UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q (Mark One) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended April 3, 1999 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _______ Commission File Number 0-24620 DARLING INTERNATIONAL INC. (Exact name of registrant as specified in its charter) DELAWARE 36-2495346 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 251 O'CONNOR RIDGE BLVD., SUITE 300, IRVING, TEXAS 75038 (Address of principal executive offices) (972) 717-0300 (Registrant's telephone number) Not applicable (Former name, address and fiscal year, if changed since last report) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months or for such shorter period that the Registrant was required to file such report(s)), and (2) has been subject to such filing requirements for the past 90 days. YES /X/ NO / / The number of shares outstanding of the Registrant's common stock, $0.01 par value, was 15,568,362 as of May 13, 1999.
DARLING INTERNATIONAL INC. AND SUBSIDIARIES FORM 10-Q FOR THE THREE MONTHS ENDED APRIL 3, 1999 TABLE OF CONTENTS Page No. PART I: Financial Information Item 1. FINANCIAL STATEMENTS Consolidated Balance Sheets. . . . . . . . . . . . 3 April 3, 1999 (unaudited) and January 2, 1999 Consolidated Statements of Operations (unaudited). . . . . 4 Three Months Ended April 3, 1999 and April 4, 1998 Consolidated Statements of Cash Flows (unaudited). . . . . 5 Three Months Ended April 3, 1999 and April 4, 1998 Notes to Consolidated Financial Statements (unaudited). . . 6 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. . . . . . . 11 PART II: Other Information Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS . . . . . . . . . . . . . . . 16 Item 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . 17 Signatures. . . . . . . . . . . . . . . . . . . 18 Index to Exhibits. . . . . . . . . . . . . . . . . 19 <TABLE> <CAPTION> DARLING INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS April 3, 1999 and January 2, 1999 (in thousands, except shares and per share data) April 3, January 2, 1999 1999 ---------- ---------- (unaudited) <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 1,625 $ 12,317 Accounts receivable 20,204 16,615 Inventories 9,057 11,707 Prepaid expenses 7,725 3,977 Deferred income tax assets 4,006 3,928 Other 603 671 -------- ------- Total current assets 43,220 49,215 Property, plant and equipment, less accumulated depreciation of $106,510 at April 3, 1999 and $100,713 at January 2, 1999 133,311 140,074 Collection routes and contracts, less accumulated amortization of $13,549 at April 3, 1999 and $12,101 at January 2, 1999 41,530 42,978 Goodwill, less accumulated amortization of $570 at April 3, 1999 and $513 at January 2, 1999 5,434 5,461 Other assets 5,246 5,438 Net assets of discontinued operations 20,000 20,000 -------- -------- $ 248,741 $ 263,166 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 8,318 $ 7,717 Accounts payable, principally trade 9,525 15,517 Accrued expenses 20,369 22,255 Accrued interest 158 656 -------- -------- Total current liabilities 38,370 46,145 Long-term debt, less current portion 139,526 140,613 Other non-current liabilities 23,640 24,836 Deferred income taxes 13,767 13,626 -------- -------- Total liabilities 215,303 225,220 -------- -------- Stockholders' equity Common stock, $.01 par value; 25,000,000 shares authorized; 15,589,077 and 15,589,077 shares issued and outstanding at April 3, 1999 and at January 2, 1999, respectively 156 156 Preferred stock, $0.01 par value; 1,000,000 shares authorized, none issued - - Additional paid-in capital 35,063 35,063 Retained earnings/(deficit) (1,781) 2,727 Total stockholders' equity 33,438 37,946 -------- -------- Contingencies (note 3) $ 248,741 $ 263,166 ======== ======== The accompanying notes are an integral part of these consolidated financial statements. </TABLE>
<TABLE> <CAPTION> DARLING INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Three months ended April 3, 1999 and April 4, 1998 (in thousands, except per share data) Three Months Ended April 3 , April 4, 1999 1998 ----------- --------- (unaudited) <S> <C> <C> Net sales $ 69,846 $ 94,407 Costs and expenses: Cost of sales and operating expenses 57,719 76,593 Selling, general and administrative expenses 6,945 8,824 Depreciation and amortization 7,807 8,100 -------- -------- Total costs and expenses 72,471 93,517 -------- -------- Operating income/(loss) (2,625) 890 -------- -------- Other income/(expense): Interest expense (3,581) (2,926) Other, net (401) (157) -------- -------- Total other income/(expense) (3,982) (3,083) -------- -------- Loss from continuing operations before income taxes (6,607) (2,193) Income tax benefit (2,416) (819) -------- -------- Loss from continuing operations (4,191) (1,374) Discontinued operations: Loss from discontinued operations, net of tax - (30) Estimated loss on disposal of discontinued operations, net of tax (317) - -------- -------- Net loss $ (4,508) $ (1,404) ======== ======== Basic loss per share: Continuing operations $(0.27) $(0.09) Discontinued operations: Loss from operations - - Estimated loss on disposal (0.02) - Total $ (0.29) $ (0.09) ======== ======== Diluted loss per share: Continuing operations $(0.27) $(0.09) Discontinued operations: Loss from operations - - Estimated loss on disposal (0.02) - Total $ (0.29) $ (0.09) ======== ========= The accompanying notes are an integral part of these consolidated financial statements. </TABLE>
<TABLE> <CAPTION> DARLING INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Three months ended April 3, 1999 and April 4, 1998 (in thousands) Three Months Ended April 3, April 4, 1999 1998 ----------- ----------- (unaudited) <S> <C> <C> Cash flows from operating activities: Loss from continuing operations $ (4,191) $ (1,374) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 7,807 8,100 Deferred income tax 63 (915) (Gain)/Loss on sales of assets (209) 15 Changes in operating assets and liabilities: Accounts receivable (3,589) 8,737 Inventories and prepaid expenses (1,096) 2,713 Accounts payable and accrued expenses (7,878) (4,337) Accrued interest (498) 22 Other (163) (394) ------- ------- Net cash provided/(used) by continuing operations (9,754) 12,567 Net cash provided/(used) by discontinued operations 119 (875) ------- ------- Net cash provided /(used) by operating activities (9,635) 11,692 ------- ------- Cash flows from investing activities: Recurring capital expenditures (763) (5,140) Gross proceeds from sale of property, plant and equipment and other assets 1,429 87 Payments related to routes and other intangibles (83) (387) Net cash used in discontinued operations (330) (793) ------- ------- Net cash provided/(used) by investing activities 253 (6,233) ------- ------- Cash flows from financing activities: Proceeds from long-term debt 40,194 23,499 Payments on long-term debt (40,625) (27,472) Contract payments (773) (895) Issuance of common stock - 50 Net cash used in discontinued operations (150) (102) ------- -------- Net cash used in financing activities (1,354) (4,920) ------- -------- Net increase/(decrease) in cash and cash equivalents from discontinued operations 44 (147) ------- -------- Net increase/(decrease) in cash and cash equivalents (10,692) 392 Cash and cash equivalents at beginning of period 12,317 2,949 ------- -------- Cash and cash equivalents at end of period $ 1,625 $ 3,341 ======= ======== Supplemental disclosure of cash flow information: Cash paid during the quarter for: Interest $ 4,234 $ 3,086 ------- -------- Income taxes, net of refunds $ (120) $ 106 ------- -------- The accompanying notes are an integral part of these consolidated financial statements. </TABLE>
DARLING INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements April 3, 1999 (unaudited) (1) General The accompanying consolidated financial statements for the three month periods ended April 3, 1999 and April 4, 1998 have been prepared by Darling International Inc. (Company) without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). The information furnished herein reflects all adjustments (consisting only of normal recurring accruals) which are, in the opinion of management, necessary to present a fair statement of the financial position and operating results of the Company as of and for the respective periods. However, these operating results are not necessarily indicative of the results expected for full fiscal year. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. However, management of the Company believes that the disclosures herein are adequate to make the information presented not misleading. The accompanying consolidated financial statements should be read in conjunction with the audited consolidated financial statements contained in the Company's Form 10-K for the fiscal year ended January 2, 1999. (2) Certain Significant Accounting Policies (a) 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. The operations of International Processing Corporation have been reclassified as discontinued operations. As such, certain prior year balances have been reclassified in order to conform to current year presentation. (b) Fiscal Periods The Company has a 52/53 week fiscal year ending on the Saturday nearest December 31. Fiscal periods for the consolidated financial statements included herein are as of January 2, 1999, and include the 13 weeks ended April 3, 1999 and the 13 weeks ended April 4, 1998. (c) Earnings/(Loss) Per Common Share Basic earnings/(loss) per common share are computed by dividing net earnings/(loss) attributable to outstanding common stock by the weighted average number of common stock shares outstanding during the year. Diluted earnings/(loss) per common share are computed by dividing net earnings/(loss) 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 and 15,567,000 for April 3, 1999 and April 4, 1998 respectively. The effect of all outstanding stock options were excluded from diluted earnings/(loss) per common share for both years because the effect was anti-dilutive. (3) Contingencies (a) ENVIRONMENTAL Chula Vista The Company is the owner of an undeveloped property located in Chula Vista, California (the "Site"). A rendering plant was operated on the Site until 1982. From 1959 to 1978, a portion of the Site was used as an industrial waste disposal facility, which was closed pursuant to Closure Order No. 80-06, issued by the State of California Regional Water Quality Control Board for the San Diego Region (the "RWQCB"). In June 1982, RWQCB staff approved a completed closure plan which included construction of a containment cell (the "Containment Cell") on a portion (approximately 5 acres) of the Site to isolate contaminated soil excavated from the Site. The Site has been listed by the State of California as a site for which expenditures for removal and remedial actions may be made by the State pursuant to the California Hazardous Substances Account Act, California Health & Safety Code Section 25300 et seq. Technical consultants retained by the Company have conducted various investigations of the environmental conditions at the Site, and in 1996, requested that the RWQCB issue a "no further action" letter with respect to the Site. In 1997, the RWQCB issued Order No. 97-40 prescribing a maintenance and monitoring program for the Containment Cell. In June 1998, the RWQCB provided a letter to assure potential purchasers and lenders of limitations on their liability connected to the balance of the Site (approximately 30 acres) in order to facilitate a potential sale. The Company continues to work with the RWQCB to define the scope of an additional order which will address the Company's future obligations for that remaining portion of the Site. Cleveland In August, 1997, the Company received a Notice of Violation ("NOV") from the United States Environmental Protection Agency ("EPA") for alleged violations of the Ohio Air Quality Rules as they relate to odor emissions. The NOV asserted that the Cleveland, OH facility was in violation of the State's nuisance rule based on a City of Cleveland record of complaints associated with odors emanating from its facility. Since December, 1992, the Company has been working with the City of Cleveland under a Consent Agreement to address such complaints and concerns of the neighborhood in close proximity to the Plant. Upon receipt of the NOV the Company initiated a cooperative effort with EPA to address the NOV. In August, 1998, the Company received a second NOV from EPA which encompassed the alleged violations from the first NOV and alleged several violations of terms and conditions found in the Cleveland plant's air permit. The Company again met with EPA to seek an amicable resolution. Although rendering of animal by-products has been discontinued at the Cleveland plant, EPA is not satisfied with this as a resolution of the NOV and is seeking a monetary penalty. The Company has challenged EPA's approach to resolution of the NOV as well as EPA's authority to be involved with an enforcement action connected with a state nuisance rule. The Company continues to seek an amicable resolution.
(b) LITIGATION Melvindale A group of residents living near the Company's Melvindale, Michigan plant has filed suit, purportedly on behalf of a class of persons similarly situated. The class has not been certified. The suit is based on legal theories of trespass, nuisance and negligence and/or gross negligence, and is pending in the United States District Court, Eastern District of Michigan. Plaintiffs allege that emissions to the air, particularly odor, from the plant have reduced the value and enjoyment of Plaintiffs' property, and Plaintiffs seek damages, including mental anguish, exemplary damages and injunctive relief. In a lawsuit with similar factual allegations, also pending in United States District Court, Eastern District of Michigan, the City of Melvindale has filed suit against the Company based on legal theories of nuisance, trespass, negligence and violation of Melvindale nuisance ordinances seeking damages and declaratory and injunctive relief. The Company or its predecessors have operated a rendering plant at the Melvindale location since 1927 in a heavily industrialized area down river south of Detroit. The Company has taken and is taking all reasonable steps to minimize odor emissions from its recycling processes and is defending the lawsuit vigorously. Other Litigation The Company is also a party to several other lawsuits, claims and loss contingencies incidental to its business, including assertions by regulatory agencies related to the release of unacceptable odors from some of 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 environmental and other 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 $2.4 million and $8.4 million at April 3, 1999. The accrued expenses and other noncurrent liabilities classifications in the Company's consolidated balance sheets include reserves for insurance, environmental and litigation contingencies of $21.4 million and $19.2 million at April 3, 1999 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.
(4) Business Segments The Company operated on a worldwide basis within four industry segments: Rendering, Restaurant Services, Esteem Products and Bakery By-Products Recycling. 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. Bakery Py-Products Recycling segment has been classified as a discontinued operation since the fourth quarter of Fiscal 1998 (see Note 2a). 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. 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. 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. Business Segment Net Revenues (in thousands): April 3, 1999 April 4, 1998 --------------- -------------- Rendering: Trade $ 54,336 $79,595 Intersegment 8,019 8,623 -------- -------- 62,355 88,219 -------- -------- Restaurant Services: Trade 15,327 14,811 Intersegment 1,700 2,216 -------- -------- 17,027 17,027 -------- -------- Esteem Products: Trade 183 - Intersegment 24 - 207 - Eliminations (9,743) (10,839) -------- -------- Total $ 69,846 $ 94,407 ======== ========
Business Segment Profit (Loss) (in thousands): April 3, 1999 April 4, 1998 --------------- -------------- Rendering $ 1,038 $ 5,032 Restaurant Services 187 579 Esteem Products (534) (534) Corporate Activities (3,717) (4,344) Interest expense (3,581) (2,926) ------- ------- Loss from continuing operations before income taxes $ (6,607) $(2,193) ======= ====== 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): April 3, January 2, 1999 1999 ------------ ---------- Rendering $80,558 $84,904 Restaurant Services 31,863 32,100 Combined Rend./Rest. Svcs. 91,751 93,080 Esteem Products 3,168 3,097 Corporate Activities 21,401 29,985 Net assets of discontinued operations 20,000 20,000 -------- -------- Total $248,741 $263,166 ======= =======
DARLING INTERNATIONAL INC. AND SUBSIDIARIES FORM 10-Q FOR THE THREE MONTHS ENDED APRIL 3, 1999 PART I Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion summarizes information with respect to the liquidity and capital resources of the Company at April 3, 1999 and factors affecting its results of operations for the three months ended April 3, 1999 and April 4, 1998. RESULTS OF OPERATIONS Three Months Ended April 3, 1999 Compared to Three Months Ended April 4, 1998 GENERAL The Company recorded a loss from continuing operations of $4.2 million for the first quarter of the fiscal year ending January 1, 2000 ("Fiscal 1999"), as compared to a loss of $1.4 million for the first quarter of the fiscal year ended January 2, 1999 ("Fiscal 1998"). Operating income decreased $3.5 million to an operating loss of $2.6 million in the first quarter of Fiscal 1999 from operating income of $0.9 million in the first quarter of Fiscal 1998. The decrease in operating income was primarily due to: 1) Declines in overall finished goods prices; and 2) Declines in the volume of raw materials processed. These were partially offset by decreases in operating expenses. Interest expense increased from $2.9 million in Fiscal 1998 to $3.6 million in Fiscal 1999, primarily due a higher overall interest rate. 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. In addition, the Company provides grease trap collection services to Restaurants. Sales are significantly affected by finished goods prices, quality of raw material, and volume of raw material. Net sales include the sales of produced finished goods, trap grease services, and finished goods purchased for resale, which constitute less than 10% of total sales. During the first quarter of Fiscal 1999, net sales decreased 26.0%, to $69.8 million as compared to $94.4 million during the first quarter of Fiscal 1998 primarily due to the following: 1) Decreases in overall finished goods prices resulted in a $14.5 million decrease in sales in the first quarter of Fiscal 1999 versus the first quarter of Fiscal 1998. The Company's average prices for the first quarter of Fiscal 1999 were 16.2% lower than the average prices for the first quarter of Fiscal 1998; 2) Decreases in the volume of raw materials processed resulted in a $12.4 million decrease in sales, offset by $1.2 million in yield gains; 3) Decreases in finished hides sales accounted for $1.5 million in sales decreases; and 4) Other increases, including service income and finished product purchased for resale resulted in a $2.6 million increase in sales.
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 raw material. The Company utilizes both fixed and formula pricing methods for the purchase of raw materials. Fixed prices are adjusted where possible as needed for changes in competition and significant changes in finished goods market conditions, while raw materials purchased under formula prices are correlated with specific finished goods prices. During the first quarter of Fiscal 1999, cost of sales and operating expenses decreased $18.8 million (25.0%) to $57.7 million as compared to $76.6 million during the first quarter of 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 $14.1 million in cost of sales; 2) Decreases in the volume of raw materials collected and processed resulted in a decrease of approximately $2.2 million in cost of sales and operating expenses; 3) Decreases in steam cost resulted in a $1.2 million decrease in operating expenses; 4) Decreases in labor costs resulted in a $1.5 million decrease in operating expenses; and 5) Increases in finished goods purchased for resale offset by various other operating expense decreases resulted in a net increase of $0.2 million. SELLING, GENERAL AND ADMINISTRATIVE COSTS Selling, general and administrative costs were $6.9 million during the first quarter of Fiscal 1999, a $1.9 million decrease from $8.8 million for the first quarter of Fiscal 1998. Significant decreases were realized in labor costs, travel and entertainment, legal costs, and advertising and promotional. DEPRECIATION AND AMORTIZATION Depreciation and amortization charges decreased $0.3 million to $7.8 million during the first quarter of Fiscal 1999 as compared to $8.1 million during the first quarter of Fiscal 1998. INTEREST EXPENSE Interest expense increased $0.7 million from $2.9 million during the first quarter of Fiscal 1998 to $3.6 million during the first quarter of Fiscal 1999, primarily due to an increase in the overall interest rate. INCOME TAXES The income tax benefit of $2.4 million for the first quarter of Fiscal 1999 consists of federal tax benefit and various state and foreign taxes. This is an increase of $1.6 million from the $0.8 million income tax benefit during the first quarter of Fiscal 1998. CAPITAL EXPENDITURES The Company made capital expenditures of $0.8 million during the first quarter of Fiscal 1999 compared to capital expenditures of $5.1 million during the first quarter of Fiscal 1998.
DISCONTINUED OPERATIONS The operations of the Bakery By-Products Recycling segment have been classified as discontinued operations. The Company recorded an estimated loss on disposal, net of tax, of $14.7 million to reflect the pending sale of this business segment in the fourth quarter of Fiscal 1998. During the first quarter of Fiscal 1999, the Company recorded an additional loss on disposal of $0.3 million. 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 (7.75% at April 3, 1999) plus a margin of 1%. Under the Amended and Restated Credit Agreement, the Term Loan is payable by the Company in quarterly installments of $1,800,000 on March 31, 1999; $1,200,000 on June 30, 1999; $2,000,000 on September 30 1999; $2,500,000 on December 31, 1999; $2,500,000 on March 31, 2000; $22,500,000 on June 30, 2000; $2,500,000 on September 30, 2000; and the balance due on December 31, 2000. As of April 3, 1999, $34,902,000 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 (7.75% at April 3, 1999) plus a margin of 1%. Additionally, the Company must pay a commitment fee equal to 0.375% per annum on the unused portion of the Revolving Credit Facility. Under the Amended and Restated Credit Agreement, the Revolving Credit Facility provides for a mandatory reduction of $2,500,000 on March 31, 2001, with the remaining balance due at maturity on June 30, 2001. As of April 3, 1999, $112,688,000 was outstanding under the Revolving Credit Facility. As of April 3, 1999, the Company had outstanding irrevocable letters of credit aggregating $12,401,000. 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 April 3, 1999, no cash dividends could be paid to the Company's stockholders pursuant to the Amended and Restated Credit Agreement. The Company has only very limited involvement with derivative financial instruments and does not use them for trading purposes. Interest rate swap agreements are used to reduce the potential impact of increases in interest rates on floating-rate long-term debt. At April 3, 1999, the Company was party to three interest rate swap agreements, each with a term of five years (all maturing June 27, 2002). Under terms of the swap agreements, the interest obligation on $70 million of Credit Agreement floating-rate debt was exchanged for fixed rate contracts which bear interest, payable quarterly, at an average rate of 6.6% plus a credit margin. On April 3, 1999, the Company had working capital of $4.3 million and its working capital ratio was 1.11 to 1 compared to working capital of $3.1 million and a working capital ratio of 1.07 to 1 on January 2, 1999. In 1998, the Company made a strategic decision to dispose of the Bakery By-Products Recycling segment. The sale took place on April 5, 1999. Net proceeds from the sale were required to be used to retire debt. The Company has credit available under the Revolving Credit Facility to cover its presently foreseeable capital needs, assuming it continues to meet the certain financial covenant tests under the Amended and Restated Credit Agreement dated January 22, 1999, which were adjusted downward to reflect the sharp decline in the prices the Company received for its finished products (meat and bone meal, yellow grease and tallow) in 1998. Such prices continued to decline early in 1999. The Company is implementing a plan to modify its business operations in light of the continued low prices for its finished goods. However, if prices for finished goods the Company sells were to materially decline below those prevailing in the first quarter of 1999, the Company might be forced to seek further covenant waivers under the Amended and Restated Credit Agreement in the later part of 1999. ACCOUNTING MATTERS The Company is assessing the reporting and disclosure requirements of SFAS No. 133, Accounting For Derivative Instruments and Hedging Activities. This statement establishes accounting and reporting standards for derivative instruments and hedging activities. This statement is effective for financial statements for fiscal years beginning after June 15, 1999. The Company believes SFAS No. 133 will not have a material impact on its financial statements. The Company will adopt the provisions of SFAS No. 133 in the first quarter of Fiscal 2000. YEAR 2000 Readiness Since many computer systems and other equipment with embedded chips or processors (collectively, "Business Systems") use only two digits to represent the year, these business systems may be unable to accurately process certain data before, during or after the year 2000. As a result, business and governmental entities are at risk for possible miscalculations or systems failures causing disruptions in their business operations. This is commonly known as the Year 2000 issue. The Year 2000 issue can arise at any point in the Company's supply, manufacturing, distribution and financial chains. The Company began work on the Year 2000 compliance issue in 1997. The scope of the project includes: ensuring the compliance of all applications, operating systems and hardware on PC and LAN platforms; addressing issues related to non-IT embedded software and equipment; and addressing the compliance of key suppliers and customers. The project has four phases: assessment of systems and equipment affected by the Year 2000 issue; definition of strategies to address affected systems and equipment; remediation or replacement of affected systems and equipment; and testing that each is Year 2000 compliant. With respect to ensuring the compliance of all applications, operating systems and hardware on the Company's various computer platforms, the assessment phase and definition of strategies phase have been completed. It is estimated that 80% of the remediation or replacement phase has been completed with the balance of this phase expected to be completed by mid 1999. The testing phase of existing applications operating systems and hardware not being remediated or replaced has been completed. With respect to addressing issues related to Non-IT embedded software and equipment, which principally exists in the Company's manufacturing plants, the assessment phase and definition of strategies phase are expected to be completed by the end of second quarter 1999. Testing began in 1999, and remediation and replacement is expected to be completed by the end of third quarter 1999, if needed. The Company relies on third party suppliers for raw materials, water, utilities, transportation and other key services. Interruption of supplier operations due to Year 2000 issues could affect Company operations. We have initiated efforts to evaluate the status of our most critical suppliers' progress. This process of evaluating our critical suppliers is scheduled for completion by mid-1999. Options to reduce the risks of interruption due to suppliers failures include identification of alternate suppliers where feasible or warranted. These activities are intended to provide a means of managing risk, but cannot eliminate the potential for disruption due to third party failure. The Company is also dependent upon customers for sales and cash flow. Year 2000 interruptions in customers' operations could result in reduced sales, increased inventory or receivable levels, and cash flow reductions. The Company is in the assessment phase with respect to the evaluation of critical customers' progress and is scheduled for completion by mid-1999. Contingency The Company is in the process of developing contingency plans for those areas that are critical to our business. These contingency plans will be designed to mitigate serious disruptions to our business flow beyond the end of 1999, where possible. The major efforts related to contingency planning are scheduled for completion by the end of the third quarter of 1999. Costs The Company does not separately track the internal costs incurred for the Y2K project. Such costs, however, are principally the related payroll costs for the Company's information systems group. The Company has incurred approximately $130,000 in related internal expenses to date. Future expenses are expected to be approximately $50,000. Such cost estimates are based upon presently available information and may change as the Company continues with its Y2K project. All estimated costs have been budgeted and are expected to be funded through cash flows from operations. These costs do not include any cost associated with the implementation of contingency plans, which are in the process of being developed. Risks The failure to correct a material Year 2000 problem could result in an interruption in, or a failure of, certain normal business activities or operations. Such failures could materially and adversely affect the Company's results of operations, liquidity and financial condition. Due to the general uncertainty inherent in the Year 2000 problem, resulting in part from the uncertainty of the Year 2000 readiness of third-party suppliers and customers, the Company is unable to determine at this time whether the consequences of Year 2000 failures will have a material impact on the Company's results of operations, liquidity or financial condition. FORWARD LOOKING STATEMENTS This Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q, including, without limitation, the statements under the sections entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Legal Proceedings" and located elsewhere herein regarding industry prospects and the Company's financial position are forward-looking statements. Although the Company believes that the expectation reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Important factors that could cause actual results to differ materially from the Company's expectations include: the Company's continued ability to obtain sources of supply for its rendering operations; general economic conditions in the European and Asian markets; and prices in the competing commodity markets which are volatile and are beyond the Company's control, and the Year 2000 readiness issue. Future profitability may be affected by the Company's ability to grow its restaurant services business and the development of its value-added feed ingredients, all of which face competition from companies which may have substantially greater resources than the Company. Item 3. 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 April 3, 1999, the Company had $70 million notational value of interest rate swaps outstanding. These swaps effectively changed the interest rate on $70 million in long-term debt to a 9.6% fixed rate through the period ending June 27, 2002. Assuming variable rates at the end of the first quarter of Fiscal 1999 and average long-term borrowings for the first quarter of Fiscal 1999, a one hundred basis point change in interest rates would impact net interest expense by $0.2 million, net of the effect of swaps.
DARLING INTERNATIONAL INC. AND SUBSIDIARIES FORM 10-Q FOR THE THREE MONTHS ENDED APRIL 3, 1999 PART II: Other Information Item 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) EXHIBITS Exhibits No. Description ------------ ------------ 11 Statement re-computation of per share earnings. 27 Financial Data Schedule (b) REPORTS ON FORM 8-K The Registrant filed the following current report[s] on Form 8-K during the quarter ended April 3, 1999. 1) Current Report on Form 8-K dated January 25, 1999, including information regarding the extension of the forbearance period to January 22, 1999, pursuant to a forbearance agreement dated December 14, 1998, between the Company and the banks. 2) Current Report on Form 8-K dated February 3, 1999, including information regarding the execution of an Amended and Restated Credit Agreement dated as of January 22, 1999, between the Company and the banks. 3) Current Report on Form 8-K dated February 22, 1999, including information regarding the execution of a Stock Purchase Agreement dated as of February 9, 1999, with Scope Products, Inc., pursuant to which the Company agreed to sell all the issued and outstanding stock of the Company's wholly-owned subsidiary International Processing Corporation.
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DARLING INTERNATIONAL INC. Registrant Date: May 14, 1999 By: /s/ Dennis B. Longmire ------------------------------- Dennis B. Longmire Chairman and Chief Executive Officer Date: May 14, 1999 By: /s/ John O. Muse -------------------------------- John O. Muse Vice President and Chief Financial Officer (Principal Financial Officer)
DARLING INTERNATIONAL INC. AND SUBSIDIARIES FORM 10-Q FOR THE THREE MONTHS ENDED APRIL 3, 1999 INDEX TO EXHIBITS Exhibits No. Description Page No. - ------------ ----------- ------- 11 Statement re-computation of per share earnings. 20 27 Financial Data Schedule
EXHIBIT 11 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS/(LOSS) The following table details the computation of basic and diluted earnings/(loss) per common share, in thousands except per share data. <TABLE> <CAPTION> April 3, April 4, 1999 1998 ==================================================================== =================== ================== <S> <C> <C> Earnings (loss) from continuing operations $ (4,191) $ (1,404) ======= ======== Discontinued operations: Income (loss) from discontinued operations, net of tax - (30) Estimated loss on disposal of discontinued operations, net of tax (317) - ------- ------- Net earnings (loss) available to common stock $ (4,508) $ (1,404) ======= ======= - -------------------------------------------------------------------- ------------------- ------------------ Shares (Basic): Weighted average number of common shares outstanding 15,589 15,567 ======= ======= Basic earnings (loss) per share: Continuing operations (0.27) (0.09) Discontinued operations: Income (loss) from operations - - Estimated loss on disposal (0.02) - Total $ (0.29) $ (0.09) ====== ====== - -------------------------------------------------------------------- ------------------- ------------------ Shares (Diluted): Weighted average number of common shares outstanding 15,589 15,567 Additional shares assuming exercise of stock options - - Average common shares outstanding and equivalents 15,589 15,567 Diluted earnings (loss) per share: Continuing operations (0.27) (0.09) Discontinued operations: Income (loss) from operations - - Estimated loss on disposal (0.02) - Total $ (0.29) $ (0.09) ======= ======= - -------------------------------------------------------------------- ------------------- ------------------ </TABLE>