(Mark One)/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 29, 2002
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _______
Commission File Number 0-24620
DARLING INTERNATIONAL INC.(Exact name of registrant as specified in its charter)
251 O'CONNOR RIDGE BLVD., SUITE 300, IRVING, TEXAS 75038(Address of principal executive offices)(972) 717-0300(Registrant's telephone number)
Not applicable(Former name, address and fiscal year, if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such report(s)), and (2) has been subject to such filing requirements for the past 90 days.
YES /X/ NO / /
The number of shares outstanding of the Registrant's common stock, $0.01 par value, as of August 12, 2002 was 62,281,448.
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DARLING INTERNATIONAL INC. AND SUBSIDIARIESFORM 10-Q FOR THE THREE MONTHS ENDED JUNE 29, 2002
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS Consolidated Balance Sheets. . . . . . . . . . . . . . . . 3 June 29, 2002 (unaudited) and December 29, 2001 Consolidated Statements of Operations (unaudited). . . . . . . . 4 Three Months and Six Months Ended June 29, 2002 and June 30, 2001 Consolidated Statements of Cash Flows (unaudited). . . . . . . . 5 Six Months Ended June 29, 2002 and June 30, 2001 Notes to Consolidated Financial Statements (unaudited). . . . . . . 6 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . 15 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS . . . . . . . . . . . . . . . . . . . 22 PART II: OTHER INFORMATION Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . . . . . . . . . . . . . 23 Item 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . 24 Signatures . . . . . . . . . . . . . . . . . . . . . 25
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DARLING INTERNATIONAL INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETSJune 29, 2002 and December 29, 2001(in thousands, except shares and per share data)
June 29, December 29, 2002 2001 ----------- ------------ ASSETS (unaudited) - ------ Current assets: Cash and cash equivalents ................................... $ 2,795 $ 3,668 Accounts receivable ......................................... 19,891 23,719 Inventories ................................................. 8,289 7,698 Prepaid expenses ............................................ 7,602 4,394 Assets held for sale ........................................ 2,667 - Deferred income taxes ....................................... 2,571 2,203 Other ....................................................... 175 209 --------- --------- Total current assets .................................... 43,990 41,891 Property, plant and equipment, less accumulated depreciation of $161,772 at June 29, 2002 and $155,555 at December 29, 2001 76,064 74,744 Collection routes and contracts, less accumulated amortization of $22,145 at June 29, 2002 and $22,139 at December 29, 2001 .. 25,162 27,366 Goodwill, less accumulated amortization of $1,077 at June 29, 2002 and December 29, 2001 ........................... 4,429 4,429 Assets held for sale ............................................. - 3,002 Other noncurrent assets .......................................... 8,015 7,647 --------- --------- $ 157,660 $ 159,079 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) - ---------------------------------------------- Current liabilities: Current portion of long-term debt ........................... $ 4,265 $ 120,053 Accounts payable, principally trade ......................... 8,164 11,104 Accrued expenses ............................................ 25,405 24,069 Accrued interest ............................................ 687 3,383 --------- --------- Total current liabilities ............................... 38,521 158,609 Long-term debt, less current portion ............................. 70,850 - Other non-current liabilities .................................... 7,418 8,134 Deferred income taxes ............................................ 2,358 1,990 --------- --------- Total liabilities ....................................... 119,147 168,733 --------- --------- Redeemable Preferred Stock, $0.01 par value, 1,000,000 shares authorized, 100,000 shares outstanding ........................ 7,861 - Stockholders' equity (deficit): Common stock, $0.01 par value; 100,000,000 shares authorized; 62,298,448 and 15,589,362 shares issued and outstanding at June 29, 2002 and at December 29, 2001, respectively ..... 623 156 Additional paid-in capital .................................. 73,242 35,235 Treasury stock, at cost; 21,000 shares at June 29, 2002 and December 29, 2001 ...................................... (172) (172) Accumulated comprehensive loss .............................. (533) (533) Accumulated deficit ......................................... (42,508) (44,340) --------- --------- Total stockholders' equity (deficit) .................... 30,652 (9,654) --------- --------- Contingencies (note 3) $ 157,660 $ 159,079 ========= ========= The accompanying notes are an integral part of these consolidated financial statements.
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DARLING INTERNATIONAL INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONSThree months and six months ended June 29, 2002 and June 30, 2001(in thousands, except per share data)
Three Months Ended Six Months Ended ----------------------- --------------------- June 29, June 30, June 29, June 30, 2002 2001 2002 2001 ---------- --------- --------- --------- (unaudited) (unaudited) Net sales ............................................... $ 62,044 $ 58,614 $ 123,725 $ 122,248 --------- --------- --------- --------- Costs and expenses: Cost of sales and operating expenses ............... 46,277 46,690 92,672 95,002 Selling, general and administrative expenses ....... 8,285 6,778 15,445 13,783 Depreciation and amortization ...................... 4,235 6,488 8,627 13,302 --------- --------- --------- --------- Total costs and expenses ........................ 58,797 59,956 116,744 122,087 --------- --------- --------- --------- Operating income (loss) ......................... 3,247 (1,342) 6,981 161 --------- --------- --------- --------- Other income (expense): Interest expense ................................... (1,385) (3,267) (5,271) (6,494) Other, net ......................................... 745 (1,112) 1,480 (537) --------- --------- --------- --------- Total other expense ............................ (640) (4,379) (3,791) (7,031) --------- --------- --------- --------- Income (loss) before income taxes ............... 2,607 (5,721) 3,190 (6,870) Income taxes ............................................ (1,358) - (1,358) - --------- --------- --------- --------- Net income (loss) ............................... 1,249 (5,721) 1,832 (6,870) Preferred dividends and accretion ............... (255) - (255) - --------- --------- --------- --------- Net income (loss) applicable to common shareholders ........................... $ 994 $ (5,721) $ 1,577 $ (6,870) ========= ========= ========= ========= Basic and diluted income (loss) per share ............... $ 0.03 $ (0.37) $ 0.06 $ (0.44) ========= ========= ========= ========= The accompanying notes are an integral part of these consolidated financial statements.
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DARLING INTERNATIONAL INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWSSix Months ended June 29, 2002 and June 30, 2001(in thousands)
Six Months Ended ----------------------- June 29, June 30, 2002 2001 --------- ---------- (unaudited) Cash flows from operating activities: Net income (loss) ............................................................ $ 1,832 $ (6,870) Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Depreciation and amortization ............................................. 8,627 13,302 Gain on disposal of property, plant, equipment and other assets ........... (1,612) (244) Changes in operating assets and liabilities: Accounts receivable .................................................... 3,828 1,449 Inventories and prepaid expenses ....................................... (3,799) 1,091 Accounts payable and accrued expenses .................................. 2,251 (11,994) Accrued interest ....................................................... 2,635 (2,919) Other .................................................................. (1,500) (3,157) --------- --------- Net cash provided (used) by operating activities .............................. 12,262 (9,342) --------- --------- Cash flows from investing activities: Capital expenditures ......................................................... (7,398) (3,782) Gross proceeds from disposal of property, plant and equipment and other assets .......................................................... 1,604 141 --------- --------- Net cash used by investing activities ............................... (5,794) (3,641) --------- --------- Cash flows from financing activities: Proceeds from long-term debt ................................................. 94,034 125,341 Payments on long-term debt ................................................... (98,339) (109,498) Common and preferred stock issuance costs .................................... (2,840) - Contract payments ................................................................. (196) (3,262) --------- --------- Net cash provided (used) by financing activities .................... (7,341) 12,581 --------- --------- Net decrease in cash and cash equivalents ......................................... (873) (402) Cash and cash equivalents at beginning of period .................................. 3,668 3,509 --------- --------- Cash and cash equivalents at end of period ........................................ $ 2,795 $ 3,107 ========= ========= Supplemental disclosure of cash flow information: Cash paid during the period for: Interest ................................................................. $ 2,635 $ 9,413 ========= ========= Income taxes, net of refunds ............................................. $ 619 $ 28 ========= ========= Noncash financing activity - Recapitalization transactions (note 6): Debt reduction ............................................................... (40,633) - Accrued interest reduction ................................................... (5,331) - Forbearance fees reduction ................................................... (3,855) - Preferred stock, net of issuance costs and discount .......................... 8,327 - Common stock issued, net of issuance costs ................................... 41,492 - The accompanying notes are an integral part of these consolidated financial statements.
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DARLING INTERNATIONAL INC. AND SUBSIDIARIESNotes to Consolidated Financial StatementsJune 29, 2002(unaudited)
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June 29, December 29, 2002 2001 --------- ------------ Collection Routes and Contracts: Routes ................................ $ 42,307 $ 42,307 Non-compete agreements ................. 4,627 6,797 Royalty and consulting agreements ...... 373 401 --------- --------- 47,307 49,505 Accumulated Amortization: Routes ................................. (19,185) (17,498) Non-compete agreements ................. (2,726) (4,423) Royalty and consulting agreements ...... (234) (218) --------- --------- (22,145) (22,139) --------- --------- Collection routes and contracts, less accumulated amortization ........... $ 25,162 $ 27,366 ========= =========
Three Months Ended Six Months Ended ------------------------------------------------ June 29, June 30, June 29, June 30, 2002 2001 2002 2001 ---------------------- -------------------- Reported net income (loss) applicable to common shareholders .................. $ 994 $(5,721) $1,577 $(6,870) Add back: goodwill amortization ............ - 51 - 141 ------- -------- ------- -------- Adjusted net income (loss) applicable to common shareholders .................. $ 994 $(5,670) $1,577 $(6,729) ======= ======== ======= ======== Basic earnings (loss) per share: Reported net income (loss) .................. $ 0.03 $ (0.37) $ 0.06 $ (0.44) Add back: goodwill amortization ............ - 0.01 - 0.01 ------- -------- ------- -------- Adjusted net income (loss) .................. $ 0.03 $ (0.36) $ 0.06 $ (0.43) ======= ======== ======= ========
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Three Months Ended Six Months Ended ------------------------------------------------------- June 29, June 30, June 29, June 30, 2002 2001 2002 2001 ------------------------- ------------------------ Rendering: Trade ............ $ 44,254 $ 43,464 $ 89,849 $ 93,226 Intersegment ..... 8,626 6,630 16,506 12,818 ---------- ---------- ---------- --------- 52,880 50,094 106,355 106,044 ---------- ---------- ---------- --------- Restaurant Services: Trade ............. 17,790 15,150 33,876 29,022 Intersegment ...... 1,886 1,558 3,862 3,357 ---------- ---------- ---------- --------- 19,676 16,708 37,738 32,379 ---------- ---------- ---------- --------- Eliminations ............ (10,512) (8,188) (20,368) (16,175) ---------- ---------- ---------- --------- Total ................... $ 62,044 $ 58,614 $123,725 $122,248 ========== ========== ========== =========
Three Months Ended Six Months Ended ----------------------------------------------------- June 29, June 30, June 29, June 30, 2002 2001 2002 2001 ------------------------- ------------------------ Rendering ................... $ 4,751 $ 2,413 $ 8,900 $ 4,913 Restaurant Services ......... 3,956 2,304 7,795 3,239 Corporate activities ........ (4,715) (7,171) (8,235) (8,528) Interest expense ............ (1,385) (3,267) (5,270) (6,494) --------- --------- --------- --------- Net earnings (loss) before income taxes ........... $ 2,607 $ (5,721) $ 3,190 $ (6,870) ========= ========= ========= =========
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June 29, December 29, 2002 2001 ---------- ------------ Rendering ................................. $ 55,404 $ 56,847 Restaurant Services ....................... 16,201 14,779 Combined Rendering/Restaurant Services .... 60,354 64,155 Corporate Activities ...................... 25,701 23,298 -------- -------- Total ..................................... $157,660 $159,079 ======== ========
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June 29, December 29, 2002 2001 ---------- ------------ Esteem (Norfolk, NE) ........... $ 1,200 $ 1,200 Peptide (Norfolk, NE) .......... 500 500 Petaluma, CA ................... 497 497 Billings, MT ................... 421 421 West Point, NE ................. - 118 Lynchburg, VA .................. - 100 Shelbyville, IN ................ - 62 Zanesville, OH ................. - 54 Goldsboro, NC .................. 49 50 ------- ------- $ 2,667 $ 3,002 ======= =======
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DARLING INTERNATIONAL INC. AND SUBSIDIARIESFORM 10-Q FOR THE THREE MONTHSENDED JUNE 29, 2002
PART I
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion summarizes factors affecting the Company's results of operations for the three and six months ended June 29, 2002 and June 30, 2001, and information with respect to the liquidity and capital resources of the Company at June 29, 2002.
Three Months Ended June 29, 2002 Compared to Three Months Ended June 30, 2001
The Company recorded net income of $1.2 million for the second quarter of the fiscal year ending December 28, 2002 ("Fiscal 2002"), as compared to a net loss of $5.7 million for the second quarter of the fiscal year ended December 29, 2001 ("Fiscal 2001"), an improvement of $6.9 million. Principal factors affecting these comparative results, which are discussed further in the following section were higher sales prices, lower depreciation and energy expenses, lower interest expense, and gain on disposal of assets related to a fire at the Company's Norfolk, NE plant; partially offset by higher raw material prices, severance expense related to the Company's recapitalization, and accrued income tax expense.
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. In addition, the Company provides grease trap collection services to restaurants. Sales are significantly affected by finished goods prices, quality of raw material, and volume of raw material. Net sales include the sales of produced finished goods, trap grease services, collection fees, and finished goods purchased for resale, which constitute less than 10% of total sales for both the second quarter of Fiscal 2002 and the second quarter of Fiscal 2001.
During the second quarter of Fiscal 2002, net sales increased by $3.4 million (5.8%), to $62.0 million, as compared to $58.6 million during the second quarter of Fiscal 2001, primarily due to the following: 1) Increases in aggregate finished goods prices resulted in a $5.2 million increase in sales in the second quarter of Fiscal 2002, compared to the second quarter of Fiscal 2001, (average yellow grease prices increased $1.54/cwt to $9.67/cwt (18.9% higher); average tallow prices increased $1.44/cwt to $10.50/cwt (15.9% higher); and average meat and bone meal prices increased $21.20/ton to $183.00/ton (11.6% higher)); 2) Higher collection fees, which improved recovery of collection expenses, by $1.5 million; 3) Improved yields on production of finished goods increased sales by $1.2 million; partially offset by 4) Lower raw material inage decreased sales $1.9 million; 5) Finished products purchased for resale decreased $1.6 million; 6) Hide sales decreased $0.7 million; and 7) Other decreases of $0.3 million.
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Cost of sales and operating expenses include prices paid to raw material suppliers, the cost of product purchased for resale, and the cost to collect and process raw material. The Company utilizes both fixed and formula pricing methods for the purchase of raw materials. Fixed prices are adjusted where possible as needed for changes in competition and significant changes in finished goods market conditions, while raw materials purchased under formula prices are correlated with specific finished goods prices.
During the second quarter of Fiscal 2002, cost of sales and operating expenses decreased $0.4 million (0.9%) to $46.3 million as compared to $46.7 million during the second quarter of Fiscal 2001 primarily as a result of: 1) Lower natural gas and fuel oil prices, $2.0 million; 2) Lower finished products purchased for resale decreased cost of sales $1.8 million; 3) Lower raw material inage decreased cost of sales $0.5 million; partially offset by 4) Higher raw material prices of $3.2 million, which result in part from higher finished product prices which increase formula raw material pricing arrangements with raw material suppliers; 5) Higher factory and collection payroll expense of $0.7 million, and higher transportation expenses not covered by business interruption insurance incurred moving raw material inage between plant locations due to outages at the Norfolk plant related to the fire and at the Sioux City plant related to the plant expansion.
Selling, general and administrative costs were $8.3 million during the second quarter of Fiscal 2002, a $1.5 million increase from $6.8 million for the second quarter of Fiscal 2001, primarily due to increased payroll expenses of $1.6 million, which included approximately $1.0 million in charges for compensation to be paid to the Company's CEO over a 2-year period due to a change in control of the Company and his change in status from an employee of the Company to a consultant pursuant to the terms of the related agreement for his services.
Depreciation and amortization charges decreased $2.3 million to $4.2 million during the second quarter of Fiscal 2002 as compared to $6.5 million during the second quarter of Fiscal 2001. The decrease is primarily due to various property and equipment assets becoming fully depreciated during Fiscal 2001.
Interest expense decreased $1.9 million from $3.3 million during the second quarter of Fiscal 2001 to $1.4 million during the second quarter of Fiscal 2002, primarily due to changes resulting from the effect of the provisions of Statement 15 as it applies to the Company's Recapitalization Agreement which was closed May 13, 2002 (see note 6 to the consolidated financial statements included elsewhere herein).
Other income (expense) increased $1.8 million from net other expense of $1.1 million during the second quarter of Fiscal 2001 to net other income of $0.7 million during the second quarter of Fiscal 2002. This increase was primarily due to a gain of $0.7 million, resulting from insurance proceeds received in excess of the net book value of assets destroyed by fire at the Company's Norfolk, Nebraska plant. Included in the second quarter of Fiscal 2001 net other expense was a loss on the early retirement of a noncompete liability of $0.4 million and loss on fair value adjustments on the interest rate swap agreements which extended beyond the June, 2001, maturity date of the Credit Agreement of $0.5 million.
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The Company recorded income tax expense of $1.4 million during the second quarter of Fiscal 2002 based on its estimate of the effective tax rate for the entire year. The estimated effective income tax rate includes consideration of the level of valuation allowance recorded as a reduction of deferred tax assets. Based on the Company's assessment of its ability to carryback net operating losses, scheduled reversals of future taxable and deductible amounts, future taxable income and tax planning strategies, the Company does not contemplate recognition of a net deferred tax asset for Fiscal 2002.
The Company made capital expenditures of $3.8 million during the second quarter of Fiscal 2002 compared to capital expenditures of $2.3 million during the second quarter of Fiscal 2001, an increase of $1.5 million. The increase is primarily due to capital spending on the expansion of the Company's Sioux City plant location, which when completed, will process raw material inage from the Norfolk plant which was destroyed by fire.
Six Months Ended June 29, 2002 Compared to Six Months Ended June 30, 2001
The Company recorded net income of $1.8 million for the first six months of Fiscal 2002, as compared to a net loss of $6.9 million for the first six months of Fiscal 2001, an improvement of $8.7 million. Principal factors affecting these comparative results which are discussed further in the following section were improved yields on production, higher sales prices, higher collection fees which improved recovery of collection expense, lower natural gas and fuel oil expenses included in cost of sales, lower depreciation expense, lower interest expense, and gain on disposal of assets related to a fire at the Company's Norfolk, NE plant, partially offset by the impact of lower raw material inage on net sales, severance expense related to the Company's recapitalization, and accrued income tax expense.
During the first six months of Fiscal 2002, net sales increased $1.4 million (1.2%), to $123.7 million as compared to $122.3 million during the first six months of Fiscal 2001, primarily due to the following: 1) Improved yield on production increased sales $3.4 million; 2) Increases in aggregate finished goods prices resulted in a $3.1 million increase in sales, (average yellow grease prices increased $1.03/cwt to $9.52/cwt (12.1% higher); average tallow prices increased $0.86/cwt to $10.09/cwt (9.3% higher); and average meat and bone meal prices increased $2.40/ton to $182.40/ton (1.3% higher)); 3) Higher collection fees, which improved recovery of collection expenses, by $2.9 million; partially offset by 4) Raw material inage decreased $4.1 million; 5) Finished products purchased for resale decreased $2.2 million; 6) Hide sales decreased $1.4 million; and 7) Other decreases of $0.3 million.
During the first six months of Fiscal 2002, cost of sales and operating expenses decreased $2.3 million (2.4%) to $92.7 million as compared to $95.0 million during the first six months of Fiscal 2001 primarily as a result of the following: 1) Lower natural gas and fuel oil expense included in cost of sales and operating expenses decreased $3.7 million; 2) Lower finished products purchased for resale decreased cost of sales $2.2 million; 3) Lower raw material inage decreased cost of sales $0.9 million; and 4) Other decreases of $0.2 million; partially offset by 5) Higher raw material prices of $2.6 million which results, in part, from higher finished product prices and formula raw material pricing arrangements with raw material suppliers; 6) Higher factory and collection payroll expense increased $1.4 million; and 7) Higher insurance expense included in cost of sales and operating expense of $0.7 million.
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Selling, general and administrative costs were $15.4 million during the first six months of Fiscal 2002, a $1.6 million increase (11.6%) from $13.8 million for the first six months of Fiscal 2001. The increase was primarily due to increased payroll expenses of $2.0 million, which included approximately $1.0 million in charges for compensation to be paid to the Company’s CEO over a 2-year period due to a change in control of the Company and his change in status from an employee of the Company to a consultant pursuant to the terms of the related agreement for his services. The increases were partially offset by reduced bad debt expense of $0.4 million.
Depreciation and amortization charges decreased $4.7 million to $8.6 million during the first six months of Fiscal 2002 as compared to $13.3 million during the first six months of Fiscal 2001. The decrease is primarily due to various property and equipment assets becoming fully depreciated during Fiscal 2001.
Interest expense decreased $1.2 million (18.5%) from $6.5 million during the first six months of Fiscal 2001 to $5.3 million during the first six months of Fiscal 2002, primarily due to changes resulting from the effect of the provisions of Statement 15 as it applies to the Company's Recapitalization Agreement (see note 6 to the consolidated financial statements elsewhere herein), and amortization of forbearance fees of $1.7 million included in interest expense, net of the effect of lower interest rates.
Other income (expense) increased $2.0 million to $1.5 million the first six months of Fiscal 2002 from net other expense of $0.5 million in the first six months of Fiscal 2001. This increase was primarily due to a gain of $1.7 million resulting from insurance proceeds received in excess of the net book value of assets destroyed by fire at the Company's Norfolk, Nebraska plant during the first six months of Fiscal 2002. Included in net other expense in the first six months of Fiscal 2001 was a loss on the early retirement of a non-compete liability of $0.4 million and fair value adjustments on interest rate swap agreements of $0.7 million, partially offset by gain related to the ineffective portion of natural gas hedge transactions of $0.5 million.
The Company recorded income tax expense of $1.4 million during the first six months of Fiscal 2002 based on its estimate of the effective tax rate for the entire year. The estimated effective income tax rate includes consideration of the level of valuation allowance recorded as a reduction of deferred tax assets. Based on the Company's assessment of its ability to carryback net operating losses, scheduled reversals of future taxable and deductible amounts, future taxable income and tax planning strategies, the Company does not contemplate recognition of a net deferred tax asset for Fiscal 2002.
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The Company made capital expenditures of $7.4 million during the first six months of Fiscal 2002 compared to capital expenditures of $3.8 million during the first six months of Fiscal 2001. The increase was primarily due to capital spending on the expansion of the Company's Sioux City plant, which when completed, will process raw material inage from the Norfolk plant which was destroyed by fire.
At June 29, 2002, the Company’s total borrowings outstanding under its Credit Agreement were $61.0 million.
Debt consists of the following (in thousands):
June 29, December 29, 2002 2001 --------- ------------ Credit Agreement: Revolving Credit Facility (contractual amount of $61,013)...... $ 75,095 $120,027 Term Loan .............................. - - Other notes ................................ 20 26 -------- -------- 75,115 120,053 Less current maturities .................... 4,265 120,053 -------- -------- $ 70,850 $ - ======== ========
On May 13, 2002, the Company consummated a recapitalization and executed a new amended and restated Credit Agreement with its lenders. The new Credit Agreement reflects the effect of applying the provisions of Statement of Financial Accounting Standards No. 15, Accounting by Debtors and Creditors for Troubled Debt Restructurings ("Statement 15"). Statement 15 requires that the previously existing amount of debt owed by the Company to the lenders be reduced by the fair value of the equity interest granted and that no gain from restructuring the Company's debt be recognized with the result that the carrying amount of the debt of $75.1 million exceeds its contractual amount of $61.0 million by $14.1 million at June 29, 2002. The fair value of the equity interest granted was determined on the closing date of the recapitalization, May 13, 2002. Interest expense on the remaining carrying amount of debt reported in our financial statements is based on a new effective interest rate (0.54% at June 29, 2002) that equates the present value of the future cash payment specified by the new terms of the term loan with the carrying amount of the debt.
Under terms of the new Credit Agreement, the Company exchanged borrowings outstanding under its previous Credit Agreement, a portion of the accrued interest and commitment fees, and forbearance fees payable for 46,705,086 shares of newly issued common stock, equal to 75% of the Company's then total outstanding common stock on a fully diluted basis (exclusive of stock options issued and outstanding), and 100,000 shares of 6% cumulative redeemable Series A Preferred Stock with a liquidation preference of $100 per share and a face value of $10.0 million. The Company's new Credit Agreement includes a term loan with a contractual principal amount of $61.0 million (and a carrying value of $75.1 million outstanding at June 29, 2002, due to the provisions of Statement 15 as discussed above) and also provides for a revolving credit facility which will enable the Company to borrow or issue letters of credit of up to $17.3 million. The term loan and the revolving credit facility mature on May 10, 2007.
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Substantially all assets of the Company are either pledged or mortgaged as collateral for borrowings under the new Credit Agreement. The new 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.
The classification of long-term debt in the accompanying June 29, 2002 consolidated balance sheet is based on the repayment terms of the debt issued under the new Credit Agreement pursuant to the recapitalization.
Management believes the cash flow from operating activities and funds available under the new Credit Agreement will be sufficient to meet working capital and capital expenditure needs for at least the next 12 months.
Net cash provided by operating activities was $12.3 million for the first six months of Fiscal 2002 compared to net cash used of $9.3 million in the comparable prior fiscal year period, an increase of $21.6 million principally due to improved net income and changes in the balances of operating assets and liabilities which resulted in additional cash flow in the Fiscal 2002 period. Cash used by investing activities was $5.8 million for the first six months of Fiscal 2002 compared to $3.6 million in the prior fiscal year period. The increased level of expenditures in Fiscal 2002 was due primarily to increased capital expenditures for machinery and equipment. Net cash used by financing activities was $7.3 million in the first six months of Fiscal 2002 compared to cash provided of $12.6 million in the first six months of Fiscal 2001, principally due to additional reductions of long-term debt in the Fiscal 2002 period compared to additions to indebtedness in the first six months of 2001.
The Company made capital expenditures of $7.4 million primarily for machinery and equipment during the first six months of Fiscal 2002 compared to capital expenditures of $3.8 million during the first six months of Fiscal 2001.
The Company follows certain significant accounting policies when preparing its consolidated financial statements. A complete summary of these policies is included in Note 1 to the consolidated financial statements included in the Company's Annual Report on Form 10-K/A.
Certain of the policies require management to make significant and subjective estimates which are sensitive to deviations of actual results from management's assumptions. In particular, management makes estimates regarding the fair value of the Company's reporting units in assessing potential impairment of goodwill, estimates regarding future undiscounted cash flows from the future use of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable, estimates regarding the net realizable value of long-lived assets held for sale, estimates regarding pension expense, estimates of bad debts and estimates regarding self insured risks including insurance, environmental and litigation contingencies.
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In assessing impairment of goodwill, the Company uses estimates and assumptions in determining the estimated fair value of reporting units. In assessing the impairment of long-lived assets where there has been a change in circumstances indicating the carrying value of a long-lived asset may not be recoverable, the Company has estimated future undiscounted net cash flows from use of the asset based on actual historical results and expectations about future economic circumstances including future business volume, finished product prices and operating costs. The estimates of fair value of reporting units and of future net cash flows from use of the asset could change if actual prices and costs differ due to industry conditions or other factors affecting the level of business volume or the Company's performance. In assessing impairment of long-lived assets held for sale, the Company has estimated the net realizable value of such assets based on information from various external sources regarding possible selling prices for such assets. The estimate of reserve for bad debts is based upon the Company's bad debt experience, market conditions, aging of trade accounts receivable, and interest rates, among other factors. Pension expense is based upon actuarial estimates. These estimates could change based on changes in market conditions, interest rates, and other factors. In estimating liabilities for self insured risks, the Company considers information from outside consultants and experts, and past historical experience, in projecting future costs expected to be incurred. These estimates could change if future events are different than assumed by management, actual costs to settle the liabilities differ from those estimated and the circumstances associated with the self insured risks change.
The Financial Accounting Standards Board recently issued Statement 143, Accounting for Asset Retirement Obligations, and Statement 146, Accounting for Costs Associated with Exit or Disposal Activities. Statement 143 establishes requirements for the accounting for removal costs associated with asset retirements and is effective for fiscal years beginning after June 15, 2002, with earlier adoption encouraged. Statement 146 requires all restructurings initiated after December 31, 2002, to be recorded when they are incurred and can be measured at fair value, with the recorded liability subsequently adjusted for changes in estimated cash flows. The Company is currently assessing the impact of Statements 143 and 146 on its consolidated financial statements.
This Quarterly Report on Form 10-Q includes "forward-looking" statements that involve risks and uncertainties. The words "believe," "anticipate," "expect," "estimate," "intend," and similar expressions identify forward-looking statements. All statements other than statements of historical facts included in the Quarterly Report on Form 10-Q, including, without limitation, the statements under the sections entitled "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. Actual results could differ materially from those discussed in the forward-looking statements as a result of certain factors. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct.
In addition to those factors discussed elsewhere in this report, and in other public filings with the SEC, 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. Among other things, future profitability may be affected by the Company's ability to grow its business which faces competition from companies which may have substantially greater resources than the Company.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Market risks affecting the Company are exposures to changes in prices of the finished products the Company sells, interest rates on debt, availability of raw material supply, and the price of natural gas used in the Company's plants. Raw materials available to the Company are impacted by seasonal factors, including holidays, when raw material inage declines; warm weather, which can adversely affect the quality of raw material processed and finished products produced; and cold weather, which can impact collection of raw material. Predominantly all of the Company's finished products are commodities which are generally sold at prices prevailing at the time of sale. The Company used, through June 2002, interest rate and, through March, 2001, natural gas swaps, to manage these related risks. The Company is not party to any interest rate swap agreements subsequent to June 2002. Beginning in April, 2001, the Company is using natural gas forward purchase agreements with its suppliers to manage the price risk of natural gas used in its facilities. While the Company does have international operations, and operates in international markets, it considers its market risks in such activities to be immaterial.
As of June 29, 2002, the Company has forward purchase agreements in place for purchases of approximately 827,000 mmbtu's of natural gas for the period July through December, 2002, with an average purchase price of $2.81/mmbtu.
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PART II: Other Information
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The matters voted upon at the annual meeting of stockholders held on May 10, 2002 were as follows:
The election of five directors to serve until the next annual meeting of stockholders or until their successors have been elected and qualified. The number of votes cast for and against the election of each nominee, as well as the number of abstentions and broker non-votes with respect to the election of each nominee, were as follows:
Thomas Albrecht For 12,187,105 Against/Withheld 2,200 Fredric J. Klink For 12,141,605 Against/Withheld 47,700 Charles Macaluso For 12,187,105 Against/Withheld 2,200 Richard A. Peterson For 12,187,105 Against/Withheld 2,200 Denis J. Taura For 11,636,558 Against/Withheld 552,747
Approved the issuance of approximately 46.7 million shares of common stock and up to 110,000 shares of newly created 6% cumulative redeemable Series A Preferred stock.
For 11,442,275 Against/Withheld 747,030
Amended the Company's certificate of incorporation to increase the number of authorized shares of common stock from 25 million to 100 million.
For 11,429,475 Against/Withheld 759,830
Amended the Company's certificate of incorporation to grant the lenders pre-emptive rights to purchase the Company's common stock in the future.
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Item 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits 10.1 Consulting Agreement dated as of May 10, 2002 by and between Darling International Inc., Taura, Flynn and Associates LLC, and Denis J. Taura. (b) REPORTS ON FORM 8-K The Registrant did not file any current reports on Form 8-K during the quarter ended June 29, 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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