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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, 1996, or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from to
Commission file number 0-19075
THE MORNINGSTAR GROUP INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2217488
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
5956 SHERRY LANE, SUITE 1500
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 28, 1997 was approximately $299.0 million which value,
solely for the purpose of this calculation, excludes shares held by the
Registrant's executive officers and directors. Such exclusion should not be
deemed a determination by the Registrant that all such individuals are, in
fact, affiliates of the Registrant.
February 28, 1997, the number of outstanding shares of common stock was:
Common Stock, $.01 par value: 14,548,443 shares
DOCUMENTS INCORPORATED BY REFERENCE
Part I and Part II of this Form 10-K incorporate information from the
Registrant's Annual Report to Stockholders for the year ended December 31,
1996. Part III of this Form 10-K incorporates information from the Registrant's
definitive Proxy Statement relating to the Registrant's annual meeting of stock
holders to be held on April 24, 1997.
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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,
non-refrigerated and frozen specialty food products that include: (i) branded
products and (ii) other specialty, dairy based and non-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 $50.0 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 $34.0 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.
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 $9.0 million charge in the fourth quarter of
1993, included provisions for reductions in workforce, relocation of the
manufacturing for certain product lines to gain operating efficiencies and the
abandonment of other product lines. Included within the $9.0 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.
ACQUISITIONS
Presto Food Products, Inc. Acquisition
On December 3, 1996, the Company acquired all of the issued and
outstanding shares of capital stock of Presto Food Products, Inc. ("Presto"), a
California corporation, from the shareholders of Presto pursuant to a stock
purchase agreement dated as of October 20, 1996, by and among the Company,
Presto and the Presto shareholders. Presto's sales for the year ended December
31, 1995, were approximately $139.5 million. Presto is a national manufacturer,
marketer and distributor of non-diary and dairy products, such as Mocha Mix
non-dairy coffee creamers, Jon Donaire desserts and ice cream cakes, aerosols,
bakery toppings and icings, and frozen pre-whipped toppings and creamers,
serving customers throughout the United States since 1937. The Company paid
approximately $133.5 million in cash for the stock acquired and assumed
approximately $37.4 million in related liabilities. The allocation of the
purchase price was based on preliminary estimates of fair value. The final
allocation may be revised if the appraised values are significantly different
from the preliminary estimates. Included in the assumed liabilities is
approximately $3.2 million related to costs associated with the involuntary
termination and/or relocation of certain employees of the acquired company. The
terminated employees represent redundant and excess personnel in the operations,
marketing, selling, and general and administrative areas. This termination plan
will likely be completed by the second quarter of 1997. In conjunction with the
consummation of the Presto acquisition, the Company renegotiated its credit
agreement. Funds provided by the renegotiated Senior Credit Agreement ("Senior
Credit Agreement") were utilized to retire existing senior debt of approximately
$44.8 million, to acquire the capital stock of Presto for $123.5 million and to
pay approximately $2.1 million in fees and expenses
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associated with the Presto acquisition. The Company accounted for the
acquisition as a purchase and accordingly, Presto's results are included in the
1996 Consolidated Statement of Operations for the period December 3, 1996,
through December 31, 1996.
Cream Products Acquisition
On July 31, 1996, the Company completed the purchase of substantially
all of the assets of Cream Products Company ("Cream Products"), located in
Chicago, Illinois. Cream Products' sales for the year ended December 31, 1995,
were approximately $24.6 million. Cream Products is a manufacturer and
distributor of dairy and non-dairy products primarily supplying food makers and
food service customers throughout the United States, since 1938. The Company
paid approximately $5.9 million in cash for the assets acquired, and assumed
approximately $2.3 million in related liabilities. Funds for this acquisition
were provided by the Company's operations in conjunction with its revolving
credit facility. The Company accounted for the acquisition as a purchase and
accordingly, Cream Product's results are included in the 1996 Consolidated
Statement of Operations for the period August 1, 1996, through December 31,
1996.
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 $51.0 million, consisting of $48.0 million in cash after working
capital adjustments and $3.0 million in 9% Series A Preferred Stock (the
"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 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 1996 Annual Report to Stockholders
(See Item 8, Footnote No.4) to conform with discontinued operations treatment
("Discontinued Operations").
On March 31, 1995, the 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 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 $0.5 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 $38.6 million in 1994.
Interest expense of $0.4 million was allocated to Discontinued Operations
during 1994. 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.
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PRODUCTS
The following table sets forth sales percentage information by product
and business category.
Percent of Net Sales from Continuing Operations
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------
Product Category/Business 1992 1993 1994 1995 1996
------------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Branded specialty food products 29.3% 30.1% 34.9% 38.4% 38.4%
----- ----- ----- ----- -----
Other specialty products:
UHT 30.1% 25.0% 22.6% 25.0% 28.6%
Cultured & other 40.6% 44.9% 42.5% 36.6% 33.0%
----- ----- ----- ----- -----
Total other specialty 70.7% 69.9% 65.1% 61.6% 61.6%
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ====== ======
</TABLE>
BRANDED SPECIALTY FOOD PRODUCTS
The Company's branded product business consists of seven product lines:
International Delight(R), Mocha Mix(R), Second Nature(R), Naturally Yours(TM),
Jon Donaire(R), Wacky Willie(R), and Lactaid(R). In the development of its
branded product lines, the Company has targeted growing market niches and
acquired or 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.
Mocha Mix. Mocha Mix is a non-dairy coffee creamer that is marketed in
regular, lite and fat free varieties. Mocha Mix is comparable to the rich,
creamy taste of half & half but is low in saturated fat and has no cholesterol.
This product is available in various package sizes such as individual servings
(portion control), 4 oz., quarts and half gallons. This product was acquired in
conjunction with the acquisition of Presto.
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.
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.
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Jon Donaire. Jon Donaire is a line of frozen cheesecakes, mousse cakes
and ice cream cakes that was acquired in conjunction with the purchase of
Presto. These desserts are sold to national and regional restaurant operators,
quick service restaurants, coffee shops, club stores, in-store bakeries and a
variety of other food service operators. Desserts are sold in both full cake
and single portion packed sizes, as well as custom variations for large
national accounts.
Wacky Willie. This trademark and the boyish cartoon character spokesman
were purchased in October 1996. Currently, the Company is marketing Killer
Shake under this umbrella brand. Killer Shake is a low-fat flavored milk with
the taste and "mouthfeel" of a real dairy shake. Killer Shake is currently
offered in four flavors: Totally Chocolate, Radically Vanilla, Bodacious
Bananaberry and Crankin' Cappucino and is sold in convenience stores and club
stores.
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 is available in 1/2 pint, quart and half gallon containers.
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 and
non-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 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 and frozen specialty food products are manufactured at
eleven plants located in California (6), Wisconsin (2), Tennessee (1), Texas
(1), and Maryland (1). UHT products are manufactured in six of the plants and
cultured products are manufactured in four of the plants.
The Company distributes products from its eleven plants to more than
3,200 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, radio advertising, coupon redemption, free-standing inserts 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, priced 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, 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(R) 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. In 1996, the Company developed and launched an aseptic,
half and half dairy coffee creamer product to be sold under the International
Delight(R) brand name. Also in 1996, the Company developed and launched a
non-dairy coffee whitener named International Delight(R) Creme Supreme
available in pint and quart containers.
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), Mocha Mix(R), Jon Donaire(R), Wacky Willie(R), 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) on 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.
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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 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 with the Company (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 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.
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 longstanding 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 cream, vegetable oils, non-dairy
powder, 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, gas stores, supermarkets, grocery warehouses, independent
distributors, other dairies, club stores and food service customers such as
hotels, in-store bakeries, restaurants, nursing homes, schools, and theme
parks. The Company sells to customers nationwide and a certain percentage of
its products are 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, 1996.
SEASONALITY
Sales of the Company's refrigerated and frozen specialty food products
exhibit modest seasonality with products such as whipping cream, aerosol
toppings, prewhipped toppings, sour cream and International Delight(R), among
others, experiencing higher sales in the fourth quarter.
EMPLOYEES
As of December 31, 1996 the Company employed approximately 1,403 people
of which approximately 778 were represented by unions under collective
bargaining agreements. These agreements cover employees at the following
locations: Fullerton, Gustine, City of Industry, Santa Fe Springs 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. Two contracts were
negotiated in the last 12 months. One contract is 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 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 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 and cream 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 and cream by
processors are higher than these minimums due to premiums charged by suppliers
and shippers. The Company has long, established relationships with bulk milk
and cream suppliers, primarily milk cooperatives in each of its markets and has
not experienced any longstanding shortages in its supply of fresh bulk milk and
cream. The Company's requirements for bulk milk have decreased since the
divestiture of Velda in April 1994.
ITEM 2. PROPERTIES.
The Company currently operates processing facilities in the following
locations:
<TABLE>
<CAPTION>
Approximate
Square
Location Products Footage
-------- -------- -------
<S> <C> <C>
Fullerton, California Cultured Products, UHT 84,000
Frederick, Maryland Cultured Products, UHT 69,000
Gustine, California UHT, Juices 114,000
Madison, Wisconsin Cultured Products, UHT 84,000
Bristol, Wisconsin Cold Packed Cheese 82,000
Sulphur Springs, Texas UHT, Juices 70,000
Tulare, California Cultured Products, UHT 39,000
Cypress, California (leased) Ice Cream Cakes/Sheet Cakes 6,000
Santa Fe Springs, California Cheesecakes, Desserts 100,000
City of Industry, California Toppings, Non-dairy creamers, aerosol 108,000
Arlington, Tennessee UHT creamers, toppings 142,000
</TABLE>
The Company's executive offices are located in approximately 17,000
square feet of leased office space located at 5956 Sherry Lane, Suite 1500,
Dallas, Texas 75225-6522. The lease for this property expires on February 28,
2002. All of the Company's processing facilities which are owned 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.
8
<PAGE> 10
ITEM 3. LEGAL PROCEEDINGS.
From time to time the Company is subject to 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 1996.
9
<PAGE> 11
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, 1996 on pages
54-56 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, 1996 on page 55
under the caption "Selected Financial Data" and is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
The information required by this item is included in the Registrant's
Annual Report to Stockholders for the year ended December 31, 1996 on pages 30
through 33, 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, 1996 on pages 34
through 55 and is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
10
<PAGE> 12
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 April 24, 1997 under the captions "Directors and Officers", "Proposal
for the Election of Directors" and "Section 16(a) Reporting" and is
incorporated herein by reference.
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 April 24, 1997 under the caption "Executive Management and Director
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 on
Executive Compensation" and "The Morningstar Group Inc. Stock 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 April 24, 1997 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.
11
<PAGE> 13
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.
Page Number
-----------
(1) Financial Statements
See Item 8 on page 9
(2) Index to Financial Statement Schedule
Report of independent public accountants on
financial statement schedules..........................17
Schedule II - Allowance for doubtful accounts.............18
All other schedules have been omitted because they are not
applicable, not required, or because the required information
is shown in the consolidated financial statements or notes
thereto.
(3) Exhibits required by Item 601 of Regulation S-K.
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
3(a) -- Restated Certificate of Incorporation of
the Company. (Incorporated by reference to
Exhibit 3(a) to the Registrant's Annual
Report on Form 10-K of the Registrant for
the fiscal year ended December 31, 1992.)*
3(b) -- Amended and Restated By-laws of the
Company. (Incorporated by reference to
Exhibit 3(b) to the Registrant's Annual
Report on Form 10-K of the Registrant for
the fiscal year ended December 31, 1992.)*
4(a) -- 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) -- 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(c) -- MorningStar Foods, Inc. 1991 Incentive
and Nonstatutory Stock Option Plan.**
10(d) -- The Morningstar Group Inc. 1992
Incentive and Nonstatutory Option Plan.**
10(e) -- Licensing Agreement to produce Lactaid
Brand Lactose Reduced Milk (Confidential
treatment has been granted with respect to
portions of this exhibit).**
</TABLE>
12
<PAGE> 14
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
10(f) -- Amendment No. 2 to Lactaid Licensing
Agreement and to Distribution Agreement
(Confidential treatment has been granted
with respect to portions of this
exhibit).***
10(g) -- 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
portions of 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(h) -- 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 portions of
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(i) -- 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(j) -- Form of Dairy Products Supply Agreement
by and among The Morningstar Group Inc.,
its named subsidiaries and Velda Farms
Inc.****
10(k) -- The Morningstar Group Inc. Employees
Savings and Profit Sharing Plan, revised
effective April 1, 1988.****
10(l) -- License agreement entered into as of
October 1, 1994 between The Morningstar
Group Inc. and AgriFoods International
Cooperative LTD. (Confidential treatment
has been granted with respect to portions
of this exhibit).****
10(m) -- The Morningstar Group Inc. 1994
Incentive and Nonstatutory Stock Option
Plan. (Incorporated by reference to Exhibit
4.2 to the Registration Statement on Form
S-8 (Registration No. 33-53975) filed by
the Registrant on June 6, 1994.)*
10(n) -- Stock Option Agreement dated as of April
14, 1994 by and between The Morningstar
Group Inc. and C. Dean Metropoulos.
(Incorporated by reference to Exhibit
4.3 to the Registration Statement on Form
S-8 (Registration No. 33-53975) filed by
the Registrant on June 6, 1994.)*
10(o) -- The Morningstar Group Inc. 1996 Director
Stock Option Plan.#
10(p) -- Amendment No. 1 to The Morningstar Group
Inc. 1994 Incentive and Nonstatutory Stock
Option Plan.#
10(q) -- Employment Agreement dated as of
October 1, 1995 by and between The
Morningstar Group Inc. and Michael J.
Cramer.#
</TABLE>
13
<PAGE> 15
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
10(r) -- Change-in-control Arrangement dated as
of September 18, 1996 by and between The
Morningstar Group Inc. and Darron K. Ash.#
10(s) -- Employment Agreement dated as of October
1, 1996 by and between The Morningstar
Group Inc. and C. Dean Metropoulos.
(Incorporated by reference to Exhibit 10.1
to the Current Report on Form 8-K filed
with the Securities and Exchange Commission
on December 18, 1996.)*
10(t) -- Change-in-Control Arrangement dated as
of October 14, 1996 by and between The
Morningstar Group Inc. and Joseph B.
Armes.#
10(u) -- Severance Arrangement by and between The
Morningstar Group Inc. and L. Hollis
Jones.#
10(v) -- Credit Agreement dated as of December 2,
1996 by and among The Morningstar Group
Inc., NationsBank of Texas, N.A. and the
lenders named therein. (Incorporated by
reference to Exhibit 2.2 to the Current
Report on Form 8-K filed with the
Securities and Exchange Commission on
December 18, 1996.)*
10(w) -- Stock Purchase Agreement dated as of
October 20, 1996 by and among Presto Food
Products, Inc., the shareholders of Presto
Food Products, Inc. signatory thereto and
The Morningstar Group Inc. (Incorporated by
reference to Exhibit 2.1 to the Current
Report on Form 8-K filed with the
Securities and Exchange Commission on
December 18, 1996.)*
13(a) -- The Morningstar Group Inc. Annual Report
to Stockholders for the year ended December
31, 1996 (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 this Form 10-K).#
</TABLE>
14
<PAGE> 16
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
21 -- Subsidiaries.#
23.1 -- Consent of Arthur Andersen LLP.#
27 -- Financial Data Schedule.#
</TABLE>
(b) Reports on Form 8-K
Current Report on Form 8-K dated as of December 3, 1996
regarding the acquisition of Presto Food Products, Inc.
- --------------------
* 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 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.
15
<PAGE> 17
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, 1997
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, 1997
- ---------------------------------------
C. Dean Metropoulos
/s/ JACK W. EVANS Director March 28, 1997
- ---------------------------------------
Jack W. Evans
/s/ JOHN R. MUSE Director March 28, 1997
- ---------------------------------------
John R. Muse
/s/ CHARLES W. TATE Director March 28, 1997
- ---------------------------------------
Charles W. Tate
/s/ JIM L. TURNER Director March 28, 1997
- ---------------------------------------
Jim L. Turner
/s/ L. HOLLIS JONES President and Chief Operating Officer March 28, 1997
- ---------------------------------------
L. Hollis Jones
/s/ DARRON K. ASH Vice President, Chief Financial Officer and March 28, 1997
- --------------------------------------- Principal Accounting Officer
Darron K. Ash
</TABLE>
16
<PAGE> 18
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
10, 1997. 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 10, 1997
17
<PAGE> 19
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, 1996 ......... $1,595 $3,681 $(165) $1,565 $6,676
Year Ended December 31, 1995 ......... 1,495 695 (595) -- 1,595
Year Ended December 31, 1994 ......... 974 622 (101) -- 1,495
</TABLE>
18
<PAGE> 20
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
<S> <C>
3(a) -- Restated Certificate of Incorporation of
the Company. (Incorporated by reference to
Exhibit 3(a) to the Registrant's Annual
Report on Form 10-K of the Registrant for
the fiscal year ended December 31, 1992.)*
3(b) -- Amended and Restated By-laws of the
Company. (Incorporated by reference to
Exhibit 3(b) to the Registrant's Annual
Report on Form 10-K of the Registrant for
the fiscal year ended December 31, 1992.)*
4(a) -- 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) -- 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(c) -- MorningStar Foods, Inc. 1991 Incentive
and Nonstatutory Stock Option Plan.**
10(d) -- The Morningstar Group Inc. 1992
Incentive and Nonstatutory Option Plan.**
10(e) -- Licensing Agreement to produce Lactaid
Brand Lactose Reduced Milk (Confidential
treatment has been granted with respect to
portions of this exhibit).**
</TABLE>
<PAGE> 21
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
10(f) -- Amendment No. 2 to Lactaid Licensing
Agreement and to Distribution Agreement
(Confidential treatment has been granted
with respect to portions of this
exhibit).***
10(g) -- 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
portions of 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(h) -- 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 portions of
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(i) -- 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(j) -- Form of Dairy Products Supply Agreement
by and among The Morningstar Group Inc.,
its named subsidiaries and Velda Farms
Inc.****
10(k) -- The Morningstar Group Inc. Employees
Savings and Profit Sharing Plan, revised
effective April 1, 1988.****
10(l) -- License agreement entered into as of
October 1, 1994 between The Morningstar
Group Inc. and AgriFoods International
Cooperative LTD. (Confidential treatment
has been granted with respect to portions
of this exhibit).****
10(m) -- The Morningstar Group Inc. 1994
Incentive and Nonstatutory Stock Option
Plan. (Incorporated by reference to Exhibit
4.2 to the Registration Statement on Form
S-8 (Registration No. 33-53975) filed by
the Registrant on June 6, 1994.)*
10(n) -- Stock Option Agreement dated as of April
14, 1994 by and between The Morningstar
Group Inc. and C. Dean Metropoulos.
(Incorporated by reference to Exhibit 4.3
to the Registration Statement on Form S-8
(Registration No. 33-53975) filed by the
Registrant on June 6, 1994.)*
10(o) -- The Morningstar Group Inc. 1996 Director
Stock Option Plan.#
10(p) -- Amendment No. 1 to The Morningstar Group
Inc. 1994 Incentive and Nonstatutory Stock
Option Plan.#
10(q) -- Employment Agreement dated as of
October 1, 1995 by and between The
Morningstar Group Inc. and Michael J.
Cramer.#
</TABLE>
<PAGE> 22
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
10(r) -- Change-in-Control Arrangement dated as
of September 18, 1996 by and between The
Morningstar Group Inc. and Darron K. Ash.#
10(s) -- Employment Agreement dated as of October
1, 1996 by and between The Morningstar
Group Inc. and C. Dean Metropoulos.
(Incorporated by reference to Exhibit 10.1
to the Current Report on Form 8-K filed
with the Securities and Exchange Commission
on December 18, 1996.)*
10(t) -- Change-in-Control Arrangement dated as
of October 14, 1996 by and between The
Morningstar Group Inc. and Joseph B.
Armes.#
10(u) -- Severance Arrangement by and between The
Morningstar Group Inc. and L. Hollis
Jones.#
10(v) -- Credit Agreement dated as of December 2,
1996 by and among The Morningstar Group
Inc., NationsBank of Texas, N.A. and the
lenders named therein. (Incorporated by
reference to Exhibit 2.2 to the Current
Report on Form 8-K filed with the
Securities and Exchange Commission on
December 18, 1996.)*
10(w) -- Stock Purchase Agreement dated as of
October 20, 1996 by and among Presto Food
Products, Inc., the shareholders of Presto
Food Products, Inc. signatory thereto and
The Morningstar Group Inc. (Incorporated by
reference to Exhibit 2.1 to the Current
Report on Form 8-K filed with the
Securities and Exchange Commission on
December 18, 1996.)*
13(a) -- The Morningstar Group Inc. Annual Report
to Stockholders for the year ended December
31, 1996 (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 this Form 10-K).#
</TABLE>
<PAGE> 23
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
21 -- Subsidiaries.#
23.1 -- Consent of Arthur Andersen LLP.#
27 -- Financial Data Schedule.#
(b) Reports on Form 8-K
Current Report on Form 8-K dated as of December 3, 1996
regarding the acquisition of Presto Food Products, Inc.
</TABLE>
- ------------------------
* Incorporated by reference as indicated.
** Incorporated by reference to the corresponding exhibit to the
Registration Statement on Form S-1 (Registration No. 33-45805)
filed by the Registrant on February 19, 1992.
*** Incorporated by reference to the corresponding exhibit to the
Registration Statement on Form S-1 (Registration No. 33-45805), as
Amended by the Registrant on April 22, 1992.
**** Incorporated by reference to the corresponding exhibit to the
Registrant's Annual Report on Form 10-K of the Registrant for the
year ended December 31, 1994.
# Filed herewith.
<PAGE> 1
EXHIBIT 10(o)
THE MORNINGSTAR GROUP INC.
1996 DIRECTOR STOCK OPTION PLAN
1. Purpose.
The Morningstar Group Inc., a Delaware corporation (herein, together
with its successors, referred to as the "Company"), by means of this 1996
Director Stock Option Plan (the "Plan"), desires to afford certain non-employee
directors of the Company who are responsible for the continued growth of the
Company an opportunity to acquire a proprietary interest in the Company, and
thus to create in such persons an increased interest in and a greater concern
for the welfare of the Company.
The stock options described in Section 6 (the "Options"), and the
shares of Common Stock (as hereinafter defined) acquired pursuant to the
exercise of such Options are in lieu of a cash payment of $12,000 representing
the directors' annual retainer fee.
2. Administration.
The Plan shall be administered by the Option Committee, or any
successor thereto, of the Board of Directors of the Company (the "Board of
Directors"), or by any other committee appointed by the Board of Directors to
administer this Plan (the "Committee"); provided, however, the entire Board of
Directors may act as the Committee if it chooses to do so. The number of
individuals that shall constitute the Committee shall be determined from time
to time by a majority of all the members of the Board of Directors, and, unless
that majority of the Board of Directors determines otherwise, shall be no less
than two individuals. A majority of the Committee shall constitute a quorum
(or if the Committee consists of only two members, then both members shall
constitute a quorum), and subject to the provisions of Section 5, the acts of a
majority of the members present at any meeting at which a quorum is present, or
acts approved in writing by all members of the Committee, shall be the acts of
the Committee. Whenever the Company shall have a class of equity securities
registered pursuant to Section 12 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), each member of the Committee shall be required to
be a "disinterested person" within the meaning of Rule 16b-3, as amended ("Rule
16b-3"), or other applicable rules under Section 16(b) of the Exchange Act and
the Committee shall administer the Plan so as to comply at all times with the
Exchange Act.
<PAGE> 2
The members of the Committee shall serve at the pleasure of the Board
of Directors, which shall have the power, at any time and from time to time, to
remove members from or add members to the Committee. Removal from the
Committee may be with or without cause. Any individual serving as a member of
the Committee shall have the right to resign from membership in the Committee
by written notice to the Board of Directors. The Board of Directors, and not
the remaining members of the Committee, shall have the power and authority to
fill vacancies on the Committee, however caused. The Board of Directors shall
promptly fill any vacancy that causes the number of members of the Committee to
be below two or, if the Company has a class of equity securities registered
pursuant to Section 12 of the Exchange Act, any other number that Rule 16b-3
may require from time to time.
3. Shares Available.
Subject to the adjustments provided in Section 8, the maximum
aggregate number of shares of Common Stock, par value $0.01 per share, of the
Company ("Common Stock") which may be granted for all purposes under the Plan
shall be 50,000 shares. If, for any reason, any shares as to which Options
have been granted cease to be subject to purchase thereunder, including the
expiration of such Option, the termination of such Option prior to exercise, or
the forfeiture of such Option, such shares shall thereafter be available for
grants to such individual or other individuals under the Plan. Options granted
under the Plan may be fulfilled in accordance with the terms of the Plan with
(i) authorized and unissued shares of the Common Stock, (ii) issued shares of
such Common Stock held in the Company's treasury, or (iii) issued shares of
Common Stock reacquired by the Company in each situation as the Board of
Directors or the Committee may determine from time to time in its sole
discretion.
4. Eligibility and Bases of Participation.
Grants of Initial Options and Annual Options (as both terms are
hereinafter defined) may be made under the Plan, subject to and in accordance
with Section 6, to Director Participants. As used herein, the term "Director
Participants" shall mean any individual who is not an employee of the Company
and serves as a member of the Board of Directors.
5. Authority of Committee.
Subject to and not inconsistent with the express provisions of the
Plan, the Internal Revenue Code of 1986, as amended (the "Code"), and, if
applicable, Rule 16b-3, the Committee shall have plenary authority to:
2
<PAGE> 3
a. determine the restrictions to be applicable to Options and all
other terms and provisions thereof (which need not be
identical);
b. require, as a condition to the granting of any Option, that
the person receiving such Option agree not to sell or
otherwise dispose of such Option, any Common Stock acquired
pursuant to such Option, or any other "derivative security"
(as defined by Rule 16a-1(c) under the Exchange Act) for a
period of six months following the later of (i) the date of
the grant of such Option or (ii) the date when the exercise
price of such Option is fixed if such exercise price is not
fixed at the date of grant of such Option, or for such other
period as the Committee may determine;
c. provide an arrangement through registered broker-dealers
whereby temporary financing may be made available to an
optionee by the broker-dealer, under the rules and regulations
of the Board of Governors of the Federal Reserve, for the
purpose of assisting the optionee in the exercise of an
Option, such authority to include the payment by the Company
of the commissions of the broker-dealer;
d. provide the establishment of procedures for an optionee (i) to
have withheld from the total number of shares of Common Stock
to be acquired upon the exercise of an Option that number of
shares having a Fair Market Value (as defined in Section 14)
which, together with such cash as shall be paid in respect of
fractional shares, shall equal the Option exercise price, and
(ii) to exercise a portion of an Option by delivering that
number of shares of Common Stock already owned by such
optionee having an aggregate Fair Market Value which shall
equal the partial Option exercise price and to deliver the
shares thus acquired by such optionee in payment of shares to
be received pursuant to the exercise of additional portions of
such Option, the effect of which shall be that such optionee
can in sequence utilize such newly acquired shares in payment
of the exercise price of the entire Option, together with such
cash as shall be paid in respect of fractional shares;
e. provide (in accordance with Section 11 or otherwise) the
establishment of a procedure whereby a number of shares of
Common Stock or other securities may be withheld from the
total number of shares of Common Stock or other securities to
be issued upon exercise of an Option to meet the obligation of
withholding for income, social security and other
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<PAGE> 4
taxes incurred by an optionee upon such exercise or required
to be withheld by the Company in connection with such
exercise;
f. prescribe, amend, modify and rescind rules and regulations
relating to the Plan; and
g. make all determinations permitted or deemed necessary,
appropriate or advisable for the administration of the Plan,
interpret any Plan or Option provision, perform all other
acts, exercise all other powers, and establish any other
procedures determined by the Committee to be necessary,
appropriate or advisable in administering the Plan or for the
conduct of the Committee's business. Any act of the
Committee, including interpretations of the provisions of the
Plan or any Option and determinations under the Plan or any
Option shall be final, conclusive and binding on all parties.
The Committee may delegate to one or more of its members, or to one or
more agents, such administrative duties as it may deem advisable, and the
Committee or any Person (as defined in Section 14) to whom it has delegated
duties as aforesaid may employ one or more Persons to render advice with
respect to any responsibility the Committee or such Person may have under the
Plan; provided, however, that whenever the Company has a class of equity
securities registered under Section 12 of the Exchange Act, the Committee may
not delegate any duties to a member of the Board of Directors who, if elected
to serve on the Committee, would not qualify as a "disinterested person" to
administer the Plan as contemplated by Rule 16b-3 or other applicable rules
under the Exchange Act. The Committee may employ attorneys, consultants,
accountants, or other Persons and the Committee, the Company, and its officers
and directors shall be entitled to rely upon the advice, opinions, or
valuations of any such Persons. No member or agent of the Committee shall be
personally liable for any action, determination or interpretation made in good
faith with respect to the Plan and all members and agents of the Committee
shall be fully protected by the Company in respect of any such action,
determination or interpretation.
6. Stock Option Grants to Director Participants.
Subject to the express provisions of this Plan, each Director
Participant on April 4, 1996 shall be granted a non-qualified stock option
(options which do not qualify under Section 422 of the Code) (the "Initial
Option") to purchase Common Stock. The number of shares subject to the Initial
Option shall be determined by calculating the value of an option to purchase
the Company's Common Stock equal to $12,000 based upon the Black-Scholes option
pricing method. Such Initial Option
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<PAGE> 5
shall be in lieu of a cash payment of his or her $12,000 annual directors'
retainer fee for 1996. Thereafter, subject to the express provisions of this
Plan, each Director Participant shall be granted an Initial Option to purchase
Common Stock upon his or her initial election to the Board of Directors. The
number of shares subject to the Initial Option shall be determined by
calculating the value of an option to purchase the Company's Common Stock equal
to $12,000 based upon the Black-Scholes option pricing method. Such Initial
Option shall be in lieu of a cash payment of his or her $12,000 annual
directors' retainer fee in respect of the year in which such Director
Participant first becomes a member of the Board of Directors. In addition, for
each year following the year in which the Director Participant was granted the
Initial Option, each Director Participant shall receive a non-qualified option
(the "Annual Option") in lieu of a cash payment of his or her $12,000 annual
directors' retainer fee. The number of shares of Common Stock underlying each
Initial Option and/or Annual Option shall be determined by dividing the annual
retainer fee of $12,000 by the Fair Value (as hereinafter described) of a
non-qualified option to purchase one share of Common Stock. Fractional shares
resulting from such calculation shall be rounded to the nearest hundred. For
purposes of such calculation, "Fair Value" shall be determined by using the
Black-Scholes option pricing method taking into account as of the grant date
the exercise price and expected life of the Initial Option or Annual Option, as
applicable, the current price of the Common Stock and its expected volatility,
expected dividends on the Common Stock, and the risk-free interest rate for the
expected term of the Initial Option or Annual Option, as applicable. The terms
and conditions of the Options granted under this Section 6 shall be determined
from time to time by the Committee; provided, however, that the Options granted
under this Section 6 shall be subject to all terms and provisions of the Plan,
including the following:
a. Option Exercise Price. The Committee shall establish the
Option exercise price at the time any Initial Option or Annual
Option is granted at such amount as the Committee shall
determine, subject to the following limitation. The Option
exercise price for each share purchasable under any Option
granted hereunder shall be such amount as the Committee shall,
in its best judgment, determine to be not less than the
greater of (i) the par value per share of such Common Stock
and (ii) one hundred percent of the Fair Market Value per
share at the date such Option is granted. The Option exercise
price shall be subject to adjustment in accordance with the
provisions of Section 8 of the Plan.
b. Payment. The price per share of Common Stock with respect to
each Option exercise shall be payable at the time of such
exercise. Such
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<PAGE> 6
price shall be payable in cash or by any other means
acceptable to the Committee, including delivery to the Company
of shares of Common Stock owned by the optionee or by the
delivery or withholding of shares pursuant to a procedure
created pursuant to Section 5.d. of the Plan. Shares
delivered to or withheld by the Company in payment of the
Option exercise price shall be valued at the Fair Market Value
of the Common Stock on the day preceding the date of the
exercise of the Option.
c. Exercisability of Stock Option. Subject to Section 7, each
Option shall be exercisable in one or more installments as the
Committee may determine at the time of grant. No Option shall
be exercisable after the expiration of ten years from the date
of grant of the Option, unless otherwise expressly provided in
such Option.
d. Death. In the event of the death of a Director Participant,
the estate of such person, or a person who acquired the right
to exercise such Option by bequest or inheritance or by reason
of the death of the optionee, shall have the right to exercise
such Option in accordance with its terms, at any time and from
time to time within one year after the date of death unless a
longer or shorter period is expressly provided in such Option
or established by the Committee pursuant to Section 7 (but in
no event after the expiration date of such Option).
e. Disability. If a Director Participant's service as a director
of the Company terminates because of his Disability (as
defined in Section 14), such optionee or his legal
representative shall have the right to exercise the Option in
accordance with its terms at any time and from time to time
within one year after the date of the optionee's termination
unless a longer or shorter period is expressly provided in
such Option or established by the Committee pursuant to
Section 7 (but not after the expiration of the Option).
f. Other Termination of Relationship. If a Director
Participant's service as a director of the Company terminates
for any reason other than those specified in subsections 6(d)
and (e) above, such optionee shall have the right to exercise
his or her Option in accordance with its terms within 30 days
after the date of such termination, unless a longer or shorter
period is expressly provided in such Option or established by
the Committee pursuant to Section 7 (but not after the
expiration date of the Option); provided, however, that, if
the optionee is removed from
6
<PAGE> 7
office for cause by action of the stockholders in accordance
with the by-laws of the Company and the General Corporation
Law of the State of Delaware or if such optionee voluntarily
terminates his service without the consent of the Company,
then such optionee shall immediately forfeit his rights under
his Option except as to the shares of Common Stock already
purchased.
7. Change of Control.
If a Change of Control (as defined in Section 14) shall occur, or if
the Company shall enter into an agreement providing for a Change of Control,
all Options outstanding under the Plan shall become exercisable in full as of
the date of such Change of Control. Each Option accelerated in connection with
a Change of Control pursuant to the preceding sentence shall terminate,
notwithstanding any express provision thereof or any other provision of the
Plan, on such date (not later than the stated expiration date) as the Committee
shall determine.
8. Adjustment of Shares.
Unless otherwise expressly provided in a particular Option, in the
event that, by reason of any merger, consolidation, combination, liquidation,
reorganization, recapitalization, stock dividend, stock split, split-up, split-
off, spin-off, combination of shares, exchange of shares or other like change
in capital structure of the Company (collectively, a "Reorganization"), the
Common Stock is substituted, combined, or changed into any cash, property, or
other securities, or the shares of Common Stock are changed into a greater or
lesser number of shares of Common Stock, the number and/or kind of shares
and/or interests subject to an Option and the per share price or value thereof
shall be appropriately adjusted by the Committee to give appropriate effect to
such Reorganization. Any fractional shares or interests resulting from such
adjustment shall be eliminated.
In the event the Company will not be the surviving entity of a
Reorganization and, following such Reorganization, any optionee will hold
Options issued pursuant to this Plan which have not been exercised, cancelled,
or terminated in connection therewith, the Company shall cause such Options to
be assumed (or cancelled and replacement Options issued) by the surviving
entity.
9. Assignment or Transfer.
No Option granted under the Plan or any rights or interests therein
shall be assignable or transferable by an optionee except by will or the laws
of descent and
7
<PAGE> 8
distribution or pursuant to a qualified domestic relations order as defined by
the Code and, during the lifetime of an optionee, Options granted to him or her
hereunder shall be exercisable only by the optionee or, in the event that a
legal representative or guardian has been appointed for an optionee, such legal
guardian or representative.
10. Compliance with Securities Laws.
The Company shall not in any event be obligated to file any
registration statement under the Securities Act of 1933, as amended (the
"Securities Act"), or any applicable state securities law to permit the
exercise of any Option or to issue any Common Stock in violation of the
Securities Act or any applicable state securities law. Each optionee (or, in
the event of his death or, in the event a legal representative has been
appointed in connection with his Disability, the person exercising the Option)
shall, as a condition to his or her right to exercise any Option, deliver to
the Company an agreement or certificate containing such representations,
warranties and covenants as the Company may deem necessary or appropriate to
ensure that the issuance of shares of Common Stock pursuant to such exercise is
not required to be registered under the Securities Act or any applicable state
securities law.
Certificates for shares of Common Stock, when issued, shall have
substantially the following legend, or statements of other applicable
restrictions, endorsed thereon, and may not be immediately transferable:
THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR ANY STATE SECURITIES LAWS. THE SHARES MAY NOT BE OFFERED
FOR SALE, SOLD, PLEDGED, TRANSFERRED OR OTHERWISE DISPOSED OF
UNTIL THE HOLDER HEREOF PROVIDES EVIDENCE SATISFACTORY TO THE
ISSUER (WHICH, IN THE DISCRETION OF THE ISSUER, MAY INCLUDE AN
OPINION OF COUNSEL SATISFACTORY TO THE ISSUER) THAT SUCH
OFFER, SALE, PLEDGE, TRANSFER OR OTHER DISPOSITION WILL NOT
VIOLATE APPLICABLE FEDERAL OR STATE LAWS.
8
<PAGE> 9
11. Withholding Taxes.
By acceptance of the Option, the optionee will be deemed to (i)
authorize the Company, in the event that the Company determines that a
withholding obligation is applicable to an optionee, to withhold from a
Director Participant's salary or any cash compensation paid to such Director
Participant an amount sufficient to discharge any federal, state, and local
taxes imposed on the Company, and which otherwise has not been reimbursed by
the Director Participant, in respect of the Director Participant's exercise of
all or a portion of the Option; and (ii) agree that the Company may, in its
discretion and, in the event that the Company determines that a withholding
obligation is applicable to an optionee, hold the stock certificate to which
the Director Participant is entitled upon exercise of the Option as security
for the payment of the aforementioned withholding tax liability, until cash
sufficient to pay that liability has been accumulated, and may, in its
discretion, effect such withholding by retaining shares issuable upon the
exercise of the Option having a Fair Market Value on the date of exercise which
is equal to the amount to be withheld.
12. Costs and Expenses.
The costs and expenses of administering the Plan shall be borne by the
Company and shall not be charged against any Option.
13. Funding of Plan.
The Plan shall be unfunded. The Company shall not be required to make
any segregation of assets to assure the payment of any Option under the Plan.
14. Definitions.
In addition to the terms specifically defined elsewhere in the Plan,
as used in the Plan, the following terms shall have the respective meanings
indicated:
a. "Affiliate" shall mean, as to any Person, a Person that
directly, or indirectly through one or more intermediaries,
controls, or is controlled by, or is under common control
with, such Person.
b. "Annual Option" shall have the meaning set forth in Section 6
hereof.
c. "Board of Directors" shall have the meaning set forth in
Section 2 hereof.
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<PAGE> 10
d. "Change of Control" shall mean the first to occur of the
following events: (i) a majority of the Board of Directors of
the Company shall consist of Persons who are not Continuing
Directors; or (ii) the acquisition by any Person or group of
related Persons for purposes of Section 13(d) of the Exchange
Act of the power, directly or indirectly, to vote or direct
the voting of securities having more than 50% of the ordinary
voting power for the election of directors of the Company.
e. "Code" shall have the meaning set forth in Section 5 hereof.
f. "Committee" shall have the meaning set forth in Section 2
hereof.
g. "Common Stock" shall have the meaning set forth in Section 3
hereof.
h. "Company" shall have the meaning set forth in Section 1
hereof.
i. "Continuing Director" shall mean, as of the date of
determination, any Person who (i) was a member of the Board of
Directors of the Company on the date of adoption of this Plan
or (ii) was nominated for election or elected to the Board of
Directors of the Company with the affirmative vote of a
majority of the Continuing Directors who were members of such
Board of Directors at the time of such nomination or election.
j. "Disability" shall mean, with respect to a particular
director, such director's inability to perform the material
duties of serving on the Board of Directors unless another
meaning shall be agreed to in writing by the Committee and the
optionee.
k. "Exchange Act" shall have the meaning set forth in Section 2
hereof.
l. "Fair Market Value" shall, as it relates to the Common Stock,
mean the average of the high and low prices of such Common
Stock as reported on the principal national securities
exchange on which the shares of Common Stock are then listed
on the date specified herein, or if there were no sales on
such date, on the next preceding day on which there were
sales, or if such Common Stock is not listed on a national
securities exchange, the last reported bid price in the
over-the-counter market, or if such shares are not traded in
the over-the-counter market, the per share cash price for
which all of the outstanding Common Stock could be sold to a
willing purchaser in an arms length transaction
10
<PAGE> 11
(without regard to minority discount, absence of liquidity, or
transfer restrictions imposed by any applicable law or
agreement) at the date of the event giving rise to a need for
a determination. Except as may be otherwise expressly
provided in a particular Option, Fair Market Value shall be
determined in good faith by the Committee.
m. The term "including" when used herein shall mean "including,
but not limited to."
n. "Initial Option" shall have the meaning set forth in Section
6 hereof.
o. "Options" shall have the meaning set forth in Section 1
hereof.
p. "Person" shall mean any individual, sole proprietorship,
corporation, partnership, limited liability company, trust,
unincorporated association, mutual company, joint stock
company, estate, union, employee organization, or government
or agency or political subdivision thereof.
q. "Plan" shall have the meaning set forth in Section 1 hereof.
r. "Reorganization" shall have the meaning set forth in Section
8 hereof.
s. "Rule 16b-3" shall have the meaning set forth in Section 2
hereof.
t. "Securities Act" shall have the meaning set forth in Section
10 hereof.
15. Amendment of Plan.
The Board of Directors shall have the right to amend, modify, suspend
or terminate the Plan at any time; provided, however, that the provisions of
Section 6 may not be amended more than once every six months, other than to
comport with changes in the Code, ERISA, or the rules thereunder. The Board of
Directors shall be authorized to amend the Plan and the Options granted
thereunder to comply with Rule 16b-3 (or any successor rule) under the Exchange
Act. No amendment, modification, suspension or termination of the Plan shall
alter or impair any Options previously granted under the Plan, without the
consent of the holders thereof.
16. Effective Date.
The Plan shall become effective on the date on which it is approved by
the Board of Directors of the Company and shall be void retroactively if not
approved by the stockholders of the Company within twelve months of the date of
approval by the Board of Directors.
11
<PAGE> 1
EXHIBIT 10(p)
AMENDMENT NO. 1 TO THE MORNINGSTAR GROUP INC.
1994 INCENTIVE AND NONSTATUTORY STOCK OPTION PLAN
I. The first sentence of Section 3 of the Employee Plan shall be deleted
and restated in its entirety as follows:
"Subject to the adjustments provided in Section 9, the maximum
aggregate number of shares of common stock, par value $0.01 per
share, of the Company ("Common Stock") which may be granted for
all purposes under the Plan shall be 1,440,000 shares."
II. Subsection 6(i) of the Employee Plan shall be deleted and restated in
its entirety as follows:
"i. Maximum Number of Options to be Issued to a Key Employee.
The maximum number of shares of Common Stock with respect to which
Options may be granted to any Key Employee or Eligible Non-Employee
hereunder is 400,000 (including any Options which are cancelled or
expire)."
<PAGE> 1
EXHIBIT 10(q)
EMPLOYMENT AGREEMENT
AGREEMENT made this 1st day of October, 1995, by and between The
Morningstar Group Inc. (hereinafter "Company") and Michael J. Cramer
(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 Executive Vice
President, Secretary and General Counsel 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 Executive Vice President
and Secretary of its related operations and subsidiaries. Employee shall have
responsibility for the administrative and legal affairs of the Company and its
subsidiaries and shall report to the CEO and to the Board of Directors of the
Company.
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<PAGE> 2
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 October
1, 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
1995 (whether paid in 1995 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 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.
2
<PAGE> 3
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 for the last full year of employment but in no event less
than the sum of Two Hundred Thousand ($200,000) Dollars. 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 Sixty (60) days 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 and Employee shall be paid at closing of
the Sale the sum calculated in accordance with Section 4(a) hereof as
if Employee was terminated without Cause. Notwithstanding the above
right of the Employee to terminate, the Employee agrees that he will
remain with the Company for up to 6 months after a Sale upon request
of the Company. In such event, Employee will receive, in addition to
the sum calculated in accordance with Section 4(a), compensation for
the period worked after the Sale at Employees' normal rate and on the
same basis.
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<PAGE> 4
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
/s/ MICHAEL J. CRAMER
------------------------------
Michael J. Cramer
4
<PAGE> 5
COMPANY
By: /s/ C. DEAN METROPOULOS
---------------------------
C. Dean Metropoulos, CEO
5
<PAGE> 1
EXHIBIT 10(r)
September 18, 1996
Darron Ash
The Morningstar Group
5956 Sherry Lane
Dallas, Texas 75225
Dear Darron,
Per this memo, below is an outline of your financial arrangements with
Morningstar. These are subject to review by the compensation committee of the
board.
<TABLE>
<S> <C>
Term October 1, 1996 through September 30, 1998
Title Chief Financial Officer
Base Salary $125,000
Bonus Potential 50% of base salary if budgeted EPS is achieved
Severance In the event of a change of control of the company during the term
of this agreement, you shall be paid the sum equivalent to one year
of your existing base salary plus anticipated bonus. Change in
control shall be defined as the acquisition of a majority of the stock
or all or substantially all of the assets of the Company by any person
of entity, a merger with another company where the then current
Board of Directors of Morningstar no longer controls the surviving
company or other similar consolidation of the Company with
another entity.
</TABLE>
I'm looking forward to continuing a mutually enjoyable and productive
relationship.
Sincerely Yours,
/s/ HOLLIS JONES
- ----------------
Hollis Jones
<PAGE> 1
Exhibit 10(t)
October 14, 1996
Mr. Joseph B. Armes
7519 Bradford Pear Drive
Irving, TX 75063
RE: Employment
Dear Joe:
This will confirm the terms of your employment with The Morningstar
Group Inc. (the "Company"):
1. Your position shall be General Counsel. In addition, at the
next board meeting, you will be appointed a Vice President and Assistant
Secretary of the Company.
2. Your base salary shall be $120,000 per year payable in 26
equal increments. Your base salary shall be increased to $145,000 effective
1/1/97.
3. You shall be eligible for a bonus of up to 35% of your base
salary. 50% of this bonus shall be based on the Company EPS target set for the
year by the board and 50% shall be a subjective review by the CEO and the
President. This would be payable in a lump sum along with other executive
level bonuses within 15 days after completion of the Company's independent
outside auditors.
4. You shall receive 30,000 stock options pursuant to the
Company's 1994 plan, as amended. The options will vest in the same manner as
options granted to other senior executive officers of the Company. The strike
price shall be $10.25 per share.
5. You will receive all benefits provided to senior level
executives of the Company pursuant to the terms and conditions of those benefit
plans as they exist or as they are modified; provided, however, you will be
entitled to three weeks of vacation per year immediately (prorated for 1996).
6. Until you become eligible to participate in the Company's
health plan, the Company will reimburse you on a monthly basis for the cost of
your COBRA premium through Weil, Gotshal.
7. You will report to the President of the Company with a "dotted
line" relationship to the undersigned.
<PAGE> 2
Mr. Joseph B. Armes
October 14, 1996
Page 2
8. In the event you do not receive any bonus that you would
otherwise be entitled to from Weil, Gotshal for July 1, 1996 to date as a
result of your departure, we will reimburse you for said loss of bonus. You
will be eligible for a partial year bonus from the Company for 1996 (based on
the criteria set forth in #3 above).
We would not, however pay both a Weil, Gotshal bonus
attributable to the period 10/14 - 12/31/96 and a Company bonus.
9. You will be a participant in the Board of Directors meetings
and you shall attend all meetings which the Secretary normally and customarily
attends. It is expected that you will become Secretary of the Company at the
Board of Directors meeting held in conjunction with the next annual meeting of
the shareholders.
10. In the event of a change in control of the Company, during the
period ending 2 years from the date of your commencement of employment you
shall be paid the sum equivalent to one year of your then existing base salary
plus anticipated bonus. Change in control shall be defined as the acquisition
of a majority of the stock or all or substantially all of the assets of the
Company by any person or entity, a merger with another company where the then
current Board of Directors of Morningstar no longer controls the surviving
company or other similar consolidation of the Company with another entity.
Very truly yours,
/s/ MICHAEL J. CRAMER
------------------------
Michael J. Cramer
Executive Vice President
MJC:ckb
<PAGE> 1
EXHIBIT 10(u)
Dear Hollis:
Per our conversation, below is an outline of your financial
arrangements with Morningstar. These are subject to Company Comp review.
Term: Aug. 5, 1996 - Aug. 5, 1998
Title: President & Chief Operating Officer
Base Salary: $200,000
Compensation: $200,000 Base Salary
$150,000 Bonus on budgeted EPS
$ 50,000 on a higher target EPS & sales growth
target. To be mutually developed.
Severance: In the event you are terminated by the company
for any reason other than cause, you will
receive a lump sum payment equal to one year of
your annual base salary.
I look forward to continuing a mutually enjoyable relationship.
Sincerely,
/s/ C. DEAN METROPOULOS
- -----------------------
C. Dean Metropoulos
<PAGE> 1
EXHIBIT 13(a)
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 for purposes of the management's discussion and
analysis: (i) Branded products, which include historical sales of the Company's
seven nationally branded products -- International Delight(R), Mocha Mix(R),
Second Nature(R), Naturally Yours(TM), Jon Donaire(R), Lactaid(R) and Wacky
Willie(R); and (ii) 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.
PRESTO FOOD PRODUCTS, INC. ACQUISITION
On December 3, 1996, the Company acquired all of the issued and
outstanding shares of capital stock of Presto Food Products, Inc. ("Presto"), a
California corporation, from the shareholders of Presto pursuant to a stock
purchase agreement dated as of October 20, 1996, by and among the Company,
Presto and the Presto shareholders. Presto's sales for the year ended December
31, 1995, were approximately $139.5 million. Presto is a national manufacturer,
marketer and distributor of non-dairy and dairy products, such as Mocha Mix
non-dairy coffee creamers, Jon Donaire desserts and ice cream cakes, aerosols,
bakery toppings and icings, frozen pre-whipped toppings and creamers, serving
customers throughout the United States since 1937. The Company paid
approximately $123.5 million in cash for the stock acquired and assumed
approximately $37.4 million in related liabilities. In conjunction with the
consummation of the Presto acquisition, the Company renegotiated its credit
agreement. Funds provided by the renegotiated Senior Credit Agreement ("Senior
Credit Agreement") were utilized to pay off existing senior debt of
approximately $44.8 million, to acquire the capital stock of Presto for $123.5
million and to pay approximately $2.1 million in fees and expenses associated
with the Presto acquisition. The Company accounted for the acquisition as a
purchase and accordingly, Presto's results are included in the 1996
Consolidated Statement of Operations for the period December 3, 1996, through
December 31, 1996.
WACKY WILLIE ACQUISITION
On October 1, 1996, the Company completed the acquisition of the rights to
the Wacky Willie and Killer Shake trademarks for $300,000 in cash from Killer
Productions Company. There were no liabilities associated with the acquisition,
nor were there any other assets included in the transaction. The Company may at
its sole option, before August 1999, pay an additional $700,000 to Killer
Productions representing the final portion of the purchase price. In addition,
in the event net sales reach $5.0 million in any consecutive twelve-month
period ending on or before August 1999, the Company will be required to pay the
additional $700,000 representing the final portion of the purchase price. The
funding for this purchase was provided by the Company's operations. Sales of
Killer Shake are included in the 1996 Consolidated Statement of Operations for
the period January 1, 1996, through December 31, 1996. The Company manufactured
and sold this product under a license arrangement for the period January 1,
1996, through September 30, 1996.
CREAM PRODUCTS ACQUISITION
On August 1, 1996, the Company completed the purchase of substantially all
of the assets of Cream Products Company ("Cream Products"), located in Chicago,
Illinois. Cream Products' sales for the year ended December 31, 1995, were
approximately $24.6 million. Cream Products is a manufacturer and distributor
of dairy and non-dairy products primarily supplying food makers and food
service customers throughout the United States since 1938. The Company paid
approximately $5.9 million in cash for the assets acquired, and assumed
approximately $2.3 million in related liabilities. Funds for this acquisition
were provided by the Company's operations in conjunction with its revolving
credit facility. The Company accounted for the acquisition as a purchase and
accordingly, Cream Products' results are included in the 1996 Consolidated
Statement of Operations for the period August 1, 1996, through December 31,
1996.
30
<PAGE> 2
LA CORONA ACQUISITION
On May 28, 1996, the Company completed the purchase of substantially all
of the assets of La Corona Foods, Inc. ("La Corona"), located in Glendale,
Arizona. La Corona's sales for the fiscal year ended September 30, 1995, were
approximately $6.9 million. The Company paid approximately $3.4 million in cash
for the assets purchased, and assumed approximately $2.5 million in related
liabilities. The funding for this acquisition was provided by the Company's
operations. The Company accounted for the acquisition as a purchase and
accordingly, La Corona's results are included in the 1996 Consolidated
Statement of Operations for the period May 29, 1996, through December 31, 1996.
MERKTS CHEESE ACQUISITION
On March 19, 1996, the Company completed the acquisition of substantially
all of the assets of Merkts Cheese Company ("Merkts"), located in Bristol,
Wisconsin. Merkts recorded approximately $10.3 million in sales for the fiscal
year ending June 30, 1995. The Company paid approximately $3.6 million in cash
for the assets purchased, and assumed approximately $0.4 million in
liabilities. The source of funding for this acquisition was provided by the
Company's operations. The Company accounted for the acquisition as a purchase
and accordingly, Merkts' results are included in the 1996 Consolidated
Statement of Operations for the period March 20, 1996, through December 31,
1996.
DISCONTINUED 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 $51.0 million, consisting
of $48.0 million in cash after working capital adjustments and $3.0 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.
1996 COMPARED TO 1995
Net sales from Continuing Operations for the year ended December 31, 1996,
totaled $394.3 million, an increase of $89.6 million or 29.4% from net sales
from Continuing Operations during 1995. The following table reflects net sales
from Continuing Operations by product category for each year:
<TABLE>
<CAPTION>
PRODUCT CATEGORIES YEAR ENDED Year Ended
(Dollars in thousands) DECEMBER 31, 1996 December 31, 1995
----------------- -----------------
<S> <C> <C>
Branded products $ 151,513 $ 117,016
Specialty products 242,793 187,714
------------ ------------
Net Sales $ 394,306 $ 304,730
============ ============
</TABLE>
Net sales of Branded products increased 29.5% to $151.5 million in 1996
from $117.0 million in 1995 primarily as a result of volume increases in the
International Delight, Naturally Yours and Lactaid product lines. The volume
for the Second Nature product line declined slightly from 1995 to 1996. Net
sales of Specialty products increased 29.3% from 1995 to 1996. This increase
was due to volume increases in the Company's cultured products, such as yogurt,
cottage cheese and sour cream, as well as its UHT products such as aerosol,
whipping cream, non-dairy, half and half, and bakery toppings and icings. The
Company's 1996 Branded and Specialty sales increased $4.2 million and $29.3
million, respectively, versus 1995, as a result of the acquisitions completed
during 1996.
Gross profit totaled $91.5 million or 23.2% of net sales during 1996
compared to $71.8 million or 23.6% of net sales in 1995. The increase in gross
profit is primarily attributable to the increase in Branded and Specialty sales
in 1996. The slight decline in the gross margin percentage in 1996 resulted
from increased prices for several of the Company's raw ingredients.
Operating expenses were $65.3 million or 16.6% of net sales in 1996 versus
$51.4 million or 16.9% of net sales in 1995. Distribution expenses as a percent
of net sales declined to 4.3% in 1996 from 5.3% in 1995, despite the
31
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
increase in Branded sales. This reduction reflects the Company's continuing
efforts to optimize the efficiencies of its national distribution programs.
Selling and marketing expenses as a percent of net sales increased from 7.3% in
1995 to 8.3% in 1996. This increase resulted from increased marketing
expenditures for advertising and promotions as well as additional expenditures
for broker commissions due to increased sales. General and administrative
expenses, as a percent of net sales, decreased slightly from 4.3% in 1995 to
3.9% in 1996, due mainly to the fixed nature of some of these costs as well as
synergies realized from the consolidation of the Company's finance and
administration departments to the Company's corporate office.
The Company's income tax provision increased $1.7 million from $6.1
million in 1995 to $7.8 million in 1996. The effective income tax rate for the
year ended December 31, 1996, was 35.0% compared to an effective tax rate of
34.8% in 1995. As of December 31, 1996, the Company's net deferred tax assets
totaled $1.6 million. During 1996, the Company realized the benefit of all
previous carryforwards and tax credits. Without the benefit of the
carry-forwards and credits, the 1996 effective tax rate would have been
approximately 45.1%.
The Company's 1996 operating income increased $5.7 million, from $20.5
million in 1995 to $26.2 million in 1996. This increase resulted primarily from
increased Branded and Specialty sales and lower operating costs (as a percent
of net sales), offset in part by a slightly lower gross profit percentage.
The Company's net income for 1996 of $14.6 million compares to $11.5
million for 1995. The increase in 1996 resulted from the increase in Branded
and Specialty sales and gross margin dollars, reduced operating expenses (as a
percent of net sales), and reduced interest expense, offset in part by higher
income taxes and a reduction in other income.
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
from Continuing Operations during 1994. The following table reflects net sales
from Continuing Operations by product category for each year:
<TABLE>
<CAPTION>
PRODUCT CATEGORIES YEAR ENDED Year Ended
(Dollars in thousands) DECEMBER 31, 1995 December 31, 1994
----------------- -----------------
<S> <C> <C>
Branded products $ 117,016 $ 102,159
Specialty products 187,714 190,155
------------ ------------
Net Sales $ 304,730 $ 292,314
============ ============
</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.
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 and marketing
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 income tax provision increased $0.6 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.
32
<PAGE> 4
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 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.
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 increase in Branded
sales and gross margin dollars, reduced operating expenses, and reduced
interest expense, offset in part by higher income taxes.
EARNINGS PER SHARE
The fully diluted, weighted average number of shares of common stock and
common stock equivalents outstanding decreased from 15,245,562 in 1995 to
15,133,887 in 1996. The decrease in 1996 resulted from the purchase of treasury
stock offset in part by the issuance and exercise of stock options.
LIQUIDITY AND CAPITAL RESOURCES
In 1996, the Company generated cash of $28.2 million from its operating
activities from Continuing Operations, which, coupled with $0.4 million
received from the exercise of stock options, $1.0 million from decreased cash
balances and $182.3 million received from borrowings under the renegotiated
Senior Credit Agreement, was used to repay debt of $50.8 million, fund capital
and other expenditures of $11.5 million, to acquire subsidiaries for $145.3
million, and provide $4.3 million for the purchase of treasury stock.
The Company believes that cash generated from its operations, together
with borrowings under the Senior Credit Agreement, will provide the cash
necessary to fund the Company's operations, debt service, and capital
expenditures for the foreseeable future. The Company estimates that it will
require cash of $28.0 million during 1997 to fund approximately $20.0 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, 1996, the Company had approximately $28.8 million
of unused borrowing capacity under the Revolver.
The Company has suspended the payment of its common stock dividends since
the first quarter of 1994.
The Company was in compliance with all financial covenants as of December
31, 1996.
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, the subsequent acquisition of Favorite Foods, Inc.
("Favorite") and the acquisitions completed in 1996. 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 its
estimate of undiscounted future cash flows (without interest charges) over the
remaining life of the asset.
FORWARD-LOOKING INFORMATION
In accordance with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company notes that the statements in this
Annual Report and elsewhere, which are forward-looking and which provide other
than historical information, involve risks and uncertainties that may impact
the Company's actual results of operations. The Company continues to face risks
and uncertainties including without limitation: continuing its acquisition
program, the ability of the Company to realize benefits from continuing to
consolidate certain general and administrative functions, to retain management,
to execute its focused business strategies, and to continue product
enhancements and new product ideas. Although the Company believes that the
assumptions underlying the forward-looking statements contained herein are
reasonable, any of the assumptions could be inaccurate, and, therefore, there
can be no assurance that the forward-looking statements included in this Annual
Report will prove to be accurate. In light of the significant uncertainties
inherent in the forward-looking statements included herein, the inclusion of
such information should not be regarded as a representation by the Company or
any other person that the objectives and plans of the Company will be achieved.
33
<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, 1996 and 1995, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. 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, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSON LLP
Dallas, Texas,
February 10, 1997
34
<PAGE> 6
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 10, 1997
35
<PAGE> 7
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
ASSETS 1996 1995
------------ ------------
(Dollars in thousands)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 4,786 $ 5,811
Receivables, net of allowance for doubtful
accounts of $6,676 and $1,595, respectively 57,802 28,043
Inventories 25,400 11,123
Prepaids and other 3,015 1,597
Deferred tax assets 7,339 3,089
Net assets held for sale 676 836
------------ ------------
Total current assets 99,018 50,499
PROPERTY, PLANT AND EQUIPMENT:
Land 7,843 5,713
Buildings and improvements 29,507 18,804
Machinery and equipment 70,239 43,552
------------ ------------
Gross property, plant and equipment 107,589 68,069
Less: Accumulated depreciation (22,807) (17,748)
------------ ------------
Net property, plant and equipment 84,782 50,321
INTANGIBLE AND OTHER ASSETS:
Identifiable intangible assets 73,146 1,847
Goodwill 96,175 58,671
Deferred financing costs 2,731 1,259
Other assets 139 112
------------ ------------
Total intangible and other assets 172,191 61,889
------------ ------------
Total assets $ 355,991 $ 162,709
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
36
<PAGE> 8
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
------------ ------------
(Dollars in thousands)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 32,968 $ 21,488
Accrued liabilities 39,923 15,869
Current maturities of long-term debt 8,000 8,000
------------ ------------
Total current liabilities 80,891 45,357
LONG-TERM DEBT (net of current maturities) 177,349 36,000
OTHER LONG-TERM LIABILITIES 3,269 1,959
DEFERRED TAX LIABILITIES 5,694 2,070
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 50,000,000 shares
authorized; 15,298,111 shares in 1996 and
15,244,261 shares in 1995 issued 153 152
Additional paid-in capital 73,179 71,991
Treasury stock, at cost (767,000 shares in 1996 and
230,000 shares in 1995) (6,140) (1,840)
Retained earnings 21,596 7,020
------------ ------------
Total stockholders' equity 88,788 77,323
------------ ------------
Total liabilities and stockholders' equity $ 355,991 $ 162,709
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
37
<PAGE> 9
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 1995 1994
------------ ------------ ------------
(Dollars in thousands, except per share and share amounts)
<S> <C> <C> <C>
NET SALES $ 394,306 $ 304,730 $ 292,314
COST OF GOODS SOLD 302,801 232,948 222,145
------------ ------------ ------------
GROSS PROFIT 91,505 71,782 70,169
OPERATING COSTS AND EXPENSES:
Distribution 17,056 16,120 18,689
Selling and marketing 32,839 22,233 21,295
General and administrative 15,450 13,001 11,778
------------ ------------ ------------
Total operating costs and expenses 65,345 51,354 51,762
------------ ------------ ------------
OPERATING INCOME 26,160 20,428 18,407
INTEREST EXPENSE 3,647 3,921 4,446
AMORTIZATION OF DEFERRED FINANCING COSTS 379 381 351
DIVIDEND INCOME -- (268) --
OTHER INCOME, NET (286) (1,008) (1,244)
------------ ------------ ------------
INCOME BEFORE INCOME TAXES 22,420 17,402 14,854
PROVISION FOR INCOME TAXES 7,844 6,062 5,533
------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS 14,576 11,340 9,321
DISCONTINUED OPERATIONS:
Income from discontinued operations -- -- 903(a)
Gain on disposal -- 184(b) 423(b)
------------ ------------ ------------
INCOME FROM DISCONTINUED OPERATIONS -- 184 1,326
NET INCOME $ 14,576 $ 11,524 $ 10,647
============ ============ ============
EARNINGS PER COMMON SHARE:
Continuing operations $ .96 $ .74 $ .62
Discontinued operations -- .02 .09
------------ ------------ ------------
Earnings per common share $ .96 $ .76 $ .71
============ ============ ============
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 15,133,887 15,245,562 15,050,538
</TABLE>
- --------------
(a)Net of applicable tax provision of $507.
(b)Net of applicable tax provision of $216 and $2,865.
The accompanying notes are an integral part of these consolidated statements.
38
<PAGE> 10
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON COMMON STOCK TREASURY RETAINED
SHARES AND ADDITIONAL STOCK, EARNINGS
ISSUED PAID-IN CAPITAL AT COST (DEFICIT) TOTAL
---------- --------------- ---------- ---------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993 14,287,212 $ 69,684 $ -- $ (15,151) $ 54,533
Exercise of stock options 633,585 1,622 -- -- 1,622
Net income -- -- -- 10,647 10,647
---------- --------------- ---------- ---------- --------
Balance, December 31, 1994 14,920,797 71,306 -- (4,504) 66,802
Exercise of stock options 323,464 837 -- -- 837
Purchase of treasury stock -- -- (1,840) -- (1,840)
Net income -- -- -- 11,524 11,524
---------- --------------- ---------- ---------- --------
Balance, December 31, 1995 15,244,261 72,143 (1,840) 7,020 77,323
Exercise of stock options 53,850 381 -- -- 381
Income tax benefits of stock options -- 808 -- -- 808
Purchase of treasury stock -- -- (4,300) -- (4,300)
Net income -- -- -- 14,576 14,576
---------- --------------- ---------- ---------- --------
Balance, December 31, 1996 15,298,111 $ 73,332 $ (6,140) $ 21,596 $ 88,788
========== =============== ========== ========== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
39
<PAGE> 11
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 1995 1994
---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 389,101 $ 306,918 $ 284,605
Interest received 129 224 134
Income tax refund 156 -- --
Cash paid to suppliers and employees (354,037) (272,992) (259,147)
Interest paid (2,971) (4,220) (4,395)
Income taxes paid (4,171) (3,199) (2,663)
---------- ---------- ----------
Net cash provided by Continuing Operations 28,207 26,731 18,534
Net cash used by Discontinued Operations -- -- (3,403)
---------- ---------- ----------
Net cash provided by operating activities 28,207 26,731 15,131
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of subsidiaries:
Working capital (3,268) -- --
Property, plant and equipment (29,926) -- --
Other assets (111,809) -- --
Other long-term (assets) liabilities (311) -- --
---------- ---------- ----------
(145,314) -- --
---------- ---------- ----------
Capital expenditures (11,462) (10,705) (7,622)
Proceeds from sale of assets -- 2 32
Dividends received from Preferred Stock -- 268 --
Other (52) 1,258 682
---------- ---------- ----------
Net cash used by Continuing Operations (156,828) (9,177) (6,908)
Discontinued Operations:
Sale of Discontinued Operations -- -- 50,237
Sale of Preferred Stock -- 3,000 --
Capital and other expenditures -- -- (482)
---------- ---------- ----------
Net cash provided by Discontinued Operations -- 3,000 49,755
---------- ---------- ----------
Net cash provided (used) by investing activities (156,828) (6,177) 42,847
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 381 837 1,622
Purchase of treasury stock (4,300) (1,840) --
Proceeds from issuance of long-term debt 160,000 -- --
Net borrowings (repayments) under
revolving credit facility 22,349 (1,892) (14,783)
Principal payments on long-term debt (50,834) (14,000) (45,470)
Dividends paid -- -- (535)
---------- ---------- ----------
Net cash provided (used) by financing activities 127,596 (16,895) (59,166)
NET INCREASE (DECREASE) IN CASH (1,025) 3,659 (1,188)
CASH, BEGINNING OF PERIOD 5,811 2,152 3,340
---------- ---------- ----------
CASH, END OF PERIOD $ 4,786 $ 5,811 $ 2,152
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
40
<PAGE> 12
CONSOLIDATED STATEMENTS OF CASH FLOWS
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 1995 1994
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
NET INCOME $ 14,576 $ 11,524 $ 10,647
ADJUSTMENTS TO RECONCILE NET INCOME
TO NET CASH PROVIDED BY OPERATIONS:
Discontinued Operations net income -- (184) (1,326)
Depreciation 6,378 5,122 4,344
Amortization of intangibles 3,291 2,700 2,632
(Gain) loss on fixed asset retirements -- -- (243)
Increase in deferred tax assets (4,250) 3,635 4,222
Change in assets and liabilities net of
effects from acquisitions and
divestitures of subsidiaries:
Accounts receivable (5,205) 2,426 (3,707)
Inventories (1,243) (583) 987
Prepaids and other 1,493 151 3,569
Accounts payable 1,747 4,225 (655)
Accrued liabilities 8,011 (4,076) (1,986)
Other long-term liabilities 3,409 1,791 50
-------- -------- --------
Total adjustments 13,631 15,207 7,887
-------- -------- --------
Net cash provided by Continuing Operations 28,207 26,731 18,534
Discontinued Operations:
Discontinued Operations net income -- 184 1,326
Gain on disposal -- (184) (423)
Change in working capital -- -- (4,914)
Depreciation and amortization -- -- 608
-------- -------- --------
Net cash used by Discontinued Operations -- -- (3,403)
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 28,207 $ 26,731 $ 15,131
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
41
<PAGE> 13
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND BUSINESS
BACKGROUND
The Morningstar Group Inc., a Delaware corporation (together with its
subsidiaries, the "Company" or "Morningstar") 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.
BUSINESS
The Company's Continuing Operations include its specialty operations which
manufacture and market shelf stable, refrigerated and frozen food products
including nationally branded products, other specialty, dairy-based cultured
and ultra-pasteurized products and non-dairy based food products. Discontinued
Operations include all previously divested regional dairy operations and other
divested operations.
(2) PRESTO FOOD PRODUCTS, INC. ACQUISITION
On December 3, 1996, the Company acquired all of the issued and
outstanding shares of capital stock of Presto Food Products, Inc. ("Presto"), a
California corporation, from the shareholders of Presto pursuant to a stock
purchase agreement dated as of October 20, 1996, by and among the Company,
Presto and the Presto shareholders. Presto's sales for the year ended December
31, 1995, were approximately $139.5 million. Presto is a national manufacturer,
marketer and distributor of non-dairy and dairy products, such as Mocha Mix
non-dairy coffee creamers, Jon Donaire desserts and ice cream cakes, aerosols,
bakery toppings and icings, frozen pre-whipped toppings and creamers, serving
customers throughout the United States since 1937. The Company paid
approximately $123.5 million in cash for the stock acquired and assumed
approximately $37.4 million in related liabilities. The allocation of the
purchase price was based on preliminary estimates of fair value. The final
allocation may be revised if the appraised values are significantly different
from the preliminary estimates. Included in the assumed liabilities is
approximately $3.2 million related to costs associated with the involuntary
termination and/or relocation of certain employees of the acquired company. The
terminated employees represent redundant and excess personnel in the
operations, marketing, selling, and general and administrative areas. This
termination plan will likely be completed by the second quarter of 1997. In
conjunction with the consummation of the Presto acquisition, the Company
renegotiated its credit agreement. Funds provided by the renegotiated Senior
Credit Agreement ("Senior Credit Agreement") were utilized to pay off existing
senior debt of approximately $44.8 million, to acquire the capital stock of
Presto for $123.5 million and to pay approximately $2.1 million in fees and
expenses associated with the Presto acquisition. The Company accounted for the
acquisition as a purchase and accordingly, Presto's results are included in the
1996 Consolidated Statement of Operations for the period December 3, 1996,
through December 31, 1996.
Unaudited pro forma operating results of the Company, assuming the
acquisition had been made as of January 1, 1995, follow. Such information
includes adjustments to reflect additional goodwill and intangible
amortization, a reduction in redundant and excess personnel related costs,
additional interest expense, additional amortization of deferred financing
costs and additional income tax expense.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 1995
-------- --------
(Dollars in thousands, except per share amounts) (Unaudited)
<S> <C> <C>
Pro forma net sales $528,056 $444,202
======== ========
Pro forma net income from Continuing Operations $ 18,325 $ 13,799
======== ========
Pro forma net income $ 18,325 $ 13,983
======== ========
Pro forma earnings per share from Continuing Operations $ 1.21 $ 0.91
======== ========
Pro forma earnings per share $ 1.21 $ 0.92
======== ========
</TABLE>
42
<PAGE> 14
(3) OTHER ACQUISITIONS
WACKY WILLIE ACQUISITION
On October 1, 1996, the Company completed the acquisition of the rights to
the Wacky Willie and Killer Shake trademarks for $300,000 in cash from Killer
Productions Company. There were no liabilities associated with the acquisition,
nor were there any other assets included in the transaction. The Company may at
its sole option, before August 1999, pay an additional $700,000 to Killer
Productions representing the final portion of the purchase price. In addition,
in the event net sales reach $5.0 million in any consecutive twelve-month
period ending on or before August 1999, the Company will be required to pay the
additional $700,000 representing the final portion of the purchase price. The
funding for this purchase was provided by the Company's operations. Sales of
Killer Shake are included in the 1996 Consolidated Statement of Operations for
the period January 1, 1996, through December 31, 1996. The Company manufactured
and sold this product under a license arrangement for the period January 1,
1996, through September 30, 1996.
CREAM PRODUCTS ACQUISITION
On August 1, 1996, the Company completed the purchase of substantially all
of the assets of Cream Products Company ("Cream Products"), located in Chicago,
Illinois. Cream Products' sales for the year ended December 31, 1995, were
approximately $24.6 million. Cream Products is a manufacturer and distributor
of dairy and non-dairy products primarily supplying food makers and food
service customers throughout the United States since 1938. The Company paid
approximately $5.9 million in cash for the assets acquired, and assumed
approximately $2.3 million in related liabilities. Funds for this acquisition
were provided by the Company's operations in conjunction with its revolving
credit facility. The Company accounted for the acquisition as a purchase and
accordingly, Cream Products' results are included in the 1996 Consolidated
Statement of Operations for the period August 1, 1996, through December 31,
1996.
LA CORONA ACQUISITION
On May 28, 1996, the Company completed the purchase of substantially all
of the assets of La Corona Foods, Inc. ("La Corona"), located in Glendale,
Arizona. La Corona's sales for the fiscal year ended September 30, 1995, were
approximately $6.9 million. The Company paid approximately $3.4 million in cash
for the assets purchased, and assumed approximately $2.5 million in related
liabilities. The funding for this acquisition was provided by the Company's
operations. The Company accounted for the acquisition as a purchase and
accordingly, La Corona's results are included in the 1996 Consolidated
Statement of Operations for the period May 29, 1996, through December 31, 1996.
MERKTS CHEESE ACQUISITION
On March 19, 1996, the Company completed the acquisition of substantially
all of the assets of Merkts Cheese Company ("Merkts"), located in Bristol,
Wisconsin. Merkts recorded approximately $10.3 million in sales for the fiscal
year ending June 30, 1995. The Company paid approximately $3.6 million in cash
for the assets purchased, and assumed approximately $0.4 million in
liabilities. The funding for this acquisition was provided by the Company's
operations. The Company accounted for the acquisition as a purchase and
accordingly, Merkts' results are included in the 1996 Consolidated Statement of
Operations for the period March 20, 1996, through December 31, 1996.
(4) 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") for $51.0 million, consisting of $48.0 million in cash after working
capital adjustments and $3.0 million of 9% Series A Preferred Stock (the
"Preferred Stock"). The Company deferred the gain on the Preferred Stock
pending realization of the gain. The majority of the cash proceeds were used to
pay down external bank debt and to fund federal and state taxes generated by
the gain on
43
<PAGE> 15
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the sale. 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 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 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 $0.5 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 $38.6 million in 1994.
Interest expense of $0.4 million was allocated to Discontinued Operations
during 1994. 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.
(5) 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, 1996 1995
-------- --------
<S> <C> <C>
Raw materials and supplies $ 11,767 $ 5,975
Finished goods 13,633 5,148
-------- --------
Total $ 25,400 $ 11,123
======== ========
</TABLE>
Finished goods inventories include the costs of materials, labor and plant
overhead.
44
<PAGE> 16
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>
Asset Category Useful 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. Identifiable intangible assets of approximately $72.3
million were recorded in connection with the acquisitions consummated in 1996.
These assets are being amortized on a straight-line basis over a range of 5-40
years. Amortization costs totaled $1.0 million in 1996, $0.7 million in 1995,
and $0.7 million in 1994. Accumulated amortization was $2.8 million and $1.8
million at December 31, 1996 and 1995, respectively.
GOODWILL
Goodwill is amortized on a straight-line basis over a range of 25-40 years
and is recorded at cost less accumulated amortization. Goodwill of
approximately $39.4 million was recorded in connection with the acquisitions
consummated in 1996. Amortization costs totaled $1.9 million in 1996, $1.7
million in 1995, and $1.7 million in 1994. Accumulated amortization was $10.4
million and $8.5 million at December 31, 1996 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. In
conjunction with renegotiating its Senior Credit Agreement in December 1996,
the Company incurred deferred financing costs of approximately $2.7 million.
Accumulated amortization was $87,000 and $1.5 million at December 31, 1996 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 to Be Disposed Of."
This statement is effective for financial statements beginning after December
15, 1995. The Company 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 its estimate of undiscounted future cash flows (without interest
charges) over the remaining life of the asset.
45
<PAGE> 17
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996 1995
-------- --------
<S> <C> <C>
Accrued interest $ 1,140 $ 407
Payroll and benefits (accrued wages,
vacation and profit sharing) 8,315 4,080
Restructuring accruals 60 230
Insurance accruals 5,527 5,195
Income and property taxes 5,791 1,491
Marketing and advertising 6,863 2,017
Acquisition related accruals 6,290 --
Other accrued liabilities 5,937 2,449
-------- --------
Total $ 39,923 $ 15,869
======== ========
</TABLE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
The financial position of the Company at December 31, 1996 and 1995,
includes certain financial instruments which may have a fair value that is
different from 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, 1996.
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 PER COMMON SHARE
The earnings 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.
46
<PAGE> 18
(6) INCOME TAXES
The components of the provision for income taxes from Continuing
Operations are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Current $ 6,271 $ 1,879 $ 272
Deferred (340) 3,448 4,163
State 1,913 735 1,098
-------- -------- --------
Provision for income taxes $ 7,844 $ 6,062 $ 5,533
======== ======== ========
</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, 1996 1995
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $ -- $ 385
Accrued vacation 588 504
Accrued workers' compensation 1,671 1,397
Acquisition reserves 2,394 --
Other insurance reserves 666 657
Restructuring reserves 350 396
Other accrued expenses and reserves 2,182 1,454
Other deferred tax assets 600 2,340
-------- --------
Total deferred tax assets 8,451 7,133
Deferred tax liabilities:
Accelerated depreciation and amortization 6,759 2,901
Other deferred tax liabilities 47 140
-------- --------
Total deferred tax liabilities 6,806 3,041
Valuation allowance -- (3,073)
-------- --------
Net deferred tax assets 1,645 1,019
Noncurrent deferred tax liabilities (5,694) (2,070)
-------- --------
Current deferred tax assets $ 7,339 $ 3,089
======== ========
</TABLE>
The Company reduced goodwill by approximately $21,000, $5.6 million and
$4.2 million for the years ended December 31, 1996, 1995 and 1994,
respectively, representing realization of deferred tax assets created prior to
the Company's financial restructuring transaction.
47
<PAGE> 19
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The provision for income taxes was different from 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,
--------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Provision computed at statutory rate $ 7,846 $ 5,917 $ 5,050
State income taxes 1,243 1,025 905
Tax on non-deductible goodwill amortization 486 473 516
Utilization of previously unrecognized
deferred tax assets (2,265) (1,405) (1,107)
Other 534 52 169
-------- -------- --------
Provision for income taxes $ 7,844 $ 6,062 $ 5,533
======== ======== ========
</TABLE>
(7) LONG-TERM DEBT
The Company's long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996 1995
---------- ----------
<S> <C> <C>
Senior term loan $ 160,000 $ 41,000
Revolving credit facility 22,349 --
Industrial development revenue bonds 3,000 3,000
---------- ----------
Total long-term debt 185,349 44,000
Less: Current maturities (8,000) (8,000)
---------- ----------
Long-term debt, net of current maturities $ 177,349 $ 36,000
========== ==========
</TABLE>
Maturities of long-term debt at December 31, 1996, are as follows (in
thousands):
<TABLE>
<C> <C>
1997 $ 8,000
1998 15,000
1999 20,000
2000 30,000
2001 35,000
Thereafter 77,349
--------
Total maturities $185,349
========
</TABLE>
SENIOR TERM LOAN AND REVOLVING CREDIT FACILITY
On December 2, 1996, in conjunction with the Presto acquisition, the
Company renegotiated a $220.0 million credit agreement ("Senior Credit
Agreement"). Funding provided by the Senior Credit Agreement was utilized to
acquire the capital stock of Presto for approximately $123.5 million, to pay
off the existing senior debt of approximately $44.8 million and to pay $2.1
million in fees and expenses associated with the Presto acquisition.
The base interest rate on the Term Loan and the Revolver is the prime rate
plus an applicable margin spread. Both facilities have alternative rate options
based upon applicable margin spreads above the London Interbank Offered Rate
("LIBOR"). At December 31, 1996, $160.0 million in borrowings under the Term
Loan were outstanding at an interest rate of 6.95% and $22.4 million in
borrowings were outstanding under the Revolver at an interest rate of
48
<PAGE> 20
6.99%. Borrowings under these lending facilities are secured by virtually all
of the assets of the Company. Up to $15.0 million in letters of credit may be
issued under the Revolver, of which $8.8 million was issued and outstanding at
December 31, 1996. As of December 31, 1996, approximately $28.8 million was
additionally available to the Company under the $60.0 million Revolver. A fee
of 1.5% per year is charged on outstanding letters of credit. A 0.42% per year
commitment fee on uncommitted funds is payable quarterly. The Revolver matures
on December 1, 2002, coincident with the scheduled maturity of the Term Loan.
The Senior Credit Agreement contains numerous covenants pertaining to
management and operations of the Company including, among other restrictions,
limitations on the amount of annual capital expenditures as well as
specification of certain maximum leverage ratios, minimum fixed charge coverage
ratios and minimum net worth. The Senior Credit Agreement also requires
mandatory prepayment 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.
During April 1994, the Company completed the sale of Velda for
approximately $51.0 million, consisting of $48.0 million in cash after working
capital adjustments 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 then existing senior term loan and $11.8 million of its then existing
revolver.
The Company was in compliance with all financial covenants as of December
31, 1996.
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, 1996, was 4.30%.
(8) 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, 1996, eligible employees totaled 363, of which 214 were
participants in the plan. Contributions are made by the Company and by plan
participants. Company contributions are allocated to the participants on the
basis of individual contributions, the age of the participant and the number of
years that the participant has been in the plan. During 1996 the Company also
contributed to two single-employer and five multi-employer pension/retirement
plans under the terms of various union contracts, which covered 778 of its
1,403 employees at December 31, 1996. 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, 1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Defined contribution profit sharing plan $ 416 $ 250 $ 230
Union pension plans 1,445 1,182 1,122
</TABLE>
POST-RETIREMENT BENEFIT PLANS
In December 1990, the Financial Accounting Standards Board issued its
standard on accounting for post retirement benefits other than pensions. This
standard requires that the expected cost of these benefits must be charged to
expense during the years that the employees render service. The cost of
providing these benefits has been primarily paid by non-union retirees and the
Company's calculation of its obligation is not material as of December 31,
1996.
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 $2.0 million in 1996,
$2.0 million in 1995, and $2.6 million in 1994. Having made these payments, no
remaining obligations exist for these years under the union plans.
49
<PAGE> 21
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) 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 $4.3 million in 1996, $3.2 million in 1995, and
$3.0 million in 1994.
The following is a summary of future minimum annual lease payments under
noncancelable operating lease obligations as of December 31, 1996 (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ------------------------
<C> <C>
1997 $ 3,893
1998 3,469
1999 2,557
2000 1,965
2001 693
Thereafter 1,383
-------
Total $13,960
=======
</TABLE>
EMPLOYMENT AGREEMENTS
As of December 31, 1996, the Company had 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). As of December 31, 1996, the maximum amount
payable under these employment agreements was approximately $4.6 million in the
aggregate.
LITIGATION
From time to time the Company is subject to 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.
(10) RELATED PARTY TRANSACTIONS
HICKS MUSE
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 $150,000 and $114,000
in 1995 and 1994, respectively, and reimbursed Hicks Muse approximately $28,000
and $37,000 for expenses for each year, respectively. Hicks Muse was also paid
a fee of $300,000 relating to the sale of Velda.
50
<PAGE> 22
(11) EQUITY
EMPLOYEE AND DIRECTOR STOCK OPTIONS
The Company has several stock-based compensation plans, which are
described below. The Company applies Accounting Principles Board ("APB")
Opinion 25 and related Interpretations in accounting for its stock-based
compensation plans. In 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), which, if fully adopted by the Company,
would change the methods the Company applies in recognizing the cost of its
stock-based compensation plans. Adoption of the cost recognition provisions of
SFAS 123 is optional and the Company has decided not to elect these provisions.
However, pro forma disclosures as if the Company had adopted these cost
recognition provisions in 1995 are required for fiscal years beginning after
December 15, 1995. The Company has elected to provide these disclosures for its
fiscal year which began on January 1, 1996.
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,
1996, 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 $1.1 million. 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
Stock 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,
1996, 175,000 options had been granted to employees. The exercise price for
25,000 of the options granted in 1992 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 of the 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. Under this plan, 14,000 options had been exercised
as of December 31, 1996.
1992 DIRECTOR STOCK OPTION PLAN
In April 1992, the Company established the 1992 Director Stock Option Plan
which provides for the issuance of options to purchase 39,062 shares of common
stock to non-employee directors of the Company. At December 31, 1996, 39,062
options had been granted to non-employee directors. The exercise price for
these options is $2.56 per share, which was the fair market value of the
options at the date of issuance. The options become exercisable over a
three-year period and expire ten years after the date of their issuance. As of
December 31, 1996, no options under this plan had been exercised.
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,
1996, 231,000 options had been granted to employees. The exercise price for
195,000 of the 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
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. An additional 12,000
options were granted in 1996 under this plan at exercise prices of $9.50 (6,000
options) and $10.00 (6,000 options), which were the fair market values of the
options on each issuance date. These options become exercisable over a
three-year period and expire ten years after the date of their issuance. Under
this plan, 26,000 options had been exercised as of December 31, 1996.
51
<PAGE> 23
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1996 STOCK OPTION PLAN
In May 1996, the Company amended the 1994 Incentive and Nonstatutory Stock
Option Plan to provide for the issuance of options to purchase up to 1,440,000
shares of common stock to key employees of the Company. At December 31, 1996,
1,212,000 options had been granted to employees. The exercise price for these
options is $10.25 per share, which was the fair market value of the options at
the date of issuance. 387,000 of the options become exercisable over a
three-year period and 825,000 of the options became exercisable on the date of
issuance. These options expire ten years after the date of their issuance. As
of December 31, 1996, no options under this plan had been exercised.
1996 DIRECTOR STOCK OPTION PLAN
In May 1996, the Company established the 1996 Director Stock Option Plan
which provides for the issuance of options to purchase 50,000 shares of common
stock to non-employee directors of the Company. At December 31, 1996, 40,000
options had been granted to non-employee directors. The exercise price for
these options is $10.25 per share, which was the fair market value of the
options at the date of issuance. The options become exercisable over a
three-year period and expire ten years after the date of their issuance. As of
December 31, 1996, no options under this plan had been exercised.
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, 1996, 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 vested
in equal amounts over two years. The options expire ten years after the date of
their issuance. As of December 31, 1996, no options under this plan had been
exercised.
SUMMARY OF OPTIONS (NUMBER OF OPTIONS)
<TABLE>
<CAPTION>
1992 1996
DIRECTOR CHAIRMAN DIRECTOR
1991 PLAN 1992 PLAN PLAN 1994 PLAN PLAN 1996 PLAN* PLAN
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Outstanding at December 31, 1994 335,413 176,000 39,062 210,000 600,000 -- --
Granted in 1995 -- 30,000 -- 81,000 -- -- --
Canceled in 1995 (13,049) (31,000) -- (70,000) -- -- --
Exercised in 1995 (311,464) -- -- (2,000) -- -- --
--------- --------- --------- --------- --------- --------- ---------
Outstanding at December 31, 1995 10,900 175,000 39,062 219,000 600,000 -- --
Granted in 1996 -- -- -- 12,000 -- 1,212,000 40,000
Canceled in 1996 -- -- -- -- -- -- --
Exercised in 1996 (5,850) (14,000) -- (24,000) -- -- --
--------- --------- --------- --------- --------- --------- ---------
Outstanding at December 31, 1996 5,050 161,000 39,062 207,000 600,000 1,212,000 40,000
========= ========= ========= ========= ========= ========= =========
Exercisable at December 31, 1995 10,900 105,000 39,062 52,000 600,000 -- --
========= ========= ========= ========= ========= ========= =========
Exercisable at December 31, 1996 5,050 141,000 39,062 119,000 600,000 825,000 --
========= ========= ========= ========= ========= ========= =========
</TABLE>
* Granted under 1994 Stock Option Plan as amended.
52
<PAGE> 24
PRO FORMA NET INCOME AND EARNINGS PER COMMON SHARE
Had the compensation cost for the Company's stock-based compensation plans
been determined consistent with SFAS 123, the Company's net income and earnings
per common share for 1996 and 1995 would approximate the pro forma amounts
below (in thousands, except per share data):
<TABLE>
<CAPTION>
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1996 1995 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income $ 14,576 $ 10,770 $ 11,524 $ 11,460
Earnings per common share .96 .72 .76 .75
</TABLE>
Pro forma charges to expense for options granted in 1996 and 1995 are as
follows:
<TABLE>
<CAPTION>
1996 1995 CHARGE
ANNUAL ANNUAL ALLOCABLE TO TOTAL
CHARGE CHARGE FUTURE YEARS CHARGE
-------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
1995 Stock options $ 104 $ 64 $ 144 $ 312
1996 Stock options 3,702 -- 1,573 5,275
-------- -------- -------- --------
Total $ 3,806 $ 64 $ 1,717 $ 5,587
======== ======== ======== ========
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Modified Black-Scholes option pricing model with the following
weighted average assumptions used for grants in 1996 and 1995, respectively:
risk free interest rates of 6.47% and 6.65%; expected dividend yields of 0.00%
and 0.00%; expected lives of 4.0 years and 4.0 years; expected volatility of
40.31% and 39.86%. The weighted average fair value of options granted in 1996
and 1995 was $10.31 and $6.93, respectively. The effects of applying SFAS 123
in this pro forma disclosure are not indicative of future amounts. SFAS 123
does not apply to awards prior to 1995.
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 $20.0
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
December 31, 1996, the Company had purchased an additional 537,000 shares at a
cost of $4.3 million.
53
<PAGE> 25
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for the years ended December 31, 1996 and
1995, is as follows:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
DOLLARS IN THOUSANDS:
Net sales 1996 $81,724 $85,693 $99,869 $127,020
1995 71,893 74,882 73,167 84,788
Gross profit 1996 19,386 19,996 20,588 31,535
1995 17,269 17,718 16,295 20,500
Income from Continuing Operations 1996 2,831 3,463 3,027 5,255
1995 2,269 2,846 2,316 3,909
Income (loss) from Discontinued Operations 1996 -- -- -- --
1995 694 (510) -- --
Net income 1996 2,831 3,463 3,027 5,255
1995 2,963 2,336 2,316 3,909
PER COMMON SHARE:
Income from Continuing Operations 1996 $ 0.19 $ 0.23 $ 0.20 $ 0.34
1995 0.15 0.19 0.15 0.25
Income (loss) from Discontinued Operations 1996 -- -- -- --
1995 0.05 (0.03) -- --
Net income 1996 0.19 0.23 0.20 0.34
1995 0.20 0.16 0.15 0.25
Market price range:
High 1996 10.00 12.25 11.88 20.00
Low 1996 7.88 9.13 10.25 11.88
High 1995 7.50 8.00 9.25 9.00
Low 1995 5.50 6.38 6.38 7.50
</TABLE>
54
<PAGE> 26
SELECTED FINANCIAL DATA
1992 THROUGH 1996
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
(Dollars in thousands, except share and per share amounts)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA
Net sales $ 394,306 $ 304,730 $ 292,314 $ 273,949 $ 230,220
Gross profit 91,505 71,782 70,169 62,531 56,090
Operating income 26,160 20,428 18,407 5,335 15,493
Income (loss) from Continuing Operations 14,576 11,340 9,321 (257) (1,640)
Income (loss) from Discontinued Operations -- 184 1,326 1,241 (3,359)
Extraordinary item, net of tax -- -- -- (164)(a) (5,676)(b)
Net income (loss) 14,576 11,524 10,647 820 (10,675)
Dividends on preferred stock -- -- -- -- 939
Net income (loss) to common stockholders $ 14,576 $ 11,524 $ 10,647 $ 820 $ (11,614)
============ ============ ============ ============ ============
Earnings (loss) per common and common
equivalent share:
Continuing Operations $ .96 $ .74 $ .62 $ (.02) $ (.21)
Discontinued Operations -- .02 .09 .08 (.28)
------------ ------------ ------------ ------------ ------------
Earnings (loss) before extraordinary item .96 .76 .71 .06 (.49)
Extraordinary item -- -- -- (.01) (.47)
------------ ------------ ------------ ------------ ------------
Earnings (loss) $ .96 $ .76 $ .71 $ .05(a) $ (.96)(b)
============ ============ ============ ============ ============
Weighted average common and
common equivalent shares outstanding 15,133,887 15,245,562 15,050,538 15,011,607 12,128,343
Dividends declared per common share $ -- $ -- $ -- $ .150 $ .075
============ ============ ============ ============ ============
BALANCE SHEET DATA
Working capital $ 26,127 $ 13,142 $ 11,615 $ 15,635 $ 14,996
Total assets 355,991 162,709 165,265 212,134 180,786
Current maturities of long-term debt 8,000 8,000 6,000 14,750 10,167
Long-term debt 177,349 36,000 53,892 105,425 86,329
Common stockholders' equity 88,788 77,323 66,802 54,533 55,779
</TABLE>
- ---------------
(a) Loss on purchase of senior subordinated debentures, net of applicable tax
benefit of $71 thousand.
(b) The Company reported a net loss of $5.7 million on the purchase of
approximately $34 million in subordinated debt at a premium.
55
<PAGE> 27
CORPORATE INFORMATION
CORPORATE OFFICERS
C. DEAN METROPOULOS
Chief Executive Officer
L. HOLLIS JONES
President and Chief Operating Officer
DARRON K. ASH
Vice President and Chief Financial Officer
MICHAEL J. CRAMER
Vice President and Secretary
JOSEPH B. ARMES
Vice President and General Counsel
EXECUTIVE OFFICE:
5956 Sherry Lane, Suite 1500
Dallas, Texas 75225-6522
(214) 360-4700, FAX (214) 360-9100
Web Site Address:
www.morningstar-group.com
INDEPENDENT PUBLIC ACCOUNTANTS:
Arthur Andersen LLP
Dallas, Texas
LEGAL COUNSEL:
Weil, Gotshal & Manges LLP
Dallas, Texas
TRANSFER AGENT:
KeyCorp Shareholder Services, Inc.
Dallas, Texas
FORM 10-K:
A copy of the Company's annual report to the Securities and Exchange Commission
on Form 10-K may be obtained without charge by writing to the Company's office,
Attention: Joseph B. Armes.
ANNUAL MEETING:
The annual meeting of shareholders will be held at 10:00 a.m., local time,
Thursday, April 24, 1997, at the Hotel Crescent Court, 400 Crescent Court,
Dallas, Texas.
MARKET PRICE INFORMATION:
The NASDAQ trading symbol for the Company's common stock is MSTR. There were
approximately 135 holders of record of the Company's common stock at December
31, 1996.
56
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Morningstar Foods Inc.
MStar Inc.
Presto Transportation, Inc.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our reports included (or incorporated by reference) in this Form 10-K, into the
Company's previously filed Form S-8 Registration Statements File Nos. 33-64830
and 33-53975.
/s/ ARTHUR ANDERSEN LLP
-------------------------
ARTHUR ANDERSEN LLP
Dallas, Texas
March 26, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 4,786
<SECURITIES> 0
<RECEIVABLES> 64,478
<ALLOWANCES> 6,676
<INVENTORY> 25,400
<CURRENT-ASSETS> 99,018
<PP&E> 107,589
<DEPRECIATION> 22,807
<TOTAL-ASSETS> 355,991
<CURRENT-LIABILITIES> 80,891
<BONDS> 0
0
0
<COMMON> 88,788
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 355,991
<SALES> 394,306
<TOTAL-REVENUES> 394,306
<CGS> 302,801
<TOTAL-COSTS> 302,801
<OTHER-EXPENSES> 65,345
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,026
<INCOME-PRETAX> 22,420
<INCOME-TAX> 7,844
<INCOME-CONTINUING> 14,576
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,576
<EPS-PRIMARY> .96
<EPS-DILUTED> .96
</TABLE>
