<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[x] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended March 31, 1997
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 0-19934
THE MORNINGSTAR GROUP INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2217488
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
5956 SHERRY LANE, SUITE 1500
DALLAS, TEXAS 75225-6522
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 360-4777
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X , No .
----- -----
As of April 30, 1997, the number of shares outstanding of each class of
common stock was:
Common Stock, $.01 par value: 15,319,443 shares
<PAGE> 2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
----------- ------------
(Unaudited)
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash .................................................. $ 6,335 $ 4,786
Receivables, net of allowance for doubtful accounts
of $6,888 and $6,676 ................................ 53,328 57,802
Inventories ........................................... 26,012 25,400
Prepaids and other .................................... 2,775 3,015
Deferred tax assets ................................... 7,339 7,339
Net assets held for sale .............................. 656 676
--------- ---------
Total current assets ......................... 96,445 99,018
PROPERTY, PLANT AND EQUIPMENT:
Land .................................................. 12,551 7,843
Buildings ............................................. 34,300 29,507
Machinery and equipment ............................... 75,667 70,239
--------- ---------
Gross property, plant and equipment .......... 122,518 107,589
Less: Accumulated depreciation ....................... (25,106) (22,807)
--------- ---------
Net property, plant and equipment ............ 97,412 84,782
INTANGIBLE AND OTHER ASSETS:
Identifiable intangible assets ........................ 72,459 73,146
Goodwill .............................................. 89,717 96,175
Deferred financing costs .............................. 2,612 2,731
Other assets .......................................... 513 139
--------- ---------
Total intangible and other assets ............ 165,301 172,191
--------- ---------
TOTAL ASSETS ............................................ $ 359,158 $ 355,991
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
1
<PAGE> 3
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
----------- ------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
<S> <C> <C>
Accounts payable .................................................. $ 32,055 $ 32,968
Accrued liabilities ............................................... 35,988 39,923
Current portion of long-term debt ................................. 9,750 8,000
--------- ---------
Total current liabilities ................................. 77,793 80,891
LONG-TERM DEBT (net of current maturities) .......................... 179,249 177,349
OTHER LONG-TERM LIABILITIES ......................................... 3,278 3,269
DEFERRED TAX LIABILITIES ............................................ 5,694 5,694
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 50,000,000 shares authorized;
15,319,443 shares in 1997 and 15,298,111 shares issued in 1996 .. 153 153
Additional paid-in capital ........................................ 73,349 73,179
Treasury stock, at cost (767,000 shares in 1997 and 1996) ......... (6,140) (6,140)
Retained earnings ................................................. 25,780 21,596
--------- ---------
Total stockholders' equity ................................ 93,144 88,788
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .......................... $ 359,158 $ 355,991
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
2
<PAGE> 4
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------
1997 1996
------------ ------------
<S> <C> <C>
NET SALES ................................................. $ 130,298 $ 81,724
Cost of goods sold ...................................... 95,069 62,338
Selling, distribution, and general and administrative ... 24,886 14,498
------------ ------------
OPERATING INCOME .......................................... 10,343 4,888
OTHER (INCOME) AND EXPENSES:
Interest expense ........................................ 3,252 697
Amortization of deferred financing costs ................ 120 95
Other income, net ....................................... (118) (191)
------------ ------------
INCOME BEFORE INCOME TAXES ................................ 7,089 4,287
Provision for income taxes .............................. 2,905 1,456
------------ ------------
NET INCOME ................................................ $ 4,184 $ 2,831
============ ============
EARNINGS PER COMMON SHARE ................................. $ .27 $ .19
============ ============
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING ........................... 15,430,000 14,782,000
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
3
<PAGE> 5
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1997 1996
--------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Cash received from customers ...................... $ 134,772 $ 84,890
Interest received ................................. -- 34
Income tax refund ................................. -- 156
Cash paid to suppliers and employees .............. (119,716) (73,199)
Interest paid ..................................... (3,979) (752)
Income taxes paid ................................. (2,502) (245)
--------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES ........... 8,575 10,884
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of subsidiary:
Working capital .................................. (1,290) 71
Property, plant and equipment .................... (1,559) (3,113)
Other assets ..................................... (4,151) (578)
--------- --------
Net cash used by acquisition of subsidiary ... (7,000) (3,620)
Capital expenditures ............................. (3,023) (2,588)
Proceeds from sale of fixed assets ............... 13 --
Other ............................................ (836) 152
--------- --------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES .... (10,846) (6,056)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock ............ 170 --
Net payments under revolving credit facility ...... 5,650 --
Payments on long-term debt ........................ (2,000) (2,000)
Purchase of treasury stock ........................ -- (4,300)
--------- --------
NET CASH USED BY FINANCING ACTIVITIES ............... 3,820 (6,300)
NET INCREASE (DECREASE) IN CASH ..................... 1,549 (1,472)
CASH, BEGINNING OF PERIOD ........................... 4,786 5,811
--------- --------
CASH, END OF PERIOD ................................. $ 6,335 $ 4,339
========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
4
<PAGE> 6
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATIONS
(Unaudited, dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
1997 1996
------- --------
<S> <C> <C>
NET INCOME ........................................... $ 4,184 $ 2,831
ADJUSTMENTS TO RECONCILE NET INCOME TO
NET CASH FLOW FROM OPERATIONS:
Depreciation ....................................... 2,299 1,444
Amortization of intangibles ........................ 1,540 675
Increase in deferred taxes ......................... -- 21
Change in assets and liabilities, net of effects
from acquisition of subsidiary:
Accounts receivable .......................... 5,187 3,166
Inventories .................................. 75 13
Prepaids and other ........................... 240 166
Accounts payable ............................. (913) 836
Accrued liabilities .......................... (4,046) 1,869
Long-term liabilities ........................ 9 (137)
------- --------
NET CASH PROVIDED BY OPERATIONS ...................... $ 8,575 $ 10,884
======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
5
<PAGE> 7
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
(1) CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements as of March 31, 1997, and
for the three months then ended have been prepared by The Morningstar
Group Inc. (the "Company" or "Morningstar") without audit. In the
opinion of management, all necessary adjustments (which include only
normal recurring adjustments) to present fairly, in all material
respects, the consolidated financial position, results of operations and
changes in cash flows at March 31, 1997, and for the three months then
ended, have been made. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been omitted. These
financial statements should be read in conjunction with the Company's
1996 financial statements contained in its most recent Annual Report on
Form 10-K. Certain prior year balances have been reclassified to conform
to the current year presentation.
On February 3, 1997, the Company completed the purchase of
substantially all of the assets of the frozen whipped toppings business
of Van de Kamp's, Inc. ("VDK"). VDK's sales for the year ended December
31, 1996 were approximately $13.1 million. VDK is a manufacturer and
distributor of frozen whipped toppings primarily supplying retail
customers throughout the United States. The Company paid approximately
$7.0 million in cash for the assets acquired, and assumed approximately
$.1 million in related liabilities. The source of funding was provided
by the Company's operations in conjunction with its revolving credit
facility.
During the first quarter of 1997, the company received appraised
values on certain assets acquired in the Presto Food Products, Inc.
acquisition. As a result, the allocation of the purchase price was
revised resulting in a reclassification of $10.3 million from goodwill
to property, plant and equipment.
(2) INVENTORIES
Inventories are valued at the lower of cost or market. Cost is
determined using the first-in, first-out method. Inventories are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
At At
March 31, December 31,
1997 1996
--------- ------------
<S> <C> <C>
Raw materials and supplies ..... $10,865 $11,767
Finished goods ................. 15,147 13,633
------- -------
Total ................. $26,012 $25,400
======= =======
</TABLE>
Finished goods inventories include the costs of materials, labor
and plant overhead.
6
<PAGE> 8
(3) DEBT
The Company's outstanding long-term debt and average interest
rates in effect on March 31, 1997 were:
<TABLE>
<CAPTION>
Average
Amount of Interest
Debt Rate
-------------- --------
(in thousands)
<S> <C> <C>
Senior term loan ........................... $158,000 7.125%
Revolving credit facility (a) .............. 27,999 7.642%
Industrial development revenue bonds ....... 3,000 3.650%
--------
Total ............................... 188,999
Less: Current maturities .................. 9,750
--------
Long-term debt, net of current maturities .. $179,249
========
</TABLE>
- -----------------
(a) As of March 31, 1997, approximately $27,999,000 was outstanding under
the revolving credit facility and letters of credit totaling
$8,827,000 were issued. As of March 31, 1997, the Company had
$23,174,000 in additional borrowing capacity under the terms of its
revolving credit facility.
(4) EARNINGS PER COMMON SHARE
The earnings (loss) per common share is computed based on the
weighted average number of shares of the Company's common stock and
common stock equivalents outstanding during the period. Common stock
equivalents represent the dilutive effect of the assumed exercise of
certain outstanding stock options.
The Company intends to adopt SFAS No. 128 "Earnings Per Share"
(SFAS 128) effective December 15, 1997 and present December 31, 1997 and
prior periods earnings per share under SFAS 128. Early adoption of the
new statement is not permitted. The calculation of basic earnings per
share under SFAS 128 will have a favorable impact as it excludes
potentially dilutive options previously included in the calculation of
primary earnings per share.
(5) STOCK REPURCHASE PROGRAM
On June 21, 1995, the Company's Board of Directors announced that
it had approved a plan pursuant to which the Company may repurchase up
to $20.0 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, 1996, 767,000 shares had been repurchased by the Company
at a cost of $6.1 million. As of March 31, 1997, the Company had not
purchased any additional shares.
7
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION.
Results of Operations - First Quarter 1997
Compared with First Quarter 1996
Net sales are classified into three categories: (i) Branded products,
which include sales of the Company's seven nationally branded products
- --International Delight(R), a gourmet-flavored and non-flavored coffee creamer;
Second Nature(R), a refrigerated no-cholesterol egg substitute; Mocha Mix(R),
non-dairy coffee creamers; Naturally Yours(TM), fat-free and regular, real
dairy sour cream; Jon Donaire(R), cheesecakes and desserts; Wacky Willie(TM),
flavored shakes; and, in the western two-thirds of the United States,
Lactaid(R), lactose-free and lactose-reduced milks produced under license from
McNeil Consumer Products Company, a subsidiary of Johnson & Johnson; (ii)
Proprietary products, which include the Company's sales of yogurt, aerosol
toppings, bakery toppings and icings, and frozen pre-whipped toppings; and
(iii) Specialty products, which include all sales of the Company's specialty
foods business other than branded products and proprietary products.
Net sales for the first quarter of 1997 totaled $130.3 million, an
increase of $48.6 million from net sales for the same period in 1996. The
following table reflects net sales by product category from year to year
(dollars in thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
Product Category 1997 1996
- ---------------- -------- -------
<S> <C> <C>
Branded products ........ $ 53,930 $34,139
Proprietary products .... 32,099 13,854
Specialty products ...... 44,269 33,731
-------- -------
Net Sales ............... $130,298 $81,724
======== =======
</TABLE>
Net sales of branded products increased by 58.0% for the first quarter of
1997 when compared to the same period of 1996. This improvement was
accomplished through increased sales of International Delight, Naturally Yours,
Wacky Willie and Lactaid. The acquisition of Presto Food Products, Inc.
("Presto") accounted for approximately $11.1 million of branded sales during
the first quarter of 1997. Net sales of proprietary products increased by
131.7% for the first quarter of 1997 when compared to the same period of 1996.
This improvement was accomplished through increased sales of yogurt, aerosol
toppings and bakery toppings. The acquisition of Presto accounted for
approximately $13.1 million of proprietary sales during the first quarter of
1997. Net sales of specialty products increased by 31.2% during the first
quarter as compared to 1996 primarily as a result of increased UHT and cultured
product sales. Sales of Presto products accounted for approximately $3.3
million of specialty product sales during the first quarter of 1997.
Gross margin was 27.0% for the first quarter of 1997 compared to 23.7%
for the like period of 1996. This increase resulted primarily from three main
items: (i) higher overall gross margins for Presto products, (ii) purchasing
and manufacturing synergies realized as a result of the acquisition of Presto
and (iii) the Company's selective exit from some of its lower margin business.
Operating expenses as a percentage of net sales were 19.1% for the first
quarter of 1997 compared to 17.7% for the same period of 1996. Distribution
expense as a percent of sales increased as compared to 1996 due primarily to
the acquisition of Presto that included a number of outside warehouses as well
as several frozen products which tend to be more costly to distribute than
refrigerated products. Selling expenses increased as a percent of sales as a
result of increased marketing and promotional activities and increased
brokerage commissions related to the increase in branded sales. General and
administrative expenses as a percent of sales decreased as compared to 1996 due
to continuing efforts to eliminate redundant overhead costs and inefficiencies.
The Company's operating income during the first quarter of 1997 was $10.3
million, an increase of 111.6% from operating income for the first quarter of
1996 of approximately $4.9 million. The increase in operating income was
primarily due to the increased sales of all three product categories, and an
increase in gross margin percentage offset in part by increased operating
costs.
8
<PAGE> 10
For the first quarter, interest expense increased by 366.6% from $.7
million during 1996 to $3.3 million during 1997. The increase resulted from
debt incurred in connection with the Presto acquisition.
The Company recorded net income of $4.2 million in the first quarter of
1997 compared to net income of $2.8 million in the same period last year. The
improved profitability was primarily the result of higher sales and an increase
in gross margin percentage offset by increases in the Company's interest
expense and its provision for income taxes.
Liquidity and Capital Resources
Cash provided by continuing operations was $8.6 million during the first
three months of 1997 compared to cash provided by continuing operations of
$10.9 million during the first three months of 1996. The sources of cash during
the first quarter of 1997 were the $8.6 million provided by continuing
operations, $.2 million from the exercise of stock options and $5.6 million of
borrowings from the Company's credit facilities. The cash was utilized to pay
down debt of $2.0 million, to provide for capital and other expenditures of
$3.8 million, to provide for the purchase of VDK for $7.0 million and to
increase cash balances by $1.6 million.
Capital expenditures during the first quarter of 1997 were spent
primarily on equipment additions for increased operating efficiencies. As of
March 31, 1997, the Company was in compliance with all covenants and financial
ratios contained in its senior credit agreement. Based upon the Company's
projections for the remainder of 1997, management does not anticipate any
violation of the financial covenants contained in the senior credit agreement.
At March 31, 1997, the Company had approximately $23.2 million in unused
borrowing capacity under its revolving credit facility. The Company expects
that operating cash flows, together with borrowings under its revolving credit
facility, will be sufficient to fund the Company's requirements for working
capital, treasury stock purchases and capital expenditures for the foreseeable
future.
Financing
As of March 31, 1997, the Company's senior credit agreement consisted of
a $160.0 million term loan and a $60.0 million revolving credit facility. As of
March 31, 1997, approximately $27,999,000 was outstanding under the revolving
credit facility and approximately $8,827,000 million in letters of credit were
outstanding. As of March 31, 1997, the unpaid principal balance of the term
loan was $158.0 million.
The remaining amortization schedule for the term loan as of March 31,
1997, is as follows:
<TABLE>
<CAPTION>
Approximate
Quarterly payment date(s) Quarterly payment
---------------------------------- -----------------
<S> <C> <C>
June 30, 1997 - December 31, 1997 $ 2,000,000
March 31, 1998 - December 31, 1998 $ 3,750,000
March 31, 1999 - December 31, 1999 $ 5,000,000
March 31, 2000 - December 31, 2000 $ 7,500,000
March 31, 2001 - December 31, 2001 $ 8,750,000
March 31, 2002 - December 31, 2002 $ 13,000,000
</TABLE>
9
<PAGE> 11
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
To the knowledge of the Company, there are no reportable suits or
proceedings pending or threatened against or affecting the Company other than
those encountered in the ordinary course of the Company's business and
described in the Company's most recent Annual Report on Form 10-K.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) 99(A) Exhibits.
Calculation of weighted average shares outstanding .
(b) Reports on Form 8-K.
(1) Form 8-K/A dated February 18, 1997.
Item 2. Acquisition of Presto Food Products, Inc.
10
<PAGE> 12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE MORNINGSTAR GROUP INC.
/s/ DARRON K. ASH
----------------------------
Darron K. Ash
(Authorized Officer)
Date: May 13, 1997
11
<PAGE> 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
99(A) Calculation of weighted average shares outstanding.
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1997 1996
----------- -----------
<S> <C> <C>
Weighted average shares outstanding during period 15,309,443 15,234,161
Treasury stock (767,494) (652,912)
Dilutive effect of stock options,
(using the treasury stock method) 888,051 200,751
----------- -----------
Weighted Average Common and Common Equivalent
Shares Outstanding 15,430,000 14,782,000
=========== ===========
</TABLE>
12
<PAGE> 14
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 6,335
<SECURITIES> 0
<RECEIVABLES> 60,216
<ALLOWANCES> 6,888
<INVENTORY> 26,012
<CURRENT-ASSETS> 96,445
<PP&E> 122,518
<DEPRECIATION> 25,106
<TOTAL-ASSETS> 359,158
<CURRENT-LIABILITIES> 77,793
<BONDS> 0
0
0
<COMMON> 93,144
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 359,158
<SALES> 130,298
<TOTAL-REVENUES> 130,298
<CGS> 95,069
<TOTAL-COSTS> 95,069
<OTHER-EXPENSES> 24,886
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,372
<INCOME-PRETAX> 7,089
<INCOME-TAX> 2,905
<INCOME-CONTINUING> 4,184
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,184
<EPS-PRIMARY> .27
<EPS-DILUTED> .27
</TABLE>
