MICHAEL FOODS OF DELAWARE INC Securities Registration: Business Combination (S-4/A) BUSINESS

The following is an excerpt from a S-4/A SEC Filing, filed by MICHAEL FOODS OF DELAWARE ... on 5/17/2004.

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BUSINESS

Overview

We believe that we are a leading producer and distributor of specialty egg products to the foodservice, retail and industrial ingredient markets. We believe that we are also a leading producer and distributor of refrigerated potato products to the retail market. In addition, we distribute refrigerated food items, primarily cheese and other dairy products, to the retail grocery market predominantly in the central United States. For the year ended December 31, 2003, we generated net sales of $1,180.5 million on a pro forma basis after giving effect to the sale of the dairy products division, which the predecessor sold effective September 30, 2003.

We believe that our largest operating division, our egg products division, is one of the largest producers of processed egg products in the United States with an estimated 44% share of the processed egg market, and we believe it is three times larger than its closest competitor. We also participate in the higher value-added sector of the U.S. processed egg market, which includes extended shelf-life, or ESL, liquid eggs, precooked egg patties and omelets, low/no cholesterol liquid eggs and hardcooked eggs. During the year ended December 31, 2003, we processed approximately 1.4 billion pounds of eggs through our fully-integrated national operations, and we believe we are the lowest cost producer of processed egg products in the United States.

Since 2000, we have grown our sales volumes of higher value-added egg products at more than twice the industry growth rate for egg consumption. Moreover, we have benefited from our ability to capitalize on favorable consumer and food industry trends by introducing new, higher value-added egg products. This ability has helped us to improve our egg products division's operating profit margin from 3.3% in 1992 to 9.5% for the year ended December 31, 2003.

We offer our customers a wide range of products within our food categories. Our strategy within these categories is to focus on higher-margin specialty sectors (such as processed egg products and refrigerated potato products) which we believe are growing at a higher rate than their respective food categories. We also seek to develop and market products that address key food industry concerns, including food safety, convenience, product quality and consistency and labor and waste reduction. Our products are primarily sold through long-standing preferred supplier relationships with major foodservice distributors and national restaurant chains. For the year ended December 31, 2003, sales to Sysco and U.S. Foodservice accounted for approximately 13% and 15%, of our external net sales, respectively. The following charts set forth the net sales and operating profit of our three divisions-egg products, potato products and refrigerated distribution-as a percentage of total net sales and operating profit for these three divisions for the year ended December 31, 2003.

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Egg Products. We believe that our egg products division, comprised primarily of M.G. Waldbaum Company, Papetti's Hygrade Egg Products, Inc., MFI Food Canada, Ltd. and Trilogy Egg Products, Inc., is one of the largest producers of processed egg products and the fourth largest egg producer in the United States. Our higher-margin specialty products include ESL liquid eggs, precooked egg patties and omelets, low/no cholesterol

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liquid egg products and hardcooked eggs. Our retail grocery brands include Better 'n Eggs and All Whites and our foodservice brands include Table Ready and Easy Eggs. The egg products division's major customers include leading foodservice distributors, such as Sysco Corporation and U.S. Foodservice, national restaurant chains, such as Burger King Corporation, IHOP Corp. (International House of Pancakes), Sonic Corp. and Dunkin' Donuts Incorporated, major retail grocery store chains, such as Costco Wholesale Corporation, Wal-Mart Stores Inc. and Ahold USA Retail Operations and major industrial ingredient customers, such as General Mills, Inc. and Unilever Bestfoods North America Foodservice. For the year ended December 31, 2003, the egg products division represented approximately 70% and 75% of the net sales and the operating profit of our three divisions, respectively.

Potato Products. Our potato products division, comprised primarily of Northern Star Co. and Farm Fresh Foods, Inc., produces and distributes refrigerated potato products to the retail grocery and foodservice markets. Our products principally include hash browns and diced, sliced, mashed and other specialty potato products. The potato products division is the national retail market leader in refrigerated potato products with an estimated 57% share in the retail grocery market under the Simply Potatoesand Diner's Choice brands. Our branded retail refrigerated potato products' annual volume has doubled since 1997. Due to their freshness and quality, refrigerated potato products are generally sold at higher price points than frozen potato products and, according to our consumer studies, have superior taste and texture characteristics. In addition, we use a production process that produces a 75-day shelf-life for our potato products, which we believe is the longest in the retail refrigerated potato products market. Our belief is based on routine review and monitoring of information relating to the shelf-life of our competitors' products as presented on the containers and packaging of their products. The potato products division's largest customers include major retail grocery store chains, such as The Kroger Co., Publix Super Markets, Inc. and Food Lion LLC and major foodservice distributors, such as Sysco and U.S. Foodservice. For the year ended December 31, 2003, the potato products division represented approximately 6% and 9% of the net sales and the operating profit of our three divisions, respectively.

Refrigerated Distribution. Our refrigerated distribution division, comprised primarily of Crystal Farms Refrigerated Distribution Company and Wisco Farm Cooperative, is a distributor of over 400 branded and private label refrigerator case items to retailers and wholesale warehouses predominantly in the central United States. The refrigerated distribution division's principal product line is its Crystal Farms branded cheese, which has a strong presence in the upper Midwest region of the United States and the largest market share for branded cheese in Minnesota. Crystal Farmsbranded cheese generated approximately $135.0 million of net sales in the twelve months ended December 31, 2003. This division also distributes shell eggs, bagels, butter, margarine and our refrigerated potato and other products. The refrigerated distribution division's largest customers include major grocery retailers, such as SUPERVALU Inc./Cub Foods Stores and Roundy's, Inc. For the year ended December 31, 2003, our refrigerated distribution division sales to SUPERVALU and its affiliates accounted for approximately 40% of the refrigerated distribution division's net sales volume. For the year ended December 31, 2003, the refrigerated distribution division represented approximately 24% and 16% of the net sales and operating profit of our three divisions, respectively.

Industry Trends

We believe that our specialty egg products are well positioned to continue capitalizing on the growth of the foodservice industry, which is being driven by increasing food consumption away from home. We also believe that the egg products division will benefit from several trends, including continued increases in processed egg consumption. Our business is influenced by the following industry trends:

Growth in Foodservice. According to the USDA, purchases of food prepared away from home in the United States have grown from 35.8% of total food purchases in 1975 to 46.1% in 2002, and we expect this trend to continue. The increase in foodservice sales has been largely driven by demographic changes, including the

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increases in personal disposable income, single parent households and dual income families. We expect this growth in foodservice sales to continue to lead to increased demand for processed food products. Additionally, we believe that the focus of the foodservice industry on increasing product safety, reducing preparation costs and outsourcing more of the food preparation process complements our product portfolio and new product development efforts.

As a producer of processed egg products and refrigerated potato products, we believe that we meet the needs of our clients primarily for the following reasons:

• processed food products which are already partially-to-fully processed reduce the amount of labor needed in the foodservice kitchen to prepare a meal;

• processed food products are typically processed (using processes such as our UHT process) to reduce bacteria counts and, hence, provide enhanced food safety;

• processed food products generally exhibit longer shelf-lives than unprocessed foods and are sold in packages which generally provide ease-of-use and portion control, thus reducing spoilage and waste; and

• processed food products are processed in ways that increase the consistency of the products.

Our new product development efforts are largely focused on the needs of our foodservice clients, namely on reducing their labor costs and food waste and enhancing food safety and consistency.

Growth in Egg Consumption. According to the USDA, egg consumption increased at a compounded annual growth rate of 2.0% between 1991 and 2001. This growth was partially due to a shift in consumer perception of the health attributes of eggs, as well as new applications for eggs. In addition, we believe the recent increase in popularity of high protein, low carbohydrate diets has had a positive impact on egg consumption in the United States. In 2000, the American Heart Association revised its nutritional recommendations that limited the weekly intake of eggs. We believe this action helped improve the perception of eggs as a healthy part of a balanced diet.

Growth in Higher Value-Added Processed Egg Products. The growth in food consumption away from home and the development of new egg products has resulted in an increase in the production and consumption of processed egg products. According to the USDA, approximately 28.9% of all eggs consumed in the United States in 2001 were processed, up from approximately 21.7% in 1991. This represents a 4.9% compounded annual growth rate in consumption of processed eggs from 1991 to 2001 compared with an overall increase in the consumption of eggs at a compounded annual growth rate of 2.0% during that period. Requirements of the foodservice industry for food safety and concerns regarding product quality, consistency and convenience have served to increase the consumption of higher value-added egg products such as ESL liquid eggs and precooked eggs. We have witnessed this trend within our customer base as former shell egg purchasers such as Burger King and IHOP recognize the operational and economic benefits of processed egg products.

Consolidation in Foodservice Distribution Channel. Leading foodservice distributors continue to consolidate the foodservice industry in an effort to improve and broaden their product offerings, competitiveness and profitability. For example, according to ID Magazine, a foodservice industry publication, the top 20 foodservice distributors have increased their share of total industry sales from 22.5% in 1991 to 32.6% in 2001. As foodservice distributors consolidate, we believe they will increasingly choose to do business with national suppliers that have broad product lines and extensive service capabilities to meet both the scale and the scope of their operational requirements. By using national suppliers, foodservice distributors are able to simplify operations by dealing with fewer vendors that have the production, warehousing and distribution capabilities necessary to meet their needs. Large order volumes also allow foodservice distributors to benefit from favorable pricing terms we offer our major customers.

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Market, Ranking and Other Data

The data included in this prospectus regarding markets and ranking, including the size of certain markets and our position and the position of our competitors within these markets, is based on reports of government agencies or published industry sources and our estimates based on our management's knowledge and experience in the markets in which we operate. Our estimates have been based on information obtained from our customers, distributors, suppliers, trade and business organizations and other contacts in the markets in which we operate. Consumption patterns and consumer preferences can and do change rapidly, which could result in changes in data presented in this prospectus.

Our Competitive Strengths

We believe that the following key competitive strengths will contribute to our continued success:

Extensive Portfolio of Specialty and Branded Products with Leading Regional and National Market Positions. We specialize in the development, production and distribution of specialty food products that address many of the needs of the foodservice and the retail markets. We have been successful in developing new and innovative products as evidenced by a broad portfolio of strong market positions and leading brands, as shown in the table below.

Market Position Division Products Key Brands (1)
Egg Products ESL liquid eggs Easy Eggs No. 1 U.S. market Precooked eggs Table Ready share of processed Hardcooked eggs Better'n Eggs egg products (2) Low/no All Whites cholesterol
liquid eggs
Other (3)

Potato Products Refrigerated cut Northern Star No. 1 U.S. retail and mashed potato Simply Potatoes market share products Diner's Choice

Refrigerated Processed and Crystal Farms No. 1 Minnesota Distribution wrapped cheeses market share for and other branded cheese products Strong upper Midwest market share $135.0 million retail cheese brand

(1) Market position data is derived primarily from our own estimates, which are based on information we obtained from customers, distributors, suppliers and trade and business organizations. See also "-Market, Ranking and Other Data."

(2) Market position for processed egg products is not derived from a third party source but rather is reflective of our own belief, which is based on the estimate we calculated by comparing the volume of processed eggs we produced in 2003 against the data provided by the USDA for the total market volume of processed eggs produced in 2003. See also "-Market, Ranking and Other Data."

(3) "Other" egg products include short shelf-life liquid eggs, dried eggs, frozen eggs and shell eggs.

Long-Standing Customer Relationships. Our high quality products, manufacturing scale and capability, extensive focus on customer service and customer-focused product development have helped us to build and retain a strong and diverse customer base. We have long-standing preferred supplier relationships with the major broad-line foodservice distributors, serving as their leading supplier of specialty egg and refrigerated potato products. In addition, we have long-standing relationships with many national restaurant chains that serve breakfast, major industrial ingredient companies and major retail grocery store chains. Our average length of

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relationship with our top ten egg products and potato products customers exceeds 10 years. We believe these long-standing relationships are the result of our high quality products and service levels.

Large Scale Operator with Efficient Manufacturing Operations. During the year ended December 31, 2003, we processed approximately 1.4 billion pounds of eggs. We believe our significant annual volume combined with our diversified egg procurement and highly automated manufacturing facilities provide us with a cost advantage in the marketplace. Over the last six years, we have invested to expand our manufacturing capacity for value-added egg products, to upgrade our potato product 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 investments include the installation of new precooked egg production lines, a new dried egg facility, automated packaging equipment and quality control systems. Additionally, our diverse geographic presence, with core manufacturing facilities in the Midwest and eastern United States, allows us to serve customers cost-effectively throughout the United States. We believe that our operational scale, product breadth and geographic scope make us an attractive and important strategic partner for foodservice distributors, major restaurant chains and industrial ingredient companies.

Industry Leading Product Development Capability. We leverage our innovation and product development capabilities to develop new specialty products and improve existing specialty products. We conduct our research and development activities through designated facilities, including our state-of-the-art pilot plant for egg products in Gaylord, Minnesota. Our staff works closely with current and prospective customers to either adapt existing products to meet specific customer applications or to create and commercialize new customized specialty food products. Over the last few years, we have introduced, both independently and in conjunction with our customers, several new products and line extensions including precooked puffed egg patties and specialty dried eggs products. Products currently being test marketed include omelets for the retail market, precooked egg fillings for breakfast wraps, refrigerated French fries and French toast sticks.

Strong, Proven Management Team with Significant Equity Interest. We have an experienced and successful senior management team that has an average of over 20 years of food industry experience, each of whom has been with Michael Foods for over 10 years. The management team is headed by Gregg A. Ostrander, who has been our president and chief executive officer since 1994 and has 28 years of food industry experience, including management positions with Beatrice Foods Company and Armour Swift-Eckrich, a division of ConAgra Foods, Inc. Our management team has a strong track record of product innovation, cost containment and operating excellence during periods of both rising and falling commodity prices and while operating under a high degree of financial leverage. Our management team successfully executed an operational turnaround and subsequent sale of our dairy products division. Furthermore, our senior management's commitment to the business is evidenced by their equity investment of $33.0 million, representing, after the transactions, approximately 10.2% of the total equity invested in our company.

Stable Free Cash Flow Generation. Our business has generated stable free cash flow due to the combination of our sales growth, strong operating margins, stable egg products business and low capital expenditure and working capital requirements.

Our Business Strategy

Our strategy has enabled us to capitalize upon key industry trends, specifically the increases in both food prepared away from the home and the consumption of further-processed eggs. The primary components of our business strategy include the following:

Encouraging Customers to Purchase our Higher-Margin Products. We seek to continually transition our customers from lower value-added products to higher value-added, higher-margin products that offer improved food safety, reduced labor and waste and improved product quality and consistency. For example, in 1989 we worked with Burger King to help it transition from shell eggs to our value-added ESL liquid eggs and then, in

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1998, to our higher value-added precooked egg patties. In 2002, we assisted IHOP in transitioning from shell eggs to ESL liquid eggs, and became its exclusive supplier of ESL liquid eggs. We believe assisting customers in these transitions will continue to drive our future financial performance. In addition, we are actively encouraging and assisting current and prospective customers who may wish to enter into, or expand their presence in, the profitable foodservice breakfast category. For example, Sonic and Dunkin' Donuts are using our precooked egg products as part of their evolving breakfast strategies. Our sales force identifies customers and potential customers that either do not serve breakfast or that do not serve a hot breakfast. We are able to increase our customer's sales volumes through one or more of the following:

• Increasing reach (consumer trial),

• Increasing frequency (consumer visits),

• Increasing party size (larger groups), and/or

• Increasing check average (check average being the average revenue per transaction).

Adding breakfast to our clients' product offerings and introducing new menu items increases their reach. If a customer already serves breakfast but is not offering hot breakfast, adding a hot breakfast sandwich generally increases reach, frequency and check average. With regard to potential customers looking to add breakfast to their menu offerings, we add value by identifying and demonstrating the potential opportunity, offering culinary expertise, menu development and assistance in equipment selection when needed.

Capitalizing On Growth Opportunities. We believe that significant growth opportunities exist in each of our divisions. We are focused on increasing our specialty egg products sales to quick service restaurants, coffee- oriented venues and convenience stores that are seeking to grow revenues by either broadening their existing breakfast offerings or introducing a breakfast menu to add to their existing lunch and dinner offerings. For example, we have had success working with Sonic and Dunkin' Donuts to introduce hot breakfast menus that include our higher value-added egg products. We are also currently working with several major national restaurants to introduce a breakfast menu that includes our higher value-added egg products. In our potato products division, we plan to continue to participate in the fast growing refrigerated potato products market. Demonstrating this trend, according to the U.S. Potato Board's 2004-2006 Long Range Plan the fresh potatoes retail market grew (in pounds) by only 5.8% from 2000 to 2001, compared with a 25% growth (in pounds) in the refrigerated potatoes retail market during the same period according to AC Nielsen Corporation. In our refrigerated distribution division, we intend to expand our geographic reach and increase existing market penetration for our Crystal Farms branded cheese, while introducing new products and line extensions under the Crystal Farms label.

Continuing Strategic Sourcing and Cost Reduction Programs. We began a strategic sourcing program in our egg products division in 2002 in an effort to improve efficiency in our procurement operations and reduce overall costs. Our strategy involves focusing our procurement efforts on our key suppliers and working with them on improving all aspects of the procurement process, including the egg and grain purchasing function and farm and plant operations. Enhanced communication and coordination with these key suppliers has served to streamline the procurement process and has already resulted in benefits to both our suppliers and to us. Additionally, we have increased volume commitments with our key suppliers in exchange for improved pricing and terms. We believe the strategic sourcing program will continue to provide us with operational and financial benefits, and we expect we will continue to see improved results from this program over the next several years.

In mid-2003, we began a purchasing and supply chain management, or PSM, initiative, with the goal of reducing our effectable spending in areas other than raw material procurement for our egg products division by a cumulative amount of $55.0 million between 2003 and 2007. We have formed a dedicated task force, which includes key managers from each of our divisions, to administer this initiative. This cost reduction initiative is focused on areas where we believe there are significant opportunities for cost improvement, such as potato and cheese purchases, freight, packaging materials, technology costs and other fixed overhead categories. The task

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force has initiated programs which have already resulted in cost savings in the areas of container procurement, sanitation costs, office supplies and market-based egg purchases.

Pursuing Attractive Acquisition and Joint Venture Opportunities. We will continue to evaluate and selectively pursue acquisitions and joint ventures that expand our product offerings and/or geographic reach and broaden our technological expertise to complement our existing businesses. Since 1988, we have completed 17 acquisitions and three joint ventures, including the $106 million acquisition of Papetti's Hygrade Egg Products, Inc. in 1997. The acquisition of Papetti's significantly increased our market share, scale, geographic scope and offerings for our egg products division. In recent years, we have focused on making small strategic acquisitions. For example, in the past four years, we acquired Ingredient Supply LLC, which expanded our egg products division's hardcooked eggs product line, acquired the egg products division of Canadian Inovatech, Inc., one of the largest providers of processed egg products in Canada, which greatly expanded our presence in international markets, particularly for the industrial ingredient market, and invested in foreign egg products joint ventures to expand the geographic coverage of our egg products division and pursue new technologies.

Egg Products Division

Our egg products division produces, processes and distributes a variety of egg products and shell eggs. We believe that our egg products division is one of the largest producers of processed egg products in the United States with an estimated 44% share of the processed egg market and we believe it is three times larger than its closest competitor. We also participate in the higher value-added sector of the United States processed egg market, which includes ESL liquid eggs, precooked egg patties and omelets, low/no cholesterol liquid eggs and hardcooked eggs. We serve all significant market channels-foodservice, retail and industrial ingredient-with a comprehensive product line. During the year ended December 31, 2003, the egg products division processed approximately 1.4 billion pounds of eggs through its integrated facilities. The division focuses on producing higher value-added egg products that we believe are safe, easy to prepare and consistent in quality.

Demand for higher value-added egg products in both the retail and foodservice markets has been driven by the following factors:

Food Safety Processed egg products are pasteurized and quality controlled, which reduces the likelihood of contamination. As a result, foodservice companies and major restaurant chains are choosing processed egg products as a lower-risk alternative to unprocessed eggs.

Labor Reduction/Ease of Use Processed egg products require less preparation time, reducing labor costs for foodservice companies and increasing convenience for individual purchasers.

Product Quality and Consistency Foodservice companies and national restaurant chains require consistency of products throughout their operations. Processed egg products, particularly precooked egg products which are produced to distinct specifications, provide foodservice companies and national restaurant chains with a processed egg product that provides a more consistent taste, quality and serving size than shell eggs.

Efficiency/Waste Reduction Processed egg products reduce the need for disposal of partially used product and have fewer packaging and space requirements.

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Products. Our higher value-added processed egg products are detailed below:

ESL liquid eggs: These products are packaged in cartons and bag-in-box packaging principally for use in foodservice markets. We use proprietary ultra-high temperature pasteurization processes to produce our ESL liquid eggs. These processes produce an egg product that is salmonella and listeria-negative, as defined by federal law, with a refrigerated shelf-life of up to three months. Our ESL egg products are marketed under the Easy Eggs and Table Ready brand names.

Precooked eggs: These products are fully-cooked and packaged at the manufacturing facility and then reheated at the point of consumption. Foodservice companies and quick service restaurant chains find these products attractive because they can reduce labor costs and waste, improve consistency and require only a minimal infrastructure investment. We will continue to direct significant production and marketing resources to this product as usage increases.

Low/no cholesterol eggs: These egg products consist primarily of egg whites sold in retail grocery market under the names Better 'n Eggs, and All Whites. Egg substitutes are increasingly popular among health conscious consumers, and are developing a high level of acceptance in the retail market.

Hardcooked eggs: These products are hard-boiled eggs, which are packaged in pails with brine solution or in modified atmosphere packs that are designed to increase both shelf-life and food safety. Hardcooked eggs are sold primarily to foodservice accounts for use in salads and other dishes.

In addition, our other egg products include frozen eggs, short shelf-life liquid eggs and dried eggs that we supply in order to provide our customers with a broad range of egg products. Frozen eggs are used primarily by foodservice and industrial ingredient customers. Short shelf-life liquid eggs are liquid eggs packaged with standard pasteurization and are convenient for industrial ingredient customers, such as bakeries, who will use a large quantity of eggs within a short time period to produce other products. Dried eggs are used primarily by industrial ingredient customers in the production of mayonnaise, salad dressings and baking mixes.

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 industrial ingredient customers, such as General Mills, Inc. and Unilever Bestfoods North America Foodservice.

The strength of the egg products division's customer base is demonstrated by low turnover and the long-standing nature of the relationships, exemplified by an average relationship length in excess of ten years for its top ten customers. As an example of this type of relationship, the egg products division has a five year preferred supplier contract (terminable upon six months notice) with U.S. Foodservice pursuant to which we supply a substantial majority of U.S. Foodservice's egg products needs. This relationship is over 20 years old. Our volume with U.S. Foodservice grew 7% during 2002 and we estimate it will be up approximately 9% in 2003.

Competition. The egg processing industry is heavily concentrated, especially when compared to the shell egg industry. Sunny Fresh Foods, a subsidiary of Cargill, is our largest higher value-added egg products competitor. We also compete with other egg products processors including Sonstegard Foods Company, Rose Acre Farms, Inc., Echo Lake Farm Produce, Cutler Egg Products, Inc. and ConAgra Foods.

Sales and Marketing. The division distributes its egg products to food processors and foodservice customers primarily throughout the United States, with international sales in the Far East, South America and Europe. The

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largest selling product line within the egg product division, ESL liquid eggs, and other egg products are marketed nationally to a wide variety of food service and industrial ingredient customers. Most of the division's annual shell egg sales (approximately $19.3 million in 2003) are made to our refrigerated distribution division, which, in turn, distributes them predominantly in the central United States.

In 2002, the egg products division derived approximately 97% of net sales from egg products, with 3% of net sales coming from shell eggs. Pricing for shell eggs and certain egg products in the United States reflects levels reported by Urner Barry. Prices of certain higher value-added egg products, such as ESL liquid eggs, egg substitutes, and hardcooked and precooked egg products, typically are not significantly affected by Urner Barry quoted price levels. These products accounted for approximately 64% of the egg product division's 2002 sales. Prices for the egg products division's other products, including frozen and short shelf-life liquid eggs, certain dried products and, particularly, shell eggs, are significantly affected by frequently changing market levels as reported by Urner Barry.

Sales Dynamics. The egg products division's supply agreements with its customers typically last one year. These contracts generally stipulate a number of conditions including the types of products to be supplied, volume targets, pricing levels (with weekly, monthly, quarterly or annual revision options), discount options, delivery and other logistical and administrative parameters. The contracts generally do not provide for any minimum volume or financial commitment and typically can be terminated early without penalty. We sell our egg products based on a mix of variable, semi-variable and fixed price contracts, of which variable contracts account for approximately 60% of the egg products division's net sales. Sales of egg products under variable priced sales contracts are tied to a pricing index, either an Urner Barry egg market or grain index. Price changes under these sales contracts are based on a formula and generally allow for a pass-through of cost increases. Our semi-variable sales contracts generally allow us to change prices by giving 30 to 60 days notice. These contracts are with major broad-line foodservice distributors who are generally less sensitive to price increases because their customers purchase food products from them on a cost-plus basis. Our fixed price egg products sales contracts generally have durations of up to one year and maturity dates that are generally staggered throughout the year, effectively reducing our commitment to fixed priced contracts. We use fixed price contracts because our large national foodservice customers require fixed pricing in order to manage the prices at which they sell their products. As a result, we bear commodity risks. To mitigate these risks, we have established a risk management strategy. For more information relating to our risk management strategy, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Commodity Risk Management."

Suppliers. In 2002, the egg products division produced approximately a third of its shell egg requirements at multiple internal egg production facilities. A majority of the remainder of the division's egg requirements are purchased under contracts with numerous cooperatives and egg producers at prices primarily derived from grain-based costs and Urner Barry market indices. No egg supplier provides more than 10% of the division's annual egg requirements.

Commodity Risk Management. Since variable costs, principally feed costs and the cost to purchase eggs, represent a large percentage of the total costs of our egg products, significant price fluctuations in these raw materials could have an adverse affect on our results of operations. See "Risk Factors-Risk Relating to Our Company and the Industries We Serve-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." Historically, feed costs have generally been less volatile than egg market prices. Internally produced eggs typically cost less than eggs we purchase from our suppliers. We partially hedge key feed costs, such as corn and soybean meal, by using futures and other purchase contracts. There is no market mechanism for hedging egg prices. The egg products 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 egg cost is somewhat controllable. Further, the egg products 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

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allows the division to typically realize a modest processing margin on such sales, even though there are notable commodity influences on both the egg sourcing cost and the egg products pricing, with each changing as frequently as daily. Shell eggs are essentially a commodity and are sold based upon reported egg prices. Egg prices are significantly influenced by modest shifts in supply and demand. Pricing of shell eggs is also typically affected by seasonal demand related to increased consumption during holiday periods. Our operating profit is significantly affected by egg market prices and prices of other raw materials, such as grain, which can fluctuate widely. We have a risk management strategy to mitigate these risks which includes hedging a significant percentage of our grain commodity requirements, aligning our procurement and sales volumes by matching the percentage of variable pricing contracts and the percentage of raw materials procured on a variable basis, negotiating agreements with fixed price customers to allow us to raise prices in response to increased commodity prices and transitioning customers from lower value-added egg products to higher margin, higher value-added specialty products. For more information on our risk management strategy, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Commodity Risk Management."

Facilities. Our principal egg processing plants are located in New Jersey, Minnesota, Nebraska, Pennsylvania, Iowa, Manitoba and Ontario. Certain of our facilities are fully integrated from the production and maintenance of laying flocks through the processing of eggs products. Fully automated laying barns, housing approximately 13.5 million producing hens, are located in Nebraska, Minnesota and South Dakota, of which approximately 1.6 million are housed in contract facilities. Major laying facilities also maintain their own grain and feed storage facilities. We also maintain facilities with approximately 2.8 million pullets, or hens that are less than 16 weeks old.

Potato Products Division

The potato products division produces and distributes refrigerated potato products to the retail grocery and foodservice markets. This division's products principally include hash browns and diced, sliced, mashed and other specialty potato products. The potato products division is the national retail market leader in refrigerated potato products with an estimated 57% share in the retail grocery market under the Simply Potatoes and Diner's Choice brands. Our branded retail refrigerated potato products' annual volume has doubled since 1997. Due to their freshness and quality, refrigerated potato grocery products are generally sold at higher price points than frozen potatoes and, according to our consumer studies, have superior taste and texture characteristics. In addition, we use a production process that produces refrigerated potato products for retail having a shelf-life of 75 days, which we believe to be the longest shelf-life in this category. The shelf-life of our competitors' retail products are advertised as being approximately 45 to 60 days.

Products. The potato products division produces and sells refrigerated hash browns, diced, sliced, mashed and other specialty potato products which are marketed to the foodservice market under the Northern Star, Farm Fresh and Quality Farms brand names and under the Simply Potatoes and Diner's Choice brand names to the retail market. Historically, the Simply Potatoes brand has achieved consistent growth despite minimal consumer advertising expenditures consisting in the last five years of less than $1.0 million annually.

Growth in the potato products division is the result of several factors, including the growth in specialty potato products and increasing consumer awareness of the refrigerated potato category. For example, refrigerated mashed potatoes continue to be a popular category in both the retail and foodservice markets, particularly special recipe mashed potatoes, including deluxe mashed potatoes (prepared with butter and sour cream), seasoned mashed, red skin garlic mashed and mashed with onion. The potato products division's ability to create such customized mashed potato products has attracted interest from chain restaurants in the foodservice market, such as International House of Pancakes, which use these blends as signature menu items. In addition, we have had success with other products such as special cut potatoes, including thick-sliced russets and red skin wedges, and seasoned hash browns.

Since 1997, we have invested significant capital of approximately $20.0 million in our Minneapolis potato processing facility, including investing in the re-design of the plant layout and the upgrade of equipment. Since

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1997, production yields have improved, labor costs have declined and gross profit per pound has increased to 31.4% for the year ended December 31, 2003 compared to 22.5% in 1997.

Customers. The potato products division leverages existing relationships with national foodservice distributor customers of our egg products division. Many of our top potato products division's customers are also long-standing customers of the egg products division. We provide 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 and Food Lion. These relationships provide a foundation for our potato products division and provide potential growth opportunities.

Competition. We were the first 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 by volume in the United States of refrigerated potato products to the retail market. The potato products division's largest competitor is Reser's Fine Foods Inc., a national producer of refrigerated products. Other competitors include Bob Evans Farms Inc. and local and regional processors, including I&K Distributors, Inc. and Naturally Potatoes. In the broader potato products category, other large national producers, particularly those that produce frozen potato products, compete indirectly with our potato products division.

Suppliers. A high-quality, consistent-cost potato supply is important to the potato products division's profitability. Historically, potato prices have remained relatively stable. A substantial portion of our annual potato requirements are met through contracts with potato producers, with a high percentage of such production coming from irrigated land, allowing for relatively consistent raw material quality. In addition, the potato products division contracts with a geographically diverse supplier group to hedge weather and quality risk. The remaining portion of the potato products division's potato requirements are purchased on the spot market. Potatoes are mainly sourced from Minnesota, North Dakota and Wisconsin, with lesser quantities sourced from California, Idaho, Oregon and Nevada.

Refrigerated Distribution Division

The refrigerated distribution division is a leading distributor of refrigerated products to retailers and wholesale warehouses predominantly in the central region of the United States. The refrigerated distribution division distributes its own Crystal Farms branded cheese, with sales for the year ended December 31, 2003 of approximately $135.0 million. With a reputation for quality and a market position between national brands such as Kraft and private label brands, Crystal Farms cheese drives this division's sales and profitability. In addition, the refrigerated distribution division distributes a wide range of refrigerated food products primarily on a direct-store-delivery basis, offering customers a high level of service and quality alternatives to nationally branded products. The refrigerated distribution division has strong distribution capabilities with over 400 different branded and private label refrigerated food products.

Products. The refrigerated distribution division offers a broad selection of refrigerated products, which consist principally of cheese, eggs, bagels, butter, margarine, muffins, potato products, juice and ethnic foods, such as corn and flour tortillas. Cheese products are the refrigerated distribution division's most significant entry point with new customers. While most of the division's products are supplied by vendors or our other divisions, the refrigerated distribution division operates a cheese packaging facility in Lake Mills, Wisconsin, which processes and packages various cheese products acquired in bulk from third-party suppliers for its Crystal Farms brand and its private label customers.

The refrigerated distribution division has historically taken its products to market on a direct-to-store delivery basis and it has more recently experienced success dealing with larger chains and wholesalers through warehouse delivery of goods. The refrigerated distribution division is working with retailers and wholesalers to develop partnerships and to respond to the changing needs of the food industry.

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Customers. 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, 2003, the division served approximately 5,000 retail locations, inclusive of stores receiving products through warehouse delivery. SUPERVALU Inc., or SUPERVALU, the food industry's largest distributor, is the refrigerated distribution division's largest customer. For the year ended December 31, 2003, sales to warehouse operations of SUPERVALU and SUPERVALU-owned and franchised stores, including Cub Foods Stores, bigg's, Shopper's Food Warehouse and Farm Fresh, accounted for approximately 40% of the refrigerated distribution division's net sales. Other principal customers include Roundy's, Coborn's Inc., Nash-Finch Company and Wal-Mart Stores, Inc.

Competition. While the division competes with the refrigerated products of larger suppliers such as Beatrice, Kraft, Land O' Lakes, Inc. and Sargento Foods Inc., we believe that we have successfully positioned 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. We believe that Crystal Farms branded cheese currently has an estimated 2% market share in the United States and an estimated 42% market share in Minnesota.

Suppliers. This division obtains products from a number of different co-packers and, in the case of cheese, purchases the product in bulk and repackages it under the Crystal Farms brand and private labels.

Sales, Marketing and Customer Service

Each of our three divisions has developed a marketing strategy, which emphasizes high product quality and superior 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. In addition, the egg products division uses a separate nationwide system of brokers for the retail market. That division also maintains a small sales group which handles frozen, dried and short shelf-life liquid egg product sales to industrial customers. We employ a small marketing staff, which executes marketing plans in the foodservice market, with additional resources available from outside agencies and consultants as needed. In addition, the egg products division has a consumer support program to support several of its egg products which are sold in the retail market.

The refrigerated distribution division's internal and external sales personnel obtain orders from retail stores which are usually placed no more than one day ahead of the requested delivery date. That division's marketing efforts are primarily focused on in-store and cooperative advertising programs, which are executed with grocers on a market-by-market basis. Beginning in 1999, Crystal Farms increased its consumer marketing support efforts by using television, radio, outdoor and in-store programs, with favorable sales volume results.

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 expire in 2006. Our license to use these four patents will continue until the expiration of the patents. The patented 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

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use these patents will also 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.

We believe that certain of our competitors infringe upon some of our patents and the patents licensed to us. We, along with North Carolina State University, have initiated litigation against several processors of competing liquid egg products claiming infringement of the original and subsequent related process patents licensed to us by North Carolina State University relating to ultrapasteurized liquid egg production. In 1992, a jury for the United States District Court for the Middle District of Florida found the original patent to be valid and that a processor, Bartow Food Co., willfully and deliberately infringed one of the patents. In another action, the United States District Court for the District of New Jersey found in 1992 and 1993 that Papetti's had infringed certain of the patents and that the licensed patents are valid and enforceable. In 1994, the Court of Appeals for the Federal Circuit upheld this judgment. In 1993, Nulaid Foods Inc., or Nulaid Foods, sought a declaratory judgment that the licensed patents are invalid. This action was subsequently settled, and Nulaid Foods agreed that it would not contest the validity and enforceability of the patents as well as their past infringement of the patents. Nulaid Foods is currently using the patented process by operating under a sublicense agreement. Reissue and reexamination proceedings were initiated by us and our competitors with the U.S. Patent and Trademark Office, or PTO, seeking to determine the scope and validity of some of the patents that we license from North Carolina State University. The PTO ruled that claims in the licensed patents are valid and in full force and effect. On September 13, 2000, Sunny Fresh Foods, a division of Cargill, filed a declaratory judgment action in the United States District Court for the District of Minnesota requesting the adjudication of the unenforceability and invalidity of those patents exclusively licensed to us by North Carolina State University. In August 2003, a jury found the patents to be valid and enforceable, but ruled that Sunny Fresh Foods has not infringed the licensed patents. We have filed an appeal to reverse the non-infringement ruling. Infringement litigation actions were recently settled with two other egg processors, Rose Acre Farms and Cutler Egg Products. Both parties agreed that the patents are valid and enforceable. Both parties are now operating under sublicense agreements. For more information, see "-Legal Proceedings."

Although we believe that our competitors may be deterred from competing with us because of our active enforcement of our patent rights, we do not believe that the expiration of our patent rights will have a material adverse affect on our business or market share within the corresponding market because of our processing expertise, strong market position and cost-efficiencies due, in part, to scale.

The egg products division maintains numerous trademarks and/or trade names for its products, including "Logan Valley," "Sunny Side Up," "Michael Foods," "Deep Chill," "Simply Eggs Brand," "Better 'n Eggs," "All Whites," "Chef's Omelet Brand," "Express Eggs," "Quaker State Farms," "Broke N' Ready," "Canadian Inovatech," "Centromay," "Emulsa," and "Inovatech." Ultrapasteurized liquid eggs are marketed using the "Easy Eggs" and "Table Ready" trade names.

Within the potato products division, we market our refrigerated potato products to foodservice customers under a variety of brands, including "Northern Star," "Farm Fresh" and "Quality Farms." The "Simply Potatoes" and "Diner's Choice" brands are used for retail refrigerated products.

Refrigerated distribution division products are marketed principally under the "Crystal Farms" trade name.

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 USDA inspection of many facilities, we have instituted quality systems plans in each of our divisions which address topics such as supplier control, ingredient, packaging and product specifications, preventive maintenance, pest control and sanitation. Each of our facilities also has in place a hazard analysis critical control points plan which identifies critical pathways

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through which contaminants may enter our facilities and mandates control measures that must be used to prevent, eliminate or reduce all relevant foodborne 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 of which we suspect may be problem.

In 2003, we engaged Keller and Heckman LLP, an unaffiliated law firm to assess our food regulatory compliance. We spent approximately $42,000 on this engagement in 2003. This law firm focused on our ability to ensure the safety of our food products for human consumption. Based on its review of our regulatory reports and documents, as well as site visits, the law firm concluded that no significant food safety issues existed.

In March 2003, Belovo S.A., our egg products joint venture in Belgium, in which we hold a 35.63% interest, notified the Belgian governmental health authorities of a potential processed egg powder contamination issue. Following the notification, production ceased for a month and the egg powders were recalled. The Belgian health authority placed the egg powder in quarantine. As of December 31, 2003, approximately 60% of the quarantined inventory (measured by value) has been released. Belovo is working with the Belgian health authority to resolve the status of the remaining inventory. The potential loss, if any, related to this matter has not been determined. However, we expect that governmental relief and product liability insurance coverage will mitigate the financial impact of this recall.

In November 2000, the refrigerated distribution division initiated a recall of 60,000 pounds of two cheese products manufactured by a co-packer due to a possible contamination of listeria. No illnesses were reported with the recall, and the impact on the refrigerated distribution division's sales and earnings was minimal. Our co-packer paid all costs associated with the recall. We were the first company to recall the cheese, which had been produced for numerous firms nationally, and through our direct share distribution network we were able to rapidly collect the recalled product.

We currently maintain general liability insurance, which includes product liability insurance 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 FDA regulation regarding grading, quality, labeling and sanitary control. The processing plants of our egg products division that break eggs, and some of our other egg processing operations, are subject to continuous on-site USDA inspection. All of our other processing plants are subject to periodic inspections by the USDA, FDA and state regulatory authorities.

Crystal Farms cheese and butter products 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. A substantial portion of the egg production operations of our egg products division are located in the State of Nebraska. With certain exceptions, a provision of the Nebraska constitution generally prohibits corporations from engaging in farming or ranching in Nebraska. Although the constitutional provision contains an exemption for agricultural land operated by a corporation for the purpose of raising poultry, the Nebraska Attorney General has, in written opinions, taken the position that facilities devoted primarily to the production of eggs do not fall within such exemption and therefore are subject to the restrictions contained in the constitutional provision. We believe that our egg production facilities in Nebraska are part of integrated facilities for the production, processing and distribution of egg products, and therefore, that any agricultural land presently owned by us in Nebraska is being used for non-farming and non-ranching purposes.

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The constitution empowers the Nebraska Attorney General, or if the Attorney General fails to act, a Nebraska citizen, to obtain a court order to, among other things, force a divestiture of land held in violation of this constitutional provision. If land subject to such a court order is not divested within a two-year period, the constitutional provision directs the court to declare the land escheated, or forfeited, to the State of Nebraska. We are not aware of any proceedings under this over 75 year-old constitutional provision pending or threatened against us or any other companies engaging in farming or ranching activities in Nebraska. We believe that we have adequate contingency arrangements in place in the event a determination is made that we engage in farming and/or ranching activities proscribed by the Nebraska constitution. Until the scope of such provision has been clarified by further judicial, legislative, or executive action, there can be no assurance as to the effect, if any, that it may have on our egg products division.

Environmental Regulation

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

We have ongoing relationships with Hatch Mott MacDonald, Environ International Corporation and Liesch Associates, Inc., environmental consulting firms that aid us in our environmental compliance efforts. In 2003, two of the environmental consulting firms completed environmental site assessments for all of our facilities. As a result of our efforts, except as noted below, we believe we are currently in material compliance with all environmental regulations and requirements. Nonetheless, as is the case with any business, if we do not fully comply with environmental regulations, or if a release of hazardous substances occurs at or from one of our facilities, we may be subject to penalties and/or held liable for the cost of remedying the condition.

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

We received a request for information from the U.S. Environmental Protection Agency, or the EPA, in July 2003 regarding the wastewater disposal practices and procedures of all of our facilities in and around Wakefield, Nebraska. We responded to this request for information in September 2003. We recently received a supplemental request for information from the EPA regarding our two egg processing facilities in Wakefield, Nebraska and responded to that request. On May 11, 2004, the EPA issued an Administrative Compliance Order finding that discharges from the Wakefield, Nebraska facilities on specified occasions exceeded our permit limits and caused the City of Wakefield's waste treatment facility to violate its permit. The order directs us to develop a plan to address these issues and we expect to provide a timely response.

We have made, and will continue to make, expenditures to comply with environmental requirements. We have upgraded the wastewater treatment system at our Klingerstown, Pennsylvania facility. We have paid the city of Lenox, Iowa the cost to construct and have agreed to continue to pay Lenox to operate a wastewater treatment plant used by our facility located there. In addition, we updated our wastewater system at our egg production facility in Bloomfield, Nebraska in 2002. These expenditures have reduced the current and future risk of wastewater violations at these facilities. We are reviewing the adequacy of our wastewater treatment systems at the egg products division's facility in Gaylord, Minnesota. We may elect to upgrade the wastewater controls at this facility or we may be required to upgrade such controls in the future.

In response to ongoing discussions with environmental regulators in New Jersey relating to wastewater discharges at our Elizabeth, New Jersey facilities, we may be required to upgrade the wastewater treatment systems at these facilities. Recently, New Jersey environmental regulatory authorities had proposed that our Papetti's subsidiary pay a $200,000 fine to settle a waste water non-compliance matter relating to one of our facilities in Elizabeth, New Jersey. We paid this fine on April 20, 2004.

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Under the Comprehensive Environmental Response, Compensation, and Liability Act, or CERCLA, liability for contamination is imposed, regardless of fault, on current owners and operators of a contaminated facility. CERCLA also imposes liability on any person who owned or operated the facility at the time of the disposal and on any person who arranged for the disposal of hazardous waste at the facility. Moreover, liability is imposed jointly and severally; that is, the full cost of cleanup can be imposed on any one responsible party, although liability is often allocated equitably among responsible parties. As a consequence of this liability scheme, CERCLA liability attaches to all facilities a corporation currently owns or operates, without regard to whether it was the owner or operator at the time the hazardous substances were disposed of at the facilities, although the current owner may have a right of contribution against the prior owners for their equitable share of the liability. The Resource Conservation and Recovery Act and many state laws similarly impose liability, regardless of fault, on current owners and operators.

We are aware of contaminations in two of the facilities currently operated by our Northern Star subsidiary in Minnesota. A parcel adjacent to Northern Star, which was sold in 2002 to CSM Investors II, Inc., is undergoing remediation pursuant to the Minnesota voluntary cleanup program. Portions of the property were contaminated with components of linseed oil stemming from industrial activities that occurred prior to Northern Star's operation of the plant. After the contamination was discovered, Northern Star entered into settlement agreements with Archer Daniels Midland and Burlington Northern Railroad in 1993 and 1994, pursuant to which those parties agreed to investigate and remediate the contaminated soil to levels acceptable to the Minnesota Pollution Control Agency. When it acquired the land in 2002, CSM Investments contractually agreed to carry out the remediation on behalf of Archer Daniels Midland and Burlington Northern Railroad. In exchange, Archer Daniels Midland and Burlington Northern Railroad placed funds in escrow to cover CSM's remediation costs. CSM is currently remediating the soil in connection with its development of the parcel as part of an office park. Northern Star does not believe it has any liability for this divested parcel.

In addition, investigations of a vacant parcel behind the Northern Star plant owned by an affiliate of Northern Star, Minnesota Products, Inc., revealed the presence of waste linseed oil, petroleum hydrocarbons, and buried ash below the ground surface. The investigations were performed by RESPEC Consulting & Services and Barr Engineering, Inc., both environmental consulting firms. The contamination relates to a period prior to Northern Star's operation of the adjoining facility. A land-use restriction has been recorded with the deed for this parcel prohibiting any significant soil disturbance on this surplus parcel without the approval of the Minnesota Pollution Control Agency. The restriction can be lifted if soil and groundwater sampling shows that the intended use of the property poses no significant risk to human health or the environment. Currently, Northern Star has no plans to develop the vacant parcel.

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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. The office space lease expires in 2012 and the annual base rent is approximately $750,000.

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

Owned/ Lease Annual Location Principal Use Size (square feet) Leased Expiration Base Rent
Elizabeth, New Jersey(a) Processing 75,000 Leased 2007 $ 432,000 Elizabeth, New Jersey(a) Processing 125,000 Leased 2007 681,000 Bloomfield, Nebraska Processing 80,000 Owned - - LeSueur, Minnesota Processing 29,000 Owned - - Wakefield, Nebraska Processing 380,000 Owned - - Klingerstown, Pennsylvania(b) Processing and Distribution 139,000 Leased 2017 526,000 Klingerstown, Pennsylvania(b) Processing and Distribution 19,000 Leased 2017 14,000 Lenox, Iowa Processing and Distribution 143,000 Owned - - Gaylord, Minnesota Processing and Distribution 230,000 Owned - - Elizabeth, New Jersey(a) Sales and Distribution 80,000 Leased 2007 480,000 Bloomfield, Nebraska Egg Production 619,000 Owned - - Wakefield, Nebraska Egg Production 658,000 Owned - - LeSueur, Minnesota Egg Production 345,000 Owned - - Gaylord, Minnesota Egg Production 349,000 Owned - - Gaylord, Minnesota Pullet Houses 130,000 Owned - - Wakefield, Nebraska Pullet Houses 432,000 Owned - - Plainview, Nebraska Pullet Houses 112,000 Owned - - Winnipeg, Manitoba(c) Processing 102,000 Leased 2013 614,000 St. Mary's, Ontario(c) Processing 42,000 Leased 2012 238,000 Mississauga, Ontario(c) Distribution 8,000 Leased 2005 68,000 Abbotsford, British Columbia(c) Sales Office 5,000 Leased 2005 20,000

(a) There are two five year extensions available on these leases.

(b) The two five year extensions of these leases have already been accepted.

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 2006 and has the option to extend the lease three successive five year periods. The annual base rent is approximately $330,000.

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 2005 and 2006. The administrative and sales office lease has the option to extend the lease for five

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years. The annual base rent for all of the leases is $210,000. The division owns a distribution center located near LeSueur, Minnesota, which is approximately 33,000 square feet. The refrigerated distribution division also owns and operates a 48,200 square foot refrigerated warehouse and a 19,000 square foot cheese packaging facility on a 19 acre site in Lake Mills, Wisconsin.

The total annual base rent of the facilities described above is approximately $4.3 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 "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources."

Employees

At December 31, 2003, we had 3,806 employees. The egg products division employed 2,694 full-time and 208 part-time employees none of whom are represented by a union. The potato products division employed 254 persons, 183 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 514 employees, none of whom are represented by a union. Our corporate, sales, distribution and customer service and information systems groups collectively employed 136 employees at December 31, 2003. We believe our relations with our employees to be good.

Legal Proceedings

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

On September 13, 2000, Sunny Fresh Foods, a division of Cargill, filed a declaratory judgment action in the United States District Court for the District of Minnesota requesting the adjudication of the unenforceability and invalidity of those patents exclusively licensed to us by North Carolina State University. In August 2003, a jury found the patents to be valid and enforceable, but ruled that Sunny Fresh Foods has not infringed the licensed patents. We have filed an appeal to reverse the non-infringement ruling. We also settled litigation regarding infringement of these patents with Rose Acre Farms and Cutler Egg Products in January 2004.

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

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