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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 2, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _______________ to _______________
Commission File Number
0-24620
DARLING INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
Delaware 36-2495346
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
251 O'Connor Ridge Blvd.
Suite 300
Irving, Texas 75038
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 717-0300
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $0.01 par value per share
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such report(s)), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant was approximately $16,000,000 as of March 29, 1999 based upon the
closing price of such stock as reported on the American Stock Exchange ("AMEX")
on that day.
There were 15,568,362 shares of common stock, $0.01 par value, outstanding
at March 29, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Selected designated portions of the Registrant's definitive Proxy Statement
are incorporated by reference into Part III of this Annual Report.
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 2, 1999
TABLE OF CONTENTS
Page No.
PART I.
ITEM 1. BUSINESS.......................................................... 3
ITEM 2. PROPERTIES........................................................ 8
ITEM 3. LEGAL PROCEEDINGS................................................. 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............11
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.......................................11
ITEM 6. SELECTED FINANCIAL DATA...........................................12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION......................13
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.......20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................20
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE...............................46
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................46
ITEM 11. EXECUTIVE COMPENSATION............................................46
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNER
AND MANAGEMENT....................................................46
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................46
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K.......................................................47
SIGNATURES ..................................................49
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 2, 1999
PART I
ITEM 1. BUSINESS
General
Founded by the Swift meat packing interests and the Darling family in
1882, Darling International Inc. ("Darling" or the "Company") was incorporated
in Delaware in 1962 under the name "Darling-Delaware Company, Inc." On December
28, 1993, the Company changed its name from "Darling-Delaware Company, Inc." to
"Darling International Inc." The address of the Company's principle executive
office is 251 O'Connor Ridge Boulevard, Suite 300, Irving, Texas, 75038, and its
telephone number at such address is (972)717-0300.
The Company is a recycler of food processing by-products and believes
that it is the largest independent processor in the United States in terms of
raw material processed annually.
The Company collects and recycles animal processing by-products and
used restaurant cooking oil. In addition, the Company provides grease trap
collection services to restaurants. The Company processes such raw materials at
35 facilities located throughout the United States into finished products such
as tallow, meat and bone meal and yellow grease. The Company sells these
products nationally and internationally, primarily to producers of various
industrial and commercial oleo-chemicals, soaps, pet foods and livestock feed,
for use as ingredients in their products or for further processing into basic
chemical compounds.
Commencing 1998, as part of an overall strategy to better commit
financial resources, the Company reorganized its operations into three diverse
yet distinctive areas. These are: 1) Rendering, the core business of turning
inedible waste from meat and poultry processors into high quality feed
ingredients and fats for other industrial applications; 2) Restaurant Services,
a group focused on growing the grease collection business while expanding the
line of services, which includes grease trap servicing, offered to restaurants
and food processors; and 3) Esteem Products, the new business dedicated to using
newly developed technologies to produce novel products from established supply
sources. Management believes that organizing along business lines will enable
the Company to utilize its flexibility and diversification to service a
changing, more sophisticated marketplace. In November 1998, the Company made a
strategic decision to dispose of an additional segment, Bakery By-Products
Recycling, a group which produces high quality bakery by-products for the feed
industry. The results of the Bakery By-Products Recycling segment have been
reported separately as discontinued operations. See Note 14 of Notes to
Consolidated Financial Statements for further information regarding discontinued
operations. For the financial results of the Company's operating segments for
1998, see Note 16 of Notes to Consolidated Financial Statements.
The Company's net sales from continuing operations were $337.0 million,
$444.1 million and $467.3 million during the 1998, 1997 and 1996 fiscal years,
respectively. In addition, net external sales by operating segment, including
discontinued operations, were as follows:
Fiscal Fiscal Fiscal
1998 1997 1996
----------------------------------------------------------------------------
Continuing operations:
Rendering (a) $275,424 73.5% $444,142 89.1% $467,325 95.6%
Restaurant Services (a) 61,451 16.4 N/A - N/A -
Esteem Products 156 0.1 - - - - - -
Discontinued operations:
Bakery By-Products Recycling $ 37,456 10.0% $ 54,329 10.9% $ 21,590 4.4%
------- ------ -------- ------ -------- ------
Total $374,487 100.0% $498,471 100.0% $488,915 100.0%
======= ====== ======= ====== ======= ======
(a) Prior to Fiscal 1998, Rendering and Restaurant Services was not
separately accounted for and therefore separate revenue data does not
exist for Fiscal 1997 and 1996, as it is impractical to create such
data.
Processing Operations
The Company creates finished products primarily through the drying,
grinding, separating and blending of its various raw materials. The process
starts with the collection of animal processing by-products (fat, bones,
feathers and offal), and used restaurant cooking oil from meat packers, grocery
stores, butcher shops, meat markets, poultry processors and restaurants.
The animal processing by-products are ground and heated to extract
water and separate oils from animal tissue as well as to sterilize and make the
material suitable as an ingredient for animal feed. Meat and bone meal is
separated from the cooked material by pressing the material, then grinding and
sifting it through screens. The separated tallow is centrifuged and/or refined
for purity. The primary finished products derived from the processing of animal
by-products are tallow and meat and bone meal. Other by-products include poultry
meal, feather meal and blood meal. Used restaurant cooking oil is processed
under a separate procedure that involves heating, settling and sterilizing, as
well as refining, resulting in derived yellow grease, feed-grade animal fat, or
oleo-chemical feedstocks.
Purchase and Collection of Raw Materials
The Company operates a fleet of approximately 1,100 trucks and
tractor-trailers to collect raw materials from more than 80,000 restaurants,
butcher shops, grocery stores, and independent meat and poultry processors. The
Company replaces or upgrades its vehicle fleet to maintain efficient operations.
Raw materials are collected in one of two manners. Certain large
suppliers, such as large meat processors and poultry processors are furnished
with bulk trailers in which the raw material is loaded. The Company transports
these trailers directly to a processing facility. The Company provides the
remaining suppliers, primarily grocery stores and butcher shops with containers
in which to deposit the raw material. The containers are picked up by or emptied
into Company trucks on a periodic basis. The type and frequency of service is
determined by individual supplier requirements, the volume of raw material
generated by the supplier, supplier location, and weather, among other factors.
Used restaurant cooking oil is placed in various sizes and types of
containers which are supplied by the Company. In some instances, these
containers are loaded directly onto the trucks, while in other instances the oil
is pumped through a vacuum hose into the truck. The Company also provides an
alternative collection service to restaurants, CleanStar(R) 2000, a
self-contained collection system that is housed inside the restaurant, with the
used cooking oil pumped directly into collection vehicles via an outside valve.
The CleanStar 2000 system and service is provided either on a fee basis to the
raw material customer or as a negotiated offset to the cost of raw materials
purchased. Approximately 4% of the Company's restaurant suppliers utilize the
CleanStar 2000 system. The frequency of all forms of collection service is
determined by the volume of oil generated by the restaurant.
The raw materials collected by the Company are transported either
directly to a processing plant or to a transfer station, where materials from
several collection routes are loaded into trailers and transported to a
processing plant. Collections of animal processing by-products generally are
made during the day, and materials are delivered to plants for processing within
24 hours of collection to eliminate spoilage. Collection of used restaurant
cooking oil can be made at any time of the day or night, depending on supplier
preference; these materials may be held for longer periods of time before
processing.
During the past year, the Company's largest single supplier accounted
for less than 5% of the total raw material processed by the Company, and the 10
largest raw materials suppliers accounted for approximately 27% of the total raw
material processed by the Company. For a discussion of the Company's competition
for raw materials, see "Competition."
Raw Materials Pricing
The Company has two primary pricing arrangements with its raw materials
suppliers. More than half of the Company's annual volume of raw materials is
acquired on a "formula" basis. Under a formula arrangement, the charge or credit
for raw materials is tied to published finished product commodity prices after
deducting a fixed service charge. The service charge is designed to enable the
Company to cover all of its collection and processing costs and realize a
profit. The Company acquires the remaining annual volume of raw material under
"non-formula" arrangements whereby suppliers either are paid a fixed price, are
not paid, or are charged for the collection service, depending on various
economic factors.
The credit received or amount charged for raw material under both
formula and non-formula arrangements is based on various factors, including the
type of raw materials, the expected value of the finished product to be
produced, the anticipated yields, the volume of material generated by the
supplier, and processing and transportation costs. Competition among processors
to procure raw materials also affects the price paid for raw materials. See
"Competition."
Formula prices are generally adjusted on a weekly or monthly basis
while non-formula prices or charges are adjusted as needed to respond to
significant changes in finished product prices.
Finished Products
The finished products that result from the processing of animal
by-products are oils (primarily tallow and yellow grease) and proteins
(primarily meat and bone meal). Oils are used as ingredients in the production
of pet food, animal feed and soaps. Oleo-chemical producers use these oils as
feedstocks to produce specialty ingredients used in paint, rubber, paper,
concrete, plastics and a variety of other consumer and industrial products.
Meals are used primarily as high protein additives in pet food and animal feed.
Predominantly all of the Company's finished products are commodities
which are quoted on established commodity markets or are priced relative to such
commodities. While the Company's finished products are generally sold at prices
prevailing at the time of sale, the Company's ability to deliver large
quantities of finished products from multiple locations and to coordinate sales
from a central location enables the Company to occasionally receive a premium
over the then-prevailing market price.
Marketing, Sales and Distribution of Finished Products
The Company markets its finished products worldwide. Marketing
activities are primarily conducted through the Company's marketing department
which is headquartered in Irving, Texas. The Company also maintains sales
offices in Los Angeles, California, and Newark, New Jersey for sales and
distribution of selected products. This sales force is in contact with several
hundred customers daily and coordinates the sale and assists in the distribution
of most finished products produced at the Company's processing plants. The
Company sells its finished products internationally through commodities brokers
and through Company agents in various countries.
The Company sells to numerous foreign markets, including the European
Economic Community, Asia, the Pacific Rim, North Africa, Mexico and South
America. The Company has no material foreign operations, but exports a portion
of its products to customers in various foreign counties. Total export sales
were $128,776,000, $101,040,000 and $119,055,000 for the years ended January 2,
1999, January 3, 1998, and December 28, 1996, respectively. The level of export
sales may vary from year to year depending on the relative strength of domestic
versus overseas markets. The Company obtains payment protection for most of its
foreign sales by requiring payment before shipment or by requiring bank letters
of credit or guarantees of payment from U.S. government agencies. The Company
ordinarily is paid for its products in U.S. dollars and has not experienced any
material currency translation losses or any material foreign exchange control
difficulties.
The Company has not experienced any material restrictions on the export
of its products, although certain countries, including India and certain Middle
East countries restrict the import of proteins and fats and oils made from
porcine and bovine material, and the European Community has restrictions on
proteins and fats and oils made from specified bovine materials. The B.S.E.
situation in Europe and new F.D.A. restrictions, coupled with much lower prices
for competing commodities, caused lower prices for some of the Company's key
products. See Note 16 of Notes to Consolidated Financial Statements for
information regarding the Company's export sales.
Finished products produced by Darling are distributed primarily by
truck and rail from the Company's plants shortly following production. While
there are some temporary inventory accumulations at various port locations for
export shipments, inventories rarely exceed three weeks' production and,
therefore, the Company uses limited working capital to carry inventories and
reduces its exposure to fluctuations in commodity prices.
Competition
Management of the Company believes that the most competitive aspect of
the business is the procurement of raw materials rather than the sale of
finished products. During the last ten years, pronounced consolidation within
the meat packing industry has resulted in bigger and more efficient slaughtering
operations, the majority of which utilize "captive" processors. Simultaneously,
the number of small meat packers, which have historically been a dependable
source of supply for non-captive processors, has decreased significantly.
Although the total amount of slaughtering may be flat or only moderately
increasing, the availability, quantity and quality of raw materials available to
the independent processors from these sources have all decreased. These factors
have been offset, in part, however, by increasing environmental consciousness.
The need for restaurants to comply with environmental regulations concerning the
proper disposal of used restaurant cooking oil is offering a growth area for
this raw material source.
In marketing its finished products, the Company faces competition from
other processors and from producers of other suitable commodities. Tallows and
greases are in certain instances substitutes for soybean oil and palm stearine,
while meat and bone meal is a substitute for soybean meal. Consequently, the
prices of tallow, yellow grease, and meat and bone meal correlate to some degree
with these commodities. The markets for finished products are impacted mainly by
the worldwide supply of fats, oils, proteins and grains. Other factors that
influence the prices that the Company receives for its finished products include
the quality of the Company's finished products, consumer health consciousness,
worldwide credit conditions and U.S. government foreign aid. From time to time,
the Company enters into arrangements with its suppliers of raw materials
pursuant to which such suppliers buy back the Company's finished products.
Seasonality
The amount of raw materials made available to the Company by its
suppliers is relatively stable on a weekly basis except for those weeks
including a major holiday during which availability of raw materials declines
because major meat and poultry processors are not operating. Weather is also a
factor. Extremely warm weather adversely affects the ability of the Company to
make higher quality products because the raw material deteriorates more rapidly
than in cooler weather, while extremely cold weather, in certain instances, can
hinder the collection of raw materials.
Employees and Labor Relations
As of January 2, 1999, the Company employed approximately 1,400 persons
full-time in continuing business segments. Approximately 45% of the total number
of employees are covered by collective bargaining agreements; however, the
Company has no national or multi-plant union contracts. Management believes that
the Company's relations with its employees and their representatives are good.
There can be no assurance, however, that new agreements will be reached without
union action or will be on terms satisfactory to the Company.
Regulations
The Company is subject to the rules and regulations of various federal,
state and local governmental agencies. These include, but are not limited to,
the FDA, which regulates food and feed production, USDA, which regulates
collection and production methods, EPA, which regulates air and water discharge
requirements, as well as local and state agencies governing air and water
discharge. Such rules and regulations may influence the Company's operating
results at one or more facilities.
The FDA rule on the feeding of mammalian protein to ruminant animals
took effect in August of 1997 as a measure to prevent the potential occurrence
of BSE (Bovine Spongiform Encephalopathy) in the United States. As expected,
this rule has had little effect on the operations of the Company, and the
Company is in compliance with the provisions of the rule.
ITEM 2. PROPERTIES
The Company's 44 operating facilities consist of 24 full service
rendering plants, six yellow grease/trap grease plants, one blending plant, two
research and technology plants, one spray dry plant, one edible plant, and 9
bakery recycling plants classified as discontinued operations. Except for nine
leased facilities, all of these facilities are owned by the Company. In
addition, the Company owns or leases 24 transfer stations in the United States
and one transfer station in Canada that serve as collection points for routing
raw material to the processing plants set forth below. Some locations service a
single business segment while others service multiple business segments. The
following is a listing of the Company's operating facilities by business
segment:
LOCATION DESCRIPTION
Combined Rendering and Restaurant Services Business Segments
- ------------------------------------------------------------
Alton, IA Rendering/Yellow Grease
Billings, MT Rendering/Yellow Grease
Blue Earth, MN Rendering/Yellow Grease
Boise, ID Rendering/Yellow Grease
Collinsville, OK Rendering/Yellow Grease
Dallas, TX Rendering/Yellow Grease
Detroit, MI Rendering/Yellow Grease/Trap
Kansas City, KS Rendering/Yellow Grease
Los Angeles, CA Rendering/Yellow Grease/Trap
Milwaukee, WI Rendering/Yellow Grease
Newark, NJ Rendering/Yellow Grease
Norfolk, NE Rendering/Yellow Grease
San Angelo, TX Rendering/Yellow Grease
San Francisco, CA Rendering/Yellow Grease
Sioux City, IA Rendering/Yellow Grease
St. Louis, MO Rendering/Yellow Grease
Tacoma, WA Rendering/Yellow Grease/Trap
Bakery By-Products
Rendering Business Segment Discontinued Business Segment
- -------------------------- ---------------------------------
Coldwater, MI Rendering Carteret, NJ Bakerage
Fresno, CA Rendering Chicago, IL Bakerage
Houston, TX Rendering Cincinnati, OH Bakerage
Linkwood, MD Rendering Conley, GA Bakerage
Omaha, NE Rendering Durham, NC Bakerage
Omaha, NE Blending Kansas City, KS Bakerage
Omaha, NE Edible Oils Lake City, GA Bakerage
Turlock, CA Rendering Mt. Pleasant, TX Bakerage
Wahoo, NE Rendering Terre Haute, IN Bakerage
Restaurant Services Business Segment
- ------------------------------------
Chicago, IL Trap
Fort Lauderdale, FL Yellow Grease/Trap
Henderson, NV Yellow Grease/Trap
Houston, TX Yellow Grease/Trap
Lake City, GA Yellow Grease
Tampa, FL Yellow Grease
Esteem Products Business Segment
- --------------------------------
Norfolk, NE Spray Dry (online 2Q99)
Norfolk, NE Research & Technology
Wahoo, NE Research & Technology
ITEM 3. LEGAL PROCEEDINGS
(a) ENVIRONMENTAL
Chula Vista
The Company is the owner of an undeveloped property located in Chula Vista,
California (the "Site"). A rendering plant was operated on the Site until
1982. From 1959 to 1978, a portion of the Site was used as an industrial
waste disposal facility, which was closed pursuant to Closure Order No.
80-06, issued by the State of California Regional Water Quality Control
Board for the San Diego Region (the "RWQCB"). In June 1982, RWQCB staff
approved a completed closure plan which included construction of a
containment cell (the "Containment Cell") on a portion (approximately 5
acres) of the Site to isolate contaminated soil excavated from the Site.
The Site has been listed by the State of California as a site for which
expenditures for removal and remedial actions may be made by the State
pursuant to the California Hazardous Substances Account Act, California
Health & Safety Code Section 25300 et seq. Technical consultants retained
by the Company have conducted various investigations of the environmental
conditions at the Site, and in 1996, requested that the RWQCB issue a "no
further action" letter with respect to the Site. In 1997, the RWQCB issued
Order No. 97-40 prescribing a maintenance and monitoring program for the
Containment Cell. In June 1998, the RWQCB provided a letter to assure
potential purchasers and lenders of limitations on their liability
connected to the balance of the Site (approximately 30 acres) in order to
facilitate a potential sale. The Company continues to work with the RWQCB
to define the scope of an additional order which will address the Company's
future obligations for that remaining portion of the Site.
Cleveland
In August, 1997, the Company received a Notice of Violation ("NOV") from
the United States Environmental Protection Agency ("EPA") for alleged
violations of the Ohio Air Quality Rules as they relate to odor emissions.
The NOV asserted that the Cleveland, OH facility was in violation of the
State's nuisance rule based on a City of Cleveland record of complaints
associated with odors emanating from its facility. Since December, 1992,
the Company has been working with the City of Cleveland under a Consent
Agreement to address such complaints and concerns of the neighborhood in
close proximity to the Plant. Upon receipt of the NOV the Company initiated
a cooperative effort with EPA to address the NOV. In August, 1998, the
Company received a second NOV from EPA which encompassed the alleged
violations from the first NOV and alleged several violations of terms and
conditions found in the Cleveland plant's air permit. The Company again met
with EPA to seek an amicable resolution. Although rendering of animal
by-products has been discontinued at the Cleveland plant, EPA is not
satisfied with this as a resolution of the NOV and is seeking a monetary
penalty. The Company has challenged EPA's approach to resolution of the NOV
as well as EPA's authority to be involved with an enforcement action
connected with a state nuisance rule. The Company continues to seek an
amicable resolution.
Underground Storage Tanks
The Company's processing operations do not produce hazardous or toxic
wastes; however, the Company does operate underground fuel storage tanks
("UST's") that are subject to federal, state and local laws and
regulations. As of January 2, 1999, the Company has removed or closed all
UST's.
(b) LITIGATION
.
Melvindale
A group of residents living near the Company's Melvindale, Michigan plant
has filed suit, purportedly on behalf of a class of persons similarly
situated. The class has not been certified. The suit is based on legal
theories of trespass, nuisance and negligence and/or gross negligence, and
is pending in the United States District Court, Eastern District of
Michigan. Plaintiffs allege that emissions to the air, particularly odor,
from the plant have reduced the value and enjoyment of Plaintiffs'
property, and Plaintiffs seek damages, including mental anguish, exemplary
damages and injunctive relief. In a lawsuit with similar factual
allegations, also pending in United States District Court, Eastern District
of Michigan, the City of Melvindale has filed suit against the Company
based on legal theories of nuisance, trespass, negligence and violation of
Melvindale nuisance ordinances seeking damages and declaratory and
injunctive relief. The Company or its predecessors have operated a
rendering plant at the Melvindale location since 1927 in a heavily
industrialized area down river south of Detroit. The Company has taken and
is taking all reasonable steps to minimize odor emissions from its
recycling processes and is defending the lawsuit vigorously.
Other Litigation
The Company is also a party to several other lawsuits, claims and loss
contingencies incidental to its business, including assertions by certain
regulatory agencies related to the release of unacceptable odors from some
if its processing facilities.
Although the ultimate liability cannot be determined with certainty, management
of the Company believes that reserves for contingencies are reasonable and
sufficient based upon present governmental regulations and information currently
available to management. The Company believes that any additional liability
relative to such lawsuits and claims which may not be covered by insurance would
not likely have a material adverse effect on the Company's financial position,
although it could potentially have a material impact on the results of
operations in any one year.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
Fiscal quarter ended January 2, 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On September 12, 1997 the common stock began trading on the American
Stock Exchange under the symbol "DAR". Prior to that date, the common stock
became eligible for trading on the Nasdaq National Market under the symbol
"DARL" on September 8, 1994. On October 28, 1997, the Stockholders of the
Company approved a three-for-one stock split. The following table sets forth,
for the quarters indicated, the high and low sales prices per share for the
common stock as reported on the American Stock Exchange or Nasdaq National
Market retroactively restated to reflect the stock split.
Fiscal Quarter Market Price
High Low
----------------- ----------------
1998:
First Quarter $9.125 $7.875
Second Quarter $8.625 $7.125
Third Quarter $7.375 $3.375
Fourth Quarter $3.625 $2.500
1997:
First Quarter $9.833 $7.333
Second Quarter $10.000 $6.917
Third Quarter $10.000 $8.000
Fourth Quarter $11.604 $8.500
As of March 24, 1999, there were 72 holders of record of the common
stock.
The Company has not declared or paid any dividend on the common stock
since January 3, 1989. The Company's Credit Agreement restricts the Company's
ability to pay dividends. The Company does not currently anticipate paying cash
dividends on the common stock in the foreseeable future, but intends instead to
retain future earnings for reinvestment in its business or reduction of its
indebtedness.
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 2, 1999
PART II
ITEM 6. SELECTED FINANCIAL DATA
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table presents selected consolidated historical financial
data for the periods indicated. The selected historical consolidated financial
data set forth below should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements of the Company for the three years ended
January 2, 1999, January 3, 1998, and December 28, 1996, and the related notes
thereto.
Fiscal 1998 Fiscal 1997 Fiscal 1996 Fiscal 1995 Fiscal 1994
Fifty-two Fifty-three Fifty-two Fifty-two Fifty-two
Weeks Ended Weeks Ended Weeks Ended Weeks Ended Weeks Ended
January 2, January 3, December 28, December 30, December 31,
1999 1998 1996 1995 1994
- --------------------------------------------- -------------- -------------- -------------- -------------- --------------
Operating Data:
Net sales $337,031 $444,142 $467,325 $421,608 $354,333
-------- -------- -------- -------- --------
Cost of sales and operating expenses 283,822 362,787 375,436 336,248 282,908
Selling, general and administrative expenses 33,073 33,247 31,512 26,675 25,680
Depreciation and amortization 32,418 29,751 26,434 22,576 19,871
Provision for loss contingencies - - 6,075 - -
-------- -------- -------- -------- --------
Operating income/(loss) (12,282) 18,357 27,868 36,109 25,874
Interest expense 12,466 13,070 12,981 13,311 15,206
Other (income)/expense, net 1,398 (1,348) (487) (322) (80)
-------- -------- -------- -------- --------
Income/(Loss) from continuing operations
before income taxes (26,146) 6,635 15,374 23,120 10,748
Income tax expense/(benefit) (9,347) 2,307 7,467 8,740 3,391
-------- -------- -------- -------- --------
Earnings/(Loss) from continuing operations (16,799) 4,328 7,907 14,380 7,357
Discontinued operations:
Income/(Loss) from discontinued
operations, net of tax (b) (637) 1,081 (233) - -
Estimated loss on disposal, net of tax (b) (14,657) - - - -
-------- -------- -------- -------- --------
Net income /(loss) $(32,093) $ 5,409 $ 7,674 $ 14,380 $ 7,357
Basic earnings/(loss) per common share (2.06) 0.35 0.50 0.95 0.49
Diluted earnings/(loss) per common share (2.06) 0.33 0.46 0.90 0.49
Weighted average shares outstanding 15,581 15,519 15,375 15,138 15,000
Diluted weighted average shares outstanding 15,581 16,461 16,674 15,966 15,000
Other Data:
EBITDA (a) 20,135 48,108 60,271 58,685 45,745
Depreciation 26,429 24,074 21,529 18,595 15,994
Amortization 5,989 5,677 4,905 3,981 3,877
Capital expenditures 14,967 24,520 26,449 24,636 17,822
Balance Sheet Data:
Working capital (deficiency) 3,070 5,225 (5,187) 12,936 (2,959)
Total assets 263,166 305,973 320,050 266,062 245,505
Current portion of long-term debt 7,717 5,118 15,113 9,060 11,577
Total long-term debt less current portion 140,613 142,181 138,173 117,096 109,132
Stockholders' equity 37,946 69,756 64,033 54,833 39,482
(a) "EBITDA" represents, for any relevant period, operating profit plus
depreciation and amortization and provision for loss contingencies. EBITDA
is presented here not as a measure of operating results, but rather as a
measure of the Company's debt service ability and is not intended to be a
presentation in accordance with generally accepted accounting principles.
(b) All prior period data has been reclassified in accordance with APB 30 to
reflect the classification of the Bakery By-Products Recycling segment as a
discontinued operation (see Note 14 in Notes to Consolidated Financial
Statements).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the Company's financial condition and
results of operations should be read in conjunction with the historical
consolidated financial statements and notes thereto included in Item 8.
Beginning in 1998, the Company was organized along operating business segments.
See Note 16 of Notes to Consolidated Financial Statements. However, comparative
information for these reporting segments does not exist for prior years.
Accordingly, the discussion below is based on the Company as a whole.
Results of Operations
Fifty-two Week Fiscal Year Ended January 2, 1999 ("Fiscal 1998") Compared to
Fifty-three Week Fiscal Year Ended January 3, 1998 ("Fiscal 1997")
General
The Company recorded a loss from continuing operations of $(16.8)
million for Fiscal 1998 compared to earnings from continuing operations of $4.3
million for Fiscal 1997. Operating income decreased from $18.4 million for
Fiscal 1997 to a $(12.3) million operating loss for Fiscal 1998. The decrease
was primarily due to: 1) Declines in the volume of raw materials processed; 2)
Approximately $2.7 million in increased depreciation and amortization expense
related to acquisitions and capital expenditures; and 3) Significant decreases
in all of the Company's finished goods prices.
In 1998, the Company made a strategic decision to discontinue the
operations of the Bakery By-Products Recycling segment in order to concentrate
its financial and human resources on its other business segments. During Fiscal
1998, the Company recorded an estimated loss on the disposal of the discontinued
segment, net of tax, of $14.7 million. The results of the Bakery By-Products
Recycling segment have been reported separately as discontinued operations for
each year presented.
Net Sales
The Company collects and processes animal by-products (fat, bones and
offal), and used restaurant cooking oil to produce finished products of tallow,
meat and bone meal, and yellow grease. Sales are significantly affected by
finished goods prices, quality of raw material, and volume of raw material. Net
sales include the sales of produced finished goods, grease trap services, and
finished goods purchased for resale, which constitute less than 10% of total
sales.
During Fiscal 1998, net sales decreased by $107.1 million (24.1%) to
$337.0 million as compared to $444.1 million during Fiscal 1997, primarily due
to the following: 1) Decreases in overall finished goods prices resulted in an
$86.4 million decrease in sales during Fiscal 1998 versus Fiscal 1997. The
Company's average yellow grease prices were 8.87% lower, average tallow prices
were 5.72% lower, and average meat and bone meal prices were 34.11% lower; 2)
Decreases in the volume of raw materials processed resulted in a $36.8 million
decrease in sales; 3) Decreases in finished hides sales accounted for $7.8
million in sales decreases; 4) Increases in products purchased for resale
resulted in a $14.9 million increase; and 5) Increases in service charge income
of $5.0 million and inventory changes of $4.0 million somewhat offset the
decreases.
Cost of Sales and Operating Expenses
Cost of sales and operating expenses includes prices paid to raw
material suppliers, the cost of product purchased for resale, and the cost to
collect and process the raw material. The Company utilizes both fixed and
formula pricing methods for the purchase of raw materials. Fixed prices are
adjusted where possible as needed for changes in competition and significant
changes in finished goods market conditions, while raw materials purchased under
formula prices are correlated with specific finished goods prices.
During Fiscal 1998, cost of sales and operating expenses decreased
$79.0 million (21.8%) to $283.8 million as compared to $362.8 million during
Fiscal 1997, primarily as a result of the following: 1) Lower raw material
prices paid, correlating to decreased prices for fats and oils and meat and bone
meal, resulted in decreases of $74.4 million in cost of sales; 2) Decreases in
the volume of raw materials collected and processed resulted in a decrease of
approximately $15.5 million in cost of sales and operating expenses; 3)
Increases in products purchased for resale resulted in a $14.9 million increase;
4) Decreases in hides purchases accounted for $6.0 million in cost of sales
decrease; 5) Decreases in operating expenses, primarily labor costs, resulted in
a decrease of $1.9 million; and 6) Inventory changes resulted in an increase of
$3.9 million.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $33.1 million during
Fiscal 1998, a $0.1 million decrease from $33.2 million during Fiscal 1997.
Decreases in payroll costs were offset by increases in consulting costs,
advertising, and miscellaneous office costs.
Depreciation and Amortization
Depreciation and amortization charges increased $2.6 million, to $32.4
million during Fiscal 1998 as compared to $29.8 million during Fiscal 1997. This
increase was due to additional depreciation on fixed asset additions and
amortization on intangibles acquired as a result of various acquisitions.
Interest Expense
Interest expense decreased $0.6 million, to $12.5 million during Fiscal
1998 as compared to $13.1 million during Fiscal 1997, primarily due to the
refinancing of all outstanding debt on June 5, 1997, at a lower overall rate of
interest.
Income Taxes
The income tax benefit of $9.3 million for Fiscal 1998 consists of $8.5
million of federal tax benefit and $0.8 million for various state and foreign
tax benefits. In Fiscal 1997, the Company recorded a $2.3 million income tax
expense which consisted of $1.7 million of federal tax expense and $0.6 million
for various state and foreign taxes.
Capital Expenditures
The Company made capital expenditures of $15.0 million during Fiscal
1998 as compared to $24.5 million in Fiscal 1997.
Discontinued Operations
The operations of the Bakery By-Products Recycling segment have been
classified as discontinued operations. The results of operations, net of
applicable income taxes, were a net loss of $0.6 million in Fiscal 1998 versus
net earnings of $1.1 million in Fiscal 1997. This decrease was primarily a
result of lower finished goods prices which are closely tied to corn markets. In
addition, the Company recorded an estimated loss on disposal, net of tax, of
$14.7 million to reflect the pending sale of this business segment which is
expected to be finalized during the second quarter of Fiscal 1999.
Fifty-three Week Fiscal Year Ended January 3, 1998, ("Fiscal 1997") Compared
to Fifty-two Week Fiscal Year Ended December 28, 1996 ("Fiscal 1996")
General
The Company recorded earnings from continuing operations of $4.3
million for Fiscal 1997 compared to earnings from continuing operations of $7.9
million for Fiscal 1996. Operating income decreased from $27.9 million for
Fiscal 1996 to $18.4 million for Fiscal 1997. During Fiscal 1996, the Company
recorded $6.1 million in charges to the provision for loss contingency for costs
related to environmental claims at the Company's Blue Earth, Minnesota plant.
Operating income before the provision for loss contingency decreased $15.6
million from $34.0 million in Fiscal 1996 to $18.4 million in Fiscal 1997. The
decrease was primarily due to: 1) Declines in the volume of raw materials
processed; 2) Approximately $3.3 million in increased depreciation and
amortization expense related to acquisitions and capital expenditures; and 3) A
$1.7 million expenditure related to the buy back of stock options from the
former president of the Company. These were offset by a $1.9 million insurance
settlement of certain property and casualty claims with past insurers. Interest
expense increased from $13.0 million in Fiscal 1996 to $13.1 million in Fiscal
1997.
Net Sales
During Fiscal 1997, net sales decreased 5.0%, to $444.1 million as
compared to $467.3 million during Fiscal 1996 primarily due to the following: 1)
The acquisition of Standard Tallow ("Standard") in 1996 resulted in an increase
in sales of $4.2 million in Fiscal 1997 versus Fiscal 1996; 2) Overall finished
goods prices were relatively flat and resulted in an increase of approximately
$3.0 million in sales. Compared to Fiscal 1996 finished goods prices, the
Company's average yellow grease prices were 14.9% lower, average tallow prices
were 0.6% lower, and average meat and bone meal prices were 7.6% higher; 3)
Decreases in the volume of raw materials processed resulted in a $31.2 million
decrease in sales, offset by $4.6 million in yield gains; and 4) Decreases in
finished hides prices and inventory changes accounted for an additional decrease
of $3.8 million in sales.
Cost of Sales and Operating Expenses
During Fiscal 1997, cost of sales and operating expenses decreased
$12.6 million (3.4%), to $362.8 million as compared to $375.4 million during
Fiscal 1996 primarily as a result of the following: 1) Cost of sales and
operating expenses grew $4.0 million due to the acquisition of Standard Tallow;
2) Decreases in the volume of raw material collected and processed resulted in a
decrease of approximately $18.9 million in cost of sales and operating expenses;
3) Lower raw material prices paid, correlating to decreased prices for fats and
oils resulted in decreases of $2.1 million in cost of sales; 4) Changes in
inventory levels resulted in approximately $1.9 million increase in cost of
sales; and 5) Finally, higher payroll and other costs resulted in a $2.5 million
increase in operating expenses.
Selling, General and Administrative Expenses
and Provisions for Loss Contingency
Selling, general and administrative expenses were $33.2 million during
Fiscal 1997, a $1.6 million increase from $31.6 million during Fiscal 1996.
During Fiscal 1997, the Company recorded a $1.7 million expenditure related to
the buyback of stock options from the former president of the Company. The
Company recorded $6.1 million in charges to the provision for loss contingency
during Fiscal 1996 to cover estimated costs related to environmental violations
at the Company's Blue Earth, Minnesota plant.
Depreciation and Amortization
Depreciation and amortization charges increased $3.4 million, to $29.8
million during Fiscal 1997 as compared to $26.4 million during Fiscal 1996. This
increase was due to additional depreciation on fixed asset additions and
amortization on intangibles acquired as a result of the acquisition of Standard
Tallow.
Interest Expense
Interest expense increased $0.1 million, to $13.1 million during Fiscal
1997 as compared to $13.0 million during Fiscal 1996.
Income Taxes
The income tax expense of $2.3 million for Fiscal 1997 consists of $1.7
million of federal tax expense and $0.6 million for various state and foreign
taxes. In Fiscal 1996, the Company recorded a $7.5 million income tax expense
which consisted of $6.9 million of federal tax expense and $0.6 million for
various state taxes, after taking into account the non-tax deductible nature of
certain of the expenses related to the settlement of environmental claims at the
Company's Blue Earth, Minnesota plant.
Capital Expenditures
The Company made capital expenditures of $24.5 million during Fiscal
1997 as compared to $26.4 million in Fiscal 1996.
Discontinued Operations
The operations for the Bakery By-Products Recycling segment have been
classified as discontinued operations to conform to the 1998 presentation. The
results of operations, net of applicable income taxes, were net earnings of $1.1
million in Fiscal 1997 versus a net loss of $0.2 million in Fiscal 1996. The
increase is a result of higher finished goods prices and the reflection of 12
months of operations in Fiscal 1997 versus 4 months of operations in Fiscal
1996.
LIQUIDITY AND CAPITAL RESOURCES
Effective June 5, 1997, the Company entered into a Credit Agreement
(the "Credit Agreement") which originally provided for borrowings in the form of
a $50,000,000 Term Loan and $175,000,000 Revolving Credit Facility. On October
3, 1998, the Company entered into an amendment of the Credit Agreement whereby
BankBoston, N.A., as agent, and the other participant banks in the Credit
Agreement (the "Banks") agreed to forbear from exercising rights and remedies
arising as a result of several existing events of default of certain financial
covenants (the "Defaults") under the Credit Agreement, as amended, until
November 9, 1998.
On November 6, 1998, the Company entered into an extension of the
Amendment whereby the Banks agreed to forbear from exercising rights and
remedies arising as a result of the Defaults until December 14, 1998. The
forbearance period was subsequently extended to January 22, 1999. On January 22,
1999, the Company and the banks entered into an Amended and Restated Credit
Agreement (the "Amended and Restated Credit Agreement").
The Amended and Restated Credit Agreement provides for borrowing in the
form of a $36,702,000 Term Loan and $135,000,000 Revolving Credit Facility.
The Term Loan provides for $36,702,000 of borrowing. Under the Credit
Agreement, the Term Loan bore interest, payable monthly at LIBOR (5.25% at
January 2, 1999) plus a margin (the "Credit Margin") (3.0% at January 2, 1999).
Under the Amended and Restated Credit Agreement, the Term Loan bears interest,
payable quarterly, at a Base Rate (7.75% at January 2, 1999) plus a margin of
1%. Under the Amended and Restated Credit Agreement, the Term Loan is payable by
the Company in quarterly installments of $1,800,000 on March 31, 1999;
$1,200,000 on June 30, 1999; $2,000,000 on September 30 1999; $2,500,000 on
December 31, 1999; $2,500,000 on March 31, 2000; $22,500,000 on June 30, 2000;
$2,500,000 on September 30, 2000; and the balance due on December 31, 2000. As
of January 2, 1999, $36,702,000 was outstanding under the Term Loan.
The Revolving Credit Facility provides for borrowings up to a maximum
of $135,000,000 with sublimits available for letters of credit and a swingline.
Under the Credit Agreement, outstanding borrowings on the Revolving Credit
Facility bore interest, payable monthly, at various LIBOR rates (ranging from
5.2044% to 5.25% at January 2, 1999) plus the Credit Margin as well as portions
at a Base Rate (8.25% at January 2, 1999) or, for swingline advances, at the
Base Rate. Under the Amended and Restated Credit Agreement, the Revolving Credit
Facility bears interest, payable quarterly, at a Base Rate (7.75% at January 2,
1999) plus a margin of 1%. Additionally, the Company must pay a commitment fee
equal to 0.375% per annum on the unused portion of the Revolving Credit
Facility. Under the Amended and Restated Credit Agreement, the Revolving Credit
Facility provides for a mandatory reduction of $2,500,000 on March 31, 2001,
with the remaining balance due at maturity on June 30, 2001. As of January 2,
1999, $111,319,000 was outstanding under the Revolving Credit Facility. As of
January 2, 1999, the Company had outstanding irrevocable letters of credit
aggregating $12,429,000.
Substantially all assets of the Company are either pledged or mortgaged
as collateral for borrowings under the Amended and Restated Credit Agreement.
The Amended and Restated Credit Agreement contains certain terms and covenants,
which, among other matters, restrict the incurrence of additional indebtedness,
the payment of cash dividends, the retention of certain proceeds from sales of
assets, and the annual amount of capital expenditures, and requires the
maintenance of certain minimum financial ratios. As of January 2, 1999, no cash
dividends could be paid to the Company's stockholders pursuant to the Amended
and Restated Credit Agreement.
The Company has only very limited involvement with derivative financial
instruments and does not use them for trading purposes. Interest rate swap
agreements are used to reduce the potential impact of increases in interest
rates on floating-rate long-term debt. At January 2, 1999, the Company was party
to three interest rate swap agreements, each with a term of five years (all
maturing June 27, 2002). Under terms of the swap agreements, the interest
obligation on $70 million of Credit Agreement floating-rate debt was exchanged
for fixed rate contracts which bear interest, payable quarterly, at an average
rate of 6.6% plus a credit margin.
On January 2, 1999, exclusive of the effect of discontinued operations, the
Company had working capital of $3.1 million and its working capital ratio was
1.07 to 1 compared to working capital of $5.2 million and a working capital
ratio of 1.11 to 1 on January 3, 1998. The decrease in working capital is
primarily the result of decreases in accounts receivable balances resulting from
decreased sales.
In 1998, the Company made a strategic decision to dispose of the Bakery
By-Products Recycling segment. The Company anticipates that the sale will take
place on April 5, 1999. Net proceeds from the sale are required to be used to
retire debt.
The Company has credit available under the Revolving Credit Facility to
cover its presently foreseeable capital needs, assuming it continues to meet the
certain financial covenant tests under the Amended and Restated Credit Agreement
dated January 22, 1999, which were adjusted downward to reflect the sharp
decline in the prices the Company received for its finished products (meat and
bone meal, yellow grease and tallow) in 1998. Such prices continued to decline
early in 1999. The Company is implementing a plan to modify its business
operations in light of the continued low prices for its finished goods. However,
if prices for finished goods the Company sells were to materially decline below
those prevailing in the first quarter of 1999, the Company might be forced to
seek further covenant waivers under the Amended and Restated Credit Agreement in
the later part of 1999.
ACCOUNTING MATTERS
The Company is assessing the reporting and disclosure requirements of
SFAS No. 133, Accounting For Derivative Instruments and Hedging Activities. This
statement establishes accounting and reporting standards for derivative
instruments and hedging activities. This statement is effective for financial
statements for fiscal years beginning after June 15, 1999. The Company believes
SFAS No. 133 will not have a material impact on its financial statements. The
Company will adopt the provisions of SFAS No.
133 in the first quarter of Fiscal 2000.
YEAR 2000
Readiness
Since many computer systems and other equipment with embedded chips or
processors (collectively, "Business Systems") use only two digits to represent
the year, these business systems may be unable to accurately process certain
data before, during or after the year 2000. As a result, business and
governmental entities are at risk for possible miscalculations or systems
failures causing disruptions in their business operations. This is commonly
known as the Year 2000 issue. The Year 2000 issue can arise at any point in the
Company's supply, manufacturing, distribution and financial chains.
The Company began work on the Year 2000 compliance issue in 1997. The
scope of the project includes: ensuring the compliance of all applications,
operating systems and hardware on PC and LAN platforms; addressing issues
related to non-IT embedded software and equipment; and addressing the compliance
of key suppliers and customers. The project has four phases: assessment of
systems and equipment affected by the Year 2000 issue; definition of strategies
to address affected systems and equipment; remediation or replacement of
affected systems and equipment; and testing that each is Year 2000 compliant.
With respect to ensuring the compliance of all applications, operating
systems and hardware on the Company's various computer platforms, the assessment
phase and definition of strategies phase have been completed. It is estimated
that 80% of the remediation or replacement phase has been completed with the
balance of this phase expected to be completed by mid 1999. The testing phase of
existing applications operating systems and hardware not being remediated or
replaced has been completed.
With respect to addressing issues related to Non-IT embedded software
and equipment, which principally exists in the Company's manufacturing plants,
the assessment phase and definition of strategies phase are expected to be
completed by the end of second quarter 1999. Testing began in 1999, and
remediation and replacement is expected to be completed by the end of third
quarter 1999, if needed.
The Company relies on third party suppliers for raw materials, water,
utilities, transportation and other key services. Interruption of supplier
operations due to Year 2000 issues could affect Company operations. We have
initiated efforts to evaluate the status of our most critical suppliers'
progress. This process of evaluating our critical suppliers is scheduled for
completion by mid-1999. Options to reduce the risks of interruption due to
suppliers failures include identification of alternate suppliers where feasible
or warranted. These activities are intended to provide a means of managing risk,
but cannot eliminate the potential for disruption due to third party failure.
The Company is also dependent upon customers for sales and cash flow.
Year 2000 interruptions in customers' operations could result in reduced sales,
increased inventory or receivable levels, and cash flow reductions. The Company
is in the assessment phase with respect to the evaluation of critical customers'
progress and is scheduled for completion by mid-1999.
Contingency
The Company is in the process of developing contingency plans for those
areas that are critical to our business. These contingency plans will be
designed to mitigate serious disruptions to our business flow beyond the end of
1999, where possible. The major efforts related to contingency planning are
scheduled for completion by the end of the third quarter of 1999.
Costs
The Company does not separately track the internal costs incurred for
the Y2K project. Such costs, however, are principally the related payroll costs
for the Company's information systems group. The Company has incurred
approximately $30,000 in related internal expenses to date. Future expenses are
expected to be approximately $150,000. Such cost estimates are based upon
presently available information and may change as the Company continues with its
Y2K project. All estimated costs have been budgeted and are expected to be
funded through cash flows from operations. These costs do not include any cost
associated with the implementation of contingency plans, which are in the
process of being developed.
Risks
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers and customers,
the Company is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Company's results of
operations, liquidity or financial condition.
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K includes "forward-looking" statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. All statements
other than statements of historical facts included in the Annual Report on Form
10-K, including, without limitation, the statements under the sections entitled
"Business," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Legal Proceedings" and located elsewhere herein
regarding industry prospects and the Company's financial position are
forward-looking statements. Although the Company believes that the expectation
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to be correct. Important factors
that could cause actual results to differ materially from the Company's
expectations include: the Company's continued ability to obtain sources of
supply for its rendering operations; general economic conditions in the European
and Asian markets; and prices in the competing commodity markets which are
volatile and are beyond the Company's control, and the Year 2000 readiness
issue. Future profitability may be affected by the Company's ability to grow its
restaurant services business and the development of its value-added feed
ingredients, all of which face competition from companies which may have
substantially greater resources than the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The principal market risk affecting the Company is exposure to changes
in interest rates on debt. The Company does not use derivative instruments,
exclusive of interest rate swaps. While the Company does have international
operations, and operates in international markets, it considers its market risks
in such activities to be immaterial.
The Company uses interest rate swaps to hedge adverse interest rate
changes on a portion of its long-term debt. At January 2, 1999, the Company had
$70 million notational value of interest rate swaps outstanding. These swaps
effectively changed the interest rate on $70 million in long-term debt to a 9.6%
fixed rate through the period ending June 27, 2002. Assuming year end Fiscal
1998 variable rates and average long-term borrowings for Fiscal 1998, a one
hundred basis point change in interest rates would impact net interest expense
by $0.7 million, net of the effect of swaps.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Pages
Independent Auditors' Report 21
Consolidated Balance Sheets-
January 2, 1999 and January 3, 1998 22
Consolidated Statements of Operations-
Three years ended January 2, 1999 23
Consolidated Statements of Stockholders' Equity -
Three years ended January 2, 1999 24
Consolidated Statements of Cash Flows -
Three years ended January 2, 1999 25
Notes to Consolidated Financial Statements -
January 2, 1999 and January 3, 1998 26
Financial Statement Schedule:
II - Valuation and Qualifying Accounts 45
All other schedules are omitted since the required
information is not present or is not present in amounts
sufficient to require submission of the schedule, or because
the information required is included in the consolidated
financial statements and notes thereto.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Darling International Inc.:
We have audited the consolidated financial statements of Darling International
Inc. and subsidiaries as listed in the accompanying index. In connection with
our audits of the consolidated financial statements, we also have audited the
financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Darling
International Inc. and subsidiaries as of January 2, 1999 and January 3, 1998,
and the results of their operations and their cash flows for each of the years
in the three-year period ended January 2, 1999, in conformity with generally
accepted accounting principles. Also in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
KPMG LLP
Dallas, Texas
March 5, 1999
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Balance Sheets
January 2, 1999 and January 3, 1998
(in thousands, except share and per share data)
January 2, January 3,
ASSETS (note 8) 1999 1998
- --------------- ---------- ----------
Current assets:
Cash and cash equivalents $ 12,317 $ 2,949
Accounts receivable 16,615 29,242
Inventories (note 3) 11,707 13,420
Prepaid expenses 3,977 3,167
Deferred income tax assets (note 10) 3,928 3,742
Other 671 378
------- -------
Total current assets 49,215 52,898
Property, plant and equipment, net (note 4) 140,074 156,607
Collection routes and contracts, less accumulated
amortization of $12,101 at January 2, 1999
and $7,668 at January 3, 1998 42,978 48,248
Goodwill, less accumulated amortization of
$513 at January 2, 1999
and $286 at January 3, 1998 (note 2) 5,461 5,649
Other assets (note 5) 5,438 5,440
Net assets of discontinued operations (note 14) 20,000 37,131
------- -------
$263,166 $305,973
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (note 8) 7,717 $ 5,118
Accounts payable, principally trade 15,517 17,950
Accrued expenses (note 6) 22,255 23,694
Accrued interest (note 8) 656 911
------- -------
Total current liabilities 46,145 47,673
Long-term debt, less current portion (note 8) 140,613 142,181
Other noncurrent liabilities (note 9) 24,836 20,957
Deferred income taxes (note 10) 13,626 25,406
------- -------
Total liabilities 225,220 236,217
------- -------
Stockholders' equity (notes 8, 10 and 11):
Common stock, $.01 par value; 25,000,000 shares
authorized, 15,589,077 and 15,563,037 shares
issued and outstanding at January 2, 1999
and January 3, 1998 156 156
Preferred stock, $0.01 par value; 1,000,000
shares authorized, none issued - -
Additional paid-in capital 35,063 34,780
Retained earnings 2,727 34,820
------- -------
Total stockholders' equity 37,946 69,756
------- -------
Commitments and contingencies (notes 7 and 15)
$263,166 $305,973
======= =======
The accompanying notes are an integral part of these
consolidated financial statements.
Consolidated Statements of Operations
Three years ended January 2, 1999
(in thousands, except per share data)
January 2, January 3, December 28,
1999 1998 1996
--------- --------- ----------
Net sales $337,031 $444,142 $467,325
------- ------- -------
Costs and expenses:
Cost of sales and operating expenses 283,822 362,787 375,436
Selling, general and administrative expenses 33,073 33,247 31,512
Depreciation and amortization 32,418 29,751 26,434
Provision for loss contingencies (note 15) - - 6,075
------- ------- -------
Total costs and expenses 349,313 425,785 439,457
------- ------- -------
Operating income/(loss) (12,282) 18,357 27,868
------- ------- -------
Other income/(expense):
Interest expense (note 8) (12,466) (13,070) (12,981)
Other, net (1,398) 1,348 487
------- ------- -------
Total other income/(expense) (13,864) (11,722) (12,494)
------- ------- -------
Income/(loss) from continuing operations
before income taxes (26,146) 6,635 15,374
Income tax expense/(benefit) (note 10) (9,347) 2,307 7,467
------- ------- -------
Earnings/(loss) from continuing operations (16,799) 4,328 7,907
Discontinued operations:
Income/(loss) from discontinued operations,
net of tax (637) 1,081 (233)
Estimated loss on disposal of discontinued
operations, net of tax (14,657) - -
------- ------- -------
Net earnings/(loss) $(32,093) $ 5,409 $ 7,674
======= ======= =======
Basic earnings/(loss) per share:
Continuing operations $ (1.08) $ 0.28 $ 0.51
Discontinued operations:
Income/(loss) from operations (0.04) 0.07 (0.01)
Estimated loss on disposal (0.94) - -
------- ------- -------
Total $ (2.06) $ 0.35 $ 0.50
======= ======= =======
Diluted earnings (loss) per share:
Continuing operations $ (1.08) $ 0.26 $ 0.47
Discontinued operations:
Income/(loss) from operations (0.04) 0.07 (0.01)
Estimated loss on disposal (0.94) - -
--------- ------- -------
Total $ (2.06) $ 0.33 $ 0.46
========= ======= =======
The accompanying notes are an integral part of these
consolidated financial statements.
Consolidated Statements of Stockholders' Equity
Three years ended January 2, 1999
(In thousands, except share data)
Common stock
-----------------------
Additional
Number $.01 par paid-in Retained Total
of shares value capital earnings stockholders'
equity
- -------------------------------------------------------------------------------------------------------------
Balances at December 30, 1995 15,256,530 $ 153 $32,943 $21,737 $54,833
Issuance of common stock 199,407 2 618 - 620
Tax benefits relating to January 1,
1994 - - 906 - 906
valuation allowance
Net earnings - - - 7,674 7,674
---------- ----- ------- ------- -------
Balances at December 28, 1996 15,455,937 155 34,467 29,411 64,033
Issuance of common stock 107,100 1 313 - 314
Net earnings - - - 5,409 5,409
---------- ----- ------- ------- -------
Balances at January 3, 1998 15,563,037 156 34,780 34,820 69,756
---------- ----- ------- ------- -------
Issuance of common stock 26,040 - 98 - 98
Tax benefits relating to January 1,
1994 - - 185 - 185
valuation allowance
Net earnings (loss) - - - (32,093) (32,093)
---------- ----- ------- ------- -------
Balances at January 2, 1999 15,589,077 $ 156 $35,063 $ 2,727 $37,946
========== ===== ======= ======= =======
The accompanying notes are an integral part of these
consolidated financial statements.
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three years ended January 2, 1999
(in thousands)
January 2, January 3, December 28,
1999 1998 1996
------------ ---------- -------------
Cash flows from operating activities:
Earnings/(loss) from continuing operations $ (16,799) $ 4,328 $ 7,907
Adjustments to reconcile net earnings/(loss) to net
cash provided by continuing operating activities:
Depreciation and amortization 32,418 29,751 26,434
Deferred income tax expense/(benefit) (9,312) (1,641) (88)
Loss/(gain) on sale of assets 982 (927) 294
Changes in operating assets and liabilities, net
of effects from acquisitions:
Accounts receivable 12,627 3,278 92
Inventories and prepaid expenses 749 (3,492) 2,932
Accounts payable and accrued expenses 265 (3,786) 8,710
Accrued interest (256) (3,365) 380
Other 3,403 (1,821) 985
--------- --------- -----------
Net cash provided by continuing operations 24,077 22,325 45,184
Net cash provided by discontinued operations 1,388 4,812 1,231
--------- --------- -----------
Net cash provided by operating activities 25,465 27,137 46,415
--------- --------- -----------
Cash flows from investing activities:
Recurring capital expenditures (14,967) (20,230) (22,929)
Capital expenditures related to acquisitions - (4,290) (3,520)
Gross proceeds from sale of property, plant and equipment,
assets held for disposition and other assets 4,090 6,055 507
Payments related to routes and other intangibles (341) (6,870) (707)
Fair value of net assets acquired in acquisitions (note 1) - - (42,098)
Net cash used in discontinued operations (1,999) (2,047) (2,182)
--------- --------- -----------
Net cash used in investing activities (13,217) (27,382) (70,929)
--------- --------- -----------
Cash flows from financing activities:
Proceeds from long-term debt 99,980 283,124 20,124
Payments on long-term debt (99,084) (289,116) (33,223)
Proceeds from acquisition debt - - 40,000
Contract payments (3,326) (1,544) (1,600)
Deferred loan costs (118) (1,008) -
Issuance of common stock 99 314 620
Net cash provided by/(used in) discontinued operations (460) (1,526) (100)
--------- --------- -----------
Net cash provided by (used in) financing activities (2,909) (9,756) 25,821
--------- --------- -----------
Net (increase)/decrease in cash and cash equivalents
from discontinued operations 29 745 (751)
--------- --------- -----------
Net increase/(decrease) in cash and cash equivalents 9,368 (9,256) 556
Cash and cash equivalents at beginning of year 2,949 12,205 11,649
--------- --------- -----------
Cash and cash equivalents at end of year $ 12,317 $ 2,949 $ 12,205
========= ========= ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 11,997 $17,114 $ 12,603
--------- ------ ----------
Income taxes, net of refunds $ (1,454) $ 4,345 $ 1,647
--------- ------- -----------
The accompanying notes are an integral part of these
consolidated financial statements.
DARLING INTERNATIONAL INC.
Notes to Consolidated Financial Statements
January 2, 1999 and January 3, 1998
(1) GENERAL
(a) NATURE OF OPERATIONS
Darling International Inc. (the "Company") believes it is the largest
independent recycler of food processing by-products in the United
States, operating a fleet of vehicles, through which it collects
animal by-products and used restaurant cooking oil from butcher
shops, grocery stores, independent meat and poultry processors and
restaurants nationwide. The Company processes raw materials through
facilities located throughout the United States into finished
products, such as tallow, meat and bone meal, and yellow grease. The
Company sells its finished products domestically and internationally
to producers of soap, cosmetics, rubber, pet food and livestock feed
for use as ingredients in such products.
On October 22, 1993, the Company entered into a settlement agreement
providing for a restructure of the Company's debt and equity and
resolution of a class action lawsuit (the "Settlement"). On December
29, 1993, the Settlement was consummated and became binding on all
original note holders. The Company has accounted for the Settlement
using "Fresh Start Reporting" as of January 1, 1994, in accordance
with Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization Under the United States Bankruptcy Code" issued by the
American Institute of Certified Public Accountants. Using a valuation
of the Company performed by an independent appraiser, the Company
determined the total reorganization value of all its assets to be
approximately $236,294,000 as of January 1, 1994 and the Company's
accumulated deficit was eliminated as of January 1, 1994.
(b) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(1) Basis of Presentation
The consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
As disclosed in Note 14, the operations of IPC, as defined below,
are classified as discontinued operations. As such, certain prior
year balances have been reclassified in order to conform to
current year presentation.
(2) Fiscal Year
The Company has a 52/53 week fiscal year ending on the Saturday
nearest December 31. Fiscal years for the consolidated financial
statements included herein are for the 52 weeks ended January 2,
1999, the 53 weeks ended January 2, 1999, and the 52 weeks ended
December 28, 1996.
(3) Inventories
Inventories re stated at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method.
(4) Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation
is computed by the straight-line method over the estimated
useful lives of assets: 1) Buildings and improvements - 24 to 30
years; 2) Machinery and equipment - 3 to 8 years; and 3)
Vehicles - 4 to 6 years.
Maintenance and repairs are charged to expense as incurred and
expenditures for major renewals and improvements are
capitalized.
(5) Collection Routes and Contracts
Collection routes, restrictive covenants and consulting
agreements are recorded at cost and are amortized using the
straight-line method over periods ranging from 3 to 15 years.
(6) Goodwill
Goodwill, which represents the excess of purchase price over
fair value of net assets acquired, is amortized on a
straight-line basis over the expected periods to be benefited,
not exceeding 30 years. Annually, the Company makes an
assessment to determine the recoverability of this intangible
asset.
(7) Environmental Expenditures
Environmental expenditures incurred to mitigate or prevent
environmental contamination that has yet to occur and that
otherwise may result from future operations are capitalized.
Expenditures that relate to an existing condition caused by past
operations and that do not contribute to current or future
revenues are expensed or charged against established
environmental reserves. Reserves are established when
environmental assessments and/or clean-up requirements are
probable and the costs are reasonably estimable.
(8) Income Taxes
The Company accounts for income taxes using the asset and
liability method. Under the asset and liability method, deferred
tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the
enactment date.
(9) Earnings Per Common Share
Basic earnings per common share are computed by dividing net
earnings attributable to outstanding common stock by the
weighted average number of common stock shares outstanding
during the year. Diluted earnings per common share are computed
by dividing net earnings attributable to outstanding common
stock by the weighted average number of common shares
outstanding during the year increased by dilutive common
equivalent shares (stock options) determined using the treasury
stock method, based on the average market price exceeding the
exercise price of the stock options.
The weighted average common shares used for basic earnings per
common share was 15,581,000 15,519,000 and 15,375,000 for 1998,
1997 and 1996, respectively. The effect of dilutive stock
options added 942,000 and 1,299,000 shares for 1997 and 1996,
respectively, for the computation of diluted earnings per common
share. For 1998, the effect of all outstanding stock options
were excluded from diluted earnings per common share because the
effect was anti-dilutive.
(10) Stock Option Plans
The Company accounts for its stock option plan in accordance
with the provisions of Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. As such, compensation expense is
recorded on the date of grant only if the current market price
of the underlying stock exceeds the exercise price. On January
1, 1996, the Financial Accounting Standards Board issued SFAS
No. 123, Accounting for Stock-Based Compensation, which permits
entities to recognize as expense over the vesting period the
fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 allows entities to continue to apply
the provisions of APB Opinion No. 25 and provide pro forma net
income and pro forma earnings per share disclosures for employee
stock option grants made in 1995 and future years as if the
fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma
disclosure provisions of SFAS No. 123.
(11) Statements of Cash Flows
The Company considers all short-term highly liquid instruments,
with an original maturity of three months or less, to be cash
equivalents.
(12) Supplemental Schedule of Non-Cash Investing and
Financing Activities
During the year ended December 28, 1996, non-cash investing and
financing activities included the purchase of 100% of the common
stock of Standard Tallow for $10,400,000. Assets acquired,
liabilities assumed, and consideration paid for this acquisition
are as follows (in thousands):
Fair value of assets acquired, less cash $ 20,066
Liabilities assumed and incurred (11,094)
-------
Fair value of net assets acquired 8,972
Bank debt incurred (10,400)
-------
Cash (received)paid upon purchase $ (1,428)
========
In addition, the Company purchased 100% of the common stock of
International Processing Corporation and International
Transportation Service, Inc. (collectively referred to as "IPC")
for $30,000,000. Assets acquired, liabilities assumed and
consideration paid for this acquisition are as follows (in
thousands):
Fair value of assets acquired, less cash $ 40,836
Liabilities assumed and incurred (14,710)
-------
Fair value of net assets acquired 33,126
Bank debt incurred (29,600)
-------
Cash (received)paid upon purchase $ 3,526
========
(13) Use of Estimates
The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(14) Impairment of Long-Lived Assets and Long-Lived Assets
To Be Disposed Of
The Company applies the provisions of SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." This Statement requires that
long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset.
If such assets are considered to be impaired, the impairment to
be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
(15) Financial Instruments
The carrying amount of cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses approximates
fair value due to the short maturity of these instruments. The
carrying amount of $70,000,000 of outstanding borrowings under
the Credit Agreement at January 2, 1999, approximated
$70,207,000 since these borrowings bear interest at a fixed rate
pursuant to an interest rate swap.
The carrying amount of the balance of outstanding borrowings
under the Credit Agreement at January 2, 1999 and January 3,
1998 approximated fair value since the borrowings bear interest
at current market rates.
(16) Derivative Instruments
The Company's use of derivative instruments is limited to
interest rate swaps which are entered into with the intent of
managing overall borrowing costs. The Company does not use
derivative instruments for trading purposes.
The Company has entered into interest rate swaps to effectively
fix the interest rate of a portion of its long term debt. The
notational amount of the swaps fixes approximately 48% of total
long term debt at January 2, 1999, at an underlying rate of
7.85%. These swaps settle at maturity, June 27, 2002. The
Company's credit risk related to interest rate swaps is
considered minimal due to strong creditworthy counterparties,
settlement on a net basis, and short durations.
(2) ACQUISITIONS
During Fiscal 1997, as part of the Company's strategy to expand its
presence in restaurant grease collection and the grease trap business,
the Company made the following acquisitions: Enduro, Midwest Recycling,
and Torvac, totaling $11.7 million which included goodwill acquired of
$2.2 million.
On May 8, 1996, the Company acquired 100% of the common stock of Standard
Tallow for $10,400,000. The Company recorded goodwill associated with
this acquisition in the amount of $4.3 million, which will be amortized
over 30 years.
On August 30, 1996, the Company acquired 100% of the common stock of IPC
for $32,800,000. The Company recorded goodwill associated with this
acquisition in the amount of $15.9 million which was being amortized over
30 years (see Note 14) Subsequent funding of approximately $3,600,000 was
made into IPC to increase the overall investment of the Company.
(3) INVENTORIES
A summary of inventories follows (in thousands):
January 2, January 3,
1999 1998
----------- -----------
Finished product $ 11,065 $ 12,863
Supplies and other 642 557
-------- --------
$ 11,707 $ 13,420
======== ========
(4) PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment follows (in thousands):
January 2, January 3,
1999 1998
------------- ------------
Land $ 18,089 $ 18,506
Buildings and improvements 25,720 23,243
Machinery and equipment 137,524 125,293
Vehicles 51,250 51,731
Construction in process 8,204 16,178
-------- --------
240,787 234,951
Accumulated depreciation (100,713) (78,344)
-------- --------
$ 140,074 $ 156,607
======== ========
(5) OTHER ASSETS
Other assets consist of the following (in thousands):
January 2, January 3,
1999 1998
------------- ----------
Prepaid pension cost (note 12) $ 3,009 $ 2,612
Deposits and other 2,429 2,828
-------- -------
$ 5,438 $ 5,440
======= =======
(6) ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
January 2, January 3,
1999 1998
------------- ------------
Insurance $ 3,778 $ 3,988
Compensation and benefits 4,654 5,259
Utilities and sewage 2,649 2,661
Reserve for environmental and
litigation matters (note 15) 2,000 2,000
Income taxes payable 231 2,431
Other 8,943 7,355
------- -------
$ 22,255 $ 23,694
======= =======
(7) LEASES
The Company leases nine plants and storage locations, four office
locations and a portion of its transportation equipment. Leases are
noncancellable and expire at various times through the year 2028. Minimum
rental commitments under noncancellable leases as of January 2, 1999, are
as follows (in thousands):
Period Ending Fiscal Operating Leases
-------------------- ----------------
1999 2,122
2000 1,989
2001 1,819
2002 1,694
2003 978
Thereafter 8,632
-------
Total $ 17,234
======
Rent expense for the years ended January 2, 1999, January 3, 1998, and
December 28, 1996 was $1,695,867, $1,283,035 and $1,210,687,
respectively.
(8) LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
January 2, January 3,
1999 1998
---------- -----------
Credit Agreement:
Revolving Credit Facility $ 111,319 $ 100,875
Term Loan 36,702 46,250
Other notes 309 174
-------- --------
148,330 147,299
Less current maturities 7,717 5,118
-------- --------
$ 140,613 $ 142,181
======== ========
CREDIT AGREEMENT
Effective June 5, 1997, the Company entered into a Credit Agreement (the
"Credit Agreement") which originally provided for borrowings in the form of
a $50,000,000 Term Loan and $175,000,000 Revolving Credit Facility. On
October 3, 1998, the Company entered into an amendment of the Credit
Agreement whereby BankBoston, N.A., as agent, and the other participant
banks in the Credit Agreement (the "Banks") agreed to forbear from
exercising rights and remedies arising as a result of several existing
events of default of certain financial covenants (the "Defaults") under the
Credit Agreement, as amended, until November 9, 1998.
On November 6, 1998, the Company entered into an extension of the Amendment
whereby the Banks agreed to forbear from exercising rights and remedies
arising as a result of the Defaults until December 14, 1998. The
forbearance period was subsequently extended to January 22, 1999. On
January 22, 1999, the Company and the banks entered into an Amended and
Restated Credit Agreement (the "Amended and Restated Credit Agreement").
The Amended and Restated Credit Agreement provides for borrowing in the
form of a $36,702,000 Term Loan and $135,000,000 Revolving Credit Facility.
The Term Loan provides for $36,702,000 of borrowing. Under the Credit
Agreement, the Term Loan bore interest, payable monthly at LIBOR (5.25% at
January 2, 1999) plus a margin (the "Credit Margin") (3.0% at January 2,
1999). Under the Amended and Restated Credit Agreement, the Term Loan bears
interest, payable quarterly, at a Base Rate (7.75% at January 2, 1999) plus
a margin of 1%. Under the Amended and Restated Credit Agreement, the Term
Loan is payable by the Company in quarterly installments of $1,800,000 on
March 31, 1999; $1,200,000 on June 30, 1999; $2,000,000 on September 30
1999; $2,500,000 on December 31, 1999; $2,500,000 on March 31, 2000;
$22,500,000 on June 30, 2000; $2,500,000 on September 30, 2000; and the
balance due on December 31, 2000. As of January 2, 1999, $36,702,000 was
outstanding under the Term Loan.
The Revolving Credit Facility provides for borrowings up to a maximum of
$135,000,000 with sublimits available for letters of credit and a
swingline. Under the Credit Agreement, outstanding borrowings on the
Revolving Credit Facility bore interest, payable monthly, at various LIBOR
rates (ranging from 5.2044% to 5.25% at January 2, 1999) plus the Credit
Margin as well as portions at a Base Rate (8.25% at January 2, 1999) or,
for swingline advances, at the Base Rate. Under the Amended and Restated
Credit Agreement, the Revolving Credit Facility bears interest, payable
quarterly, at a Base Rate (7.75% at January 2, 1999) plus a margin of 1%.
Additionally, the Company must pay a commitment fee equal to 0.375% per
annum on the unused portion of the Revolving Credit Facility. Under the
Amended and Restated Credit Agreement, the Revolving Credit Facility
provides for a mandatory reduction of $2,500,000 on March 31, 2001, with
the remaining balance due at maturity on June 30, 2001. As of January 2,
1999, $111,319,000 was outstanding under the Revolving Credit Facility. As
of January 2, 1999, the Company had outstanding irrevocable letters of
credit aggregating $12,429,000.
Substantially all assets of the Company are either pledged or mortgaged as
collateral for borrowings under the Amended and Restated Credit Agreement.
The Amended and Restated Credit Agreement contains certain terms and
covenants, which, among other matters, restrict the incurrence of
additional indebtedness, the payment of cash dividends, the retention of
certain proceeds from sales of assets, and the annual amount of capital
expenditures, and requires the maintenance of certain minimum financial
ratios. As of January 2, 1999, no cash dividends could be paid to the
Company's stockholders pursuant to the Amended and Restated Credit
Agreement.
Certain financial covenant tests under the Amended and Restated Credit
Agreement were adjusted downward to reflect the sharp decline in the prices
the Company received for its finished products in 1998. Such prices
continue to decline early in 1999. If prices for the Company's finished
goods are to decline below those prevailing in the first quarter of 1999,
the Company might be forced to seek further covenant waivers under the
Amended and Restated Credit Agreement in the later part of 1999.
The Company has only very limited involvement with derivative financial
instruments and does not use them for trading purposes. Interest rate swap
agreements are used to reduce the potential impact of increases in interest
rates on floating-rate long-term debt. At January 2, 1999, the Company was
party to three interest rate swap agreements, each with a term of five
years (all maturing June 27, 2002). Under terms of the swap agreements, the
interest obligation on $70 million of Credit Agreement floating-rate debt
was exchanged for fixed rate contracts which bear interest, payable
quarterly, at an average rate of 6.6% plus a credit margin.
SUBORDINATED NOTES
On June 27, 1997, the Company redeemed Subordinated Notes with a face
amount of $69,976,000, using proceeds from the Revolving Credit Facility.
OTHER
Aggregate maturities of long-term debt subsequent to January 2, 1999 are
as follows (in thousands):
1999 7,717
2000 29,294
2001 111,319
(9) OTHER NONCURRENT LIABILITIES
Other noncurrent liabilities consist of the following (in thousands):
January 2, January 3,
1999 1998
---------- -----------
Reserve for insurance, environmental,
litigation and tax matters (note 15) $16,237 $10,212
Liabilities associated with consulting
and noncompete agreements 7,201 9,487
Other 1,398 1,258
------- -------
$24,836 $20,957
======= =======
The Company sponsors a defined benefit health care plan that provides
postretirement medical and life insurance benefits to certain employees.
The Company accounts for this plan in accordance with Statement of
Financial Accounting Standards No. 106 and the effect on the Company's
financial position and results of operations is immaterial.
(10) INCOME TAXES
Income tax expense (benefit) attributable to income (loss) from
continuing operations before income taxes consists of the following (in
thousands):
January 2, January 3, December 28,
1999 1998 1996
------------ ----------- -------------
Current:
Federal $ (34) $ 2,813 $ 6,944
State - 262 611
Foreign - 14 -
Deferred:
Federal (8,529) (1,099) (62)
State (784) (94) (26)
Foreign (97) 411 -
------ ------ ------
$(9,347) $ 2,307 $ 7,467
====== ====== ======
Income tax expense for the years ended January 2, 1999, January 3, 1998,
and December 28, 1996, differed from the amount computed by applying the
statutory U.S. federal income tax rate (35%) to income (loss) from
continuing operations before income taxes as a result of the following
(in thousands):
January 2, January 3, December 28,
1999 1998 1996
----------- ---------- -----------
Computed "expected"
tax expense $ (9,151) $ 2,322 $ 5,381
State income taxes,
net of federal benefit (510) 109 368
Tax-exempt income of foreign
sales corporation 116 (463) (323)
Nondeductible fines and
penalties (note 15) - - 1,058
Other, net 198 339 983
------- ------- --------
$ (9,347) $ 2,307 $ 7,467
======= ======= =======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
January 2, 1999 and January 3, 1998 are presented below (in thousands):
January 2, January 3,
1999 1998
----------- -----------
Deferred tax assets:
Net operating loss carryforwards $ 32,290 $ 28,582
Foreign tax credits and capital
loss carryforwards - 4,434
Loss contingency reserves 6,345 5,191
Net assets of discontinued operations 6,654 -
Other 1,767 1,473
--------- --------
Total gross deferred tax assets 47,056 39,680
Less valuation allowance (20,616) (19,472)
-------- -------
Net deferred tax assets 26,440 20,208
-------- --------
Deferred tax liabilities:
Collection routes and contracts (9,520) (10,754)
Property, plant and equipment (25,458) (29,861)
Other (1,160) (1,252)
-------- --------
Total gross deferred tax liabilities (36,138) (41,867)
------- -------
$ (9,698) $(21,659)
======== =======
The portion of the deferred tax assets and liabilities expected to be
recognized in Fiscal 1999 has been recorded at January 2, 1999, in the
accompanying consolidated balance sheet as a net current deferred income
tax asset of $3,928,000. The remaining non-current deferred tax assets
and liabilities have been recorded as a net deferred income tax liability
of $13,626,000 at January 2, 1999 in the accompanying consolidated
balance sheet.
The valuation allowance for deferred tax assets as of January 2, 1999 and
January 3, 1998 was $20,616,000 and $19,472,000, respectively. The net
changes in the total valuation allowance for the years ended January 2,
1999 and January 3, 1998 was an increase of $1,144,000 and a decrease of
$190,000. The Company believes that the remaining net deferred tax assets
at January 2, 1999 and January 3, 1998 will be realized primarily through
future reversals of existing taxable temporary differences.
At January 2, 1999, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $84,972,000 which are
available to offset future federal taxable income through 2013. The
availability of the net operating loss carryforwards to reduce future
taxable income is subject to various limitations. As a result of the
change in ownership, the Company believes utilization of its pre-1994 net
operating loss carryforwards ($75,154,000) is limited to $3,400,000 per
year for the remaining life of the net operating losses. At January 2,
1999, foreign tax credits of approximately $2,702,000 and capital loss
carryforwards of approximately $313,000 expired.
The Company reports tax benefits utilized related to the January 1, 1994
valuation allowance ($185,000 in 1998 and $906,000 in 1996) as a direct
addition to additional paid-in capital.
(11) STOCKHOLDERS' EQUITY
At December 29, 1993, the Company granted options to purchase 384,615
shares of the Company's common stock to the former owners of the
Redeemable Preferred Stock. The options have a term of ten years from the
date of grant and may be exercised at a price of $3.45 per share
(approximated market value at the date of grant).
The 1993 Flexible Stock Option Plan and the 1994 Employee Flexible Stock
Option Plan provide for the granting of stock options to key officers and
salaried employees of the Company and its subsidiaries. Options to
purchase common stock were granted at a price approximating fair market
value at the date of grant. Options granted under the plans expire ten
years from the date of grant. Vesting occurs on each anniversary of the
grant date as defined in the specific option agreement. The plans also
provide for the acceleration by one year of vesting of all non-vested
shares upon the termination of the employee's employment in certain
circumstances or upon a change in management control.
The Non-Employee Directors Stock Option Plan provides for the granting of
options to non-employee directors of the Company. As of January 2, 1999,
options to purchase 294,000 shares of common stock had been granted
pursuant to this plan. The options have a term of ten years from the date
of grant and may be exercised at a price of $3.33 - $9.042 per share
(approximated market value at the date of grant). The options vest 25%
six months after the grant date and 25% on each anniversary date
thereafter.
The per share weighted average fair value of stock options granted during
1998, 1997 and 1996 was $5.57, $7.34 and $4.63, respectively, on the date
of grant using the Black Scholes option-pricing model with the following
weighted assumptions:
1998 1997 1996
-------------------------------------
Expected dividend yield 0.0% 0.0% 0.0%
Risk-free interest rate 5.25% 5.25% 6.6%
Expected life 10 years 10 years 10 years
Expected volatility 3.79-4.06 4.12-4.43 6.20
The Company applies APB Opinion No. 25 in accounting for its Plans and,
accordingly, no compensation cost has been recognized for its stock
options in the financial statements as stock options were granted at
market value on the grant date. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options
under SFAS No. 123, the Company's earnings (loss) from continuing
operations would have been reduced to the pro forma amounts indicated
below (in thousands, except per share):
1998 1997 1996
-------------------------------------
Earnings (loss) from
continuing operations
As reported $(16,799) $4,328 $7,907
Pro forma $(16,963) $3,293 $7,337
Basic earnings (loss) per common
share from continuing operations
As reported $(1.08) $0.28 $0.51
Pro forma $(1.09) $0.21 $0.47
Pro forma net earnings reflects only options granted since 1995.
Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma amounts
presented above because compensation cost is reflected over the options
vesting period and compensation cost for options granted prior to January
1, 1995 are not considered.
A summary of transactions for all stock options granted follows:
Option exercise Weighted-avg.
Number of price exercise price
shares per share per share
----------------------------------------------
Options outstanding at
December 30, 1995 2,723,727 $2.857-9.250 $3.9269
Granted 430,200 8.792-10.292 9.6183
Canceled (29,190) 2.857-4.125 3.4018
Exercised (199,407) 2.857-4.125 3.0998
----------
Options outstanding at
December 28, 1996 2,925,330 2.857-10.292 4.8255
Granted 683,062 8.25-10.875 9.25
Canceled (450,300) 2.857-10.292 3.5062
Exercised (107,100) 3.33-8.833 4.5346
----------
Options outstanding at
January 3, 1998 3,050,992 2.857-10.875 6.0191
Granted 96,900 3.4375-8.687 7.4138
Canceled (43,530) 4.125-10.292 8.3417
Exercised (26,040) 3.45-4.125 3.8139
----------
Options outstanding at
January 2, 1999 3,078,322 $2.857-10.875 $6.0489
=========
Options exercisable at
January 2, 1999 2,443,745 $2.857-10.875 $5.2529
=========
At January 2, 1999, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $2.857 - $10.875
and 6.6 years, respectively.
At January 2, 1999 and January 3, 1998, the number of options exercisable
was 2,443,745 and 1,927,382, respectively, and the weighted-average
exercise price of those options was $5.2529 and $4.7302, respectively.
(12) EMPLOYEE BENEFIT PLANS
The Company has retirement and pension plans covering substantially all
of its employees. Most retirement benefits are provided by the Company
under separate final-pay noncontributory pension plans for all salaried
and hourly employees (excluding those covered by union-sponsored plans)
who meet service and age requirements. Benefits are based principally on
length of service and earnings patterns during the five years preceding
retirement.
The Company's funding policy for those plans is to contribute annually
not less than the minimum amount required nor more than the maximum
amount that can be deducted for federal income tax purposes.
Contributions are intended to provide not only for benefits attributed to
service to date but also for those expected to be earned in the future.
The following table sets forth the plans' funded status and amounts
recognized in the Company's consolidated balance sheets based on the
measurement date (October 1, 1998 and 1997) (in thousands):
January 2, January 3,
1999 1998
--------- ----------
Change in benefit obligation:
Benefit obligation at beginning of year $40,222 $34,504
Service cost 1,360 1,024
Interest cost 2,835 2,557
Amendments 113 95
Actuarial loss 4,684 3,960
Benefits paid (2,108) (1,918)
------- -------
Benefit obligation at end of year 47,106 40,222
------ ------
Change in plan assets:
Fair value of plan assets at beginning of year 42,313 35,212
Actual return on plan assets 1,398 8,184
Employer contribution 1,271 835
Benefits paid (2,108) (1,918)
------- -------
Fair value of plan assets at end of year 42,874 42,313
------ ------
Funded status (4,232) 2,091
Unrecognized actuarial loss (gain) 6,609 (59)
Unrecognized prior service cost 632 580
-------- ----------
Prepaid benefit cost $ 3,009 $ 2,612
======== ========
Net pension cost includes the following components (in thousands):
January 2, January 3, December 28,
1999 1998 1996
---------- ----------- -----------
Service cost $1,360 $1,024 $ 1,033
Interest cost 2,835 2,557 2,463
Expected return on plan assets (3,870) (8,708) (2,737)
Net amortization and deferral 70 5,793 (154)
------ ------ -------
Net pension cost $ 395 $ 666 $ 605
====== ====== =======
Assumptions used in accounting for the employee benefit pension plans were:
January 2, January 3, December 28,
1999 1998 1996
------------------------------------
Weighted average discount rate 6.75% 7.25% 7.75%
Rate of increase in future
compensation levels 5.80% 5.15% 5.02%
Expected long-term rate of
return on assets 9.25% 9.25% 8.75%
The Company participates in several multi-employer pension plans which
provide defined benefits to certain employees covered by labor contracts.
These plans are not administered by the Company and contributions are
determined in accordance with provisions of negotiated labor contracts.
Information with respect to the Company's proportionate share of the
excess, if any, of the actuarially computed value of vested benefits over
these pension plans' net assets is not available. The cost of such plans
amounted to $1,306,367, $1,529,000 and $1,333,000 for the years ended
January 2, 1999, January 3, 1998, and December 28, 1996, respectively.
(13) CONCENTRATION OF CREDIT RISK
Concentration of credit risk is limited due to the Company's diversified
customer base and the fact that the Company sells commodities. No single
customer accounted for more than 10% of the Company's net sales in 1998,
1997 and 1996.
(14) DISCONTINUED OPERATIONS
In 1998, the Company made a decision to discontinue the operations of the
Bakery By-Products Recycling segment in order to concentrate its
financial and human resources on its other businesses. The Bakery
By-Products Recycling segment was comprised of International Processing
Corporation, International Transportation Services, Inc., and Food
By-Products Recycling (collectively referred to as "IPC"). Both
International Processing Corporation and International Transportation
Services, Inc., are wholly-owned subsidiaries of the Company. Food
By-Products Recycling is a wholly-owned subsidiary of International
Transportation Services, Inc. On February 10, 1999, the Company announced
the execution of a Stock Purchase Agreement dated February 9, 1999, with
Scope Products, Inc., a wholly-owned subsidiary of Scope Industries,
pursuant to which the Company agreed to sell all the issued and
outstanding stock of IPC for a total consideration of $22,000,000.
$2,000,000 of the total consideration will be deposited in an escrow
account to cover certain post-closing adjustments and the Company's
indemnification obligations under the Agreement. The closing of the
transaction is certain to subject conditions, including receipt of
necessary approval under the Hart-Scott-Rodino Act. Accordingly, there
can be no assurance that the conditions to closing will be satisfied or
waived by the parties or that the sale will be consummated. The Company
anticipates that the sale will take place on April 5, 1999.
The anticipated disposal of IPC has been accounted for as a discontinued
operation and, accordingly, its net assets have been segregated from
continuing operations in the accompanying consolidated balance sheets,
statements of operations and cash flows and the Company's financial
results of prior periods were reclassified.
The condensed statement of operations relating to discontinued operations
for the years ended January 2, 1999 (through the measurement date of
November 3, 1998), January 3, 1998, and December 28, 1996 follows (in
thousands):
January 2, January 3, December 28,
1999 1998 1996
--------- ---------- -----------
Net sales $37,456 $54,329 $21,590
Cost and expenses 38,484 52,586 21,985
------ ------ ------
Income (loss) before income taxes (1,028) 1,743 (395)
Provision for income taxes (391) 662 (162)
------- ------- -------
Net earnings (loss) $ (637) $ 1,081 $ (233)
====== ====== =======
Included in the estimated loss on disposition of discontinued operations
is a net tax benefit of $2.2 million. In addition, no interest expense
has been allocated to discontinued operations.
At January 2, 1999, net assets of discontinued operations on the
consolidated balance sheets include primarily property, plant and
equipment, collection routes and contracts, and intangible assets, less
current liabilities to be assumed upon disposal.
(15) CONTINGENCIES
(a) ENVIRONMENTAL
Chula Vista
The Company is the owner of an undeveloped property located in Chula
Vista, California (the "Site"). A rendering plant was operated on the Site
until 1982. From 1959 to 1978, a portion of the Site was used as an
industrial waste disposal facility, which was closed pursuant to Closure
Order No. 80-06, issued by the State of California Regional Water Quality
Control Board for the San Diego Region (the "RWQCB"). In June 1982, RWQCB
staff approved a completed closure plan which included construction of a
containment cell (the "Containment Cell") on a portion (approximately 5
acres) of the Site to isolate contaminated soil excavated from the Site.
The Site has been listed by the State of California as a site for which
expenditures for removal and remedial actions may be made by the State
pursuant to the California Hazardous Substances Account Act, California
Health & Safety Code Section 25300 et seq. Technical consultants retained
by the Company have conducted various investigations of the environmental
conditions at the Site, and in 1996, requested that the RWQCB issue a "no
further action" letter with respect to the Site. In 1997, the RWQCB issued
Order No. 97-40 prescribing a maintenance and monitoring program for the
Containment Cell. In June 1998, the RWQCB provided a letter to assure
potential purchasers and lenders of limitations on their liability
connected to the balance of the Site (approximately 30 acres) in order to
facilitate a potential sale. The Company continues to work with the RWQCB
to define the scope of an additional order which will address the
Company's future obligations for that remaining portion of the Site.
Cleveland
In August, 1997, the Company received a Notice of Violation ("NOV") from
the United States Environmental Protection Agency ("EPA") for alleged
violations of the Ohio Air Quality Rules as they relate to odor emissions.
The NOV asserted that the Cleveland, OH facility was in violation of the
State's nuisance rule based on a City of Cleveland record of complaints
associated with odors emanating from its facility. Since December, 1992,
the Company has been working with the City of Cleveland under a Consent
Agreement to address such complaints and concerns of the neighborhood in
close proximity to the Plant. Upon receipt of the NOV the Company
initiated a cooperative effort with EPA to address the NOV. In August,
1998, the Company received a second NOV from EPA which encompassed the
alleged violations from the first NOV and alleged several violations of
terms and conditions found in the Cleveland plant's air permit. The
Company again met with EPA to seek an amicable resolution. Although
rendering of animal by-products has been discontinued at the Cleveland
plant, EPA is not satisfied with this as a resolution of the NOV and is
seeking a monetary penalty. The Company has challenged EPA's approach to
resolution of the NOV as well as EPA's authority to be involved with an
enforcement action connected with a state nuisance rule. The Company
continues to seek an amicable resolution.
Underground Storage Tanks
The Company's processing operations do not produce hazardous or toxic
wastes; however, the Company does operate underground fuel storage tanks
("UST's") that are subject to federal, state and local laws and
regulations. As of January 2, 1999, the Company has removed or closed all
UST's.
Blue Earth
In Fiscal 1996, the Company recorded a provision for loss contingency of
$6.1 million to cover the expected costs of settlement as well as legal,
environmental and other related costs for the previously disclosed
contingencies at the Company's Blue Earth rendering plant.
(b) LITIGATION
.
Melvindale
A group of residents living near the Company's Melvindale, Michigan plant
has filed suit, purportedly on behalf of a class of persons similarly
situated. The class has not been certified. The suit is based on legal
theories of trespass, nuisance and negligence and/or gross negligence, and
is pending in the United States District Court, Eastern District of
Michigan. Plaintiffs allege that emissions to the air, particularly odor,
from the plant have reduced the value and enjoyment of Plaintiffs'
property, and Plaintiffs seek damages, including mental anguish, exemplary
damages and injunctive relief. In a lawsuit with similar factual
allegations, also pending in United States District Court, Eastern
District of Michigan, the City of Melvindale has filed suit against the
Company based on legal theories of nuisance, trespass, negligence and
violation of Melvindale nuisance ordinances seeking damages and
declaratory and injunctive relief. The Company or its predecessors have
operated a rendering plant at the Melvindale location since 1927 in a
heavily industrialized area down river south of Detroit. The Company has
taken and is taking all reasonable steps to minimize odor emissions from
its recycling processes and is defending the lawsuit vigorously.
Other Litigation
The Company is also a party to several other lawsuits, claims and loss
contingencies incidental to its business, including assertions by certain
regulatory agencies related to the release of unacceptable odors from some
if its processing facilities.
The Company purchases its workers compensation, auto and general liability
insurance on a retrospective basis. The Company accrues its expected
ultimate costs related to claims occurring during each fiscal year and
carries this accrual as a reserve until such claims are paid by the
Company.
The Company has established loss reserves for insurance, environmental and
litigation matters as a result of the matters discussed above. Although
the ultimate liability cannot be determined with certainty, management of
the Company believes that reserves for contingencies are reasonable and
sufficient based upon present governmental regulations and information
currently available to management. The Company estimates the range of
possible losses related to environmental and litigation matters, based on
certain assumptions, is between $2.5 million and $8.5 million at January
2, 1999. The accrued expenses and other noncurrent liabilities
classifications in the Company's consolidated balance sheets include
reserves for insurance, environmental and litigation contingencies of
$19.2 million and $15.7 million at January 2, 1999 and January 3, 1998,
respectively. There can be no assurance, however, that final costs will
not exceed current estimates. The Company believes that any additional
liability relative to such lawsuits and claims which may not be covered by
insurance would not likely have a material adverse effect on the Company's
financial position, although it could potentially have a material impact
on the results of operations in any one year.
(16) BUSINESS SEGMENTS
During Fiscal 1998, the Company adopted SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information. The Company operated on
a worldwide basis within four industry segments: Rendering, Restaurant
Services, Esteem Products and Bakery By-Products Recycling. Prior to Fiscal
1998, Rendering and Restaurant Services were not separately accounted for
and therefore separate segment data does not exist for Fiscal 1997 and 1996
as it is impractical to create such data. Esteem Products was newly created
in Fiscal 1998. The measure of segment profit (loss) includes all revenues,
operating expenses (excluding certain amortization of intangibles) and
selling, general and administrative expenses incurred at all operating
locations and exclude general corporate expenses.
Rendering
Rendering consists of the collection and processing of animal by-products
from butcher shops, grocery stores and independent meat and poultry
processors, converting these wastes into similar products such as useable
oils and proteins utilized by the agricultural and oleochemical industries.
Restaurant Services
Restaurant Services consists of the collection of used cooking oils from
restaurants and recycling them into similar products such as high-energy
animal feed ingredients and industrial oils. Restaurant Services also
provides grease trap servicing. Prior to Fiscal 1998, the activities
conducted by this business segment were considered part of the Rendering
segment.
Esteem Products
Esteem Products consists of the development and marketing of enhanced feed
ingredients from existing raw material streams utilizing advanced
biochemistry and animal nutrition technologies.
Bakery By-Products Recycling
Bakery By-Products Recycling consists of the collection and processing of
bakery and confectionery by-products from bakeries, snack food producers,
confectioners, and pasta manufacturers, converting them into a high-energy
ingredient used as a component of livestock and poultry rations. This
business segment has been classified as a discontinued operation (see Note
14).
Included in corporate activities are general corporate expenses and the
amortization of intangibles related to "Fresh Start Reporting." Assets of
corporate activities include cash, unallocated prepaid expenses, deferred
tax assets, prepaid pension, and miscellaneous other assets.
Business Segment Net Revenues (in thousands):
January 2, 1999
----------------
Rendering:
Trade $275,424
Intersegment 29,210
-------
304,634
-------
Restaurant Services:
Trade 61,451
Intersegment 7,521
-------
68,972
-------
Esteem Products:
Trade 156
Intersegment 106
-------
262
-------
Eliminations (36,837)
-------
Total $337,031
=======
Business Segment Profit (Loss) (in thousands):
January 2,
1999
----------
Rendering $5,231
Restaurant Services 773
Esteem Products (2,792)
Corporate Activities (16,892)
Interest expense (12,466)
-------
Income (loss) from continuing operations
before income taxes $(26,146)
=======
Certain assets are not attributable to a single operating segment but
instead relate to multiple operating segments operating out of individual
locations. These assets are utilized by both the Rendering and Restaurant
Services business segments and are identified in the category Combined
Rend./Rest. Svcs. Depreciation of Combined Rend./Rest. Svcs. assets is
allocated based upon an estimate of the percentage of corresponding
activity attributed to each segment. Additionally, although intangible
assets are allocated to operating segments, the amortization related to the
adoption of "Fresh Start Reporting" is not considered in the measure of
operating segment profit (loss) and is included in Corporate Activities.
Business Segment Assets (in thousands):
January 2,
1999
----------
Rendering $84,904
Restaurant Services 32,100
Combined Rend./Rest. Svcs. 93,080
Esteem Products 3,097
Corporate Activities 29,985
Net assets of discontinued operations 20,000
--------
Total $263,166
=======
Business Segment Property, Plant and Equipment (in thousands):
January 2,
1999
----------
Depreciation and amortization:
Rendering $21,756
Restaurant Services 7,132
Esteem Products 455
Corporate Activities 3,075
------
Total $32,418
======
Additions:
Rendering $6,821
Restaurant Services 1,105
Combined Rend./Rest. Svcs. 3,948
Esteem Products 2,764
Corporate Activities 329
------
Total $14,967
======
The Company has no material foreign operations, but exports a portion of
its products to customers in various foreign countries.
Geographic Area Net Trade Revenues (in thousands):
January 2, January 3, December 28,
1999 1998 1996
------------- ----------- -------------
United States $208,255 $343,102 $348,270
Korea 5,897 5,280 5,796
Spain 8,237 8,700 12,191
Mexico 9,094 6,511 4,645
Japan 5,037 4,868 1,789
N. Europe 694 3,210 4,191
Pacific Rim 6,592 9,208 14,875
Taiwan 3,342 2,408 3,023
Canada 1,659 4,791 5,846
Latin/South America 10,772 7,331 11,390
Other/Brokered 77,452 48,733 55,309
-------- -------- --------
Total $337,031 $444,142 $467,325
======= ======= =======
Other/Brokered trade revenues represent product for which the
ultimate destination is not monitored.
(17) QUARTERLY FINANCIAL DATA
(UNAUDITED AND IN THOUSANDS EXCEPT PER SHARE AMOUNTS):
Year Ended January 2, 1999
------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
------------ -------------- ------------- --------------
Net sales $95,669 $87,315 $79,349 $74,698
Operating income (loss) 846 (1,284) (6,227) (5,618)
Earnings (loss) from
continuing operations (1,373) (2,717) (6,294) (6,415)
Discontinued operations:
Income (loss) from operations (31) 88 (603) (91)
Estimated loss on disposal - - - (14,657)
Net earnings (loss) (1,404) (2,629) (6,897) (21,163)
Basic earnings (loss) per share (0.09) (0.17) (0.44) (1.36)
Diluted earnings (loss) per share (0.09) (0.17) (0.44) (1.36)
Year Ended January 3, 1998
-------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
Net sales $112,266 $115,212 $101,722 $114,942
Operating income 3,994 8,671 2,176 3,516
Earnings (loss) from
continuing operations 213 3,133 (596) 1,578
Discontinued operations:
Income from operations 173 679 73 156
Net earnings (loss) 386 3,812 (523) 1,734
Basic earnings (loss) per share 0.02 0.25 (0.03) 0.11
Diluted earnings (loss) per share 0.02 0.23 (0.03) 0.10
See Note 14 for a discussion of fourth quarter Fiscal 1998 determination to
dispose of IPC. IPC is classified as a discontinued operation, and
accordingly, the information presented in this table differs from that
reported on Forms 10Q because of the reclassification of discontinued
operations for all periods presented in the table.
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
SCHEDULE II
Valuation and Qualifying Accounts
(In thousands)
Additions Charged to:
Balance at ----------------------- Balance at
Beginning Costs and End of
Description of Period Expenses Other Deductions Period
- ---------------------------------- ------------ ---------- -------- ---------- ----------
Accumulated amortization of
collection routes and contracts:
Year ended January 2, 1999 $ 7,668 $ 5,759 $ - $ 1,326 $ 12,101
======== ======== ===== ========= ========
Year ended January 3, 1998 $ 2,971 $ 5,660 $ - $ 963 $ 7,668
======== ======== ===== ========== ========
Year ended December 28, 1996 $ 7,854 $ 4,785 $ - $ 9,668 $ 2,971
======== ======== ===== ======== ========
Accumulated amortization of
goodwill:
Year ended January 2, 1999 $ 286 $ 227 $ - $ - $ 513
========= ========== ===== ======== ========
Year ended January 3, 1998 $ 120 $ 166 $ - $ - $ 286
========= ========== ===== ======== =======
Year ended December 28, 1996 $ - $ 120 $ - $ - $ 120
========= ========== ===== ======== =======
Note: Deductions consist of the write-off of fully amortized collection routes and contracts.
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 2, 1999
PART II
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item with respect to items 401 and 405
of Regulation S-K appears in the sections entitled "Election of Directors,"
"Executive Officers" and "Compliance with Section 16(a) of the Exchange Act"
included in the Registrant's definitive Proxy Statement relating to the 1998
Annual Meeting of Stockholders, which information is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item appears in the section entitled
"Executive Compensation" included in the Registrant's definitive Proxy Statement
relating to the 1998 Annual Meeting of Stockholders, which information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item appears in the section entitled
"Security Ownership of Certain Beneficial Owners and Management" included in the
Registrant's definitive Proxy Statement relating to the 1998 Annual Meeting of
Stockholders, which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Denis Taura, a director of the Company, is a principal in Taura Flynn &
Associates, LLC. The Company incurred from Taura Flynn & Associates, LLC, fees
and expenses of $335,592 related to management consulting services provided to
the Company.
Fredrick J. Klink, a director of the Company, is a partner in the law
firm of Dechert, Price & Rhodes. The Company paid Dechert, Price & Rhodes fees
for the performance of various legal services.
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 2, 1999
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
(1) The following consolidated financial statements are included in Item 8.
Pages
Independent Auditors' Report 21
Consolidated Balance Sheets-
January 2, 1999 and January 3, 1998 22
Consolidated Statements of Operations -
Three years ended January 2, 1999 23
Consolidated Statements of Stockholders' Equity -
Three years ended January 2, 1999 24
Consolidated Statements of Cash Flows -
Three years ended January 3, 19998 25
Notes to Consolidated Financial Statements -
January 2, 1999 and January 3, 1998 26
Quarterly Data 44
(2) The following financial statement schedule is included in Item 8.
Schedule II - Valuation and Qualifying Accounts 45
All other schedules are omitted since the required information
is not present or is not present in amounts sufficient to
require submission of the schedule, or because the information
required is included in the consolidated financial statements
and notes thereto.
(3) (a) Exhibits
Exhibit No. Description
3.1 * Restated Certificate of Incorporation of the Company.
3.2 * Amended and Restated Bylaws of the Company.
4.1 * Specimen Common Stock Certificate.
10.1 ** Amended and Restated Credit Agreement, dated
as of January 22, 1999, among Darling
International Inc., BankBoston, N.A., Comerica
Bank, Credit Lyonnais New York Branch, and Wells
Fargo Bank (Texas), National Association as
Co-agents, and other banks as named therein.
10.2* Registration Rights Agreement, as amended.
10.3* Form of Indemnification Agreement.
10.4* Lease, dated November 30, 1993, between the Company and
the Port of Tacoma.
10.5 P Leases, dated July 1, 1996, between the Company and the
City and County of San Francisco.
10.6 * 1993 Flexible Stock Option Plan.
10.7 *** International Swap Dealers Association, Inc.
(ISDA) Master Agreement and Schedule between
Credit Lyonnais and Darling International Inc.
dated as of June 6, 1997, related to interest
rate swap transaction.
10.7(a)*** International Swap Dealers Association, Inc. (ISDA) Master
Agreement and Schedule between Credit Lyonnais and Darling
International Inc. dated as of June 6, 1997, related to
interest rate swap transaction.
10.7(b)*** International Swap Dealers Association, Inc. (ISDA) Master
Agreement and Schedule between Credit Lyonnais and Darling
International Inc. dated as of June 6, 1997, related to
interest rate swap transaction.
10.8 * Form of Executive Severance Agreement.
10.9 * 1994 Employee Flexible Stock Option Plan.
10.10* Non-Employee Directors Stock Option Plan.
11 Statement re computation of per share earnings.
21 Subsidiaries of the Registrant.
23 Consent of KPMG LLP.
27 Financial Data Schedule
* Incorporated by reference from the Registrant's Registration
Statement on Form S-1 filed July 15, 1994
(Registration No. 33-79478).
** Incorporated by reference to Form 8-K filed January 29, 1999.
*** Incorporated by reference to Form 10-Q filed August 7, 1997.
P Filed pursuant to temporary hardship exemption under cover of
Form SE.
(b) Reports on Form 8-K:
The Registrant filed the following current report on Form 8-K
during the quarter ended January 2, 1999.
1. Current Report on Form 8-K dated December 16, 1998,
including information regarding the extension of the
forbearance period to January 15, 1999, pursuant to a
forbearance agreement dated December 14, 1998,
between the Company and the banks.
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 2, 1999
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Form 10-K for the Fiscal Year Ended January 2, 1999 on its
behalf by the undersigned, thereunto duly authorized, in the city of Irving,
State of Texas, on the 30th day of March, 1999.
DARLING INTERNATIONAL INC.
By: /s/ Dennis B. Longmire
-----------------------------
Dennis B. Longmire
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
the report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
Signature Title Date
/s/ Dennis B. Longmire Chairman of the Board and March 30, 1999
- ------------------------ Chief Executive Officer
Dennis B. Longmire (Principal Executive Officer)
/s/ John O. Muse Vice President, March 30, 1999
- --------------------- Chief Financial Officer
John O. Muse (Principal Financial Officer)
/s/ Cathy S. Hauslein Controller March 30, 1999
- -----------------------
Cathy S. Hauslein (Principal Accounting Officer)
/s/ Bruce Waterfall Director March 30, 1999
- -----------------------
Bruce Waterfall
/s/ Fredric J. Klink Director March 30, 1999
- ----------------------
Fredric J. Klink
/s/ William Westerman Director March 30, 1999
- -----------------------
William Westerman
/s/ Denis J. Taura Director March 30, 1999
- ----------------------
Denis J. Taura
INDEX TO EXHIBITS
Exhibit No. Description Page
- ------------ ----------------------------------------------------- -----
3.1 * Restated Certificate of Incorporation of the Company.
3.2 * Amended and Restated Bylaws of the Company.
4.1 * Specimen Common Stock Certificate.
10.1 ** Amended and Restated Credit Agreement, dated as of
January 22, 1999, among Darling International Inc.,
BankBoston, N.A., Comerica Bank, Credit Lyonnais New York
Branch, and Wells Fargo Bank (Texas), National Association
as Co-agents, and other banks as named therein.
10.2* Registration Rights Agreement, as amended.
10.3* Form of Indemnification Agreement.
10.4* Lease, dated November 30, 1993, between the Company and the Port
of Tacoma.
10.5 P Leases, dated July 1, 1996, between the Company and the City and
County of San Francisco.
10.6 * 1993 Flexible Stock Option Plan.
10.7*** International Swap Dealers Association, Inc. (ISDA)
Master Agreement and Schedule between Credit Lyonnais and
Darling International Inc. dated as of June 6, 1997, related
to interest rate swap transaction.
10.7(a)*** International Swap Dealers Association, Inc. (ISDA) Master
Agreement and Schedule between Credit Lyonnais and Darling
International Inc. dated as of June 6, 1997, related to
interest rate swap transaction.
10.7(b)*** International Swap Dealers Association, Inc. (ISDA) Master
Agreement and Schedule between Credit Lyonnais and Darling
International Inc. dated as of June 6, 1997, related to
interest rate swap transaction.
10.8 * Form of Executive Severance Agreement.
10.9 * 1994 Employee Flexible Stock Option Plan.
10.10* Non-Employee Directors Stock Option Plan.
11 Statement re computation of per share earnings. 51
21 Subsidiaries of the Registrant. 52
23 Consent of KPMG LLP. 53
27 Financial Data Schedule
* Incorporated by reference from the Registrant's Registration Statement
on Form S-1 filed July 15, 1994 (Registration No. 33-79478).
** Incorporated by reference to Form 8-K filed January 29, 1999.
*** Incorporated by reference to Form 10-Q filed August 7, 1997.
P Filed pursuant to temporary hardship exemption under cover of Form SE.
Darling International Inc.
Exhibit 11
Statement RE Computation of Per Share Earnings
The following table details the computation of basic and diluted earnings per
common share, in thousands except per share data:
January 3, January 3, December 28,
1998 1998 1996
==========================================================================================================================
Earnings (loss) from continuing operations $ (16,799) $ 4,328 $ 7,907
========= ======= =======
Discontinued operations:
Income (loss) from discontinued operations, net of tax (637) 1,081 (233)
Estimated loss on disposal of discontinued operations,
net of tax (14,657) - -
------- ------- -------
Net earnings (loss) available to common stock $(32,093) $ 5,409 $ 7,674
======= ======= =======
- ------------------------------------------------------------------------------------------------------------------------
Shares (Basic):
Weighted average number of common shares outstanding 15,581 15,519 15,375
======= ====== ======
Basic earnings (loss) per share:
Continuing operations $ (1.08) $ 0.28 $ 0.51
Discontinued operations:
Income (loss) from operations (0.04) 0.07 (0.01)
Estimated loss on disposal (0.94) - -
------ ------ -----
Total $ (2.06) $ 0.35 $ 0.50
====== ====== =====
- ------------------------------------------------------------------------------------------------------------------------
Shares (Diluted):
Weighted average number of common shares outstanding 15,581 15,519 15,375
Additional shares assuming exercise of stock options - 942 1,299
------- ------ -------
Average common shares outstanding and equivalents 15,581 16,461 16,674
======= ====== =======
Diluted earnings (loss) per share:
Continuing operations $ (1.08) $ 0.26 $ 0.47
Discontinued operations:
Income (loss) from operations (0.04) 0.07 (0.01)
Estimated loss on disposal (0.94) - -
------ ------ ------
Total $ (2.06) $ 0.33 $ 0.46
====== ===== =====
- ------------------------------------------------------------------------------------------------------------------------
Darling International Inc.
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Subsidiary State of Incorporation
---------- ----------------------
International Processing Corporation Georgia
Darling International Inc.
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Darling International Inc.:
We consent to incorporation by reference in the registration statements on
Form S-3 (No. 33-79478) and Form S-8 (Nos. 33-99868 and 33-99866) of
Darling International Inc. of our report dated March 5, 1999, relating to
the consolidating balance sheets of Darling International Inc. and
subsidiaries as of January 2, 1999 and January 3, 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for each of the years in the three-year period ended January 2, 1999, and
the related schedule, which report appears in the January 2, 1999 annual
report on Form 10-K of Darling International Inc.
KPMG LLP
Dallas, Texas
March 30, 1999