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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[x] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended December 31, 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 1800
DALLAS, TEXAS 75225-6522
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 360-4777
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
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 .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of Common Stock held by non-affiliates of the
Registrant based on the closing price of the Common Stock on the NASDAQ Stock
Market on February 28, 1995 was approximately $74,449,000, which value, solely
for the purpose of this calculation, excludes shares held by the Registrant's
executive officers and directors. Such exclusion should not be deemed a
determination by the Registrant that all such individuals are, in fact,
affiliates of the Registrant.
February 28, 1995, the number of shares outstanding of common stock was:
Common Stock, $.01 par value: 14,920,797 shares
DOCUMENTS INCORPORATED BY REFERENCE
Part II of this Form 10-K incorporates information from the Registrant's
Annual Report to Stockholders for the year ended December 31, 1994. Part III
of this Form 10-K incorporates information from the Registrant's definitive
Proxy Statement relating to the Registrant's annual meeting of stockholders to
be held on May 18, 1995.
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PART I
ITEM 1. BUSINESS.
THE COMPANY
The Morningstar Group Inc., a Delaware Corporation, ("Morningstar" or the
"Company") is a national manufacturer and marketer of refrigerated and
non-refrigerated specialty food products that include: (i) branded products and
(ii) other specialty, dairy-based ultra-pasteurized ("UHT") and cultured
products. These two major product categories comprise the Company's continuing
operations, ("Continuing Operations").
The Company was formed in 1988 to acquire several regional dairies,
novelty/ice cream operations and specialty food operations. Shortly after these
acquisitions, significant increases in bulk milk prices adversely affected the
Company's operating performance and ability to service its highly leveraged
capital structure. In 1989, Morningstar shifted its emphasis to refrigerated
specialty food products by reorganizing its operations, introducing its branded
product lines and commencing the divestiture of its regional dairy and
novelty/ice cream operations. In March 1991, Hicks, Muse & Co. Incorporated,
now Hicks, Muse, Tate & Furst Incorporated ("Hicks Muse"), together with
certain other investors, recapitalized the Company through a transaction that
reduced the Company's leverage (the "Financial Restructuring"). Prior to this
transaction, the Company is referred to as "Predecessor"; after this
transaction, the Company is referred to as "Successor". In April 1992, the
Company completed a public offering of 6,215,000 shares of common stock,
consisting of 5,000,000 newly issued shares and 1,215,000 shares from existing
stockholders. The net proceeds to the Company from this offering of
approximately $50 million, together with the proceeds from new senior loans,
were used to redeem all of the Company's outstanding 15% preferred stock and
purchase $34 million in principal amount of its 13% senior subordinated
debentures at a premium, reducing the Company's interest expense and
eliminating the future payment of preferred stock dividends.
The Company acquired Favorite Foods Inc. ("Favorite") on March 31, 1993
for approximately $28 million plus expenses. Favorite is a cultured and
ultrapasteurized processor headquartered in Fullerton, California which
recorded sales of approximately $31 million during the nine months ended
December 31, 1993. Favorite's results of operations are included in the
Consolidated Statement of Operations contained in the Company's Annual Report
to Stockholders for the period April 1 through December 31, 1993.
On January 6, 1994, the Company announced a restructuring plan designed
to sharpen its focus on the faster-growing segments of its core specialty food
products business, while reorganizing its operations to increase efficiency.
The plan, which resulted in a $9 million charge in the fourth quarter of 1993,
included provisions for reductions in workforce, relocation of the
manufacturing for certain product lines to gain operating efficiencies and the
abandonment of other product lines. Included within the $9 million charge was
$1.9 million for reserves established for certain supply agreements and
promissory notes received as part of the sale of certain of the Company's
regional dairies in 1991 and 1992. The $9 million charge included non-cash
expenses of $4.4 million and cash expenses of $4.6 million. The majority of
the cash expenditures were paid during 1994.
The Company suspended the payment of dividends on its common stock
immediately following the $.0375 per share payment in the first quarter of 1994
to holders of record as of December 31, 1993.
DISCONTINUED OPERATIONS
The Company has made significant divestitures since its inception and as
a result, the size and scope of the Company's operations have changed
significantly. During 1990, the Company divested Oak Farms Inc. ("Oak Farms")
and Cabell's Dairy Inc. ("Cabell's") regional dairy operations located in
Texas, and Adohr Farms Inc. ("Adohr") in California. During 1991, the Company
divested a novelty/ice cream operation in Texas and a milk distribution
location in Pennsylvania. The Company also closed a novelty operation located
in Kansas City, Missouri in October 1991. During 1992, the Company divested
Embassy Dairy Inc., a regional dairy in Waldorf, Maryland and East Coast Ice
Cream, a novelty/ice cream operation located in Laurel, Maryland. In January
1994, the Company divested its plastic packaging operation located in Dallas,
Texas. On April 13, 1994, the Company completed the divestiture of its
Florida-based fluid milk operation Velda Farms, Inc. ("Velda"), for
approximately $48 million in cash after working capital adjustments and $3
million in 9% Series A Preferred Stock. The Company has deferred the
recognition of the gain on the preferred stock pending realization of the gain.
The majority of the cash proceeds were used to pay down existing bank debt and
to fund federal and state taxes generated by the gain on the sale. The sale of
Velda concluded the divestiture of the
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Company's regional dairies which were considered a major and distinct segment
of its business. As such, the operations of the regional dairies and other
divested operations have been restated and presented in the consolidated
financial statements in the 1994 Annual Report to Stockholders (See Item 8) to
conform with discontinued operations treatment ("Discontinued Operations").
PRODUCTS
The following table sets forth sales percentage information by product
and business category.
Percent of Net Sales from Continuing Operations
<TABLE>
<CAPTION>
Year Ended Combined Year Ended December 31,
December 31, Period -----------------------------------
Product Category/Business 1990 1991(a) 1992 1993 1994
------------------------- ------------ -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Branded specialty food products 14.6% 24.7% 29.3% 30.1% 34.9%
------ ------ ------ ------ ------
Other specialty products:
UHT 41.2% 35.5% 30.1% 25.0% 22.6%
Cultured & other 44.2% 39.8% 40.6% 44.9% 42.5%
------ ------ ------ ------ ------
Total other specialty 85.4% 75.3% 70.7% 69.9% 65.1%
------ ------ ------ ------ ------
Total 100.0% 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ====== ======
</TABLE>
(a) Combines the two months ended February 28, 1991 and the ten
months ended December 31, 1991. A change of control occurred on
March 1, 1991. Operations prior to that date are referred to as
Predecessor and after that date are referred to as Successor.
BRANDED SPECIALTY FOOD PRODUCTS
The Company's branded product business consists of four product lines:
International Delight(R), Second Nature(R), Naturally Yours(TM) and Lactaid(R).
In the development of its branded product lines, the Company has targeted
growing market niches and developed products to meet the specific consumer
demands.
International Delight. International Delight is a gourmet flavored
coffee creamer that is marketed in several regular and no-fat flavors. In
1994, the Company completed the installation of its 1/2 ounce aseptic product
line. This aseptic product requires no refrigeration and is marketed in
several flavors. In 1995, the Company will introduce its newest line of
International Delight Cappuccino products which will also be offered in several
flavors.
International Delight was originally introduced on a regional basis in
1973 and was repackaged, reformulated and marketed as a national brand in 1989.
The product is sold in 1/2 ounce single serving, pint and quart sizes to
supermarkets, food service outlets, club stores and convenience stores. The
non-aseptic International Delight is a non-dairy product that is manufactured
using the UHT process and, as a result, has an extended shelf life. The
Company encounters competition in this product line from various regional and
national competitors.
Second Nature. Second Nature is a pasteurized, no-fat, no cholesterol
egg product. The primary ingredient of Second Nature is egg whites. The
product was the first refrigerated alternative to whole eggs to provide the
equivalent nutritional value of whole eggs. Second Nature is another product
that was first marketed by the Company as a national brand in 1989. Second
Nature was reformulated in a no-fat variety and introduced nationally during
1993 in a twin pack containing two eight-ounce containers. Second Nature is
typically sold in the fresh egg section of supermarkets, encountering
competition from several other national and regional competitors both in the
refrigerated format and in the frozen format.
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Naturally Yours. Naturally Yours no-fat sour cream was introduced
nationally during 1993 following a test market in the last half of 1992.
Naturally Yours contains 67% less calories than full fat sour cream while
delivering similar taste and texture characteristics. Naturally Yours competes
with numerous national and regional competitors in the no-fat sour cream
category.
Lactaid. Lactaid is a line of lactose-reduced and lactose-free UHT
fluid milks produced by the Company under a license arrangement with McNeil
Consumer Products Company ("McNeil"), an affiliate of Johnson & Johnson. See
"Intellectual Property". Lactose intolerance afflicts millions of individuals
and Lactaid products bring such individuals back into the market for dairy
products. Lactaid has been sold by the Company in the western two-thirds of the
United States since September 1991.
OTHER SPECIALTY PRODUCTS
The Company manufactures and distributes other dairy-based specialty
food products, including (i) UHT products, such as whipping cream, aerosol
toppings, half & half and coffee creamers, and (ii) cultured products, such as
cottage cheese, sour cream, snack dips and yogurt. These products are sold
under customers' brand names, in a wide variety of food service packages as
well as under the Company's own regional brand names such as Avoset(R)
(creams), Bancroft(R) (cottage cheese and sour cream), Naturally Yours(R)
(yogurt), Qwip(R) (aerosol toppings) and Trimline(R) (cottage cheese and other
low fat products). The Company sells its UHT and cultured products to food
service distributors, regional dairies and retail grocery warehouses. The
Company also processes several products for other national marketers including
Dole(R) and Procter & Gamble(R). The Company encounters competition from
several other regional UHT and cultured product manufacturers.
UHT. Certain of the Company's branded products and a number of its
other specialty products are produced using the UHT process. The UHT process
involves heating products to extremely high temperatures to eliminate all
living organisms and then rapidly cooling the products. This process results in
product shelf lives in excess of 45 days allowing these products to be shipped
relatively long distances and to be distributed through warehouses.
The UHT product category includes several products such as whipping
cream, half & half, heavy whipping cream, bavarian style cream, light cream,
pastry topping, baker's cream, coffee cream, flavored milks and various
non-dairy formulas of creams and creamers. The Company packages its UHT
products in a wide variety of sizes and packages to facilitate serving the
various needs of its diverse customer base. These packages include: 1/2
ounce and 3/8 ounce portion control creamers; half-pint, pint, quart pure-pak
containers; aerosol cans; glass bottles; metal cans; and various multi-gallon
containers.
Cultured. Cultured products are derived from milk that is pasteurized,
inoculated with beneficial bacterial cultures, cooled and then, in some
instances, mixed with other ingredients to provide flavor. The culturing
process provides unique flavor and texture characteristics and extends shelf
life. The Company's cultured products have shelf lives from 30 to 60 days
allowing distribution through warehouse systems.
The cultured products category includes: cottage cheese, sour cream,
snack dips and yogurt. Each of these basic products has numerous formula
variations primarily related to varying levels of fat content and flavoring
options. These products are generally packaged in plastic containers ranging
in size from four ounces to 35 pounds.
PRODUCTION AND DISTRIBUTION
Refrigerated specialty food products are manufactured at six plants
located in California (3), Wisconsin (1), Texas (1) and Maryland (1). UHT
products are manufactured in each of the six plants and cultured products are
manufactured in each of the plants other than Gustine, California and the Texas
plant.
The Company distributes products from its six plants to more than 900
customers in 50 states and to more than 20 foreign countries using common
carriers as well as a number of leased refrigerated vehicles. Certain
customers pick up products at the Company's manufacturing facilities.
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MARKETING AND CUSTOMERS
Branded Specialty Products. The Company develops consumer awareness of
its branded products through media advertising of such products, primarily
through cooperative advertising with the stores in which its branded specialty
products are sold and with manufacturers of products that complement the
Company's branded specialty products. The Company also utilizes coupon
redemption and in-store demonstrations to develop consumer awareness.
Branded specialty products are primarily sold to grocery warehouses
serving the major supermarket chains and are primarily sold through the
Company's network of independent food brokers and nationwide sales force. The
typical broker used by the Company generally works exclusively on commission.
The broker is responsible for placing the sale of the Company's branded
products and for ensuring that the product is appropriately stocked and
positioned in supermarkets.
The Company also ships its branded products internationally, currently
serving Canada and several countries in the Pacific Rim, Aruba, Australia,
Bermuda, the islands of the Caribbean, Chile, Mexico, Puerto Rico, Saipan, and
Saudi Arabia, among others.
Other Specialty Products. The Company markets its other specialty
products directly to dairy companies, private label supermarket wholesalers,
grocery warehouses, food service outlets and food manufacturers. The primary
market for the Company's other specialty products is the United States. The
Company also markets certain UHT products in the Pacific Rim, primarily in Hong
Kong, Taiwan and Singapore.
RESEARCH AND DEVELOPMENT
The development of new products and the processes under which they are
manufactured has been an important part of the Company's growing emphasis on
branded specialty products. In addition to the Company's full-time research
technicians, all employees, both at the operating and management levels, are
encouraged to play an active role in the development of products and their
manufacturing processes. The Company's senior management is closely involved
in the identification and development of branded products. The Company
utilizes consumer research to test new products prior to market introduction.
One of the achievements of this research and development effort was the
reformulation of Second Nature to deliver the equivalent nutritional value of
whole eggs. More recently Second Nature(R) was reformulated to be a no-fat
product. This research effort also developed Naturally Yours(TM), a no-fat
sour cream made from real dairy ingredients. The Company has also recently
developed and introduced a no-fat version of International Delight.
INTELLECTUAL PROPERTY
General
The Company's business involves the use of patents, trademarks and trade
secrets and licenses granted both to and by the Company. The Company's most
important trademarks include International Delight(R), Second Nature(R),
Naturally Yours(TM), Trimline, Avoset, Bancroft, Carnation Smooth 'n Creamy
(under license from Nestle) and the Company's star logo. The Company has also
permitted third parties to use its trademarks pursuant to licenses granted by
the Company, typically in connection with its divestitures (see Discontinued
Operations).
License Agreement with AgriFoods International Cooperative Ltd.
The Company has entered a license agreement with AgriFoods, a Canadian
Cooperative association whereby the Company granted to AgriFoods an exclusive
license to manufacture, market and distribute International Delight(R) liquid
flavored coffee creamer products in Canada and to use the trademark,
International Delight(R) in said products. The agreement provides for a
royalty to be paid to the Company based on the number of cases of product sold
on a monthly basis.
Lactaid License Arrangement
Lactaid is produced under two Lactaid License Agreements (collectively
the "Lactaid License") with McNeil. Under the terms of the Lactaid License,
McNeil granted the Company the exclusive right to manufacture, produce and
package Lactaid modified milk products in the western two-thirds of the United
States and certain countries around the Pacific Rim. The Lactaid
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License provides for payment of a license fee to McNeil based on the volume of
Lactaid modified milk products sold by the Company.
DIVESTITURES
The purchasers of Adohr Farms entered into a Requirements and
Distribution Agreement (herein so called) pursuant to which they agreed to
purchase a minimum of 75% of their UHT and cultured products requirements from
the Company for a period of seven years ending in 1997.
The purchasers of Embassy Dairy Inc. entered into an agreement pursuant
to which they agreed to purchase their requirements of UHT and cultured
products for a period of three years ending in 1995.
The purchasers of Velda Farms, L.P. entered into an agreement pursuant
to which they agreed to purchase their requirements of certain UHT and cultured
products for a period of ten years ending in 2004.
The Company has agreed to indemnify the purchasers of certain of its
divested operations with regard to certain potential liabilities arising out of
the acquisition of such operations. In connection therewith, the Company has
indemnified Southern Foods, the purchaser of the Oak Farms and Cabell's dairy
subsidiaries, against claims related to compliance with environmental
regulations and fair trade practices arising out of the prior operation of Oak
Farms and Cabell's through March 2000. See Item 3 of this Form 10-K.
SUPPLIERS AND RAW MATERIALS
The Company purchases its primary raw material, bulk milk, from farm
marketing cooperatives, individual farmers and other dairy companies. The
supply and cost of bulk milk are influenced by many factors, including consumer
demand, government regulation and seasonality. The Company has not experienced
any supply shortages and expects that bulk milk will continue to be available
in sufficient quantities to supply its processing requirements.
Certain other raw materials, such as juice concentrates, sweeteners,
flavorings and various packaging supplies, are generally available from a wide
variety of sources.
CUSTOMERS
The Company markets products to a broad range of customers including
convenience stores, supermarkets, grocery warehouses, independent distributors,
other dairies, club stores and food service customers such as hotels,
restaurants, nursing homes, schools, and theme parks. The Company sells to
customers nationwide and a small percentage of its products is distributed in
foreign countries, primarily in Canada, Mexico and the Pacific Rim. No
customer of the Company accounted for more than 10% of the Company's net sales
for the year ended December 31, 1994.
SEASONALITY
Sales of the Company's refrigerated specialty food products exhibit
modest seasonality with products such as whipping cream, aerosol toppings, sour
cream and International Delight experiencing higher sales in the late fall and
winter seasons.
EMPLOYEES
As of December 31, 1994 the Company employed approximately 809 people of
whom approximately 435 were represented by unions under collective bargaining
agreements. These agreements cover employees at the following locations:
Fullerton, Gustine and Tulare, California; and Madison, Wisconsin. All of the
collective bargaining agreements are due to expire within the next 12 months.
In December 1994, the production employees of the Company's Sulphur Springs,
Texas plant voted to be represented by a labor union. Negotiations on a
collective bargaining agreement had not yet begun as of December 31, 1994. The
Company will from time to time be negotiating new agreements with the various
unions representing these employees and it expects that it will enter into
agreements with such unions which are satisfactory to the Company. The Company
has had no recent work stoppages and considers its relations with its employees
to be satisfactory.
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GOVERNMENT REGULATION
PUBLIC HEALTH
As a manufacturer and distributor of food products, the Company is
subject to the Federal Food, Drug, and Cosmetic Act and regulations promulgated
thereunder by the FDA. This comprehensive regulatory scheme governs, among
other things, the manufacturing, composition and ingredients, labeling,
packaging, and safety of food. For example, the FDA regulates manufacturing
practices for foods through its current good manufacturing practices
regulations, specifies the "recipes," called standards of identity, for certain
foods, including many of the kinds of products marketed by the Company (e.g .,
sour cream, half & half, and yogurt), and prescribes the format and content of
certain information required to appear on the labels of food products.
Additionally, the FDA is responsible for enforcement of the Public
Health Service Act and regulations issued thereunder, which authorize
regulatory activity necessary to prevent the introduction, transmission or
spread of communicable diseases. These regulations require, for example,
pasteurization of milk and milk products.
The FDA has recently enacted extensive regulations pursuant to the
Nutrition Labeling and Education Act of 1990. The regulations, which took
effect in August 1994, require nutritional labeling on all foods that are a
meaningful source of nutrition, including certain of the Company's products.
Limitations have been placed on the use of certain labeling terms while the use
of other terms are required. The Company has revised the labeling of its
products to conform to the final regulations.
In addition to FDA regulation of the Company's products, the Company's
advertising is subject to regulation by the Federal Trade Commission pursuant
to the Federal Trade Commission Act and regulations issued thereunder.
The Company and its products are also subject to state regulation
through such measures as licensing of the Company's dairy plants, enforcement
by state health agencies of state standards for the Company's products,
inspection of the Company's facilities, and regulation of the Company's trade
practices in connection with the sale of the dairy products.
Enforcement actions for violations of federal and state regulations may
include seizure and condemnation of violative products, cease and desist
orders, injunctions and/or monetary penalties.
The Company maintains quality control laboratories at each of its food
processing facilities to test bulk milk and other ingredients as well as
finished products. In addition, the Company has developed and administers
Hazard Analysis of Critical Control Point programs designed to detect hazardous
levels of bacteria and other contamination that may have occurred during
manufacturing. The Company believes that its facilities and practices are
sufficient to maintain its compliance with applicable government regulations,
although there can be no assurances in this regard.
INTERSTATE COMMERCE COMMISSION
The Company's interstate trucking services to the public in connection
with its backhaul operations are subject to regulation by the Interstate
Commerce Commission (the "ICC"). In order to provide backhaul services, the
Company obtained a license from the ICC and must comply with certain safety and
insurance requirements promulgated by the ICC on a continuing basis.
EMPLOYEE SAFETY REGULATIONS
The Company is subject to certain health and safety regulations
including regulations issued pursuant to the Occupational Safety and Health
Act. These regulations require the Company to comply with certain
manufacturing, health and safety standards to protect its employees from
accidents.
ENVIRONMENTAL REGULATIONS
The Company is subject to certain federal, state and local environmental
regulations. Certain of the Company's facilities discharge biodegradable
wastewater into municipal waste treatment facilities in excess of levels
permitted under local regulations. In such circumstances, the Company generally
pays wastewater surcharges to municipal water treatment authorities. However,
such authorities may require the Company to comply with such regulations and
construct pre-treatment facilities or take other action to reduce effluent
discharge.
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The Company maintains underground fuel storage tanks to service its
vehicles. All such tanks are periodically inspected to determine compliance
with applicable regulations. In connection with these inspections, the Company
may, at times, need to make certain expenditures in order to maintain
compliance.
Environmental compliance with federal, state or local authorities is not
expected to have a material impact on the Company's capital expenditures,
earnings or competitive position.
DAIRY SUPPORT PROGRAM
The minimum prices paid for grade-A bulk milk in the United States are
controlled in most areas by Federal Milk Marketing Orders or state regulatory
agencies. In most areas, the prices paid for bulk milk by processors are higher
than these minimums due to premiums charged by suppliers and shippers. The
Company has long established relationships with bulk milk suppliers, primarily
milk cooperatives in each of its markets and has not experienced any shortages
in its supply of fresh bulk milk. The Company's requirements for bulk milk
have decreased since the divestiture of Velda in April 1994.
THE PUBLIC EQUITY OFFERING
On April 24, 1992, the Company issued 5,000,000 shares of new common
stock in a public offering at an issue price of $11 per share. Simultaneously
1,215,000 shares were sold to the public by certain selling stockholders. The
offering provided net cash proceeds to the Company of approximately $50 million
which, combined with approximately $104 million in new senior bank borrowings,
was used to purchase approximately $34 million in face amount of Debentures at
a cash premium of approximately $4 million, to redeem all the Company's 15%
Preferred Stock for approximately $18 million and to refinance approximately
$98 million in senior debt.
ITEM 2. PROPERTIES.
The Company currently operates processing facilities in the following
locations:
<TABLE>
<CAPTION>
Approximate
Square
Location Products Footage
-------- -------- -------
<S> <C> <C>
Fullerton, California Cultured Products, UHT 83,995
Frederick, Maryland Cultured Products, UHT 68,958
Gustine, California UHT, Juices 114,000
Madison, Wisconsin Cultured Products, UHT 83,558
Sulphur Springs, Texas UHT, Juices 70,333
Tulare, California Cultured Products, UHT 39,415
</TABLE>
----------------
The Company's executive offices are located in approximately 10,500
square feet of leased office space located at 5956 Sherry Lane, Suite 1800,
Dallas, Texas 75225-6522. The lease for this property expires on April 30,
1999. All six of the Company's processing facilities are held as collateral
against the Company's Senior Credit Agreement.
The Company believes that its facilities are well maintained and adequate
to meet its current needs. The Company does expect to expand the capacity of
its existing facilities in order to service future growth.
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ITEM 3. LEGAL PROCEEDINGS.
FEDERAL INVESTIGATION
The Company received a target letter dated December 31, 1991, from the
United States Department of Justice informing it that Morningstar was a target
of a federal grand jury investigation of suspected bid-rigging and market
allocation in the dairy industry in the State of Texas. The investigation
related to activities conducted in the fluid milk industry in Texas. Oak Farms
and Cabell's (collectively the "Texas Dairy Subsidiaries") were formed by the
Company in March 1988 in connection with the acquisition of substantially all
of the assets of Southland's dairy operations. The Texas Dairy Subsidiaries
conducted fluid milk operations in Texas and were sold to Southern Foods Group,
Inc. ("Southern Foods") in September 1990, which merged them into its
subsidiary, Schepps-Foremost, Inc.
The investigation by the Department of Justice concluded in 1994. The
Company was not made a party to legal action commenced by the Department.
The Company has agreed to indemnify purchasers of its divested operations
with regard to certain potential liabilities arising out of the acquisition of
such operations. In connection therewith, the Company has indemnified Southern
Foods, the purchaser of the Oak Farms and Cabell's dairy subsidiaries, against
claims related to compliance with environmental regulations and fair trade
practices arising out of the prior operation of Oak Farms and Cabell's through
March 2000.
Southern Foods made claim against the Company in 1994 pursuant to the
indemnification provisions noted above to recover certain sums that Southern
Foods paid as a result of the Department of Justice investigation. Subsequent
to December 31, 1994, the Company reached an agreement with Southern Foods to
pay the sum of $425,000 to settle all claims between the Companies relating to
the aforesaid investigation. This agreement will not have a material adverse
effect on the results of operations or the financial position of the Company.
From time to time the Company is subject to other litigation in the
ordinary course of its business. In connection with the divestitures of
certain of the Company's operations, the Company assumed certain obligations of
indemnification, none of which is believed to be material to the Company. The
Company maintains insurance in respect of certain losses that may result from
its current or future operations. The Company believes that the outcome of any
existing litigation, after considering the indemnities and insurance related to
such litigation, would not have a material impact on its operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the stockholders during the fourth
quarter of the fiscal year.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information required by this item is included in the Registrant's
Annual Report to Stockholders for the year ended December 31, 1994 on page 31
under the caption "Quarterly Financial Information" and is incorporated herein
by reference.
ITEM 6. SELECTED FINANCIAL DATA.
The information required by this item is included in the Registrant's
Annual Report to Stockholders for the year ended December 31, 1994 on page 32
under the caption "Selected Financial Data" and is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The information required by this item is included in the Registrant's
Annual Report to Stockholders for the year ended December 31, 1994 on pages 9
through 11, under the caption "Management's Discussion and Analysis of Results
of Operations and Financial Condition," and is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this item is included in the Registrant's
Annual Report to Stockholders for the year ended December 31, 1994 on pages 12
through 30, and is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
9
<PAGE> 11
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item is included in the Registrant's
definitive Proxy Statement relating to its annual meeting of stockholders to be
held on May 18, 1995 under the caption "Directors and Officers".
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is included in the Registrant's
definitive Proxy Statement relating to its annual meeting of stockholders to be
held on May 18, 1995 under the caption "Executive Management Compensation" and
is incorporated herein by reference. The foregoing incorporation by reference
specifically excludes the discussion under "Executive Management Compensation
- -- Compensation Committee Report" and "The Morningstar Group Inc. Stock Price
Performance".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is included in the Registrant's
definitive Proxy Statement relating to its annual meeting of stockholders to be
held on May 18, 1995 under the caption "Voting Securities Outstanding, Security
Ownership of Management and Principal Stockholders" and is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is included in the Registrant's
definitive Proxy Statement under the captions "Executive Management
Compensation -- Compensation Committee Interlocks and Insider Participation"
and "Certain Transactions" and is incorporated herein by reference.
10
<PAGE> 12
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this Report. The page
number, if any, listed opposite a document indicates the page number in
the sequential number system in the manually signed original of this
Report where such document can be found.
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C> <C>
(1) Financial Statements
See Item 8 on page 9.
(2) Index to Financial Statement Schedules
Report of independent public accountants on financial
statement schedules . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Schedule II - Allowance for doubtful accounts . . . . . . . . . . . . . . 20
</TABLE>
All other schedules have been omitted because they are not
applicable, not required, or because the required information
is shown in the consolidated financial statements or notes
thereto.
(3) Exhibits required by Item 601 of Regulation S-K.
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
3(a) -- Restated Certificate of Incorporation of the Company. (Incorporated by reference to
Exhibit 3(a) to the Registrant's Annual Report on Form 10-K of the Registrant for the
fiscal year ended December 31, 1992.)*
3(b) -- Amended and Restated By-laws of the Company. (Incorporated by reference to Exhibit
3(b) to the Registrant's Annual Report on Form 10-K of the Registrant for the fiscal
year ended December 31, 1992.)*
4(a) -- Third Amended and Restated Stockholders' Agreement dated as of March 1, 1991, among
the Company and certain stockholders of the Company. (Incorporated by reference to
Exhibit 4(d) to the Registrant's Annual Report on Form 10-K of the Registrant for the
fiscal year ended December 31, 1990.)*
</TABLE>
____________________________
11
<PAGE> 13
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
4(b) -- Stockholders' Agreement dated as of March 1, 1991, among LTCB, NMB, HMCM, the Company
and certain stockholders of the Company. (Incorporated by reference to Exhibit 4(e) to
the Registrant's Annual Report on Form 10-K of the Registrant for the fiscal year
ended December 31, 1990.)*
4(c) -- Stockholders' Agreement dated February 5, 1992 among the Company and certain
stockholders. (Incorporated by reference to Exhibit 4(d) to the Registrant's Annual
Report on Form 10-K of the Registrant for the fiscal year ended December 31, 1992.)*
10(a) -- Dairy Products Purchase Agreement dated April 1, 1988, between Company and Southland
(without exhibits). (Incorporated by reference to Exhibit 10(a) to the Registrant's
Registration Statement on Form S-1, as amended, registration No. 33-21790.)*
10(b) -- Stock Purchase Agreement dated as of March 16, 1990, between the Company and Southern
Foods Group, Inc. (Incorporated by reference to Exhibit (c)(1) to the Registrant's
Current Report on Form 8-K dated September 6, 1990.)*
10(c) -- First Amendment to Stock Purchase Agreement dated September 6, 1990, among Southern
Foods Group, Inc., the Company and Schepps-Foremost, Inc. (Incorporated by reference
to Exhibit (c)(2) to the Registrant's Current Report on Form 8-K dated September 6,
1990.)*
10(d) -- Securities Purchase Agreement dated as of February 22, 1991, between the Company and
HMCM. (Incorporated by reference to Exhibit (c)(2) to the Registrant's Current Report
on Form 8-K dated March 1, 1991.)*
10(e) -- Stock Purchase Agreement dated as of March 1, 1991, among the Company, NMB U.S.
Finance Corporation and The Long-Term Credit Bank of Japan, Ltd. (Incorporated by
reference to Exhibit 10(g) to the Registrant's Annual Report on Form 10-K of the
Registrant for the fiscal year ended December 31, 1990.)*
10(f) -- Financial Advisory Agreement dated as of March 1, 1991, between the Company and Hicks,
Muse & Co. Incorporated. (Incorporated by reference to Exhibit 10(h) to the
Registrant's Annual Report on Form 10-K of the Registrant for the fiscal year ended
December 31, 1990.)*
10(g) -- Employees' Savings and Profit Sharing Plan dated April 1, 1988. (Incorporated by
reference to Exhibit 10(g) to the Registrant's Annual Report on Form 10-K of the
Registrant for the fiscal year ended December 31, 1988.)*
10(h) -- Employment Agreement dated March 1, 1991, between the Company and James A. Bach.
(Incorporated by reference to Exhibit 10(k) to the Registrant's Annual Report on Form
10-K of the Registrant for the fiscal year ended December 31, 1990.)*
10(i) -- Employment Agreement dated March 1, 1991, between the Company and Clifford L.
Marquart. (Incorporated by reference to Exhibit 10(l) to the Registrant's Annual
Report on Form 10-K of the Registrant for the fiscal year ended December 31, 1990.)*
</TABLE>
____________________________
12
<PAGE> 14
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
10(j) -- Employment Agreement dated March 1, 1991, between the Company and Tracy L. Noll.
(Incorporated by reference to Exhibit 10(m) to the Registrant's Annual Report on Form
10-K of the Registrant for the fiscal year ended December 31, 1990.)*
10(k) -- Amendment No. 1 to Employment Agreement, entered into as of September 17, 1991, by and
among The Morningstar Group Inc. and James A. Bach.**
10(l) -- Amendment No. 1 to Employment Agreement, entered into as of September 17, 1991, by and
among The Morningstar Group Inc. and Clifford L. Marquart.**
10(m) -- Amendment No. 1 to Employment Agreement, entered into as of September 17, 1991, by and
among The Morningstar Group Inc. and Tracy L. Noll.**
10(n) -- Purchase Agreement dated as of September 13, 1991, among HMCM, certain sellers (as
defined), certain buyers (as defined) and the Company.**
10(o) -- MorningStar Foods, Inc. 1991 Incentive and Nonstatutory Stock Option Plan.**
10(p) -- The Morningstar Group Inc. 1992 Incentive and Nonstatutory Option Plan.**
10(q) -- Second Amended and Restated Credit Agreement dated as of May 4, 1992, among the
Company, the financial institutions named therein, LTCB, as Agent, and Banque Paribas
as Co-Agent. (Incorporated by reference to Exhibit 10(t) to the Registrant's Annual
Report on Form 10-K of the Registrant for the fiscal year ended December 31, 1992.)*
10(r) -- Licensing Agreement to produce Lactaid Brand Lactose Reduced Milk (Confidential
treatment has been granted with respect to portions of this exhibit).**
10(s) -- Stock Purchase Agreement dated as of January 10, 1992, among Protein Capital
Corporation and the Company.***
10(t) -- First Amendment to Stock Purchase Agreement, dated as of March 31, 1992 to Stock
Purchase Agreement dated as of January 10, 1992, among Protein Capital Corporation and
the Company.***
10(u) -- Stock Purchase Agreement dated as of March 31, 1992, among Protein Capital Corporation
and the Company.***
10(v) -- Amendment No. 2 to Employment Agreement, entered into as of April 30, 1992 by and
among The Morningstar Group Inc. and James A. Bach. (Incorporated by reference to
Exhibit 10(dd) to the Registrant's Annual Report on Form 10-K of the Registrant for
the fiscal year ended December 31, 1992.)*
</TABLE>
___________________________
13
<PAGE> 15
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
10(w) -- Amendment No. 2 to Employment Agreement, entered into as of April 30, 1992 by and
among The Morningstar Group Inc. and Clifford L. Marquart. (Incorporated by reference
to Exhibit 10(ee) to the Registrant's Annual Report on Form 10-K of the Registrant for
the fiscal year ended December 31, 1992.)*
10(x) -- Amendment No. 2 to Employment Agreement, entered into as of April 30, 1992 by and
among The Morningstar Group Inc. and Tracy L. Noll. (Incorporated by reference to
Exhibit 10(ff) to the Registrant's Annual Report on Form 10-K of the Registrant for
the fiscal year ended December 31, 1992.)*
10(y) -- Amendment No. 1 to Financial Advisory Agreement entered into as of April 30, 1992
between the Company and Hicks, Muse & Co. Incorporated. (Incorporated by reference to
Exhibit 10(gg) to the Registrant's Annual Report on Form 10-K of the Registrant for
the fiscal year ended December 31, 1992.)*
10(z) -- Incentive Stock Option Agreement (Tenure Option) entered into as of March 1, 1991,
between MorningStar Foods Inc. and James A. Bach.****
10(aa) -- Incentive Stock Option Agreement (EBITDA Option) entered into as of March 1, 1991,
between MorningStar Foods Inc. and James A. Bach.****
10(bb) -- Incentive Stock Option Agreement (Tenure Option) entered into as of March 1, 1991,
between MorningStar Foods Inc. and Clifford L. Marquart.****
10(cc) -- Incentive Stock Option Agreement (EBITDA Option) entered into as of March 1, 1991,
between MorningStar Foods Inc. and Clifford L. Marquart.****
10(dd) -- Incentive Stock Option Agreement (Tenure Option) entered into as of March 1, 1991,
between MorningStar Foods Inc. and Tracy L. Noll.****
10(ee) -- Incentive Stock Option Agreement (EBITDA Option) entered into as of March 1, 1991,
between MorningStar Foods Inc. and Tracy L. Noll.****
10(ff) -- Amendment No. 1 to Incentive Stock Option Agreement (EBITDA Option) entered into as of
September 12, 1991, by and among The Morningstar Group Inc. and James A. Bach.****
10(gg) -- Amendment No. 1 to Incentive Stock Option Agreement (Tenure Option) entered into as of
September 12, 1991, by and among The Morningstar Group Inc. and James A. Bach.****
10(hh) -- Amendment No. 1 to Incentive Stock Option Agreement (EBITDA Option) entered into as of
September 12, 1991, by and among The Morningstar Group Inc. and Clifford L.
Marquart.****
</TABLE>
____________________________
14
<PAGE> 16
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
10(ii) -- Amendment No. 1 to Incentive Stock Option Agreement (Tenure Option) entered into as of
September 12, 1991, by and among The Morningstar Group Inc. and Clifford L.
Marquart.****
10(jj) -- Amendment No. 1 to Incentive Stock Option Agreement (EBITDA Option) entered into as of
September 12, 1991, by and among The Morningstar Group Inc. and Tracy L. Noll.****
10(kk) -- Amendment No. 1 to Incentive Stock Option Agreement (Tenure Option) entered into as of
September 12, 1991, by and among The Morningstar Group Inc. and Tracy L. Noll.****
10(ll) -- Amendment No. 2 to Incentive Stock Option Agreement (EBITDA Option) entered into as of
April 30, 1992 by and among The Morningstar Group Inc. and James A. Bach.
(Incorporated by reference to Exhibit 10(tt) to the Registrant's Annual Report on Form
10-K of the Registrant for the fiscal year ended December 31, 1992.)*
10(mm) -- Amendment No. 2 to Incentive Stock Option Agreement (Tenure Option) entered into as of
April 30, 1992 by and among The Morningstar Group Inc. and James A. Bach.
(Incorporated by reference to Exhibit 10(uu) to the Registrant's Annual Report on Form
10-K of the Registrant for the fiscal year ended December 31, 1992.)*
10(nn) -- Amendment No. 2 to Incentive Stock Option Agreement (EBITDA Option) entered into as of
April 30, 1992 by and among The Morningstar Group Inc. and Clifford L. Marquart.
(Incorporated by reference to Exhibit 10(vv) to the Registrant's Annual Report on Form
10-K of the Registrant for the fiscal year ended December 31, 1992.)*
10(oo) -- Amendment No. 2 to Incentive Stock Option Agreement (Tenure Option) entered into as of
April 30, 1992 by and among The Morningstar Group Inc. and Clifford L. Marquart.
(Incorporated by reference to Exhibit 10(ww) to the Registrant's Annual Report on Form
10-K of the Registrant for the fiscal year ended December 31, 1992.)*
10(pp) -- Amendment No. 2 to Incentive Stock Option Agreement (EBITDA Option) entered into as of
April 30, 1992 by and among The Morningstar Group Inc. and Tracy L. Noll.
(Incorporated by reference to Exhibit 10(xx) to the Registrant's Annual Report on Form
10-K of the Registrant for the fiscal year ended December 31, 1992.)*
10(qq) -- Amendment No. 2 to Incentive Stock Option Agreement (Tenure Option) entered into as of
April 30, 1992 by and among The Morningstar Group Inc. and Tracy L. Noll.
(Incorporated by reference to Exhibit 10(yy) to the Registrant's Annual Report on Form
10-K of the Registrant for the fiscal year ended December 31, 1992.)*
10(rr) -- Amendment to No. 2 to Lactaid Licensing Agreement and to Distribution Agreement
(Confidential treatment has been granted with respect to this exhibit).****
</TABLE>
__________________________
15
<PAGE> 17
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
10(ss) -- Amendment No. 3 to Employment Agreement, entered into as of July 30, 1992 by and among
The Morningstar Group Inc. and James A. Bach. (Incorporated by reference to Exhibit
10(aaa) to the Registrant's Annual Report on Form 10-K of the Registrant for the
fiscal year ended December 31, 1992.)*
10(tt) -- Amendment No. 3 to Employment Agreement, entered into as of July 30, 1992 by and among
The Morningstar Group Inc. and Clifford L. Marquart. (Incorporated by reference to
Exhibit 10(bbb) to the Registrant's Annual Report on Form 10-K of the Registrant for
the fiscal year ended December 31, 1992.)*
10(uu) -- Amendment No. 3 to Employment Agreement, entered into as of July 30, 1992 by and among
The Morningstar Group Inc. and Tracy L. Noll. (Incorporated by reference to Exhibit
10(ccc) to the Registrant's Annual Report on Form 10-K of the Registrant for the
fiscal year ended December 31, 1992.)*
10(vv) -- Amendment No. 3 to Incentive Stock Option Agreement (Tenure Option) entered into as of
October 1, 1992, by and among The Morningstar Group Inc. and James A. Bach.
(Incorporated by reference to Exhibit 10(ddd) to the Registrant's Annual Report on
Form 10-K of the Registrant for the fiscal year ended December 31, 1992.)*
10(ww) -- Amendment No. 3 to Incentive Stock Option Agreement (Tenure Option) entered into as of
October 1, 1992, by and among The Morningstar Group Inc. and Clifford L. Marquart.
(Incorporated by reference to Exhibit 10(eee) to the Registrant's Annual Report on
Form 10-K of the Registrant for the fiscal year ended December 31, 1992.)*
10(xx) -- Amendment No. 3 to Incentive Stock Option Agreement (Tenure Option) entered into as of
October 1, 1992, by and among The Morningstar Group Inc. and Tracy L. Noll.
(Incorporated by reference to Exhibit 10(fff) to the Registrant's Annual Report on
Form 10-K of the Registrant for the fiscal year ended December 31, 1992.)*
10(yy) -- Letter agreement dated December 15, 1993 between The Morningstar Group and Hicks, Muse
& Company, Inc.*****
10(zz) -- Agreement dated June 1, 1993 between McNeil Consumer Products Company, a division of
McNeil - PPC, Inc. and The Morningstar Group Inc. (Confidential treatment has been
granted with respect to this exhibit). (Incorporated by reference to Exhibit 10(a) to
the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30,
1993.)*
10(aaa) -- Letter Agreement dated June 1, 1993 between McNeil Consumer Products Company, a
division of McNeil - PPC, Inc. and The Morningstar Group Inc. and Avoset Food
Corporation (Confidential treatment has been granted with respect to this exhibit).
(Incorporated by reference to Exhibit 10(b) to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1993.)*
10(bbb) -- First Amendment and Waiver to the Second Amended and Restated Credit Agreement dated
March 5, 1993 among The Morningstar Group Inc. and The Long-Term Credit Bank of Japan,
Limited, New York Branch, Agent and Banque Paribas, Houston Agency as Co-Agent.*****
</TABLE>
__________________________
16
<PAGE> 18
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
10(ccc) -- Second Amendment to the Second Amended and Restated Credit Agreement dated October 28,
1993 among The Morningstar Group Inc. and The Long-Term Credit Bank of Japan, Limited,
New York Branch, Agent and Banque Paribas, Houston Agency as Co-Agent.*****
10(ddd) -- Waiver to the Second Amended and Restated Credit Agreement dated March 4, 1993 among
The Morningstar Group Inc. and The Long-Term Credit Bank of Japan, Limited, New York
Branch, Agent and Banque Paribas, Houston Agency as Co-Agent.*****
10(eee) -- Agreement and Plan of Merger dated February 17, 1994 by and among Engles Dairy
Acquisition, Inc., Velda Farms Inc. and The Morningstar Group.*****
10(fff) -- Form of Dairy Products Supply Agreement by and among The Morningstar Group Inc., its
named subsidiaries and Velda Farms Inc.*****
10(ggg) -- Letter of Resignation dated March 17, 1994 from James A. Bach, accepted and agreed to
by The Morningstar Group Inc.*****
10(hhh) -- Waiver No. 1 to Employment Agreement entered into as of December 15, 1993 by and among
The Morningstar Group Inc. and James A. Bach.*****
10(iii) -- Waiver No. 1 to Employment Agreement entered into as of December 15, 1993 by and among
The Morningstar Group Inc. and Tracy L. Noll.*****
10(jjj) -- Advisory Agreement entered into as of October 1, 1993 by and among The Morningstar
Group Inc. and C. Dean Metropoulos.*****
10(kkk) -- Stock Purchase Agreement entered into as of February 5, 1993 by and among TSC
Holdings, Inc. and The Morningstar Group Inc.*****
10(lll) -- The Morningstar Group Inc. Employees Savings and Profit Sharing Plan, revised
effective April 1, 1988.*****
10(mmm) -- License agreement entered into as of October 1, 1994 between The Morningstar Group
Inc. and AgriFoods International Cooperative LTD (Confidential treatment has been
requested for this exhibit).+
13(a) -- The Morningstar Group Inc. Annual Report to Stockholders for the year ended December
31, 1993 (except for the pages and information thereof expressly incorporated by
reference in this Form 10-K, the annual report is provided solely for the information
of the Securities and Exchange Commission and is not to be deemed "filed" as part of
the Form 10-K).*****
13(b) -- The Morningstar Group Inc. Annual Report to Stockholders for the year ended December
31, 1994 (except for the pages and information thereof expressly incorporated by
reference in this Form 10-K, the annual report is provided solely for the information
of the Securities and Exchange Commission and is not to be deemed "filed" as part of
the Form 10-K).+
21 -- Subsidiaries.+
27 -- Financial Data Schedule.+
</TABLE>
_________________________
* Incorporated by reference as indicated.
** Incorporated by reference to the corresponding exhibit to the
Registration Statement on Form S-1 (Registration No. 33-45805) filed
by the Registrant on February 19, 1992.
*** Incorporated by reference to the corresponding exhibit to the
Registration Statement on Form S-1 (Registration
33-45805), as amended by the Registrant on April 8, 1992.
**** Incorporated by reference to the corresponding exhibit to the
Registration Statement on Form S-1 (Registration No 33-45805), as
amended by the Registrant on April 22, 1992.
***** Incorporated by reference to the corresponding exhibit to the
Registrant's Annual Report on Form 10-K of the Registrant for the
year ended December 31, 1994.
+ Filed herewith.
(b) Reports on Form 8-K
None.
17
<PAGE> 19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
THE MORNINGSTAR GROUP INC.
By /s/ C. DEAN METROPOULOS
---------------------------------------------
C. Dean Metropoulos
(President, Chief Executive Officer and Director)
Date: March 27, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ C. DEAN METROPOULOS Director, President and Chief Executive Officer March 27, 1995
- -------------------------------------
C. Dean Metropoulos
/s/ JACK W. EVANS Director March 27, 1995
- -------------------------------------
Jack W. Evans
/s/ JOHN R. MUSE Director March 27, 1995
- -------------------------------------
John R. Muse
/s/ CHARLES W. TATE Director March 27, 1995
- -------------------------------------
Charles W. Tate
/s/ JIM L. TURNER Director March 27, 1995
- -------------------------------------
Jim L. Turner
/s/ N. MICHAEL DION Chief Financial Officer and March 27, 1995
- ------------------------------------- Principal Accounting Officer
N. Michael Dion
</TABLE>
18
<PAGE> 20
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and
Board of Directors of
The Morningstar Group Inc.:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of The Morningstar Group Inc., and
subsidiaries included in the Annual Report to Stockholders incorporated by
reference in this Form 10-K and have issued our report thereon dated February
17, 1995. Our audits were made for the purpose of forming an opinion on those
statements taken as a whole. The schedule listed in the Index to Financial
Statement Schedules is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audits of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Dallas, Texas,
February 17, 1995
19
<PAGE> 21
SCHEDULE II
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
ALLOWANCE FOR DOUBTFUL ACCOUNTS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Deductions Balance at
Beginning Charged to From End of
Period Of Period Expense Reserves Acquisitions Period
------ ---------- ---------- --------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1994 . . . . . . . . . . $ 974 $ 622 $ (101) $ - $ 1,495
Year Ended December 31, 1993 . . . . . . . . . . 306 735 (226) 159 974
Year Ended December 31, 1992 . . . . . . . . . . 649 107 (450) - 306
</TABLE>
20
<PAGE> 22
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
3(a) -- Restated Certificate of Incorporation of the Company. (Incorporated by reference to
Exhibit 3(a) to the Registrant's Annual Report on Form 10-K of the Registrant for the
fiscal year ended December 31, 1992.)*
3(b) -- Amended and Restated By-laws of the Company. (Incorporated by reference to Exhibit
3(b) to the Registrant's Annual Report on Form 10-K of the Registrant for the fiscal
year ended December 31, 1992.)*
4(a) -- Third Amended and Restated Stockholders' Agreement dated as of March 1, 1991, among
the Company and certain stockholders of the Company. (Incorporated by reference to
Exhibit 4(d) to the Registrant's Annual Report on Form 10-K of the Registrant for the
fiscal year ended December 31, 1990.)*
4(b) -- Stockholders' Agreement dated as of March 1, 1991, among LTCB, NMB, HMCM, the Company
and certain stockholders of the Company. (Incorporated by reference to Exhibit 4(e) to
the Registrant's Annual Report on Form 10-K of the Registrant for the fiscal year
ended December 31, 1990.)*
4(c) -- Stockholders' Agreement dated February 5, 1992 among the Company and certain
stockholders. (Incorporated by reference to Exhibit 4(d) to the Registrant's Annual
Report on Form 10-K of the Registrant for the fiscal year ended December 31, 1992.)*
10(a) -- Dairy Products Purchase Agreement dated April 1, 1988, between Company and Southland
(without exhibits). (Incorporated by reference to Exhibit 10(a) to the Registrant's
Registration Statement on Form S-1, as amended, registration No. 33-21790.)*
10(b) -- Stock Purchase Agreement dated as of March 16, 1990, between the Company and Southern
Foods Group, Inc. (Incorporated by reference to Exhibit (c)(1) to the Registrant's
Current Report on Form 8-K dated September 6, 1990.)*
10(c) -- First Amendment to Stock Purchase Agreement dated September 6, 1990, among Southern
Foods Group, Inc., the Company and Schepps-Foremost, Inc. (Incorporated by reference
to Exhibit (c)(2) to the Registrant's Current Report on Form 8-K dated September 6,
1990.)*
10(d) -- Securities Purchase Agreement dated as of February 22, 1991, between the Company and
HMCM. (Incorporated by reference to Exhibit (c)(2) to the Registrant's Current Report
on Form 8-K dated March 1, 1991.)*
10(e) -- Stock Purchase Agreement dated as of March 1, 1991, among the Company, NMB U.S.
Finance Corporation and The Long-Term Credit Bank of Japan, Ltd. (Incorporated by
reference to Exhibit 10(g) to the Registrant's Annual Report on Form 10-K of the
Registrant for the fiscal year ended December 31, 1990.)*
10(f) -- Financial Advisory Agreement dated as of March 1, 1991, between the Company and Hicks,
Muse & Co. Incorporated. (Incorporated by reference to Exhibit 10(h) to the
Registrant's Annual Report on Form 10-K of the Registrant for the fiscal year ended
December 31, 1990.)*
10(g) -- Employees' Savings and Profit Sharing Plan dated April 1, 1988. (Incorporated by
reference to Exhibit 10(g) to the Registrant's Annual Report on Form 10-K of the
Registrant for the fiscal year ended December 31, 1988.)*
10(h) -- Employment Agreement dated March 1, 1991, between the Company and James A. Bach.
(Incorporated by reference to Exhibit 10(k) to the Registrant's Annual Report on Form
10-K of the Registrant for the fiscal year ended December 31, 1990.)*
10(i) -- Employment Agreement dated March 1, 1991, between the Company and Clifford L.
Marquart. (Incorporated by reference to Exhibit 10(l) to the Registrant's Annual
Report on Form 10-K of the Registrant for the fiscal year ended December 31, 1990.)*
10(j) -- Employment Agreement dated March 1, 1991, between the Company and Tracy L. Noll.
(Incorporated by reference to Exhibit 10(m) to the Registrant's Annual Report on Form
10-K of the Registrant for the fiscal year ended December 31, 1990.)*
10(k) -- Amendment No. 1 to Employment Agreement, entered into as of September 17, 1991, by and
among The Morningstar Group Inc. and James A. Bach.**
10(l) -- Amendment No. 1 to Employment Agreement, entered into as of September 17, 1991, by and
among The Morningstar Group Inc. and Clifford L. Marquart.**
10(m) -- Amendment No. 1 to Employment Agreement, entered into as of September 17, 1991, by and
among The Morningstar Group Inc. and Tracy L. Noll.**
10(n) -- Purchase Agreement dated as of September 13, 1991, among HMCM, certain sellers (as
defined), certain buyers (as defined) and the Company.**
10(o) -- MorningStar Foods, Inc. 1991 Incentive and Nonstatutory Stock Option Plan.**
10(p) -- The Morningstar Group Inc. 1992 Incentive and Nonstatutory Option Plan.**
10(q) -- Second Amended and Restated Credit Agreement dated as of May 4, 1992, among the
Company, the financial institutions named therein, LTCB, as Agent, and Banque Paribas
as Co-Agent. (Incorporated by reference to Exhibit 10(t) to the Registrant's Annual
Report on Form 10-K of the Registrant for the fiscal year ended December 31, 1992.)*
10(r) -- Licensing Agreement to produce Lactaid Brand Lactose Reduced Milk (Confidential
treatment has been granted with respect to portions of this exhibit).**
10(s) -- Stock Purchase Agreement dated as of January 10, 1992, among Protein Capital
Corporation and the Company.***
10(t) -- First Amendment to Stock Purchase Agreement, dated as of March 31, 1992 to Stock
Purchase Agreement dated as of January 10, 1992, among Protein Capital Corporation and
the Company.***
10(u) -- Stock Purchase Agreement dated as of March 31, 1992, among Protein Capital Corporation
and the Company.***
10(v) -- Amendment No. 2 to Employment Agreement, entered into as of April 30, 1992 by and
among The Morningstar Group Inc. and James A. Bach. (Incorporated by reference to
Exhibit 10(dd) to the Registrant's Annual Report on Form 10-K of the Registrant for
the fiscal year ended December 31, 1992.)*
10(w) -- Amendment No. 2 to Employment Agreement, entered into as of April 30, 1992 by and
among The Morningstar Group Inc. and Clifford L. Marquart. (Incorporated by reference
to Exhibit 10(ee) to the Registrant's Annual Report on Form 10-K of the Registrant for
the fiscal year ended December 31, 1992.)*
10(x) -- Amendment No. 2 to Employment Agreement, entered into as of April 30, 1992 by and
among The Morningstar Group Inc. and Tracy L. Noll. (Incorporated by reference to
Exhibit 10(ff) to the Registrant's Annual Report on Form 10-K of the Registrant for
the fiscal year ended December 31, 1992.)*
10(y) -- Amendment No. 1 to Financial Advisory Agreement entered into as of April 30, 1992
between the Company and Hicks, Muse & Co. Incorporated. (Incorporated by reference to
Exhibit 10(gg) to the Registrant's Annual Report on Form 10-K of the Registrant for
the fiscal year ended December 31, 1992.)*
10(z) -- Incentive Stock Option Agreement (Tenure Option) entered into as of March 1, 1991,
between MorningStar Foods Inc. and James A. Bach.****
10(aa) -- Incentive Stock Option Agreement (EBITDA Option) entered into as of March 1, 1991,
between MorningStar Foods Inc. and James A. Bach.****
10(bb) -- Incentive Stock Option Agreement (Tenure Option) entered into as of March 1, 1991,
between MorningStar Foods Inc. and Clifford L. Marquart.****
10(cc) -- Incentive Stock Option Agreement (EBITDA Option) entered into as of March 1, 1991,
between MorningStar Foods Inc. and Clifford L. Marquart.****
10(dd) -- Incentive Stock Option Agreement (Tenure Option) entered into as of March 1, 1991,
between MorningStar Foods Inc. and Tracy L. Noll.****
10(ee) -- Incentive Stock Option Agreement (EBITDA Option) entered into as of March 1, 1991,
between MorningStar Foods Inc. and Tracy L. Noll.****
10(ff) -- Amendment No. 1 to Incentive Stock Option Agreement (EBITDA Option) entered into as of
September 12, 1991, by and among The Morningstar Group Inc. and James A. Bach.****
10(gg) -- Amendment No. 1 to Incentive Stock Option Agreement (Tenure Option) entered into as of
September 12, 1991, by and among The Morningstar Group Inc. and James A. Bach.****
10(hh) -- Amendment No. 1 to Incentive Stock Option Agreement (EBITDA Option) entered into as of
September 12, 1991, by and among The Morningstar Group Inc. and Clifford L.
Marquart.****
10(ii) -- Amendment No. 1 to Incentive Stock Option Agreement (Tenure Option) entered into as of
September 12, 1991, by and among The Morningstar Group Inc. and Clifford L.
Marquart.****
10(jj) -- Amendment No. 1 to Incentive Stock Option Agreement (EBITDA Option) entered into as of
September 12, 1991, by and among The Morningstar Group Inc. and Tracy L. Noll.****
10(kk) -- Amendment No. 1 to Incentive Stock Option Agreement (Tenure Option) entered into as of
September 12, 1991, by and among The Morningstar Group Inc. and Tracy L. Noll.****
10(ll) -- Amendment No. 2 to Incentive Stock Option Agreement (EBITDA Option) entered into as of
April 30, 1992 by and among The Morningstar Group Inc. and James A. Bach.
(Incorporated by reference to Exhibit 10(tt) to the Registrant's Annual Report on Form
10-K of the Registrant for the fiscal year ended December 31, 1992.)*
10(mm) -- Amendment No. 2 to Incentive Stock Option Agreement (Tenure Option) entered into as of
April 30, 1992 by and among The Morningstar Group Inc. and James A. Bach.
(Incorporated by reference to Exhibit 10(uu) to the Registrant's Annual Report on Form
10-K of the Registrant for the fiscal year ended December 31, 1992.)*
10(nn) -- Amendment No. 2 to Incentive Stock Option Agreement (EBITDA Option) entered into as of
April 30, 1992 by and among The Morningstar Group Inc. and Clifford L. Marquart.
(Incorporated by reference to Exhibit 10(vv) to the Registrant's Annual Report on Form
10-K of the Registrant for the fiscal year ended December 31, 1992.)*
10(oo) -- Amendment No. 2 to Incentive Stock Option Agreement (Tenure Option) entered into as of
April 30, 1992 by and among The Morningstar Group Inc. and Clifford L. Marquart.
(Incorporated by reference to Exhibit 10(ww) to the Registrant's Annual Report on Form
10-K of the Registrant for the fiscal year ended December 31, 1992.)*
10(pp) -- Amendment No. 2 to Incentive Stock Option Agreement (EBITDA Option) entered into as of
April 30, 1992 by and among The Morningstar Group Inc. and Tracy L. Noll.
(Incorporated by reference to Exhibit 10(xx) to the Registrant's Annual Report on Form
10-K of the Registrant for the fiscal year ended December 31, 1992.)*
</TABLE>
___________________________
<PAGE> 23
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
10(qq) -- Amendment No. 2 to Incentive Stock Option Agreement (Tenure Option) entered into as of
April 30, 1992 by and among The Morningstar Group Inc. and Tracy L. Noll.
(Incorporated by reference to Exhibit 10(yy) to the Registrant's Annual Report on Form
10-K of the Registrant for the fiscal year ended December 31, 1992.)*
10(rr) -- Amendment to No. 2 to Lactaid Licensing Agreement and to Distribution Agreement
(Confidential treatment has been granted with respect to this exhibit).****
10(ss) -- Amendment No. 3 to Employment Agreement, entered into as of July 30, 1992 by and among
The Morningstar Group Inc. and James A. Bach. (Incorporated by reference to Exhibit
10(aaa) to the Registrant's Annual Report on Form 10-K of the Registrant for the
fiscal year ended December 31, 1992.)*
10(tt) -- Amendment No. 3 to Employment Agreement, entered into as of July 30, 1992 by and among
The Morningstar Group Inc. and Clifford L. Marquart. (Incorporated by reference to
Exhibit 10(bbb) to the Registrant's Annual Report on Form 10-K of the Registrant for
the fiscal year ended December 31, 1992.)*
10(uu) -- Amendment No. 3 to Employment Agreement, entered into as of July 30, 1992 by and among
The Morningstar Group Inc. and Tracy L. Noll. (Incorporated by reference to Exhibit
10(ccc) to the Registrant's Annual Report on Form 10-K of the Registrant for the
fiscal year ended December 31, 1992.)*
10(vv) -- Amendment No. 3 to Incentive Stock Option Agreement (Tenure Option) entered into as of
October 1, 1992, by and among The Morningstar Group Inc. and James A. Bach.
(Incorporated by reference to Exhibit 10(ddd) to the Registrant's Annual Report on
Form 10-K of the Registrant for the fiscal year ended December 31, 1992.)*
10(ww) -- Amendment No. 3 to Incentive Stock Option Agreement (Tenure Option) entered into as of
October 1, 1992, by and among The Morningstar Group Inc. and Clifford L. Marquart.
(Incorporated by reference to Exhibit 10(eee) to the Registrant's Annual Report on
Form 10-K of the Registrant for the fiscal year ended December 31, 1992.)*
10(xx) -- Amendment No. 3 to Incentive Stock Option Agreement (Tenure Option) entered into as of
October 1, 1992, by and among The Morningstar Group Inc. and Tracy L. Noll.
(Incorporated by reference to Exhibit 10(fff) to the Registrant's Annual Report on
Form 10-K of the Registrant for the fiscal year ended December 31, 1992.)*
10(yy) -- Letter agreement dated December 15, 1993 between The Morningstar Group and Hicks, Muse
& Company, Inc.*****
10(zz) -- Agreement dated June 1, 1993 between McNeil Consumer Products Company, a division of
McNeil - PPC, Inc. and The Morningstar Group Inc. (Confidential treatment has been
granted with respect to this exhibit). (Incorporated by reference to Exhibit 10(a) to
the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30,
1993.)*
10(aaa) -- Letter Agreement dated June 1, 1993 between McNeil Consumer Products Company, a
division of McNeil - PPC, Inc. and The Morningstar Group Inc. and Avoset Food
Corporation (Confidential treatment has been granted with respect to this exhibit).
(Incorporated by reference to Exhibit 10(b) to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1993.)*
10(bbb) -- First Amendment and Waiver to the Second Amended and Restated Credit Agreement dated
March 5, 1993 among The Morningstar Group Inc. and The Long-Term Credit Bank of Japan,
Limited, New York Branch, Agent and Banque Paribas, Houston Agency as Co-Agent.*****
10(ccc) -- Second Amendment to the Second Amended and Restated Credit Agreement dated October 28,
1993 among The Morningstar Group Inc. and The Long-Term Credit Bank of Japan, Limited,
New York Branch, Agent and Banque Paribas, Houston Agency as Co-Agent.*****
10(ddd) -- Waiver to the Second Amended and Restated Credit Agreement dated March 4, 1993 among
The Morningstar Group Inc. and The Long-Term Credit Bank of Japan, Limited, New York
Branch, Agent and Banque Paribas, Houston Agency as Co-Agent.*****
10(eee) -- Agreement and Plan of Merger dated February 17, 1994 by and among Engles Dairy
Acquisition, Inc., Velda Farms Inc. and The Morningstar Group.*****
10(fff) -- Form of Dairy Products Supply Agreement by and among The Morningstar Group Inc., its
named subsidiaries and Velda Farms Inc.*****
10(ggg) -- Letter of Resignation dated March 17, 1994 from James A. Bach, accepted and agreed to
by The Morningstar Group Inc.*****
10(hhh) -- Waiver No. 1 to Employment Agreement entered into as of December 15, 1993 by and among
The Morningstar Group Inc. and James A. Bach.*****
10(iii) -- Waiver No. 1 to Employment Agreement entered into as of December 15, 1993 by and among
The Morningstar Group Inc. and Tracy L. Noll.*****
10(jjj) -- Advisory Agreement entered into as of October 1, 1993 by and among The Morningstar
Group Inc. and C. Dean Metropoulos.*****
10(kkk) -- Stock Purchase Agreement entered into as of February 5, 1993 by and among TSC
Holdings, Inc. and The Morningstar Group Inc.*****
10(lll) -- The Morningstar Group Inc. Employees Savings and Profit Sharing Plan, revised
effective April 1, 1988.*****
10(mmm) -- License agreement entered into as of October 1, 1994 between The Morningstar Group
Inc. and AgriFoods International Cooperative LTD (Confidential treatment has been
requested for this exhibit).+
13(a) -- The Morningstar Group Inc. Annual Report to Stockholders for the year ended December
31, 1993 (except for the pages and information thereof expressly incorporated by
reference in this Form 10-K, the annual report is provided solely for the information
of the Securities and Exchange Commission and is not to be deemed "filed" as part of
the Form 10-K).*****
13(b) -- The Morningstar Group Inc. Annual Report to Stockholders for the year ended December
31, 1994 (except for the pages and information thereof expressly incorporated by
reference in this Form 10-K, the annual report is provided solely for the information
of the Securities and Exchange Commission and is not to be deemed "filed" as part of
the Form 10-K).+
21 -- Subsidiaries.+
27 -- Financial Data Schedule.+
</TABLE>
___________________________
* Incorporated by reference as indicated.
** Incorporated by reference to the corresponding exhibit to the
Registration Statement on Form S-1 (Registration No. 33-45805) filed
by the Registrant on February 19, 1992.
*** Incorporated by reference to the corresponding exhibit to the
Registration Statement on Form S-1 (Registration
33-45805), as amended by the Registrant on April 8, 1992.
**** Incorporated by reference to the corresponding exhibit to the
Registration Statement on Form S-1 (Registration No 33-45805), as
amended by the Registrant on April 22, 1992.
***** Incorporated by reference to the corresponding exhibit to the
Registrant's Annual Report on Form 10-K of the Registrant for the
year ended December 31, 1994.
+ Filed herewith.
<PAGE> 1
EXHIBIT 10(mmm)
LICENSE AGREEMENT
THIS AGREEMENT dated and effective as of October 1, 1994, between The
Morningstar Group Inc., a Delaware corporation, 5956 Sherry Lane, Suite 1100,
Dallas, Texas, USA, 75225 (Fax No.: (214) 360-9100) (hereinafter called
"Owner") and AgriFoods International Cooperative Ltd., a cooperative
association under the laws of Canada, doing business as Dairyworld Foods, of
3920 Norland Avenue, Suite 300, Burnaby, British Columbia, Canada, V5G 4K7
(Mailing address: P.O. Box 9100, Vancouver, British Columbia, Canada V6B 4C3
(Fax No.: (604) 268-1234) (hereinafter called the "User").
A. Owner is the owner in Canada of the trademarks listed in Schedule "A"
hereto for use in association with liquid non-dairy flavored coffee
whitener products and, further, of Confidential Information (as
defined in Section 29. hereof) regarding certain ingredients,
formulations and processing methodology used in the manufacture of
such whiteners.
B. Owner wishes to grant to User, and User wishes to obtain from Owner,
the exclusive right and license in Canada to use the trademarks in
association with certain products as detailed below; to manufacture
said products using Owner's Confidential Information and to
distribute, sell and market certain products as detailed below, on the
terms and conditions herein contained.
NOW, THEREFORE for valuable consideration, the parties hereto agree as
follows:
1. License. Owner hereby grants to User the non-transferable
exclusive right and license (with no right to sublicense) to (a) manufacture,
sell, market and distribute those types of International Delight liquid
non-dairy flavored coffee whitener products listed on Schedule A
-1-
<PAGE> 2
hereto in the package sizes indicated thereon (collectively, the "Product(s)");
(b) to use the trademark INTERNATIONAL DELIGHT(R), the "International Delight"
trademark design and any other trade marks or tradenames set forth on Schedule
A (collectively, the "Trademarks") in connection with the packaging, promotion,
sale and distribution of the Products. The exclusive right and license granted
to User in this Section shall apply to all types of International Delight
liquid non-dairy flavored coffee whitener products whether now existing or to
be developed except that User shall be restricted in its distribution of such
products to the package sizes listed on Schedule A or as may be added in
accordance with Section 5.
2. International Delight. Pursuant to the terms of Section 7 hereof,
Owner shall designate to User the raw material suppliers for User to utilize to
procure the base materials, stabilizer and flavoring ingredients the
("Ingredients") to produce the Products. Owner shall provide all necessary
information and instructions and otherwise offer all reasonable assistance to
User to enable User to produce the Products. All Products shall be ultra high
temperature pasteurized. User covenants that the Ingredients so purchased
shall be used exclusively in the Products and that all Products shall contain
only the Ingredients and such other raw materials as Owner designates in
writing.
3. Territory. Owner and User agree that User's sole focus hereunder
shall be the production, promotion, sale and distribution of the Products in
the Territory designated on Schedule A in order to maximize the sales of
Products within that area. User shall not, directly or indirectly, promote,
sell or distribute the Products outside the Territory nor shall User authorize
or knowingly permit the redistribution of Products outside of the Territory.
4. Royalty Fees. (a) In consideration for Owner granting User a
license hereunder, User
-2-
<PAGE> 3
shall pay to Owner a monthly royalty fee (the "Royalty Fee") based upon
the amount of Sales (as defined in subparagraph (b) hereof) of the Products
during each month of the term hereof. The Royalty Fee for each month's Sales
shall be due and payable to Owner on the thirtieth day of the immediately
following month. The initial rate for Royalty Fees for the applicable
container size of Product produced is set forth on Schedule A. Said rate be
adjusted under the terms of Section 11 hereof.
(b) "Sales" as used herein shall mean gross sales of the Products
to customers or distributors of User less returns for damaged or returned
Products. No deduction shall be made for discounts, allowances, uncollectible
accounts or costs incurred by User. The Royalty Fee shall be accrued upon the
sale of the Products regardless of the time of collection by the User.
5. Addition and Removal of Products. (a) Upon receiving consent of
the Owner, User may add additional International Delight liquid flavored
non-dairy and dairy coffee whitener products (or additional package sizes of
products already covered hereunder as Products) to Schedule A, which additions
shall thereafter be deemed Products for the purposes hereof. Owner or User, as
the case may be, shall provide all necessary information and instructions and
otherwise offer reasonable assistance so as to enable User to commence
production of any such additional product hereunder (each, a "New Product").
When a New Product is added, Owner shall, in good faith and after consultation
with User, determine after the initial twelve-month sales period of such New
Product whether User shall continue to produce, sell and distribute such New
Product.
(b) If Owner in good faith and after consultation with User shall
determine that a particular Product or package size listed on Schedule A is not
commercially practicable in the Territory, then User, upon the direction of
Owner shall cease the production, sale and distribution
-3-
<PAGE> 4
of such Product or package size.
6. Minimum Sales. During the term of this Agreement, User shall
sell in the Territory the minimum amount of Products represented in Canadian
dollars (the "Minimum Sales Quotas") as set out in Schedule "C". If User fails
to achieve the Minimum Sales Quotas in any one year as set forth in Schedule
"C", Owner may terminate this Agreement effective immediately upon written
notice to User given at any time within 90 days after January 31 of such year.
Owner's right of termination pursuant to this Section 6 shall be in addition to
and separate from any right of termination under Section 24. Termination of
this Agreement pursuant to this Section 6 shall not relieve User from its
obligation to pay the Royalty Fee pursuant to Section 4 for the period up to
the date of termination or for the period following termination.
7. Purchase of Ingredients. Owner shall designate the suppliers from
which User shall purchase the Ingredients for the Products and User shall
purchase and use only the Ingredients from these designated suppliers to
manufacture the Product in accordance with the formulations, processing
methodology and specifications as set forth on Schedule B hereto. User shall
pay the applicable supplier for all Ingredients purchased hereunder in
accordance with that supplier's established payment policies. Title,
possession and risk of loss of the Ingredients shall be as agreed upon by User
and the applicable supplier.
8. Sales of Other Products. In consideration for Owner granting User
the license hereunder and disclosing to User certain Confidential Information
about the Products, User hereby covenants and agrees with Owner that for the
term of this Agreement and for a period of two years thereafter the User shall
not manufacture, produce, promote, sell or distribute within the Territory any
dairy or non dairy product whether liquid, powder or otherwise (other than the
-4-
<PAGE> 5
Products) which is intended for consumption by people as a flavored coffee
whitener or creamer (collectively such products are known as "Competing
Products") or direct its or their employees to develop any Competing Product
for sale within the Territory or assist or provide consultation in any manner
in any of the foregoing within the Territory. Notwithstanding any other
provision of this Agreement, the User shall have the right to sell and produce
flavored dairy creamers but only in response to a competitive introduction and
sale within the Territory of a flavored dairy creamer product and only to the
extent such product sold by User is (i) private label, (ii) control brand or
(iii) User's own label. In the event User does intend to sell and produce a
dairy creamer in accordance with the preceding sentence, User shall give notice
to Owner at the earliest possible date of its intention to do so and shall use
its best efforts to use the dairy flavored creamer only in the section of the
Territory that it believes is reasonably necessary to deal with the competitive
introduction in the Territory.
9. Other Licensees. During the term of this Agreement, Owner agrees
not to import and distribute the Products within the Territory or license any
other entity to produce, promote, sell and distribute the Products within the
Territory, unless and until any one or more of the following shall occur:
(a) User is unable to fulfill consumer or trade demand for the
Products inside the Territory for a two-month period as a result of (i) fire or
damage to one of the Facilities or any other Force Majeure Event (as defined in
Section 27 hereof), (ii) User's refusal or inability to provide sufficient
manufacturing capability upon Owner's demand therefor or (iii) any action by a
local, provincial or other government authority that delists one or more of
User's manufacturing plants as an approved source of food fit for human
consumption in commerce; provided that if such
-5-
<PAGE> 6
inability to fulfill demand is a result of the events described in clauses (i)
or (iii) or User's inability in clause (ii), then User shall be able to use
substitute facilities and suppliers, with the consent of Owner, such consent
not to be unreasonably withheld, until such time as such conditions may be
reasonably rectified or ameliorated, as the case may be;
(b) User after agreeing to do so, refuses to introduce a New Product
in the Territory;
(c) User refuses, upon Owner's demand, to remove a Product; or
(d) User becomes insolvent or makes any assignment or arrangement for
the benefit of creditors or consents to the appointment of a trustee or
receiver, or a trustee or a receiver is appointed for User or for a substantial
part of its property, or a bankruptcy, reorganization or insolvency proceeding
is instituted by or against User under the Bankruptcy and Insolvency Act or
Companies Creditors Arrangement Act.
10.A. Agreements of User. In addition to other covenants contained
herein, User hereby agrees and covenants with Owner for the term of this
Agreement as follows:
(a) User shall maintain capacity at its Facilities and otherwise use
its reasonable efforts to produce, promote and sell all of the Products in such
a manner as is necessary to develop them commercially within the Territory.
(b) User shall conduct all manufacturing, production and packaging of
the Products in accordance with the best business practices of the dairy
industry and the formulations, processing methodology and specifications and
shall also perform the quality control procedures set forth on Schedule B
hereto, as amended by Owner from time to time, in addition to and not instead
of its own quality control procedures.
(c) In connection with its production, packaging, storage, sale and
distribution of the
-6-
<PAGE> 7
Products, User shall comply with all applicable federal, provincial and local
laws and regulations; and without limiting the foregoing, User shall produce
the Products in full compliance with the Food and Drugs Act R.S.C. 1985 c. F-27
(as amended), the Consumer Packaging and Labelling Act R.S.C. 1985 c. C-38 (as
amended) and all other and further applicable laws and regulations which may be
adopted during the term of this Agreement which relate to the production and
sale of the Product.
(d) User shall inform and keep Owner advised of all changes to
applicable federal, provincial and local laws and regulations within the
Territory that will have a material adverse effect on the promotion of the
Products.
(e) User shall neither purchase nor use in any of the Products any
raw materials without the prior written consent of Owner.
(f) User shall not sell or otherwise transfer the Ingredients
(separate from its use in the Products) or use Ingredients for any purpose
other than that approved by Owner.
(g) User shall advise Owner of any significant adverse safety data
relating to any raw materials or the Ingredients in the Product or any Product
of which User becomes aware and shall comply with any laws or regulations
relating to the recording or reporting of any such information.
(h) User shall notify Owner promptly of any consumer complaint with
respect to any Product of which User becomes aware if such complaint involves
serious illness or death or adulteration of any Product. If requested by
Owner, User shall investigate any such complaint and advise Owner of its
investigation within five business days. User further agrees to notify Owner
promptly if the number of customer complaints with respect to any Product
exceeds the
-7-
<PAGE> 8
threshold ratio set forth on Schedule B and will comply with the procedures set
forth on such Schedule in such event.
(i) User shall sell Products to all potential customers within the
Territory, who so request to purchase Products, at prices consistent with those
prices at which User offers Products to others in that area.
10. B. Agreement of Owner. In addition to other covenants contained
herein, Owner hereby agrees and covenants with User for the term of this
Agreement as follows:
(a) In performing its obligations hereunder, Owner shall comply with
all applicable federal, provincial and local laws and regulations, including
the Food and Drugs Act.
(b) Owner shall (i) advise User of any significant adverse safety
data relating to the Products of which Owner becomes aware, (ii) notify User
promptly of any consumer complaint with respect to any Product of User of which
Owner becomes aware, if such complaint involves serious illness or death or
adulteration of such Product and (iii) comply with any laws or regulations
relating to the recording or reporting of any such information.
11. Term. The initial term of this Agreement shall be for the period
commencing on the Commencement Date and ending on September 30, 2004 (the
"Initial Term"). After the Initial Term, this Agreement may be renewed for
successive one-year periods (each, a "Renewal Term") if the parties mutually
agree to such renewal, its terms, the royalty rate and the performance
standards to be established by Owner for such Renewal Term. Negotiations
concerning the first Renewal Term hereunder, shall commence not later than
March 31, 2004. If such negotiations are not complete 30 days prior to the
end of the Initial Term or any Renewal Term, as the case may be, the Agreement
shall be deemed terminated at the end of such term.
-8-
<PAGE> 9
12. Marketing, Sales and Promotions.
(a) On or before May 31 of each year of this Agreement, User shall
submit to Owner an annual sales and marketing plan and provide Owner any
material updates thereof. At User's request, Owner will use reasonable efforts
to assist User in the development of such sales and marketing plan.
(b) User agrees that all manner of use by it of the Intellectual
Property (as hereinafter defined) including without limitation all advertising,
promotional programs, sale brochures, business cards and stationery, and
telephone directory listings, shall at all times be subject to Owner's approval
prior to use (which approval or disapproval shall be given within a reasonable
period of time). User agrees that neither it nor any of its employees, agents
or representatives shall make any representations or warranties, through
advertising, promotional activities or otherwise, as to the quality or
performance of the Products other than those representations and warranties
which Owner in writing authorizes User to make or are implied by law.
13. Packaging. All packaging (including all printed or graphic
material included on any packaging) referring or related in any way to any
Product shall be reviewed and approved in writing by Owner prior to any use
thereof. Owner reserves the right to change any package at any time upon 180
days prior written notice to User and any new packaging shall be utilized by
User within 180 days of User's receipt from Owner of the art work for the new
packaging. User shall bear all costs associated with all packaging (including
any changes thereof) for the Products, including, without limitation, the
disposal of any defective or obsolete inventory of packaging.
14. Trademarks and Intellectual Property Rights. (a) User hereby
agrees to be bound by and shall comply with all the terms, conditions and
provisions of Schedule D ("Trademark Rights
-9-
<PAGE> 10
and Obligations").
(b) User acknowledges and agrees that neither User nor any of its
employees, agents or representatives shall acquire any property right or other
interest in, or appropriate for its own use, any of the Trademarks, tradedress
or any patent, copyright, industrial design or other intellectual property
right relating to Owner or any Product (collectively the "Intellectual
Property").
15. Facilities, Co-Pack & Sublicensing. (a) Owner shall inspect and
approve any dairy facility, factory, production or storage facility or other
facility which User proposes to utilize in the production, sale or
distribution of the Products (each, a "Facility" and collectively, the
"Facilities"). User agrees not to utilize any Facility in connection herewith
without Owner's prior written approval, which approval will not be unreasonably
withheld. Owner hereby approves User's Facility listed on Schedule A.
(b) Subject to the balance of this provision, and further subject to
the receipt of Owner's prior written consent, User may contract with third
parties for the manufacture and packaging of Products within the Territory on
behalf of User (such third party hereafter called "Co-Packer"). User will not
disclose information to or engage any Co-Packer unless Co-Packer first enters
into a written co-packing agreement with User (which has first been approved by
Owner) in which Co-Packer inter alia, acknowledges and agrees that:
(i) the Co-Packer has the right to manufacture the Products as an
agent of User while the co-packing agreement is in effect and
for the sole purpose of co-packing Products for User, and that
upon termination or expiry of the co-packing agreement,
Co-Packer will discontinue all use of the Ingredients,
formulations and processing methodology used in the
manufacture of the Products and return to User
-10-
<PAGE> 11
all materials pertaining to the manufacture of the Products;
(ii) the Ingredients, formulations and processing methodology used
in the manufacture of the Products is the property of Owner
and constitutes trade secrets and Confidential Information
that may not be disclosed by Co-Packer to any other person
except as provided in the co-packing agreement or as required
by law, whether during or after the expiry or termination of
the term of the co-packing agreement. Further, the Co-Packer
will implement any and all measures to insure protection of
the Confidential Information as requested by Owner;
(iii) the Intellectual Property is owned by Owner and the Co-Packer
has no right to use the Intellectual Property and will not use
the Intellectual Property except on packaging or Products
co-packed by Co-Packer under the co-packing agreement; and
(iv) all Products manufactured by the Co-Packer shall conform to
the policies, practices, specifications, directions and
standards regarding Products in effect from time to time under
this Agreement.
Subject to the balance of this paragraph, and further subject to receipt of the
Owner's prior written consent, User may grant sublicenses to third parties for
the manufacture and packaging of Products within the Territory, provided that
User will not sublicense any third party or disclose any Confidential
Information to it unless the third party first enters into a written sublicense
agreement with User (which has first been approved by Owner) in which the third
party acknowledges and agrees to the terms and conditions stipulated above for
Co-Packers, and in
-11-
<PAGE> 12
addition, such sublicense agreement contains all other covenants and conditions
that Owner may reasonably direct to have included therein. User will not
engage any third party as sublicensee unless that third party is first approved
by Owner. Owner may, at its option, require that any sublicense agreement
include Owner as a party entitled to enforce the sublicense agreement against
the sublicensee.
16. Inspections. Owner shall have the right at any time during the
term of this Agreement, upon 48 hours prior oral or written notice, to enter
any Facility and inspect such Facility, the operations and manufacturing and
quality control procedures being performed by User, Co-Packer or sublicensee at
such Facility, the Ingredients and other raw materials for the Products being
stored or used at such Facility and any finished Products stored at such
Facility, in each case, in order to verify that User, Co-Packer or sublicensee
is in compliance with the provisions hereof and all applicable laws and
regulations. Owner's inspection of any Facility shall be limited to items
which touch and concern the Ingredients, the Product, its production, storage
and distribution. User acknowledges that granting Owner certain inspection
rights hereunder in no way relieves User of any of its obligations under this
Agreement, nor shall such provision require Owner to conduct any such
inspections.
17. Rejection and Recall of Product. User shall undertake a recall
or market withdrawal action with respect to (and Owner reserves the right to
reject) any Product (a) which is unfit for human consumption, (b) upon a
request or order to do so from the Health and Protection Branch or Ministry of
Health of British Columbia or any other government agency which has the right
to request or order such a recall, withdrawal or the like (c) which does not
meet the standards set forth in the recall procedure manual annexed hereto as
Schedule E. User shall recall and
-12-
<PAGE> 13
withdraw from the market any Product so rejected or ordered to be recalled or
withdrawn and shall take all other steps necessary to ensure that any such
Product shall not be sold, distributed or otherwise made available for
consumption. User shall provide any substantiation with regard to the recall
withdrawal and destruction of Product as Owner reasonably requests. User shall
bear all costs of recall withdrawal and disposal of any Product. If User
declines to undertake a recall or withdrawal action of a Product promptly after
receiving a request or order to do so from Owner, the Health and Protection
Branch or the Ministry of Health of British Columbia, or such other government
entity which has the authority to request or order a withdrawal or recall, User
shall, notwithstanding any provision in this Agreement to the contrary, be
liable for and shall indemnify and hold harmless Owner from any losses and
damages arising directly from User's failure to recall or withdraw such
Product.
18. Suspension of Production and Sales. Owner, in its sole (but
reasonable) discretion, may direct that User suspend until further notice from
Owner, and User shall so suspend, all production, sale and distribution of the
Products if Owner determines, or has reason to believe, that conditions in any
Facility or any raw materials, the Ingredients or packaging of any Products are
unsanitary or a public health concern or do not materially comply with the
terms and conditions of this Agreement. At the time of such suspension
directive, Owner shall specify to User in writing the reasons for such
suspension. In the event that User so suspends production, sale and
distribution of the Products, upon direction of Owner, and such suspension is
without cause or any of the foregoing events proves to be false, then Owner
shall pay to User the actual costs incurred by User in suspending production,
sale and distribution of any Products.
19. Insurance. User shall maintain general liability insurance
coverage (including product
-13-
<PAGE> 14
liability and completed operations coverage) in connection with manufacturing,
production and packaging of the Product with a single occurrence limit of not
less than $5,000,000. Promptly upon the execution of this Agreement, User
shall furnish Owner with a certificate of insurance from an insurance carrier
acceptable to Owner in its reasonable judgment, which certificate shall
evidence the existence of such insurance coverage. The insurance carrier shall
be instructed to notify Owner of any decrease, cancellation or significant
change in such insurance coverage. Owner shall be named as an additional
insured under such policy of insurance.
20. Records Information and Certification. (a) Each month with the
Royalty Fee, if any, User will provide to Owner accurate and complete written
reports of all Sales of the Products that occur in each such month that give
rise to royalties and the calculation of the Royalty Fee thereon. This report
shall be certified as substantially correct by two officers of User, one of
whom shall be the Vice President of Finance. User will provide such reports
even when there are no Royalty Fees payable.
(b) Upon request, User shall furnish to Owner, at Owner's cost, at
its offices in Dallas, Texas, a reasonable sample of all types of Products
produced during the previous month.
(c) Upon request therefor, User shall deliver to Owner such other
data, records and information relating to production, promotion, sale or
distribution of the Products or any related matters as Owner reasonably
requests.
(d) User will keep accurate and complete records of all transactions
and activities that give rise to the obligation to pay a Royalty Fee under this
Agreement. Upon 48 hours notice, Owner will have the right to inspect and/or
audit all of User's records of this type. If an inspection or audit reveals an
underpayment greater that two percent (2%) of the amount of Royalty Fee
-14-
<PAGE> 15
otherwise properly payable, User will pay all of Owner's reasonable costs in
connection with conducting the inspection or audit and collecting the
underpayment, including professional fees and the cost of lodging,
transportation and meals.
21. Notice of Certain Government Actions. The User shall notify
Owner immediately by telephone if any federal, provincial or local governmental
or administrative authority or agency shall (a) order a recall of any Product
or other similar action, market withdrawal, etc., or (b) find salmonella or
other bacteriological agents, substances or conditions which are considered by
such authority or agency to indicate unsanitary conditions in a Facility or a
public health concern with respect to any of the Products. User shall maintain
for inspection by Owner (and provide to Owner copies upon request) the results
of all federal, provincial or local government or administrative or regulatory
authority or agency inspection, reports and sanitation audits with respect to
any Facility which touch or concern the Product or the production thereof.
Within 30 days of receipt by User, User shall deliver to Owner copies of any
governmental or administrative authority or agency inspection reports with
respect to any of the Products.
22. Coordination of Information. Except as required by law, and as
long as this Agreement is in effect, User shall consult with Owner questions by
regulatory or other governmental agencies, the press and the public regarding
the Products which User reasonably determines may have a substantial effect on
Owner and shall not make a statement or comment regarding the same without
Owner's approval. Owner may, at its discretion, meet with any third parties
regarding the Products when any issue arises which may have a substantial
effect on the Owner.
23. Continuing Guarantee. User guarantees Owner that, as of the
date of each shipment
-15-
<PAGE> 16
by User hereunder of any Product subject to the provisions of the Consumer
Packaging and Labelling Act and the Food and Drugs Act each as amended from
time to time and any and all additional laws and or regulations which replace,
alter, supplement or expand the said acts insofar as regulation of the Product
is concerned (collectively the "Acts"), such Product is not (i) when shipped,
adulterated or misbranded within the meaning of the Acts or of any applicable
provincial law in which the definitions of adulteration and misbranding are
substantially the same as those contained in the Acts or (ii) a Product which
may not, under the provisions of the Acts, be introduced into commerce. This
guarantee shall be a continuing guarantee and shall continue in effect for the
life of this Agreement.
24. Termination. This Agreement may be terminated as follows:
(a) in accordance with Sections 6 and 11 hereof;
(b) by User or Owner: (i) upon mutual written agreement of the
parties; (ii) by written notice to the other party if such other
party defaults in the performance of any material obligation or
material agreement under or otherwise fails to comply with any
material provision of this Agreement (including any Schedule
hereto) or breaches any material warranty contained herein, and
such default, failure or breach shall not have been cured or
remedied within 15 days after notice thereof; (provided, however,
that this Section 24(b)(ii) shall not apply to termination due to
the events specified in Section 24(c)(i) or (c)(ii) below); or
(iii) by written notice to the other party if such other party
becomes insolvent or makes any assignment or arrangement for the
benefit of creditors or consents to the appointment of a trustee
or receiver, or a trustee or a receiver is appointed for such
party or for a substantial part of its property, or a bankruptcy,
reorganization or insolvency proceeding is instituted by or
against such party either under the
-16-
<PAGE> 17
Bankruptcy and Insolvency Act or the Companies Creditors Arrangement Act;
(c) by Owner upon the occurrence of either of the following:
(i) the User fails to pay within 15 days of the date when due
a Royalty Fee pursuant to Section 4 hereof, or
(ii) if User ceases production of any Product for any period
of time not in the ordinary course of business (and production is not
provided by any substitute producer or supplier authorized under
Section 9(a)).
25. Events Upon Termination. Upon termination of this Agreement,
User shall promptly:
(a) cease manufacture of all Products;
(b) cease the use of all packaging for the Products;
(c) discontinue all advertising and promotions making reference to the
Products and Trademarks;
(d) notify its affiliates, distributors and customers of the
termination of this Agreement;
(e) provide to Owner a statement of the inventory of Products and
packaging for Products on hand and an estimate of the time required to dispose
of the inventory of Products and packaging;
(f) upon Owner's request, turn over to Owner, upon reasonable
reimbursement therefor, all relevant sales and marketing material in User's
possession, including, but not limited to, advertising, point-of-sales
material, radio copy and TV commercials, and in the absence of Owner's request,
User, at its cost, shall destroy all of such materials; and
(g) return to Owner any and all Confidential Information in User's
possession.
For a period of 120 days after the termination date of this
Agreement, User may continue
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<PAGE> 18
to sell remaining inventories (which exist as of the date of termination) of
finished Products or packaging provided that such Product and packaging
conforms with all provisions of this Agreement, and provided further that User
makes timely payment of the Royalty Fee due on such sales and of all other
Royalty Fees owed as of the date of termination.
26. Indemnification. (a) Owner shall defend, indemnify and hold
harmless User and each of its directors, employees, officers and agents from
and against any liability, damages, claims, actions or proceedings (including,
without limitation, reasonable attorneys' fees) (collectively, "Losses")
suffered or incurred by User arising out of or based upon (i) the breach by
Owner of any warranty, covenant or agreement made by Owner hereunder or (ii)
User's use of the trademark International Delight(R) or any other Trademark to
the extent used as expressly permitted hereunder.
(b) User shall defend, indemnify and hold harmless Owner and each of
its directors, officers, employees and agents from and against any Losses
suffered or incurred by Owner arising out of or based upon (i) the breach by
User of any warranty, covenant or agreement made by User hereunder, (ii) the
handling, transportation, possession, use, processing or resale of any
Ingredient (iii) User's production, packaging, sale or distribution of any
Product or (iv) any claims for personal injury or death of any person with
respect to the Product.
(c) In any claim for indemnification under this Section 26, the party
seeking indemnification (the "Indemnitee") shall give written notice to the
other party (the "Indemnitor") within 30 days after notice of any claim or suit
involving or which could involve an indemnifiable Loss hereunder or within the
period of time necessary to respond to such claim without the risk of default,
whichever period is shorter. Failure to tender such notice as stated in the
previous
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<PAGE> 19
sentence shall result in a waiver of Indemnitor's indemnity obligation
hereunder with respect to such claim. Indemnitee shall in all ways cooperate
fully with the Indemnitor and its insurer in defending against, and disposing
of any such suits, claims, actions or proceedings, including but not limited to
providing to Indemnitor at Indemnitee's expense such information, documents and
access to employees of Indemnitee as may be necessary to defend such action.
Indemnitor shall provide to Indemnitee such information regarding such matter
as Indemnitee may from time to time reasonably request. Indemnitor shall
control completely the defense, settlement or other disposition of any such
claim.
27. Force Majeure. The obligations of Owner and User hereunder
(except as to the payment of money) shall be subject to any delays or
non-performance caused by acts of God, fires, floods, explosion, sabotage,
riot, orders of, or failure to issue all necessary permits by civil or military
authorities whether relating to discharge of materials into the environment or
otherwise (which failure is not substantially caused by the parties' action or
inaction), delays by suppliers of fuel, power, raw materials, the Ingredients,
containers or transportation, breakage or failure of machinery, strikes,
lockouts or labor trouble, perils of the sea, or any other similar cause beyond
the reasonable control of the non-performing party (each such cause, a "Force
Majeure Event"). Such non-performing party shall not be liable for breach of
this Agreement with respect to such non-performance, provided that the
non-performing party gives prompt written notice to the other party of the Force
Majeure Event and exercises all reasonable efforts to eliminate the Force
Majeure Event and to resume performance of its affected obligations as soon as
practicable.
28. Independent Contractor. Owner and User agree that each party is
an independent
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<PAGE> 20
contractor and neither is an employee, agent or representative of the other.
Nothing contained herein shall be construed to create hereunder between the
parties a joint venture, partnership, business association or other form of
business entity. Neither party shall have the power or authority to bind the
other in any manner whatsoever.
29. Confidentiality.
A. Definitions.
(i) "Confidential Information" means information of a
proprietary or confidential nature and trade secrets
relating to the Products, or New Products including
their Ingredients, raw materials, processing and
includes all documentation and any verbal
explanations, descriptions or discussions thereof,
provided, that the same are identified at the time of
disclosure and confirmed as being confidential in a
written document within ten (10) days following its
non-written disclosure. All documentation of
Confidential Information will be marked
"Confidential" or the like. Confidential Information
shall not include:
(a) information which was in the public domain at the time of
disclosure or,
(b) information which was in the Receiving Party's possession
prior to the time of its disclosure hereunder in the form of
written records, or
(c) information, which, though originally Confidential Information
subsequently becomes part of the public knowledge or
literature through no fault of the Receiving Party's, as of
the date of its becoming part of the
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<PAGE> 21
public knowledge or literature, or
(d) information, which, though originally Confidential
Information, subsequently is received by the Receiving Party
without obligations of secrecy from a third party who is free
to disclose such information, as of the date of such third
party disclosure.
(e) information required by law to be disclosed by the Receiving
Party, and then only to the extent that it is required to be
disclosed, provided that the Receiving Party shall notify the
Disclosing Party of any demand received by the Receiving Party
for disclosure of information received, and upon receipt of
such notice, the Disclosing Party may require the Receiving
Party, before disclosure of information received, to take such
measures as may be available to protect the information
received from further disclosure, provided that the Disclosing
Party shall pay in advance all expenses to be incurred by the
Receiving Party in connection with such measures.
(ii) "Disclosing Party" means the party that discloses
Confidential Information to the other party; and
(iii) "Receiving Party" means the party to whom
Confidential Information is disclosed.
B. The Receiving Party shall keep confidential all Confidential
Information belonging to the Disclosing Party and shall not disclose it
directly or indirectly or make it available to any third party without the
prior written consent of the Disclosing Party. The Receiving Party shall
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<PAGE> 22
treat the Confidential Information with the same care that the Receiving Party
uses in the protection of its own proprietary information. The Receiving Party
may disclose Confidential Information only to those of its officers, directors
and employees who:
(i) have a need to know (and only to the extent that each
has a need to know); and
(ii) are aware that the Confidential Information must be
kept confidential.
In addition to the above standard of care, the Receiving Party shall also use
its best efforts to prevent its directors, officers or employees or any other
person breaching the confidentiality obligation contained in this Section 29
and in furtherance thereof the Receiving Party shall use its best efforts to:
(iii) establish and maintain adequate security measures to
safeguard the Confidential Information from
unauthorized access or use; and
(iv) immediately notify the Disclosing Party of any
suspected or actual unauthorized use, copying or
disclosure of any Confidential Information.
C. The Receiving Party shall not use Confidential Information for
any purpose not expressly permitted in this Agreement unless otherwise
authorized by the Disclosing Party. This Section 29 shall survive the
expiration or termination of this Agreement.
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<PAGE> 23
30. Notices. Other than routine communications in the normal
course, any notices or other communications hereunder shall be in writing and
shall be sent by telecopier, with confirmation copy by mail or national
overnight delivery service, and shall be considered to have been duly given on
the earlier of (i) the date of actual receipt by telecopier, mail or national
overnight delivery service or (ii) three (3) business days after deposit in
Canadian double registered mail or first-class certified U.S. mail, postage
prepaid, return receipt requested, addressed to the parties at their respective
addresses or fax number set forth above or such other address or addresses or
fax number as either party shall have furnished from time to time to the other
party in writing.
31. Governing Law; Jurisdiction. This Agreement shall be governed
by and shall be construed in accordance with the laws of the Province of
British Columbia. The parties attorn to the exclusive jurisdiction of the
courts of the British Columbia or the United States District Courts located in
the State of Texas for the resolution of all disputes or controversies between
the parties hereto and agree that any claim or proceeding arising directly or
indirectly from this Agreement, any Schedule or other attachment hereto or any
transaction contemplated hereby may be initiated and maintained only before
such courts.
32. Entire Agreement. This Agreement, its Schedules and the
Non-Disclosure Agreement dated October 1, 1994 constitute the entire agreement
of the parties with respect to the subject matter hereof, and supersede all
prior negotiations, commitments, representations and undertakings of the
parties with respect to the subject matter hereof and thereof. Each party
agrees that the other has made no representations, written or oral, and each
party has relied upon no representation, written or oral, in connection with or
relating to the negotiation of or the
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<PAGE> 24
entering into of this Agreement which are not expressly included in writing
herein.
33. Severability. If and to the extent any provision (or any part
thereof) of this Agreement shall be held to be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remainder of
this Agreement shall not be affected thereby. If any provisions of this
Agreement are held by a court of competent jurisdiction to conflict with any
federal, provincial or local law, such provisions are hereby declared to be of
such force and effect as is permissible in such jurisdiction.
34. Headings. Headings used herein are for the convenient
reference of the parties and are not intended to limit, expand or modify in any
manner the express terms of this Agreement.
35. Assignment. User will not assign or transfer its rights and
obligations under this Agreement without the prior written consent of Owner;
however; in the event of an amalgamation or other reorganization of User
wherein all or substantially all of the equity interest in User is transferred
to or controlled by the post-amalgamation or post-reorganization entity, User
may assign or transfer its rights and obligations under this Agreement to such
entity only if (i) such entity agrees in writing with Owner to be bound by and
to assume all liabilities and obligations of User under this Agreement and (ii)
such entity does not compete with Owner within the Territory or United States
of America. This Agreement may be assigned by Owner to an entity at any time
without the approval of User; however; Owner may assign or transfer its rights
and obligations under this Agreement to such entity only if (i) such entity
agrees in writing with User to be bound by and to assume all liabilities and
obligations of Owner under this Agreement; and (ii) such entity does not
compete with User within the Territory.
36. No Waiver. The failure of either party to require the
performance of any term of this
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<PAGE> 25
Agreement, or the waiver of either party of any breach of this Agreement, shall
not prevent a subsequent exercise or enforcement of such terms or be deemed a
waiver of any subsequent breach of the same or any other term of this
Agreement.
37. Modifications. Except with respect to the provisions set
forth on Schedules B or D (which Owner has expressly reserves the right
hereunder to change or amend unilaterally) no modification or amendment to this
Agreement shall be effective unless in writing, signed by both parties and
referring explicitly to this Agreement. In the event that any Product
specification change shall cause either a raw material cost increase or require
a capital expenditure by User such change will only be made after agreement has
been reached between Owner and User. The provisions of this Agreement shall
control any inconsistent provisions contained in orders, purchase orders,
shipping documents, invoices or like communications between the parties.
38. Listing Allowances. User agrees to reimburse Owner for listing
allowances for Products paid by Owner prior to the date hereof in the amount of
$239,110.00 Canadian Dollars, as more particularly set out and described in
Schedule "F". User will reimburse Owner for one half of the listing allowances
within five days following the Commencement Date hereof, and will pay the
balance of the listing allowances by payment to Owner of $1.00 for each case of
Products produced by User until such time as the total amount of the listing
allowances have been reimbursed to Owner. Payments in respect of the latter
half of the listing allowances shall be made by User to Owner at the same time
as the payment of royalties under Section 4.
39. Binding Effect. This Agreement shall be binding upon and shall
inure to the benefit of the successors and assigns of the parties hereto.
Further, this Agreement shall be binding upon any affiliates, subsidiaries,
corporate parents, affiliated cooperatives, partners or other similarly
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<PAGE> 26
related parties to the parties hereto.
IN WITNESS WHEREOF the parties hereto have executed this Agreement to
be effective as of the Commencement Date.
THE MORNINGSTAR GROUP INC.
By: /s/ BILL BRICK
______________________________________
Title: Vice President - Sales
______________________________________
By: /s/ MICHAEL J. CRAMER
______________________________________
Title: Executive Vice President and Secretary
______________________________________
AGRIFOODS INTERNATIONAL COOPERATIVE, LTD.
By: /s/ DAVID E. COE
______________________________________
Title: Chief Executive Officer
______________________________________
By: /s/ A. CLIFFORD DENNY
______________________________________
Title: Chief Financial Officer
______________________________________
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<PAGE> 27
SCHEDULE A
Section 1: Products: The following International Delight(R) liquid non-
dairy flavored coffee whitener Products:
Irish Creme Amaretto Suisse Chocolate Mocha Cinnamon Hazelnut
Section 1: Trademarks:
International Delight(R) and International Delight design
Section 3: The Territory:
Canada
Section 4: Royalty Fees for the Initial Term:
<TABLE>
<CAPTION>
Royalty Fee Per
Package Size Case of Product Sold
------------ --------------------
<S> <C>
*
</TABLE>
Section 11: Commencement Date: October 1, 1994. Each year of this
Agreement shall be deemed to be the 12-month period commencing on October 1 and
ending on the following September 30.
Section 15: Approved Facilities: 6800 Lougheed Highway, P.O. Box 6590,
Burnaby, British Columbia V5A 1W2.
- --------------------
* Confidential portions omitted and filed separately with the Commission.
-27-
<PAGE> 28
Schedule B
Production and Quality Standards
*
- --------------------
* Confidential portions omitted and filed separately with the Commission.
-28-
<PAGE> 29
Schedule C
Minimum Sales Quotas
<TABLE>
<CAPTION>
MINIMUM SALES QUOTAS
YEAR (In Canadian Dollars)
---- ---------------------
<S> <C>
*
</TABLE>
- --------------------
* Confidential portions omitted and filed separately with the Commission.
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<PAGE> 30
Schedule D
Trademark Rights and Obligations
1. The following statements shall appear on all materials bearing the
Trademarks used in the marketing of any Products, including all packaging,
promotion and advertising materials:
The "INTERNATIONAL DELIGHT(R) logo and the words 'INTERNATIONAL
DELIGHT' are trademarks of The Morningstar Group Inc."; or
"INTERNATIONAL DELIGHT(R) is a registered trademark of The
Morningstar Group Inc."
(if necessary due to space requirements).
2. Prior to putting into use any product label, labeling, advertising or
promotional materials or packaging designs which display the Trademarks, User
shall forward copies thereof to Owner for the sole and exclusive purpose of
reviewing and approving the manner in which the Trademarks are displayed
thereon (which approval or disapproval shall not be unreasonably delayed).
3. User recognizes the right of Owner to the Trademarks, as well as the
distinctive features of packaging used in connection with such Trademarks, and
it is understood and agreed that User shall not claim adversely to Owner any
right, title or interest in or to said Trademarks or distinctive features of
the packaging used in connection with the Trademarks.
4. User also agrees not to attempt to register or use, or to aid any third
party in attempting to register or use, any trademark, service mark or
tradedress which, in the reasonable opinion of Owner, may be confusingly
similar to any of the Trademarks or tradedress of Owner. It is understood that
this covenant shall survive termination of this Agreement.
5. If Owner considers it advisable to record User as a licensee of any of the
Trademarks, User agrees to cooperate in such procedure, and to execute any
reasonable and ordinary documents submitted to User for this purpose.
6. User acknowledges that it neither has nor shall secure by this Agreement or
by its acts during the term of this Agreement any title to or interest in any
of the Trademarks, or tradedress of Owner whether or not registered, or to any
labeling or packaging designs used by Owner in connection with any of its
products, nor any right to use any of the Trademarks as a company name or
trading name or style or as any part thereof, nor shall any of the Trademarks
be used as part of any product name. Except as expressly set forth herein, the
right to use the Trademarks and tradedress of Owner, shall at all times remain
vested solely in Owner.
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<PAGE> 31
7. User shall use and display the Trademarks properly and shall take no
actions which may jeopardize the existence or enforceability of such Trademarks
by Owner. This shall include, although not in any way be limited to, providing
any notices required under applicable law. The User shall not display the
Trademarks in such a way as may injure the goodwill of Owner, its products or
the Trademarks themselves.
8. User shall notify Owner in writing of any possible infringement of or act
of unfair competition affecting the Trademarks which comes to User's attention.
Owner shall then determine whether it wishes to take action against such
possible infringement of or act of unfair competition affecting the Trademarks
called to its attention by User. If Owner decides to take action against any
such possible infringement or act of unfair competition, User agrees to
cooperate fully with Owner, at Owner's request and expense, in the prosecution
of suits or other proceedings, including becoming a party thereto with Owner,
unless becoming a party thereto would be materially adverse to a significant
portion of User's business. Recovery of damages resulting from any such action
shall be solely for the account of Owner.
-31-
<PAGE> 32
Schedule E
User's Recall Procedure Manual
Furnished User under separate cover.
-32-
<PAGE> 33
Schedule F
Listing Allowances
<TABLE>
<S> <C>
*
</TABLE>
- --------------------
* Confidential portions omitted and filed separately with the Commission.
-33-
<PAGE> 1
EXHIBIT 13(b)
FINANCIAL STATEMENTS
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
The Company has presented information in its Consolidated Statements of
Operations in a manner which delineates the results of those operations
designated as Continuing Operations and of those operations designated as
Discontinued Operations. Net sales from Continuing Operations are further
classified into two categories: (i) Branded Specialty Products, which include
historical sales of the Company's four nationally branded products -
International Delight(R), Second Nature(R), Naturally Yours(TM) and Lactaid(R);
and (ii) Other Specialty Products, which includes all sales of the Company's
specialty foods business other than Branded Specialty Products. Discontinued
Operations includes the results of the Company's divested regional dairies and
other divested operations.
On April 13, 1994, the Company completed the divestiture of its
Florida-based fluid milk operation Velda Farms Inc. ("Velda") to Engles Dairy
Acquisition L.P. at an approximate selling price of $51 million consisting of
$48 million in cash after working capital adjustments and $3 million of 9%
Series A Preferred Stock. The sale of Velda completes the Company's divestiture
of its regional dairies. These regional dairy operations, along with the
Company's other divested operations, have been treated as discontinued
operations, and previously published financial statements have been restated to
conform with this presentation.
On January 6, 1994, the Company announced a restructuring plan to sharpen
its focus on the faster-growing value-added segments of its core specialty food
products business, while reorganizing its operations to be more efficient. The
plan, which resulted in a $9.0 million charge in the fourth quarter of 1993,
included provisions for reductions in workforce, relocation of the
manufacturing for certain product lines to gain operating efficiencies, and the
abandonment of other product lines. The charge also included $1.9 million
representing reserves established for certain supply agreements and promissory
notes received as part of the sale of certain of the Company's regional dairies
in 1991 and 1992. The $9.0 million charge included non-cash expenses of $4.4
million and cash expenses of $4.6 million. The majority of the cash
expenditures were made during 1994. The Company suspended the payment of its
common stock dividend immediately following the $.0375 per share payment in the
first quarter of 1994 to holders of record as of December 31, 1993.
The Company acquired Favorite Foods Inc. ("Favorite") on March 31, 1993.
Favorite is a cultured and ultrapasteurized processor headquartered in
Fullerton, California. The consolidated results of operations for 1993 include
the results of Favorite from April 1, 1993 through December 31, 1993.
1994 COMPARED TO 1993
Net sales from Continuing Operations for the year ended December 31, 1994
totaled $292.3 million, an increase of $18.4 million (or 6.7%) from net sales
from Continuing Operations during 1993. The following table reflects net sales
from Continuing Operations by product category for each year:
<TABLE>
<CAPTION>
Year Ended December 31,
PRODUCT CATEGORIES 1993 1994
- ------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Branded products $ 82,556 $ 102,159
Specialty products 191,393 190,155
------------- ------------
Net sales $ 273,949 $ 292,314
============= ============
</TABLE>
Net sales of branded products increased 23.7% to $102.2 million in 1994 from
$82.6 million in 1993 reflecting volume increases in all four branded products.
Net sales of specialty products remained relatively flat from 1993 to 1994,
before considering the results of operations of Favorite for the first quarter
of 1993. On a pro forma basis, net sales of specialty products declined 6.0%
from $202.3 million in 1993 to $190.2 million in 1994. This reduction is
primarily related to the Company's selective withdrawal from certain marginally
profitable segments of this business.
The Morningstar Group | 1994 Annual Report
1
<PAGE> 2
FINANCIAL STATEMENTS
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Net sales from Discontinued Operations were $38.6 million in 1994 versus
$122.7 million in 1993. The 1994 decrease relates to the sale of Velda which
was completed on April 13, 1994.
Gross profit from Continuing Operations totaled $69.8 million or 23.9% of
net sales during 1994 compared to $62.4 million or 22.8% of net sales in 1993.
The increase in gross profit is attributable to the increase in sales of
branded products in 1994.
Operating expenses from Continuing Operations were $51.8 million or 17.7% of
net sales in 1994 versus $57.2 million (including $7.1 million in restructuring
and other charges) or 20.9% of net sales in 1993. 1993 operating expenses
before these charges were $50.1 million or 18.3% of net sales. Distribution
expenses as a percent of net sales remained level from 1993 to 1994 at 6.4%.
Selling expenses as a percent of net sales increased slightly during 1994, as a
result of increased marketing and promotional activities and increased
brokerage commissions related to the increase in branded sales. General and
administrative expenses, as a percent of net sales, declined in 1994 primarily
as a result of the 1993 restructuring plan.
The Company's operating income from Continuing Operations for 1994 was $18.1
million, an increase of $12.9 million from 1993. Prior to the 1993
restructuring and other charges, the Company's operating income from Continuing
Operations increased 47.2% in 1994, from $12.3 million in 1993.
Interest expense declined 12.0% from $5.0 million in 1993 to $4.4 million in
1994. This reduction is due to an overall decrease in debt of $11.8 million
(exclusive of the reduction in debt from the proceeds of the sale of Velda)
offset by an increase in the Company's average borrowing costs.
The Company's income tax provision increased $4.7 million from $.8 million
in 1993 to $5.5 million in 1994. The effective income tax rate for year ended
December 31, 1994 was 37.2% compared to an effective tax rate of 144.0% in
1993. As of December 31, 1994, the Company's net deferred tax assets totaled
$8.9 million, less a valuation allowance of the same amount. Future reductions
in the valuation allowance totaling $4.7 million will result in a reduction of
goodwill associated with the Company's financial restructuring transaction
which occurred on March 1, 1991. The reductions in the remaining $4.2 million
of valuation allowance will result in reduced deferred tax expense. The
allocation of future reductions in the valuation allowance will be determined
by the ratio of deferred tax attributes that existed as of the financial
restructuring date to those deferred tax attributes created subsequent to the
financial restructuring date. At December 31, 1994, the Company had pretax net
operating loss carryforwards for federal income tax purposes of $15.1 million
which are available to offset future income tax liabilities. In addition, the
Company has approximately $.8 million in alternative minimum tax credits which
are also available to offset future income tax liabilities.
The Company's 1994 income from Continuing Operations of $9.3 million
compares to a loss in 1993 of $.3 million. Included in the 1993 loss is $7.1
million in restructuring and other charges. Excluding the restructuring and
other charges, the 1994 income from Continuing Operations increased $4.9
million, or 111.4% from $4.4 million in 1993.
The Company's net income for 1994 of $10.6 million compares to net income of
$.8 million for 1993. The increase in 1994 is primarily related to the increase
in gross profit, reduced interest expense and the absence of the restructuring
and other charges.
1993 COMPARED TO 1992
Net sales from Continuing Operations for the year ended December 31, 1993
totaled $273.9 million, an increase of $43.7 million (or 19.0%) from net sales
from Continuing Operations during 1992. The following table reflects net sales
from Continuing Operations by product category for each year:
<TABLE>
<CAPTION>
Year Ended December 31,
PRODUCT CATEGORIES 1992 1993
- ------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Branded products $ 67,401 $ 82,556
Specialty products 162,819 191,393
-------------- -------------
Net sales $ 230,220 $ 273,949
============== =============
</TABLE>
Net sales of branded products increased 22.5% to $82.6 million in 1993 from
$67.4 million in 1992 reflecting volume increases in International Delight(R),
Lactaid(R) and Naturally Yours(TM). Second Nature(R) volumes declined slightly
year to year. Net sales of other specialty products increased to $191.4 million
in 1993 from $162.8 million in 1992 primarily as the result of the acquisition
of Favorite Foods on March 31, 1993. Volumes of specialty products prior to the
Favorite acquisition increased slightly year to year.
The Morningstar Group | 1994 Annual Report
2
<PAGE> 3
Net sales from Discontinued Operations were $122.7 million in 1993 versus
$180.4 million in 1992. The decrease relates primarily to the divestiture of
the Company's former regional dairy in Maryland (Embassy) and the Company's
former novelty/ice cream operation in Maryland (East Coast Ice Cream), both of
which were sold in July 1992.
Gross profit from Continuing Operations totaled $62.4 million or 22.8% of
net sales during 1993 compared to $55.8 million or 24.2% of net sales in 1992.
The increase in gross profit is mainly attributable to the increase in sales
from 1992 to 1993. The decrease in gross profit margins was due to reduced
margins in the Company's branded and other specialty products categories
resulting primarily from increased raw material and overhead costs which could
not be entirely recouped through pricing improvements.
Operating expenses from Continuing Operations were $57.2 million (including
$7.1 million in restructuring and other charges) or 20.9% of net sales in 1993
compared to $40.6 million (including other charges of $1.1 million) or 17.6% of
net sales in 1992. Operating expenses before these charges were $50.1 million
or 18.3% in 1993 compared to $39.5 million or 17.2% in 1992. Distribution
expenses increased as a percent of net sales due to an increase in the sales of
branded products which are generally transported nationwide. Selling expenses
rose as a percentage of net sales primarily as a result of increased
advertising and promotion activities related to increased sales of branded
products. General and administrative expenses declined slightly.
The Company's operating income from Continuing Operations for 1993 was $5.2
million, a decline of $10.0 million from 1992. The decline in operating income
was the result of the increase in restructuring and other charges and the
decrease in gross profit margins. Prior to restructuring and other charges, the
Company's operating income declined from $16.3 million in 1992 to $12.3 million
in 1993.
Interest expense declined 28.6% from $7.0 million in 1992 to $5.0 million in
1993 primarily as the result of decreased indebtedness levels and lower average
borrowing costs during 1993.
The Company's loss from Continuing Operations for 1993 of $.3 million
compares to a loss in 1992 of $1.6 million. The Company's net income of $.8
million in 1993 compares to a net loss of $10.7 million in 1992. Included in
the net loss for 1992, the Company recorded an extraordinary loss of $5.7
million on the purchase of subordinated debentures at a premium and charged
$9.6 million of previously incurred financing costs to expense as a result of
refinancing its senior debt agreement during 1992.
EARNINGS PER SHARE
The weighted average number of shares of common stock and common stock
equivalents outstanding increased slightly from 15,011,607 in 1993 to
15,050,538 in 1994.
LIQUIDITY AND CAPITAL RESOURCES
In 1994, the Company generated cash of $18.5 million from its operating
activities from Continuing Operations, which, coupled with $49.8 million of net
cash provided by Discontinued Operations, $1.6 million received from the
exercise of stock options and reduced cash balances of $1.2 million, was used
to repay debt of $60.3 million, fund capital and other expenditures of $6.9
million, pay dividends of $.5 million on its common stock and provide $3.4
million for cash used by operating activities of Discontinued Operations.
The Company believes that cash generated from its operations, together with
borrowings under the Revolver, will provide the cash necessary to fund the
Company's operations, remaining cash restructuring expenditures, debt service
and capital expenditures for the foreseeable future. The Company estimates that
it will require cash of $15.9 million during 1995 to fund approximately $9.9
million in capital expenditures and approximately $6.0 million in senior bank
debt reduction; funding would be obtained from operations and short-term
borrowings, if necessary. At December 31, 1994, the Company had approximately
$15.0 million of unused borrowing capacity under the Revolver. The Company
suspended the payment of its common stock dividend immediately following the
payment of its quarterly dividend of $.0375 per common share in the first
quarter of 1994 to holders of record as of December 31, 1993.
The Company was in compliance with all financial covenants as of December
31, 1994. Based upon the Company's projections for 1995, management does not
anticipate any violation of the financial covenants contained in the Senior
Credit Agreement.
The Company's Consolidated Balance Sheet includes significant goodwill and
intangible assets as a result of its financial restructuring transaction which
occurred on March 1, 1991, and the subsequent acquisition of Favorite. The
Company continually evaluates whether events and circumstances indicate the
remaining estimated useful life of goodwill warrants revision or that the
remaining balance of goodwill may not be recoverable. To make this evaluation
the Company uses an estimate of undiscounted net income over the remaining life
of the goodwill.
The Morningstar Group | 1994 Annual Report
3
<PAGE> 4
FINANCIAL STATEMENTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE STOCKHOLDERS AND
BOARD OF DIRECTORS OF
THE MORNINGSTAR GROUP INC.:
We have audited the accompanying consolidated balance sheets of The
Morningstar Group Inc. (a Delaware corporation) and subsidiaries as of December
31, 1994 and 1993, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1994. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Morningstar Group Inc.
and subsidiaries as of December 31, 1994 and 1993, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1994, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Dallas, Texas
February 17, 1995
The Morningstar Group | 1994 Annual Report
4
<PAGE> 5
MANAGEMENT'S REPORT ON FINANCIAL RESPONSIBILITY
TO OUR STOCKHOLDERS:
Management is responsible for the preparation and integrity of the
consolidated financial statements of The Morningstar Group Inc. and
subsidiaries and all other information contained in this Annual Report. The
accompanying consolidated financial statements have been prepared in accordance
with generally accepted accounting principles applied on a consistent basis.
These financial statements reflect informed judgments and estimates which
management believes to be reasonable.
The Company maintains an effective system of internal accounting controls
which are modified periodically as the Company's operations change.
Additionally, the Company is receptive to suggestions made by Arthur Andersen
LLP, its independent public accountants, regarding enhancements and changes to
the Company's existing internal accounting controls. Overall, management
believes that its system of internal accounting controls is adequate to provide
reasonable assurance as to the integrity and reliability of its financial
statements and the safeguarding of assets.
The Board of Directors, acting through its Audit Committee, monitors the
accounting affairs of the Company and has approved the accompanying
consolidated financial statements. The Audit Committee, consisting of two
outside directors, reviews the results of the annual financial statement audit
and the actions taken by management and the independent public accountants to
assure that each is carrying out its responsibilities.
/s/ C. DEAN METROPOULOS /s/ N. MICHAEL DION /s/ DARRON K. ASH
C. Dean Metropoulos N. Michael Dion Darron K. Ash
Chairman, President and Chief Financial Officer Controller
Chief Executive Officer
February 17, 1995
The Morningstar Group | 1994 Annual Report
5
<PAGE> 6
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
ASSETS 1993 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 3,340 $ 2,152
Receivables, net of allowance for doubtful accounts of $974
and $1,495, respectively 26,762 30,469
Inventories 11,527 10,540
Prepaids and other 9,519 5,062
Net assets of Discontinued Operations - current 5,571 -
---------------- --------------
Total current assets 56,719 48,223
PROPERTY, PLANT AND EQUIPMENT:
Land 6,062 6,062
Buildings and improvements 16,463 17,938
Machinery and equipment 29,334 36,041
---------------- --------------
Gross property, plant and equipment 51,859 60,041
Less: Accumulated depreciation (9,749) (13,404)
---------------- --------------
Net property, plant and equipment 42,110 46,637
INTANGIBLE AND OTHER ASSETS:
Identifiable intangible assets 3,177 2,512
Goodwill 71,829 65,951
Deferred financing costs 2,705 1,540
Other assets 1,772 402
Net assets of Discontinued Operations - noncurrent 33,822 -
---------------- --------------
Total intangible and other assets 113,305 70,405
---------------- --------------
Total assets $ 212,134 $ 165,265
================ ==============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
The Morningstar Group | 1994 Annual Report
6
<PAGE> 7
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1993 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 17,850 $ 17,263
Accrued liabilities 17,663 19,345
Current maturities of long-term debt 14,750 6,000
------------- -------------
Total current liabilities 50,263 42,608
LONG-TERM DEBT (net of current maturities) 105,425 53,892
OTHER LONG-TERM LIABILITIES 1,913 1,963
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 50,000,000 shares authorized;
14,287,212 in 1993 and 14,920,797 in 1994 issued and outstanding 143 149
Additional paid-in capital 69,541 71,157
Retained deficit (15,151) (4,504)
------------- -------------
Total stockholders' equity 54,533 66,802
------------- -------------
Total liabilities and stockholders' equity $ 212,134 $ 165,265
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
The Morningstar Group | 1994 Annual Report
7
<PAGE> 8
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
1992 1993 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES $ 230,220 $ 273,949 $ 292,314
COST OF GOODS SOLD 174,428 211,597 222,484
------------- ------------ ------------
GROSS PROFIT 55,792 62,352 69,830
OPERATING COSTS AND EXPENSES:
Distribution 13,173 17,661 18,689
Selling 13,927 19,008 21,295
General and administrative 12,404 13,427 11,778
Restructuring and other charges 1,093 7,100 -
------------- ------------ ------------
Total operating costs and expenses 40,597 57,196 51,762
------------- ------------ ------------
OPERATING INCOME 15,195 5,156 18,068
INTEREST EXPENSE 6,957 4,984 4,446
AMORTIZATION AND WRITE-OFF OF DEFERRED
FINANCING COSTS 918 493 351
REFINANCING CHARGES 9,584 - -
OTHER INCOME, NET (722) (905) (1,583)
------------- ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (1,542) 584 14,854
PROVISION FOR INCOME TAXES 98 841 5,533
------------- ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS (1,640) (257) 9,321
DISCONTINUED OPERATIONS:
Income (loss) from Discontinued Operations (3,359)(a) 1,241(a) 903(a)
Gain on disposal - - 423(b)
------------- ------------ ------------
INCOME (LOSS) FROM DISCONTINUED OPERATIONS (3,359) 1,241 1,326
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (4,999) 984 10,647
EXTRAORDINARY ITEM (5,676)(c) (164)(d) -
------------- ------------ ------------
NET INCOME (LOSS) (10,675) 820 10,647
LESS: DIVIDENDS ON PREFERRED STOCK 939 - -
------------- ------------ ------------
NET INCOME (LOSS) TO COMMON STOCKHOLDERS $ (11,614) $ 820 $ 10,647
============= ============ ============
EARNINGS (LOSS) PER COMMON SHARE:
Continuing Operations $ (.21) $ (.02) $ .62
Discontinued Operations (.28) .08 .09
------------- ------------ ------------
Earnings (loss) before extraordinary item (.49) .06 .71
Extraordinary item (.47) (.01) -
------------- ------------ ------------
Earnings (loss) per common share $ (.96) $ .05 $ .71
============= ============ ============
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 12,128,343 15,011,607 15,050,538
</TABLE>
(a) Net of applicable tax provision (benefit) of $(71), $1,044 and $507.
(b) Net of applicable tax provision of $2,865.
(c) Loss on purchase of senior subordinated debentures, net of applicable taxes
of $0.
(d) Loss on purchase of senior subordinated debentures, net of applicable tax
benefit of $71.
The accompanying notes are an integral part of these consolidated statements.
The Morningstar Group | 1994 Annual Report
8
<PAGE> 9
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Common Stock and
Additional Paid-in Capital
------------------------------------------
Single Retained
Class A Class B Class Deficit Total
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1991 $ 15,421 $ 2,815 $ - $ (1,148) $ 17,088
Dividends on redeemable preferred stock - - - (939) (939)
($1.565 per share)
Conversion to single class of stock (15,421) (2,815) 18,236 - -
Issuance of common stock - - 50,281 - 50,281
Vesting of stock options - - 1,093 - 1,093
Cash dividends on common stock - - - (1,069) (1,069)
($.075 per share)
Net Loss - - - (10,675) (10,675)
----------- ---------- ---------- ---------- ----------
Balance, December 31, 1992 - - 69,610 (13,831) 55,779
Exercise of stock options - - 74 - 74
Cash dividends on common stock - - - (2,140) (2,140)
($.15 per share)
Net Income - - - 820 820
----------- ---------- ---------- ---------- ----------
Balance, December 31, 1993 - - 69,684 (15,151) 54,533
Exercise of stock options - - 1,622 - 1,622
Net Income - - - 10,647 10,647
----------- ---------- ---------- ---------- ----------
Balance, December 31, 1994 $ - $ - $ 71,306 $ (4,504) $ 66,802
=========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
The Morningstar Group | 1994 Annual Report
9
<PAGE> 10
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
1992 1993 1994
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 225,873 $ 274,751 $ 284,605
Interest received 194 238 134
Income tax refund - 6 -
Cash paid to suppliers and employees (207,130) (257,501) (259,147)
Interest paid (9,276) (6,240) (4,395)
Income taxes paid (547) (453) (2,663)
------------- -------------- --------------
Net cash provided by Continuing Operations 9,114 10,801 18,534
Net cash provided (used) by Discontinued Operations 5,342 5,896 (3,403)
------------- -------------- --------------
Net cash provided by operating activities 14,456 16,697 15,131
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of subsidiary:
Working capital - (2,936) -
Property, plant and equipment - (12,255) -
Other assets - (15,190) -
Other long term liabilities - 354 -
------------- -------------- --------------
- (30,027) -
Capital expenditures (5,307) (5,520) (7,622)
Proceeds from sale of assets - 209 32
Other (2,119) (2,175) 682
------------- -------------- --------------
Net cash used by Continuing Operations (7,426) (37,513) (6,908)
Discontinued Operations:
Sale of Discontinued Operations 12,592 125 50,237
Capital and other expenditures (223) (1,198) (482)
------------- -------------- --------------
Net cash provided (used) by Discontinued Operations 12,369 (1,073) 49,755
Net cash provided (used) by investing activities 4,943 (38,586) 42,847
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance (redemption) of preferred stock (17,814) - -
Issuance of common stock 50,281 74 1,622
Proceeds from issuance of long-term debt 104,000 35,000 -
Net borrowings (repayments) under
revolving credit facility 500 6,675 (14,783)
Principal payments on long-term debt (154,409) (18,231) (45,470)
Refinancing fees (3,140) - -
Dividends paid (535) (2,140) (535)
------------- -------------- --------------
Net cash provided (used) by financing activities (21,117) 21,378 (59,166)
NET DECREASE IN CASH (1,718) (511) (1,188)
CASH, BEGINNING OF PERIOD 5,569 3,851 3,340
------------- -------------- --------------
CASH, END OF PERIOD $ 3,851 $ 3,340 $ 2,152
============= ============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
The Morningstar Group | 1994 Annual Report
10
<PAGE> 11
CONSOLIDATED STATEMENTS OF CASH FLOWS - RECONCILIATION OF
NET INCOME (LOSS) TO NET CASH PROVIDED BY OPERATIONS
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
1992 1993 1994
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET INCOME (LOSS) $ (10,675) $ 820 $ 10,647
ADJUSTMENTS TO RECONCILE NET
INCOME (LOSS) TO NET CASH
PROVIDED BY OPERATIONS:
Discontinued Operations net (income) loss 3,359 (1,241) (1,326)
Depreciation 3,387 3,810 4,344
Amortization of intangibles 5,743 4,288 2,632
Refinancing charges 10,343 - -
Restructuring and other charges - 7,100 -
(Gain) loss on fixed asset retirements 68 82 (243)
Increase in noncash taxes - 1,040 4,222
Loss on extinguishment of debentures 5,676 164 -
Change in assets and liabilities net of
effects from acquisitions and
divestitures of subsidiaries:
Accounts receivable (5,069) (1,208) (3,707)
Inventories (54) (2,792) 987
Prepaids and other (1,683) (2,969) 3,569
Accounts payable 206 1,455 (655)
Other accrued liabilities (2,866) 2,466 (1,986)
Other long-term liabilities 679 (2,214) 50
------------ ------------- -------------
Total adjustments 19,789 9,981 7,887
Net cash provided by Continuing Operations 9,114 10,801 18,534
Discontinued Operations:
Discontinued Operations net income (loss) (3,359) 1,241 1,326
Gain on disposal - - (423)
Refinancing and other charges 7,376 - -
Change in working capital (2,151) 1,584 (4,914)
Depreciation and amortization 3,476 3,071 608
------------ ------------- -------------
Net cash provided (used) by Discontinued Operations 5,342 5,896 (3,403)
NET CASH PROVIDED BY OPERATIONS $ 14,456 $ 16,697 $ 15,131
============ ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
The Morningstar Group | 1994 Annual Report
11
<PAGE> 12
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND BUSINESS
BACKGROUND
The Morningstar Group Inc., a Delaware corporation (together with
its subsidiaries, the "Company", "Morningstar", or "Successor") was
formed in March 1991. On April 1, 1988, the Company's predecessor,
MorningStar Foods Inc., acquired substantially all of the net assets
and operations of the Dairy Group of The Southland Corporation.
Due to a change of ownership, the Company adopted a new basis of
accounting on March 1, 1991. In accordance with generally accepted
accounting principles, the assets and liabilities of the Company were
adjusted to their appraised fair market values as of this date.
In the second quarter of 1992 the Company accomplished a public
offering of 5,000,000 new shares of common equity, which provided
$50.3 million in net cash proceeds which, combined with $104.0 million
in new senior borrowings, was utilized to purchase $34.0 million in
face amount of the Company's 13% Senior Subordinated Debentures at a
cash premium of $4.1 million, to redeem $17.8 million of the Company's
preferred stock and to refinance $98.4 million of previously
outstanding senior debt.
The Company announced on January 6, 1994 a new growth strategy
which included $9.0 million in restructuring and other charges
recognized in the fourth quarter of 1993 and the cessation of the
payment of dividends on its common stock. This restructuring plan also
contemplated the sale of Velda Farms Inc. ("Velda") which was
completed on April 13, 1994, for $48.0 million in cash and $3.0
million in 9% Series A preferred stock. The Company has deferred the
recognition of the gain on the preferred stock pending realization of
the gain. The majority of the cash proceeds were used to pay down
external bank debt and to fund federal and state taxes generated by
the gain on the sale.
BUSINESS
The Company's Continuing Operations include its specialty
operations which manufacture and market refrigerated food products
including nationally branded products and other specialty, dairy-based
cultured and ultrapasteurized products. Discontinued Operations
include all previously divested regional dairy operations and other
divested operations.
(2) ACQUISITIONS AND DISCONTINUED OPERATIONS
DISCONTINUED OPERATIONS
The Company has made significant divestitures since its inception
and as a result, the size and scope of the Company's operations have
been significantly changed. In 1991, the Company divested a
novelty/ice cream operation in Texas and closed a novelty/ice cream
operation in Missouri. In 1992, the Company divested a regional dairy
operation and a novelty/ice cream operation, both located in Maryland.
On April1994, the Company completed the divestiture of its
Florida-based fluid milk operation Velda Farms Inc. ("Velda"). The
sale of Velda concluded the divestiture of the Company's regional
dairies which were considered a major and distinct segment of its
business. As such, the operations of the regional dairies and other
divested operations have been restated and presented in the
consolidated financial statements to conform with discontinued
operations treatment ("Discontinued Operations").
Net sales of Discontinued Operations were $180.4 million in 1992,
$122.7 million in 1993 and $38.6 million in 1994. Interest expense of
$2.4 million, $1.4 million and $.4 million was allocated to
Discontinued Operations during 1992, 1993 and 1994, respectively. The
allocation method was based upon the ratio of net assets of
Discontinued Operations to the sum of consolidated net assets plus
consolidated debt, less debt specifically allocated to certain of the
Company's subsidiaries.
The Morningstar Group | 1994 Annual Report
12
<PAGE> 13
FAVORITE FOODS ACQUISITION
On March 31, 1993, the Company completed its purchase of Favorite
Foods, Inc., formerly a subsidiary of Nestle USA, Inc., for
approximately $28 million plus expenses. Simultaneously with the
purchase, the acquired corporation was merged into Favorite Foods
Inc., a Delaware corporation (collectively "Favorite"). Favorite,
headquartered in Fullerton, California, is a processor of cultured and
ultrapasteurized products and recorded approximately $31 million in
sales during the nine months ended December 31, 1993. Favorite's
results are included in the 1993 Consolidated Statement of Operations
for the period April 1 through December 31, 1993.
(3) SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All
significant intracompany transactions and balances have been
eliminated.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially expose the Company to
concentrations of credit risk consist primarily of trade accounts
receivable. The Company sells its products to supermarkets,
convenience stores, dairies, food service and institutional
organizations, club stores and private label suppliers located in all
50 states and over 20 foreign countries, with a concentration of
customers located in California. The Company performs ongoing credit
evaluations of its customers' financial condition. The Company
establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific customers, historical trends
and other information.
CASH AND CASH EQUIVALENTS
The Company considers overnight investments to be cash.
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,
1993 1994
----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Raw materials and supplies $ 7,913 $ 6,757
Finished goods 3,614 3,783
--------- ----------
Total $ 11,527 $ 10,540
========= ==========
</TABLE>
Finished goods inventories include the costs of materials, labor
and plant overhead.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost and is
depreciated on a straight-line basis over the estimated useful lives
of the assets, as follows:
<TABLE>
<CAPTION>
Useful
ASSET CATEGORY Life (Years)
---------------------------------------------------------------------------------------
<S> <C>
Machinery and equipment 3 - 10
Buildings and improvements 25
</TABLE>
Property sold or retired is eliminated from the accounts in the
year of disposition. Major expenditures for renewals and betterments
are capitalized while maintenance and repairs are charged against
income.
The Morningstar Group | 1994 Annual Report
13
<PAGE> 14
IDENTIFIABLE INTANGIBLE ASSETS
Identifiable intangible assets relate to the acquisition of
Favorite in 1993, and are being amortized over their estimated useful
lives which is generally 5 years. Amortization costs totaled
$2,200,000 in 1992, $1,933,000 in 1993 and $665,000 in 1994. The 1993
amortization does not include the write-down of certain identifiable
intangibles associated with the 1993 restructuring and other charges.
Accumulated amortization was $513,000 and $1,178,000 at December 31,
1993 and 1994, respectively.
GOODWILL
Goodwill is amortized on a straight-line basis over 40 years and is
recorded at cost less accumulated amortization. The Company
continually evaluates whether events and circumstances indicate the
remaining estimated useful life of goodwill may warrant revision or
that the remaining balance of goodwill may not be recoverable. To make
this evaluation, the Company uses an estimate of undiscounted net
income over the remaining life of the goodwill. Amortization costs
totaled $1,934,000 in 1992, $1,654,000 in 1993 and $1,660,000 in 1994.
Accumulated amortization was $5,200,000 and $6,860,000 at December 31,
1993 and 1994, respectively.
DEFERRED FINANCING COSTS
Costs incurred that relate to the issuance of indebtedness and the
corresponding accumulated amortization are included in deferred
financing costs in the accompanying consolidated balance sheets.
Deferred financing costs related to existing debt are amortized over
the life of the related debt. Accumulated amortization was $767,000
and $1,118,000 at December 31, 1993 and 1994, respectively.
ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
<TABLE>
<CAPTION>
At December 31,
1993 1994
-----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Accrued interest $ 390 $ 706
Payroll & benefits (accrued wages, vacation and profit sharing) 3,533 3,472
Restructuring accruals 4,425 717
Insurance accruals 5,083 3,559
Income taxes 591 3,042
Marketing and advertising 1,683 2,689
Other accrued liabilities 1,958 5,160
------- -------
Total $17,663 $19,345
======= =======
</TABLE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
The financial position of the Company at December 31, 1994 includes
certain financial instruments which may have a fair value that is
different than that which is currently reflected on the financial
statements. However, any variation in value is insignificant.
The Morningstar Group | 1994 Annual Report
14
<PAGE> 15
REVENUE RECOGNITION
The Company recognizes revenue upon shipment to customers.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company has not entered into any derivatives or other
speculative financial instruments as of December 31, 1994.
INCOME TAXES
Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes," was issued in February 1992. The
Company elected to adopt this standard effective January 1, 1992. The
adoption of SFAS 109 had no material effect on the Company's financial
statements.
OTHER INCOME
Other income primarily consists of purchase discounts and royalty
revenue.
EARNINGS (LOSS) PER COMMON SHARE
The earnings (loss) per common share is computed based on the
weighted average number of shares of the Company's common stock and
common stock equivalents outstanding during the period. Common stock
equivalents represent the dilutive effect of the assumed exercise of
certain outstanding stock options. The impact of outstanding stock
options discussed in Note 10 has not been considered in 1992 because
of their antidilutive effect.
FINANCIAL STATEMENT PRESENTATION
Certain prior year balances have been reclassified to conform to
the current year presentation.
PRO FORMA RESULTS FROM CONTINUING OPERATIONS
The following unaudited pro forma information is presented to
illustrate the estimated effects of: (i) the completion of the May
1992 equity offering and related financing and debenture purchase and
(ii) the acquisition of Favorite as if each transaction had occurred
at January 1, 1992 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Year Ended December 31,
1992 1993
(Unaudited)
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Pro forma net sales from Continuing Operations $ 273,277 $ 285,136
========== ===========
Pro forma net income (loss) from Continuing Operations
before extraordinary items $ 9,321 $ (161)
========== ===========
Pro forma net income (loss) from Continuing Operations $ 3,645 $ (325)
========== ===========
Pro forma shares outstanding 14,980,582 14,287,212
Pro forma earnings (loss) per share $ .24 $ (.02)
========== ===========
</TABLE>
The pro forma information presented above does not eliminate the
effect of the Company's $7.1 million in restructuring and other
charges recorded in the fourth quarter of 1993.
(4) INCOME TAXES
The components of the provision for income taxes from Continuing
Operations are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
1992 1993 1994
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current $ - $ 207 $ 272
Deferred 71 388 4,163
State 27 246 1,098
--------- ----------- -------------
Provision for income taxes $ 98 $ 841 $ 5,533
========= =========== =============
</TABLE>
The Morningstar Group | 1994 Annual Report
15
<PAGE> 16
Temporary differences and carryforwards which give rise to a
significant portion of net deferred income tax assets are as follows
(in thousands):
<TABLE>
<CAPTION>
At December 31,
1993 1994
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred Tax Assets:
Net operating loss carryforward $ 7,887 $ 5,130
Accrued vacation 811 525
Accrued workers' compensation 946 1,030
Restructuring reserves 2,331 501
Other accrued expenses and reserves 2,075 3,404
Other deferred tax assets 1,548 1,011
--------- ----------
Total deferred tax assets 15,598 11,601
Deferred Tax Liabilities:
Accelerated depreciation and amortization 2,880 2,393
Other deferred tax liabilities 519 298
--------- ----------
Total deferred tax liabilities 3,399 2,691
--------- ----------
Net deferred income tax assets 12,199 8,910
Valuation allowance (12,199) (8,910)
--------- ----------
Long-term deferred income taxes, net $ - $ -
========= ==========
</TABLE>
Approximately $4.7 million of the deferred tax assets were created
prior to the Company's financial restructuring transaction which
occurred on March 1, 1991 and when utilized, results in a reduction of
goodwill associated with that transaction. The Company reduced
goodwill by approximately $71,000, $388,000 and $4,163,000 for the
years ended December 31, 1992, 1993 and 1994 respectively,
representing realization of deferred tax assets created prior to the
Company's financial restructuring transaction.
The provision (benefit) for income taxes was different than the
amount computed using the statutory income tax rate for the reasons
set forth in the following table (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
1992 1993 1994
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Provision (benefit) computed at statutory rate $ (524) $ 199 $ 5,050
State income taxes 18 162 905
Tax on non-deductible goodwill amortization 657 539 516
Utilization of previously unrecognized deferred
tax assets - (138) (1,107)
Other (53) 79 169
----------- ---------- ----------
Provision for income taxes $ 98 $ 841 $ 5,533
=========== ========== ==========
</TABLE>
AVAILABILITY AND AMOUNT OF NET OPERATING LOSS CARRYFORWARDS
At December 31, 1994, the Company had pretax net operating loss
("NOL") carryforwards for federal income tax purposes of $15.1 million
which are available to offset future income tax liabilities. NOL
carryforwards expire by 2007. In addition, the Company has
approximately $.8 million in alternative minimum tax credits which are
also available to offset future income tax liabilities.
The Morningstar Group | 1994 Annual Report
16
<PAGE> 17
(5) LONG-TERM DEBT
The Company's long-term debt consists of the following (in
thousands):
<TABLE>
<CAPTION>
At December 31,
1993 1994
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Senior term loan $ 100,500 $ 55,000
Revolving credit facility 16,675 1,892
Industrial development revenue bonds 3,000 3,000
--------- ----------
Total long-term debt 120,175 59,892
Less: Current maturities 14,750 6,000
--------- ----------
Long-term debt, net of current maturities $ 105,425 $ 53,892
========= ==========
</TABLE>
Maturities of long-term debt at December 31, 1994, are as follows
(in thousands):
<TABLE>
<S> <C>
1995 $ 6,000
1996 14,083
1997 17,272
1998 17,645
1999 1,892
Thereafter 3,000
--------------
Total maturities $ 59,892
==============
</TABLE>
SENIOR TERM LOAN AND REVOLVING CREDIT FACILITY
In March 1993, in conjunction with the acquisition of Favorite, the
Company's existing credit agreement was amended and restated (the
"Senior Credit Agreement"). The Senior Credit Agreement includes a
six-year term loan (the "Senior Term Loan") and a $25 million
revolving credit facility (the "Revolver"). At December 31, 1994, $1.9
million was borrowed under the Revolver and approximately $8.1 million
was issued pursuant to letters of credit.
The Senior Credit Agreement also requires mandatory prepayments of
the loans under certain conditions such as the sale of assets, excess
cash flow, the issuance of new debt or equity and the receipt of
certain other cash proceeds.
The base interest rate on the Term Loan and the Revolver is the
prime rate. Both facilities have alternative rate options based upon
spread above the London Interbank Offered Rates ("LIBOR"). At December
31, 1994, $55.0 million in borrowings under the Term Loan were
outstanding at a weighted average interest rate of 7.07%. At December
31, 1994, $1.9 million in borrowings under the Revolver were
outstanding at a weighted average interest rate of 9.00%. Borrowings
under these lending facilities are secured by virtually all of the
assets of the Company. Up to $17 million in letters of credit may be
issued under the Revolver. As of December 31, 1994 approximately $15.0
million was additionally available to the Company under the Revolver.
A fee of 1.75% per year is charged on outstanding letters of credit. A
0.5% per year commitment fee on uncommitted funds is payable
quarterly. The Revolver matures on March 20, 1999 coincident with the
scheduled maturity of the Term Loan. The Senior Credit Agreement
contains numerous covenants pertaining to management and operations of
the Company including limitations on the amount of annual capital
expenditures as well as specification of certain leverage ratios,
interest coverage ratios, fixed charge coverage ratios and minimum net
worth. The Senior Credit Agreement also limits the amount of the
annual common stock dividends to the greater of $2.5 million or seven
and one-half percent of the prior year earnings before interest,
taxes, depreciation and amortization, not to exceed $5.0 million.
During April 1994, the Company completed the sale of Velda for
approximately $48 million in cash and $3 million in 9% Series A
preferred stock. In conjunction with the sale, the Company paid down
approximately $36.7 million of its Senior Term Loan and $11.8 million
of its Revolver. The Senior Credit Agreement was also amended to
change the amortization schedule of the Senior Term Loan (see maturity
schedule above). Also, effective June 20, 1994, the Company's Revolver
commitment was reduced, as previously scheduled, from $30 million to
$25 million.
The Morningstar Group | 1994 Annual Report
17
<PAGE> 18
The Company was in compliance with all financial covenants as of
December 31, 1994. Based upon the Company's projections for 1995,
management does not anticipate any violation of the financial
covenants contained in the Senior Credit Agreement.
INDUSTRIAL DEVELOPMENT REVENUE BONDS
The industrial development revenue bonds were issued on December
14, 1988 to fund the construction of a waste water treatment facility
at the Company's Frederick, Maryland processing plant. The bonds
mature on December 1, 2003, and bear interest that fluctuates weekly
based upon market factors. The interest rate in effect for these bonds
on December 31, 1994 was 6.05%.
(6) RESTRUCTURING AND OTHER CHARGES
In contemplation of the sale of certain assets (see Note 2 -
"Acquisitions and Discontinued Operations"), the Company recorded
provisions in the Consolidated Statements of Operations for the ten
months ended December 31, 1991 representing management's best estimate
of the cost of restructuring. In 1992, additional losses were incurred
as divestitures were completed and compensation expense was recorded
related to the accelerated vesting of stock options in connection with
the Company's initial public offering. On January 6, 1994, the Company
announced a restructuring plan to sharpen its focus on the
faster-growing value-added segments of its core specialty food
products business, while reorganizing its operations to be more
efficient. The plan, which resulted in a $9.0 million charge in the
fourth quarter of 1993, included provisions for reductions in
workforce, relocation of the manufacturing for certain product lines
to gain operating efficiencies, and the abandonment of other product
lines. As of December 31, 1994, the Company had abandoned two yogurt
production lines and one ultrapasteurized ("UHT") production line in
connection with the restructuring plan. The Company has also relocated
two UHT production lines as well as several cultured production lines
as of December 31, 1994. The $9.0 million charge included non-cash
expenses of $4.4 million and cash expenses of $4.6 million. The
majority of the cash expenditures were paid during 1994. Approximately
100 employment positions were eliminated as a part of the 1993
restructuring plan. The relocation of product lines impacted each of
the Company's six specialty dairy facilities. The charge also included
$1.9 million representing reserves established for certain supply
agreements and promissory notes received as part of the sale of
certain of the Company's regional dairies in 1991 and 1992. This
charge has been included in Discontinued Operations in the
Consolidated Statements of Operations.
The components of these 1992 and 1993 charges include (in
thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
1992 1993
----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Restructuring Charge
Consulting, severance and related personnel costs $ - $ 2,500
Relocation of product lines - 3,600
Excess data processing conversion expenses - 1,000
---------- ----------
Subtotal - 7,100
Other Charges
Loss on divestitures (a) 2,134 1,900
Compensation expense on stock options 1,093 -
---------- ----------
Subtotal 3,227 1,900
---------- ----------
Total $ 3,227 $ 9,000
========== ==========
</TABLE>
(a) Included in Discontinued Operations.
The Morningstar Group | 1994 Annual Report
18
<PAGE> 19
(7) EMPLOYEE BENEFIT PLANS
RETIREMENT PLANS
The Company has adopted a defined contribution profit sharing plan
for the purpose of providing retirement benefits for eligible
non-union employees. At December 31, 1994, eligible employees totaled
321, of which 214 were participants in the plan. Contributions are
made by the Company and by plan participants. Company contributions
are allocated to the participants on the basis of individual
contributions, the age of the participant and the number of years that
the participant has been in the plan. During 1994 the Company also
contributed to four multi-employer pension/retirement plans under the
terms of various union contracts. The various union contracts covered
435 of the Company's 809 employees at December 31, 1994. The number of
union pension plans and the portion of employees covered have varied
from year to year. Contributions to these pension plans are as
follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
1992 1993 1994
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Defined contribution profit sharing plan $ 397 $ 414 $ 230
Union pension plans 998 1,197 1,122
</TABLE>
POST-RETIREMENT BENEFIT PLANS
In December 1990, the Financial Accounting Standards Board issued
its standard on accounting for post-retirement benefits other than
pensions. This standard requires that the expected cost of these
benefits must be charged to expense during the years that the
employees render service. The cost of providing these benefits has
been primarily paid by non-union retirees and the Company's
calculation of its obligation is not material as of December 31, 1994.
The Company's union employees participate in various defined
contribution union plans that provide health care and other welfare
benefits during their employment and after retirement. Amounts charged
to expense and contributed to these health and welfare plans totaled
approximately $2,175,000 in 1992, $2,292,000 in 1993 and $2,608,000 in
1994. Having made these payments, no remaining obligations exist for
these years under the union plans.
(8) COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases certain plant facilities and related equipment
and vehicles under operating lease arrangements. Lease expense
pursuant to such arrangements was approximately $3,929,000 in 1992,
$5,012,000 in 1993 and $3,009,000 in 1994.
The following is a summary of future minimum annual lease payments
under noncancelable operating lease obligations as of December 31,
1994 (in thousands):
<TABLE>
<CAPTION>
Year Ending December 31,
-------------------------------------------------------------------------------------------
<S> <C>
1995 $ 2,704
1996 1,965
1997 1,732
1998 1,596
1999 1,360
Thereafter 1,507
----------
Total $ 10,864
==========
</TABLE>
The Morningstar Group | 1994 Annual Report
19
<PAGE> 20
FINANCIAL STATEMENTS
EMPLOYMENT AGREEMENTS
The Company had previously entered into employment agreements, as
amended, with its former Chief Executive Officer, Chief Operating
Officer and former Chief Financial Officer. The former Chief Executive
Officer, James A. Bach, resigned on March 17, 1994. Pursuant to his
employment agreement, Mr. Bach is to receive approximately $1,175,000
over a period of two and one half years from the date of his
resignation. The agreement with the former Chief Financial Officer,
Tracy L. Noll, terminated with his resignation on June 17, 1994. The
agreement with the Chief Operating Officer, Clifford L. Marquart,
terminated on February 28, 1995. For the year ended December 31, 1994,
the combined salaries and bonuses for these executives was
approximately $1,400,000.
LITIGATION
The Company received a "target letter" dated December 31, 1991,
from the United States Department of Justice informing it that
Morningstar was a target of a federal grand jury investigation of
suspected bid-rigging and market allocation in the dairy industry in
the State of Texas. The investigation related to activities conducted
in the fluid milk industry in Texas. Oak Farms and Cabell's
(collectively the "Texas Dairy Subsidiaries") were formed by the
Company in March 1988 in connection with the acquisition of
substantially all of the assets of Southland's dairy operations. The
Texas Dairy Subsidiaries conducted fluid milk operations in Texas and
were sold to Southern Foods Group, Inc. ("Southern Foods") in
September 1990, which merged them into its subsidiary,
Schepps-Foremost, Inc.
The investigation by the Department of Justice concluded in 1994.
The Company was not made a party to legal action commenced by the
Department.
The Company has agreed to indemnify purchasers of its divested
operations with regard to certain potential liabilities arising out of
the acquisition of such operations. In connection therewith, the
Company has indemnified Southern Foods, the purchaser of the Oak Farms
and Cabell's dairy subsidiaries, against claims related to compliance
with environmental regulations and fair trade practices arising out of
the prior operation of Oak Farms and Cabell's through March 2000.
Southern Foods made claim against the Company in 1994 pursuant to
the indemnification provisions noted above to recover certain sums
that Southern Foods paid as a result of the Department of Justice
investigation. Subsequent to December 31, 1994, the Company reached an
agreement with Southern Foods to pay the sum of $425,000 to settle all
claims between the Companies relating to the aforesaid investigation.
This agreement will not have a material adverse effect on the results
of operations or the financial position of the Company.
From time to time the Company is subject to other litigation in the
ordinary course of its business. In connection with the divestitures
of certain of the Company's operations, the Company assumed certain
obligations of indemnification, none of which is believed to be
material to the Company. The Company maintains insurance in respect of
certain losses that may result from its current or future operations.
The Company believes that the outcome of any existing litigation,
after considering the indemnities and insurance related to such
litigation, would not have a material impact on its operations.
The Morningstar Group | 1994 Annual Report
20
<PAGE> 21
(9) RELATED PARTY TRANSACTIONS
HICKS MUSE
The Company entered into a financial advisory agreement dated
March 1, 1991, as amended, pursuant to which Hicks Muse has provided
financial advisory services to the Company since such date and will
continue to provide financial advisory services to the Company in the
future. The term of this agreement is ten years and will continue from
year to year thereafter unless terminated by either party. As
compensation for such services, the Company pays Hicks Muse an
advisory fee, together with all reasonable expenses incurred in
connection therewith. The Company paid advisory fees of $200,000,
$200,000 and $114,000 in 1992, 1993 and 1994, respectively and
reimbursed Hicks Muse approximately $30,000, $21,000 and $37,000 for
expenses for each year, respectively. Hicks Muse was also paid a fee
of $420,000 relating to the acquisition of Favorite and $300,000
relating to the sale of Velda.
ADVISORY AGREEMENT
The Company entered into an advisory agreement dated October 1,
1993, pursuant to which C. Dean Metropoulos will provide advisory
services to the Company in implementing its new growth strategy and
accomplishing its 1993 restructuring plan. The term of this agreement
is three years and is cancelable by either party at any time.
Subsequent to execution of the advisory agreement, Mr. Metropoulos was
named to the additional positions of President and Chief Executive
Officer. As compensation for all services rendered by Mr. Metropoulos,
the Company pays Mr. Metropoulos a monthly fee of approximately
$29,000 plus all reasonable expenses incurred in connection therewith.
During 1993, the Company paid a total of approximately $290,000 in
monthly fees and reimbursed approximately $6,000 in expenses pursuant
to this agreement.
(10) EQUITY
1991 STOCK OPTION PLAN
In March 1991, the Company established the 1991 Incentive and
Nonstatutory Stock Option Plan which provides for the issuance of
options to purchase 999,999 shares of common stock to key employees of
the Company. At December 31, 1994, 769,941 tenure options and 228,258
incentive options have been granted to employees. Upon completion of
the common stock offering in 1992, the incentive options became
vested, resulting in compensation expense of $1,093,000. The exercise
price for all options granted is $2.56 per share, which was the fair
market value of the options at the date of issuance. The options
expire ten years after the date of their issuance.
1992 STOCK OPTION PLAN
In July 1992, the Company established the 1992 Incentive and
Nonstatutory Option Plan which provides for the issuance of options to
purchase 181,818 shares of common stock to key employees of the
Company. At December 31, 1994, 176,000 options had been granted to
employees. The exercise price for 67,000 of these options granted is
$9.00 per share, which was the fair market value of the options at the
date of issuance. The exercise price for 120,000 options granted in
1994 is $7.00 per share, which was the fair market value of the
options at the date of issuance. The options granted in 1992 become
exercisable over a three-year period and expire ten years after the
date of their issuance. One-third of the options granted in 1994
became exercisable on the date of issuance, while the remaining
options vest in equal amounts over two years. The options granted in
1994 expire ten years after the date of their issuance. No options
under the 1992 plan had been exercised as of December 31, 1994.
The Morningstar Group | 1994 Annual Report
21
<PAGE> 22
FINANCIAL STATEMENTS
1994 STOCK OPTION PLAN
In June 1994, the Company established the 1994 Incentive and
Nonstatutory Stock Option Plan which provides for the issuance of
options to purchase 250,000 shares of common stock to key employees of
the Company. At December 31, 1994, 210,000 options had been granted to
employees. The exercise price for all options granted is $7.00 per
share which was the fair market value of the options at the date of
issuance. These options become exercisable over a three year period
and expire ten years after the date of their issuance. No options had
been exercised as of December 31, 1994.
CHAIRMAN OPTION PLAN
On February 15, 1994, the Compensation Committee of the Company's
Board of Directors approved the issuance of options to purchase
600,000 shares of common stock of the Company to C. Dean Metropoulos,
Chairman, President and CEO of the Company. As of December 31, 1994,
600,000 options had been granted to Mr. Metropoulos. The exercise
price for these options is $6.50 per share, which was the fair market
value of the options at the date of issuance. One-third of these
options became exercisable on the date of issuance, while the
remaining options vest in equal amounts over two years. The options
expire ten years after the date of their issuance. As of December 31,
1994, no options had been exercised.
<TABLE>
<CAPTION>
1991 Plan 1992 Plan 1992 Plan 1994 Plan Chairman Plan
Number of Number of Option Number of Number of
Options Options Prices Options Options
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Outstanding at December 31, 1992 999,999 150,000 $ 9.00 - -
Granted in 1993 - 11,000 9.00 - -
Cancelled in 1993 - (1,000) 9.00 - -
Exercised in 1993 (29,000) - - - -
-------- -------- ------------ ------- -------
Outstanding at December 31, 1993 970,999 160,000 9.00 - -
-------- -------- ------------ ------- -------
Granted in 1994 - 120,000 7.00 210,000 600,000
Cancelled in 1994 (1,800) (104,000) 9.00 - -
Exercised in 1994 (633,786) - - - -
-------- -------- ------------ ------- -------
Outstanding at December 31, 1994 335,413 176,000 $7.00 - 9.00 210,000 600,000
======== ======== ============ ======= =======
Exercisable at December 31, 1993 695,102 53,319 $ 9.00 - -
======== ======== ============ ======= =======
Exercisable at December 31, 1994 335,413 78,654 $7.00 - 9.00 - 400,000
======== ======== ============ ======= =======
</TABLE>
The Morningstar Group | 1994 Annual Report
22
<PAGE> 23
(11) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for the years ended December 31, 1993 and
1994 is as follows:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DOLLARS IN THOUSANDS:
Net Sales 1993 $ 56,576(a) $ 72,361 $ 69,603 $ 75,409
1994 70,739 73,667 70,429 77,479
Gross profit 1993 14,677 16,732 14,197 16,746
1994 16,259 17,278 15,665 20,628
Income (loss) from Continuing Operations 1993 1,017 1,777 246 (3,297)(b)
1994 1,764 2,539 1,857 3,161
Income (loss) from Discontinued Operations 1993 932 893 314 (898)(c)
1994 827 709 (295) 85
Income (loss) before extraordinary item 1993 1,949 2,670 560 (4,195)(b)(c)
1994 2,591 3,248 1,562 3,246
Extraordinary item 1993 - (164) - -
1994 - - - -
Net income (loss) 1993 1,949 2,506 560 (4,195)(b)(c)
1994 2,591 3,248 1,562 3,246
PER COMMON SHARE:
Income (loss) from Continuing Operations 1993 $ 0.07 $ 0.12 $ 0.01 $ (0.22)
1994 0.12 0.17 0.12 0.21
Income (loss) from Discontinued Operations 1993 0.06 0.06 0.02 (0.06)
1994 0.05 0.05 (0.02) -
Income (loss) before extraordinary item 1993 0.13 0.18 0.04 (0.28)
1994 0.17 0.22 0.10 0.21
Extraordinary item 1993 - (0.01) - -
1994 - - - -
Net income (loss) 1993 0.13 0.17 0.04 (0.28)
1994 0.17 0.22 0.10 0.21
Cash dividends declared 1993 .0375 .0375 .0375 .0375
1994 - - - -
Market Price Range:
High 1993 $ 13.00 $ 11.25 $ 10.75 $ 10.00
Low 1993 10.50 8.50 8.75 6.00
High 1994 8.00 7.75 7.75 7.25
Low 1994 6.50 6.50 6.75 6.50
</TABLE>
- ---------------
(a) Excludes the results of Favorite Foods.
(b) Includes restructuring and other charges of $7.1 million, before associated
income tax benefits of $2.4 million.
(c) Includes restructuring and other charges of $1.9 million, before associated
income tax benefits of $.7 million.
The Morningstar Group | 1994 Annual Report
23
<PAGE> 24
SELECTED FINANCIAL DATA 1990 THROUGH 1994
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Predecessor(a) Successor
--------------------------- ------------------------------------------------------
Two Ten
Year Months Months Year Year Year
Ended Ended Ended Ended Ended Ended
December February December December December December
31, 28, 31, 31, 31, 31,
Statements of operations data 1990 1991 1991 1992 1993 1994
--------------------------- ------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Sales $ 188,161 $ 28,037 $ 152,497 $ 230,220 $ 273,949 $ 292,314
Gross profit 40,478 6,686 41,666 55,792 62,352 69,830
Operating income 13,112 1,435 13,377 15,195 5,156 18,068
Income (loss) from Continuing Operations (7,357) (529) 783 (1,640) (257) 9,321
Income (loss) from Discontinued Operations (14,950) (564) (56) (3,359) 1,241 1,326
Extraordinary item, net of tax - 58,115(b) - (5,676)(c) (164)(d) -
Net income (loss) (22,307) 57,022 727 (10,675) 820 10,647
Dividends on preferred stock 1,904 - 1,875 939 - -
Net income (loss) to common stockholders (24,211) 57,022 (1,148) (11,614) 820 10,647
Earnings (loss) per common and
equivalent share:
Continuing Operations $ (1.05) $ (.06) $ (.14) $ (.21) $ (.02) $ .62
Discontinued Operations (1.69) (.06) (.01) (.28) .08 .09
----------- --------- ---------- ---------- ---------- ----------
Earnings (loss) before extraordinary
item (2.74) (.12) (.15) (.49) .06 .71
Extraordinary item - 6.57 - (.47) (.01) -
----------- --------- ---------- ---------- ---------- ----------
Earnings (loss) $ (2.74) $ 6.45(b) $ (.15) $ (.96)(c) $ .05(d) $ .71
=========== ========= ========== ========== ========== ==========
Weighted average common and equivalent
shares outstanding 8,843,301 8,843,301 7,825,473 12,128,343 15,011,607 15,050,538
Dividends declared per common share $ - $ - $ - $ .075 $ .15 $ -
=========== ========= ========== ========== ========== ==========
Balance sheet data
Working capital $ 4,791 $ (1,916) $ 7,210 $ 14,996 $ 15,635 $ 11,615
Total assets 212,254 213,999 204,429 180,786 212,134 165,265
Current maturities of long-term debt 1,575 - 7,000 10,167 14,750 6,000
Long-term debt 225,436 167,294 132,794 86,329 105,425 53,892
Preferred stock 17,307 17,307 16,875 - - -
Common stockholders' equity (69,641) (12,619) 17,088 55,779 54,533 66,802
</TABLE>
(a) The Company was formed in 1988 to acquire several regional dairies,
novelty/ice cream operations and specialty food operations. On March 1,
1991, the financial restructuring transaction resulted in a change in
control of the Company. The statements of operations data, other data and
balance sheet data of the predecessors and successor are not comparable
due to the application of purchase accounting in connection with the 1988
acquisition and 1991 financial restructuring transaction. See Note 1 to
the Notes to Consolidated Financial Statements.
(b) The Company reported a net gain of $58.1 million on the purchase of
approximately $110.2 million in subordinated debt at a discount.
(c) The Company reported a net loss of $5.7 million on the purchase of
approximately $34 million in subordinated debt at a premium. See Note 1
to the Notes to Consolidated Financial Statements.
(d) Loss on purchase of senior subordinated debentures, net of applicable tax
benefit of $71 thousand.
The Morningstar Group | 1994 Annual Report
24
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES
<TABLE>
<CAPTION>
Corporation Description State of Incorporation
- -------------------------------------------------- ----------------------
<S> <C>
- -- MStar Inc. Delaware
Favorite Foods Inc. Delaware
(additionally does business as Avoset Foods)
Star Specialty Foods Inc. Delaware
(additionally does business as Bancroft Dairy)
Avoset International LTD Delaware
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Exhibit 27 for 1994 10-K
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<CASH> 2,152
<SECURITIES> 0
<RECEIVABLES> 30,469
<ALLOWANCES> 1,495
<INVENTORY> 10,540
<CURRENT-ASSETS> 48,223
<PP&E> 60,041
<DEPRECIATION> (13,404)
<TOTAL-ASSETS> 165,265
<CURRENT-LIABILITIES> 42,608
<BONDS> 3,000
<COMMON> 71,306
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 165,265
<SALES> 292,314
<TOTAL-REVENUES> 292,314
<CGS> 222,484
<TOTAL-COSTS> 51,762
<OTHER-EXPENSES> (1,583)
<LOSS-PROVISION> 622
<INTEREST-EXPENSE> 4,446
<INCOME-PRETAX> 14,854
<INCOME-TAX> 5,533
<INCOME-CONTINUING> 9,321
<DISCONTINUED> 1,326
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,647
<EPS-PRIMARY> .71
<EPS-DILUTED> .71
</TABLE>
