<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec. 240.14a-11(c) or sec. 240.14a-12
The Morningstar Group Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(l) and
0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
- --------------------------------------------------------------------------------
(3) Filing Party:
- --------------------------------------------------------------------------------
(4) Date Filed:
- --------------------------------------------------------------------------------
<PAGE> 2
THE MORNINGSTAR GROUP INC.
5956 SHERRY LANE, SUITE 1500
DALLAS, TEXAS 75225-6522
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON APRIL 24, 1997
---------------------
NOTICE IS HEREBY GIVEN that the Annual Meeting of the Stockholders of The
Morningstar Group Inc., a Delaware corporation (the "Corporation"), will be held
on Thursday, April 24, 1997, at 10:00 a.m., local time, at the Hotel Crescent
Court, 400 Crescent Court, Dallas, Texas, for the following purposes:
1. To elect six (6) directors;
2. To consider and act upon a proposal to approve Amendment No. 2 to The
Morningstar Group Inc. 1994 Incentive and Nonstatutory Stock Option
Plan;
3. To consider and act upon a proposal to approve Amendment No. 1 to The
Morningstar Group Inc. 1996 Director Stock Option Plan;
4. To consider and act upon a proposal to approve The Morningstar Group
Inc. 1997 Employee Stock Purchase Plan;
5. To ratify the appointment of Arthur Andersen LLP as independent auditors
of the Corporation for the ensuing year; and
6. To transact such other business as may properly come before the meeting
or any adjournment thereof.
The transfer books will not be closed, but only stockholders of record at
the close of business on February 28, 1997, will be entitled to notice of, and
to vote at, the meeting or any adjournment thereof. A complete list of the
stockholders entitled to vote at the meeting shall be open to the examination of
any stockholder, for any purpose germane to the meeting, at the offices of the
Corporation during the ten days preceding the meeting and will also be available
for inspection at the meeting.
You are cordially invited to attend the meeting. Even if you plan to
attend, you are respectfully requested to sign, date and return the enclosed
proxy at your earliest convenience in the enclosed return envelope. You may
revoke your proxy at any time prior to exercise.
By Order of the Board of Directors,
/s/ MICHAEL J. CRAMER
MICHAEL J. CRAMER
Secretary
Dallas, Texas
March 21, 1997
IT IS IMPORTANT THAT THE ENCLOSED PROXY CARD BE SIGNED, DATED AND PROMPTLY
RETURNED IN THE ENCLOSED ENVELOPE SO THAT YOUR SHARES WILL BE REPRESENTED
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING.
<PAGE> 3
THE MORNINGSTAR GROUP INC.
5956 SHERRY LANE, SUITE 1500
DALLAS, TEXAS 75225-6522
---------------------
PROXY STATEMENT
MARCH 21, 1997
---------------------
GENERAL INFORMATION
This proxy statement is furnished to the stockholders of The Morningstar
Group Inc., a Delaware corporation (the "Corporation"), in connection with the
solicitation of proxies to be used in voting at the Annual Meeting of
Stockholders (the "Annual Meeting") to be held at 10:00 a.m., local time, on
Thursday, April 24, 1997, at the Hotel Crescent Court, 400 Crescent Court,
Dallas, Texas, and at any and all adjournments thereof, and is being first
mailed to the stockholders on or about March 24, 1997. THE ENCLOSED PROXY IS
SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE CORPORATION.
A person giving the enclosed proxy has the power to revoke it by giving
notice to the Secretary in person, or by written notification actually received
by the Secretary (including by delivery of a later dated proxy card), at any
time prior to its being exercised. You may also revoke a previously given proxy
by appearing at the meeting and voting at the meeting. Your appearance at the
meeting will not, in and of itself, constitute a revocation of any proxy
previously given. Unless previously revoked, the shares represented by the
enclosed proxy will be voted in accordance with the stockholder's directions if
the proxy is duly executed and returned prior to the Annual Meeting. If no
directions are specified, the shares will be voted FOR the election of the
director nominees recommended by the Board of Directors, FOR the approval of
Amendment No. 2 to The Morningstar Group Inc. 1994 Incentive and Nonstatutory
Stock Option Plan (the "Amendment to Employee Plan"), FOR the approval of
Amendment No. 1 to The Morningstar Group Inc. 1996 Director Stock Option Plan
(the "Amendment to Director Plan"), FOR the approval of The Morningstar Group
Inc. 1997 Employee Stock Purchase Plan (the "Employee Stock Purchase Plan"), FOR
the ratification of the appointment of Arthur Andersen LLP as independent
auditors of the Corporation for the ensuing year, and in accordance with the
discretion of the named attorney-in-fact on other matters properly brought
before the Annual Meeting.
The Corporation will bear the cost of preparing, printing and mailing this
proxy statement and of soliciting the proxies sought hereby. In addition to the
use of the mails, solicitation may be made in person or by telephone, facsimile
transmission or otherwise by officers, directors and regular employees of the
Corporation, who will not receive additional compensation for those services.
<PAGE> 4
VOTING SECURITIES OUTSTANDING, SECURITY OWNERSHIP OF
MANAGEMENT AND PRINCIPAL STOCKHOLDERS
As of February 28, 1997, the Corporation had 15,315,443 shares of common
stock, par value $.01 per share ("Common Stock"), issued and outstanding. Each
share of Common Stock entitles the holder to one vote. Only stockholders of
record at the close of business on February 28, 1997, will be entitled to notice
of, and to vote at, the Annual Meeting.
PRINCIPAL STOCKHOLDERS
The following table and notes thereto set forth, as of February 28, 1997,
the number of shares of Common Stock held by each person or entity who is known
to the Corporation to own beneficially more than five percent (5%) of the
outstanding shares of Common Stock. Unless otherwise noted, the Corporation
believes that the persons or entities named below have sole voting and
investment power with respect to the shares indicated.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
OF COMMON STOCK
----------------------------
NAME AND ADDRESS OF NUMBER OF PERCENT OF
BENEFICIAL OWNER SHARES CLASS(a)
------------------- --------- -----------
<S> <C> <C>
Ryback Management Corporation
7711 Carondelet Avenue
Box 16900
St. Louis, MO 63105................... 1,354,200(b) 8.8%
The Vinik Group
260 Franklin Street
Boston, MA 02110...................... 1,208,000(c) 7.9%
Mellon Bank Corporation
One Mellon Bank Center
Pittsburgh, PA 15258.................. 1,161,000(d) 7.6%
C. Dean Metropoulos
c/o The Morningstar Group Inc.
5956 Sherry Lane
Suite 1500
Dallas, TX 75225...................... 1,046,740(e) 6.8%
</TABLE>
- ---------------
(a) Based on 15,315,443 shares of Common Stock outstanding.
(b) The following information is based on Amendment No. 2 to Schedule 13G, dated
January 27, 1997, filed with the Securities and Exchange Commission (the
"Commission") by Ryback Management Corporation. As of December 31, 1996,
Lindner Growth Fund (formerly Lindner Fund, Inc.), a separate series of the
Lindner Investment Series Trust, was the beneficial owner of 1,354,200
shares of Common Stock. Lindner Investment Series Trust is an investment
company registered under the Investment Company Act of 1940, as amended, and
is managed by Ryback Management Corporation, an investment adviser
registered under the Investment Advisers Act of 1940, as amended. The
address of the principal business office of Ryback Management Corporation is
7711 Carondelet Avenue, Box 16900, St. Louis, Missouri 63105. Lindner Growth
Fund has sole power to vote or to direct the vote and sole power to dispose
or to direct the disposition of all shares of Common Stock owned,
beneficially and of record, by it.
2
<PAGE> 5
(c) The following information is based on Amendment No. 1 to Schedule 13D, dated
December 30, 1996, filed with the Commission by Jeffrey N. Vinik; Vinik
Partners, L.P. ("VPLP"); Vinik Asset Management, L.P. ("VAMLP"); VGH
Partners, L.L.C. ("VGHP"); Vinik Asset Management, L.L.C. ("VAMLLC");
Michael S. Gordon; and Mark D. Hostetter (collectively referred to in the
preceding table as "The Vinik Group"). The address of the principal business
office of each reporting person is 260 Franklin Street, Boston,
Massachusetts 02110. The business address of Vinik Overseas (as hereinafter
defined) is c/o Citco Fund Services (Cayman Islands) Ltd., West Bay Road,
Grand Cayman, Cayman Islands. As of December 30, 1996, VPLP was the
beneficial owner of 451,400 shares of Common Stock; Vinik Overseas Fund,
Ltd. ("Vinik Overseas") was the beneficial owner of 710,700 shares of Common
Stock; and a discretionary account (the "Discretionary Account") managed by
VAMLP was the beneficial owner of 45,900 shares of Common Stock. VGHP is the
general partner of VPLP and shares with VPLP the power to vote or to direct
the vote and the power to dispose or to direct the disposition of the shares
of Common Stock owned beneficially by VPLP. Each of Vinik Overseas and the
Discretionary Account is a party to an investment management agreement with
VAMLP pursuant to which VAMLP has investment authority with respect to
shares held by Vinik Overseas and the Discretionary Account, which authority
includes the power to dispose of and to vote the shares held in such
accounts. VAMLLC is the general partner of VAMLP. VAMLLC, as the general
partner of VAMLP, has the power to vote or to direct the vote and the power
to dispose or to direct the disposition of the shares of Common Stock owned
beneficially by Vinik Overseas and the Discretionary Account, respectively.
Mr. Vinik is the senior managing member, and each of Messrs. Gordon and
Hostetter is a managing member, of VGHP and VAMLLC. Each of Messrs. Vinik,
Gordon and Hostetter shares with VPLP, Vinik Overseas and the Discretionary
Account the power to vote or to direct the vote and the power to dispose or
to direct the disposition of the shares of Common Stock owned beneficially
by VPLP, Vinik Overseas and the Discretionary Account, respectively.
(d) The following information is based on a Schedule 13G, dated January 30,
1997, filed with the Commission by Mellon Bank Corporation ("Mellon"). The
address of the principal business office of Mellon is One Mellon Bank
Center, Pittsburgh, Pennsylvania 15258. As of January 30, 1997, Mellon and
the following direct or indirect subsidiaries of Mellon owned shares of
Common Stock in their various fiduciary capacities: Boston Safe Deposit and
Trust Company; Boston Safe Deposit and Trust Company of California; and
Mellon Bank, N.A. (each a "Bank" as defined in Section 3(a)(6) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")); and
Franklin Portfolio Associates Trust; Laurel Capital Advisors; Mellon Capital
Management Corporation; The Boston Company Asset Management, Inc.; and The
Dreyfus Corporation (each an investment advisor registered under the
Investment Advisors Act of 1940, as amended, and together with the Banks,
the "Subsidiaries"). As of January 30, 1997, Mellon and the Subsidiaries
owned beneficially an aggregate of 1,161,000 shares of Common Stock. Mellon
has sole power to vote or to direct the vote of 1,019,000 shares owned
beneficially by it, shared power to vote or to direct the vote of 6,000
shares owned beneficially by it, sole power to dispose or to direct the
disposition of 1,002,000 shares owned beneficially by it and shared power to
dispose or to direct the disposition of 159,000 shares owned beneficially by
it.
(e) The address of the principal business office of Mr. Metropoulos is The
Morningstar Group Inc., 5956 Sherry Lane, Suite 1500, Dallas, Texas 75225.
Includes (i) presently exercisable options to purchase 1,000,000 shares of
Common Stock held by Mr. Metropoulos; (ii) 23,500 shares of Common Stock
held directly of record by Mr. Metropoulos; (iii) 4,000 shares of Common
Stock held by an immediate family member; and (iv) 19,240 shares of Common
Stock for which Mr. Metropoulos is either the custodian or trustee. Mr.
Metropoulos disclaims beneficial ownership of any shares of Common Stock not
held directly of record by him.
3
<PAGE> 6
DIRECTORS AND OFFICERS
The following table and notes thereto set forth, as of February 28, 1997
(unless otherwise noted below), the number of shares of Common Stock owned
beneficially by the directors, the Named Executive Officers (as defined under
"Executive Management and Director Compensation -- Executive Compensation") and
all directors and executive officers of the Corporation as a group. Unless
otherwise noted, the Corporation believes that each person named in the
following table has sole voting and investment power with respect to the shares
indicated. The Corporation has been provided such information by its directors
and executive officers.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
OF COMMON STOCK
--------------------------
NUMBER OF PERCENT
NAME OF BENEFICIAL OWNER SHARES OF CLASS(a)
------------------------ --------- -----------
<S> <C> <C>
C. Dean Metropoulos......................................... 1,046,740(b) 6.8%
Chairman of the Board
and Chief Executive Officer
L. Hollis Jones............................................. 210,000(c) 1.4%
President and Chief
Operating Officer
John R. Muse................................................ 152,345(d) 1.0%
Director
Jack W. Evans............................................... 58,537 *
Director
Jim L. Turner............................................... 58,537 *
Director
Charles W. Tate............................................. 23,382 *
Director
Darron K. Ash............................................... 79,000(e) *
Vice President and Chief
Financial Officer
Michael J. Cramer........................................... 62,000(f) *
Executive Vice President
and Secretary
Joseph B. Armes............................................. 30,000(g) *
Vice President and
General Counsel
All Directors and Executive Officers as a group (9
persons).................................................. 1,720,541 11.2%
</TABLE>
- ---------------
* Represents less than 1%.
(a) Based on 15,315,443 shares of Common Stock outstanding and calculated in
accordance with Rule 13d-3 under the Exchange Act.
(b) Includes (i) presently exercisable options to purchase 1,000,000 shares of
Common Stock held by Mr. Metropoulos; (ii) 23,500 shares of Common Stock
held directly of record by Mr. Metropoulos; (iii) 4,000 shares of Common
Stock held by an immediate family member; and (iv) 19,240 shares of Common
Stock for which Mr. Metropoulos is either the custodian or trustee. Mr.
Metropoulos disclaims beneficial ownership of any shares of Common Stock not
held directly of record by him.
(c) Represents presently exercisable options to purchase 210,000 shares of
Common Stock.
4
<PAGE> 7
(d) Includes (i) 141,575 shares of Common Stock held directly by Mr. Muse; (ii)
1,000 shares of Common Stock held by Mr. Muse's wife; (iii) 4,770 shares of
Common Stock held by various trusts for which Mr. Muse is the custodian; and
(iv) 5,000 shares of Common Stock held by a children's trust for which Mr.
Muse is the trustee.
(e) Represents presently exercisable options to purchase 79,000 shares of Common
Stock.
(f) Includes presently exercisable options to purchase 60,000 shares of Common
Stock.
(g) Represents presently exercisable options to purchase 30,000 shares of Common
Stock.
5
<PAGE> 8
PROPOSAL FOR THE ELECTION OF DIRECTORS
At its meeting on February 7, 1997, the Board of Directors of the
Corporation resolved to increase the number of directors on the Board of
Directors from five to six members in accordance with the Corporation's Bylaws.
Accordingly, action will be taken at the Annual Meeting for the election of six
directors to serve for one-year terms. The Corporation does not have a
nominating committee; the Board of Directors has nominated the persons named
below to stand for election as directors at the Annual Meeting. With the
exception of L. Hollis Jones, each of the persons nominated presently serves as
a director of the Corporation. Mr. Jones has consented to being named herein and
has agreed to serve if so elected. It is intended that the attorney-in-fact
named in the proxy card will vote FOR the election of the six nominees listed
below, unless instructions to the contrary are given therein. These nominees
have indicated that they are able and willing to serve as directors. However, if
some unexpected occurrence should require the substitution of some other person
or persons for any one or more of the nominees, it is intended that the
attorney-in-fact will vote FOR such substitute nominee(s) as the Board of
Directors may designate. All directors elected at the Annual Meeting will hold
office for their respective terms and until their respective successors are
elected and qualified.
The information appearing in the following table and the notes thereto,
with respect to the principal occupation or employment of each of the nominees
during the past five years and their present directorships, has been furnished
to the Corporation by the respective nominees. Unless otherwise stated, the
Corporation is the organization in which the nominee holds the position
indicated.
<TABLE>
<CAPTION>
DATE TERM
NAME AND PRINCIPAL OCCUPATION AGE EXPIRES DIRECTOR SINCE
----------------------------- --- --------- --------------
<S> <C> <C> <C>
C. Dean Metropoulos................................ 50 May 1997 December 1993
Chairman of the Board and Chief Executive Officer
L. Hollis Jones.................................... 42 -- --
President and Chief Operating Officer
John R. Muse....................................... 46 May 1997 March 1991
Managing Director and Principal
of Hicks, Muse, Tate & Furst Incorporated
Jack W. Evans...................................... 74 May 1997 May 1991
Chief Executive Officer and
President of Jack Evans Investments, Inc.
Jim L. Turner...................................... 51 May 1997 May 1991
Chairman of the Board and President of
Dr Pepper Bottling Company of Texas
Charles W. Tate.................................... 52 May 1997 August 1991
Managing Director and Principal
of Hicks, Muse, Tate & Furst Incorporated
</TABLE>
6
<PAGE> 9
C. Dean Metropoulos is the Chairman of the Board and Chief Executive
Officer of C. Dean Metropoulos & Partners, a private investment firm, having
served since its inception in November 1993. Mr. Metropoulos is also the
Chairman of the Board and Chief Executive Officer of International Home Foods,
Inc. From 1983 to June 1993, Mr. Metropoulos was Chairman and Chief Executive
Officer of Stella Foods, Inc., a national manufacturer, marketer and distributor
of specialty cheeses. Mr. Metropoulos was President of the Corporation from
March 1994 to December 1995 and has served as Chief Executive Officer of the
Corporation since March 17, 1994. Mr. Metropoulos serves as a director of
Ghirardelli Chocolate Company.
L. Hollis Jones is the President and Chief Operating Officer of the
Corporation, having served since August 1995. Prior to joining the Corporation,
Mr. Jones was President of Hollis Jones, Inc., a management consulting firm,
from January 1994 until July 1995. From February 1983 until January 1994, Mr.
Jones held various positions at Campbell Taggart, Inc., a subsidiary of
Anheuser-Busch, including President of its diversified division (June 1991-June
1992) and Vice President -- General Manager of its bakery division (June
1992-January 1994). Mr. Jones serves as a director of International Home Foods,
Inc.
John R. Muse is an Executive Vice President, Managing Director and
Principal of Hicks, Muse, Tate & Furst Incorporated ("HMTF"), a private
investment firm, having served since its inception in May 1989. From 1984 to
1989, Mr. Muse was Managing Director of Prudential Securities Incorporated
("Prudential Securities") in Dallas, Texas, where he served as the head of
investment/merchant banking activities for the southwestern region of the United
States. Prior to joining Prudential Securities, Mr. Muse served as senior vice
president and a director of Schneider, Bernet & Hickman, Inc. ("Schneider,
Bernet") in Dallas from 1979 to 1983 and was responsible for the company's
investment banking activities. Prior to his employment with Schneider, Bernet,
Mr. Muse was employed by Bateman, Eichler, Hill Richards in Los Angeles. Mr.
Muse is the Chairman of the Board of Hedstrom Corporation and Hat Brands, Inc.
and serves as a director of Olympus Real Estate Corporation. Mr. Muse also
serves on the Boards of Directors for the SMU Edwin L. Cox School of Business,
St. Philip's School and Community Center, University of Texas at Tyler Health
Center, the Dallas Summer Musicals and Goodwill Industries.
Jack W. Evans is the Chief Executive Officer and President of Jack Evans
Investments, Inc., a private investment firm. Prior to forming his private
investment firm in October 1990, Mr. Evans was Chairman of the Board, President
and Chief Executive Officer of the Cullum Companies, the parent corporation of
the Tom Thumb grocery store chain, from June 1983 until his retirement in
October 1990. Mr. Evans also served as Mayor of the City of Dallas, Texas from
1981 to 1983. Mr. Evans serves as a director of Randall's Food Markets, American
Title Company, Texas Utilities, First Bank, Ray Acquisitions and Brinker
International.
Jim L. Turner is the Chairman of the Board and President of Dr Pepper
Bottling Company of Texas, one of the largest independent bottling companies in
the United States. Prior to joining Dr Pepper Bottling Company of Texas in March
1985, Mr. Turner was a senior vice president (bottling operations) of the Dr
Pepper Company from February 1982 to March 1985. Mr. Turner serves as a director
of All American Bottling.
Charles W. Tate is an Executive Vice President, Managing Director and
Principal of HMTF, having served since joining HMTF in 1991. Prior to joining
HMTF, Mr. Tate was employed for 19 years by Morgan Stanley & Co. Incorporated
("Morgan Stanley") and last served as a Managing Director in Morgan Stanley's
Merchant Banking Division. Mr. Tate serves as a director of Berg Electronics
Corp., DESA Holdings Corporation, Hat Brands, Inc., Heritage Brands, Inc.,
International Wire Group, Inc. and International Home Foods, Inc.
7
<PAGE> 10
COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS
The Corporation has a standing Audit Committee, the members of which are
Messrs. Jack W. Evans (Chairman) and Jim L. Turner. Two meetings were held by
such committee during the year ended December 31, 1996. The principal functions
performed by such committee included nomination of the independent auditors of
the Corporation, review of the proposed scope of the independent audits and the
results thereof, review with management personnel of the independent auditors'
observations on financial policy, controls and personnel, and conferring with
the Chief Financial Officer concerning the audit.
The Corporation has a standing Compensation Committee, the members of which
are Messrs. Jack W. Evans (Chairman) and Jim L. Turner. Two meetings were held
by such committee during 1996. The functions performed by such committee
included making a recommendation to the Board of Directors as to the salary and
bonus of the Chief Executive Officer and administering the Corporation's stock
option plans.
The Corporation has a standing Executive Committee, the members of which
are Messrs. C. Dean Metropoulos and John R. Muse. The Executive Committee did
not meet during the year ended December 31, 1996. The functions performed by
such committee include managing the business affairs of the Corporation during
the interval between regular and special meetings of the Board of Directors.
Such committee is subject at all times to the control and direction of the Board
of Directors.
The total number of meetings of the Board of Directors held during the year
ended December 31, 1996 was three. The Board of Directors did not vote by
unanimous consent during the last year. During 1996, no director of the
Corporation attended less than 66-2/3% of the total number of meetings of the
Board of Directors and all committees on which such director served.
8
<PAGE> 11
EXECUTIVE MANAGEMENT AND DIRECTOR COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth all compensation, including bonuses, stock
option awards and other payments, paid or accrued by the Corporation during the
fiscal years shown below, to or for the Chief Executive Officer and the four
other most highly compensated executive officers (the Chief Executive Officer
and such other officers collectively referred to as the "Named Executive
Officers") of the Corporation.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------- ------------
SECURITIES ALL
UNDERLYING OTHER
SALARY BONUS OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) (#) ($)(a)
--------------------------- ---- ------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
C. Dean Metropoulos................. 1996 584,615(b) 350,000 400,000 2,375
Chairman of the Board 1995 350,000 450,000 -0- 1,981
and Chief Executive 1994 290,000(c) 450,000 600,000 -0-
Officer
L. Hollis Jones..................... 1996 169,231 200,000 200,000 5,935(d)
President and Chief 1995 57,115(e) 50,000 30,000 -0-
Operating Officer 1994 -- -- -- --
Michael J. Cramer................... 1996 137,500 35,000 30,000 2,375
Executive Vice 1995 137,500 33,400 30,000 883
President and Secretary 1994 137,500 25,000 -0- -0-
Darron K. Ash....................... 1996 108,642 60,000 75,000 1,826
Vice President and 1995 84,051 18,796 6,000 249
Chief Financial 1994 14,583(f) 7,520 -0- -0-
Officer
Joseph B. Armes..................... 1996 22,615(h) 10,500 30,000 -0-
Vice President and 1995 -- -- -- --
General Counsel(g) 1994 -- -- -- --
</TABLE>
- ---------------
(a) "All Other Compensation" includes contributions by the Corporation to its
401(k) savings plan of $2,375, $1,125, $2,375 and $1,826 on behalf of
Messrs. Metropoulos, Jones, Cramer and Ash, respectively.
(b) Includes (i) $484,615 in salary and consulting fees and (ii) $100,000 in
agreed upon expense reimbursement.
(c) Includes (i) $250,000 in salary and consulting fees and (ii) $40,000 in
agreed upon expense reimbursement.
(d) Includes $4,810 in an automobile allowance.
(e) Mr. Jones became employed with the Corporation in August 1995.
(f) Mr. Ash became employed with the Corporation in October 1994.
(g) Mr. Armes was elected Vice President and General Counsel of the Corporation
in November 1996.
(h) Mr. Armes became employed with the Corporation in October 1996.
9
<PAGE> 12
The following table reflects information with respect to option grants made
to the Named Executive Officers during 1996 under the Corporation's stock option
plans.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
PERCENT
OF TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED TO EXERCISE
UNDERLYING EMPLOYEES OR BASE GRANT DATE
OPTIONS IN FISCAL PRICE EXPIRATION PRESENT
NAME GRANTED(#)(a) YEAR ($/SH) DATE VALUE($)(b)
- -------------------------------------- ------------- ---------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C>
C. Dean Metropoulos................... 400,000 33% $10.25 7/16/06 1,660,000
L. Hollis Jones....................... 200,000 16% $10.25 7/16/06 830,000
Michael J. Cramer..................... 30,000 3% $10.25 7/16/06 124,500
Darron K. Ash......................... 75,000 6% $10.25 7/16/06 311,250
Joseph B. Armes....................... 30,000 3% $10.25 7/16/06 124,500
</TABLE>
- ---------------
(a) The options to purchase Common Stock were granted under The Morningstar
Group Inc. 1994 Incentive and Nonstatutory Stock Option Plan.
(b) The grant date present value of such option grants was determined using a
variation of the Black-Scholes option pricing model. The estimated values
presented are based on the following assumptions made for the option awards
as of the time of grant: an expected dividend yield of 0%; volatility of
40.31%; and a risk-free rate of 6.47%. The actual value, if any, that an
executive officer may realize from the exercise of the options will be the
excess of the fair market value of the Common Stock on the date of exercise
over the exercise price. See "Executive Management and Director
Compensation -- Aggregated Option Exercises in Last Fiscal Year and December
31, 1996 Option Values."
The following table reflects information with respect to options exercised
by the Named Executive Officers during 1996 and unexercised options held by the
Named Executive Officers at December 31, 1996.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND DECEMBER 31, 1996 OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
SHARES UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
ACQUIRED VALUE AT FISCAL YEAR-END(#) AT FISCAL YEAR-END($)(a)
ON EXERCISE REALIZED --------------------------- ---------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------ ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
C. Dean Metropoulos........... -0- -0- 1,000,000 -0- 11,625,000 -0-
L. Hollis Jones............... -0- -0- 210,000 20,000 2,003,750 257,500
Michael J. Cramer............. -0- -0- 60,000 -0- 660,000 -0-
Darron K. Ash................. -0- -0- 79,000 2,000 753,625 25,250
Joseph B. Armes............... -0- -0- 30,000 -0- 281,250 -0-
</TABLE>
- ---------------
(a) Based on the Corporation's closing stock price of $19.625 on December 31,
1996.
10
<PAGE> 13
METROPOULOS ADVISORY AGREEMENT
On October 1, 1993, the Corporation entered into an Advisory Agreement with
C. Dean Metropoulos (the "Advisory Agreement") pursuant to which Mr. Metropoulos
agreed to provide advisory services to the Corporation. As compensation for all
services rendered by Mr. Metropoulos pursuant to the Advisory Agreement and in
connection with his employment as Chief Executive Officer of the Corporation,
Mr. Metropoulos received from the Corporation during 1996 an aggregate of
$484,615 and was reimbursed $100,000 in expenses. The Advisory Agreement
terminated on October 1, 1996 in accordance with its terms.
EMPLOYMENT AGREEMENTS
Metropoulos Employment Agreement. Mr. Metropoulos entered into an
employment agreement with the Corporation on October 1, 1996. Pursuant to his
employment agreement, Mr. Metropoulos will serve as Chairman of the Board and
Chief Executive Officer of the Corporation through October 1, 1999, unless
earlier terminated. Unless either party gives written notice to the contrary
prior to October 1 of each year that the employment agreement is in effect, the
employment agreement will automatically be extended for an additional year so
that, as of each October 1, the remaining term of the employment agreement will
be three years.
The compensation provided to Mr. Metropoulos under his employment agreement
includes an annual base salary of not less than $600,000, subject to increase in
the event of a material acquisition or like event which materially changes or
increases his duties and responsibilities, and such benefits as are customarily
accorded the executives of the Corporation. In addition, Mr. Metropoulos is
entitled to an annual bonus in an amount not to exceed $300,000, such bonus to
be payable based on an EBITDA (as hereinafter defined) target established for
such year by the Board of Directors. "EBITDA" means the Corporation's earnings
before interest, taxes, depreciation and amortization.
Mr. Metropoulos' employment agreement also provides that if his employment
is terminated due to disability or death, Mr. Metropoulos or his estate, heirs
or beneficiaries, as the case may be, will receive, in addition to any other
benefits provided under any benefit plan, Mr. Metropoulos' then current base
salary and bonus (based on the prior year's bonus) for a period of two years
from his disability or death. In the event that (i) Mr. Metropoulos terminates
his employment with the Corporation for good reason (as defined), (ii) a
triggering event (as defined), including, but not limited to, a change in
control of the Corporation, occurs, or (iii) the Corporation terminates Mr.
Metropoulos' employment for any reason other than cause (as defined) or Mr.
Metropoulos' retirement or resignation without good reason, Mr. Metropoulos will
receive, in a lump sum, in cash, an amount equal to his then current base salary
and bonus (based on the prior year's bonus) for the balance of the then existing
three-year term of the employment agreement. Additionally, Mr. Metropoulos'
employment agreement contains a noncompetition provision pursuant to which he
has agreed that, for a period of two years following the date of his termination
of employment with the Corporation, he will not, subject to certain exceptions,
solicit certain employees, clients or customers of the Corporation or engage in,
invest in or render services to any entity having as its principal business the
specialty dairy foods business.
Cramer Employment Agreement. Mr. Cramer entered into an employment
agreement with the Corporation on October 1, 1995. Pursuant to his employment
agreement, Mr. Cramer will serve as the Executive Vice President and Secretary
of the Corporation and its subsidiaries. The employment agreement will continue
in effect until terminated in accordance with the provisions thereof (as
described below).
Pursuant to his employment agreement, Mr. Cramer is entitled to an annual
compensation package (the "Annual Compensation") based on the salary, bonus and
allowances, if any, earned by Mr. Cramer for the year 1995 (whether paid in 1995
or otherwise). Mr. Cramer also is entitled to such benefits as are customarily
accorded the executives of the Corporation. Mr. Cramer is required to devote
sufficient time, attention and energies to the business of the Corporation to
accomplish the duties set forth in his employment agreement.
11
<PAGE> 14
Mr. Cramer's employment agreement may be terminated (i) by the Corporation
for cause (as defined) and (ii) by Mr. Cramer upon giving the applicable written
notice to the Corporation. If Mr. Cramer's employment is terminated by the
Corporation for any reason other than cause, he will receive from the
Corporation an amount equal to 1.5 times his Annual Compensation for the last
full year of employment; provided, that such amount shall not be less than
$200,000. In addition, the Corporation will maintain Mr. Cramer's medical and
dental insurance for a period of one year after his termination on the same
terms and conditions which existed prior to his termination.
In the event the Corporation (i) sells a majority of its assets or (ii)
sells a majority of its shares of Common Stock, or control of a majority of the
Corporation's shares of Common Stock changes through a merger, sale,
consolidation or like occurrence or event (each a "Sale"), Mr. Cramer's
employment agreement provides that he may terminate such agreement upon the
expiration of any applicable notice periods and shall be paid at the closing of
the Sale a sum calculated in accordance with the provisions of his employment
agreement relating to termination without cause. Notwithstanding an exercise by
Mr. Cramer of the foregoing right of termination, Mr. Cramer has agreed to
remain in the employ of the Corporation for a maximum of six months after the
Sale if the Corporation so requests. In such event Mr. Cramer will receive, in
addition to the amounts set forth in the first sentence of this paragraph,
compensation for the period of extended employment with the Corporation at his
then current rate.
Jones Severance Arrangement. The Corporation has agreed that, in the event
that Mr. Jones is terminated by the Corporation for any reason other than cause,
Mr. Jones will receive from the Corporation a lump sum payment equal to one year
of his base salary.
Ash Change-in-Control Arrangement. The Corporation has agreed that, in the
event of a change-in-control of the Corporation on or prior to September 30,
1998, Mr. Ash will receive from the Corporation a sum equivalent to one year of
his base salary plus target bonus for such year. "Change-in-Control" means the
acquisition of a majority of the stock or all or substantially all of the assets
of the Corporation by any person or entity, a merger with another company where
the then current Board of Directors of the Corporation no longer controls the
surviving company or other similar consolidation of the Corporation with another
entity.
Armes Change-in-Control Arrangement. The Corporation has agreed that, in
the event of a Change-in-Control (as defined above) of the Corporation on or
prior to October 15, 1998, Mr. Armes will receive from the Corporation a sum
equivalent to one year of his base salary plus target bonus for such year.
COMPENSATION OF DIRECTORS
During 1996, each of the Corporation's directors except for Mr.
Metropoulos, an employee of the Corporation, received an option to purchase
shares of Common Stock of the Corporation in lieu of the $12,000 annual retainer
previously received by non-employee directors of the Corporation, plus a $1,000
fee for each regular meeting of the Board of Directors attended. Options to
purchase 10,000 shares of Common Stock, vesting ratably over a three-year period
(in lieu of a $12,000 annual retainer for each such year) commencing on the
first anniversary of the date of grant, were granted to each non-employee
director of the Corporation on July 16, 1996. In addition, the Board of
Directors has adopted the Amendment to Director Plan pursuant to which
additional shares of Common Stock have been reserved for issuance to the
non-employee directors of the Corporation. See "Proposal to Adopt Amendment No.
1 to The Morningstar Group Inc. 1996 Director Stock Option Plan." The
Corporation reimbursed all of its directors for expenses reasonably incurred by
them in the discharge of their duties.
COMPENSATION COMMITTEE INTERLOCKS
AND INSIDER PARTICIPATION
During the year ended December 31, 1996, the members of the Compensation
Committee of the Board of Directors were Messrs. Jack W. Evans and Jim L.
Turner. Neither Mr. Evans nor Mr. Turner served as an officer or employee of the
Corporation or any of its subsidiaries during fiscal 1996.
12
<PAGE> 15
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
Compensation Philosophy
The Corporation's compensation program is designed to enhance stockholder
value by linking a large part of executive compensation directly to those
aspects of performance that are highly correlated with share price. The
objective is to provide executives an opportunity to achieve total compensation
above the median of an industry peer group for exceptional performance. The
primary components of the compensation program are base salary, an annual cash
bonus based on individual and company performance and a long-term opportunity to
participate in increased stockholder value through grants of stock options.
The Compensation Committee of the Board of Directors of the Corporation
(the "Compensation Committee") was established in 1992 and since that time has
been comprised solely of independent, non-employee directors. The Compensation
Committee reviews and approves incentive plans, executive benefit programs and
perquisites. The Compensation Committee also grants stock options and
administers the Corporation's option plans. In reviewing executive compensation,
the Compensation Committee has recently relied on an independent and nationally
recognized compensation consulting firm -- SCA Consulting, LLC ("SCA
Consulting"). SCA Consulting conducted an extensive review of the Corporation's
total compensation program as it relates to senior management and compared such
of the Corporation's practices to those of the Corporation's peers. Based on
information provided to the Compensation Committee by SCA Consulting, the
Compensation Committee believes that the total compensation program for the
Corporation's executive group falls within the policy guidelines established by
the Compensation Committee.
The Compensation Committee believes that stock options are a superior
incentive to motivate key employees to act in the best interests of
stockholders. While many publicly-held companies have multiple long-term
incentive plans, frequently including cash, stock options, and restricted stock,
or combinations thereof, stock options are the only continuing long-term
incentive that the Corporation's Chief Executive Officer and other named
executive officers receive.
Compensation of Chief Executive Officer
As a direct result of Mr. Metropoulos' central role in the management of
the Corporation during the past three years, in 1996 the Compensation Committee
determined to assure his retention as Chairman of the Board and Chief Executive
Officer for a minimum of three years commencing on October 1, 1996 and
continuing until September 30, 1999. The Compensation Committee proposed and Mr.
Metropoulos agreed to a three-year compensation package which set his base
salary at $600,000 per year for the three-year period and his annual incentive
compensation opportunity at a maximum rate of $300,000 per year. The actual
annual incentive amount paid to Mr. Metropoulos each year will be determined
annually based on performance and may be less than $300,000.
In reviewing Mr. Metropoulos' performance for fiscal year 1996, the
Compensation Committee considered that this year's performance far exceeded
expectations as the most profitable year in the Corporation's history. The
Corporation's earnings per share for fiscal year 1996 increased 30% over fiscal
year 1995. Under Mr. Metropoulos' leadership, the Corporation has made a
dramatic turnaround. In addition, as a result of the acquisition of Presto Food
Products, Inc. in December 1996, the Corporation has increased in size
dramatically since Mr. Metropoulos became Chief Executive Officer.
The Compensation Committee made awards in 1996 based on a number of
factors, including the competitive level of long-term incentive compensation,
the prospective level of total compensation, the responsibilities and ability to
influence stockholder value, and the amount and terms of outstanding previous
awards. The Compensation Committee determined that the options granted to Mr.
Metropoulos in connection with his employment in 1994 should be disregarded in
considering future grants because those options were granted at a time when the
Corporation's financial condition and operating performance made the Corporation
a turnaround candidate, and those options were necessary to induce Mr.
Metropoulos to join the Corporation at a time when the Corporation's prospects
were unsure at best.
13
<PAGE> 16
The Compensation Committee recommended adoption of the Amendment to
Employee Plan, as described beginning on page 17. These grants are intended to
recognize the dramatic increase in the size of the Corporation as a result of
four acquisitions in 1996, as well as the increase in the Corporation's stock
price during this period. Under the grants to be made pursuant to the Amendment
to Employee Plan, stockholders must realize significant returns on their
investment before management can receive any significant gains on their options.
The grants to be made under the Amendment to Employee Plan will strongly focus
the Corporation's senior management on delivering significant stockholder value.
Federal Income Tax Considerations
Section 162(m) of the Internal Revenue Code of 1986, as amended (the
"Code"), limits the federal income tax deductibility of compensation paid to the
Corporation's Chief Executive Officer and to each of the other four most highly
compensated executive officers. The Corporation generally may deduct
compensation to such an officer only if the compensation does not exceed
$1,000,000 during any fiscal year or is "performance-based" as defined in
Section 162(m) of the Code. The Compensation Committee intends to design the
Corporation's compensation programs so that total compensation paid to any
employee will not exceed $1,000,000 in any one year, except for compensation
payments in excess of $1,000,000 which qualify as "performance-based." However,
the Corporation may pay compensation which is not deductible in limited
circumstances when prudent management of the Corporation so requires.
Jack W. Evans, Chairman
Jim L. Turner
14
<PAGE> 17
THE MORNINGSTAR GROUP INC. STOCK PERFORMANCE
The following graph depicts the Corporation's stock performance from April
24, 1992 (the date on which quotations for the Common Stock first appeared on
the NASDAQ National Market System) through December 31, 1996 relative to the
performance of the NASDAQ Stock Market (US Companies) Index and the NASDAQ Food
and Kindred Products Index (published by the Center for Research in Security
Prices of the University of Chicago Graduate School of Business). The following
graph also illustrates the performance of the NASDAQ Stock Market (US Companies)
Index and the NASDAQ Food and Kindred Products Index from December 31, 1991
through December 31, 1996. All indices shown in the graph have been reset to a
base of 100 as of April 24, 1992, and assume an investment of $100 on that date
and the reinvestment of dividends paid since that date.
[MORNINGSTAR PERFORMANCE]
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
CRSP Total Returns Index for: 12/31/91 12/31/92 12/31/93 12/30/94 12/29/95 12/31/96
- ---------------------------------------------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
THE MORNINGSTAR GROUP INC. 109.1 67.0 68.3 78.0 191.4
NYSE/AMEX/Nasdaq Stock Market (US Companies) 101.2 110.9 123.4 122.8 167.4 202.9
NASDAQ Stocks (SIC 2000-2099 US + Foreign) 106.7 113.3 121.2 104.1 116.5 123.9
Food and kindred products
NOTES:
A. The lines represent monthly index levels derived from compounded daily returns that include all dividends.
B. The indexes are reweighted daily, using the market capitalization on the previous trading day.
C. If the monthly interval, based on the fiscal year-end, is not a trading day, the preceding trading day is used.
D. The index level for all series was set to $100.0 on 04/24/92.
- -----------
</TABLE>
15
<PAGE> 18
RELATED PARTY TRANSACTIONS
STOCKHOLDERS' AGREEMENT
In connection with the completion of the Corporation's initial public
offering in 1992, all of the pre-offering stockholders of the Corporation
entered into a stockholders' agreement (the "Stockholders' Agreement"). During
the term of the Stockholders' Agreement, each party to the Stockholders'
Agreement has (i) agreed to vote such stockholder's shares of Common Stock for
the election to the Corporation's Board of Directors of all nominees of
HMC/Morningstar, L.P. ("HMCM"), and (ii) granted to HMCM a conditional
irrevocable proxy in order to ensure compliance with the voting provisions of
the Stockholders' Agreement. The Stockholders' Agreement will be effective until
the earlier to occur of (i) HMCM and the holders of an additional 66-2/3% of the
shares of Common Stock subject to the Stockholders' Agreement consenting to the
termination thereof, (ii) HMCM and its affiliates ceasing to own at least 5% of
the Corporation's outstanding shares of Common Stock, or (iii) February 5, 2002.
Based on the stock transfer records of the Corporation's transfer agent,
the Corporation believes that, as of December 31, 1996, HMCM owned beneficially
less than five percent (5%) of the Corporation's issued and outstanding Common
Stock; however, HMCM has advised the Corporation that the Stockholders'
Agreement may continue to be effective as there can be no assurance that certain
limited partners of HMCM have not transferred shares of Common Stock into
brokerage accounts, in which case such shares are still owned beneficially by
such limited partners and remain subject to the Stockholders' Agreement.
During the term of the Stockholders' Agreement, in the event that the
Corporation proposes to file a registration statement under the Securities Act
of 1933, as amended, the Corporation will notify the parties to the
Stockholders' Agreement and will, subject to certain exceptions (including
limitations imposed by any underwriters in connection with any offering),
include in such registration statement the aggregate amount of Common Stock
requested by such holders. The Corporation will pay all expenses incurred in
connection with the registration of such selling stockholders' Common Stock,
with the exception of fees, discounts and commissions payable to any
underwriters.
Each of John R. Muse and Charles W. Tate is a director, officer and
stockholder of Hicks, Muse & Co. (TX) Incorporated, the managing general partner
of the sole general partner of HMCM. Messrs. Muse and Tate are also directors of
the Corporation.
16
<PAGE> 19
PROPOSAL TO ADOPT
AMENDMENT NO. 2 TO
THE MORNINGSTAR GROUP INC.
1994 INCENTIVE AND NONSTATUTORY
STOCK OPTION PLAN
THE PLAN
The Corporation has in effect The Morningstar Group Inc. 1994 Incentive and
Nonstatutory Stock Option Plan (the "Employee Plan"), adopted by the Board of
Directors with stockholder approval in 1994.
Pursuant to the Employee Plan, the Corporation may grant options to
purchase shares of its Common Stock to key employees of the Corporation or any
of its subsidiaries, including officers and directors who are also employees,
and certain other eligible persons. The purposes of the Employee Plan are (i) to
provide an incentive to certain key employees of the Corporation and its
subsidiaries and certain other eligible persons to remain in the service of the
Corporation, (ii) to provide an opportunity for employees to acquire a
proprietary interest in the Corporation so that they will apply their best
efforts for the benefit of the Corporation, and (iii) to aid the Corporation in
attracting able persons to enter the service of the Corporation and its
subsidiaries.
General. Subject to adjustment for certain changes in the capital structure
of the Corporation, the aggregate number of shares as to which options may be
granted under the Employee Plan currently is 1,440,000. The maximum number of
shares of Common Stock with respect to which options may be granted pursuant to
the Employee Plan to a key employee or other eligible person is 400,000
(including any options which are cancelled or expire).
Options granted pursuant to the Employee Plan shall be either incentive
options (which are intended to meet the requirements of Section 422 of the
Code), or non-qualified options (which do not meet the requirements of Section
422 of the Code). Pursuant to the Employee Plan, no incentive options may be
granted after ten (10) years from the date the Employee Plan was adopted by the
Corporation. Subject to certain additional limitations, no option by its terms
shall be exercisable after the expiration of ten (10) years from the date of
grant of such option, or such other period (in the case of non-qualified
options) or such shorter period (in the case of incentive options) as the Stock
Option Committee in its sole discretion may determine. The exercise price of any
non-qualified option may not be less than the par value of the Common Stock on
the date of grant of such option. The exercise price of any incentive options or
options intended to comply with Section 162(m) of the Code (and thus be exempt
from the deduction limitation imposed by Section 162(m)) shall be not less than
100% of the fair market value per share of the Common Stock on the date of grant
of such options (or 110% in the case of certain incentive options).
Administration of the Plan. The Employee Plan provides that the
Compensation Committee of the Board of Directors shall serve as the Stock Option
Committee, shall administer the Employee Plan and shall have all of the powers
attendant thereto, including the power to grant options thereunder. The Employee
Plan provides that (i) unless otherwise determined by the Board of Directors,
the Stock Option Committee shall consist of no fewer than two members of the
Board of Directors, (ii) as long as the Corporation has a class of equity
securities registered under Section 12 of the Exchange Act, each member of the
Stock Option Committee shall be a "disinterested person" as defined in Rule
16b-3(c)(2)(i) promulgated under the Exchange Act, and (iii) each member of the
Stock Option Committee shall be an "outside director" as such term is used in
connection with Section 162(m) of the Code. Directors Jack W. Evans and Jim L.
Turner constitute the Stock Option Committee.
Performance Objectives. All options that will be granted under the Employee
Plan in 1997 will be subject to accelerated vesting upon the Corporation's
achieving certain performance goals (as specified in each optionee's grant
letter). Generally, such options will become exercisable nine years from the
date of grant unless sooner accelerated. Accelerated vesting for such options
becomes available if certain specified stock price targets (based on a 20%
annual growth rate) are achieved by the Corporation by the end of the five-year
17
<PAGE> 20
period commencing January 1, 1997; more specifically, in the event the
Corporation meets its stock price targets for (i) the first year during such
period, 20% of such options will become immediately exercisable; (ii) the second
year during such period, 40% of such options will become immediately
exercisable; (iii) the third year during such period, 60% of such options will
become immediately exercisable; (iv) the fourth year during such period, 80% of
such options will become immediately exercisable; and (v) the fifth year during
such period, 100% of such options will become immediately exercisable, in each
case reduced by any performance-based options previously vested. By way of
example only, if the fair market value of a share of Common Stock on the date of
the grant is $20.00, then the Corporation must achieve the following stock price
targets by the end of 1997, 1998, 1999, 2000 and 2001 in order for accelerated
vesting to become available: $24.00, $29.00, $35.00, $41.50 and $50.00,
respectively, which individual stock price targets will be deemed to be achieved
on the date (the "Accelerated Vesting Date") that the average of the daily
market prices for each day during the 20 consecutive trading days prior to the
Accelerated Vesting Date equals the applicable stock price target set forth
above. If the Corporation does not achieve the specified stock price targets for
a particular year, no options will become exercisable on an accelerated basis
for that year. Any performance-based options that have not vested at the end of
the five-year period will vest nine years from the date of grant.
Notwithstanding the foregoing, in the event of a Change of Control (as defined),
such options will become immediately exercisable. Furthermore, no additional
options will be authorized under the Employee Plan prior to the earlier to occur
of (i) five years from the date that the Board of Directors adopted the
Amendment to Employee Plan and (ii) the Corporation's achievement of the stock
price target applicable to the year 2001.
Federal Tax Consequences of the Plan. The discussion below is based on
federal income tax law and authorities as of the date of this proxy statement,
which are subject to change at any time. The law is technical and complex and
the discussion represents only a general summary of some of the applicable
provisions of federal income tax law.
Grant of Options
A grantee of an option (a "Holder") will realize no taxable income at the time
an option is granted under the Employee Plan or the Director Plan (as
hereinafter defined).
Incentive Stock Options
With regard to incentive stock options granted under the Employee Plan, no
income will be recognized by a Holder upon transfer to such Holder of shares of
Common Stock pursuant to the exercise of an incentive stock option. In order to
be eligible for this tax benefit, the Holder must make no disposition of the
shares of Common Stock so received before such Holder has held such shares for
at least one year and at least two years have passed since the Holder was
granted the option. Assuming compliance with this and other applicable tax
provisions, a Holder will realize long-term capital gain or loss when such
Holder disposes of such shares of Common Stock, measured by the difference
between the exercise price and the amount received for the shares at the time of
disposition. If the Holder disposes of shares acquired by exercise of the option
before the expiration of the above-noted periods, any amount realized from such
disqualifying disposition will be taxable as ordinary income in the year of
disposition to the extent that the lesser of:
(a) the fair market value of the shares on the date the option was
exercised, or
(b) the amount realized upon such disqualifying disposition,
exceeds the exercise price. Any amount realized in excess of fair market value
on the date of exercise will be treated as long or short-term capital gain,
depending upon the holding period of the shares. If the amount realized upon
such disposition is less than the exercise price, the loss will be treated as
long or short-term capital loss, depending upon the holding period of the
shares. In this connection, the Holder's holding period for shares acquired on
exercise of an option will begin on the day after the date the option is
exercised. For
18
<PAGE> 21
purposes of the alternative minimum tax, the Holder shall recognize income upon
the transfer of shares to him or her pursuant to the exercise of the incentive
stock option in an amount equal to the difference between the fair market value
of the shares and the exercise price.
Non-Qualified Stock Options
With regard to non-qualified stock options, whether granted under the Employee
Plan or the Director Plan, ordinary income generally will be realized by the
Holder at the time of exercise of an option, except with respect to shares which
are subject to a substantial risk of forfeiture and which are not transferable
on the date of the exercise of the option ("Nonvested Shares"), if any. The
amount of income recognized by a Holder on exercise of a non-qualified option
generally will be equal to the difference between the exercise price and the
fair market value of the shares on the date of exercise. In the case of Holders
who are employees, tax withholding is required on such income. When a Holder
disposes of shares acquired upon the exercise of the option, any amount received
in excess of the fair market value of the shares on the date of exercise will be
treated as long or short-term capital gain, depending upon the holding period of
the shares, and if the amount received is less than the fair market value of the
shares on the date of exercise, the loss will be treated as long or short-term
capital loss, depending upon the holding period of the shares. The optionee's
holding period for shares will begin on the day after the date of exercise.
With respect to any shares acquired upon the exercise of non-qualified options
which are Nonvested Shares, Section 83(b) of the Code permits the Holder to
elect, not more than 30 days after the date of exercise of the option to acquire
the Nonvested Shares, to include as ordinary income the difference between the
fair market value of the Nonvested Shares and the exercise price at the time of
exercise. If no Section 83(b) election is made, then the ordinary income
inclusion occurs on the date the Nonvested Shares become vested (because they
are no longer subject to a substantial risk of forfeiture or are transferable),
and the amount of such inclusion will be the excess of the fair market value of
the shares at the time they vest over the exercise price. The Holder's holding
period in Nonvested Shares will begin on the day after the date of exercise if a
Section 83(b) election is made; otherwise, the holding period will begin the day
after the shares vest.
If a Holder pays the exercise price by tendering other vested shares of Common
Stock then owned by such Holder, the difference between the fair market value
and adjusted basis of the tendered shares will not produce a taxable gain or
loss to the optionee; however, the Holder's tax basis for an equal number of
acquired shares will be the same as the Holder's tax basis for the tendered
shares. The remaining acquired shares will have an original tax basis equal to
the sum of the amount paid in cash, if any, plus any amount which the Holder is
required to recognize as income as a result of the exercise of the option.
In view of recent amendments to Section 16(b) of the Exchange Act and the
rules and regulations thereunder that are related thereto, any Holder who is an
officer of the Corporation or a beneficial owner of more than ten percent of any
class of registered equity securities of the Corporation should consult with his
or her tax advisor as to whether the timing of income recognition is deferred
for any period following the exercise of a non-qualified stock option (i.e., the
"Deferral Period"). If there is a Deferral Period, absent a written election
pursuant to Section 83(b) of the Code filed with the Internal Revenue Service
within 30 days after the date of exercise of the option, income recognition will
be deferred until the expiration of the Deferral Period.
Treatment of the Corporation
No deduction will be allowed to the Corporation for federal income tax
purposes at the time of the grant or exercise of an incentive stock option
issued under the Employee Plan. At the time of a disqualifying disposition of an
incentive stock option by a Holder, the Corporation will be entitled to a
deduction for the amount taxable to the optionee as ordinary income. The
Corporation will be entitled to a deduction for federal income tax purposes in
the same amount as a Holder is considered to have realized ordinary income in
connection with the exercise of a non-qualified stock option granted under the
Employee Plan or the Director Plan, subject to compliance with the requirements
of Section 162 of the Code. With respect to certain
19
<PAGE> 22
employees (the Chief Executive Officer and the other four most
highly-compensated officers), the deduction for compensation during the taxable
year is limited to $1,000,000 for each such person unless the requirements for
the "performance-based compensation" exception of Section 162(m)(4)(C) of the
Code have been satisfied. Options issued under the Employee Plan are intended to
qualify for the "performance-based compensation" exception in instances in which
the option exercise price is at least equal to the fair market value of the
stock subject to the option on the date of grant. In addition, to the extent
that the vesting of options is accelerated by a Change of Control or ownership
of the Corporation, in certain instances a portion of the income recognized with
respect thereto may be treated as "excess parachute payments" for purposes of
Section 280G of the Code, in which case a portion of such income would be
nondeductible to the Corporation, and the Holder would be subject to a 20%
excise tax on a portion of such payments.
DESCRIPTION OF AMENDMENT NO. 2
At its meeting on February 7, 1997, the Board of Directors of the
Corporation adopted the Amendment to Employee Plan (a copy of which is attached
hereto as Exhibit A) and directed that the Amendment to Employee Plan be
submitted to the stockholders for their approval. The Amendment to Employee Plan
provides for (i) an increase in the aggregate number of shares of Common Stock
as to which options may be granted under the Employee Plan to 2,940,000 shares
and (ii) an increase in the maximum number of shares of Common Stock as to which
options may be granted under the Employee Plan to a key employee or other
eligible person to 850,000 shares.
The following table sets forth the number of shares underlying the options
to be granted under the Employee Plan to (i) the Named Executive Officers; (ii)
the current executive officers of the Corporation as a group; (iii) the current
directors of the Corporation who are not executive officers as a group; and (iv)
all employees, including all current officers who are not executive officers, as
a group.
NEW PLAN BENEFITS
THE MORNINGSTAR GROUP INC. 1994 INCENTIVE AND NONSTATUTORY STOCK OPTION PLAN
<TABLE>
<CAPTION>
NAME AND POSITION SHARES
- ----------------- -------
<S> <C>
C. Dean Metropoulos......................................... 450,000
Chairman of the Board and Chief Executive Officer
L. Hollis Jones............................................. 150,000
President and Chief Operating Officer
Michael J. Cramer........................................... 15,000
Executive Vice President and Secretary
Darron K. Ash............................................... 50,000
Vice President and Chief Financial Officer
Joseph B. Armes............................................. 50,000
Vice President and General Counsel
All current executive officers as a group................... 715,000
All current directors who are not executive officers as a
group..................................................... -0-
All employees, including current officers who are not
executive officers, as a group............................ 575,000
</TABLE>
The Board of Directors favors a vote FOR the proposal to approve the
Amendment to Employee Plan. Unless a contrary indication is specified, the
shares represented by the enclosed proxy will be so voted.
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<PAGE> 23
PROPOSAL TO ADOPT
AMENDMENT NO. 1 TO
THE MORNINGSTAR GROUP INC.
1996 DIRECTOR STOCK OPTION PLAN
THE PLAN
The Corporation has in effect The Morningstar Group Inc. 1996 Director
Stock Option Plan (the "Director Plan"), adopted by the Board of Directors with
stockholder approval in 1996.
Pursuant to the Director Plan, the Corporation may grant options to
purchase shares of its Common Stock to directors of the Corporation who are not
employees of the Corporation. The purpose of the Director Plan is to provide
certain non-employee directors of the Corporation who are responsible for the
continued growth of the Corporation an opportunity to acquire a proprietary
interest in the Corporation, and thus to create in such persons an increased
interest in and a greater concern for the welfare of the Corporation.
General. Subject to adjustment for certain changes in the capital structure
of the Corporation, the aggregate number of shares as to which options may be
granted under the Director Plan currently is 50,000.
Options granted pursuant to the Director Plan shall be non-qualified
options (which do not meet the requirements of Section 422 of the Code). Subject
to certain additional limitations, no option by its terms shall be exercisable
after the expiration of ten (10) years from the date of grant of such option, or
such other period as the Option Committee in its sole discretion may determine.
The exercise price of any non-qualified option may not be less than the greater
of (i) the par value per share of the Common Stock and (ii) 100% of the fair
market value of a share of Common Stock on the date of grant of such option.
Administration of the Plan. The Director Plan provides that the Option
Committee of the Board of Directors shall administer the Director Plan and shall
have all of the powers attendant thereto. The Director Plan provides that (i)
unless otherwise determined by the Board of Directors, the Option Committee
shall consist of no fewer than two members of the Board of Directors and (ii) as
long as the Corporation has a class of equity securities registered under
Section 12 of the Exchange Act, each member of the Option Committee shall be a
"disinterested person" as defined in Rule 16b-3 promulgated under the Exchange
Act. Directors Jack W. Evans and Jim L. Turner constitute the Option Committee.
Performance Objectives. All options that will be granted under the Director
Plan in 1997 will be subject to accelerated vesting upon the Corporation's
achieving certain performance goals (as specified in each optionee's grant
letter). Generally, such options will become exercisable nine years from the
date of grant unless sooner accelerated. Accelerated vesting for such options
becomes available if certain specified stock price targets (based on a 20%
annual growth rate) are achieved by the Corporation by the end of the five-year
period commencing January 1, 1997; more specifically, in the event the
Corporation meets its stock price targets for (i) the first year during such
period, 20% of such options will become immediately exercisable; (ii) the second
year during such period, 40% of such options will become immediately
exercisable; (iii) the third year during such period, 60% of such options will
become immediately exercisable; (iv) the fourth year during such period, 80% of
such options will become immediately exercisable; and (v) the fifth year during
such period, 100% of such options will become immediately exercisable, in each
case reduced by any performance-based options previously vested. By way of
example only, if the fair market value of a share of Common Stock on the date of
the grant is $20.00, then the Corporation must achieve the following stock price
targets by the end of 1997, 1998, 1999, 2000 and 2001 in order for accelerated
vesting to become available: $24.00, $29.00, $35.00, $41.50 and $50.00,
respectively, which individual stock price targets will be deemed to be achieved
on the Accelerated Vesting Date. If the Corporation does not achieve the
specified stock price targets for a particular year, no options will become
exercisable on an accelerated basis for that year. Any performance-based options
that have not vested at the end of the five-year period will vest nine years
from the date of grant. Notwithstanding the foregoing, in the event of a Change
of Control (as defined), such options will become immediately exercisable.
Furthermore, no additional options will be authorized under the Director Plan
prior to the earlier to occur of (i) five years from the date that the Board of
Directors adopted
21
<PAGE> 24
the Amendment to Director Plan and (ii) the Corporation's achievement of the
stock price target applicable to the year 2001.
Federal Tax Consequences of the Plan. See description beginning on page 18
hereof.
DESCRIPTION OF AMENDMENT NO. 1
By unanimous written consent dated March 19, 1997, the Board of Directors
of the Corporation adopted the Amendment to Director Plan (a copy of which is
attached hereto as Exhibit B) and directed that the Amendment to Director Plan
be submitted to the stockholders for their approval. The Amendment to Director
Plan provides for an increase in the aggregate number of shares of Common Stock
as to which options may be granted under the Director Plan to 125,000 shares.
The following table sets forth the number of shares underlying the options
to be granted under the Director Plan to the non-employee director group.
NEW PLAN BENEFITS
THE MORNINGSTAR GROUP INC. 1996 DIRECTOR STOCK OPTION PLAN
<TABLE>
<CAPTION>
NAME AND POSITION SHARES
----------------- ------
<S> <C>
Non-employee director group................................. 60,000
</TABLE>
The Board of Directors favors a vote FOR the proposal to approve the
Amendment to Director Plan. Unless a contrary indication is specified, the
shares represented by the enclosed proxy will be so voted.
22
<PAGE> 25
PROPOSAL TO ADOPT
THE MORNINGSTAR GROUP INC.
1997 EMPLOYEE STOCK PURCHASE PLAN
BACKGROUND AND PURPOSE
By unanimous written consent dated March 19, 1997, the Board of Directors
of the Corporation adopted the Employee Stock Purchase Plan (a copy of which is
attached hereto as Exhibit C) and directed that the Employee Stock Purchase Plan
be submitted to the stockholders for their approval. The Employee Stock Purchase
Plan is intended to secure for the Corporation and its stockholders the benefits
of the incentive inherent in the ownership of the Corporation's capital stock by
present and future employees of the Corporation and its Subsidiaries (as that
term is defined in the Employee Stock Purchase Plan). The Employee Stock
Purchase Plan is intended to comply with the provisions of Sections 421, 423 and
424 of the Code and shall be administered, interpreted and construed in
accordance with such provisions. The following discussion is based on the
assumption that the Employee Stock Purchase Plan is in compliance with the
foregoing provisions of the Code.
ELIGIBILITY TO PARTICIPATE IN THE EMPLOYEE STOCK PURCHASE PLAN
Subject to the approval of the Corporation's stockholders, the Employee
Stock Purchase Plan will become effective on July 1, 1997. Generally, all
full-time employees of the Corporation and its Subsidiaries are eligible to
participate in the Employee Stock Purchase Plan; provided, that no employee will
be eligible if that employee would, upon the grant of an option pursuant to the
Employee Stock Purchase Plan, own five percent or more of the total combined
voting power or value of all classes of stock of the Corporation or any of its
Subsidiaries.
SHARES RESERVED UNDER THE EMPLOYEE STOCK PURCHASE PLAN
Subject to adjustment for certain changes in the capital structure of the
Corporation, the aggregate number of shares of Common Stock that may be issued
under the Employee Stock Purchase Plan is 500,000 shares. The shares of Common
Stock delivered by the Corporation pursuant to the Employee Stock Purchase Plan
may be treasury shares, newly issued shares or both. If and to the extent that
any option to purchase reserved shares is not exercised by a participating
employee for any reason, such shares will remain available for purposes of the
Employee Stock Purchase Plan but will not be deemed to increase the aggregate
number of shares to be reserved for purposes of the Employee Stock Purchase Plan
(subject to adjustment for certain changes in the capital structure of the
Corporation).
ADMINISTRATION
The Employee Stock Purchase Plan will be administered by the Compensation
Committee of the Board of Directors (the "Stock Purchase Committee") and will
consist of at least two directors who (i) are not employees of the Corporation,
(ii) are not eligible, and for a period of one year prior to the commencement of
their service on the Committee have not been eligible, to participate in the
Employee Stock Purchase Plan, and (iii) are "Non-Employee Directors" within the
meaning of Rule 16b-3 promulgated under the Exchange Act. The Stock Purchase
Committee shall serve at the pleasure of the Board of Directors and is
authorized to request the advice or assistance of, or to employ, such other
persons as are necessary for proper administration of the Employee Stock
Purchase Plan. Subject to the express provisions of the Employee Stock Purchase
Plan, the Stock Purchase Committee is authorized to (i) interpret the Employee
Stock Purchase Plan, (ii) prescribe and amend the rules and regulations relating
thereto, and (iii) make all other determinations necessary or advisable in
administering the Employee Stock Purchase Plan, all such determinations to be
final and binding on all persons. Directors Jack W. Evans and Jim L. Turner
constitute the Stock Purchase Committee.
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<PAGE> 26
ELECTION TO PARTICIPATE AND PAYROLL DEDUCTIONS
An eligible employee may elect to participate in the Employee Stock
Purchase Plan during the enrollment period designated by the Stock Purchase
Committee prior to the beginning of any calendar year (each a "Plan Year") in
which the Employee Stock Purchase Plan is effective. If an eligible employee
elects to participate in the Employee Stock Purchase Plan, he or she will
receive, on the first day of each Plan Year in which he or she elects to
participate (the "Grant Date"), an option to purchase shares of Common Stock of
the Corporation in accordance with the terms of the Employee Stock Purchase
Plan.
An eligible employee may elect to have the Corporation deduct from each
paycheck an amount ranging from one percent (1%) to ten percent (10%) of such
employee's gross compensation. All payroll deductions will be credited to the
participating employee's account, which account will accrue no interest.
An eligible employee's right to purchase shares of Common Stock pursuant to
his or her options under the Employee Stock Purchase Plan will be limited by
such employee's purchases of stock under all other employee stock purchase plans
of the Corporation and its Parent Corporation or Subsidiary Corporation (as
those terms are defined in Section 424 of the Code); all such purchases, when
aggregated, shall not exceed $25,000 of the fair market value of such stock
purchased (determined at the time the option is granted) for each calendar year.
Subject to the immediately preceding sentence, the maximum number of shares of
Common Stock which a participating employee may purchase pursuant to the options
granted to such participating employee on the Grant Date shall equal the
quotient of (i) the product of (a) .10 times (b) such participating employee's
Eligible Compensation (as defined) for the preceding calendar year divided by
(ii) the product of (a) .85 times (b) the fair market value of a share of Common
Stock on the date of grant.
Unless a participating employee elects to terminate his or her
participation in the Employee Stock Purchase Plan during the enrollment period
for a particular Plan Year, such employee will be deemed (i) to have elected to
participate in such Plan Year and (ii) to have authorized the same percentage of
payroll deduction for such Plan Year as applied to such employee's participation
in the Employee Stock Purchase Plan for the prior Plan Year.
A participating employee may terminate his or her participation in the
Employee Stock Purchase Plan at any time, whereupon no further payroll
deductions will be made, and all payroll deductions previously made will be
invested on the Investment Date (as hereinafter defined). Any participating
employee who terminates his or her participation in the Employee Stock Purchase
Plan may elect to participate in a subsequent Plan Year, if then eligible. In
addition, a participating employee may, at any time during the Plan Year (but
not more than four times), decrease his or her payroll deductions by one or more
percentage points, which decrease will become effective with the first pay
period of the first succeeding calendar quarter to which it may be practicably
applied.
In the event of a participating employee's retirement or termination of
employment prior to the Investment Date, the options granted to such
participating employee under the Employee Stock Purchase Plan will terminate,
and the amount in such participating employee's account will be refunded
(without interest) to such participating employee, and in the event of his or
her death will be paid to his or her estate.
PURCHASE PRICE AND METHOD OF PURCHASE
The purchase price for each share of Common Stock purchased under the
Employee Stock Purchase Plan (the "Exercise Price") will be the lesser of 85% of
the fair market value of such share on the Grant Date or 85% of the fair market
value of such share on the Investment Date.
As of the last day of any Plan Year (each an "Investment Date"), each
participating employee will be deemed, without any further action, to have
purchased that number of whole and fractional shares of Common Stock determined
by dividing the amount in his or her account by the Exercise Price, subject to
the limitations set forth in the third paragraph under the section entitled
"Election to Participate and Payroll Deductions" above. Any funds remaining in a
participating employee's account after the exercise of his or her options will
be refunded (without interest) to such participating employee. All such shares
will be maintained in separate accounts for the participating employees.
Dividends paid on such shares will be credited to each participating
24
<PAGE> 27
employee's account and will be automatically reinvested in whole and fractional
shares of Common Stock unless such employee elects not to have such dividends
reinvested.
TERMINATION
The Employee Stock Purchase Plan and all rights of participants thereunder
will terminate on the earliest to occur of (i) any Investment Date on which
participating employees become entitled to purchase a number of shares greater
than the number of shares reserved and available for purchase under the Employee
Stock Purchase Plan and (ii) a decision by the Board of Directors to terminate
the Employee Stock Purchase Plan. In the event of a termination under (i) above,
reserved shares remaining as of the termination date will be sold to
participating employees on a pro rata basis. In the event of a termination under
(ii) above, the effective date of such termination will be deemed to be the
Investment Date for the Plan Year and any outstanding options under the Employee
Stock Purchase Plan will be deemed to be exercised on such date.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general description of the United States federal income
tax consequences of participation in the Employee Stock Purchase Plan for
participants who are citizens or residents of the United States. State, local
and foreign tax consequences are not discussed herein. The following general
description does not address any specific individual's tax situation. Further,
the description is based upon present federal income tax laws, and thus is
subject to change when laws change.
Federal Income Tax Consequences to Participating Employees. The Employee
Stock Purchase Plan is intended to qualify as an "employee stock purchase plan"
within the meaning of Section 423 of the Code.
Participating employees are subject to current taxation with respect to
amounts withheld from their paychecks pursuant to the Employee Stock Purchase
Plan.
A participating employee will realize no taxable income on the Grant Date
when options are granted under the Employee Stock Purchase Plan. A participating
employee will realize no taxable income on the Investment Date upon the purchase
of shares of Common Stock pursuant to the exercise of such options. A
participating employee's tax basis in such shares of Common Stock acquired upon
exercise of the options will equal the purchase price for the shares under the
terms of the options. A participating employee's holding period in the shares of
Common Stock will begin the day after the date of exercise of the options.
Upon the sale or other disposition by a participating employee of shares of
Common Stock more than two years after the Grant Date of the options and more
than one year after the transfer of shares of Common Stock to such participating
employee (a "qualifying disposition") (or upon the death of a participating
employee at any time while owning the shares of Common Stock), the participating
employee is required to realize ordinary income equal to the lesser of (i) the
excess of (a) the fair market value of the shares of Common Stock at the time of
such disposition or death over (b) the purchase price for the shares of Common
Stock pursuant to the options, or (ii) the excess of (a) the fair market value
of the shares of Common Stock on the Grant Date over (b) the purchase price for
the shares of Common Stock pursuant to the options. To the extent that the
participating employee's amount realized on a qualifying disposition of such
shares of Common Stock exceeds the sum of the participating employee's tax basis
in the shares and the amount treated as ordinary income by the preceding
sentence, then that excess will be treated as long-term capital gain. If the
participating employee's amount realized on the sale of the shares is less than
such participating employee's tax basis in the shares, then the participating
employee will recognize a long-term capital loss on the sale of the shares.
To illustrate the foregoing, assume a participating employee purchases a
share of Common Stock for $85, the fair market value of such share of Common
Stock on the Grant Date was $100, and the fair market value of such share of
Common Stock on the Investment Date was $105. If the share is sold in a
qualifying disposition for $115, the participating employee has ordinary income
of $15 and long-term capital gains of $15. If the share is sold in a qualifying
disposition for $100, the participating employee has $15 of ordinary income and
no long-term capital gains. If the share is sold in a qualifying disposition for
$95, the participating
25
<PAGE> 28
employee has ordinary income of $10 and no long-term capital gains. If the share
is sold in a qualifying disposition for $80, the participating employee has a $5
long-term capital loss.
Upon the disposition by a participating employee of shares of Common Stock
within two years after a Grant Date or within one year after the transfer of
such shares of Common Stock to such participating employee (a "disqualifying
disposition"), a participating employee will realize ordinary income equal to
the excess of the fair market value of the shares of Common Stock on the
Investment Date over the purchase price for such shares of Common Stock. This
amount is taxable in the year of the disqualifying disposition even if the
shares of Common Stock are sold at a loss. Any difference between the amount
realized in a disqualifying disposition and the sum of the purchase price for
the shares of Common Stock and the amount required to be treated as ordinary
income from the disqualifying disposition gives rise to capital gain or loss, as
the case may be, which gain or loss will be long-term if the shares have been
held for more than one year at the time of sale.
To illustrate a disqualifying disposition, assume the share of Common Stock
was purchased for $85, its fair market value on the Grant Date was $100, and its
fair market value on the Investment Date was $105. If there is a disqualifying
disposition in which such share of Common Stock is sold for $115, then the
participating employee has ordinary income of $20 and capital gain of $10. If
the disqualifying disposition is a sale for $100, then the participating
employee has ordinary income of $20 and a capital loss of $5. If the
disqualifying disposition is a sale for $95, then the participating employee has
ordinary income of $20 and a $10 capital loss. If the disqualifying disposition
is a sale for $80, then the participating employee has ordinary income of $20
and a capital loss of $25.
Federal Income Tax Consequences to the Corporation. The Corporation is not
entitled to any deduction in connection with the purchase or sale of shares of
Common Stock, other than in connection with a disqualifying disposition. Upon a
disqualifying disposition of shares of Common Stock, the Corporation generally
is entitled to a deduction equal to the amount of ordinary income required to be
realized by the participating employee.
The Board of Directors favors a vote FOR the proposal to approve the
Employee Stock Purchase Plan. Unless a contrary indication is specified, the
shares represented by the enclosed proxy will be so voted.
26
<PAGE> 29
PROPOSAL FOR RATIFICATION OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors of the Corporation has appointed Arthur Andersen LLP
as independent auditors of the Corporation. Arthur Andersen LLP, certified
public accountants, have been the independent auditors of the Corporation since
April 1988. As a matter of sound corporate practice, the Board of Directors has
decided to submit to the stockholders for ratification the appointment of Arthur
Andersen LLP as the Corporation's independent auditors. If the stockholders do
not ratify the appointment of Arthur Andersen LLP, the appointment of the
independent auditors will be reconsidered by the Board of Directors. If the
stockholders ratify the appointment, the Board of Directors, in its discretion,
may direct the appointment of new independent auditors at any time during the
year if the Board of Directors believes that such a change would be in the best
interests of the Corporation.
A representative of Arthur Andersen LLP will be present at the meeting.
Such representative will be given the opportunity to make a statement if he or
she desires to do so and will be available to respond to appropriate questions.
The Board of Directors favors a vote FOR the proposal to ratify the
appointment of Arthur Andersen LLP. Unless a contrary indication is specified,
the shares represented by the enclosed proxy will be so voted. In the event the
appointment of Arthur Andersen LLP is not ratified by the stockholders, the
Board of Directors will reconsider the appointment and, if appropriate, will
make another appointment to be effective as soon as reasonably practicable.
SECTION 16(A) REPORTING
Section 16(a) of the Exchange Act requires the Corporation's directors and
executive officers, and persons who beneficially own more than 10% of the Common
Stock, to file with the Commission initial reports of beneficial ownership and
reports of changes in beneficial ownership of Common Stock and other equity
securities of the Corporation. Officers, directors and greater than 10%
beneficial owners are required by the Commission to furnish the Corporation with
copies of all Section 16(a) reports they file. To the Corporation's knowledge,
based solely on a review of the copies of such reports furnished to the
Corporation, all Section 16(a) filing requirements applicable to its officers
and directors were complied with for the year ended December 31, 1996, except
for the following: L. Hollis Jones (Form 3) and Darron K. Ash (Form 3).
STOCKHOLDER PROPOSALS
Stockholder proposals to be included in the Corporation's proxy statement
relating to the 1998 Annual Meeting of Stockholders of the Corporation must be
received no later than November 21, 1997 at the Corporation's principal
executive offices, 5956 Sherry Lane, Suite 1500, Dallas, Texas 75225-6522,
Attention: General Counsel. Stockholders of the Corporation who intend to
nominate candidates for election as a director or to bring other business before
the meeting must also comply with the applicable procedures set forth in the
Corporation's Bylaws. See "Stockholder Nomination of Director Candidates." The
Corporation will furnish copies of such Bylaw provisions upon written request to
the Secretary of the Corporation at the aforementioned address.
OTHER MATTERS
The Board of Directors knows of no other matters to be brought before the
Annual Meeting. However, if any additional matters are properly brought before
the Annual Meeting, it is the intention of the attorney-in-fact named in the
accompanying proxy to vote in accordance with his judgment on such matters.
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<PAGE> 30
VOTING REQUIREMENTS
With regard to the Proposal for the Election of Directors, votes may be
cast for or votes may be withheld from each nominee. Directors will be elected
by plurality vote. Therefore, votes that are withheld will be excluded entirely
from the vote and will have no effect. Abstentions may not be specified with
respect to the election of directors and, under Delaware law, broker non-votes
(as explained below) will have no effect on the outcome of the election of
directors. In general, a broker who holds securities in street name has limited
authority to vote on matters submitted at a stockholders meeting in the absence
of specific instructions from the beneficial owner. In the absence of
instructions from the beneficial owner or authorization from the National
Association of Securities Dealers, Inc. (the "NASD") to vote on specific matters
without the necessity of obtaining instructions from the beneficial owner, a
broker will specify a "non-vote" on particular matters. For purposes of Delaware
law, a broker non-vote is counted as present for quorum purposes, but is
generally excluded entirely from determining whether a particular matter has
been approved. Typically, however, brokers are permitted by the NASD to vote for
the election of directors without instructions from the beneficial owner.
With regard to the Proposal for the Approval of the Amendment to Employee
Plan, votes may be cast for or against the amendment, or stockholders may
abstain from voting on the particular matter. Approval of the amendment requires
the affirmative vote of at least a majority of the shares of Common Stock
present or represented by proxy at the Annual Meeting and entitled to vote.
Therefore, abstentions will have the effect of votes against the approval of the
amendment and, under Delaware law, broker non-votes will have no effect on the
outcome.
With regard to the Proposal for the Approval of the Amendment to Director
Plan, votes may be cast for or against the amendment, or stockholders may
abstain from voting on the particular matter. Approval of the amendment requires
the affirmative vote of at least a majority of the shares of Common Stock
present or represented by proxy at the Annual Meeting and entitled to vote.
Therefore, abstentions will have the effect of votes against the approval of the
amendment and, under Delaware law, broker non-votes will have no effect on the
outcome.
With regard to the Proposal for the Approval of the Employee Stock Purchase
Plan, votes may be cast for or against the plan, or stockholders may abstain
from voting on the particular matter. Approval of the plan requires the
affirmative vote of at least a majority of the shares of Common Stock present or
represented by proxy at the Annual Meeting and entitled to vote. Therefore,
abstentions will have the effect of votes against the approval of the plan and,
under Delaware law, broker non-votes will have no effect on the outcome.
With regard to the Proposal for Ratification of Independent Public
Accountants, votes may be cast for or against the ratification of the
appointment of the independent auditors, or stockholders may abstain from voting
on the particular matter. Approval of the ratification of the appointment of the
independent auditors requires the affirmative vote of at least a majority of the
shares of Common Stock present or represented by proxy at the Annual Meeting and
entitled to vote. Therefore, abstentions will have the effect of votes against
the approval of the ratification of the appointment of the independent auditors
and, under Delaware law, broker non-votes will have no effect on the outcome.
If no directions are specified in any duly signed and dated proxy card
received by the Corporation, the shares represented by that proxy card will be
counted as present for quorum purposes and will be voted by the attorney-in-fact
named in the proxy FOR the election of the director nominees recommended by the
Board of Directors, FOR the approval of the Amendment to Employee Plan, FOR the
approval of the Amendment to Director Plan, FOR the approval of the Employee
Stock Purchase Plan, FOR the ratification of the appointment of Arthur Andersen
LLP as independent auditors of the Corporation, and in accordance with the
discretion of the named attorney-in-fact on other matters properly brought
before the Annual Meeting.
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<PAGE> 31
STOCKHOLDER NOMINATION OF DIRECTOR CANDIDATES
The Bylaws of the Corporation provide that any stockholder of record who is
entitled to vote for the election of directors at a meeting called for that
purpose may nominate persons for election to the Board of Directors subject to
the following notice requirements.
As described more fully in the Corporation's Bylaws, a stockholder desiring
to nominate a person for election to the Board of Directors must send a written
notice to the Secretary of the Corporation setting forth (i) as to each person
who the stockholder proposes to nominate, all information required to be
disclosed in solicitations of proxies for election of directors, or as otherwise
required, in each case pursuant to Regulation 14A under the Exchange Act
(including such person's written consent to being named in the proxy statement
as a nominee and to serving as a director if elected) and (ii) as to the
stockholder giving the notice (A) the name and address of such stockholder as it
appears on the Corporation's books and (B) the class and number of shares of the
Corporation that are owned of record by such stockholder. To be timely, notice
of persons to be nominated by a stockholder as a director at a meeting of
stockholders must be delivered to or mailed and received at the principal
executive offices of the Corporation not less than 120 days before the first
anniversary of the preceding year's annual meeting.
The enclosed form of proxy has been prepared at the direction of the
Corporation, of which you are a stockholder, and is sent to you at the request
of the Board of Directors. The proxy named herein has been designated by your
Board of Directors.
The Board of Directors of the Corporation urges you, even if you presently
plan to attend the meeting in person, to execute the enclosed proxy and mail it
as indicated immediately. You may revoke your proxy and vote in person if you
are in fact able to attend.
THE MORNINGSTAR GROUP INC.
By Order of the Board of Directors
/s/ MICHAEL J. CRAMER
MICHAEL J. CRAMER
Secretary
Dallas, Texas
March 21, 1997
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<PAGE> 32
10-K REPORT AVAILABLE
A copy of the Corporation's annual report on Form 10-K, as filed with the
Securities and Exchange Commission, will be furnished without charge to
stockholders upon receipt by the Corporation of a request addressed to:
Joseph B. Armes
The Morningstar Group Inc.
5956 Sherry Lane, Suite 1500
Dallas, Texas 75225-6522
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EXHIBIT A
AMENDMENT NO. 2 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 2,940,000 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
850,000 (including any Options which are cancelled or expire)."
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EXHIBIT B
AMENDMENT NO. 1 TO THE MORNINGSTAR GROUP INC.
1996 DIRECTOR STOCK OPTION PLAN
I. The first sentence of Section 3 of the Director Plan shall be deleted and
restated in its entirety as follows:
"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 125,000 shares."
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EXHIBIT C
1997 EMPLOYEE STOCK PURCHASE PLAN
1. Definitions.
"Account" means an Employee Stock Purchase Plan account maintained by
Morningstar with respect to the Common Stock purchased by each Participating
Employee.
"Code" means the Internal Revenue Code of 1986, as amended.
"Committee" means the Compensation Committee of the Board of Directors of
The Morningstar Group Inc.
"Common Stock" means The Morningstar Group Inc. Common Stock, par value
$0.01 per share.
"Current Eligible Compensation" for any pay period means the gross amount
of Eligible Compensation with respect to which net amounts are actually paid in
such pay period.
"Eligible Compensation" means base salary, asset gathering compensation,
adjusted compensation, incentive compensation, overtime, bonuses and/or other
regular payments, unless otherwise determined by the Committee. Eligible
Compensation does not include any payments for shift differential, reimbursement
for expenses, deferred profit-sharing distributions, deferred compensation, or
other non-regular payments unless otherwise determined by the Committee.
"Eligible Employee" means employees eligible to participate in the Plan
pursuant to the provisions of Section 5.
"Fair Market Value" means the mean of the high and low sales prices of a
share of Common Stock on the NASDAQ Stock Market on the date in question or, if
the Common Stock shall not have been traded on such exchange on such date, the
mean of the high and low sales prices on such exchange on the first day prior
thereto on which the Common Stock was so traded or such other amount as may be
determined by the Committee by any fair and reasonable means.
"Grant Date" means the first day of the Plan Year.
"Investment Date" means the last day of the Plan Year.
"Morningstar" means The Morningstar Group Inc., a Delaware corporation.
"Participating Employee" means an employee (i) for whom payroll deductions
are currently being made or (ii) for whom payroll deductions are not currently
being made because he or she has reached the limitation set forth in Section 7.
"Parent Corporation" or "Subsidiary Corporation" has the meaning assigned
by Section 424(e) and Section 424(f) of the Code.
"Plan" means this The Morningstar Group Inc. 1997 Employee Stock Purchase
Plan.
"Plan Year" means a calendar year (or, in the case of the initial Plan
Year, the period beginning July 1, 1997 and ending December 31, 1997).
"Regular Paycheck" means bi-weekly, limited hour, and monthly base salary
paychecks.
"Rights" means options to purchase Common Stock of Morningstar in
accordance with the terms of the Plan granted to Participating Employees on each
Grant Date.
"Subsidiary" means any Subsidiary Corporation or Parent Corporation with
respect to Morningstar not excluded by the Committee from participation in the
Plan for the Plan Year, in the Committee's sole discretion.
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2. Purpose of the Plan.
The purpose of the Plan is to secure for Morningstar and its stockholders
the benefits of the incentive inherent in the ownership of Morningstar's capital
stock by present and future employees of Morningstar and its Subsidiaries. The
Plan is intended to comply with the provisions of Sections 421, 423 and 424 of
the Code and the Plan shall be administered, interpreted and construed in
accordance with such provisions.
3. Shares Reserved for the Plan.
There shall be reserved for issuance and purchase by Participating
Employees under the Plan an aggregate of 500,000 shares of Common Stock, subject
to adjustment as provided in Section 14. Shares subject to the Plan may be
shares now or hereafter authorized but unissued, or shares that were once issued
and subsequently reacquired by Morningstar. If and to the extent that any right
to purchase reserved shares shall not be exercised by any Participating Employee
for any reason, shares that have not been so purchased hereunder shall again
become available for the purposes of the Plan unless the Plan shall have been
terminated, but such unpurchased shares shall not be deemed to increase the
aggregate number of shares specified above to be reserved for purposes of the
Plan (subject to adjustment as provided in Section 14).
4. Administration of the Plan.
The Plan shall be administered, at the expense of Morningstar, by the
Committee. The Committee consists of not less than 2 members of the Board of
Directors who are not officers or in the employ of Morningstar, who are not
eligible, and for a period of one year prior to the commencement of their
service on the Committee have not been eligible, to participate in the Plan, who
are "Non-Employee Directors" within the meaning of Rule 16b-3 promulgated under
the Securities Exchange Act of 1934, as amended, and who shall serve at the
pleasure of the Board of Directors. The Committee may request advice or
assistance or employ such other persons as are necessary for proper
administration of the Plan. Subject to the express provisions of the Plan, the
Committee shall have authority to interpret the Plan, to prescribe, amend and
recent rules and regulations relating to it, and to make all other
determinations necessary or advisable in administering the Plan, all of which
determinations shall be final and binding upon all persons.
5. Eligible Employees.
All employees (within the meaning of Treasury Regulation Section
1.421-7(h)) of Morningstar and each Subsidiary on the Grant Date shall be
eligible to participate in the Plan, other than any such employee
(a) who has been employed by Morningstar or any Subsidiary for less
than ninety days as of the Grant Date;
(b) whose customary employment is 20 hours or less per week; or
(b) who owns immediately after the grant of Rights on the Grant Date,
stock possessing five percent or more of the total combined voting power or
value of all classes of stock of Morningstar or of any of Parent
Corporation or Subsidiary Corporation.
In determining stock ownership under this Section 5, the rules of Section 424(d)
of the Code shall apply, and stock that the employee may purchase under
outstanding options shall be treated as stock owned by the employee.
6. Election to Participate and Payroll Deductions.
Each Eligible Employee may elect to participate in the Plan during the
enrollment period designated by the Committee just prior to the beginning of a
Plan Year (the "Enrollment Period").
Each Eligible Employee may elect a payroll deduction of from 1% to 10% of
Current Eligible Compensation from each paycheck, in increments of 1% (i.e., 1%,
2%, 3% etc.). Elections under this Section 6 are subject to the limits set forth
in Section 7 and Section 8. All payroll deductions shall be credited, as
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promptly as practicable, to a book entry account in the name of the
Participating Employee (a "Payroll Account") and may be used by Morningstar for
any corporate purpose. No interest shall accrue on any Payroll Account.
Unless he or she elects otherwise during the Enrollment Period for the Plan
Year, an Eligible Employee who is a Participating Employee on the day before a
Plan Year commenced will be deemed (i) to have elected to participate in such
Plan Year and (ii) to have authorized the same percentage of payroll deduction
for such Plan Year as in effect for such Participating Employee on the day
before such Plan Year commenced.
A Participating Employee may at any time cease participation in the Plan by
filing the required form with Morningstar. The cessation will be effective as
soon as practicable, whereupon no further payroll deductions shall be made, and
payroll deductions shall be invested on the Investment Date as provided in
Section 10. Any Participating Employee who ceases to participate may elect to
participate in a subsequent Plan Year, if then eligible. A Participating
Employee may at any time during the Plan Year (but not more than four times)
decrease his or her payroll deductions by one or more percentage points by
filing the required form with Morningstar, which decrease shall become effective
with the first pay period of the first succeeding calendar quarter to which it
may be practicably applied.
7. Grant of Rights.
On the Grant Date, each Participating Employee shall be granted Rights in
accordance with the terms of the Plan. Subject to Section 8 below, the maximum
number of shares of Common Stock which a Participating Employee may purchase
pursuant to the Rights granted to such Participating Employee on the Grant Date
shall equal the quotient of (i) the product of (a) .10 times (b) such
Participating Employee's Eligible Compensation for the preceding calendar year
divided by (ii) the product of (a) .85 times (b) the Fair Market Value of a
share of Common Stock on the Grant Date.
8. Limitation of Number of Shares That an Employee May Purchase.
In accordance with Section 423(b)(8) of the Code, no right or option to
purchase shares under this Plan shall permit an employee to purchase stock under
all employee stock purchase plans of Morningstar and its Parent Corporation or
Subsidiary Corporations at a rate which in the aggregate exceeds $25,000 of Fair
Market Value of such stock (determined at the time the right is granted, which,
in the case of this Plan, is the Grant Date) for each calendar year in which the
right is outstanding at any time.
9. Purchase Price.
The purchase price for each share of Common Stock under the Rights (the
"Exercise Price") shall be the lesser of eighty-five percent (85%) of the Fair
Market Value of such share on the Grant Date or eighty-five percent (85%) of the
Fair Market Value of such share on the Investment Date.
10. Method of Purchase and Investment Accounts.
As of the Investment Date for each Plan Year, each Participating Employee
shall be deemed, without any further action, to exercise the Rights granted to
such Participating Employee and to have purchased, the number of whole and
fractional shares of Common Stock determined by dividing the amount of such
Participating Employee's Payroll Account by the Exercise Price, subject to the
limitations set forth in Section 7 and Section 8. Any funds remaining in a
Participating Employee's Payroll Account after exercise of the Rights shall be
refunded (without interest) to such Participating Employee as soon as
practicable. All such shares shall be maintained in separate Accounts for the
Participating Employees. All dividends paid with respect to such shares shall be
credited to each Participating Employee's Account, and will be automatically
reinvested in whole and fractional shares of Common Stock, unless the
Participating Employee elects not to have such dividends reinvested.
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11. Title of Accounts.
Each Account shall be in the name of the Participating Employee.
12. Rights as a Stockholder.
At the time funds from a Participating Employee's payroll deductions
account are used to purchase the Common Stock pursuant to the Rights, he or she
shall have all of the rights and privileges of a stockholder of Morningstar with
respect to whole shares purchased under the Plan whether or not certificates
representing full shares have been issued.
13. Rights not Transferable.
Rights granted under the Plan are not transferable by a Participating
Employee other than by will or the laws of descent and distribution and are
exercisable during his or her lifetime only by him or her.
14. Adjustment in Case of Changes Affecting Morningstar's Common Stock.
In the event of any change in the Common Stock of Morningstar by reason of
stock dividends, split-ups, corporate separations, recapitalizations, mergers,
consolidations, combinations, exchanges of shares and the like, the aggregate
number and class of shares available under the Plan and subject to the Rights
shall be adjusted appropriately; provided, however, that no adjustment shall be
made which would disqualify the Plan (or any Rights granted thereunder) as an
employee stock purchase plan (or as Rights granted thereunder) under the
provisions of Section 423 and Section 424 of the Code.
15. Retirement, Termination and Death.
In the event of a Participating Employee's retirement or termination of
employment prior to the Investment Date, the Rights granted to such
Participating Employee hereunder shall terminate, and the amount of such
Participating Employee's Payroll Account shall be refunded (without interest) to
such Participating Employee, and in the event of his or her death shall be paid
to his or her estate, any such refund or payment to be made as soon as
practicable.
16. Amendment of the Plan.
The Board of Directors may at any time, or from time to time, amend the
Plan in any respect; provided, however, that the Plan may not be amended in any
way that will cause Rights issued under it to fail to meet the requirements for
employee stock purchase plans as defined in Section 423 of the Code, including
stockholder approval if required.
17. Termination of the Plan.
The Plan and all rights of employees hereunder shall terminate:
(a) on the Investment Date that Participating Employees become
entitled to purchase a number of shares greater than the number of reserved
shares remaining available for purchase; or
(b) at any time, at the discretion of the Board of Directors.
In the event that the Plan terminates under circumstances described in (a)
above, reserved shares remaining as of the termination date shall be sold to
Participating Employees on a pro rata basis. In the event the Plan terminates
under circumstances described in (b) above, the effective date of such
termination shall be deemed to be the Investment Date for the Plan Year and the
Rights shall be deemed to be exercised on such date in accordance with Section
10 hereof.
18. Effective Date of the Plan.
The Plan shall be effective as of July 1, 1997.
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19. Governmental and Other Regulations.
The Plan, and the grant and exercise of the Rights to purchase shares
hereunder, and Morningstar's obligation to sell and deliver shares upon the
exercise of rights to purchase shares, shall be subject to all applicable
Federal state and foreign laws, rules and regulations, and to such approvals by
any regulatory or governmental agency as may, in the opinion of counsel for
Morningstar, be required.
20. Indemnification of Committee.
Services on the Committee shall constitute service as a Director of
Morningstar, so that members of the Committee shall be entitled to
indemnification and reimbursement as Directors of Morningstar pursuant to its
Certificate of Incorporation, By-Laws, or resolutions of its Board of Directors
or stockholders.
21. Shareholder Approval.
The Plan must be approved by the shareholders of Morningstar in accordance
with Section 423(b)(2) of the Code and Treasury Regulation Section 1.423-2(c)
within twelve months before or after the date of the Plan's adoption by the
Board of Directors of Morningstar. In the event such shareholder approval is not
obtained in accordance with such requirements, then the Plan shall terminate,
the Rights shall lapse, and all unexpended payroll deductions shall be refunded
(without interest) to Participating Employees as soon as practicable.
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THE MORNINGSTAR GROUP INC. ANNUAL MEETING
APRIL 24, 1997 CONTINUED FROM OTHER SIDE
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE NOMINEES AND
FOR PROPOSALS 2, 3, 4 AND 5. This Proxy will be voted as specified. IF NO
SPECIFIC DIRECTIONS ARE GIVEN, ALL OF THE VOTES ATTRIBUTABLE TO YOUR VOTING
SHARES WILL BE VOTED FOR THE NOMINEES.
1. ELECTION OF DIRECTORS.
Nominees: C. Dean Metropoulos, L. Hollis Jones, John R. Muse, Jack
W. Evans, Jim L. Turner and Charles W. Tate
(Mark only one)
[ ] VOTE FOR all nominees listed, except as marked to the contrary
above (if any).
(to withhold your vote for any individual nominee strike a
line through the nominee's name in the list above).
[ ] VOTE WITHHELD from all nominees.
2. APPROVAL OF AMENDMENT NO. 2 TO THE MORNINGSTAR GROUP INC. 1994
INCENTIVE AND NONSTATUTORY STOCK OPTION PLAN.
FOR [ ] AGAINST [ ]
ABSTAIN [ ]
3. APPROVAL OF AMENDMENT NO. 1 TO THE MORNINGSTAR GROUP INC. 1996
DIRECTOR STOCK OPTION PLAN.
FOR [ ] AGAINST [ ]
ABSTAIN [ ]
4. APPROVAL OF THE MORNINGSTAR GROUP INC. 1997 EMPLOYEE STOCK PURCHASE
PLAN.
FOR [ ] AGAINST [ ]
ABSTAIN [ ]
5. RATIFICATION OF THE APPOINTMENT OF ARTHUR ANDERSEN LLP AS INDEPENDENT
AUDITORS of the Corporation for the ensuing year.
FOR [ ] AGAINST [ ]
ABSTAIN [ ]
If any other business is properly brought before the meeting, the
undersigned acknowledges that the above named proxy will vote in his
discretion on such other business.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE
ENCLOSED ENVELOPE
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THE MORNINGSTAR GROUP INC. ANNUAL MEETING
APRIL 24, 1997
The undersigned having received the notice and accompanying Proxy Statement
for said meeting hereby appoints MICHAEL J. CRAMER with full power of
substitution, as the undersigned's proxy and attorney-in-fact to vote at
the Annual Meeting April 24, 1997 or at any adjournment thereof all shares
of The Morningstar Group Inc. which the undersigned may be entitled to
vote. The above proxy is hereby instructed to vote as shown on the reverse
side of this card.
This proxy must be dated
and signed exactly as
shown hereon.
Dated: , 1997
Executors, administrators,
trustees, etc., should
give full title as such.
If the signer is a
corporation, please sign
full corporate name by
duly authorized officer.
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