<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
(x) Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 1994
or
( ) Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission file number 0-19075
THE MORNINGSTAR GROUP INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2217488
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
5956 SHERRY LANE, SUITE 1100
DALLAS, TEXAS 75225-6522
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 360-4777
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. Yes X . No .
--- ---
As of July 31, 1994, the number of shares outstanding of each class of
common stock was:
Common Stock, $.01 par value: 14,390,262 shares
<PAGE> 2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31, June 30,
1993 1994
------------- -------------
(Unaudited)
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,340 $ 2,455
Receivables, net of allowance for doubtful accounts of $974 and $1,210 . . 26,762 25,818
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,527 10,813
Prepaids and deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,519 5,119
Net assets of discontinued operations - current . . . . . . . . . . . . . . 5,571 -
------------- -------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . 56,719 44,205
PROPERTY, PLANT AND EQUIPMENT:
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,062 6,062
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,463 17,707
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . 29,334 31,345
------------- -------------
Gross property, plant and equipment . . . . . . . . . . . . . . . . 51,859 55,114
Less: Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . (9,749) (11,387)
------------- -------------
Net property, plant and equipment . . . . . . . . . . . . . . . . . 42,110 43,727
INTANGIBLE AND OTHER ASSETS:
Identifiable intangible assets . . . . . . . . . . . . . . . . . . . . . . 3,177 2,844
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71,829 69,036
Deferred financing costs . . . . . . . . . . . . . . . . . . . . . . . . . 2,705 1,663
Net assets of discontinued operations - noncurrent . . . . . . . . . . . . 33,822 -
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,772 2,570
------------- -------------
Total intangible and other assets . . . . . . . . . . . . . . . . . 113,305 76,113
------------- -------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 212,134 $ 164,045
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
1
<PAGE> 3
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31, June 30,
1993 1994
------------- -------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,850 $ 17,535
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,663 19,717
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . 14,750 3,165
------------- -------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . 50,263 40,417
LONG-TERM DEBT (net of current maturities) . . . . . . . . . . . . . . . . . 105,425 61,145
OTHER LONG-TERM LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . 1,913 1,847
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 50,000,000 shares authorized;
14,287,212 shares in 1993 and 14,390,262 in 1994 issued and outstanding . 143 144
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . 69,541 69,804
Retained deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (15,151) (9,312)
------------- -------------
Total stockholders' equity and retained deficit . . . . . . . . . . 54,533 60,636
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . . . . $ 212,134 $ 164,045
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
2
<PAGE> 4
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- --------------------------
1993 1994 1993 1994
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
NET SALES . . . . . . . . . . . . . . . . . . . . . . $ 72,361 $ 73,667 $ 128,937 $ 144,406
Cost of goods sold . . . . . . . . . . . . . . . . 55,629 56,389 97,528 110,869
Selling, distribution, and general and
administrative. . . . . . . . . . . . . . . . . . 12,815 12,812 24,746 25,338
----------- ------------ ----------- -----------
OPERATING INCOME . . . . . . . . . . . . . . . . . . 3,917 4,466 6,663 8,199
OTHER (INCOME) AND EXPENSE:
Interest expense . . . . . . . . . . . . . . . . . 1,282 1,147 2,430 2,377
Amortization of deferred financing cost . . . . . . 132 75 238 170
Other income, net . . . . . . . . . . . . . . . . . (275) (425) (449) (670)
----------- ------------ ----------- -----------
INCOME BEFORE INCOME TAXES . . . . . . . . . . . . . 2,778 3,669 4,444 6,322
Provision for income taxes . . . . . . . . . . . . 1,001 1,130 1,650 2,019
----------- ------------ ----------- -----------
INCOME FROM CONTINUING OPERATIONS . . . . . . . . . . 1,777 2,539 2,794 4,303
DISCONTINUED OPERATIONS
Income from discontinued operations (a) . . . . . . 893 163 1,825 1,070
Gain on disposal (b) . . . . . . . . . . . . . . . - 546 - 466
----------- ------------ ----------- -----------
INCOME FROM DISCONTINUED OPERATIONS . . . . . . . . . 893 709 1,825 1,536
----------- ------------ ----------- -----------
NET INCOME BEFORE EXTRAORDINARY ITEM . . . . . . . . 2,670 3,248 4,619 5,839
EXTRAORDINARY ITEM (c) . . . . . . . . . . . . . . . (164) - (164) -
----------- ------------ ----------- -----------
NET INCOME . . . . . . . . . . . . . . . . . . . . . $ 2,506 $ 3,248 $ 4,455 $ 5,839
=========== ============ =========== ===========
EARNINGS PER COMMON SHARE:
Earnings from continuing operations . . . . . . . . $ 0.12 $ 0.17 $ 0.19 $ 0.29
Earnings from discontinued operations . . . . . . . 0.06 0.05 0.12 0.10
----------- ------------ ----------- -----------
Earnings before extraordinary item . . . . . . . . 0.18 0.22 0.31 0.39
Extraordinary item . . . . . . . . . . . . . . . . (0.01) - (0.01) -
----------- ------------ ----------- -----------
Earnings per common share . . . . . . . . . . . . . $ 0.17 $ 0.22 $ 0.30 $ 0.39
=========== ============ =========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING . . . . . 15,022,955 15,006,128 15,050,657 14,975,488
(a) Net of applicable tax provision of . . . . . . $ 421 $ 51 $ 863 $ 507
(b) Net of applicable tax provision of . . . . . . - 2,920 - 2,879
(c) Loss on purchase of senior subordinated debentures, net of applicable taxes of $71.
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
3
<PAGE> 5
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------
1993 1994
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers . . . . . . . . . . . . . . . . . . . . . . . . . . $ 129,944 $ 145,929
Interest received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 102
Income tax refund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 -
Cash paid to suppliers and employees . . . . . . . . . . . . . . . . . . . . . . (118,494) (129,548)
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,011) (2,856)
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (23) (757)
------------ -----------
NET CASH PROVIDED BY CONTINUING OPERATIONS . . . . . . . . . . . . . . . . . . . . 8,520 12,870
NET CASH PROVIDED (USED) BY DISCONTINUED OPERATIONS . . . . . . . . . . . . . . . . 4,308 (3,147)
------------ ----------
NET CASH PROVIDED BY OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 12,828 9,723
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . (30,608) -
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,362) (3,315)
Proceeds from sale of fixed assets . . . . . . . . . . . . . . . . . . . . . . . 25 45
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (405) (726)
------------ -----------
Net cash used in continuing operations . . . . . . . . . . . . . . . . . . . (33,350) (3,996)
Discontinued Operations:
Sale of discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . - 50,006
Capital and other expenditures . . . . . . . . . . . . . . . . . . . . . . . . . (569) (482)
------------ -----------
Net cash provided (used) by discontinued operations . . . . . . . . . . . . . (569) 49,524
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES . . . . . . . . . . . . . . . . . (33,919) 45,528
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuing common stock . . . . . . . . . . . . . . . . . . . . . . . - 264
Proceeds from issuance of long-term debt . . . . . . . . . . . . . . . . . . . . 35,000 -
Net payments on revolving credit facility . . . . . . . . . . . . . . . . . . . (2,459) (15,904)
Payments on long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . (11,231) (39,961)
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,070) (535)
------------ -----------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES . . . . . . . . . . . . . . . . . 20,240 (56,136)
----------- -----------
NET DECREASE IN CASH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (851) (885)
CASH, BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,849 3,340
------------ -----------
CASH, END OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,998 $ 2,455
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
4
<PAGE> 6
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATIONS
(Unaudited, dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------
1993 1994
----------- -----------
<S> <C> <C>
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,455 $ 5,839
ADJUSTMENTS TO RECONCILE NET INCOME TO
NET CASH FLOW FROM OPERATIONS:
Discontinued operations net income . . . . . . . . . . . . . . . . . . . . . . (1,825) (1,536)
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,846 2,087
Amortization of intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . 2,267 1,336
(Gain) loss on fixed asset retirements . . . . . . . . . . . . . . . . . . . . 28 (12)
Increase in deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 2,040 1,963
Loss on redemption of debentures . . . . . . . . . . . . . . . . . . . . . . . 235 -
Change in assets and liabilities, net of effects
from disposition of subsidiary:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 329 944
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (243) 714
Prepaids & deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,184) 3,513
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (459) (382)
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,064 (1,531)
Long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,033) (65)
----------- -----------
NET CASH PROVIDED BY CONTINUING OPERATIONS . . . . . . . . . . . . . . . . . . . . 8,520 12,870
DISCONTINUED OPERATIONS:
Discontinued operations net income . . . . . . . . . . . . . . . . . . . . . . 1,825 1,536
Gain on divestiture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (466)
Change in working capital . . . . . . . . . . . . . . . . . . . . . . . . . . . 861 (5,009)
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . 1,622 792
----------- -----------
NET CASH PROVIDED (USED) BY DISCONTINUED OPERATIONS . . . . . . . . . . . . . . . . 4,308 (3,147)
----------- -----------
NET CASH PROVIDED BY OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,828 $ 9,723
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
5
<PAGE> 7
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1994
(1) CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements as of June 30, 1994, and for
the six months then ended have been prepared by The Morningstar Group
Inc. (the "Company" or "Morningstar") without audit. In the opinion of
management, all necessary adjustments (which include only normal
recurring adjustments) to present fairly, in all material respects, the
consolidated financial position, results of operations and changes in
cash flows at June 30, 1994 and for the six months then ended, have been
made. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been omitted. These financial statements
should be read in conjunction with the Company's 1993 financial
statements contained in its most recent Annual Report on Form 10-K.
On April 13, 1994, Morningstar completed the divestiture of its
Florida-based fluid milk operation Velda Farms Inc. ("Velda") to Engles
Dairy Acquisition L.P. ("Purchaser") at an approximate selling price of
$51 million consisting of $48 million of cash and $3 million of 9% Series
A Preferred Stock. The sale of Velda completes the Company's divestiture
of its regional dairies. These operations have been treated as
discontinued operations, and previously published financial statements
have been restated to conform with this presentation.
On March 31, 1993, the Company acquired Favorite Foods Inc.,
("Favorite") a subsidiary of Nestle USA, Inc., for $28 million plus
expenses. Favorite, headquartered in Fullerton, California, is a
processor of cultured and ultrapasteurized products. The Company amended
its senior credit agreement to increase the term loan and borrowed funds
thereunder to complete this purchase.
(2) INVENTORIES
Inventories are valued at the lower of cost or market. Cost is
determined using the first-in, first-out method. Inventories are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
At December 31, At June 30,
1993 1994
-------------- -------------
<S> <C> <C>
Raw materials and supplies . . . . . . . . . . . . . . . . . . . $ 7,871 $ 6,759
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . 3,656 4,054
-------------- -------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,527 $ 10,813
============== =============
</TABLE>
Finished goods inventories include the costs of materials, labor
and plant overhead.
6
<PAGE> 8
(3) DEBT
The Company's outstanding long-term debt and average interest
rates in effect on June 30, 1994 were:
<TABLE>
<CAPTION>
Average
Amount of Interest
Debt Rate
------------- --------
(in thousands)
<S> <C> <C>
Senior term loan . . . . . . . . . . . . . . . . . . . . . . $ 60,539 6.313%
Revolving credit facility (a) . . . . . . . . . . . . . . . . 771 7.750%
Industrial development revenue bonds . . . . . . . . . . . . . 3,000 3.050%
------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . 64,310
Less: Current maturities . . . . . . . . . . . . . . . . . . 3,165
------------
Long term debt, net of current maturities . . . . . . . . . . $ 61,145
============
</TABLE>
(a) At June 30, 1994, $771,000 was borrowed under the revolving
credit facility and letters of credit totalling $4,933,015
were issued. At June 30, 1994, the Company had $19,295,985
in additional borrowing capacity under the terms of its
revolving credit facility.
(4) PRO FORMA RESULTS
The following unaudited pro forma information is presented to
illustrate the estimated effects of: (i) the acquisition of Favorite and
(ii) the divestiture of Velda as if both transactions had occurred at
January 1, 1993 (in thousands except per share information):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ---------------------------
1993 1994 1993 1994
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Pro forma net sales . . . . . . . . . . . . . . . . . $ 72,361 $ 73,667 $ 140,124 $ 144,406
Pro forma net income . . . . . . . . . . . . . . . . 1,777 2,539 2,852 4,303
Pro forma shares outstanding . . . . . . . . . . . . 15,022,955 15,006,128 15,050,657 14,975,488
Pro forma earnings per share . . . . . . . . . . . . $ 0.12 $ 0.17 $ 0.19 $ 0.29
</TABLE>
7
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Results of Operations - Second Quarter and Year-to-Date 1994
Compared with Second Quarter and Year-to-Date 1993
Net sales are classified into two categories: (i) branded specialty
products, which include historical sales of the Company's four national branded
products - International Delight(R) non-dairy coffee creamer, Second Nature(R)
egg product, Lactaid(R) reduced lactose milk and Naturally Yours(R) no fat sour
cream; and (ii) other specialty products, which includes all sales of the
Company's specialty foods business other than branded specialty products.
Net sales for the second quarter of 1994 totalled $73.7 million, an
increase of $1.3 million from net sales for the same period in 1993. For the
six months ended June 30, 1994, net sales were $144.4 million, an increase of
$15.5 million from the same period in 1993. The following table reflects net
sales by business category from year to year:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- --------------------------
Business Category 1993 1994 1993 1994
----------------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Branded specialty products . . . . . . . . . . . $ 19,191 $ 23,957 $ 38,442 $ 47,818
Other specialty products . . . . . . . . . . . . 53,170 49,710 90,495 96,588
----------- ------------ ----------- -----------
Net sales . . . . . . . . . . . . . . . . . . . $ 72,361 $ 73,667 $ 128,937 $ 144,406
=========== ============ =========== ===========
</TABLE>
Net sales of branded specialty products increased by 24.8% and 24.4% for
the second quarter and first six months of 1994 when compared to similar
periods in 1993. This improvement was accomplished through increased sales of
all four branded products with the exception of a slight decrease in Second
Nature sales in the second quarter. Net sales of other specialty products
decreased 6.5% during the second quarter due to declines in UHT and cultured,
while sales for the first six months increased 6.7% primarily as the result of
the acquisition of Favorite on March 31, 1993. The second quarter declines in
net sales were primarily due to lower volumes and competitive pricing.
Gross margin was 23.5% and 23.2% for the second quarter and first six
months of 1994 compared to 23.1% and 24.4% for like periods of 1993. These
comparisons are the result of increasing sales of branded products in the
second quarter, which contribute higher gross margins, but have been slightly
offset by increased competitive pricing in the other specialty products
category.
Operating expense ratios were 17.4% and 17.6% for the second quarter and
first six months of 1994 compared to 17.7% and 19.2% for like periods of 1993.
Distribution expenses increased as a percent of net sales due to a higher
proportion of delivered customers being served. Selling expenses increased as
a percent of net sales primarily as the result of increased advertising and
promotional activities related to the growth of branded specialty products.
General and administrative expenses declined as a percent of net sales due to
the effects of the Company's restructuring program.
The Company's operating income during the second quarter of 1994 was $4.5
million, an increase of 14.0% from operating income for the second quarter of
1993 of approximately $3.9 million. For the first six months, 1994 operating
income was $8.2 million, an increase of 23.1% from 1993 operating income of
$6.7 million. The increase in operating income from like periods in 1993 was
the result of slightly higher sales and gross margins.
For the second quarter, interest expense declined by 10.5% from $1.3
million in 1993 to $1.1 million in 1994. For the first six months, interest
expense declined 2.2%. These reductions resulted from lower average debt
levels especially in the second quarter of 1994 following the sale of Velda.
The Company recorded net income from continuing operations of $2.5 million
and $4.3 million in the second quarter and first six months of 1994 compared to
$1.8 million and $2.8 million for the comparable periods of 1993. The improved
profitability was primarily the result of higher branded sales and lower
general and administrative expenses.
8
<PAGE> 10
The Company recorded a gain of approximately $.5 million net of applicable
taxes on the sale of Velda which was completed during the second quarter of
1994.
The Company recorded an extraordinary loss of $.2 million in the second
quarter of 1993 for the premium paid to retire approximately $4.8 million in
senior subordinated debentures.
During the fourth quarter of 1993, the Company recorded a charge of $9.0
million which included provisions for reductions in workforce, relocation of
the manufacturing of certain product lines to gain operating efficiencies, and
the abandonment of other product lines. The charge also included $1.9 million
representing the excess of the book value of operating assets sold in 1991 and
1992 over their estimated realizable value. Cash expenditures during the first
six months of 1994 related to this charge were approximately $2.5 million, with
an additional $2.0 million expected in the remainder of 1994.
Liquidity and Capital Resources
Cash provided by continuing operations was $12.9 million during the first
six months of 1994 compared to cash provided by continuing operations of $8.5
million during the first six months of 1993. The sources of cash during the
first six months of 1994 were the $12.9 million provided by continuing
operations, $50.0 million from the sale of Morningstar's discontinued
operations, $.9 million from reduced cash balances, and $.2 million from the
exercise of stock options. These sources of cash were utilized to pay down
debt of $55.9 million, to provide for capital and other expenditures of $4.5
million, to pay dividends of $.5 million, and to provide $3.1 million used by
discontinued operations.
Capital expenditures during the first six months of 1994 were spent
primarily on equipment additions for increased operating efficiencies. As of
the end of the second quarter of 1994, the Company was not in compliance with
its fixed charge coverage ratio and has obtained a waiver of this covenant from
its senior lenders. The Company was in compliance with all other covenants and
financial ratios contained in its senior credit agreement.
At June 30, 1994 the Company had approximately $19.3 million in unused
borrowing capacity under its revolving credit facility. The Company expects
that operating cash flows, together with borrowings under its revolving credit
facility, will be sufficient to fund the Company's requirements for working
capital and capital expenditures for the foreseeable future.
Financing
As of June 30, 1994, the Company's senior credit agreement consisted of a
$60.5 million term loan and a $25.0 million revolving credit facility. As of
June 30, 1994, approximately $0.8 million was borrowed under the revolving
credit facility and approximately $4.9 million in letters of credit were
outstanding.
On April 13, 1994, Morningstar completed the divestiture of Velda, its
Florida-based fluid milk operation, to Engles Dairy Acquisition L.P. at an
approximate selling price of $51 million including $3.0 million of 9% Series A
Preferred Stock. After adjusting the selling price for increases in working
capital, approximately $48 million was received in cash. Following the
application of all cash proceeds on June 14, 1994, the Company had no revolver
balance outstanding and had a remaining term loan balance of approximately
$60.5 million. No further quarterly payments are required on the term loan
until June 20, 1995. The remaining amortization schedule for the term loan is
as follows:
<TABLE>
<CAPTION>
Approximate
Quarterly payment date(s) Quarterly payment
---------------------------------- -----------------
<S> <C>
June 20, 1995 $ 3,165,000
September 20, 1995 - March 20, 1997 3,723,000
June 20, 1997 - September 20, 1998 4,529,000
December 20, 1998 4,139,000
</TABLE>
9
<PAGE> 11
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
To the knowledge of the Company, there are no reportable suits or
proceedings pending or threatened against or affecting the Company other than
those encountered in the ordinary course of the Company's business and
described in the Company's most recent Annual Report on Form 10-K.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Pursuant to a Stockholders Meeting held on May 19, 1994, the Company's
stockholders took the following actions:
Election of Directors - The stockholders elected each of C.
Dean Metropoulos, Clifford L. Marquart, John R. Muse,
Charles W. Tate, Jack W. Evans, Jim L. Turner and Arnold L.
Chavkin to serve as a director of the Company until his
successor is elected and qualified, or if earlier, until
his death, resignation or removal from office.
Appointment of Auditors - The stockholders ratified the
appointment of Arthur Andersen & Co. as independent
auditors of the Company for the ensuing year.
1994 Stock Option Plan - The stockholders approved the 1994
Incentive and Nonstatutory Stock Option Plan.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
None.
(b) Reports on Form 8-K.
(1) April 28, 1994.
Item 2. Acquisition or Disposition of Assets.
(a) Disposition of Velda Farms Inc.
Item 7. Financial Statements and Exhibits.
(b) Pro Forma Financial Information.
(c) Exhibit 10 (a) - Amended and Restated Agreement and
Plan of Merger dated April 8, 1994, among Engles Dairy
Acquisition, L.P., Velda Farms Inc. and The
Morningstar Group Inc.
Exhibit 10 (b) - Form of Dairy Products Supply
Agreement by and among Morningstar, its named
subsidiaries and Velda Farms Inc. (Incorporated by
reference to Exhibit 10 (fff) to Morningstar's Annual
Report on Form 10-K for the fiscal year ended December
3, 1993.)
10
<PAGE> 12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE MORNINGSTAR GROUP INC.
/s/ C. DEAN METROPOULOS
C. Dean Metropoulos
President and Chief Executive Officer
(Authorized Officer)
Date: August 12, 1994
11
