-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ic+G+Dt7YhAlen3PZHy09Ty/YtcTvKtItwhMC8L0Ol61RC+q1PgeoQ7xLiXMQ5Rt 9WWjTQccI3s+Vh2VRBX3Bw== 0000916540-98-000004.txt : 19980417 0000916540-98-000004.hdr.sgml : 19980417 ACCESSION NUMBER: 0000916540-98-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980103 FILED AS OF DATE: 19980331 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: DARLING INTERNATIONAL INC CENTRAL INDEX KEY: 0000916540 STANDARD INDUSTRIAL CLASSIFICATION: 2070 IRS NUMBER: 362495346 STATE OF INCORPORATION: DE FISCAL YEAR END: 1228 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-13323 FILM NUMBER: 98583224 BUSINESS ADDRESS: STREET 1: 251 O CONNOR RIDGE BLVD STREET 2: STE 300 CITY: IRVING STATE: TX ZIP: 75038 BUSINESS PHONE: 2147170300 10-K 1 FORM 10-K FOR DARLING INTERNATIONAL INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) X ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended January 3, 1998 OR TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from _______________ to _______________ Commission File Number 0-24620 DARLING INTERNATIONAL INC. (Exact name of registrant as specified in its charter) Delaware 36-2495346 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) 251 O'Connor Ridge Blvd. Suite 300 Irving, Texas 75038 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (972) 717-0300 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock $0.01 par value per share (Title of Class) 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 report(s)), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by nonaffiliates of the Registrant was approximately $40,000,000 as of March 20, 1998 based upon the closing price of such stock as reported on the American Stock Exchange ("AMEX") on that day. There were 15,573,392 shares of common stock, $0.01 par value, outstanding at March 20, 1998. DOCUMENTS INCORPORATED BY REFERENCE Selected designated portions of the Registrant's definitive Proxy Statement are incorporated by reference into Part III of this Annual Report. DARLING INTERNATIONAL INC. AND SUBSIDIARIES FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 3, 1998 TABLE OF CONTENTS Page No. PART I. ITEM 1. BUSINESS...........................................................3 ITEM 2. PROPERTIES.........................................................8 ITEM 3. LEGAL PROCEEDINGS..................................................8 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............10 PART II. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.......................................10 ITEM 6. SELECTED FINANCIAL DATA...........................................11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION......................13 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................19 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...............................42 PART III. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................42 ITEM 11. EXECUTIVE COMPENSATION............................................42 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....................................................42 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................42 PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.......................................................43 SIGNATURES ..................................................46 DARLING INTERNATIONAL INC. AND SUBSIDIARIES FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 3, 1998 PART I ITEM 1. BUSINESS General Founded by the Swift meat packing interests and the Darling family in 1882, Darling International Inc. ("Darling" or the "Company") was incorporated in Delaware in 1962 under the name "Darling-Delaware Company, Inc." On December 28, 1993, the Company changed its name from "Darling-Delaware Company, Inc." to "Darling International Inc." The address of the Company's principle executive office is 251 O'Connor Ridge Boulevard, Suite 300, Irving, Texas, 75038, and its telephone number at such address is (972)717-0300. The Company is a recycler of food processing by-products and believes that it is the largest independent processor in the United States in terms of raw material processed annually. The Company collects and recycles animal processing by-products, used restaurant cooking oil, and bakerage by-products from restaurants, butcher shops, grocery stores, bakeries, and independent meat and poultry processors nationwide. In addition, the Company provides grease trap collection services to restaurants. The Company processes such raw materials at 51 facilities located throughout the United States into finished products such as tallow, meat and bone meal, yellow grease, and dried bakery product. The Company sells these products nationally and internationally, primarily to producers of various industrial and commercial oleo-chemicals, soaps, pet foods and livestock feed, for use as ingredients in their products or for further processing into basic chemical compounds. The Company's net sales were $498.4 million, $488.9 million and $421.6 million during the 1997, 1996 and 1995 fiscal years, respectively. Net sales from rendering operations accounted for 89.1%, 95.6% and 100% of the Company's net sales during the 1997, 1996 and 1995 fiscal years, respectively. The Company's bakery by-products recycling operations accounted for 10.9% and 4.4% of the Company's net sales during the 1997 and 1996 fiscal years, respectively. Processing Operations The Company creates finished products primarily through the drying, grinding, separating and blending of its various raw materials. The process starts with the collection of animal processing by-products (fat, bones, feathers and offal), used restaurant cooking oil, and bakery by-products from meat packers, grocery stores, butcher shops, meat markets, poultry processors, restaurants and bakeries. The animal processing by-products are ground and heated to extract water and separate oils from animal tissue as well as to sterilize and make the material suitable as an ingredient for animal feed. Meat and bone meal is separated from the cooked material by pressing the material, then grinding and sifting it through screens. The separated tallow is centrifuged and/or refined for purity. The primary finished products derived from the processing of animal by-products are tallow and meat and bone meal. Other by-products include poultry meal, feather meal and blood meal. Used restaurant cooking oil is processed under a separate procedure that involves heating, settling and sterilizing, as well as refining, resulting in derived yellow grease, feed-grade animal fat, or oleo-chemical feedstocks. Bakery by-products are ground, heated to extract moisture, and blended to produce a high-calorie animal feed ingredient. Purchase and Collection of Raw Materials The Company operates a fleet of approximately 1,200 trucks and tractor-trailers to collect raw materials from more than 80,000 restaurants, butcher shops, grocery stores, bakeries, and independent meat and poultry processors. The Company replaces or upgrades its vehicle fleet to maintain efficient operations. Raw materials are collected in one of two manners. Certain large suppliers, such as large meat processors, poultry processors, and bakeries are furnished with bulk trailers in which the raw material is loaded. The Company transports these trailers directly to a processing facility. The Company provides the remaining suppliers, primarily grocery stores, butcher shops, and smaller bakeries and confectioners, with containers in which to deposit the raw material. The containers are picked up by or emptied into Company trucks on a periodic basis. The type and frequency of service is determined by individual supplier requirements, the volume of raw material generated by the supplier, supplier location, and weather, among other factors. Used restaurant cooking oil is placed in various sizes and types of containers which are supplied by the Company. In some instances, these containers are loaded directly onto the trucks, while in other instances the oil is pumped through a vacuum hose into the truck. The Company also provides an alternative collection service to restaurants, CleanStar 2000(R) , a self-contained collection system that is housed inside the restaurant, with the used cooking oil pumped directly into collection vehicles via an outside valve. The CleanStar 2000(R) system and service is provided either on a fee basis to the raw material customer or as a negotiated offset to the cost of raw materials purchased (see discussion of CleanStar expenditures in Item 7). Approximately 4% of the Company's restaurant suppliers utilize the CleanStar 2000(R) system. The frequency of all forms of collection service is determined by the volume of oil generated by the restaurant. The raw materials collected by the Company are transported either directly to a processing plant or to a transfer station, where materials from several collection routes are loaded into trailers and transported to a processing plant. Collections of animal processing by-products generally are made during the day, and materials are delivered to plants for processing within 24 hours of collection to eliminate spoilage. Collection of used restaurant cooking oil and bakery by-products can be made at any time of the day or night, depending on supplier preference; these materials may be held for longer periods of time before processing. During the past year, the Company's largest single supplier accounted for less than 5% of the total raw material processed by the Company, and the 10 largest raw materials suppliers accounted for approximately 27% of the total raw material processed by the Company. For a discussion of the Company's competition for raw materials, see "Competition." Raw Materials Pricing The Company has two primary pricing arrangements with its raw materials suppliers. More than half of the Company's annual volume of raw materials is acquired on a "formula" basis. Under a formula arrangement, the charge or credit for raw materials is tied to published finished product commodity prices after deducting a fixed service charge. The service charge is designed to enable the Company to cover all of its collection and processing costs and realize a profit. The Company acquires the remaining annual volume of raw material under "non-formula" arrangements whereby suppliers either are paid a fixed price, are not paid, or are charged for the collection service, depending on various economic factors. The credit received or amount charged for raw material under both formula and non-formula arrangements is based on various factors, including the type of raw materials, the expected value of the finished product to be produced, the anticipated yields, the volume of material generated by the supplier, and processing and transportation costs. Competition among processors to procure raw materials also affects the price paid for raw materials. See "Competition." Formula prices are generally adjusted on a weekly or monthly basis while non-formula prices or charges are adjusted as needed to respond to significant changes in finished product prices. Finished Products The finished products that result from the processing of animal by-products are oils (primarily tallow and yellow grease) and proteins (primarily meat and bone meal). Raw material received from bakeries are processed into dried bakery product. Oils are used as ingredients in the production of pet food, animal feed and soaps. Oleo-chemical producers use these oils as feedstocks to produce specialty ingredients used in paint, rubber, paper, concrete, plastics and a variety of other consumer and industrial products. Meals are used primarily as high protein additives in pet food and animal feed. Dried bakery product is used primarily as an additive in animal feed. Predominantly all of the Company's finished products are commodities which are quoted on established commodity markets or are priced relative to such commodities. While the Company's finished products are generally sold at prices prevailing at the time of sale, the Company's ability to deliver large quantities of finished products from multiple locations and to coordinate sales from a central location enables the Company to occasionally receive a premium over the then-prevailing market price. Marketing, Sales and Distribution of Finished Products The Company markets its finished products worldwide. Marketing activities are primarily conducted through the Company's marketing department which is headquartered in Irving, Texas. The Company also maintains sales offices in Los Angeles, California, Atlanta, Georgia, and Newark, New Jersey for sales and distribution of selected products. This sales force is in contact with several hundred customers daily and coordinates the sale and assists in the distribution of most finished products produced at the Company's processing plants. The Company sells its finished products internationally through commodities brokers and through Company agents in various countries. The Company sells to numerous foreign markets, including the European Economic Community, Asia, the Pacific Rim, North Africa, Mexico and South America. The Company has no material foreign operations, but exports a portion of its products to customers in various foreign counties. Total export sales were $101,040,000, $119,055,000, and $169,829,000, for the years ended January 3, 1998, December 28, 1996, and December 30, 1995, respectively. The level of export sales may vary from year to year depending on the relative strength of domestic versus overseas markets. The Company obtains payment protection for most of its foreign sales by requiring payment before shipment or by requiring bank letters of credit or guarantees of payment from U.S. government agencies. The Company ordinarily is paid for its products in U.S. dollars and has not experienced any material currency translation losses or any material foreign exchange control difficulties. The Company has not experienced any material restrictions on the export of its products, although certain countries, including India and certain Middle East countries restrict the import of proteins and fats and oils made from porcine and bovine material, and the European Community has restrictions on proteins and fats and oils made from specified bovine materials. The B.S.E. situation in Europe and new F.D.A. restrictions, coupled with much lower prices for competing commodities, caused lower prices for some of the Company's key products. See Note 14 of Notes to Consolidated Financial Statements for information regarding the Company's export sales. Finished products produced by Darling are distributed primarily by truck and rail from the Company's plants shortly following production. While there are some temporary inventory accumulations at various port locations for export shipments, inventories rarely exceed three weeks' production and, therefore, the Company uses limited working capital to carry inventories and reduces its exposure to fluctuations in commodity prices. Realignment Commencing 1998, as part of an overall strategy to better commit financial resources, the Company reorganized its operations into four diverse yet distinctive areas. These are: 1) Rendering, the core business of turning inedible waste from meat and poultry processors into high quality feed ingredients and fats for other industrial applications; 2) Restaurant Services, a group focused on growing the grease collection business while expanding the line of services offered to restaurants and food processors; 3) Bakery By-Products Recycling, a group which produces high quality bakery by-products to the feed industry; and 4) Esteem Products, the new business dedicated to using newly developed technologies to produce more highly refined products from established supply sources. Management believes that organizing along business lines will enable the Company to utilize its flexibility and diversification to service a changing, more sophisticated market place. Competition Management of the Company believes that the most competitive aspect of the business is the procurement of raw materials rather than the sale of finished products. During the last ten years, pronounced consolidation within the meat packing industry has resulted in bigger and more efficient slaughtering operations, the majority of which utilize "captive" processors. Simultaneously, the number of small meat packers, which have historically been a dependable source of supply for non-captive processors, has decreased significantly. Although the total amount of slaughtering may be flat or only moderately increasing, the availability, quantity and quality of raw materials available to the independent processors from these sources have all decreased. These factors have been offset, in part, however, by increasing environmental consciousness. The need for restaurants to comply with environmental regulations concerning the proper disposal of used restaurant cooking oil is offering a growth area for this raw material source. In marketing its finished products, the Company faces competition from other processors and from producers of other suitable commodities. Tallows and greases are in certain instances substitutes for soybean oil and palm stearine, while meat and bone meal is a substitute for soybean meal. Dried bakery product is a substitute for corn in animal feed. Consequently, the prices of tallow, yellow grease, meat and bone meal, and dried bakery product correlate to some degree with these commodities. The markets for finished products are impacted mainly by the worldwide supply of fats, oils, proteins and grains. Among other factors that influence the prices that the Company receives for its finished products include the worldwide supply of oils and proteins, the quality of the Company's finished products, consumer health consciousness, worldwide credit conditions and U.S. government foreign aid. From time to time, the Company enters into arrangements with its suppliers of raw materials pursuant to which such suppliers buy back the Company's finished products. Seasonality The amount of raw materials made available to the Company by its suppliers is relatively stable on a weekly basis except for those weeks including a major holiday during which availability of raw materials declines because major meat and poultry processors are not operating. Weather is also a factor. Extremely warm weather adversely affects the ability of the Company to make higher quality products because the raw material deteriorates more rapidly than in cooler weather, while extremely cold weather, in certain instances, can hinder the collection of raw materials. Employees and Labor Relations As of January 3, 1998, the Company employed approximately 1,900 persons full-time. Approximately 41% of the total number of employees are covered by collective bargaining agreements; however, the Company has no national or multi-plant union contracts. Management believes that the Company's relations with its employees and their representatives are good. There can be no assurance, however, that new agreements will be reached without union action or will be on terms satisfactory to the Company. Regulations The Company is subject to the rules and regulations of various federal, state and local governmental agencies. These include, but are not limited to, the FDA, which regulates food and feed production , USDA, which regulates collection and production methods, EPA, which regulates air and water discharge requirements, as well as local and state agencies governing air and water discharge. Such rules and regulations may influence the Company's operating results at one or more facilities. The FDA rule on the feeding of mammalian protein to ruminant animals took effect in August of 1997 as a measure to prevent the potential occurrence of BSE (Bovine Spongiform Encephalopathy) in the United States. As expected, this rule has had little effect on the operations of the company, and the company is in compliance with the provisions of the rule. Settlement On December 29, 1993, the Company consummated the settlement (the "Settlement") of a class action lawsuit (the "Class Action") filed against the Company on August 15, 1991, in connection with, among other things, the Company's issuance and subsequent default in payment of interest due under approximately $175.0 million of 14% Senior Subordinated Notes due March 15, 1999 (the "Original Notes") and breach of the indenture governing the Original Notes (the "Original Notes Indenture"). As part of the Settlement and the attendant restructuring (the "Restructuring") of the Company's capitalization, Original Noteholders received, upon surrender of their Original Notes, 4,749,484 shares of Common Stock (the "Noteholders' Common Stock"), $70.0 million aggregate principal amount of First Priority Senior Subordinated Notes due July 15, 2000 (the "Subordinated Notes") and approximately $5.0 million in cash. In addition, pursuant to the Settlement, the Company issued 249,975 shares of Class A Common Stock, options to purchase 128,205 shares of Class A Common Stock and options to purchase 494,500 shares of Common Stock. ITEM 2. PROPERTIES The Company's 51 operating facilities consist of 27 full service rendering plants, eleven bakery recycling plants, seven yellow grease/trap grease plants, two blending plants, two research and technology plants, one spray dry plant and one edible plant. Except for nine leased facilities, all of these facilities are owned by the Company. The following is a listing of the Company's operating facilities: Location Description Location Description -------- ----------- -------- ----------- Alton, IA .............Rendering Linkwood, MD.............Rendering Billings, MT...........Rendering Los Angeles, CA..........Rendering Blue Earth, MN ........Rendering Milwaukee, WI............Rendering Boise, ID..............Rendering Mt. Pleasant, TX (IPC)...Bakerage Calhoun, GA (IPC)......Bakerage Newark, NJ...............Rendering Carteret, NJ (IPC).....Bakerage Norfolk, NE..............Rendering Chicago, IL (IPC)......Bakerage Norfolk, NE .............Spray Dry Chicago, IL............Yellow Grease Norfolk, NE .............R&T Cincinnati, OH.........Yellow Grease Omaha, NE................Rendering Cincinnati, OH (IPC)...Bakerage Omaha, NE ...............Blending Cleveland, OH .........Rendering Omaha, NE................Edible Oils Coldwater, MI..........Rendering Russellville, AR.........Rendering Collinsville, OK.......Rendering San Angelo, TX...........Rendering Conley, GA (IPC) ......Bakerage San Antonio, TX (IPC)....Bakerage Dallas, TX.............Rendering San Francisco, CA........Rendering Detroit, MI............Rendering Sioux City, IA...........Rendering Durham, NC (IPC).......Bakerage St. Louis, MO............Rendering Fort Lauderdale, FL....Yellow Grease Tacoma, WA...............Rendering Fresno, CA.............Rendering Tampa, FL................Yellow Grease Henderson, NV..........Yellow Grease Terre Haute, IN (IPC)....Bakerage Houston, TX............Rendering Turlock, CA..............Rendering Houston, TX ...........Yellow Grease Wahoo, NE................Rendering Kansas City, KS........Rendering Wahoo, NE ...............R&T Kansas City, KS (IPC)..Bakerage West Point, NE...........Rendering Kearny, NJ ............Blending Lake City, GA (IPC).....Bakerage Lake City, GA (IPC).....Yellow Grease In addition, the Company owns or leases 20 transfer stations in the United States and one transfer station in Canada that serve as collection points for routing raw material to the processing plants set forth above. ITEM 3. LEGAL PROCEEDINGS (a) ENVIRONMENTAL Blue Earth In July 1997, the Company, the United States Attorney for the District of Minnesota, and the State of Minnesota received Court approval of the proposed settlement to resolve the government's criminal claims relating to environmental law violations at the Company's Blue Earth rendering plant. The specific violations are contained in the Indictment against the Company filed on December 16, 1996, and the Plea Agreement accepted in July 1997. These violations relate to improper sampling, testing, and reporting of waste contaminants in order to conceal discharges in excess of the permitted levels. The Court approved the Plea Agreement under which Darling has paid $2.7 million in criminal fines and penalties, as well as $1.0 million in restitution and remediation. A consent Decree (the "Decree") to resolve all state and federal civil and administrative claims related to the Blue Earth allegations was approved by the Court in September 1997. Pursuant to the Decree Darling paid $300,000 in civil and administrative penalties, and is undertaking other requirements of the Decree. The Company recorded a provision for loss contingency of $6.1 million during Fiscal 1996 to cover the expected cost of the settlement as well as legal, environmental and other related costs. Chula Vista The Company is the owner of an undeveloped property located in Chula Vista, California (the "Site"). A rendering plant was operated on the Site until 1982. From 1959 to 1978, a portion of the Site was used as an industrial waste disposal facility which was closed pursuant to Closure Order No. 80-06 issued by the State of California Regional Water Quality Control Board for the San Diego Region (the "RWQCB"). The Site has been listed by the State of California as a site for which expenditures for removal and remedial actions may be made by the State pursuant to the California Hazardous Substances Account Act, California Health & Safety Code Section 25300 et seq. Technical consultants retained by the Company have conducted various investigations of the environmental conditions at the Site, and in 1996, requested that the RWQCB issue a "no further action" letter with respect to the Site. The RWQCB has not yet taken any formal action in response to such request. Underground Storage Tanks The Company's processing operations do not produce hazardous or toxic wastes; however, the Company does operate underground fuel storage tanks ("UST's") that are subject to federal, state and local laws and regulations. As of January 3, 1998, the Company has removed or closed 177 of its 183 UST's. (b) LITIGATION Petruzzi An antitrust class action suit was filed in 1986 by Petruzzi IGA Supermarkets in the United States District Court for the Middle District of Pennsylvania (the "Class Action Suit) seeking damages from the Company. On September 14, 1995, the Company entered into a settlement agreement providing for the disposal of all claims in the Class Action Suit. The settlement agreement was approved by the District Court on December 20, 1995. On August 18, 1997, the District Court awarded plaintiffs attorney's fees of $1.3 million from the Company which was paid on October 3, 1997. Other Litigation The Company is also a party to several other lawsuits, claims and loss contingencies incidental to its business, including assertions by certain regulatory agencies related to the release of unacceptable odors from some of its processing facilities. Although the ultimate liability cannot be determined with certainty, the Company has estimated its probable liability and established a reserve with respect to these contingencies. The Company believes that any additional liability relative to such lawsuits and claims which may not be covered by insurance would not likely have a material adverse effect on the Company's financial position, although it could potentially have a material impact on the results of operations in any one year. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The matters voted on at the Special Meeting of Stockholders held on October 28, 1997, were as follows: (i) Amendment to the Company's Restated Certificate of Incorporation in order to increase the number of shares of Common Stock, par value $0.01 per share, authorized for issuance thereunder from ten million (10,000,000) shares to twenty-five (25,000,000) million shares in order to affect a three-for-one stock split of the Company's Common Stock (in the form of a stock dividend) and to increase the amount of the Company's authorized but unissued stock. For 4,783,095 Against 5,608 Abstain 300 Non-Vote 0 (ii) Amendment to the Company's Restated Certificate of Incorporation in order to authorize one million (1,000,000) shares of preferred stock, par value $0.01 per share, issuable in series with the terms of each series to be fixed by the Board of Directors of the Company. For 4,142,924 Against 300,408 Abstain 1,410 Non-Vote 343,261 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS On September 12, 1997 the common stock began trading on the American Stock Exchange under the symbol "DAR". Prior to that date, the common stock became eligible for trading on the Nasdaq National Market under the symbol "DARL" on September 8, 1994. On October 28, 1997, the Stockholders of the Company approved a three-for-one stock split. The following table sets forth, for the quarters indicated, the high and low sales prices per share for the common stock as reported on the American Stock Exchange or Nasdaq National Market retroactively restated to reflect the stock split. Fiscal Quarter Market Price High Low ---------------- ----------------- 1997: First Quarter $9.833 $7.333 Second Quarter $10.000 $6.917 Third Quarter $10.000 $8.000 Fourth Quarter $11.604 $8.500 1996: First Quarter $10.208 $8.875 Second Quarter $9.667 $7.250 Third Quarter $9.417 $8.250 Fourth Quarter $10.625 $9.083 As of March 16, 1998, there were 74 holders of record of the common stock. The Company has not declared or paid any dividend on the common stock since January 3, 1989. The Company's Credit Agreement restricts the Company's ability to pay dividends. The Company does not currently anticipate paying cash dividends on the common stock in the foreseeable future, but intends instead to retain future earnings for reinvestment in its business or reduction of its indebtedness. ITEM 6. SELECTED FINANCIAL DATA SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA The following table presents selected consolidated historical financial data for the periods indicated. The Company accounted for the resolution of a class action lawsuit (the "Settlement") in accordance with fresh start reporting ("Fresh Start Reporting"), as set forth in Statement of Position 90-7. See Note 3 of Notes to Consolidated Financial Statements. As a result, the Company's Consolidated Balance Sheets at January 3, 1998, December 28, 1996 December 30, 1995 and December 31, 1994 and the Consolidated Statement of Operations for the years ended January 3, 1998, December 28, 1996, December 30, 1995 and December 31, 1994 are presented on a different basis than that for periods before Fresh Start Reporting, and, therefore, are not comparable. The selected historical consolidated financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements of the Company for the three years ended January 3, 1998, December 28, 1996, and December 30, 1995, and the related notes thereto. DARLING INTERNATIONAL INC. AND SUBSIDIARIES FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 3, 1998 PART II
Predecessor ----------- Fiscal 1997 Fiscal 1996 Fiscal 1995 Fiscal 1994 Fiscal 1993 ----------- ----------- ----------- ----------- ----------- Weeks Ended Weeks Ended Weeks Ended Weeks Ended Weeks Ended January 3, December 28, December 30, December 31, January 1, 1998 1996 1995 1994 1994 - - -------------------------------------------------------------------------------------------------------- ----------- (amounts in thousands, except per share data) Operating Data: Net sales $498,421 $488,914 $421,608 $354,333 $332,780 ------- ------- ------- ------- ------- Cost of sales and operating expenses 404,159 395,025 336,248 282,908 269,979 Selling, general and administrative expenses 38,645 32,767 26,675 25,680 21,139 Depreciation and amortization 33,670 27,611 22,576 19,871 18,975 Provision for loss contingencies - 6,075 - - 1,595 ------- ------- ------- ------- ------- Operating profit 21,947 27,436 36,109 25,874 21,092 Interest expense 13,732 12,994 13,311 15,206 29,644 Other (income) expense, net (163) (537) (322) (80) (487) ------- ------- ------- ------- ------- Income (loss) before reorganization items and income taxes 8,378 14,979 23,120 10,748 (8,065) Reorganization items: Professional fees - - - - (5,336) Fresh start valuation adjustment - - - - 80,843 ------- ------- ------- ------- ------- Income before income taxes 8,378 14,979 23,120 10,748 67,442 Income tax expense 2,969 7,305 8,740 3,391 ------- ------- ------- ------- Net earnings $5,409 $7,674 $14,380 $7,357 ======= ======= ======= ======= Basic earnings per common share (b) 0.35 0.50 0.95 0.49 Diluted earnings per common share (b) 0.33 0.46 0.90 0.49 Weighted average shares outstanding (b) 15,519 15,375 15,138 15,000 Diluted weighted average shares outstanding (b) 16,461 16,674 15,966 15,000 Other Data: EBITDA (a) 55,617 61,122 58,685 45,745 41,662 Depreciation 26,573 22,282 18,595 15,994 16,569 Amortization 7,097 5,329 3,981 3,877 2,406 Capital expenditures 26,573 28,631 24,636 17,822 16,320 Balance Sheet Data: Working capital (deficiency) 3,324 (8,015) 12,936 (2,959) (281) Total assets 312,977 329,645 266,062 245,505 236,294 Current portion of long-term debt 5,113 15,598 9,060 11,577 11,098 Total long-term debt less current portion 142,181 138,173 117,096 109,132 122,566 Stockholders' equity 69,756 64,033 54,833 39,482 27,027 (a) "EBITDA" represents, for any relevant period, operating profit plus depreciation and amortization and provision for loss contingencies. EBITDA is presented here not as a measure of operating results, but rather as a measure of the Company's debt service ability and is not intended to be a presentation in accordance with generally accepted accounting principles. (b) All prior period shares outstanding and earnings per share have been restated in accordance with SFAS No. 128. (See Note 1(b)(9) in Notes to Consolidated Financial Statements).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the Company's financial condition and results of operations should be read in conjunction with the historical consolidated financial statements and notes thereto included in Item 8. Results of Operations Fifty-three Week Fiscal Year Ended January 3, 1998 ("Fiscal 1997") Compared to Fifty-two Week Fiscal Year Ended December 28, 1996 ("Fiscal 1996") General The Company recorded net earnings of $5.4 million for Fiscal 1997 compared to net earnings of $7.7 million for Fiscal 1996. Operating income decreased from $27.4 million for Fiscal 1996 to $21.9 million for Fiscal 1997. During Fiscal 1996, the Company recorded $6.1 million in charges to the provision for loss contingency for costs related to environmental claims at the Company's Blue Earth, Minnesota plant. Operating income before the provision for loss contingency decreased $11.6 million from $33.5 million in Fiscal 1996 to $21.9 million in Fiscal 1997. The decrease was primarily due to: 1) declines in the volume of raw materials processed; 2) approximately $6 million in increased depreciation and amortization expense related to acquisitions and capital expenditures; and 3) a $1.7 million expenditure related to the buy back of stock options from the former president of the company. These were offset by a $1.9 million insurance settlement of certain property and casualty claims with past insurers. Interest expense increased from $13.0 million in Fiscal 1996 to $13.7 million in Fiscal 1997, primarily due to increased debt related to acquisitions. Net Sales The Company collects and processes animal by-products (fat, bones and offal), used restaurant cooking oil, and bakery by-products to produce finished products of tallow, meat and bone meal, yellow grease, and dried bakery product. Sales are significantly affected by finished goods prices, quality of raw material, and volume of raw material. Net sales include the sales of produced finished goods, grease trap services, and finished goods purchased for resale, which constitute less than 10% of total sales. During Fiscal 1997, net sales increased 1.9%, to $498.4 million as compared to $488.9 million during Fiscal 1996 primarily due to the following: 1) The acquisition of International Processing Corporation ("IPC") and Standard Tallow ("Standard") in 1996 resulted in an increase in sales of $36.9 million in Fiscal 1997 versus Fiscal 1996; 2) Overall finished goods prices were relatively flat and resulted in an increase of approximately $3.0 million in sales. Compared to Fiscal 1996 finished goods prices, the Company's average yellow grease prices were 14.9% lower, average tallow prices were 0.6% lower, and average meat and bone meal prices were 7.6% higher; 3) Decreases in the volume of raw materials processed resulted in a $31.2 million decrease in sales, offset by $4.6 million in yield gains; and 4) Decreases in finished hides prices and inventory changes accounted for an additional decrease of $3.2 million in sales. Cost of Sales and Operating Expenses Cost of sales and operating expenses includes prices paid to raw material suppliers, the cost of product purchased for resale, and the cost to collect and process the raw material. The Company utilizes both fixed and formula pricing methods for the purchase of raw materials. Fixed prices are adjusted where possible as needed for changes in competition and significant changes in finished goods market conditions, while raw materials purchased under formula prices are correlated with specific finished goods prices. During Fiscal 1997, cost of sales and operating expenses increased $9.1 million (2.3%), to $404.2 million as compared to $395.0 million during Fiscal 1996 primarily as a result of the following: 1) Cost of sales and operating expenses grew $25.8 million due to the acquisition of Standard Tallow and IPC; 2) Decreases in the volume of raw material collected and processed resulted in a decrease of approximately $18.9 million in cost of sales and operating expenses; 3) Lower raw material prices paid, correlating to decreased prices for fats and oils resulted in decreases of $2.1 million in cost of sales; 4) Changes in inventory levels resulted in approximately $1.9 million increase in cost of sales; and 5) finally, higher payroll costs resulted in a $2.2 million increase in operating expenses. Selling, General and Administrative Expenses and Provisions for Loss Contingency Selling, general and administrative expenses were $38.6 million during Fiscal 1997, a $5.9 million increase from $32.7 million during Fiscal 1996. The increase in expenses was primarily attributable to the acquisitions of Standard Tallow and IPC. The Company recorded $6.1 million in charges to the provision for loss contingency during Fiscal 1996 to cover estimated costs related to environmental violations at the Company's Blue Earth, Minnesota plant. Depreciation and Amortization Depreciation and amortization charges increased $6.1 million, to $33.7 million during Fiscal 1997 as compared to $27.6 million during Fiscal 1996. This increase was due to additional depreciation on fixed asset additions and amortization on intangibles acquired as a result of the acquisitions of Standard Tallow and IPC. Interest Expense Interest expense increased $0.7 million, to $13.7 million during Fiscal 1997 as compared to $13.0 million during Fiscal 1996, primarily due to increased debt related to the acquisitions. Income Taxes The income tax expense of $3.0 million for Fiscal 1997 consists of $2.4 million of federal tax expense and $0.6 million for various state and foreign taxes. In Fiscal 1996, the Company recorded a $7.3 million income tax expense which consisted of $6.7 million of federal tax expense and $0.6 million for various state taxes, after taking into account the non-tax deductible nature of certain of the expenses related to the settlement of environmental claims at the Company's Blue Earth, Minnesota plant. Capital Expenditures The Company made capital expenditures of $26.6 million during Fiscal 1997 as compared to $28.6 million in Fiscal 1996. - - ----------------------------- Fiscal Year Ended December 28, 1996, ("Fiscal 1996") Compared to Fiscal Year Ended December 30, 1995 ("Fiscal 1995") The Company recorded net earnings of $7.7 million for Fiscal 1996 compared to net earnings of $14.4 million for Fiscal 1995. The decrease was primarily due to: 1) a $6.1 million provision for loss contingency recorded in Fiscal 1996 to cover estimated costs related to environmental violations at the Company's Blue Earth, Minnesota plant; and 2) approximately $5 million in depreciation and amortization expense related to acquisitions and capital expenditures. Additionally, as a result of an extreme fourth quarter 1996 drop in the price of corn, bakerage operating margins were not adequate to offset the related depreciation, amortization and interest costs associated with the acquisition of IPC. Operating profit before the provision for loss contingency decreased from $36.1 million in Fiscal 1995 to $33.5 million in Fiscal 1996. Interest expense decreased from $13.3 million in Fiscal 1995 to $13.0 million in Fiscal 1996, primarily due to decreased interest rates. Net Sales The $67.3 million increase in sales in Fiscal 1996 compared to Fiscal 1995 is due to the following: 1) Approximately $31.6 million was due primarily to the acquisition of Standard Tallow Company ("Standard Tallow") and International Processing Corporation ("IPC"); 2) Improvements in finished goods prices resulted in an increase of approximately $45.0 million in sales. The Company experienced significantly higher domestic finished market prices while overseas markets were considerably depressed compared to the prior year. Compared to Fiscal 1995, the Company's average yellow grease prices were 8.6% higher during Fiscal 1996. Average tallow prices were 1.8% lower and average meat and bone meal prices were 31.3% higher; 3) Increases in the volume of raw materials processed resulted in a $19.1 million increase in sales, offset by $5.6 million in yield reductions due to raw material quality; and 4) The volume of finished goods purchased for resale decreased from $60.5 million to $39.2 million due to depressed overseas markets. Cost of Sales and Operating Expenses During Fiscal 1996, cost of sales and operating expenses increased $58.8 million (17.5%), to $395.0 million as compared to $336.2 million during Fiscal 1995 as a result of the following: 1) Cost of sales and operating expenses grew $26.9 million due to the acquisition of Standard Tallow and IPC; 2) Increases in the volume of raw material collected and processed resulted in an increase of approximately $16.1 million in cost of sales and operating expenses; 3) Higher raw material prices paid, correlating to increased prices for fats and oils and meat and bone meal, resulted in increases of $41.2 million in cost of sales; 4) Decreases in the volume of finished goods purchased for resale resulted in a $20.0 million decrease in cost of sales; and 5) Changes in inventory levels resulted in an approximately $7.0 million decrease in cost of sales; and 6) finally, higher steam expenses attributable to increased natural gas prices, and expenses attributable to the expansion of CleanStar 2000(R), the Company's inside used restaurant cooking oil collection system, resulted in a $1.8 million increase in operating expenses. Selling, General and Administrative Expenses and Provision for Loss Contingency Selling, general and administrative expenses were $32.7 million during Fiscal 1996, a $6.0 million increase from $26.7 million during Fiscal 1995. The increase in expenses was primarily attributable to the acquisitions of Standard Tallow and IPC, increases in compensation and related costs, product development costs, and professional fees. The Company recorded $6.1 million in charges to the provision for loss contingency during Fiscal 1996 to cover costs related to environmental violations at the Company's Blue Earth, Minnesota plant. Depreciation and Amortization Depreciation and amortization charges increased $5.0 million, to $27.6 million during Fiscal 1996 as compared to $22.6 million during Fiscal 1995. This increase was due to additional depreciation on fixed asset additions and amortization on intangibles acquired as a result of the acquisitions of Standard Tallow and IPC. Interest Expense Interest expense decreased $0.3 million, to $13.0 million during Fiscal 1996 as compared to $13.3 million during Fiscal 1995, primarily due to decreased interest rates. Income Taxes In Fiscal 1996, the Company recorded a $7.3 million income tax expense which consisted of $6.7 million of federal tax expense and $0.6 million for various state taxes, after taking into account the expected non-tax deductible nature of approximately $3.0 million of the expenses related to the settlement of environmental violations at the Company's Blue Earth, Minnesota plant. In Fiscal 1995, the Company recorded an $8.7 million income tax expense which consisted of $7.8 million of federal tax expense and $0.9 million of state tax expense. Capital Expenditures The Company's capital expenditures consist primarily of investments in facilities, collection operations and environmental equipment. The Company made capital expenditures of $28.6 million during Fiscal 1996 as compared to $24.6 million in Fiscal 1995. LIQUIDITY AND CAPITAL RESOURCES Effective June 5, 1997, the Company entered into a Credit Agreement (the "Credit Agreement") which provides for borrowings in the form of a $50,000,000 Term Loan and $175,000,000 Revolving Credit Facility. As of January 3, 1998, the Company was in compliance with all provisions of the Credit Agreement. The Term Loan provides for $50,000,000 of borrowing. The Term Loan bears interest, payable monthly at LIBOR (5.9375% at January 3, 1998) plus a margin (the "Credit Margin") (1.25% at January 3, 1998) which floats based on the achievement of certain financial ratios. The Term Loan is payable by the Company in quarterly installments of $1,250,000 commencing on June 30, 1997 through March 31, 1999; $2,500,000 commencing on June 30, 1999 through March 31, 2002; and an installment of $10,000,000 due on June 5, 2002. As of January 3, 1998, $46,250,000 was outstanding under the Term Loan. The Revolving Credit Facility provides for borrowings up to a maximum of $175,000,000 with sublimits available for letters of credit and a swingline. Outstanding borrowings on the Revolving Credit Facility bear interest, payable monthly, at various LIBOR rates (ranging from 5.8125% to 5.9648% at January 3, 1998) plus the Credit Margin as well as portions at a Base Rate (8.50% at January 3, 1998) or, for swingline advances, at the Base Rate. Additionally, the Company must pay a commitment fee equal to 0.25% per annum on the unused portion of the Revolving Credit Facility. The Revolving Credit Facility matures on June 5, 2002. As of January 3, 1998, $100,875,000 was outstanding under the Revolving Credit Facility. As of January 3, 1998, the Company had outstanding irrevocable letters of credit aggregating $8,401,000. The Credit Agreement contains certain terms and covenants, which, among other matters, restrict the incurrence of additional indebtedness, the payment of cash dividends and the annual amount of capital expenditures, and requires the maintenance of certain minimum financial ratios. As of January 3, 1998, no cash dividends could be paid to the Company's stockholders pursuant to the Credit Agreement. The Company has only very limited involvement with derivative financial instruments and does not use them for trading purposes. Interest rate swap agreements are used to reduce the potential impact of increases in interest rates on floating-rate long-term debt. At January 3, 1998, the Company was party to three interest rate swap agreements, each with a term of five years (all maturing June 27, 2002). Under terms of the swap agreements, the interest obligation on $70 million of Credit Agreement floating-rate debt was exchanged for fixed rate contracts which bear interest, payable quarterly, at an average rate of 6.6% plus a credit margin. On January 3, 1998, the Company had working capital of $3.3 million and its working capital ratio was 1.06 to 1 compared to a working capital deficit of $8.0 million and a working capital ratio of 0.90 to 1 on December 28, 1996. The increase in working capital is primarily the result of the $10.5 million decrease in current maturities of long-term debt. Net cash provided by operating activities has decreased $19.4 million from $46.4 million during Fiscal 1996 to $27.1 million during Fiscal 1997. The Company believes that cash from operations and current cash balances, together with the undrawn balance from the Company's loan agreements, will be sufficient to satisfy the Company's planned capital requirements. ACQUISITIONS The Company periodically makes acquisitions which on a stand-alone basis are not considered significant acquisitions for disclosure purposes. During Fiscal 1997, the Company made acquisitions totaling $11.7 million which included goodwill acquired of $2.2 million. ACCOUNTING MATTERS In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. SFAS No. 131 is effective for annual periods beginning after December 15, 1997. This Statement established standards for the way that public business enterprises report information about operating segments in annual financial statements. The Statement defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company anticipates that this Statement will require additional disclosure regarding operating segments in Fiscal 1998. In June 1997, the Financial Accounting Standards also issued SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. This Statement establishes standards for reporting and display of comprehensive income and its components. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Reclassification of financial statements for earlier periods provided for comparative purposes is required. The Company does not anticipate restatement of its financial statements upon adoption of SFAS No. 130. OTHER As a result of computer programs being written using two digits rather than four to define the applicable years, there is a concern by the business community as to whether these systems will be able to process information beginning in the year 2000. To deal with this concern, the Company has initiated programs and information systems reviews in an attempt to ensure that key systems and processes will remain functional. This objective is to be achieved either by modifying present systems or by installing new systems. While there can be no assurance that all modifications will be successful, management does not expect that costs of modifications or consequences of any unsuccessful modifications will have a material adverse effect on the Company. FORWARD LOOKING STATEMENTS This Annual Report on Form 10-K includes "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts included in the Annual Report on Form 10-K, including, without limitation, the statements under the sections entitled "Business," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Legal Proceedings" and located elsewhere herein regarding industry prospects and the Company's financial position are forward-looking statements. Although the Company believes that the expectation reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Important factors that could cause actual results to differ materially from the Company's expectations include: the Company's continued ability to obtain sources of supply for its rendering operations; general economic conditions in the European and Asian markets; and prices in the competing commodity markets which are volatile and are beyond the Company's control. Future profitability may be effected by the Company's ability to grow its restaurant services business and the development of its value-added feed ingredients, all of which face competition from companies which may have substantially greater resources than the Company. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Pages Independent Auditors' Report 20 Consolidated Balance Sheets- January 3, 1998 and December 28, 1996 21 Consolidated Statements of Operations- Three years ended January 3, 1998 22 Consolidated Statements of Stockholders' Equity - Three years ended January 3, 1998 23 Consolidated Statements of Cash Flows - Three years ended January 3, 1998 24 Notes to Consolidated Financial Statements - January 3, 1998 and December 28, 1996 25 Financial Statement Schedule: II - Valuation and Qualifying Accounts 41 All other schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and notes thereto. INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Darling International Inc.: We have audited the consolidated financial statements of Darling International Inc. and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Darling International Inc. and subsidiaries as of January 3, 1998 and December 28, 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended January 3, 1998, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG Peat Marwick LLP Dallas, Texas February 20, 1998 DARLING INTERNATIONAL INC. AND SUBSIDIARIES Consolidated Balance Sheets January 3, 1998 and December 28, 1996 (in thousands, except share and per share data)
January 3, December 28, ASSETS (note 9) 1998 1996 - - --------------- ---------- ----------- Current assets: Cash and cash equivalents $ 2,955 $ 12,956 Accounts receivable 32,459 35,966 Inventories (note 4) 13,897 12,643 Prepaid expenses 3,459 1,493 Deferred income tax assets (note 11) 4,006 6,184 Other 383 484 --------- --------- Total current assets 57,159 69,726 Property, plant and equipment, net (note 5) 170,636 175,786 Collection routes and contracts, less accumulated amortization of $8,700 at January 3, 1998 and $3,222 at December 28, 1996 58,715 59,940 Goodwill, less accumulated amortization of $949 at January 3, 1998 and $293 at December 28, 1996 (note 2) 20,902 19,905 Other assets (note 6) 5,565 4,288 --------- --------- $ 312,977 $ 329,645 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt (note 9) $ 5,113 $ 15,598 Accounts payable, principally trade 22,426 27,732 Accrued expenses (note 7) 25,385 30,118 Accrued interest (note 9) 911 4,293 -------- -------- Total current liabilities 53,835 77,741 Long-term debt, less current portion (note 9) 142,181 138,173 Other noncurrent liabilities (note 10) 21,391 20,376 Deferred income taxes (note 11) 25,814 29,322 -------- -------- Total liabilities 234,221 265,612 -------- -------- Stockholders' equity (notes 3, 9, 11 and 12): Common stock, $.01 par value; 25,000,000 shares authorized, 15,563,037 and 15,455,937 shares issued and outstanding at January 3, 1998 and December 28,1996 156 155 Preferred stock, $0.01 par value; 1,000,000 shares authorized, none issued - - Additional paid-in capital 34,780 34,467 Retained earnings 34,820 29,411 -------- -------- Total stockholders' equity 69,756 64,033 -------- -------- Commitments and contingencies (notes 8 and 15) $ 312,977 $ 329,645 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. Consolidated Statements of Operations Three years ended January 3, 1998 (in thousands, except per share data)
January 3, December 28, December 30, 1998 1996 1995 ----------- ------------ ------------ Net sales (note 14) $ 498,421 $ 488,914 $421,608 -------- -------- ------- Costs and expenses: Cost of sales and operating expenses 404,159 395,025 336,248 Selling, general and administrative expenses 38,645 32,767 26,675 Depreciation and amortization 33,670 27,611 22,576 Provision for loss contingencies - 6,075 - -------- -------- ------- Total costs and expenses 476,474 461,478 385,499 -------- -------- ------- Operating income 21,947 27,436 36,109 -------- -------- ------- Other income (expense): Interest expense (note 9) (13,732) (12,994) (13,311) Other, net 163 537 322 -------- -------- ------- Total other income (expense) (13,569) (12,457) (12,989) --------- --------- ------- Income before income taxes 8,378 14,979 23,120 Income tax expense (note 11) 2,969 7,305 8,740 -------- -------- ------- Net earnings $ 5,409 $ 7,674 $ 14,380 ======== ======== ======= Basic earnings per share (note 1) $ 0.35 $ 0.50 $ 0.95 ======== ======== ======= Diluted earnings per share (note 1) $ 0.33 $ 0.46 $ 0.90 ======== ======== =======
The accompanying notes are an integral part of these consolidated financial statements. DARLING INTERNATIONAL INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity Three years ended January 3, 1998 (In thousands, except share data)
Common stock ---------------------- Additional Total Number $.01 par paid-in Retained stockholders' of shares value capital earnings equity -------------------------------------------------------------------------------------------------------- Balances at December 31, 1994 14,998,785 $150 $ 31,975 $ 7,357 $ 39,482 Issuance of common stock 257,745 3 757 - 760 Tax benefits relating to January 1, 1994 valuation allowance - - 211 - 211 Net earnings - - - 14,380 14,380 ---------- ----- ------- ------- ------- Balances at December 30, 1995 15,256,530 153 32,943 21,737 54,833 Issuance of common stock 199,407 2 618 - 620 Tax benefits relating to January 1, 1994 valuation allowance - - 906 - 906 Net earnings - - - 7,674 7,674 ---------- ----- ------- ------- ------- Balances at December 28, 1996 15,455,937 155 34,467 29,411 64,033 Issuance of common stock 107,100 1 313 - 314 Net earnings - - - 5,409 5,409 ---------- ----- ------- ------- ------- Balances at January 3, 1998 15,563,037 $156 $34,780 $34,820 $69,756 ========== ===== ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. DARLING INTERNATIONAL INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Three years ended January 3, 1998 (in thousands)
January 3, December 28, December 30, 1998 1996 1995 ----------- ------------ ------------ Cash flows from operating activities Net earnings $ 5,409 $ 7,674 $ 14,380 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 33,670 27,611 22,576 Deferred income tax expense (benefit) (1,330) (88) 6,319 Loss (gain) on sale of assets (910) 294 196 Changes in operating assets and liabilities, net of effects from acquisitions: Accounts receivable 3,507 1,978 (3,418) Inventories and prepaid expenses (3,220) 3,724 2,244 Accounts payable and accrued expenses (4,700) 4,007 (2,170) Accrued interest (3,382) 391 (653) Other (1,907) 824 (5,278) ---------- ----------- ----------- Net cash provided by operating activities 27,137 46,415 34,196 ---------- ----------- ----------- Cash flows from investing activities: Recurring capital expenditures (22,283) (25,111) (22,649) Capital expenditures related to acquisitions (4,290) (3,520) (1,987) Gross proceeds from sale of property, plant and equipment, assets held for disposition and other assets 6,061 507 721 Payments related to routes and other intangibles (6,870) (707) (4,051) Fair value of net assets acquired in acquisitions (note 1) - (42,098) - ---------- ----------- ----------- Net cash used in investing activities (27,382) (70,929) (27,966) ---------- ----------- ----------- Cash flows from financing activities: Proceeds from long-term debt 283,124 20,124 107,178 Payments on long-term debt (289,601) (33,223) (105,931) Proceeds from acquisition debt - 40,000 - Contract payments (2,585) (1,700) (916) Deferred loan costs (1,008) - (740) Issuance of common stock 314 620 760 ---------- ----------- ----------- Net cash provided by (used in) financing activities (9,756) 25,821 351 ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents (10,001) 1,307 6,581 Cash and cash equivalents at beginning of year 12,956 11,649 5,068 ---------- ----------- ----------- Cash and cash equivalents at end of year $ 2,955 $ 12,956 $ 11,649 ========== =========== =========== Supplemental disclosure of cash flow information: Cash paid during the year for: Interest $ 17,114 $ 12,603 $ 13,964 ---------- ----------- ----------- Income taxes, net of refunds $ 4,345 $ 1,647 $ 3,920 ---------- ----------- -----------
The accompanying notes are an integral part of these consolidated financial statements. DARLING INTERNATIONAL INC. Notes to Consolidated Financial Statements January 3, 1998 and December 28, 1996 (1) GENERAL (a) NATURE OF OPERATIONS Darling International Inc. (the "Company") believes it is the largest independent recycler of food processing by-products in the United States, operating a fleet of vehicles, through which it collects animal by-products, used restaurant cooking oil, and bakery by-products from butcher shops, grocery stores, independent meat and poultry processors, restaurants, and bakeries nationwide. The Company processes raw materials through facilities located throughout the United States into finished products, such as tallow, meat and bone meal, yellow grease, and dried bakery product. The Company sells its finished products domestically and internationally to producers of soap, cosmetics, rubber, pet food and livestock feed for use as ingredients in such products. (b) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (1) Basis of Presentation The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. (2) Fiscal Year The Company has a 52/53 week fiscal year ending on the Saturday nearest December 31. Fiscal years for the consolidated financial statements included herein are for the 53 weeks ended January 3, 1998, the 52 weeks ended December 28, 1996, and the 52 weeks ended December 30, 1995. (3) Inventories Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. (4) Property, Plant and Equipment Historically, property, plant and equipment are recorded at cost. Depreciation is computed by the straight-line method over the estimated useful lives of assets: 1) Buildings and improvements - 24 to 30 years, 2) Machinery and equipment - 3 to 8 years, and 3) Vehicles - 4 to 6 years. In accordance with Fresh Start Reporting (see Note 3), property, plant and equipment were restated to their approximate fair value as of January 1, 1994. Subsequent additions are recorded at cost. Maintenance and repairs are charged to expense as incurred and expenditures for major renewals and improvements are capitalized. (5) Collection Routes and Contracts Collection routes, restrictive covenants and consulting agreements are recorded at cost and are amortized using the straight-line method over periods ranging from 3 to 15 years. (6) Goodwill Goodwill, which represents the excess of purchase price over fair value of net assets acquired, is amortized on a straight-line basis over the expected periods to be benefited, not exceeding 30 years. Annually, the Company makes an assessment to determine the recoverability of this intangible asset. (7) Environmental Expenditures Environmental expenditures incurred to mitigate or prevent environmental contamination that has yet to occur and that otherwise may result from future operations are capitalized. Expenditures that relate to an existing condition caused by past operations and that do not contribute to current or future revenues are expensed or charged against established environmental reserves. Reserves are established when environmental assessments and/or clean-up requirements are probable and the costs are reasonably estimable. (8) Income Taxes The Company accounts for income taxes using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (9) Earnings Per Common Share In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128"). SFAS No. 128 revised the previous calculation methods and presentations of earnings per share and requires that all prior-period earnings (loss) per share data be restated. The Company adopted SFAS No. 128 in the fourth quarter of 1997 as required by this Statement. Basic earnings per common share are computed by dividing net earnings attributable to outstanding common stock by the weighted average number of common stock shares outstanding during the year. Diluted earnings per common share are computed by dividing net earnings attributable to outstanding common stock by the weighted average number of common shares outstanding during the year increased by dilutive common equivalent shares (stock options) determined using the treasury stock method, based on the average market price exceeding the exercise price of the stock options. All prior-period earnings per share amounts have been restated in accordance with SFAS No. 128. The weighted average common shares used for basic earnings per common share was 15,519,000, 15,375,000 and 15,138,000 for 1997, 1996 and 1995 respectively. The effect of dilutive stock options added 942,000, 1,299,000 and 828,000 shares for 1997, 1996 and 1995 respectively for the computation of diluted earnings per common share. (10) Stock Option Plans Prior to January 1, 1996, the Company accounted for its stock option plan in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On January 1, 1996, the Financial Accounting Standards Board issued SFAS No. 123, Accounting for Stock-Based Compensation, which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. (11) Statements of Cash Flows The Company considers all short-term highly liquid instruments, with an original maturity of three months or less, to be cash equivalents. (12) Supplemental Schedule of Non-Cash Investing and Financing Activities During the year ended December 28, 1996, non-cash investing and financing activities included the purchase of 100% of the common stock of Standard Tallow for $10,400,000. Assets acquired, liabilities assumed, and consideration paid for this acquisition are as follows (in thousands): Fair value of assets acquired, less cash $ 20,066 Liabilities assumed and incurred (11,094) ------- Fair value of net assets acquired 8,972 Bank debt incurred (10,400) ------- Cash (received)paid upon purchase $ (1,428) ======= In addition, the Company purchased 100% of the common stock of International Processing Corporation and International Transportation Service, Inc. (collectively referred to as "IPC") for $30,000,000. Assets acquired, liabilities assumed and consideration paid for this acquisition are as follows (in thousands): Fair value of assets acquired, less cash $ 47,836 Liabilities assumed and incurred (14,710) -------- Fair value of net assets acquired 33,126 Bank debt incurred (29,600) -------- Cash (received)paid upon purchase $ 3,526 ======== (13) Use of Estimates The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (14) Impairment of Long-Lived Assets and Long-Lived Assets To Be Disposed Of The Company adopted the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on December 31, 1995. This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Adoption of this Statement did not have a material impact on the Company's financial position, results of operations, or liquidity. (15) Financial Instruments The carrying amount of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximates fair value due to the short maturity of these instruments. The carrying amount of $70,000,000 of outstanding borrowings under the Credit Agreement at January 3, 1998, approximated $71,800,000 since these borrowings bear interest at a fixed rate pursuant to an interest rate swap. The carrying amount of the balance of outstanding borrowings under the Credit Agreement at January 3, 1998 and December 28, 1996 approximated fair value since the borrowings bear interest at current market rates. The fair market value of the Subordinated Notes approximated $73,000,000 at December 28, 1996. The fair value of the Subordinated Notes was estimated based on current borrowing rates available for financings with non-rated, non-investment grade bonds with similar terms and maturities. (16) Derivative Instruments The Company's use of derivative instruments is limited to interest rate swaps which are entered into with the intent of managing overall borrowing costs. The Company does not use derivative instruments for trading purposes. The Company has entered into interest rate swaps to effectively fix the interest rate of a portion of its long term debt. The notational amount of the swaps fixes approximately 48% of total long term debt at January 3, 1998, at an underlying rate of 7.85%. These swaps settle at maturity, June 27, 2002. The Company's credit risk related to interest rate swaps is considered minimal due to strong creditworthy counterparties, settlement on a net basis, and short durations. (2) ACQUISITIONS During Fiscal 1997, as part of the Company's strategy to expand its presence in the grease trap business, the Company made the following acquisitions: Enduro, Midwest Recycling, and Torvac, totaling $11.7 million which included goodwill acquired of $2.2 million. On August 30, 1996, the Company acquired 100% of the outstanding capital stock of IPC in accordance with a Stock Purchase Agreement (dated August 30, 1996, between the Company, IPC and the stockholders of IPC (the "Sellers")). IPC processes by-products collected from bakeries, pasta manufacturers, confectioners and snack food producers for sale to the animal feed industry. The purchase price for the capital stock of IPC was $30,000,000. The purchase price was paid in cash and was determined by agreement between the Company and the Seller. The Company funded $29.6 million of the purchase price with funds financed under the Acquisition Facility pursuant to the Credit Agreement among the Company, The First National Bank of Boston, as agent, and Harris Trust and Savings Bank, as co-agent. The remaining $400,000 of the purchase price was funded out of cash on hand. In connection with the acquisition, the Company also paid approximately $2.8 million in full payment and retirement of certain indebtedness of IPC. The Company used cash on hand to fund the repayment of such indebtedness. The IPC acquisition was accounted for under the purchase method of accounting in accordance with Accounting Principles Board Opinion No. 16 and operations since the acquisition date have been included in the consolidated statements of operations. The excess of the total acquisition cost over the recorded value of assets acquired was allocated to goodwill in the amount of $15.9 million and will be amortized over 30 years. The pro forma results of operations which follow assume that the IPC acquisition had occurred at the beginning of each period presented. In addition to combining the historical results of operations of the two companies, the pro forma calculations include adjustments for the estimated effect on the Company's historical results of operations for depreciation and amortization and interest related to the acquisition. (in thousands, except per share data) Year ended Year ended December 28, December 31, 1996 1995 (unaudited) (unaudited) ----------------------------------- Net sales $ 544,436 $ 477,459 Net earnings 10,298 14,227 Basic earnings per share $0.67 $0.94 On May 8, 1996, the Company acquired 100% of the common stock of Standard Tallow for $10,400,000. The Company recorded goodwill associated with this acquisition in the amount of $4.3 million which will be amortized over 30 years. (3) THE SETTLEMENT AND FRESH START REPORTING On October 22, 1993, the Company entered into a settlement agreement providing for a restructure of the Company's debt and equity and resolution of a class action lawsuit ("the Settlement"). On December 29, 1993 (the "Effective Date"), the Settlement was consummated and became binding on all original note holders. The Settlement was accomplished pursuant to a court order which was tantamount to a prepackaged bankruptcy despite the fact that the Settlement did not occur under the Bankruptcy Code. Accordingly, the Company has accounted for the Settlement using "Fresh Start Reporting" as of January 1, 1994 in accordance with Statement of Position 90-7, "Financial Reporting by Entities In Reorganization Under the United States Bankruptcy Code" ("SOP 90-7") issued by the American Institute of Certified Public Accountants. Using a valuation of the Company performed by an independent appraiser, the Company determined the total reorganization value of all its assets to be approximately $236,294,000 as of January 1, 1994. The historical values of the Company's liabilities, other than deferred income taxes, approximated fair value at January 1, 1994. Deferred income taxes were recorded in conformity with generally accepted accounting principles. The Company's accumulated deficit was eliminated as of January 1, 1994. (4) INVENTORIES A summary of inventories follows (in thousands): January 3, December 28, 1998 1996 -------------------------------- Finished product $ 13,338 $ 12,005 Supplies and other 559 638 ------- ------- $ 13,897 $ 12,643 ======= ======= (5) PROPERTY, PLANT AND EQUIPMENT A summary of property, plant and equipment follows (in thousands): January 3, December 28, 1998 1996 --------------------------------- Land $ 19,141 $ 20,717 Buildings and improvements 24,768 26,113 Machinery and equipment 133,521 122,195 Vehicles 57,589 50,269 Construction in process 17,169 12,465 -------- -------- 252,188 231,759 Accumulated depreciation (81,552) (55,973) -------- -------- $ 170,636 $ 175,786 ======== ======== (6) OTHER ASSETS Other assets consist of the following (in thousands): January 3, December 28, 1998 1996 ------------------------------ Prepaid pension cost (note 13) $ 2,612 $ 2,028 Deposits and other 2,953 2,260 ------- ------- $ 5,565 $ 4,288 ======= ======= (7) ACCRUED EXPENSES Accrued expenses consist of the following (in thousands): January 3, December 28, 1998 1996 ------------------------------- Insurance $ 3,363 $ 2,257 Compensation and benefits 5,817 4,854 Utilities and sewage 2,640 2,904 Reserve for environmental and litigation matters (note 15) 2,000 7,350 Income taxes payable 3,011 3,034 Other 8,554 9,719 -------- ------- $ 25,385 $ 30,118 ======== ======= (8) LEASES The Company leases nine plants and storage locations, four office locations and a portion of its transportation equipment. Leases are noncancellable and expire at various times through the year 2028. Minimum rental commitments under noncancellable leases as of January 3, 1998, are as follows (in thousands): Period Ending Fiscal Operating Leases -------------------- ---------------- 1998 $ 2,028 1999 1,649 2000 1,331 2001 1,189 2002 958 Thereafter 8,796 ------- Total $ 15,951 ======= Rent expense for the years ended January 3, 1998, December 28, 1996, and December 30, 1995 was $2,263,000, $1,929,000, and $1,163,000, respectively. (9) LONG-TERM DEBT Long-term debt consists of the following (in thousands): January 3, December 28, 1998 1996 ------------------------------ Credit Agreement: Revolving Credit Facility $ 100,875 $ 5,000 Term Loan 46,250 38,000 Acquisition Line - 40,000 First Priority Sr. Subordinated Notes - 69,976 Other notes 169 795 --------- -------- 147,294 153,771 Less current maturities 5,113 15,598 --------- -------- $ 142,181 $ 138,173 ========= ======== CREDIT AGREEMENT Effective June 5, 1997, the Company entered into a Credit Agreement (the "Credit Agreement") which provides for borrowings in the form of a $50,000,000 Term Loan, and a $175,000,000 Revolving Credit. Facility. As of January 3, 1998, the Company was in compliance with all provisions of the Credit Agreement. The Term Loan provides for $50,000,000 of borrowing. The Term Loan bears interest, payable monthly, at LIBOR (5.9375% at January 3, 1998) plus a margin (the "Credit Margin") (1.25% at January 3, 1998) which floats based on the achievement of certain financial ratios. The Term Loan is payable by the Company in quarterly installments of $1,250,000 commencing on June 30, 1997 through March 31, 1999, $2,500,000 commencing on June 30, 1999 through March 31, 2002; and an installment of $10,000,000 due on June 5, 2002. As of January 3, 1998, $46,250,000 was outstanding under the Term Loan Facility. The Revolving Credit Facility provides for borrowings up to a maximum of $175,000,000 with sublimits available for letters of credit and a swingline. Outstanding borrowings on the Revolving Credit Facility bear interest, payable monthly, at various LIBOR rates (ranging from 5.8125% to 5.9648% at January 3, 1998) plus the Credit Margin as well as portions at a Base Rate (8.50% at January 3, 1998) or, for swingline advances, at the Base Rate. Additionally, the Company must pay a commitment fee equal to 0.25% per annum on the unused portion of the Revolving Credit Facility. The Revolving Credit Facility matures on June 5, 2002. As of January 3, 1998, $100,875,000 was outstanding under the Revolving Credit Facility. As of January 3, 1998, the Company had outstanding irrevocable letters of credit aggregating $8,401,000. The Company has only very limited involvement with derivative financial instruments and does not use them for trading purposes. The interest rate swap agreement is used to reduce the potential impact of increases in interest rates on floating-rate long-term debt. At January 3, 1998, the Company was party to three interest rate swap agreements, each with a term of five years (all maturing June 27, 2002). Under terms of the swap agreement, the interest obligation on $70 million of Credit Agreement floating-rate debt was exchanged for fixed rate contracts which bear interest, payable quarterly, at an average rate of 6.6% plus a credit margin. The Credit Agreement contains certain terms and covenants, which, among other matters, restrict the incurrence of additional indebtedness, the payment of cash dividends and the annual payment of capital expenditures, and requires the maintenance of certain minimum financial ratios. As of January 3, 1998, no cash dividends could be paid to the Company's stockholders pursuant to the Credit Agreement. SUBORDINATED NOTES On June 27, 1997, the Company redeemed Subordinated Notes with a face amount of $69,976,000, using proceeds from the Revolving Credit Facility. OTHER Aggregate maturities of long-term debt subsequent to January 3, 1998 are as follows (in thousands): 1998 $ 5,113 1999 8,806 2000 10,000 2001 10,000 2002 113,375 (10) OTHER NONCURRENT LIABILITIES Other noncurrent liabilities consist of the following (in thousands): January 3, December 28, 1998 1996 ------------------------- Reserve for insurance, environmental and litigation matters (note 15) $10,246 $ 9,829 Liabilities associated with consulting and noncompete agreements 9,887 9,356 Other 1,258 1,191 ------ ------ $21,391 $20,376 ====== ====== The Company sponsors a defined benefit health care plan that provides postretirement medical and life insurance benefits to certain employees. The Company accounts for this plan in accordance with Statement of Financial Accounting Standards No. 106 and the effect on the Company's financial position and results of operations is immaterial. (11) INCOME TAXES Income tax expense (benefit) attributable to income before income taxes consists of the following (in thousands): January 3, December 28, December 30, 1998 1996 1995 ----------------------------------------------- Current: Federal $3,135 $6,801 $1,883 State 291 592 509 Foreign 14 - 29 Deferred: Federal (812) (62) 5,921 State (70) (26) 398 Foreign 411 - - ----- ----- ----- $2,969 $7,305 $8,740 ===== ===== ===== Income tax expense for the years ended January 3, 1998, December 28, 1996, and December 30, 1995, differed from the amount computed by applying the statutory U.S. federal income tax rate (35%) to income before income taxes as a result of the following (in thousands): January 3, December 28, December 30, 1998 1996 1995 --------------------------------------- Computed "expected" tax expense $ 2,932 $ 5,243 $ 8,092 State income taxes, net of federal benefit 144 368 590 Tax-exempt income of foreign sales corporation (463) (323) (448) Nondeductible fines and penalties (note 15) - 1,058 - Other, net 356 959 506 ------- ------- ------- $ 2,969 $ 7,305 $ 8,740 ======= ======= ======= The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at January 3, 1998 and December 28, 1996 are presented below (in thousands): January 3, December 28, 1998 1996 ----------------------------- Deferred tax assets: Net operating loss carryforwards $ 28,582 $ 29,859 Foreign tax credits and capital loss carryforwards 4,434 4,434 Loss contingency reserves 5,309 6,038 Deferred loan and other costs capitalized and amortized for tax purposes - 890 Other 1,620 2,112 --------- -------- Total gross deferred tax assets 39,945 43,333 Less valuation allowance (19,472) (19,472) --------- -------- Net deferred tax assets 20,473 23,861 --------- -------- Deferred tax liabilities: Collection routes and contracts (11,022) (13,337) Property, plant and equipment (30,001) (32,812) Other (1,258) (850) --------- -------- Total gross deferred tax liabilities (42,281) (46,999) --------- -------- $ (21,808) $ (23,138) ========= ======== The portion of the deferred tax assets and liabilities expected to be recognized in Fiscal 1998 has been recorded at January 3, 1998, in the accompanying consolidated balance sheet as a net current deferred income tax asset of $4,006,000. The remaining non-current deferred tax assets and liabilities have been recorded as a net deferred income tax liability of $25,814,000 at January 3, 1998 in the accompanying consolidated balance sheet. The valuation allowance for deferred tax assets as of January 3, 1998 and December 28, 1996 was $19,472,000. The net changes in the total valuation allowance for the year ended December 28, 1996 was a decrease of $930,000. The Company believes that the remaining net deferred tax assets at January 3, 1998 and December 28, 1996 will be realized primarily through future reversals of existing taxable temporary differences. At January 3, 1998, the Company had net operating loss carryforwards for federal income tax purposes of approximately $75,215,000 which are available to offset future federal taxable income through 2008. The availability of the net operating loss carryforwards to reduce future taxable income is subject to various limitations. As a result of the change in ownership, the Company believes utilization of its net operating loss carryforwards is limited to $3,400,000 per year for the remaining life of the net operating losses. The Company also has approximately $3,896,000 of foreign tax credits and approximately $313,000 of capital loss carry forwards which are available to reduce future federal income taxes, if any, through 1998. The Company reports tax benefits utilized related to the January 1, 1994 valuation allowance ($906,000 in 1996 and $211,000 in 1995) as a direct addition to additional paid-in capital. (12) STOCKHOLDERS' EQUITY (a) COMMON EQUITY On October 28, 1997, the Stockholders of the Company approved a three-for-one stock split. As a result, all references to shares or per share data have been retroactively restated to reflect the three-for-one stock split. (b) STOCK OPTIONS At December 29, 1993, the Company granted options to purchase 384,615 shares of the Company's common stock to the former owners of the Redeemable Preferred Stock. The options have a term of ten years from the date of grant and may be exercised at a price of $3.45 per share (approximated market value at the date of grant). The 1993 Flexible Stock Option Plan and the 1994 Employee Flexible Stock Option Plan provide for the granting of stock options to key officers and salaried employees of the Company and its subsidiaries. Options to purchase common stock were granted at a price approximating fair market value at the date of grant. Options granted under the plans expire ten years from the date of grant. Vesting occurs on each anniversary of the grant date as defined in the specific option agreement. The plans also provide for the acceleration by one year of vesting of all non-vested shares upon the termination of the employee's employment in certain circumstances or upon a change in management control. The Non-Employee Directors Stock Option Plan provides for the granting of options to non-employee directors of the Company. As of January 3, 1998, options to purchase 327,000 shares of common stock had been granted pursuant to this plan. The options have a term of ten years from the date of grant and may be exercised at a price of $3.33 - $9.042 per share (approximated market value at the date of grant). The options vest 25% six months after the grant date and 25% on each anniversary date thereafter. The per share weighted average fair value of stock options granted during 1997, 1996 and 1995 was $7.34, $4.63 and $2.74, respectively, on the date of grant using the Black Scholes option-pricing model with the following weighted assumptions: 1997 1996 1995 ---------------------------------- Expected dividend yield 0.0% 0.0% 0.0% Risk-free interest rate 5.25% 6.6% 6.5% Expected life 10 years 10 years 10 years Expected volatility 4.12-4.43 6.20 5.59 The Company applies APB Opinion No. 25 in accounting for its Plans and, accordingly, no compensation cost has been recognized for its stock options in the financial statements as stock options were granted at market value on the grant date. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net earnings would have been reduced to the pro forma amounts indicated below (in thousands, except per share): 1997 1996 1995 ------------------------- Net earnings As reported $5,409 $7,674 $14,380 Pro forma $4,374 $7,104 $14,308 Basic earnings per common share As reported $0.35 $0.50 $0.95 Pro forma $0.28 $0.46 $0.95 Pro forma net earnings reflects only options granted in 1997, 1996 and 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net income amounts presented above because compensation cost is reflected over the options vesting period and compensation cost for options granted prior to January 1, 1995 are not considered. A summary of transactions for all stock options granted follows:
Option exercise Weighted-avg. Number of price exercise price shares per share per share ---------------------------------------------------- Options outstanding at December 31, 1994 2,266,662 $2.857-4.125 $3.2342 Granted 743,100 4.646-9.25 5.6914 Canceled (28,290) 3.333-4.125 3.6841 Exercised (257,745) 2.857-4.125 2.9496 --------- Options outstanding at December 30, 1995 2,723,727 2.857-9.25 3.9269 Granted 430,200 8.792-10.292 9.6183 Canceled (29,190) 2.857-4.125 3.4018 Exercised (199,407) 2.857-4.125 3.0998 --------- Options outstanding at December 28, 1996 2,925,330 2.857-10.292 4.8255 Granted 683,062 8.25-10.875 9.25 Canceled (450,300) 2.857-10.292 3.5062 Exercised (107,100) 3.33-8.833 4.5346 --------- Options outstanding at January 3, 1998 3,050,992 $2.857-10.875 $6.005 ========= Options exercisable at January 3, 1998 1,927,382 $2.857-10.292 $4.7302 =========
At January 3, 1998, the range of exercise prices and weighted-average remaining contractual life of outstanding options was $2.857-$10.292 and 7.5 years, respectively. At January 3, 1998 and December 28, 1996, the number of options exercisable was 1,927,382 and 1,391,212 respectively, and the weighted-average exercise price of those options was $4.7302 and $3.9853, respectively. (13) EMPLOYEE BENEFIT PLANS The Company has retirement and pension plans covering substantially all of its employees. Most retirement benefits are provided by the Company under separate final-pay noncontributory pension plans for all salaried and hourly employees (excluding those covered by union-sponsored plans) who meet service and age requirements. Benefits are based principally on length of service and earnings patterns during the five years preceding retirement. The Company's funding policy for those plans is to contribute annually not less than the minimum amount required nor more than the maximum amount that can be deducted for federal income tax purposes. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. The following table sets forth the plans' funded status and amounts recognized in the Company's consolidated balance sheets based on the measurement date (October 1, 1997 and 1996) (in thousands):
January 3, 1998 December 28, 1996 ----------------------------- ------------------------- Assets Benefits Assets Benefits exceed exceed exceed exceed benefits assets benefits assets ---------------------------------------------------------- Actuarial present value of benefit obligations: Vested benefit obligation $32,588 $ 2,491 $29,317 $ 2,023 ====== ===== ====== ======= Accumulated benefit obligation, including vested benefits 32,823 2,702 29,103 2,163 ====== ===== ====== ====== Projected benefit obligation for services rendered to date 37,520 2,702 32,341 2,163 Plan assets at fair value (primarily equity and debt instruments) 39,945 2,368 33,234 1,978 ------ ----- ------ ------- Plan assets in excess of (less than) projected benefit obligation 2,425 (334) 893 (185) Unrecognized net loss (gain) from past experience different from that assumed and effects of changes in assumptions (547) 668 840 468 Adjustment for contributions made from measurement date to year end - 400 - 12 ------ ----- ------ ------- Prepaid pension cost included in consolidated balance sheet $ 1,878 $ 734 $ 1,733 $ 295 ====== ======= ====== =======
Net pension cost includes the following components (in thousands): January 3, December 28, December 30, 1998 1996 19995 -------------------------------------- Service cost $1,024 $ 1,033 $ 779 Interest cost 2,557 2,463 2,241 Actual return on plan assets (8,708) (2,737) (4,363) Net amortization and deferral 5,793 (154) 1,839 ------ ------- ------- Net pension cost $ 666 $ 605 $ 496 ====== ======= ====== Assumptions used in accounting for the employee benefit pension plans were: January 3, December 28, December 30, 1998 1996 1995 -------------------------------------- Weighted average discount rate 7.25% 7.75% 7.50% Rate of increase in future compensation levels 5.15% 5.02% 5.90% Expected long-term rate of return on assets 9.25% 8.75% 8.75% The Company participates in several multi-employer pension plans which provide defined benefits to certain employees covered by labor contracts. These plans are not administered by the Company and contributions are determined in accordance with provisions of negotiated labor contracts. Information with respect to the Company's proportionate share of the excess, if any, of the actuarially computed value of vested benefits over these pension plans' net assets is not available. The cost of such plans amounted to $1,529,000, $1,333,000, and $1,288,000, for the years ended January 3, 1998, December 28, 1996, and December 30, 1995, respectively. (14) NET SALES The Company has no material foreign operations, but exports a portion of its products to customers in various foreign countries. Total export sales were $101,040,000, $119,055,000, and $169,829,000, for the years ended January 3, 1998, December 28, 1996, and December 30, 1995, respectively. Concentration of credit risk is limited due to the Company's diversified customer base and the fact that the Company sells commodities. No single customer accounted for more than 10% of the Company's net sales in 1997, 1996, and 1995. (15) CONTINGENCIES (a) ENVIRONMENTAL Blue Earth In July 1997, the Company, the United States Attorney for the District of Minnesota, and the State of Minnesota received Court approval of the proposed settlement to resolve the government's criminal claims relating to environmental law violations at the Company's Blue Earth rendering plant. The specific violations are contained in the Indictment against the Company filed on December 16, 1996, and the Plea Agreement accepted in July 1997. These violations relate to improper sampling, testing, and reporting of waste contaminants in order to conceal discharges in excess of the permitted levels. The Court approved the Plea Agreement under which Darling has paid $2.7 million in criminal fines and penalties, as well as $1.0 million in restitution and remediation. A consent Decree (the "Decree") to resolve all state and federal civil and administrative claims related to the Blue Earth allegations was approved by the Court in September 1997. Pursuant to the Decree Darling paid $300,000 in civil and administrative penalties, and is undertaking other requirements of the Decree. The Company recorded a provision for loss contingency of $6.1 million during Fiscal 1996 to cover the expected cost of the settlement as well as legal, environmental and other related costs. Chula Vista The Company is the owner of an undeveloped property located in Chula Vista, California (the "Site"). A rendering plant was operated on the Site until 1982. From 1959 to 1978, a portion of the Site was used as an industrial waste disposal facility which was closed pursuant to Closure Order No. 80-06 issued by the State of California Regional Water Quality Control Board for the San Diego Region (the "RWQCB"). The Site has been listed by the State of California as a site for which expenditures for removal and remedial actions may be made by the State pursuant to the California Hazardous Substances Account Act, California Health & Safety Code Section 25300 et seq. Technical consultants retained by the Company have conducted various investigations of the environmental conditions at the Site, and in 1996, requested that the RWQCB issue a "no further action" letter with respect to the Site. The RWQCB has not yet taken any formal action in response to such request. Underground Storage Tanks The Company's processing operations do not produce hazardous or toxic wastes; however, the Company does operate underground fuel storage tanks ("UST's") that are subject to federal, state and local laws and regulations. As of January 3, 1998, the Company has removed or closed 177 of its 183 UST's. (b) LITIGATION Petruzzi An antitrust class action suit was filed in 1986 by Petruzzi IGA Supermarkets in the United States District Court for the Middle District of Pennsylvania (the "Class Action Suit") seeking damages from the Company. On September 14, 1995, the Company entered into a settlement agreement providing for the disposal of all claims in the Class Action Suit. The settlement was approved by the District Court on December 20, 1995. On August 18, 1997 the District Court awarded plaintiffs attorney's fees of $1.3 million from the Company which was paid on October 3, 1997. Other Litigation The Company is also a party to several other lawsuits, claims and loss contingencies incidental to its business, including assertions by certain regulatory agencies related to the release of unacceptable odors from some of its processing facilities. The Company purchases its workers compensation, auto and general liability insurance on a retrospective basis. The Company accrues its expected ultimate costs related to claims occurring during each fiscal year and carries this accrual as a reserve until such claims are paid by the Company. The Company has established loss reserves for insurance, environmental and litigation matters as a result of the matters discussed above. Although the ultimate liability cannot be determined with certainty, management of the Company believes that reserves for contingencies are reasonable and sufficient based upon present governmental regulations and information currently available to management. The Company estimates the range of possible losses related to environmental and litigation matters, based on certain assumptions, is between $4.3 million and $13.3 million at January 3, 1998. The accrued expenses and other noncurrent liabilities classifications in the Company's consolidated balance sheets include reserves for insurance, environmental and litigation contingencies of $15.7 million and $20.8 million at January 3, 1998 and December 28, 1996, respectively. There can be no assurance, however, that final costs will not exceed current estimates. The Company believes that any additional liability relative to such lawsuits and claims which may not be covered by insurance would not likely have a material adverse effect on the Company's financial position, although it could potentially have a material impact on the results of operations in any one year. (16) QUARTERLY FINANCIAL DATA (UNAUDITED AND IN THOUSANDS EXCEPT PER SHARE AMOUNTS):
Year Ended January 3, 1998 ------------------------------------------------------------------- First Quarter Second Quarter Third Quarter Fourth Quarter Net sales $125,809 $128,796 $114,455 $129,361 Operating income 4,273 9,767 2,294 5,613 Net earnings (loss) 386 3,812 (523) 1,734 Basic earnings (loss) per share 0.02 0.25 (0.03) 0.11 Diluted earnings (loss) per share 0.02 0.23 (0.03) 0.10 Year Ended December 28, 1996 ---------------------------------------------------------------------- First Quarter Second Quarter Third Quarter Fourth Quarter Net sales $109,741 $114,253 $127,249 $137,672 Operating income 8,918 9,223 3,203 6,092 Net earnings (loss) 3,931 3,613 (1,253) 1,382 Basic earnings (loss) per share 0.26 0.24 (0.08) 0.09 Diluted earnings (loss) per share 0.24 0.22 (0.08) 0.08
SCHEDULE II
Valuation and Qualifying Accounts (In thousands) Additions Charged to: Balance at ------------------------ Balance at Beginning Costs and End of Description of Period Expenses Other Deductions Period - - -------------------------------------- ---------- ----------- --------- ---------- ------------- Accumulated amortization of collection routes and contracts: Year ended January 3, 1998 $ 3,222 $ 6,441 $ - $ 963 $ 8,700 ======== ========= ======== ======= ======== Year ended December 28, 1996 $ 7,854 $ 5,036 $ - $ 9,668 $ 3,222 ======== ========= ======== ======= ======== Year ended December 30, 1995 $ 3,877 $ 3,977 $ - $ - $ 7,854 ======== ========= ======== ======= ======== Accumulated amortization of goodwill: Year ended January 3, 1998 $ 293 $ 656 $ - $ - $ 949 ========= ========= ======== ======= ======== Year ended December 28, 1996 $ - $ 293 $ - $ - $ 293 ========= ========= ======== ======= ======== Note: Deductions consist of the write-off of fully amortized collection routes and contracts in 1996 and 1997.
DARLING INTERNATIONAL INC. AND SUBSIDIARIES FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 3, 1998 PART II ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item with respect to items 401 and 405 of Regulation S-K appears in the sections entitled "Election of Directors," "Executive Officers" and "Compliance with Section 16(a) of the Exchange Act" included in the Registrant's definitive Proxy Statement relating to the 1997 Annual Meeting of Stockholders, which information is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this item appears in the section entitled "Executive Compensation" included in the Registrant's definitive Proxy Statement relating to the 1997 Annual Meeting of Stockholders, which information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item appears in the section entitled "Security Ownership of Certain Beneficial Owners and Management" included in the Registrant's definitive Proxy Statement relating to the 1997 Annual Meeting of Stockholders, which information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company paid Denis Taura, a director of the Company, fees and expenses of $63,368 related to management consulting services provided to the Company. Fredrick J. Klink, a director of the Company, is a partner in the law firm of Dechert, Price & Rhodes. The Company paid Dechert, Price & Rhodes fees for the performance of various legal services. DARLING INTERNATIONAL INC. AND SUBSIDIARIES FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 3, 1998 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents filed as part of this report: (1) The following consolidated financial statements are included in Item 8. Pages Independent Auditors' Report 20 Consolidated Balance Sheets- January 3, 1998 and December 28, 1996 21 Consolidated Statements of Operations - Three years ended January 3, 1998 22 Consolidated Statements of Stockholders' Equity - Three years ended January 3, 1998 23 Consolidated Statements of Cash Flows - Three years ended January 3, 19998 24 Notes to Consolidated Financial Statements - January 3, 1998 and December 28, 1996 25 Quarterly Data 40 (2) The following financial statement schedule is included in Item 8. Schedule II - Valuation and Qualifying Accounts 41 All other schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and notes thereto. (3) (a) Exhibits Exhibit No. Description 2 * Settlement Agreement, dated December 29, 1993, relating to the settlement of class action litigation styled IDS Life Insurance Company, Inc., et al. v. Darling-Delaware Company, Inc., et al., Case No. 91 C 5166, in the United States District Court for the Northern District of Illinois. 2.1***** Stock Purchase Agreement dated as of August 30, 1996, among Darling International Inc., International Processing Corporation, International Transportation Service, Inc., and the stockholders of International Processing Corporation and International Transportation Service, Inc. 3.1 * Restated Certificate of Incorporation of the Company. 3.2 * Amended and Restated Bylaws of the Company. 4.1 * Specimen Common Stock Certificate. 10.1 **** Credit Agreement, dated as of June 5, 1997, among Darling International Inc., BankBoston, N.A., Comerica Bank, Credit Lyonnais New York Branch, and Wells Fargo Bank (Texas), National Association as Co-agents, and other banks as named therein. 10.2 * Registration Rights Agreement, as amended. 10.3 * Form of Indemnification Agreement. 10.4 * Lease, dated November 30, 1993, between the Company and the Port of Tacoma. 10.5 P Leases, dated July 1, 1996, between the Company and the City and County of San Francisco. 10.6 * 1993 Flexible Stock Option Plan. 10.7 *** International Swap Dealers Association, Inc. (ISDA) Master Agreement and Schedule between Credit Lyonnais and Darling International Inc. dated as of June 6, 1997, related to interest rate swap transaction. 10.7(a)*** International Swap Dealers Association, Inc. (ISDA) Master Agreement and Schedule between Credit Lyonnais and Darling International Inc. dated as of June 6, 1997, related to interest rate swap transaction. 10.7(b)*** International Swap Dealers Association, Inc. (ISDA) Master Agreement and Schedule between Credit Lyonnais and Darling International Inc. dated as of June 6, 1997, related to interest rate swap transaction. 10.8 * Form of Executive Severance Agreement. 10.9 * 1994 Employee Flexible Stock Option Plan. 10.10* Non-Employee Directors Stock Option Plan. 10.11** Employment Agreement, dated as of March 31, 1995, between Darling International Inc. and Dennis B. Longmire. 10.12****** Separation Agreement dated as of September 24, 1996, by and between Kenneth A. Ghazey and Darling International Inc. 11 Statement re computation of per share earnings. 21 Subsidiaries of the Registrant. 23 Consent of KPMG Peat Marwick LLP. 27 Financial Data Schedule * Incorporated by reference from the Registrant's Registration Statement on Form S-1 filed July 15, 1994 (Registration No. 33-79478). ** Incorporated by reference to Form 10-Q filed May 8, 1995. *** Incorporated by reference to Form 10-Q filed August 7, 1997. **** Incorporated by reference to Form 8-K filed June 5, 1997. ***** Incorporated by reference to Form 8-K filed September 13, 1996. P Filed pursuant to temporary hardship exemption under cover of Form SE. ****** Incorporated by reference to Form 10-K filed March 25, 1997. (b) Reports on Form 8-K: None. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Form 10-K for the Fiscal Year Ended January 3, 1998 on its behalf by the undersigned, thereunto duly authorized, in the city of Irving, State of Texas, on the 31st day of March, 1998. DARLING INTERNATIONAL INC. By: /s/ Dennis B. Longmire --------------------------------- Dennis B. Longmire Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, the report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Dennis B. Longmire Chairman of the Board and March 31, 1998 ------------------ Chief Executive Officer Dennis B. Longmire (Principal Executive Officer) /s/ John O. Muse Vice President, March 31, 1998 ------------------ Chief Financial Officer John O. Muse (Principal Financial Officer) /s/ Mark C. Levy Vice President and Controller March 31, 1998 ------------------ (Principal Accounting Officer) Mark C. Levy /s/ Bruce Waterfall Director March 31, 1998 ----------------- Bruce Waterfall /s/ Fredric J. Klink Director March 31, 1998 ----------------- Fredric J. Klink /s/ William Westerman Director March 31, 1998 ----------------- William Westerman /s/ Denis J. Taura Director March 31, 1998 ----------------- Denis J. Taura INDEX TO EXHIBITS Exhibit No. Description Page ------- --------------- ---- 2 * Settlement Agreement, dated December 29, 1993, relating to the settlement of class action litigation styled IDS Life Insurance Company, Inc., et al. v. Darling-Delaware Company, Inc., et al., Case No. 91 C 5166, in the United States District Court for the Northern District of Illinois. 2.1***** Stock Purchase Agreement dated as of August 30, 1996, among Darling International Inc., International Processing Corporation, International Transportation Service, Inc., and the stockholders of International Processing Corporation and International Transportation Service, Inc. 3.1 * Restated Certificate of Incorporation of the Company. 3.2 * Amended and Restated Bylaws of the Company. 4.1 * Specimen Common Stock Certificate. 10.1 **** Credit Agreement, dated as of June 5, 1997, among Darling International Inc., BankBoston, N.A., Comerica Bank, Credit Lyonnais New York Branch, and Wells Fargo Bank (Texas), National Association as Co-agents, and other banks as named therein. 10.2 * Registration Rights Agreement, as amended. 10.3 * Form of Indemnification Agreement. 10.4 * Lease, dated November 30, 1993, between the Company and the Port of Tacoma. 10.5 P Leases, dated July 1, 1996, between the Company and the City and County of San Francisco. 10.6 * 1993 Flexible Stock Option Plan. 10.7 *** International Swap Dealers Association, Inc. (ISDA) Master Agreement and Schedule between Credit Lyonnais and Darling International Inc. dated as of June 6, 1997, related to interest rate swap transaction. 10.7(a)*** International Swap Dealers Association, Inc. (ISDA) Master Agreement and Schedule between Credit Lyonnais and Darling International Inc. dated as of June 6, 1997, related to interest rate swap transaction. 10.7(b)*** International Swap Dealers Association, Inc. (ISDA) Master Agreement and Schedule between Credit Lyonnais and Darling International Inc. dated as of June 6, 1997, related to interest rate swap transaction. 10.8 * Form of Executive Severance Agreement. 10.9 * 1994 Employee Flexible Stock Option Plan. 10.10* Non-Employee Directors Stock Option Plan. 10.13 ** Employment Agreement, dated as of March 31, 1995, between Darling International Inc. and Dennis B. Longmire. 10.14****** Separation Agreement dated as of September 24, 1996, by and between Kenneth A. Ghazey and Darling International Inc. 11 Statement re computation of per share earnings. 49 21 Subsidiaries of the Registrant. 50 23 Consent of KPMG Peat Marwick LLP. 51 27 Financial Data Schedule 52 * Incorporated by reference from the Registrant's Registration Statement on Form S-1 filed July 15, 1994(Registration No. 33-79478). ** Incorporated by reference to Form 10-Q filed May 8, 1995. *** Incorporated by reference to Form 10-Q filed August 7, 1997. **** Incorporated by reference to Form 8-K filed June 5, 1997. ***** Incorporated by reference to Form 8-K filed September 13, 1996. P Filed pursuant to temporary hardship exemption under cover of Form SE. ******Incorporated by reference to Form 10-K filed March 25, 1997. DARLING INTERNATIONAL INC. EXHIBIT 11 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS The following table details the computation of basic and diluted earnings per common share, in thousands except per share data:
January 3, December 28, December 30, 1998 1996 1995 - - ---------------------------------------------------- ---------- ----------- --------- Net earnings available to common stock $ 5,409 $ 7,674 $ 14,380 ======= ======= ======== Shares (Basic): Weighted average number of common shares outstanding 15,519 15,375 15,138 ======= ======= ======== Basic earnings per share $ 0.35 $ 0.50 $ 0.95 ======= ======= ======== Shares (Diluted): Weighted average number of common shares outstanding 15,519 15,375 15,138 Additional shares assuming exercise of stock options 942 1,299 828 ------- ------- -------- Average common shares outstanding and equivalents 16,461 16,674 15,966 ======= ======= ======== Diluted earnings per share $ 0.33 $ 0.46 $ 0.90 ======= ======= ========
DARLING INTERNATIONAL INC. EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT Subsidiary State of Incorporation International Processing Corporation Georgia DARLING INTERNATIONAL INC. EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT The Board of Directors Darling International Inc.: We consent to incorporation by reference in the registration statements on Form S-3 (No. 33-79478) and Form S-8 (Nos. 33-99868 and 33-99866) of Darling International Inc. of our report dated February 20, 1998, relating to the consolidating balance sheets of Darling International Inc. and subsidiaries as of January 3, 1998 and December 28, 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended January 3, 1998, and the related schedule, which report appears in the January 3, 1998 annual report on Form 10-K of Darling International Inc. KPMG Peat Marwick LLP Dallas, Texas March 30, 1998 EX-27 2 ART. 5 FDS FOR 10-K
5 1,000 12-MOS JAN-03-1998 DEC-29-1996 JAN-03-1998 2,955 0 32,459 199 13,897 57,159 252,188 81,552 312,977 53,835 142,181 0 0 156 69,600 312,977 498,421 498,421 404,159 476,474 0 0 13,732 8,378 2,969 5,409 0 0 0 5,409 0.35 0.33
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