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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 June 30, 1997
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______________ to _________________
Commission file number 0-19934
THE MORNINGSTAR GROUP INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2217488
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
5956 SHERRY LANE, SUITE 1500
DALLAS, TEXAS 75225-6522
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 360-4777
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X , No .
--- ---
As of July 31, 1997, the number of shares outstanding of each class of
common stock was:
Common Stock, $.01 par value: 15,442,941 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)
June 30, December 31,
1997 1996
------------- -------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash............................................................................. $ 2,167 $ 4,786
Receivables, net of allowance for doubtful accounts of $8,852 and $6,676 ....... 48,038 57,802
Inventories...................................................................... 25,689 25,400
Prepaids and other............................................................... 2,599 3,015
Deferred tax assets.............................................................. 7,339 7,339
Net assets held for sale......................................................... 630 676
------------- -------------
Total current assets.................................................... 86,462 99,018
PROPERTY, PLANT AND EQUIPMENT:
Land............................................................................. 12,551 7,843
Buildings ....................................................................... 35,131 29,507
Machinery and equipment.......................................................... 80,189 70,239
------------- -------------
Gross property, plant and equipment..................................... 127,871 107,589
Less: Accumulated depreciation.................................................. (27,163) (22,807)
------------- -------------
Net property, plant and equipment....................................... 100,708 84,782
INTANGIBLE AND OTHER ASSETS:
Identifiable intangible assets................................................... 71,808 73,146
Goodwill......................................................................... 90,189 96,175
Deferred financing costs......................................................... 2,495 2,731
Other assets..................................................................... 661 139
------------- -------------
Total intangible and other assets....................................... 165,153 172,191
------------- -------------
TOTAL ASSETS....................................................................... $ 352,323 $ 355,991
============= =============
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)
June 30, December 31,
1997 1996
------------- -------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................................. $ 27,102 $ 32,968
Accrued liabilities.............................................................. 36,364 39,923
Current portion of long-term debt................................................ 11,500 8,000
------------- -------------
Total current liabilities................................................ 74,966 80,891
LONG-TERM DEBT (net of current maturities)......................................... 169,200 177,349
OTHER LONG-TERM LIABILITIES........................................................ 3,020 3,269
DEFERRED TAX LIABILITIES........................................................... 5,694 5,694
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 50,000,000 shares authorized;
15,382,942 shares in 1997 and 15,261,061 shares issued in 1996................. 153 153
Additional paid-in capital....................................................... 73,873 73,179
Treasury stock, at cost (767,000 shares in 1997 and 1996)........................ (6,140) (6,140)
Retained earnings ............................................................... 31,557 21,596
------------- -------------
Total stockholders' equity............................................... 99,443 88,788
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......................................... $ 352,323 $ 355,991
============= =============
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 Six Months Ended
June 30, June 30,
--------------------------- -----------------------
1997 1996 1997 1996
----------- ----------- ----------- ------
NET SALES................................................ $ 140,374 $ 85,693 $ 270,672 $ 167,417
Cost of goods sold..................................... 100,953 65,698 196,022 128,036
Selling, distribution, and general and administrative.. 26,337 14,239 51,223 28,737
----------- ----------- ----------- -----------
OPERATING INCOME......................................... 13,084 5,756 23,427 10,644
OTHER (INCOME) AND EXPENSES:
Interest expense....................................... 3,310 645 6,562 1,342
Amortization of deferred financing costs............... 116 95 236 190
Other income, net...................................... (131) (191) (249) (382)
----------- ----------- ----------- ------------
INCOME BEFORE INCOME TAXES............................... 9,789 5,207 16,878 9,494
Provision for income taxes............................. 4,012 1,744 6,917 3,200
----------- ----------- ----------- -----------
NET INCOME............................................... $ 5,777 $ 3,463 $ 9,961 $ 6,294
=========== =========== =========== ===========
EARNINGS PER COMMON SHARE................................ $ .37 $ .23 $ .64 $ .42
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING.......................... 15,716,000 14,724,000 15,644,000 14,778,000
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)
Six Months Ended
June 30,
---------------------------
1997 1996
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers......................................................... $ 280,622 $ 169,021
Interest received.................................................................... 35 127
Income tax refund.................................................................... - 156
Cash paid to suppliers and employees................................................. (245,771) (148,572)
Interest paid........................................................................ (7,415) (1,617)
Income taxes paid.................................................................... (7,773) (2,807)
----------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES.............................................. 19,698 16,308
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of subsidiary:
Working capital..................................................................... (1,290) (125)
Property, plant and equipment....................................................... (1,559) (3,613)
Other assets........................................................................ (4,151) (3,315)
----------- ----------
Net cash used by acquisition of subsidiary...................................... (7,000) (7,053)
Capital expenditures................................................................ (10,121) (4,455)
Proceeds from sale of fixed assets.................................................. 19 -
Other............................................................................... (1,260) 1,173
----------- ----------
NET CASH USED BY INVESTING ACTIVITIES.................................................. (18,362) (10,335)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock............................................... 694 118
Net payments under revolving credit facility......................................... (649) -
Payments on long-term debt........................................................... (4,000) (4,000)
Purchase of treasury stock........................................................... - (4,300)
----------- ----------
NET CASH USED BY FINANCING ACTIVITIES.................................................. (3,955) (8,182)
----------- ----------
NET DECREASE IN CASH................................................................... (2,619) (2,209)
CASH, BEGINNING OF PERIOD.............................................................. 4,786 5,811
----------- ----------
CASH, END OF PERIOD.................................................................... $ 2,167 $ 3,602
=========== ==========
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 OPERATIONS
(Unaudited, dollars in thousands)
Six Months Ended
June 30,
---------------------------
1997 1996
----------- -----------
NET INCOME.............................................................................. $ 9,961 $ 6,294
ADJUSTMENTS TO RECONCILE NET INCOME TO
NET CASH FLOW FROM OPERATIONS:
Depreciation.......................................................................... 5,243 2,938
Amortization of intangibles........................................................... 2,988 1,350
Increase in deferred taxes............................................................ - 21
Change in assets and liabilities, net of effects from acquisition of
subsidiary:
Accounts receivable............................................................. 10,477 1,604
Inventories..................................................................... 398 (1,094)
Prepaids and other.............................................................. 416 (70)
Accounts payable................................................................ (5,866) 2,384
Accrued liabilities............................................................. (3,670) 3,018
Long-term liabilities........................................................... (249) (138)
----------- -----------
NET CASH PROVIDED BY OPERATIONS......................................................... $ 19,698 $ 16,308
=========== ===========
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
June 30, 1997
(1) CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements as of June 30, 1997, and for the
six 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
June 30, 1997, and for the six months then ended, have been made. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been omitted. These financial statements should be read in
conjunction with the Company's 1996 financial statements contained in its
most recent Annual Report on Form 10-K. Certain prior year balances have
been reclassified to conform to the current year presentation.
On February 3, 1997, the Company completed the purchase of
substantially all of the assets of the frozen whipped toppings business of
Van de Kamp's, Inc. ("VDK"). VDK's sales for the year ended December 31,
1996 were approximately $13.1 million. VDK is a manufacturer and
distributor of frozen whipped toppings primarily supplying retail
customers throughout the United States. The Company paid approximately
$7.0 million in cash for the assets acquired, and assumed approximately
$.1 million in related liabilities. The source of funding was provided by
the Company's operations in conjunction with its revolving credit
facility.
During the first six months of 1997, the company received appraised
values on certain assets acquired in the Presto Food Products, Inc.
acquisition. As a result, the allocation of the purchase price was revised
resulting in a reclassification of $9.2 million from goodwill to property,
plant and equipment.
(2) INVENTORIES
Inventories are valued at the lower of cost or market. Cost is
determined using the first-in, first-out method. Inventories are
summarized as follows (in thousands):
At At
June 30, December 31,
1997 1996
-------------- -----------
Raw materials and supplies................................................... $ 14,443 $ 11,767
Finished goods............................................................... 11,246 13,633
-------------- -------------
Total...................................................... $ 25,689 $ 25,400
============== =============
Finished goods inventories include the costs of materials, labor and plant
overhead.
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(3) DEBT
The Company's outstanding long-term debt and average interest rates in
effect on June 30, 1997 were:
Average
Amount of Interest
Debt Rate
-------------- ------------
(in thousands)
Senior term loan................................................... $ 156,000 7.130%
Revolving credit facility (a)...................................... 21,700 7.256%
Industrial development revenue bonds............................... 3,000 4.080%
---------------
Total....................................................... 180,700
Less: Current maturities.......................................... 11,500
--------------
Long-term debt, net of current maturities.......................... $ 169,200
==============
-----------------
(a) As of June 30, 1997, approximately $21,700,000 was
outstanding under the revolving credit facility and letters
of credit totaling $7,974,000 were issued. As of June 30,
1997, the Company had $30,326,000 in additional borrowing
capacity under the terms of its revolving credit facility.
(4) EARNINGS PER COMMON SHARE
The earnings per common share is computed based on the weighted average
number of shares of the Company's common stock and common stock
equivalents outstanding during the period. Common stock equivalents
represent the dilutive effect of the assumed exercise of certain
outstanding stock options.
The Company intends to adopt SFAS No. 128 "Earnings Per Share" "SFAS
128" effective December 15, 1997 and present December 31, 1997 and prior
periods earnings per share under SFAS 128. Early adoption of the new
statement is not permitted. The calculation of basic earnings per share
under SFAS 128 will have a favorable impact as it excludes potentially
dilutive options previously included in the calculation of primary
earnings per share.
(5) STOCK REPURCHASE PROGRAM
On June 21, 1995, the Company's Board of Directors announced that it
had approved a plan pursuant to which the Company may repurchase up to
$20.0 million of its common stock. The purchases will be effected through
open market transactions or negotiated transactions from time to time,
depending on the market price of the stock and other factors. As of
December 31, 1996, 767,000 shares had been repurchased by the Company at a
cost of $6.1 million. As of June 30, 1997, the Company had not purchased
any additional shares.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION.
Results of Operations - Second Quarter and Year - to - Date 1997 Compared with
Second Quarter and Year - to - Date 1996
Net sales are classified into three categories: (i) Branded products,
which include sales of the Company's seven nationally branded products
- --International Delight(R), a gourmet-flavored and non-flavored coffee creamer;
Second Nature(R), a refrigerated no-cholesterol egg substitute; Mocha Mix(R),
non-dairy coffee creamers; Naturally Yours(TM), fat-free and regular, real
dairy sour cream; Jon Donaire(R), cheesecakes and desserts; Wacky Willie(TM),
flavored shakes; and, in the western two-thirds of the United States,
Lactaid(R), lactose-free and lactose-reduced milks produced under license from
McNeil Consumer Products Company, a subsidiary of Johnson & Johnson; (ii)
Proprietary products, which include the Company's sales of yogurt, aerosol
toppings, bakery toppings and icings, and frozen pre-whipped toppings; and
(iii) Specialty products, which include all sales of the Company's specialty
foods business other than branded products and proprietary products.
Net sales for the second quarter of 1997 totaled $140.4 million, an
increase of $54.7 million from net sales for the same period in 1996. For the
six months ended June 30, 1997, net sales were $270.7 million, an increase of
$103.3 million from the same period in 1996. The following table reflects net
sales by product category from year to year (dollars in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ---------------------------
1997 1996 1997 1996
------------ ------------- ------------ -----------
Product Category
Branded products $ 54,757 $ 32,937 $ 108,687 $ 66,472
Proprietary products 41,111 16,735 73,210 30,993
Specialty products 44,506 36,021 88,775 69,952
----------- ------------ ----------- -----------
Net Sales $ 140,374 $ 85,693 $ 270,672 $ 167,417
=========== ============ =========== ===========
Net sales of branded products increased by 66.2% and 63.5% for the second
quarter and first six months of 1997, respectively, when compared to similar
periods in 1996. This improvement was accomplished through increased sales of
International Delight, Naturally Yours, Wacky Willie and Lactaid. The
acquisition of Presto Food Products, Inc. ("Presto") accounted for
approximately $12.7 million and $23.8 million of branded sales during the
second quarter and first six months of 1997, respectively. Net sales of
proprietary products increased by 145.7% and 136.2%for the second quarter and
first six months of 1997, respectively, when compared to the same periods of
1996. This improvement was accomplished through increased sales of yogurt,
aerosol toppings and bakery toppings. The acquisition of Presto accounted for
approximately $20.9 million and $34.0 million of proprietary sales during the
second quarter and first six months of 1997, respectively. Net sales of
specialty products increased by 23.6% and 26.9% during the second quarter and
first six months as compared to 1996 primarily as a result of increased UHT and
cultured product sales.
Gross margin was 28.1% and 27.6% for the second quarter and first six
months of 1997, compared to 23.3% and 23.5% for the like periods of 1996. These
increases in gross margin resulted primarily from three main items: (i) higher
overall gross margins for Presto products, (ii) purchasing and manufacturing
synergies realized as a result of the acquisition of Presto and (iii) the
Company's selective exit from some of its lower margin business.
Operating expenses as a percentage of net sales were 18.8% and 18.9% for
the second quarter and first six months of 1997, respectively compared to 16.6%
and 17.2% for like periods in 1996. Distribution expense as a percent of sales
increased as compared to 1996 due primarily to the acquisition of Presto which
included a number of outside warehouses as well as several frozen products
which tend to be more costly to distribute than refrigerated products. Selling
expenses increased as a percent of sales as a result of increased marketing and
promotional activities and increased brokerage commissions related to the
increase in branded sales. General and administrative expenses as a percent of
sales decreased as compared to 1996 due to continuing efforts to eliminate
redundant overhead costs and inefficiencies as well as the fixed nature of a
majority of these costs.
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The Company's operating income during the second quarter of 1997 was
$13.1 million, an increase of 127.3% from operating income for the second
quarter of 1996 of approximately $5.8 million. For the first six months of
1997, operating income was $23.4 million, an increase of 120.1% from 1996
operating income of $10.6 million. The increase in operating income from like
periods in 1996 was primarily due to the increased sales of all three product
categories, and an increase in gross margin percentage offset in part by
increased operating costs.
For the second quarter, interest expense increased by 413.2% from $.6
million during 1996 to $3.3 million during 1997. For the first six months,
interest expense increased 389.0%. The increase in 1997 resulted from debt
incurred in connection with the Presto acquisition.
The Company recorded net income of $5.8 million and $10.0 million in the
second quarter and first six months of 1997, respectively compared to $3.5
million and $6.3 million for the comparable periods of 1996. The improved
profitability was primarily the result of higher sales and an increase in gross
margin percentage offset by increases in the Company's operating expenses,
interest expense and its provision for income taxes.
Liquidity and Capital Resources
Cash provided by operations was $19.7 million during the first six months
of 1997 compared to cash provided by operations of $16.3 million during the
first six months of 1996. The sources of cash during the first six months of
1997 were the $19.7 million provided by operations, $.7 million from the
exercise of stock options and the reduced cash balance of $2.6 million. The
cash was utilized to pay down debt of $4.6 million, to provide for capital and
other expenditures of $10.1 million and to provide for the purchase of VDK for
$7.0 million.
Capital expenditures during the first six months of 1997 were spent
primarily on equipment additions for increased operating efficiencies as well
as expansion of certain production lines. As of June 30, 1997, the Company was
in compliance with all covenants and financial ratios contained in its senior
credit agreement. Based upon the Company's projections for the remainder of
1997, management does not anticipate any violation of the financial covenants
contained in the senior credit agreement.
At June 30, 1997, the Company had approximately $30.3 million in unused
borrowing capacity under its revolving credit facility. The Company expects
that operating cash flows, together with borrowings under its revolving credit
facility, will be sufficient to fund the Company's requirements for working
capital, treasury stock purchases and capital expenditures for the foreseeable
future.
Financing
As of June 30, 1997, the Company's senior credit agreement consisted of a
$160.0 million term loan and a $60.0 million revolving credit facility. As of
June 30, 1997, approximately $21,700,000 was outstanding under the revolving
credit facility and approximately $7,974,000 million in letters of credit were
outstanding. As of June 30, 1997, the unpaid principal balance of the term loan
was $156.0 million.
The remaining amortization schedule for the term loan as of June 30,
1997, is as follows:
Approximate
Quarterly payment dates Quarterly payment
-------------------------------------- -----------------
September 30, 1997 - December 31, 1997 $ 2,000,000
March 31, 1998 - December 31, 1998 $ 3,750,000
March 31, 1999 - December 31, 1999 $ 5,000,000
March 31, 2000 - December 31, 2000 $ 7,500,000
March 31, 2001 - December 31, 2001 $ 8,750,000
March 31, 2002 - December 31, 2002 $ 13,000,000
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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) 10.1 Executive Retention Agreement, dated as of May 29, 1997 between
the Corporation and L. Hollis Jones.
10.2 Executive Retention Agreement, dated as of May 29, 1997 between
the Corporation and Darron K. Ash.
10.3 Executive Retention Agreement, dated as of May 29, 1997 between
the Corporation and Joseph B. Armes.
10.4 Amendment No. 1 to Employment Agreement, dated as of June 12,
1997 between the Corporation and C. Dean Metropoulos.
10.5 Amendment No. 1 to Employment Agreement, dated as of June 12,
1997 between the Corporation and Michael J. Cramer
27 Financial Data Schedule
99(A) Exhibits.
Calculation of weighted average shares outstanding.
(b) Not Applicable
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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
(Authorized Officer)
Date: August 14, 1997
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.1 Executive Retention Agreement, dated as of May 29, 1997 between
the Corporation and L. Hollis Jones.
10.2 Executive Retention Agreement, dated as of May 29, 1997 between
the Corporation and Darron K. Ash.
10.3 Executive Retention Agreement, dated as of May 29, 1997 between
the Corporation and Joseph B. Armes.
10.4 Amendment No. 1 to Employment Agreement, dated as of June 12,
1997 between the Corporation and C. Dean Metropoulos.
10.5 Amendment No. 1 to Employment Agreement, dated as of June 12,
1997 between the Corporation and Michael J. Cramer
27 Financial Data Schedule
99(A) Exhibits.
Calculation of weighted average shares outstanding.