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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 September 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 October 31, 1997, the number of shares outstanding of each class of
common stock was:
Common Stock, $.01 par value: 15,538,969 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)
September 30, December 31,
1997 1996
---------- ---------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash............................................................................. $ 2,154 $ 4,786
Receivables, net of allowance for doubtful accounts of $8,570 and $6,676 ....... 45,922 57,802
Inventories ..................................................................... 28,420 25,400
Prepaids and other .............................................................. 2,450 3,015
Deferred tax assets ............................................................. 7,339 7,339
Net assets held for sale ........................................................ 602 676
---------- ---------
Total current assets ................................................... 86,887 99,018
PROPERTY, PLANT AND EQUIPMENT:
Land ............................................................................ 12,551 7,843
Buildings ....................................................................... 35,435 29,507
Machinery and equipment ......................................................... 87,209 70,239
---------- ---------
Gross property, plant and equipment .................................... 135,195 107,589
Less: Accumulated depreciation ................................................. (28,854) (22,807)
---------- ---------
Net property, plant and equipment ...................................... 106,341 84,782
INTANGIBLE AND OTHER ASSETS:
Identifiable intangible assets .................................................. 71,118 73,146
Goodwill ........................................................................ 89,582 96,175
Deferred financing costs ........................................................ 2,380 2,731
Other assets .................................................................... 827 139
---------- ---------
Total intangible and other assets ...................................... 163,907 172,191
---------- ---------
TOTAL ASSETS....................................................................... $ 357,135 $ 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)
September 30, December 31,
1997 1996
---------- ---------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................................. $ 32,308 $ 32,968
Accrued liabilities ............................................................. 29,681 39,923
Current portion of long-term debt ............................................... 13,250 8,000
---------- ---------
Total current liabilities ............................................... 75,239 80,891
LONG-TERM DEBT (net of current maturities) ........................................ 166,050 177,349
OTHER LONG-TERM LIABILITIES ....................................................... 3,017 3,269
DEFERRED TAX LIABILITIES .......................................................... 5,694 5,694
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 50,000,000 shares authorized;
15,513,238 shares in 1997 and 15,261,061 shares issued in 1996 ................ 155 153
Additional paid-in capital ...................................................... 74,939 73,179
Treasury stock, at cost (767,000 shares in 1997 and 1996) ....................... (6,140) (6,140)
Retained earnings ............................................................... 38,181 21,596
---------- ---------
Total stockholders' equity .............................................. 107,135 88,788
---------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......................................... $ 357,135 $ 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 Nine Months Ended
September 30, September 30,
------------------------------ -------------------------------
1997 1996 1997 1996
------------ ----------- ------------ ------------
NET SALES ............................................... $ 134,141 $ 99,869 $ 404,813 $ 267,286
Cost of goods sold .................................... 96,362 79,281 292,384 207,317
Selling, distribution, and general and administrative . 23,391 15,147 74,614 43,884
------------ ----------- ------------ ------------
OPERATING INCOME ........................................ 14,388 5,441 37,815 16,085
OTHER (INCOME) AND EXPENSES:
Interest expense ...................................... 3,234 691 9,796 2,033
Amortization of deferred financing costs .............. 115 94 351 284
Other (income) expense, net ........................... (188) 32 (437) (350)
------------ ----------- ------------ ------------
INCOME BEFORE INCOME TAXES .............................. 11,227 4,624 28,105 14,118
Provision for income taxes ............................ 4,603 1,597 11,520 4,797
------------ ----------- ------------ ------------
NET INCOME .............................................. $ 6,624 $ 3,027 $ 16,585 $ 9,321
============ =========== ============ ============
EARNINGS PER COMMON SHARE ............................... $ .41 $ .20 $ 1.04 $ .63
============ =========== ============ ============
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING ......................... 16,227,555 14,828,554 15,977,726 14,802,981
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,
1997 1996
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers .................. $ 417,038 $ 261,007
Interest received ............................. 58 129
Income tax refund ............................. -- 156
Cash paid to suppliers and employees .......... (368,299) (238,645)
Interest paid ................................. (10,587) (2,306)
Income taxes paid ............................. (11,004) (4,013)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES ....... 27,206 16,328
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of subsidiary:
Working capital .............................. (1,290) (58)
Property, plant and equipment ................ (1,559) (8,343)
Other assets ................................. (4,302) (4,511)
--------- ---------
Net cash used by acquisition of subsidiary.. (7,151) (12,912)
Capital expenditures ......................... (17,561) (7,465)
Proceeds from sale of fixed assets ........... 26 --
Other ........................................ (865) 123
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES............ (25,551) (20,254)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options ....... 1,762 139
Net payments under revolving credit facility .. (49) 12,000
Payments on long-term debt .................... (6,000) (6,000)
Purchase of treasury stock .................... -- (4,300)
--------- ---------
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES. (4,287) 1,839
--------- ---------
NET DECREASE IN CASH ............................ (2,632) (2,087)
CASH, BEGINNING OF PERIOD ....................... 4,786 5,811
--------- ---------
CASH, END OF PERIOD ............................. $ 2,154 $ 3,724
========= =========
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)
Nine Months Ended
September 30,
1997 1996
-------- --------
NET INCOME ........................................................... $ 16,585 $ 9,321
ADJUSTMENTS TO RECONCILE NET INCOME TO
NET CASH FLOW FROM OPERATIONS:
Depreciation ....................................................... 6,888 4,953
Amortization of intangibles ........................................ 4,199 2,146
(Gain) loss on fixed asset retirements ............................. (26) --
Increase in deferred taxes ......................................... -- 21
Change in assets and liabilities, net of effects
from acquisition of subsidiary:
Accounts receivable .......................................... 12,593 (6,279)
Inventories .................................................. (2,333) (3,265)
Prepaids and other ........................................... 565 (371)
Accounts payable ............................................. (660) 5,325
Accrued liabilities .......................................... (10,353) 4,692
Long-term liabilities ........................................ (252) (215)
-------- --------
NET CASH PROVIDED BY OPERATIONS ...................................... $ 27,206 $ 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, 1997
(1) CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements as of September 30, 1997, 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, 1997, 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 1996 financial statements contained in its
most recent Annual Report on Form 10-K.
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 $7.2 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
September 30, December 31,
1997 1996
-------------- -------------
Raw materials and supplies........................ $ 10,580 $ 11,767
Finished goods.................................... 17,840 13,633
------------- -------------
Total.......................................... $ 28,420 $ 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 September 30, 1997 were:
Average
Amount of Interest
Debt Rate
--------------- ---------------
(in thousands)
Senior term loan....................................... $ 154,000 7.014%
Revolving credit facility (a).......................... 22,300 7.006%
Industrial development revenue bonds................... 3,000 3.860%
---------------
Total................................................ 179,300
Less: Current maturities.............................. 13,250
---------------
Long-term debt, net of current maturities.............. $ 166,050
===============
-----------------
(a) As of September 30, 1997, approximately $22,300,000 was
outstanding under the revolving credit facility and letters of
credit totaling $8,274,000 were issued. As of September 30, 1997,
the Company had $29,426,000 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 September 30, 1997, the Company had not
purchased any additional shares. On September 28, 1997, the Company's Board
of Directors terminated the repurchase program.
(6) RECENT DEVELOPMENTS
On September 28, 1997, Morningstar entered into a definitive merger
agreement with Suiza Foods Corporation ("Suiza"). Under the merger
agreement, shareholders of Morningstar will receive 0.85 shares of Suiza
common stock for each of the Morningstar common shares outstanding and
option holders will receive 0.85 Suiza stock options for each of the
Morningstar stock options outstanding. In addition, Suiza will assume all
of Morningstar's outstanding debt.
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The definitive merger agreement has been unanimously approved by the
Boards of Directors of Suiza and Morningstar. The proposed transaction is
subject to certain closing conditions, including without limitation,
approval by the shareholders of both companies, the expiration of the
waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended and verification that the merger is eligible for treatment
as a tax-free exchange and as a pooling of interests.
Morningstar has called a special meeting of stockholders to be held on
November 26, 1997. Holders of record on October 27, 1997 will be entitled
to vote on the merger.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION.
Results of Operations - Third Quarter and Year - to - Date 1997
Compared with Third 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 third quarter of 1997 totaled $134.1 million, an increase
of $34.3 million from net sales for the same period in 1996. For the nine months
ended September 30, 1997, net sales were $404.8 million, an increase of $137.5
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 Nine Months Ended
September 30, September 30,
----------------------- -------------------------
1997 1996 1997 1996
--------- --------- ---------- ----------
Product Category
----------------
Branded products $ 53,320 $ 37,063 $ 162,007 $ 103,535
Proprietary products 36,717 18,264 109,927 49,257
Specialty products 44,104 44,542 132,879 114,494
--------- --------- ---------- ----------
Net Sales $ 134,141 $ 99,869 $ 404,813 $ 267,286
========= ========= ========== ==========
Net sales of branded products increased by 43.9% and 56.5% for the third
quarter and first nine 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
$13.4 million and $37.2 million of branded sales during the third quarter and
first nine months of 1997, respectively. Net sales of proprietary products
increased by 101.0% and 123.2% for the third quarter and first nine 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 $19.0 million
and $53.0 million of proprietary sales during the third quarter and first nine
months of 1997, respectively. Net sales of specialty products decreased by 1.0%
and increased by 16.1% during the third quarter and first nine months as
compared to 1996. The Company continues to manage the specialty category for
margins with controlled growth.
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Gross margin was 28.2% and 27.8% for the third quarter and first nine
months of 1997, compared to 20.6% and 22.4% 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 17.4% and 18.4% for
the third quarter and first nine months of 1997, respectively compared to 15.2%
and 16.4% 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.
The Company's operating income during the third quarter of 1997 was $14.4
million, an increase of 164.4% from operating income for the third quarter of
1996 of approximately $5.4 million. For the first nine months of 1997, operating
income was $37.8 million, an increase of 135.1% from 1996 operating income of
$16.1 million. The increase in operating income from like periods in 1996 was
primarily due to the increased sales and an increase in gross margin percentage
offset in part by increased operating costs.
For the third quarter, interest expense increased by 368.0% from $.7
million during 1996 to $3.2 million during 1997. For the first nine months,
interest expense increased 381.8%. The increase in 1997 resulted from debt
incurred in connection with the Presto acquisition.
The Company recorded net income of $6.6 million and $16.6 million in the
third quarter and first nine months of 1997, respectively compared to $3.0
million and $9.3 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 $27.2 million during the first nine months
of 1997 compared to cash provided by operations of $16.3 million during the
first nine months of 1996. The sources of cash during the first nine months of
1997 were the $27.2 million provided by operations, $1.8 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 $6.0 million, to provide for capital and other
expenditures of $18.4 million and to provide for the purchase of VDK for $7.2
million.
Capital expenditures during the first nine months of 1997 were spent
primarily on equipment additions for increased operating efficiencies as well as
expansion of certain production lines. As of September 30, 1997, the Company was
in compliance with all covenants and financial ratios contained in its senior
credit agreement.
At September 30, 1997, the Company had approximately $29.4 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 and capital expenditures for the foreseeable future.
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Financing
As of September 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 September 30, 1997, approximately $22.3 million was outstanding under the
revolving credit facility and approximately $8.3 million in letters of
credit were outstanding. As of September 30, 1997, the unpaid principal balance
of the term loan was $154.0 million.
The remaining amortization schedule for the term loan as of September 30,
1997, is as follows:
Approximate
Quarterly payment dates Quarterly payment
- ---------------------------------- ---------------------
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 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 those described in the
Company's most recent Annual Report on Form 10-K.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
2.1 Agreement and plan of merger dated as of September 28, 1997 by
and among Suiza Foods Corporation, SF Acquisition Corporation,
and the Company (incorporated by reference from the Suiza Foods
Corporation registration statement on Form S-4 filed on
October 14, 1997 (File No. 333-37869)).
11.1 Calculation of weighted average shares outstanding.
(b) On September 29, 1997, the Company filed a current report on form
8-K containing a copy of the press release concerning the merger
of the Company into Suiza Foods Corporation, and an analyst and
investor presentation relating thereto.
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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: November 12, 1997
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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.
-------------------------------------
Darron K. Ash
(Authorized Officer)
Date: November 12, 1997
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INDEX TO EXHIBIT
EXHIBIT NO. DESCRIPTION
- ----------- -----------
11.1 Calculation of weighted average shares outstanding.
27 Financial Data Schedule.