UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) X ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended January 1, 2000 OR TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from ____________ to ____________ Commission File Number 0-24620 DARLING INTERNATIONAL INC. (Exact name of registrant as specified in its charter) Delaware 36-2495346 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) 251 O'Connor Ridge Blvd. Suite 300 Irving, Texas 75038 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (972) 717-0300 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock $0.01 par value per share (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such report(s)), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by nonaffiliates of the Registrant was approximately $11,500,000 as of March 21, 2000 based upon the closing price of such stock as reported on the American Stock Exchange ("AMEX") on that day. There were 15,589,077 shares of common stock, $0.01 par value, outstanding at March 21, 2000. DOCUMENTS INCORPORATED BY REFERENCE Selected designated portions of the Registrant's definitive Proxy Statement are incorporated by reference into Part III of this Annual Report.
DARLING INTERNATIONAL INC. AND SUBSIDIARIES FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 1, 2000 TABLE OF CONTENTS Page No. PART I. ITEM 1. BUSINESS.......................................................... 3 ITEM 2. PROPERTIES........................................................ 8 ITEM 3. LEGAL PROCEEDINGS................................................. 9 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............11 PART II. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS........................................11 ITEM 6. SELECTED FINANCIAL DATA............................................12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS......................13 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS........19 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................19 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE................................44 PART III. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.................44 ITEM 11. EXECUTIVE COMPENSATION.............................................44 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNER AND MANAGEMENT.....................................................44 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................44 PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K........................................................45 SIGNATURES ...................................................47
DARLING INTERNATIONAL INC. AND SUBSIDIARIES FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 1, 2000 PART I ITEM 1. BUSINESS General Founded by the Swift meat packing interests and the Darling family in 1882, Darling International Inc. ("Darling" or the "Company") was incorporated in Delaware in 1962 under the name "Darling-Delaware Company, Inc." On December 28, 1993, the Company changed its name from "Darling-Delaware Company, Inc." to "Darling International Inc." The address of the Company's principle executive office is 251 O'Connor Ridge Boulevard, Suite 300, Irving, Texas, 75038, and its telephone number at such address is (972)717-0300. The Company is a recycler of food processing by-products and believes that it is the largest publicly traded processor in the United States in terms of raw material processed annually. The Company collects and recycles animal processing by-products and used restaurant cooking oil. In addition, the Company provides grease trap collection services to restaurants. The Company processes such raw materials at 30 facilities located throughout the United States into finished products such as tallow, meat and bone meal and yellow grease. The Company sells these products nationally and internationally, primarily to producers of various industrial and commercial oleo-chemicals, soaps, pet foods and livestock feed, for use as ingredients in their products or for further processing into basic chemical compounds. Commencing 1998, as part of an overall strategy to better commit financial resources, the Company reorganized its operations into three diverse yet distinctive areas. These are: 1) Rendering, the core business of turning inedible waste from meat and poultry processors into high quality feed ingredients and fats for other industrial applications; 2) Restaurant Services, a group focused on growing the grease collection business while expanding the line of services, which includes grease trap servicing, offered to restaurants and food processors; and 3) Esteem Products, the new business dedicated to using newly developed technologies to produce novel products from established supply sources. Due to unfavorable market conditions resulting from declining prices, beginning in Fiscal 2000 the Esteem Product division will be combined with the Company's rendering operations. In November 1998, the Company made a strategic decision to dispose of an additional segment, Bakery By-Products Recycling, a group which produces high quality bakery by-products for the feed industry. The results of the Bakery By-Products Recycling segment have been reported separately as discontinued operations. See Note 15 of Notes to Consolidated Financial Statements for further information regarding discontinued operations. For the financial results of the Company's operating segments, see Note 17 of Notes to Consolidated Financial Statements. The Company's net sales from continuing operations were $258.6 million, $337.0 million, and $444.1 million during the 1999, 1998 and 1997 fiscal years, respectively. In addition, net external sales by operating segment, including discontinued operations, were as follows: <TABLE> <CAPTION> Fiscal Fiscal Fiscal 1999 1998 1997 -------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Continuing operations: Rendering (a) $204,404 79.1% $275,424 73.5% $444,142 89.1% Restaurant Services (a) 53,939 20.8 61,451 16.4 N/A - Esteem Products 227 0.1 156 0.1 - - Discontinued operations: Bakery By-Products Recycling - - 37,456 10.0 54,329 10.9 ------- ----- ------- ----- ------- ------ Total $258,570 100.0% $374,487 100.0% $498,471 100.0% ======= ===== ======= ===== ======= ===== <FN> (a) Prior to Fiscal 1998, Rendering and Restaurant Services was not separately accounted for and therefore separate revenue data does not exist for Fiscal 1997 as it is impractical to create such data. </FN> </TABLE> Processing Operations The Company creates finished products primarily through the drying, grinding, separating and blending of its various raw materials. The process starts with the collection of animal processing by-products (fat, bones, feathers and offal), and used restaurant cooking oil from meat packers, grocery stores, butcher shops, meat markets, poultry processors and restaurants. The animal processing by-products are ground and heated to extract water and separate oils from animal tissue as well as to sterilize and make the material suitable as an ingredient for animal feed. Meat and bone meal is separated from the cooked material by pressing the material, then grinding and sifting it through screens. The separated tallow is centrifuged and/or refined for purity. The primary finished products derived from the processing of animal by-products are tallow and meat and bone meal. Other by-products include poultry meal, feather meal and blood meal. Used restaurant cooking oil is processed under a separate procedure that involves heating, settling and sterilizing, as well as refining, resulting in derived yellow grease, feed-grade animal fat, or oleo-chemical feedstocks. Purchase and Collection of Raw Materials The Company operates a fleet of approximately 1,000 trucks and tractor-trailers to collect raw materials from more than 80,000 restaurants, butcher shops, grocery stores, and independent meat and poultry processors. The Company replaces or upgrades its vehicle fleet to maintain efficient operations. Raw materials are collected in one of two manners. Certain large suppliers, such as large meat processors and poultry processors are furnished with bulk trailers in which the raw material is loaded. The Company transports these trailers directly to a processing facility. The Company provides the remaining suppliers, primarily grocery stores and butcher shops with containers in which to deposit the raw material. The containers are picked up by or emptied into Company trucks on a periodic basis. The type and frequency of service is determined by individual supplier requirements, the volume of raw material generated by the supplier, supplier location, and weather, among other factors. Used restaurant cooking oil is placed in various sizes and types of containers which are supplied by the Company. In some instances, these containers are loaded directly onto the trucks, while in other instances the oil is pumped through a vacuum hose into the truck. The Company also provides an alternative collection service to restaurants called CleanStar(R) 2000, which is a self-contained collection system that is housed inside the restaurant, with the used cooking oil pumped directly into collection vehicles via an outside valve. The CleanStar 2000 system and service is provided either on a fee basis to the raw material customer or as a negotiated offset to the cost of raw materials purchased. Approximately 9% of the Company's restaurant suppliers utilize the CleanStar 2000 system. The frequency of all forms of collection service is determined by the volume of oil generated by the restaurant. The raw materials collected by the Company are transported either directly to a processing plant or to a transfer station, where materials from several collection routes are loaded into trailers and transported to a processing plant. Collections of animal processing by-products generally are made during the day, and materials are delivered to plants for processing within 24 hours of collection to eliminate spoilage. Collection of used restaurant cooking oil can be made at any time of the day or night, depending on supplier preference; these materials may be held for longer periods of time before processing. The Company charges a collection fee to offset a portion of the cost incurred in collecting raw material. During the past year, the Company's largest single supplier accounted for less than 8% of the total raw material processed by the Company, and the 10 largest raw materials suppliers accounted for approximately 31% of the total raw material processed by the Company. For a discussion of the Company's competition for raw materials, see "Competition." Raw Materials Pricing The Company has two primary pricing arrangements with its raw materials suppliers. Approximately half of the Company's annual volume of raw materials is acquired on a "formula" basis. Under a formula arrangement, the charge or credit for raw materials is tied to published finished product commodity prices after deducting a fixed service charge. The Company acquires the remaining annual volume of raw material under "non-formula" arrangements whereby suppliers either are paid a fixed price, are not paid, or are charged for the collection service, depending on various economic factors. The credit received or amount charged for raw material under both formula and non-formula arrangements is based on various factors, including the type of raw materials, the expected value of the finished product to be produced, the anticipated yields, the volume of material generated by the supplier, and processing and transportation costs. Competition among processors to procure raw materials also affects the price paid for raw materials. See "Competition." Formula prices are generally adjusted on a weekly or monthly basis while non-formula prices or charges are adjusted as needed to respond to changes in finished product prices. Finished Products The finished products that result from the processing of animal by-products are oils (primarily tallow and yellow grease) and proteins (primarily meat and bone meal). Oils are used as ingredients in the production of pet food, animal feed and soaps. Oleo-chemical producers use these oils as feedstocks to produce specialty ingredients used in paint, rubber, paper, concrete, plastics and a variety of other consumer and industrial products. Meals are used primarily as high protein additives in pet food and animal feed. Predominantly all of the Company's finished products are commodities which are quoted on established commodity markets or are priced relative to such commodities. While the Company's finished products are generally sold at prices prevailing at the time of sale, the Company's ability to deliver large quantities of finished products from multiple locations and to coordinate sales from a central location enables the Company to occasionally receive a premium over the then-prevailing market price. Marketing, Sales and Distribution of Finished Products The Company markets its finished products worldwide. Marketing activities are primarily conducted through the Company's marketing department which is headquartered in Irving, Texas. The Company also maintains sales offices in Los Angeles, California, and Newark, New Jersey for sales and distribution of selected products. This sales force is in contact with several hundred customers daily and coordinates the sale and assists in the distribution of most finished products produced at the Company's processing plants. The Company sells its finished products internationally through commodities brokers and through Company agents in various countries. The Company sells to numerous foreign markets, including the European Economic Community, Asia, the Pacific Rim, North Africa, Mexico and South America. The Company has no material foreign operations, but exports a portion of its products to customers in various foreign counties. Total export sales were $107,405,000, $128,776,000 and $101,040,000 for the years ended January 1, 2000, January 2, 1999, and January 3, 1998, respectively. The level of export sales may vary from year to year depending on the relative strength of domestic versus overseas markets. The Company obtains payment protection for most of its foreign sales by requiring payment before shipment or by requiring bank letters of credit or guarantees of payment from U.S. government agencies. The Company ordinarily is paid for its products in U.S. dollars and has not experienced any material currency translation losses or any material foreign exchange control difficulties. The Company has not experienced any material restrictions on the export of its products, although certain countries, including India and certain Middle East countries restrict the import of proteins and fats and oils made from porcine and bovine material, and the European Community has restrictions on proteins and fats and oils made from specified bovine materials. The Bovine Spongiform Encephalopathy ("BSE") situation in Europe and new F.D.A. restrictions, coupled with much lower prices for competing commodities, caused lower prices for some of the Company's key products. See Note 17 of Notes to Consolidated Financial Statements for information regarding the Company's export sales. Finished products produced by Darling are distributed primarily by truck and rail from the Company's plants shortly following production. While there are some temporary inventory accumulations at various port locations for export shipments, inventories rarely exceed three weeks' production and, therefore, the Company uses limited working capital to carry inventories and reduces its exposure to fluctuations in commodity prices. Competition Management of the Company believes that the most competitive aspect of the business is the procurement of raw materials rather than the sale of finished products. During the last ten years, pronounced consolidation within the meat packing industry has resulted in bigger and more efficient slaughtering operations, the majority of which utilize "captive" processors. Simultaneously, the number of small meat packers, which have historically been a dependable source of supply for non-captive processors, has decreased significantly. Although the total amount of slaughtering may be flat or only moderately increasing, the availability, quantity and quality of raw materials available to the independent processors from these sources have all decreased. These factors have been offset, in part, however, by increasing environmental consciousness. The need for restaurants to comply with environmental regulations concerning the proper disposal of used restaurant cooking oil is offering a growth area for this raw material source. In marketing its finished products, the Company faces competition from other processors and from producers of other suitable commodities. Tallows and greases are in certain instances substitutes for soybean oil and palm stearine, while meat and bone meal is a substitute for soybean meal. Consequently, the prices of tallow, yellow grease, and meat and bone meal correlates substantially with these commodities. The markets for finished products are impacted mainly by the worldwide supply of fats, oils, proteins and grains. Other factors that influence the prices that the Company receives for its finished products include the quality of the Company's finished products, consumer health consciousness, worldwide credit conditions and U.S. government foreign aid. From time to time, the Company enters into arrangements with its suppliers of raw materials pursuant to which such suppliers buy back the Company's finished products. Seasonality The amount of raw materials made available to the Company by its suppliers is relatively stable on a weekly basis except for those weeks including a major holiday during which availability of raw materials declines because major meat and poultry processors are not operating. Weather is also a factor. Extremely warm weather adversely affects the ability of the Company to make higher quality products because the raw material deteriorates more rapidly than in cooler weather, while extremely cold weather, in certain instances, can hinder the collection of raw materials. Employees and Labor Relations As of January 1, 2000, the Company employed approximately 1,300 persons full-time in continuing business segments. Approximately 45% of the total number of employees are covered by collective bargaining agreements; however, the Company has no national or multi-plant union contracts. Management believes that the Company's relations with its employees and their representatives are good. There can be no assurance, however, that new agreements will be reached without union action or will be on terms satisfactory to the Company. Regulations The Company is subject to the rules and regulations of various federal, state and local governmental agencies. These include, but are not limited to, the FDA, which regulates food and feed production, USDA, which regulates collection and production methods, EPA, which regulates air and water discharge requirements, as well as local and state agencies governing air and water discharge. Such rules and regulations may influence the Company's operating results at one or more facilities. The FDA rule on the feeding of mammalian protein to ruminant animals took effect in August of 1997 as a measure to prevent the potential occurrence of BSE in the United States. The Company is in compliance with the provisions of the rule.
ITEM 2. PROPERTIES The Company's 30 operating facilities consist of 22 full service rendering plants, seven yellow grease/trap grease plants, one blending plant, and one edible plant. Except for five leased facilities, all of these facilities are owned by the Company. In addition, the Company owns or leases 21 transfer stations in the United States and one transfer station in Canada that serve as collection points for routing raw material to the processing plants set forth below. Some locations service a single business segment while others service multiple business segments. The following is a listing of the Company's operating facilities by business segment: LOCATION DESCRIPTION Combined Rendering and Restaurant Services Business Segments - ------------------------------------------------------------ Billings, MT Rendering/Yellow Grease Blue Earth, MN Rendering/Yellow Grease Boise, ID Rendering/Yellow Grease Collinsville, OK Rendering/Yellow Grease Dallas, TX Rendering/Yellow Grease Detroit, MI Rendering/Yellow Grease/Trap Kansas City, KS Rendering/Yellow Grease Los Angeles, CA Rendering/Yellow Grease/Trap Newark, NJ Rendering/Yellow Grease Norfolk, NE Rendering/Yellow Grease San Angelo, TX Rendering/Yellow Grease San Francisco, CA Rendering/Yellow Grease Sioux City, IA Rendering/Yellow Grease St. Louis, MO Rendering/Yellow Grease Tacoma, WA Rendering/Yellow Grease/Trap Rendering Business Segment - -------------------------- Coldwater, MI Rendering Fresno, CA Rendering Houston, TX Rendering Linkwood, MD Rendering Omaha, NE Rendering Omaha, NE Blending Omaha, NE Edible Oils Turlock, CA Rendering Wahoo, NE Rendering Restaurant Services Business Segment - ------------------------------------ Chicago, IL Trap Fort Lauderdale, FL Yellow Grease/Trap No. Las Vegas, NV Yellow Grease/Trap Houston, TX Yellow Grease/Trap Atlanta, GA Yellow Grease Tampa, FL Yellow Grease/Trap
ITEM 3. LEGAL PROCEEDINGS (a) ENVIRONMENTAL Chula Vista The Company has been the owner of an undeveloped property located in Chula Vista, California (the "Site"). A rendering plant was operated on the Site until 1982. From 1959 to 1978, a portion of the Site was used as an industrial waste disposal facility, which was closed pursuant to Closure Order No. 80-06, issued by the State of California Regional Water Quality Control Board for the San Diego Region (the "RWQCB"). In June 1982, RWQCB staff approved a completed closure plan which included construction of a containment cell (the "Containment Cell") on a portion (approximately 5 acres) of the Site to isolate contaminated soil excavated from the Site. The Site has been listed by the State of California as a site for which expenditures for removal and remedial actions may be made by the State pursuant to the California Hazardous Substances Account Act, California Health & Safety Code Section 25300 et seq. Technical consultants retained by the Company have conducted various investigations of the environmental conditions at the Site, and in 1996, requested that the RWQCB issue a "no further action" letter with respect to the Site. In 1997, the RWQCB issued Order No. 97-40 prescribing a maintenance and monitoring program for the Containment Cell. Thereafter, the Company continued to work with the RWQCB to define the scope of an additional order which would address the Company's future obligations for that remaining portion (approximately 30 acres) of the Site. On December 30, 1999, the Company completed a sale of the entire Site pursuant to which the purchaser assumed responsibility for known environmental liabilities at the Site. Purchaser's assumption of such liability is supported by a Real Estate Pollution Insurance Policy and a Full Occurrence Commercial General Liability with Pollution Coverage Insurance Policy. The Company does not currently anticipate future material involvement at the Site. Cleveland In August, 1997, the Company received a Notice of Violation ("NOV") from the United States Environmental Protection Agency ("EPA") for alleged violations of the Ohio Air Quality Rules as they relate to odor emissions. The NOV asserted that the Cleveland, OH facility was in violation of the State's nuisance rule based on a City of Cleveland record of complaints associated with odors emanating from its facility. Since December, 1992, the Company has been working with the City of Cleveland under a Consent Agreement to address such complaints and concerns of the neighborhood in close proximity to the plant. In August, 1998, the Company received a second NOV from EPA which encompassed the alleged violations from the first NOV and alleged several violations of terms and conditions found in the Cleveland plant's air permit. Rendering of animal by-products has been discontinued at the Cleveland plant. The Company and EPA have concluded an amicable resolution of the NOV in the form of an Administrative Consent Order without a monetary penalty. (b) LITIGATION . Melvindale A group of residents living near the Company's Melvindale, Michigan plant has filed suit, purportedly on behalf of a class of persons similarly situated. The class has been certified for injunctive relief only. The court declined to certify a damage class. The suit is based on legal theories of trespass, nuisance and negligence and/or gross negligence, and is pending in the United States District Court, Eastern District of Michigan. Plaintiffs allege that emissions to the air, particularly odor, from the plant have reduced the value and enjoyment of Plaintiffs' property, and Plaintiffs seek damages, including mental anguish, exemplary damages and injunctive relief. In a lawsuit with similar factual allegations, also pending in United States District Court, Eastern District of Michigan, the City of Melvindale has filed suit against the Company based on legal theories of nuisance, trespass, negligence and violation of Melvindale nuisance ordinances seeking damages and declaratory and injunctive relief. The court has dismissed the trespass counts in both lawsuits without prejudice. The Company or its predecessors have operated a rendering plant at the Melvindale location since 1927 in a heavily industrialized area down river south of Detroit. The Company has taken and is taking all reasonable steps to minimize odor emissions from its recycling processes and is defending the lawsuit vigorously. Other Litigation The Company is also a party to several other lawsuits, claims and loss contingencies incidental to its business, including assertions by certain regulatory agencies related to the release of unacceptable odors from some if its processing facilities. Although the ultimate liability cannot be determined with certainty, management of the Company believes that reserves for contingencies are reasonable and sufficient based upon present governmental regulations and information currently available to management. The Company believes that any additional liability relative to such lawsuits and claims which may not be covered by insurance would not likely have a material adverse effect on the Company's financial position, although it could potentially have a material impact on the results of operations in any one year.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the Fiscal quarter ended January 1, 2000. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is traded on the American Stock Exchange under the symbol "DAR". The following table sets forth, for the quarters indicated, the high and low sales prices per share for the common stock as reported on the American Stock Exchange. Fiscal Quarter Market Price --------------------------------- High Low ----------------- --------------- 1999: First Quarter $3.500 $1.750 Second Quarter $2.125 $1.500 Third Quarter $2.000 $1.063 Fourth Quarter $3.000 $0.875 1998: First Quarter $9.125 $7.875 Second Quarter $8.625 $7.125 Third Quarter $7.375 $3.375 Fourth Quarter $3.625 $2.500 The Company has been notified by its stock transfer agent that as of March 21, 2000, there were 75 "registered" holders of record of the common stock. There are approximately 500 beneficial stockholders of the common stock. The Company's Credit Agreement restricts the Company's ability to pay dividends. The Company does not currently anticipate paying cash dividends on the common stock in the foreseeable future, but intends instead to retain future earnings for reinvestment in its business or reduction of its indebtedness.
DARLING INTERNATIONAL INC. AND SUBSIDIARIES FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 1, 2000 ITEM 6. SELECTED FINANCIAL DATA SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA The following table presents selected consolidated historical financial data for the periods indicated. The selected historical consolidated financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements of the Company for the three years ended January 1, 2000, January 2, 1999, and January 3, 1998, and the related notes thereto. <TABLE> <CAPTION> DARLING INTERNATIONAL INC. AND SUBSIDIARIES FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 1, 2000 Fiscal 1999 Fiscal 1998 Fiscal 1997 Fiscal 1996 Fiscal 1995 Fifty-two Fifty-two Fifty-three Fifty-two Fifty-two Weeks Ended Weeks Ended Weeks Ended Weeks Ended Weeks Ended January 1, January 2, January 3, December 28, December 30, 2000 1999 1998 1996 1995 - --------------------------------------------- -------------- -------------- -------------- -------------- -------------- <S> <C> <C> <C> <C> <C> Operating Data: Net sales $258,570 $337,031 $444,142 $467,325 $421,608 ------- ------- ------- ------- ------- Cost of sales and operating expenses 212,266 283,822 362,787 375,436 336,248 Selling, general and administrative 26,773 33,073 33,247 31,512 26,675 expenses Depreciation and amortization 31,525 32,418 29,751 26,434 22,576 Provision for loss contingencies - - - 6,075 - ------- ------- ------- ------- ------- Operating income/(loss) (11,994) (12,282) 18,357 27,868 36,109 Interest expense 14,004 12,466 13,070 12,981 13,311 Other (income)/expense, net (283) 1,398 (1,348) (487) (322) ------- ------- ------- ------- ------- Income/(loss) from continuing operations before income taxes (25,715) (26,146) 6,635 15,374 23,120 Income tax expense/(benefit) (10,015) (9,347) 2,307 7,467 8,740 ------- ------- ------- ------- ------- Earnings/(loss) from continuing (15,700) (16,799) 4,328 7,907 14,380 operations Discontinued operations: Income/(loss) from discontinued operations, net of tax - (637) 1,081 (233) - Loss on disposal, net of tax (333) (14,657) - - - ------- ------- ------- ------- ------- Net income /(loss) $(16,033) $(32,093) $ 5,409 $ 7,674 $14,380 Basic earnings/(loss) per common share $ (1.03) $ (2.06) $ 0.35 $ 0.50 $ 0.95 Diluted earnings/(loss) per common share $ (1.03) $ (2.06) $ 0.33 $ 0.46 $ 0.90 Weighted average shares outstanding 15,589 15,581 15,519 15,375 15,138 Diluted weighted average shares 15,589 15,581 16,461 16,674 15,966 outstanding Other Data: EBITDA (a) $ 20,918 $ 20,136 $ 48,108 $ 60,377 $ 58,685 Depreciation 25,611 26,429 24,074 21,529 18,595 Amortization 5,914 5,989 5,677 4,905 3,981 Capital expenditures 9,851 14,967 24,520 26,449 24,636 Balance Sheet Data: Working capital (deficiency) $ (5,223) $ 3,070 $ 5,225 $ (5,187) $ 12,936 Total assets 197,804 263,166 305,973 320,050 266,062 Current portion of long-term debt 7,810 7,717 5,118 15,113 9,060 Total long-term debt less current portion 110,209 140,613 142,181 138,173 117,096 Stockholders' equity 21,913 37,946 69,756 64,033 54,833 <FN> (a) "EBITDA" represents, for any relevant period, operating profit plus depreciation and amortization, impairment of long-lived assets and provision for loss contingencies. EBITDA is presented here not as a measure of operating results, but rather as a measure of the Company's debt service ability and is not intended to be a presentation in accordance with generally accepted accounting principles. </FN> </TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the Company's financial condition and results of operations should be read in conjunction with the historical consolidated financial statements and notes thereto included in Item 8. Beginning in 1998, the Company was organized along operating business segments. See Note 17 of Notes to Consolidated Financial Statements. Results of Operations Fifty-two Week Fiscal Year Ended January 1, 2000 ("Fiscal 1999") Compared to Fifty-two Week Fiscal Year Ended January 2, 1999 ("Fiscal 1998") General The Company recorded a loss from continuing operations of $(15.7) million for Fiscal 1999 compared to a loss from continuing operations of $(16.8) million for Fiscal 1998. The Company's operating loss decreased from $(12.3) million for Fiscal 1998 to $(12.0) million for Fiscal 1999. The improvement was primarily due to reductions in selling, general and administrative costs and operating expenses. Interest expense increased from $12.5 million in Fiscal 1998 to $14.0 million in Fiscal 1999, primarily due to higher overall interest rates. In 1998, the Company made a strategic decision to discontinue the operations of the Bakery By-Products Recycling segment in order to concentrate its financial and human resources on its other business segments. The sale was finalized on April 5, 1999. During Fiscal 1998, the Company recorded an estimated loss on the disposal of the discontinued segment, net of tax, of $14.7 million. The results of the Bakery By-Products Recycling segment have been reported separately as discontinued operations for each year presented. Net Sales The Company collects and processes animal by-products (fat, bones and offal), and used restaurant cooking oil to produce finished products of tallow, meat and bone meal, and yellow grease. Sales are significantly affected by finished goods prices, quality of raw material, and volume of raw material. Net sales include the sales of produced finished goods, grease trap services, and finished goods purchased for resale, which constitute less than 10% of total sales. During Fiscal 1999, net sales decreased by $78.4 million (23.3%) to $258.6 million as compared to $337.0 million during Fiscal 1998, primarily due to the following: 1) Decreases in overall finished goods prices resulted in an $46.3 million decrease in sales during Fiscal 1999 versus Fiscal 1998. The Company's average yellow grease prices were 18.96% lower, average tallow prices were 21.94% lower, and average meat and bone meal prices were 15.69% lower; 2) Decreases in the volume of raw materials processed resulted in a $25.0 million decrease in sales; 3) Decreases in finished hides sales accounted for $4.4 million in sales decreases; 4) Decreases in products purchased for resale resulted in a $10.5 million sales decrease; and 5) Increases in collection fees (to offset a portion of the cost incurred in collecting raw material) of $7.2 million and inventory changes of $0.6 million somewhat offset the decreases. Cost of Sales and Operating Expenses Cost of sales and operating expenses includes prices paid to raw material suppliers, the cost of product purchased for resale, and the cost to collect and process the raw material. The Company utilizes both fixed and formula pricing methods for the purchase of raw materials. Fixed prices are adjusted where possible as needed for changes in competition and significant changes in finished goods market conditions, while raw materials purchased under formula prices are correlated with specific finished goods prices. During Fiscal 1999, cost of sales and operating expenses decreased $71.5 million (25.2%) to $212.3 million as compared to $283.8 million during Fiscal 1998, primarily as a result of the following: 1) Lower raw material prices paid, correlating to decreased prices for fats and oils and meat and bone meal, resulted in decreases of $43.0 million in cost of sales; 2) Decreases in the volume of raw materials collected and processed resulted in a decrease of approximately $5.1 million in cost of sales and operating expenses; 3) Decreases in products purchased for resale resulted in a $10.0 million decrease; 4) Decreases in hides purchases accounted for $4.0 million in cost of sales decrease; 5) Decreases in operating expenses, primarily labor, repairs, natural gas and contract hauling costs, resulted in a decrease of $11.6 million offset by an impairment charge of $1.4 million; and 6)Inventory changes resulted in an increase of $0.6 million. Selling, General and Administrative Expenses Selling, general and administrative expenses were $26.8 million during Fiscal 1999, a $6.3 million decrease from $33.1 million during Fiscal 1998. Decreases were realized in labor costs, travel and entertainment, and professional and legal fees. Depreciation and Amortization Depreciation and amortization charges decreased $0.9 million, to $31.5 million during Fiscal 1999 as compared to $32.4 million during Fiscal 1998. Interest Expense Interest expense increased $1.5 million, to $14.0 million during Fiscal 1999 as compared to $12.5 million during Fiscal 1998, primarily due to increases in the overall interest rate partially offset by a $30.3 million reduction in principal. Income Taxes The income tax benefit of $10.0 million for Fiscal 1999 consists of $9.2 million of federal tax benefit and $0.8 million for various state and foreign tax benefits. In Fiscal 1998, the Company recorded a $9.3 million income tax benefit which consisted of $8.5 million of federal tax benefit and $0.8 million for various state and foreign tax benefits. Capital Expenditures The Company made capital expenditures of $9.9 million during Fiscal 1999 as compared to $15.0 million in Fiscal 1998. Discontinued Operations The operations of the Bakery By-Products Recycling segment have been classified as discontinued operations. The Company realized an additional loss on disposal, net of tax, of $0.3 million on the sale of this business segment which was finalized on April 5, 1999, in addition to the amount estimated in Fiscal 1998. Fifty-two Week Fiscal Year Ended January 2, 1999, ("Fiscal 1998") Compared to Fifty-three Week Fiscal Year Ended January 3, 1998 ("Fiscal 1997") General The Company recorded losses from continuing operations of $(16.8) million for Fiscal 1998 compared to earnings from continuing operations of $4.3 million for Fiscal 1997. Operating income decreased from $18.4 million for Fiscal 1997 to $(12.3) million for Fiscal 1998. The decrease was primarily due to: 1) Declines in volume of raw materials processed; 2) Approximately $2.6 million in increased depreciation and amortization related to acquisitions and capital expenditures; and 3) Significant decreases in all of the Company's finished good prices. In 1998, the Company made a strategic decision to discontinue the operations of the Bakery By-Products Recycling segment in order to concentrate its financial and human resources on its other business segments. During Fiscal 1998, the Company recorded an estimated loss on the disposal of the discontinued segment, net of tax, of $14.7 million. The results of the Bakery By-Products Recycling segment have been reported separately as discontinued operations for each year presented. Net Sales During Fiscal 1998, net sales decreased 24.1%, to $337.0 million as compared to $444.1 million during Fiscal 1997 primarily due to the following: 1) Decreases in overall finished good prices resulted in an $86.4 million decrease in sales during Fiscal 1998 versus Fiscal 1997. The Company's average yellow grease prices were 8.87% lower, average tallow prices were 5.72% lower, and average meat and bone meal prices were 34.11% lower; 2) Decreases in volume of raw materials processed resulted in a $36.8 million decrease in sales; 3) Decreases in finished hide sales accounted for $7.8 million in sales decreases; 4) Increases in products purchased for resale resulted in a $14.9 million increase; and 5) Increases in collection fees (to offset a portion of the cost incurred in collecting raw material) of $5.0 million and inventory changes of $4.0 million somewhat offset the decreases. Cost of Sales and Operating Expenses During Fiscal 1998, cost of sales and operating expenses decreased $79.0 million (21.8%), to $283.8 million as compared to $362.8 million during Fiscal 1997 primarily as a result of the following: 1) Lower raw material prices paid, correlating to decreased prices for fats and oils and meat and bone meal, resulted in decreases of $74.4 million in cost of sales; 2) Decreases in the volume of raw materials collected and processed resulted in a decrease of approximately $15.5 million in cost of sales and operating expenses; 3) Increases in products purchased for resale resulted in a $14.9 million increase; 4) Decreases in hides purchases accounted for $6.0 million in cost of sales decrease; 5) Decreases in operating expenses, primarily labor costs, resulted in a decrease of $1.9 million; and 6) Inventory changes resulted in an increase of $3.9 million. Selling, General and Administrative Expenses Selling, general and administrative expenses were $33.1 million during Fiscal 1998, a $0.1 million decrease from $33.2 million during Fiscal 1997. Decreases in payroll costs were offset by increases in consulting costs, advertising and miscellaneous office costs. Depreciation and Amortization Depreciation and amortization charges increased $2.6 million, to $32.4 million during Fiscal 1998 as compared to $29.8 million during Fiscal 1997. This increase was due to additional depreciation on fixed asset additions and amortization on intangibles as a result of various acquisitions. Interest Expense Interest expense decreased $0.6 million, to $12.5 million during Fiscal 1998 as compared to $13.1 million during Fiscal 1997, primarily due to the refinancing of all outstanding debt on June 5, 1997 at a lower overall rate of interest. Income Taxes The income tax benefit of $9.3 million for Fiscal 1998 consists of $8.5 million of federal tax benefit and $0.8 million for various state and foreign taxes. In Fiscal 1997, the Company recorded a $2.3 million income tax expense which consisted of $1.7 million of federal tax expense and $0.6 million for various state and foreign taxes. Capital Expenditures The Company made capital expenditures of $15.0 million during Fiscal 1998 as compared to $24.5 million in Fiscal 1997. Discontinued Operations The operations for the Bakery By-Products Recycling segment have been classified as discontinued operations. The results of operations, net of applicable income taxes, was a net loss of $0.6 million in Fiscal 1998 versus a net earnings of $1.1 million in Fiscal 1997. The decrease was primarily a result of lower finished goods prices, which are closely tied to corn markets. In addition, the Company recorded an estimated loss on disposal, net of tax, of $14.7 million to reflect the pending sale of this business segment which was finalized on April 5, 1999. LIQUIDITY AND CAPITAL RESOURCES Effective June 5, 1997, the Company entered into a Credit Agreement (the "Credit Agreement") which originally provided for borrowings in the form of a $50,000,000 Term Loan and $175,000,000 Revolving Credit Facility. On October 3, 1998, the Company entered into an amendment of the Credit Agreement whereby BankBoston, N.A., as agent, and the other participant banks in the Credit Agreement (the "Banks") agreed to forbear from exercising rights and remedies arising as a result of several existing events of default of certain financial covenants (the "Defaults") under the Credit Agreement, as amended, until November 9, 1998. On November 6, 1998, the Company entered into an extension of the Amendment whereby the Banks agreed to forbear from exercising rights and remedies arising as a result of the Defaults until December 14, 1998. The forbearance period was subsequently extended to January 22, 1999. On January 22, 1999, the Company and the banks entered into an Amended and Restated Credit Agreement (the "Amended and Restated Credit Agreement"). The Amended and Restated Credit Agreement provides for borrowing in the form of a $36,702,000 Term Loan and $135,000,000 Revolving Credit Facility. The Term Loan provides for $36,702,000 of borrowing. Under the Amended and Restated Credit Agreement, the Term Loan bears interest, payable quarterly, at a Base Rate (8.50% at January 1, 2000) plus a margin of 1%. Under the Amended and Restated Credit Agreement, the Term Loan is payable by the Company in quarterly installments of $2,500,000 on March 31, 2000; $22,500,000 on June 30, 2000; $2,500,000 on September 30, 2000; and the balance due on December 31, 2000. The net proceeds from the sales of various properties were applied against installments due on December 31, 1999, March 31, 2000 and a portion of the installment due on June 30, 2000. The properties sold were: International Processing Corporation ($19,600,000 on April 5, 1999); Milwaukee property ($950,000 on September 20, 1999); Bristol, VA property ($69,000 on October 15, 1999); Las Vegas property ($2,737,000 on December 17, 1999) and Chula Vista property ($3,710,000 on December 30, 1999). As of January 1, 2000, $7,720,000 was outstanding under the Term Loan. The Revolving Credit Facility provides for borrowings up to a maximum of $135,000,000 with sublimits available for letters of credit and a swingline. Under the Amended and Restated Credit Agreement, the Revolving Credit Facility bears interest, payable quarterly, at a Base Rate (8.50% at January 1, 2000) plus a margin of 1%. Additionally, the Company must pay a commitment fee equal to 0.375% per annum on the unused portion of the Revolving Credit Facility. Under the Amended and Restated Credit Agreement, the Revolving Credit Facility provides for a mandatory reduction of $2,500,000 on March 31, 2001, with the remaining balance due at maturity on June 30, 2001. As of January 1, 2000, $110,179,000 was outstanding under the Revolving Credit Facility. As of January 1, 2000, the Company had outstanding irrevocable letters of credit aggregating $11,233,000. Substantially all assets of the Company are either pledged or mortgaged as collateral for borrowings under the Amended and Restated Credit Agreement. The Amended and Restated Credit Agreement contains certain terms and covenants, which, among other matters, restrict the incurrence of additional indebtedness, the payment of cash dividends, the retention of certain proceeds from sales of assets, and the annual amount of capital expenditures, and requires the maintenance of certain minimum financial ratios. As of January 1, 2000, no cash dividends could be paid to the Company's stockholders pursuant to the Amended and Restated Credit Agreement. The Company has limited involvement with derivative financial instruments and does not use them for trading purposes. Interest rate swap agreements are used to reduce the potential impact of increases in interest rates on floating-rate long-term debt. At January 1, 2000, the Company was party to three interest rate swap agreements. Under the terms of the swap agreements, the interest obligation on $70 million of Amended and Restated Credit Agreement floating-rate debt was exchanged for fixed rate contracts which bear interest, payable quarterly. One swap agreement for $25 million matures June 27, 2002, bears interest at 6.5925% and the Company's receive rate is based on the three-month LIBOR. A second swap agreement for $25 million matures June 27, 2001, bears interest at 9.83% and the Company's receive rate is based on the Base Rate. The third swap agreement for $20 million matures on June 27, 2002, with a one-time option for the bank to cancel at June 27, 2001, bears interest at 9.17% and the Company's receive rate is based on the Base Rate. On January 1, 2000, the Company had a working capital deficit of $5.2 million and its working capital ratio was 0.88 to 1 compared to working capital of $3.1 million and a working capital ratio of 1.07 to 1 on January 2, 1999. The Company has experienced two consecutive years of operating losses and reduced cash flow as compared to 1997. Management believes that, unless the prices for the products the Company sells decline further, the Company's cash flow from operations and availability of credit under the Revolver (see Note 9 to Consolidated Financial Statements) should enable the Company to meet its Fiscal 2000 obligations in the ordinary course of business. However, if prices for finished goods the Company sells were to materially decline below those prevailing in Fiscal 1999, the Company might be forced to seek further covenant waivers under the Amended and Restated Credit Agreement in 2000. ACCOUNTING MATTERS The Company is assessing the reporting and disclosure requirements of SFAS No. 133, Accounting For Derivative Instruments and Hedging Activities. This statement establishes accounting and reporting standards for derivative instruments and hedging activities. This statement, as amended by SFAS No. 137, is effective for financial statements for fiscal years beginning after June 15, 2000. The Company has not yet determined the impact SFAS No. 133 will have on its financial statements. The Company will adopt the provisions of SFAS No. 133 in the first quarter of Fiscal 2001. YEAR 2000 The Company began aggressively addressing its Year 2000 compliance issues in 1997. As a result, the Company experienced no significant Year 2000 issues internally or with its various suppliers or vendors. There are no Year 2000 issues outstanding nor are any Year 2000 issues expected to arise. FORWARD LOOKING STATEMENTS This Annual Report on Form 10-K includes "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts included in the Annual Report on Form 10-K, including, without limitation, the statements under the sections entitled "Business," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Legal Proceedings" and located elsewhere herein regarding industry prospects and the Company's financial position are forward-looking statements. Although the Company believes that the expectation reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Important factors that could cause actual results to differ materially from the Company's expectations include: the Company's continued ability to obtain sources of supply for its rendering operations; general economic conditions in the European and Asian markets; and prices in the competing commodity markets which are volatile and are beyond the Company's control. Future profitability may be affected by the Company's ability to grow its business which faces competition from companies which may have substantially greater resources than the Company. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS The principal market risk affecting the Company is exposure to changes in interest rates on debt. The Company does not use derivative instruments, exclusive of interest rate swaps. While the Company does have international operations, and operates in international markets, it considers its market risks in such activities to be immaterial. The Company uses interest rate swaps to hedge adverse interest rate changes on a portion of its long-term debt. At January 1, 2000, the Company was party to three interest rate swap agreements. Under the terms of the swap agreements, the interest obligation on $70 million of Amended and Restated Credit Agreement floating-rate debt was exchanged for fixed rate contracts which bear interest, payable quarterly. One swap agreement for $25 million matures June 27, 2002, bears interest at 6.5925% and the Company's receive rate is based on the three-month LIBOR. A second swap agreement for $25 million matures June 27, 2001, bears interest at 9.83% and the Company's receive rate is based on the Base Rate. The third swap agreement for $20 million matures on June 27, 2002, with a one-time option for the bank to cancel at June 27, 2001, bears interest at 9.17% and the Company's receive rate is based on the Base Rate. Assuming variable rates at the end of each fiscal year and average long-term borrowings for each fiscal year, a one-hundred basis point change in interest rate would impact net interest expense by $0.2 million and $0.7 million, net of the effect of swaps, for Fiscal 1999 and Fiscal 1998, respectively. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Pages Independent Auditors' Report 20 Consolidated Balance Sheets- January 1, 2000 and January 2, 1999 21 Consolidated Statements of Operations- Three years ended January 1, 2000 22 Consolidated Statements of Stockholders' Equity - Three years ended January 1, 2000 23 Consolidated Statements of Cash Flows - Three years ended January 1, 2000 24 Notes to Consolidated Financial Statements - January 1, 2000 and January 2, 1999 25 Financial Statement Schedule: II - Valuation and Qualifying Accounts 43 All other schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and notes thereto.
INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Darling International Inc.: We have audited the consolidated financial statements of Darling International Inc. and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Darling International Inc. and subsidiaries as of January 1, 2000 and January 2, 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended January 1, 2000, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG LLP Dallas, Texas March 15, 2000
<TABLE> <CAPTION> DARLING INTERNATIONAL INC. AND SUBSIDIARIES Consolidated Balance Sheets January 1, 2000 and January 2, 1999 (in thousands, except share and per share data) January 1, January 2, ASSETS (notes 2 and 9) 2000 1999 ------------- ------------ <S> <C> <C> Current assets: Cash and cash equivalents $ 1,828 $ 12,317 Accounts receivable 16,987 16,615 Inventories (note 4) 9,644 11,707 Prepaid expenses 3,948 3,977 Deferred income tax assets (note 11) 4,203 3,928 Other 518 671 ------- ------- Total current assets 37,128 49,215 Property, plant and equipment, net (note 5) 113,824 140,074 Collection routes and contracts, less accumulated amortization of $15,819 at January 1, 2000 and $12,101 at January 2, 1999 36,965 42,978 Goodwill, less accumulated amortization of $741 at January 1, 2000 and $513 at January 2, 1999 4,813 5,461 Other assets (note 6) 5,074 5,438 Net assets of discontinued operations (note 15) - 20,000 ------- ------- $197,804 $263,166 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt (note 9) $ 7,810 $ 7,717 Accounts payable, principally trade 11,139 15,517 Accrued expenses (note 7) 23,292 22,255 Accrued interest (note 9) 110 656 ------- ------- Total current liabilities 42,351 46,145 Long-term debt, less current portion (note 9) 110,209 140,613 Other noncurrent liabilities (note 10) 19,341 24,836 Deferred income taxes (note 11) 3,990 13,626 ------- ------- Total liabilities 175,891 225,220 ------- ------- Stockholders' equity (notes 9, 11 and 12): Preferred stock, $0.01 par value; 1,000,000 shares authorized, none issued - - Common stock, $.01 par value; 25,000,000 shares authorized, 15,589,077 shares issued and outstanding at January 1, 2000 and January 2, 1999 156 156 Additional paid-in capital 35,063 35,063 Retained earnings/(deficit) (13,306) 2,727 ------- ------- Total stockholders' equity 21,913 37,946 ------- ------- Commitments and contingencies (notes 8 and 16) $197,804 $263,166 ======= ======= </TABLE> The accompanying notes are an integral part of these consolidated financial statements.
<TABLE> <CAPTION> Consolidated Statements of Operations Three years ended January 1, 2000 (in thousands, except per share data) January January January 1, 2000 2, 1999 3, 1998 ---------------- ---------------- --------------- <S> <C> <C> <C> Net sales $258,570 $337,031 $444,142 ------- ------- ------- Costs and expenses: Cost of sales and operating expenses 212,266 283,822 362,787 Selling, general and administrative expenses 26,773 33,073 33,247 Depreciation and amortization 31,525 32,418 29,751 ------- ------- ------- Total costs and expenses 270,564 349,313 425,785 ------- ------- ------- Operating income/(loss) (11,994) (12,282) 18,357 ------- ------- ------- Other income/(expense): Interest expense (note 9) (14,004) (12,466) (13,070) Other, net 283 (1,398) 1,348 ------- ------- ------- Total other income/(expense) (13,721) (13,864) (11,722) ------- ------- ------- Income/(loss) from continuing operations before income taxes (25,715) (26,146) 6,635 Income tax expense/(benefit) (note 11) (10,015) (9,347) 2,307 ------- ------- ------- Earnings/(loss) from continuing operations (15,700) (16,799) 4,328 Discontinued operations (note 15): Income/(loss) from discontinued operations, net of tax - (637) 1,081 Loss on disposal of discontinued operations, net of tax (333) (14,657) - ------- ------- ------- Net earnings/(loss) $(16,033) $(32,093) $ 5,409 ======= ======= ======= Basic earnings/(loss) per share: Continuing operations $ (1.01) $ (1.08) $ 0.28 Discontinued operations: Income/(loss) from operations - (0.04) 0.07 Loss on disposal (0.02) (0.94) - ------- ------- ------- Total $ (1.03) $ (2.06) $ 0.35 ======= ======= ======= Diluted earnings (loss) per share: Continuing operations $ (1.01) $ (1.08) $ 0.26 Discontinued operations: Income/(loss) from operations - (0.04) 0.07 Loss on disposal (0.02) (0.94) - ------- ------- ------- Total $ (1.03) $ (2.06) $ 0.33 ======= ======= ======= </TABLE> The accompanying notes are an integral part of these consolidated financial statements.
<TABLE> <CAPTION> Consolidated Statements of Stockholders' Equity Three years ended January 1, 2000 (In thousands, except share data) Common stock Additional Retained Total Number $.01 par paid-in earnings/ stockholders' of shares value capital (deficit) equity - ------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Balances at December 28, 1996 15,455,937 $ 155 $ 34,467 $ 29,411 $ 64,033 Issuance of common stock 107,100 1 313 - 314 Net earnings - - - 5,409 5,409 ---------- ----- ------- ------- ------- Balances at January 3, 1998 15,563,037 156 34,780 34,820 69,756 Issuance of common stock 26,040 - 98 - 98 Tax benefits relating to January 1, 1994 valuation allowance - - 185 - 185 Net loss - - - (32,093) (32,093) ---------- ----- ------- ------- ------- Balances at January 2, 1999 15,589,077 156 35,063 2,727 37,946 Net loss - - - (16,033) (16,033) ---------- ----- ------- ------- ------- Balances at January 1, 2000 15,589,077 $ 156 $ 35,063 $(13,306) $ 21,913 ========== ===== ======= ======= ======= </TABLE> The accompanying notes are an integral part of these consolidated financial statements.
<TABLE> <CAPTION> DARLING INTERNATIONAL INC. Consolidated Statements of Cash Flows Three years ended January 1, 2000 (in thousands) January 1, January 2, January 3, 2000 1999 1998 ------------ ---------- --------- <S> <C> <C> <C> Cash flows from operating activities: Earnings/(loss) from continuing operations $ (15,700) $ (16,799) $ 4,328 Adjustments to reconcile net earnings/(loss) to net cash provided by continuing operating activities: Depreciation and amortization 31,525 32,418 29,751 Deferred income tax benefit (9,911) (9,312) (1,641) Loss/(gain) on sale of assets (2,060) 982 (927) Impairment of long-lived assets 1,387 - - Changes in operating assets and liabilities, net of effects from acquisitions: Accounts receivable (372) 12,627 3,278 Inventories and prepaid expenses 2,092 749 (3,492) Accounts payable and accrued expenses (4,328) 265 (3,786) Accrued interest (546) (256) (3,365) Other (1,403) 3,403 (1,821) ------ ------ ------ Net cash provided by continuing operations 684 24,077 22,325 Net cash provided by discontinued operations 119 1,388 4,812 ------ ------ ------ Net cash provided by operating activities 803 25,465 27,137 ------ ------ ------ Cash flows from investing activities: Recurring capital expenditures (9,851) (14,967) (20,230) Capital expenditures related to acquisitions - - (4,290) Gross proceeds from sale of property, plant and equipment, assets held for disposition and other assets 32,150 4,090 6,055 Payments related to routes and other intangibles (152) (341) (6,870) Net cash used in discontinued operations (330) (1,999) (2,047) ------ ------ ------ Net cash provided by/(used in) investing activities 21,817 (13,217) (27,382) ------ ------ ------ Cash flows from financing activities: Proceeds from long-term debt 179,927 99,980 283,124 Payments on long-term debt (210,237) (99,084) (289,116) Contract payments (2,377) (3,326) (1,544) Deferred loan costs (300) (118) (1,008) Issuance of common stock - 99 314 Net cash used in discontinued operations (150) (460) (1,526) ------ ------ ------ Net cash used in financing activities (33,137) (2,909) (9,756) ------ ------ ------ Net change in cash and cash equivalents from discontinued operations 28 29 745 ------ ------ ------ Net increase/(decrease) in cash and cash equivalents (10,489) 9,368 (9,256) Cash and cash equivalents at beginning of year 12,317 2,949 12,205 ------- ------- ------- Cash and cash equivalents at end of year $ 1,828 $ 12,317 $ 2,949 ======= ======= ======= Supplemental disclosure of cash flow information: Cash paid during the year for: Interest $ 14,550 $ 11,997 $ 17,114 ------- ------- ------ Income taxes, net of refunds $ (625) $ (1,454) $ 4,345 ------- ------- ------ </TABLE> The accompanying notes are an integral part of these consolidated financial statements.
DARLING INTERNATIONAL INC. Notes to Consolidated Financial Statements January 1, 2000 and January 2, 1999 (1) GENERAL (a) NATURE OF OPERATIONS Darling International Inc. (the "Company") believes it is the largest publicly traded recycler of food processing by-products in the United States, operating a fleet of vehicles, through which it collects animal by-products and used restaurant cooking oil from butcher shops, grocery stores, independent meat and poultry processors and restaurants nationwide. The Company processes raw materials through facilities located throughout the United States into finished products, such as tallow, meat and bone meal, and yellow grease. The Company sells its finished products domestically and internationally to producers of soap, cosmetics, rubber, pet food and livestock feed for use as ingredients in such products. On October 22, 1993, the Company entered into a settlement agreement providing for a restructure of the Company's debt and equity and resolution of a class action lawsuit (the "Settlement"). On December 29, 1993, the Settlement was consummated and became binding on all original note holders. The Company has accounted for the Settlement using "Fresh Start Reporting" as of January 1, 1994, in accordance with Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the United States Bankruptcy Code" issued by the American Institute of Certified Public Accountants. Using a valuation of the Company performed by an independent appraiser, the Company determined the total reorganization value of all its assets to be approximately $236,294,000 as of January 1, 1994 and the Company's accumulated deficit was eliminated as of January 1, 1994. (b) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (1) Basis of Presentation The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. As disclosed in Note 15, the operations of IPC, as defined below, are classified as discontinued operations. (2) Fiscal Year The Company has a 52/53 week fiscal year ending on the Saturday nearest December 31. Fiscal years for the consolidated financial statements included herein are for the 52 weeks ended January 1, 2000, the 52 weeks ended January 2, 1999, and the 53 weeks ended January 3, 1998. (3) Inventories Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. (4) Property, Plant and Equipment Property, plant and equipment are recorded at cost. Depreciation is computed by the straight-line method over the estimated useful lives of assets: 1) Buildings and improvements - 24 to 30 years; 2) Machinery and equipment - 3 to 8 years; and 3) Vehicles - 4 to 6 years. Maintenance and repairs are charged to expense as incurred and expenditures for major renewals and improvements are capitalized. (5) Collection Routes and Contracts Collection routes, restrictive covenants and consulting agreements are recorded at cost and are amortized using the straight-line method over periods ranging from 3 to 15 years. (6) Goodwill Goodwill, which represents the excess of purchase price over fair value of net assets acquired, is amortized on a straight-line basis over the expected periods to be benefited, not exceeding 30 years. Annually, the Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. The amount of goodwill impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting the Company's average cost of funds. The assessment of the recoverability of goodwill will be impacted if estimated future operating cash flows are not achieved. (7) Environmental Expenditures Environmental expenditures incurred to mitigate or prevent environmental contamination that has yet to occur and that otherwise may result from future operations are capitalized. Expenditures that relate to an existing condition caused by past operations and that do not contribute to current or future revenues are expensed or charged against established environmental reserves. Reserves are established when environmental assessments and/or clean-up requirements are probable and the costs are reasonably estimable. (8) Income Taxes The Company accounts for income taxes using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (9) Earnings Per Common Share Basic earnings per common share are computed by dividing net earnings attributable to outstanding common stock by the weighted average number of common shares outstanding during the year. Diluted earnings per common share are computed by dividing net earnings attributable to outstanding common stock by the weighted average number of common shares outstanding during the year increased by dilutive common equivalent shares (stock options) determined using the treasury stock method, based on the average market price exceeding the exercise price of the stock options. The weighted average common shares used for basic earnings per common share was 15,589,000 15,581,000 and 15,519,000 for 1999, 1998 and 1997, respectively. The effect of dilutive stock options added 942,000 shares for 1997 for the computation of diluted earnings per common share. For 1999 and 1998 the effect of all outstanding stock options were excluded from diluted earnings per common share because the effect was anti-dilutive. (10) Stock Option Plans The Company accounts for its stock option plan in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation, permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. (11) Statements of Cash Flows The Company considers all short-term highly liquid instruments, with an original maturity of three months or less, to be cash equivalents. (12) Use of Estimates The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (13) Impairment of Long-Lived Assets and Long-Lived Assets To Be Disposed Of The Company applies the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. In Fiscal 1999, the Company recorded an impairment charge of $1,387,000 to reduce the carrying value of certain land and buildings not currently used in operations to estimated fair value. The impairment charge is included in operating expenses in the accompanying Fiscal 1999 Consolidated Statement of Operations. (14) Financial Instruments The carrying amount of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximates fair value due to the short maturity of these instruments. The carrying amount for the Company's outstanding borrowings under the Credit Agreement and Term Loan described in note 9, approximates the fair value due to the floating interest rates on the borrowings. The fair value of the interest rate swap agreements was $(967,000) and $(207,000) at January 1, 2000, and January 2, 1999, respectively. Current market pricing models were used to estimate fair value of interest rate swap agreements. The Company incurred additional interest expense of $913,400 and $670,300 in Fiscal 1999 and 1998, respectively, related to the swap agreements. (15) Derivative Instruments The Company's use of derivative instruments is limited to interest rate swaps which are entered into with the intent of managing overall borrowing costs. The Company does not use derivative instruments for trading purposes. For the periods presented, interest rate swaps are accounted for under the accrual method, whereby the difference between the Company's pay and receive rate is recognized as an increase or decrease to interest expense. The fair value of the swap agreements and changes in fair value are not recognized in the consolidated financial statements. (2) LIQUIDITY The Company has experienced two consecutive years of operating losses and reduced cash flow as compared to 1997. Management believes that, unless the prices for the products the Company sells decline further, the Company's cash flow from operations and availability of credit under the Revolver (see note 9) should enable the Company to meet its Fiscal 2000 obligations in the ordinary course of business. However, if prices for finished goods the Company sells were to materially decline below those prevailing in Fiscal 1999, the Company might be forced to seek further covenant waivers under the Amended and Restated Credit Agreement in 2000. (3) ACQUISITIONS During Fiscal 1997, as part of the Company's strategy to expand its presence in restaurant grease collection and the grease trap business, the Company made the following acquisitions: Enduro, Midwest Recycling, and Torvac, totaling $11.7 million which included goodwill acquired of $2.2 million. (4) INVENTORIES A summary of inventories follows (in thousands): January 1, January 2, 2000 1999 ----------------- ---------------- Finished product $ 8,897 $11,065 Supplies and other 747 642 -------- ------- $ 9,644 $11,707 ======== ======= (5) PROPERTY, PLANT AND EQUIPMENT A summary of property, plant and equipment follows (in thousands): January 1, January 2, 2000 1999 --------------------------------- Land $ 11,291 $ 18,089 Buildings and improvements 28,003 25,720 Machinery and equipment 139,569 137,524 Vehicles 51,439 51,250 Construction in process 6,234 8,204 -------- -------- 236,536 240,787 Accumulated depreciation (122,712) (100,713) -------- -------- $ 113,824 $ 140,074 ======== ======== (6) OTHER ASSETS Other assets consist of the following (in thousands): January 1, January 2, 2000 1999 -------------------------------- Prepaid pension cost (note 13) $ 2,092 $ 3,009 Deposits and other 2,982 2,429 ------- ------- $ 5,074 $ 5,438 ======= ======= (7) ACCRUED EXPENSES Accrued expenses consist of the following (in thousands): January 1, January 2, 2000 1999 ------------------------------ Insurance $ 3,339 $ 3,778 Compensation and benefits 4,480 4,654 Utilities and sewage 2,649 2,649 Reserve for environmental and litigation matters (note 16) 2,000 2,000 Other 10,824 9,174 ------- ------- $ 23,292 $ 22,255 ======= ======= (8) LEASES The Company leases five plants and storage locations, four office locations and a portion of its transportation equipment. Leases are noncancellable and expire at various times through the year 2028. Minimum rental commitments under noncancellable leases as of January 1, 2000, are as follows (in thousands): Period Ending Fiscal Operating Leases 2000 2,719 2001 2,478 2002 2,282 2003 1,529 2004 773 Thereafter 8,253 ------- Total $ 18,034 ======= Rent expense for the years ended January 1, 2000, January 2, 1999, and January 3, 1998 was $2,429,404, $1,695,867 and $1,283,035 respectively. (9) LONG-TERM DEBT Long-term debt consists of the following (in thousands): January 1, January 2, 2000 1999 -------------------------------- Credit Agreement: Revolving Credit Facility $ 110,179 $ 111,319 Term Loan 7,720 36,702 Other notes 120 309 -------- -------- 118,019 148,330 Less current maturities 7,810 7,717 -------- -------- $ 110,209 $ 140,613 ======== ======== CREDIT AGREEMENT Effective June 5, 1997, the Company entered into a Credit Agreement (the "Credit Agreement") which originally provided for borrowings in the form of a $50,000,000 Term Loan and $175,000,000 Revolving Credit Facility. On October 3, 1998, the Company entered into an amendment of the Credit Agreement whereby BankBoston, N.A., as agent, and the other participant banks in the Credit Agreement (the "Banks") agreed to forbear from exercising rights and remedies arising as a result of several existing events of default of certain financial covenants (the "Defaults") under the Credit Agreement, as amended, until November 9, 1998. On November 6, 1998, the Company entered into an extension of the Amendment whereby the Banks agreed to forbear from exercising rights and remedies arising as a result of the Defaults until December 14, 1998. The forbearance period was subsequently extended to January 22, 1999. On January 22, 1999, the Company and the banks entered into an Amended and Restated Credit Agreement (the "Amended and Restated Credit Agreement"). The Amended and Restated Credit Agreement provides for borrowing in the form of a $36,702,000 Term Loan and $135,000,000 Revolving Credit Facility. The Term Loan provides for $36,702,000 of borrowing. Under the Credit Agreement, the Term Loan bore interest, payable monthly at LIBOR plus a margin (the "Credit Margin"). Under the Amended and Restated Credit Agreement, the Term Loan bears interest, payable quarterly, at a Base Rate (8.50% at January 1, 2000) plus a margin of 1%. As of January 1, 2000, $7,720,000 was outstanding under the Term Loan, with $3,516,000 due on June 30, 2000, $2,500,000 due on September 30, 2000, and the balance due on December 31, 2000. The Revolving Credit Facility provides for borrowings up to a maximum of $135,000,000 with sublimits available for letters of credit and a swingline. Under the Credit Agreement, outstanding borrowings on the Revolving Credit Facility bore interest, payable monthly, at various LIBOR rates plus the Credit Margin as well as portions at a Base Rate or, for swingline advances, at the Base Rate. Under the Amended and Restated Credit Agreement, the Revolving Credit Facility bears interest, payable quarterly, at a Base Rate (8.50% at January 1, 2000) plus a margin of 1%. Additionally, the Company must pay a commitment fee equal to 0.375% per annum on the unused portion of the Revolving Credit Facility. Under the Amended and Restated Credit Agreement, the Revolving Credit Facility provides for a mandatory reduction of $2,500,000 on March 31, 2001, with the remaining balance due at maturity on June 30, 2001. As of January 1, 2000, $110,179,000 was outstanding under the Revolving Credit Facility. As of January 1, 2000, the Company had outstanding irrevocable letters of credit aggregating $11,233,000. Substantially all assets of the Company are either pledged or mortgaged as collateral for borrowings under the Amended and Restated Credit Agreement. The Amended and Restated Credit Agreement contains certain terms and covenants, which, among other matters, restrict the incurrence of additional indebtedness, the payment of cash dividends, the retention of certain proceeds from sales of assets, and the annual amount of capital expenditures, and requires the maintenance of certain minimum financial ratios. As of January 1, 2000, no cash dividends could be paid to the Company's stockholders pursuant to the Amended and Restated Credit Agreement. The Company has limited involvement with derivative financial instruments and does not use them for trading purposes. Interest rate swap agreements are used to reduce the potential impact of increases in interest rates on floating-rate long-term debt. At January 1, 2000, the Company was party to three interest rate swap agreements. Under the terms of the swap agreements, the interest obligation on $70 million of Amended and Restated Credit Agreement floating-rate debt was exchanged for fixed rate contracts which bear interest, payable quarterly. One swap agreement for $25 million matures June 27, 2002, bears interest at 6.5925% and the Company's receive rate is based on the three-month LIBOR. A second swap agreement for $25 million matures June 27, 2001, bears interest at 9.83% and the Company's receive rate is based on the Base Rate. The third swap agreement for $20 million matures on June 27, 2002, with a one-time option for the bank to cancel at June 27, 2001, bears interest at 9.17% and the Company's receive rate is based on the Base Rate. OTHER Aggregate maturities of long-term debt subsequent to January 1, 2000 are as follows (in thousands): 2000 7,810 2001 110,209 (10) OTHER NONCURRENT LIABILITIES Other noncurrent liabilities consist of the following (in thousands): January 1, January 2, 2000 1999 ------------ ----------- Reserve for insurance, environmental, litigation and tax matters (note 16) $14,927 $16,237 Liabilities associated with consulting and noncompete agreements 4,253 7,201 Other 161 1,398 ------ ------ $19,341 $24,836 ====== ====== The Company sponsors a defined benefit health care plan that provides postretirement medical and life insurance benefits to certain employees. The Company accounts for this plan in accordance with Statement of Financial Accounting Standards No. 106 and the effect on the Company's financial position and results of operations is immaterial. (11) INCOME TAXES Income tax expense (benefit) attributable to income (loss) from continuing operations before income taxes consists of the following (in thousands): January 1, January 2, January 3, 2000 1999 1998 ---------------------------------------------- Current: Federal $ - $ (34) $ 2,813 State - - 262 Foreign - - 14 Deferred: Federal (9,183) (8,432) (1,099) State (796) (784) (94) Foreign (36) (97) 411 ------- ------ ------ $(10,015) $(9,347) $ 2,307 ======= ====== ====== Income tax expense for the years ended January 1, 2000, January 2, 1999, and January 3, 1998, differed from the amount computed by applying the statutory U.S. federal income tax rate (35%) to income (loss) from continuing operations before income taxes as a result of the following (in thousands): <TABLE> <CAPTION> January 1, January 2, January 3, 2000 1999 1998 --------------------------------------------- <S> <C> <C> <C> Computed "expected" tax expense $ (9,000) $(9,151) $ 2,322 State income taxes, net of federal benefit (517) (510) 109 Tax-exempt income of foreign sales corporation - 116 (463) Change in valuation allowance (311) - - Other, net (187) 198 339 ------- ------ ------- $(10,015) $(9,347) $ 2,307 ======= ====== ======= </TABLE> The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at January 1, 2000 and January 2, 1999 are presented below (in thousands): January 1, January 2, 2000 1999 ----------- ------------ Deferred tax assets: Net operating loss carryforwards $ 36,490 $ 32,290 Capital loss carryforwards 5,420 - Loss contingency reserves 5,972 6,345 Net assets of discontinued operations - 6,654 Other 1,434 1,767 -------- -------- Total gross deferred tax assets 49,316 47,056 Less valuation allowance (20,305) (20,616) -------- -------- Net deferred tax assets 29,011 26,440 -------- -------- Deferred tax liabilities: Collection routes and contracts (7,805) (9,520) Property, plant and equipment (20,164) (25,458) Other (829) (1,160) -------- -------- Total gross deferred tax liabilities (28,798) (36,138) -------- -------- $ 213 $ (9,698) ======== ======== The portion of the deferred tax assets and liabilities expected to be recognized in Fiscal 2000 has been recorded at January 1, 2000, in the accompanying consolidated balance sheet as a net current deferred income tax asset of $4,203,000. The remaining non-current deferred tax assets and liabilities have been recorded as a net deferred income tax liability of $3,990,000 at January 1, 2000 in the accompanying consolidated balance sheet. The valuation allowance for deferred tax assets as of January 1, 2000 and January 2, 1999 was $20,305,000 and $20,616,000, respectively. The net changes in the total valuation allowance for the years ended January 1, 2000 and January 2, 1999 was a decrease of $311,000 and an increase of $1,144,000. The Company believes that the remaining net deferred tax assets at January 1, 2000 and January 2, 1999 will be realized primarily through future reversals of existing taxable temporary differences. At January 1, 2000, the Company had net operating loss carryforwards for federal income tax purposes of approximately $96,025,000 which are available to offset future federal taxable income through 2019 and capital loss carryforwards of approximately $14,264,000 which are available to offset capital gains through 2004. The availability of the net operating loss carryforwards to reduce future taxable income is subject to various limitations. As a result of the change in ownership, the Company believes utilization of its pre-1994 net operating loss carryforwards ($75,154,000) is limited to $3,400,000 per year for the remaining life of the net operating losses. The Company reports tax benefits utilized related to the January 1, 1994 valuation allowance ($185,000 in 1998) as a direct addition to additional paid-in capital. (12) STOCKHOLDERS' EQUITY At December 29, 1993, the Company granted options to purchase 384,615 shares of the Company's common stock to the former owners of the Redeemable Preferred Stock. The options have a term of ten years from the date of grant and may be exercised at a price of $3.45 per share (approximated market value at the date of grant). The 1993 Flexible Stock Option Plan and the 1994 Employee Flexible Stock Option Plan provide for the granting of stock options to key officers and salaried employees of the Company and its subsidiaries. Options to purchase common stock were granted at a price approximating fair market value at the date of grant. Options granted under the plans expire ten years from the date of grant. Vesting occurs on each anniversary of the grant date as defined in the specific option agreement. The plans also provide for the acceleration by one year of vesting of all non-vested shares upon the termination of the employee's employment in certain circumstances or upon a change in management control. The Non-Employee Directors Stock Option Plan provides for the granting of options to non-employee directors of the Company. As of January 1, 2000, options to purchase 447,000 shares of common stock had been granted pursuant to this plan. The options have a term of ten years from the date of grant and may be exercised at a price of $1.75 - $9.042 per share (market value at the date of grant). The options vest 25% six months after the grant date and 25% on each anniversary date thereafter. The per share weighted average fair value of stock options granted during 1999, 1998, and 1997 was $1.65, $5.57 and $7.34, respectively, on the date of grant using the Black Scholes option-pricing model with the following weighted assumptions: 1999 1998 1997 --------------------------------------------- Expected dividend yield 0.0% 0.0% 0.0% Risk-free interest rate 6.38% 5.25% 5.25% Expected life 10 years 10 years 10 years Expected annual volatility 62.41 - 66.59% 59.95-64.12% 64.99-69.99% The Company applies APB Opinion No. 25 in accounting for its Plans and, accordingly, no compensation cost has been recognized for its stock options in the financial statements as stock options were granted at market value on the grant date. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's earnings (loss) from continuing operations would have been reduced to the pro forma amounts indicated below (in thousands, except per share): 1999 1998 1997 ---------------------------------- Earnings (loss) from continuing operations As reported $(15,700) $(16,799) $4,328 Pro forma $(16,201) $(18,527) $2,319 Basic earnings (loss) per common share from continuing operations As reported $(1.01) $(1.08) $0.28 Pro forma $(1.04) $(1.19) $0.15 A summary of transactions for all stock options granted follows: Option Weighted-avg exercise exercise Number of price price shares per share per share ------------------------------------------ Options outstanding at December 28, 1996 2,925,330 $2.88-10.29 $4.83 Granted 683,062 8.25-10.88 9.25 Canceled (450,300) 2.86-10.29 3.51 Exercised (107,100) 3.33-8.83 4.53 --------- Options outstanding at January 3, 1998 3,050,992 2.86-10.88 6.02 Granted 96,900 3.44-8.69 7.41 Canceled (43,530) 4.13-10.29 8.34 Exercised (26,040) 3.45-4.13 3.81 --------- Options outstanding at January 2, 1999 3,078,322 2.86-10.88 6.05 Granted 111,000 1.75-2.63 2.12 Canceled (952,687) 2.63-10.29 6.43 --------- Options outstanding at January 1, 2000 2,236,635 $1.75-10.88 $5.69 ========= Options exercisable at January 1, 2000 1,928,958 $1.81-10.88 $5.50 ========= At January 1, 2000, the range of exercise prices and weighted-average remaining contractual life of outstanding options was $1.75 - $10.875 and 5.6 years, respectively. At January 1, 2000 and January 2, 1999, the number of options exercisable was 1,928,958 and 2,443,745, respectively, and the weighted-average exercise price of those options was $5.50 and $5.25, respectively. (13) EMPLOYEE BENEFIT PLANS The Company has retirement and pension plans covering substantially all of its employees. Most retirement benefits are provided by the Company under separate final-pay noncontributory pension plans for all salaried and hourly employees (excluding those covered by union-sponsored plans) who meet service and age requirements. Benefits are based principally on length of service and earnings patterns during the five years preceding retirement. The Company's funding policy for those plans is to contribute annually not less than the minimum amount required nor more than the maximum amount that can be deducted for federal income tax purposes. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. The following table sets forth the plans' funded status and amounts recognized in the Company's consolidated balance sheets based on the measurement date (October 1, 1999 and 1998) (in thousands): January 1, January 2, 2000 1999 ------------------------- Change in benefit obligation: Benefit obligation at beginning of year $47,106 $40,222 Service cost 1,781 1,360 Interest cost 3,110 2,835 Amendments 264 113 Actuarial (gain)/loss (4,123) 4,684 Benefits paid (2,148) (2,108) ------ ------ Benefit obligation at end of year 45,990 47,106 ------ ------ Change in plan assets: Fair value of plan assets at beginning of year 42,874 42,313 Actual return on plan assets 5,566 1,398 Employer contribution 391 1,271 Benefits paid (2,148) (2,108) ------ ------ Fair value of plan assets at end of year 46,683 42,874 ------ ------ Funded status 693 (4,232) Unrecognized actuarial loss 575 6,609 Unrecognized prior service cost 824 632 ------ ------ Prepaid benefit cost $ 2,092 $ 3,009 ====== ====== Net pension cost includes the following components (in thousands): January 1, January 2, January 3, 2000 1999 1988 ---------------------------------------- Service cost $1,781 $1,360 $1,024 Interest cost 3,110 2,835 2,557 Expected return on plan assets (3,894) (3,870) (8,708) Net amortization and deferral 73 70 5,793 ----- ----- ----- Net pension cost $1,070 $ 395 $ 666 ===== ===== ===== Assumptions used in accounting for the employee benefit pension plans were: January 1, January 2, January 3, 2000 1999 1998 -------------------------------------- Weighted average discount rate 7.50% 6.75% 7.25% Rate of increase in future compensation levels 5.17% 5.80% 5.15% Expected long-term rate of return on assets 9.25% 9.25% 9.25% The Company participates in several multi-employer pension plans which provide defined benefits to certain employees covered by labor contracts. These plans are not administered by the Company and contributions are determined in accordance with provisions of negotiated labor contracts. Information with respect to the Company's proportionate share of the excess, if any, of the actuarially computed value of vested benefits over these pension plans' net assets is not available. The cost of such plans amounted to $1,306,433, $1,306,367, and $1,529,000 for the years ended January 1, 2000, January 2, 1999, and January 3, 1998, respectively. (14) CONCENTRATION OF CREDIT RISK Concentration of credit risk is limited due to the Company's diversified customer base and the fact that the Company sells commodities. No single customer accounted for more than 10% of the Company's net sales in 1999, 1998 and 1997. (15) DISCONTINUED OPERATIONS In 1998, the Company made a decision to discontinue the operations of the Bakery By-Products Recycling segment in order to concentrate its financial and human resources on its other businesses. The Bakery By-Products Recycling segment was comprised of International Processing Corporation, International Transportation Services, Inc., and Food By-Products Recycling (collectively referred to as "IPC"). On February 10, 1999, the Company announced the execution of a Stock Purchase Agreement dated February 9, 1999, with Scope Products, Inc., a wholly-owned subsidiary of Scope Industries, pursuant to which the Company agreed to sell all the issued and outstanding stock of IPC for a net consideration of $19,600,000. The sale was consummated on April 5, 1999. The disposal of IPC has been accounted for as a discontinued operation and, accordingly, its net assets have been segregated from continuing operations in the accompanying consolidated balance sheets, statements of operations and cash flows for the periods presented. The condensed statement of operations relating to discontinued operations for the years ended January 2, 1999 (through the measurement date of November 3, 1998), and January 3, 1998 follows (in thousands): January 2, January 3, 1999 1998 ------------------------------- Net sales $37,456 $54,329 Cost and expenses 38,484 52,586 ------ ------ Income (loss) before income taxes (1,028) 1,743 Provision for income taxes (391) 662 ------ ------ Net earnings (loss) $ (637) $ 1,081 ====== ====== Included in the loss on disposition of discontinued operations is a net tax benefit of $2.2 million. In addition, no interest expense has been allocated to discontinued operations. (16) CONTINGENCIES (a) ENVIRONMENTAL Chula Vista The Company has been the owner of an undeveloped property located in Chula Vista, California (the "Site"). A rendering plant was operated on the Site until 1982. From 1959 to 1978, a portion of the Site was used as an industrial waste disposal facility, which was closed pursuant to Closure Order No. 80-06, issued by the State of California Regional Water Quality Control Board for the San Diego Region (the "RWQCB"). In June 1982, RWQCB staff approved a completed closure plan which included construction of a containment cell (the "Containment Cell") on a portion (approximately 5 acres) of the Site to isolate contaminated soil excavated from the Site. The Site has been listed by the State of California as a site for which expenditures for removal and remedial actions may be made by the State pursuant to the California Hazardous Substances Account Act, California Health & Safety Code Section 25300 et seq. Technical consultants retained by the Company have conducted various investigations of the environmental conditions at the Site, and in 1996, requested that the RWQCB issue a "no further action" letter with respect to the Site. In 1997, the RWQCB issued Order No. 97-40 prescribing a maintenance and monitoring program for the Containment Cell. Thereafter, the Company continued to work with the RWQCB to define the scope of an additional order which would address the Company's future obligations for that remaining portion (approximately 30 acres) of the Site. On December 30, 1999, the Company completed a sale of the entire Site pursuant to which the purchaser assumed responsibility for known environmental liabilities at the Site. Purchaser's assumption of such liability is supported by a Real Estate Pollution Insurance Policy and a Full Occurrence Commercial General Liability with Pollution Coverage Insurance Policy. The Company does not currently anticipate future material involvement at the Site. Cleveland In August, 1997, the Company received a Notice of Violation ("NOV") from the United States Environmental Protection Agency ("EPA") for alleged violations of the Ohio Air Quality Rules as they relate to odor emissions. The NOV asserted that the Cleveland, OH facility was in violation of the State's nuisance rule based on a City of Cleveland record of complaints associated with odors emanating from its facility. Since December, 1992, the Company has been working with the City of Cleveland under a Consent Agreement to address such complaints and concerns of the neighborhood in close proximity to the plant. In August, 1998, the Company received a second NOV from EPA which encompassed the alleged violations from the first NOV and alleged several violations of terms and conditions found in the Cleveland plant's air permit. Rendering of animal by-products has been discontinued at the Cleveland plant. The Company and EPA have concluded an amicable resolution of the NOV in the form of an Administrative Consent Order without a monetary penalty. (b) LITIGATION . Melvindale A group of residents living near the Company's Melvindale, Michigan plant has filed suit, purportedly on behalf of a class of persons similarly situated. The class has been certified for injunctive relief only. The court declined to certify a damage class. The suit is based on legal theories of trespass, nuisance and negligence and/or gross negligence, and is pending in the United States District Court, Eastern District of Michigan. Plaintiffs allege that emissions to the air, particularly odor, from the plant have reduced the value and enjoyment of Plaintiffs' property, and Plaintiffs seek damages, including mental anguish, exemplary damages and injunctive relief. In a lawsuit with similar factual allegations, also pending in United States District Court, Eastern District of Michigan, the City of Melvindale has filed suit against the Company based on legal theories of nuisance, trespass, negligence and violation of Melvindale nuisance ordinances seeking damages and declaratory and injunctive relief. The court has dismissed the trespass counts in both lawsuits without prejudice. The Company or its predecessors have operated a rendering plant at the Melvindale location since 1927 in a heavily industrialized area down river south of Detroit. The Company has taken and is taking all reasonable steps to minimize odor emissions from its recycling processes and is defending the lawsuit vigorously. Other Litigation The Company is also a party to several other lawsuits, claims and loss contingencies incidental to its business, including assertions by certain regulatory agencies related to the release of unacceptable odors from some if its processing facilities. The Company purchases its workers compensation, auto and general liability insurance on a retrospective basis. The Company accrues its expected ultimate costs related to claims occurring during each fiscal year and carries this accrual as a reserve until such claims are paid by the Company. The Company has established loss reserves for insurance, environmental and litigation matters as a result of the matters discussed above. Although the ultimate liability cannot be determined with certainty, management of the Company believes that reserves for contingencies are reasonable and sufficient based upon present governmental regulations and information currently available to management. The Company estimates the range of possible losses related to environmental and litigation matters, based on certain assumptions, is between $2.5 million and $8.5 million at January 1, 2000. The accrued expenses and other noncurrent liabilities classifications in the Company's consolidated balance sheets include reserves for insurance, environmental and litigation contingencies of $17.1 million and $19.2 million at January 1, 2000 and January 2, 1999, respectively. There can be no assurance, however, that final costs will not exceed current estimates. The Company believes that any additional liability relative to such lawsuits and claims which may not be covered by insurance would not likely have a material adverse effect on the Company's financial position, although it could potentially have a material impact on the results of operations in any one year. (17) BUSINESS SEGMENTS During Fiscal 1998, the Company adopted SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information. The Company operated on a worldwide basis within four industry segments: Rendering, Restaurant Services, Esteem Products and Bakery By-Products Recycling. Prior to Fiscal 1998, Rendering and Restaurant Services were not separately accounted for and therefore separate segment data does not exist for Fiscal 1997 as it is impractical to create such data. Esteem Products was newly created in Fiscal 1998; however the Esteem Products segment has subsequently been combined with the Company's Rendering segment and in Fiscal 2000 will no longer be considered a separate operating segment for internal management reporting. The measure of segment profit (loss) includes all revenues, operating expenses (excluding certain amortization of intangibles), and selling, general and administrative expenses incurred at all operating locations and exclude general corporate expenses. Rendering Rendering consists of the collection and processing of animal by-products from butcher shops, grocery stores and independent meat and poultry processors, converting these wastes into similar products such as useable oils and proteins utilized by the agricultural and oleochemical industries. Restaurant Services Restaurant Services consists of the collection of used cooking oils from restaurants and recycling them into similar products such as high-energy animal feed ingredients and industrial oils. Restaurant Services also provides grease trap servicing. Prior to Fiscal 1998, the activities conducted by this business segment were considered part of the Rendering segment. Esteem Products Esteem Products consists of the development and marketing of enhanced feed ingredients from existing raw material streams utilizing advanced biochemistry and animal nutrition technologies. Due to unfavorable market conditions, beginning in Fiscal 2000 the Esteem Products division will be combined with the Company's Rendering operations. Bakery By-Products Recycling Bakery By-Products Recycling consists of the collection and processing of bakery and confectionery by-products from bakeries, snack food producers, confectioners, and pasta manufacturers, converting them into a high-energy ingredient used as a component of livestock and poultry rations. This business segment has been classified as a discontinued operation and was sold in 1999 (see note 15). Included in corporate activities are general corporate expenses and the amortization of intangibles related to "Fresh Start Reporting." Assets of corporate activities include cash, unallocated prepaid expenses, deferred tax assets, prepaid pension, and miscellaneous other assets. Business Segment Net Revenues (in thousands): January 1, January 2, 2000 1999 --------------------------------- Rendering: Trade $204,404 $275,424 Intersegment 27,933 29,210 ------- ------- 232,337 304,634 ------- ------- Restaurant Services: Trade 53,939 61,451 Intersegment 7,204 7,521 ------- ------- 61,143 68,972 ------- ------- Esteem Products: Trade 227 156 Intersegment 37 106 ------- ------- 264 262 ------- ------- Eliminations (35,174) (36,837) ------- ------- Total $258,570 $337,031 ======= ======= Business Segment Profit (Loss) (in thousands): January 1, January 2, 2000 1999 ------------------------- Rendering $ 4,859 $ 5,231 Restaurant Services 922 773 Esteem Products (1,610) (2,792) Corporate Activities (15,882) (16,892) Interest expense (14,004) (12,466) ------- ------- Income (loss) from continuing operations before income taxes $(25,715) $(26,146) ======= ======= Certain assets are not attributable to a single operating segment but instead relate to multiple operating segments operating out of individual locations. These assets are utilized by both the Rendering and Restaurant Services business segments and are identified in the category Combined Rend./Rest. Svcs. Depreciation of Combined Rend./Rest. Svcs. assets is allocated based upon an estimate of the percentage of corresponding activity attributed to each segment. Additionally, although intangible assets are allocated to operating segments, the amortization related to the adoption of "Fresh Start Reporting" is not considered in the measure of operating segment profit (loss) and is included in Corporate Activities. Business Segment Assets (in thousands): January 1, January 2, 2000 1999 -------------------------- Rendering $75,708 $84,904 Restaurant Services 24,753 32,100 Combined Rend./Rest. Svcs. 77,956 93,080 Esteem Products 3,668 3,097 Corporate Activities 15,719 29,985 Net assets of discontinued operations - 20,000 ------- ------- Total $197,804 $263,166 ======= ======= Business Segment Property, Plant and Equipment (in thousands): January 1, January 2, 2000 1999 -------------------------- Depreciation and amortization: Rendering $20,502 $21,756 Restaurant Services 7,449 7,132 Esteem Products 388 455 Corporate Activities 3,186 3,075 ------- ------- Total $31,525 $32,418 ======= ======= Additions: Rendering $3,601 $6,821 Restaurant Services 4,279 1,105 Combined Rend./Rest. Svcs. 1,661 3,948 Esteem Products 140 2,764 Corporate Activities 170 329 ------- ------- Total $ 9,851 $14,967 ======= ======= The Company has no material foreign operations, but exports a portion of its products to customers in various foreign countries. Geographic Area Net Trade Revenues (in thousands): January 1, January 2, 1999 January 3, 2000 1998 ------------------------------------------------- United States $151,165 $208,255 $343,102 Korea 13,029 5,897 5,280 Spain 1,798 8,237 8,700 Mexico 19,320 9,094 6,511 Japan 2,162 5,037 4,868 N. Europe 2,095 694 3,210 Pacific Rim 9,008 6,592 9,208 Taiwan 2,415 3,342 2,408 Canada 580 1,659 4,791 Latin/South America 13,413 10,772 7,331 Other/Brokered 43,585 77,452 48,733 ------- -------- ------- Total $258,570 $337,031 $444,142 ======= ======== ======= Other/Brokered trade revenues represent product for which the ultimate destination is not monitored.
(18) QUARTERLY FINANCIAL DATA (UNAUDITED AND IN THOUSANDS EXCEPT PER SHARE AMOUNTS): <TABLE> <CAPTION> Year Ended January 1, 2000 ------------------------------------------------------------------ First Quarter Second Quarter Third Quarter Fourth Quarter ------------- -------------- ------------- -------------- <S> <C> <C> <C> <C> Net sales $69,846 $58,182 $63,381 $67,161 Operating income (loss) (2,625) (2,818) (3,318) (3,233) Earnings (loss) from continuing operations (4,191) (4,457) (5,196) (1,856) Discontinued operations: Income (loss) from operations - - - - Loss on disposal (317) (16) - - Net earnings (loss) (4,508) (4,473) (5,196) (1,856) Basic earnings (loss) per share (0.29) (0.29) (0.33) (0.12) Diluted earnings (loss) per share (0.29) (0.29) (0.33) (0.12) Year Ended January 2, 1999 ------------------------------------------------------------------ First Quarter Second Quarter Third Quarter Fourth Quarter ------------- -------------- ------------- -------------- Net sales $95,669 $87,315 $79,349 $74,698 Operating income (loss) 846 (1,284) (6,226) (5,618) Earnings (loss) from continuing operations (1,373) (2,717) (6,294) (6,415) Discontinued operations: Income (loss) from operations (31) 88 (603) (91) Loss on disposal - - - (14,657) Net earnings (loss) (1,404) (2,629) (6,897) (21,163) Basic earnings (loss) per share (0.09) (0.17) (0.44) (1.36) Diluted earnings (loss) per share (0.09) (0.17) (0.44) (1.36) </TABLE> See Note 15 for a discussion of fourth quarter Fiscal 1998 determination to dispose of IPC.
DARLING INTERNATIONAL INC. AND SUBSIDIARIES SCHEDULE II <TABLE> <CAPTION> 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 - -------------------------------------------- ------------- -------------- -------------- ------------- ---------- <S> <C> <C> <C> <C> <C> Accumulated amortization of collection routes and contracts: Year ended January 1, 2000 $ 12,101 $ 5,686 $ 4 $ 1,972 $ 15,819 ======= ======= ===== ======= ======= Year ended January 2, 1999 $ 7,668 $ 5,759 $ - $ 1,326 $ 12,101 ======= ======= ===== ======= ======= Year ended January 3, 1998 $ 2,971 $ 5,660 $ - $ 963 $ 7,668 ======= ======= ===== ======= ======= Accumulated amortization of goodwill: Year ended January 1, 2000 $ 513 $ 228 $ - $ - $ 741 ======= ======= ===== ======= ======= Year ended January 2, 1999 $ 286 $ 227 $ - $ - $ 513 ======= ======= ===== ======= ======= Year ended January 3, 1998 $ 120 $ 166 $ - $ - $ 286 ======= ======= ===== ======= ======= </TABLE> Note: Deductions consist of the write-off of fully amortized collection routes and contracts.
DARLING INTERNATIONAL INC. AND SUBSIDIARIES FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 1, 2000 PART II ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item with respect to items 401 and 405 of Regulation S-K appears in the sections entitled "Election of Directors," "Executive Officers" and "Compliance with Section 16(a) of the Exchange Act" included in the Registrant's definitive Proxy Statement relating to the 1999 Annual Meeting of Stockholders, which information is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this item appears in the section entitled "Executive Compensation" included in the Registrant's definitive Proxy Statement relating to the 1999 Annual Meeting of Stockholders, which information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item appears in the section entitled "Security Ownership of Certain Beneficial Owners and Management" included in the Registrant's definitive Proxy Statement relating to the 1999 Annual Meeting of Stockholders, which information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Mr. Taura has served as Chairman of the Board and Chief Executive Officer of the Company since August 1999. Mr. Taura is a partner in the management consulting firm Taura Flynn & Associates, LLC. Prior to Mr. Taura serving as Chairman of the Board and Chief Executive Officer, the Company incurred from Taura Flynn & Associates, LLC, fees and expenses of $148,007 related to management consulting services provided to the Company. Fredrick J. Klink, a director of the Company, is a partner in the law firm of Dechert, Price & Rhodes. The Company paid Dechert, Price & Rhodes fees for the performance of various legal services.
DARLING INTERNATIONAL INC. AND SUBSIDIARIES FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 1, 2000 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents filed as part of this report: (1) The following consolidated financial statements are included in Item 8. Pages ------- Independent Auditors' Report 20 Consolidated Balance Sheets- January 1, 2000 and January 2, 1999 21 Consolidated Statements of Operations - Three years ended January 1, 2000 22 Consolidated Statements of Stockholders' Equity - Three years ended January 1, 2000 23 Consolidated Statements of Cash Flows - Three years ended January 1, 2000 24 Notes to Consolidated Financial Statements - January 1, 2000 and January 2, 199925 Quarterly Data 42 (2) The following financial statement schedule is included in Item 8. Schedule II - Valuation and Qualifying Accounts 43 All other schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and notes thereto. (3) (a) Exhibits Exhibit No. Description ----------- ------------------ 3.1 * Restated Certificate of Incorporation of the Company. 3.2 * Amended and Restated Bylaws of the Company. 4.1 * Specimen Common Stock Certificate. 10.1** Amended and Restated Credit Agreement, dated as of January 22, 1999, among Darling International Inc., BankBoston, N.A., Comerica Bank, Credit Lyonnais New York Branch, and Wells Fargo Bank (Texas), National Association as Co-agents, and other banks as named therein. 10.2* Registration Rights Agreement, as amended. 10.3* Form of Indemnification Agreement. 10.4* Lease, dated November 30, 1993, between the Company and the Port of Tacoma. 10.5 P Leases, dated July 1, 1996, between the Company and the City and County of San Francisco. 10.6 * 1993 Flexible Stock Option Plan. 10.7 *** International Swap Dealers Association, Inc. (ISDA) Master Agreement and Schedule between Credit Lyonnais and Darling International Inc. dated as of June 6, 1997, related to interest rate swap transaction. 10.7(a)*** International Swap Dealers Association, Inc. (ISDA) Master Agreement and Schedule between Wells Fargo Bank, N.A. and Darling International Inc. dated as of June 6, 1997, related to interest rate swap transaction. 10.7(b)*** International Swap Dealers Association, Inc. (ISDA) Master Agreement and Schedule between BankBoston, N.A. and Darling International Inc. dated as of June 26, 1997, related to interest rate swap transaction. 10.8 * Form of Executive Severance Agreement. 10.9 * 1994 Employee Flexible Stock Option Plan. 10.10* Non-Employee Directors Stock Option Plan. 10.17 Termination on September 20, 1999, of International Swap Dealers Association, Inc. ("ISDA") Master Agreement and Schedule between BankBoston N.A. and Darling International Inc. dated as of June 6, 1997, related to interest rate swap transaction and a new interest rate swap transaction is effected September 27, 1999. 10.17(a) Confirmation dated September 20, 1999 which supplements, forms part of, and is subject to, the ISDA Master Agreement dated as of June 6, 1997 between Credit Lyonnais and Darling International Inc. 10.18 Master Lease Agreement between Navistar Leasing Company and Darling International Inc. dated as of August 4, 1999. 11 Statement re computation of per share earnings. 21 Subsidiaries of the Registrant. 23 Consent of KPMG LLP. 27 Financial Data Schedule * Incorporated by reference from the Registrant's Registration Statement on Form S-1 filed July 15, 1994 (Registration No. 33-79478). ** Incorporated by reference to Form 8-K filed January 29, 1999. *** Incorporated by reference to Form 10-Q filed August 7, 1997. P Filed pursuant to temporary hardship exemption under cover of Form SE. (b) Reports on Form 8-K: No reports were filed on Form 8-K during the quarter ended January 1, 2000.
DARLING INTERNATIONAL INC. AND SUBSIDIARIES FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 1, 2000 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Form 10-K for the Fiscal Year Ended January 1, 2000 on its behalf by the undersigned, thereunto duly authorized, in the city of Irving, State of Texas, on the 31st day of March, 2000. DARLING INTERNATIONAL INC. By: /s/ Denis J. Taura --------------------------- Denis J. Taura Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, the report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date --------- ------------ ------------- /s/ Denis J. Taura Chairman of the Board and March __, 2000 Denis J. Taura Chief Executive Officer /s/ James A. Ransweiler President and March __, 2000 James A. Ransweiler Chief Operating Officer (Principal Executive Officer) /s/ John O. Muse Vice President and March __, 2000 John O. Muse Chief Financial Officer (Principal Financial & Accounting Officer) /s/ Bruce Waterfall Director March __, 2000 Bruce Waterfall /s/ Fredric J. Klink Director March __, 2000 Fredric J. Klink /s/ Dennis B. Longmire Director March __, 2000 Dennis B. Longmire /s/ David Jackson Director March __, 2000 David Jackson
INDEX TO EXHIBITS Exhibit No. Description Page ------------- ----------------------------- ----- 3.1 * Restated Certificate of Incorporation of the Company. 3.2 * Amended and Restated Bylaws of the Company. 4.1 * Specimen Common Stock Certificate. 10.1 ** Amended and Restated Credit Agreement, dated as of January 22, 1999, among Darling International Inc., BankBoston, N.A., Comerica Bank, Credit Lyonnais New York Branch, and Wells Fargo Bank (Texas), National Association as Co-agents, and other banks as named therein. 10.2* Registration Rights Agreement, as amended. 10.3* Form of Indemnification Agreement. 10.4* Lease, dated November 30, 1993, between the Company and the Port of Tacoma. 10.5 P Leases, dated July 1, 1996, between the Company and the City and County of San Francisco. 10.6 * 1993 Flexible Stock Option Plan. 10.7 *** International Swap Dealers Association, Inc. (ISDA) Master Agreement and Schedule between Credit Lyonnais and Darling International Inc. dated as of June 6, 1997, related to interest rate swap transaction. 10.7(a)*** International Swap Dealers Association, Inc. (ISDA) Master Agreement and Schedule between Credit Lyonnais and Darling International Inc. dated as of June 6, 1997, related to interest rate swap transaction. 10.7(b)*** International Swap Dealers Association, Inc. (ISDA) Master Agreement and Schedule between Credit Lyonnais and Darling International Inc. dated as of June 6, 1997, related to interest rate swap transaction. 10.8 * Form of Executive Severance Agreement. 10.9 * 1994 Employee Flexible Stock Option Plan. 10.10* Non-Employee Directors Stock Option Plan. 10.17 Termination on September 20, 1999, of International Swap Dealers Association, Inc. ("ISDA") Master Agreement and Schedule between BankBoston N.A. and Darling International Inc. dated as of June 6, 1997, related to interest rate swap transaction and a new interest rate swap transaction is effected September 27, 1999. 10.17(a) Confirmation dated September 20, 1999 which supplements, forms part of, and is subject to, the ISDA Master Agreement dated as of June 6, 1997 between Credit Lyonnais and Darling International Inc. 10.18 Master Lease Agreement between Navistar Leasing Company and Darling International Inc. dated as of August 4, 1999. 11 Statement re computation of per share earnings. 49 23 Consent of KPMG LLP. 50 27 Financial Data Schedule * Incorporated by reference from the Registrant's Registration Statement on Form S-1 filed July 15, 1994 (Registration No. 33-79478). ** Incorporated by reference to Form 8-K filed January 29, 1999. *** Incorporated by reference to Form 10-Q filed August 7, 1997. P Filed pursuant to temporary hardship exemption under cover of Form SE.
Darling International Inc. Exhibit 11 Statement RE Computation of Per Share Earnings The following table details the computation of basic and diluted earnings per common share, in thousands except per share data: <TABLE> <CAPTION> January 1, January 2, January 3, 1998 2000 1999 ================================================================= ================== ================== =================== <S> <C> <C> <C> Earnings (loss) from continuing operations $ (15,700) $ (16,799) $ 4,328 ========= ========= ======== Discontinued operations: Income (loss) from discontinued operations, net of tax - (637) 1,081 Estimated loss on disposal of discontinued operations, net of tax (334) (14,657) - --------- --------- -------- Net earnings (loss) available to common stock $ (16,034) $ (32,093) $ 5,409 ========= ========= ======== - ----------------------------------------------------------------- ------------------ ------------------ ------------------- Shares (Basic): Weighted average number of common shares outstanding 15,589 15,581 15,519 ========= ========= ======== Basic earnings (loss) per share: Continuing operations $(1.01) $(1.08) $ 0.28 Discontinued operations: Income (loss) from operations - (0.04) 0.07 Estimated loss on disposal (0.02) (0.94) - --------- --------- -------- Total $(1.03) $(2.06) $ 0.35 ========= ========= ======== - ----------------------------------------------------------------- ------------------ ------------------ ------------------- Shares (Diluted): Weighted average number of common shares outstanding 15,589 15,581 15,519 Additional shares assuming exercise of stock options - - 942 --------- --------- -------- Average common shares outstanding and equivalents 15,589 15,581 16,461 ========= ========= ======== Diluted earnings (loss) per share: Continuing operations $(1.01) $(1.08) $ 0.26 Discontinued operations: Income (loss) from operations - (0.04) 0.07 Estimated loss on disposal (0.02) (0.94) - --------- --------- -------- Total $ (1.03) $ (2.06) $ 0.33 ========= ========= ======== </TABLE>
EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT The Board of Directors Darling International Inc.: We consent to incorporation by reference in the registration statements on Form S-3 (No. 33-79478) and Form S-8 (Nos. 33-99868 and 33-99866) of Darling International Inc. of our report dated March 15, 2000, relating to the consolidated balance sheets of Darling International Inc. and subsidiaries as of January 1, 2000 and January 2, 1999, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended January 1, 2000, and the related schedule, which report appears in the January 1, 2000 annual report on Form 10-K of Darling International Inc. KPMG LLP Dallas, Texas March 31, 2000