-----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, Uv2kMoAjwynnvHoepUxrMzdoEspcVObKC+B/uepzLlFfWGBjL4DTtjhA1uZzE7XS GAWWubd6kOeufCPh/Ak0ig== 0000916540-98-000013.txt : 19981124 0000916540-98-000013.hdr.sgml : 19981124 ACCESSION NUMBER: 0000916540-98-000013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981003 FILED AS OF DATE: 19981123 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: 98757241 BUSINESS ADDRESS: STREET 1: 251 O CONNOR RIDGE BLVD STREET 2: STE 300 CITY: IRVING STATE: TX ZIP: 75038 BUSINESS PHONE: 9727170300 MAIL ADDRESS: STREET 1: 251 OCONNOR RIDGE BLVD STREET 2: #300 CITY: IRVING STATE: TX ZIP: 75038 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 October 3, 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 November 13, 1998 was 15,589,362. DARLING INTERNATIONAL INC. AND SUBSIDIARIES FORM 10-Q FOR THE THREE MONTHS ENDED OCTOBER 3, 1998 TABLE OF CONTENTS Page No. PART I: FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS Consolidated Balance Sheets. . . . . . . . . . . . . 3 October 3, 1998 (unaudited) and January 3, 1998 Consolidated Statements of Operations (unaudited). . . . . . 4 Three Months and Nine Months Ended October 3, 1998 and September 27, 1997 Consolidated Statements of Cash Flows (unaudited). . . . . . 5 Nine Months Ended October 3, 1998 and September 27, 1997 Notes to Consolidated Financial Statements (unaudited). . . . 6 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. . . . . . . . 11 PART II: OTHER INFORMATION Item 1. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . 19 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . . . . . . . . . . . . . 19 Item 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . 20 Signatures. . . . . . . . . . . . . . . . . . . 21 Index to Exhibits. . . . . . . . . . . . . . . . . 22 DARLING INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS October 3, 1998 and January 3, 1998 (in thousands, except shares and per share data)
October 3 January 3 1998 1998 --------- --------- (unaudited) ASSETS Current assets: Cash and cash equivalents ......................................................... $ 3,398 $ 2,955 Accounts receivable ............................................................... 22,358 32,459 Inventories ....................................................................... 13,044 13,897 Prepaid expenses .................................................................. 6,318 3,459 Deferred income tax assets ........................................................ 2,916 4,006 Other ............................................................................. 689 383 -------- ------- Total current assets .......................................................... 48,723 57,159 Property, plant and equipment, less accumulated depreciation of $103,074 at October 3, 1998 and $81,552 at January 3, 1998 .......................................................... 159,886 170,636 Collection routes and contracts, less accumulated amortization of $13,748 at October 3, 1998 and $8,700 at January 3, 1998 ........................................................... 53,937 58,715 Goodwill, less accumulated amortization of $1,571 at October 3, 1998 and $949 at January 3, 1998 ...................................... 20,371 20,902 Other assets ........................................................................... 5,331 5,565 -------- ------- $288,248 $312,977 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt (note 3) ........................................ $ 7,584 $ 5,113 Long-term debt currently being renegotiated (note 3) .............................. 135,064 - Accounts payable, principally trade ............................................... 17,261 22,426 Accrued expenses .................................................................. 26,512 25,385 Accrued interest .................................................................. 1,330 911 -------- -------- Total current liabilities ..................................................... 187,751 53,835 Long-term debt, less current portion (note 3) .......................................... - 142,181 Other non-current liabilities .......................................................... 22,998 21,391 Deferred income taxes .................................................................. 18,583 25,814 -------- -------- Total liabilities ............................................................. 229,332 243,221 -------- -------- Stockholders' equity Common stock, $.01 par value; 25,000,000 shares authorized; 15,589,362 and 15,563,037 shares issued and outstanding at October 3, 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 ........................................................ 34,871 34,780 Retained earnings ................................................................. 23,889 34,820 -------- -------- Total stockholders' equity .................................................... 58,916 69,756 -------- -------- Contingencies (note 4) $288,248 $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 nine months ended October 3, 1998 and September 27, 1997 (in thousands, except per share data)
Three Months Ended Nine Months Ended --------------------- ---------------------- Oct. 3, Sept. 27, Oct. 3, Sept. 27, 1998 1997 1998 1997 --------- --------- --------- --------- (unaudited) (unaudited) Net sales ..................................................................... $ 89,234 $ 114,455 $ 296,589 $ 369,061 --------- --------- --------- --------- Costs and expenses: Cost of sales and operating expenses ..................................... 77,113 94,273 246,969 299,898 Selling, general and administrative expenses ............................. 10,141 9,591 29,633 28,316 Depreciation and amortization ............................................ 9,179 8,297 27,532 24,514 --------- --------- --------- -------- Total costs and expenses .............................................. 96,433 112,161 304,134 352,728 --------- --------- --------- -------- Operating income (loss) ............................................... (7,199) 2,294 (7,545) 16,333 --------- --------- --------- -------- Other income (expense): Interest expense ......................................................... (2,963) (2,914) (8,673) (10,089) Other, net ............................................................... (237) (113) (743) (44) --------- --------- --------- -------- Total other income (expense) ........................................ (3,200) (3,027) (9,416) (10,133) --------- --------- --------- -------- Income (loss) before income taxes ..................................... (10,399) (733) (16,961) 6,200 Income tax expense (benefit) .................................................. (3,502) (210) (6,031) 2,525 --------- --------- --------- -------- Net earnings (loss) ................................................... $ (6,897) $ (523) $ (10,930) $ 3,675 ========= ========= ========= ======== Basic earnings (loss) per common share ........................................ $ (0.44) $ (0.03) $ (0.70) $ 0.24 ========= ========= ========= ======== Diluted earnings (loss) per common share ...................................... $ (0.44) $ (0.03) $ (0.70) $ 0.22 ========= ========= ========= ======== The accompanying notes are an integral part of these consolidated financial statements.
DARLING INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Nine months ended October 3, 1998 and September 27, 1997 (in thousands)
Nine Months Ended Oct. 3, Sept. 27, 1998 1997 --------- --------- (unaudited) Cash flows from operating activities: Net earnings (loss) ....................................................... $ (10,930) $ 3,675 Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Depreciation and amortization .......................................... 27,532 24,514 Deferred income tax expense (benefit) .................................. (6,144) (1,622) (Gain) loss on sales of assets ......................................... (14) 14 Changes in operating assets and liabilities, net of effects from acquisitions: Accounts receivable ............................................... 10,101 5,372 Inventories and prepaid expenses .................................. (2,038) (4,463) Accounts payable and accrued expenses ............................. (4,037) (7,357) Accrued interest .................................................. 419 (3,220) Other ............................................................. 3,208 124 --------- --------- Net cash provided by operating activities ........................ 18,097 17,037 --------- --------- Cash flows from investing activities: Recurring capital expenditures ............................................ (11,646) (15,524) Capital expenditures related to acquisitions .............................. - (1,005) Net proceeds from sale of property, plant and equipment and other assets ............................................. 379 5,790 Payments related to routes and other intangibles .......................... (158) (3,619) --------- --------- Net cash used in investing activities ............................ (11,425) (14,358) --------- --------- Cash flows from financing activities: Proceeds from long-term debt .............................................. 71,881 233,246 Payments on long-term debt ................................................ (76,526) (245,272) Contract payments ......................................................... (1,675) (1,047) Deferred loan costs ....................................................... - (1,008) Issuance of common stock .................................................. 91 262 --------- --------- Net cash used in financing activities ............................ (6,229) (13,819) --------- --------- Net increase (decrease) in cash and cash equivalents ........................... 443 (11,140) Cash and cash equivalents at beginning of period ............................... 2,955 12,956 --------- --------- Cash and cash equivalents at end of period ..................................... $ 3,398 $ 1,816 ========= ========= The accompanying notes are an integral part of these consolidated financial statements.
DARLING INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements October 3, 1998 (unaudited) (1) General 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 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 accompanying consolidated financial statements for the three month and nine month periods ended October 3, 1998 and September 27, 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 the 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 39 weeks ended October 3, 1998, and the 13 and 39 weeks ended September 27, 1997. (c) Earnings (Loss) 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 (loss) attributable to outstanding common stock by the weighted average number of common shares outstanding during the year. Diluted earnings (loss) per common share are computed by dividing net earnings (loss) 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 15,585,000 and 15,578,000 for the three months and nine months ended October 3, 1998, respectively, and 15,531,000 and 15,504,000 for the three months and nine months ended September 27, 1997, respectively. The effect of dilutive stock options added 1,107,000 shares for the nine months ended September 27, 1997. For the three months and nine months ended October 3, 1998, no stock options (362,000 shares and 733,000 shares respectively) were included in the calculation of diluted earnings (loss) per common share as the effect was antidilutive. In addition, for the three months ended September 27, 1997, no stock options (983,000 shares) were included in the calculation of diluted earnings (loss) per common share as the effect was antidilutive. (3) Long-Term Debt Currently Being Renegotiated Long-term debt currently being renegotiated consists of the following (in thousands): October 3, January 3, 1998 1998 ------------- ------------ Credit Agreement: Revolving Credit Facility $100,064 $100,875 Term Loan 42,500 46,250 Other Notes 84 169 -------- -------- 142,648 147,294 Less current maturities: Long-term debt currently being renegotiated 135,064 - Other long-term debt 7,584 5,113 -------- -------- $ - $142,181 ======== ======== Effective June 5, 1997, the Company entered into a Credit Agreement (the "Credit Agreement") which provided for borrowings in the form of a $50,000,000 Term Loan and $175,000,000 Revolving Credit Facility. The Term Loan provides for $50,000,000 of borrowing. The Term Loan bears interest payable monthly at LIBOR (5.5938% at October 3, 1998), plus a margin (the "Credit Margin") (3.00% at October 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 October 3, 1998, $42,500,000 was outstanding under the Term Loan. As further discussed below, the Revolving Credit Facility currently being renegotiated provides for borrowings up to a maximum of $135,000,000 with sublimits available for letters of credit. Outstanding borrowings on the Revolving Credit Facility bear interest, payable monthly, at various LIBOR rates (ranging from 5.500% to 5.6875% at October 3, 1998) plus the Credit Margin as well as portions at a Base Rate (8.25% at October 3, 1998), plus a margin (the "Base Margin") (0.50% at October 3, 1998) which floats based on the achievement of certain financial ratios or, for swingline advances, at the Base Rate plus the Base Margin. Additionally, the Company must pay a commitment fee equal to 0.375% per annum on the unused portion of the Revolving Credit Facility. The Revolving Credit Facility matures on June 5, 2002. As of October 3, 1998, $100,064,000 was outstanding under the Revolving Credit Facility and the Company had outstanding irrevocable letters of credit aggregating $11,701,773, leaving approximately $23 million available to borrow. 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 October 3, 1998 the Company had several existing events of default of certain financial covenants (the "Defaults") under the Credit Agreement, as amended. On October 2, 1998, the Company entered into an amendment (the "Amendment") of the Credit Agreement whereby BankBoston, N.A., as agent, and the other participant banks in the Credit Agreement (the "Banks") agreed to forbear from exercising rights and remedies arising as a result of the Defaults until November 9, 1998. Included as a part of the Amendment was a reduction in the commitment under the Revolving Credit Facility from $175,000,000 to $135,000,000. In addition, the Amendment included changes in the Company's costs of borrowing under the Credit Agreement facilities as described herein. On November 6, 1998, the Company entered into an extension of the Amendment whereby the Banks agreed to forbear from exercising rights and remedies arising as a result of the Defaults until December 14, 1998. The Banks have agreed, pursuant to terms of the Credit Agreement as amended, to continue to extend credit to the Company. No assurance can be given that the Company will reach agreement with the Banks by December 14, 1998, (or whether the Banks will agree to extension of such date) or what action the Banks will take if no such agreement is reached. Because the aforementioned forbearance was for a period of less than one year, in accordance with current accounting literature (EITF 86-30) relating to classification of debt, the Company has classified all of its debt as current. At October 3, 1998, the long-term debt payable within one year is $7,584,000, and the debt which has been classified as current, due to the term of the forbearance, totals $135,064,000. The Company is currently in discussions with the banks to further amend its Credit Agreement. If such discussions result in an amended Credit Agreement that extends payment of all or a portion of the debt beyond one year from the Company's next reported balance sheet date and meets the other conditions of EITF 86-30, that portion of the debt due after one year will be reclassified as long-term. (4) 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. Cleveland In August, 1997, the Company received a Notice of Violation ("NOV") from the United States Environmental Protection Agency ("EPA") for alleged violations of the Ohio Air Quality Rules as they relate to odor emissions. The NOV asserted that the Cleveland, OH facility was in violation of the State's nuisance rule based on a City of Cleveland record of complaints associated with odors emanating from its facility. Since December, 1992, the Company has been working with the City of Cleveland under a Consent Agreement to address such complaints and concerns of the neighborhood in close proximity to the Plant. Upon receipt of the NOV the Company initiated a cooperative effort with EPA to address the NOV. In August, 1998, the Company received a second NOV from EPA which encompassed the alleged violations from the first NOV and alleged several violations of terms and conditions found in the Cleveland plant's air permit. The Company again met with EPA to seek an amicable resolution. Although rendering of animal by-products has been discontinued at the Cleveland plant, EPA is not satisfied with this as a resolution of the NOV and is seeking a monetary penalty. The Company has challenged EPA's approach to resolution of the NOV as well as EPA's authority to be involved with an enforcement action connected with a state nuisance rule. The Company continues to seek an amicable resolution. (b) LITIGATION Melvindale A group of residents living near the Company's Melvindale, Michigan plant has filed suit, purportedly on behalf of a class of persons similarly situated. The class has not been certified. The suit is based on legal theories of trespass, nuisance and negligence and/or gross negligence, and is pending in the United States District Court, Eastern District of Michigan. Plaintiffs allege that emissions to the air, particularly odor, from the plant have reduced the value and enjoyment of Plaintiffs' property, and Plaintiffs seek damages, including mental anguish, exemplary damages and injunctive relief. In a lawsuit with similar factual allegations, also pending in United States District Court, Eastern District of Michigan, the City of Melvindale has filed suit against the Company based on legal theories of nuisance, trespass, negligence and violation of Melvindale nuisance ordinance seeking damages and declaratory and injunctive relief. The Company or its predecessors have operated a rendering plant at the Melvindale location since 1927 in a heavily industrialized area down river south of Detroit. The Company has taken and is taking all reasonable steps to minimize odor emissions from its recycling processes and is defending the lawsuit vigorously. 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 October 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 $20.8 million and $15.7 million at October 3, 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. (5) 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 (loss) did not differ from net income (loss) for the periods ended October 3, 1998 and September 27, 1997. DARLING INTERNATIONAL INC. AND SUBSIDIARIES FORM 10-Q FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 3, 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 October 3, 1998 and factors affecting its results of operations for the three months and nine months ended October 3, 1998 and September 27, 1997. RESULTS OF OPERATIONS Three Months Ended October 3, 1998 Compared to Three Months Ended September 27, 1997 GENERAL The Company recorded a net loss of $6.9 million for the third quarter of the fiscal year ending January 2, 1999 ("Fiscal 1998"), as compared to net loss of $0.5 million for the third quarter of the fiscal year ended January 3, 1998 ("Fiscal 1997"). Operating income decreased $9.5 million to an operating loss of $7.2 million in the third quarter of Fiscal 1998 from operating income of $2.3 million in the third 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 $0.9 million in increased depreciation and amortization expense related to acquisitions and capital expenditures. 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 third quarter of Fiscal 1998, net sales decreased 22.1%, to $89.2 million as compared to $114.5 million during the third quarter of Fiscal 1997 primarily due to the following: 1) Decreases in overall finished goods prices resulted in a $21.5 million decrease in sales in the third quarter of Fiscal 1998 versus the third quarter of Fiscal 1997. The Company's average yellow grease prices were 16.3% lower, average tallow prices were 9.2% lower, and average meat and bone meal prices were 46.9% lower. Average corn prices were 25.0% lower; 2) Decreases in the volume of raw materials processed combined with a slight decrease in overall yields resulted in an $11.3 million decrease in sales; 3) Decreases in finished hides sales accounted for $1.4 million in sales decreases; 4) Increases in products purchased for resale resulted in a $5.3 million increase; 5) Inventory changes accounted for an increase of $2.3 million in sales and 6) Service charge income increased $1.3 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 third quarter of Fiscal 1998, cost of sales and operating expenses decreased $17.2 million (18.2%) to $77.1 million as compared to $94.3 million during the third 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 $15.6 million in cost of sales; 2) Decreases in the volume of raw materials collected and processed resulted in a decrease of approximately $5.7 million in cost of sales and operating expenses; 3) Increases in products purchased for resale resulted in a $5.3 million increase; and 4) Decreases in hides purchases accounted for $1.2 million in cost of sales decreases. SELLING, GENERAL AND ADMINISTRATIVE COSTS Selling, general and administrative costs were $10.1 million during the third quarter of Fiscal 1998, a $0.5 million increase from $9.6 million for the third quarter of Fiscal 1997. Selling, general and administrative costs include $0.3 million reorganization costs for severance and other costs related to the consolidation of the Cleveland plant and a Regional office and certain corporate reductions. DEPRECIATION AND AMORTIZATION Depreciation and amortization charges increased $0.9 million to $9.2 million during the third quarter of Fiscal 1998 as compared to $8.3 million during the third 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 increased $0.1 million from $2.9 million during the third quarter of Fiscal 1997 to $3.0 million during the third quarter of Fiscal 1998 due primarily to an increase in the interest rate credit spread applied to the Company's outstanding debt. INCOME TAXES The income tax benefit of $3.5 million for the third quarter of Fiscal 1998 consists of federal tax benefit and various state and foreign taxes. This is a change of $3.3 million from $0.2 million income tax benefit during the third quarter of Fiscal 1997. CAPITAL EXPENDITURES The Company made capital expenditures of $3.0 million during the third quarter of Fiscal 1998 compared to capital expenditures of $5.2 million during the third quarter of Fiscal 1997. Nine Months Ended October 3, 1998 Compared to Nine Months Ended September 27, 1997 GENERAL The Company recorded a net loss of $10.9 million for the first nine months of Fiscal 1998, as compared to net earnings of $3.7 million for the first nine months of Fiscal 1997. Operating income decreased from $16.3 million in the first nine months of Fiscal 1997 to an operating loss of $7.5 million in the first nine 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 $3.0 million in increased depreciation and amortization expense related to acquisitions and capital expenditures. Interest expense decreased from $10.1 million to $8.7 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 During the first nine months of Fiscal 1998, net sales decreased by $72.5 million (19.6%) to $296.6 million as compared to $369.1 million during the first nine months of Fiscal 1997, primarily due to the following: 1) Decreases in overall finished goods prices resulted in a $64.2 million decrease in sales in the first nine months of Fiscal 1998, versus the first nine months of Fiscal 1997. The Company's average yellow grease prices were 14.3% lower, average tallow prices were 11.8% lower, and average meat and bone meal prices were 33.7% lower. Average corn prices were 16.3% lower; 2) Decreases in the volume of raw materials processed resulted in a $17.3 million decrease in sales; 3) Decreases in finished hides sales accounted for $6.3 million in sales decreases; 4) Increases in products purchased for resale resulted in a $9.7 million increase and 5) Increases in service charge income of $4.2 million and inventory changes of $1.4 million somewhat offset the decreases. COST OF SALES AND OPERATING EXPENSES During the first nine months of Fiscal 1998, cost of sales and operating expenses decreased $52.9 million (17.6%) to $247.0 million as compared to $299.9 million during the first nine 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 $45.9 million in cost of sales; 2) Decreases in the volume of raw materials collected and processed resulted in a decrease of approximately $10.2 million in cost of sales and operating expenses; 3) Increases in products purchased for resale resulted in a $9.7 million increase; 4) Decreases in hides purchases accounted for $4.8 million in cost of sales decrease; and 5) Decreases in operating expenses, primarily labor costs, resulted in a decrease of $1.7 million. SELLING, GENERAL AND ADMINISTRATIVE COSTS Selling, general and administrative costs were $29.6 million during the first nine months of Fiscal 1998, a $1.3 million increase from $28.3 million for the first nine months of Fiscal 1997. Approximately $1.3 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 $3.0 million to $27.5 million during the first nine months of Fiscal 1998, as compared to $24.5 million during the first nine 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 $1.4 million from $10.1 million during the first nine months of Fiscal 1997, to $8.7 million during the first nine 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 $6.0 million for the first nine months of Fiscal 1998 consists of federal tax benefit and various state and foreign taxes. This is a change of $8.5 million from the $2.5 million income tax expense during the first nine months of Fiscal 1997. CAPITAL EXPENDITURES The Company made capital expenditures of $11.7 million during the first nine months of Fiscal 1998, compared to capital expenditures of $15.5 million during the first nine months of Fiscal 1997. LIQUIDITY AND CAPITAL RESOURCES Effective June 5, 1997, the Company entered into a Credit Agreement (the "Credit Agreement") which provided for borrowings in the form of a $50,000,000 Term Loan and $175,000,000 Revolving Credit Facility. The Term Loan provides for $50,000,000 of borrowing. The Term Loan bears interest payable monthly at LIBOR (5.5938% at October 3, 1998), plus a margin (the "Credit Margin") (3.00% at October 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 October 3, 1998, $42,500,000 was outstanding under the Term Loan. As further discussed below, the Revolving Credit Facility currently being renegotiated provides for borrowings up to a maximum of $135,000,000 with sublimits available for letters of credit. Outstanding borrowings on the Revolving Credit Facility bear interest, payable monthly, at various LIBOR rates (ranging from 5.500% to 5.6875% at October 3, 1998) plus the Credit Margin as well as portions at a Base Rate (8.25% at October 3, 1998), plus a margin (the "Base Margin") (0.50% at October 3, 1998) which floats based on the achievement of certain financial ratios or, for swingline advances, at the Base Rate plus the Base Margin. Additionally, the Company must pay a commitment fee equal to 0.375% per annum on the unused portion of the Revolving Credit Facility. The Revolving Credit Facility matures on June 5, 2002. As of October 3, 1998, $100,064,000 was outstanding under the Revolving Credit Facility and the Company had outstanding irrevocable letters of credit aggregating $11,701,773, leaving approximately $23 million available to borrow. 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 October 3, 1998 the Company had several existing events of default of certain financial covenants (the "Defaults") under the Credit Agreement, as amended. On October 2, 1998, the Company entered into an amendment (the "Amendment") of the Credit Agreement whereby BankBoston, N.A., as agent, and the other participant banks in the Credit Agreement (the "Banks") agreed to forbear from exercising rights and remedies arising as a result of the Defaults until November 9, 1998. Included as a part of the Amendment was a reduction in the commitment under the Revolving Credit Facility from $175,000,000 to $135,000,000. In addition, the Amendment included changes in the Company's costs of borrowing under the Credit Agreement facilities as described herein. On November 6, 1998, the Company entered into an extension of the Amendment whereby the Banks agreed to forbear from exercising rights and remedies arising as a result of the Defaults until December 14, 1998. The Banks have agreed, pursuant to terms of the Credit Agreement as amended, to continue to extend credit to the Company. No assurance can be given that the Company will reach agreement with the Banks by December 14, 1998, (or whether the Banks will agree to extension of such date) or what action the Banks will take if no such agreement is reached. 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 October 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 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 October 3, 1998, the Company had a working capital deficit of $139.0 million and its working capital ratio was 0.26 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 the classification of all its debt as current (see note 3). Net cash provided by operating activities has increased $1.1 million from $17.0 million during the first nine months of Fiscal 1997 to $18.1 million during the first nine 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. The Company intends to dispose of under-performing and non-productive assets and reduce expenses, which the Company believes will enable it to effectively conduct its business, despite continuing low prices for (i) meat and bone meal, which is one of the Company's principal products and (ii) corn, which determines the price which the Company's bakery waste processing subsidiary receives for its output. 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. The Company will adopt the provisions of SFAS No. 133 in the first quarter of Fiscal 2000. YEAR 2000 Readiness Since many computer systems and other equipment with embedded chips or processors (collectively, "Business Systems") use only two digits to represent the year, these business systems may be unable to accurately process certain data before, during or after the year 2000. As a result, business and governmental entities are at risk for possible miscalculations or systems failures causing disruptions in their business operations. This is commonly known as the Year 2000 issue. The Year 2000 issue can arise at any point in the Company's supply, manufacturing, distribution and financial chains. The Company began work on the Year 2000 compliance issue in 1997. The scope of the project includes: ensuring the compliance of all applications, operating systems and hardware on PC and LAN platforms; addressing issues related to non-IT embedded software and equipment; and addressing the compliance of key suppliers and customers. The project has four phases: assessment of systems and equipment affected by the Year 2000 issue; definition of strategies to address affected systems and equipment; remediation or replacement of affected systems and equipment; and testing that each is Year 2000 compliant. With respect to ensuring the compliance of all applications, operating systems and hardware on the Company's various computer platforms, the assessment phase and definition of strategies phase have been completed. It is estimated that 80% of the remediation or replacement phase has been completed with the balance of this phase expected to be completed by mid 1999. The testing phase of existing applications operating systems and hardware not being remediated or replaced is expected to be completed by the end of the first quarter of 1999. With respect to addressing issues related to Non-IT embedded software and equipment, which principally exists in the Company's manufacturing plants, the assessment phase and definition of strategies phase are expected to be completed by the end of second quarter 1999. Testing will begin in 1999 and is expected to be completed by the end of third quarter 1999 as well as the remediation and replacement phase. The Company relies on third party suppliers for raw materials, water, utilities, transportation and other key services. Interruption of supplier operations due to Year 2000 issues could affect Company operations. We have initiated efforts to evaluate the status of our most critical suppliers' progress. This process of evaluating our critical suppliers is scheduled for completion by mid-1999. Options to reduce the risks of interruption due to suppliers failures include identification of alternate suppliers where feasible or warranted. These activities are intended to provide a means of managing risk, but cannot eliminate the potential for disruption due to third party failure. The Company is also dependent upon customers for sales and cash flow. Year 2000 interruptions in customers' operations could result in reduced sales, increased inventory or receivable levels, and cash flow reductions. The Company is in the assessment phase with respect to the evaluation of critical customers' progress and is scheduled for completion by mid-1999. Contingency The Company is in the process of developing contingency plans for those areas that are critical to our business. These contingency plans will be designed to mitigate serious disruptions to our business flow beyond the end of 1999, where possible. The major efforts related to contingency planning are scheduled for completion by the end of the third quarter of 1999. Costs The Company does not separately track the internal costs incurred for the Y2K project. Such costs, however, are principally the related payroll costs for the Company's information systems group. The Company has incurred approximately $30,000 in related internal expenses to date. Future expenses are expected to be approximately $150,000. Such cost estimates are based upon presently available information and may change as the Company continues with its Y2K project. All estimated costs have been budgeted and are expected to be funded through cash flows from operations. These costs do not include any cost associated with the implementation of contingency plans, which are in the process of being developed. Risks The failure to correct a material Year 2000 problem could result in an interruption in, or a failure of, certain normal business activities or operations. Such failures could materially and adversely affect the Company's results of operations, liquidity and financial condition. Due to the general uncertainty inherent in the Year 2000 problem, resulting in part from the uncertainty of the Year 2000 readiness of third-party suppliers and customers, the Company is unable to determine at this time whether the consequences of Year 2000 failures will have a material impact on the Company's results of operations, liquidity or financial condition. 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; prices in the competing commodity markets which are volatile and are beyond the Company's control, the Year 2000 readiness issue; and likelihood of success in amending the Company's Credit Agreement to maintain the existing financing. Future profitability may be affected 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 NINE MONTHS ENDED OCTOBER 3, 1998 PART II: Other Information Item 1. LEGAL PROCEEDINGS The information required by this item is included on pages 9 and 10 of this report and is incorporated herein by reference. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the quarter ended October 3, 1998. 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. 10.15 Fourth Amendment to Credit Agreement dated as of October 2, 1998 between Darling International Inc., the banks or other lending institutions which are a signatory thereto, Comerica Bank, Credit Lyonnais New York Branch and Wells Fargo Bank (Texas), National Association and BankBoston, N.A. 10.16 The First Modification to Fourth Amendment to Credit Agreement dated as of November 2, 1998 between Darling International Inc., the banks or other lending institutions which are a signatory thereto, Comerica Bank, Credit Lyonnais New York Branch and Wells Fargo Bank (Texas), National Association and BankBoston, N.A. 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 October 3, 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: November 23, 1998 By: /s/Dennis B. Longmire ------------------------------ Dennis B. Longmire Chairman and Chief Executive Officer Date: November 23, 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 AND NINE MONTHS ENDED OCTOBER 3, 1998 INDEX TO EXHIBITS Exhibits No. Description Page No. 3.1* Restated Articles of Incorporation 3.3 Amended and Restated Bylaws, dated March 10, 1994 and March 31, 1995. 10.15 Fourth Amendment to Credit Agreement dated as of October 2, 1998 between Darling International Inc., the banks or other lending institutions which are a signatory thereto, Comerica Bank, Credit Lyonnais New York Branch and Wells Fargo Bank (Texas), National Association and BankBoston, N.A. 10.16 The First Modification to Fourth Amendment to Credit Agreement dated as of November 2, 1998 between Darling International Inc., the banks or other lending institutions which are a signatory thereto, Comerica Bank, Credit Lyonnais New York Branch and Wells Fargo Bank (Texas), National Association and BankBoston, N.A. 11 Statement re-computation of per share earnings. 23 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 Nine Months Ended ------------------------- ------------------------- Oct. 3, Sept. 27, Oct. 3, Sept. 27, 1998 1997 1998 1997 - -------------------------------------------------------------------------------------------------------- Earnings (Loss) (Basic): Net earnings (loss) available $ (6,897) $ (523) $ (10,930) $ 3,675 to common stock ============ =========== ============= ======== - --------------------------------------------------------------------------------------------------------- Shares (Basic): Weighted average number of common shares outstanding 15,585 15,531 15,578 15,504 ============ =========== ============= ======== Basic earnings (loss) per common share $ (0.44) $ (0.03) $ (0.70) $ 0.24 ============ =========== ============= ======== - --------------------------------------------------------------------------------------------------------- Earnings (Loss) (Diluted): Net earnings (loss) available $ (6,897) $ (523) $ (10,930) $ 3,675 to common stock ============ =========== =========== ======== - --------------------------------------------------------------------------------------------------------- Shares (Diluted): Weighted average number of common shares outstanding 15,585 15,531 15,578 15,504 Additional shares assuming exercise of stock options - - - 1,107 ------------ ----------- ------------- -------- Average common shares outstanding and equivalents 15,585 15,531 15,578 16,611 ============ =========== ============= ======== Diluted earnings (loss) per common share $ (0.44) $ (0.03) $ (0.70) $ 0.22 ============ =========== ============= ======== - ---------------------------------------------------------------------------------------------------------
EX-27 2 ART. 5 FDS FOR 3RD QUARTER 10-Q
5 1,000 9-MOS JAN-02-1999 JAN-04-1998 OCT-03-1998 3,398 0 22,358 533 13,044 48,723 262,960 103,074 288,248 187,751 142,648 0 0 156 58,760 288,248 296,589 296,589 246,969 304,134 0 0 8,673 (16,961) (6,031) (10,930) 0 0 0 (10,930) (0.70) (0.70)
EX-10 3 4TH AMENDMENT TO CREDIT AGMT FOURTH AMENDMENT TO CREDIT AGREEMENT THIS FOURTH AMENDMENT TO CREDIT AGREEMENT (the "Amendment"), dated as of October 2, 1998, is among DARLING INTERNATIONAL INC. ("Borrower"), the banks or other lending institutions which are a signatory hereto (individually, a "Bank" and, collectively, the "Banks"), COMERICA BANK, CREDIT LYONNAIS NEW YORK BRANCH and WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION, each individually as a Bank and as a co-agent and BANKBOSTON, N.A., individually as a Bank and as agent for itself and the other Banks (in its capacity as agent, together with its successors in such capacity, the "Agent"). RECITALS: Borrower, the Banks and the Agent have entered into that certain Credit Agreement dated as of June 5, 1997 (as amended by that certain First Amendment to Pledge Agreement and Credit Agreement dated November 10, 1997 between the Borrower and the Agent, as amended by that certain Second Amendment to Pledge Agreement and Credit Agreement dated March 6, 1998 among the Borrower, the Banks and the Agent, as amended by that certain Third Amendment to Credit Agreement dated June 30, 1998 among the Borrower, the Banks and the Agent and as the same may hereafter be amended or otherwise modified, the "Credit Agreement"). Agent has advised the Borrower that an Event of Default has occurred under Section 12.1 (c) of the Credit Agreement as a result of the Borrower's failure to comply with the covenant in Section 11.1 as evidenced by the Borrower's financial statements dated as of August 27, 1998 (such Event of Default together with any further violation of Section 11.1 of the Credit Agreement from August 27, 1998 through November 9, 1998, herein the "Net Worth Defaults"). The Borrower has notified the Agent and the Banks that it anticipates that it will be unable to comply with Section 11.1 after November 9, 1998, Section 11.2 of the Credit Agreement as of and after the end of the third Fiscal Quarter of its 1998 Fiscal Year and Section 11.3 of the Credit Agreement as of and after the end of the fourth Fiscal Quarter of its 1998 Fiscal Year, all of which will create, or may have created, Defaults under the Credit Agreement (the "Potential Defaults" and together with the Net Worth Defaults, herein the "Existing Defaults"). Borrower has requested that the Agent and the Banks forbear from exercising their rights and remedies arising as a result of the Existing Defaults in order to allow the Borrower, the Banks and the Agent time possibly to agree to an amendment to the Credit Agreement satisfactory to all parties to address the Existing Defaults. The Agent and the Banks are willing to so forbear subject to the amendment to the Credit Agreement as contemplated hereby. NOW, THEREFORE, in consideration of the premises herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows effective as of the date hereof and conditioned upon the execution of this Amendment by Borrower, each Obligated Party and all the Banks on or prior to October 14, 1998: ARTICLE 1 Definitions Section 1.1 Definitions. Capitalized terms used in this Amendment, to the extent not otherwise defined herein, shall have the same meanings as in the Credit Agreement, as amended hereby. ARTICLE 2 Amendments Section 2.1 Amendment to Section 1.1. The definition of the term "Revolving Commitment" in Section 1.1 of the Credit Agreement is amended in its entirety to read as follows: "Revolving Commitment" means, as to each Bank, the obligation of such Bank to make advances of funds and purchase participation interests in (or with respect to the Agent as a Bank, hold other interests in) Letters of Credit and Swingline Loans in an aggregate principal amount at any one time outstanding up to but not exceeding the amount set forth opposite the name of such Bank on Schedule 1.1 hereto under the heading "Revolving Commitment", as the same may be reduced or terminated pursuant to Section 2.6, 12.2 or 14.8 or, if applicable, in such Bank's most recent Assignment and Acceptance executed after October 3, 1998. The aggregate amount of the Revolving Commitments of all Banks equals One Hundred Thirty-Five Million Dollars ($135,000,000). Section 2.2 Amendment to Section 2.5. The first sentence of Section 2.5 of the Credit Agreement is amended in its entirety to read as follows: The Borrower agrees to pay to the Agent for the account of each Bank a commitment fee on the daily average unused amount of such Bank's Revolving Commitment for the period from and including the Closing Date to the Termination Date, at a rate equal to (i) from and including the Closing Date to October 3, 1998, one quarter of one percent (0.25%) per annum and (ii) from and including October 3, 1998 to the Termination Date, three-eighths of one percent (.375%) per annum. Section 2.3 Amendment to Section 4.1. Section 4.1 of the Credit Agreement is amended in its entirety to read as follows: Section 4.1 Interest Rate. The Borrower shall pay to the Agent for the account of each Bank interest on the unpaid principal amount of each Loan made by such Bank for the period commencing on the date of such Loan to but excluding the date such Loan is due, at a fluctuating rate per annum equal to (a) with respect to the Revolving Loans or Term Loans, (i) during the period that such Loans or portions thereof are subject to a Base Rate Account, the Base Rate plus the Base Margin and (ii) during the period that such Loans or portions thereof are subject to a Libor Account, the Adjusted Libor Rate plus the Libor Rate Margin; and (b) with respect to the Swingline Loans, the Base Rate plus the Base Margin. Section 2.4 Amendment to Section 4.2. All of Section 4.2 of the Credit Agreement is amended in its entirety to read as follows: Section 4.2 Determinations of Margins. The phrase "Libor Rate Margin"(i) prior to October 3, 1998, shall have the meaning set forth in this Section 4.2 prior to giving effect to the amendment thereof set out in that certain Fourth Amendment to Credit Agreement dated as of October 2, 1998; (ii) during the period commencing on October 3, 1998 and at all times thereafter until and excluding the date when the Term Loan is paid in cash in full (the "Term Loan Payment Date"), shall mean three percent (3.00%) per annum; (iii) during the period commencing on the Term Loan Payment Date and ending on but excluding the first Adjustment Date (as defined below), shall mean the percent per annum set forth in the table below under the heading "Libor Rate Margin" and opposite the Adjusted Funded Debt to EBITDA Ratio calculated for the completed four (4) Fiscal Quarters which immediately preceded the Term Loan Payment Date; and (iv) during each period, from and including one Adjustment Date to but excluding the next Adjustment Date (herein a "Calculation Period"), shall mean the percent per annum set forth in the table below under the heading "Libor Rate Margin" and opposite the Adjusted Funded Debt to EBITDA Ratio calculated for the completed four (4) Fiscal Quarters which immediately preceded the beginning of the applicable Calculation Period. The phrase "Base Margin" (i) during the period commencing on October 3, 1998 and at all times thereafter until and excluding the Term Loan Payment Date, shall mean one-half of one percent (0.50%) per annum; (ii) during the period commencing on the Term Loan Payment Date and ending on but excluding the first Adjustment Date (as defined below), shall mean the percent per annum set forth in the table below under the heading "Base Margin" and opposite the Adjusted Funded Debt to EBITDA Ratio calculated for the completed four (4) Fiscal Quarters which immediately preceded the Term Loan Payment Date; and (iv) during each Calculation Period, shall mean the percent per annum set forth in the table below under the heading "Base Margin" and opposite the Adjusted Funded Debt to EBITDA Ratio calculated for the completed four (4) Fiscal Quarters which immediately preceded the beginning of the applicable Calculation Period. MARGINS --------------------------------------- Adjusted FUnded Debt To EBITDA Base Margin Libor Rate Margin ---------------------------------------------------------------------- greater than or equal to 3.50 0.25% 2.75% less than 3.50 0.00% 2.25% The Libor Rate Margin (for Interest Periods commencing after the Term Loan Payment Date) and the Base Margin shall automatically be adjusted on and as of the Term Loan Payment Date in accordance with the Adjusted Funded Debt to EBITDA Ratio set forth in the most recent Compliance Certificate delivered under subsection 9.1 (c) prior to the Term Loan Payment Date and the table set forth above. In furtherance of the foregoing, Borrower agrees to add a calculation of the Adjusted Funded Debt to EBITDA Ratio to each Compliance Certificate. Upon delivery of the Compliance Certificate pursuant to subsection 9.1(c) in connection with the financial statements of Borrower and the Subsidiaries required to be delivered pursuant to subsection 9.1(b) at the end of each Fiscal Quarter commencing with the first such Compliance Certificate delivered after the Term Loan Payment Date, the Libor Rate Margin (for Interest Periods commencing after the applicable Adjustment Date) and the Base Margin shall also be automatically adjusted in accordance with the Adjusted Funded Debt to EBITDA Ratio set forth therein and the table set forth above, such automatic adjustment to take effect as of the first Business Day after the receipt by the Agent of the related Compliance Certificate pursuant to subsection 9.1(c) (each such Business Day when such margins change pursuant to this sentence or the next following sentence, herein an "Adjustment Date"). If Borrower fails to deliver such Compliance Certificate which so sets forth the Adjusted Funded Debt to EBITDA Ratio within the period of time required by subsection 9.1(c), the Libor Rate Margin (for Interest Periods commencing after the applicable Adjustment Date) shall automatically be adjusted to 2.75% per annum and the Base Margin shall automatically be adjusted to .25% per annum, such automatic adjustments to take effect as of the first Business Day after the last day on which Borrower was required to deliver the applicable Compliance Certificate in accordance with subsection 9.1(c) and to remain in effect until subsequently adjusted in accordance herewith upon the delivery of a Compliance Certificate. The phrase "Adjusted Funded Debt to EBITDA Ratio" means the ratio, calculated as of the end of each Fiscal Quarter, of Adjusted Funded Debt as of the date of determination to the EBITDA of the Borrower and the Subsidiaries (determined on a consolidated basis) for the four (4) Fiscal Quarters then ending. The phrase "Adjusted Funded Debt" means, as of any Fiscal Quarter end, the sum of the following calculated without duplication: (i) Funded Debt (as defined in Section 11.2) outstanding as of such Fiscal Quarter end plus (ii) all reimbursement obligations of the Borrower and the Subsidiaries (whether contingent or otherwise and determined on a consolidated basis) in respect of letters of credit, bankers' acceptances, surety or other bonds and similar instruments outstanding as of such Fiscal Quarter end (but excluding those supporting Debt otherwise included in this definition) plus (iii) all obligations outstanding as of such Fiscal Quarter end of the Borrower and the Subsidiaries (determined on a consolidated basis) arising in connection with noncompete, consulting and similar agreements which are classified as liabilities on a balance sheet in accordance with GAAP. Section 2.5 Amendment to Schedules. The schedules to the Credit Agreement are amended to add Schedule 1.1 thereto to read in its entirety as set forth on Schedule 1.1 hereto. ARTICLE 3 Forbearance Section 3.1 Forbearance; Obligations to Extend Credit. Subject to the terms and provisions of this Amendment, Agent and each Bank agrees, until November 9, 1998, (i) to forbear from exercising any of their rights and remedies arising under the Loan Documents or otherwise as a result of the Existing Defaults (the "Forbearance") and (ii) to continue to extend credit to the Borrower and allow Borrower to Continue Libor Accounts and Convert Base Rate Accounts to Libor Accounts under the terms of the Credit Agreement (as amended hereby) notwithstanding the fact that pursuant to subsections 7.2 (a) and 4.5 (c) the Banks have no obligation to do so as a result of the Existing Defaults. Notwithstanding the Forbearance, as a result of the Existing Defaults neither Borrower nor any Subsidiary shall be allowed to enter into any of the transactions permitted by the exceptions set forth in Section 10.3 or 10.4 (i) of the Credit Agreement which are conditioned on no Default existing. However, Borrower and the Subsidiaries shall be allowed to enter into the transactions permitted by the exceptions set forth in Section 10.8 of the Credit Agreement which are conditioned on no Default existing notwithstanding the Existing Defaults. Section 3.2 Termination of Forbearance. This Amendment does not constitute a waiver or forbearance with respect to any Default other than the Existing Defaults. In the event that prior to November 9, 1998 any further Defaults occur under the Credit Agreement (i.e., other than the Existing Defaults), then the Agent and the Banks shall have the right and option, in their discretion and without notice to Borrower or any Obligated Party, to (i) terminate the Forbearance, (ii) refuse to extend additional credit to the Borrower under the Loan Documents, (iii) prohibit Borrower from Converting and Continuing Accounts and (iv) exercise any and all of the rights and remedies under the Loan Documents or otherwise arising as a result of such Existing Defaults (the earlier of November 9, 1998 or the date of the termination of the Forbearance under this Section 3.2, herein the "Forbearance Termination Date"). Section 3.3 No Waivers. Borrower and each Obligated Party (by its execution of this Amendment below) agree that by entering into this Amendment, neither Agent nor any Bank in any way waives, beyond the Forbearance Termination Date, any rights and remedies it may have with respect to the Existing Defaults it being agreed that the Forbearance is only to provide Borrower with an opportunity to reach an agreement with the Agent and the Banks relating to the amendment to the Credit Agreement to remedy the Existing Defaults and that the Existing Defaults may be asserted after the Forbearance Termination Date if an agreement relating to such amendment is not reached by such date (it being understood and agreed that such amendment has not been and may not be reached). After the Forbearance Termination Date, Agent and the Banks may pursue all rights and remedies arising as a result of the Existing Defaults (including without limitation the right to stop making additional extensions of credit available to the Borrower under the Credit Agreement) without notice of any kind to the Borrower or any Obligated Party. Section 3.4 Tolling. All periods of limitations specified by statutes and all defenses of laches or waiver as to the Existing Defaults will be tolled and otherwise suspended during the period from the date hereof through the date which is ninety (90) days after the Forbearance Termination Date. ARTICLE 4 Miscellaneous Section 4.1 Ratifications. The terms and provisions set forth in this Amendment shall modify and supersede all inconsistent terms and provisions set forth in the Credit Agreement and except as expressly modified and superseded by this Amendment, the terms and provisions of the Credit Agreement and the other Loan Documents are ratified and confirmed and shall continue in full force and effect. Borrower, Agent and each Bank agree that the Credit Agreement, as amended hereby, and the other Loan Documents shall continue to be legal, valid, binding and enforceable in accordance with their respective terms. Section 4.2 Representations and Warranties. Borrower hereby represents and warrants to Agent and each Bank that (i) the execution, delivery and performance of this Amendment has been authorized by all requisite action on the part of Borrower and each Obligated Party, (ii) except for the existence of the Existing Defaults and any matters disclosed to the Banks and the Agent in that certain spiral bound booklet entitled "Bank Meeting, Thursday September 17, 1998," the representations and warranties contained in the Loan Documents are true and correct in all material respects on and as of the date hereof as though made on and as of the date hereof (except with respect to any representations or warranties limited by their terms to a specific date), (iii) except for the Existing Defaults, no Default has occurred and is continuing and no event or condition has occurred that with the giving of notice or lapse of time or both would be a Default, (iv) except for the Existing Defaults, Borrower and each Obligated Party are in full compliance with all covenants and agreements contained in the Loan Documents, and (v) as of the date hereof, there are no claims or offsets against or defenses or counterclaims to the obligations of Borrower or any Obligated Party under the Loan Documents. TO INDUCE THE AGENT AND THE BANKS TO ENTER INTO THIS AGREEMENT, THE BORROWER AND EACH OBLIGATED PARTY (by its execution of this Amendment) WAIVE ANY AND ALL SUCH CLAIMS, OFFSETS, DEFENSES, OR COUNTERCLAIMS, WHETHER KNOWN OR UNKNOWN, ARISING PRIOR TO THE DATE HEREOF AND AGREE TO STRICTLY COMPLY WITH THE TERMS OF THE LOAN DOCUMENTS. Section 4.3 Survival of Representations and Warranties. All representations and warranties made in this Amendment shall survive the execution and delivery of this Amendment and the other Loan Documents, and no investigation by Agent or any Bank or any closing shall affect the representations and warranties or the right of Agent or any Bank to rely upon them. Section 4.4 Reference to Agreements. Each of the Loan Documents, including the Credit Agreement, are amended so that any reference in such Loan Documents to the Credit Agreement shall mean a reference to the Credit Agreement as amended hereby. Section 4.5 Severability. Any provision of this Amendment held by a court of competent jurisdiction to be invalid or unenforceable shall not impair or invalidate the remainder of this Amendment and the effect thereof shall be confined to the provision so held to be invalid or unenforceable. Section 4.6 Applicable Law. This Amendment shall be governed by and construed in accordance with the laws of the State of Texas. Section 4.7 Successors and Assigns. This Amendment is binding upon and shall inure to the benefit of Agent, the Banks and Borrower and their respective successors and assigns, except Borrower may not assign or transfer any of its rights or obligations hereunder without the prior written consent of the Banks. Section 4.8 Counterparts. This Amendment may be executed in one or more counterparts, each of which when so executed shall be deemed to be an original, but all of which when taken together shall constitute one and the same agreement. Section 4.9 Effect of Waiver. No consent or waiver, express or implied, by Agent or any Bank to or for any breach of or deviation from any covenant, condition or duty by Borrower or any Obligated Party shall be deemed a consent or waiver to or of any other breach of the same or any other covenant, condition or duty. Section 4.10 Headings. The headings, captions, and arrangements used in this Amendment are for convenience only and shall not affect the interpretation of this Amendment. Section 4.11 ENTIRE AGREEMENT. THIS AMENDMENT EMBODIES THE FINAL, ENTIRE AGREEMENT AMONG THE PARTIES HERETO AND SUPERSEDES ANY AND ALL PRIOR COMMITMENTS, AGREEMENTS, REPRESENTATIONS AND UNDERSTANDINGS, WHETHER WRITTEN OR ORAL, RELATING TO THIS AMENDMENT, AND MAY NOT BE CONTRADICTED OR VARIED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OR DISCUSSIONS OF THE PARTIES HERETO. THERE ARE NO ORAL AGREEMENTS AMONG THE PARTIES HERETO. Executed as of the date first written above. Borrower: --------- DARLING INTERNATIONAL INC. By: /s/ Brad Phillips Brad Phillips, Treasurer AGENT: ------ BANKBOSTON, N.A., individually as a Bank and as the Agent By: /s/ Stephen Y. McGehee Stephen Y. McGehee, Managing Director CO-AGENTS: ---------- CREDIT LYONNAIS NEW YORK BRANCH By: Name: Title: COMERICA BANK By: Name: Title: WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION By: Name: Title: OTHER BANKS: ------------ Each of the undersigned Obligated Parties consents and agrees to this Amendment (including, without limitation, Sections 3.3 and 4.2) and agrees that the Guaranty to which it is a party shall remain in full force and effect and shall continue to be its legal, valid and binding obligation enforceable against it in accordance with its terms. Obligated Parties: International Processing Corporation International Transportation Service, Inc. The Standard Tallow Corporation Darling Restaurant Services Inc. Esteem Products Inc. By: Brad Phillips, Treasurer of each Obligated Party SCHEDULE 1.1 TO DARLING INTERNATIONAL FOURTH AMENDMENT TO CREDIT AGREEMENT Bank Revolver Commitment EX-10 4 1ST MODIFICATION TO 4TH AMEND TO CREDIT AGMT FIRST MODIFICATION TO FOURTH AMENDMENT TO CREDIT AGREEMENT THIS FIRST MODIFICATION TO FOURTH AMENDMENT TO CREDIT AGREEMENT ("Modification"), dated as of November 2, 1998, is among DARLING INTERNATIONAL INC. ("Borrower"), the banks or other lending institutions which are a signatory hereto (individually, a "Bank" and, collectively, the "Banks"), COMERICA BANK, CREDIT LYONNAIS NEW YORK BRANCH and WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION, each individually as a Bank and as a co-agent and BANKBOSTON, N.A., individually as a Bank and as agent for itself and the other Banks (in its capacity as agent, together with its successors in such capacity, the "Agent"). RECITALS: Borrower, the Banks and the Agent have entered into that certain Credit Agreement dated as of June 5, 1997 (as amended by that certain First Amendment to Pledge Agreement and Credit Agreement dated November 10, 1997 between the Borrower and the Agent, that certain Second Amendment to Pledge Agreement and Credit Agreement dated March 6, 1998 among the Borrower, the Banks and the Agent, that certain Third Amendment to Credit Agreement dated June 30, 1998 among the Borrower, the Banks and the Agent, that certain Fourth Amendment to Credit Agreement dated as of October 2, 1998 among the Borrower, the Banks and the Agent (the "Fourth Amendment") and as the same may hereafter be amended or otherwise modified, the "Credit Agreement"). As set forth in the Fourth Amendment, the Agent has advised Borrower of the Net Worth Default (as defined in the Fourth Amendment) and Borrower has notified the Agent and the Banks of the Potential Defaults (as defined in the Fourth Amendment). Pursuant to the Fourth Amendment, the Agent and the Banks agreed to the Forbearance (as defined in the Fourth Amendment), until November 9, 1998. Borrower has requested that the Agent and the Banks extend the Forbearance Termination Date (as defined in the Fourth Amendment) from November 9, 1998 to December 14, 1998 in order to allow Borrower, the Banks and the Agent additional time possibly to agree to an amendment to the Credit Agreement satisfactory to all parties to address the Existing Defaults (as defined in the Fourth Amendment). The Agent and the Banks are willing to extend the Forbearance Termination Date on the terms and subject to the conditions set forth herein. NOW, THEREFORE, in consideration of the premises herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows effective as of the date hereof and conditioned upon the execution of this Modification by Borrower, each Obligated Party and all the Banks on or prior to November 2, 1998: ARTICLE 1 Definitions Section 1.1 Definitions. Capitalized terms used in this Modification, to the extent not otherwise defined herein, shall have the same meanings as in the Fourth Amendment or the Credit Agreement. ARTICLE 2 Modifications Section 2.1 Modification to Section 3.1 of the Fourth Amendment. Effective as of the date hereof, Section 3.1 of the Fourth Amendment is hereby amended in its entirety to read as follows: Section 3.1 Forbearance; Obligations to Extend Credit. Subject to the terms and provisions of this Amendment, Agent and each Bank agrees, until December 14, 1998, (i) to forbear from exercising any of their rights and remedies arising under the Loan Documents or otherwise as a result of the Existing Defaults (the "Forbearance") and (ii) to continue to extend credit to Borrower and allow Borrower to Continue Libor Accounts and Convert Base Rate Accounts to Libor Accounts under the terms of the Credit Agreement (as amended hereby) notwithstanding the fact that pursuant to subsections 7.2(a) and 4.5(c) the Banks have no obligation to do so as a result of the Existing Defaults. Notwithstanding the Forbearance, as a result of the Existing Defaults neither Borrower nor any Subsidiary shall be allowed to enter into any of the transactions permitted by the exceptions set forth in Sections 10.3 or 10.4(i) of the Credit Agreement which are conditioned on no Default existing. However, Borrower and the Subsidiaries shall be allowed to enter into the transactions permitted by the exceptions set forth in Section 10.8 of the Credit Agreement which are conditioned on no Default existing notwithstanding the Existing Defaults until December 14, 1998. Section 2.2 Modification to Section 3.2 of the Fourth Amendment. Effective as of the date hereof, Section 3.2 of the Fourth Amendment is hereby amended in its entirety to read as follows: Section 3.2 Termination of Forbearance. This Amendment does not constitute a waiver or forbearance with respect to any Default other than the Existing Defaults. In the event that prior to December 14, 1998 any further Defaults occur under the Credit Agreement (i.e., other than the Existing Defaults), then the Agent and the Banks shall have the right and option, in their discretion and without notice to Borrower or any Obligated Party, to (i) terminate the Forbearance, (ii) refuse to extend additional credit to Borrower under the Loan Documents, (iii) prohibit Borrower from Converting and Continuing Accounts and (iv) exercise any and all of the rights and remedies under the Loan Documents or otherwise arising as a result of such Existing Defaults (the earlier of December 14, 1998 or the date of the termination of the Forbearance under this Section 3.2, herein the "Forbearance Termination Date"). ARTICLE 3 Asset Dispositions Section 3.1 Disposition of Russellville, Arkansas Property. Pursuant to that certain spiral bound booklet entitled "Bank Meeting, Thursday September 17, 1998," prepared by the Borrower and distributed to the Banks, the Borrower provided the Banks notice that the Borrower anticipated selling its property located in Russellville, Arkansas (the "Arkansas Property") by September 30, 1998. The anticipated closing date of the sale of the Arkansas Property is now anticipated to be sometime during the first week of November 1998. Borrower has requested that the Required Banks consent to the Borrower's departure from clause (e) (ii) of Section 10.8 of the Credit Agreement (the "Applicable Covenant") in order to permit the sale of the Arkansas Property because the Applicable Covenant requires that the Borrower provide certifications demonstrating compliance with subclauses (iii) and (iv) of clause (e) not less than ten (10) Business Days prior to the date of the proposed disposition. As of the date hereof, the disposition of the Arkansas Property is anticipated to occur prior to the expiration of ten (10) Business Days and the Borrower has not provided the certifications required by the Applicable Covenant. Section 3.2 Consent to Disposition of Russellville, Arkansas Property. Subject to the other terms of this Modification (including, without limitation, Section 3.3 hereof), each of the undersigned Banks consent to Borrower's departure from the Applicable Covenant as specifically described above for purposes of permitting the sale of the Arkansas Property prior to the expiration of the ten (10) Business Day period required by the Applicable Covenant and agree that such departure will not result in a Default. Section 3.3 No Waiver: Application of Proceeds. To induce the Banks to agree to the terms of Section 3.2 of this Modification, Borrower: (a) Agrees that the consent set forth in Section 3.2 shall not be deemed a consent to the departure from or waiver of (i) the Applicable Covenant for any purpose other than to permit the sale of the Arkansas Property or (ii) any other covenant or condition in any Loan Document or (iii) any Default that otherwise may arise as a result of the sale of the Arkansas Property. The failure to comply with the Applicable Covenant for any other disposition of assets limited thereby shall constitute an Event of Default; (b) Agrees that the Net Proceeds of the sale of the Arkansas Property and the Net Proceeds of the sale of any other property sold under the permissions of clauses (d) and (e) of Section 10.8 of the Credit Agreement shall be applied within two (2) Business Days of the receipt thereof as a prepayment on the Loans, to be applied first to the installments due under the Term Loan in the inverse order of maturity and in accordance with Section 5.4 of the Credit Agreement and after the Term Loan is paid in full, to the Revolving Loans with a permanent reduction of the Revolving Commitments in the aggregate amount of each such prepayment made on the Revolving Loans (the term "Net Proceeds" means the cash proceeds received by Borrower or any Subsidiary from any disposition of assets (including payments under notes or other debt securities received in connection with any disposition of assets) net of (i) the costs of such disposition (including taxes, brokerage fees, attorneys' fees and other professional fees attributable thereto) and (ii) amounts applied to repayment of Debt (other than the Obligations) secured by a lien, security interest, claim or encumbrance on the asset or property disposed); and (c) Certifies in accordance with Section 10.8 (e) (ii) of the Credit Agreement as follows: (i) the sales price for the Arkansas Property (as determined in accordance with the applicable sale agreement) does not exceed Seven Million Five Hundred Thousand Dollars ($7,500,000); and (ii) the aggregate sales prices for all the assets sold (as determined in accordance with the applicable sale agreements) in the current Loan Year under the permissions of clause (e) of Section 10.8 of the Credit Agreement does not exceed the Annual Cap for this Loan Year. The Banks agree that the Net Proceeds from the sale of the Arkansas Property or any other property sold under the permissions of clauses (d) and (e) of Section 10.8 of the Credit Agreement (as applied to installments due under the Term Loan in the inverse order of maturity) will be credited against any mandatory prepayment of the Term Loan which may be required in any amendment to the Credit Agreement in the order in which such mandatory prepayments are established to be due. The Borrower acknowledges that the Banks have not agreed to, and have no obligation to agree to, any such amendment to the Credit Agreement. ARTICLE 4 Miscellaneous Section 4.1 Ratifications. The terms and provisions set forth in this Modification shall modify and supersede all inconsistent terms and provisions set forth in the Fourth Amendment and except as expressly modified and superseded by this Modification, the terms and provisions of the Fourth Amendment, the Credit Agreement and the other Loan Documents are ratified and confirmed and shall continue in full force and effect. Borrower, the Agent and each Bank agree that the Fourth Amendment, the Credit Agreement and the other Loan Documents shall continue to be legal, valid, binding and enforceable in accordance with their respective terms. Section 4.2 Representations and Warranties. Borrower hereby represents and warrants to the Agent and each Bank that (i) the execution, delivery and performance of this Modification has been authorized by all requisite action on the part of Borrower and each Obligated Party, (ii) except for the existence of the Existing Defaults and any matters disclosed to the Banks and the Agent in that certain spiral bound booklet entitled "Bank Meeting, Thursday September 17, 1998," the representations and warranties contained in the Loan Documents are true and correct in all material respects on and as of the date hereof as though made on and as of the date hereof (except with respect to any representations or warranties limited by their terms to a specific date), (iii) except for the Existing Defaults, no Default has occurred and is continuing and no event or condition has occurred that with the giving of notice or lapse of time or both would be a Default, (iv) except for the Existing Defaults, Borrower and each Obligated Party are in full compliance with all covenants and agreements contained in the Loan Documents, and (v) as of the date hereof, there are no claims or offsets against or defenses or counterclaims to the obligations of Borrower or any Obligated Party under the Loan Documents. TO INDUCE THE AGENT AND THE BANKS TO ENTER INTO THIS MODIFICATION, THE BORROWER AND EACH OBLIGATED PARTY (by its execution of this Modification) WAIVE ANY AND ALL SUCH CLAIMS, OFFSETS, DEFENSES, OR COUNTERCLAIMS, WHETHER KNOWN OR UNKNOWN, ARISING PRIOR TO THE DATE HEREOF AND AGREE TO STRICTLY COMPLY WITH THE TERMS OF THE LOAN DOCUMENTS. Section 4.3 Survival of Representations and Warranties. All representations and warranties made in this Modification shall survive the execution and delivery of this Modification and the other Loan Documents, and no investigation by the Agent or any Bank or any closing shall affect the representations and warranties or the right of the Agent or any Bank to rely upon them. Section 4.4 Severability. Any provision of this Modification held by a court of competent jurisdiction to be invalid or unenforceable shall not impair or invalidate the remainder of this Modification and the effect thereof shall be confined to the provision so held to be invalid or unenforceable. Section 4.5 Applicable Law. This Modification shall be governed by and construed in accordance with the laws of the State of Texas. Section 4.6 Successors and Assigns. This Modification is binding upon and shall inure to the benefit of the Agent, the Banks and Borrower and their respective successors and assigns, except Borrower may not assign or transfer any of its rights or obligations hereunder without the prior written consent of the Banks. Section 4.7 Counterparts. This Modification may be executed in one or more counterparts, each of which when so executed shall be deemed to be an original, but all of which when taken together shall constitute one and the same agreement. Section 4.8 Effect of Waiver. No consent or waiver, express or implied, by the Agent or any Bank to or for any breach of or deviation from any covenant, condition or duty by Borrower or any Obligated Party shall be deemed a consent or waiver to or of any other breach of the same or any other covenant, condition or duty. Section 4.9 Headings. The headings, captions, and arrangements used in this Modification are for convenience only and shall not affect the interpretation of this Modification. Section 4.10 ENTIRE AGREEMENT. THIS MODIFICATION EMBODIES THE FINAL, ENTIRE AGREEMENT AMONG THE PARTIES HERETO AND SUPERSEDES ANY AND ALL PRIOR COMMITMENTS, AGREEMENTS, REPRESENTATIONS AND UNDERSTANDINGS, WHETHER WRITTEN OR ORAL, RELATING TO THIS MODIFICATION, AND MAY NOT BE CONTRADICTED OR VARIED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OR DISCUSSIONS OF THE PARTIES HERETO. THERE ARE NO ORAL AGREEMENTS AMONG THE PARTIES HERETO. Executed as of the date first written above. Borrower: DARLING INTERNATIONAL INC. By: Brad Phillips, Treasurer AGENT: BANKBOSTON, N.A., individually as a Bank and as the Agent By: Stephen Y. McGehee, Managing Director CO-AGENTS: CREDIT LYONNAIS NEW YORK BRANCH By: Name: Title: COMERICA BANK By: Name: Title: WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION By: Name: Title: OTHER BANKS: Each of the undersigned Obligated Parties consents and agrees to this Modification (including, without limitation, Section 4.2) and agrees that the Guaranty to which it is a party shall remain in full force and effect and shall continue to be its legal, valid and binding obligation enforceable against it in accordance with its terms. Obligated Parties: International Processing Corporation International Transportation Service, Inc. The Standard Tallow Corporation Darling Restaurant Services Inc. Esteem Products Inc. By: Brad Phillips, Treasurer of each Obligated Party ARTICLE 5 -----END PRIVACY-ENHANCED MESSAGE-----