-----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, SGdX0Bp03nyR5fCmyYAgV3qd7TzN0RTRB9e49x8zswyeFjUo49vYciUaFiqX0lCz rjlrE1e2bWEFg9eoO5QAgg== 0000916540-98-000008.txt : 19980819 0000916540-98-000008.hdr.sgml : 19980819 ACCESSION NUMBER: 0000916540-98-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980704 FILED AS OF DATE: 19980818 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: DARLING INTERNATIONAL INC CENTRAL INDEX KEY: 0000916540 STANDARD INDUSTRIAL CLASSIFICATION: FATS & OILS [2070] IRS NUMBER: 362495346 STATE OF INCORPORATION: DE FISCAL YEAR END: 0103 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13323 FILM NUMBER: 98693402 BUSINESS ADDRESS: STREET 1: 251 O CONNOR RIDGE BLVD STREET 2: STE 300 CITY: IRVING STATE: TX ZIP: 75038 BUSINESS PHONE: 2147170300 10-Q 1 FORM 10Q FOR DARLING INTERNATIONAL INC UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q (Mark One) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 4, 1998 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _______ Commission File Number 0-24620 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 No.) 251 O'CONNOR RIDGE BLVD., SUITE 300, IRVING, TEXAS 75038 (Address of principal executive offices) (972) 717-0300 (Registrant's telephone number) Not applicable (Former name, address and fiscal year, if changed since last report) 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 / / The number of shares outstanding of the Registrant's common stock, $0.01 par value, as of August 14, was 15,587,292. DARLING INTERNATIONAL INC. AND SUBSIDIARIES FORM 10-Q FOR THE THREE MONTHS ENDED JULY 4, 1998 TABLE OF CONTENTS Page No. PART I: FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS Consolidated Balance Sheets . . . . . . . . . . . . . 3 July 4, 1998 (unaudited) and January 3, 1998 Consolidated Statements of Operations (unaudited) . . . . . . 4 Three Months and Six Months Ended July 4, 1998 and June 28, 1997 Consolidated Statements of Cash Flows (unaudited). . . . . . . 5 Six Months Ended July 4, 1998 and June 28, 1997 Notes to Consolidated Financial Statements (unaudited). . . . . 6 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . 9 PART II: OTHER INFORMATION Item 1. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . 15 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . . . . . . . . . . . . 15 Item 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . 16 Signatures . . . . . . . . . . . . . . . . . . 17 Index to Exhibits . . . . . . . . . . . . . . . . 18 DARLING INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS July 4, 1998 and January 3, 1998 (in thousands, except shares and per share data) July 4, January 3, 1998 1998 --------- --------- (unaudited) ASSETS Current assets: Cash and cash equivalents $ 3,279 $ 2,955 Accounts receivable 21,855 32,459 Inventories 12,647 13,897 Prepaid expenses 6,402 3,459 Deferred income tax assets 3,448 4,006 Other 661 383 --------- --------- Total current assets 48,292 57,159 Property, plant and equipment, less accumulated depreciation of $95,998 at July 4, 1998 and $81,552 at January 3, 1998 164,415 170,636 Collection routes and contracts, less accumulated amortization of $11,914 at July 4, 1998 and $8,700 at January 3, 1998 58,140 58,715 Goodwill, less accumulated amortization of $1,381 at July 4, 1998 and $949 at January 3, 1998 20,560 20,902 Other assets 4,670 5,565 --------- --------- $ 296,077 $ 312,977 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 5,113 $ 5,113 Accounts payable, principally trade 19,577 22,426 Accrued expenses 25,301 25,385 Accrued interest 919 911 --------- --------- Total current liabilities 50,910 53,835 Long-term debt, less current portion 130,750 142,181 Other non-current liabilities 25,901 21,391 Deferred income taxes 22,732 25,814 --------- --------- Total liabilities 230,293 243,221 --------- --------- Stockholders' equity Common stock, $.01 par value; 25,000,000 shares authorized; 15,582,912 and 15,563,037 shares issued and outstanding at July 4, 1998 and at January 3, 1998, respectively 156 156 Preferred stock, $0.01 par value; 1,000,000 shares authorized, none issued - - Additional paid-in capital 34,841 34,780 Retained earnings 30,787 34,820 Accumulated other comprehensive income - - --------- -------- Total stockholders' equity 65,784 69,756 --------- -------- Contingencies (note 3) $ 296,077 $ 312,977 ========= ========= The accompanying notes are an integral part of these consolidated financial statements. DARLING INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Three months and six months ended July 4, 1998 and June 28, 1997 (in thousands, except per share data)
Three Months Ended Six Months Ended ------------------------ --------------------- July 4, June 28, July 4, June 28, 1998 1997 1998 1997 -------- -------- -------- -------- (unaudited) (unaudited) Net sales $ 99,271 $128,796 $207,354 $254,605 ------- ------- ------- ------- Costs and expenses: Cost of sales and operating expenses 82,423 103,259 169,855 205,623 Selling, general and administrative expenses 8,718 7,529 19,492 18,726 Depreciation and amortization 9,265 8,241 18,353 16,216 --------- ------- -------- -------- Total costs and expenses 100,406 119,029 207,700 240,565 ------- ------- -------- -------- Operating income (loss) (1,135) 9,767 (346) 14,040 ---------- ------- --------- -------- Other income (expense): Interest expense (2,748) (3,699) (5,856) (7,354) Other, net (438) 143 (360) 247 ---------- ------- --------- -------- Total other income (expense) (3,186) (3,556) (6,216) (7,107) --------- ------- -------- -------- Income (loss) before income taxes (4,321) 6,211 (6,562) 6,933 Income tax expense (benefit) (1,692) 2,399 (2,529) 2,734 ----------- ------- -------- -------- Net earnings (loss) $ (2,629) $ 3,812 $ (4,033) $ 4,199 ========== ======= ========= ======= Basic earnings (loss) per common share $ (0.17) $ 0.25 $ (0.26) $ 0.27 ========== ======= ======== ===== Diluted earnings (loss) per common share $ (0.17) $ 0.23 $ (0.26) $ 0.26 ========== ======= ======== ===== The accompanying notes are an integral part of these consolidated financial statements.
DARLING INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Six months ended July 4, 1998 and June 28, 1997 (in thousands) Six Months Ended July 4, June 28, 1998 1997 ---------- -------- (unaudited) Cash flows from operating activities: Net earnings (loss) $ (4,033) $ 4,199 Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Depreciation and amortization 18,353 16,216 Deferred income tax expense (benefit) (2,524) (723) Gain on sales of assets (13) (622) Changes in operating assets and liabilities net of effects from acquisitions: Accounts receivable 10,604 3,652 Inventories and prepaid expenses (1,718) (1,471) Accounts payable and accrued expenses (2,932) (3,133) Accrued interest 8 (3,765) Other 6,856 3,746 -------- -------- Net cash provided by operating activities 24,601 18,099 -------- -------- Cash flows from investing activities: Recurring capital expenditures (8,616) (10,289) Capital expenditures related to acquisitions - (1,001) Net proceeds from sale of property, plant and equipment and other assets 172 5,051 Payments related to routes and other intangibles (2,733) (3,607) -------- -------- Net cash used in investing activities (11,177) (9,846) -------- -------- Cash flows from financing activities: Proceeds from long-term debt 45,811 201,044 Payments on long-term debt (57,242) (214,589) Contract payments (1,730) (737) Deferred loan costs - (965) Issuance of common stock 61 196 -------- -------- Net cash used in financing activities (13,100) ( 15,051) -------- -------- Net increase (decrease) in cash and cash equivalents 324 (6,798) Cash and cash equivalents at beginning of period 2,955 12,956 -------- -------- Cash and cash equivalents at end of period $ 3,279 $ 6,158 ======== ======== The accompanying notes are an integral part of these consolidated financial statements. DARLING INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements July 4, 1998 (unaudited) (1) General The accompanying consolidated financial statements for the three month and six month periods ended July 4, 1998 and June 28, 1997 have been prepared by Darling International Inc. (Company) without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). The information furnished herein reflects all adjustments (consisting only of normal recurring accruals) which are, in the opinion of management, necessary to present a fair statement of the financial position and operating results of the Company as of and for the respective periods. However, these operating results are not necessarily indicative of the results expected for full fiscal year. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. However, management of the Company believes that the disclosures herein are adequate to make the information presented not misleading. The accompanying consolidated financial statements should be read in conjunction with the audited consolidated financial statements contained in the Company's Form 10-K for the fiscal year ended January 3, 1998. (2) Summary of Significant Accounting Policies (a) 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. (b) Fiscal Periods The Company has a 52/53 week fiscal year ending on the Saturday nearest December 31. Fiscal periods for the consolidated financial statements included herein are as of January 3, 1998, and include the 13 and 26 weeks ended July 4, 1998, and the 13 and 26 weeks ended June 28, 1997. (c) 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 (loss) 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 (loss) 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 (loss) per share amounts have been restated in accordance with SFAS No. 128. The weighted average common shares used for basic earnings (loss) per common share was 15,580,000 and 15,574,000 for the three months and six months ended July 4, 1998, and 15,504,000 and 15,489,000 for the three months and six months ended June 28, 1997. The effect of dilutive stock options added 831,000 and 945,000 shares for the three months and six months ended June 28, 1997. For the three months and six months ended July 4, 1998, no stock options were included in the calculation of diluted earnings (loss) per common share as the effect was antidilutive. (3) Contingencies (a) ENVIRONMENTAL 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"). In June 1982, RWQCB staff approved a completed closure plan which included construction of a containment cell (the "Containment Cell") on a portion (approximately 5 acres) of the Site to isolate contaminated soil excavated from the Site. 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. In 1997 the RWQCB issued Order No. 97-40 prescribing a maintenance and monitoring program for the Containment Cell. In June 1998 the RWQCB provided a letter to assure potential purchasers and lenders of limitations on their liability connected to the balance of the Site (approximately 30 acres) in order to facilitate a potential sale. The Company continues to work with the RWQCB to define the scope of an additional order which will address the Company's future obligations for that remaining portion of the Site. (b) LITIGATION Other Litigation The Company is also a party to several other lawsuits, claims and loss contingencies incidental to its business, including assertions by regulatory agencies related to the release of unacceptable odors from some of its processing facilities. The Company has established loss reserves for environmental and other 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 $3.8 million and $12.8 million at July 4, 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 $21.6 million and $15.7 million at July 4, 1998 and January 3, 1998, 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. (4) Changes in Accounting Principles Effective January 4, 1998, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." This Statement requires that all items recognized under accounting standards as components of comprehensive earnings be reported in an annual financial statement that is displayed with the same prominence as the other annual financial statements. This Statement also requires that the Company classify items of other comprehensive earnings by their nature in an annual financial statement. Comprehensive income did not differ from net income for the periods ended July 4, 1998 and June 28, 1997. DARLING INTERNATIONAL INC. AND SUBSIDIARIES FORM 10-Q FOR THE THREE MONTHS AND SIX MONTHS ENDED JULY 4, 1998 PART I Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion summarizes information with respect to the liquidity and capital resources of the Company at July 4, 1998 and factors affecting its results of operations for the three months and six months ended July 4, 1998 and June 28, 1997. RESULTS OF OPERATIONS Three Months Ended July 4, 1998 Compared to Three Months Ended June 28, 1997 GENERAL The Company recorded a net loss of $2.6 million for the second quarter of the fiscal year ending January 2, 1999 ("Fiscal 1998"), as compared to net earnings of $3.8 million for the second quarter of the fiscal year ended January 3, 1998 ("Fiscal 1997"). Operating income decreased $10.9 million to an operating loss of $1.1 million in the second quarter of Fiscal 1998 from operating income of $9.8 million in the second quarter of Fiscal 1997. The decrease in operating income was primarily due to: 1) Declines in overall finished goods prices; 2) Declines in the volume of raw materials processed; and 3) Approximately $1.1 million in increased depreciation and amortization expense related to acquisitions and capital expenditures. Interest expense decreased from $3.7 million in Fiscal 1997 to $2.7 million in Fiscal 1998, primarily due to the refinancing of all outstanding debt on June 5, 1997, resulting in a lower overall interest rate. 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. In addition, the Company provides grease trap collection services to Restaurants. 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, trap grease services, and finished goods purchased for resale, which constitute less than 10% of total sales. During the second quarter of Fiscal 1998, net sales decreased 22.9%, to $99.3 million as compared to $128.8 million during the second quarter of Fiscal 1997 primarily due to the following: 1) Decreases in overall finished goods prices resulted in a $20.3 million decrease in sales in the second quarter of Fiscal 1998 versus the second quarter of Fiscal 1997. The Company's average yellow grease prices were 16.2% lower, average tallow prices were 4.9% lower, and average meat and bone meal prices were 37.9% lower. Average corn prices were 16.5% lower; 2) Decreases in the volume of raw materials processed resulted in a $3.8 million decrease in sales; 3) Decreases in finished hides sales accounted for $2.0 million in sales decreases; 4) Inventory changes accounted for an additional decrease of $4.9 million in sales; and 5) Service charge income increased $1.4 million to somewhat offset the other decreases. 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 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 the second quarter of Fiscal 1998, cost of sales and operating expenses decreased $20.9 million (20.2%) to $82.4 million as compared to $103.3 million during the second quarter of Fiscal 1997 primarily as a result of the following: 1) Lower raw material prices paid, correlating to decreased prices for fats and oils, meat and bone meal and corn resulted in decreases of $17.0 million in cost of sales; 2) Decreases in the volume of raw materials collected and processed resulted in a decrease of approximately $2.4 million in cost of sales and operating expenses; and 3) Changes in inventory levels resulted in an approximately $4.0 million decrease in cost of sales, offset by a $3.0 million increase in product purchased for resale. SELLING, GENERAL AND ADMINISTRATIVE COSTS Selling, general and administrative costs were $8.7 million during the second quarter of Fiscal 1998, a $1.2 million increase from $7.5 million for the second quarter of Fiscal 1997. This increase resulted from a favorable $1.9 million insurance settlement of certain property and casualty claims from past insurers which was recorded during the second quarter of 1997. This was somewhat offset by a $0.7 million decrease in labor costs. DEPRECIATION AND AMORTIZATION Depreciation and amortization charges increased $1.1 million to $9.3 million during the second quarter of Fiscal 1998 as compared to $8.2 million during the second quarter of Fiscal 1997. This increase was primarily due to additional depreciation on fixed asset additions and amortization on intangibles acquired as a result of various acquisitions. The Company adopted Fresh Start Accounting in 1994. Under this method of accounting, the assets acquired prior to December 1994 were restated at fair market value and depreciated over estimated remaining lives of 5-15 years. INTEREST EXPENSE Interest expense decreased $1.0 million from $3.7 million during the second quarter of Fiscal 1997 to $2.7 million during the second quarter of Fiscal 1998, primarily due to the refinancing of all outstanding debt on June 5, 1997 at a lower overall rate of interest. INCOME TAXES The income tax benefit of $1.7 million for the second quarter of Fiscal 1998 consists of federal tax benefit and various state and foreign taxes. This is a decrease of $4.1 million from $2.4 million income tax expense during the second quarter of Fiscal 1997. CAPITAL EXPENDITURES The Company made capital expenditures of $2.7 million during the second quarter of Fiscal 1998 compared to capital expenditures of $4.9 million during the second quarter of Fiscal 1997. Six Months Ended July 4, 1998 Compared to Six Months Ended June 28, 1997 GENERAL The Company recorded a net loss of $4.0 million for the first six months of Fiscal 1998, as compared to net earnings of $4.2 million for the first six months of Fiscal 1997. Operating income decreased from $14.0 million in the first six months of Fiscal 1997 to an operating loss of $0.3 million in the first six months of Fiscal 1998. The decrease in operating income was primarily due to: 1) Declines in overall finished goods prices; 2) Declines in the volume of raw materials processed; and 3) Approximately $2.2 million in increased depreciation and amortization expense related to acquisitions and capital expenditures. Interest expense decreased from $7.4 million to $5.9 million in Fiscal 1998, primarily due to the refinancing of all outstanding debt on June 5, 1997, resulting in a lower overall interest rate. NET SALES During the first six months of Fiscal 1998, net sales decreased by $47.2 million (18.5%) to $207.4 million as compared to $254.6 million during the first six months of Fiscal 1997, primarily due to the following: 1) Decreases in overall finished goods prices resulted in a $46.5 million decrease in sales in the first six months of Fiscal 1998, versus the first six months of Fiscal 1997. The Company's average yellow grease prices were 20.6% lower, average tallow prices were 11.3% lower, and average meat and bone meal prices were 32.5% lower. Average corn prices were 12.5% lower; 2) Decreases in the volume of raw materials processed resulted in a $6.9 million decrease in sales, offset by $1.5 million in yield gains; 3) Decreases in finished hides sales accounted for $4.9 million in sales decreases; and 4) Increases in service charge income of $2.8 million and inventory changes of $5.0 million somewhat offset the decreases. COST OF SALES AND OPERATING EXPENSES During the first six months of Fiscal 1998, cost of sales and operating expenses decreased $35.7 million (17.4%) to $169.9 million as compared to $205.6 million during the first six months of Fiscal 1997, primarily as a result of the following: 1) Lower raw material prices paid, correlating to decreased prices for fats and oils, meat and bone meal and corn resulted in decreases of $36.4 million in cost of sales; 2) Decreases in the volume of raw materials collected and processed resulted in a decrease of approximately $4.5 million in cost of sales and operating expenses; and 3) Changes in inventory levels resulted in an approximately $3.7 million increase in cost of sales. SELLING, GENERAL AND ADMINISTRATIVE COSTS Selling, general and administrative costs were $19.5 million during the first six months of Fiscal 1998, a $0.8 million increase from $18.7 million for the first six months of Fiscal 1997. Approximately $0.5 million in increased expenses related to the functional reorganization of the Company by line of business and other expenses related to legal and environmental matters. DEPRECIATION AND AMORTIZATION Depreciation and amortization charges increased by $2.2 million to $18.4 million during the first six months of Fiscal 1998, as compared to $16.2 million during the first six months of Fiscal 1997. This increase was primarily due to additional depreciation on fixed asset additions and amortization on intangibles acquired as a result of various acquisitions. INTEREST EXPENSE Interest expense decreased by $1.5 million from $7.4 million during the first six months of Fiscal 1997, to $5.9 million during the first six months of Fiscal 1998, primarily due to the refinancing of all outstanding debt on June 5, 1997, at a lower overall rate of interest. INCOME TAXES The income tax benefit of $2.5 million for the first six months of Fiscal 1998 consists of federal tax benefit and various state and foreign taxes. This is a decrease of $5.2 million from the $2.7 million income tax expense during the first six months of Fiscal 1997. CAPITAL EXPENDITURES The Company made capital expenditures of $8.6 million during the first six months of Fiscal 1998, compared to capital expenditures of $11.3 million during the first six months of Fiscal 1997. 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 July 4, 1998 the Company was in compliance with all provisions of the Credit Agreement, as amended. The Term Loan provides for $50,000,000 of borrowing. The Term Loan bears interest payable monthly at LIBOR (5.6875% at July 4, 1998), plus a margin (the "Credit Margin") (1.625% at July 4, 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 July 4, 1998, $43,750,000 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 5.6563% to 5.6992% at July 4, 1998) plus the Credit Margin as well as portions at a Base Rate (8.50% at July 4, 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 July 4, 1998, $92,000,000 was outstanding under the Revolving Credit Facility. As of July 4, 1998, the Company had outstanding irrevocable letters of credit aggregating $12,445,000. 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. Certain financial covenants to the Credit Agreement required amendments, effective June 30, 1998, due to declines in the prices of the commodities which the Company sells, as discussed above. As of July 4, 1998, the Company was in compliance with all provisions of the Credit Agreement, as amended. If such commodity prices do not improve, the Company will seek (i) further amendments or waivers of certain covenants or (ii) alternative long-term financing. As of July 4, 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 July 4, 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 of $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 July 4, 1998, the Company had a working capital deficit of $2.6 million and its working capital ratio was 0.95 to 1 compared to working capital of $3.3 million and a working capital ratio of 1.06 to 1 on January 3, 1998. This decrease in working capital is mainly attributable to decreases in accounts receivable due to lower finished goods prices. Although operating income declined substantially the first six months of Fiscal 1998 as compared to the first six months of Fiscal 1997, overall debt declined $11.4 million during the first six months of Fiscal 1998. Net cash provided by operating activities has increased $6.5 million from $18.1 million during the first six months of Fiscal 1997 to $24.6 million during the first six months of Fiscal 1998. 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. 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. The Company is also assessing the reporting and disclosure requirements of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement establishes accounting and reporting standards for derivative instruments and hedging activities. The statement is effective for financial statements for fiscal years beginning after June 15, 1999. The Company believes SFAS No. 133 will not have a material impact on its financial statements or accounting policies. The Company will adopt the provisions of SFAS No. 133 in the first quarter of 2000. 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 Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q, including, without limitation, the statements under the sections entitled "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 expectations 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. DARLING INTERNATIONAL INC. AND SUBSIDIARIES FORM 10-Q FOR THE THREE MONTHS AND SIX MONTHS ENDED JULY 4, 1998 PART II: Other Information Item 1. LEGAL PROCEEDINGS The information required by this item is included on pages 7 and 8 of this report and is incorporated herein by reference. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The matters voted upon at the annual meeting of stockholders held on May 27, 1998 were as follows: (i) The election of five directors to serve until the next annual meeting of stockholders or until their successors have been elected and qualified. The number of votes cast for and against the election of each nominee, as well as the number of abstentions and broker non-votes with respect to the election of each nominee, were as follows: Fredric J. Klink For 13,689,200 Against/Witheld 242,259 Dennis B. Longmire For 13,689,545 Against/Witheld 241,914 Denis J. Taura For 13,688,095 Against/Witheld 243,364 Bruce Waterfall For 13,689,395 Against/Witheld 242,064 William L. Westerman For 13,689,350 Against/Witheld 242,109 (ii) The amendment of the 1994 Employee Flexible Stock Option Plan to increase the number of shares of Common Stock, issuable thereunder from 2,052,198 shares to 2,552,198 shares. The number of votes cast for and against the proposal, as well as the number of abstentions and broker non-votes were as follows: For 11,585,646 Against/Witheld 2,345,795 Abstain 18 Item 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits Exhibits No. Description 3.1* Restated Articles of Incorporation. 3.2* Amended and Restated Bylaws, dated March 10, 1994 and March 31, 1995. 10.14 Master Lease Agreement between STI and Darling International Inc. dated as of May 14, 1998. 11 Statement re-computation of per share earnings. 27 Financial Data Schedule * Incorporated by reference to the Registrant's Registration Statement on Form S-1 (Registration No. 33-79478). (b) REPORTS ON FORM 8-K There were no reports filed on Form 8-K during the three months ended July 4, 1998. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DARLING INTERNATIONAL INC. Registrant Date: August 18, 1998 By: /s/ Dennis B. Longmire Dennis B. Longmire Chairman and Chief Executive Officer Date: August 18, 1998 By: /s/ John O. Muse John O. Muse Vice President and Chief Financial Officer (Principal Financial Officer) DARLING INTERNATIONAL INC. AND SUBSIDIARIES FORM 10-Q FOR THE THREE MONTHS ENDED JULY 4, 1998 INDEX TO EXHIBITS Exhibits No. Description Page No. 3.1* Restated Articles of Incorporation 3.2* Amended and Restated Bylaws, dated March 10, 1994 and March 31, 1995. 10.14 Master Equipment Lease between STI Credit Corporation and Darling International Inc. dated as of May 14, 1998. 19 11 Statement re-computation of per share earnings. 18 27 Financial Data Schedule * Incorporated by reference to the Registrant's Registration Statement on Form S-1 (Registration No. 33-79478). EXHIBIT 11 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS The following table details the computation of basic and diluted earnings (loss) per common share, in thousands except per share data.
Three Months Ended Six Months Ended ---------------------------- ---------------------------- July 4, June 28, July 4, June 28, 1998 1997 1998 1997 --------------------------------------- ---------- ---------- ---------- --------- Earnings (Loss) (Basic): Net earnings (loss) available $ (2,629) $ 3,812 $ (4,033) $ 4,199 to common stock ======== ======== ========= ======== Shares (Basic): Weighted average number of common shares outstanding 15,580 15,504 15,574 15,489 ======== ======== ========= ======== Basic earnings (loss) per common share $ (0.17) $ 0.25 $ (0.26) $ 0.27 ======== ======== ========= ======== ========================================================================================================= Earnings (Loss) (Diluted): Net earnings (loss) available $ (2,629) $ 3,812 $ (4,033) $ 4,199 to common stock ======== ======== ========= ======== Shares (Diluted): Weighted average number of common shares outstanding 15,580 15,504 15,574 15,489 Additional shares assuming exercise of stock options - 831 - 945 -------- -------- --------- ------- Average common shares outstanding and equivalents 15,580 16,335 15,574 16,434 ======== ======== ========= ======= Diluted earnings (loss) per common share $ (0.17) $ 0.23 $ (0.26) $ 0.26 ======== ======== ========= ======
EX-27 2 ART. 5 FDS FOR 2ND QUARTER 10-Q
5 1,000 6-MOS JAN-02-1999 JAN-04-1998 JUL-04-1998 3,279 0 21,855 243 12,647 48,292 243,115 109,293 296,077 50,910 135,863 0 0 156 65,628 296,077 207,354 207,354 169,855 207,700 0 0 5,856 (6,562) (2,529) (4,033) 0 0 0 (4,033) (0.26) (0.26)
EX-10 3 MASTER EQUIPMENT LEASE STI CREDIT CORPORATION Mail Code 130 P. 0. Box 4418 Atlanta, Georgia 30302-4418 MASTER EQUIPMENT LEASE Lease Number 453-01 This Master Equipment Lease (hereinafter the "Lease") by and between STI Credit Corporation (hereinafter called "Lessor") with its principal place of business located at 1 Park Place, Atlanta, Georgia and Darling International Inc. (hereinafter called "Lessee") with its principal place of business located at 251 O'Connor Ridge Boulevard, Suite 300, Irving, Texas 75038. For and in consideration of the mutual covenants and promises contained herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Lessor and Lessee agree as follows: 1. Lessor leases to Lessee and Lessee leases and hires from Lessor all machinery, equipment and other property ("Equipment") described in Exhibit A attached hereto and made a part hereof. Said Equipment will be located at the location as set forth in Exhibit A attached hereto and made a part hereof. The rental for the Equipment described above shall be equal to the amounts set forth in Schedule A attached hereto and made a part hereof, plus all applicable taxes. Terms and conditions of this lease will be set forth as agreed upon by Lessor's proposal to Lessee dated , with such terms and conditions amended from time to time, as mutually agreed upon by Lessor and Lessee. 2. Should any rental payment not be paid within ten (10) days after the regularly scheduled due date, a late charge not exceeding five percent (5%) of the monthly rental payment may be charged to cover administrative expenses incurred by Lessor upon such default. Said charge shall be made only once on any given rental installment during the term of the Lease. 3. The term of the Lease for the Equipment described in Paragraph 1 above shall commence as set forth in Schedule A attached hereto and made a part hereof. All rental payments shall be payable in advance at Lessor's address set forth above or at such other place as Lessor may designate, such rental payments to be paid without notice or demand to Lessee and without abatement, set-off or deduction of any amount whatsoever by Lessee, all rights of set-off or similar claims being hereby waived by Lessee. 4. It is understood that Lessor is not the manufacturer or vendor of the Equipment, nor the agent of the manufacturer or vendor of the Equipment, and that LESSOR GIVES NO WARRANTY, EXPRESS OR IMPLIED, WITH RESPECT TO THE EQUIPMENT, INCLUDING ANY WARRANTY AS TO, MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, OR CAPACITY, OR AS TO THE EXISTENCE OF PATENT OR LATENT DEFECTS, OR ANY WARRANTY THAT THE EQUIPMENT WILL MEET THE REQUIREMENTS OF ANY LAW, RULE, SPECIFICATION OR CONTRACT. LESSOR IS NOT RESPONSIBLE FOR ANY REPAIRS, SERVICE OR DEFECT IN THE EQUIPMENT OR THE OPERATION THEREOF OR FOR ANY LOSS, DELAY OR DAMAGE RESULTING FROM DEFECT IN, BREAKAGE OR INEFFICIENCY OF THE EQUIPMENT. In lieu of any warranty by Lessor, Lessor agrees to cooperate with Lessee, at Lessee's sole option and expense, to provide Lessee with the benefit, if any, of any warranty or maintenance commitment given by any third-party manufacturer or vendor with respect to the Equipment, provided that Lessee shall hold Lessor harmless from any liability in connection with such effort and undertaking. 5. ln no event shall Lessor be liable for consequential, incidental or indirect damages, including lost profits, or for any negligence, except for Lessor's gross negligence or willful misconduct or breach of this Lease. 6. Lessee represents and warrants to Lessor (i) if Lessee is a corporation, that Lessee is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, and is qualified to do business in all jurisdictions in which it conducts business, (ii) that the making of this Lease was duly authorized on the part of Lessee and constitutes a valid obligation, binding upon and enforceable against Lessee in accordance with its terms, (iii) that neither the making of this Lease nor the performance in accordance with the terms hereof will violate any provision of any law or any judgment, order or ruling of any court or governmental agency or be in conflict with, result in a breach of, or constitute a default under Lessee's organizational documents (if Lessee is a corporation) or any agreement to which Lessee is a party or by which Lessee or its property is bound, and (iv) that there are no pending, or to the knowledge of Lessee, threatened actions or proceedings before any court or administrative or governmental agency that are reasonably expected to have a material adverse effect on the financial condition or business operations of Lessee. Furthermore Lessee represents and warrants that all financial statements that have heretofore been presented by Lessee to Lessor in conjunction with the transaction which is the subject of this Lease fairly and accurately present a true and correct picture of Lessee's financial condition and income. Such financial statements do not contain any untrue statement of a material fact, nor do they omit to state a material fact required to be stated therein or necessary in order to make such financial statements not misleading; and there is no fact, situation or event which materially adversely affects or, so far as Lessee can now foresee, will materially adversely affect the properties, business, assets, income, prospects or condition (financial or otherwise) of Lessee. It is understood by the Lessee that the Lease has been approved by Lessor on the strength of the representations that have been made by Lessee. 7. Lessee covenants and agrees that Lessee will provide to Lessor (i) within 120 days after its fiscal year end, Lessee's annual audited financial statements and (ii) with reasonable promptness, such other information as Lessor may reasonably request. 8. This Lease (including the Schedules and Exhibits which form a part of this Lease) correctly sets forth the entire agreement between Lessor and Lessee. No representations, agreements or understandings shall be binding on either of the parties hereto unless specifically set forth in this Lease or a written amendment to this Lease. The term "Lessee" as used herein shall include any and all Lessees who sign hereunder, each of whom shall be jointly and severally bound hereby. 9. Lessee and Lessor from time to time, and by mutual consent, may lease other items of property, subject to the terms, provisions and conditions contained in this Lease, for such rental term and payments as may be agreed, by the execution of a subsequent Schedule A to Master Equipment Lease, each of which, together with any Exhibits and Schedules thereto, shall become an amendment hereto and a part hereof. The term "Equipment" as used in Paragraphs 10 through 23 of this Lease shall include all property described in any subsequent Schedule to Master Equipment Lease and any Exhibits thereto. 10. Lessee shall maintain a safety program and use its reasonable and diligent best efforts to cause its employees and other operatives, as applicable, to maintain compliance with such safety program such that they will use the equipment in a proper and prudent manner, in material compliance and material conformance with all applicable national, state, municipal, local and other laws, ordinances and regulations and all operating and maintenance instructions and manuals of the manufacturer of the Equipment. Lessee will not remove or alter any labels, plates or other markings attached to the Equipment identifying the Equipment, and if such labels, plates or other markings are supplied by Lessor during the term of this Lease, Lessee shall affix and keep the same in a prominent place on the Equipment. 11. Lessee, at its expense shall keep the Equipment in good repair, condition and working order, normal wear and tear excepted, and shall furnish any and all parts, mechanisms and devices required to keep the Equipment in good and working order. All repairs, parts, mechanisms and devices furnished or permanently affixed to the Equipment and any other additions or improvements of any kind whatsoever made to the Equipment shall automatically become part of the Equipment and property of Lessor. No alterations or additions to the Equipment shall be made without the prior written consent of the Lessor. Page Two 12. Lessee shall at its expense insure the Equipment for its full replacement value and shall assume and be responsible for all risks of damage to the Equipment during the term of this Lease and while the Equipment is in the possession or under the custody and control of Lessee, notwithstanding the expiration or other termination of the Lease. Lessee shall also maintain liability insurance coverage against bodily injury and property damage arising out of the possession or use of the Equipment. Such property and liability insurance shall be maintained with insurance companies satisfactory to Lessor, shall satisfy all requirements set forth in Exhibit B attached hereto and made a part hereof, shall name Lessor as insured and loss payee on property insurance and as an additional insured on liability insurance, and shall provide for thirty (30) days written notice to Lessor prior to cancellation or any change which affects any interest of Lessor Lessee shall furnish Lessor with evidence of all such insurance policies. The proceeds of any insurance resulting from loss, theft or damage to Equipment shall, as mutually agreed upon by Lessor and Lessee, be applied toward repair, restoration or replacement of such Equipment or, if not so applied, then toward payment of Lessee's obligations hereunder, with any insurance proceeds in excess of Lessee's obligations hereunder to be retained by Lessee. Lessee irrevocably appoints Lessor as Lessee's attorney-in-fact, at such time that an event of default hereunder has occurred and is continuing, to make any claim for, to receive payment for, and to execute and endorse any documents, checks or other instruments in payment for, loss, theft or damage under any such insurance policy, this power coupled with an interest. No loss, theft or damage to Equipment or any part thereof shall impair any obligation of Lessee under this Lease, which shall continue in full force and effect. In the event of loss, theft or damage of any kind to any Equipment, Lessee shall promptly notify Lessor of such loss, theft or damage and, as mutually agreed upon by Lessor and Lessee, shall: (a) Place such Equipment in good repair, condition and working order; or (b) Replace such Equipment with like Equipment in good repair, condition, and working order and furnish to Lessor any necessary documents requested by Lessor so as to vest good and marketable title thereto in Lessor, unencumbered by any lien or security interest; or (c) Pay to Lessor in cash within ten (10) days of loss, theft or damage an amount equal to the sum calculated pursuant to clause (h) of Paragraph 19 of this Lease. Upon such payment, this Lease shall terminate with respect to such Equipment and Lessee shall upon demand by Lessor return such Equipment to Lessor "as is" and at such location as Lessor shall designate. 13. Lessee shall maintain in its principal office full and complete records showing the location of each item of Equipment. Said records shall be available to Lessor during regular business hours for the purpose of inspection and duplication. Lessor shall have free access at all reasonable times to inspect any item of Equipment. 14. Lessee shall keep Equipment free and clear of all levies, liens and encumbrances and shall pay all license fees, registration fees, assessments, charges and taxes (local, municipal, state and national) which may now or hereafter be imposed upon the ownership, leasing, rental, sale, possession or use of Equipment, excluding, however, all taxes on or measured by Lessor's net income or capital. Lessee shall make, prepare and file all required ad valorem and similar taxes and pay the same. In case of failure by Lessee to pay such fees, assessments, charges and taxes or to keep Equipment free and clear of levies, liens or encumbrances or to keep Equipment properly insured or to keep Equipment in good repair and working order, all as hereinbefore specified, Lessor shall have the right, but shall not be obligated, to make such payments or effect such obligations of Lessee at Lessee's sole expense, the cost thereof to be repayable by Lessee within thirty (30) days of the date such payments were made by Lessor together with interest thereon from the date paid by Lessor until repaid by Lessee at the rate of ten percent (10%) per annum. 15. Upon the expiration of this Lease, Lessee will have the right to purchase the equipment under this lease for an amount as set forth in Schedule (A) entitled "TRAC" Rental Adjustment. Lessee shall provide Lessor at least sixty (60) days prior written notification of its election to purchase the equipment, such purchase to be made at the expiration of this Lease or within ten (10) days thereafter. In the event Lessee chooses not to exercise this right, then Lessee shall promptly return at Lessee's risk and expense the Equipment to Lessor at a location satisfactory to Lessor and in good repair and working order, normal wear and tear excepted. Notwithstanding the expiration or termination of this Lease, the terms and provisions of this Lease shall continue to apply with respect to the Equipment until its return to Lessor, provided that rental payments shall be calculated and owing on a per diem basis (based on the monthly rental) until such return. 16. (a) Lessee agrees to indemnify Lessor against all loss, damage, expense or penalty arising from any action on account of any injury to person or property of any character whatsoever occasioned by the operation, handling or transportation of any Equipment during the term of this Lease or while the Equipment is in the possession or under the custody and control of Lessee, notwithstanding the expiration or other termination of this Lease. (b) Lessor intends to claim cost recovery deductions for Federal income tax purposes with respect to the Equipment under Section 168 of the Internal Revenue Code of 1986 (the "Code") in amounts determined with reference to a tax basis equal to the Lessor's capitalized cost of the Equipment and using the most accelerated depreciation method allowed by Section 168(b) of the Code and the shortest recovery period allowed by Section 168(c) of the Code for property of the same type as the Equipment. Accordingly, the Lessee represents, warrants and covenants that at all times during the term of the Lease: (i) The Equipment will not fail, by reason of the identity, tax status or any other attribute of the Lessee or of any user of the Equipment or by reason of the location of the Equipment, to be eligible for cost recovery deductions under Section 168 of the Code at the most accelerated rate allowable thereunder for property of the same type as the Equipment; (ii) All items of income, gain, loss, deduction or credit attributable to the Equipment will be treated as derived from, or allocated to, sources within the United States within the meaning of Section 861 of the Code and the regulations promulgated thereunder; (iii) With respect to the Equipment and any indebtedness incurred by the Lessor to finance the Equipment, neither the Lessee nor any affiliates, subsidiaries and assignees of Lessee will claim (a) cost recovery deductions with respect to the Equipment, (b) deductions in the amount of any interest paid or accrued with respect to any loan incurred by the Lessor to finance the Equipment, or (c) any corresponding credit or deduction under applicable state or local tax laws; (iv) The Equipment does not constitute "limited use property" within the meaning of Revenue Procedure 76-30, 1976-2 C.B. 647 and is not "tax-exempt use property" within the meaning of Section 168(h) of the Code or property otherwise described in Section 168(g)(1) of the Code; and (v) The Lessee will keep and make available for inspection and copying by the Lessor such records as shall be necessary to establish the factual basis for the matters referred to in this Paragraph 16(b), and upon request by the Lessor, the Lessee will certify the correctness of such records and any facts contained therein. If Federal or state tax enforcement authorities formally notify the Lessor of a disallowance, elimination, reduction, or disqualification, or if there shall be a disallowance, elimination, reduction, or disqualification, in whole or in part, of any Federal, state or local income tax deduction for depreciation or cost recovery with respect to the Equipment as a result of Lessee's breach of a covenant of Lessee under this paragraph 16(b), the Lessee shall pay to the Lessor as additional rent an amount such that the amount after deduction therefrom of all taxes required to be paid by the Lessor with respect to the receipt of such amount under the laws of any Federal, state or local government or taxing authority in the United States shall compensate the Lessor for the loss of deferral of its income tax liability, including any interest, penalties or additions to taxes payable as a result of such disallowance, elimination, reduction or disqualification. Any amounts payable to the Lessor pursuant to this Paragraph 16(b) shall be payable upon demand by the Lessor, accompanied by a statement describing in reasonable detail the loss of depreciation or cost recovery benefits and setting forth the computation of the amounts so payable. Page Three The Lessee shall not be responsible for, and the Lessor shall not be entitled to a payment under this Paragraph 16(b) on account of any loss due to one or more of the following events: (i) The Lessor's sale of the Equipment, except for a sale occasioned by the Lessee's fault, (ii) The failure of the Lessor timely to claim depreciation or cost recovery deductions with respect to the Equipment unless such failure results from circumstances other than those caused by the Lessor, or (iii) The failure of the Lessor to have sufficient income from which to deduct such depreciation or cost recovery deductions. Upon receipt of formal notification by any Federal, state or local taxing authorities of a proposed disallowance or adjustment (collectively a "Disallowance") of any credit or deduction, as a result of which additional rent may be payable by the Lessee in accordance with this Paragraph 16(b), the Lessor shall promptly notify the Lessee of such Disallowance. The Lessor hereby agrees to exercise in good faith its best efforts (determined in the sole discretion of tax counsel to the Lessor to be reasonable, proper and consistent with the overall tax interests of the Lessor) to avoid requiring the Lessee to pay such additional rent; provided, however, that the Lessor shall have the sole discretion to determine whether or not to undertake judicial or administrative proceedings beyond the level of a Federal or state auditing agent; and provided further, however, that the Lessor shall not be required to take any action pursuant to this sentence unless and until the Lessee shall have agreed to indemnify the Lessor for any liability, cost, expense or loss which the Lessor may incur as a result of contesting such Disallowance beyond the level of a Federal or State auditing agent, together with any and all costs and expenses that may be incurred by the Lessor in enforcing this indemnity, and shall have agreed to pay the Lessor on demand all such liabilities, costs, expenses and losses which the Lessor may incur in contesting such Disallowance. (c) All of the Lessor's rights and privileges arising from the indemnities contained in this Paragraph 16 shall survive the expiration or other termination of the Lease and such indemnities are expressly made for the benefit of, and shall be enforceable by the Lessor, its successors and assigns. 17. {Intentionally left blank} 18. Any one or more of the following events or conditions shall constitute an event of default hereunder: (a) Nonpayment of any rent or other amount provided for in this Lease for ten (10) days after the same becomes due, whether by acceleration or otherwise, or default by Lessee in the performance of any other obligation, term, covenant or condition of this Lease, and such default continues for a period of ten (10) days after notification from Lessor to Lessee. (b) Nonpayment of any rent or other amount provided for in any lease, note, document or agreement under which Lessee is indebted for a sum exceeding $1,000,000.00 to any person or entity other than Lessor or any parent or affiliate corporation of Lessor beyond any grace period provided with respect thereto or default by Lessee in the performance of any other obligation, term, covenant or condition of such lease, note, document or agreement which causes such person or entity to cause such indebtedness to become due prior to its stated maturity date; (c) Any writ or order of attachment or execution or other legal process levied on or charged against any Equipment or other property of Lessee, tangible or intangible, real or personal and not released or satisfied within thirty (30) days; (d) {Intentionally left blank} (e) Lessee ceases to actively conduct its business; (f) The filing by or against Lessee of a petition in bankruptcy or any other debtor relief proceedings, whether under the Bankruptcy Code or otherwise; and only if such a petition is an involuntary petition, such involuntary petition is not dismissed within sixty (60) days. (g) The making of any assignment for the benefit of creditors by Lessee or appointment of a receiver or trustee for Lessee's assets or the initiation of any proceeding for the dissolution or liquidation or settlement of Lessee or its affairs; (h) {Intentionally left blank} (i) Any certificate, statement, representation, warranty or audit heretofore or hereafter furnished by or on behalf of Lessee or any guarantor or other party liable for payment or performance of this Lease, proves to have been false in any material respect at the time as of which the facts therein set forth were stated or certified; or upon the date of execution of this Lease or any Schedule to Master Equipment Lease there shall have been any material adverse change in any of the facts disclosed by such certificate, statement, representation, warranty or audit, which shall not have been disclosed to Lessor in writing at or prior to the time of such execution; or (j) {Intentionally left blank} 19. Upon the happening of any event of default as defined herein, and during the continuance thereof, Lessor may, at its sole option and without demand, notice or presentment of any kind, (a) declare this Lease to be in default; (b) take possession of any or all Equipment wherever located, without court order or other process of law or any hearing or proceedings prior to repossession, Lessee hereby waiving all such notice, process, proceedings and any and all damages caused by such taking of possession; (c) terminate this Lease as to all or any Equipment covered hereby, whereupon Lessee shall forthwith surrender and return the Equipment as specified in Paragraph 15 above; (d) terminate any other lease, note, document or agreement between Lessor and Lessee; (e) lease all or any of the Equipment upon such terms and to such lessees as Lessor, in its sole discretion, may elect; (f) sell all or any of the Equipment upon such terms and to such purchasers as Lessor, in its sole discretion, may elect; (g) collect interest on all amounts not paid when due under this Lease at a rate of 10% per annum from the date due until paid; (h) recover from Lessee the sum of (i) all amounts then due and owing by Lessee under the terms of this Lease, including without limitation, accrued and unpaid monthly rental payments, accrued interest, costs incurred by Lessor pursuant to Paragraph 14 above, and indemnifications then owing pursuant to Paragraph 16 above, plus (ii) the present value of all rental payments payable for the remaining term of this Lease plus (iii) the amount of any tax benefits lost by Lessor as a result of exercising its rights and remedies hereunder, plus (iv) if Lessor shall not have obtained possession of the Equipment, the value of Lessor's residual interest in such Equipment, plus (v) all costs, expenses and reasonable attorney's fees incurred by Lessor in the exercise of any of its rights or remedies hereunder or as a result of enforcing any of the terms, conditions or provisions hereof; and (i) pursue any other remedy available to Lessor at law or in equity. In the event Lessor sells or leases any of the Equipment after declaring a default hereunder, such sale or lease shall be free and clear of any interest of Lessee hereunder, and Lessor shall apply against the amount recoverable from Lessee pursuant to clause (h) above, the proceeds of any sale less the value of Lessor's residual interest in the Equipment so sold and the proceeds of any lease (based on the present value of the rental payments due under such lease from the date such lease commences through the last day of the term of this Lease). For purposes of this Paragraph 19, the present value of lease payments shall equal the sum of all future rental payments payable under the lease, with each such payment discounted to its net present value at a simple interest rate equal to six percent (6%) per annum. All remedies described in the preceding paragraph shall be cumulative and may, at Lessor's option, be enforced concurrently. The exercise of any one remedy shall not be deemed an election of remedies precluding the exercise of any other remedy. Page Four 20. Lessor may assign the rents reserved herein or any or all of Lessor's rights hereunder and the rights of Lessor's assignee shall be independent of any claim of Lessee against Lessor. Lessee upon receiving notice of any such assignment by Lessor, shall abide thereby and make payment as may be therein directed. Upon any such assignment, the term "Lessor" herein shall be deemed to refer to the assignee. Lessee shall not assign this Lease or sublet the Equipment without the prior written consent of the Lessor; but provided however Lessee shall be allowed to assign or sublet the equipment to Darling Restaurant Services, Inc., provided Lessee shall remain unconditionally obligated for the terms and conditions of this Lease. Lessee shall not move the Equipment from the location originally designated in this Lease except for transfers that may occur from time to time between the Lessee's operating facilities located within the forty-eight (48) contiguous states of Canada. If transferred, Lessee will give Lessor written notice within thirty (30) days after the transfer. 21. Neither the Equipment nor any part thereof shall be, or be considered to be, a fixture or a part of any real property in which it may be installed, and the Lessee agrees that it will not affix said Equipment or any part thereof, nor allow the same to be affixed, to any real property in such a manner that the same may be, or be considered to be, a part of any real estate, building or improvement. When required by Lessor, Lessee shall secure and furnish to Lessor, Landlord's and/or Mortgagee's waivers and consents, prior to the delivery of the Equipment. 22. Time is of the essence of this Lease. This Lease may be amended or varied only in writing signed by both Lessor and Lessee. No waiver or failure to exercise any right or rights by Lessor shall be deemed a waiver of such right or rights at any time and Lessor at all times retains the right to require strict compliance with the terms of this Lease. Upon request by Lessor, Lessee shall execute and deliver to Lessor such documents, including without limitation, financing statements, as Lessor shall deem necessary or desirable for recording or filing to protect the interest of Lessor in Equipment. All filing expenses shall be paid by Lessee. All notices hereunder shall be sufficient if in writing and given personally or mailed to the parties involved at its address set forth herein. Any such notice mailed to such address shall be effective four (4) days after being deposited in the United States mail, duly addressed and with postage prepaid. This Lease has been made, executed and delivered in Atlanta, Georgia and shall in all respects be governed by the laws of the State of Georgia, and Lessee consents and submits to the jurisdiction of all courts located in the State of Georgia. This Lease takes effect only when accepted by Lessor at its principal office in Atlanta, Georgia and shall not be deemed made or executed until so accepted by the Lessor. 23. LESSEE HEREBY ACKNOWLEDGES THAT LESSEE HAS READ THIS LEASE AND IS AWARE OF ALL TERMS HEREOF AND THAT THE LEASE IS NONCANCELABLE BY LESSEE FOR THE FULL TERM SET FORTH HEREIN AND ACKNOWLEDGES RECEIPT OF AN EXACT COPY OF THIS LEASE. ANY INVALIDITY OR UNENFORCEABILITY OF A PARTICULAR PROVISION OF THIS LEASE SHALL NOT AFFECT THE OTHER PROVISIONS HEREOF AND THIS LEASE SHALL BE CONSTRUED IN ALL RESPECTS AS IF SUCH INVALID OR UNENFORCEABLE PROVISION WERE OMITTED. Executed this 14th day of May 1998 . --------- ------------------- --- By execution hereof, the signer certifies that he has read this Master Equipment Lease, and that he is duly authorized to execute this Lease on behalf of Lessee. LESSEE: Darling International Inc. (CORPORATE SEAL) By: Title: By: Title: ACCEPTED BY LESSOR: STI Credit Corporation By: Title: Date: , 19 . THIS LEASE CANNOT BE CANCELLED BY LESSEE SUNTRUST Bank, Atlanta SCHEDULE TO Mail Code 130 MASTER EQUIPMENT LEASE P.O. Bo 4418 Atlanta GA 30302 Lease Number _____________ This lease, by and between SunTrust Bank, Atlanta (hereinafter called "Lessor") with its principal place of business located at 1 Park Place, Atlanta, Georgia and(hereinafter called "Lessee") with its principal place of business located at For and in consideration of the mutual covenants and promises contained herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Lessor and Lessee agree as follows: 1. Lessor leases to Lessee and Lessee leases and hires from Lessor all machinery, equipment and other property ("Equipment") described in Exhibit A of page(s) attached hereto and made a part of this Schedule and also a part of the Lease described in Paragraph 7 hereof. Said Equipment will be located at in the city of in the county of in the state of . The rental for the Equipment described above shall be equal to the amounts set forth in Schedule A attached hereto and made a part hereof and also a part of the Lease described in Paragraph 7 hereof, plus all applicable taxes. The schedule of rental payments for the Equipment described above shall consist of payments made on a monthly basis for years, which shall be the term of the Lease for the Equipment described above. In addition a security or retained deposit of $ shall be paid to the Lessor in advance of lease commencement and shall be held by Lessor, without interest, throughout the term of the Lease and will be appropriately applied before the end of the Lease term. 2. Should any rental payment not be paid within ten days after the regularly scheduled due date, a late charge not exceeding five percent of the monthly rental payment may be charged to cover administrative expenses incurred by Lessor upon such default. Said charge shall be made only once on any given rental installment during the term of the Lease. 3. The term of the Lease for the Equipment described in Paragraph 1 hereof shall commence on the date of the execution by Lessee of the Acknowledgment of Delivery and Acceptance of such Equipment in the form supplied by Lessor. The first monthly rental payment shall be due and payable on the date of execution of such Acknowledgment by Lessee, and subsequent monthly rental payments shall be due and payable on the same date of each month thereafter, unless otherwise agreed upon in writing by Lessor and Lessee. All rental payments shall be payable in advance at Lessor's address set forth above or at such other place as Lessor may designate, such rental payments to be paid without notice or demand to Lessee and without abatement, set-off or deduction of any amount whatsoever by Lessee, all rights of set-off or similar claims being hereby waived by Lessee. 4. It is understood that Lessor is not the manufacturer or vendor of the Equipment, nor the agent of the manufacturer or vendor of the Equipment, and that LESSOR GIVES NO WARRANTY, EXPRESS OR IMPLIED, WITH RESPECT TO THE EQUIPMENT, INCLUDING ANY WARRANTY AS TO QUIET ENJOYMENT, MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, OR CAPACITY, OR AS TO THE EXISTENCE OF PATENT OR LATENT DEFECTS, OR ANY WARRANTY THAT THE EQUIPMENT WILL MEET THE REQUIREMENTS OF ANY LAW, RULE, SPECIFICATION OR CONTRACT. LESSOR IS NOT RESPONSIBLE FOR ANY REPAIRS, SERVICE OR DEFECT IN THE LEASED EQUIPMENT OR THE OPERATION THEREOF OR FOR ANY LOSS, DELAY OR DAMAGE RESULTING FROM DEFECT IN, BREAKAGE OR INEFFICIENCY OF THE EQUIPMENT. In lieu of any warranty by Lessor, Lessor agrees to cooperate with Lessee, at Lessee's sole option and expense, to provide Lessee with the benefit, if any, of any warranty or maintenance commitment given by any third-party manufacturer or vendor with respect to the Equipment, provided that Lessee shall hold Lessor harmless from any liability in connection with such effort and undertaking. THIS SCHEDULE IS NONCANCELABLE BY LESSEE AND IS GIVEN IN ACCORDANCE WITH, AND SUBJECT TO THE TERMS OF, THE LEASE DESCRIBED IN PARAGRAPH 7 HEREOF, AND IS A FORMAL AMENDMENT THERETO AND IS HEREBY MADE A PART THEREOF. 5. In no event shall Lessor be liable for consequential, incidental or indirect damages, including lost profits, or for any negligence. 6. To induce Lessor to lease to Lessee the Equipment described in Paragraph 1 hereof, Lessee represents and warrants that each representation and warranty of Lessee set forth in the Lease is true and correct on and as of the date of execution of this Schedule as though made on such date and that no event of default and no event which with notice or lapse of time or both exists or would result from execution of this Schedule. 7. The Equipment leased under this Schedule to Master Equipment Lease is leased, by the Lessor to the Lessee and from the Lessor by the Lessee, in accordance with and subject to the terms, provisions and conditions of a certain Master Equipment Lease dated the day of , 19 , (the "Lease"), provided however, that the length of the term of the Lease with respect to the Equipment described in this Schedule and the amount of the rental payments for the Equipment described in this Schedule shall be the term and amount set forth in Paragraph 1 of this Schedule. 8. Lessee and Lessor agree to perform and observe each and every term, provision and condition contained herein and in the Lease. Executed this day of , 19 . ------------- ----------------------- ----- By execution hereof, the signer hereby certifies that he has read this Schedule INCLUDING THE ABOVE MENTIONED MASTER EQUIPMENT LEASE, and that he is duly authorized to execute this Schedule on behalf of Lessee. LESSEE: By: Title: By: (CORPORATE SEAL) Title: ACCEPTED BY LESSOR: SUNTRUST Bank, Atlanta By: Title: Date: , 19 . THIS LEASE CANNOT BE CANCELLED BY LESSEE -----END PRIVACY-ENHANCED MESSAGE-----