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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, 1995, 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. [ ]
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 29, 1996 was approximately $124,780,000 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 29, 1996, the number of outstanding shares of common stock was:
Common Stock, $.01 par value: 15,244,261 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, 1995. 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 22, 1996.
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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 ultrapasteurized ("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 to
purchase $34 million in principal amount of its 13% senior subordinated
debentures (the "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 $9.0 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.
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 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 1995 Annual Report to Stockholders (See Item 8,
Footnote No. 2) 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>
Combined Year Ended December 31,
Period -------------------------------------------------------------
Product Category/Business 1991(a) 1992 1993 1994 1995
------------------------- ---------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Branded specialty food products 24.7% 29.3% 30.1% 34.9% 38.4%
---------- ------------ ------------ ------------- ------------
Other specialty products:
UHT 35.5% 30.1% 25.0% 22.6% 25.0%
Cultured & other 39.8% 40.6% 44.9% 42.5% 36.6%
---------- ------------ ------------ ------------- ------------
Total other specialty 75.3% 70.7% 69.9% 65.1% 61.6%
---------- ------------ ------------ ------------- ------------
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 fat-free flavors. In
1995, the Company completed the installation of its second 1/2 ounce aseptic
production line. This aseptic product requires no refrigeration and is
marketed 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, fat-free, 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 fat-free variety and introduced nationally during
1993 in a twin pack containing two eight-ounce containers. In 1995, the
Company introduced a four-ounce twin pack container to complement its other
sizes. 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 fat-free 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. During 1995, the Company
introduced a regular sour cream under this label to expand the product line.
The Company also introduced several fat-free flavored snack dips in 1995
including salsa, ranch and french onion. Naturally Yours competes with
numerous national and regional competitors in the fat-free and regular sour
cream categories.
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, and 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 the Gustine, California plant and
the Texas plant.
The Company distributes products from its six plants to more than 850
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 television
advertising, 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.
While the research and development function is important to the Company's
operations, the total expenditures related to this function are not material to
the Company's Consolidated Statements of Operations.
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 fat-free
product. This research effort also developed Naturally Yours(TM), a fat-free
sour cream made from real dairy ingredients and a fat-free version of
International Delight. Most recently, the Company developed an aseptic, real
1/2 and 1/2 coffee creamer product to be sold under the International Delight
brand name.
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 into 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 in 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 from the Company for a period of three years ended 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 from the Company 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, 1995.
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, 1995 the Company employed approximately 792 people of
which approximately 486 were represented by unions under collective bargaining
agreements. These agreements cover employees at the following locations:
Fullerton, Gustine and Tulare, California, Sulphur Springs, Texas and Madison,
Wisconsin. 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. Three contracts were negotiated in the last 12 months. Two contracts
are being negotiated at the present time. 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 Food and Drug Administration ( 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 is 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 to 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 aggregate principal amount of
the 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 owns and 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
pursuant the Company's Senior Credit Agreement.
The Company believes that its facilities are well maintained and adequate
to meet its current needs. The Company expects 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 was 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 Texas 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. In February
1995, the Company reached an agreement with Southern Foods to pay the sum of
$425,000 to settle all claims between the parties relating to the aforesaid
investigation. This agreement did 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 business, financial
condition or results of 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, 1995 on page 34
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, 1995 on page 35
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, 1995 on pages 13
through 16, 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, 1995 on pages 17
through 33, 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 22, 1996 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 22, 1996 under the caption "Executive Management Compensation" and
is incorporated herein by reference. The foregoing incorporation by reference
specifically excludes the discussion under "Executive Management and Director
Compensation - Report of the Compensation Committee" 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 22, 1996 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 and
Director Compensation - Compensation Committee Interlocks and Insider
Participation" and "Related Party 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 Schedule
Report of independent public accountants on financial
statement schedules . . . . . . . . . . . . . . . . . . . . . . 20
Schedule II - Allowance for doubtful accounts . . . . . . . . . . 21
</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> <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> <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 the 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> <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> <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> <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> <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 Inc. 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> <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 Inc.*****
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 granted for this exhibit).*****
10(nnn) -- Employment Agreement entered into as of April 13, 1995
between the Company and C. Dean Metropoulos and certain
other key management personnel.#
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 ofthe Form 10-K).#
</TABLE>
17
<PAGE> 19
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C> <C>
21 -- Subsidiaries.#
27 -- Financial Data Schedule.#
</TABLE>
(b) Reports on Form 8-K
None.
__________________________________
* 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 No. 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.
18
<PAGE> 20
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/ DARRON K. ASH
----------------------------------------
Darron K. Ash
(Vice President, Chief Financial Officer)
Date: March 28, 1996
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 and Chief Executive Officer March 28, 1996
- -------------------------------------
C. Dean Metropoulos
/s/ JACK W. EVANS Director March 28, 1996
- -------------------------------------
Jack W. Evans
/s/ JOHN R. MUSE Director March 28, 1996
- -------------------------------------
John R. Muse
/s/ CHARLES W. TATE Director March 28, 1996
- -------------------------------------
Charles W. Tate
/s/ JIM L. TURNER Director March 28, 1996
- -------------------------------------
Jim L. Turner
/s/ L. HOLLIS JONES President and Chief Operating Officer March 28, 1996
- -------------------------------------
L. Hollis Jones
/s/ DARRON K. ASH Vice President, Chief Financial Officer and March 28, 1996
- ------------------------------------- Principal Accounting Officer
Darron K. Ash
</TABLE>
19
<PAGE> 21
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
16, 1996. 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 16, 1996
20
<PAGE> 22
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, 1995 . . . . . . . . . . $ 1,495 $ 695 $ (595) $ - $1,595
Year Ended December 31, 1994 . . . . . . . . . . 974 622 (101) - 1,495
Year Ended December 31, 1993 . . . . . . . . . . 306 735 (226) 159 974
</TABLE>
21
<PAGE> 23
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C> <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 the 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.)*
</TABLE>
22
<PAGE> 24
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C> <C>
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.)*
</TABLE>
23
<PAGE> 25
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C> <C>
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.****
</TABLE>
24
<PAGE> 26
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C> <C>
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.)*
</TABLE>
25
<PAGE> 27
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C> <C>
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).****
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.)*
</TABLE>
26
<PAGE> 28
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C> <C>
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 Inc. 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 Inc.*****
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.*****
</TABLE>
27
<PAGE> 29
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C> <C>
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 granted for this exhibit).*****
*10(nnn) -- Employment Agreement entered into as of April 13, 1995
between the Company and C. Dean Metropoulos and certain
other key management personnel.#
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 ofthe Form 10-K).#
*21 -- Subsidiaries.#
*27 -- Financial Data Schedule.#
</TABLE>
(b) Reports on Form 8-K
None.
__________________________________
* 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 No. 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.
28
<PAGE> 1
EXHIBIT 10(nnn)
EMPLOYMENT AGREEMENT
AGREEMENT made this _____ day of _____________, 1995, by and between
____________________ (hereinafter "Company") and ________________________
(hereinafter "Employee").
WHEREAS, Company is a Delaware corporation in the business, through its
various subsidiaries of manufacture, processing and distribution of specialty
dairy products throughout the United States and,
WHEREAS, Employee is and has been employed as the ____________ of the
Company and,
WHEREAS, Company is desirous of contracting with Employee to assure he
will continue his employment with Company and/or its subsidiaries and,
WHEREAS, Employee is desirous of continuing his employment with Company
and/or its subsidiaries.
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties above-named do hereby
agree as follows:
1. Position and Duties. Company hereby agrees to employ Employee and
Employee agrees to be employed by Company as the ___________________ of its
related operations and subsidiaries. Employee shall have responsibility for the
____________________ of the Company and its subsidiaries and shall report
directly to the President of Company.
Employee shall devote sufficient time, attention and energies to the
business of Company to accomplish his duties herein and except as otherwise
provided in this Agreement, shall not be engaged in any activity or have any
ownership interest in any business in competition with Company or potentially
in competition with Company.
2. Term of Agreement. This Agreement shall commence on _______________,
1995, and continue until terminated pursuant to Section 4 hereof.
3. Compensation and Benefits. The Company shall pay to the Employee an
annual compensation package based on the salary, bonus and allowances, if any,
(the "Compensation") earned by the Employee for the year 1994 (whether paid in
1994 or otherwise). In computing the Compensation to be paid, the Compensation
actually paid to Employee shall be annualized (the "Annual Compensation").
Further, the Company shall provide Employee such benefits as the Company
provides to its other employees similarly situated.
To the extent this Agreement is not terminated pursuant to Section 4, the
Company shall review the Annual Compensation and make appropriate adjustments
when its other management level employees are reviewed.
4. Termination.
a. By Company. The Company, by action of the President or its Board of
Directors may terminate Employee's employment hereunder but only for
Cause. Cause shall be defined as the death of Employee or the disability of
Employee, which disability continues for a period of six (6) months;
misappropriation by Employee of Company's assets or other willful
misconduct or bad faith in disregard of Employee's material duties to
Company or the gross neglect by Employee of the performance of his duties.
In the event of Employee's termination by Company without Cause,
Company shall pay to Employee within seven (7) days of said termination an
amount equal to 1.5 times Employee's Annual Compensation. Further,
Employee's medical and dental insurance shall be maintained by the Company
for a period of one year on the same terms and conditions which existed
prior to Employee's termination.
b. By Employee. Employee may terminate this Agreement at any time by
giving written notice to Company at such place it may from time to time
designate in writing. Written notice shall be at least One Hundred Twenty
(120) days prior to said proposed date of termination. This notice
provision shall be six months if the Company sells a majority of its
assets, if a majority of the Company's shares are sold or if control of a
majority of the Company's shares changes or occurs through merger, sale,
consolidation, or any like occurrence or event (a "Sale").
In the event of a Sale, this Agreement shall, at Employee's option
terminate upon expiration of the notice period referred to above and
Employee shall be paid at the closing of the Sale the sum calculated in
accordance with Section 4(a) hereof as if Employee was terminated without
Cause.
In the event the Employee exercises his option as noted in the above
paragraph and the Company wishes to continue his employment during the six
month notice period, then in that event the Employee shall continue to
receive his current compensation and benefits during the period of
continued employment. Payment of continued compensation and benefits shall
not, however, reduce the severance payment to be made in accordance with
the above paragraph.
5. Binding Effect; Assignment. This Agreement shall be binding upon the
parties hereto, their heirs, executors, administrators, successors and assigns.
Employee shall not assign any of his rights under this Agreement. The rights
and liabilities of Company hereunder shall inure to the benefit of, and shall
be assumed by and binding upon, any successor or assignee of the Company
whether by sale or transfer of controlling shares of Company, merger or
consolidation of the Company with another corporation, by sale of 50% or more
of the assets of Company or any like occurrence or event.
6. Entire Agreement; Amendment. This Agreement is the entire agreement
between the parties regarding the subject matter hereof and supersedes any
understandings or agreements whether oral or written. Any changes to this
Agreement must be made in writing and signed by both parties.
7. Waiver. Failure by either party to insist on strict enforcement of any
provision of this Agreement on one or more occasions shall not be construed as
a waiver of such provision and shall not deprive the party of the right to
require compliance with the provision of the future.
8. Severability. The invalidity or unenforceability of any provision of
this Agreement shall not effect the validity or any other provision.
9. Applicable Law. This Agreement shall be governed and construed under
and in accordance with the laws of the State of Texas.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day, month and year first written above.
EMPLOYEE
_____________________________
Name
COMPANY
By: __________________________
President
The Company has entered into Employment Agreements substantially in the
form of Exhibit 10(nnn) with the following persons:
C. Dean Metropoulos (the maximum allowable severance is $1.0 million.)
Michael J. Cramer
Louis Pellicano
N. Michael Dion
Evan Metropoulos
<PAGE> 1
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 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 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 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 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 $7.1 million charge to Continuing Operations in
the fourth quarter of 1993, included provisions for reductions in work force,
relocation of the manufacturing for certain product lines to gain operating
efficiencies, and the abandonment of other product lines. The restructuring
also resulted in a $1.9 million charge to Discontinued Operations in the fourth
quarter of 1993, 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 total $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 through December 31, 1993.
1995 COMPARED TO 1994
Net sales from Continuing Operations for the year ended December 31, 1995,
totaled $304.7 million, an increase of $12.4 million or 4.2% from net sales of
Continuing Operations during 1994. The following table reflects net sales from
Continuing Operations by product category for each year:
<TABLE>
<CAPTION>
YEAR ENDED
PRODUCT CATEGORIES DECEMBER 31,
- ------------------ ----------------------
1994 1995
-------- --------
(Dollars in Thousands)
<S> <C> <C>
Branded Products..... $102,159 $117,016
Specialty Products... 190,155 187,714
-------- --------
Net Sales........ $292,314 $304,730
======== ========
</TABLE>
Net sales of branded products increased 14.5% to $117.0 million in 1995
from $102.2 million in 1994 reflecting volume increases in the International
Delight and Lactaid product lines. The volumes for the Naturally Yours and
Second Nature product lines declined slightly from 1994 to 1995. Net sales of
specialty products declined 1.3% from 1994 to 1995. This reduction is
primarily due to the Company's selective withdrawal from certain marginally
profitable segments of this business.
The Morningstar Group 1995 Annual Report 13
<PAGE> 2
Gross profit totaled $71.8 million or 23.6% of net sales during 1995
compared to $70.2 million or 24.0% of net sales in 1994. The increase in gross
profit is primarily attributable to the increase in branded sales in 1995. The
slight decline in the gross margin percentage in 1995 resulted from increased
prices for several of the Company's raw ingredients.
Operating expenses were $51.4 million or 16.9% of net sales in 1995 versus
$51.8 million or 17.7% of net sales in 1994. Distribution expenses as a
percent of net sales declined to 5.3% in 1995 from 6.4 % in 1994, despite the
increase in branded sales. This reduction reflects the Company's continuing
efforts to optimize the efficiencies of its distribution programs. Selling
expenses as a percent of net sales remained relatively level from 1994 to 1995.
General and administrative expenses, as a percent of net sales, increased
slightly from 4.0% in 1994 to 4.3% in 1995, due in part to additional
depreciation on enhancements to the Company's information systems.
The Company's 1995 operating income increased $2.0 million, from $18.4
million in 1994 to $20.4 million in 1995. This increase resulted primarily
from increased branded sales and lower operating costs, offset in part by a
slightly lower gross profit percentage.
Interest expense declined 11.8% from $4.4 million in 1994 to $3.9 million
in 1995. This reduction in expense is due to an overall decrease of the
Company's outstanding debt of $15.9 million during 1995, in conjunction with a
decline in the Company's average borrowing costs.
The Company's income tax provision increased $.6 million from $5.5 million
in 1994 to $6.1 million in 1995. The effective income tax rate for the year
ended December 31, 1995, was 34.8% compared to an effective tax rate of 37.2%
in 1994. As of December 31, 1995, the Company's net deferred tax assets
totaled $4.1 million, less a valuation allowance of $3.1 million. Future
reductions in the valuation allowance will result in reduced deferred tax
expense. At December 31, 1995, the Company had pretax net operating loss
carryforwards for federal income tax purposes of $1.1 million which are
available to offset future income tax liabilities. In addition, the Company
has approximately $2.1 million in alternative minimum tax credits which are
available to offset future income tax liabilities.
The Company's 1995 income from Continuing Operations of $11.3 million
compares to income in 1994 of $9.3 million. This 21.7% increase in 1995
resulted from increased branded sales, reduced operating costs, reduced
interest expense and a reduction in the effective income tax rate.
The Company's net income for 1995 of $11.5 million compares to $10.6
million for 1994. The increase in 1995 resulted from the items described in
the income from Continuing Operations section offset by a $1.1 million
reduction in income from Discontinued Operations.
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
Product Categories December 31,
- ------------------ ----------------------
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>
The Morningstar Group 1995 Annual Report 14
<PAGE> 3
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.
Net sales from Discontinued Operations were $38.6 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 $70.2 million or 24.0% of
net sales during 1994 compared to $62.5 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
$18.4 million, an increase of $13.1 million from 1993. Prior to the 1993
restructuring and other charges, the Company's operating income from Continuing
Operations increased 48.0% in 1994, from $12.4 million in 1993.
Interest expense declined 11.8% from $5.0 million in 1993 to $4.4 million
in 1994. This reduction was 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 the 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 Morningstar Group 1995 Annual Report 15
<PAGE> 4
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.
EARNINGS PER SHARE
The fully diluted, weighted average number of shares of common stock and
common stock equivalents outstanding increased from 15,050,538 in 1994 to
15,245,562 in 1995. A majority of the increase in 1995 resulted from the
exercise of outstanding stock options.
LIQUIDITY AND CAPITAL RESOURCES
In 1995, the Company generated cash of $26.7 million from its operating
activities from Continuing Operations, which, coupled with $3.0 million of net
cash provided by Discontinued Operations and $.8 million received from the
exercise of stock options, was used to repay debt of $15.9 million, fund
capital and other expenditures of $9.1 million, provide $1.8 million for the
purchase of treasury stock and increase cash balances by $3.7 million.
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, debt service, stock repurchases and capital expenditures
for the foreseeable future. The Company estimates that it will require cash of
$16.0 million during 1996 to fund approximately $8.0 million in capital
expenditures and approximately $8.0 million in senior bank debt reduction;
funding will be obtained from operations and short-term borrowings, if
necessary. At December 31, 1995, the Company had approximately $15.5 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, 1995. Based upon the Company's projections for 1996, management does not
anticipate any violation of the financial covenants contained in the Senior
Credit Agreement. The Senior Credit Agreement contains numerous covenants
pertaining to management and operations of the Company including limitations on
the amount of capital expenditures as well as specification of certain leverage
ratios, interest coverage ratios, fixed charge coverage ratios and minimum net
worth. The Senor 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.
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 future cash flows (without
interest charges) over the remaining life of the goodwill.
The Morningstar Group 1995 Annual Report 16
<PAGE> 5
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, 1995 and 1994, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1995. 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, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Dallas, Texas,
February 16, 1996
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/ L. HOLLIS JONES /s/ DARRON K. ASH
C. Dean Metropoulos L. Hollis Jones Darron K. Ash
Chairman and President and Vice President and
Chief Executive Officer Chief Operating Officer Chief Financial Officer
February 16, 1996
The Morningstar Group 1995 Annual Report 17
<PAGE> 6
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
ASSETS 1994 1995
- --------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C>
Current Assets:
Cash $ 2,152 $ 5,811
Receivables, Net of Allowance for Doubtful
Accounts of $1,495 and $1,595, Respectively 30,469 28,043
Inventories 10,540 11,123
Prepaids and Other 5,062 1,597
Deferred Tax Assets - 3,089
Net Assets Held for Sale - 836
----------- -----------
Total Current Assets 48,223 50,499
Property, Plant and Equipment:
Land 6,062 5,713
Buildings and Improvements 17,938 18,804
Machinery and Equipment 36,041 43,552
----------- -----------
Gross Property, Plant and Equipment 60,041 68,069
Less: Accumulated Depreciation (13,404) (17,748)
----------- -----------
Net Property, Plant and Equipment 46,637 50,321
Intangible and Other Assets:
Identifiable Intangible Assets 2,512 1,847
Goodwill 65,951 58,671
Deferred Financing Costs 1,540 1,259
Other Assets 402 112
----------- -----------
Total Intangible and Other Assets 70,405 61,889
----------- -----------
Total Assets $ 165,265 $ 162,709
=========== ===========
- --------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
The Morningstar Group 1995 Annual Report 18
<PAGE> 7
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1994 1995
- --------------------------------------------------------------------------------------------------------
(Dollars In Thousands, Except Share Amounts)
<S> <C> <C>
Current Liabilities:
Accounts Payable $ 17,263 $ 21,488
Accrued Liabilities 19,345 15,869
Current Maturities of Long-Term Debt 6,000 8,000
------------ ------------
Total Current Liabilities 42,608 45,357
Long-Term Debt (Net of Current Maturities) 53,892 36,000
Other Long-Term Liabilities 1,963 4,029
Commitments and Contingencies
Stockholders' Equity:
Common Stock, $.01 Par Value, 50,000,000 Shares Authorized;
14,920,797 Shares Issued in 1994 and 15,244,261 Shares Issued in 1995 149 152
Additional Paid-In Capital 71,157 71,991
Treasury Stock, at Cost (0 Shares in 1994 and 230,000 Shares in 1995) - (1,840)
Retained Earnings (Deficit) (4,504) 7,020
------------ ------------
Total Stockholders' Equity 66,802 77,323
------------ ------------
Total Liabilities and Stockholders' Equity $ 165,265 $ 162,709
============ ============
- --------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
The Morningstar Group 1995 Annual Report 19
<PAGE> 8
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1993 1994 1995
- ---------------------------------------------------------------------------------------------------------
(Dollars In Thousands, Except Per Share Amounts)
<S> <C> <C> <C>
Net Sales $ 273,949 $ 292,314 $ 304,730
Cost of Goods Sold 211,418 222,145 232,948
---------- ----------- -----------
Gross Profit 62,531 70,169 71,782
Operating Costs and Expenses:
Distribution 17,661 18,689 16,120
Selling 19,008 21,295 22,233
General and Administrative 13,427 11,778 13,001
Restructuring and Other Charges 7,100 - -
---------- ----------- -----------
Total Operating Costs and Expenses 57,196 51,762 51,354
---------- ----------- -----------
Operating Income 5,335 18,407 20,428
Interest Expense 4,984 4,446 3,921
Amortization of Deferred Financing Costs 493 351 381
Dividend Income - - (268)
Other Income, Net (726) (1,244) (1,008)
---------- ----------- -----------
Income Before Income Taxes 584 14,854 17,402
Provision for Income Taxes 841 5,533 6,062
---------- ----------- -----------
Income (Loss) from Continuing Operations (257) 9,321 11,340
Discontinued Operations:
Income from Discontinued Operations 1,241 (a) 903 (a) -
Gain on Disposal - 423 (b) 184 (b)
---------- ----------- -----------
Income from Discontinued Operations 1,241 1,326 184
---------- ----------- -----------
Income Before Extraordinary Item 984 10,647 11,524
Extraordinary Item (164) (c) - -
---------- ----------- -----------
Net Income $ 820 $ 10,647 $ 11,524
=========== =========== ===========
Earnings (Loss) Per Common Share:
Continuing Operations $ (.02) $ .62 $ .74
Discontinued Operations .08 .09 .02
---------- ----------- -----------
Earnings Before Extraordinary Item .06 .71 .76
Extraordinary Item (.01) - -
---------- ----------- -----------
Earnings Per Common Share $ .05 $ .71 $ .76
========== =========== ===========
Weighted Average Common and
Common Equivalent Shares Outstanding 15,011,607 15,050,538 15,245,562
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(a) Net of applicable tax provision of $1,044 and $507.
(b) Net of applicable tax provision of $2,865 and $216.
(c) 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 1995 Annual Report 20
<PAGE> 9
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK RETAINED
AND ADDITIONAL TREASURY EARNINGS
PAID-IN CAPITAL STOCK (DEFICIT) TOTAL
- ----------------------------------------------------------------------------------------------------------
(Dollars In Thousands, Except Share Amounts)
<S> <C> <C> <C> <C>
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
Exercise of Stock Options 837 - - 837
Purchase of Treasury Stock - (1,840) - (1,840)
Net Income - - 11,524 11,524
--------- ---------- ---------- ---------
Balance, December 31, 1995 $ 72,143 $ (1,840) $ 7,020 $ 77,323
========= ========== ========== =========
- ---------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
The Morningstar Group 1995 Annual Report 21
<PAGE> 10
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1993 1994 1995
- ----------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Cash Received from Customers $ 274,751 $ 284,605 $ 306,918
Interest Received 238 134 224
Income Tax Refund 6 - -
Cash Paid to Suppliers and Employees (257,501) (259,147) (272,992)
Interest Paid (6,240) (4,395) (4,220)
Income Taxes Paid (453) (2,663) (3,199)
---------- ----------- -----------
Net Cash Provided by Continuing Operations 10,801 18,534 26,731
Net Cash Provided (Used) by Discontinued Operations 5,896 (3,403) -
---------- ----------- -----------
Net Cash Provided by Operating Activities 16,697 15,131 26,731
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 (5,520) (7,622) (10,705)
Proceeds from Sale of Assets 209 32 2
Dividends Received from Velda Preferred Stock - - 268
Other (2,175) 682 1,258
---------- ----------- -----------
Net Cash Used by Continuing Operations (37,513) (6,908) (9,177)
Discontinued Operations:
Sale of Discontinued Operations 125 50,237 -
Sale of Velda Preferred Stock - - 3,000
Capital and Other Expenditures (1,198) (482) -
---------- ----------- -----------
Net Cash Provided (Used) by Discontinued Operations (1,073) 49,755 3,000
---------- ----------- -----------
Net Cash Provided (Used) by Investing Activities (38,586) 42,847 (6,177)
Cash Flows from Financing Activities:
Proceeds from Issuance of Common Stock 74 1,622 837
Purchase of Treasury Stock - - (1,840)
Proceeds from Issuance of Long-Term Debt 35,000 - -
Net Borrowings (Repayments) Under
Revolving Credit Facility 6,675 (14,783) (1,892)
Principal Payments on Long-Term Debt (18,231) (45,470) (14,000)
Dividends Paid (2,140) (535) -
---------- ----------- -----------
Net Cash Provided (Used) by Financing Activities 21,378 (59,166) (16,895)
Net Increase (Decrease) in Cash (511) (1,188) 3,659
Cash, Beginning of Period 3,851 3,340 2,152
---------- ----------- -----------
Cash, End of Period $ 3,340 $ 2,152 $ 5,811
========== =========== ===========
- ---------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
The Morningstar Group 1995 Annual Report 22
<PAGE> 11
CONSOLIDATED STATEMENTS OF CASH FLOWS
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1993 1994 1995
- ----------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C>
Net Income $ 820 $ 10,647 $ 11,524
Adjustments to Reconcile Net Income to Net Cash
Provided by Operations:
Discontinued Operations Net Income (1,241) (1,326) (184)
Depreciation 3,810 4,344 5,122
Amortization of Intangibles 4,288 2,632 2,700
Restructuring and Other Charges 7,100 - -
(Gain) Loss on Fixed Asset Retirements 82 (243) -
Increase in Deferred Taxes 1,040 4,222 3,635
Loss on Extinguishment of Debentures 164 - -
Change in Assets and Liabilities Net of
Effects from Acquisitions and
Divestitures of Subsidiaries:
Accounts Receivable (1,208) (3,707) 2,426
Inventories (2,792) 987 (583)
Prepaids and Other (2,969) 3,569 151
Accounts Payable 1,455 (655) 4,225
Accrued Liabilities 2,466 (1,986) (4,076)
Other Long-Term Liabilities (2,214) 50 1,791
--------- ---------- ---------
Total Adjustments 9,981 7,887 15,207
Net Cash Provided by Continuing Operations 10,801 18,534 26,731
Discontinued Operations:
Discontinued Operations Net Income 1,241 1,326 184
Gain on Disposal - (423) (184)
Change in Working Capital 1,584 (4,914) -
Depreciation and Amortization 3,071 608 -
--------- ---------- ---------
Net Cash Provided (Used) by Discontinued Operations 5,896 (3,403) -
Net Cash Provided by Operating Activities $ 16,697 $ 15,131 $ 26,731
========= ========== =========
- ---------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
The Morningstar Group 1995 Annual Report 23
<PAGE> 12
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.
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 after working capital adjustments and $3.0 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 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 changed
significantly. 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 April 13, 1994, 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").
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. The Company recorded an additional loss
from Discontinued Operations of approximately $.5 million, net of tax benefits,
during the second quarter of 1995, related to Discontinued Operations reserves
and other liabilities.
Net sales of the Discontinued Operations were $122.7 million in 1993 and
$38.6 million in 1994. Interest expense of $1.4 million and $.4 million was
allocated to Discontinued Operations during 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 1995 Annual Report 24
<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 $31.0
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 relevant
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,
---------------------
1994 1995
---------- ---------
<S> <C> <C>
Raw Materials and Supplies... $ 6,757 $ 5,975
Finished Goods .............. 3,783 5,148
---------- ---------
Total ................... $ 10,540 $ 11,123
========== =========
</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.
IDENTIFIABLE INTANGIBLE ASSETS
Identifiable intangible assets related to the acquisition of Favorite were
added in 1993, and are being amortized over their estimated useful lives which
is generally five years. Amortization costs totaled $1,933,000 in 1993,
$665,000 in 1994 and $665,000 in 1995. The 1993 amortization does not include
the write-down of certain identifiable intangibles associated with the 1993
restructuring and other charges. Accumulated amortization was $1,178,000 and
$1,843,000 at December 31, 1994 and 1995, respectively.
The Morningstar Group 1995 Annual Report 25
<PAGE> 14
GOODWILL
Goodwill is amortized on a straight-line basis over 40 years and is
recorded at cost less accumulated amortization. Amortization costs totaled
$1,654,000 in 1993, $1,660,000 in 1994 and $1,652,000 in 1995. Accumulated
amortization was $6,860,000 and $8,512,000 at December 31, 1994 and 1995,
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 $1,118,000 and $1,499,000 at December 31, 1994 and
1995, respectively.
ACCOUNTING FOR LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued "SFAS" No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." This statement is effective for financial statements
beginning after December 15, 1995. The Company has elected to adopt the
statement effective December 31, 1995. The adoption of SFAS No. 121 had no
material effect on the Company's financial statements.
The Company continually evaluates whether events and circumstances indicate
that the remaining carrying amount of an asset may not be recoverable or the
remaining useful life may warrant revision. To make this evaluation, the
Company uses an estimate of undiscounted future cash flows (without interest
charges) over the remaining life of the asset.
ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------
1994 1995
--------- ---------
<S> <C> <C>
Accrued Interest ............. $ 706 $ 407
Payroll and Benefits
(Accrued Wages,
Vacation, and
Profit Sharing) .......... 3,472 4,080
Restructuring Accruals ....... 717 230
Insurance Accruals ........... 3,559 5,195
Income Tax ................... 3,042 1,491
Marketing and Advertising .... 2,689 2,017
Other Accrued Liabilities .... 5,160 2,449
------- -------
Total .................... $19,345 $15,869
======= =======
</TABLE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
The financial position of the Company at December 31, 1995, includes
certain financial instruments which may have a fair value that is different
than that which is currently reflected in the financial statements. However,
any variation in value is insignificant.
USE OF ESTIMATES
The preparation of these financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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, 1995.
The Morningstar Group 1995 Annual Report 26
<PAGE> 15
INCOME TAXES
Deferred income taxes reflect the tax effect of temporary differences
between the amount of assets and liabilities recognized for financial reporting
and tax purposes and are measured by applying currently enacted tax laws. The
effect on deferred income tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
OTHER INCOME
Other income primarily consists of royalty revenue.
EARNINGS (LOSS) PER COMMON SHARE
The earnings (loss) per common share is computed based on the fully diluted
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.
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 the acquisition of Favorite as if the transaction had
occurred at January 1, 1993 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1993
------------
(Unaudited)
<S> <C>
Pro Forma Net Sales from
Continuing Operations $ 285,136
===========
Pro Forma Net Loss from
Continuing Operations
Before Extraordinary Items $ (161)
===========
Pro Forma Net Loss from
Continuing Operations $ (325)
===========
Pro Forma Shares Outstanding 14,287,212
===========
Pro Forma Loss Per Share $ (.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,
-------------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Current $ 207 $ 272 $1,339
Deferred 388 4,163 3,448
State 246 1,098 1,275
------ ------ ------
Provision for
Income Taxes $ 841 $5,533 $6,062
====== ====== ======
</TABLE>
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,
---------------
1994 1995
---- ----
<S> <C> <C>
Deferred Tax Assets:
Net Operating Loss
Carryforward $ 5,130 $ 385
Accrued Vacation 525 504
Accrued Workers'
Compensation 1,030 1,397
Restructuring Reserves 501 396
Other Accrued Expenses
and Reserves 3,404 2,111
Other Deferred Tax Assets 1,011 2,340
------- -------
Total Deferred Tax Assets 11,601 7,133
Deferred Tax Liabilities:
Accelerated Depreciation
and Amortization 2,393 2,901
Other Deferred Tax
Liabilities 298 140
------- -------
Total Deferred Tax Liabilities 2,691 3,041
Valuation Allowance (8,910) (3,073)
------- -------
Net Deferred Tax Assets - 1,019
Noncurrent Deferred Tax
Liabilities - (2,070)
------- -------
Current Deferred Tax
Assets $ - $ 3,089
======= =======
</TABLE>
The Company reduced goodwill by approximately $388,000, $4,163,000 and
$5,648,000 for the years ended December 31, 1993, 1994 and 1995, respectively,
representing realization of deferred tax assets created prior to the Company's
financial restructuring transaction.
The Morningstar Group 1995 Annual Report 27
<PAGE> 16
The provision 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,
-------------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Provision Computed
at Statutory Rate..... $ 199 $ 5,050 $ 5,917
State Income Taxes........ 162 905 1,025
Tax on Nondeductible
Goodwill Amortization. 539 516 473
Utilization of Previously
Unrecognized Deferred
Tax Assets............ (138) (1,107) (1,405)
Other..................... 79 169 52
----- ------- -------
Provision for Income
Taxes................... $ 841 $ 5,533 $ 6,062
===== ======= =======
</TABLE>
AVAILABILITY AND AMOUNT OF NET OPERATING LOSS CARRYFORWARDS
At December 31, 1995, the Company had pretax net operating loss ("NOL")
carryforwards for federal income tax purposes of $1.1 million which are
available to offset future income tax liabilities. NOL carryforwards expire in
2007. In addition, the Company has approximately $2.1 million in alternative
minimum tax credits which are available to offset future income tax
liabilities.
(5) LONG-TERM DEBT
The Company's long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------
1994 1995
---- ----
<S> <C> <C>
Senior Term Loan........... $55,000 $41,000
Revolving Credit Facility.. 1,892 -
Industrial Development
Revenue Bonds.......... 3,000 3,000
------- -------
Total Long-Term Debt... 59,892 44,000
Less: Current Maturities.. (6,000) (8,000)
------- -------
Long-Term Debt, Net of
Current Maturities..... $53,892 $36,000
======= =======
</TABLE>
Maturities of long-term debt at December 31, 1995, are as follows (in
thousands):
<TABLE>
<S> <C>
1996................................ $ 8,000
1997................................ 15,355
1998................................ 17,645
1999................................ -
2000................................ -
Thereafter.......................... 3,000
-------
Total Maturities................ $44,000
=======
</TABLE>
SENIOR TERM LOAN AND REVOLVING CREDIT FACILITY
In March 1993, in conjunction with the acquisition of Favorite Foods Inc.,
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, 1995, there were no outstanding borrowings under
the Revolver and approximately $9.5 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 Senior Term Loan and the Revolver is the
prime rate. Both facilities have alternative rate options based upon spread
above the London Interbank Offered Rate ("LIBOR"). At December 31, 1995, $41.0
million in borrowings under the Senior Term Loan were outstanding at a weighted
average interest rate of 6.68%. 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, 1995,
approximately $15.5 million was additionally available to the Company under the
Revolver. A fee of .5% per year is charged on outstanding letters of credit.
A .25% per year commitment fee on uncommitted funds is payable quarterly. The
Revolver matures on March 20, 1999, coincident with the original scheduled
maturity of the Term Loan. The Senior Credit Agreement contains numerous
The Morningstar Group 1995 Annual Report 28
<PAGE> 17
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 $48.0 million in cash and $3.0 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 Company was in compliance with all financial covenants as of December
31, 1995. Based upon the Company's projections for 1996, 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, 1995, was 5.35%.
(6) RESTRUCTURING AND OTHER CHARGES
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 work force, relocation of the
manufacturing for certain product lines to gain operating efficiencies, and the
abandonment of other product lines. As of December 31, 1995, 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, 1995. 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 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 the 1993 charge include (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1993
------------
<S> <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) 1,900
------
Total $9,000
======
</TABLE>
(a) Included in Discontinued Operations.
The Morningstar Group 1995 Annual Report 29
<PAGE> 18
(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, 1995, eligible employees totaled 312, of which 189 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 1995, the Company also
contributed to two single-employer and four multi-employer pension/retirement
plans under the terms of various union contracts, which covered 486 of its 792
employees at December 31, 1995. The number of union pension plans and the
portion of employees covered has varied from year to year. Contributions to
these pension plans are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Defined Contribution
Profit Sharing Plan $ 414 $ 230 $ 250
Union Pension Plans 1,197 1,122 1,182
</TABLE>
POST-RETIREMENT BENEFIT PLANS
The cost of providing post retirement benefits other than pensions for
non-union employees has been primarily paid by non-union retirees and the
Company's calculation of its obligation is not material as of December 31, 1995.
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 $2,292,000 in 1993,
$2,608,000 in 1994 and $1,999,000 in 1995. 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 $5,012,000 in 1993, $3,009,000 in 1994 and
$3,151,000 in 1995.
The following is a summary of future minimum annual lease payments under
noncancelable operating lease obligations as of December 31, 1995
(in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- ------------
<S> <C>
1996 $ 2,391
1997 2,169
1998 2,064
1999 1,483
2000 1,131
Thereafter 510
--------
Total $ 9,748
========
</TABLE>
EMPLOYMENT AGREEMENTS
The Company had previously entered into employment agreements with its
former Chief Executive Officer, Chief Operating Officer and 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
The Morningstar Group 1995 Annual Report 30
<PAGE> 19
on June 17, 1994. The agreement with the Chief Operating Officer, Clifford L.
Marquart, terminated on February 28, 1995. For the years ended December 31,
1994 and 1995, the combined salaries and bonuses for these executives was
approximately $1,400,000 and $337,000, respectively.
In 1995, the Company entered into employment agreements with certain key
management personnel which provide for annual compensation and benefits and
also provide for certain severance payments to be made to such individuals in
the event of a change in control (as defined) of the Company or the involuntary
termination of such individuals for reasons other than cause (as defined).
None of the agreements provide for payments exceeding 18 months of
compensation and benefits. The maximum amount payable under these employment
agreements is approximately $2,386,000 in the aggregate.
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. In February
1995, 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 did 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 business, financial
condition or results of operations.
(9) RELATED-PARTY TRANSACTIONS
HICKS, MUSE, TATE & FURST
The Company had previously entered into a financial advisory agreement
dated March 1, 1991, as amended, pursuant to which Hicks Muse provided
financial advisory services to the Company. Effective September 30, 1995, this
agreement was terminated. As compensation for such services, the Company paid
Hicks Muse an advisory fee, together with all reasonable expenses incurred in
connection therewith. The Company paid advisory fees of $200,000, $114,000
and $150,000 in 1993, 1994 and 1995, and reimbursed Hicks Muse approximately
$21,000, $37,000 and $28,000 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
The Morningstar Group 1995 Annual Report 31
<PAGE> 20
Chief Executive Officer in April 1994. As compensation for all services
rendered, the Company paid Mr. Metropoulos $290,000 and $350,000 in salary,
$450,000 and $450,000 in bonus and approximately $6,000 and $22,000 in
reimbursed expenses for 1994 and 1995, respectively.
(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, 1995, 769,941 tenure options and 228,258 incentive options had 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 was $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, 1995,
175,000 options had been granted to employees. The exercise price for 25,000
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 exercise price for 30,000 of the options
granted in 1995 is $6.75 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 1995 vest ratably over a three-year period. The options
granted in 1994 and 1995 expire ten years after the date of their issuance. No
options under the 1992 plan had been exercised as of December 31, 1995.
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, 1995,
219,000 options had been granted to employees. The exercise price for 195,000
of these options granted is $7.00 per share, which was the fair market value of
the options at the date of issuance. The exercise price for 24,000 of the
options granted in 1995 is $8.00 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. Under
this plan, 2,000 options had been exercised as of December 31, 1995.
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 and CEO of the
Company. As of December 31, 1995, 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, 1995, no options had been
exercised.
The Morningstar Group 1995 Annual Report 32
<PAGE> 21
SUMMARY OF OPTIONS
(number of options)
<TABLE>
<CAPTION>
1992 PLAN 1994 PLAN
OPTION OPTION
1991 PLAN 1992 PLAN PRICE 1994 PLAN PRICE CHAIRMAN PLAN
---------- --------- ------------- --------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at December 31, 1993 . . . . 970,999 160,000 $ 9.00 - $ - -
Granted in 1994 . . . . . . . . . . . . - 120,000 7.00 210,000 7.00 600,000
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 $ 7.00 600,000
--------- --------- ------------- --------- ----------- -------------
Granted in 1995 . . . . . . . . . . . . - 30,000 6.75 81,000 7.00-8.00 -
Cancelled in 1995 . . . . . . . . . . . (13,049) (31,000) 9.00 (70,000) 7.00 -
Exercised in 1995 . . . . . . . . . . . (311,464) - - (2,000) 7.00 -
--------- --------- ------------- --------- ----------- -------------
Outstanding at December 31, 1995 . . . . 10,900 175,000 $6.75 - $9.00 219,000 $7.00-$8.00 600,000
========= ========= ============= ========= =========== =============
Exercisable at December 31, 1994 . . . . 355,413 78,654 $9.00 - - 400,000
========= ========= ============= ========= =========== =============
Exercisable at December 31, 1995 . . . . 10,900 105,000 $7.00 - $9.00 52,000 $ 7.00 600,000
========= ========= ============= ========= =========== =============
</TABLE>
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 31, 1995, 230,000
shares had been repurchased by the Company at a cost of $1.8 million. As of
January 31, 1996, the Company had purchased an additional 487,000 shares at a
cost of $3.9 million.
The Morningstar Group 1995 Annual Report 33
<PAGE> 22
(11) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for the years ended December 31, 1994
and 1995, is as follows:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FORTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
DOLLARS IN THOUSANDS:
<S> <C> <C> <C> <C> <C>
Net Sales 1994 $ 70,739 $ 73,667 $ 70,429 $ 77,479
1995 71,893 74,882 73,167 84,788
Gross Profit 1994 16,344 17,363 15,750 20,712
1995 17,269 17,718 16,250 20,545
Income from Continuing Operations 1994 1,764 2,539 1,857 3,161
1995 2,269 2,846 2,316 3,909
Income (Loss) from Discontinued Operations 1994 827 709 (295) 85
1995 694 (510) - -
Net Income 1994 2,591 3,248 1,562 3,246
1995 2,963 2,336 2,316 3,909
PER COMMON SHARE:
Income from Continuing Operations 1994 $ 0.12 $ 0.17 $ 0.12 $ 0.21
1995 0.15 0.19 0.15 0.25
Income (loss) from Discontinued Operations 1994 0.05 0.05 (0.02) -
1995 0.05 (0.03) - -
Net Income 1994 0.17 0.22 0.10 0.21
1995 0.20 0.16 0.15 0.25
Market Price Range:
High 1994 $ 8.00 $ 7.75 $ 7.75 $ 7.25
Low 1994 6.50 6.50 6.75 6.50
High 1995 7.50 8.00 9.25 9.00
Low 1995 5.50 6.38 6.38 7.50
</TABLE>
The Morningstar Group 1995 Annual Report 34
<PAGE> 23
SELECTED FINANCIAL DATA 1991 THROUGH 1995
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Predecessor (a) Successor
--------------- -------------------------------------------------------------------------
Two Ten
Months Months
Ended Ended
February December Year Ended December 31,
28, 31, ------------------------------------------------------------
1991 1991 1992 1993 1994 1995
---------- ---------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA
Net Sales $ 28,037 $ 152,497 $ 230,220 $ 273,949 $ 292,314 $ 304,730
Gross Profit 6,793 42,042 56,090 62,531 70,169 71,782
Operating Income 1,542 13,753 15,493 5,335 18,407 20,428
Income (loss) from Continuing Operations (529) 783 (1,640) (257) 9,321 11,340
Income (loss) from Discontinued Operations (564) (56) (3,359) 1,241 1,326 184
Extraordinary Item, Net of Tax 58,115(b) - (5,676)(c) (164)(d) - -
Net Income (Loss) 57,022 727 (10,675) 820 10,647 11,524
Dividends on Preferred Stock - 1,875 939 - - -
Net Income (loss) to Common Stockholders $ 57,022 $ (1,148) $ (11,614) $ 820 $ 10,647 $ 11,524
========== =========== ============= ============ ============ ===========
Earnings (Loss) per Common and Common
Equivalent Share:
Continuing Operations $ (.06) $ (.14) $ (.21) $ (.02) $ .62 $ .74
Discontinued Operations (.06) (.01) (.28) .08 .09 .02
---------- ----------- ------------- ------------ ------------ -----------
Earnings (Loss) before
Extraordinary Item (.12) (.15) (.49) .06 .71 .76
Extraordinary Item 6.57 - (.47) (.01) - -
---------- ----------- ------------ ------------ ------------ -----------
Earnings (Loss) $ 6.45(b) $ (.15) $ (.96)(c) $ .05 (d) $ .71 $ .76
========== =========== ============= ============ ============ ===========
Weighted Average Common and
Common Equivalent
Shares Outstanding 8,843,301 7,825,473 12,128,343 15,011,607 15,050,538 15,245,562
DIVIDENDS DECLARED PER COMMON SHARE $ - $ - $ .075 $ .15 $ - $ -
========== =========== ============ ============ ============ ===========
BALANCE SHEET DATA
Working Capital $ (1,916) $ 7,210 $ 14,996 $ 15,635 $ 11,615 $ 13,142
Total Assets 213,999 204,249 180,786 212,134 165,265 162,709
Current Maturities of Long-term Debt - 7,000 10,167 14,750 6,000 8,000
Long-term Debt 167,294 132,794 86,329 105,425 53,892 36,000
Preferred Stock 17,307 16,875 - - - -
Common Stockholders' Equity (12,619) 17,088 55,779 54,533 66,802 77,323
</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 1995 Annual Report 35
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES
Corporation Description State of Incorporation
- ---------------------------------------------- ----------------------
- -- 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
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0
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