1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[x] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended September 30, 1996
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from to
Commission file number 0-19075
THE MORNINGSTAR GROUP INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2217488
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
5956 SHERRY LANE, SUITE 1500
DALLAS, TEXAS 75225-6522
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 360-4777
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X . No .
----- -----
As of September 30, 1996, the number of shares outstanding of each class
of common stock was:
Common Stock, $.01 par value: 15,261,061 shares
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31, September 30,
1995 1996
------------ ------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,811 $ 3,724
Receivables, net of allowance for doubtful accounts of $1,595 and $2,978 . 28,043 36,344
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,123 15,992
Prepaids and deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,597 2,042
Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,089 3,089
Net assets held for sale . . . . . . . . . . . . . . . . . . . . . . . . . 836 804
------------ ------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . 50,499 61,995
PROPERTY, PLANT AND EQUIPMENT:
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,713 5,843
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,804 21,512
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . 43,552 50,998
------------ ------------
Gross property, plant and equipment . . . . . . . . . . . . . . . . 68,069 78,353
Less: Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . (17,748) (20,999)
------------ ------------
Net property, plant and equipment . . . . . . . . . . . . . . . . . 50,321 57,354
INTANGIBLE AND OTHER ASSETS:
Identifiable intangible assets . . . . . . . . . . . . . . . . . . . . . . 1,847 3,278
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,671 65,452
Deferred financing costs . . . . . . . . . . . . . . . . . . . . . . . . . 1,259 980
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112 236
------------ ------------
Total intangible and other assets . . . . . . . . . . . . . . . . . 61,889 69,946
------------ ------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 162,709 $ 189,295
============ ============
The accompanying notes are an integral part of these consolidated statements.
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THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31, September 30,
1995 1996
------------ ------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 21,488 $ 28,462
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,869 22,541
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . 8,000 12,836
------------ ------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . 45,357 63,839
LONG-TERM DEBT (net of current maturities) . . . . . . . . . . . . . . . . . 36,000 37,164
OTHER LONG-TERM LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . 4,029 5,339
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 50,000,000 shares authorized;
15,244,261 shares in 1995 and 15,261,061 shares in 1996 issued
and outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152 153
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . 71,991 72,599
Treasury stock at cost (230,000 shares in 1995 and 767,000 shares in 1996) (1,840) (6,140)
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,020 16,341
------------ ------------
Total stockholders' equity and retained earnings . . . . . . . . . 77,323 82,953
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . . . . $ 162,709 $ 189,295
============ ============
The accompanying notes are an integral part of these consolidated statements.
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THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, dollars in thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
1995 1996 1995 1996
---------- ----------- ---------- ----------
NET SALES . . . . . . . . . . . . . . . . . . . . . . $ 73,167 $ 99,869 $ 219,943 $ 267,286
Cost of goods sold . . . . . . . . . . . . . . . . 56,872 79,281 168,511 207,317
Selling, distribution, and general and
administrative . . . . . . . . . . . . . . . . . 12,125 15,147 37,510 43,884
---------- ----------- ---------- ----------
OPERATING INCOME . . . . . . . . . . . . . . . . . . 4,170 5,441 13,922 16,085
OTHER (INCOME) AND EXPENSE:
Interest expense . . . . . . . . . . . . . . . . . 940 691 3,114 2,033
Dividend Income . . . . . . . . . . . . . . . . . . - - (268) -
Amortization of net deferred financing costs . . . 94 94 286 284
Other income, net . . . . . . . . . . . . . . . . . (292) 32 (683) (350)
---------- ----------- ---------- ----------
INCOME BEFORE INCOME TAXES . . . . . . . . . . . . . 3,428 4,624 11,473 14,118
Provision for income taxes . . . . . . . . . . . . 1,112 1,597 4,040 4,797
---------- ----------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS . . . . . . . . . . 2,316 3,027 7,433 9,321
DISCONTINUED OPERATIONS
Gain on disposal (a) . . . . . . . . . . . . . . . - - 184 -
---------- ----------- ---------- ----------
INCOME (LOSS) FROM DISCONTINUED OPERATIONS . . . . . - - 184 -
---------- ----------- ---------- ----------
NET INCOME . . . . . . . . . . . . . . . . . . . . . $ 2,316 $ 3,027 $ 7,617 $ 9,321
========== =========== ========== ==========
EARNINGS PER COMMON SHARE:
Earnings from continuing operations . . . . . . . . $ .15 $ .20 $ .49 $ .63
Earnings from discontinued operations . . . . . . . - - .01 -
---------- ----------- ---------- ----------
Earnings per common share . . . . . . . . . . . . . $ .15 $ .20 $ .50 $ .63
========== =========== ========== ==========
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING . . . . . . . . . . . . . . . . 15,390,199 14,828,554 15,284,802 14,802,981
(a) Net of applicable tax provision of . . . . . . $ - $ - $ 216 $ -
The accompanying notes are an integral part of these consolidated statements.
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THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, dollars in thousands)
Nine Months Ended
September 30,
-------------------------
1995 1996
----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers . . . . . . . . . . . . . . . . . . . . . . . . . . $ 224,440 $ 261,007
Interest received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 129
Income tax refund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 156
Cash paid to suppliers and employees . . . . . . . . . . . . . . . . . . . . . . (197,067) (238,645)
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,622) (2,306)
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,837) (4,013)
----------- ----------
NET CASH PROVIDED BY CONTINUING OPERATIONS . . . . . . . . . . . . . . . . . . . . 20,914 16,328
NET CASH USED BY DISCONTINUED OPERATIONS . . . . . . . . . . . . . . . . . . . . . - -
----------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES . . . . . . . . . . . . . . . . . . . . . 20,914 16,328
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of subsidiaries:
Working capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (58)
Property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . - (8,343)
Other assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (4,511
----------- ----------
- (12,912)
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9,052) (7,465)
Proceeds from sale of fixed assets . . . . . . . . . . . . . . . . . . . . . . . 2 -
Dividends received from Preferred Stock . . . . . . . . . . . . . . . . . . . . . 268 -
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 336 123
----------- ----------
Net cash used by continuing operations . . . . . . . . . . . . . . . . . . . . (8,446) (7,342)
Discontinued Operations:
Sale of Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000 -
----------- ----------
Net cash provided by discontinued operations . . . . . . . . . . . . . . . . . 3,000 -
NET CASH USED BY INVESTING ACTIVITIES . . . . . . . . . . . . . . . . . . . . . . (5,446) (20,254)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuing common stock . . . . . . . . . . . . . . . . . . . . . . . 813 139
Net payments under revolving credit facility . . . . . . . . . . . . . . . . . . (1,892) 12,000
Payments on long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . (12,000) (6,000)
Repurchase of treasury stock, at cost . . . . . . . . . . . . . . . . . . . . . - (4,300)
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES . . . . . . . . . . . . . . . . . (13,079) 1,839
----------- ----------
NET INCREASE (DECREASE) IN CASH . . . . . . . . . . . . . . . . . . . . . . . . . . 2,389 (2,087)
CASH, BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,152 5,811
----------- ----------
CASH, END OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,541 $ 3,724
=========== ==========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of businesses:
Fair value of assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . $ - $ 17,000
Cash paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 12,900
----------- ----------
Liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ - $ 5,100
=========== ==========
The accompanying notes are an integral part of these consolidated statements.
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THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
(Unaudited, dollars in thousands)
Nine Months Ended
September 30,
-------------------------
1995 1996
---------- ----------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,617 $ 9,321
ADJUSTMENTS TO RECONCILE NET INCOME TO
NET CASH FLOW FROM OPERATIONS:
Discontinued operations net income . . . . . . . . . . . . . . . . . . . . . . (184) -
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,810 4,953
Amortization of intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . 2,025 2,146
Increase in deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 2,866 21
Change in assets and liabilities, net of effects
from disposition of subsidiary:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,497 (6,279)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (916) (3,265)
Prepaids & deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,883 (371)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,796 5,325
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,229) 4,692
Long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . (251) (215)
---------- ----------
NET CASH PROVIDED BY CONTINUING OPERATIONS . . . . . . . . . . . . . . . . . . . . 20,914 16,328
DISCONTINUED OPERATIONS:
Discontinued operations net income . . . . . . . . . . . . . . . . . . . . . . 184 -
Gain on divestiture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (184) -
---------- ----------
NET CASH USED BY DISCONTINUED OPERATIONS . . . . . . . . . . . . . . . . . . . . . - -
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES . . . . . . . . . . . . . . . . . . . . . $ 20,914 $ 16,328
========== ==========
The accompanying notes are an integral part of these consolidated statements.
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THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
(1) CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements as of September 30, 1996,
and for the nine months then ended have been prepared by The Morningstar
Group Inc. (the "Company" or "Morningstar") without audit. In the
opinion of management, all necessary adjustments (which include only
normal recurring adjustments) to present fairly, in all material
respects, the consolidated financial position, results of operations and
changes in cash flows at September 30, 1996 and for the nine months then
ended, have been made. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been omitted. These
financial statements should be read in conjunction with the Company's
1995 financial statements contained in its most recent Annual Report on
Form 10-K. Certain prior year balances have been reclassified to conform
to the current year presentation.
On July 31, 1996, the Company completed the purchase of
substantially all of the assets of Cream Products Company ("Cream
Products") located in Chicago, Illinois. Cream Products' sales for the
year ended December 31, 1995 were approximately $24.6 million. Cream
Products is a manufacturer and distributor of dairy and non-dairy
products primarily supplying food makers and food service customers
throughout the United States, since 1938. The Company paid approximately
$5.9 million in cash for the assets acquired, and assumed approximately
$2.3 million in related liabilities. The source of funding was provided
by the Company's operations in conjunction with its revolving credit
facility.
On May 28, 1996, the Company completed the purchase of
substantially all of the assets of the La Corona Foods, Inc. ("La
Corona"), located in Glendale, Arizona. La Corona's sales for the fiscal
year ended September 30, 1995 were approximately $6.9 million. The
Company paid approximately $3.4 million in cash for the assets purchased,
and assumed approximately $2.5 million in related liabilities. The
source of funding for this acquisition was provided by the Company's
operations.
On March 19, 1996, the Company completed the acquisition of
substantially all of the assets of Merkt Cheese Company ("Merkt"),
located in Bristol, Wisconsin. Merkt recorded approximately $10.3
million in sales for the fiscal year ending June 30, 1995. Merkt's
revenues during the first quarter of 1996 were immaterial to the
Company's consolidated statements of operations. The Company paid
approximately $3.62 million in cash for the assets purchased, and assumed
approximately $.3 million in liabilities. The source of funding for this
acquisition was provided by the Company's operations.
On April 13, 1994, Morningstar completed the divestiture of its
Florida-based fluid milk operation Velda Farms Inc. ("Velda") to Engles
Dairy Acquisition L.P. ("Purchaser") at an approximate selling price of
$48 million in cash after working capital adjustments and $3 million of
9% Series A Preferred Stock (the "Velda Preferred Stock"). The Company
deferred the recognition of the gain on the Preferred Stock pending
realization of the gain. The sale of Velda completed the Company's
divestiture of its regional dairies. These regional dairy operations
along with the Company's other divested operations, have been treated as
discontinued operations, and previously published financial statements
have been restated to conform with this presentation.
On March 31, 1995, the Velda Preferred Stock was redeemed by its
issuer at face value plus accrued dividends. The $3.0 million gain on
the stock, less applicable taxes and other reserves of $2.3 million, was
reflected in discontinued operations in the Consolidated Statements of
Operations during the first quarter of 1995. The Company also recognized
$268,000 in dividends, related to the Velda Preferred Stock, during the
first quarter of 1995 which was recorded in continuing operations. The
Company recorded an additional loss from discontinued operations of
approximately $.5 million, net of tax benefits, during the second quarter
of 1995, related to discontinued operations reserves and other
liabilities.
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(2) INVENTORIES
Inventories are valued at the lower of cost or market. Cost is
determined using the first-in, first-out method. Inventories are
summarized as follows (in thousands):
At December 31, At September 30,
1995 1996
--------------- ----------------
Raw materials and supplies . . . . . . . . . . . . . . . . . . . $ 5,975 $ 8,590
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . 5,148 7,402
------------- ------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,123 $ 15,992
============= ============
Finished goods inventories include the costs of materials, labor
and plant overhead.
(3) DEBT
The Company's outstanding long-term debt and average interest
rates in effect on September 30, 1996 were:
Average
Amount of Interest
Debt Rate
-------------- --------
(in thousands)
Senior term loan . . . . . . . . . . . . . . . . . . . . . . $ 35,000 6.094 %
Revolving credit facility (a) . . . . . . . . . . . . . . . . 12,000 6.833 %
Industrial development revenue bonds . . . . . . . . . . . . . 3,000 4.050 %
------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . 50,000
Less: Current maturities . . . . . . . . . . . . . . . . . . 12,836
------------
Long term debt, net of current maturities . . . . . . . . . . $ 37,164
============
(a) At September 30, 1996, $12,000,000 was borrowed under the
revolving credit facility and letters of credit totaling
$8,394,000 were issued. At September 30, 1996, the Company
had $4,606,000 in additional borrowing capacity under the
terms of its revolving credit facility.
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(4) EARNINGS PER COMMON SHARE
The earnings (loss) per common share is computed based on the
weighted average number of shares of the Company's common stock and
common stock equivalents outstanding during the period. Common stock
equivalents represent the dilutive effect of the assumed exercise of
certain outstanding stock options.
(5) STOCK REPURCHASE PROGRAM
On June 21, 1995, the Company's Board of Directors announced that
it had approved a plan pursuant to which the Company may repurchase up to
$20 million of its common stock. The purchases will be effected through
open market transactions or negotiated transactions from time to time,
depending on the market price of the stock and other factors. As of
December 31, 1995, 230,000 shares had been repurchased by the Company at
a cost of $1.8 million. As of September 30, 1996, the Company had
purchased an additional 537,000 shares at a cost of $4.3 million.
(6) SUBSEQUENT EVENT
On October 20, 1996, the Company entered into a stock purchase
agreement to acquire Presto Food Products, Inc. ("Presto"). Presto is a
leading manufacturer and marketer of a broad line of creamers, toppings
and desserts with a geographic focus on North America and the Pacific
Rim. Presto's sales for the year ended December 31, 1995 were
approximately $139.5 million. This transaction is expected to close
prior to December 31, 1996.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Results of Operations - Third Quarter and Year-to-Date 1996
Compared with Third Quarter and Year-to-Date 1995
Net sales are classified into two categories: (i) Branded products, which
include historical sales of the Company's four national branded products -
International Delight(R) gourmet flavored and non-flavored coffee creamers,
Second Nature(R) egg product, Lactaid(R) reduced lactose and lactose-free milks
and Naturally Yours(R) fat free and regular sour cream; and (ii) Specialty
products, which includes all sales of the Company's specialty foods business
other than branded products.
Net sales for the third quarter of 1996 totaled $99.9 million, an increase
of $26.7 million from net sales for the same period in 1995. For the nine
months ended September 30, 1996, net sales were $267.3 million, an increase of
$47.3 million from the same period in 1995. The following table reflects net
sales by business category from year to year:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- --------------------------
Business Category 1995 1996 1995 1996
----------------- ----------- ------------ ----------- -----------
Branded products . . . . . . . . . . . . . . . . $ 27,322 $ 37,063 $ 82,798 $ 103,535
Specialty products . . . . . . . . . . . . . . . 45,845 62,806 137,145 163,751
----------- ------------ ----------- -----------
Net sales . . . . . . . . . . . . . . . . . . . $ 73,167 $ 99,869 $ 219,943 $ 267,286
=========== ============ =========== ===========
Net sales of branded products increased by 35.7% and 25.0% for the third
quarter and first nine months of 1996 when compared to similar periods in 1995.
This improvement was accomplished through increased sales of International
Delight and Lactaid. Net sales of specialty products increased 37.0% during
the third quarter of 1996 versus 1995, due to increases in volumes and prices
for UHT and cultured products offset in part by a reduction in juice and other
sales. Net sales of specialty products increased 19.4% during the nine month
period ended September 30, 1996 due to similar increases experienced in the
third quarter.
Gross margin was 20.6% and 22.4% for the third quarter and first nine
months of 1996 compared to 22.3% and 23.4% for the same periods in 1995. These
reductions in gross margins are the result of increased prices for certain raw
materials (primarily milk and cream) used by the Company, offset in part by a
favorable shift in the product mix toward branded products, which provide
higher margins.
Operating expense ratios were 15.2% and 16.4% for the third quarter and
first nine months of 1996 compared to 16.6% and 17.1% for the same periods in
1995. Distribution expenses, as a percent of net sales, decreased (by 1.3%)
during the nine months ended September 30, 1996, versus the same period in
1995, despite the increase in branded sales. This reflects the Company's
continuing efforts to optimize its distribution programs. Selling and marketing
expenses, as a percent of net sales, increased by 1.5% during the nine months
ended September 30, 1996 as compared to the same period in 1995. This increase
resulted primarily from increased marketing and promotional activities and
increased brokerage commissions related to the increase in branded sales.
General and administrative expenses, as a percent of net sales, decreased by
0.7% during the first nine months of 1996 as compared to the same period in
1995.
The Company's operating income during the third quarter of 1996 was $5.4
million, an increase of 30.5% from operating income for the third quarter of
1995 of approximately $4.2 million. For the first nine months, 1996 operating
income was $16.1 million, an increase of 15.5% from 1995 operating income of
$13.9 million. The increase in operating income from like periods in 1995 was
the result of branded sales which contribute higher operating margins offset in
part by increased raw material costs.
For the third quarter, interest expense declined by 26.5% from $.9 million
in 1995 to $.7 million in 1996. For the first nine months, interest expense
declined 34.7%. These reductions resulted primarily from lower average debt
levels in conjunction with lower average interest rates on the Company's debt.
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The Company recorded net income from continuing operations of $3.0 million
and $9.3 million in the third quarter and first nine months of 1996 compared to
$2.3 million and $7.4 million for the comparable periods of 1995. The improved
profitability was primarily the result of higher branded sales, lower operating
costs as a percent of net sales and reduced interest costs, offset in part by
lower gross margins.
Liquidity and Capital Resources
Cash provided by continuing operations was $16.3 million during the
first nine months of 1996 compared to cash provided by continuing operations of
$20.9 million during the first nine months of 1995. The sources of cash during
the first nine months of 1996 were the $16.3 million provided by continuing
operations, $.1 million from the exercise of stock options, $2.0 million from
reduced cash balances and $12.0 million in borrowings under the revolver.
These sources of cash were utilized to pay down debt of $6.0 million, to
provide for capital and other expenditures of $7.2 million, to provide $12.9
million for the purchase of acquisitions, and to provide $4.3 million for the
purchase of treasury stock.
Capital expenditures during the first nine months of 1996 were spent
primarily on equipment additions for increased operating efficiencies. As of
the end of the third quarter of 1996, the Company was in compliance with all
covenants and financial ratios contained in its Senior Credit Agreement. Based
upon the Company's projections for the remainder of 1996, management does not
anticipate any violation of the financial covenants contained in its Senior
Credit Agreement.
At September 30, 1996 the Company had approximately $4.6 million in unused
borrowing capacity under its revolving credit facility. The Company expects
that operating cash flows, together with borrowings under its revolving credit
facility, will be sufficient to fund the Company's requirements for working
capital, debt service, potential stock repurchases, and capital expenditures
for the foreseeable future.
Financing
As of September 30, 1996, the Company's senior credit agreement consisted
of a $97.0 million term loan (of which $35.0 million was outstanding) and a
$25.0 million revolving credit facility. As of September 30, 1996, $12.0
million borrowed under the revolving credit facility and approximately $8.4
million in letters of credit were outstanding.
On April 13, 1994, Morningstar completed the divestiture of Velda, its
Florida-based fluid milk operation, to Engles Dairy Acquisition L.P. at an
approximate selling price of $48 million in cash after working capital
adjustments, and $3.0 million of 9% Series A Preferred Stock. Following the
application of the cash proceeds on April 13, 1994, the Company had no revolver
balance outstanding and had a remaining term loan balance of approximately
$64.2 million. The Company made additional term loan principal payments during
the year ended December 31, 1994, and 1995, of approximately $11.8 million and
$14.0 million, respectively. Additionally, the Company paid its scheduled term
loan principal payments of $2.0 million each during March, June and September
of 1996. The remaining amortization schedule for the term loan is as follows:
Approximate
Quarterly payment date(s) Quarterly payment
---------------------------------- -----------------
December 20, 1996 $2,000,000
March 20, 1997 $1,798,000
June 20, 1997 - September 20, 1998 $4,519,000
December 20, 1998 $4,088,000
10
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
To the knowledge of the Company, there are no reportable suits or
proceedings pending or threatened against or affecting the Company other than
those encountered in the ordinary course of the Company's business and
described in the Company's most recent Annual Report on Form 10-K.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Calculation of weighted average shares outstanding.
(b) Reports on Form 8-K.
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE MORNINGSTAR GROUP INC.
/s/ DARRON K. ASH
------------------------------------------
Darron K. Ash
Vice President and Chief Financial Officer
(Authorized Officer)
Date: November 14, 1996
12
14
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27 Financial Data Schedule
99(A) Calculation of weighted average shares outstanding.