Minnesota, consisting of approximately 175,000 square feet of production area. 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 $352,000.

Refrigerated Distribution Division. The Refrigerated Distribution Division leases administrative and sales offices in suburban Minneapolis and several small warehouses across the United States. The leases expire between 2007 and 2011. The administrative and sales office lease may be extended at our option for five years. The annual base rent for all of the leases is approximately $312,000. 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 $5.1 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 senior credit facility.

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 May 2004, the U.S. Environmental Protection Agency (“EPA”) issued “Findings of Violation and Order for Compliance” to the Company in connection with its discharge of wastewater to the municipal treatment facility in Wakefield, Nebraska (“City”). The findings alleged that wastewater from the Wakefield egg processing operations caused interference or process upset at the City’s facility. EPA ordered the Company to identify interim measures and a long-term proposal for addressing the issues that it had identified. In June 2004, the Company provided EPA with a proposal for improving the Wakefield facility’s performance and compliance, and supplemented the proposal in August 2004. Concurrently, and in connection with the same matter, the Nebraska Department of Environmental Quality (“NDEQ”) issued two enforcement documents:

(a) In June 2004, NDEQ issued a Notice of Violation alleging that Company wastewater had contributed to upset, interference and pass-through at the City’s wastewater treatment facility. We responded to the Notice of Violation in August 2004.

(b) In June 2004, NDEQ issued a Complaint and Notice for Opportunity for Hearing alleging that Company wastewater was causing interference or process upset at our pretreatment facility. In October 2004, the Company entered into an Administrative Consent Order with NDEQ under which it agreed to land-apply certain egg solids rather than sending them to the City’s wastewater treatment facility.

In early 2006, the United States Department of Justice notified us and the City that it intended to seek civil penalties and injunctive relief for violation of various environmental laws relating to the above matters and other issues. A series of meetings were held during 2006 with the Department of Justice, EPA, NDEQ and the Nebraska attorney general. In early 2007, a settlement among the parties was announced, under which we agreed to pay a $1,050,000 civil penalty, agreed to take certain environmentally proactive measures, and agreed to a specific schedule for completing construction of a mechanical wastewater treatment facility in the City that we had previously voluntarily undertaken.

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 small penalties to resolve alleged minor 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.

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

None.

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PART II

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

ITEM 6—SELECTED FINANCIAL DATA

The following table sets forth selected consolidated historical financial data with respect to the Company and the Predecessor. The data presented below was derived from the Company’s and the Predecessor’s Consolidated Financial Statements. Due to the Merger, which was accounted for as a purchase, different bases of accounting have been used to prepare the Company and Predecessor Consolidated Financial Statements. The Merger resulted in additional interest expense for new debt incurred and higher depreciation and amortization of property, plant and equipment and other intangible assets recorded. 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.

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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 leading producer and distributor of egg and refrigerated potato products to the foodservice, retail and food ingredient markets. We also distribute refrigerated food items, primarily cheese and other dairy products, to the retail grocery market predominantly in the central United States. We focus our growth efforts on the specialty segments within our food categories and strive to be a market leader in product innovation and low-cost production. Our strategic focus on value-added processing of food products is designed to capitalize on key food industry trends, such as the desire for improved safety and convenience, reduced labor and waste, and growth of food consumption away from home. 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 and food ingredient companies.

Capital Expenditures. From 1998 through 2006, we invested approximately $341 million in capital expenditures, excluding capital expenditures made in the Dairy Products Division, which was sold in late 2003. More than half of this cumulative amount was used for growth investments to expand our manufacturing capacity for value-added egg products, to upgrade our potato products operations, to improve and expand our distribution centers, to install a new company-wide management information system and to otherwise position ourselves for future growth. These expenditures included the installation of new precooked egg production lines, a new dried egg facility, automated packaging machines and quality control systems. We expect these investments to improve manufacturing efficiencies, customer service and product quality. The remainder of capital spending over the past nine years was on routine major equipment and facilities betterment activities, and rolling stock upgrades.

Acquisitions/Joint Ventures. We have grown both organically and through acquisitions. Since 1988, we have completed 17 acquisitions and three joint ventures, including the $106 million acquisition of Papetti’s in 1997. The acquisition of Papetti’s significantly increased our Egg Products Division’s market share, scale, geographic scope and product offerings. 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 acquisitions remain a part of our growth plans.

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Commodity Risk Management. Our principal exposure to market risks that may adversely affect our results of operations and financial condition include changes in future commodity prices and interest rates. We seek to minimize or manage these market risks through normal operating and financing activities and through the use of commodity contracts and interest rate cap agreements, where practicable. We do not trade or use instruments with the objective of earning financial gains on commodity prices or interest rate fluctuations, 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 for the years ended December 31, 2006, 2005 and 2004. 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.

Results for the Year Ended December 31, 2006 Compared to results for the Year Ended December 31, 2005

Net Sales. Net sales for the year ended December 31, 2006 increased less than 1%, or $4.8 million, to $1,247.3 million from $1,242.5 million for the year ended December 31, 2005, as a result of an increase in external net sales in our Potato Products Division, partially offset by decreases in external net sales by our Egg Products Division and Refrigerated Distribution Division.

Egg Products Division Net Sales. Egg Products Division external net sales for the year ended December 31, 2006 decreased less than 1%, or $2.5 million, to $858.4 million from $860.9 million for the year ended December 31, 2005. External net sales increased for most of our higher value-added products lines and declined for most of our lower value-added lines. The egg market was unusually volatile in 2006, with low levels seen early in the year and very high levels seen later in the year. For the full year 2006, shell egg prices increased by approximately 10% from 2005 levels, as reported by Urner

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Barry. Our pricing year-over-year varied by product line, with the overall divisional selling price per pound declining slightly in 2006 from 2005 levels. We experienced a pricing decline for higher value-added products, reflecting increased competition. Unit sales increased for most product lines in 2006, and all higher value-added lines, with an overall increase of 1.9% recorded for the Division as compared to 2005 levels. Sales of higher value-added egg products represented approximately 74% of the Egg Products Division’s external net sales in 2006 compared with 72% in 2005.

Potato Products Division Net Sales. Potato Products Division external net sales for the year ended December 31, 2006 increased $11.8 million, or 12%, to $114.0 million from $102.2 million for the year ended December 31, 2005. This increase was primarily attributable to strong unit sales growth for retail potato products, which increased approximately 21% from 2005 levels. Foodservice unit sales increased approximately 6%. Sales to new customers, growth in sales to existing customers and, particularly, growth in the retail category all contributed to the sales increase. Approximately 55% of the Division’s 2006 net sales were to the foodservice market, with 45% to the retail market. The retail component has grown significantly in recent years. Pricing for the Division in 2006 was comparable to 2005 levels.

Refrigerated Distribution Division Net Sales. Refrigerated Distribution Division external net sales for the year ended December 31, 2006 decreased $4.3 million, or 2%, to $275.0 million from $279.3 million for the year ended December 31, 2005. This decrease was mostly due to notable market deflation in cheese and butter prices year-over-year. The key distributed products business was strong, with branded cheese unit sales up 2% and butter unit sales up 11%. Overall, 2006 unit sales for the Division decreased 1% from 2005 levels, with core distributed products ahead 5% and shell egg unit sales down 14% .

Gross Profit. Gross profit for the year ended December 31, 2006 decreased $6.6 million to $230.5 million from $237.1 million for the year ended December 31, 2005. Our gross profit margin was 18.5% of net sales for 2006, compared with 19.1% for 2005. The decrease in gross profit margin was due to decreased gross profit margins from certain higher value-added egg products and negative gross profits from the sale of our lower value-added egg products collectively. Additionally, we experienced increases in energy, packaging and freight costs, which we were not able to fully offset with selective price increases.

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the year ended December 31, 2006 increased $2.5 million, or 2%, to $133.3 million from $130.8 million for the year ended December 31, 2005. Selling, general and administrative expenses were 10.7% of net sales in 2006 as compared to 10.5% in 2005. The main reason for the increase in operating expenses during 2006 was approximately $3 million for officer severance and related stock option compensation expense (see Note F to the financial statements). Without such unexpected expenses, operating expenses in 2006 would have decreased compared to 2005, largely due to reduced incentive expense.

Operating Profit. Operating profit for the year ended December 31, 2006 decreased $12.1 million, or approximately 11%, to $94.1 million from $106.2 million for the year ended December 31, 2005. This decrease was due to a significant decrease in Egg Products gross profits, which increases from the other two divisions could not fully offset and the increase in selling, general and administrative expenses related to officer severance and related stock option compensation expense noted above.

Egg Products Division Operating Profit. Egg Products Division operating profit for the year ended December 31, 2006 decreased $14.3 million, or 17%, to $67.7 million from $82.0 million for the year ended December 31, 2005. Operating profit for higher value-added egg products decreased by approximately $14 million, or 13%, from 2005 levels, mainly reflecting compressed margins due to the lower egg market early in the year, which then strengthened substantially during the fourth quarter. We also experienced a substantial run-up in corn costs in the fourth quarter. With the rapid increase in our costs, we were unable to offset the cost increases in a timely manner with selective price increases. Operating losses from other egg products increased from 2005 levels, reflecting unfavorable market-driven pricing during a period of increased costs. Shell eggs had a modest profit in 2006, as compared to a modest loss in 2005, reflecting improved market pricing.

Potato Products Division Operating Profit. Potato Products Division operating profit for the year ended December 31, 2006 increased $2.0 million, or 12% to $19.2 million from $17.2 million for the year ended December 31, 2005. This increase reflected significant volume growth in our more profitable retail operations, which resulted in an increase in that sector’s profitability. The foodservice business also had an increase in volume in 2006, compared to 2005 levels, which drove operating earnings growth.

Refrigerated Distribution Division Operating Profit. Refrigerated Distribution Division operating profit for the year ended December 31, 2006 increased $2.9 million, or 18%, to $18.6 million from $15.7 million for the year ended December 31, 2005. Operating profit increased mainly due to lower market prices for our key product line, cheese, and significant volume growth for that product line.

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Interest Expense. Interest expense increased approximately $8.8 million in 2006 compared to 2005, reflecting higher interest rates and additional amortization of debt issuance costs.

Plant Closing Expenses. We announced in late November that, due to rising operating costs, we will be consolidating our Canadian egg processing operations of our Egg Products Division to our facility in Winnipeg, Manitoba. The result will be the closing of the egg processing facility located in St. Marys, Ontario in late March 2007. We recorded severance costs and asset impairment on the leased building and certain plant equipment as well as other plant assets which can not be transferred to other of our processing facilities.

Income Taxes. Our effective tax rate was 42.7% in 2006 compared to 26.6% in 2005. The increase in the effective tax rate was related to several factors, with the recording of a valuation allowance against the deferred tax assets of one of our foreign subsidiaries in 2006 being the most significant (see Note C to the financial statements). Also, the 2005 effective tax rate was lower than our historical effective tax rates mainly due to a change in the tax rate used to calculate the deferred tax benefit as a result of a reduction in our state income tax rate.

Equity in Losses of Unconsolidated Subsidiary. An equity loss of $2.7 million was recorded in 2006 compared to a loss of $0.5 million in 2005. The losses relate to our Belgian joint venture. In the third quarter of 2006, we recorded a $1.8 million valuation adjustment on the investment in the joint venture and $0.9 million of losses related to Belovo’s 2006 operations. We also recorded a tax valuation allowance of $1.0 million against the full amount of the deferred tax asset that resulted from the investment valuation adjustment taken. The tax valuation allowance was recorded because we believe it is more likely than not that the deferred tax asset that resulted from the investment valuation adjustment will not be realized.

Results for the Year Ended December 31, 2005 Compared to results for the Year Ended December 31, 2004

Net Sales. Net sales for the year ended December 31, 2005 decreased $71.0 million, or approximately 5%, to $1,242.5 million from $1,313.5 million for the year ended December 31, 2004, as a result of a decrease in external net sales in our Egg Products Division and our Refrigerated Distribution Division, partially offset by an increase in external net sales by our Potato Products Division.

Egg Products Division Net Sales. Egg Products Division external net sales for the year ended December 31, 2005 decreased $80.5 million, or 9%, to $860.9 million from $941.4 million for the year ended December 31, 2004. External net sales increased for most of our higher value-added products lines and declined for lower value-added lines. Egg market deflation had a notable impact in 2005, as the egg market declined from historically high levels in 2004 to a multi-decade low in mid-2005. During 2005, shell egg prices decreased by approximately 20% from 2004 levels, as reported by Urner Barry, resulting in weak pricing for market-sensitive (food ingredient) egg products. In late 2005 egg prices returned to more normal levels. Unit sales increased for most product lines in 2005, with an overall increase of 2.1% recorded for the Division as compared to 2004 levels. Sales of higher value-added egg products represented approximately 72% of the Egg Products Division’s external net sales in 2005 compared with 65% in 2004. Sales diminished for our most commodity-sensitive products—short shelf-life liquid and shell eggs.

Potato Products Division Net Sales. Potato Products Division external net sales for the year ended December 31, 2005 increased $18.4 million, or 22%, to $102.2 million from $83.8 million for the year ended December 31, 2004. This increase was primarily attributable to strong unit sales growth for retail potato products, which increased approximately 26% from 2004 levels. Foodservice unit sales increased approximately 8%. Sales to new customers, growth in sales to existing customers, increased marketing and, particularly, growth in the retail category all contributed to the sales increase. Approximately 57% of the Division’s 2005 net sales were to the foodservice market, with 43% to the retail market. Pricing in both market segments was higher in 2005 than in 2004.

Refrigerated Distribution Division Net Sales. Refrigerated Distribution Division external net sales for the year ended December 31, 2005 decreased $9.0 million, or 3%, to $279.3 million from $288.3 million for the year ended December 31, 2004. This decrease was mostly due to notably lower market pricing for shell eggs. The key distributed products business was strong, with branded cheese unit sales up approximately 6%. Dollar sales for distributed products increased over 1%. In addition to eggs, deflation of markets was seen in cheese and butter sales, which are the Division’s largest product lines.

Gross Profit. Gross profit for the year ended December 31, 2005 increased $0.7 million to $237.1 million from $236.4 million for the year ended December 31, 2004. Our gross profit margin was 19.1% of net sales for 2005, compared with 18.0% for 2004. The increase in gross profit margin was due to increased gross profit margins from higher value-added egg products and potato products.

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Selling, General and Administrative Expenses. Selling, general and administrative expenses for the year ended December 31, 2005 decreased $7.3 million, or 5%, to $130.8 million from $138.1 million for the year ended December 31, 2004. Selling, general and administrative expenses were 10.5% of net sales in 2005 and 2004. The decrease in expenses was caused by a reduction in incentive accrual based on the level of achievement of the incentive plan target and overall expense management. Additionally, the decrease of expenses in 2005 was in part due to higher levels of bad debt expense recorded in 2004. The increased bad debt expense recorded in 2004 related primarily to specific pasta company and bakery company customers that had filed for bankruptcy in 2004.

Operating Profit. Operating profit for the year ended December 31, 2005 increased $8.0 million, or approximately 8%, to $106.2 million from $98.2 million for the year ended December 31, 2004. This increase is due to a notable increase in Potato Products operating profits and also an increase in Refrigerated Distribution operating profits, which more than offset a decrease from Egg Products.

Egg Products Division Operating Profit. Egg Products Division operating profit for the year ended December 31, 2005 decreased $5.6 million, or 6%, to $82.0 million from $87.6 million for the year ended December 31, 2004. Operating profit for higher value-added egg products increased by approximately $27.0 million, or 39%, from 2004, mainly reflecting lower egg costs. Operating profits from other egg products declined significantly from 2004 levels, reflecting unfavorable market-driven pricing. Shell egg profitability went from a profit in 2004 to a loss in 2005, reflecting substantially lower Urner Barry pricing levels in 2005. The 2004 period included approximately $2.0 million in income related to amounts received under patent infringement settlements. The Division incurred unusual operating expenses in 2004 related to the handling of wastewater, particularly at the Wakefield, Nebraska location (see Item 3).

Potato Products Division Operating Profit. Potato Products Division operating profit for the year ended December 31, 2005 increased $10.3 million to $17.2 million from $6.9 million for the year ended December 31, 2004. This increase reflected significant volume growth in our more profitable retail operations which resulted in an increase in that sector’s profitability. Also, there was significant profitability in the foodservice business in 2005, compared to break-even operations in 2004.

Refrigerated Distribution Division Operating Profit. Refrigerated Distribution Division operating profit for the year ended December 31, 2005 increased $2.5 million, or 19%, to $15.7 million from $13.2 million for the year ended December 31, 2004. Operating profit increased mainly due to lower market prices for our key product line, cheese, and significant volume growth for that product line.

Interest Expense and Income Taxes. Interest expense increased approximately $3.8 million in 2005 compared to 2004, reflecting higher interest rates. Our effective tax rate was 26.6% in 2005 compared to 38.2% in 2004. The reduction in the effective tax rate for 2005 was related to several factors, with a change in the tax rate used to calculate the deferred tax benefit being the most meaningful factor. The change in the tax rate was primarily due to a reduction in our state income tax rate.

Equity in Losses of Unconsolidated Subsidiary. We had equity losses of approximately $0.5 million in both 2005 and 2004 related to our Belgian joint venture.

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 Refrigerated Distribution 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. Inflation is not expected to have a significant impact on our business, results of operations or financial condition since we can generally offset the impact of inflation through a combination of productivity gains and price increases. However, we had unusual inflationary impacts to our operations in 2004, 2005, and 2006, as we experienced notable inflation for key purchased items such as natural gas, diesel fuel and packaging materials. We were unable to fully offset these impacts through selective price increases to our customers.

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Liquidity and Capital Resources

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

Cash flow provided by operating activities was $76.8 million for the year ended December 31, 2006, compared to $104.4 million for the year ended December 31, 2005. The decrease in our cash flow provided by operating activities was primarily attributable to a decrease in net earnings of approximately $20 million. Cash flow provided by operating activities was $104.4 million for the year ended December 31, 2005, compared to $121.6 million for the year ended December 31, 2004. The decrease in our cash flow provided by operating activities in 2005 was primarily attributable to an increase in working capital, largely related to an increase in inventories, a tax receivable recorded at the time of the Merger, and changes in deferred income taxes (see Note C to consolidated financial statements).

As a result of the Merger, in 2003 we incurred approximately $780 million of long-term debt, including $495 million of borrowings under our senior credit facility, $135 million of borrowings under a senior unsecured term loan facility and $150 million from the issuance of 8% senior subordinated notes due 2013. The senior credit facility that we entered into in connection with the Merger currently provides a $100 million revolving credit facility maturing in 2009 and a $540 million term loan facility maturing in 2010. The senior unsecured term loan facility of $135 million was to mature in 2011. The senior credit facility (“credit agreement”) and senior unsecured term loan agreement were amended as of September 17, 2004 (see our Form 8-K of September 22, 2004; incorporated by reference herein). The credit agreement was amended a second time as of May 18, 2005 (see our Form 8-K of May 23, 2005; incorporated by reference herein) and a third time as of November 22, 2005 (see our Form 8-K of November 4, 2005; incorporated by reference herein). As a result of the third amendment, which expanded the capacity of the senior credit facility, the $135 million senior unsecured term loan agreement was terminated, with the loan being paid-in-full.

As a result of the Merger, we continue to have substantial annual cash interest expense. Our senior credit facility requires us to meet a minimum interest coverage ratio and a maximum leverage ratio. In addition, the senior credit facility 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 operating our businesses. We were in compliance with all of the covenants in the credit agreement and the indenture as of December 31, 2006.

M-Foods Holdings, Inc. has incurred $100 million 9.75% Senior Notes due October 1, 2013. As a wholly-owned subsidiary of M-Foods Holdings, Inc., we are responsible for servicing these notes.

The following is a calculation of our minimum interest coverage and maximum leverage ratios under our senior credit facility. The terms and related calculations are defined in our senior credit facility agreement, as amended, which agreement and amendments are included as exhibits to this Form 10-K.

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The aggregate maturities of our long-term debt, our lease commitments and our long-term purchase commitments for the years subsequent to December 31, 2006, are as follows:

We have entered into substantial purchase obligations to fulfill our egg, potato and cheese 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 45% of our annual 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 five contracted egg suppliers will approximate $106 million in 2007, $104 million in 2008, $99 million in 2009, $80 million in 2010 and $17 million in 2011, and that the 2007 amount will account for approximately 34% of our total egg purchases this year. In addition, we have contracts to purchase potatoes that expire in 2007. These contracts will supply approximately 49% of the Potato Products Division’s raw potato needs in 2007. Two potato suppliers are each expected to provide more than 10% of our 2007 potato requirements. We had no forward buy cheese contracts at December 31, 2006. 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.

As discussed above, we have a credit agreement with various lenders, including commercial banks, other financial institutions and investment groups, which expires in 2009 and 2010 and provides credit facilities which originally provided $595 million. As amended in 2005, the credit agreement provides $640 million. Within the credit agreement, there is a $100 million revolving line of credit. As of December 31, 2006, $477 million was outstanding under the credit agreement, plus approximately $6.5 million was used under the revolving line of credit for letters of credit. After paying our stockholder approximately $70.1 million in dividends in 2004, we made a voluntary repayment of $35 million under the credit agreement in December 2004. During 2005, we effectively made, as part of the credit agreement amendment process in November 2005, another voluntary repayment of approximately $49 million. In December 2006, we made another voluntary repayment of $60 million. At the time of the Merger, largely the same lender group provided us with a $135 million senior unsecured term loan agreement, which was to expire in 2011. The senior unsecured term loan was repaid in 2005, at which time the senior unsecured term loan was terminated.

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The weighted average interest rate for our borrowings under the credit agreement was approximately 7.35% at December 31, 2006. Given our business trends and cash flow forecast, we do not anticipate any use of the revolving line of credit during 2007, except for letters of credit purposes. However, it is possible that one or more acquisitions could arise, which could result in much of the revolving line of credit being utilized at some point.

We may repurchase from time to time a portion of our senior subordinated notes, subject to market conditions and other factors. No assurance can be given as to whether or when, or at what prices, such repurchases may occur. Any such repurchases would be limited by certain restrictions found in our credit agreement and in the indenture governing the subordinated notes. The indenture requires the Company to pay certain amounts, as set forth in the indenture, if repurchases occur before the specified dates.

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 can provide no assurances that we would be able to accomplish any of these alternatives on a timely basis or on satisfactory terms, if at all. In addition, the terms of our existing and future indebtedness, including the senior subordinated notes and our senior credit facility may limit our ability to pursue any of these alternatives.

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

Capital Spending

We invested approximately $33.8 million in capital expenditures in 2006, $40.7 million in 2005, and $37.7 million in 2004. Capital expenditures each year mainly related to expanding capacity for value-added products, expanding warehouse space for all of our divisions, and upgrading information technology systems. Capital expenditures in 2006, 2005, and 2004 were funded from cash flows from operations and borrowings under our credit facility.

We plan to spend approximately $41.0 million in total capital expenditures for 2007, which will be used to expand capacity for higher value-added egg products, maintain existing production facilities, replace tractors and trailers, and to upgrade information technology systems, among other projects. This spending is expected to be funded from operating cash flows.

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. 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 December 31, 2006 was approximately $15.8 million.

Insurance

In general, our insurance costs have declined over the past three years. Regarding our largest insurance programs, in 2006 our casualty insurance premiums declined from 2005 levels and, due to an extended term, we did not have a change in premium for our property coverage in 2006. We expect a further decline in our casualty insurance premiums in 2007 based upon counsel from our broker and we recently secured a decrease in property insurance rates for 2007. We have also experienced, and expect to continue to experience, rising premiums for our portion of health and dental insurance benefits offered to our employees, although the past three years we have succeeded in maintaining such increases below prevailing market rates.

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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, financial instruments and 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 determine 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 inflation rates, litigation trends, legal interpretations, benefit level changes and claim settlement patterns.

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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

We use derivative financial instruments to manage our cash flow exposure to various market risks, including certain interest rate, cheese, grain and feed costs. The fair value of these derivative financial instruments is based on estimated amounts which may fluctuate with market conditions.

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.

Recent Accounting Pronouncements

In July 2006, the Financial Accounting Standards Board issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. While our analysis of the impact of FIN 48 is not yet complete, we do not anticipate it will have a material impact on our shareholder’s equity at the time of adoption.

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS No. 157”). This standard clarifies the principle that fair value should be based on the assumptions that market participants would use when pricing an asset or liability. Additionally, it establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. This standard is effective for financial statements issued for fiscal years beginning after November 15, 2007. We are currently evaluating the impact of this statement. We believe the adoption of SFAS No. 157 will not have a material impact on our consolidated financial position or results of operations.

In September 2006, the SEC staff issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” SAB 108 was issued in order to eliminate the diversity of practice surrounding how public companies quantify financial statement misstatements. The Company adopted SAB 108 by using the cumulative effect transition method provided for in SAB 108 as of January 1, 2006. The impact of adopting SAB 108 reduced our retained earnings by $3.3 million effective January 1, 2006.

Market Risk

Commodity Hedging

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

The primary raw materials used in the production of eggs are corn and soybean meal. We purchase these materials to feed our approximately 13.5 million hens, which produce approximately 30% of our annual egg requirements. Shell and liquid eggs are purchased from third-party suppliers and in the spot market for the remainder of the Egg Products Division’s needs. Eggs, corn and soybean meal are commodities that are subject to significant price fluctuations due to market conditions which, in certain circumstances, can adversely affect the results of operations.

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

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During 2006, we settled forward buy cheese contracts of approximately 20.0 million pounds, or 26% of our Crystal Farms branded cheese purchases, at a premium to the market of approximately $3.7 million. No forward buy cheese contracts were outstanding at December 31, 2006.

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. The monthly purchases for natural gas have been made for January, February and March 2007 and cover approximately 75% of our estimated usage requirements during that period, or approximately 21% of our annual needs. Also, we partially mitigate the risk of variability of our transportation-related fuel costs through the use of home heating oil futures contracts from time to time. The monthly purchases for home heating oil are for January through December 2007 and cover approximately 52% of our estimated annual usage requirements. At December 31, 2006 the notional value of the combined fixed price purchases for natural gas and home heating oil was approximately $8.8 million, with a market risk of $0.8 million. Market risk is estimated as the potential loss in fair value resulting from a hypothetical 10% adverse change in price.

Interest Rates

Due to the Merger, we have fixed rate debt of $150 million, which we believe had a fair value of approximately the same amount as of the end of 2006. The market risk related to this fixed rate debt, which represents the impact on the fair value from a hypothetical 100 basis point change in interest rates, is $1.5 million. Our credit agreement debt obligations of approximately $477 million carry a variable rate of interest. We believe the fair value of this debt approximated $477 million as of the end of 2006. The interest paid on these obligations floats with market changes in interest rates, though a majority of the credit agreement debt is presently tied to six month Eurodollar rates.

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.

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

None.

ITEM 9A—CONTROLS AND PROCEDURES

(a) Our management evaluated, with the participation of the Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of December 31, 2006. Based on their evaluation, our principal executive and principal financial officers concluded that our disclosure controls and procedures were effective as of December 31, 2006.

(b) There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during our fiscal quarter ended December 31, 2006, 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.

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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:

Gregg A. Ostrander is our Chairman, Chief Executive Officer and President. He has held the office of Chief Executive Officer since 1994, has been our Chairman since 2001, and was President from 1994 – January 2006 and since August 2006. Mr. Ostrander has been a director of Michael Foods since 1994. In 1993, Mr. Ostrander served as our Chief Operating Officer. Mr. Ostrander is also a director of Arctic Cat Inc., a recreational vehicle manufacturer, and Birds Eye Foods, Inc., a food company.

John D. Reedy is our Executive Vice President and Chief Financial Officer and has held these dual positions since 2000. From 1988 to 2000, Mr. Reedy was our Vice President—Finance and Chief Financial Officer.

James G. Mohr is our Senior Vice President—Supply Chain and has held that position since 2004. From 1996 to 2003, Mr. Mohr was our Vice President—Supply Chain. Mr. Mohr has served us in various transportation and logistics management positions since 1994.

Mark W. Westphal is our Senior Vice President-Finance and has held that position since 2006. Mr. Westphal has served us in various financial positions since 1995, most recently as Vice President – Customer Accounting & Analysis.

Mark D. Witmer is our Treasurer and Secretary. Mr. Witmer has held the former position since 2003 and the latter since 2001. Mr. Witmer joined us as the Director of Corporate Communications in 1989.

Mark B. Anderson is the President of our Refrigerated Distribution Division, a position he has held since 2004. From 2002 to 2003, Mr. Anderson served as Vice President/General Manager of the Division. From 1998 – 2002, Mr. Anderson held various business development and general manager positions within the Division.

Todd M. Abbrecht has been a director of Michael Foods since November 2003 following the consummation of the Merger. Mr. Abbrecht is a Managing Director of Thomas H. Lee Partners, L.P., where he has been employed since 1992. Prior to Thomas H. Lee Partners, L.P., Mr. Abbrecht held a position in the mergers and acquisitions department of Credit Suisse First Boston. Mr. Abbrecht is a director of Simmons Bedding Company, a bedding products manufacturer and distributor, and Warner Chilcott Corporation, a specialty pharmaceutical company.

Anthony J. DiNovi has been a director of Michael Foods since November 2003 following the consummation of the Merger. 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 American Media Operations, Inc., a consumer magazine

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publisher, Nortek, Inc., a manufacturer and distributor of building products, US LEC Corporation, a voice, data and Internet services provider, Dunkin’ Brands, Inc., a quick service restaurant franchisor, West Corporation, a provider of business process outsourcing solutions and voice-related services, and Vertis, Inc., a provider of advertising, media, and marketing solutions.

Jerome J. Jenko has been a director and a member of the management committee of Michael Foods Investors since 2001 and a director of Michael Foods since 1998. Mr. Jenko had been a director and a member of the management committee of M-Foods Investor LLC, our Predecessor’s parent, prior to the 2003 Merger. He has been a Senior Advisor with Goldsmith, Agio, Helms and Company, 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 and Chief Executive Officer of M. A. Gedney Company (“Gedney”). 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 November 2003 following the consummation of the Merger. Mr. Weldon is a Managing Director of Thomas H. Lee Partners, L.P, where he has been employed since 1991. 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 Nortek, Inc., a manufacturer and distributor of building products, Cumulus Media Partners LLC, a radio broadcasting firm, and THL-PMPL Holding Corp., a manufacturer of plastic interior subsystems for cars and light trucks.

Audit Committee

The Board of Directors has a standing audit committee established in accordance with section 3(a)(58)(A) of the Exchange Act (15 U.S.C. 78c(a)(58)(A)). The members of the audit committee are Jerome J. Jenko, Chairman, Todd M. Abbrecht and Charles D. Weil.

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 which is our Chief Executive Officer. 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. When making final compensation decisions regarding our Chief Executive Officer, the compensation committee acts without his participation. The committee generally meets twice yearly.

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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 equityholders. Our current executive compensation program is mainly focused on net sales and EBITDA (earnings before interest, taxes, depreciation and amortization, as defined in our senior credit facility) 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 historical and prospective breakdowns of the total compensation components for each executive officer. Our decisions on compensation for our executive officers are based primarily upon our assessment of each individual’s performance and potential to enhance long-term equityholder 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 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 our 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, as defined, 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.

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 2006, 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 achievement of this target.

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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. Incentive payments for the past fiscal year are made on, or before, March 15^th of the subsequent year. Incentive payments for 2006 were made on March 9, 2007.

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 2006 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 and/or President make 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 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. Historically, they have been made during our annual 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.

The Company’s 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 the Company’s employ 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 the Company, 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 Chief Executive Officer, President/Chief Operating Officer and Chief Financial Officer are offered a club membership, at the Company’s expense, to facilitate business development. Historically, the Chief Executive Officer and President/Chief Operating Officer have availed themselves of this perquisite, while the Chief Financial Officer has not. The same officers are offered reimbursement for an annual executive physical, the usage of which varies by officer and by year, and have their tax preparation expenses paid by us. Our use of perquisites as an element of compensation is limited and is largely based on the historical practices and policies of the Company. 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.

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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 2006.

Summary Compensation Table

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None of the named executive officers received stock option awards or stock awards in 2006. The estate of our deceased President and Chief Operating Officer, James D. Clarkson, exercised his vested stock options in November 2006. There were no other stock option exercises in 2006.

Option Exercises and Stock Vested in 2006

Outstanding Equity Awards at December 31, 2006

Employment Agreements

General Provisions. The employment agreement with Gregg A. Ostrander provides for automatic one year renewals beginning with the second anniversary of the closing of the Merger. 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 for good reason. 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.

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Ostrander’s annual base salary is subject to periodic review, and once increased, the increased base salary becomes a minimum. For 2006, 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.

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The employment agreement with John D. Reedy provides for automatic one year renewals beginning with the second anniversary of the closing of the Merger. 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 for good reason. 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 2006, 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. Mr. Reedy is subject to a noncompetition covenant and a nonsolicitation provision.

Termination Provisions. The Ostrander employment agreement provides that if Mr. Ostrander’s employment is terminated by his death or disability, Mr. Ostrander, or his estate or beneficiaries, will receive 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, as described below, Mr. Ostrander will receive his annual base salary through the date of termination and other benefits not yet paid under any plan, program, policy, contract or agreement with or practice of Michael Foods. “Good reason” includes, among other things, any diminution in position, authority, duties and responsibilities or any requirement to relocate or travel extensively. If Mr. Ostrander terminates his employment for good reason or if Michael Foods terminates his employment other than for cause, death or disability, Mr. Ostrander will receive a lump sum 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 the Merger and 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. In no event shall the Company be obligated to make any such payments in connection with the acquisition in excess, in the aggregate, of $6,300,000. With respect to any such 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.

Our President and Chief Operating Officer, James D. Clarkson, died in August 2006. His family/estate received, in 2006, the amounts payable per his employment agreement’s termination provisions. See Summary Compensation Table.

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, such term having a meaning substantially similar to the meaning given such term in the Ostrander employment agreement, Mr. Reedy will receive his annual base salary through the date of termination and other benefits not yet paid under any plan, program, policy, contract or agreement with or practice of Michael Foods. If Mr. Reedy terminates his employment for good reason or if Michael Foods terminates his employment other than for cause, death or disability, Mr. Reedy will receive a lump sum 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.

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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 the Merger and 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. In no event shall the Company be obligated to make any such payments in connection with the acquisition in excess, in the aggregate, of $6,300,000. With respect to any such 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 Mohr employment agreement provides that if Mr. Mohr is terminated by his death or disability, Mr. Mohr, 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 pro rated for the months of employment in that year, plus any eligible unpaid other benefits, plus an amount equal to Mr. Mohr’s current annual base salary.

If Mr. Mohr’s employment is terminated for cause or he terminates without good reason, such term having a meaning substantially similar to the meaning given such term in the Ostrander employment agreement, Mr. Mohr 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. Mohr terminates his employment for good reason or if Michael Foods terminates his employment other than for cause, death or disability, Mr. Mohr 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 a payment equal to Mr. Mohr’s current annual base salary. In addition, Mr. Mohr will receive for one year following the termination date, or until such earlier time as Mr. Mohr becomes eligible to receive comparable benefits, certain medical, dental and life insurance benefits for himself and his family.

Mr. Anderson has a severance agreement which provides for payment of his pro rated compensation through the date of termination, a lump sum payment of two years’ total annual compensation, and the continuation of certain benefits should he be terminated under certain conditions within two years of a change in control of our Crystal Farms subsidiary.

Mr. Westphal, Mr. Bailey and Mr. Witmer are not subject to any severance agreement.

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 is also our Chief Executive Officer. No compensation committee interlock relationships existed in 2006.

Deferred Compensation Plan

Upon the closing of the Merger, certain members of management became 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, however, 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. There were distributions of deferred compensation totaling $13.1 million in 2004 coinciding with the dividends issued by Holdings to Michael Foods Investors, LLC.

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.

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Director Compensation

All members of our Board of Directors are reimbursed for their usual and customary expenses incurred in connection with attending all Board and other committee meetings. Members of the Board of Directors who are also our employees, or employees of Thomas H. Lee Partners, L.P., do not receive remuneration for serving as members of the board. Other non-employee directors receive a quarterly retainer of $4,000 and are paid $3,000 for each Board meeting attended, or $500 for a meeting held telephonically.

For all committees except the audit committee, non-employee outside directors (excludes affiliates of Thomas H. Lee Partners, L.P.) 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 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 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 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 2006 totaled $143,994. Fees paid by us to non-employee directors in 2006 were as follows:

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.

Fifty percent of the then 25,000 option shares initially reserved for issuance under this stock option plan were issued to Messrs. Ostrander, Reedy, Clarkson, Mohr and Max Hoffmann (Vice President and Chief Financial Officer for Refrigerated Distribution Division) in 2003. As amended in 2004, the plan provides for a total of 32,277 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 at the Merger date for those grants made in 2003 and for certain grants made in 2004, or the date of grant for other grants. On termination of employment for any reason, all unvested options of the terminated employee are cancelled. Vested options not exercised within 90 days after termination are cancelled, unless such employee is terminated for cause or leaves without good reason, in which case such vested options shall be cancelled upon termination. If employment is terminated for any reason other than for cause or a termination without good reason, M-Foods Holdings will provide a notice setting forth the fair market value of the common stock within 90 days of such termination. In the event of a change in control of M-Foods Holdings, 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.

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The following table sets forth certain information, as of March 15, 2007, regarding beneficial ownership of Michael Foods Investors, LLC by: (i) each person or entity owning any class of Michael Foods Investors, LLC’s outstanding securities and (ii) each member of Michael Foods Investors, LLC’s management committee (which, with the exception of Charles Weil, is identical to the board of directors of Michael Foods), each of our currently serving named executive officers and all members of the management committee 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 and 330,000 Class C Units. The Class A Units, Class B Units and Class C Units generally have identical rights and preferences, except that the Class C Units are non-voting and have different rights with respect to certain distributions as described in our Form 10-K for the year ended December 31, 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.

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Securities Authorized for Issuance Under Equity Compensation Plans

The following table sets forth information as of December 31, 2006.