-----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, Ukgl6R0dlkAdXQA63dbo8JOpBijmPWlKNWwX+lc5EGxr02JyLDzAC5uv6h37x0G4 YLws5+Ib4B7ou+QSzRnj0g== 0000916540-99-000003.txt : 19990402 0000916540-99-000003.hdr.sgml : 19990402 ACCESSION NUMBER: 0000916540-99-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990102 FILED AS OF DATE: 19990331 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-K SEC ACT: SEC FILE NUMBER: 001-13323 FILM NUMBER: 99580812 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-K 1 FORM 10-K DARLING INTERNATIONAL INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) X ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended January 2, 1999 OR TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from _______________ to _______________ Commission File Number 0-24620 DARLING INTERNATIONAL INC. (Exact name of registrant as specified in its charter) Delaware 36-2495346 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) 251 O'Connor Ridge Blvd. Suite 300 Irving, Texas 75038 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (972) 717-0300 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock $0.01 par value per share (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such report(s)), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by nonaffiliates of the Registrant was approximately $16,000,000 as of March 29, 1999 based upon the closing price of such stock as reported on the American Stock Exchange ("AMEX") on that day. There were 15,568,362 shares of common stock, $0.01 par value, outstanding at March 29, 1999. DOCUMENTS INCORPORATED BY REFERENCE Selected designated portions of the Registrant's definitive Proxy Statement are incorporated by reference into Part III of this Annual Report. DARLING INTERNATIONAL INC. AND SUBSIDIARIES FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 2, 1999 TABLE OF CONTENTS Page No. PART I. ITEM 1. BUSINESS.......................................................... 3 ITEM 2. PROPERTIES........................................................ 8 ITEM 3. LEGAL PROCEEDINGS................................................. 9 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............11 PART II. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.......................................11 ITEM 6. SELECTED FINANCIAL DATA...........................................12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION......................13 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.......20 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................20 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...............................46 PART III. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................46 ITEM 11. EXECUTIVE COMPENSATION............................................46 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNER AND MANAGEMENT....................................................46 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................46 PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.......................................................47 SIGNATURES ..................................................49 DARLING INTERNATIONAL INC. AND SUBSIDIARIES FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 2, 1999 PART I ITEM 1. BUSINESS General Founded by the Swift meat packing interests and the Darling family in 1882, Darling International Inc. ("Darling" or the "Company") was incorporated in Delaware in 1962 under the name "Darling-Delaware Company, Inc." On December 28, 1993, the Company changed its name from "Darling-Delaware Company, Inc." to "Darling International Inc." The address of the Company's principle executive office is 251 O'Connor Ridge Boulevard, Suite 300, Irving, Texas, 75038, and its telephone number at such address is (972)717-0300. The Company is a recycler of food processing by-products and believes that it is the largest independent processor in the United States in terms of raw material processed annually. The Company collects and recycles animal processing by-products and used restaurant cooking oil. In addition, the Company provides grease trap collection services to restaurants. The Company processes such raw materials at 35 facilities located throughout the United States into finished products such as tallow, meat and bone meal and yellow grease. 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. Commencing 1998, as part of an overall strategy to better commit financial resources, the Company reorganized its operations into three diverse yet distinctive areas. These are: 1) Rendering, the core business of turning inedible waste from meat and poultry processors into high quality feed ingredients and fats for other industrial applications; 2) Restaurant Services, a group focused on growing the grease collection business while expanding the line of services, which includes grease trap servicing, offered to restaurants and food processors; and 3) Esteem Products, the new business dedicated to using newly developed technologies to produce novel products from established supply sources. Management believes that organizing along business lines will enable the Company to utilize its flexibility and diversification to service a changing, more sophisticated marketplace. In November 1998, the Company made a strategic decision to dispose of an additional segment, Bakery By-Products Recycling, a group which produces high quality bakery by-products for the feed industry. The results of the Bakery By-Products Recycling segment have been reported separately as discontinued operations. See Note 14 of Notes to Consolidated Financial Statements for further information regarding discontinued operations. For the financial results of the Company's operating segments for 1998, see Note 16 of Notes to Consolidated Financial Statements. The Company's net sales from continuing operations were $337.0 million, $444.1 million and $467.3 million during the 1998, 1997 and 1996 fiscal years, respectively. In addition, net external sales by operating segment, including discontinued operations, were as follows:
Fiscal Fiscal Fiscal 1998 1997 1996 ---------------------------------------------------------------------------- Continuing operations: Rendering (a) $275,424 73.5% $444,142 89.1% $467,325 95.6% Restaurant Services (a) 61,451 16.4 N/A - N/A - Esteem Products 156 0.1 - - - - - - Discontinued operations: Bakery By-Products Recycling $ 37,456 10.0% $ 54,329 10.9% $ 21,590 4.4% ------- ------ -------- ------ -------- ------ Total $374,487 100.0% $498,471 100.0% $488,915 100.0% ======= ====== ======= ====== ======= ====== (a) Prior to Fiscal 1998, Rendering and Restaurant Services was not separately accounted for and therefore separate revenue data does not exist for Fiscal 1997 and 1996, as it is impractical to create such data.
Processing Operations The Company creates finished products primarily through the drying, grinding, separating and blending of its various raw materials. The process starts with the collection of animal processing by-products (fat, bones, feathers and offal), and used restaurant cooking oil from meat packers, grocery stores, butcher shops, meat markets, poultry processors and restaurants. The animal processing by-products are ground and heated to extract water and separate oils from animal tissue as well as to sterilize and make the material suitable as an ingredient for animal feed. Meat and bone meal is separated from the cooked material by pressing the material, then grinding and sifting it through screens. The separated tallow is centrifuged and/or refined for purity. The primary finished products derived from the processing of animal by-products are tallow and meat and bone meal. Other by-products include poultry meal, feather meal and blood meal. Used restaurant cooking oil is processed under a separate procedure that involves heating, settling and sterilizing, as well as refining, resulting in derived yellow grease, feed-grade animal fat, or oleo-chemical feedstocks. Purchase and Collection of Raw Materials The Company operates a fleet of approximately 1,100 trucks and tractor-trailers to collect raw materials from more than 80,000 restaurants, butcher shops, grocery stores, and independent meat and poultry processors. The Company replaces or upgrades its vehicle fleet to maintain efficient operations. Raw materials are collected in one of two manners. Certain large suppliers, such as large meat processors and poultry processors are furnished with bulk trailers in which the raw material is loaded. The Company transports these trailers directly to a processing facility. The Company provides the remaining suppliers, primarily grocery stores and butcher shops with containers in which to deposit the raw material. The containers are picked up by or emptied into Company trucks on a periodic basis. The type and frequency of service is determined by individual supplier requirements, the volume of raw material generated by the supplier, supplier location, and weather, among other factors. Used restaurant cooking oil is placed in various sizes and types of containers which are supplied by the Company. In some instances, these containers are loaded directly onto the trucks, while in other instances the oil is pumped through a vacuum hose into the truck. The Company also provides an alternative collection service to restaurants, CleanStar(R) 2000, a self-contained collection system that is housed inside the restaurant, with the used cooking oil pumped directly into collection vehicles via an outside valve. The CleanStar 2000 system and service is provided either on a fee basis to the raw material customer or as a negotiated offset to the cost of raw materials purchased. Approximately 4% of the Company's restaurant suppliers utilize the CleanStar 2000 system. The frequency of all forms of collection service is determined by the volume of oil generated by the restaurant. The raw materials collected by the Company are transported either directly to a processing plant or to a transfer station, where materials from several collection routes are loaded into trailers and transported to a processing plant. Collections of animal processing by-products generally are made during the day, and materials are delivered to plants for processing within 24 hours of collection to eliminate spoilage. Collection of used restaurant cooking oil can be made at any time of the day or night, depending on supplier preference; these materials may be held for longer periods of time before processing. During the past year, the Company's largest single supplier accounted for less than 5% of the total raw material processed by the Company, and the 10 largest raw materials suppliers accounted for approximately 27% of the total raw material processed by the Company. For a discussion of the Company's competition for raw materials, see "Competition." Raw Materials Pricing The Company has two primary pricing arrangements with its raw materials suppliers. More than half of the Company's annual volume of raw materials is acquired on a "formula" basis. Under a formula arrangement, the charge or credit for raw materials is tied to published finished product commodity prices after deducting a fixed service charge. The service charge is designed to enable the Company to cover all of its collection and processing costs and realize a profit. The Company acquires the remaining annual volume of raw material under "non-formula" arrangements whereby suppliers either are paid a fixed price, are not paid, or are charged for the collection service, depending on various economic factors. The credit received or amount charged for raw material under both formula and non-formula arrangements is based on various factors, including the type of raw materials, the expected value of the finished product to be produced, the anticipated yields, the volume of material generated by the supplier, and processing and transportation costs. Competition among processors to procure raw materials also affects the price paid for raw materials. See "Competition." Formula prices are generally adjusted on a weekly or monthly basis while non-formula prices or charges are adjusted as needed to respond to significant changes in finished product prices. Finished Products The finished products that result from the processing of animal by-products are oils (primarily tallow and yellow grease) and proteins (primarily meat and bone meal). Oils are used as ingredients in the production of pet food, animal feed and soaps. Oleo-chemical producers use these oils as feedstocks to produce specialty ingredients used in paint, rubber, paper, concrete, plastics and a variety of other consumer and industrial products. Meals are used primarily as high protein additives in pet food and animal feed. Predominantly all of the Company's finished products are commodities which are quoted on established commodity markets or are priced relative to such commodities. While the Company's finished products are generally sold at prices prevailing at the time of sale, the Company's ability to deliver large quantities of finished products from multiple locations and to coordinate sales from a central location enables the Company to occasionally receive a premium over the then-prevailing market price. Marketing, Sales and Distribution of Finished Products The Company markets its finished products worldwide. Marketing activities are primarily conducted through the Company's marketing department which is headquartered in Irving, Texas. The Company also maintains sales offices in Los Angeles, California, and Newark, New Jersey for sales and distribution of selected products. This sales force is in contact with several hundred customers daily and coordinates the sale and assists in the distribution of most finished products produced at the Company's processing plants. The Company sells its finished products internationally through commodities brokers and through Company agents in various countries. The Company sells to numerous foreign markets, including the European Economic Community, Asia, the Pacific Rim, North Africa, Mexico and South America. The Company has no material foreign operations, but exports a portion of its products to customers in various foreign counties. Total export sales were $128,776,000, $101,040,000 and $119,055,000 for the years ended January 2, 1999, January 3, 1998, and December 28, 1996, respectively. The level of export sales may vary from year to year depending on the relative strength of domestic versus overseas markets. The Company obtains payment protection for most of its foreign sales by requiring payment before shipment or by requiring bank letters of credit or guarantees of payment from U.S. government agencies. The Company ordinarily is paid for its products in U.S. dollars and has not experienced any material currency translation losses or any material foreign exchange control difficulties. The Company has not experienced any material restrictions on the export of its products, although certain countries, including India and certain Middle East countries restrict the import of proteins and fats and oils made from porcine and bovine material, and the European Community has restrictions on proteins and fats and oils made from specified bovine materials. The B.S.E. situation in Europe and new F.D.A. restrictions, coupled with much lower prices for competing commodities, caused lower prices for some of the Company's key products. See Note 16 of Notes to Consolidated Financial Statements for information regarding the Company's export sales. Finished products produced by Darling are distributed primarily by truck and rail from the Company's plants shortly following production. While there are some temporary inventory accumulations at various port locations for export shipments, inventories rarely exceed three weeks' production and, therefore, the Company uses limited working capital to carry inventories and reduces its exposure to fluctuations in commodity prices. Competition Management of the Company believes that the most competitive aspect of the business is the procurement of raw materials rather than the sale of finished products. During the last ten years, pronounced consolidation within the meat packing industry has resulted in bigger and more efficient slaughtering operations, the majority of which utilize "captive" processors. Simultaneously, the number of small meat packers, which have historically been a dependable source of supply for non-captive processors, has decreased significantly. Although the total amount of slaughtering may be flat or only moderately increasing, the availability, quantity and quality of raw materials available to the independent processors from these sources have all decreased. These factors have been offset, in part, however, by increasing environmental consciousness. The need for restaurants to comply with environmental regulations concerning the proper disposal of used restaurant cooking oil is offering a growth area for this raw material source. In marketing its finished products, the Company faces competition from other processors and from producers of other suitable commodities. Tallows and greases are in certain instances substitutes for soybean oil and palm stearine, while meat and bone meal is a substitute for soybean meal. Consequently, the prices of tallow, yellow grease, and meat and bone meal correlate to some degree with these commodities. The markets for finished products are impacted mainly by the worldwide supply of fats, oils, proteins and grains. Other factors that influence the prices that the Company receives for its finished products include the quality of the Company's finished products, consumer health consciousness, worldwide credit conditions and U.S. government foreign aid. From time to time, the Company enters into arrangements with its suppliers of raw materials pursuant to which such suppliers buy back the Company's finished products. Seasonality The amount of raw materials made available to the Company by its suppliers is relatively stable on a weekly basis except for those weeks including a major holiday during which availability of raw materials declines because major meat and poultry processors are not operating. Weather is also a factor. Extremely warm weather adversely affects the ability of the Company to make higher quality products because the raw material deteriorates more rapidly than in cooler weather, while extremely cold weather, in certain instances, can hinder the collection of raw materials. Employees and Labor Relations As of January 2, 1999, the Company employed approximately 1,400 persons full-time in continuing business segments. Approximately 45% of the total number of employees are covered by collective bargaining agreements; however, the Company has no national or multi-plant union contracts. Management believes that the Company's relations with its employees and their representatives are good. There can be no assurance, however, that new agreements will be reached without union action or will be on terms satisfactory to the Company. Regulations The Company is subject to the rules and regulations of various federal, state and local governmental agencies. These include, but are not limited to, the FDA, which regulates food and feed production, USDA, which regulates collection and production methods, EPA, which regulates air and water discharge requirements, as well as local and state agencies governing air and water discharge. Such rules and regulations may influence the Company's operating results at one or more facilities. The FDA rule on the feeding of mammalian protein to ruminant animals took effect in August of 1997 as a measure to prevent the potential occurrence of BSE (Bovine Spongiform Encephalopathy) in the United States. As expected, this rule has had little effect on the operations of the Company, and the Company is in compliance with the provisions of the rule. ITEM 2. PROPERTIES The Company's 44 operating facilities consist of 24 full service rendering plants, six yellow grease/trap grease plants, one blending plant, two research and technology plants, one spray dry plant, one edible plant, and 9 bakery recycling plants classified as discontinued operations. Except for nine leased facilities, all of these facilities are owned by the Company. In addition, the Company owns or leases 24 transfer stations in the United States and one transfer station in Canada that serve as collection points for routing raw material to the processing plants set forth below. Some locations service a single business segment while others service multiple business segments. The following is a listing of the Company's operating facilities by business segment: LOCATION DESCRIPTION Combined Rendering and Restaurant Services Business Segments - ------------------------------------------------------------ Alton, IA Rendering/Yellow Grease Billings, MT Rendering/Yellow Grease Blue Earth, MN Rendering/Yellow Grease Boise, ID Rendering/Yellow Grease Collinsville, OK Rendering/Yellow Grease Dallas, TX Rendering/Yellow Grease Detroit, MI Rendering/Yellow Grease/Trap Kansas City, KS Rendering/Yellow Grease Los Angeles, CA Rendering/Yellow Grease/Trap Milwaukee, WI Rendering/Yellow Grease Newark, NJ Rendering/Yellow Grease Norfolk, NE Rendering/Yellow Grease San Angelo, TX Rendering/Yellow Grease San Francisco, CA Rendering/Yellow Grease Sioux City, IA Rendering/Yellow Grease St. Louis, MO Rendering/Yellow Grease Tacoma, WA Rendering/Yellow Grease/Trap Bakery By-Products Rendering Business Segment Discontinued Business Segment - -------------------------- --------------------------------- Coldwater, MI Rendering Carteret, NJ Bakerage Fresno, CA Rendering Chicago, IL Bakerage Houston, TX Rendering Cincinnati, OH Bakerage Linkwood, MD Rendering Conley, GA Bakerage Omaha, NE Rendering Durham, NC Bakerage Omaha, NE Blending Kansas City, KS Bakerage Omaha, NE Edible Oils Lake City, GA Bakerage Turlock, CA Rendering Mt. Pleasant, TX Bakerage Wahoo, NE Rendering Terre Haute, IN Bakerage Restaurant Services Business Segment - ------------------------------------ Chicago, IL Trap Fort Lauderdale, FL Yellow Grease/Trap Henderson, NV Yellow Grease/Trap Houston, TX Yellow Grease/Trap Lake City, GA Yellow Grease Tampa, FL Yellow Grease Esteem Products Business Segment - -------------------------------- Norfolk, NE Spray Dry (online 2Q99) Norfolk, NE Research & Technology Wahoo, NE Research & Technology ITEM 3. LEGAL PROCEEDINGS (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. Underground Storage Tanks The Company's processing operations do not produce hazardous or toxic wastes; however, the Company does operate underground fuel storage tanks ("UST's") that are subject to federal, state and local laws and regulations. As of January 2, 1999, the Company has removed or closed all UST's. (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 ordinances 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 certain regulatory agencies related to the release of unacceptable odors from some if its processing facilities. 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 believes that any additional liability relative to such lawsuits and claims which may not be covered by insurance would not likely have a material adverse effect on the Company's financial position, although it could potentially have a material impact on the results of operations in any one year. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the Fiscal quarter ended January 2, 1999. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS On September 12, 1997 the common stock began trading on the American Stock Exchange under the symbol "DAR". Prior to that date, the common stock became eligible for trading on the Nasdaq National Market under the symbol "DARL" on September 8, 1994. On October 28, 1997, the Stockholders of the Company approved a three-for-one stock split. The following table sets forth, for the quarters indicated, the high and low sales prices per share for the common stock as reported on the American Stock Exchange or Nasdaq National Market retroactively restated to reflect the stock split. Fiscal Quarter Market Price High Low ----------------- ---------------- 1998: First Quarter $9.125 $7.875 Second Quarter $8.625 $7.125 Third Quarter $7.375 $3.375 Fourth Quarter $3.625 $2.500 1997: First Quarter $9.833 $7.333 Second Quarter $10.000 $6.917 Third Quarter $10.000 $8.000 Fourth Quarter $11.604 $8.500 As of March 24, 1999, there were 72 holders of record of the common stock. The Company has not declared or paid any dividend on the common stock since January 3, 1989. The Company's Credit Agreement restricts the Company's ability to pay dividends. The Company does not currently anticipate paying cash dividends on the common stock in the foreseeable future, but intends instead to retain future earnings for reinvestment in its business or reduction of its indebtedness. DARLING INTERNATIONAL INC. AND SUBSIDIARIES FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 2, 1999 PART II ITEM 6. SELECTED FINANCIAL DATA SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA The following table presents selected consolidated historical financial data for the periods indicated. The selected historical consolidated financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements of the Company for the three years ended January 2, 1999, January 3, 1998, and December 28, 1996, and the related notes thereto.
Fiscal 1998 Fiscal 1997 Fiscal 1996 Fiscal 1995 Fiscal 1994 Fifty-two Fifty-three Fifty-two Fifty-two Fifty-two Weeks Ended Weeks Ended Weeks Ended Weeks Ended Weeks Ended January 2, January 3, December 28, December 30, December 31, 1999 1998 1996 1995 1994 - --------------------------------------------- -------------- -------------- -------------- -------------- -------------- Operating Data: Net sales $337,031 $444,142 $467,325 $421,608 $354,333 -------- -------- -------- -------- -------- Cost of sales and operating expenses 283,822 362,787 375,436 336,248 282,908 Selling, general and administrative expenses 33,073 33,247 31,512 26,675 25,680 Depreciation and amortization 32,418 29,751 26,434 22,576 19,871 Provision for loss contingencies - - 6,075 - - -------- -------- -------- -------- -------- Operating income/(loss) (12,282) 18,357 27,868 36,109 25,874 Interest expense 12,466 13,070 12,981 13,311 15,206 Other (income)/expense, net 1,398 (1,348) (487) (322) (80) -------- -------- -------- -------- -------- Income/(Loss) from continuing operations before income taxes (26,146) 6,635 15,374 23,120 10,748 Income tax expense/(benefit) (9,347) 2,307 7,467 8,740 3,391 -------- -------- -------- -------- -------- Earnings/(Loss) from continuing operations (16,799) 4,328 7,907 14,380 7,357 Discontinued operations: Income/(Loss) from discontinued operations, net of tax (b) (637) 1,081 (233) - - Estimated loss on disposal, net of tax (b) (14,657) - - - - -------- -------- -------- -------- -------- Net income /(loss) $(32,093) $ 5,409 $ 7,674 $ 14,380 $ 7,357 Basic earnings/(loss) per common share (2.06) 0.35 0.50 0.95 0.49 Diluted earnings/(loss) per common share (2.06) 0.33 0.46 0.90 0.49 Weighted average shares outstanding 15,581 15,519 15,375 15,138 15,000 Diluted weighted average shares outstanding 15,581 16,461 16,674 15,966 15,000 Other Data: EBITDA (a) 20,135 48,108 60,271 58,685 45,745 Depreciation 26,429 24,074 21,529 18,595 15,994 Amortization 5,989 5,677 4,905 3,981 3,877 Capital expenditures 14,967 24,520 26,449 24,636 17,822 Balance Sheet Data: Working capital (deficiency) 3,070 5,225 (5,187) 12,936 (2,959) Total assets 263,166 305,973 320,050 266,062 245,505 Current portion of long-term debt 7,717 5,118 15,113 9,060 11,577 Total long-term debt less current portion 140,613 142,181 138,173 117,096 109,132 Stockholders' equity 37,946 69,756 64,033 54,833 39,482 (a) "EBITDA" represents, for any relevant period, operating profit plus depreciation and amortization and provision for loss contingencies. EBITDA is presented here not as a measure of operating results, but rather as a measure of the Company's debt service ability and is not intended to be a presentation in accordance with generally accepted accounting principles. (b) All prior period data has been reclassified in accordance with APB 30 to reflect the classification of the Bakery By-Products Recycling segment as a discontinued operation (see Note 14 in Notes to Consolidated Financial Statements).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the Company's financial condition and results of operations should be read in conjunction with the historical consolidated financial statements and notes thereto included in Item 8. Beginning in 1998, the Company was organized along operating business segments. See Note 16 of Notes to Consolidated Financial Statements. However, comparative information for these reporting segments does not exist for prior years. Accordingly, the discussion below is based on the Company as a whole. Results of Operations Fifty-two Week Fiscal Year Ended January 2, 1999 ("Fiscal 1998") Compared to Fifty-three Week Fiscal Year Ended January 3, 1998 ("Fiscal 1997") General The Company recorded a loss from continuing operations of $(16.8) million for Fiscal 1998 compared to earnings from continuing operations of $4.3 million for Fiscal 1997. Operating income decreased from $18.4 million for Fiscal 1997 to a $(12.3) million operating loss for Fiscal 1998. The decrease was primarily due to: 1) Declines in the volume of raw materials processed; 2) Approximately $2.7 million in increased depreciation and amortization expense related to acquisitions and capital expenditures; and 3) Significant decreases in all of the Company's finished goods prices. In 1998, the Company made a strategic decision to discontinue the operations of the Bakery By-Products Recycling segment in order to concentrate its financial and human resources on its other business segments. During Fiscal 1998, the Company recorded an estimated loss on the disposal of the discontinued segment, net of tax, of $14.7 million. The results of the Bakery By-Products Recycling segment have been reported separately as discontinued operations for each year presented. Net Sales The Company collects and processes animal by-products (fat, bones and offal), and used restaurant cooking oil to produce finished products of tallow, meat and bone meal, and yellow grease. Sales are significantly affected by finished goods prices, quality of raw material, and volume of raw material. Net sales include the sales of produced finished goods, grease trap services, and finished goods purchased for resale, which constitute less than 10% of total sales. During Fiscal 1998, net sales decreased by $107.1 million (24.1%) to $337.0 million as compared to $444.1 million during Fiscal 1997, primarily due to the following: 1) Decreases in overall finished goods prices resulted in an $86.4 million decrease in sales during Fiscal 1998 versus Fiscal 1997. The Company's average yellow grease prices were 8.87% lower, average tallow prices were 5.72% lower, and average meat and bone meal prices were 34.11% lower; 2) Decreases in the volume of raw materials processed resulted in a $36.8 million decrease in sales; 3) Decreases in finished hides sales accounted for $7.8 million in sales decreases; 4) Increases in products purchased for resale resulted in a $14.9 million increase; and 5) Increases in service charge income of $5.0 million and inventory changes of $4.0 million somewhat offset the 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 the raw material. The Company utilizes both fixed and formula pricing methods for the purchase of raw materials. Fixed prices are adjusted where possible as needed for changes in competition and significant changes in finished goods market conditions, while raw materials purchased under formula prices are correlated with specific finished goods prices. During Fiscal 1998, cost of sales and operating expenses decreased $79.0 million (21.8%) to $283.8 million as compared to $362.8 million during Fiscal 1997, primarily as a result of the following: 1) Lower raw material prices paid, correlating to decreased prices for fats and oils and meat and bone meal, resulted in decreases of $74.4 million in cost of sales; 2) Decreases in the volume of raw materials collected and processed resulted in a decrease of approximately $15.5 million in cost of sales and operating expenses; 3) Increases in products purchased for resale resulted in a $14.9 million increase; 4) Decreases in hides purchases accounted for $6.0 million in cost of sales decrease; 5) Decreases in operating expenses, primarily labor costs, resulted in a decrease of $1.9 million; and 6) Inventory changes resulted in an increase of $3.9 million. Selling, General and Administrative Expenses Selling, general and administrative expenses were $33.1 million during Fiscal 1998, a $0.1 million decrease from $33.2 million during Fiscal 1997. Decreases in payroll costs were offset by increases in consulting costs, advertising, and miscellaneous office costs. Depreciation and Amortization Depreciation and amortization charges increased $2.6 million, to $32.4 million during Fiscal 1998 as compared to $29.8 million during Fiscal 1997. This increase was due to additional depreciation on fixed asset additions and amortization on intangibles acquired as a result of various acquisitions. Interest Expense Interest expense decreased $0.6 million, to $12.5 million during Fiscal 1998 as compared to $13.1 million during Fiscal 1997, 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 $9.3 million for Fiscal 1998 consists of $8.5 million of federal tax benefit and $0.8 million for various state and foreign tax benefits. In Fiscal 1997, the Company recorded a $2.3 million income tax expense which consisted of $1.7 million of federal tax expense and $0.6 million for various state and foreign taxes. Capital Expenditures The Company made capital expenditures of $15.0 million during Fiscal 1998 as compared to $24.5 million in Fiscal 1997. Discontinued Operations The operations of the Bakery By-Products Recycling segment have been classified as discontinued operations. The results of operations, net of applicable income taxes, were a net loss of $0.6 million in Fiscal 1998 versus net earnings of $1.1 million in Fiscal 1997. This decrease was primarily a result of lower finished goods prices which are closely tied to corn markets. In addition, the Company recorded an estimated loss on disposal, net of tax, of $14.7 million to reflect the pending sale of this business segment which is expected to be finalized during the second quarter of Fiscal 1999. Fifty-three Week Fiscal Year Ended January 3, 1998, ("Fiscal 1997") Compared to Fifty-two Week Fiscal Year Ended December 28, 1996 ("Fiscal 1996") General The Company recorded earnings from continuing operations of $4.3 million for Fiscal 1997 compared to earnings from continuing operations of $7.9 million for Fiscal 1996. Operating income decreased from $27.9 million for Fiscal 1996 to $18.4 million for Fiscal 1997. During Fiscal 1996, the Company recorded $6.1 million in charges to the provision for loss contingency for costs related to environmental claims at the Company's Blue Earth, Minnesota plant. Operating income before the provision for loss contingency decreased $15.6 million from $34.0 million in Fiscal 1996 to $18.4 million in Fiscal 1997. The decrease was primarily due to: 1) Declines in the volume of raw materials processed; 2) Approximately $3.3 million in increased depreciation and amortization expense related to acquisitions and capital expenditures; and 3) A $1.7 million expenditure related to the buy back of stock options from the former president of the Company. These were offset by a $1.9 million insurance settlement of certain property and casualty claims with past insurers. Interest expense increased from $13.0 million in Fiscal 1996 to $13.1 million in Fiscal 1997. Net Sales During Fiscal 1997, net sales decreased 5.0%, to $444.1 million as compared to $467.3 million during Fiscal 1996 primarily due to the following: 1) The acquisition of Standard Tallow ("Standard") in 1996 resulted in an increase in sales of $4.2 million in Fiscal 1997 versus Fiscal 1996; 2) Overall finished goods prices were relatively flat and resulted in an increase of approximately $3.0 million in sales. Compared to Fiscal 1996 finished goods prices, the Company's average yellow grease prices were 14.9% lower, average tallow prices were 0.6% lower, and average meat and bone meal prices were 7.6% higher; 3) Decreases in the volume of raw materials processed resulted in a $31.2 million decrease in sales, offset by $4.6 million in yield gains; and 4) Decreases in finished hides prices and inventory changes accounted for an additional decrease of $3.8 million in sales. Cost of Sales and Operating Expenses During Fiscal 1997, cost of sales and operating expenses decreased $12.6 million (3.4%), to $362.8 million as compared to $375.4 million during Fiscal 1996 primarily as a result of the following: 1) Cost of sales and operating expenses grew $4.0 million due to the acquisition of Standard Tallow; 2) Decreases in the volume of raw material collected and processed resulted in a decrease of approximately $18.9 million in cost of sales and operating expenses; 3) Lower raw material prices paid, correlating to decreased prices for fats and oils resulted in decreases of $2.1 million in cost of sales; 4) Changes in inventory levels resulted in approximately $1.9 million increase in cost of sales; and 5) Finally, higher payroll and other costs resulted in a $2.5 million increase in operating expenses. Selling, General and Administrative Expenses and Provisions for Loss Contingency Selling, general and administrative expenses were $33.2 million during Fiscal 1997, a $1.6 million increase from $31.6 million during Fiscal 1996. During Fiscal 1997, the Company recorded a $1.7 million expenditure related to the buyback of stock options from the former president of the Company. The Company recorded $6.1 million in charges to the provision for loss contingency during Fiscal 1996 to cover estimated costs related to environmental violations at the Company's Blue Earth, Minnesota plant. Depreciation and Amortization Depreciation and amortization charges increased $3.4 million, to $29.8 million during Fiscal 1997 as compared to $26.4 million during Fiscal 1996. This increase was due to additional depreciation on fixed asset additions and amortization on intangibles acquired as a result of the acquisition of Standard Tallow. Interest Expense Interest expense increased $0.1 million, to $13.1 million during Fiscal 1997 as compared to $13.0 million during Fiscal 1996. Income Taxes The income tax expense of $2.3 million for Fiscal 1997 consists of $1.7 million of federal tax expense and $0.6 million for various state and foreign taxes. In Fiscal 1996, the Company recorded a $7.5 million income tax expense which consisted of $6.9 million of federal tax expense and $0.6 million for various state taxes, after taking into account the non-tax deductible nature of certain of the expenses related to the settlement of environmental claims at the Company's Blue Earth, Minnesota plant. Capital Expenditures The Company made capital expenditures of $24.5 million during Fiscal 1997 as compared to $26.4 million in Fiscal 1996. Discontinued Operations The operations for the Bakery By-Products Recycling segment have been classified as discontinued operations to conform to the 1998 presentation. The results of operations, net of applicable income taxes, were net earnings of $1.1 million in Fiscal 1997 versus a net loss of $0.2 million in Fiscal 1996. The increase is a result of higher finished goods prices and the reflection of 12 months of operations in Fiscal 1997 versus 4 months of operations in Fiscal 1996. LIQUIDITY AND CAPITAL RESOURCES Effective June 5, 1997, the Company entered into a Credit Agreement (the "Credit Agreement") which originally provided for borrowings in the form of a $50,000,000 Term Loan and $175,000,000 Revolving Credit Facility. On October 3, 1998, the Company entered into an 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 several existing events of default of certain financial covenants (the "Defaults") under the Credit Agreement, as amended, until November 9, 1998. 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 forbearance period was subsequently extended to January 22, 1999. On January 22, 1999, the Company and the banks entered into an Amended and Restated Credit Agreement (the "Amended and Restated Credit Agreement"). The Amended and Restated Credit Agreement provides for borrowing in the form of a $36,702,000 Term Loan and $135,000,000 Revolving Credit Facility. The Term Loan provides for $36,702,000 of borrowing. Under the Credit Agreement, the Term Loan bore interest, payable monthly at LIBOR (5.25% at January 2, 1999) plus a margin (the "Credit Margin") (3.0% at January 2, 1999). Under the Amended and Restated Credit Agreement, the Term Loan bears interest, payable quarterly, at a Base Rate (7.75% at January 2, 1999) plus a margin of 1%. Under the Amended and Restated Credit Agreement, the Term Loan is payable by the Company in quarterly installments of $1,800,000 on March 31, 1999; $1,200,000 on June 30, 1999; $2,000,000 on September 30 1999; $2,500,000 on December 31, 1999; $2,500,000 on March 31, 2000; $22,500,000 on June 30, 2000; $2,500,000 on September 30, 2000; and the balance due on December 31, 2000. As of January 2, 1999, $36,702,000 was outstanding under the Term Loan. The Revolving Credit Facility provides for borrowings up to a maximum of $135,000,000 with sublimits available for letters of credit and a swingline. Under the Credit Agreement, outstanding borrowings on the Revolving Credit Facility bore interest, payable monthly, at various LIBOR rates (ranging from 5.2044% to 5.25% at January 2, 1999) plus the Credit Margin as well as portions at a Base Rate (8.25% at January 2, 1999) or, for swingline advances, at the Base Rate. Under the Amended and Restated Credit Agreement, the Revolving Credit Facility bears interest, payable quarterly, at a Base Rate (7.75% at January 2, 1999) plus a margin of 1%. Additionally, the Company must pay a commitment fee equal to 0.375% per annum on the unused portion of the Revolving Credit Facility. Under the Amended and Restated Credit Agreement, the Revolving Credit Facility provides for a mandatory reduction of $2,500,000 on March 31, 2001, with the remaining balance due at maturity on June 30, 2001. As of January 2, 1999, $111,319,000 was outstanding under the Revolving Credit Facility. As of January 2, 1999, the Company had outstanding irrevocable letters of credit aggregating $12,429,000. Substantially all assets of the Company are either pledged or mortgaged as collateral for borrowings under the Amended and Restated Credit Agreement. The Amended and Restated Credit Agreement contains certain terms and covenants, which, among other matters, restrict the incurrence of additional indebtedness, the payment of cash dividends, the retention of certain proceeds from sales of assets, and the annual amount of capital expenditures, and requires the maintenance of certain minimum financial ratios. As of January 2, 1999, no cash dividends could be paid to the Company's stockholders pursuant to the Amended and Restated Credit Agreement. The Company has only very limited involvement with derivative financial instruments and does not use them for trading purposes. Interest rate swap agreements are used to reduce the potential impact of increases in interest rates on floating-rate long-term debt. At January 2, 1999, the Company was party to three interest rate swap agreements, each with a term of five years (all maturing June 27, 2002). Under terms of the swap agreements, the interest obligation on $70 million of Credit Agreement floating-rate debt was exchanged for fixed rate contracts which bear interest, payable quarterly, at an average rate of 6.6% plus a credit margin. On January 2, 1999, exclusive of the effect of discontinued operations, the Company had working capital of $3.1 million and its working capital ratio was 1.07 to 1 compared to working capital of $5.2 million and a working capital ratio of 1.11 to 1 on January 3, 1998. The decrease in working capital is primarily the result of decreases in accounts receivable balances resulting from decreased sales. In 1998, the Company made a strategic decision to dispose of the Bakery By-Products Recycling segment. The Company anticipates that the sale will take place on April 5, 1999. Net proceeds from the sale are required to be used to retire debt. The Company has credit available under the Revolving Credit Facility to cover its presently foreseeable capital needs, assuming it continues to meet the certain financial covenant tests under the Amended and Restated Credit Agreement dated January 22, 1999, which were adjusted downward to reflect the sharp decline in the prices the Company received for its finished products (meat and bone meal, yellow grease and tallow) in 1998. Such prices continued to decline early in 1999. The Company is implementing a plan to modify its business operations in light of the continued low prices for its finished goods. However, if prices for finished goods the Company sells were to materially decline below those prevailing in the first quarter of 1999, the Company might be forced to seek further covenant waivers under the Amended and Restated Credit Agreement in the later part of 1999. ACCOUNTING MATTERS The Company is 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. This 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 has been completed. 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 began in 1999, and remediation and replacement is expected to be completed by the end of third quarter 1999, if needed. 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 Annual Report on Form 10-K includes "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts included in the Annual Report on Form 10-K, including, without limitation, the statements under the sections entitled "Business," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Legal Proceedings" and located elsewhere herein regarding industry prospects and the Company's financial position are forward-looking statements. Although the Company believes that the expectation reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Important factors that could cause actual results to differ materially from the Company's expectations include: the Company's continued ability to obtain sources of supply for its rendering operations; general economic conditions in the European and Asian markets; and prices in the competing commodity markets which are volatile and are beyond the Company's control, and the Year 2000 readiness issue. 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. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS The principal market risk affecting the Company is exposure to changes in interest rates on debt. The Company does not use derivative instruments, exclusive of interest rate swaps. While the Company does have international operations, and operates in international markets, it considers its market risks in such activities to be immaterial. The Company uses interest rate swaps to hedge adverse interest rate changes on a portion of its long-term debt. At January 2, 1999, the Company had $70 million notational value of interest rate swaps outstanding. These swaps effectively changed the interest rate on $70 million in long-term debt to a 9.6% fixed rate through the period ending June 27, 2002. Assuming year end Fiscal 1998 variable rates and average long-term borrowings for Fiscal 1998, a one hundred basis point change in interest rates would impact net interest expense by $0.7 million, net of the effect of swaps. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Pages Independent Auditors' Report 21 Consolidated Balance Sheets- January 2, 1999 and January 3, 1998 22 Consolidated Statements of Operations- Three years ended January 2, 1999 23 Consolidated Statements of Stockholders' Equity - Three years ended January 2, 1999 24 Consolidated Statements of Cash Flows - Three years ended January 2, 1999 25 Notes to Consolidated Financial Statements - January 2, 1999 and January 3, 1998 26 Financial Statement Schedule: II - Valuation and Qualifying Accounts 45 All other schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and notes thereto. INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Darling International Inc.: We have audited the consolidated financial statements of Darling International Inc. and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Darling International Inc. and subsidiaries as of January 2, 1999 and January 3, 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended January 2, 1999, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG LLP Dallas, Texas March 5, 1999 DARLING INTERNATIONAL INC. AND SUBSIDIARIES Consolidated Balance Sheets January 2, 1999 and January 3, 1998 (in thousands, except share and per share data) January 2, January 3, ASSETS (note 8) 1999 1998 - --------------- ---------- ---------- Current assets: Cash and cash equivalents $ 12,317 $ 2,949 Accounts receivable 16,615 29,242 Inventories (note 3) 11,707 13,420 Prepaid expenses 3,977 3,167 Deferred income tax assets (note 10) 3,928 3,742 Other 671 378 ------- ------- Total current assets 49,215 52,898 Property, plant and equipment, net (note 4) 140,074 156,607 Collection routes and contracts, less accumulated amortization of $12,101 at January 2, 1999 and $7,668 at January 3, 1998 42,978 48,248 Goodwill, less accumulated amortization of $513 at January 2, 1999 and $286 at January 3, 1998 (note 2) 5,461 5,649 Other assets (note 5) 5,438 5,440 Net assets of discontinued operations (note 14) 20,000 37,131 ------- ------- $263,166 $305,973 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt (note 8) 7,717 $ 5,118 Accounts payable, principally trade 15,517 17,950 Accrued expenses (note 6) 22,255 23,694 Accrued interest (note 8) 656 911 ------- ------- Total current liabilities 46,145 47,673 Long-term debt, less current portion (note 8) 140,613 142,181 Other noncurrent liabilities (note 9) 24,836 20,957 Deferred income taxes (note 10) 13,626 25,406 ------- ------- Total liabilities 225,220 236,217 ------- ------- Stockholders' equity (notes 8, 10 and 11): Common stock, $.01 par value; 25,000,000 shares authorized, 15,589,077 and 15,563,037 shares issued and outstanding at January 2, 1999 and January 3, 1998 156 156 Preferred stock, $0.01 par value; 1,000,000 shares authorized, none issued - - Additional paid-in capital 35,063 34,780 Retained earnings 2,727 34,820 ------- ------- Total stockholders' equity 37,946 69,756 ------- ------- Commitments and contingencies (notes 7 and 15) $263,166 $305,973 ======= ======= The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Operations Three years ended January 2, 1999 (in thousands, except per share data) January 2, January 3, December 28, 1999 1998 1996 --------- --------- ---------- Net sales $337,031 $444,142 $467,325 ------- ------- ------- Costs and expenses: Cost of sales and operating expenses 283,822 362,787 375,436 Selling, general and administrative expenses 33,073 33,247 31,512 Depreciation and amortization 32,418 29,751 26,434 Provision for loss contingencies (note 15) - - 6,075 ------- ------- ------- Total costs and expenses 349,313 425,785 439,457 ------- ------- ------- Operating income/(loss) (12,282) 18,357 27,868 ------- ------- ------- Other income/(expense): Interest expense (note 8) (12,466) (13,070) (12,981) Other, net (1,398) 1,348 487 ------- ------- ------- Total other income/(expense) (13,864) (11,722) (12,494) ------- ------- ------- Income/(loss) from continuing operations before income taxes (26,146) 6,635 15,374 Income tax expense/(benefit) (note 10) (9,347) 2,307 7,467 ------- ------- ------- Earnings/(loss) from continuing operations (16,799) 4,328 7,907 Discontinued operations: Income/(loss) from discontinued operations, net of tax (637) 1,081 (233) Estimated loss on disposal of discontinued operations, net of tax (14,657) - - ------- ------- ------- Net earnings/(loss) $(32,093) $ 5,409 $ 7,674 ======= ======= ======= Basic earnings/(loss) per share: Continuing operations $ (1.08) $ 0.28 $ 0.51 Discontinued operations: Income/(loss) from operations (0.04) 0.07 (0.01) Estimated loss on disposal (0.94) - - ------- ------- ------- Total $ (2.06) $ 0.35 $ 0.50 ======= ======= ======= Diluted earnings (loss) per share: Continuing operations $ (1.08) $ 0.26 $ 0.47 Discontinued operations: Income/(loss) from operations (0.04) 0.07 (0.01) Estimated loss on disposal (0.94) - - --------- ------- ------- Total $ (2.06) $ 0.33 $ 0.46 ========= ======= =======
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Stockholders' Equity Three years ended January 2, 1999 (In thousands, except share data) Common stock ----------------------- Additional Number $.01 par paid-in Retained Total of shares value capital earnings stockholders' equity - ------------------------------------------------------------------------------------------------------------- Balances at December 30, 1995 15,256,530 $ 153 $32,943 $21,737 $54,833 Issuance of common stock 199,407 2 618 - 620 Tax benefits relating to January 1, 1994 - - 906 - 906 valuation allowance Net earnings - - - 7,674 7,674 ---------- ----- ------- ------- ------- Balances at December 28, 1996 15,455,937 155 34,467 29,411 64,033 Issuance of common stock 107,100 1 313 - 314 Net earnings - - - 5,409 5,409 ---------- ----- ------- ------- ------- Balances at January 3, 1998 15,563,037 156 34,780 34,820 69,756 ---------- ----- ------- ------- ------- Issuance of common stock 26,040 - 98 - 98 Tax benefits relating to January 1, 1994 - - 185 - 185 valuation allowance Net earnings (loss) - - - (32,093) (32,093) ---------- ----- ------- ------- ------- Balances at January 2, 1999 15,589,077 $ 156 $35,063 $ 2,727 $37,946 ========== ===== ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements.
DARLING INTERNATIONAL INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Three years ended January 2, 1999 (in thousands) January 2, January 3, December 28, 1999 1998 1996 ------------ ---------- ------------- Cash flows from operating activities: Earnings/(loss) from continuing operations $ (16,799) $ 4,328 $ 7,907 Adjustments to reconcile net earnings/(loss) to net cash provided by continuing operating activities: Depreciation and amortization 32,418 29,751 26,434 Deferred income tax expense/(benefit) (9,312) (1,641) (88) Loss/(gain) on sale of assets 982 (927) 294 Changes in operating assets and liabilities, net of effects from acquisitions: Accounts receivable 12,627 3,278 92 Inventories and prepaid expenses 749 (3,492) 2,932 Accounts payable and accrued expenses 265 (3,786) 8,710 Accrued interest (256) (3,365) 380 Other 3,403 (1,821) 985 --------- --------- ----------- Net cash provided by continuing operations 24,077 22,325 45,184 Net cash provided by discontinued operations 1,388 4,812 1,231 --------- --------- ----------- Net cash provided by operating activities 25,465 27,137 46,415 --------- --------- ----------- Cash flows from investing activities: Recurring capital expenditures (14,967) (20,230) (22,929) Capital expenditures related to acquisitions - (4,290) (3,520) Gross proceeds from sale of property, plant and equipment, assets held for disposition and other assets 4,090 6,055 507 Payments related to routes and other intangibles (341) (6,870) (707) Fair value of net assets acquired in acquisitions (note 1) - - (42,098) Net cash used in discontinued operations (1,999) (2,047) (2,182) --------- --------- ----------- Net cash used in investing activities (13,217) (27,382) (70,929) --------- --------- ----------- Cash flows from financing activities: Proceeds from long-term debt 99,980 283,124 20,124 Payments on long-term debt (99,084) (289,116) (33,223) Proceeds from acquisition debt - - 40,000 Contract payments (3,326) (1,544) (1,600) Deferred loan costs (118) (1,008) - Issuance of common stock 99 314 620 Net cash provided by/(used in) discontinued operations (460) (1,526) (100) --------- --------- ----------- Net cash provided by (used in) financing activities (2,909) (9,756) 25,821 --------- --------- ----------- Net (increase)/decrease in cash and cash equivalents from discontinued operations 29 745 (751) --------- --------- ----------- Net increase/(decrease) in cash and cash equivalents 9,368 (9,256) 556 Cash and cash equivalents at beginning of year 2,949 12,205 11,649 --------- --------- ----------- Cash and cash equivalents at end of year $ 12,317 $ 2,949 $ 12,205 ========= ========= =========== Supplemental disclosure of cash flow information: Cash paid during the year for: Interest $ 11,997 $17,114 $ 12,603 --------- ------ ---------- Income taxes, net of refunds $ (1,454) $ 4,345 $ 1,647 --------- ------- -----------
The accompanying notes are an integral part of these consolidated financial statements. DARLING INTERNATIONAL INC. Notes to Consolidated Financial Statements January 2, 1999 and January 3, 1998 (1) GENERAL (a) NATURE OF OPERATIONS Darling International Inc. (the "Company") believes it is the largest independent recycler of food processing by-products in the United States, operating a fleet of vehicles, through which it collects animal by-products and used restaurant cooking oil from butcher shops, grocery stores, independent meat and poultry processors and restaurants nationwide. The Company processes raw materials through facilities located throughout the United States into finished products, such as tallow, meat and bone meal, and yellow grease. The Company sells its finished products domestically and internationally to producers of soap, cosmetics, rubber, pet food and livestock feed for use as ingredients in such products. On October 22, 1993, the Company entered into a settlement agreement providing for a restructure of the Company's debt and equity and resolution of a class action lawsuit (the "Settlement"). On December 29, 1993, the Settlement was consummated and became binding on all original note holders. The Company has accounted for the Settlement using "Fresh Start Reporting" as of January 1, 1994, in accordance with Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the United States Bankruptcy Code" issued by the American Institute of Certified Public Accountants. Using a valuation of the Company performed by an independent appraiser, the Company determined the total reorganization value of all its assets to be approximately $236,294,000 as of January 1, 1994 and the Company's accumulated deficit was eliminated as of January 1, 1994. (b) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (1) Basis of Presentation The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. As disclosed in Note 14, the operations of IPC, as defined below, are classified as discontinued operations. As such, certain prior year balances have been reclassified in order to conform to current year presentation. (2) Fiscal Year The Company has a 52/53 week fiscal year ending on the Saturday nearest December 31. Fiscal years for the consolidated financial statements included herein are for the 52 weeks ended January 2, 1999, the 53 weeks ended January 2, 1999, and the 52 weeks ended December 28, 1996. (3) Inventories Inventories re stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. (4) Property, Plant and Equipment Property, plant and equipment are recorded at cost. Depreciation is computed by the straight-line method over the estimated useful lives of assets: 1) Buildings and improvements - 24 to 30 years; 2) Machinery and equipment - 3 to 8 years; and 3) Vehicles - 4 to 6 years. Maintenance and repairs are charged to expense as incurred and expenditures for major renewals and improvements are capitalized. (5) Collection Routes and Contracts Collection routes, restrictive covenants and consulting agreements are recorded at cost and are amortized using the straight-line method over periods ranging from 3 to 15 years. (6) Goodwill Goodwill, which represents the excess of purchase price over fair value of net assets acquired, is amortized on a straight-line basis over the expected periods to be benefited, not exceeding 30 years. Annually, the Company makes an assessment to determine the recoverability of this intangible asset. (7) Environmental Expenditures Environmental expenditures incurred to mitigate or prevent environmental contamination that has yet to occur and that otherwise may result from future operations are capitalized. Expenditures that relate to an existing condition caused by past operations and that do not contribute to current or future revenues are expensed or charged against established environmental reserves. Reserves are established when environmental assessments and/or clean-up requirements are probable and the costs are reasonably estimable. (8) Income Taxes The Company accounts for income taxes using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (9) Earnings Per Common Share Basic earnings per common share are computed by dividing net earnings attributable to outstanding common stock by the weighted average number of common stock shares outstanding during the year. Diluted earnings per common share are computed by dividing net earnings attributable to outstanding common stock by the weighted average number of common shares outstanding during the year increased by dilutive common equivalent shares (stock options) determined using the treasury stock method, based on the average market price exceeding the exercise price of the stock options. The weighted average common shares used for basic earnings per common share was 15,581,000 15,519,000 and 15,375,000 for 1998, 1997 and 1996, respectively. The effect of dilutive stock options added 942,000 and 1,299,000 shares for 1997 and 1996, respectively, for the computation of diluted earnings per common share. For 1998, the effect of all outstanding stock options were excluded from diluted earnings per common share because the effect was anti-dilutive. (10) Stock Option Plans The Company accounts for its stock option plan in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. On January 1, 1996, the Financial Accounting Standards Board issued SFAS No. 123, Accounting for Stock-Based Compensation, which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. (11) Statements of Cash Flows The Company considers all short-term highly liquid instruments, with an original maturity of three months or less, to be cash equivalents. (12) Supplemental Schedule of Non-Cash Investing and Financing Activities During the year ended December 28, 1996, non-cash investing and financing activities included the purchase of 100% of the common stock of Standard Tallow for $10,400,000. Assets acquired, liabilities assumed, and consideration paid for this acquisition are as follows (in thousands): Fair value of assets acquired, less cash $ 20,066 Liabilities assumed and incurred (11,094) ------- Fair value of net assets acquired 8,972 Bank debt incurred (10,400) ------- Cash (received)paid upon purchase $ (1,428) ======== In addition, the Company purchased 100% of the common stock of International Processing Corporation and International Transportation Service, Inc. (collectively referred to as "IPC") for $30,000,000. Assets acquired, liabilities assumed and consideration paid for this acquisition are as follows (in thousands): Fair value of assets acquired, less cash $ 40,836 Liabilities assumed and incurred (14,710) ------- Fair value of net assets acquired 33,126 Bank debt incurred (29,600) ------- Cash (received)paid upon purchase $ 3,526 ======== (13) Use of Estimates The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (14) Impairment of Long-Lived Assets and Long-Lived Assets To Be Disposed Of The Company applies the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. (15) Financial Instruments The carrying amount of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximates fair value due to the short maturity of these instruments. The carrying amount of $70,000,000 of outstanding borrowings under the Credit Agreement at January 2, 1999, approximated $70,207,000 since these borrowings bear interest at a fixed rate pursuant to an interest rate swap. The carrying amount of the balance of outstanding borrowings under the Credit Agreement at January 2, 1999 and January 3, 1998 approximated fair value since the borrowings bear interest at current market rates. (16) Derivative Instruments The Company's use of derivative instruments is limited to interest rate swaps which are entered into with the intent of managing overall borrowing costs. The Company does not use derivative instruments for trading purposes. The Company has entered into interest rate swaps to effectively fix the interest rate of a portion of its long term debt. The notational amount of the swaps fixes approximately 48% of total long term debt at January 2, 1999, at an underlying rate of 7.85%. These swaps settle at maturity, June 27, 2002. The Company's credit risk related to interest rate swaps is considered minimal due to strong creditworthy counterparties, settlement on a net basis, and short durations. (2) ACQUISITIONS During Fiscal 1997, as part of the Company's strategy to expand its presence in restaurant grease collection and the grease trap business, the Company made the following acquisitions: Enduro, Midwest Recycling, and Torvac, totaling $11.7 million which included goodwill acquired of $2.2 million. On May 8, 1996, the Company acquired 100% of the common stock of Standard Tallow for $10,400,000. The Company recorded goodwill associated with this acquisition in the amount of $4.3 million, which will be amortized over 30 years. On August 30, 1996, the Company acquired 100% of the common stock of IPC for $32,800,000. The Company recorded goodwill associated with this acquisition in the amount of $15.9 million which was being amortized over 30 years (see Note 14) Subsequent funding of approximately $3,600,000 was made into IPC to increase the overall investment of the Company. (3) INVENTORIES A summary of inventories follows (in thousands): January 2, January 3, 1999 1998 ----------- ----------- Finished product $ 11,065 $ 12,863 Supplies and other 642 557 -------- -------- $ 11,707 $ 13,420 ======== ======== (4) PROPERTY, PLANT AND EQUIPMENT A summary of property, plant and equipment follows (in thousands): January 2, January 3, 1999 1998 ------------- ------------ Land $ 18,089 $ 18,506 Buildings and improvements 25,720 23,243 Machinery and equipment 137,524 125,293 Vehicles 51,250 51,731 Construction in process 8,204 16,178 -------- -------- 240,787 234,951 Accumulated depreciation (100,713) (78,344) -------- -------- $ 140,074 $ 156,607 ======== ======== (5) OTHER ASSETS Other assets consist of the following (in thousands): January 2, January 3, 1999 1998 ------------- ---------- Prepaid pension cost (note 12) $ 3,009 $ 2,612 Deposits and other 2,429 2,828 -------- ------- $ 5,438 $ 5,440 ======= ======= (6) ACCRUED EXPENSES Accrued expenses consist of the following (in thousands): January 2, January 3, 1999 1998 ------------- ------------ Insurance $ 3,778 $ 3,988 Compensation and benefits 4,654 5,259 Utilities and sewage 2,649 2,661 Reserve for environmental and litigation matters (note 15) 2,000 2,000 Income taxes payable 231 2,431 Other 8,943 7,355 ------- ------- $ 22,255 $ 23,694 ======= ======= (7) LEASES The Company leases nine plants and storage locations, four office locations and a portion of its transportation equipment. Leases are noncancellable and expire at various times through the year 2028. Minimum rental commitments under noncancellable leases as of January 2, 1999, are as follows (in thousands): Period Ending Fiscal Operating Leases -------------------- ---------------- 1999 2,122 2000 1,989 2001 1,819 2002 1,694 2003 978 Thereafter 8,632 ------- Total $ 17,234 ====== Rent expense for the years ended January 2, 1999, January 3, 1998, and December 28, 1996 was $1,695,867, $1,283,035 and $1,210,687, respectively. (8) LONG-TERM DEBT Long-term debt consists of the following (in thousands): January 2, January 3, 1999 1998 ---------- ----------- Credit Agreement: Revolving Credit Facility $ 111,319 $ 100,875 Term Loan 36,702 46,250 Other notes 309 174 -------- -------- 148,330 147,299 Less current maturities 7,717 5,118 -------- -------- $ 140,613 $ 142,181 ======== ======== CREDIT AGREEMENT Effective June 5, 1997, the Company entered into a Credit Agreement (the "Credit Agreement") which originally provided for borrowings in the form of a $50,000,000 Term Loan and $175,000,000 Revolving Credit Facility. On October 3, 1998, the Company entered into an 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 several existing events of default of certain financial covenants (the "Defaults") under the Credit Agreement, as amended, until November 9, 1998. 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 forbearance period was subsequently extended to January 22, 1999. On January 22, 1999, the Company and the banks entered into an Amended and Restated Credit Agreement (the "Amended and Restated Credit Agreement"). The Amended and Restated Credit Agreement provides for borrowing in the form of a $36,702,000 Term Loan and $135,000,000 Revolving Credit Facility. The Term Loan provides for $36,702,000 of borrowing. Under the Credit Agreement, the Term Loan bore interest, payable monthly at LIBOR (5.25% at January 2, 1999) plus a margin (the "Credit Margin") (3.0% at January 2, 1999). Under the Amended and Restated Credit Agreement, the Term Loan bears interest, payable quarterly, at a Base Rate (7.75% at January 2, 1999) plus a margin of 1%. Under the Amended and Restated Credit Agreement, the Term Loan is payable by the Company in quarterly installments of $1,800,000 on March 31, 1999; $1,200,000 on June 30, 1999; $2,000,000 on September 30 1999; $2,500,000 on December 31, 1999; $2,500,000 on March 31, 2000; $22,500,000 on June 30, 2000; $2,500,000 on September 30, 2000; and the balance due on December 31, 2000. As of January 2, 1999, $36,702,000 was outstanding under the Term Loan. The Revolving Credit Facility provides for borrowings up to a maximum of $135,000,000 with sublimits available for letters of credit and a swingline. Under the Credit Agreement, outstanding borrowings on the Revolving Credit Facility bore interest, payable monthly, at various LIBOR rates (ranging from 5.2044% to 5.25% at January 2, 1999) plus the Credit Margin as well as portions at a Base Rate (8.25% at January 2, 1999) or, for swingline advances, at the Base Rate. Under the Amended and Restated Credit Agreement, the Revolving Credit Facility bears interest, payable quarterly, at a Base Rate (7.75% at January 2, 1999) plus a margin of 1%. Additionally, the Company must pay a commitment fee equal to 0.375% per annum on the unused portion of the Revolving Credit Facility. Under the Amended and Restated Credit Agreement, the Revolving Credit Facility provides for a mandatory reduction of $2,500,000 on March 31, 2001, with the remaining balance due at maturity on June 30, 2001. As of January 2, 1999, $111,319,000 was outstanding under the Revolving Credit Facility. As of January 2, 1999, the Company had outstanding irrevocable letters of credit aggregating $12,429,000. Substantially all assets of the Company are either pledged or mortgaged as collateral for borrowings under the Amended and Restated Credit Agreement. The Amended and Restated Credit Agreement contains certain terms and covenants, which, among other matters, restrict the incurrence of additional indebtedness, the payment of cash dividends, the retention of certain proceeds from sales of assets, and the annual amount of capital expenditures, and requires the maintenance of certain minimum financial ratios. As of January 2, 1999, no cash dividends could be paid to the Company's stockholders pursuant to the Amended and Restated Credit Agreement. Certain financial covenant tests under the Amended and Restated Credit Agreement were adjusted downward to reflect the sharp decline in the prices the Company received for its finished products in 1998. Such prices continue to decline early in 1999. If prices for the Company's finished goods are to decline below those prevailing in the first quarter of 1999, the Company might be forced to seek further covenant waivers under the Amended and Restated Credit Agreement in the later part of 1999. The Company has only very limited involvement with derivative financial instruments and does not use them for trading purposes. Interest rate swap agreements are used to reduce the potential impact of increases in interest rates on floating-rate long-term debt. At January 2, 1999, the Company was party to three interest rate swap agreements, each with a term of five years (all maturing June 27, 2002). Under terms of the swap agreements, the interest obligation on $70 million of Credit Agreement floating-rate debt was exchanged for fixed rate contracts which bear interest, payable quarterly, at an average rate of 6.6% plus a credit margin. SUBORDINATED NOTES On June 27, 1997, the Company redeemed Subordinated Notes with a face amount of $69,976,000, using proceeds from the Revolving Credit Facility. OTHER Aggregate maturities of long-term debt subsequent to January 2, 1999 are as follows (in thousands): 1999 7,717 2000 29,294 2001 111,319 (9) OTHER NONCURRENT LIABILITIES Other noncurrent liabilities consist of the following (in thousands): January 2, January 3, 1999 1998 ---------- ----------- Reserve for insurance, environmental, litigation and tax matters (note 15) $16,237 $10,212 Liabilities associated with consulting and noncompete agreements 7,201 9,487 Other 1,398 1,258 ------- ------- $24,836 $20,957 ======= ======= The Company sponsors a defined benefit health care plan that provides postretirement medical and life insurance benefits to certain employees. The Company accounts for this plan in accordance with Statement of Financial Accounting Standards No. 106 and the effect on the Company's financial position and results of operations is immaterial. (10) INCOME TAXES Income tax expense (benefit) attributable to income (loss) from continuing operations before income taxes consists of the following (in thousands): January 2, January 3, December 28, 1999 1998 1996 ------------ ----------- ------------- Current: Federal $ (34) $ 2,813 $ 6,944 State - 262 611 Foreign - 14 - Deferred: Federal (8,529) (1,099) (62) State (784) (94) (26) Foreign (97) 411 - ------ ------ ------ $(9,347) $ 2,307 $ 7,467 ====== ====== ====== Income tax expense for the years ended January 2, 1999, January 3, 1998, and December 28, 1996, differed from the amount computed by applying the statutory U.S. federal income tax rate (35%) to income (loss) from continuing operations before income taxes as a result of the following (in thousands): January 2, January 3, December 28, 1999 1998 1996 ----------- ---------- ----------- Computed "expected" tax expense $ (9,151) $ 2,322 $ 5,381 State income taxes, net of federal benefit (510) 109 368 Tax-exempt income of foreign sales corporation 116 (463) (323) Nondeductible fines and penalties (note 15) - - 1,058 Other, net 198 339 983 ------- ------- -------- $ (9,347) $ 2,307 $ 7,467 ======= ======= ======= The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at January 2, 1999 and January 3, 1998 are presented below (in thousands): January 2, January 3, 1999 1998 ----------- ----------- Deferred tax assets: Net operating loss carryforwards $ 32,290 $ 28,582 Foreign tax credits and capital loss carryforwards - 4,434 Loss contingency reserves 6,345 5,191 Net assets of discontinued operations 6,654 - Other 1,767 1,473 --------- -------- Total gross deferred tax assets 47,056 39,680 Less valuation allowance (20,616) (19,472) -------- ------- Net deferred tax assets 26,440 20,208 -------- -------- Deferred tax liabilities: Collection routes and contracts (9,520) (10,754) Property, plant and equipment (25,458) (29,861) Other (1,160) (1,252) -------- -------- Total gross deferred tax liabilities (36,138) (41,867) ------- ------- $ (9,698) $(21,659) ======== ======= The portion of the deferred tax assets and liabilities expected to be recognized in Fiscal 1999 has been recorded at January 2, 1999, in the accompanying consolidated balance sheet as a net current deferred income tax asset of $3,928,000. The remaining non-current deferred tax assets and liabilities have been recorded as a net deferred income tax liability of $13,626,000 at January 2, 1999 in the accompanying consolidated balance sheet. The valuation allowance for deferred tax assets as of January 2, 1999 and January 3, 1998 was $20,616,000 and $19,472,000, respectively. The net changes in the total valuation allowance for the years ended January 2, 1999 and January 3, 1998 was an increase of $1,144,000 and a decrease of $190,000. The Company believes that the remaining net deferred tax assets at January 2, 1999 and January 3, 1998 will be realized primarily through future reversals of existing taxable temporary differences. At January 2, 1999, the Company had net operating loss carryforwards for federal income tax purposes of approximately $84,972,000 which are available to offset future federal taxable income through 2013. The availability of the net operating loss carryforwards to reduce future taxable income is subject to various limitations. As a result of the change in ownership, the Company believes utilization of its pre-1994 net operating loss carryforwards ($75,154,000) is limited to $3,400,000 per year for the remaining life of the net operating losses. At January 2, 1999, foreign tax credits of approximately $2,702,000 and capital loss carryforwards of approximately $313,000 expired. The Company reports tax benefits utilized related to the January 1, 1994 valuation allowance ($185,000 in 1998 and $906,000 in 1996) as a direct addition to additional paid-in capital. (11) STOCKHOLDERS' EQUITY At December 29, 1993, the Company granted options to purchase 384,615 shares of the Company's common stock to the former owners of the Redeemable Preferred Stock. The options have a term of ten years from the date of grant and may be exercised at a price of $3.45 per share (approximated market value at the date of grant). The 1993 Flexible Stock Option Plan and the 1994 Employee Flexible Stock Option Plan provide for the granting of stock options to key officers and salaried employees of the Company and its subsidiaries. Options to purchase common stock were granted at a price approximating fair market value at the date of grant. Options granted under the plans expire ten years from the date of grant. Vesting occurs on each anniversary of the grant date as defined in the specific option agreement. The plans also provide for the acceleration by one year of vesting of all non-vested shares upon the termination of the employee's employment in certain circumstances or upon a change in management control. The Non-Employee Directors Stock Option Plan provides for the granting of options to non-employee directors of the Company. As of January 2, 1999, options to purchase 294,000 shares of common stock had been granted pursuant to this plan. The options have a term of ten years from the date of grant and may be exercised at a price of $3.33 - $9.042 per share (approximated market value at the date of grant). The options vest 25% six months after the grant date and 25% on each anniversary date thereafter. The per share weighted average fair value of stock options granted during 1998, 1997 and 1996 was $5.57, $7.34 and $4.63, respectively, on the date of grant using the Black Scholes option-pricing model with the following weighted assumptions: 1998 1997 1996 ------------------------------------- Expected dividend yield 0.0% 0.0% 0.0% Risk-free interest rate 5.25% 5.25% 6.6% Expected life 10 years 10 years 10 years Expected volatility 3.79-4.06 4.12-4.43 6.20 The Company applies APB Opinion No. 25 in accounting for its Plans and, accordingly, no compensation cost has been recognized for its stock options in the financial statements as stock options were granted at market value on the grant date. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's earnings (loss) from continuing operations would have been reduced to the pro forma amounts indicated below (in thousands, except per share): 1998 1997 1996 ------------------------------------- Earnings (loss) from continuing operations As reported $(16,799) $4,328 $7,907 Pro forma $(16,963) $3,293 $7,337 Basic earnings (loss) per common share from continuing operations As reported $(1.08) $0.28 $0.51 Pro forma $(1.09) $0.21 $0.47 Pro forma net earnings reflects only options granted since 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma amounts presented above because compensation cost is reflected over the options vesting period and compensation cost for options granted prior to January 1, 1995 are not considered. A summary of transactions for all stock options granted follows: Option exercise Weighted-avg. Number of price exercise price shares per share per share ---------------------------------------------- Options outstanding at December 30, 1995 2,723,727 $2.857-9.250 $3.9269 Granted 430,200 8.792-10.292 9.6183 Canceled (29,190) 2.857-4.125 3.4018 Exercised (199,407) 2.857-4.125 3.0998 ---------- Options outstanding at December 28, 1996 2,925,330 2.857-10.292 4.8255 Granted 683,062 8.25-10.875 9.25 Canceled (450,300) 2.857-10.292 3.5062 Exercised (107,100) 3.33-8.833 4.5346 ---------- Options outstanding at January 3, 1998 3,050,992 2.857-10.875 6.0191 Granted 96,900 3.4375-8.687 7.4138 Canceled (43,530) 4.125-10.292 8.3417 Exercised (26,040) 3.45-4.125 3.8139 ---------- Options outstanding at January 2, 1999 3,078,322 $2.857-10.875 $6.0489 ========= Options exercisable at January 2, 1999 2,443,745 $2.857-10.875 $5.2529 ========= At January 2, 1999, the range of exercise prices and weighted-average remaining contractual life of outstanding options was $2.857 - $10.875 and 6.6 years, respectively. At January 2, 1999 and January 3, 1998, the number of options exercisable was 2,443,745 and 1,927,382, respectively, and the weighted-average exercise price of those options was $5.2529 and $4.7302, respectively. (12) EMPLOYEE BENEFIT PLANS The Company has retirement and pension plans covering substantially all of its employees. Most retirement benefits are provided by the Company under separate final-pay noncontributory pension plans for all salaried and hourly employees (excluding those covered by union-sponsored plans) who meet service and age requirements. Benefits are based principally on length of service and earnings patterns during the five years preceding retirement. The Company's funding policy for those plans is to contribute annually not less than the minimum amount required nor more than the maximum amount that can be deducted for federal income tax purposes. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. The following table sets forth the plans' funded status and amounts recognized in the Company's consolidated balance sheets based on the measurement date (October 1, 1998 and 1997) (in thousands): January 2, January 3, 1999 1998 --------- ---------- Change in benefit obligation: Benefit obligation at beginning of year $40,222 $34,504 Service cost 1,360 1,024 Interest cost 2,835 2,557 Amendments 113 95 Actuarial loss 4,684 3,960 Benefits paid (2,108) (1,918) ------- ------- Benefit obligation at end of year 47,106 40,222 ------ ------ Change in plan assets: Fair value of plan assets at beginning of year 42,313 35,212 Actual return on plan assets 1,398 8,184 Employer contribution 1,271 835 Benefits paid (2,108) (1,918) ------- ------- Fair value of plan assets at end of year 42,874 42,313 ------ ------ Funded status (4,232) 2,091 Unrecognized actuarial loss (gain) 6,609 (59) Unrecognized prior service cost 632 580 -------- ---------- Prepaid benefit cost $ 3,009 $ 2,612 ======== ======== Net pension cost includes the following components (in thousands): January 2, January 3, December 28, 1999 1998 1996 ---------- ----------- ----------- Service cost $1,360 $1,024 $ 1,033 Interest cost 2,835 2,557 2,463 Expected return on plan assets (3,870) (8,708) (2,737) Net amortization and deferral 70 5,793 (154) ------ ------ ------- Net pension cost $ 395 $ 666 $ 605 ====== ====== ======= Assumptions used in accounting for the employee benefit pension plans were: January 2, January 3, December 28, 1999 1998 1996 ------------------------------------ Weighted average discount rate 6.75% 7.25% 7.75% Rate of increase in future compensation levels 5.80% 5.15% 5.02% Expected long-term rate of return on assets 9.25% 9.25% 8.75% The Company participates in several multi-employer pension plans which provide defined benefits to certain employees covered by labor contracts. These plans are not administered by the Company and contributions are determined in accordance with provisions of negotiated labor contracts. Information with respect to the Company's proportionate share of the excess, if any, of the actuarially computed value of vested benefits over these pension plans' net assets is not available. The cost of such plans amounted to $1,306,367, $1,529,000 and $1,333,000 for the years ended January 2, 1999, January 3, 1998, and December 28, 1996, respectively. (13) CONCENTRATION OF CREDIT RISK Concentration of credit risk is limited due to the Company's diversified customer base and the fact that the Company sells commodities. No single customer accounted for more than 10% of the Company's net sales in 1998, 1997 and 1996. (14) DISCONTINUED OPERATIONS In 1998, the Company made a decision to discontinue the operations of the Bakery By-Products Recycling segment in order to concentrate its financial and human resources on its other businesses. The Bakery By-Products Recycling segment was comprised of International Processing Corporation, International Transportation Services, Inc., and Food By-Products Recycling (collectively referred to as "IPC"). Both International Processing Corporation and International Transportation Services, Inc., are wholly-owned subsidiaries of the Company. Food By-Products Recycling is a wholly-owned subsidiary of International Transportation Services, Inc. On February 10, 1999, the Company announced the execution of a Stock Purchase Agreement dated February 9, 1999, with Scope Products, Inc., a wholly-owned subsidiary of Scope Industries, pursuant to which the Company agreed to sell all the issued and outstanding stock of IPC for a total consideration of $22,000,000. $2,000,000 of the total consideration will be deposited in an escrow account to cover certain post-closing adjustments and the Company's indemnification obligations under the Agreement. The closing of the transaction is certain to subject conditions, including receipt of necessary approval under the Hart-Scott-Rodino Act. Accordingly, there can be no assurance that the conditions to closing will be satisfied or waived by the parties or that the sale will be consummated. The Company anticipates that the sale will take place on April 5, 1999. The anticipated disposal of IPC has been accounted for as a discontinued operation and, accordingly, its net assets have been segregated from continuing operations in the accompanying consolidated balance sheets, statements of operations and cash flows and the Company's financial results of prior periods were reclassified. The condensed statement of operations relating to discontinued operations for the years ended January 2, 1999 (through the measurement date of November 3, 1998), January 3, 1998, and December 28, 1996 follows (in thousands): January 2, January 3, December 28, 1999 1998 1996 --------- ---------- ----------- Net sales $37,456 $54,329 $21,590 Cost and expenses 38,484 52,586 21,985 ------ ------ ------ Income (loss) before income taxes (1,028) 1,743 (395) Provision for income taxes (391) 662 (162) ------- ------- ------- Net earnings (loss) $ (637) $ 1,081 $ (233) ====== ====== ======= Included in the estimated loss on disposition of discontinued operations is a net tax benefit of $2.2 million. In addition, no interest expense has been allocated to discontinued operations. At January 2, 1999, net assets of discontinued operations on the consolidated balance sheets include primarily property, plant and equipment, collection routes and contracts, and intangible assets, less current liabilities to be assumed upon disposal. (15) 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. Underground Storage Tanks The Company's processing operations do not produce hazardous or toxic wastes; however, the Company does operate underground fuel storage tanks ("UST's") that are subject to federal, state and local laws and regulations. As of January 2, 1999, the Company has removed or closed all UST's. Blue Earth In Fiscal 1996, the Company recorded a provision for loss contingency of $6.1 million to cover the expected costs of settlement as well as legal, environmental and other related costs for the previously disclosed contingencies at the Company's Blue Earth rendering plant. (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 ordinances 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 certain regulatory agencies related to the release of unacceptable odors from some if its processing facilities. The Company purchases its workers compensation, auto and general liability insurance on a retrospective basis. The Company accrues its expected ultimate costs related to claims occurring during each fiscal year and carries this accrual as a reserve until such claims are paid by the Company. The Company has established loss reserves for insurance, environmental and litigation matters as a result of the matters discussed above. Although the ultimate liability cannot be determined with certainty, management of the Company believes that reserves for contingencies are reasonable and sufficient based upon present governmental regulations and information currently available to management. The Company estimates the range of possible losses related to environmental and litigation matters, based on certain assumptions, is between $2.5 million and $8.5 million at January 2, 1999. The accrued expenses and other noncurrent liabilities classifications in the Company's consolidated balance sheets include reserves for insurance, environmental and litigation contingencies of $19.2 million and $15.7 million at January 2, 1999 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. (16) BUSINESS SEGMENTS During Fiscal 1998, the Company adopted SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information. The Company operated on a worldwide basis within four industry segments: Rendering, Restaurant Services, Esteem Products and Bakery By-Products Recycling. Prior to Fiscal 1998, Rendering and Restaurant Services were not separately accounted for and therefore separate segment data does not exist for Fiscal 1997 and 1996 as it is impractical to create such data. Esteem Products was newly created in Fiscal 1998. The measure of segment profit (loss) includes all revenues, operating expenses (excluding certain amortization of intangibles) and selling, general and administrative expenses incurred at all operating locations and exclude general corporate expenses. Rendering Rendering consists of the collection and processing of animal by-products from butcher shops, grocery stores and independent meat and poultry processors, converting these wastes into similar products such as useable oils and proteins utilized by the agricultural and oleochemical industries. Restaurant Services Restaurant Services consists of the collection of used cooking oils from restaurants and recycling them into similar products such as high-energy animal feed ingredients and industrial oils. Restaurant Services also provides grease trap servicing. Prior to Fiscal 1998, the activities conducted by this business segment were considered part of the Rendering segment. Esteem Products Esteem Products consists of the development and marketing of enhanced feed ingredients from existing raw material streams utilizing advanced biochemistry and animal nutrition technologies. Bakery By-Products Recycling Bakery By-Products Recycling consists of the collection and processing of bakery and confectionery by-products from bakeries, snack food producers, confectioners, and pasta manufacturers, converting them into a high-energy ingredient used as a component of livestock and poultry rations. This business segment has been classified as a discontinued operation (see Note 14). Included in corporate activities are general corporate expenses and the amortization of intangibles related to "Fresh Start Reporting." Assets of corporate activities include cash, unallocated prepaid expenses, deferred tax assets, prepaid pension, and miscellaneous other assets. Business Segment Net Revenues (in thousands): January 2, 1999 ---------------- Rendering: Trade $275,424 Intersegment 29,210 ------- 304,634 ------- Restaurant Services: Trade 61,451 Intersegment 7,521 ------- 68,972 ------- Esteem Products: Trade 156 Intersegment 106 ------- 262 ------- Eliminations (36,837) ------- Total $337,031 ======= Business Segment Profit (Loss) (in thousands): January 2, 1999 ---------- Rendering $5,231 Restaurant Services 773 Esteem Products (2,792) Corporate Activities (16,892) Interest expense (12,466) ------- Income (loss) from continuing operations before income taxes $(26,146) ======= Certain assets are not attributable to a single operating segment but instead relate to multiple operating segments operating out of individual locations. These assets are utilized by both the Rendering and Restaurant Services business segments and are identified in the category Combined Rend./Rest. Svcs. Depreciation of Combined Rend./Rest. Svcs. assets is allocated based upon an estimate of the percentage of corresponding activity attributed to each segment. Additionally, although intangible assets are allocated to operating segments, the amortization related to the adoption of "Fresh Start Reporting" is not considered in the measure of operating segment profit (loss) and is included in Corporate Activities. Business Segment Assets (in thousands): January 2, 1999 ---------- Rendering $84,904 Restaurant Services 32,100 Combined Rend./Rest. Svcs. 93,080 Esteem Products 3,097 Corporate Activities 29,985 Net assets of discontinued operations 20,000 -------- Total $263,166 ======= Business Segment Property, Plant and Equipment (in thousands): January 2, 1999 ---------- Depreciation and amortization: Rendering $21,756 Restaurant Services 7,132 Esteem Products 455 Corporate Activities 3,075 ------ Total $32,418 ====== Additions: Rendering $6,821 Restaurant Services 1,105 Combined Rend./Rest. Svcs. 3,948 Esteem Products 2,764 Corporate Activities 329 ------ Total $14,967 ====== The Company has no material foreign operations, but exports a portion of its products to customers in various foreign countries. Geographic Area Net Trade Revenues (in thousands): January 2, January 3, December 28, 1999 1998 1996 ------------- ----------- ------------- United States $208,255 $343,102 $348,270 Korea 5,897 5,280 5,796 Spain 8,237 8,700 12,191 Mexico 9,094 6,511 4,645 Japan 5,037 4,868 1,789 N. Europe 694 3,210 4,191 Pacific Rim 6,592 9,208 14,875 Taiwan 3,342 2,408 3,023 Canada 1,659 4,791 5,846 Latin/South America 10,772 7,331 11,390 Other/Brokered 77,452 48,733 55,309 -------- -------- -------- Total $337,031 $444,142 $467,325 ======= ======= ======= Other/Brokered trade revenues represent product for which the ultimate destination is not monitored. (17) QUARTERLY FINANCIAL DATA (UNAUDITED AND IN THOUSANDS EXCEPT PER SHARE AMOUNTS):
Year Ended January 2, 1999 ------------------------------------------------------------------ First Quarter Second Quarter Third Quarter Fourth Quarter ------------ -------------- ------------- -------------- Net sales $95,669 $87,315 $79,349 $74,698 Operating income (loss) 846 (1,284) (6,227) (5,618) Earnings (loss) from continuing operations (1,373) (2,717) (6,294) (6,415) Discontinued operations: Income (loss) from operations (31) 88 (603) (91) Estimated loss on disposal - - - (14,657) Net earnings (loss) (1,404) (2,629) (6,897) (21,163) Basic earnings (loss) per share (0.09) (0.17) (0.44) (1.36) Diluted earnings (loss) per share (0.09) (0.17) (0.44) (1.36)
Year Ended January 3, 1998 ------------------------------------------------------------------- First Quarter Second Quarter Third Quarter Fourth Quarter ------------- -------------- ------------- -------------- Net sales $112,266 $115,212 $101,722 $114,942 Operating income 3,994 8,671 2,176 3,516 Earnings (loss) from continuing operations 213 3,133 (596) 1,578 Discontinued operations: Income from operations 173 679 73 156 Net earnings (loss) 386 3,812 (523) 1,734 Basic earnings (loss) per share 0.02 0.25 (0.03) 0.11 Diluted earnings (loss) per share 0.02 0.23 (0.03) 0.10
See Note 14 for a discussion of fourth quarter Fiscal 1998 determination to dispose of IPC. IPC is classified as a discontinued operation, and accordingly, the information presented in this table differs from that reported on Forms 10Q because of the reclassification of discontinued operations for all periods presented in the table. DARLING INTERNATIONAL INC. AND SUBSIDIARIES SCHEDULE II Valuation and Qualifying Accounts (In thousands)
Additions Charged to: Balance at ----------------------- Balance at Beginning Costs and End of Description of Period Expenses Other Deductions Period - ---------------------------------- ------------ ---------- -------- ---------- ---------- Accumulated amortization of collection routes and contracts: Year ended January 2, 1999 $ 7,668 $ 5,759 $ - $ 1,326 $ 12,101 ======== ======== ===== ========= ======== Year ended January 3, 1998 $ 2,971 $ 5,660 $ - $ 963 $ 7,668 ======== ======== ===== ========== ======== Year ended December 28, 1996 $ 7,854 $ 4,785 $ - $ 9,668 $ 2,971 ======== ======== ===== ======== ======== Accumulated amortization of goodwill: Year ended January 2, 1999 $ 286 $ 227 $ - $ - $ 513 ========= ========== ===== ======== ======== Year ended January 3, 1998 $ 120 $ 166 $ - $ - $ 286 ========= ========== ===== ======== ======= Year ended December 28, 1996 $ - $ 120 $ - $ - $ 120 ========= ========== ===== ======== ======= Note: Deductions consist of the write-off of fully amortized collection routes and contracts.
DARLING INTERNATIONAL INC. AND SUBSIDIARIES FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 2, 1999 PART II ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item with respect to items 401 and 405 of Regulation S-K appears in the sections entitled "Election of Directors," "Executive Officers" and "Compliance with Section 16(a) of the Exchange Act" included in the Registrant's definitive Proxy Statement relating to the 1998 Annual Meeting of Stockholders, which information is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this item appears in the section entitled "Executive Compensation" included in the Registrant's definitive Proxy Statement relating to the 1998 Annual Meeting of Stockholders, which information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item appears in the section entitled "Security Ownership of Certain Beneficial Owners and Management" included in the Registrant's definitive Proxy Statement relating to the 1998 Annual Meeting of Stockholders, which information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Denis Taura, a director of the Company, is a principal in Taura Flynn & Associates, LLC. The Company incurred from Taura Flynn & Associates, LLC, fees and expenses of $335,592 related to management consulting services provided to the Company. Fredrick J. Klink, a director of the Company, is a partner in the law firm of Dechert, Price & Rhodes. The Company paid Dechert, Price & Rhodes fees for the performance of various legal services. DARLING INTERNATIONAL INC. AND SUBSIDIARIES FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 2, 1999 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents filed as part of this report: (1) The following consolidated financial statements are included in Item 8. Pages Independent Auditors' Report 21 Consolidated Balance Sheets- January 2, 1999 and January 3, 1998 22 Consolidated Statements of Operations - Three years ended January 2, 1999 23 Consolidated Statements of Stockholders' Equity - Three years ended January 2, 1999 24 Consolidated Statements of Cash Flows - Three years ended January 3, 19998 25 Notes to Consolidated Financial Statements - January 2, 1999 and January 3, 1998 26 Quarterly Data 44 (2) The following financial statement schedule is included in Item 8. Schedule II - Valuation and Qualifying Accounts 45 All other schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and notes thereto. (3) (a) Exhibits Exhibit No. Description 3.1 * Restated Certificate of Incorporation of the Company. 3.2 * Amended and Restated Bylaws of the Company. 4.1 * Specimen Common Stock Certificate. 10.1 ** Amended and Restated Credit Agreement, dated as of January 22, 1999, among Darling International Inc., BankBoston, N.A., Comerica Bank, Credit Lyonnais New York Branch, and Wells Fargo Bank (Texas), National Association as Co-agents, and other banks as named therein. 10.2* Registration Rights Agreement, as amended. 10.3* Form of Indemnification Agreement. 10.4* Lease, dated November 30, 1993, between the Company and the Port of Tacoma. 10.5 P Leases, dated July 1, 1996, between the Company and the City and County of San Francisco. 10.6 * 1993 Flexible Stock Option Plan. 10.7 *** International Swap Dealers Association, Inc. (ISDA) Master Agreement and Schedule between Credit Lyonnais and Darling International Inc. dated as of June 6, 1997, related to interest rate swap transaction. 10.7(a)*** International Swap Dealers Association, Inc. (ISDA) Master Agreement and Schedule between Credit Lyonnais and Darling International Inc. dated as of June 6, 1997, related to interest rate swap transaction. 10.7(b)*** International Swap Dealers Association, Inc. (ISDA) Master Agreement and Schedule between Credit Lyonnais and Darling International Inc. dated as of June 6, 1997, related to interest rate swap transaction. 10.8 * Form of Executive Severance Agreement. 10.9 * 1994 Employee Flexible Stock Option Plan. 10.10* Non-Employee Directors Stock Option Plan. 11 Statement re computation of per share earnings. 21 Subsidiaries of the Registrant. 23 Consent of KPMG LLP. 27 Financial Data Schedule * Incorporated by reference from the Registrant's Registration Statement on Form S-1 filed July 15, 1994 (Registration No. 33-79478). ** Incorporated by reference to Form 8-K filed January 29, 1999. *** Incorporated by reference to Form 10-Q filed August 7, 1997. P Filed pursuant to temporary hardship exemption under cover of Form SE. (b) Reports on Form 8-K: The Registrant filed the following current report on Form 8-K during the quarter ended January 2, 1999. 1. Current Report on Form 8-K dated December 16, 1998, including information regarding the extension of the forbearance period to January 15, 1999, pursuant to a forbearance agreement dated December 14, 1998, between the Company and the banks. DARLING INTERNATIONAL INC. AND SUBSIDIARIES FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 2, 1999 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Form 10-K for the Fiscal Year Ended January 2, 1999 on its behalf by the undersigned, thereunto duly authorized, in the city of Irving, State of Texas, on the 30th day of March, 1999. DARLING INTERNATIONAL INC. By: /s/ Dennis B. Longmire ----------------------------- Dennis B. Longmire Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, the report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Dennis B. Longmire Chairman of the Board and March 30, 1999 - ------------------------ Chief Executive Officer Dennis B. Longmire (Principal Executive Officer) /s/ John O. Muse Vice President, March 30, 1999 - --------------------- Chief Financial Officer John O. Muse (Principal Financial Officer) /s/ Cathy S. Hauslein Controller March 30, 1999 - ----------------------- Cathy S. Hauslein (Principal Accounting Officer) /s/ Bruce Waterfall Director March 30, 1999 - ----------------------- Bruce Waterfall /s/ Fredric J. Klink Director March 30, 1999 - ---------------------- Fredric J. Klink /s/ William Westerman Director March 30, 1999 - ----------------------- William Westerman /s/ Denis J. Taura Director March 30, 1999 - ---------------------- Denis J. Taura INDEX TO EXHIBITS Exhibit No. Description Page - ------------ ----------------------------------------------------- ----- 3.1 * Restated Certificate of Incorporation of the Company. 3.2 * Amended and Restated Bylaws of the Company. 4.1 * Specimen Common Stock Certificate. 10.1 ** Amended and Restated Credit Agreement, dated as of January 22, 1999, among Darling International Inc., BankBoston, N.A., Comerica Bank, Credit Lyonnais New York Branch, and Wells Fargo Bank (Texas), National Association as Co-agents, and other banks as named therein. 10.2* Registration Rights Agreement, as amended. 10.3* Form of Indemnification Agreement. 10.4* Lease, dated November 30, 1993, between the Company and the Port of Tacoma. 10.5 P Leases, dated July 1, 1996, between the Company and the City and County of San Francisco. 10.6 * 1993 Flexible Stock Option Plan. 10.7*** International Swap Dealers Association, Inc. (ISDA) Master Agreement and Schedule between Credit Lyonnais and Darling International Inc. dated as of June 6, 1997, related to interest rate swap transaction. 10.7(a)*** International Swap Dealers Association, Inc. (ISDA) Master Agreement and Schedule between Credit Lyonnais and Darling International Inc. dated as of June 6, 1997, related to interest rate swap transaction. 10.7(b)*** International Swap Dealers Association, Inc. (ISDA) Master Agreement and Schedule between Credit Lyonnais and Darling International Inc. dated as of June 6, 1997, related to interest rate swap transaction. 10.8 * Form of Executive Severance Agreement. 10.9 * 1994 Employee Flexible Stock Option Plan. 10.10* Non-Employee Directors Stock Option Plan. 11 Statement re computation of per share earnings. 51 21 Subsidiaries of the Registrant. 52 23 Consent of KPMG LLP. 53 27 Financial Data Schedule * Incorporated by reference from the Registrant's Registration Statement on Form S-1 filed July 15, 1994 (Registration No. 33-79478). ** Incorporated by reference to Form 8-K filed January 29, 1999. *** Incorporated by reference to Form 10-Q filed August 7, 1997. P Filed pursuant to temporary hardship exemption under cover of Form SE. Darling International Inc. Exhibit 11 Statement RE Computation of Per Share Earnings The following table details the computation of basic and diluted earnings per common share, in thousands except per share data:
January 3, January 3, December 28, 1998 1998 1996 ========================================================================================================================== Earnings (loss) from continuing operations $ (16,799) $ 4,328 $ 7,907 ========= ======= ======= Discontinued operations: Income (loss) from discontinued operations, net of tax (637) 1,081 (233) Estimated loss on disposal of discontinued operations, net of tax (14,657) - - ------- ------- ------- Net earnings (loss) available to common stock $(32,093) $ 5,409 $ 7,674 ======= ======= ======= - ------------------------------------------------------------------------------------------------------------------------ Shares (Basic): Weighted average number of common shares outstanding 15,581 15,519 15,375 ======= ====== ====== Basic earnings (loss) per share: Continuing operations $ (1.08) $ 0.28 $ 0.51 Discontinued operations: Income (loss) from operations (0.04) 0.07 (0.01) Estimated loss on disposal (0.94) - - ------ ------ ----- Total $ (2.06) $ 0.35 $ 0.50 ====== ====== ===== - ------------------------------------------------------------------------------------------------------------------------ Shares (Diluted): Weighted average number of common shares outstanding 15,581 15,519 15,375 Additional shares assuming exercise of stock options - 942 1,299 ------- ------ ------- Average common shares outstanding and equivalents 15,581 16,461 16,674 ======= ====== ======= Diluted earnings (loss) per share: Continuing operations $ (1.08) $ 0.26 $ 0.47 Discontinued operations: Income (loss) from operations (0.04) 0.07 (0.01) Estimated loss on disposal (0.94) - - ------ ------ ------ Total $ (2.06) $ 0.33 $ 0.46 ====== ===== ===== - ------------------------------------------------------------------------------------------------------------------------
Darling International Inc. EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT Subsidiary State of Incorporation ---------- ---------------------- International Processing Corporation Georgia Darling International Inc. EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT The Board of Directors Darling International Inc.: We consent to incorporation by reference in the registration statements on Form S-3 (No. 33-79478) and Form S-8 (Nos. 33-99868 and 33-99866) of Darling International Inc. of our report dated March 5, 1999, relating to the consolidating balance sheets of Darling International Inc. and subsidiaries as of January 2, 1999 and January 3, 1998, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended January 2, 1999, and the related schedule, which report appears in the January 2, 1999 annual report on Form 10-K of Darling International Inc. KPMG LLP Dallas, Texas March 30, 1999 EX-27 2 ART. 5 FDS FOR 10-K
5 1,000 12-MOS JAN-02-1999 JAN-04-1998 JAN-02-1999 12,317 0 16,615 204 11,707 49,215 140,074 100,713 263,166 46,145 148,330 0 0 156 37,790 263,166 337,031 337,031 283,822 349,313 0 0 12,466 (26,146) (9,347) (16,799) (15,294) 0 0 (32,093) (2.06) (2.06)
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