Annual Report (Form 10-K), fiscal year 1994

ITEM 1. BUSINESS.
THE COMPANY
The Morningstar Group Inc., a Delaware Corporation, ("Morningstar" or the "Company") is a national manufacturer and marketer of refrigerated and non-refrigerated specialty food products that include: (i) branded products and (ii) other specialty, dairy-based ultra-pasteurized ("UHT") and cultured products. These two major product categories comprise the Company's continuing operations, ("Continuing Operations").
The Company was formed in 1988 to acquire several regional dairies, novelty/ice cream operations and specialty food operations. Shortly after these acquisitions, significant increases in bulk milk prices adversely affected the Company's operating performance and ability to service its highly leveraged capital structure. In 1989, Morningstar shifted its emphasis to refrigerated specialty food products by reorganizing its operations, introducing its branded product lines and commencing the divestiture of its regional dairy and novelty/ice cream operations. In March 1991, Hicks, Muse & Co. Incorporated, now Hicks, Muse, Tate & Furst Incorporated ("Hicks Muse"), together with certain other investors, recapitalized the Company through a transaction that reduced the Company's leverage (the "Financial Restructuring"). Prior to this transaction, the Company is referred to as "Predecessor"; after this transaction, the Company is referred to as "Successor". In April 1992, the Company completed a public offering of 6,215,000 shares of common stock, consisting of 5,000,000 newly issued shares and 1,215,000 shares from existing stockholders. The net proceeds to the Company from this offering of approximately $50 million, together with the proceeds from new senior loans, were used to redeem all of the Company's outstanding 15% preferred stock and purchase $34 million in principal amount of its 13% senior subordinated debentures at a premium, reducing the Company's interest expense and eliminating the future payment of preferred stock dividends.
The Company acquired Favorite Foods Inc. ("Favorite") on March 31, 1993 for approximately $28 million plus expenses. Favorite is a cultured and ultrapasteurized processor headquartered in Fullerton, California which recorded sales of approximately $31 million during the nine months ended December 31, 1993. Favorite's results of operations are included in the Consolidated Statement of Operations contained in the Company's Annual Report to Stockholders for the period April 1 through December 31, 1993.
On January 6, 1994, the Company announced a restructuring plan designed to sharpen its focus on the faster-growing segments of its core specialty food products business, while reorganizing its operations to increase efficiency. The plan, which resulted in a $9 million charge in the fourth quarter of 1993, included provisions for reductions in workforce, relocation of the manufacturing for certain product lines to gain operating efficiencies and the abandonment of other product lines. Included within the $9 million charge was $1.9 million for reserves established for certain supply agreements and promissory notes received as part of the sale of certain of the Company's regional dairies in 1991 and 1992. The $9 million charge included non-cash expenses of $4.4 million and cash expenses of $4.6 million. The majority of the cash expenditures were paid during 1994.
The Company suspended the payment of dividends on its common stock immediately following the $.0375 per share payment in the first quarter of 1994 to holders of record as of December 31, 1993.
DISCONTINUED OPERATIONS
The Company has made significant divestitures since its inception and as a result, the size and scope of the Company's operations have changed significantly. During 1990, the Company divested Oak Farms Inc. ("Oak Farms") and Cabell's Dairy Inc. ("Cabell's") regional dairy operations located in Texas, and Adohr Farms Inc. ("Adohr") in California. During 1991, the Company divested a novelty/ice cream operation in Texas and a milk distribution location in Pennsylvania. The Company also closed a novelty operation located in Kansas City, Missouri in October 1991. During 1992, the Company divested Embassy Dairy Inc., a regional dairy in Waldorf, Maryland and East Coast Ice Cream, a novelty/ice cream operation located in Laurel, Maryland. In January 1994, the Company divested its plastic packaging operation located in Dallas, Texas. On April 13, 1994, the Company completed the divestiture of its Florida-based fluid milk operation Velda Farms, Inc. ("Velda"), for approximately $48 million in cash after working capital adjustments and $3 million in 9% Series A Preferred Stock. The Company has deferred the recognition of the gain on the preferred stock pending realization of the gain. The majority of the cash proceeds were used to pay down existing bank debt and to fund federal and state taxes generated by the gain on the sale. The sale of Velda concluded the divestiture of the
Company's regional dairies which were considered a major and distinct segment of its business. As such, the operations of the regional dairies and other divested operations have been restated and presented in the consolidated financial statements in the 1994 Annual Report to Stockholders (See Item 8) to conform with discontinued operations treatment ("Discontinued Operations").
PRODUCTS
The following table sets forth sales percentage information by product and business category.
Percent of Net Sales from Continuing Operations
(a) Combines the two months ended February 28, 1991 and the ten months ended December 31, 1991. A change of control occurred on March 1, 1991. Operations prior to that date are referred to as Predecessor and after that date are referred to as Successor.
BRANDED SPECIALTY FOOD PRODUCTS
The Company's branded product business consists of four product lines: International Delight(R), Second Nature(R), Naturally Yours(TM) and Lactaid(R). In the development of its branded product lines, the Company has targeted growing market niches and developed products to meet the specific consumer demands.
International Delight. International Delight is a gourmet flavored coffee creamer that is marketed in several regular and no-fat flavors. In 1994, the Company completed the installation of its 1/2 ounce aseptic product line. This aseptic product requires no refrigeration and is marketed in several flavors. In 1995, the Company will introduce its newest line of International Delight Cappuccino products which will also be offered in several flavors.
International Delight was originally introduced on a regional basis in 1973 and was repackaged, reformulated and marketed as a national brand in 1989. The product is sold in 1/2 ounce single serving, pint and quart sizes to supermarkets, food service outlets, club stores and convenience stores. The non-aseptic International Delight is a non-dairy product that is manufactured using the UHT process and, as a result, has an extended shelf life. The Company encounters competition in this product line from various regional and national competitors.
Second Nature. Second Nature is a pasteurized, no-fat, no cholesterol egg product. The primary ingredient of Second Nature is egg whites. The product was the first refrigerated alternative to whole eggs to provide the equivalent nutritional value of whole eggs. Second Nature is another product that was first marketed by the Company as a national brand in 1989. Second Nature was reformulated in a no-fat variety and introduced nationally during 1993 in a twin pack containing two eight-ounce containers. Second Nature is typically sold in the fresh egg section of supermarkets, encountering competition from several other national and regional competitors both in the refrigerated format and in the frozen format.
Naturally Yours. Naturally Yours no-fat sour cream was introduced nationally during 1993 following a test market in the last half of 1992. Naturally Yours contains 67% less calories than full fat sour cream while delivering similar taste and texture characteristics. Naturally Yours competes with numerous national and regional competitors in the no-fat sour cream category.
Lactaid. Lactaid is a line of lactose-reduced and lactose-free UHT fluid milks produced by the Company under a license arrangement with McNeil Consumer Products Company ("McNeil"), an affiliate of Johnson & Johnson. See "Intellectual Property". Lactose intolerance afflicts millions of individuals and Lactaid products bring such individuals back into the market for dairy products. Lactaid has been sold by the Company in the western two-thirds of the United States since September 1991.
OTHER SPECIALTY PRODUCTS
The Company manufactures and distributes other dairy-based specialty food products, including (i) UHT products, such as whipping cream, aerosol toppings, half & half and coffee creamers, and (ii) cultured products, such as cottage cheese, sour cream, snack dips and yogurt. These products are sold under customers' brand names, in a wide variety of food service packages as well as under the Company's own regional brand names such as Avoset(R) (creams), Bancroft(R) (cottage cheese and sour cream), Naturally Yours(R) (yogurt), Qwip(R) (aerosol toppings) and Trimline(R) (cottage cheese and other low fat products). The Company sells its UHT and cultured products to food service distributors, regional dairies and retail grocery warehouses. The Company also processes several products for other national marketers including Dole(R) and Procter & Gamble(R). The Company encounters competition from several other regional UHT and cultured product manufacturers.
UHT. Certain of the Company's branded products and a number of its other specialty products are produced using the UHT process. The UHT process involves heating products to extremely high temperatures to eliminate all living organisms and then rapidly cooling the products. This process results in product shelf lives in excess of 45 days allowing these products to be shipped relatively long distances and to be distributed through warehouses.
The UHT product category includes several products such as whipping cream, half & half, heavy whipping cream, bavarian style cream, light cream, pastry topping, baker's cream, coffee cream, flavored milks and various non-dairy formulas of creams and creamers. The Company packages its UHT products in a wide variety of sizes and packages to facilitate serving the various needs of its diverse customer base. These packages include: 1/2 ounce and 3/8 ounce portion control creamers; half-pint, pint, quart pure-pak containers; aerosol cans; glass bottles; metal cans; and various multi-gallon containers.
Cultured. Cultured products are derived from milk that is pasteurized, inoculated with beneficial bacterial cultures, cooled and then, in some instances, mixed with other ingredients to provide flavor. The culturing process provides unique flavor and texture characteristics and extends shelf life. The Company's cultured products have shelf lives from 30 to 60 days allowing distribution through warehouse systems.
The cultured products category includes: cottage cheese, sour cream, snack dips and yogurt. Each of these basic products has numerous formula variations primarily related to varying levels of fat content and flavoring options. These products are generally packaged in plastic containers ranging in size from four ounces to 35 pounds.
PRODUCTION AND DISTRIBUTION
Refrigerated specialty food products are manufactured at six plants located in California (3), Wisconsin (1), Texas (1) and Maryland (1). UHT products are manufactured in each of the six plants and cultured products are manufactured in each of the plants other than Gustine, California and the Texas plant.
The Company distributes products from its six plants to more than 900 customers in 50 states and to more than 20 foreign countries using common carriers as well as a number of leased refrigerated vehicles. Certain customers pick up products at the Company's manufacturing facilities.
MARKETING AND CUSTOMERS
Branded Specialty Products. The Company develops consumer awareness of its branded products through media advertising of such products, primarily through cooperative advertising with the stores in which its branded specialty products are sold and with manufacturers of products that complement the Company's branded specialty products. The Company also utilizes coupon redemption and in-store demonstrations to develop consumer awareness.
Branded specialty products are primarily sold to grocery warehouses serving the major supermarket chains and are primarily sold through the Company's network of independent food brokers and nationwide sales force. The typical broker used by the Company generally works exclusively on commission. The broker is responsible for placing the sale of the Company's branded products and for ensuring that the product is appropriately stocked and positioned in supermarkets.
The Company also ships its branded products internationally, currently serving Canada and several countries in the Pacific Rim, Aruba, Australia, Bermuda, the islands of the Caribbean, Chile, Mexico, Puerto Rico, Saipan, and Saudi Arabia, among others.
Other Specialty Products. The Company markets its other specialty products directly to dairy companies, private label supermarket wholesalers, grocery warehouses, food service outlets and food manufacturers. The primary market for the Company's other specialty products is the United States. The Company also markets certain UHT products in the Pacific Rim, primarily in Hong Kong, Taiwan and Singapore.
RESEARCH AND DEVELOPMENT
The development of new products and the processes under which they are manufactured has been an important part of the Company's growing emphasis on branded specialty products. In addition to the Company's full-time research technicians, all employees, both at the operating and management levels, are encouraged to play an active role in the development of products and their manufacturing processes. The Company's senior management is closely involved in the identification and development of branded products. The Company utilizes consumer research to test new products prior to market introduction.
One of the achievements of this research and development effort was the reformulation of Second Nature to deliver the equivalent nutritional value of whole eggs. More recently Second Nature(R) was reformulated to be a no-fat product. This research effort also developed Naturally Yours(TM), a no-fat sour cream made from real dairy ingredients. The Company has also recently developed and introduced a no-fat version of International Delight.
INTELLECTUAL PROPERTY
General
The Company's business involves the use of patents, trademarks and trade secrets and licenses granted both to and by the Company. The Company's most important trademarks include International Delight(R), Second Nature(R), Naturally Yours(TM), Trimline, Avoset, Bancroft, Carnation Smooth 'n Creamy (under license from Nestle) and the Company's star logo. The Company has also permitted third parties to use its trademarks pursuant to licenses granted by the Company, typically in connection with its divestitures (see Discontinued Operations).
License Agreement with AgriFoods International Cooperative Ltd.
The Company has entered a license agreement with AgriFoods, a Canadian Cooperative association whereby the Company granted to AgriFoods an exclusive license to manufacture, market and distribute International Delight(R) liquid flavored coffee creamer products in Canada and to use the trademark, International Delight(R) in said products. The agreement provides for a royalty to be paid to the Company based on the number of cases of product sold on a monthly basis.
Lactaid License Arrangement
Lactaid is produced under two Lactaid License Agreements (collectively the "Lactaid License") with McNeil. Under the terms of the Lactaid License, McNeil granted the Company the exclusive right to manufacture, produce and package Lactaid modified milk products in the western two-thirds of the United States and certain countries around the Pacific Rim. The Lactaid
License provides for payment of a license fee to McNeil based on the volume of Lactaid modified milk products sold by the Company.
DIVESTITURES
The purchasers of Adohr Farms entered into a Requirements and Distribution Agreement (herein so called) pursuant to which they agreed to purchase a minimum of 75% of their UHT and cultured products requirements from the Company for a period of seven years ending in 1997.
The purchasers of Embassy Dairy Inc. entered into an agreement pursuant to which they agreed to purchase their requirements of UHT and cultured products for a period of three years ending in 1995.
The purchasers of Velda Farms, L.P. entered into an agreement pursuant to which they agreed to purchase their requirements of certain UHT and cultured products for a period of ten years ending in 2004.
The Company has agreed to indemnify the purchasers of certain of its divested operations with regard to certain potential liabilities arising out of the acquisition of such operations. In connection therewith, the Company has indemnified Southern Foods, the purchaser of the Oak Farms and Cabell's dairy subsidiaries, against claims related to compliance with environmental regulations and fair trade practices arising out of the prior operation of Oak Farms and Cabell's through March 2000. See Item 3 of this Form 10-K.
SUPPLIERS AND RAW MATERIALS
The Company purchases its primary raw material, bulk milk, from farm marketing cooperatives, individual farmers and other dairy companies. The supply and cost of bulk milk are influenced by many factors, including consumer demand, government regulation and seasonality. The Company has not experienced any supply shortages and expects that bulk milk will continue to be available in sufficient quantities to supply its processing requirements.
Certain other raw materials, such as juice concentrates, sweeteners, flavorings and various packaging supplies, are generally available from a wide variety of sources.
CUSTOMERS
The Company markets products to a broad range of customers including convenience stores, supermarkets, grocery warehouses, independent distributors, other dairies, club stores and food service customers such as hotels, restaurants, nursing homes, schools, and theme parks. The Company sells to customers nationwide and a small percentage of its products is distributed in foreign countries, primarily in Canada, Mexico and the Pacific Rim. No customer of the Company accounted for more than 10% of the Company's net sales for the year ended December 31, 1994.
SEASONALITY
Sales of the Company's refrigerated specialty food products exhibit modest seasonality with products such as whipping cream, aerosol toppings, sour cream and International Delight experiencing higher sales in the late fall and winter seasons.
EMPLOYEES
As of December 31, 1994 the Company employed approximately 809 people of whom approximately 435 were represented by unions under collective bargaining agreements. These agreements cover employees at the following locations: Fullerton, Gustine and Tulare, California; and Madison, Wisconsin. All of the collective bargaining agreements are due to expire within the next 12 months. In December 1994, the production employees of the Company's Sulphur Springs, Texas plant voted to be represented by a labor union. Negotiations on a collective bargaining agreement had not yet begun as of December 31, 1994. The Company will from time to time be negotiating new agreements with the various unions representing these employees and it expects that it will enter into agreements with such unions which are satisfactory to the Company. The Company has had no recent work stoppages and considers its relations with its employees to be satisfactory.
GOVERNMENT REGULATION
PUBLIC HEALTH
As a manufacturer and distributor of food products, the Company is subject to the Federal Food, Drug, and Cosmetic Act and regulations promulgated thereunder by the FDA. This comprehensive regulatory scheme governs, among other things, the manufacturing, composition and ingredients, labeling, packaging, and safety of food. For example, the FDA regulates manufacturing practices for foods through its current good manufacturing practices regulations, specifies the "recipes," called standards of identity, for certain foods, including many of the kinds of products marketed by the Company (e.g ., sour cream, half & half, and yogurt), and prescribes the format and content of certain information required to appear on the labels of food products.
Additionally, the FDA is responsible for enforcement of the Public Health Service Act and regulations issued thereunder, which authorize regulatory activity necessary to prevent the introduction, transmission or spread of communicable diseases. These regulations require, for example, pasteurization of milk and milk products.
The FDA has recently enacted extensive regulations pursuant to the Nutrition Labeling and Education Act of 1990. The regulations, which took effect in August 1994, require nutritional labeling on all foods that are a meaningful source of nutrition, including certain of the Company's products. Limitations have been placed on the use of certain labeling terms while the use of other terms are required. The Company has revised the labeling of its products to conform to the final regulations.
In addition to FDA regulation of the Company's products, the Company's advertising is subject to regulation by the Federal Trade Commission pursuant to the Federal Trade Commission Act and regulations issued thereunder.
The Company and its products are also subject to state regulation through such measures as licensing of the Company's dairy plants, enforcement by state health agencies of state standards for the Company's products, inspection of the Company's facilities, and regulation of the Company's trade practices in connection with the sale of the dairy products.
Enforcement actions for violations of federal and state regulations may include seizure and condemnation of violative products, cease and desist orders, injunctions and/or monetary penalties.
The Company maintains quality control laboratories at each of its food processing facilities to test bulk milk and other ingredients as well as finished products. In addition, the Company has developed and administers Hazard Analysis of Critical Control Point programs designed to detect hazardous levels of bacteria and other contamination that may have occurred during manufacturing. The Company believes that its facilities and practices are sufficient to maintain its compliance with applicable government regulations, although there can be no assurances in this regard.
INTERSTATE COMMERCE COMMISSION
The Company's interstate trucking services to the public in connection with its backhaul operations are subject to regulation by the Interstate Commerce Commission (the "ICC"). In order to provide backhaul services, the Company obtained a license from the ICC and must comply with certain safety and insurance requirements promulgated by the ICC on a continuing basis.
EMPLOYEE SAFETY REGULATIONS
The Company is subject to certain health and safety regulations including regulations issued pursuant to the Occupational Safety and Health Act. These regulations require the Company to comply with certain manufacturing, health and safety standards to protect its employees from accidents.
ENVIRONMENTAL REGULATIONS
The Company is subject to certain federal, state and local environmental regulations. Certain of the Company's facilities discharge biodegradable wastewater into municipal waste treatment facilities in excess of levels permitted under local regulations. In such circumstances, the Company generally pays wastewater surcharges to municipal water treatment authorities. However, such authorities may require the Company to comply with such regulations and construct pre-treatment facilities or take other action to reduce effluent discharge.
The Company maintains underground fuel storage tanks to service its vehicles. All such tanks are periodically inspected to determine compliance with applicable regulations. In connection with these inspections, the Company may, at times, need to make certain expenditures in order to maintain compliance.
Environmental compliance with federal, state or local authorities is not expected to have a material impact on the Company's capital expenditures, earnings or competitive position.
DAIRY SUPPORT PROGRAM
The minimum prices paid for grade-A bulk milk in the United States are controlled in most areas by Federal Milk Marketing Orders or state regulatory agencies. In most areas, the prices paid for bulk milk by processors are higher than these minimums due to premiums charged by suppliers and shippers. The Company has long established relationships with bulk milk suppliers, primarily milk cooperatives in each of its markets and has not experienced any shortages in its supply of fresh bulk milk. The Company's requirements for bulk milk have decreased since the divestiture of Velda in April 1994.
THE PUBLIC EQUITY OFFERING
On April 24, 1992, the Company issued 5,000,000 shares of new common stock in a public offering at an issue price of $11 per share. Simultaneously 1,215,000 shares were sold to the public by certain selling stockholders. The offering provided net cash proceeds to the Company of approximately $50 million which, combined with approximately $104 million in new senior bank borrowings, was used to purchase approximately $34 million in face amount of Debentures at a cash premium of approximately $4 million, to redeem all the Company's 15% Preferred Stock for approximately $18 million and to refinance approximately $98 million in senior debt.
ITEM 2.



ITEM 2. PROPERTIES.
The Company currently operates processing facilities in the following locations:
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The Company's executive offices are located in approximately 10,500 square feet of leased office space located at 5956 Sherry Lane, Suite 1800, Dallas, Texas 75225-6522. The lease for this property expires on April 30, 1999. All six of the Company's processing facilities are held as collateral against the Company's Senior Credit Agreement.
The Company believes that its facilities are well maintained and adequate to meet its current needs. The Company does expect to expand the capacity of its existing facilities in order to service future growth.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS.
FEDERAL INVESTIGATION
The Company received a target letter dated December 31, 1991, from the United States Department of Justice informing it that Morningstar was a target of a federal grand jury investigation of suspected bid-rigging and market allocation in the dairy industry in the State of Texas. The investigation related to activities conducted in the fluid milk industry in Texas. Oak Farms and Cabell's (collectively the "Texas Dairy Subsidiaries") were formed by the Company in March 1988 in connection with the acquisition of substantially all of the assets of Southland's dairy operations. The Texas Dairy Subsidiaries conducted fluid milk operations in Texas and were sold to Southern Foods Group, Inc. ("Southern Foods") in September 1990, which merged them into its subsidiary, Schepps-Foremost, Inc.
The investigation by the Department of Justice concluded in 1994. The Company was not made a party to legal action commenced by the Department.
The Company has agreed to indemnify purchasers of its divested operations with regard to certain potential liabilities arising out of the acquisition of such operations. In connection therewith, the Company has indemnified Southern Foods, the purchaser of the Oak Farms and Cabell's dairy subsidiaries, against claims related to compliance with environmental regulations and fair trade practices arising out of the prior operation of Oak Farms and Cabell's through March 2000.
Southern Foods made claim against the Company in 1994 pursuant to the indemnification provisions noted above to recover certain sums that Southern Foods paid as a result of the Department of Justice investigation. Subsequent to December 31, 1994, the Company reached an agreement with Southern Foods to pay the sum of $425,000 to settle all claims between the Companies relating to the aforesaid investigation. This agreement will not have a material adverse effect on the results of operations or the financial position of the Company.
From time to time the Company is subject to other litigation in the ordinary course of its business. In connection with the divestitures of certain of the Company's operations, the Company assumed certain obligations of indemnification, none of which is believed to be material to the Company. The Company maintains insurance in respect of certain losses that may result from its current or future operations. The Company believes that the outcome of any existing litigation, after considering the indemnities and insurance related to such litigation, would not have a material impact on its operations.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the stockholders during the fourth quarter of the fiscal year.
PART II
ITEM 5.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information required by this item is included in the Registrant's Annual Report to Stockholders for the year ended December 31, 1994 on page 31 under the caption "Quarterly Financial Information" and is incorporated herein by reference.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA.
The information required by this item is included in the Registrant's Annual Report to Stockholders for the year ended December 31, 1994 on page 32 under the caption "Selected Financial Data" and is incorporated herein by reference.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The information required by this item is included in the Registrant's Annual Report to Stockholders for the year ended December 31, 1994 on pages 9 through 11, under the caption "Management's Discussion and Analysis of Results of Operations and Financial Condition," and is incorporated herein by reference.
ITEM 8.


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this item is included in the Registrant's Annual Report to Stockholders for the year ended December 31, 1994 on pages 12 through 30, and is incorporated herein by reference.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.



ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item is included in the Registrant's definitive Proxy Statement relating to its annual meeting of stockholders to be held on May 18, 1995 under the caption "Directors and Officers".
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is included in the Registrant's definitive Proxy Statement relating to its annual meeting of stockholders to be held on May 18, 1995 under the caption "Executive Management Compensation" and is incorporated herein by reference. The foregoing incorporation by reference specifically excludes the discussion under "Executive Management Compensation - -- Compensation Committee Report" and "The Morningstar Group Inc. Stock Price Performance".
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is included in the Registrant's definitive Proxy Statement relating to its annual meeting of stockholders to be held on May 18, 1995 under the caption "Voting Securities Outstanding, Security Ownership of Management and Principal Stockholders" and is incorporated herein by reference.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is included in the Registrant's definitive Proxy Statement under the captions "Executive Management Compensation -- Compensation Committee Interlocks and Insider Participation" and "Certain Transactions" and is incorporated herein by reference.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this Report. The page number, if any, listed opposite a document indicates the page number in the sequential number system in the manually signed original of this Report where such document can be found.
All other schedules have been omitted because they are not applicable, not required, or because the required information is shown in the consolidated financial statements or notes thereto.
(3) Exhibits required by Item 601 of Regulation S-K.
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* Incorporated by reference as indicated.
** Incorporated by reference to the corresponding exhibit to the Registration Statement on Form S-1 (Registration No. 33-45805) filed by the Registrant on February 19, 1992.
*** Incorporated by reference to the corresponding exhibit to the Registration Statement on Form S-1 (Registration 33-45805), as amended by the Registrant on April 8, 1992.
**** Incorporated by reference to the corresponding exhibit to the Registration Statement on Form S-1 (Registration No 33-45805), as amended by the Registrant on April 22, 1992.
***** Incorporated by reference to the corresponding exhibit to the Registrant's Annual Report on Form 10-K of the Registrant for the year ended December 31, 1994.
+ Filed herewith.
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By /s/ C. DEAN METROPOULOS --------------------------------------------- C. Dean Metropoulos (President, Chief Executive Officer and Director)
Date: March 27, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of The Morningstar Group Inc.:
We have audited in accordance with generally accepted auditing standards, the consolidated financial statements of The Morningstar Group Inc., and subsidiaries included in the Annual Report to Stockholders incorporated by reference in this Form 10-K and have issued our report thereon dated February 17, 1995. Our audits were made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in the Index to Financial Statement Schedules is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Dallas, Texas, February 17, 1995
SCHEDULE II
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
ALLOWANCE FOR DOUBTFUL ACCOUNTS (Dollars in Thousands)
INDEX TO EXHIBITS
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* Incorporated by reference as indicated.
** Incorporated by reference to the corresponding exhibit to the Registration Statement on Form S-1 (Registration No. 33-45805) filed by the Registrant on February 19, 1992.
*** Incorporated by reference to the corresponding exhibit to the Registration Statement on Form S-1 (Registration 33-45805), as amended by the Registrant on April 8, 1992.
**** Incorporated by reference to the corresponding exhibit to the Registration Statement on Form S-1 (Registration No 33-45805), as amended by the Registrant on April 22, 1992.
***** Incorporated by reference to the corresponding exhibit to the Registrant's Annual Report on Form 10-K of the Registrant for the year ended December 31, 1994.
+ Filed herewith.