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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 1, 2000
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 $11,500,000 as of March 21, 2000 based upon the
closing price of such stock as reported on the American Stock Exchange ("AMEX")
on that day.
There were 15,589,077 shares of common stock, $0.01 par value, outstanding
at March 21, 2000.
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 1, 2000
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 OPERATIONS......................13
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS........19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................19
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE................................44
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.................44
ITEM 11. EXECUTIVE COMPENSATION.............................................44
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNER
AND MANAGEMENT.....................................................44
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................44
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K........................................................45
SIGNATURES ...................................................47
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 1, 2000
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 publicly traded 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
30 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. Due to unfavorable market conditions resulting from declining prices,
beginning in Fiscal 2000 the Esteem Product division will be combined with the
Company's rendering operations. 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 15 of Notes to Consolidated
Financial Statements for further information regarding discontinued operations.
For the financial results of the Company's operating segments, see Note 17 of
Notes to Consolidated Financial Statements.
The Company's net sales from continuing operations were $258.6 million,
$337.0 million, and $444.1 million during the 1999, 1998 and 1997 fiscal years,
respectively. In addition, net external sales by operating segment, including
discontinued operations, were as follows:
Fiscal Fiscal Fiscal
1999 1998 1997
--------------------------------------------------------------------------
Continuing operations:
Rendering (a) $204,404 79.1% $275,424 73.5% $444,142 89.1%
Restaurant Services (a) 53,939 20.8 61,451 16.4 N/A -
Esteem Products 227 0.1 156 0.1 - -
Discontinued operations:
Bakery By-Products Recycling - - 37,456 10.0 54,329 10.9
------- ----- ------- ----- ------- ------
Total $258,570 100.0% $374,487 100.0% $498,471 100.0%
======= ===== ======= ===== ======= =====
(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 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 1,000 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 called CleanStar(R) 2000, which is
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 9% 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. The Company charges a collection fee to offset a portion of the cost
incurred in collecting raw material.
During the past year, the Company's largest single supplier accounted for
less than 8% of the total raw material processed by the Company, and the 10
largest raw materials suppliers accounted for approximately 31% 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. Approximately 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 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 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 $107,405,000, $128,776,000 and $101,040,000 for the years ended January 1,
2000, January 2, 1999, and January 3, 1998, 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 Bovine
Spongiform Encephalopathy ("BSE") 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 17 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 correlates substantially
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 1, 2000, the Company employed approximately 1,300 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 in the United States. The Company is in compliance with the provisions of
the rule.
ITEM 2. PROPERTIES
The Company's 30 operating facilities consist of 22 full service rendering
plants, seven yellow grease/trap grease plants, one blending plant, and one
edible plant. Except for five leased facilities, all of these facilities are
owned by the Company. In addition, the Company owns or leases 21 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
- ------------------------------------------------------------
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
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
Rendering Business Segment
- --------------------------
Coldwater, MI Rendering
Fresno, CA Rendering
Houston, TX Rendering
Linkwood, MD Rendering
Omaha, NE Rendering
Omaha, NE Blending
Omaha, NE Edible Oils
Turlock, CA Rendering
Wahoo, NE Rendering
Restaurant Services Business Segment
- ------------------------------------
Chicago, IL Trap
Fort Lauderdale, FL Yellow Grease/Trap
No. Las Vegas, NV Yellow Grease/Trap
Houston, TX Yellow Grease/Trap
Atlanta, GA Yellow Grease
Tampa, FL Yellow Grease/Trap
ITEM 3. LEGAL PROCEEDINGS
(a) ENVIRONMENTAL
Chula Vista
The Company has been 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. Thereafter, the Company continued to work with the RWQCB
to define the scope of an additional order which would address the
Company's future obligations for that remaining portion (approximately 30
acres) of the Site. On December 30, 1999, the Company completed a sale of
the entire Site pursuant to which the purchaser assumed responsibility for
known environmental liabilities at the Site. Purchaser's assumption of such
liability is supported by a Real Estate Pollution Insurance Policy and a
Full Occurrence Commercial General Liability with Pollution Coverage
Insurance Policy. The Company does not currently anticipate future material
involvement at 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. 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. Rendering of animal by-products has been
discontinued at the Cleveland plant. The Company and EPA have concluded an
amicable resolution of the NOV in the form of an Administrative Consent
Order without a monetary penalty.
(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 been certified for injunctive relief only. The
court declined to certify a damage class. 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 court has dismissed the trespass counts in both
lawsuits without prejudice. 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 1, 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the American Stock Exchange
under the symbol "DAR". 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.
Fiscal Quarter Market Price
---------------------------------
High Low
----------------- ---------------
1999:
First Quarter $3.500 $1.750
Second Quarter $2.125 $1.500
Third Quarter $2.000 $1.063
Fourth Quarter $3.000 $0.875
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
The Company has been notified by its stock transfer agent that as of
March 21, 2000, there were 75 "registered" holders of record of the common
stock. There are approximately 500 beneficial stockholders of the common stock.
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 1, 2000
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 1, 2000, January 2, 1999, and January 3, 1998, and the related notes
thereto.
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 1, 2000
Fiscal 1999 Fiscal 1998 Fiscal 1997 Fiscal 1996 Fiscal 1995
Fifty-two Fifty-two Fifty-three Fifty-two Fifty-two
Weeks Ended Weeks Ended Weeks Ended Weeks Ended Weeks Ended
January 1, January 2, January 3, December 28, December 30,
2000 1999 1998 1996 1995
- --------------------------------------------- -------------- -------------- -------------- -------------- --------------
Operating Data:
Net sales $258,570 $337,031 $444,142 $467,325 $421,608
------- ------- ------- ------- -------
Cost of sales and operating expenses 212,266 283,822 362,787 375,436 336,248
Selling, general and administrative 26,773 33,073 33,247 31,512 26,675
expenses
Depreciation and amortization 31,525 32,418 29,751 26,434 22,576
Provision for loss contingencies - - - 6,075 -
------- ------- ------- ------- -------
Operating income/(loss) (11,994) (12,282) 18,357 27,868 36,109
Interest expense 14,004 12,466 13,070 12,981 13,311
Other (income)/expense, net (283) 1,398 (1,348) (487) (322)
------- ------- ------- ------- -------
Income/(loss) from continuing operations
before income taxes (25,715) (26,146) 6,635 15,374 23,120
Income tax expense/(benefit) (10,015) (9,347) 2,307 7,467 8,740
------- ------- ------- ------- -------
Earnings/(loss) from continuing (15,700) (16,799) 4,328 7,907 14,380
operations
Discontinued operations:
Income/(loss) from discontinued operations,
net of tax - (637) 1,081 (233) -
Loss on disposal, net of tax (333) (14,657) - - -
------- ------- ------- ------- -------
Net income /(loss) $(16,033) $(32,093) $ 5,409 $ 7,674 $14,380
Basic earnings/(loss) per common share $ (1.03) $ (2.06) $ 0.35 $ 0.50 $ 0.95
Diluted earnings/(loss) per common share $ (1.03) $ (2.06) $ 0.33 $ 0.46 $ 0.90
Weighted average shares outstanding 15,589 15,581 15,519 15,375 15,138
Diluted weighted average shares 15,589 15,581 16,461 16,674 15,966
outstanding
Other Data:
EBITDA (a) $ 20,918 $ 20,136 $ 48,108 $ 60,377 $ 58,685
Depreciation 25,611 26,429 24,074 21,529 18,595
Amortization 5,914 5,989 5,677 4,905 3,981
Capital expenditures 9,851 14,967 24,520 26,449 24,636
Balance Sheet Data:
Working capital (deficiency) $ (5,223) $ 3,070 $ 5,225 $ (5,187) $ 12,936
Total assets 197,804 263,166 305,973 320,050 266,062
Current portion of long-term debt 7,810 7,717 5,118 15,113 9,060
Total long-term debt less current portion 110,209 140,613 142,181 138,173 117,096
Stockholders' equity 21,913 37,946 69,756 64,033 54,833
(a) "EBITDA" represents, for any relevant period, operating profit plus
depreciation and amortization, impairment of long-lived assets 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.
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 17 of Notes to Consolidated Financial Statements.
Results of Operations
Fifty-two Week Fiscal Year Ended January 1, 2000 ("Fiscal 1999") Compared to
Fifty-two Week Fiscal Year Ended January 2, 1999 ("Fiscal 1998")
General
The Company recorded a loss from continuing operations of $(15.7)
million for Fiscal 1999 compared to a loss from continuing operations of $(16.8)
million for Fiscal 1998. The Company's operating loss decreased from $(12.3)
million for Fiscal 1998 to $(12.0) million for Fiscal 1999. The improvement was
primarily due to reductions in selling, general and administrative costs and
operating expenses. Interest expense increased from $12.5 million in Fiscal 1998
to $14.0 million in Fiscal 1999, primarily due to higher overall interest rates.
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. The sale was
finalized on April 5, 1999. 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 1999, net sales decreased by $78.4 million (23.3%) to
$258.6 million as compared to $337.0 million during Fiscal 1998, primarily due
to the following: 1) Decreases in overall finished goods prices resulted in an
$46.3 million decrease in sales during Fiscal 1999 versus Fiscal 1998. The
Company's average yellow grease prices were 18.96% lower, average tallow prices
were 21.94% lower, and average meat and bone meal prices were 15.69% lower; 2)
Decreases in the volume of raw materials processed resulted in a $25.0 million
decrease in sales; 3) Decreases in finished hides sales accounted for $4.4
million in sales decreases; 4) Decreases in products purchased for resale
resulted in a $10.5 million sales decrease; and 5) Increases in collection fees
(to offset a portion of the cost incurred in collecting raw material) of $7.2
million and inventory changes of $0.6 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 1999, cost of sales and operating expenses decreased
$71.5 million (25.2%) to $212.3 million as compared to $283.8 million during
Fiscal 1998, 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 $43.0 million in cost of sales; 2) Decreases in
the volume of raw materials collected and processed resulted in a decrease of
approximately $5.1 million in cost of sales and operating expenses; 3) Decreases
in products purchased for resale resulted in a $10.0 million decrease; 4)
Decreases in hides purchases accounted for $4.0 million in cost of sales
decrease; 5) Decreases in operating expenses, primarily labor, repairs, natural
gas and contract hauling costs, resulted in a decrease of $11.6 million offset
by an impairment charge of $1.4 million; and 6)Inventory changes resulted in an
increase of $0.6 million.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $26.8 million during
Fiscal 1999, a $6.3 million decrease from $33.1 million during Fiscal 1998.
Decreases were realized in labor costs, travel and entertainment, and
professional and legal fees.
Depreciation and Amortization
Depreciation and amortization charges decreased $0.9 million, to $31.5
million during Fiscal 1999 as compared to $32.4 million during Fiscal 1998.
Interest Expense
Interest expense increased $1.5 million, to $14.0 million during Fiscal
1999 as compared to $12.5 million during Fiscal 1998, primarily due to increases
in the overall interest rate partially offset by a $30.3 million reduction in
principal.
Income Taxes
The income tax benefit of $10.0 million for Fiscal 1999 consists of
$9.2 million of federal tax benefit and $0.8 million for various state and
foreign tax benefits. In Fiscal 1998, the Company recorded a $9.3 million income
tax benefit which consisted of $8.5 million of federal tax benefit and $0.8
million for various state and foreign tax benefits.
Capital Expenditures
The Company made capital expenditures of $9.9 million during Fiscal
1999 as compared to $15.0 million in Fiscal 1998.
Discontinued Operations
The operations of the Bakery By-Products Recycling segment have been
classified as discontinued operations. The Company realized an additional loss
on disposal, net of tax, of $0.3 million on the sale of this business segment
which was finalized on April 5, 1999, in addition to the amount estimated in
Fiscal 1998.
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 losses 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 $(12.3) million for Fiscal 1998. The decrease was primarily due
to: 1) Declines in volume of raw materials processed; 2) Approximately $2.6
million in increased depreciation and amortization related to acquisitions and
capital expenditures; and 3) Significant decreases in all of the Company's
finished good 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
During Fiscal 1998, net sales decreased 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 good 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 volume of
raw materials processed resulted in a $36.8 million decrease in sales; 3)
Decreases in finished hide 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 collection fees (to offset a portion of the cost
incurred in collecting raw material) of $5.0 million and inventory changes of
$4.0 million somewhat offset the decreases.
Cost of Sales and Operating Expenses
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 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
taxes. 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 for the Bakery By-Products Recycling segment have been
classified as discontinued operations. The results of operations, net of
applicable income taxes, was a net loss of $0.6 million in Fiscal 1998 versus a
net earnings of $1.1 million in Fiscal 1997. The 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 was
finalized on April 5, 1999.
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 Amended
and Restated Credit Agreement, the Term Loan bears interest, payable quarterly,
at a Base Rate (8.50% at January 1, 2000) plus a margin of 1%. Under the Amended
and Restated Credit Agreement, the Term Loan is payable by the Company in
quarterly installments of $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. The net proceeds from the sales of various properties were applied against
installments due on December 31, 1999, March 31, 2000 and a portion of the
installment due on June 30, 2000. The properties sold were: International
Processing Corporation ($19,600,000 on April 5, 1999); Milwaukee property
($950,000 on September 20, 1999); Bristol, VA property ($69,000 on October 15,
1999); Las Vegas property ($2,737,000 on December 17, 1999) and Chula Vista
property ($3,710,000 on December 30, 1999). As of January 1, 2000, $7,720,000
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 Amended and Restated Credit Agreement, the Revolving Credit Facility
bears interest, payable quarterly, at a Base Rate (8.50% at January 1, 2000)
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 1, 2000,
$110,179,000 was outstanding under the Revolving Credit Facility. As of January
1, 2000, the Company had outstanding irrevocable letters of credit aggregating
$11,233,000.
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 1, 2000, no cash
dividends could be paid to the Company's stockholders pursuant to the Amended
and Restated Credit Agreement.
The Company has 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 1, 2000, the Company was party
to three interest rate swap agreements. Under the terms of the swap agreements,
the interest obligation on $70 million of Amended and Restated Credit Agreement
floating-rate debt was exchanged for fixed rate contracts which bear interest,
payable quarterly. One swap agreement for $25 million matures June 27, 2002,
bears interest at 6.5925% and the Company's receive rate is based on the
three-month LIBOR. A second swap agreement for $25 million matures June 27,
2001, bears interest at 9.83% and the Company's receive rate is based on the
Base Rate. The third swap agreement for $20 million matures on June 27, 2002,
with a one-time option for the bank to cancel at June 27, 2001, bears interest
at 9.17% and the Company's receive rate is based on the Base Rate.
On January 1, 2000, the Company had a working capital deficit of $5.2
million and its working capital ratio was 0.88 to 1 compared to working capital
of $3.1 million and a working capital ratio of 1.07 to 1 on January 2, 1999.
The Company has experienced two consecutive years of operating losses
and reduced cash flow as compared to 1997. Management believes that, unless the
prices for the products the Company sells decline further, the Company's cash
flow from operations and availability of credit under the Revolver (see Note 9
to Consolidated Financial Statements) should enable the Company to meet its
Fiscal 2000 obligations in the ordinary course of business. However, if prices
for finished goods the Company sells were to materially decline below those
prevailing in Fiscal 1999, the Company might be forced to seek further covenant
waivers under the Amended and Restated Credit Agreement in 2000.
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, as amended by SFAS No. 137,
is effective for financial statements for fiscal years beginning after June 15,
2000. The Company has not yet determined the impact SFAS No. 133 will have on
its financial statements. The Company will adopt the provisions of SFAS No. 133
in the first quarter of Fiscal 2001.
YEAR 2000
The Company began aggressively addressing its Year 2000 compliance
issues in 1997. As a result, the Company experienced no significant Year 2000
issues internally or with its various suppliers or vendors. There are no Year
2000 issues outstanding nor are any Year 2000 issues expected to arise.
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K includes "forward-looking" statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. All statements
other than statements of historical facts included in the Annual Report on Form
10-K, including, without limitation, the statements under the sections entitled
"Business," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Legal Proceedings" and located elsewhere herein
regarding industry prospects and the Company's financial position are
forward-looking statements. Although the Company believes that the expectation
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to be correct. Important factors
that could cause actual results to differ materially from the Company's
expectations include: the Company's continued ability to obtain sources of
supply for its rendering operations; general economic conditions in the European
and Asian markets; and prices in the competing commodity markets which are
volatile and are beyond the Company's control. Future profitability may be
affected by the Company's ability to grow its business which faces 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 1, 2000, the Company was
party to three interest rate swap agreements. Under the terms of the swap
agreements, the interest obligation on $70 million of Amended and Restated
Credit Agreement floating-rate debt was exchanged for fixed rate contracts which
bear interest, payable quarterly. One swap agreement for $25 million matures
June 27, 2002, bears interest at 6.5925% and the Company's receive rate is based
on the three-month LIBOR. A second swap agreement for $25 million matures June
27, 2001, bears interest at 9.83% and the Company's receive rate is based on the
Base Rate. The third swap agreement for $20 million matures on June 27, 2002,
with a one-time option for the bank to cancel at June 27, 2001, bears interest
at 9.17% and the Company's receive rate is based on the Base Rate. Assuming
variable rates at the end of each fiscal year and average long-term borrowings
for each fiscal year, a one-hundred basis point change in interest rate would
impact net interest expense by $0.2 million and $0.7 million, net of the effect
of swaps, for Fiscal 1999 and Fiscal 1998, respectively.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Pages
Independent Auditors' Report 20
Consolidated Balance Sheets-
January 1, 2000 and January 2, 1999 21
Consolidated Statements of Operations-
Three years ended January 1, 2000 22
Consolidated Statements of Stockholders' Equity -
Three years ended January 1, 2000 23
Consolidated Statements of Cash Flows -
Three years ended January 1, 2000 24
Notes to Consolidated Financial Statements -
January 1, 2000 and January 2, 1999 25
Financial Statement Schedule:
II - Valuation and Qualifying Accounts 43
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 1, 2000 and January 2, 1999,
and the results of their operations and their cash flows for each of the years
in the three-year period ended January 1, 2000, 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 15, 2000
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Balance Sheets
January 1, 2000 and January 2, 1999
(in thousands, except share and per share data)
January 1, January 2,
ASSETS (notes 2 and 9) 2000 1999
------------- ------------
Current assets:
Cash and cash equivalents $ 1,828 $ 12,317
Accounts receivable 16,987 16,615
Inventories (note 4) 9,644 11,707
Prepaid expenses 3,948 3,977
Deferred income tax assets (note 11) 4,203 3,928
Other 518 671
------- -------
Total current assets 37,128 49,215
Property, plant and equipment, net (note 5) 113,824 140,074
Collection routes and contracts, less accumulated amortization
of $15,819 at January 1, 2000 and $12,101 at January 2, 1999 36,965 42,978
Goodwill, less accumulated amortization of $741 at January 1, 2000
and $513 at January 2, 1999 4,813 5,461
Other assets (note 6) 5,074 5,438
Net assets of discontinued operations (note 15) - 20,000
------- -------
$197,804 $263,166
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (note 9) $ 7,810 $ 7,717
Accounts payable, principally trade 11,139 15,517
Accrued expenses (note 7) 23,292 22,255
Accrued interest (note 9) 110 656
------- -------
Total current liabilities 42,351 46,145
Long-term debt, less current portion (note 9) 110,209 140,613
Other noncurrent liabilities (note 10) 19,341 24,836
Deferred income taxes (note 11) 3,990 13,626
------- -------
Total liabilities 175,891 225,220
------- -------
Stockholders' equity (notes 9, 11 and 12):
Preferred stock, $0.01 par value; 1,000,000 shares
authorized, none issued - -
Common stock, $.01 par value; 25,000,000 shares
authorized, 15,589,077 shares issued and
outstanding at January 1, 2000 and January 2, 1999 156 156
Additional paid-in capital 35,063 35,063
Retained earnings/(deficit) (13,306) 2,727
------- -------
Total stockholders' equity 21,913 37,946
------- -------
Commitments and contingencies (notes 8 and 16)
$197,804 $263,166
======= =======
The accompanying notes are an integral part of these
consolidated financial statements.
Consolidated Statements of Operations
Three years ended January 1, 2000
(in thousands, except per share data)
January January January
1, 2000 2, 1999 3, 1998
---------------- ---------------- ---------------
Net sales $258,570 $337,031 $444,142
------- ------- -------
Costs and expenses:
Cost of sales and operating expenses 212,266 283,822 362,787
Selling, general and administrative expenses 26,773 33,073 33,247
Depreciation and amortization 31,525 32,418 29,751
------- ------- -------
Total costs and expenses 270,564 349,313 425,785
------- ------- -------
Operating income/(loss) (11,994) (12,282) 18,357
------- ------- -------
Other income/(expense):
Interest expense (note 9) (14,004) (12,466) (13,070)
Other, net 283 (1,398) 1,348
------- ------- -------
Total other income/(expense) (13,721) (13,864) (11,722)
------- ------- -------
Income/(loss) from continuing operations
before income taxes (25,715) (26,146) 6,635
Income tax expense/(benefit) (note 11) (10,015) (9,347) 2,307
------- ------- -------
Earnings/(loss) from continuing operations (15,700) (16,799) 4,328
Discontinued operations (note 15):
Income/(loss) from discontinued operations,
net of tax - (637) 1,081
Loss on disposal of discontinued
operations, net of tax (333) (14,657) -
------- ------- -------
Net earnings/(loss) $(16,033) $(32,093) $ 5,409
======= ======= =======
Basic earnings/(loss) per share:
Continuing operations $ (1.01) $ (1.08) $ 0.28
Discontinued operations:
Income/(loss) from operations - (0.04) 0.07
Loss on disposal (0.02) (0.94) -
------- ------- -------
Total $ (1.03) $ (2.06) $ 0.35
======= ======= =======
Diluted earnings (loss) per share:
Continuing operations $ (1.01) $ (1.08) $ 0.26
Discontinued operations:
Income/(loss) from operations - (0.04) 0.07
Loss on disposal (0.02) (0.94) -
------- ------- -------
Total $ (1.03) $ (2.06) $ 0.33
======= ======= =======
The accompanying notes are an integral part
of these consolidated financial statements.
Consolidated Statements of Stockholders' Equity
Three years ended January 1, 2000
(In thousands, except share data)
Common stock
Additional Retained Total
Number $.01 par paid-in earnings/ stockholders'
of shares value capital (deficit) equity
- -------------------------------------------------------------------------------------------------------------
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 valuation allowance - - 185 - 185
Net loss - - - (32,093) (32,093)
---------- ----- ------- ------- -------
Balances at January 2, 1999 15,589,077 156 35,063 2,727 37,946
Net loss - - - (16,033) (16,033)
---------- ----- ------- ------- -------
Balances at January 1, 2000 15,589,077 $ 156 $ 35,063 $(13,306) $ 21,913
========== ===== ======= ======= =======
The accompanying notes are an integral part
of these consolidated financial statements.
DARLING INTERNATIONAL INC.
Consolidated Statements of Cash Flows
Three years ended January 1, 2000
(in thousands)
January 1, January 2, January 3,
2000 1999 1998
------------ ---------- ---------
Cash flows from operating activities:
Earnings/(loss) from continuing operations $ (15,700) $ (16,799) $ 4,328
Adjustments to reconcile net earnings/(loss) to net cash
provided by continuing operating activities:
Depreciation and amortization 31,525 32,418 29,751
Deferred income tax benefit (9,911) (9,312) (1,641)
Loss/(gain) on sale of assets (2,060) 982 (927)
Impairment of long-lived assets 1,387 - -
Changes in operating assets and liabilities, net of effects
from acquisitions:
Accounts receivable (372) 12,627 3,278
Inventories and prepaid expenses 2,092 749 (3,492)
Accounts payable and accrued expenses (4,328) 265 (3,786)
Accrued interest (546) (256) (3,365)
Other (1,403) 3,403 (1,821)
------ ------ ------
Net cash provided by continuing operations 684 24,077 22,325
Net cash provided by discontinued operations 119 1,388 4,812
------ ------ ------
Net cash provided by operating activities 803 25,465 27,137
------ ------ ------
Cash flows from investing activities:
Recurring capital expenditures (9,851) (14,967) (20,230)
Capital expenditures related to acquisitions - -
(4,290)
Gross proceeds from sale of property, plant and equipment,
assets held for disposition and other assets 32,150 4,090 6,055
Payments related to routes and other intangibles (152) (341) (6,870)
Net cash used in discontinued operations (330) (1,999) (2,047)
------ ------ ------
Net cash provided by/(used in) investing activities 21,817 (13,217) (27,382)
------ ------ ------
Cash flows from financing activities:
Proceeds from long-term debt 179,927 99,980 283,124
Payments on long-term debt (210,237) (99,084) (289,116)
Contract payments (2,377) (3,326) (1,544)
Deferred loan costs (300) (118) (1,008)
Issuance of common stock - 99 314
Net cash used in discontinued operations (150) (460) (1,526)
------ ------ ------
Net cash used in financing activities (33,137) (2,909) (9,756)
------ ------ ------
Net change in cash and cash equivalents
from discontinued operations 28 29 745
------ ------ ------
Net increase/(decrease) in cash and cash equivalents (10,489) 9,368 (9,256)
Cash and cash equivalents at beginning of year 12,317 2,949 12,205
------- ------- -------
Cash and cash equivalents at end of year $ 1,828 $ 12,317 $ 2,949
======= ======= =======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 14,550 $ 11,997 $ 17,114
------- ------- ------
Income taxes, net of refunds $ (625) $ (1,454) $ 4,345
------- ------- ------
The accompanying notes are an integral part
of these consolidated financial statements.
DARLING INTERNATIONAL INC.
Notes to Consolidated Financial Statements
January 1, 2000 and January 2, 1999
(1) GENERAL
(a) NATURE OF OPERATIONS
Darling International Inc. (the "Company") believes it is the largest
publicly traded 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 15, the operations of IPC, as defined
below, are classified as discontinued operations.
(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 1,
2000, the 52 weeks ended January 2, 1999, and the 53 weeks ended
January 3, 1998.
(3) Inventories
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method.
(4) Property, Plant and Equipment
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 assesses the
recoverability of this intangible asset by determining whether
the amortization of the goodwill balance over its remaining life
can be recovered through undiscounted future operating cash
flows of the acquired operation. The amount of goodwill
impairment, if any, is measured based on projected discounted
future operating cash flows using a discount rate reflecting the
Company's average cost of funds. The assessment of the
recoverability of goodwill will be impacted if estimated future
operating cash flows are not achieved.
(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 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 15,589,000 15,581,000 and 15,519,000 for 1999,
1998 and 1997, respectively. The effect of dilutive stock
options added 942,000 shares for 1997 for the computation of
diluted earnings per common share. For 1999 and 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. Statement of
Financial Accounting Standards ("SFAS") No. 123, Accounting for
Stock-Based Compensation, 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) 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.
(13) 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.
In Fiscal 1999, the Company recorded an impairment charge of
$1,387,000 to reduce the carrying value of certain land and
buildings not currently used in operations to estimated fair
value. The impairment charge is included in operating expenses
in the accompanying Fiscal 1999 Consolidated Statement of
Operations.
(14) 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 for the Company's outstanding borrowings
under the Credit Agreement and Term Loan described in note 9,
approximates the fair value due to the floating interest rates
on the borrowings.
The fair value of the interest rate swap agreements was
$(967,000) and $(207,000) at January 1, 2000, and January 2,
1999, respectively. Current market pricing models were used to
estimate fair value of interest rate swap agreements. The Company
incurred additional interest expense of $913,400 and $670,300 in
Fiscal 1999 and 1998, respectively, related to the swap
agreements.
(15) 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.
For the periods presented, interest rate swaps are accounted for
under the accrual method, whereby the difference between the
Company's pay and receive rate is recognized as an increase or
decrease to interest expense. The fair value of the swap
agreements and changes in fair value are not recognized in the
consolidated financial statements.
(2) LIQUIDITY
The Company has experienced two consecutive years of operating losses and
reduced cash flow as compared to 1997. Management believes that, unless the
prices for the products the Company sells decline further, the Company's
cash flow from operations and availability of credit under the Revolver
(see note 9) should enable the Company to meet its Fiscal 2000 obligations
in the ordinary course of business. However, if prices for finished goods
the Company sells were to materially decline below those prevailing in
Fiscal 1999, the Company might be forced to seek further covenant waivers
under the Amended and Restated Credit Agreement in 2000.
(3) 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.
(4) INVENTORIES
A summary of inventories follows (in thousands):
January 1, January 2,
2000 1999
----------------- ----------------
Finished product $ 8,897 $11,065
Supplies and other 747 642
-------- -------
$ 9,644 $11,707
======== =======
(5) PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment follows (in thousands):
January 1, January 2,
2000 1999
---------------------------------
Land $ 11,291 $ 18,089
Buildings and improvements 28,003 25,720
Machinery and equipment 139,569 137,524
Vehicles 51,439 51,250
Construction in process 6,234 8,204
-------- --------
236,536 240,787
Accumulated depreciation (122,712) (100,713)
-------- --------
$ 113,824 $ 140,074
======== ========
(6) OTHER ASSETS
Other assets consist of the following (in thousands):
January 1, January 2,
2000 1999
--------------------------------
Prepaid pension cost (note 13) $ 2,092 $ 3,009
Deposits and other 2,982 2,429
------- -------
$ 5,074 $ 5,438
======= =======
(7) ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
January 1, January 2,
2000 1999
------------------------------
Insurance $ 3,339 $ 3,778
Compensation and benefits 4,480 4,654
Utilities and sewage 2,649 2,649
Reserve for environmental and
litigation matters (note 16) 2,000 2,000
Other 10,824 9,174
------- -------
$ 23,292 $ 22,255
======= =======
(8) LEASES
The Company leases five 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 1, 2000, are
as follows (in thousands):
Period Ending Fiscal Operating Leases
2000 2,719
2001 2,478
2002 2,282
2003 1,529
2004 773
Thereafter 8,253
-------
Total $ 18,034
=======
Rent expense for the years ended January 1, 2000, January 2, 1999, and
January 3, 1998 was $2,429,404, $1,695,867 and $1,283,035 respectively.
(9) LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
January 1, January 2,
2000 1999
--------------------------------
Credit Agreement:
Revolving Credit Facility $ 110,179 $ 111,319
Term Loan 7,720 36,702
Other notes 120 309
-------- --------
118,019 148,330
Less current maturities 7,810 7,717
-------- --------
$ 110,209 $ 140,613
======== ========
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 plus a
margin (the "Credit Margin"). Under the Amended and Restated Credit
Agreement, the Term Loan bears interest, payable quarterly, at a Base
Rate (8.50% at January 1, 2000) plus a margin of 1%. As of January 1,
2000, $7,720,000 was outstanding under the Term Loan, with $3,516,000 due
on June 30, 2000, $2,500,000 due on September 30, 2000, and the balance
due on December 31, 2000.
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 plus the Credit Margin as well as portions at a Base Rate 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 (8.50% at January 1, 2000) 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 1,
2000, $110,179,000 was outstanding under the Revolving Credit Facility.
As of January 1, 2000, the Company had outstanding irrevocable letters of
credit aggregating $11,233,000.
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 1, 2000, no cash dividends could be paid
to the Company's stockholders pursuant to the Amended and Restated Credit
Agreement.
The Company has 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 1, 2000, the Company was party
to three interest rate swap agreements. Under the terms of the swap
agreements, the interest obligation on $70 million of Amended and
Restated Credit Agreement floating-rate debt was exchanged for fixed rate
contracts which bear interest, payable quarterly. One swap agreement for
$25 million matures June 27, 2002, bears interest at 6.5925% and the
Company's receive rate is based on the three-month LIBOR. A second swap
agreement for $25 million matures June 27, 2001, bears interest at 9.83%
and the Company's receive rate is based on the Base Rate. The third swap
agreement for $20 million matures on June 27, 2002, with a one-time
option for the bank to cancel at June 27, 2001, bears interest at 9.17%
and the Company's receive rate is based on the Base Rate.
OTHER
Aggregate maturities of long-term debt subsequent to January 1, 2000 are
as follows (in thousands):
2000 7,810
2001 110,209
(10) OTHER NONCURRENT LIABILITIES
Other noncurrent liabilities consist of the following (in thousands):
January 1, January 2,
2000 1999
------------ -----------
Reserve for insurance, environmental,
litigation and tax
matters (note 16) $14,927 $16,237
Liabilities associated with
consulting and noncompete agreements 4,253 7,201
Other 161 1,398
------ ------
$19,341 $24,836
====== ======
The Company sponsors a defined benefit health care plan that provides
postretirement medical and life insurance benefits to certain employees.
The Company accounts for this plan in accordance with Statement of
Financial Accounting Standards No. 106 and the effect on the Company's
financial position and results of operations is immaterial.
(11) INCOME TAXES
Income tax expense (benefit) attributable to income (loss) from
continuing operations before income taxes consists of the following (in
thousands):
January 1, January 2, January 3,
2000 1999 1998
----------------------------------------------
Current:
Federal $ - $ (34) $ 2,813
State - - 262
Foreign - - 14
Deferred:
Federal (9,183) (8,432) (1,099)
State (796) (784) (94)
Foreign (36) (97) 411
------- ------ ------
$(10,015) $(9,347) $ 2,307
======= ====== ======
Income tax expense for the years ended January 1, 2000, January 2, 1999,
and January 3, 1998, 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 1, January 2, January 3,
2000 1999 1998
---------------------------------------------
Computed "expected" tax expense $ (9,000) $(9,151) $ 2,322
State income taxes, net of federal benefit (517) (510) 109
Tax-exempt income of foreign sales corporation - 116 (463)
Change in valuation allowance (311) - -
Other, net (187) 198 339
------- ------ -------
$(10,015) $(9,347) $ 2,307
======= ====== =======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
January 1, 2000 and January 2, 1999 are presented below (in thousands):
January 1, January 2,
2000 1999
----------- ------------
Deferred tax assets:
Net operating loss carryforwards $ 36,490 $ 32,290
Capital loss carryforwards 5,420 -
Loss contingency reserves 5,972 6,345
Net assets of discontinued operations - 6,654
Other 1,434 1,767
-------- --------
Total gross deferred tax assets 49,316 47,056
Less valuation allowance (20,305) (20,616)
-------- --------
Net deferred tax assets 29,011 26,440
-------- --------
Deferred tax liabilities:
Collection routes and contracts (7,805) (9,520)
Property, plant and equipment (20,164) (25,458)
Other (829) (1,160)
-------- --------
Total gross deferred tax liabilities (28,798) (36,138)
-------- --------
$ 213 $ (9,698)
======== ========
The portion of the deferred tax assets and liabilities expected to be
recognized in Fiscal 2000 has been recorded at January 1, 2000, in the
accompanying consolidated balance sheet as a net current deferred income
tax asset of $4,203,000. The remaining non-current deferred tax assets
and liabilities have been recorded as a net deferred income tax liability
of $3,990,000 at January 1, 2000 in the accompanying consolidated balance
sheet.
The valuation allowance for deferred tax assets as of January 1, 2000 and
January 2, 1999 was $20,305,000 and $20,616,000, respectively. The net
changes in the total valuation allowance for the years ended January 1,
2000 and January 2, 1999 was a decrease of $311,000 and an increase of
$1,144,000. The Company believes that the remaining net deferred tax
assets at January 1, 2000 and January 2, 1999 will be realized primarily
through future reversals of existing taxable temporary differences.
At January 1, 2000, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $96,025,000 which are
available to offset future federal taxable income through 2019 and
capital loss carryforwards of approximately $14,264,000 which are
available to offset capital gains through 2004. 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.
The Company reports tax benefits utilized related to the January 1, 1994
valuation allowance ($185,000 in 1998) as a direct addition to additional
paid-in capital.
(12) 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 1, 2000,
options to purchase 447,000 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 $1.75 - $9.042 per share
(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
1999, 1998, and 1997 was $1.65, $5.57 and $7.34, respectively, on the
date of grant using the Black Scholes option-pricing model with the
following weighted assumptions:
1999 1998 1997
---------------------------------------------
Expected dividend yield 0.0% 0.0% 0.0%
Risk-free interest rate 6.38% 5.25% 5.25%
Expected life 10 years 10 years 10 years
Expected annual volatility 62.41 - 66.59% 59.95-64.12% 64.99-69.99%
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):
1999 1998 1997
----------------------------------
Earnings (loss) from
continuing operations
As reported $(15,700) $(16,799) $4,328
Pro forma $(16,201) $(18,527) $2,319
Basic earnings (loss) per common
share from continuing operations
As reported $(1.01) $(1.08) $0.28
Pro forma $(1.04) $(1.19) $0.15
A summary of transactions for all stock options granted follows:
Option Weighted-avg
exercise exercise
Number of price price
shares per share per share
------------------------------------------
Options outstanding at
December 28, 1996 2,925,330 $2.88-10.29 $4.83
Granted 683,062 8.25-10.88 9.25
Canceled (450,300) 2.86-10.29 3.51
Exercised (107,100) 3.33-8.83 4.53
---------
Options outstanding at
January 3, 1998 3,050,992 2.86-10.88 6.02
Granted 96,900 3.44-8.69 7.41
Canceled (43,530) 4.13-10.29 8.34
Exercised (26,040) 3.45-4.13 3.81
---------
Options outstanding at
January 2, 1999 3,078,322 2.86-10.88 6.05
Granted 111,000 1.75-2.63 2.12
Canceled (952,687) 2.63-10.29 6.43
---------
Options outstanding at
January 1, 2000 2,236,635 $1.75-10.88 $5.69
=========
Options exercisable at
January 1, 2000 1,928,958 $1.81-10.88 $5.50
=========
At January 1, 2000, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $1.75 - $10.875 and
5.6 years, respectively.
At January 1, 2000 and January 2, 1999, the number of options exercisable
was 1,928,958 and 2,443,745, respectively, and the weighted-average
exercise price of those options was $5.50 and $5.25, respectively.
(13) EMPLOYEE BENEFIT PLANS
The Company has retirement and pension plans covering substantially all
of its employees. Most retirement benefits are provided by the Company
under separate final-pay noncontributory pension plans for all salaried
and hourly employees (excluding those covered by union-sponsored plans)
who meet service and age requirements. Benefits are based principally on
length of service and earnings patterns during the five years preceding
retirement.
The Company's funding policy for those plans is to contribute annually
not less than the minimum amount required nor more than the maximum
amount that can be deducted for federal income tax purposes.
Contributions are intended to provide not only for benefits attributed to
service to date but also for those expected to be earned in the future.
The following table sets forth the plans' funded status and amounts
recognized in the Company's consolidated balance sheets based on the
measurement date (October 1, 1999 and 1998) (in thousands):
January 1, January 2,
2000 1999
-------------------------
Change in benefit obligation:
Benefit obligation at beginning
of year $47,106 $40,222
Service cost 1,781 1,360
Interest cost 3,110 2,835
Amendments 264 113
Actuarial (gain)/loss (4,123) 4,684
Benefits paid (2,148) (2,108)
------ ------
Benefit obligation at end of year 45,990 47,106
------ ------
Change in plan assets:
Fair value of plan assets at beginning
of year 42,874 42,313
Actual return on plan assets 5,566 1,398
Employer contribution 391 1,271
Benefits paid (2,148) (2,108)
------ ------
Fair value of plan assets at end of year 46,683 42,874
------ ------
Funded status 693 (4,232)
Unrecognized actuarial loss 575 6,609
Unrecognized prior service cost 824 632
------ ------
Prepaid benefit cost $ 2,092 $ 3,009
====== ======
Net pension cost includes the following components (in thousands):
January 1, January 2, January 3,
2000 1999 1988
----------------------------------------
Service cost $1,781 $1,360 $1,024
Interest cost 3,110 2,835 2,557
Expected return on plan assets (3,894) (3,870) (8,708)
Net amortization and deferral 73 70 5,793
----- ----- -----
Net pension cost $1,070 $ 395 $ 666
===== ===== =====
Assumptions used in accounting for the employee benefit pension plans were:
January 1, January 2, January 3,
2000 1999 1998
--------------------------------------
Weighted average discount rate 7.50% 6.75% 7.25%
Rate of increase in future
compensation levels 5.17% 5.80% 5.15%
Expected long-term rate of
return on assets 9.25% 9.25% 9.25%
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 $1,306,433, $1,306,367, and $1,529,000 for the years ended
January 1, 2000, January 2, 1999, and January 3, 1998, respectively.
(14) 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 1999,
1998 and 1997.
(15) 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"). 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
net consideration of $19,600,000. The sale was consummated on April 5,
1999.
The 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 for the periods presented.
The condensed statement of operations relating to discontinued operations
for the years ended January 2, 1999 (through the measurement date of
November 3, 1998), and January 3, 1998 follows (in thousands):
January 2, January 3,
1999 1998
-------------------------------
Net sales $37,456 $54,329
Cost and expenses 38,484 52,586
------ ------
Income (loss) before income taxes (1,028) 1,743
Provision for income taxes (391) 662
------ ------
Net earnings (loss) $ (637) $ 1,081
====== ======
Included in the 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.
(16) CONTINGENCIES
(a) ENVIRONMENTAL
Chula Vista
The Company has been 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. Thereafter, the Company continued to work with the RWQCB
to define the scope of an additional order which would address the
Company's future obligations for that remaining portion (approximately 30
acres) of the Site. On December 30, 1999, the Company completed a sale of
the entire Site pursuant to which the purchaser assumed responsibility for
known environmental liabilities at the Site. Purchaser's assumption of
such liability is supported by a Real Estate Pollution Insurance Policy
and a Full Occurrence Commercial General Liability with Pollution Coverage
Insurance Policy. The Company does not currently anticipate future
material involvement at 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. 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. Rendering of animal by-products has been
discontinued at the Cleveland plant. The Company and EPA have concluded an
amicable resolution of the NOV in the form of an Administrative Consent
Order without a monetary penalty.
(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 been certified for injunctive relief only. The
court declined to certify a damage class. 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 court has dismissed the trespass
counts in both lawsuits without prejudice. 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
1, 2000. The accrued expenses and other noncurrent liabilities
classifications in the Company's consolidated balance sheets include
reserves for insurance, environmental and litigation contingencies of
$17.1 million and $19.2 million at January 1, 2000 and January 2, 1999,
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.
(17) 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 as it is impractical to create such data. Esteem Products was
newly created in Fiscal 1998; however the Esteem Products segment has
subsequently been combined with the Company's Rendering segment and in
Fiscal 2000 will no longer be considered a separate operating segment for
internal management reporting. 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. Due to unfavorable market
conditions, beginning in Fiscal 2000 the Esteem Products division will be
combined with the Company's Rendering operations.
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 and was
sold in 1999 (see note 15).
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 1, January 2,
2000 1999
---------------------------------
Rendering:
Trade $204,404 $275,424
Intersegment 27,933 29,210
------- -------
232,337 304,634
------- -------
Restaurant Services:
Trade 53,939 61,451
Intersegment 7,204 7,521
------- -------
61,143 68,972
------- -------
Esteem Products:
Trade 227 156
Intersegment 37 106
------- -------
264 262
------- -------
Eliminations (35,174) (36,837)
------- -------
Total $258,570 $337,031
======= =======
Business Segment Profit (Loss) (in thousands):
January 1, January 2,
2000 1999
-------------------------
Rendering $ 4,859 $ 5,231
Restaurant Services 922 773
Esteem Products (1,610) (2,792)
Corporate Activities (15,882) (16,892)
Interest expense (14,004) (12,466)
------- -------
Income (loss) from continuing operations
before income taxes $(25,715) $(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 1, January 2,
2000 1999
--------------------------
Rendering $75,708 $84,904
Restaurant Services 24,753 32,100
Combined Rend./Rest. Svcs. 77,956 93,080
Esteem Products 3,668 3,097
Corporate Activities 15,719 29,985
Net assets of discontinued operations - 20,000
------- -------
Total $197,804 $263,166
======= =======
Business Segment Property, Plant and Equipment (in thousands):
January 1, January 2,
2000 1999
--------------------------
Depreciation and amortization:
Rendering $20,502 $21,756
Restaurant Services 7,449 7,132
Esteem Products 388 455
Corporate Activities 3,186 3,075
------- -------
Total $31,525 $32,418
======= =======
Additions:
Rendering $3,601 $6,821
Restaurant Services 4,279 1,105
Combined Rend./Rest. Svcs. 1,661 3,948
Esteem Products 140 2,764
Corporate Activities 170 329
------- -------
Total $ 9,851 $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 1, January 2, 1999 January 3,
2000 1998
-------------------------------------------------
United States $151,165 $208,255 $343,102
Korea 13,029 5,897 5,280
Spain 1,798 8,237 8,700
Mexico 19,320 9,094 6,511
Japan 2,162 5,037 4,868
N. Europe 2,095 694 3,210
Pacific Rim 9,008 6,592 9,208
Taiwan 2,415 3,342 2,408
Canada 580 1,659 4,791
Latin/South America 13,413 10,772 7,331
Other/Brokered 43,585 77,452 48,733
------- -------- -------
Total $258,570 $337,031 $444,142
======= ======== =======
Other/Brokered trade revenues represent product for which the ultimate
destination is not monitored.
(18) QUARTERLY FINANCIAL DATA (UNAUDITED AND IN THOUSANDS EXCEPT PER
SHARE AMOUNTS):
Year Ended January 1, 2000
------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
Net sales $69,846 $58,182 $63,381 $67,161
Operating income (loss) (2,625) (2,818) (3,318) (3,233)
Earnings (loss) from
continuing operations (4,191) (4,457) (5,196) (1,856)
Discontinued operations:
Income (loss) from operations - - - -
Loss on disposal (317) (16) - -
Net earnings (loss) (4,508) (4,473) (5,196) (1,856)
Basic earnings (loss) per share (0.29) (0.29) (0.33) (0.12)
Diluted earnings (loss) per share (0.29) (0.29) (0.33) (0.12)
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) (6,226) (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)
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)
See Note 15 for a discussion of fourth quarter Fiscal 1998 determination to
dispose of IPC.
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 1, 2000 $ 12,101 $ 5,686 $ 4 $ 1,972 $ 15,819
======= ======= ===== ======= =======
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
======= ======= ===== ======= =======
Accumulated amortization of
goodwill:
Year ended January 1, 2000 $ 513 $ 228 $ - $ - $ 741
======= ======= ===== ======= =======
Year ended January 2, 1999 $ 286 $ 227 $ - $ - $ 513
======= ======= ===== ======= =======
Year ended January 3, 1998 $ 120 $ 166 $ - $ - $ 286
======= ======= ===== ======= =======
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 1, 2000
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 1999
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 1999 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 1999 Annual Meeting of
Stockholders, which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Taura has served as Chairman of the Board and Chief Executive Officer
of the Company since August 1999. Mr. Taura is a partner in the management
consulting firm Taura Flynn & Associates, LLC. Prior to Mr. Taura serving as
Chairman of the Board and Chief Executive Officer, the Company incurred from
Taura Flynn & Associates, LLC, fees and expenses of $148,007 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 1, 2000
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
(1) The following consolidated financial statements are included in Item 8.
Pages
-------
Independent Auditors' Report 20
Consolidated Balance Sheets-
January 1, 2000 and January 2, 1999 21
Consolidated Statements of Operations -
Three years ended January 1, 2000 22
Consolidated Statements of Stockholders' Equity -
Three years ended January 1, 2000 23
Consolidated Statements of Cash Flows -
Three years ended January 1, 2000 24
Notes to Consolidated Financial Statements -
January 1, 2000 and January 2, 199925
Quarterly Data 42
(2) The following financial statement schedule is included in Item 8.
Schedule II - Valuation and Qualifying Accounts 43
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 Wells Fargo Bank, N.A. 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 BankBoston, N.A. and Darling
International Inc. dated as of June 26, 1997, related to
interest rate swap transaction.
10.8 * Form of Executive Severance Agreement.
10.9 * 1994 Employee Flexible Stock Option Plan.
10.10* Non-Employee Directors Stock Option Plan.
10.17 Termination on September 20, 1999, of International Swap
Dealers Association, Inc. ("ISDA") Master Agreement and
Schedule between BankBoston N.A. and Darling International
Inc. dated as of June 6, 1997, related to interest rate
swap transaction and a new interest rate swap transaction
is effected September 27, 1999.
10.17(a) Confirmation dated September 20, 1999 which supplements,
forms part of, and is subject to, the ISDA Master Agreement
dated as of June 6, 1997 between Credit Lyonnais and Darling
International Inc.
10.18 Master Lease Agreement between Navistar Leasing Company and
Darling International Inc. dated as of August 4, 1999.
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:
No reports were filed on Form 8-K during the quarter ended January 1,
2000.
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 1, 2000
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 1, 2000 on its
behalf by the undersigned, thereunto duly authorized, in the city of Irving,
State of Texas, on the 31st day of March, 2000.
DARLING INTERNATIONAL INC.
By: /s/ Denis J. Taura
---------------------------
Denis J. Taura
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/ Denis J. Taura Chairman of the Board and March __, 2000
Denis J. Taura Chief Executive Officer
/s/ James A. Ransweiler President and March __, 2000
James A. Ransweiler Chief Operating Officer
(Principal Executive
Officer)
/s/ John O. Muse Vice President and March __, 2000
John O. Muse Chief Financial Officer
(Principal Financial &
Accounting Officer)
/s/ Bruce Waterfall Director March __, 2000
Bruce Waterfall
/s/ Fredric J. Klink Director March __, 2000
Fredric J. Klink
/s/ Dennis B. Longmire Director March __, 2000
Dennis B. Longmire
/s/ David Jackson Director March __, 2000
David Jackson
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.
10.17 Termination on September 20, 1999, of International Swap Dealers
Association, Inc. ("ISDA") Master Agreement and Schedule between
BankBoston N.A. and Darling International Inc. dated as of June 6,
1997, related to interest rate swap transaction and a new interest
rate swap transaction is effected September 27, 1999.
10.17(a) Confirmation dated September 20, 1999 which supplements, forms
part of, and is subject to, the ISDA Master Agreement dated as of
June 6, 1997 between Credit Lyonnais and Darling International Inc.
10.18 Master Lease Agreement between Navistar Leasing Company and Darling
International Inc. dated as of August 4, 1999.
11 Statement re computation of per share earnings. 49
23 Consent of KPMG LLP. 50
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 1, January 2, January 3, 1998
2000 1999
================================================================= ================== ================== ===================
Earnings (loss) from continuing operations $ (15,700) $ (16,799) $ 4,328
========= ========= ========
Discontinued operations:
Income (loss) from discontinued operations, net of tax - (637) 1,081
Estimated loss on disposal of discontinued operations,
net of tax (334) (14,657) -
--------- --------- --------
Net earnings (loss) available to common stock $ (16,034) $ (32,093) $ 5,409
========= ========= ========
- ----------------------------------------------------------------- ------------------ ------------------ -------------------
Shares (Basic):
Weighted average number of common shares outstanding 15,589 15,581 15,519
========= ========= ========
Basic earnings (loss) per share:
Continuing operations $(1.01) $(1.08) $ 0.28
Discontinued operations:
Income (loss) from operations - (0.04) 0.07
Estimated loss on disposal (0.02) (0.94) -
--------- --------- --------
Total $(1.03) $(2.06) $ 0.35
========= ========= ========
- ----------------------------------------------------------------- ------------------ ------------------ -------------------
Shares (Diluted):
Weighted average number of common shares outstanding 15,589 15,581 15,519
Additional shares assuming exercise of stock options - - 942
--------- --------- --------
Average common shares outstanding and equivalents 15,589 15,581 16,461
========= ========= ========
Diluted earnings (loss) per share:
Continuing operations $(1.01) $(1.08) $ 0.26
Discontinued operations:
Income (loss) from operations - (0.04) 0.07
Estimated loss on disposal (0.02) (0.94) -
--------- --------- --------
Total $ (1.03) $ (2.06) $ 0.33
========= ========= ========
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 15, 2000, relating to
the consolidated balance sheets of Darling International Inc. and
subsidiaries as of January 1, 2000 and January 2, 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for each of the years in the three-year period ended January 1, 2000, and
the related schedule, which report appears in the January 1, 2000 annual
report on Form 10-K of Darling International Inc.
KPMG LLP
Dallas, Texas
March 31, 2000