<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[x] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended June 30, 1996
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
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X . No .
----- -----
As of June 30, 1996, the number of shares outstanding of each class of
common stock was:
Common Stock, $.01 par value: 15,261,061 shares
<PAGE> 2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
-------------------------------
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31, June 30,
1995 1996
------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,811 $ 3,602
Receivables, net of allowance for doubtful accounts of $1,595 and $1,973 . 28,043 27,199
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,123 12,936
Prepaids and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,597 1,667
Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,089 3,089
Net assets held for sale . . . . . . . . . . . . . . . . . . . . . . . . . 836 1,080
------------- -------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . 50,499 49,573
------------- -------------
PROPERTY, PLANT AND EQUIPMENT:
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,713 5,843
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,804 21,488
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . 43,552 47,368
------------- -------------
Gross property, plant and equipment . . . . . . . . . . . . . . . . 68,069 74,699
Less: Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . (17,748) (19,650)
------------- -------------
Net property, plant and equipment . . . . . . . . . . . . . . . . . 50,321 55,049
------------- -------------
INTANGIBLE AND OTHER ASSETS:
Identifiable intangible assets . . . . . . . . . . . . . . . . . . . . . . 1,847 3,514
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,671 60,654
Deferred financing costs . . . . . . . . . . . . . . . . . . . . . . . . . 1,259 1,075
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112 177
------------- -------------
Total intangible and other assets . . . . . . . . . . . . . . . . . 61,889 65,420
------------- -------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 162,709 $ 170,042
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
1
<PAGE> 3
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
-------------------------------
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31, June 30,
1995 1996
------------- -------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 21,488 $ 23,872
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,869 20,226
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . 8,000 10,317
------------- -------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . 45,357 54,415
LONG-TERM DEBT (net of current maturities) . . . . . . . . . . . . . . . . . 36,000 30,463
OTHER LONG-TERM LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . 4,029 5,416
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 50,000,000 shares authorized;
15,244,261 shares in 1995 and 15,261,061 shares in 1996 issued and
outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152 153
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . 71,991 72,108
Treasury stock, at cost (230,000 shares in 1995 and 767,000 shares in 1996) (1,840) (6,140)
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,020 13,627
------------- -------------
Total stockholders' equity and retained earnings . . . . . . . . . 77,323 79,748
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . . . . $ 162,709 $ 170,042
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
2
<PAGE> 4
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------
(Unaudited, dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- --------------------------
1995 1996 1995 1996
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
NET SALES . . . . . . . . . . . . . . . . . . . . . . $ 74,882 $ 85,693 $ 146,775 $ 167,417
Cost of goods sold . . . . . . . . . . . . . . . . 57,164 65,698 111,788 128,036
Selling, distribution, and general and
administrative . . . . . . . . . . . . . . . . . 12,051 14,239 25,237 28,737
----------- ------------ ----------- -----------
OPERATING INCOME . . . . . . . . . . . . . . . . . . 5,667 5,756 9,750 10,644
OTHER (INCOME) AND EXPENSE:
Interest expense . . . . . . . . . . . . . . . . . 1,038 645 2,174 1,342
Dividend Income . . . . . . . . . . . . . . . . . . - - (268) -
Amortization of deferred financing costs . . . . . 95 95 191 190
Other income, net . . . . . . . . . . . . . . . . . 3 (191) (390) (382)
----------- ------------ ----------- -----------
INCOME BEFORE INCOME TAXES . . . . . . . . . . . . . 4,531 5,207 8,043 9,494
Provision for income taxes . . . . . . . . . . . . 1,685 1,744 2,928 3,200
----------- ------------ ----------- -----------
INCOME FROM CONTINUING OPERATIONS . . . . . . . . . . 2,846 3,463 5,115 6,294
DISCONTINUED OPERATIONS:
Gain (loss) on disposal (a) . . . . . . . . . . . . (510) - 184 -
----------- ------------ ----------- -----------
INCOME (LOSS) FROM DISCONTINUED OPERATIONS . . . . . (510) - 184 -
----------- ------------ ----------- -----------
NET INCOME . . . . . . . . . . . . . . . . . . . . . $ 2,336 $ 3,463 $ 5,299 $ 6,294
=========== ============ =========== ===========
EARNINGS PER COMMON SHARE:
Earnings from continuing operations . . . . . . . . $ 0.19 $ 0.23 $ 0.34 $ 0.42
Earnings from discontinued operations . . . . . . . (0.03) - 0.01 -
----------- ------------ ----------- -----------
Earnings per common share . . . . . . . . . . . . . $ 0.16 $ 0.23 $ 0.35 $ 0.42
=========== ============ =========== ===========
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING . . . . . . . . 15,118,978 14,724,021 15,114,951 14,778,316
(a) Net of applicable tax provision (benefit) of . . $ (591) $ - $ 216 $ -
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
3
<PAGE> 5
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------
(Unaudited, dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------------
1995 1996
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers . . . . . . . . . . . . . . . . . . . . . . . . . . $ 151,020 $ 169,021
Interest received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 127
Income tax refund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 156
Cash paid to suppliers and employees . . . . . . . . . . . . . . . . . . . . . . (135,892) (148,572)
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,672) (1,617)
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,788) (2,807)
------------ -----------
NET CASH PROVIDED BY CONTINUING OPERATIONS . . . . . . . . . . . . . . . . . . . . 10,668 16,308
NET CASH USED BY DISCONTINUED OPERATIONS . . . . . . . . . . . . . . . . . . . . . - -
------------ -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES . . . . . . . . . . . . . . . . . . . . . 10,668 16,308
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of subsidiary:
Working capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (125)
Property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . - (3,613)
Other assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (3,315)
------------ -----------
Net cash used by acquisition of subsidiary . . . . . . . . . . . . . . . . . . - (7,053)
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,930) (4,455)
Dividends received from preferred stock . . . . . . . . . . . . . . . . . . . . . 268 -
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 1,173
------------ -----------
Net cash used by continuing operations . . . . . . . . . . . . . . . . . . . . (4,625) (3,282)
Discontinued Operations:
Sale of Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000 -
------------ -----------
Net cash provided by discontinued operations . . . . . . . . . . . . . . . . . 3,000 -
NET CASH USED BY INVESTING ACTIVITIES . . . . . . . . . . . . . . . . . . . . . . . (1,625) (10,335)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuing common stock . . . . . . . . . . . . . . . . . . . . . . . 194 118
Net payments under revolving credit facility . . . . . . . . . . . . . . . . . . (1,892) -
Payments on long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,000) (4,000)
Repurchase of treasury stock, at cost . . . . . . . . . . . . . . . . . . . . . . - (4,300)
------------ -----------
NET CASH USED BY FINANCING ACTIVITIES . . . . . . . . . . . . . . . . . . . . . . (8,698) (8,182)
------------ -----------
NET INCREASE (DECREASE) IN CASH . . . . . . . . . . . . . . . . . . . . . . . . . . 345 (2,209)
CASH, BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,152 5,811
------------ -----------
CASH, END OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,497 $ 3,602
============ ===========
NONCASH INVESTMENT AND FINANCING ACTIVITIES:
Acquisition of businesses
Fair value of assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . $ - $ 9,800
Cash paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 7,000
------------ -----------
Liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ - $ 2,800
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
4
<PAGE> 6
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
-----------------------------------------------------------------------------
(Unaudited, dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------------
1995 1996
------------ -----------
<S> <C> <C>
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,299 $ 6,294
ADJUSTMENTS TO RECONCILE NET INCOME TO
NET CASH FLOW FROM OPERATING ACTIVITIES:
Discontinued operations net income . . . . . . . . . . . . . . . . . . . . . . (184) -
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,570 2,938
Amortization of intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . 1,350 1,350
Increase in deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 2,393 21
Change in assets and liabilities, net of effects
from acquisition/disposition of subsidiaries:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,665 1,604
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 670 (1,094)
Prepaids & deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,950 (70)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,597) 2,384
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,227) 3,018
Long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . (221) (138)
----------- -----------
NET CASH PROVIDED BY CONTINUING OPERATIONS . . . . . . . . . . . . . . . . . . . . 10,668 16,308
DISCONTINUED OPERATIONS:
Discontinued operations net income . . . . . . . . . . . . . . . . . . . . . . 184 -
Gain on divestiture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (184) -
----------- -----------
NET CASH USED BY DISCONTINUED OPERATIONS . . . . . . . . . . . . . . . . . . . . . - -
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES . . . . . . . . . . . . . . . . . . . . . $ 10,668 $ 16,308
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
5
<PAGE> 7
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
June 30, 1996
(1) CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements as of June 30, 1996, and for
the six months then ended have been prepared by The Morningstar Group
Inc. (the "Company" or "Morningstar") without audit. In the opinion of
management, all necessary adjustments (which include only normal
recurring adjustments) to present fairly, in all material respects, the
consolidated financial position, results of operations and changes in
cash flows at June 30, 1996 and for the six months then ended, have been
made. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been omitted. These financial statements
should be read in conjunction with the Company's 1995 financial
statements contained in its most recent Annual Report on Form 10-K.
Certain prior year balances have been reclassified to conform to the
current year presentation.
On May 28, 1996, the Company completed the purchase of
substantially all of the assets of the La Corona Foods, Inc. ("La
Corona"), located in Glendale, Arizona. La Corona's sales for the fiscal
year ended September 30, 1995 were approximately $6.9 million. The
Company paid approximately $3.4 million in cash for the assets purchased,
and assumed approximately $2.5 million in related liabilities. The
source of funding for this acquisition was provided by the Company's
operations.
On March 19, 1996, the Company completed the acquisition of
substantially all of the assets of Merkt Cheese Company ("Merkt"),
located in Bristol, Wisconsin. Merkt recorded approximately $10.3
million in sales for the fiscal year ending June 30, 1995. Merkt's
revenues during the first quarter of 1996 were immaterial to the
Company's consolidated statements of operations. The Company paid
approximately $3.62 million in cash for the assets purchased, and assumed
approximately $.3 million in liabilities. The source of funding for this
acquisition was provided by the Company's operations.
On April 13, 1994, Morningstar completed the divestiture of its
Florida-based fluid milk operation Velda Farms Inc. ("Velda") to Engles
Dairy Acquisition L.P. ("Purchaser") at an approximate selling price of
$51 million consisting of $48 million in cash after working capital
adjustments and $3 million of 9% Series A Preferred Stock (the "Velda
Preferred Stock"). The Company deferred the recognition of the gain on
the Velda Preferred Stock pending realization of the gain. The sale of
Velda completed 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 March 31, 1995, the Velda Preferred Stock was redeemed by its
issuer at face value plus accrued dividends. The $3.0 million gain on
the stock, less applicable taxes and other reserves of $2.3 million, was
reflected in discontinued operations in the Consolidated Statements of
Operations during the first quarter of 1995. The Company also recognized
$268,000 in dividends, related to the Velda Preferred Stock, during the
first quarter of 1995 which was recorded in continuing operations.
6
<PAGE> 8
(2) INVENTORIES
Inventories are valued at the lower of cost or market. Cost is
determined using the first-in, first-out method. Inventories are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
At At
December 31, June 30,
1995 1996
-------------- -------------
<S> <C> <C>
Raw materials and supplies . . . . . . . . . . . . . . . . . . . $ 5,975 $ 7,226
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . 5,148 5,710
-------------- -------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,123 $ 12,936
============== =============
</TABLE>
Finished goods inventories include the costs of materials, labor
and plant overhead.
(3) DEBT
The Company's outstanding long-term debt and average interest rates in
effect on June 30, 1996 were:
<TABLE>
<CAPTION>
Average
Amount of Interest
Debt Rate
------------- --------
(in thousands)
<S> <C> <C>
Senior term loan . . . . . . . . . . . . . . . . . . . . . . $ 37,000 6.000%
Revolving credit facility (a) . . . . . . . . . . . . . . . . 780 8.250%
Industrial development revenue bonds . . . . . . . . . . . . . 3,000 3.550%
-------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . 40,780
Less: Current maturities . . . . . . . . . . . . . . . . . . 10,317
-------------
Long term debt, net of current maturities . . . . . . . . . . $ 30,463
=============
</TABLE>
(a) At June 30, 1996, $780,000 was borrowed under the revolving
credit facility and letters of credit totaling $8,400,000
were issued. At June 30, 1996, the Company had $15,800,000
in additional borrowing capacity under the terms of its
revolving credit facility.
(4) EARNINGS 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.
(5) STOCK REPURCHASE PROGRAM
On June 21, 1995, the Company's Board of Directors announced that
it had approved a plan pursuant to which the Company may repurchase up to
$20 million of its common stock. The purchases will be effected through
open market transactions or negotiated transactions from time to time,
depending on the market price of the stock and other factors. As of
December 30, 1995, 230,000 shares had been repurchased by the Company at
a cost of $1.8 million. As of June 30, 1996, the Company had purchased
an additional 537,000 shares at a cost of $4.3 million.
7
<PAGE> 9
(6) SUBSEQUENT EVENT
On July 31, 1996, the Company completed the acquisition of
substantially all of the assets of Cream Products Company ("Cream
Products") located in Chicago, Illinois. Cream Products is a
manufacturer and distributor of quality dairy and non-dairy products
primarily supplying food makers and food service customers throughout the
United States, since 1938. Cream Products currently offers a complete
line of whipping creams, non-dairy icings and frostings, non-dairy frozen
whipped topping concentrates, non-dairy dessert toppings, real whipped
cream aerosols, and non-dairy aerosols, among others. Cream Products'
sales for the year ended December 31, 1995 were approximately $24.6
million. The source of financing for this acquisition was provided by
the Company's operations along with its revolving credit facility.
8
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Results of Operations - Second Quarter and Year-to-Date 1996
Compared with Second Quarter and Year-to-Date 1995
Net sales are classified into two categories: (i) Branded products, which
include historical sales of the Company's four national branded products -
International Delight(R) gourmet flavored coffee creamers, Second Nature(R) egg
product, Lactaid(R) reduced lactose and lactose-free milks and Naturally
Yours(R) fat free and regular sour cream; and (ii) Specialty products, which
includes all sales of the Company's specialty foods business other than branded
specialty products.
Net sales for the second quarter of 1996 totaled $85.7 million, an increase
of $10.8 million from net sales for the same period in 1995. For the six months
ended June 30, 1996, net sales were $167.4 million, an increase of $20.6
million from the same period in 1995. The following table reflects net sales
by business category from year to year:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- --------------------------
Business Category 1995 1996 1995 1996
----------------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Branded products . . . . . . . . . . . . . . . . $ 27,949 $ 32,937 $ 55,476 $ 66,472
Specialty products . . . . . . . . . . . . . . . 46,933 52,756 91,299 100,945
----------- ------------ ----------- -----------
Net sales . . . . . . . . . . . . . . . . . . . $ 74,882 $ 85,693 $ 146,775 $ 167,417
=========== ============ =========== ===========
</TABLE>
Net sales of branded products increased by 17.8% and 19.8% for the second
quarter and first six months of 1996, respectively, when compared to similar
periods in 1995. This improvement was accomplished through increased sales of
International Delight(R) and Lactaid(R). Net sales of specialty products
increased by 12.4% during the second quarter due mainly to increases in the
Company's UHT products, offset by a reduction in juice and other sales. Net
sales of specialty products increased 10.6% during the six month period ended
June 30, 1996 due to similar increases experienced in the second quarter.
Gross margin was 23.3% for the second quarter and 23.5% the first six
months of 1996, respectively, compared to 23.7% and 23.8% for like periods of
1995. These slight reductions in gross margins are the result of increased
prices for certain raw materials used by the Company, offset in part by a
favorable shift in the product mix toward branded products, which provide
higher margins.
Operating expense ratios were 16.6% and 17.2% for the second quarter and
first six months of 1996, respectively, compared to 16.1% and 17.2% for like
periods of 1995. Distribution expenses, as a percent of net sales, decreased
(by 1.4%) as compared to the first six months of 1995 despite the increase in
sales of branded products. This reflects the Company's continued efforts to
optimize its distribution programs. Selling and marketing expenses, as a
percent of net sales, increased by 2.0% during the first six months of 1996 as
compared to the same period in 1995. This increase resulted primarily from
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, decreased by 0.7% during
the first six months of 1996 as compared to the same period in 1995.
The Company's operating income during the second quarter of 1996 was $5.8
million, an increase of 1.6% from operating income for the second quarter of
1995 of approximately $5.7 million. For the first six months of 1996,
operating income was $10.6 million, an increase of 9.2% from 1995 operating
income of $9.8 million. The increase in operating income from like periods in
1995 was the result of increased sales of branded products which contribute
higher operating margins offset in part by increased raw material costs.
For the second quarter, interest expense declined by 37.9% from $1.1
million in 1995 to $.6 million in 1996. For the first six months, interest
expense declined 38.3%. The decrease in 1996 resulted from lower debt levels
in conjunction with lower average interest rates on the Company's debt.
The Company recorded net income from continuing operations of $3.5 million
and $6.3 million in the second quarter and first six months of 1996,
respectively, compared to $2.8 million and $5.1 million for the comparable
periods of 1995. The improved profitability was primarily the result of higher
branded product sales and reduced interest costs, offset in part by slightly
lower gross margins.
9
<PAGE> 11
Liquidity and Capital Resources
Cash provided by continuing operations was $16.3 million during the first
six months of 1996 compared to cash provided by continuing operations of $10.7
million during the first six months of 1995. The sources of cash during the
first six months of 1996 were the $16.3 million provided by continuing
operations, $.1 million from the exercise of stock options, and the reduced
cash balance of $2.2 million. These sources of cash were utilized to pay down
debt of $4.0 million, to provide for capital and other expenditures of $3.3
million, to provide for the purchase of Merkt for $3.6 million, to provide for
the purchase of La Corona for 3.4 million, and to purchase $4.3 million of
treasury stock.
Capital expenditures during the first six months of 1996 were spent
primarily on equipment additions for increased operating efficiencies. As of
the end of the second quarter of 1996, the Company was in compliance with all
covenants and financial ratios contained in its Senior Credit Agreement. Based
upon the Company's projections for the remainder of 1996, management does not
anticipate any violation of the financial covenants contained in its Senior
Credit Agreement.
At June 30, 1996 the Company had approximately $15.8 million in unused
borrowing capacity under its revolving credit facility. The Company expects
that operating cash flows, together with borrowings under its revolving credit
facility, will be sufficient to fund the Company's requirements for working
capital, debt service requirements, potential stock repurchases, and capital
expenditures for the foreseeable future.
Financing
As of June 30, 1996, the Company's Senior Credit Agreement consisted of a
$97.0 million term loan and a $25.0 million revolving credit facility. As of
June 30, 1996, $.8 million was borrowed under the revolving credit facility and
approximately $8.4 million in letters of credit were outstanding.
On April 13, 1994, Morningstar completed the divestiture of Velda, its
Florida-based fluid milk operation, to Engles Dairy Acquisition L.P. at an
approximate selling price of $51 million consisting of $48 million in cash
after working capital adjustments, and $3.0 million of 9% Series A Preferred
Stock. Following the application of the cash proceeds on April 13, 1994, the
Company had no revolver balance outstanding and had a remaining term loan
balance of approximately $64.2 million. The Company made additional term loan
principal payments during the year ended December 31, 1994, and 1995, of
approximately $11.8 million and $14.0 million respectively. Additionally, the
Company paid its scheduled term loan principal payments during March and June
of 1996 in the amount of $2.0 million each.
<TABLE>
<CAPTION>
Approximate
Quarterly payment date(s) Quarterly payment
---------------------------------- -----------------
<S> <C>
September 20, 1996 - December 20, 1996 $ 2,000,000
March 20, 1997 1,798,000
June 20, 1997 - September 20, 1998 4,518,000
December 20, 1998 4,088,000
</TABLE>
10
<PAGE> 12
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
To the knowledge of the Company, there are no reportable suits or
proceedings pending or threatened against or affecting the Company other than
those encountered in the ordinary course of the Company's business and
described in the Company's most recent Annual Report on Form 10-K.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Pursuant to a Stockholders Meeting held on May 22, 1996, the Company's
stockholders took the following actions:
Election of Directors - The stockholders elected each of C.
Dean Metropoulos, John R. Muse, Charles W. Tate, Jack W.
Evans, and Jim L. Turner to serve as a director of the
Company until his successor is elected and qualified, or if
earlier, until his death, resignation or removal from
office.
Appointment of Auditors - The stockholders ratified the
appointment of Arthur Andersen LLP as independent auditors
of the Company for the ensuing year.
Incentive and Nonstatutory Stock Option Plan - The
stockholders approved Amendment No. 1 to the Morningstar
Group Inc. 1994 Incentive and Nonstatutory Stock Option
Plan.
Director Stock Option Plan - The stockholders approved The
Morningstar Group Inc. 1996 Director Stock Option Plan.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Calculation of weighted average shares outstanding.
(b) Reports on Form 8-K.
None.
11
<PAGE> 13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE MORNINGSTAR GROUP INC.
/s/ DARRON K. ASH
------------------------------------------
Darron K. Ash
Vice President and Chief Financial Officer
(Authorized Officer)
Date: August 12, 1996
12
<PAGE> 14
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
27 Financial Data Schedule
99(a) Calculation of weighted average shares outstanding.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 3,602
<SECURITIES> 0
<RECEIVABLES> 29,172
<ALLOWANCES> 1,973
<INVENTORY> 12,936
<CURRENT-ASSETS> 49,573
<PP&E> 74,699
<DEPRECIATION> 19,650
<TOTAL-ASSETS> 170,042
<CURRENT-LIABILITIES> 54,415
<BONDS> 0
<COMMON> 79,748
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 170,042
<SALES> 167,417
<TOTAL-REVENUES> 167,417
<CGS> 128,036
<TOTAL-COSTS> 128,036
<OTHER-EXPENSES> 28,737
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,532
<INCOME-PRETAX> 9,494
<INCOME-TAX> 3,200
<INCOME-CONTINUING> 6,294
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,294
<EPS-PRIMARY> .42
<EPS-DILUTED> .42
</TABLE>
<PAGE> 1
EXHIBIT 99(A)
Calculation of weighted average shares outstanding.
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------------
1995 1996
---------- ----------
<S> <C> <C>
Shares outstanding during period 14,923,772 15,248,228
Treasury stock -- (710,203)
Dilutive effect of stock options,
(using the treasury stock method) 191,179 240,291
---------- ----------
Weighted Average Common and Common Equivalent
Shares Outstanding 15,114,951 14,778,316
========== ==========
</TABLE>
