Filed Pursuant to Rule 424(b)(3)
Registration No. 333-88944
PROSPECTUS
----------
[Logo of Darling International Inc.]
46,705,086 Shares of Common Stock
100,000 Shares of Series A Preferred Stock
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Investing in our common stock or our Series A Preferred Stock involves a
high degree of risk which is described in the "Risk Factors" section beginning
on page 8 of this prospectus. We urge you to carefully read the "Risk Factors"
section before you make your investment decision.
-------------------
We have prepared this prospectus to allow the selling stockholders we have
identified herein, including their transferees, pledgees, donees and their
successors, to offer for resale up to:
o 46,705,086 shares of our common stock held by them; and
o 100,000 shares of our Series A Preferred Stock held by them.
The securities offered by this prospectus could be sold in several ways,
including, in the case of the common stock, in transactions on the American
Stock Exchange, or in the case of the common stock or the Series A Preferred
Stock, at prevailing market prices at the time of sale, or in privately
negotiated transactions at prices agreed upon by the parties or through any
other means described under the heading "Plan of Distribution" beginning on page
53. We cannot assure you that the selling stockholders will sell all or any
portion of the common stock or the Series A Preferred Stock offered under this
prospectus. Our company is not selling any shares of common stock or Series A
Preferred Stock in this offering and therefore we will not receive any proceeds
from any sale of securities offered by this prospectus. We are registering the
shares of common stock and Series A Preferred Stock offered under this
prospectus to satisfy registration rights of the selling stockholders. We have
agreed to pay for all expenses in connection with the registration of the
securities offered by this prospectus.
Our common stock is quoted on the American Stock Exchange under the symbol
"DAR." On June 3, 2002, the closing sales price of our common stock on the
American Stock Exchange was $0.70 per share. There is no public market for the
Series A Preferred Stock, and we do not intend to apply for listing of the
Series A Preferred Stock on any securities exchange or for quotation through any
automated quotation system.
Our principal executive office is located at 251 O'Connor Ridge Boulevard,
Suite 300, Irving, Texas 75038 and our telephone number is 972.717.0300.
No underwriter or any other person has been engaged to facilitate the sale
of the securities in this offering.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
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The date of this prospectus is June 6, 2002
TABLE OF CONTENTS
Page
----
Forward-Looking Statements.....................................................1
Prospectus Summary.............................................................1
Summary Historical And Pro Forma Consolidated Financial Data...................5
Risk Factors...................................................................8
Recapitalization..............................................................15
Use Of Proceeds...............................................................16
Market For Common Equity And Related Stockholder Matters......................16
Dividend Policy...............................................................16
Capitalization................................................................17
Selected Historical And Pro Forma Consolidated Financial Data.................18
Management's Discussion And Analysis Of Financial Condition And Results
Of Operations.................................................................20
Our Business..................................................................27
Our Management................................................................33
Report Of The Compensation Committee..........................................40
Compliance With Section 16(a) Of The Exchange Act.............................41
Certain Relationships And Related Transactions................................41
Performance Graph.............................................................42
Security Ownership Of Certain Beneficial Owners And Management................43
Description Of Senior Credit Agreement........................................46
Description Of Capital Stock..................................................48
Selling Stockholders..........................................................51
Plan Of Distribution..........................................................53
Material U.S. Federal Tax Considerations......................................55
Legal Matters.................................................................59
Experts.......................................................................59
Where You Can Find More Information...........................................59
Index To Consolidated Financial Statements...................................F-1
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events. These forward-looking statements are subject to risks,
uncertainties and assumptions that may cause our actual results, levels of
activity, performance, or achievements to be materially different from any
future results, levels of activity, performance, or achievements expressed or
implied by such forward-looking statements. Factors that could contribute to
these differences are discussed in the "Risk Factors" section beginning on page
8 of this prospectus, and elsewhere in this prospectus as well as in our
previous filings with the SEC.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "could," "would," "expect," "plan,"
"anticipate," "believe," "estimate," "continue," or the negative of such terms
or other similar expressions. All forward-looking statements attributable to us
or persons acting on our behalf are expressly qualified in their entirety by the
cautionary statements included in this prospectus.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks, uncertainties and assumptions, the forward-looking
events discussed in this prospectus might not occur.
We urge you not to unduly rely on forward-looking statements contained or
incorporated by reference in this prospectus.
------------------
The terms "Darling," "our," "we" and "us" as used in this prospectus, refer
to Darling International Inc. and its wholly-owned subsidiaries, except where it
is clear that the term refers only to the parent company.
We urge you to rely only on the information contained in this prospectus.
We have not, and the selling stockholders have not, authorized any other person
to provide you with different information. If anyone provides you with different
or inconsistent information, we urge you not to rely on it. The selling
stockholders are not making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. We urge you to assume
that the information appearing in this prospectus is accurate as of the date on
the front cover of this prospectus only. Our business, financial condition,
results of operations and prospects may have changed since that date.
We have not undertaken any action to permit a public offering of the
securities offered by this prospectus outside the United States or to permit the
possession or distribution of this prospectus outside the United States. Persons
outside the United States who come into possession of this prospectus must
inform themselves about and observe any restrictions relating to the offering of
the securities offered by this prospectus and the distribution of this
prospectus outside of the United States.
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary is not complete and may not contain all of the information that may
be important to you. We urge you to read the entire prospectus carefully,
including the "Risk Factors" section and the financial statements and related
notes, before making an investment decision.
Darling International Inc.
Founded by the Swift meat packing interests and the Darling family in 1882,
we were incorporated in Delaware in 1962 under the name "Darling-Delaware
Company, Inc." On December 28, 1993, we changed our name from "Darling-Delaware
Company, Inc." to "Darling International Inc."
We are a recycler of food processing by-products. We collect and recycle
animal processing by-products and used restaurant cooking oil. In addition, we
provide grease trap collection services to restaurants. We process such raw
materials at 26 facilities located throughout the United States into finished
products such as tallow, meat
and bone meal and yellow grease. We sell 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.
Our principal executive office is located at 251 O'Connor Ridge Boulevard,
Suite 300, Irving, Texas 75038 and our telephone number is 972.717.0300. We
maintain a site on the World Wide Web at the address http://www.darlingii.com.
The information on our Web site is not a part of this prospectus.
Preliminary Note
The shares of our common stock and Series A Preferred Stock covered by this
prospectus were issued to our lenders as part of a reduction in the principal
amount and restructuring of our indebtedness (the "Recapitalization"). The
Recapitalization was approved by our stockholders at an annual meeting of
stockholders held on May 10, 2002 and was made effective as of that date. For a
summary description of the Recapitalization, see "Recapitalization."
The Offering of Common Stock
Securities offered for resale
by the selling stockholders...... Up to 46,705,086 shares of common stock, par
value $0.01 per share, held by them.
Voting Rights.................... Holders of common stock will have one vote
per share.
Use of Proceeds.................. The selling shareholders will receive
all of the net proceeds from the sale of
the securities sold under this prospectus.
We will not receive any of the proceeds from
those sales.
Dividends........................ We do not expect to pay dividends on our
common stock in the foreseeable future. We
anticipate that all future earnings, if
any, generated from operations will be
retained to develop and expand our business.
American Stock Exchange symbol... DAR.
2
The Offering of Series A Preferred Stock
Securities offered for resale by Up to 100,000 shares of Series A Preferred
the selling stockholders......... Stock, par value $0.01 per share, held by
them.
Voting Rights................... Holders of the Series A Preferred Stock will
have no voting rights as to general corporate
matters except as provided by Delaware law
or, in limited circumstances, as provided in
the certificate of designation relating to
the Series A Preferred Stock. See
"Description of Capital Stock-- Preferred
Stock-- Series A Preferred Stock-- Voting
Rights."
Use of Proceeds................. The selling stockholders will receive all of
the net proceeds from the sale of the
securities sold under this prospectus. We
will not receive any of the proceeds from
those sales.
Dividends....................... We will pay dividends on the Series A
Preferred Stock out of funds legally
available for the payment of dividends an an
annual fixed rate of 6% on the original issue
price of $100 per share. Dividends on the
Series A Preferred Stock will be cumulative
from the issue date, whether or not declared,
and are to be either paid in cash
semi-annually or, at our election may be
accumulated, in which case the dividends will
be added to the original issue price, and
dividends will thereafter accrue on the
original issue price as so adjusted. However,
our new amended and restated senior credit
agreement prohibits us from paying any cash
dividends while any indebtedness remains
outstanding under such agreement. See
"Description of Senior Credit Agreement."
Liquidation Preference.......... $100 per share liquidation preference, plus
all accumulated dividends and accrued and
unpaid dividends not yet accumulated.
Mandatory Redemption; Change of
Control......................... We must redeem all shares of the Series A
Preferred Stock outstanding upon the earliest
to occur of:
o a change of control of our company,
o a sale of all or substantially all of
our consolidated assets,
o a dissolution or liquidation of our
company, and
o May 10, 2007,
to the extent we have legally available
funds, at a redemption price equal to the
aggregate original issue price of the
shares to be redeemed, plus accumulated
dividends and accrued and unpaid dividends
not yet accumulated to the date of
redemption.
Optional Redemption.............. Subject to the prior payment in full of all
indebtedness outstanding under our senior
credit agreement, we may redeem shares of
Series A Preferred Stock in multiples of
3
not less than $1 million at any time, upon
30 days notice, at a redemption price equal
to the sum of the original issue price of
the shares to be redeemed, plus accumulated
dividends and accrued and unpaid dividends
not yet accumulated to the date of
redemption. If less than all shares of
Series A Preferred Stock are to be redeemed,
they are required to be redeemed pro-rata
based on the number of shares of Series A
Preferred Stock owned.
Ranking.......................... With respect to dividends and liquidation
preference, the Series A Preferred Stock
will rank senior to our common stock and
senior to other future series of our
preferred stock. We may issue additional
series of preferred stock that rank junior
to the Series A Preferred Stock without a
vote of the holders of the Series A
Preferred Stock. We may only create series
or classes of preferred stock that rank
senior to or on a parity with the Series A
Preferred Stock if the creation of those
senior shares is approved by the holders of
66 2/3% of the then outstanding shares of
the Series A Preferred Stock.
Listing.......................... The Series A Preferred Stock is not listed
for trading on any securities exchange or
market, and we do not currently intend to,
nor are we required to, list the shares of
Series A Preferred Stock on any securities
exchange or market.
We urge you to refer to the section entitled "Risk Factors" for an explanation
of the risks of investing in our common stock or our Series A Preferred Stock.
4
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
The following summary historical and pro forma consolidated financial data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our audited consolidated
financial statements and related notes thereto and unaudited consolidated
financial statements and related notes thereto included elsewhere in this
prospectus. The summary pro forma data does not purport to represent what our
results would have been if the Recapitalization had occurred at the dates
indicated. The Pro Forma columns included in the Operating Data for the three
months ended March 30, 2002 and the fiscal year ended December 29, 2001, derived
from elsewhere in this prospectus, reflect the effect of the Recapitalization
had it occurred at the beginning of such periods. The Pro Forma Balance Sheet
Data as of March 30, 2002 and December 29, 2001, derived from elsewhere in this
prospectus, reflect the effect of the Recapitalization as if it had occurred on
such dates.
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Fiscal Year Ended (a)
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
December 29, December 29, December 30, January 1, January 2, January 3,
2001 2001 2000 2000 1999 1998
Pro Forma Actual Actual Actual Actual Actual
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(in thousands, except ratio and share data)
Operating Data:
Net sales $ 255,974 $255,974 $242,795 $258,570 $ 337,031 $444,142
--------- -------- -------- -------- --------- --------
Cost of sales and
operating expenses 196,778 196,778 190,283 210,879 283,822 362,787
Selling, general and
administrative expenses 28,594 28,594 26,736 26,773 33,073 33,247
Depreciation and
amortization 26,634 26,634 31,181 32,912 32,418 29,751
--------- -------- -------- -------- --------- --------
Operating income/(loss) 3,968 3,968 (5,405) (11,994) (12,282) 18,357
Interest expense 1,415 14,162 13,971 15,533 12,747 13,070
Other (income)/expense,
net 2,000 1,651 184 (1,812) 1,117 (1,348)
--------- -------- -------- -------- --------- ---------
Income/(loss) from
continuing operations
before income taxes 553 (11,845) (19,560) (25,715) (26,146) 6,635
Income tax
expense/(benefit) - - - (10,015) (9,347) 2,307
--------- -------- -------- -------- --------- --------
Earnings/(loss) from
continuing operations 553 (11,845) (19,560) (15,700) (16,799) 4,328
Discontinued operations:
Income/(loss) from
discontinued
operations, net of tax - - - - (637) 1,081
Gain (loss) on disposal,
net of tax - - 371 (333) (14,657) -
--------- -------- -------- -------- --------- --------
Net income /(loss) 553 $(11,845) $(19,189) $(16,033) $ (32,093) $ 5,409
Preferred dividends and
accretion (1,465) - - - - -
--------- -------- -------- -------- --------- --------
Net income (loss)
applicable to common
shareholders $ (912) $(11,845) $(19,189) $(16,033) $ (32,093) $ 5,409
========= ======== ========= ======== ========= ========
Basic earnings/(loss) per
common share $ (0.01) $ (0.76) $ (1.23) (1.03) (2.06) 0.35
Diluted earnings/(loss)
per common share $ (0.01) $ (0.76) $ (1.23) (1.03) (2.06) 0.33
Weighted average shares
outstanding 62,273 15,568 15,568 15,560 15,581 15,519
Diluted weighted average
shares outstanding 62,273 15,568 15,568 15,560 15,581 16,461
Other Data:
EBITDA (b) $ 30,602 $ 30,602 $ 25,776 $ 20,918 $ 20,136 $ 48,108
Depreciation 21,378 21,378 25,541 26,998 26,432 24,074
Amortization 5,256 5,256 5,640 5,914 5,986 5,677
Capital expenditures 9,142 9,142 7,684 9,851 14,967 24,520
Ratio of earnings to
fixed charges (c) 1.09 - - - - 1.48
5
Balance Sheet Data:
Working capital
(deficiency) $ 476 $(116,718) $(106,809) $ (5,223) $ 3,070 $ 5,225
Total assets 160,209 159,079 174,505 197,804 263,166 305,973
Current portion of
long-term debt 5,097 120,053 109,528 7,810 7,717 5,118
Total long-term debt less
current portion 82,051 - - 110,209 140,613 142,181
Stockholders' equity 19,000 (9,654) 2,724 21,913 37,946 69,756
Three Months Ended
------------------------------------------
March 30, March 30, March 31,
2002 2002 2001
Pro Forma Actual Actual
------------------------------------------------------------------------------------------------------------------
(in thousands, except ratio and share data)
Operating Data:
Net sales $ 61,681 $ 61,681 $ 63,634
Cost of sales and operating expenses 46,395 46,395 48,312
Selling, general and administrative expenses 7,160 7,160 7,005
Depreciation and amortization 4,392 4,392 6,814
-------- -------- --------
Operating income/(loss) 3,734 3,734 1,503
Interest expense (665) (3,885) (3,227)
Other (income)/expense, net 511 734 575
-------- -------- --------
Income (loss) before income taxes 3,580 583 (1,149)
Income taxes 1,083 - -
-------- -------- --------
Net income (loss) 2,497 583 (1,149)
Preferred dividends and accretions (380) - -
--------- -------- --------
Net income (loss) applicable to common shareholders $ 2,117 $ 583 $ (1,149)
======== ======== ========
Basic loss per common share $ 0.03 $ 0.04 $ (0.07)
Diluted loss per common share $ 0.03 $ 0.04 $ (0.07)
Weighted average shares outstanding 62,273 15,568 15,568
Diluted weighted average shares outstanding 62,535 15,830 15,568
Other Data:
EBITDA (b) $ 8,126 $ 8,126 $ 8,317
Depreciation 3,257 3,257 5,339
Amortization 1,135 1,135 1,475
Capital expenditures 3,622 3,622 1,532
Ratio of earnings to fixed charges (c) 3.0 1.14 -
--------
Balance Sheet Data:
Working capital (deficiency) $ 4,545 $ (3,286) $(104,074)
Total assets 154,158 154,456 166,981
Current portion of long-term debt 3,646 5,120 109,018
Total long-term debt less current portion 76,328 112,127 -
Stockholders' equity (deficit) 26,642 (9,071) 1,266
(a) The fiscal years ended December 29, 2001, December 30, 2000, January 1,
2000 and January 2, 1999 each consisted of 52 weeks. The fiscal year ended
January 3, 1998 consisted of 53 weeks.
(b) "EBITDA" represents, for any relevant period, operating profit plus
depreciation and amortization and impairment of long-lived assets. 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.
(c) For purposes of calculating the ratio of earnings to fixed charges,
earnings consist of income (loss) from continuing operations before income
taxes and fixed charges. Fixed charges consist of interest expense,
amortization of debt issuance costs and one-third of rental expense deemed
to be the equivalent of interest. For the years ended December 29, 2001,
December 30, 2000, January 1, 2000 and January 2, 1999 (all actual), and
three months ended March 31, 2001 (actual) earnings were insufficient to
cover fixed charges by $11.8 million (actual), $19.6 million (actual),
$25.7 million (actual), $26.1 million (actual), and $1.1 million (actual)
respectively.
6
Ratio of Earnings to Fixed Charges
(in thousands)
Fiscal Year Ended
-------------------------------------------------------------------------------------
December 29, December 29, December 30, January 1, January 2, January 3,
2001 2001 2000 2000 1999 1998
Pro Forma Actual Actual Actual Actual Actual
----------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing
operations before income taxes $ 553 $(11,845) $(19,560) $(25,715) $(26,146) $6,635
Fixed charges:
Interest expense 1,415 14,162 13,971 15,533 12,747 13,070
Amortization of debt
issuance costs 978 629 1,258 1,590 436 388
Estimated interest within
rental expense 1,400 1,400 1,009 810 565 428
Preference security
dividend requirements 2,254 - - - - -
-------- ---------- ---------- ----------- -------- --------
Earnings (loss) $ 6,600 $ (4,346) $ (3,322) $ (7,782) $(12,398) $20,521
======== ========== ========== ========== ======== =======
Fixed charges:
Interest expense $1,415 $14,162 $13,971 $15,533 $12,747 $13,070
Amortization of debt
issuance costs 978 629 1,258 1,590 436 388
Estimated interest within
rental expense 1,400 1,400 1,009 810 565 428
Preference security
dividend requirements 2,254 - - - - -
-------- -------- --------- ---------- -------- --------
Fixed charges $ 6,047 $16,191 $ 16,238 $ 17,933 $ 13,748 $ 13,886
======== ======= ======== ========== ======== ========
Ratio of earnings to fixed
charges 1.09 - - - - 1.48
Deficiency in earnings to
cover fixed charges - $11,845 $ 19,560 $ 25,715 $ 26,146 -
======= ======== ======== ======== ========
Three Months Ended
-----------------------------------------
March 30, March 30, March 31,
2002 2002 2001
Pro Forma Actual Actual
---------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before income taxes $ 3,580 $ 583 $ (1,149)
Fixed charges:
Interest expense 665 3,885 3,227
Amortization of debt issuance costs 223 - 315
Estimated interest within rental expense 317 317 336
Preference security dividend requirements 585 - -
--------- --------- ---------
Earnings (loss) $ 5,370 $ 4,785 $ 2,729
========= ========= =========
Fixed charges:
Interest expense $ 665 $ 3,885 $ 3,227
Amortization of debt issuance costs 223 - 315
Estimated interest within rental expense 317 317 336
Preference security dividend requirements 585 - -
--------- --------- ---------
Fixed charges $ 1,790 $ 4,202 $ 3,878
========= ========= =========
Ratio of earnings to fixed charges 3.0 1.14 -
Deficiency in earnings to cover fixed charges - - $ 1,149
=========
7
RISK FACTORS
We urge you to consider carefully all of the information set forth in this
prospectus and incorporated by reference in this prospectus. Please refer to
"Where You Can Find More Information." We urge you to particularly evaluate the
following risks before deciding to purchase our common stock or our Series A
Preferred Stock. Various statements in this prospectus (including some of the
following risk factors) constitute forward-looking statements. Please refer to
the section entitled "Forward-Looking Statements."
Fluctuations in market prices of finished products--our profitability and cash
flow may be reduced by decreases in the market price of our products.
Our finished products are commodities, the prices of which are quoted on
established commodity markets. Accordingly, our profitability will be affected
by fluctuations in the prevailing market prices of such finished products. A
significant decrease in the market price of our products would have a material
adverse effect on our profitability and cash flow.
Substantial leverage and debt service--we have substantial debt and have
significant interest payment requirements which could adversely affect our
ability to operate our business and fulfill our obligations under the Series A
Preferred Stock.
We have a significant amount of indebtedness. Our substantial indebtedness
could have important consequences to the holders of our common stock and Series
A Preferred Stock including the risks that:
o we will be required to use a substantial portion of our cash flow from
operations to pay our indebtedness, thereby reducing the availability
of our cash flow to fund the implementation of our business strategy,
working capital, capital expenditures, product development efforts and
other general corporate purposes;
o our interest expense could increase if interest rates in general
increase because all of our debt will bear interest based on market
rates;
o our level of indebtedness will increase our vulnerability to general
adverse economic and industry conditions;
o our debt service obligations could limit our flexibility in planning
for, or reacting to, changes in our business;
o our level of indebtedness may place us at a competitive disadvantage
compared to our competitors that have less debt;
o our level of indebtedness may prevent us from raising the funds
necessary to redeem all of the Series A Preferred Stock upon the
occurrence of a change of control or sale of all or substantially all
of our assets as described under "Description of Capital
Stock--Preferred Stock--Series A Preferred Stock;" and
o our failure to comply with the financial and other restrictive
covenants in the agreements governing our indebtedness, which, among
other things, may limit our ability to borrow additional funds and
could result in an event of default, could have a material adverse
effect on us.
As of May 21, 2002, we owed $61.0 million in senior secured term loans and
$0.4 million in senior secured revolving loans under our senior credit agreement
described under "Description of Senior Credit Agreement." As of such date, three
letters of credit in the face amounts of $750,000, $2.35 million and $7.2
million, respectively were issued and outstanding under the senior credit
facility. We will be able to incur additional indebtedness in the future,
including $17.3 million of additional debt available under our revolving credit
facility. Additional indebtedness will increase the risks described above. All
borrowings under our senior credit agreement, will be secured and senior to the
Series A Preferred Stock and common stock.
We cannot assure the holders of the common stock and Series A Preferred
Stock that our business will generate sufficient cash flow from operations, or
that future borrowings will be available to us and our subsidiaries under the
revolving credit facility, in an amount sufficient to enable us to pay our
indebtedness, including the Series
8
A Preferred Stock, or to fund our other liquidity needs. If we cannot service
our indebtedness, we will be forced to take actions such as:
o delaying or reducing the implementation of our business strategy,
capital expenditures or product development efforts;
o selling assets;
o restructuring or refinancing our indebtedness; or
o seeking additional equity capital.
We cannot assure the holders of the common stock and Series A Preferred
Stock that any of these remedies can be effected on commercially reasonable
terms or at all. In addition, the terms of existing or future debt agreements,
including the our senior credit agreement, may restrict us from adopting any of
these alternatives. If we cannot service our indebtedness and these alternatives
are not available to us, we could be forced to seek bankruptcy protection.
For risks associated with the restrictive covenants in our debt
instruments, see "--Restrictive covenants in our debt instruments."
History of net losses--we have a history of net losses and we may continue to
incur net losses, which could adversely affect our ability to service our
indebtedness.
We have a history of net losses and have not been profitable in recent
years and may not be profitable in the future. We reported a net profit of $0.6
million for the three months ended March 30, 2002. However, for the years ended
December 29, 2001, December 30, 2000, January 1, 2000 and January 2, 1999, our
net losses were approximately $11.8 millions, $19.2 million, $16.0 million and
$32.1 million, respectively. If we incur net losses in the future, our ability
to pay principal and interest on our indebtedness could be adversely affected.
In order to prosper, we must materially improve our performance in one or
more of the following:
o marketing and selling our products and services at volumes above recent
levels;
o expanding our service charges;
o increasing gross margins;
o expanding our existing businesses through acquisitions which meet
stringent financial tests;
o maintaining our distribution capability;
o maintaining competitiveness in pricing;
o continuing to manage our operating expenses; and
o reducing our indebtedness.
There can be no assurance that we will achieve these objectives or attain
consistent profitability.
Limitation on net operating loss carryforwards--as a result of the
Recapitalization, our ability to apply federal income tax net operating loss
carryforwards may be limited.
As a result of the Recapitalization, our ability to use federal income tax
net operating loss carryforwards to offset future taxable income that may be
generated will be limited. In particular, we have undergone a change in
ownership under Section 382 of the Code as a result of the Recapitalization. By
virtue of such a change in ownership, an annual limitation (generally equal to
the pre-change value of our stock multiplied by the adjusted federal tax-exempt
rate, which is set monthly by the IRS based on prevailing interest rates and
equal to 4.89% for June 2002) will be applied to the use of those net operating
loss carryforwards against future taxable income.
Restrictive covenants in our debt instruments--restrictions imposed by our
senior credit agreement, and future debt agreements may, limit our ability to
make payments on the Series A Preferred Stock, finance future operations or
capital needs or engage in other business activities that may be in our
interest.
Our senior credit agreement will, and future debt agreements may, restrict
our ability to:
o incur additional indebtedness;
o issue additional capital stock or preferred stock;
o pay dividends and make other distributions;
o prepay subordinated debt;
9
o make restricted payments;
o create liens;
o merge, consolidate or acquire other businesses;
o sell and otherwise dispose of assets; and
o enter into transactions with affiliates.
These terms may impose restrictions on our ability to finance future
operations, implement our business strategy, fund our capital needs or engage in
other business activities that may be in our interest. In addition, our senior
credit agreement will, and future indebtedness may, require us to maintain
compliance with specified financial ratios. Although we are currently in
compliance with the financial ratios and do not plan on engaging in transactions
that may cause us to not be in compliance with the ratios, our ability to comply
with these ratios may be affected by events beyond our control, including the
risks described in the other risk factors.
A breach of any of these restrictive covenants or our inability to comply
with the required financial ratios could result in a default under the senior
credit agreement. In the event of a default under the senior credit agreement,
the lenders under the senior credit agreement may elect to:
o declare all borrowings outstanding, together with accrued and unpaid
interest and other fees, to be immediately due and payable; or
o require us to apply all of our available cash to repay these
borrowings.
The lenders will also have the right in these circumstances to terminate
any commitments they have to provide further financing, including under the
revolving credit facility.
If we are unable to repay these borrowings when due, the lenders under the
senior credit agreement also will have the right to proceed against the
collateral, which consists of substantially all of our assets and the assets of
each of our direct and indirect domestic subsidiaries. If the indebtedness under
the senior credit agreement were to be accelerated, it is likely that our assets
may be insufficient to repay this indebtedness in full. Any future credit
agreement or other agreement relating to our indebtedness to which we or any of
our subsidiaries may become a party or under which we are or any one of our
subsidiaries is or may become a guarantor may include the covenants described
above and other restrictive covenants. See "Description of Senior Credit
Agreement."
Ranking of the Series A Preferred Stock and common stock--upon any distribution
to our creditors in a bankruptcy, liquidation or reorganization or similar
proceeding relating to our company or our property, the holders of our debt will
be entitled to be paid in cash before any payment may be made with respect to
the Series A Preferred Stock and common stock.
Our obligations with respect to the Series A Preferred Stock are
subordinate and junior in right of payment to all our present and future
indebtedness, including indebtedness under our senior credit agreement, but will
rank senior to our common stock. In the event of our bankruptcy, liquidation or
reorganization, our assets will be available to pay obligations on the Series A
Preferred Stock and then the common stock only after all holders of our
indebtedness and all our other creditors have been paid. As a result, in the
event of our liquidation or bankruptcy it is likely that there will be no assets
available for distribution to our equity holders and thus no value to our
equity.
While any shares of the Series A Preferred Stock are outstanding, without
the written consent of 66 2/3% of the outstanding shares of the Series A
Preferred Stock, we may not create, authorize, issue or reclassify
o any class of stock ranking prior or equal to the Series A Preferred
Stock with respect to dividends or upon liquidation, dissolution,
winding up or otherwise; or
o any security that is convertible or exchangeable into such stock.
Dividends--our ability to pay any dividends on the Series A Preferred Stock and
common stock may be limited.
10
We cannot assure the holders of the Series A Preferred Stock that we will
be able to pay dividends on the Series A Preferred Stock. In addition, we have
not declared or paid cash dividends on our common stock since January 3, 1989.
The payment of any dividends by us on our common stock in the future will be at
the discretion of our Board of Directors and will depend upon, among other
things, future earnings, operations, capital requirements, our general financial
condition, the general financial condition of our subsidiaries and general
business conditions.
Our ability to pay any cash or noncash dividends on the Series A Preferred
Stock and common stock is subject to applicable provisions of state law and to
the terms of our senior credit agreement. The terms of our senior credit
agreement prohibit us from paying any cash dividends on the Series A Preferred
Stock and the common stock so long as any indebtedness or commitments remain
outstanding under our senior credit agreement. Moreover, under Delaware law, we
are permitted to pay cash or accumulated dividends on our capital stock,
including the Series A Preferred Stock and common stock, only out of surplus, or
if there is no surplus, out of our net profits for the fiscal year in which a
dividend is declared or for the immediately preceding fiscal year. Surplus is
defined as the excess of a company's total assets over the sum of its total
liabilities plus the par value of its outstanding capital stock. In order to pay
dividends, we must have surplus or net profits equal to the full amount of the
dividends at the time such dividend is declared. In determining our ability to
pay dividends, Delaware law permits our Board of Directors to revalue our assets
and liabilities from time to time to their fair market values in order to
establish the amount of surplus. We cannot predict what the value of our assets
or the amount of our liabilities will be in the future and, accordingly, we
cannot assure the holders of the Series A Preferred Stock and the common stock
that we will be able to pay dividends on the Series A Preferred Stock and the
common stock.
Inability to redeem the Series A Preferred Stock prior to or at maturity--we may
not have sufficient funds to make a change of control or sale of assets offer
when required by the certificate of designation relating to the Series A
Preferred Stock because of prohibitions in our senior credit agreement.
In the event that we experience a change of control or sell all or
substantially all of our assets, we cannot assure the holders of the Series A
Preferred Stock that we would have sufficient funds to satisfy all of our
obligations under the senior credit agreement and the Series A Preferred Stock.
If we experience a change of control or sell all or substantially all of
our assets, to the extent we have legally available funds for the payment, we
must offer to redeem all shares of Series A Preferred Stock then outstanding in
cash. However, we are prohibited by the senior credit agreement from redeeming
any shares of our Series A Preferred Stock so long as any indebtedness or
commitments remain outstanding under the senior credit agreement. The senior
credit agreement also provides that a change of control event constitutes a
default under the senior credit agreement. See "Description of Senior Credit
Agreement." We may also become a party to, or guarantor under, future credit
agreements or other agreements relating to senior indebtedness that contain
similar restrictions or provisions.
If we experience a change of control or sell all or substantially all of
our assets when we are prohibited from redeeming the Series A Preferred Stock,
we could seek the consent of the lenders under the senior credit agreement to
redeem the Series A Preferred Stock or could attempt to refinance the borrowings
that contain the prohibition. If we do not obtain the consent and do not
refinance the borrowings, we would remain prohibited from redeeming the Series A
Preferred Stock. This could have adverse consequences to the holders of the
Series A Preferred Stock as well as us. If a default occurs with respect to any
senior indebtedness, the subordination provisions of the certificate of
designation relating to the Series A Preferred Stock would restrict payments to
the holders of the Series A Preferred Stock.
There is no prior market for the Series A Preferred Stock and holders of the
Series A Preferred Stock cannot be assured that an active trading market will
develop for the Series A Preferred Stock. If an active trading market for the
Series A Preferred Stock does not develop, the liquidity and value of the Series
A Preferred Stock could be harmed.
The shares of Series A Preferred Stock are new securities for which there
is currently no trading market. If an active trading market for the Series A
Preferred Stock does not develop, the liquidity and value of the Series A
Preferred Stock could be harmed. We do not intend to apply for listing of the
Series A Preferred Stock on any securities exchange or interdealer quotation
system.
11
Material tax considerations for the Series A Preferred Stock--holders of the
Series A Preferred Stock will have to recognize income in advance of their
receipt of the cash attributable to this income.
Section 305(c) of the Internal Revenue Code provides that the entire amount
of a redemption premium with respect to preferred stock that is subject to
mandatory redemption (such as the Series A Preferred Stock) is treated as being
distributed to the holders of such preferred stock on an economic accrual basis
over the period the stock is outstanding notwithstanding that the cash
attributable to the redemption premium will not be received by the holder until
a subsequent period. Preferred stock generally is considered to have a
redemption premium for this purpose if the price at which it must be redeemed
exceeds its issue price by more than a de minimis amount. The Series A Preferred
Stock provides for cumulative preferred dividends. Thus, the redemption price
will depend on whether dividends on such stock are paid currently. The
legislative history of section 305(c) states that if at the time of issuance of
cumulative preferred stock there is "no intention" for dividends to be paid
currently, the IRS may treat such dividends as a disguised redemption premium.
Under that approach, the excess of the redemption price of the Series A
Preferred Stock (including any disguised redemption premium) over its issue
price is taxable as constructive distributions to the holder (treated as a
dividend to the extent of our company's current and accumulated earnings and
profits) over the term of the preferred stock using a constant interest rate
method similar to that for accruing original issue discount. To date, the IRS
has not promulgated such regulations, although the issue remains under
consideration. In the current situation, we intend to take the position that we
do not have "no intention" to pay dividends currently (although our senior
credit agreement prohibits us from paying any cash dividends while any
indebtedness remains outstanding under such agreement) and thus that holders of
the Series A Preferred Stock should not be required to treat any excess of the
final redemption price over the issue price as a series of constructive
distributions over the period such stock is outstanding. This issue is not,
however, free from doubt. Holders of Series A Preferred Stock are urged to
consult their tax advisors with respect to this issue. For a more detailed
discussion of the U.S. Federal income tax consequences to the holders of the
Series A Preferred Stock of the ownership and disposition of the Series A
Preferred Stock, see "Material U.S. Federal Tax Considerations."
Additional Issuance of Shares--we may issue additional common stock or preferred
stock, which could dilute your interests.
Our certificate of incorporation, as amended does not limit the issuance of
additional common stock or additional series of preferred stock ranking junior
to the Series A Preferred Stock. As of June 3, 2002 we have available for
issuance 37,726,552 authorized but unissued shares of common stock and 900,000
authorized but unissued shares of preferred stock that may be issued in
additional series. We may not, without the approval of 66 2/3% of the then
outstanding Series A Preferred Stock, issue any securities senior to or on
parity with the Series A Preferred Stock. None of the provisions of the
certificate of designation relating to the Series A Preferred Stock affords the
holders of the Series A Preferred Stock protection in the event of a highly
leveraged or other transactions that might adversely affect their interests.
Volatility of Share Price--the market price of our common stock and Series A
Preferred Stock could be volatile.
The market price of our common stock has been subject to volatility and, in
the future, the market price of our common stock and Series A Preferred Stock
could fluctuate widely in response to numerous factors, many of which are beyond
our control. These factors include, among other things, actual or anticipated
variations in our operating results, earnings releases by us, changes in
financial estimates by securities analysts, sales of substantial amounts of our
common stock or Series A Preferred Stock pursuant to this offering, market
conditions in the industry and the general state of the securities markets,
governmental legislation or regulation, currency and exchange rate fluctuations,
as well as general economic and market conditions, such as recessions.
Key Personnel--Our success is dependent on our key personnel.
Our success depends to a significant extent upon a number of key employees,
including members of senior management. The loss of the services of one or more
of these key employees could have a material adverse effect on our business and
prospects. We believe that our future success will depend in part on our ability
to attract, motivate and retain skilled technical, managerial, marketing and
sales personnel. Competition for such personnel is intense and there can be no
assurance that we will be successful in attracting, motivating and retaining key
personnel. The failure to hire and retain such personnel could materially
adversely affect our business and results of operations.
12
Competition--the most competitive aspect of our business is the procurement of
raw materials.
Our management believes that the most competitive aspect of our business is
the procurement of raw materials rather than the sale of finished products.
During the last ten plus 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, such as us, 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. Major competitors include:
Baker Commodities in the West; National By-Products in the Midwest; and Griffin
Industries in Texas and the Southeast. Each of these businesses compete in both
the Rendering and Restaurant Service segments. A significant decrease in raw
materials available could materially and adversely affect our business and
results of operations.
The rendering and restaurant services industry is highly fragmented and
very competitive. We compete with other rendering and restaurant services
businesses and alternative methods of disposal of animal processing by-products
and used restaurant cooking oil provided by trash haulers and waste management
companies, as well as the alternative of illegal disposal. We charge a
collection fee to offset a portion of the cost incurred in collecting raw
material. In recent years we have become highly dependent upon these collection
fees. To the extent suppliers of raw materials look to alternate methods of
disposal, whether as a result of our collection fees being deemed too expensive
or otherwise, our raw material supply will decrease and our collection fee
revenues will decrease, which could materially and adversely affect our business
and results of operations.
Government regulations and approvals--we may incur material costs and
liabilities in complying with government regulations.
We are subject to the rules and regulations of various federal, state and
local governmental agencies. Material rules and regulations and the applicable
agencies are:
o the Food and Drug Administration (FDA), which regulates food and feed
safety;
o the United States Department of Agriculture (USDA), which regulates
collection and production methods;
o the Environmental Protection Agency (EPA), which regulates air and
water discharge requirements, as well as local and state agencies
governing air and water discharge;
o state Departments of Agriculture, which regulate animal by-product
collection and transportation procedures and animal feed quality; and
o the United States Department of Transportation (USDOT), as well as
local and state agencies, which regulate the operation of our
commercial vehicles.
Such rules and regulations may influence our operating results at one or
more facilities. There can be no assurance that we will not incur material costs
and liabilities in connection with such regulations.
Ownership of our company--our lenders have the ability to exercise significant
control over all major corporate transactions and may have interests that
conflict with the interests of the other holders of the Series A Preferred Stock
and common stock.
Our lenders, through their beneficial ownership of our common stock, in the
aggregate own 75% of our voting equity. If they act in concert, the lenders have
effective control of us by virtue of their ability to elect the majority of our
directors, to approve any action requiring the approval of our stockholders,
including amendments to our charter documents, and to effect fundamental
corporate transactions such as mergers and asset sales. The interests of the
Lenders as stockholders may differ from the interests of the other holders of
the Series A Preferred Stock and common stock, thus the lenders may take actions
that may disadvantage our other stockholders. We have been advised, however,
that the lenders do not have and do not expect to have any contracts,
arrangements or understandings to vote as a group for the election of directors
or on any other issue or to hold or dispose of thier common stock or Series A
Preferred Stock.
13
We are highly dependent on natural gas.
Our operations are highly dependent on the use of natural gas. A material
increase in natural gas prices over a sustained period of time could materially
adversely affect our business, financial condition and results of operations.
Certain of our 26 operating facilities are highly dependent upon a few
suppliers.
Certain of our 26 operating facilities are highly dependent on one or a few
suppliers. Should any of these suppliers choose alternate methods of disposal,
cease their operations, have their operations interrupted by casualty, or
otherwise cease using our collection services, such operating facilities would
be materially and adversely affected.
In certain markets we are highly dependent upon the continued and uninterrupted
operation of a single operating facility.
In the majority of our markets, in the event of a casualty or condemnation
involving a facility located in such market, we would utilize a nearby operating
facility to continue to serve our customers in such market. In certain markets,
however, we do not have alternate operating facilities. In the event of a
casualty or condemnation, we would experience an interruption in our ability to
service our customers and to procure raw materials. This would materially and
adversely affect our business and results of operations in such markets. In
addition, after an operating facility affected by a casualty or condemnation is
restored, there could be no assurance that customers who in the interim choose
to use alternative disposal services would return to use our services.
Bovine spongiform encephalopathy (BSE) or "mad cow disease."
Effective August, 1997, the FDA promulgated a rule prohibiting the use of
mammalian proteins, with some exceptions, in feeds for cattle, sheep and other
ruminant animals. The intent of this rule is to prevent the spread of BSE,
commonly referred to as "mad cow disease," should the disease ever occur in the
United States. Our management believes that we are in compliance with the
provisions of the rule.
The European fear of "mad cow disease" could adversely impact acceptance of
our finished products in Europe. To date, the "mad cow disease" situation in
Europe and new FDA restrictions, coupled with much lower prices for competing
commodities, has caused lower prices for some of our key products. If "mad cow
disease" were to spread to the United States, this could have a material adverse
affect on our business and results of operations.
Events such as those of September 11, 2001 may adversely affect our operations
or the markets for our securities.
Following the September 11, 2001 terrorist attacks, there has been
substantial volatility in the U.S., Canadian and international financial
markets. Continued military or other response by the United States or its
allies, future terrorist attacks or the anticipation of any such actions or
events may have adverse impacts on the U.S. and world economies and may disrupt
financial markets (including payment systems and clearinghouses) for extended
periods of time. These armed conflicts or attacks may also directly impact our
physical facilities or those of our suppliers or customers and could have an
impact on our domestic and international sales, supply chain, production
capability and ability to deliver our products to our customers.
Political and economic instability in some regions of the world may also
result and could negatively impact our business and financial condition and our
expectations as described in forward-looking statements. The foregoing events
may adversely affect the trading price of our common shares.
14
RECAPITALIZATION
The Recapitalization Transactions
On May 13, 2002, we consummated a comprehensive recapitalization plan
designed to provide us with sufficient financing to implement our business plan
and improve our debt and capital structure. The principal components of the
Recapitalization consisted of:
o the issuance to the lenders of 46,705,086 shares of common stock, such
that the lenders collectively own 75% our issued and outstanding common
stock and 100,000 shares of 6% cumulative redeemable Series A Preferred
Stock with a liquidation preference of $100 per share in exchange for
the cancellation of an aggregate of approximately $64.6 million of
indebtedness owed by us, comprised of (i) $55.4 million principal
amount of loans under our previous credit agreement, (ii) $5.3 million
of accrued and unpaid interest and commitment fees owing under our
previous credit agreement and (iii) the $3,855,000 forbearance fee we
owed to the lenders under the forbearance agreement then existing;
o a new amended and restated credit agreement with the lenders that
provides for a $61.0 million term loan and a revolving credit facility
of $17.3 million for working capital loans and letters of credit. The
term loan and the revolving credit facility mature on May 10, 2007. See
"Description of the Senior Credit Agreement";
o the reduction of our indebtedness to the lenders from approximately
$126.9 million to $61.0 million principal amount plus approximately
$1.3 million of accrued interest;
o the reduction in the size of our Board of Directors from six to five
members and the nomination for election of the three designees of the
lenders and two existing directors to our Board of Directors until our
2003 annual meeting of stockholders;
o our granting certain preemptive rights to the lenders; and
o our filing this registration statement with the Securities and Exchange
Commission. (We also granted the lenders certain other registration
rights relating to such shares).
15
USE OF PROCEEDS
The selling stockholders will receive all of the proceeds from the resale
of the securities offered hereby. We will not receive any proceeds from the
resale of such securities.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted and traded on the American Stock Exchange under
the symbol "DAR." The table below presents, for the fiscal quarters indicated,
the high and low closing sales prices per share for each such fiscal quarter.
2002 2001 2000 1999
Fiscal Quarter High Low High Low High Low High Low
-------------- ---- --- ---- --- ---- --- ---- ---
First Quarter $0.85 $0.32 $1.250 $0.438 $2.000 $1.625 $3.500 $1.750
Second Quarter 0.840 0.500 1.750 1.125 2.125 1.500
Third Quarter 1.000 0.500 1.375 0.250 2.000 1.063
Fourth Quarter 0.910 0.500 0.875 0.250 3.000 0.875
There were 90 shareholders of record of the common stock as of May 22,
2002. As of June 3, 2002, the closing price per share of our common stock was
$0.70 as quoted on the American Stock Exchange.
DIVIDEND POLICY
We have not declared or paid any dividends on our common stock since
January 3, 1989. We do not anticipate paying any cash dividends on our common
stock in the foreseeable future. In addition, our financing arrangements
prohibit us from paying cash dividends on our common stock in the foreseeable
future. We currently intend to retain future earnings, if any, for use in the
operation of our business, to reduce our indebtedness and to fund future growth.
Any future determination to pay cash dividends on our common stock will be at
the discretion of our Board of Directors and will be based upon our financial
condition, operating results, capital requirements, plans for expansion,
restrictions imposed by any financing arrangements and any other factors that
the Board of Directors feels are relevant.
16
CAPITALIZATION
The following table sets forth the capitalization of our company as of
March 30, 2002 on an actual basis and on a pro forma basis to give effect to the
issuance of 46,705,086 shares of our common stock and 100,000 shares of our
Series A Preferred Stock in connection with the recapitalization of our company
as described under "Recapitalization."
March 30, 2002
(in thousands)
---------------------------------------------
Actual Pro Forma
----------------------- ---------------------
Cash and cash equivalents....................................... $ 2,999 $ 2,999
======== =======
Current portion of long-term debt.............................. $ 5,120 $ 3,646
Long-term debt ................................................ 112,127 76,328
Series A 6% Cumulative Redeemable Preferred Stock, liquidation
preference $10,000,000; none (actual) and 100,000 (pro
forma) shares issued and outstanding............................ - 7,619
Shareholders' Equity (Deficit):
Preferred Stock, $0.01 par value per share; 1,000,000 shares
authorized, none issued - -
Common stock, $0.01 par value per share; 25,000,000 (actual)
(pro forma) shares authorized; 15,589,362 (actual) and
62,294,448 (pro forma) shares issued and outstanding ...... 156 623
Additional paid-in capital..................................... 35,235 70,481
Treasury stock, at cost; 21,000 shares (172) (172)
Accumulated comprehensive loss (533) (533)
Accumulated deficit............................................ (43,757) (43,757)
-------- --------
Total shareholders' equity (deficit)........................... (9,071) 26,642
-------- ------
Total Capitalization..................................... $108,176 $114,235
======== ========
17
SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
The following selected historical and pro forma consolidated financial data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our audited consolidated
financial statements and related notes thereto and unaudited consolidated
financial statements and related notes thereto included elsewhere in this
prospectus. The selected pro forma data does not purport to represent what our
results would have been if the Recapitalization had occurred at the dates
indicated. The Pro Forma columns included in the Operating Data for the three
months ended March 30, 2002 and the fiscal year ended December 29, 2001, derived
from elsewhere in this prospectus, reflect the effect of the Recapitalization
had it occurred at the beginning of such periods. The Pro Forma Balance Sheet
Data as of March 30, 2002 and December 29, 2001, derived from elsewhere in this
prospectus, reflect the effect of the Recapitalization as if it had occurred on
such dates.
Fiscal Year Ended (a)
--------------------------------------------------------------------------------
December 29, December 29, December 30, January 1, January 2, January 3,
2001 2001 2000 2000 1999 1998
Pro Forma Actual Actual Actual Actual Actual
--------------------------------------------------------------------------------------------------------------
(in thousands, except ratio and share data)
Operating Data:
Net sales $255,974 $255,974 $242,795 $258,570 $337,031 $444,142
-------- -------- -------- -------- -------- --------
Cost of sales and
operating expenses 196,778 196,778 190,283 210,879 283,822 362,787
Selling, general and
administrative expenses 28,594 28,594 26,736 26,773 33,073 33,247
Depreciation and
amortization 26,634 26,634 31,181 32,912 32,418 29,751
Operating income/(loss) 3,968 3,968 (5,405) (11,994) (12,282) 18,357
Interest expense 1,415 14,162 13,971 15,533 12,747 13,070
Other (income)/expense, net 2,000 1,651 184 (1,812) 1,117 (1,348)
------- ----- --------- ------ ----- ------
Income/(loss) from
continuing operations
before income taxes 553 (11,845) (19,560) (25,715) (26,146) 6,635
Income tax expense/(benefit) - - - (10,015) (9,347) 2,307
------- ----- --------- ------ ----- ------
Earnings/(loss) from
continuing operations 553 (11,845) (19,560) (15,700) (16,799) 4,328
Discontinued operations:
Income/(loss) from
discontinued
operations, net of tax - - - - (637) 1,081
Gain (loss) on disposal,
net of tax - - 371 (333) (14,657) -
------- ----- --------- ------ ----- ------
Net income /(loss) 553 (11,845) (19,189) (16,033) (32,093) 5,409
Preferred dividends and
accretion (1,465) - - - - -
------- ----- --------- ------ ----- ------
Net income (loss)
applicable to common
shareholders $ (912) (11,845) (19,189) $(16,033) $(32,093) 5,409
======= ======= ======== ======== ======== =====
Basic earnings/(loss) per
common share $ (0.01) (0.76) (1.23) (1.03) (2.06) 0.35
Diluted earnings/(loss)
per common share $ (0.01) (0.76) (1.23) (1.03) (2.06) 0.33
Weighted average shares
outstanding 62,273 15,568 15,568 15,568 15,581 15,519
Diluted weighted average
shares outstanding 62,273 15,568 15,568 15,568 15,581 16,461
Other Data:
EBITDA (b) $ 30,602 $30,602 $25,776 20,918 20,136 48,108
Depreciation 21,378 21,378 25,541 26,998 26,432 24,074
Amortization 5,256 5,256 5,640 5,914 5,986 5,677
Capital expenditures 9,142 9,142 7,684 9,851 14,967 24,520
Ratio of earnings to
fixed charges (c) 1.09 - - - - 1.48
18
Balance Sheet Data:
Working capital
(deficiency) $ 476 $(116,718) $(106,809) (5,223) 3,070 5,225
Total assets 160,209 159,079 174,505 197,804 263,166 305,973
Current portion of
long-term debt 5,097 120,053 109,528 7,810 7,717 5,118
Total long-term debt less
current portion 82,051 _ - 110,209 140,613 142,181
Stockholders' equity
(deficit) 19,000 (9,654) 2,724 21,913 37,946 69,756
Three Months Ended
------------------------------------------
March 30, March 30, March 31,
2002 2002 2001
Pro Forma Actual Actual
--------------------------------------------------------------------------------------------------------------
Operating Data:
Net sales $61,681 $61,681 $ 63,634
Cost of sales and operating expenses 46,395 46,395 48,312
Selling, general and administrative expenses 7,160 7,160 7,005
Depreciation and amortization 4,392 4,392 6,814
Operating income/(loss) 3,734 3,734 1,503
Interest expense (665) (3,885) (3,227)
Other (income)/expense, net 511 734 575
------- ------- --------
Income (loss) before income taxes 3,580 583 (1,149)
Income taxes 1,083 - -
------- ------- --------
Net income (loss) 2,497 583 (1,149)
Preferred dividends and accretion (380) - -
------- ------- --------
Net income (loss) applicable to common shareholders $ 2,117 $ 583 $ (1,149)
======= ======= =========
Basic income (loss) per common share $ 0.03 $ 0.04 $ (0.07)
Diluted income (loss) per common share $ 0.03 $ 0.04 $ (0.07)
Weighted average shares outstanding 62,273 15,568 15,568
Diluted weighted average shares outstanding 62,535 15,830 15,568
Other Data:
EBITDA (b) 8,126 8,126 $ 8,317
Depreciation 3,257 3,257 5,339
Amortization 1,135 1,135 1,475
Capital expenditures 3,622 3,622 1,582
Ratio of earnings to fixed charges (c) 3.0 1.14 -
Balance Sheet Data:
Working capital (deficiency) $ 4,545 $(3,286) $(104,074)
Total assets 154,158 154,456 166,981
Current portion of long-term debt 3,646 5,120 109,018
Total long-term debt less current portion 76,328 112,127 -
Stockholders' equity (deficit) 26,642 (9,071) 1,266
(a) The fiscal years ended December 29, 2001, January 1, 2000 and January 2,
1999 each consisted of 52 weeks. The fiscal year ended January 3, 1998
consisted of 53 weeks.
(b) "EBITDA" represents, for any relevant period, operating profit plus
depreciation and amortization and impairment of long-lived assets. 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.
(c) For purposes of calculating the ratio of earnings to fixed charges,
earnings consist of income (loss) from continuing operations before income
taxes and fixed charges. Fixed charges consist of interest expense,
amortization of debt issuance costs and one-third of rental expense deemed
to be the equivalent of interest. For the years ended December 29, 2001,
December 30, 2000, January 1, 2000 and January 2, 1999 (all actual), and
three months ended March 31, 2001 (actual) earnings were insufficient to
cover fixed charges $11.8 million (actual), $19.6 million (actual), $25.7
million (actual), and $26.1 million (actual) and $1.1 million (actual),
respectively.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under the heading "Risk Factors" and elsewhere in this
prospectus. The following discussion should be read in conjunction with our
consolidated financial statements and related notes thereto included elsewhere
in this prospectus.
General
Darling is a recycler of food processing by-products. We collect and
recycle animal processing by-products and used restaurant cooking oil. In
addition, we provide grease trap collection services to restaurants. We process
such raw materials at 26 facilities located throughout the United States into
finished products such as tallow, meat and bone meal and yellow grease. We sell
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.
Results of Operations
3 Months Ended March 30, 2002 vs. 3 Months Ended March 31, 2001
General. We recorded net income of $0.6 million for the three months ended
March 30, 2002 (first quarter of Fiscal 2002), as compared to a loss of $1.1
million for the three months ended March 31, 2001 (first quarter of Fiscal
2001), an improvement of $1.7 million. Principal factors affecting these
comparative results, which are discussed further in the following section, were
lower depreciation expense, favorable yields on production, and higher
collection fees which improved recovery of collection expenses, partially offset
by lower inage and finished product and hide prices.
Net Sales. We collect 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, we provide 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 for
both the first quarter of Fiscal 2002 and the first quarter of Fiscal 2001.
During the first quarter of Fiscal 2002, net sales decreased by $1.9
million (3.1%), to $61.7 million as compared to $63.6 million during the first
quarter of Fiscal 2001 primarily due to the following: (1) raw material inage
decreased $2.1 million; (2) lower aggregate finished goods prices resulted in a
$2.1 million decrease (our average yellow grease prices increased $0.48/cwt to
$9.36/cwt (5.4% higher); average tallow prices increased $0.30/cwt to $9.70/cwt
(3.2% higher); and average meat and bone meal prices decreased $16.20/ton to
$181.60/ton (8.2% lower)); (3) lower hides prices decreased net sales $0.7
million; (4) finished goods purchased for resale decreased $0.6 million; (5)
other changes decreased $0.1 million; partially offset by (6) higher yields on
production of $2.3 million; and (7) higher collection fees, which improved
recovery of collection expenses, by $1.4 million.
Cost of Sales and Operating Expenses. Cost of sales and operating expenses
include prices paid to raw material suppliers, the cost of product purchased for
resale, and the cost to collect and process raw material. We utilize 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 2002, cost of sales and operating
expenses decreased $1.9 million (3.9%) to $46.4 million as compared to $48.3
million during the first quarter of Fiscal 2001 primarily as a result of the
following: (1) lower natural gas and fuel oil factory expenses resulted in a
decrease of $1.5 million in cost of sales; (2) lower raw material prices
resulted in a decrease of $0.6 million in cost of sales; (3) lower finished
goods purchased for resale decreased cost of sales $0.6 million; (4) lower raw
material inage decreased cost of sales $0.4 million; partially offset by (5)
higher collection and factory payroll expenses of $0.8 million; (6) higher
collection and factory insurance expenses of $0.3 million; and (7) other
increases of $0.1 million.
20
Selling, General and Administrative Costs. Selling, general and
administrative costs were $7.2 million during the first quarter of Fiscal 2002,
a $0.2 million increase (2.9%) from $7.0 million for the first quarter of Fiscal
2001, due to increases in payroll expense of $0.4 million, partially offset by
decreases in bad debt expense of $0.2 million.
Depreciation and Amortization. Depreciation and amortization charges
decreased $2.4 million (54.5%) to $4.4 million during the first quarter of
Fiscal 2002 as compared to $6.8 million during the first quarter of Fiscal 2001.
The decrease is primarily due to various property and equipment assets becoming
fully depreciated during Fiscal 2001.
Interest Expense. Interest expense increased $0.7 million from $3.2 million
during the first quarter of Fiscal 2001 to $3.9 million during the first quarter
of Fiscal 2002, primarily due to $1.7 million amortization of forbearance fees
included in interest expense, net of the effect of lower interest rates.
Other Income (Expense). Other income increased $0.1 million from net other
income of $0.6 million during the first quarter of Fiscal 2001 to net other
income of $0.7 million during the first quarter of Fiscal 2002. This increase
was primarily due to the gain from insurance proceeds received over the net book
value of assets destroyed by fire at our Norfolk, Nebraska plant.
Income Taxes. We assess the amount of valuation allowance recorded as a
reduction of deferred tax assets by considering our ability to carryback net
operating losses, scheduled reversals of future taxable and deductible temporary
differences, future taxable income and tax planning strategies. Based on our
assessment of these matters at March 30, 2002 and March 31, 2001, we recorded a
valuation allowance to reduce the carrying value of our net deferred tax assets
to zero in both periods.
Capital Expenditures. We made capital expenditures of $3.6 million
primarily for machinery and equipment during the first quarter of Fiscal 2002
compared to capital expenditures of $1.5 million during the first quarter of
Fiscal 2001.
52 Week Fiscal Year Ended December 29, 2001 (Fiscal 2001) vs. 52 Week Fiscal
Year Ended December 30, 2000 (Fiscal 2000)
General. We reported a sales increase of $13.2 million (5.4%) for Fiscal
2001 and operating income of $4.0 million compared to a $5.4 million operating
loss in Fiscal 2000, an improvement of $9.4 million. Principal factors affecting
these comparative results, which are discussed further in the following section,
were higher collection fees which improved recovery of collection expenses,
favorable finished goods prices, and lower depreciation expense, partially
offset by higher natural gas and fuel oil expenses. We reported a loss from
continuing operations of $11.8 million for Fiscal 2001 compared to a loss from
continuing operations of $19.6 million for Fiscal 2000, a reduction of the
operating loss of $7.8 million.
Net Sales. During Fiscal 2001, net sales increased by $13.2 million (5.4%)
to $256.0 million as compared to $242.8 million during Fiscal 2000. The increase
in net sales was primarily due to the following: (1) improved recovery of
collection expenses, $9.2 million; (2) favorable finished goods prices resulted
in a $4.6 million increase (our average yellow grease prices increased
52(cent)/cwt to $8.94/cwt (6.2% higher)), average tallow prices increased
63(cent)/cwt to $10.21/cwt (6.6% higher), and average meat and bone meal prices
decreased $4.60/ton to $184.00/ton (2.4% lower); (3) hide increased $2.0
million; (4) improved yields on production increased $0.9 million; (5) other net
increases during Fiscal 2001, $0.3 million; partially offset by (6) finished
product purchased for resale decreased $3.1 million; and (7) raw material inage
decreased $0.7 million.
Cost of Sales and Operating Expenses. During Fiscal 2001, cost of sales and
operating expenses increased $6.5 million (3.4%) to $196.8 million as compared
to $190.3 million during Fiscal 2000. The increase in cost of sales and
operating expenses was primarily due to the following: (1) natural gas and fuel
oil expenses increased $5.4 million; (2) repairs expense increased $2.9 million;
(3) leased vehicle expenses increased $0.8 million; (4) contract hauling
expenses increased $0.5 million; (5) other net increased expenses during Fiscal
2001 of $0.8 million; partially offset by (6) finished product purchased for
resale decreased $3.1 million; and (7) gasoline and lubricant expenses decreased
$0.8 million.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $28.6 million during Fiscal 2001, a $1.9 million
(7.1%), $26.7 million during Fiscal 2000, primarily due to higher payroll
expense.
21
Depreciation and Amortization. Depreciation and amortization charges
decreased $4.5 million (14.4%), to $26.6 million during Fiscal 2001 as compared
to $31.2 million during Fiscal 2000. Included in Fiscal 2001 and Fiscal 2000,
depreciation and amortization expense are impairment charges of $0.8 million and
$4.0 million, respectively, due to impairment charges recorded in accordance
with Statement of Financial Accounting Standards No. 121.
The Fiscal 2001 impairment charge of $0.8 million pertains solely to assets
held for sale in our rendering business segment. The impairment charges were
necessary to reduce the carrying value of these assets to management's estimate
of their net realizable value in light of current economic conditions. Estimated
net realizable values were based on information from business and real estate
brokers, comparable sales, property tax valuations and internal discussions with
our employees working in the geographic areas who were familiar with the
specific assets. A summary of the impairment charge follows (in millions):
Land $0.1
Leaseholds and buildings 0.1
Equipment and furniture 0.6
----
Total impairment $0.8
====
The Fiscal 2000 impairment charge of $4.0 million consists of (1) $2.1
million related to rendering business segment operating assets, (2) $0.1 million
and $0.4 million related to restaurant services business segment equipment and
allocable goodwill, respectively, and (3) $1.3 million related to assets held
for sale in our rendering business segment. The impairment charges of the assets
in operation were made to reduce the carrying value to estimated fair value
based on the discounted future cash flows of the assets. The impairment charges
of the assets held for sale were necessary to reduce the carrying value of these
assets to management's estimate of their net realizable value based on
information from a business broker. A summary of the impairment charge follows
(in millions):
Restaurant
Rendering Services Total
Leaseholds
and buildings $ 0.6 $ -- $ 0.6
Equipment
and furniture 2.9 0.1 3.0
Goodwill -- 0.4 0.4
--------- --------- ---------
Total impairment $ 3.5 $ 0.5 $ 4.0
========= ========= =========
Interest Expense. Interest expense was $14.2 million during Fiscal 2001,
compared to $14.0 million during Fiscal 2000, an increase of $0.2 million
(1.4%). The effects of amortization of loan forbearance fees included in
interest expense of $2.1 million and higher debt levels during Fiscal 2001 were
partially offset by declining interest rates on our floating rate debt.
Income Taxes. We recorded a valuation allowance to eliminate the deferred
tax benefit attributable to the Fiscal 2001 loss, as we did in Fiscal 2000.
Capital Expenditures. We made capital expenditures of $9.1 million during
Fiscal 2001 as compared to $7.7 million in Fiscal 2000, an increase of $1.4
million (18.2%). Fiscal 2001 capital expenditures were principally for:
operating equipment, $5.8 million; vehicles (primarily trucks or
tractor-trailers), $1.6 million; office equipment, $1.2 million; and other
capital expenditures, $0.5 million.
52 Week Fiscal Year Ended December 30, 2000 (Fiscal 2000) vs. 52 Week Fiscal
Year Ended January 1, 2000 (Fiscal 1999)
General. We reported a sales decrease of $15.8 million (6.1%) for Fiscal
2000, and an operating loss of $5.4 million compared to an operating loss of
$12.0 million in Fiscal 2000 an operating loss reduction of $6.6 million
(55.0%). Principal factors affecting these comparative results, which are
discussed further in the following section, were lower finished goods sales
prices and lower sales volume, the effects of which were more than offset by
lower raw material costs and higher collection fees which improved recovery of
collection expenses. We
22
reported a loss from continuing operations of $19.6 million for Fiscal 2000
compared to a loss from continuing operations of $15.7 million for Fiscal 1999,
an increased loss from continuing operations of $3.9 million (24.8%).
Net Sales. During Fiscal 2000, net sales decreased by $15.8 million (6.1%)
to $242.8 million as compared to $258.6 million during Fiscal 1999. The decrease
is net sales was primarily due to the following: (1) decreases in overall
finished goods prices resulted in an $11.1 million decrease in sales during
Fiscal 2000 versus Fiscal 1999 (our average yellow grease prices decreased
$1.17/cwt to $8.42/cwt (12.2%), average tallow prices decreased $1.48/cwt to
$9.58/cwt, and average meat and bone meal prices increased $40.12/ton to
$188.60/ton (27.2%); (2) products purchased for resale resulted in an $11.9
million; (3) decreases in the volume of raw materials processed resulted in a
$9.7 million decrease in sales; and (4) other items decreased $1.2 million
compared to Fiscal 1999; partially offset by (5) increases in collection fees
(to offset a portion of the cost incurred in collecting raw material) of $13.0
million; (6) improved yields in production of $4.1 million; and (7) finished
hides sales increased $1.0 million.
Cost of Sales and Operating Expenses. During Fiscal 2000, cost of sales and
operating expenses decreased $20.6 million (9.8%) to $190.3 million as compared
to $210.9 million during Fiscal 1999. The decrease in cost of sales and
operating expenses was primarily due to 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 $6.4 million in cost of sales; (2) decreases in
products purchased for resale resulted in a $11.9 million decrease; (3)
decreases in the volume of raw materials collected and processed resulted in a
decrease of approximately $1.8 million in cost of sales; (4) reductions in
repairs expense, payroll, and contract hauling operating expenses of $4.8
million; and (5) other changes resulted in a decrease of $2.7 million; partially
offset by (6) increases in natural gas, sewer expense and utilities, resulted in
an increase of $6.7 million; and (7) costs of hides purchased increased $0.3
million.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $26.7 million during Fiscal 2000, a $0.1 million
decrease (0.4%), from $26.8 million during Fiscal 1999. Decreases in
professional and legal fees were partially offset by various expense increases.
Depreciation and Amortization. Depreciation and amortization charges
decreased $1.7 million (5.2%), to $31.2 million during Fiscal 2000 as compared
to $32.9 million during Fiscal 1999. Included in Fiscal 2000 and Fiscal 1999
depreciation and amortization expense are impairment charges of $4.0 million and
$1.4 million, respectively, due to impairment recorded in accordance with
Statement of Financial Accounting Standards No. 121.
The Fiscal 2000 impairment charge of $4.0 million consists of (1) $2.1
million related to rendering business segment operating assets, (2) $0.1 million
and $0.4 million related to restaurant services business segment equipment and
allocable goodwill, respectively, and (3) $1.3 million related to assets held
for sale in our rendering business segment. The impairment charges of the assets
in operation were made to reduce the carrying value to estimated fair value
based on the discounted future cash flows of the assets. The impairment charges
of the assets held for sale were necessary to reduce the carrying value of these
assets to management's estimate of their net realizable value based on
information from a business broker. A summary of the impairment charge follows
(in millions):
Restaurant
Rendering Services Total
Leaseholds
and buildings $ 0.6 $ -- $ 0.6
Equipment
and furniture 2.9 0.1 3.0
Goodwill -- 0.4 0.4
--------- --------- ---------
Total impairment $ 3.5 $ 0.5 $ 4.0
========= ========= =========
The Fiscal 1999 impairment charge of $1.4 million pertains solely to assets
held for sale in our rendering business segment. The impairment charges were
necessary to reduce the carrying value of these assets to management's estimate
of their net realizable value. Estimated net realizable values were based on an
offer from a prospective buyer and information from real estate brokers. A
summary of the impairment charge follows (in millions):
Leaseholds and buildings $ 1.1
Equipment 0.3
-----
Total impairment $ 1.4
=====
23
Interest Expense. Interest expense was $14.0 million during Fiscal 2000,
compared to $15.5 million during Fiscal 1999, a decrease of $1.5 million (9.7%).
Lower debt during Fiscal 2000 was partially offset by higher interest rates.
Income Taxes. We recorded a valuation allowance to eliminate the deferred
tax benefit attributable to the Fiscal 2000 loss. This results in a decrease in
income tax benefit of $10.0 million, compared to Fiscal 1999. In Fiscal 1999, we
recorded a $10.0 million income tax benefit, which consisted of $9.2 million of
federal tax benefit and $0.8 million for various state and foreign tax benefits.
Capital Expenditures. We made capital expenditures of $7.7 million during
Fiscal 2000 as compared to $9.9 million in Fiscal 1999, a decrease of $2.2
million (22.2%).
Discontinued Operations. The operations of the Bakery By-Products Recycling
segment have been classified as discontinued operations. In Fiscal 2000, we
realized a gain related to a reduction in an indemnification reserve, net of
tax, of $0.4 million related to the sale of this business segment which was
finalized on April 5, 1999, compared to a loss of $0.3 million in Fiscal 1999.
Financing, Liquidity and Capital Resources
Recapitalization. On May 13, 2002, we consummated the Recapitalization and
executed a new amended and restated credit agreement with our lenders whereby we
exchanged borrowings outstanding under our previous credit agreement, a portion
of the accrued interest and commitment fees, and forbearance fees payable for
newly issued common stock equal to 75% of our total outstanding common stock on
a fully diluted basis (exclusive of stock options issued and outstanding), and
6% cumulative redeemable preferred stock with a face value of $10.0 million. Our
new credit agreement includes a term loan in the principal amount of $61.0
million and also provides for a revolving credit facility which will enable us
to borrow or issue letters of credit of up to $17.3 million.
Substantially all of our assets are either pledged or mortgaged as
collateral for borrowings under the new credit agreement. The new credit
agreement contains certain terms and covenants, which, among other matters,
restrict the incurrence of additional indebtedness, the payment of cash
dividends, the retention of certain proceeds from sales of assets, and the
annual amount of capital expenditures, and requires the maintenance of certain
minimum financial ratios.
The classification of long-term debt in the accompanying March 30, 2002
consolidated balance sheet is based on the repayment terms of the debt issued
under the new credit agreement pursuant to the Recapitalization and also
reflects an estimate of the effect of applying the provisions of Statement No.
15, Accounting by Debtors and Creditors for Troubled Debt Restructurings.
Statement No. 15 requires that the existing amount of debt owed by us to the
lenders be reduced by the fair value of the equity interest granted and that no
gain from restructuring our debt be recognized. Interest expense on the
remaining carrying amount of debt reported in our financial statements will be
based on a new effective interest rate that equates the present value of the
future cash payment specified by the new terms of the term loan with the
carrying amount of the debt.
As shown in the Consolidated Balance Sheet at December 29, 2001, we had
$120.0 million of debt due under our bank credit facilities classified as a
current liability because our previous credit agreement had a maturity date of
June 30, 2001. Effective June 29, 2001, we entered into a forbearance agreement
with the Lenders. The forbearance agreement, which was amended several times,
among other things, provided that the Lenders would not exercise their rights in
connection with certain defaults under the credit agreement until April 30,
2002, raised the interest rate under the credit agreement from 1% over prime to
3% over prime, required the payment of a fee of $3.9 million to the Lenders with
respect to the forbearance agreement, reduced the commitment during the
forbearance period by $2.0 million, from $128.5 million to $126.5 million, and
limited financial covenants to certain minimum cash flows, based upon our own
projected cash flow for certain periods during the forbearance period.
On March 15, 2002, we entered into the Recapitalization Agreement. Under
the terms of the Recapitalization Agreement, the forbearance period was extended
to May 31, 2002, and the agreement stipulated that our Recapitalization would
occur through a series of transactions as described above.
On March 30, 2002, we had a working capital deficit of $3.3 million and our
working capital ratio was 0.92 to 1. On December 29, 2001, we had a working
capital deficit of $116.7 million and our working capital ratio was 0.26 to 1
compared to a working capital deficit of $106.8 million and a working capital
ratio of 0.30 to 1 on December 30, 2000.
24
The Recapitalization caused our current liabilities on a pro forma basis as
of March 30, 2002 to decrease by approximately $7.8 million resulting in
positive working capital of approximately $4.5 million. The decrease in debt
resulting from the Recapitalization will reduce our interest expense.
Net cash provided by operating activities was $4.9 million for the first
quarter of Fiscal 2002 compared to $1.8 million in the comparable prior fiscal
year period, an increase of $3.1 million principally due to changes in the
balances of operating assets and liabilities which resulted in additional cash
flow in the Fiscal 2002 period. Cash used by investing activities was $2.7
million for the first quarter of Fiscal 2002 compared to $1.4 million in the
prior fiscal year period. The increased level of expenditures in Fiscal 2002 was
due primarily to increased capital expenditures for machinery and equipment. Net
cash used by financing activities was $2.9 million in the first quarter of
Fiscal 2002 compared to $1.0 million in the first quarter of Fiscal 2001
principally due to additional reductions of long-term debt in the Fiscal 2002
period.
Net cash provided by operating activities was $5.6 million, $16.2 million
and $0.7 million in Fiscal 2001, Fiscal 2000 and Fiscal 1999, respectively. Net
cash provided by operating activities in Fiscal 2001 decreased principally due
to increased accounts receivable arising from increased sales and reductions in
accounts payable and accrued expenses, partially due to lower levels of credit
extended by trade vendors and due to a $5.9 million cash payment to our
insurance claim administrator under a letter of credit arrangement. The cash
payment was funded through a borrowing under the credit agreement.
The current negative economic environment in our markets has the potential
to adversely impact our liquidity in a variety of ways, including through
reduced sales and potential inventory buildup. Our management has revised our
sales forecasts in light of our view of current economic conditions, and
believes that cash generated from operating activities at the same level as
Fiscal 2001 and funds available under the new amended and restated credit
agreement should be sufficient to meet our working capital needs and capital
expenditures for at least the next 12 months. There can be no assurance,
however, that a continued slowdown in the economy or other factors will not
cause us to fail to meet management's revised forecasts, or otherwise result in
liquidity concerns.
Quantitative and Qualitative Disclosures About Market Risks
Market risks affecting our company are exposures to changes in prices of
the finished products we sell, interest rates on debt, and the price of natural
gas used in our plants. Predominately all of our finished products are
commodities that are generally sold at prices prevailing at the time of sale. We
have used interest rate and, through March 2001, natural gas swaps to manage
these risks. Beginning in April 2001, we are using natural gas forward purchase
agreements with our suppliers to manage the price risk of natural gas used in
our facilities. While we do have international operations, and operate in
international markets, we consider our market risks in such activities to be
immaterial.
At March 30, 2002 and December 29, 2001, we were party to two interest rate
swap agreements. Under the terms of the swap agreements, the interest obligation
on $45 million of 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 our receive
rate is based on the three-month LIBOR. The second swap agreement for $20
million matures on June 27, 2002, bears interest at 9.17% and our receive rate
is based on the Base Rate.
As of March 30, 2002, we have forward purchase agreements in place for
purchases of approximately 624,000 mmbtu's of natural gas for the period April
through December, 2002, based on an average purchase price of $2.78/mmbtu.
Critical Accounting Policies
We follow certain significant accounting policies when preparing our
consolidated financial statements. A complete summary of these policies is
included in Note 1 of Notes to Consolidated Financial Statements.
Certain of the policies require our management to make significant and
subjective estimates which are sensitive to deviations of actual results from
management's assumptions. In particular, management makes estimates regarding
the fair value of our reporting units in assessing impairment of goodwill,
estimates regarding future undiscounted cash flows from the future use of
long-lived assets whenever events or changes in circumstances indicate that the
carrying amount of a long-lived asset may not be recoverable, estimates
regarding the net realizable value of long-lived assets held for sale, and
estimates regarding self insured risks including insurance, environmental and
litigation contingencies.
25
In assessing impairment of goodwill we use estimates and assumptions in
estimating the fair value of our reporting units. In assessing the impairment of
long-lived assets where there has been a change in circumstances indicating the
carrying value of a long-lived asset may not be recoverable, we have estimated
future undiscounted net cash flows from the acquired operations and from use of
the asset, respectively, based on actual historical results and expectations
about future economic circumstances including future business volume, finished
product prices and operating costs. The estimates of fair values of reporting
units, future net cash flows from the acquired operations and use of the asset
could change if actual prices and costs differ due to industry conditions or
other factors affecting the level of business volume or our performance. In
assessing impairment of long-lived assets held for sale, we have estimated the
net realizable value of such assets based on information from various external
sources regarding possible selling prices for such assets. These estimates could
change based on changes in market conditions, interest rates and other factors.
In estimating liabilities for self insured risks, we consider information from
outside consultants and experts, and past historical experience, in projecting
future costs expected to be incurred. These estimates could change if future
events are different than assumed by management, actual costs to settle the
liabilities differ from those estimated and the circumstances associated with
the self insured risks change.
Recent Accounting Pronouncements
The Financial Accounting Standards Board (FASB) recently issued Statement
of Financial Accounting Standards No. 143, Accounting for Asset Retirement
Obligations (Statement 143). Statement 143 establishes requirements for the
accounting for removal costs associated with asset retirements and is effective
for fiscal years beginning after June 15, 2002, with earlier adoption
encouraged. We are currently assessing the impact of Statement 143 on our
consolidated financial statements.
26
OUR BUSINESS
Darling
Founded by the Swift meat packing interests and the Darling family in 1882,
we were incorporated in Delaware in 1962 under the name "Darling-Delaware
Company, Inc." On December 28, 1993, we changed our name from "Darling-Delaware
Company, Inc." to "Darling International Inc."
We are a recycler of food processing by-products. We collect and recycle
animal processing by-products and used restaurant cooking oil. In addition, we
provide grease trap collection services to restaurants. We process such raw
materials at 26 facilities located throughout the United States into finished
products such as tallow, meat and bone meal and yellow grease. We sell 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, we organized our operations into two segments. These are:
o Rendering, the core business of turning inedible waste from meat and
poultry processors into high quality feed ingredients and fats for
other industrial applications; and
o 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.
Due to unfavorable market conditions resulting from declining prices, in
Fiscal 2000, the Esteem Product division, a business dedicated to using newly
developed technologies to produce novel products from established supply
sources, was combined with our rendering operations. In November 1998, we made a
strategic decision to dispose of an additional segment, Bakery By-Products
Recycling, a group which produced 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 on page F-34 for further information regarding
discontinued operations. For the financial results of our business segments, see
Note 17 of Notes to Consolidated Financial Statements beginning on page F-36.
Our net external sales from continuing operations by operating segment were
as follows:
Fiscal Fiscal Fiscal
2001 2000 1999
-------------------------------------------------------
Continuing operations:
Rendering $194,960 76.2% $186,445 76.8% $204,631 79.1%
Restaurant Services 61,014 23.8 56,350 23.2 53,939 20.9
-------- ------ -------- ------ -------- ------
Total $255,974 100.0% $242,795 100.0% $258,570 100.0%
======== ====== ======== ====== ======== ======
Processing Operations
We create finished products primarily through the drying, grinding,
separating and blending of our 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.
27
Purchase and Collection of Raw Materials
We operate a fleet of approximately 800 trucks and tractor-trailers to
collect raw materials from more than 80,000 restaurants, butcher shops, grocery
stores, and independent meat and poultry processors. We replace or upgrade our
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. We transport these trailers
directly to a processing facility. We provide 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 our 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 we supply. 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. We also provide 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(R) 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 11.1% of our restaurant suppliers utilize the CleanStar(R) 2000
system. The frequency of all forms of collection service is determined by the
volume of oil generated by the restaurant.
The raw materials we collect 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. We charge a
collection fee to offset a portion of the cost incurred in collecting raw
material.
During fiscal year 2001, our largest single supplier accounted for less
than 6.8% of the total raw material we processed, and the 10 largest raw
materials suppliers accounted for approximately 34.8% of the total raw material
we processed.
Raw Materials Pricing
We have two primary pricing arrangements with our raw materials suppliers.
Approximately half of our 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. We acquire 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 and competitive 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.
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 our finished products are commodities which are quoted
on established commodity markets or are priced relative to such commodities.
While our finished products are generally sold at prices prevailing at the time
of sale, our ability to deliver large quantities of finished products from
multiple locations and
28
to coordinate sales from a central location enables us to occasionally receive
a premium over the then-prevailing market price.
Marketing, Sales and Distribution of Finished Products
We market our finished products worldwide. Marketing activities are
primarily conducted through our marketing department which is headquartered in
Irving, Texas. We also maintain 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 our
processing plants. We sell our finished products internationally through
commodities brokers and through our agents in various countries.
We sell to numerous foreign markets, including the European Economic
Community, Asia, the Pacific Rim, North Africa, Mexico and South America. We
have no material foreign operations, but export a portion of our products to
customers in various foreign counties. Total export sales were $138.1 million,
$128.7 million and $107.4 million for the years ended December 29, 2001,
December 30, 2002, and January 1, 2000, respectively. The level of export sales
may vary from year to year depending on the relative strength of domestic versus
overseas markets. We obtain payment protection for most of our foreign sales by
requiring payment before shipment or by requiring bank letters of credit or
guarantees of payment from U.S. government agencies. We ordinarily are paid for
our products in U.S. dollars and have not experienced any material currency
translation losses or any material foreign exchange control difficulties.
We have not experienced any material restrictions on the export of our
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) or "mad cow disease"situation in Europe and new FDA
restrictions, coupled with much lower prices for competing commodities, has
caused lower prices for some of our key products.
Finished products produced by us are distributed primarily by truck and
rail from our 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, we
use limited working capital to carry inventories and reduce our exposure to
fluctuations in commodity prices.
Competition
Our management 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. Major competitors include: Baker Commodities in the West;
National By-Products in the Midwest; and Griffin Industries in Texas and the
Southeast. Each of these businesses competes in both the Rendering and
Restaurant Service segments.
In marketing our finished products, we face competition from other
processors and from producers of other suitable commodities. Tallows and greases
are in certain instances substitutes for soybean oil and palm stearine, while
meat and bone meal is a substitute for soybean meal. Consequently, the prices of
tallow, yellow grease, and meat and bone meal correlate with these substitute
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 we receive for our finished products include the
quality of our finished products, consumer health consciousness, worldwide
credit conditions and U.S. government foreign aid. From time to time, we enter
into arrangements with our suppliers of raw materials pursuant to which such
suppliers buy back our finished products.
Seasonality
The amount of raw materials made available to us by our suppliers is
relatively stable on a weekly basis except for those weeks which include major
holidays, during which the availability of raw materials declines
29
because major meat and poultry processors are not operating. Weather is also a
factor. Extremely warm weather adversely affects our ability 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 December 29, 2001, we employed approximately 1,270 persons full-time
in continuing business segments. Approximately 48.3% of the total number of
employees are covered by collective bargaining agreements, however, we have no
national or multi-plant union contracts. Our management believes that our
relations with our 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 us.
Facilities
Our corporate headquarters are located at 251 O'Connor Ridge Boulevard,
Suite 300, Irving, Texas in an office/operating facility, where we lease
approximately 20,000 square feet.
Our 26 operating facilities consist of 19 full service rendering plants, 4
yellow grease/trap grease plants, 1 blending plant, 1 edible plant, and 1 trap
grease plant. Except for 4 leased facilities, we own all of these facilities. In
addition, we own or lease 22 transfer stations in the United States and 1
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 both business segments. The
following is a listing of our operating facilities by business segment:
LOCATION DESCRIPTION
-------- -----------
Combined Rendering and Restaurant Services Business Segments
------------------------------------------------------------
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
Fresno, CA Rendering/Yellow Grease
Kansas City, KS Rendering/Yellow Grease
Los Angeles, CA Rendering/Yellow Grease/Trap
Newark, NJ Rendering/Yellow Grease
San Francisco, CA * Rendering/Yellow Grease/Trap
Sioux City, IA Rendering/Yellow Grease
St. Louis, MO Rendering/Yellow Grease
Tacoma, WA * Rendering/Yellow Grease/Trap
Turlock, CA Rendering/Yellow Grease
Rendering Business Segment
--------------------------
Coldwater, MI Rendering
Houston, TX Rendering
Linkwood, MD Rendering
Omaha, NE Rendering
Omaha, NE * Blending
Omaha, NE Edible Oils
Wahoo, NE Rendering
30
Restaurant Services Business Segment
------------------------------------
Chicago, IL Trap
Ft. Lauderdale, FL * Yellow Grease/Trap
Houston, TX Yellow Grease/Trap
No. Las Vegas, NV Yellow Grease/Trap
Tampa, FL Yellow Grease/Trap
---------------------------
* Property is leased. Annual rent expense for these leased properties in the
aggregate was $0.6 million in fiscal 2001.
Legal Proceedings
Melvindale, Michigan. A group of residents living near our 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 but has permitted approximately 300
people to join the lawsuit as plaintiffs. 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 unspecified
compensatory and exemplary damages in an amount in excess of $25,000 per
plaintiff and unspecified injunctive relief. We are unable to estimate our
potential liability from this lawsuit. 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 us 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, and all of the damage claims in
the suit filed by the City of Melvindale have been dismissed. The City of
Melvindale now seeks unspecified injunctive relief. We or our predecessors have
operated a rendering plant at the Melvindale location since 1927 in a heavily
industrialized area down river south of Detroit. We have taken and are taking
all reasonable steps to minimize odor emissions from our recycling processes and
are defending the lawsuit vigorously.
Long Island City, New York. We are a party to a lawsuit that seeks to
require an environmental cleanup at a property in Long Island City, New York
where we formerly operated a rendering plant (referred to as the "Site"). DMJ
Associates (DMJ), which holds a mortgage on the Site, has filed suit against us,
as a former owner of the Site, as well as others including the present tenants
and operators of the Site, the owner of an abandoned hazardous waste disposal
site adjoining the Site (the "Disposal Facility"), and companies that disposed
of wastes at the Disposal Facility (the "Generator Defendants"). DMJ argues
that, inter alia, under federal law it is entitled to relief directed to have
the defendants remediate the contamination. DMJ seeks both equitable and
monetary relief from all defendants for investigation, abatement and remediation
of the Site. DMJ has not yet provided information sufficient for us to ascertain
the magnitude or amount of DMJ's total claim nor our alleged share thereof. As a
result, we are unable to estimate our potential liability from this lawsuit. We
do not have information suggesting that we contributed in any material way to
any contamination that may exist at the Site. We are actively defending the suit
and are awaiting a decision on a motion on summary judgment regarding the
standing of the plaintiff.
Sauget, Illinois. We are a party to a lawsuit that seeks to recover costs
related to an environmental cleanup in or near Sauget, Illinois. The United
States had filed a complaint against Monsanto Chemical Company, Solutia, Inc.,
Anheuser-Busch, Inc., Union Electric, and 14 other defendants, seeking to
recover cleanup costs. Monsanto (which merged with Pharmacia and Upjohn, Inc. in
2000 and is now known as Pharmacia Corporation) and Solutia in turn filed a
third party complaint seeking contribution from the United States, several
federal agencies, and six more companies, in addition to us. As potentially
responsible parties themselves, Pharmacia and Solutia are seeking to recover
unspecified proportionate shares from each of the other parties, in addition to
us, of an as yet undetermined total cleanup cost. A subsidiary of ours had
operated an inorganic fertilizer plant in Sauget, Illinois for a number of years
prior to closing it in the 1960's. We are defending this case vigorously, and do
not believe, based upon currently available information, that the fertilizer
plant contributed in any significant way to the contamination that is leading to
the environmental cleanup, or that our share, if any, of the cost of the cleanup
will be material. Accordingly, the we are unable to estimate our potential
liability from this lawsuit.
31
Other Litigation. We are also a party to several other lawsuits, claims and
loss contingencies incidental to our business, including assertions by certain
regulatory agencies related to air, wastewater, and storm water discharges from
our processing facilities.
Self Insured Risks. We purchase our workers compensation, auto and general
liability insurance on a retrospective basis. We accrue our expected ultimate
costs related to claims occurring during each fiscal year and carry this accrual
as a reserve until we pay such claims.
We have 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, our management believes
that reserves for contingencies are reasonable and sufficient based upon present
governmental regulations and information currently available to management. The
accrued expenses and other noncurrent liabilities classifications in our
consolidated balance sheets include reserves for insurance, environmental and
litigation contingencies of $10.6 million at both March 30, 2002 and December
29, 2001, respectively. There can be no assurance, however, that final costs
related to these matters will not exceed current estimates. We believe that any
additional liability relative to lawsuits and claims which may not be covered by
insurance would not likely have a material adverse effect on our financial
position, although it could potentially have a material impact on the results of
operations in any one year.
Regulations
We are subject to the rules and regulations of various federal, state and
local governmental agencies. Material rules and regulations and the applicable
agencies are:
o the Food and Drug Administration (FDA), which regulates food and feed
safety;
o the United States Department of Agriculture (USDA), which regulates
collection and production methods;
o the Environmental Protection Agency (EPA), which regulates air and
water discharge requirements, as well as local and state agencies
governing air and water discharge;
o state Departments of Agriculture, which regulate animal by-product
collection and transportation procedures and animal feed quality; and
o the United States Department of Transportation (USDOT), as well as
local and state agencies, which regulate the operation of our
commercial vehicles.
Such rules and regulations may influence our operating results at one or
more facilities.
Effective August, 1997, the FDA promulgated a rule prohibiting the use of
mammalian proteins, with some exceptions, in feeds for cattle, sheep and other
ruminant animals. The intent of this rule is to prevent the spread of BSE,
commonly referred to as "mad cow disease," should the disease ever occur in the
United States. Our management believes that we are in compliance with the
provisions of the rule.
32
OUR MANAGEMENT
Executive Officers and Directors
Our executive officers and directors, their ages and their positions as of
May 13, 2002, are as follows: Our executive officers serve at the discretion of
the Board of Directors.
Name Age Position
---- --- --------
Denis J. Taura 62 Chairman of the Board and Chief Executive
Officer
James A. Ransweiler 58 President and Chief Operating Officer
John O. Muse 53 Executive Vice President - Finance and
Administration
Neil Katchen 56 Executive Vice President - Operations
Mitchell Kilanowski 50 Executive Vice President - Marketing and
Research
Gilbert L. Guitierrez 45 Senior Vice President - Business Development
Joseph R. Weaver, Jr. 55 General Counsel and Secretary
Fredric J. Klink (1) (2) 68 Director
O. Thomas Albrecht (1) (2) 55 Director
Charles Macaluso (1) (2) 58 Director
Richard A. Peterson (1) (2) 60 Director
----------------
(1) Member of the audit committee
(2) Member of the compensation committee
Denis J. Taura has served as our Chairman of the Board and Chief Executive
Officer since August 1999 and devotes at least 60% of his business time to our
company. Mr. Taura is a partner in the management consulting firm Taura Flynn &
Associates, LLC. Previously, in October 1991, Mr. Taura founded D. Taura &
Associates, a management consulting firm and a predecessor of Taura Flynn and
Associates, LLC. Mr. Taura served as chairman of D. Taura & Associates. From
January 1995 through October 1996, Mr. Taura was also affiliated with Zolfo
Cooper LLC, a management consulting firm. From 1972 to October 1991, Mr. Taura
was a partner with KPMG LLP. Mr. Taura serves as a director of Kasper A.L.S.
Limited.
James A. Ransweiler has served as the President and Chief Operating Officer
of our company since August 1999. Mr. Ransweiler served as the President of
Darling Rendering from October 1997 to August 1999. From August 1986 to October
1997, he served as Vice President of our Eastern Region, except for the period
from January 1989 to February 1990 when he served as Special Projects
Coordinator.
John O. Muse has served as our Executive Vice President - Finance and
Administration since February 2000. From October 1997 to February 2000, he
served as our Vice President and Chief Financial Officer. From 1994 to October
1997 he served as Vice President and General Manager at Consolidated Nutrition,
L.C. Prior to serving at Consolidated Nutrition, Mr. Muse was Vice President of
Premiere Technologies, a wholly-owned subsidiary of Archer-Daniels-Midland
Company. Since August 1998, Mr. Muse has served on an advisory board for Factory
Mutual Insurance Company.
Neil Katchen has served as Executive Vice President - Operations since
November 2001. Prior thereto he served as Vice President of our Eastern Region
beginning in October 1997 and served as General Manager of our Newark, New
Jersey facility from January 1990 to October 1997.
33
Mitchell Kilanowski has served as our Executive Vice President - Marketing
and Research since January 1999. From September 1997 to January 1999 Mr.
Kilanowski served as our Vice President-Marketing. From August 1986 to September
1997 he served as Director of Domestic Sales. From March 1975 to August 1986 he
served in customer sales and service.
Gilbert L. Gutierrez has served as our Senior Vice President - Business
Development since November 2001. Prior thereto he served as General Manager of
our Los Angeles, California facility from June 1997 to November 2001. Prior to
serving as General Manager, he served as our Vice President - Human Resources.
Joseph R. Weaver, Jr. has served as our General Counsel since March 1997
and as our Secretary since April 1997. From May 1994 to March 1997, he served as
Secretary and General Counsel of AAF-McQuay, Inc. From January 1990 to April
1994, Mr. Weaver served as Assistant General Counsel of AAF-McQuay, Inc., then
known as Snyder General Corporation.
Fredric J. Klink has been a director of our company since April 1995. Since
December 31, 2001, Mr. Klink has been "of counsel" at the law firm of Dechert.
Prior thereto he was a partner at the law firm of Dechert for more than five
years. Mr. Klink's law practice concentrates on mergers and acquisitions,
securities, and international work. He received his LL.B. from Columbia Law
School in 1960.
O. Thomas Albrecht has been a director of our company since May 10, 2002.
Mr. Albrecht was employed by the McDonald's Corporation from 1977 until his
retirement in March 2001. Most recently, from 1995 until March 2001, Mr.
Albrecht served as a Senior Vice President and Chief Purchasing Officer of
McDonald's Corporation.
Charles Macaluso has been a director of our company since May 10, 2002. Mr.
Macaluso was a founding principal of East Ridge Consulting, Inc., a management
consulting and corporate advisory service firm focusing on operational
assessment, strategic planning and workouts, from 1998 to 2000. From 1996 to
1998, he was a partner at Miller Associates, Inc., a workout, turnaround
partnership focusing on operational assessment, strategic planning and workouts.
Mr. Macaluso is currently a director of Elder-Beerman Stores Corp. (NASDAQ:
EBSC), where he serves on the Executive Committee and the Audit and Finance
Committee, and formerly served on the Compensation Committee. Mr. Macaluso also
serves as a director of the following privately-held companies: NCH NuWorld Ltd.
(Chairman), Crescent Public Telephone, Inc. (Chairman), Prime Succession, Inc.
(Chairman), and Lazy Days RV Centers, Inc.
Richard A. Peterson has been a director of our company since May 10, 2002.
Mr. Peterson has been the managing principal of Peterson & Associates, a firm
specializing in financial restructuring and strategic advisory services to
management and directors of distressed companies, a firm he founded in April
2001. Prior thereto, Mr. Peterson was a senior vice president and regional
manager in the managed assets department of Bank One, NA, from April 1999 until
his retirement in April 2001. From the Fall of 1998 until April 1999, he was a
first vice president and regional manager in the managed assets department of
Bank One, N.A.; and he held the same position with Bank One, N.A.'s predecessor
First National Bank of Chicago, from 1995 until the Fall of 1998. He was
employed by First National Bank of Chicago from October 1981 to 1995 in various
capacities in the "workout and turnaround" group for large corporate credits.
Compensation of Directors
Non-employee members of the Board of Directors are paid a $25,000 annual
retainer. Each outside director receives $1,500 for each board meeting or $1,000
for each committee meeting personally attended, or $500 if a committee meeting
is attended before or after a board meeting, and $750 for each board or
committee meeting attended by telephone.
Under the Non-Employee Directors Stock Option Plan, prior to May 17, 2000,
each outside director was granted an option to purchase 15,000 shares of our
common stock on the tenth business day of July 1995 and was granted an identical
option on the tenth business day of July of each year thereafter. Each outside
director elected after July 1995 but prior to May 17, 2000, was granted an
option to purchase 21,000 shares of our common stock on the day he was first
elected by our stockholders as a member of the Board of Directors. Pursuant to
an amendment to the Non-Employee Directors Stock Option Plan adopted on May 17,
2000, each outside director elected on or after May 17, 2000 is granted options
to buy 4,000 shares of our common stock when he is first elected to the Board of
Directors by our stockholders. Thus, on May 10, 2002, each of Messrs. Albrecht,
Macaluso and Peterson, upon his election to our Board of Directors was granted
options to purchase 4,000 shares of our common stock. On the date of each
calendar year thereafter on which our independent auditors sign their annual
audit report, options to purchase 4,000 shares of our common stock are granted
under the Non-Employee Directors Stock Option Plan to
34
each of our directors, but such grants occur only if we obtain 90% of our target
EBITDA for our most recent completed fiscal year. The per share exercise price
of each option granted under the Non-Employee Directors Stock Option Plan is
equal to the fair market value per share of our common stock on the date of
grant of the options relating thereto. Twenty-five percent of the shares subject
to each option vest on the date that is six months following the date of grant
and 25% of the shares vest on each of the first, second and third anniversaries
of the date of grant thereafter. Options to purchase an aggregate of 450,000
shares of our common stock may be granted under the Non-Employee Directors Stock
Option Plan.
If while unexercised options remain outstanding under the Non-Employee
Directors Stock Option Plan, any of the following events occur, all options
granted under the Non-Employee Directors Stock Option Plan become exercisable in
full, whether or not they are otherwise exercisable:
o any entity other than us makes a tender or exchange offer for shares of
our common stock pursuant to which purchases are made,
o our stockholders approve a definitive agreement to merge or consolidate
our company with or into another corporation or to sell all or
substantially all of our assets or adopt a plan of liquidation,
o the beneficial ownership of securities representing more than 15% of
the combined voting power of our company is acquired by any person, or
o during any period of two consecutive years, the individuals who at the
start of such period were members of the Board of Directors cease to
constitute at least a majority thereof, unless the election of each new
director was approved by a vote of at least two-thirds of the directors
then still in office who were directors at the start of such period.
In the case of a merger where we are the surviving entity and in which
there is a reclassification of the shares of our common stock, each option shall
become exercisable for the kind and amount of shares of stock or other
securities receivable upon such reclassification or merger. Upon consummation of
the Recapitalization, all options granted under the Non-Employee Directors Stock
Option Plan became exercisable in full, whether or not they were otherwise
exercisable.
No options were granted under the Non-Employee Directors Stock Option Plan
during fiscal 2001 because we did not achieve 90% of our targeted EBITDA for the
fiscal year ended December 30, 2000.
Executive Compensation
The following table sets forth certain information with respect to annual
and long-term compensation for services in all capacities for fiscal years 2001,
2000 and 1999 paid to our five most highly compensated executive officers who
were serving as such at December 29, 2001.
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation
------------------- ------------
Number of
Securities
Name and Underlying All Other
Principal Position Year Salary Bonus Options Compensation
------------------ ---- ------ ----- ------- ------------
Denis J. Taura 2001 $ 700,000(1) -- -- --
Chairman and Chief Executive 2000 520,000(2) -- 1,080,000(5) $ 13,200(3)
Officer 1999 -- -- 15,000(6) 328,007(4)
James A. Ransweiler 2001 307,500 $30,000 90,000(7) --
President and Chief Operating 2000 300,000 -- --
Officer 1999 258,000 -- --
John O. Muse 2001 216,924 20,000 45,000(7) --
Executive Vice President - Finance 2000 197,693 -- -- --
and Administration 1999 185,000 -- -- --
35
Neil Katchen 2001 200,000 20,000 73,800(7) --
Executive Vice President - 2000 195,000 -- -- --
Operations 1999 178,460 -- -- --
Mitchell Kilanowski 2001 164,000 10,000 45,000(7) --
Executive Vice 2000 160,000 -- -- --
President -Marketing and Research 1999 160,000 3,333 5,000(8) --
---------------------
(1) Of this amount, $180,000 represents additional salary paid to Mr. Taura
as compensation for extensive additional time spent on company matters
during fiscal 2001. Mr. Taura's current salary for fiscal 2002 is
$520,000. Upon the consummation of the Recapitalization Agreement
effective as of May 10, 2002, Mr. Taura was retained as a consultant to
our company and the remaining portion of Mr. Taura's salary for 2002
will be paid to Taura Flynn & Associates, LLC, of which Mr. Taura is a
principal, for services to be provided to our company by Mr. Taura as
Chief Executive Officer pursuant to a consulting agreement. Mr. Taura's
entry into the consulting agreement was a condition precedent to the
consummation of the Recapitalization Agreement.
(2) Of this amount, $130,000 represents compensation paid to Taura Flynn &
Associates, LLC, of which Mr. Taura is a principal, for services
provided to our company by Mr. Taura as Chief Executive Officer
pursuant to a loan-out agreement. Effective March 15, 2000, Mr. Taura
became an employee of our company. Mr. Taura does not participate in
any of our employee benefit plans.
(3) $13,200 represents payments of management consulting fees and expenses
to Taura Flynn & Associates, LLC, of which Mr. Taura is a principal,
for services provided to us.
(4) Amount represents payments of management consulting fees and expenses
to Taura Flynn & Associates, LLC, of which Mr. Taura is a principal. Of
this amount, $148,007 represented fees and expenses during 1999 related
to management consulting services provided to us prior to Mr. Taura
serving as Chief Executive Officer and $180,000 was paid pursuant to a
loan-out agreement in connection with Mr. Taura serving as Chief
Executive Officer.
(5) Amount represents (i) options to purchase 540,000 shares of our common
stock granted March 15, 2000 and ratified by shareholders on May 17,
2000; and (ii) options granted on December 13, 2000 to purchase an
additional 540,000 shares of Common Stock.
(6) Pursuant to the Directors Plan on the tenth business day of July each
year, 15,000 options were granted to Mr. Taura as a non-employee
director prior to him serving as Chief Executive Officer.
(7) On May 16, 2001, our stockholders authorized the Board of Directors to
grant under the 1994 Plan on or after June 4, 2001 options to purchase
735,355 shares of our common stock at 100% of fair market value on such
date to key employees who surrendered an equal number of options on
December 1, 2000. On June 5, 2001, options to purchase 703,385 shares
of our common stock were issued to such key employees at $0.50 per
share.
(8) Mr. Kilanowski surrendered such options on December 1, 2001. See
footnote 7 above.
On October 29, 2001, Omar A. Dreiling, who had been our Vice President -
Western Region, resigned and the responsibility for our rendering operations was
reorganized. Mr. Katchen has been appointed Executive Vice President with
responsibility for all of our rendering plants. Effective January 1, 2002, the
salaries of Messrs. Ransweiler, Muse and Katchen were increased to $335,000,
$240,000 and $220,000, respectively.
Option Grants
On June 5, 2001, options under the 1994 Plan to purchase 90,000, 45,000,
73,800, and 45,000 shares of our common stock at $0.50 per share were issued to
Messrs. Ransweiler, Muse, Katchen and Kilanowski, respectively, each of whom
surrendered an equal number of options on December 1, 2000. See "--Stock Option
Plans--1994 Plan" below. No other options were granted by us to any of the
executive officers named in the summary compensation table above during the
fiscal year ended December 29, 2001.
36
Option Exercises and Year-End Options Values
The following table sets forth certain information with respect to options
exercised during the fiscal year ended December 29, 2001 by each of the
executive officers named in the summary compensation table above and the value
of unexercised options held by such executive officers at December 29, 2001:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
Options Exercised in Fiscal 2001 Number of Securities Underlying Value of Unexercised In-
Underlying Unexercised at the-Money Options at
Shares December 29, 2001 December 29, 2001
Acquired on Exercisable (E) Exercisable (E)
Exercise Value Realized Unexercisable (U) Unexercisable(U)(1)
---------------------------------------------------------------------------------------------
Denis J. Taura -- -- 1,202,250(E) $81,000 (E)
3,750(U) 0 (U)
James A. Ransweiler -- -- 182,832(E) 2,700 (E)
72,000(U) 10,800 (U)
John O. Muse -- -- 9,000(E) 1,350 (E)
36,000(U) 5,400 (U)
Neil Katchen -- -- 14,760(E) 2,214 (E)
59,040(U) 8,856 (U)
Mitchell Kilanowski -- -- 9,000(E) 1,350 (E)
36,000(U) 5,400 (U)
(1) Based on the difference between the closing price of our common stock on
December 29, 2001 ($0.650 per share) and the exercise price of the option.
Severance Agreements
We entered into severance agreements with Messrs. Taura, Ransweiler, Muse,
Dreiling, Katchen and Kilanowski which provide, subject to certain conditions,
for severance compensation equal to one year's compensation to the officer
(except that in Mr. Taura's case, severance compensation is equal to two years'
base compensation) in the event of a termination of the officer's employment
unless such termination is voluntary or based upon cause as defined in the
agreement. Mr. Dreiling's employment has terminated and he is receiving an
aggregate of $195,000 in severance payments, to be paid in monthly installments
commencing November 2001. The Recapitalization constituted a change of control
under the terms of Mr. Taura's severance agreement. Pursuant to an amendment to
the severance agreement that was entered into as a condition precedent to
closing of the Recapitalization, such payments will be payable in twenty-four
equal monthly installments, commencing on May 13, 2002; provided, that if any
time after that date (i) Mr. Taura ceases to be a member of our Board of
Directors, or (ii) a change of control occurs, all remaining payments under the
severance agreement will become immediately due and payable.
Stock Option Plans
1993 Plan. The Board of Directors has suspended the 1993 Plan and no
further options are to be issued under such plan. Officers and other key
employees of Darling were eligible to receive options under the 1993 Plan. In
December 1993, we granted options covering 1,483,500 shares of our common stock
to seven members of our management pursuant to the 1993 Plan. The exercise price
of these options is $2.857 per share. These options vested 20% on the date of
grant and vest 20% on each anniversary date thereof. All options under the 1993
Plan have fully vested. The options granted pursuant to the 1993 Plan are
intended to be incentive stock options to the maximum extent permissible under
the Internal Revenue Code of 1986, as amended and nonqualified stock options to
the extent not incentive stock options. 184,066 of the shares covered by these
options were transferred to the 1994 Plan prior to the three-for-one stock
split, pursuant to shareholder approval at the annual meeting of stockholders
held May 20, 1997.
1994 Plan. Our compensation committee may grant options under the 1994 Plan
to officers and other key employees of Darling. The purpose of the 1994 Plan is
to attract, retain and motivate officers and key employees, and to encourage
them to have a financial interest in our company. In 1994, 500,000 options, each
to buy one share of our common stock, were authorized for the 1994 Plan and
pursuant to stockholder approval at the annual meeting of stockholder held May
20, 1997, 184,066 options forfeited or canceled under the 1993 Plan were
authorized as additional options available for grant under the 1994 Plan.
Therefore, after the effect of the three-for-one stock split, a total of
2,052,198 options were authorized to be granted under the 1994 Plan. Pursuant to
stockholder approval at the annual meeting of stockholders held May 27, 1998,
500,000 additional options were authorized for the 1994 Plan bringing the total
authorized to be granted under the 1994 Plan to 2,552,198 options. Pursuant to
stockholder
37
approval at the annual meeting of stockholders held May 17, 2000, the number of
authorized shares under the 1994 Plan were reduced from 2,552,198 to 20% on
2,012,198 shares. Options granted pursuant to the 1994 Plan typically vest the
date of grant and 20% on each anniversary date thereof. Pursuant to the
acceleration provisions of the 1994 Plan relating to change of control, upon
consummation of the Recapitalization, all options granted under the 1994 Plan
became exercisable in full, whether or not they were otherwise exercisable,
except that the options granted on June 5, 2001, as described below, did not
accelerate upon consummation of the Recapitalization.
Under the 1994 Plan, stock options are awarded based on an individual's
level of responsibility within his or her area, such individual's executive
development potential and competitive market norms. Options granted under the
1994 Plan are granted at 100% of the fair market value of the stock on the date
of grant. During fiscal 2001, 703,385 options were granted under the 1994 Plan.
On May 16, 2001, our stockholders authorized the Board of Directors to
grant under the 1994 Plan on or after June 4, 2001 options to purchase 735,355
shares of our common stock at 100% of fair market value on such date to key
employees who surrendered an equal number of options on December 1, 2000. On
June 5, 2001, options to purchase 703,385 shares of our common stock were issued
to such key employees at $0.50 per share.
Non-Employee Directors Stock Option Plan. For a description of the
Non-Employee Directors Stock Option Plan, see the disclosure set forth above
under "--Compensation of Directors."
Annual Incentive Plan
Our annual incentive plan is administered by our compensation committee and
provides incentive cash bonuses to corporate and regional executives. In 2001,
the annual incentive plan was tied to plan components comprised of actual levels
achieved for EBITDA, collection/service charge revenue, operating expenses,
safety goals, raw material procurement and individual initiatives. Incentive
earned under each component is calculated independently of the other components
and is expressed in terms of a percentage of base salary.
Pension Plan Table
The following table illustrates the approximate annual pension that the
executive officers named in the summary compensation table above (other than Mr.
Taura) would receive under the Salaried Employee's Retirement Plan if the plan
remains in effect and such executive officers retired at age 65. However,
because of changes in the tax laws or future adjustments to benefit plan
provisions, actual pension benefits could differ significantly from the amounts
set forth in the table.
Estimated Annual Pension
------------------------------------------------
(Years of Service)
Average Annual Salary
During the Last 5 Years 15 20 25 30 35
---------------------------------------------------------------------------
$150,000 $40,500 $54,000 $67,500 $71,250 $75,000
175,000 47,250 63,000 78,750 83,125 87,500
200,000 54,000 72,000 90,000 95,000 100,000
235,840 63,677 84,902 106,128 112,024 117,920
The above amounts do not reflect the compensation limitations for plans
qualified under the Internal Revenue Code, effective January 1, 1994. Effective
January 1, 2000, annual compensation in excess of $170,000 ($235,840 for 1993)
is not taken into account when calculating benefits under the Retirement Plan.
Such limitation will not, however, operate to reduce plan benefits accrued as of
December 31, 1993.
If the executive officers named in the summary compensation table above
(other than Mr. Taura) remain employees of our company until they reach age 65,
the years of credited service for Messrs. Ransweiler, Muse, Katchen and
Kilanowski will be as follows: Ransweiler, 24 years; Muse, 16 years; Katchen, 40
years; and Kilanowski, 40 years.
The Retirement Plan is a non-contributory defined benefit plan. Office and
supervisory employees, not covered under another plan, automatically become
participants in the plan on the earlier of January 1 or July 1 following
completion of 1,000 hours of service in a consecutive twelve-month period. Upon
meeting the eligibility requirement, employees are recognized as a participant
from the date of commencement of their service with our company. Eligible
employees become fully vested in their benefits after completing five years of
service. Benefits
38
under the plan are calculated on "average monthly pay" based upon the highest 60
consecutive months of the latest 120 months (and subject to the limitations
discussed above) and the years of service completed.
The basic pension benefit is equal to 45% of the employee's average monthly
pay, reduced proportionally for years of service less than 25 years. The
multiple is increased 0.5% per year for years of service in excess of 25 years
to a maximum of 15 additional years.
39
REPORT OF THE COMPENSATION COMMITTEE
The following report of the compensation committee and the performance
graph that appears immediately after such report shall not be deemed to be
soliciting material or to be filed with the Securities and Exchange Commission
under the Securities Act of 1933 or the Securities Exchange Act of 1934 or
incorporated by reference in any document so filed.
Our executive compensation program is designed to attract, motivate, reward
and retain the executive officers needed to achieve our business objectives, to
increase our profitability and to provide value to our stockholders. The program
has been structured and implemented to provide competitive compensation
opportunities and various incentive awards based on company and individual
performance. Our executive compensation program is composed of three principal
components: base salary, short term incentive awards and long term incentive
awards.
Base Salaries
The base salaries of the executive officers of our company are set forth in
the summary compensation table located above. The base salary of Mr. Taura was
established and reviewed by the compensation committee. Executive positions are
grouped by grades which are part of our company's overall salary structure. The
base salaries of senior executives, except those established by employment
agreements, are reviewed to determine if adjustment is necessary based on
competitive practices and economic conditions. Salaries are adjusted within
grade ranges based on individual performance and changes in job content and
responsibilities.
Short Term Incentive Awards
The short-term program, or Annual Incentive Plan, consists of an
opportunity for the award of an annual incentive cash bonus in addition to the
payment of base salary. In 2001, our Annual Incentive Plan for corporate and
division executives was tied to plan components comprised of actual levels
achieved for EBITDA, collection/service charge revenue, operating expenses,
safety goals, raw material procurement and individual initiatives. Incentive
earned under each component is calculated independently of the other components
and is expressed in terms of a percentage of base salary.
In fiscal 2001, our company met the predetermined threshold established for
the payment of cash incentive awards to all employees participating in the
Annual Incentive Plan. Under the Annual Incentive Plan, senior executives are
entitled to receive annual bonuses of up to 60% of their base salaries.
Long Term Incentive Awards
In connection with a financial restructuring of our company consummated in
December 1993, long term incentive awards in the form of stock options were
granted to certain of our executive officers under the 1993 Plan. In Fiscal
1997, the Board of Directors suspended the 1993 Plan and no further options are
to be issued under such plan.
Under the 1994 Plan, stock options are awarded based on an individual's
level of responsibility within his or her area, such individual's executive
development potential and competitive market norms. Options granted under the
1994 Plan are granted at 100% of the fair market value of the stock on the date
of grant.
March 14, 2002
Fredric J. Klink
Dennis B. Longmire *
Bruce Waterfall *
* Mr. Longmire and Mr. Waterfall did not stand for re-election to our Board
of Directors at our 2002 annual meeting of stockholders held on May 10,
2002. Effective May 10, 2002, our compensation committee consists of
Messrs. Klink (Chairman), Albrecht, Macaluso and Peterson.
40
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended requires
our directors and executive officers and any persons who own more than ten
percent of our common stock to file with the Securities and Exchange Commission
various reports as to ownership of such common stock. Such persons are required
by Securities and Exchange Commission regulation to furnish us with copies of
all Section 16(a) forms they file. To our knowledge, based solely on our review
of the copies of such reports furnished to us, the aforesaid Section 16(a)
filing requirements were met on a timely basis during 2001.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Taura has served as our Chairman of the Board and Chief Executive
Officer since August 1999. Mr. Taura is a partner in the management consulting
firm Taura Flynn & Associates, LLC. Prior to Mr. Taura becoming our employee, he
served as our Chairman of the Board and Chief Executive Officer pursuant to an
agreement between Taura, Flynn & Associates and us. Pursuant to such agreement,
we paid Taura, Flynn and Associates $130,000 during Fiscal 2000. Upon
consummation of the Recapitalization Agreement effective as of May 10, 2002, Mr.
Taura was retained as a consultant to serve as our Chairman and Chief Executive
Officer pursuant to an agreement between Taura, Flynn & Associates and us.
Instead of paying Mr. Taura as a salaried employee during the remainder of 2002,
we are paying Taura, Flynn & Associates an equivalent amount for his services.
Fredric J. Klink, one of our directors, was a partner in the law firm of
Dechert until December 31, 2001 when he became "of counsel" at Dechert. We pay
Dechert fees for the performance of various legal services.
41
PERFORMANCE GRAPH
Set forth below is a line graph comparing the change in the cumulative
total stockholder return on our company's common stock with the cumulative total
return of the Nasdaq Stock Market - U.S. Index, the Dow Jones Industrial
Pollution Control/Waste Management Index, and the CSFB-Nelson Agribusiness Index
for the period from December 28, 1996 to December 29, 2001, assuming the
investment of $100 on December 28, 1996 and the reinvestment of dividends.
The stock price performance shown on the graph only reflects the change
in our company's stock price relative to the noted indices and is not
necessarily indicative of future price performance.
COMPARISON OF CUMULATIVE TOTAL RETURN
DARLING COMMON STOCK
NASDAQ STOCK MARKET- U.S.
DOW JONES INDUSTRIAL POLLUTION CONTROL/WASTE MANAGEMENT INDEX
CSFB-NELSON AGRIBUSINESS INDEX
[GRAPH OMITTED]
----------------------------------- --------------- ------------- ------------- ------------ -------------- ------------
Dec. 28, Jan. 3, Jan. 2, Jan. 1, Dec. 30, Dec. 29,
1996 1998 1999 2000 2000 2001
----------------------------------- --------------- ------------- ------------- ------------ -------------- ------------
Darling International Inc. 100 88 32 22 1 2
----------------------------------- --------------- ------------- ------------- ------------ -------------- ------------
Dow Jones Industrial Pollution
Control/Waste Management Index 100 109 114 63 89 102
----------------------------------- --------------- ------------- ------------- ------------ -------------- ------------
CSFB - Agribusiness Index 100 124 128 108 131 158
----------------------------------- --------------- ------------- ------------- ------------ -------------- ------------
NASDAQ Stock Market - US 100 123 173 321 193 152
----------------------------------- --------------- ------------- ------------- ------------ -------------- ------------
Our common stock first became eligible for trading on the Nasdaq Stock
Market on September 8, 1994. On September 12, 1997, our common stock began
trading on the American Stock Exchange and ceased trading on the Nasdaq Stock
Market.
42
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners
The following table and notes set forth certain information with
respect to the beneficial ownership of shares of our common stock, as of May 13,
2002, by each person or group within the meaning of Rule 13d-3 under the
Exchange Act who is known to our management to be the beneficial owner of more
than five percent of our outstanding common stock and is based upon information
provided to us by such persons.
Amount and
Nature of
Beneficial Percent
Name and Address of Beneficial Owner Ownership (1) of Class
------------------------------------ ------------- --------
Phoenix Partners.......................................... 260,940 *
Betje Partners............................................ 91,152 *
Phaeton B.V.I............................................. 182,349 *
Morgens Waterfall Income Partners......................... 233,187 *
Morgens, Waterfall, Vintiadis & Company, Inc.............. 273,501 (2) *
Restart Partners L.P...................................... 884,193 1.4%
Restart Partners II, L.P.................................. 1,746,980 2.8%
Restart Partners III, L.P................................. 1,445,937 2.3%
Restart Partners IV, L.P.................................. 900,369 1.5%
Restart Partners V, L.P................................... 150,000 *
MWV Employee Retirement Plan Group Trust.................. 96,619 *
Endowment Restart, L.L.C.................................. 1,266,775 2.0%
Edwin H. Morgens.......................................... 7,161,882 (3) 11.5%
Bruce Waterfall .......................................... 7,261,882 (4) 11.6%
(collectively, the "Morgens, Waterfall Group")
Morgens, Waterfall Group (5).............................. 7,358,501 (6) 11.8%
Credit Lyonnais New York Branch (7)....................... 4,359,141 7.0%
Daple, S.A./PPM America Special Investments CBO II, L.P./
PPM America Special Investments Fund, L.P. (8)........ 17,902,607 28.8%
Bank One N.A. (9)......................................... 6,434,923 10.3%
Credit Agricole Indosuez (10)............................. 2,075,782 3.3%
Wells Fargo Bank (Texas) National Association (11)........ 363 *
Ark CLO 2000-1, Limited (12).............................. 1,037,891 1.7%
Cerberus Partners, L.P. (13).............................. 8,355,849 13.4%
Avenue Special Situations Fund II L.P. (14)............... 6,538,530 10.5%
(collectively, the "Lenders")
The Lenders (15) 46,705,086 75.0%
------------------------------
* Less than 1%
(1) Except as otherwise indicated in footnotes 2, 3, 4 and 6, the entities
named in this table have sole voting and investment power with respect to
all shares of capital stock shown as beneficially owned by them.
(2) Morgens Waterfall Vintiadis & Company, Inc. does not directly own any of
the common stock or options described in footnote 6 but may be deemed to
indirectly beneficially own 273,501 shares of our common stock, assuming
exercise of the options, by virtue of contracts with Phaeton B.V.I. and
Betje Partners pursuant to which Morgens Waterfall Vintiadis & Company,
Inc. provides investment advisory services.
(3) Edwin H. Morgens does not have direct beneficial ownership of the common
stock or options described in footnote 5. Mr. Morgens may be deemed to
indirectly beneficially own 7,161,882 shares of our common stock, assuming
exercise of the options described in the second to last sentence of
footnote 6, by virtue of his positions as managing member of each of MW
Management, L.L.C., MW Capital, L.L.C. and Endowment Prime, L.L.C., as
general partners of Phoenix Partners and Morgens Waterfall Income Partners
and managing member of Endowment Restart, L.L.C., respectively; as Chairman
of the Board of Directors and Secretary of Morgens Waterfall Vintiadis &
Company, Inc.; as Chairman of the Board of Directors and Secretary of
Prime, Inc., as general partner of each of Prime Group, L.P., Prime Group
II, L.P., Prime Group III, L.P., Prime Group IV, L.P. and Prime Group V,
L.P., as general partners of Restart Partners L.P., Restart Partners II,
L.P., Restart Partners III, L.P., Restart Partners IV, L.P. and Restart
Partners V, L.P., respectively.
43
(4) Bruce Waterfall has direct beneficial ownership of options for 100,000
shares, all of which are presently exercisable. He may be deemed to
indirectly beneficially own 7,161,882 shares of our common stock, assuming
exercise of the options described in the last sentence of footnote 6, by
virtue of his positions as managing member of each of MW Management,
L.L.C., MW Capital, L.L.C. and Endowment Prime, L.L.C., as general partners
of Phoenix Partners and Morgens Waterfall Income Partners and managing
member of Endowment Restart, L.L.C., respectively; as President, Assistant
Secretary and a Director of Morgens Waterfall Vintiadis & Company, Inc.; as
President and a Director of Prime, Inc. as general partner of each of Prime
Group, L.P., Prime Group II, L.P., Prime Group III, L.P., Prime Group IV,
L.P. and Prime Group V, L.P., as general partners of Restart Partners L.P.,
Restart Partners II, L.P., Restart Partners III, L.P., Restart Partners IV,
L.P. and Restart Partners V, L.P., respectively.
(5) The address for each member of the Morgens, Waterfall Group is 10 East 50th
Street, New York, New York 10281.
(6) Includes options, which are immediately exercisable, in the following
amounts for each entity: Phoenix Partners (6,498 options); Betje Partners
(2,322 options); Phaeton B.V.I. (4,620 options); Morgens Waterfall Income
Partners (7,014 options); Restart Partners L.P. (26,603 options); Restart
Partners II, L.P. (52,562 options); Restart Partners III, L.P. (43,500
options); Restart Partners IV, L.P. (27,087 options); MWV Employee
Retirement Plan Group Trust (1,680 options); Endowment Restart, L.L.C.
(38,114 options), Edwin H. Morgens may be deemed to have indirect
beneficial ownership of 208,320 options. Bruce Waterfall has direct
beneficial ownership of 100,000 options, all of which are presently
exercisable, and may be deemed to have indirect beneficial ownership of an
additional 208,320 options.
(7) The address for Credit Lyonnais New York Branch is 1301 Avenue of the
Americas, New York, NY 10019.
(8) PPM America Special Investments Fund, L.P. ("SIF I") and PPM America
Special Investments CBO II, L.P. ("CBO II") are each investment funds.
Daple, S.A. ("Daple") is a special purpose entity formed for the purpose of
investing, which invests on a pro rata basis with each of SIF I and CBO II.
PPM America Fund Management GP, Inc. ("SIF I GP") serves as the managing
general partner of SIF I. PPM America CBO II Management Company ("CBO II
GP") serves as the general partner of CBO II. PPM MGP (Bermuda), Ltd. ("PPM
Bermuda") serves as the general partner of CBO II GP. PPM America, Inc.
("PPM America") serves as investment manager/adviser to each of SIF I and
CBO II. PPM America also serves as the investment adviser to Daple and PPM
Bermuda serves as the special investment manager to Daple. Each of SIF I
GP, CBO II GP, PPM Bermuda and PPM America are subsidiaries of PPM
Holdings, Inc. ("Holdings"). The address for SIF I, SIF I GP, CBO II, and
CBO II GP is 225 West Wacker Drive, Suite 975, Chicago, Illinois 60606, the
address for PPM America is 225 West Wacker Drive, Suite 1200, Chicago,
Illinois 60606, and the address for PPM Bermuda is Clarendon House, 2
Church Street, Hamilton HM11, Bermuda. Each of SIF I, SIF I GP, CBO II, CBO
II GP, PPM America and Holdings is organized under the laws of the State of
Delaware. PPM Bermuda is organized under the laws of Bermuda. Daple is a
company incorporated with limited liability under the laws of Luxembourg.
For purposes of determining beneficial ownership of shares of common stock
pursuant to Rule 13d-3 promulgated under the Securities Exchange Act of
1934, as amended, (i) SIF I is the legal and beneficial owner of 10,522,770
shares of common stock (the "SIF I Securities") and none of the SIF I
Securities are owned directly or indirectly by SIF I GP, PPM America or
Holdings, (ii) CBO II is the legal and beneficial owner of 6,659,897 shares
of common stock (the "CBO II Securities") and none of the CBO II Securities
are owned directly or indirectly by CBO II GP, PPM Bermuda, PPM America or
Holdings, and (iii) PPM America and PPM Bermuda are the beneficial owners
of 719,940 shares of common stock registered in the name of Daple (the
"Daple Securities") due to the fact that Daple has delegated all of its
power to vote and to acquire and dispose of the Daple Securities to PPM
America and PPM Bermuda. SIF I, SIF I GP, PPM America and Holdings may be
deemed to share voting and investment power with respect to the SIF I
Securities, CBO II, CBO II GP, PPM Bermuda, PPM America and Holdings may be
deemed to share voting and investment power with respect to the CBO II
Securities, PPM America and PPM Bermuda share, and Holdings may be deemed
to share, voting and investment power with respect to the Daple Securities.
SIF I GP, PPM America and Holdings disclaim beneficial ownership of the SIF
I Securities and CBO II GP, PPM Bermuda PPM America and Holdings disclaim
beneficial ownership of the CBO II Securities. Holdings disclaims
beneficial ownership of the Daple Securities.
(9) The address for Bank One N.A. is 1 Bank One Plaza, Chicago, IL 60670.
(10) The address for Credit Agricole Indosuez is 666 Third Avenue, New York, NY
10017.
(11) The address for Wells Fargo Bank (Texas) National Association is 1000
Louisiana, 4th Floor, Houston, TX 77002.
44
(12) Patriarch Partners, LLC, as Collateral Manager of Ark CLO 2000-1, Limited,
has the power to direct the voting and disposition of the common stock and
Series A Preferred Stock of Darling owned by Ark CLO 2000-1, Limited, and
Lynn Tilton and Dennis Dolan, as the Managers of Patriarch Partners, LLC,
also have the power to direct the voting and disposition of such shares.
The address for Ark CLO 2000-1, Limited is Ark CLO 2000-1, Limited c/o
JPMorgan Chase Bank, 600 Travis Street, 50th Floor, Houston, TX 77002.
(13) Based on information in a Schedule 13D filed by Stephen Feinberg on May 22,
2002, Mr. Feinberg possesses the sole power to vote and direct the
disposition of all 8,355,849 shares of common stock of Darling held by
Cerberus Partners, L.P. and thus may be deemed to beneficially own such
shares. The address for Cerberus Partners, L.P. is 450 Park Avenue, 28th
Floor, New York, NY 10022.
(14) The address for Avenue Special Situations Fund II L.P. is 535 Madison
Avenue, 15th Floor, New York, NY 10022.
(15) Pursuant to the Recapitalization, the Lenders, acquired in the aggregate
75% of our common stock. We have been advised, however, that the Lenders do
not have and do not expect to have any contracts, arrangements or
understandings to vote as a group for the election of directors or on any
other issue or to hold or dispose of their common stock or Series A
Preferred Stock.
Security Ownership of Management
The following table and notes set forth certain information with
respect to the beneficial ownership of shares of our common stock, as of May 13,
2002, by each director, each executive officer and by all executive officers and
directors as a group:
Former Common Stock Percent of
Common Class A Unexercised Beneficially Common
Name of Individual Stock Owned Options (1) Plan Options (2) Owned (3) Stock Owned
------------------ ----------- ----------- ---------------- ------------ -----------
Denis J. Taura (4) 30,000 30,000 1,176,000 1,236,000 2.0%
Fredric J. Klink 90,000 0 100,000 190,000 *
O. Thomas Albrecht 0 0 0 0 *
Charles Macaluso 0 0 0 0 *
Richard A. Peterson 0 0 0 0 *
James A. Ransweiler 5,000 0 200,832 205,832 *
Joseph R. Weaver, Jr. 0 0 14,040 14,040 *
John O. Muse 7,500 0 18,000 25,500 *
Neil Katchen 5,000 0 29,520 34,520 *
Mitch Kilanowski 3,500 0 18,000 21,500 *
Gilbert L. Gutierrez 1,300 0 9,120 10,420 *
All executive officers and directors
as a group (11 persons) 142,300 30,000 1,565,512 1,737,812 2.7%
------------------
* Represents less than one percent of our common stock outstanding.
(1) These Class A options were canceled and the numbers represent options to
purchase shares of our common stock.
(2) Represents options that are or will be vested and exercisable within 60
days of May 13, 2002.
(3) Except as otherwise indicated in the columns "Former Class A Options" and
footnote 1 and "Unexercised Plan Options" and footnote 2 and in footnote 4,
the persons named in this table have sole voting and investment power with
respect to all shares of capital stock shown as beneficially owned by them.
(4) "Common Stock Beneficially Owned" includes 540,000 options granted to Mr.
Taura on March 15, 2000 and an additional 540,000 options granted to Mr.
Taura on December 13, 2000.
45
DESCRIPTION OF SENIOR CREDIT AGREEMENT
The Senior Credit Agreement
On May 13, 2002, the new amended and restated credit agreement was
consummated and provides for a total of $17.3 million of borrowing capacity
under a revolving credit facility and $61.0 million of borrowings through a term
loan plus allows us to continue to have our existing letters of credit
outstanding until its expiration date. In connection with the Recapitalization,
$55.4 million principal amount of loans under our previous credit facility
(together with $5.3 million of accrued and unpaid interest and commitment fees
payable under our previous credit facility and the $3,855,000 forbearance fee
payable under a forbearance agreement) were cancelled. In consideration for such
cancellation we issued to the lenders 46,705,086 shares of our common stock and
100,000 shares of Series A Preferred Stock. See "Recapitalization" for a summary
description of the terms of the Recapitalization.
Terms of the Revolving Credit Facility
Our senior credit agreement includes a revolving credit facility for
loans and letters of credit in the amount of $17.3 million, of which $0.4
million of loans and three letters of credit in the face amounts of $750,000,
$2.35 million and $7.2 million, respectively, are issued and outstanding.
Maturity. Borrowings under the revolving credit facility, together will
all accrued and unpaid interest on borrowings under the revolving credit
facility, will mature on May 10, 2007. The revolving credit facility may not be
cancelled or terminated by us unless the term loan has been or will be
contemporaneously repaid in full.
Ranking. The revolving credit facility will share a first priority lien
with the term loan on substantially all of our assets (subject only to certain
permitted liens); provided, however, that all obligations and indebtedness under
the revolving credit facility will be repaid prior to those under the term loan
in the application of any payments received after the occurrence and during the
continuance of an event of default under our senior credit agreement.
Interest; Fees. Interest will accrue on borrowings under the revolving
credit facility at our election at either (i) 30, 60, or 90 day LIBOR plus 5.0%
per annum, payable on the last day of each such LIBOR interest period, or (ii)
Credit Lyonnais New York Branch's Prime Rate plus two percent 2.0% per annum,
floating with an unused commitment fee of 0.50% per annum and a facility fee of
1.50% per annum, with such prime rate interest, unused commitment fees and
facility fees being payable quarterly on the last day of the third full calendar
month occurring after May 10, 2002 and the last day of each third month
thereafter and on the maturity date. As of May 13, 2002, the interest rate
payable on borrowings under the revolving credit facility was 6.75% per annum
(Credit Lyonnais New York Branch's prime rate plus 2%).
Letter of credit fees payable to the lenders are 3% per annum on the
face amount of each letter of credit outstanding, payable on quarterly payment
dates in arrears plus a 0.125% per annum "fronting fee" paid to Credit Lyonnais
New York Branch as Agent (for its own account) as issuer of such letter of
credit.
Conversion. Borrowings under the revolving credit facility will not be
convertible into our capital stock.
Terms of the Term Loan
Our senior credit agreement includes a term loan in the principal
amount of $61.0 million.
Maturity; Payment of Principal and Other Amounts. The term loan,
together will all accrued and unpaid interest on the term loan, will mature on
May 10, 2007.
The principal balance of the term loan is required to be repaid in
installments due quarterly on the last day of each third full calendar month
occurring after May 10, 2002: (i) $300,000 will be due on each of the first
eight quarterly payment dates, and (ii) $1,200,000 will be due on each quarterly
payment date thereafter, with a final payment in the amount of the entire
remaining principal balance and all accrued and unpaid interest thereon being
due and payable on the maturity date. In addition, to the regularly scheduled
principal and interest payments, we will make additional payments on the term
loan to the extent of (i) 25% for 2002, (ii) 35% for 2003, and (iii) 50% for
each year thereafter of excess cash flow (defined generally as EBITDA, less
scheduled principal and interest payments on the revolving credit facility and
the Term Loan and permitted capital leases, plus or minus as applicable, any
changes in adjusted working capital, less cash taxes paid, less any required
payments made under
46
non-compete agreements, less permitted capital expenditures up to $10,800,000
for 2002 (increasing by 5% per year thereafter)), which shall be calculated and
due annually, such payments to be applied in inverse order of maturity.
Ranking.
The term loan shares a first priority lien with the revolving credit
facility on substantially all of our assets (with the exception that all
obligations and indebtedness under the revolving credit facility will be repaid
prior to those under the term loan in the application of any payments received
after the occurrence and during the continuance of an event of default under our
senior credit agreement).
Interest. The term loan bears interest at our election at either (i)
30, 60, or 90 day LIBOR plus 5.0% per annum, payable on the last day of each
such LIBOR interest period, or (ii) the Credit Lyonnais New York Branch's prime
rate plus 2.0% per annum, floating, payable quarterly and on the maturity date.
As of May 13, 2002, the interest rate payable on the term loan was 6.75% per
annum.
Conversion. Borrowings under the term loan are not be convertible into
our capital stock.
47
DESCRIPTION OF CAPITAL STOCK
General
Our authorized capital stock consists of 100 million shares of common
stock, par value $0.01 per share, and one million shares of preferred stock, par
value $0.01 per share, on a pro forma basis after giving effect to the
recapitalization of our company described under the section "Recapitalization."
The following description of our capital stock is a summary of the
material terms of such capital stock. The description does not purport to be
complete and is subject to and qualified in its entirety by reference to our
restated certificate of incorporation, as amended, and amended and restated
bylaws, as amended, and to applicable Delaware law.
Common Stock
As of June 3, 2002, there were 62,273,448 shares of our common stock
issued and outstanding and 100,000 shares of Series A Preferred Stock issued and
outstanding. 3,727,538 shares of common stock have been reserved for issuance
under our stock option plans.
The holders of our common stock are entitled to dividends as our Board
of Directors may declare from funds legally available therefor, subject to the
preferential rights of the holders of our preferred stock, including our Series
A Preferred Stock. The holders of our common stock are entitled to one vote per
share on any matter to be voted upon by shareholders. In connection with the
Recapitalization, the lenders under our senior credit agreement, the holders of
46,705,086 shares of our common stock, were granted preemptive rights to
subscribe for shares of our common stock issued in the future. No other holder
of our common stock has any preemptive right to subscribe for any shares of
capital stock issued in the future.
Upon any voluntary or involuntary liquidation, dissolution, or winding
up of our affairs, the holders of our common stock are entitled to share ratably
in all assets remaining after payment of creditors and subject to prior
distribution rights of our preferred stock, if any. All of the outstanding
shares of our common stock are fully paid and non-assessable.
Preferred Stock
Our restated certificate of incorporation, as amended, provides that
our Board of Directors may by resolution issue preferred stock in one or more
classes or series and fix the designations, powers, preferences and rights of
the shares of each class or series, including dividend rates, conversion rights,
voting rights, terms of redemption and liquidation preference and the number of
shares constituting each class or series.
Series A Preferred Stock
In connection with the Recapitalization, our Board of Directors
authorized the issuance of 100,000 shares of Series A Preferred Stock to the
Lenders. The Series A Preferred Stock ranks senior (with respect to liquidation
payments) to our common stock and any preferred stock we issue in the future
unless otherwise approved by the holders of 66 2/3 of the outstanding shares of
the Series A Preferred Stock.
The complete text of the proposed Certificate of Designation
establishing the rights and preferences of the Series A Preferred Stock is
attached as Annex A to the Definitive Proxy Statement we filed with the SEC on
April 29, 2002. We urge you to read the Certificate of Designation in its
entirety.
Dividends. Dividends on the Series A Preferred Stock accumulates at a
rate of 6% per annum on the original issue price of $100 per share. Dividends on
the Series A Preferred Stock are cumulative from the issue date, whether or not
declared, and accrue semi-annually and may be either paid in cash or
accumulated, at our election. If accumulated, the dividends will be added to the
original issue price, and dividends will thereafter accrue on the original issue
price as so adjusted. Our senior credit agreement, however, prohibits us from
paying dividends in cash so long as any indebtedness or commitments remain
outstanding under the revolving credit facility or the term loan.
Liquidation Preference. Upon any liquidation, dissolution or winding up
of our company, each holder of Series A Preferred Stock will be entitled to be
paid, before any distribution or payment is made to the holders of our common
stock, the sum of the original issue price of $100 per share plus accumulated
dividends and accrued and unpaid dividends not yet accumulated. We are
prohibited from issuing any other preferred stock with a liquidation preference
equal to or greater than the Series A Preferred Stock.
48
Conversion Rights. The Series A Preferred Stock will not be
convertible.
Mandatory Redemption. The Series A Preferred Stock will be mandatorily
redeemable upon the earliest to occur of:
o a change of control of our company,
o a sale of all or substantially all of our consolidated assets,
o a dissolution or liquidation of our company, and
o May 10, 2007
to the extent we have legally available funds, at a redemption price equal to
the aggregate original issue price of the shares to be redeemed, plus
accumulated dividends and accrued and unpaid dividends not yet accumulated to
the date of redemption.
This represents a significant future liability. We cannot assure you,
however, that our business will generate sufficient cash flow from operations or
that future borrowings will be available to us under our senior credit agreement
in an amount sufficient to enable us to redeem the Series A Preferred Stock when
required to do so.
For purposes of the mandatory redemption provisions of the Series A
Preferred Stock, a change of control shall be deemed to occur when:
o any "person" (as such term is used in Section 13(d) of the
Securities Exchange Act of 1934, as amended), other than the
Lenders and their respective affiliates, individually or as a
group, becomes a "beneficial owner" (as such term is defined in
Rule 13d-3 and Rule 13d-5 under the Exchange Act), directly or
indirectly, of more than 50% of the total voting power of our
outstanding capital stock,
o the first day on which a majority of the members of our Board of
Directors are not "continuing directors" (defined as any member
who (i) was a member of the Board of Directors on the date of
issuance of the Series A Preferred Stock, (ii) was nominated for
election by the Lenders in accordance with the Recapitalization
Agreement, or (iii) was nominated or elected by a majority of the
continuing directors who were members at the time of such
nomination or election), or
o our company consolidates with, or merges with or into, any person
or entity or any person or entity consolidates with, or merges
with or into, our company, pursuant to a transaction in which any
of our outstanding voting capital stock is converted into or
exchanged for cash, securities or other property.
Optional Redemption. Subject to the prior payment in full of all
indebtedness outstanding under our senior credit agreement, we may redeem shares
of Series A Preferred Stock in multiples of not less than $1 million at any
time, upon 30 days notice, at a redemption price equal to the aggregate
liquidation preference of the shares to be redeemed, plus accumulated dividends
and accrued and unpaid dividends not yet accumulated to the date of redemption.
If less than all shares of Series A Preferred Stock are to be redeemed, they are
required to be redeemed pro-rata based on the number of shares of Series A
Preferred Stock owned.
Voting Rights. Except as required by the Delaware General Corporation
Law, the Series A Preferred Stock will be non-voting.
Section 203 of the Delaware General Corporation Law; Certain
Anti-Takeover, Limited Liability and Indemnification Provisions
Section 203 of the Delaware General Corporation Law
The following is a description of certain provisions of the Delaware
General Corporation Law, and our restated certificate of incorporation, as
amended, and amended and restated bylaws, as amended. This summary does not
purport to be complete and is qualified in its entirety by reference to the
Delaware General Corporation Law, and our restated certificate of incorporation,
as amended, and amended and restated bylaws, as amended.
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. Section 203 of the Delaware General Corporation Law prohibits a
publicly held Delaware corporation from engaging in a "business combination"
with an "interested shareholder" for a period of three years after the date of
the transaction in which the person became an "interested shareholder," unless
the business combination is approved in a prescribed manner.
49
A "business combination" includes certain mergers, asset sales, and other
transactions resulting in a financial benefit to the "interested shareholder."
Subject to certain exceptions, an "interested shareholder" is a person who,
together with affiliates and associates, owns, or within the past three years
did own, 15% of the corporation's voting stock.
Certain provisions of our restated certificate of incorporation, as
amended, and amended and restated bylaws, as amended could have anti-takeover
effects. Our restated certificate of incorporation, as amended, provides that
our Board of Directors may issue preferred stock without shareholder approval.
The issuance of preferred stock could make it more difficult for a third-party
to acquire us without the approval of our board.
Indemnification
We have included in our restated certificate of incorporation, as
amended and amended and restated bylaws, as amended provisions to (i) eliminate
the personal liability of our directors for monetary damages resulting from
breaches of their fiduciary duty to the extent permitted by the Delaware General
Corporation Law and (ii) indemnify our directors and officers to the fullest
extent permitted by Section 145 of the Delaware General Corporation Law.
Transfer Agent and Registrar
The Transfer Agent and Registrar for our common stock is EquiServe
Trust Company, N.A. The Transfer Agent's address is Blue Hills Office Park, 150
Royall Street, Canton, MA 02021 and its telephone number is 781.575.3400.
50
SELLING STOCKHOLDERS
The common stock and Series A Preferred Stock offered hereby are being
registered to permit public secondary trading of such securities, and each of
the selling stockholders may offer the securities for resale from time to time.
See "Plan of Distribution." The number of shares of common stock and/or Series A
Preferred Stock that may actually be sold by each selling stockholder will be
determined by such selling stockholder. Because each of the selling stockholders
may sell all, some or none of the shares of common stock and Series A Preferred
Stock covered by this prospectus which each holds, and because the offering
contemplated by this prospectus is not being underwritten, no estimate can be
given as to the number of shares of common stock or Series A Preferred Stock
that will be held by the selling stockholders upon termination of the offering.
Shares of common stock and Series A Preferred Stock may be sold from time to
time by the selling stockholders or by pledgees, donees, transferees or other
successors in interest. The selling stockholders may also loan or pledge the
shares registered hereunder to broker-dealers and the broker-dealers may sell
the shares so loaned or upon a default may effect the sales of the pledged
shares pursuant to this prospectus.
The following table sets forth information known to us as of May 13,
2002, with respect to the beneficial ownership of each Credit Lyonnais New York
Branch, PPM America Special Investments Fund, L.P., Daple, S.A., PPM America
Special Investments CBO II, L.P., Bank One N.A., Credit Agricole Indosuez, Wells
Fargo Bank (Texas) National Association, Ark CLO 2000-1, Limited, Cerberus
Partners, L.P., and Avenue Special Situations Fund II L.P. of our common stock
and Series A Preferred Stock before and after completion of the sale of the
securities to be sold by each under this prospectus. The information is based
upon the assumption that the selling stockholder does not sell any securities
shown in the table as beneficially owned other than the securities to be sold
under this prospectus and that the selling stockholder sells all such securities
offered under this prospectus. We have determined beneficial ownership in
accordance with the rules of the SEC.
Except in connection with the Recapitalization and in their capacity as
our lenders under our previous and our new senior credit facility, none of the
selling stockholders has held any position or office, or has had any other
material relationship with us or any of our affiliates within the past three
years, other than as a result of the ownership of our securities.
Information concerning the selling stockholders may change from time to
time. This prospectus will be supplemented from time to time as appropriate to
update the information set forth below and to identify any additional selling
stockholders who may offer shares of common stock or Series A Preferred Stock
hereunder.
51
-------------------------------------------------------------------------------------------------------------------
Common Stock Series A Preferred Stock
-------------------------------------------------------------------------------------------------------------------
Name of Selling Stockholder Shares Shares Shares Shares
Owned Offered Owned Offered
-------------------------------------------------------------------------------------------------------------------
Credit Lyonnais New York Branch 4,359,141 4,359,141 9,333 9,333
-------------------------------------------------------------------------------------------------------------------
PPM America Special Investments Fund, L.P. 10,522,770 10,522,770 22,531 22,531
-------------------------------------------------------------------------------------------------------------------
Daple, S.A. 719,940 719,940 1,541 1,541
-------------------------------------------------------------------------------------------------------------------
PPM America Special 6,659,897 6,659,897 14,259 14,259
Investments CBO II, L.P.
-------------------------------------------------------------------------------------------------------------------
Bank One N.A. 6,434,923 6,434,923 13,778 13,778
-------------------------------------------------------------------------------------------------------------------
Credit Agricole Indosuez 2,075,782 2,075,782 4,444 4,444
-------------------------------------------------------------------------------------------------------------------
Wells Fargo Bank (Texas) National Association 363 363 1 1
-------------------------------------------------------------------------------------------------------------------
Ark CLO 2000-1, Limited 1,037,891 1,037,891 2,222 2,222
-------------------------------------------------------------------------------------------------------------------
Cerberus Partners, L.P. 8,355,849 8,355,849 17,891 17,891
-------------------------------------------------------------------------------------------------------------------
Avenue Special Situations Fund II L.P. 6,538,530 6,538,530 14,000 14,000
-------------------------------------------------------------------------------------------------------------------
We have agreed to bear certain expenses (other than broker discounts
and commissions, if any) in connection with the registration of the securities.
52
PLAN OF DISTRIBUTION
We will not receive any of the proceeds of the sale of the securities
offered hereby. We are registering for resale by the selling stockholders and
certain transferees a total of up to 46,705,086 shares of our common stock and
100,000 shares of our Series A Preferred Stock, all of which are issued and
outstanding.
The selling stockholders may pledge or grant a security interest in
some or all of the shares of common stock or Series A Preferred Stock owned by
them and, if they default in the performance of their secured obligations, the
pledgees or secured parties may offer and sell the shares of common stock or
Series A Preferred Stock from time to time pursuant to this prospectus. The
selling stockholders also may transfer and donate the shares of common stock or
Series A Preferred Stock in certain circumstances in which case the transferees,
donees, pledgees or other successors in interest will be the selling beneficial
owners for purposes of this prospectus.
The common stock and Series A Preferred Stock offered hereby may be
sold from time to time by the selling stockholders or, to the extent permitted,
by pledgees, donees, transferees or other successors in interest. All or a
portion of the common stock and Series A Preferred Stock offered by the selling
stockholders may be disposed of from time to time in one or more transactions
through any one or more of the following means:
o by the purchasers directly;
o in ordinary brokerage transactions and transactions in which the
broker solicits purchasers;
o through underwriters or dealers who may receive compensation in
the form of underwriting discounts, concessions, or commissions
from the selling stockholders or such successors in interest
and/or from the purchasers of the common stock and Series A
Preferred Stock for whom they may act as agent;
o by the writing of options on the common stock and Series A
Preferred Stock;
o by the pledge of the common stock and Series A Preferred Stock as
security for any loan or obligation, including pledges to brokers
or dealers who may, from time to time, themselves effect
distributions of the common stock and Series A Preferred Stock or
interests therein;
o through purchases by a broker or dealer as principal and resale by
such broker or dealer for its own account;
o through a block trade in which the broker or dealer so engaged
will attempt to sell the common stock and Series A Preferred Stock
as agent but may position and resell a portion of the block as
principal to facilitate the transaction; and
o by an exchange distribution in accordance with the rules of such
exchange or transactions in the over the counter market.
Such sales may be made at prices and at terms then prevailing or at
prices related to the then current market price or at negotiated prices and
terms.
In addition, the selling stockholders may enter into hedging
transactions with broker-dealers or other financial institutions, which may in
turn engage in short sales of the common stock in the course of hedging the
positions they assume. The selling shareholders may also engage in the short
sale of the common stock and/or Series A Preferred Stock and may deliver the
common stock and/or Series A Preferred Stock to cover short positions or
otherwise settle short sale transactions.
In effecting sales by the selling stockholders, brokers or dealers
engaged by the selling stockholders may arrange for other brokers or dealers to
participate. Brokers or dealers participating in such transactions may receive
commissions or discounts from the selling stockholders (and, if they act as
agent for the purchaser of such securities, from such purchaser). In addition,
underwriters or agents may receive compensation in the form of discounts,
concessions or commissions, from the selling stockholders or from the purchasers
of the securities sold by the selling stockholders for whom they may act as
agents. Underwriters may sell shares of common stock or Series A Preferred Stock
to or through dealers, who may receive compensation in the form of discounts,
concessions or commissions from the underwriters or commissions from the
purchasers as the purchaser's agents. The selling stockholders, underwriters,
brokers, dealers, and agents that participate in the sale of the securities
covered by this prospectus may be deemed to be "underwriters" within the meaning
of the Securities Act in connection with such sales. To the extent the selling
stockholders may be deemed to be underwriters, the selling stockholders may be
53
subject to certain statutory liabilities of the Securities Act, including, but
not limited to, Sections 11, 12 and 17 of the Securities Act and Rule 10b-5
under the Exchange Act. In addition and without limiting the foregoing, the
selling stockholders will be subject to applicable provisions of the Exchange
Act, and the rules and regulations thereunder, including, without limitation,
Regulation M, which provisions may limit the timing of purchases and sales of
the shares of common stock and Series A Preferred Stock by the selling
stockholders.
At the time a particular offer and sale of securities under this
prospectus is made, to the extent required under the Securities Act, we will
file a supplemental prospectus, disclosing:
o the name of any such broker-dealers;
o the number of shares of common stock and Series A Preferred Stock
involved;
o the price at which such shares of common stock and Series A
Preferred Stock are to be sold;
o the commissions paid or discounts or concessions allowed to such
broker-dealers, where applicable;
o that such broker-dealers did not conduct any investigation to
verify the information set out or incorporated by reference in
this prospectus, as supplemented; and
o other facts material to the transaction.
The Registration Rights Agreement provides that we will pay
substantially all of the expenses incident to the registration, offering and
sale of the shares of common stock and Series A Preferred Stock by the selling
stockholders, other than underwriting discounts and commissions. The
Registration Rights Agreement also provides that we will indemnify the selling
stockholders against certain liabilities, including liabilities under the
Securities Act.
Any shares of common stock and Series A Preferred Stock covered by this
prospectus that qualify for sale pursuant to Rule 144 of the Securities Act may
be sold under that rule rather than pursuant to this prospectus. We cannot be
sure that any of the selling stockholders will sell any or all of the shares of
common stock and Series A Preferred Stock offered by them under this prospectus.
54
MATERIAL U.S. FEDERAL TAX CONSIDERATIONS
The following discussion summarizes certain material United States
federal income tax considerations generally applicable to holders acquiring the
common stock and the Series A Preferred Stock as capital assets, but does not
purport to be a complete analysis of all potential tax consequences. This
discussion is based on the Internal Revenue Code of 1986, as amended, Treasury
Regulations issued thereunder, and judicial and administrative authorities now
in effect, all of which are subject to change. Any such changes may be applied
retroactively in a manner that could adversely affect a holder of the common
stock or Series A Preferred Stock.
The tax treatment of a holder of common stock or Series A Preferred
Stock may vary depending on his or her particular situation or status. Certain
holders (including S corporations, insurance companies, tax-exempt
organizations, financial institutions, regulated investment companies,
broker-dealers, taxpayers subject to alternative minimum tax or persons holding
the common stock or Series A Preferred Stock as part of a "straddle," "hedge" or
"conversion transaction") may be subject to special rules not discussed below.
The following discussion does not consider all aspects of United States federal
income tax that may be relevant to the purchase, ownership, and disposition of
the common stock or Series A Preferred Stock by such holder in light of his or
her personal circumstances. In addition, the description does not consider the
effect of any applicable foreign, state, local, or estate or gift taxes.
Because individual circumstances may differ, each prospective purchaser
of our common stock or Series A Preferred Stock is urged to consult his or her
own tax advisor with respect to his or her own particular tax situation and as
to any federal, foreign, state, local or other tax considerations (including any
possible changes in the tax law) affecting the purchase, holding and disposition
of our common stock or Series A Preferred Stock.
Disposition of the Securities
Unless a nonrecognition provision applies, the sale, exchange,
redemption or other disposition of common stock or Series A Preferred Stock will
be treated as the disposition of a capital asset and taxable for U.S. federal
income tax purposes. In such event, in general, a holder of common stock of
Series A Preferred Stock will recognize capital gain or loss equal to the
difference between (i) the amount of cash plus the fair market value of property
received and (ii) the holder's tax basis in the common stock or Series A
Preferred Stock. If the common stock or Series A Preferred Stock has been held
for more than one year, such gain or loss will be long-term capital gain or
loss. The deductibility of capital losses may, however, be limited. See "Series
A Preferred Stock--Tax Aspects of Redemption Features" below for a discussion of
circumstances under which a redemption may be treated as a dividend distribution
rather than as the disposition of a capital asset.
Dividend Treatment
Dividends on the common stock or Series A Preferred Stock, whether paid
in cash or in other property, will be taxable to the holder as ordinary income
to the extent that the cash amount, or fair market value of the other property
on the date of distribution, does not exceed Darling's current and accumulated
earnings and profits (as determined for federal income tax purposes). The amount
of our company's earnings and profits at any particular time depends on our
future actions and financial performance. To the extent that the amount of any
distribution exceeds our current and accumulated earnings and profits, the
distribution will be treated as a return of capital, thus reducing (but not
below zero) the holder's adjusted tax basis in such outstanding common stock or
Series A Preferred Stock. The amount of any such excess distribution that is
greater than the holder's adjusted tax basis in the common stock or Series A
Preferred Stock will be taxed as capital gain and will be long-term capital gain
if the holder's holding period for such common stock or Series A Preferred Stock
exceeds one year.
Dividends Received Deduction
To the extent that dividends are treated as ordinary income, dividends
received by corporate holders generally will be eligible for the
dividends-received deduction under section 243 of the Internal Revenue Code.
There are, however, many exceptions and restrictions relating to the
availability of such dividends-received deduction, such as restrictions relating
to (i) the holding period of the stock on which the dividends are sought to be
deducted, (ii) debt-financed portfolio stock, (iii) dividends treated as
"extraordinary dividends" for purposes of section 1059 of the Internal Revenue
Code, discussed in "Extraordinary Dividends" below, and (iv) the alternative
minimum tax. Corporate stockholders should consult their own tax advisor
regarding the extent, if any, to which such exceptions and restrictions may
apply to their particular factual situations.
55
Extraordinary Dividends
An "extraordinary dividend," as defined in section 1059 of the Internal
Revenue Code, includes any dividend that (i) equals or exceeds five percent of
the holder's adjusted tax basis in the Series A Preferred Stock (ten percent of
the holder's basis in the common stock), treating all dividends having
ex-dividend dates within an 85-day period as one dividend, or (ii) exceeds
twenty percent of the holder's adjusted tax basis in the common stock or Series
A Preferred Stock, treating all dividends having ex-dividend dates within a
365-day period as one dividend. In determining whether a dividend paid on the
common stock or Series A Preferred Stock is an extraordinary dividend, a holder
may elect to use the fair market value of such stock rather than its adjusted
basis for purposes of determining the percent limitations if the holder is able
to establish to the satisfaction of the Secretary of the Treasury the fair
market value of the common stock or Series A Preferred Stock as of the day
before the ex-dividend date.
If a corporate holder receives an "extraordinary dividend" from Darling
with respect to common stock or Series A Preferred Stock that it has not held
for more than two years on the dividend announcement date, the basis of the
common stock or Series A Preferred Stock will be reduced (but not below zero) by
the non-taxed portion of the dividend. If, because of the limitation on reducing
basis below zero, any amount of the non-taxed portion of an extraordinary
dividend has not been applied to reduce basis, such amount will be treated as
gain from the sale or exchange of the common stock or Series A Preferred Stock
in the year in which the extraordinary dividend is received. Generally, the
non-taxed portion of an extraordinary dividend is the amount excluded from
income as a dividends-received deduction.
Certain "qualified preferred dividends" are generally not considered
extraordinary dividends. A qualified preferred dividend is any fixed dividend
payable with respect to preferred stock that (i) provides for fixed preferred
dividends payable not less frequently than annually and (ii) is not in arrears
as to dividends when acquired and (ii) the actual rate of return does not exceed
15%. If the actual rate of return, as determined under section 1059(e)(3) of the
Internal Revenue Code, on such preferred stock does not exceed fifteen percent
and the holder has held the preferred stock for more than five years, then any
qualified preferred dividend as to such stock will not be an extraordinary
dividend. However, if the actual rate of return is less than fifteen percent,
and the holder sells the qualified preferred stock before holding it for more
than five years, then some of the dividend will be treated as an extraordinary
dividend, but only to the extent to which the qualified preferred dividends paid
exceed the qualified preferred dividends that would have been paid during such
period on the basis of the stated rate of return.
The Internal Revenue Code specifies that in certain cases extraordinary
dividend treatment will be required without regard to holding periods or to
whether a dividend qualifies as a qualified preferred dividend. The Internal
Revenue Code requires that an extraordinary dividend will include any amount
treated as a dividend in the case of a redemption of the common stock or Series
A Preferred Stock that is (i) non-pro rata as to all holders, (ii) part of a
partial liquidation of our company, or (iii) that would not have been treated
(in whole or in part) as a dividend if (a) any stock options had not been
counted toward stock ownership pursuant to the attribution rules of Internal
Revenue Code section 318 or (b) section 304(a) (dealing with the sale of stock
by a controlling person among brother-sister corporations) had not been applied.
See "Series A Preferred Stock--Tax Aspects of Redemption Features" below for
additional discussion of the application of section 1059 in the redemption
context.
Series A Preferred Stock--Tax Aspects of Redemption Features
The Series A Preferred Stock is subject to mandatory redemption on the
fifth anniversary of the closing date of the Recapitalization. In addition, the
Series A Preferred Stock is redeemable by us at any time upon 30 days notice at
a redemption price equal to the aggregate liquidation preference of the shares
to be redeemed, plus accrued and unpaid dividends, if any, to the date of
redemption. See "Description of Capital Stock" above. Pursuant to section 305(c)
of the Internal Revenue Code, holders of Series A Preferred Stock may be
required to treat a portion of the difference between the Series A Preferred
Stock's issue price and its redemption price as constructive distributions of
property includable in income on a periodic basis. For purposes of determining
whether such constructive distribution treatment applies, the mandatory
redemption and the optional redemption are tested separately. Constructive
distribution treatment is required if either (or both) of these tests is
satisfied.
Section 305(c) of the Internal Revenue Code provides that the entire
amount of a redemption premium with respect to preferred stock that is subject
to mandatory redemption is treated as being distributed to the holders of such
preferred stock on an economic accrual basis over the period the stock is
outstanding. Preferred stock generally is considered to have a redemption
premium for this purpose if the redemption price exceeds its issue price by more
than a de minimis amount. For this purpose, such excess will be treated as zero
if it is less than 1/4 of 1% of the redemption price multiplied by the number of
complete years from the date of issuance of the stock until the
56
stock must be redeemed. The Series A Preferred Stock provides for cumulative
preferred dividends. Thus, the redemption price will depend on whether dividends
on such stock are paid currently. If all of the cumulative dividends are paid
currently, the redemption price will equal the issue price. The legislative
history of Internal Revenue Code Section 305(c) states that if at the time of
issuance of cumulative preferred stock there is "no intention" for dividends to
be paid currently, the IRS may treat such dividends as a disguised redemption
premium. Under that approach, the excess of the redemption price of the Series A
Preferred Stock (including any disguised redemption premium) over its issue
price is taxable as constructive distributions to the holder (treated as a
dividend to the extent of our company's current and accumulated earnings and
profits and otherwise subject to the treatment described above for
distributions) over the term of the preferred stock using a constant interest
rate method similar to that for accruing original issue discount. To date, the
IRS has not promulgated such regulations, although the issue remains under
consideration. In the current situation, our company intends to take the
position that we do not have "no intention" of paying dividends currently
(although the agreement governing our senior credit agreement prohibits us from
paying any cash dividends while any indebtedness remains outstanding under such
agreement) and thus that holders of the Series A Preferred Stock should not be
required to treat any excess of the final redemption price over the issue price
as a series of constructive distributions over the period such stock is
outstanding. This issue is not, however, free from doubt. Holders of Series A
Preferred Stock are urged to consult their tax advisors with respect to this
issue.
Constructive distributions on the Series A Preferred Stock will arise
on account of the optional redemption feature only if, based on all of the facts
and circumstances as of the date the Series A Preferred Stock is issued,
redemption pursuant to the optional redemption is more likely than not to occur.
Even if the redemption were more likely than not to occur, constructive
distribution treatment would not result if the redemption premium were solely in
the nature of a penalty for premature redemption. For this purpose, a penalty
for premature redemption is a premium over which neither our company nor the
holder has legal or practical control, such as changes in prevailing dividend
rates. Regulations promulgated pursuant to Internal Revenue Code section 305(c)
provide a safe harbor pursuant to which constructive distribution treatment will
not result from an issuer call right if (i) the issuer and the holder are
unrelated, (ii) there are no arrangements that effectively require the issuer to
redeem the stock and (iii) exercise of the option to redeem would not reduce the
yield of the stock. We do not believe that the optional redemption would be
treated as more likely than not to be exercised under these rules.
A redemption of shares of Series A Preferred Stock may be treated as a
dividend, rather than as the disposition of a capital asset, to the extent of
our current or accumulated earnings and profits (as determined for federal
income tax purposes), unless the redemption (i) results in a "complete
termination" of the holder's stock interest in our company under section
302(b)(3) of the Internal Revenue Code, (ii) results in a "substantially
disproportionate" redemption of stock with respect to the holder under section
302(b)(2) of the Internal Revenue Code, or (iii) is "not essentially equivalent
to a dividend" with respect to the holder under section 302(b)(1) of the
Internal Revenue Code. In determining whether the redemption is treated as a
dividend, the holder must take into account not only stock he or she actually
owns, but also stock he or she constructively owns within the meaning of section
318.
A distribution to a holder will be "not essentially equivalent to a
dividend" if it results in a "meaningful reduction" in the holder's stock
interest in our company. For these purposes, a redemption of the Series A
Preferred Stock that results in a reduction in the proportionate interest in our
company (taking into account any ownership of the common stock and any Darling
stock that is constructively owned) of a holder whose relative stock interest is
minimal (an interest of less than one percent should satisfy this requirement)
and who exercises no control over corporate affairs should be regarded as a
meaningful reduction in the holder's stock interest in Darling. See "Disposition
of Securities" above for a discussion of the tax consequences of having a
redemption treated as the sale or exchange of a capital asset and see "Dividend
Treatment" above for the consequences of having a redemption treated as a
dividend distribution.
Under section 1059 of the Internal Revenue Code, as discussed in
"Dividend Treatment--Extraordinary Dividends" above, an extraordinary dividend
includes any redemption of stock that is treated as a dividend that is non-pro
rata as to all holders of our stock, including holders of the common stock,
irrespective of the holding period. Consequently, to the extent the redemption
of Series A Preferred Stock constitutes a dividend, it will constitute an
extraordinary dividend to a corporate holder. If the redemption is treated as a
dividend because options are being counted as stock ownership pursuant to
Internal Revenue Code section 318, such holders are also required to recognize
gain under section 1059 of the Internal Revenue Code with respect to any
redemption treated as a dividend (in whole or in part) when the non-taxed
portion of the dividend exceeds the basis of the shares surrendered.
57
Foreign Shareholders
Dividends received by a nonresident alien, foreign trust or estate,
foreign corporation, or foreign partnership in respect of the Securities
generally will be subject to withholding of United States federal income tax at
the rate of 30% (or lower treaty rate). If, however, the dividend is effectively
connected with the foreign shareholder's conduct of a trade or business within
the United States or, where a tax treaty applies, is attributable to a foreign
shareholder's permanent establishment maintained in the United States, the
dividend will be subject to federal income tax on a net income basis at
applicable graduated individual or corporate rates and will be exempt from the
30% withholding tax. In addition, dividends that are effectively connected to a
United States trade or business or attributable to a United States permanent
establishment may be subject to an additional "branch profits tax" at a 30% rate
(or lower treaty rate).
Under currently applicable Treasury regulations, dividends paid to an
address outside the United States may be presumed to be paid to a resident of
such country, unless the payor has knowledge to the contrary, for purposes of
the withholding tax rates (including treaty rates) discussed above.
For purposes of obtaining a reduced rate of withholding under an income
tax treaty, a foreign shareholder will be required to provide certain
information concerning his or her country of residence and entitlement to tax
treaty benefits. If an exemption from withholding is claimed, the foreign
shareholder must provide appropriate certification (for example, IRS Form W-8BEN
for foreign individuals) to our company. If a foreign shareholder is eligible
for a reduced rate of United States federal withholding tax, the foreign
shareholder may obtain a refund of any excess withheld amounts by timely filing
an appropriate claim for refund.
Generally, a foreign shareholder will not be subject to United States
federal income tax on any gain recognized upon capital asset disposition of the
common stock or Series A Preferred Stock. However, a foreign shareholder will be
subject to federal income tax on the gain if (i) the gain is effectively
connected with the foreign shareholder's United States trade or business or, if
a tax treaty applies, attributable to the foreign shareholder's United States
permanent establishment, (ii) if the foreign shareholder is an individual who is
a former citizen of the United States who lost such citizenship within the
preceding ten-year period, or former long-term resident of the United States who
relinquished United States residency on or after February 6, 1995, and the loss
of citizenship or permanent residency had as one of its principal purposes the
avoidance of United States tax; or (iii) the foreign shareholder is a
non-resident alien individual who has been present in the United States for 183
days or more during the taxable year of the disposition and either (a) has a
"tax home" in the United States for United States federal income tax purposes or
(b) the gain is attributable to an office or other fixed place of business
maintained by the foreign shareholder in the United States.
Because of the complexity of the Internal Revenue Code provisions
dealing with the taxation of foreign shareholders and the possibility that
treaty provisions may affect the application of such Internal Revenue Code
provisions, foreign shareholders are urged to consult their own tax advisors
with respect to the particular tax consequences to them of an investment in our
company.
Backup Withholding
We generally will be required to withhold federal income tax at a rate
of 30% (in 2002 and 2003) from dividends paid and redemption proceeds to the
holders or common stock or Series A Preferred Stock if (i) the holder fails to
furnish us with the holder's correct taxpayer identification number or social
security number and to make such certifications as we may require, (ii) the IRS
notifies the holder or us that the holder has failed to report properly certain
interest and dividend income to IRS and to respond to notices to that effect, or
(iii) when required to do so, the shareholder fails to certify that he is not
subject to backup withholding. Any amounts withheld may be credited against the
shareholder's federal income tax liability.
The foregoing discussion of certain federal income tax considerations
does not consider the facts and circumstances of any particular prospective
purchaser situation or status. Accordingly, each purchaser of our common stock
or Series A Preferred Stock should consult his or her own tax advisor with
respect to the tax consequences to him or her, including those under state,
local, foreign, and other tax laws.
58
LEGAL MATTERS
The validity of our common stock and Series A Preferred Stock offered
hereby will be passed upon by Dechert, New York, New York.
EXPERTS
The consolidated financial statements and schedules as of December 29,
2001 and December 30, 2000 and for the years ended December 29, 2001, December
30, 2000 and January 1, 2000 included in this prospectus and in the registration
statement of which this prospectus is a part have been so included in reliance
upon the report of KPMG LLP, independent accountants, appearing elsewhere herein
and upon the authority of said firm as experts in accounting and auditing. The
audit report covering the December 29, 2001 consolidated financial statements
contains an explanatory paragraph that states there is substantial doubt about
our ability to continue as a going concern. The consolidated financial
statements do not include any adjustments that might result from the outcome of
that uncertainty.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Securities
Exchange Act of 1934, as amended. In accordance with the Exchange Act, we file
periodic reports, proxy statements and information statements and other
information with the Securities and Exchange Commission.
We have filed with the Securities and Exchange Commission, Washington,
D.C. 20549, a registration statement on Form S-1 under the Securities Act with
respect to our common stock and Series A Preferred Stock offered hereby. This
prospectus does not contain all of the information set forth in the registration
statement and the exhibits and schedules to the registration statement. For
further information with respect to our company and our common stock and Series
A Preferred Stock offered hereby, reference is made to the registration
statement and the exhibits and schedules filed as a part of the registration
statement. Statements contained in this prospectus concerning the contents of
any contract or any other document are not necessarily complete; reference is
made in each instance to the copy of such contract or any other document filed
as an exhibit to the registration statement. Each such statement is qualified in
all respects by such reference to such exhibit. The registration statement,
including exhibits and schedules thereto, as well as all other reports, proxy
statements, information statements and other information we file with the
Securities and Exchange Commission, may be inspected without charge at the
Securities and Exchange Commission's principal office in Washington, D.C., and
copies of all or any part thereof may be obtained from the Public Reference
Section of the Securities and Exchange Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, after payment of fees prescribed by the Securities and
Exchange Commission. The Securities and Exchange Commission also maintains a Web
site which provides online access to reports, proxy and information statements
and other information regarding registrants that file electronically with the
Securities and Exchange Commission at the address http://www.sec.gov.
We will furnish without charge to each person to whom a copy of this
prospectus is delivered, upon written or oral request, a copy of any and all of
these filings (except exhibits, unless they are specifically incorporated by
reference into this prospectus). Please direct any requests for copies to:
Darling International Inc.
251 O'Connor Ridge Boulevard, Suite 300
Irving, TX 75038
Attention: Joseph R. Weaver, Jr.
Telephone: 917.717.0300
Fax: 917.281.4475
E-mail: corporatesecretary@darlingii.com
59
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Pages
-----
Consolidated Financial Statements as of March 30, 2002 and March 31, 2001 and
for the Three Months Ended March 30, 2002 and March 31, 2001 (Unaudited)
Consolidated Balance Sheets.............................................................................................F-2
Consolidated Statements of Operations...................................................................................F-3
Consolidated Statements of Cash Flows...................................................................................F-4
Notes to Consolidated Financial Statements..............................................................................F-5
Consolidated Financial Statements as of December 29, 2001 and December 30, 2000
and for the Three Years Ended December 29, 2001
Independent Auditors' Report...........................................................................................F-13
Consolidated Balance Sheets............................................................................................F-14
Consolidated Statements of Operations..................................................................................F-15
Consolidated Statements of Stockholders' Equity........................................................................F-16
Consolidated Statements of Cash Flows..................................................................................F-17
Notes to Consolidated Financial Statements.............................................................................F-18
Other Financial Information - Pro Forma Financial Information
Introduction to Unaudited Pro Forma Financial Statements...............................................................F-41
Unaudited Pro Forma Consolidated Balance Sheets - March 30, 2002 and December 31, 2001.................................F-42
Unaudited Pro Forma Consolidated Statements of Operations - Three Months Ended March 30, 2002 and
Year Ended December 31, 2001...........................................................................................F-44
Notes to Unaudited Pro Forma Consolidated Financial Statements.........................................................F-45
F-1
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 30, 2002 and December 29, 2001
(in thousands, except shares and per share data)
March 30, December 29,
2001 2001
--------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 2,999 $ 3,668
Accounts receivable 18,957 23,719
Inventories 7,874 7,698
Prepaid expenses 5,316 4,394
Deferred income taxes 2,203 2,203
Other 184 3,668
---------- ---------
Total current assets 37,533 41,891
Property, plant and equipment, less accumulated
depreciation of $158,389 at March 30, 2002 and
$155,555 at December 29, 2001 75,064 74,744
Collection routes and contracts, less accumulated
amortization of $21,587 at March 30, 2002 and
$22,139 at December 29, 2001 26,231 27,366
Goodwill, less accumulated amortization of $1,077
at March 30, 2002 and December 29, 2001 4,429 4,429
Assets held for sale 3,002 3,002
Other noncurrent assets 8,197 7,647
---------- ---------
$ 154,456 $ 159,079
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt $ 5,120 $120,053
Accounts payable, principally trade 7,864 11,104
Accrued expenses 22,310 24,069
Accrued interest 5,525 3,383
---------- ---------
Total current liabilities 40,819 158,609
Long-term debt, less current portion 112,127 -
Other non-current liabilities 8,591 8,134
Deferred income taxes 1,990 1,990
---------- ---------
Total liabilities 163,527 168,733
---------- ---------
Stockholders' equity (deficit):
Preferred stock, $0.01 par value; 1,000,000 shares
authorized, none issued - -
Common stock, $0.01 par value; 25,000,000 shares authorized;
15,589,362 shares issued and outstanding 156 156
Additional paid-in capital 35,235 35,235
Treasury stock, at cost; 21,000 shares at March 30, 2002 and
December 29, 2001 (172) (172)
Accumulated comprehensive loss (533) (533)
Accumulated deficit (43,757) (44,340)
---------- ----------
Total stockholders' equity (deficit) (9,071) (9,654)
---------- ----------
Contingencies (note 3)
$ 154,456 $ 159,079
=========== =========
The accompanying notes are an integral part of these consolidated financial statements.
F-2
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended March 30, 2002 and
March 31, 2001 (in thousands,
except per share data)
(unaudited)
Three Months Ended
------------------
March 30, March 31,
2002 2002
---------- ---------
Net sales $ 61,681 $ 63,634
Costs and expenses:
Cost of sales and operating expenses 46,395 48,312
Selling, general and administrative expenses 7,160 7,005
Depreciation and amortization 4,392 6,814
---------- ---------
Total costs and expenses 57,947 62,131
---------- ---------
Operating income 3,734 1,503
---------- ---------
Other income (expense):
Interest expense (3,885) (3,227)
Other, net 734 575
---------- ---------
Total other income (expense) (3,151)
----------
Income (loss) before income taxes 583 (1,149)
Income taxes - -
---------- ---------
Net income (loss) $ 583 $ (1,149)
========== =========
Basic and diluted income (loss) per share $ 0.04 $ (0.07)
========== =========
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months ended March 30, 2002 and March 31, 2001
(in thousands)
(unaudited)
Three Months Ended
March 30, March 31,
2002 2001
----------- ---------
Cash flows from operating activities:
Net income (loss) $ 583 $ (1,149)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 4,392 6,814
Gain on disposal of property, plant, equipment and other assets (901) (74)
Changes in operating assets and liabilities:
Accounts receivable 4,762 (469)
Inventories and prepaid expenses (1,098) (605)
Accounts payable and accrued expenses (4,999) (2,724)
Accrued interest 2,142 (357)
Other 25 343
----------- -----------
Net cash provided by operating activities 4,906 1,779
----------- -----------
Cash flows from investing activities:
Capital expenditures (3,622) (1,532)
Proceeds from disposal of property, plant, equipment and other assets 946 112
----------- -----------
Net cash used by investing activities (2,676) (1,420)
----------- -----------
Cash flows from financing activities:
Proceeds from long-term debt 47,291 53,042
Payments on long-term debt (50,097) (53,552)
Contract payments (93) (505)
----------- -----------
Net cash used by financing activities (2,899) (1,015)
----------- -----------
Net decrease in cash and cash equivalents (669) (656)
Cash and cash equivalents at beginning of period 3,668 3,509
----------- -----------
Cash and cash equivalents at end of period $ 2,999 $ 2,853
=========== ===========
Supplemental disclosure of cash flow information: Cash paid during the period
for:
Interest $ 1,743 $ 3,584
----------- -----------
Income taxes, net of refunds $ - $ -
----------- -----------
The accompanying notes are an integral part of these consolidated financial statements.
F-4
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 30, 2002
(unaudited)
(1) General
The accompanying consolidated financial statements for the three month
periods ended March 30, 2002 and March 31, 2001 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 a 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/A
for the fiscal year ended December 29, 2001.
(2) Summary of 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.
(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 March 30, 2002, and include
the 13 weeks ended March 30, 2002, and 13 weeks ended March 31,
2001.
(c) Earnings (Loss) Per Share
Basic and diluted loss per common share are computed by dividing
net earnings (loss) by the weighted average number of common stock
shares outstanding during the period.
The weighted average common shares used for basic earnings (loss)
per common share was 15,568,362 for both the three months ended
March 30, 2002 and March 31, 2001. The weighted average common
shares used for diluted earnings (loss) per common share was
15,830,189 and 15,568,362 for the three months ended March 30,
2002 and March 31, 2001, respectively. Options to purchase
2,343,938 and 2,334,380 shares were excluded from diluted earning
(loss) per common share for the three months ended March 30, 2002
and March 31, 2001, as their effect was antidilutive.
(d) New Accounting Standards
The Company adopted Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets ("Statement 142")
and Statement 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, on December 30, 2001 (the first day of Fiscal
2002).
F-5
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
March 30, 2002
(unaudited)
Statement 142 eliminates the amortization for goodwill and other
intangible assets with indefinite lives. Intangible assets with
lives restricted by contractual, legal, or other means will
continue to be amortized over their useful lives. Goodwill and
other intangible assets not subject to amortization are tested for
impairment annually or more frequently if events or changes in
circumstances indicate that the asset might be impaired. Statement
142 requires a two-step process for testing impairment. First, the
fair value of each reporting unit is compared to its carrying
value to determine whether an indication of impairment exists. If
impairment is indicated, then the fair value of the reporting
unit's goodwill is determined by allocating the unit's fair value
to its assets and liabilities (including any unrecognized
intangible assets) as if the reporting unit had been acquired in a
business combination. The amount of impairment for goodwill is
measured as the excess of its carrying value over its fair value.
The Company is evaluating the impact of adopting Statement 142,
including whether any transitional goodwill impairment losses will
be required to be recognized as the cumulative effect of a change
in accounting principle.
Intangible assets subject to amortization under Statement 142
consist of collection routes and contracts and non-compete
agreements. Amortization expense is calculated using the
straight-line method over the estimated useful life of the asset
ranging from 3 to 15 years.
The gross carrying amount of collection routes and contracts and
non-compete agreements subject to amortization include (in
thousands):
March 30, December 29,
2002 2001
----------------------------
Collection Routes and Contracts:
Routes $ 42,307 $ 42,307
Non-compete agreements 5,232 6,797
Royalty and consulting agreements 279 401
--------- ---------
47,818 49,505
Accumulated Amortization:
Routes (18,341) (17,498)
Non-compete agreements (3,127) (4,423)
Royalty and consulting agreements (119) (218)
---------- ----------
(21,587) (22,139)
---------- ----------
Collection routes and contracts,
less accumulated amortization $ 26,231 $ 27,366
========== ==========
Amortization expense for the three months ended March 30, 2002 and
March 31, 2001 was approximately $1,135,000 and $1,386,000,
respectively. Amortization expense for the next five fiscal years
is estimated to be $4,178,000, $4,061,000, $3,937,000, $3,937,000
and $3,937,000.
The Company has identified its reporting units for purposes of
assessing goodwill impairment to be the individual plant
locations.
F-6
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
March 30, 2002
(unaudited)
The effect of the adoption of Statement 142 on net income (loss)
and earnings (loss) per share is as follows (in thousands, except
per share date):
Three Months Ended
-------------------------
March 30, March 31,
2002 2001
-------------------------
Reported net income (loss) $ 583 $(1,149)
Add back: goodwill amortization - 90
------ --------
Adjusted net income (loss) $ 583 $(1,059)
====== ========
Basic earnings (loss) per share:
Reported net income (loss) $ 0.04 $ (0.07)
Add back: goodwill amortization - -
------ --------
Adjusted net income (loss) $ 0.04 $ (0.07)
====== ========
Statement 144 supercedes Statement 121, Accounting for the
Impairment of Long Lived Assets and for Long Lived Assets to be
Disposed Of, and the accounting and reporting provisions of
Accounting Principles Board Opinion No. 30, Reporting the Results
of Operations, Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions. Statement 144 retains the fundamental
provisions of Statement 121 but eliminates the requirement to
allocate goodwill to long lived assets to be tested for
impairment. Statement 144 also requires discontinued operations to
be carried at the lower of cost or fair value less costs to sell
and broadens the presentation of discontinued operations to
include a component of an entity rather than a segment of a
business. The adoption of Statement 144 did not have a material
impact on the consolidated financial statements.
(3) Contingencies
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 but has permitted approximately 300 people to join the
lawsuit as plaintiffs. 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 unspecified
compensatory and exemplary damages in an amount in excess of
$25,000 per Plaintiff and unspecified injunctive relief. The
Company is unable to estimate its potential liability from this
lawsuit. 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, and all of the damage claims in
the suit filed by the City of Melvindale have been dismissed. The
City of Melvindale now seeks unspecified 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.
F-7
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
March 30, 2002
(unaudited)
Long Island City, NY
The Company is a party to a lawsuit that seeks to require an
environmental cleanup at a property in Long Island City, New York
where the Company formerly operated a rendering plant (referred to
as the "Site"). DMJ Associates (DMJ), which holds a mortgage on
the Site, has filed suit against the Company, as a former owner of
the Site, as well as others including the present tenants and
operators of the Site, the owner of an abandoned hazardous waste
disposal site adjoining the Site (the "Disposal Facility"), and
companies that disposed of wastes at the Disposal Facility (the
"Generator Defendants"). DMJ argues that, inter alia, under
federal law it is entitled to relief directed to have the
defendants remediate the contamination. DMJ seeks both equitable
and monetary relief from all defendants for investigation,
abatement and remediation of the Site. DMJ has not yet provided
information sufficient for the Company to ascertain the magnitude
or amount of DMJ's total claim nor the Company's alleged share
thereof. As a result, the Company is unable to estimate its
potential liability from this lawsuit. The Company does not have
information suggesting that it contributed in any material way to
any contamination that may exist at the Site. The Company is
actively defending the suit and is awaiting a decision on a motion
on summary judgment regarding the standing of the plaintiff.
Sauget, Illinois
The Company is a party to a lawsuit that seeks to recover costs
related to an environmental cleanup in or near Sauget, Illinois.
The United States had filed a complaint against Monsanto Chemical
Company, Solutia, Inc., Anheuser-Busch, Inc., Union Electric, and
14 other defendants, seeking to recover cleanup costs. Monsanto
(which merged with Pharmacia and Upjohn, Inc. in 2000 and is now
known as Pharmacia Corporation) and Solutia in turn filed a third
party complaint seeking contribution from the United States,
several federal agencies, and six more companies, in addition to
the Company. As potentially responsible parties themselves,
Pharmacia and Solutia are seeking to recover unspecified
proportionate shares from each of the other parties, in addition
to the Company, of an as yet undetermined total cleanup cost. A
subsidiary of the Company had operated an inorganic fertilizer
plant in Sauget, Illinois for a number of years prior to closing
it in the 1960's. The Company is defending this case vigorously,
and does not believe, based upon currently available information,
that the fertilizer plant contributed in any significant way to
the contamination that is leading to the environmental cleanup, or
that its share, if any, of the cost of the cleanup will be
material. Accordingly, the Company is unable to estimate its
potential liability from this lawsuit.
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 air,
wastewater, and storm water discharges from the Company's
processing facilities.
F-8
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
March 30, 2002
(unaudited)
Self Insured Risks
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 accrued expenses and other noncurrent
liabilities classifications in the Company's consolidated balance
sheets include reserves for insurance, environmental and
litigation contingencies of $10.6 million at March 30, 2002 and
December 29, 2001. There can be no assurance, however, that final
costs related to these matters 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 operates on a worldwide basis within two industry
segments: Rendering and Restaurant Services. 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 excludes general corporate expenses.
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 by-products 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.
F-9
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
March 30, 2002
(unaudited)
Business Segment Net Sales (in thousands):
Three Months Ended
-----------------------------
March 30, March 31,
2002 2001
-----------------------------
Rendering:
Trade $ 45,595 $ 49,762
Intersegment 7,879 6,188
---------- ---------
53,474 55,950
---------- ---------
Restaurant Services:
Trade 16,086 13,872
Intersegment 1,976 1,799
---------- ---------
18,062 15,671
--------- ---------
Eliminations (9,855) (7,987)
---------- ----------
Total $ 61,681 $ 63,634
========== ==========
Business Segment Profit (Loss) (in thousands):
Three Months Ended
-----------------------------
March 30, March 31,
2002 2001
-----------------------------
Rendering $ 4,149 $ 2,500
Restaurant Services 3,839 935
Corporate activities (3,520) (1,357)
Interest expense (3,885) (3,227)
---------- ----------
Net earnings (loss) before income taxes $ 583 $ (1,149)
========== ==========
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 Rendering/Restaurant Services.
Depreciation of Combined Rendering/Restaurant Services 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):
Three Months Ended
-----------------------------
March 30, March 31,
2002 2001
-----------------------------
Rendering $ 55,493 $ 56,847
Restaurant Services 16,158 14,779
Combined Rendering/Restaurant Services 58,756 64,155
Corporate Activities 24,049 23,298
--------- --------
Total $ 154,456 $ 159,079
========= ========
F-10
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
March 30, 2002
(unaudited)
(5) Income Taxes
The Company assesses the amount of valuation allowance recorded as a
reduction of deferred tax assets by considering its ability to carryback
net operating losses, scheduled reversals of future taxable and
deductible temporary differences, future taxable income and tax planning
strategies. Based on the Company's assessment of these matters at March
30, 2002 and March 31, 2001, the Company recorded a valuation allowance
to reduce its net deferred tax assets to zero.
(6) Recapitalization
On May 13, 2002, the Company consummated a recapitalization and executed
a new amended and restated Credit Agreement with its lenders whereby the
Company exchanged borrowings outstanding under its previous Credit
Agreement, a portion of the accrued interest and commitment fees, and
forbearance fees payable for newly issued common stock equal to 75% of
the Company's total outstanding common stock on a fully diluted basis
(exclusive of stock options issued and outstanding), and 6% cumulative
redeemable preferred stock with a face value of $10.0 million. The
Company's new Credit Agreement includes a term loan in the principal
amount of $61.0 million and also provides for a revolving credit facility
which will enable the Company to borrow or issue letters of credit of up
to $17.3 million.
Substantially all assets of the Company are either pledged or mortgaged
as collateral for borrowings under the new Credit Agreement. The new
Credit Agreement contains certain terms and covenants, which, among other
matters, restrict the incurrence of additional indebtedness, the payment
of cash dividends, the retention of certain proceeds from sales of
assets, and the annual amount of capital expenditures, and requires the
maintenance of certain minimum financial ratios.
The classification of long-term debt in the accompanying March 30, 2002
consolidated balance sheet is based on the repayment terms of the debt
issued under the new Credit Agreement pursuant to the recapitalization
and also reflects an estimate of the effect of applying the provisions of
Statement 15, Accounting by Debtors and Creditors for Troubled Debt
Restructurings. Statement 15 requires that the existing amount of debt
owed by the Company to the lenders be reduced by the fair value of the
equity interest granted and that no gain from restructuring the Company's
debt be recognized. Interest expense on the remaining carrying amount of
debt reported in our financial statements will be based on a new
effective interest rate that equates the present value of the future cash
payment specified by the new terms of the term loan with the carrying
amount of the debt.
Management believes the cash flow from operating activities at the same
level as Fiscal 2001 and funds available under the new Credit Agreement
will be sufficient to meet working capital and capital expenditure needs
for at least the next 12 months.
(7) Derivative Instruments
The Company makes limited use of derivative instruments to manage cash
flow risks related to interest and natural gas expense. The Company does
not use derivative instruments for trading purposes.
At March 30, 2002 and December 29, 2001, the Company was party to two
interest rate swap agreements whereby the interest obligation on $45
million of floating-rate debt has been 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 $20 million matures June 27, 2002, bears interest at 9.17%
and the Company's receive rate is based on the Base Rate. The Company
recorded $0.5 million of additional interest expense in the three months
ended March 31, 2001 related to the change in fair value of these
agreements. The portion of the interest rate swap agreements extending
beyond June 30, 2001, the expiration date of the previous Credit
Agreement, is not considered a hedge. Changes in the fair value of these
agreements subsequent to June 30, 2001, have been included in other
income (expense). The Company recorded a liability of $0.5 million and
$1.0 million at March 30, 2002 and December 29, 2001, respectively, (the
fair value of the interest rate swap agreements at such dates), which is
included in accrued expenses.
F-11
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
March 30, 2002
(unaudited)
Through March 2001, the Company was party to natural gas swap agreements
representing approximately 300,000 mmbtu's of natural gas per month for
January, February and March, 2001, with a NYMEX purchase price of
approximately $4.682/mmbtu. All of the Company's positions in these swap
agreements were settled during the three months ended March 31, 2001, and
the Company recorded gains of $2.6 million as a reduction of operating
expenses and $0.5 million as other income for the effective and
ineffective portions of these hedge transactions during this period. The
Company no longer uses natural gas swap agreements to manage its cash
flow risk arising from the purchase of natural gas used in its plants.
As of March 30, 2002, the Company had forward purchase agreements in
place for purchases of approximately 624,000 mmbtu's of natural gas for
the period April through December, 2002, based on an average purchase
price of $2.78/mmbtu. These agreements have no net settlement provisions
and the Company intends to take physical delivery, which it has done
under similar forward purchase agreements from March through December,
2001. Accordingly, the agreements are not subject to the requirements of
Statement 133 because they qualify as normal purchases as defined in the
standard.
(8) Comprehensive Income
The Company follows the provisions of Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income (Statement 130).
Statement 130 establishes standards for reporting and presentation of
comprehensive income and its components. In accordance with Statement
130, the Company has presented the components of comprehensive income in
its consolidated statement of stockholders' equity.
(9) Revenue Recognition
The Company recognizes revenue on sales when products are shipped and the
customer takes ownership and assumes risk of loss. Collection fees are
recognized in the month the service is provided.
F-12
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. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 December 29, 2001 and December 30,
2000, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 29, 2001, in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for derivative instruments and hedging
activities in 2001.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has debt of $120,027,000
classified as a current liability at December 29, 2001 because it matured in
June 2001 and is now subject to a recapitalization agreement pursuant to which
the lenders have agreed to a forbearance period expiring April 30, 2002, during
which time the Company will endeavor to consummate a new credit agreement. These
circumstances raise substantial doubt about the Company's ability to continue as
a going concern. Management's plans in regard to these matters are also
discussed in Note 2. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
KPMG LLP
Dallas, Texas
February 28, 2002
F-13
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 29, 2001 and December 30, 2000
(in thousands, except share and per share data)
December 29, December 30,
ASSETS (Notes 2 and 9) 2001 2000
---------------------- ------------- -------------
Current assets:
Cash and cash equivalents $ 3,668 $ 3,509
Accounts receivable, less allowance for bad debts of $467
at December 29, 2001 and $680 at December 30, 2000 23,719 21,837
Inventories (Note 3) 7,698 8,300
Prepaid expenses 4,394 3,046
Deferred income taxes (Note 11) 2,203 3,081
Assets held for sale (Note 5) - 3,161
Other (Note 1) 209 2,923
--------- ---------
Total current assets 41,891 45,857
Property, plant and equipment, net (Note 4) 74,744 88,242
Collection routes and contracts, less accumulated amortization of
$22,139 at Dec. 29, 2001 and $18,828 at Dec. 30, 2000 27,366 32,140
Goodwill, less accumulated amortization of $1,077 at
December 29, 2001 and $883 at December 30, 2000 4,429 4,632
Deferred loan costs - 629
Assets held for sale (Note 5) 3,002 -
Other assets (Note 6) 7,647 3,005
--------- ---------
$159,079 $174,505
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt (Note 9) $120,053 $109,528
Accounts payable, principally trade 11,104 14,341
Accrued expenses (Note 7) 24,069 23,160
Accrued interest 3,383 3,038
Deferred income (Note 1) - 2,599
--------- ---------
Total current liabilities 158,609 152,666
Other noncurrent liabilities (Note 10) 8,134 16,247
Deferred income taxes (Note 11) 1,990 2,868
--------- ---------
Total liabilities 168,733 171,781
--------- ---------
Stockholders' equity (deficit) (Note 12):
Preferred stock, $0.01 par value; 1,000,000 shares
authorized, none issued - -
Common stock, $.01 par value; 25,000,000 shares authorized,
15,589,362 shares issued and outstanding
at December 29, 2001 and December 30, 2000 156 156
Additional paid-in capital 35,235 35,235
Treasury stock, at cost; 21,000 shares at December 29, 2001
and December 30, 2000 (172) (172)
Accumulated comprehensive loss (533) -
Accumulated deficit (44,340) (32,495)
--------- ---------
Total stockholders' equity (deficit) (9,654) 2,724
--------- ---------
Commitments and contingencies (Notes 8 and 16)
$159,079 $174,505
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
F-14
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Three years ended December 29, 2001
(in thousands, except per share data)
December 29,
2001 December 30, January 1,
2000 2000
---------------- ---------------- ---------------
Net sales $255,974 $242,795 $258,570
-------- -------- ---------
Costs and expenses:
Cost of sales and operating expenses 196,778 190,283 210,879
Selling, general and administrative expenses 28,594 26,736 26,773
Depreciation and amortization 26,634 31,181 32,912
--------- ---------- ----------
Total costs and expenses 252,006 248,200 270,564
--------- ---------- ----------
Operating income/(loss) 3,968 (5,405) (11,994)
--------- ---------- ----------
Other income/(expense):
Interest expense (14,162) (13,971) (15,533)
Other, net (1,651) (184) 1,812
--------- ---------- ----------
Total other income/(expense) (15,813) (14,155) (13,721)
--------- ---------- ----------
Loss from continuing operations
before income taxes (11,845) (19,560) (25,715)
Income tax benefit (Note 11) - - (10,015)
--------- ---------- ----------
Loss from continuing operations (11,845) (19,560) (15,700)
Gain/(loss) on disposal of discontinued
operations, net of tax (Note 15) - 371 (333)
--------- ---------- ----------
Net loss $(11,845) $(19,189) $ (16,033)
========= ========== ==========
Basic and diluted earnings (loss) per share:
Continuing operations $ (0.76) $ (1.25) $ (1.01)
Gain/(loss) on disposal of discontinued
operations - 0.02 (0.02)
--------- ---------- ----------
Total $ (0.76) $ (1.23) $ (1.03)
========= ========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
F-15
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Three years ended December 29, 2001
(In thousands, except share data)
Common stock
-----------------------
Retained Total
Additional Accumulated earnings/ stockholders'
Number $.01 par Paid-in Treasury comprehensive (accumulated equity
of shares value capital stock loss deficit) (deficit)
------------------------------------------------------------------------------------------------------------------------------------
Balances at January 2, 1999 15,568,362 $ 156 $ 35,235 $ (172) $ - $ (2,727) $ 37,946
Net loss - - - - - (16,033) (16,033)
---------- ------ --------- ------- ---------- ----------- ---------
Balances at January 1, 2000 15,568,362 156 35,235 (172) - (13,306) 21,913
Net loss - - - - - (19,189) (19,189)
---------- ------ --------- ------ ---------- ----------- ---------
Balances at December 30, 2000 15,568,362 $ 156 $ 35,235 (172) - $ (32,495) $ 2,724
Net loss - - - - - (11,845) (11,845)
Minimum pension liability - - - - (533) - (533)
Derivative transition
adjustment (Note 1) - - - - 2,220 - 2,220
Net change arising from current period
hedging transactions (Note 1) - - - - 376 - 376
Reclassifications into earnings (Note 1) - - - - (2,596) - (2,596)
---------
Total comprehensive loss (12,378)
---------- ------ --------- ------- ---------- ----------- ---------
Balances at December 29, 2001 15,568,362 $ 156 $ 35,235 $ (172) $ (533) $ (44,340) $ (9,654)
========== ====== ========= ======= ========== ========== =========
The accompanying notes are an integral part of these consolidated financial statements.
F-16
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three years ended December 29, 2001
(in thousands)
December 29, December 30, January 1,
2001 2000 2000
---------------- ---------------- ----------------
Cash flows from operating activities:
Loss from continuing operations $ (11,845) $ (19,560) $ (15,700)
Adjustments to reconcile loss from continuing operations to
net cash provided by continuing operating activities:
Depreciation and amortization 26,634 31,181 32,912
Deferred income tax benefit - - (9,911)
Loss/(gain) on sale of assets (80) 144 (2,060)
Changes in operating assets and liabilities:
Accounts receivable (1,882) (4,850) (372)
Inventories and prepaid expenses (746) 2,246 2,092
Accounts payable and accrued expenses (4,898) 3,070 (4,328)
Accrued interest 345 2,928 (546)
Other (1,916) 1,084 (1,403)
---------- ---------- ----------
Net cash provided by continuing operating activities 5,612 16,243 684
Net cash provided by discontinued operations - - 119
---------- ---------- ----------
Net cash provided by operating activities 5,612 16,243 803
---------- ---------- ----------
Cash flows from investing activities:
Recurring capital expenditures (9,142) (7,684) (9,851)
Gross proceeds from sale of property, plant and equipment,
assets held for disposition and other assets 145 4,412 32,150
Payments related to routes and other intangibles (279) (636) (152)
Net cash used in discontinued operations - - (330)
---------- ---------- ----------
Net cash provided by/(used in) investing activities (9,276) (3,908) 21,817
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from long-term debt 208,387 171,351 179,927
Payments on long-term debt (197,862) (179,842) (210,237)
Contract payments (3,368) (2,163) (2,377)
Deferred recapitalization costs (3,334) - -
Deferred loan costs - - (300)
Net cash used in discontinued operations - - (150)
---------- ---------- ----------
Net cash provided by/(used in) financing activities 3,823 (10,654) (33,137)
---------- ---------- ----------
Net change in cash and cash equivalents
from discontinued operations - - 28
---------- ---------- ----------
Net increase/(decrease) in cash and cash equivalents 159 1,681 (10,489)
Cash and cash equivalents at beginning of year 3,509 1,828 12,317
---------- ---------- ----------
Cash and cash equivalents at end of year $ 3,668 $ 3,509 $ 1,828
========== ========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 13,817 $ 9,161 $ 14,550
---------- ---------- ----------
Income taxes, net of refunds $ (141) $ (1,777) $ (625)
---------- ---------- ----------
The accompanying notes are an integral part of these consolidated financial statements.
F-17
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) GENERAL
(a) NATURE OF OPERATIONS
Darling International Inc. (the "Company") is a 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 approved by the U.S. District Court providing for a
restructure of the Company's debt and equity and resolution of
a class action lawsuit (the "Settlement"). The terms of the
settlement were tantamount to a prepackaged bankruptcy despite
the settlement not occurring under Chapter 11 of the
Bankruptcy Code. 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 December 29, 2001, the 52
weeks ended December 30, 2000, and the 52 weeks ended
January 1, 2000.
(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.
F-18
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(5) Collection Routes and Contracts
Collection routes consist of groups of suppliers of
raw materials in similar geographic areas from which
the Company derives collection fees, and a dependable
source of raw materials for processing into finished
products. Restrictive covenants represent non-compete
agreements with former competitors whose businesses
were acquired. Amortization is computed by the
straight-line method over the following periods: 1)
Collection routes, 8 to 15 years; and 2) Restrictive
covenants, 3 to 10 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 15,568,362, 15,568,362
and 15,568,362 for 2001, 2000 and 1999, respectively.
The numbers of shares for 2000 and 1999 have been
reduced for 21,000 treasury shares from numbers
previously reported, which did not effect previously
reported earnings per share.
F-19
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
For 2001, 2000 and 1999 the effect of all outstanding
stock options was 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 accounting principles
generally accepted in the United States of America
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 2001, Fiscal 2000, and Fiscal 1999, the
Company recorded impairment charges of $840,000,
$4,016,000, and $1,387,000, respectively, to reduce
the value of goodwill and certain land, buildings and
equipment to estimated fair value. The impairment
charges are included in depreciation and amortization
expense in the accompanying Fiscal 2001, Fiscal 2000
and Fiscal 1999 Consolidated Statements of
Operations.
The Fiscal 2001 impairment charge of $840,000
pertains solely to assets held for sale (see Note 5)
in the Company's rendering business segment. The
impairment charges were necessary to reduce the
carrying value of these assets to management's
estimate of
F-20
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
their net realizable value in light of current
economic conditions. Estimated net realizable values
were based on information from business and real
estate brokers, comparable sales, property tax
valuations and internal discussions with Company
employees working in the geographic areas who were
familiar with the specific assets. A summary of the
impairment charge follows (in thousands):
Land $106
Leaseholds and buildings 134
Equipment and furniture 600
----
Total impairment $840
====
The Fiscal 2000 impairment charge of $4,016,000
consists of (1) $2,138,000 related to rendering
business segment operating assets, (2) $162,000 and
$375,000 related to restaurant services business
segment equipment and allocable goodwill,
respectively, and (3) $1,341,000 related to assets
held for sale in the Company's rendering business
segment. The impairment charges of the assets in
operation were made to reduce the carrying value to
estimated fair value based on the discounted future
cash flows of the assets. The impairment charges of
the assets held for sale were necessary to reduce the
carrying value of these assets to management's
estimate of their net realizable value based on
information from a business broker. A summary of the
impairment charge follows (in thousands):
Restaurant
Rendering Services Total
--------- ---------- -----
Leaseholds
and buildings $ 642 $ - $ 642
Equipment
and furniture 2,837 162 2,999
Goodwill - 375 375
-------- ------- --------
Total impairment $ 3,479 $ 537 $ 4,016
======== ======= ========
The Fiscal 1999 impairment charge of $1,387,000
pertains solely to assets held for sale in the
Company's rendering business segment. The impairment
charges were necessary to reduce the carrying value
of these assets to management's estimate of their net
realizable value. Estimated net realizable values
were based on an offer from a prospective buyer and
information from real estate brokers. A summary of
the impairment charge follows (in thousands):
Leaseholds and buildings $1,139
Equipment 248
------
Total impairment $1,387
======
(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.
F-21
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
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 values of the interest rate swap agreements were
liabilities of $1,020,000 and $874,400 at December 29, 2001,
and December 30, 2000, respectively. Current market pricing
models were used to estimate fair value of interest rate swap
agreements. See Note 9.
(15) Derivative Instruments
The Company makes limited use of derivative instruments
to manage cash flow risks related to interest and
natural gas expense. Interest rate swaps are entered
into with the intent of managing overall borrowing
costs. The Company does not use derivative instruments
for trading purposes.
Effective December 31, 2000 (the first day of Fiscal
2001), the Company adopted the provisions of Statement
of Financial Accounting Standards No. 133, Accounting
for Derivative Instruments and Hedging Activities
(Statement 133). Statement 133, as amended, standardizes
the accounting for derivatives instruments, including
certain derivative instruments embedded in other
contracts. Under the standard, entities are required to
report all derivative instruments in the statement of
financial position at fair value. The accounting for
changes in the fair value (i.e., gains or losses) of a
derivative instrument depends on whether it has been
designated and qualifies as part of a hedging
relationship and, if so, on the reason for holding the
instrument. If certain conditions are met, entities may
elect to designate a derivative instrument as a hedge of
exposures to changes in fair value, cash flows, or
foreign currencies. The Company held no fair value hedge
or foreign currency hedge derivative instruments at
December 30, 2000 or December 29, 2001. If the hedged
exposure is a cash flow exposure, the effective portion
of the gain or loss on the derivative instrument is
reported initially as a component of other comprehensive
income (outside of earnings) and is subsequently
reclassified into earnings when the forecasted
transaction affects earnings. Any amounts excluded from
the assessment of hedge effectiveness as well as the
ineffective portion of the gain or loss are reported in
earnings immediately. If the derivative instrument is
not designated as a hedge, the gain or loss is
recognized in earnings in the period of change. Upon
adoption, the provisions of Statement 133 must be
applied prospectively.
Upon adoption of Statement 133 on December 31, 2000, the
Company was party to interest rate and natural gas swaps
to manage the risk of changes in cash flows related to
interest expense on floating-rate borrowings under its
Credit Agreement and the purchase of natural gas used in
its plants.
At December 30, 2000, the Company was party to three
interest rate swap agreements whereby the interest
obligation on $70 million of floating-rate debt has been
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 matured
June 27, 2001, bore interest at 9.83% and the Company's
receive rate was based on the Base Rate. The third swap
agreement for $20 million matures June 27, 2002, with a
one-time option for the bank to cancel at June 27, 2001,
which the bank declined to exercise, bears interest at
9.17% and the Company's receive rate is based on the
Base Rate. Due to the uncertainty related to the
Company's ability to renew its Credit Agreement (see
Notes 2 and 9), the portion of the interest rate swap
agreements extending beyond June 30, 2001, the
expiration date of the Credit Agreement, was not
considered a hedge. The Company recorded a liability of
$0.5 million at December 30, 2000, with the related
charge recorded in other expense. The Company continues
to
F-22
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
follow this policy in Fiscal 2001. At December 29, 2001,
the fair value of this liability is $1.0 million. The
Company accounted for the portion of the interest rate
swaps through June 30, 2001 as cash flow hedges. The
fair value of this portion of the swaps was a liability
of $0.4 million at December 30, 2000.
At December 30, 2000 and through March 2001, the Company
was party to natural gas swap agreements representing
approximately 300,000 mmbtu's of natural gas per month
for January, February and March, 2001, with a NYMEX
purchase price of approximately $4.682/mmbtu. At
December 30, 2000, the fair value of the Company's
positions in these swap agreements was an asset of $2.6
million. All of the Company's positions in these swap
agreements were settled during the three months ended
March 31, 2001, and the Company no longer uses natural
gas swap agreements to manage its cash flow risk arising
from the purchase of natural gas used in its plants.
As of December 29, 2001, the Company has forward
purchase agreements in place for purchases of
approximately 1,500,000 mmbtu's of natural gas for the
period January through December, 2002, based on an
average purchase price of $3.47/mmbtu. These agreements
have no net settlement provisions and the Company
intends to take physical delivery, which it has done
under similar forward purchase agreements from March
through December, 2001. Accordingly, the agreements are
not subject to the requirements of Statement 133 because
they qualify as normal purchases as defined in the
standard.
The Company has designated the interest rate and natural
gas swap agreements as cash flow hedges and such
agreements qualify for hedge accounting under Statement
133, except as described above for certain portions of
two of the interest rate swaps. A summary of the
transition adjustment recorded to other comprehensive
income, the net change arising from hedging
transactions, and the amounts recognized in earnings
during the twelve-month period ended December 29, 2001
follows (in thousands):
Transition adjustment on December 31, 2000
to accumulated other comprehensive income $ 2,220
Net change arising from current period
hedging transactions 376
Reclassifications into earnings (2,576)
----------
Accumulated other comprehensive
loss at December 29, 2001 $ -
==========
A summary of the gains and losses recognized in
earnings during the year ended December 29, 2001
follows (in thousands):
Loss to interest expense related to
interest rate swap agreements $ (487)
Gain to operating expenses related to
natural gas swap agreements (effective portion) 2,568
Gain to other income related to
natural gas swap agreements (ineffective portion) 515
----------
Total reclassifications into earnings for the
year ended December 29, 2001 $ 2,596
==========
F-23
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Gains and losses reported in accumulated other
comprehensive income are reclassified into earnings upon
the occurrence of the hedged transactions (accrual of
interest expense and purchase of natural gas).
The entire amount reported in accumulated other
comprehensive income as of December 31, 2000
(transition), was reclassified into earnings by the
second quarter of Fiscal 2001.
There was no income tax expense or benefit recorded
related to the derivative transactions described above.
For Fiscal 2000 and 1999, interest rate swaps were
accounted for under the accrual method, whereby the
difference between the Company's pay and receive rate
was recognized as an increase or decrease to interest
expense. The natural gas fixed for float swap agreements
to which the Company was party during Fiscal 2000 are
traded on the NYMEX. Realized gains or losses from the
settlement of these financial hedging instruments were
recognized as an adjustment of the cost of purchased
natural gas in the month of delivery during Fiscal 2000.
The gains or losses realized as a result of these Fiscal
2000 hedging activities were substantially offset in the
cash market when the hedged natural gas was delivered to
the Company's facilities.
(16) Comprehensive Income
The Company follows the provisions of Statement of
Financial Accounting Standards No. 130, Reporting
Comprehensive Income (Statement 130). Statement 130
establishes standards for reporting and presentation of
comprehensive income and its components. In accordance
with Statement 130, the Company has presented the
components of comprehensive income in its consolidated
statement of stockholders' equity.
(17) Revenue Recognition
The Company recognizes revenue on sales when products
are shipped and the customer takes ownership and assumes
risk of loss. Collection fees are recognized in the
month the service is provided.
(18) Reclassifications
Certain immaterial reclassifications of amounts
previously reported have been made to the Fiscal 2000
and Fiscal 1999 consolidated financial statements to
conform the presentation for each year.
(2) LIQUIDITY AND GOING CONCERN RISK
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown
in the Consolidated Balance Sheet at December 29, 2001, the Company has
$120.0 million of debt due under its bank credit facilities classified
as a current liability because the underlying Credit Agreement had a
maturity date of June 30, 2001. Effective June 29, 2001, the Company
entered into a series of forbearance agreements and amendments with the
parties to its existing Credit Agreement. The forbearance agreements
and amendments, among other things, provide that the lenders will not
exercise their remedies under the Credit Agreement for certain defaults
until the expiration of the forbearance period on April 30, 2002
(subject to a proposed amendment to the forbearance agreement that
would extend the forbearance agreement to May 31, 2002) and will
continue to make revolving loans to the Company, raise the interest
rate under the Credit Agreement from 1% over prime to 3% over prime,
require the payment of a fee of $3.9 million to the lenders with
respect to the forbearance agreements, reduce the commitment during the
forbearance period by $2.0 million, from $128.5 million to $126.5
million, and limit financial covenants to
F-24
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
certain minimum cash flows, based upon the Company's own projected cash
flow for certain periods during the forbearance period.
On March 15, 2002, the Company entered into a Recapitalization
Agreement. Under the terms of the Recapitalization Agreement, the
forbearance period is extended to April 30, 2002 (subject to a proposed
amendment to the forbearance agreement that would extend the
forbearance agreement to May 31, 2002), if the recapitalization
transaction is contemplated, the Company will exchange the borrowings
outstanding under its existing Credit Agreement, a portion of the
accrued interest and commitment fees, and forbearance fees payable for
newly issued common stock equal to 75% of the Company's total
outstanding common shares on a fully-diluted basis (exclusive of stock
options issued and outstanding) and 6% cumulative redeemable preferred
stock with a face value of $10.0 million. If the recapitalization is
consummated, a new amended and restated credit agreement which is
anticipated to result in borrowings under a term loan of $68.3 million,
and a revolving credit agreement which will enable the Company to
borrow up to $10.1 million. The consummation of the Recapitalization is
subject to a number of conditions and termination rights.
The accompanying consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business.
The financial statements do not include any adjustments related to
recoverability and classification of liabilities that might be
necessary should the Company be unable to continue as a going concern.
Because the Company did not make the principal payments under the
credit facility when it matured on June 30, 2001, the Company is in
default under its existing credit agreement. In connection with the
Recapitalization Agreement, the Lenders agreed to extend the
forbearance period and not exercise their remedies until April 30,
2002. We have agreed in principle with the Lenders on an amendment to
the forbearance agreement that would extend the forbearance period to
May 31, 2002 but this amendment has not been signed yet. If the Company
is unable to consummate a new financing arrangement, then, in the
absence of another business transaction or debt agreement, the Company
cannot make the principal payment due under the existing Credit
Agreement and, accordingly, after the expiration of the forbearance
period, the lenders could exercise their rights to realize upon the
collateral securing the debt (which comprises substantially all the
Company's assets). As a result of this material uncertainty, there is
doubt about the Company's ability to continue as a going concern. The
absence of a new financing arrangement creates a material uncertainty
regarding the ability of the Company to continue as a going concern.
Management is not able to predict what the outcome or consequences of
these matters might be.
(3) INVENTORIES
A summary of inventories follows (in thousands):
December 29, December 30,
2001 2000
------------ ------------
Finished product $ 6,117 $ 7,117
Supplies and other 1,581 1,183
-------- --------
$ 7,698 $ 8,300
======== ========
F-25
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(4) PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment follows (in thousands):
December 29, December 30,
2001 2000
------------ ------------
Land $ 9,454 $ 9,871
Buildings and improvements 25,906 27,272
Machinery and equipment 139,248 139,678
Vehicles 49,084 48,041
Construction in process 6,607 4,324
---------- ---------
230,299 229,186
Accumulated depreciation 155,555 140,944
---------- ---------
$ 74,744 $ 88,242
========== =========
(5) ASSETS HELD FOR SALE
Assets held for sale consist of the following (in thousands):
December 29, December 30,
2001 2000
----------- ------------
Esteem (Norfolk, NE) $ 1,200 $ 1,400
Peptide (Norfolk, NE) 500 862
Petaluma, CA 497 -
Billings, MT 421 372
West Point, NE 118 -
Lynchburg, VA 100 -
Shelbyville, VA 62 -
Zanesville, VA 54 -
Goldsboro, NC 50 -
Milwaukee, WI - 527
---------- ---------
$ 3,002 $ 3,161
========== =========
The Esteem and Peptide assets are principally idle machinery and
equipment. Assets at other locations are either closed rendering
facilities or closed transfer stations (locations where raw materials
collected from suppliers are aggregated and transferred to processing
plants) and consist primarily of land. None of the above assets was
operated during Fiscal 2001 and Fiscal 2000. The effect of suspending
depreciation of these assets was approximately $0.2 million in both
Fiscal 2001 and 2000.
As discussed in Note 1, the Company recorded impairment charges related
to certain of the assets held for sale in Fiscal 2001, Fiscal 2000 and
Fiscal 1999. Included in the Fiscal 2001 and 2000 impairment charges
are the following amounts to reduce the carrying value of assets held
for sale to estimated net realizable value (in thousands):
December 29, December 30,
2001 2000
----------- ------------
Esteem $ 210 $ 1,083
Peptide 439 258
Other assets 191 -
---------- ---------
Total $ 840 $ 1,341
========== =========
F-26
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
During Fiscal 2001, management changed its assessment of the period of
time in which the assets held for sale could likely be sold.
Accordingly, the balance of assets held for sales is classified as a
noncurrent asset at December 29, 2001. Management expects to dispose of
the assets held for sale during Fiscal 2003.
(6) OTHER ASSETS
Other assets consist of the following (in thousands):
December 29, December 30,
2001 2000
-----------------------------------
Prepaid pension cost (Note 13) $ 2,359 $ 2,054
Deposits and other 1,526 951
Deferred recapitalization costs 3,762 -
------- -------
$ 7,647 $ 3,005
======= =======
(7) ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
December 29, December 30,
2001 2000
----------------------------
Compensation and benefits $ 6,750 $ 4,093
Utilities and sewage 3,944 3,981
Accrued plant expenses 2,590 2,048
Accrued forbearance fees 2,570 -
Insurance (Note 16) 2,604 6,004
Accrued freight cost 1,208 1,053
Accrued interest rate swap liability 1,020 436
Accrued taxes 888 1,359
Reserve for environmental and litigation
matters (Note 16) 599 1,149
Non-compete agreements 363 1,620
Other accrued expense 1,533 1,417
-------- --------
$ 24,069 $ 23,160
======= =======
(8) LEASES
The Company leases five plants and storage locations, four office
locations and a portion of its transportation equipment under operating
leases. Leases are noncancellable and expire at various times through
the year 2028. Minimum rental commitments under noncancellable leases
as of December 29, 2001, are as follows (in thousands):
Period Ending Fiscal Operating Leases
-------------------- ----------------
2002 $ 3,627
2003 2,725
2004 2,086
2005 1,335
2006 515
Thereafter 8,504
-------
Total $ 18,792
======
Rent expense for the years ended December 29, 2001, December 30, 2000,
and January 1, 2000 was $4.2 million, $3.2 million and $2.6 million,
respectively.
F-27
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(9) DEBT
Debt consists of the following (in thousands):
December 29, December 30,
2001 2000
-----------------------------------
Credit Agreement:
Revolving Credit Facility $120,027 $109,498
Term Loan - -
Other notes 26 30
-------- --------
120,053 109,528
Less current maturities 120,053 109,528
-------- --------
$ - $ -
======== ========
See the discussion regarding Liquidity and Going Concern Risk in Note
2. 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
amended Credit Agreement 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 amended and restated the Credit Agreement.
The Credit Agreement, as amended, provided for borrowings in the form
of a $36,702,000 Term Loan and $135,000,000 Revolving Credit Facility.
At December 30, 2000, the Term Loan had been paid in full and the
availability under the revolver was $128.5 million. Substantially all
assets of the Company are either pledged or mortgaged as collateral for
borrowings under the Credit Agreement. The 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 shown in the Consolidated Balance Sheet at December 29, 2001, the
Company has $120.0 million of debt due under its bank credit facilities
classified as a current liability because the underlying Credit
Agreement had an expiration date of June 30, 2001. Effective June 29,
2001, the Company entered into a series of forbearance agreements and
amendments with the parties to its existing Credit Agreement. The
forbearance agreements and amendments, among other things, provide that
the lenders will not exercise their remedies under the Credit Agreement
for certain defaults until April 30, 2002 (subject to a proposed
amendment to the forbearance agreement that would extend the
forbearance agreement to May 31, 2002) and will continue to make
revolving loans to the Company, raise the interest rate under the
Credit Agreement from 1% over prime to 3% over prime, require the
payment of a fee of $3.9 million to the lenders with respect to the
forbearance agreements, reduce the commitment during the forbearance
period by $2.0 million, from $128.5 million to $126.5 million, and
limit financial covenants to certain minimum cash flows, based upon the
Company's own projected cash flow for certain periods during the
forbearance period.
On March 15, 2002, the Company entered into a Recapitalization
Agreement. Under the terms of the Recapitalization Agreement, the
forbearance period is extended to April 30, 2002 (subject to a proposed
F-28
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
amendment to the forbearance agreement that would extend the
forbearance agreement to May 31, 2002), and if the recapitalization
transaction is consummated, the Company will exchange the borrowings
outstanding under its existing Credit Agreement, accrued interest, and
forbearance fees payable for newly issued common stock equal to 75% of
the Company's total outstanding common shares on a fully-diluted basis
(exclusive of stock options issued and outstanding) and 6% cumulative
redeemable preferred stock with a face value of $10.0 million. The
Company and its lenders will use their best efforts to consummate a new
Credit Agreement which is anticipated to result in borrowings under a
senior term loan of $68.3 million and a revolving credit agreement
which will enable the Company to borrow up to $10.1 million.
(10) OTHER NONCURRENT LIABILITIES
Other noncurrent liabilities consist of the following (in thousands):
December 29, December 30,
2001 2000
----------------------------------
Reserve for insurance, environmental,
litigation and tax matters (Note 16) $ 7,184 $13,214
Liabilities associated with consulting and
noncompete agreements 758 2,868
Other 192 165
-------- --------
$ 8,134 $16,247
======= ======
During Fiscal 2001, the Company made cash payments under letter of
credit arrangements to its insurance claims administrator and to one
party to a noncompete agreement of $5.9 million and $1.8 million,
respectively.
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):
December 29, December 30, January 1,
2001 2000 2000
----------------------------------------------------
Current:
Federal $ - $ - $ -
State - - -
Foreign - - -
Deferred:
Federal - - (9,183)
State - - (796)
Foreign - - (36)
--------- --------- --------
$ - $ - $(10,015)
========= ========= =======
Income tax benefit for the years ended December 29, 2001, December 30,
2000, and January 1, 2000, differed from the amount computed by
applying the statutory U.S. federal income tax rate (35%) to loss from
continuing operations before income taxes as a result of the following
(in thousands):
F-29
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
December 29, December 30, January 1,
2001 2000 2000
---------------------------------------------------
Computed "expected" tax benefit $ (4,146) $ (6,846) $ (9,000)
State income taxes, net of federal effect - - (517)
Change in valuation allowance 4,289 7,554 (311)
Other, net (143) (708) (187)
--------- -------- ---------
$ - $ - $(10,015)
========== =========== =======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 29, 2001 and December 30, 2000 are presented below (in
thousands):
December 29, December 30,
2001 2000
-----------------------------------
Deferred tax assets:
Net operating loss carryforwards $ 34,208 $ 35,668
Capital loss carryforwards - -
Loss contingency reserves 4,229 5,457
Other 1,753 1,314
--------- ---------
Total gross deferred tax assets 40,190 42,439
Less valuation allowance (25,994) (21,705)
-------- --------
Net deferred tax assets 14,196 20,734
-------- --------
Deferred tax liabilities:
Collection routes and contracts (5,250) (6,926)
Property, plant and equipment (8,016) (13,023)
Other (717) (572)
--------- ---------
Total gross deferred tax liabilities (13,983) (20,521)
------- -------
$ 213 $ 213
========= =========
The portion of the deferred tax assets and liabilities expected to be
recognized in Fiscal 2001 has been recorded at December 29, 2001, in
the accompanying consolidated balance sheet as a net current deferred
income tax asset of $2,203,000. The remaining non-current deferred tax
assets and liabilities have been recorded as a net deferred income tax
liability of $1,990,000 at December 29, 2001 in the accompanying
consolidated balance sheet.
The valuation allowance for deferred tax assets as of December 29, 2001
and December 30, 2000 was $25,994,000 and $21,705,000, respectively.
The net changes in the total valuation allowance was an increase of
$4,289,000 for the year ended December 29, 2001 and an increase of
$7,554,000 for the year ended December 30, 2000 . The Company believes
that the remaining net deferred tax assets at December 29, 2001 will be
realized primarily through future reversals of existing taxable
temporary differences.
At December 29, 2001, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $90,020,000 which are
available to offset future federal taxable income through 2019. 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 ($72,280,000) is limited to $3,400,000
per year for the remaining life of the net operating losses.
(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).
F-30
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
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 December 29,
2001, options to purchase 703,385 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 2001, 2000 and 1999 was $0.46, $1.65 and $5.57, respectively, on
the date of grant using the Black Scholes option-pricing model with the
following weighted assumptions:
2001 2000 1999
--------------------------------------------------------
Expected dividend yield 0.0% 0.0% 0.0%
Risk-free interest rate 5.14% 5.28% 6.38%
Expected life 10 years 10 years 10 years
Expected annual volatility 42.31-100.94% 42.31-98.64% 62.41-66.59%
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):
2001 2000 1999
-----------------------------------------
Net loss
As reported $(11,845) $(19,189) $(16,033)
Pro forma $(12,132) $(20,415) $(16,534)
Basic loss per common share
As reported $(0.76) $(1.23) $(1.03)
Pro forma $(0.78) $(1.31) $(1.06)
F-31
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
A summary of transactions for all stock options granted follows:
Number of Option exercise Weighted-avg.
shares price per share exercise price per
share
--------------------------------------------------------
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
=========
Granted 1,129,050 0.50-1.75 1.11
Canceled (1,031,305) 2.625-10.875 7.74
----------
Options outstanding at December 30, 2000 2,334,380 0.50-9.50 2.43
=========
Granted 703,385 0.50 0.50
Canceled (11,900) 4.125-9.50 6.38
Options outstanding at December 29, 2001 3,025,865 0.50-9.042 2.08
=========
Options exercisable at December 29, 2001 2,407,867 0.50-9.042 $2.46
=========
At December 29, 2001, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $0.50-9.042 and
7.5 years, respectively.
At December 29, 2001 and December 30, 2000, the number of options
exercisable was 2,407,867 and 2,253,590, respectively, and the
weighted-average exercise price of those options was $2.46 and $2.43,
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, 2001 and 2000) (in thousands):
F-32
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
December 29, December 30,
2001 2000
--------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year $45,404 $45,991
Service cost 1,305 1,478
Interest cost 3,425 3,363
Amendments 301 -
Actuarial (gain)/loss 1,541 (2,973)
Benefits paid (2,515) (2,455)
------- -------
Benefit obligation at end of year 49,461 45,404
------ ------
Change in plan assets:
Fair value of plan assets at beginning of year 48,881 46,683
Actual return on plan assets (4,727) 4,052
Employer contribution 710 601
Benefits paid (2,515) (2,455)
------- -------
Fair value of plan assets at end of year 42,349 48,881
------ ------
Funded status (7,112) 3,477
Unrecognized actuarial (gain)/loss 8,543 (2,148)
Unrecognized prior service cost 928 725
-------- --------
Net amount recognized $ 2,359 $ 2,054
======= =======
Amounts recognized in the consolidated balance sheets consist of:
Prepaid benefit cost $2,359 $2,054
Accrued benefit liability (713) -
Intangible asset 180 -
Accumulated other comprehensive income 533 -
------ --------
Net amount recognized $2,359 $2,054
===== =====
During December 2001, the Company's pension plans received common stock
resulting from the demutualization of an insurance company with an
aggregate fair value of $4.0 million which has been considered in the
determination of the amount of minimum liability reported at December 29,
2001. Since the common stock was received after the October 1, 2001
measurement date, it is not included in the fair value of plan assets at
end of year in the table above. The common stock received will be
considered an asset of the plans for purposes of determining Fiscal 2002
net pension cost.
Net pension cost includes the following components (in thousands):
December 29, December 30, January 1,
2001 2000 2000
----------------------------------------------------
Service cost $1,305 $1,478 $1,781
Interest cost 3,425 3,363 3,110
Expected return on plan assets (4,424) (4,217) (3,894)
Net amortization and deferral 98 98 73
------- ------- ------
Net pension cost $ 404 $ 722 $1,070
====== ====== ======
F-33
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Assumptions used in accounting for the employee benefit pension plans
were:
December 29, December 30, January 1,
2001 2000 2000
------------------------------------------------------
Weighted average discount rate 7.50% 7.75% 7.50%
Rate of increase in future compensation levels 5.16% 5.08% 5.17%
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 $1,491,000, $1,384,000 and $1,306,000 for the years ended
December 29, 2001, December 30, 2000, and January 1, 2000, 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 2001,
2000 and 1999.
(15) DISCONTINUED OPERATIONS
In 1998, the Company made a decision to discontinue the operations of the
Bakery By-Products Recycling business segment in order to concentrate its
financial and human resources on its other businesses. The disposal of
this business was accounted for as a discontinued operation. Gain (loss)
on disposal relates to an adjustment of the indemnification liability in
Fiscal 1999 and write-off of the liability in Fiscal 2000 upon
termination of the indemnification period.
(16) CONTINGENCIES
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 but has permitted approximately
300 people to join the lawsuit as plaintiffs. 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 unspecified compensatory and exemplary
damages in an amount in excess of $25,000 per plaintiff and unspecified
injunctive relief. The Company is unable to estimate its potential
liability from this lawsuit. 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, and all of the damage claims in the suit filed
by the City of Melvindale have been dismissed. The City of Melvindale now
seeks unspecified 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.
F-34
Long Island City, NY
The Company is a party to a lawsuit that seeks to require an
environmental cleanup at a property in Long Island City, New York where
the Company formerly operated a rendering plant (referred to as the
"Site"). DMJ Associates (DMJ), which holds a mortgage on the Site, has
filed suit against the Company, as a former owner of the Site, as well as
others including the present tenants and operators of the Site, the owner
of an abandoned hazardous waste disposal site adjoining the Site (the
"Disposal Facility"), and companies that disposed of wastes at the
Disposal Facility (the "Generator Defendants"). DMJ argues that, inter
alia, under federal law it is entitled to relief directed to have the
defendants remediate the contamination. DMJ seeks both equitable and
monetary relief from all defendants for investigation, abatement and
remediation of the Site. DMJ has not yet provided information sufficient
for the Company to ascertain the magnitude or amount of DMJ's total claim
nor the Company's alleged share thereof. As a result, the Company is
unable to estimate its potential liability from this lawsuit. The Company
does not have information suggesting that it contributed in any material
way to any contamination that may exist at the Site. The Company is
actively defending the suit and is awaiting a decision on a motion on
summary judgment regarding the standing of the plaintiff.
Sauget, Illinois
The Company is a party to a lawsuit that seeks to recover costs related
to an environmental cleanup in or near Sauget, Illinois. The United
States had filed a complaint against Monsanto Chemical Company, Solutia,
Inc., Anheuser-Busch, Inc., Union Electric, and 14 other defendants,
seeking to recover cleanup costs. Monsanto (which merged with Pharmacia
and Upjohn, Inc in 2000 and is now known as Pharmacia Corporation) and
Solutia in turn filed a third party complaint seeking contribution from
the United States, several federal agencies, and six more companies, in
addition to the Company. As potentially responsible parties themselves,
Pharmacia and Solutia are seeking to recover unspecified proportionate
shares from each of the other parties, in addition to the Company, of an
as yet undetermined total cleanup cost. A subsidiary of the Company had
operated an inorganic fertilizer plant in Sauget, Illinois for a number
of years prior to closing it in the 1960's. The Company is defending this
case vigorously, and does not believe, based upon currently available
information, that the fertilizer plant contributed in any significant way
to the contamination that is leading to the environmental cleanup, or
that its share, if any, of the cost of the cleanup will be material.
Accordingly, the Company is unable to estimate its potential liability
from this lawsuit.
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 air, wastewater, and stormwater discharges
from the Company's processing facilities.
Self Insured Risks
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 accrued expenses and
other noncurrent liabilities classifications in the Company's
consolidated balance sheets include reserves for insurance, environmental
and litigation contingencies of $10.6 million and $20.4 million at
December 29, 2001 and December 30, 2000, respectively. There can be no
assurance, however, that final costs related to these matters will not
exceed current estimates. The Company believes that any additional
liability relative to lawsuits and claims which may not be covered by
insurance would not likely have a material adverse effect on the
F-35
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Company's financial position, although it could potentially have a
material impact on the results of operations in any one year.
(17) BUSINESS SEGMENTS
The Company operates on a worldwide basis within two industry segments:
Rendering and Restaurant Services. 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 excludes 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.
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):
-----------------------------
December 29, December 30, January 1,
2001 2000 2000
----------------------------------------------------
Rendering:
Trade $194,960 $186,445 $204,631
Intersegment 31,182 26,011 27,970
-------- -------- --------
226,142 212,456 232,601
------- ------- -------
Restaurant Services:
Trade 61,014 56,350 53,939
Intersegment 6,854 7,781 7,204
--------- --------- ---------
67,868 64,131 61,143
-------- -------- --------
Eliminations (38,036) (33,792) (35,174)
-------- -------- -------
Total $255,974 $242,795 $258,570
======= ======= =======
Business Segment Profit (Loss) (in thousands):
-----------------------------
December 29, December 30, January 1,
2001 2000 2000
-----------------------------------------------------
Rendering $14,000 $ 8,170 $ 3,249
Restaurant Services 7,436 3,487 922
Corporate Activities (19,119) (17,246) (15,882)
Interest expense (14,162) (13,971) (14,004)
-------- ------- -------
Loss from continuing operations
before income taxes $(11,845) $(19,560) $(25,715)
======= ======= =======
F-36
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
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):
-----------------------
December 29, December 30,
2001 2000
-----------------------------------
Rendering $ 56,847 $ 64,199
Restaurant Services 14,779 17,290
Combined Rend./Rest. Svcs. 64,155 72,722
Corporate Activities 23,298 20,294
-------- --------
Total $159,079 $174,505
======= =======
Business Segment Property, Plant and Equipment (in thousands):
----------------------------------------------
December 29, December 30,
2001 2000
-----------------------------------
Depreciation and amortization:
Rendering $17,823 $21,531
Restaurant Services 6,333 6,323
Corporate Activities 2,478 3,327
------- -------
Total $26,634 $31,181
====== ======
Additions:
Rendering $ 3,327 $ 2,168
Restaurant Services 1,544 2,897
Combined Rend./Rest. Svcs. 1,292 2,159
Corporate Activities 2,979 460
------- --------
Total $ 9,142 $ 7,684
======= =======
F-37
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
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):
----------------------------------
December 29, December 30, January 1,
2001 2000 2000
----------------------------------------------------
United States $117,849 $114,102 $151,165
Korea 3,538 6,041 13,029
Spain 388 963 1,798
Mexico 23,390 25,090 19,320
Japan 1,075 1,916 2,162
N. Europe 1,444 707 2,095
Pacific Rim 9,838 889 9,008
Taiwan 552 1,775 2,415
Canada 993 864 580
Latin/South America 9,192 13,408 13,413
Other/Brokered 87,715 77,040 43,585
-------- -------- --------
Total $255,974 $242,795 $258,570
======= ======= =======
Other/Brokered trade revenues represent product for which the ultimate
destination is not monitored.
(18) QUARTERLY FINANCIAL DATA (UNAUDITED AND IN THOUSANDS EXCEPT PER SHARE
AMOUNTS):
Year Ended December 29, 2001
------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
Net sales $63,634 $58,614 $65,045 $68,681
Operating income (loss) 1,503 (1,342) 942 2,865
Loss from continuing operations (1,149) (5,721) (3,519) (1,456)
Net loss (1,149) (5,721) (3,519) (1,456)
Basic loss per share (0.07) (0.37) (0.23) (0.09)
Diluted loss per share (0.07) (0.37) (0.23) (0.09)
Year Ended December 30, 2000
------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
Net sales $62,818 $61,557 $57,629 $60,791
Operating income (loss) 194 (1,200) (1,550) (2,849)
Loss from continuing operations (3,026) (4,766) (5,169) (6,599)
Discontinued operations -
Gain on disposal - 121 - 250
Net loss (3,026) (4,645) (5,169) (6,349)
Basic loss per share (0.19) (0.30) (0.33) (0.41)
Diluted loss per share (0.19) (0.30) (0.33) (0.41)
F-38
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(19) RECENTLY ISSUED ACCOUNTING STANDARDS
Recently, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 141, Business
Combinations (Statement 141), Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets (Statement 142), Statement
of Financial Accounting Standards No. 143, Accounting for Asset
Retirement Obligations (Statement 143), and Statement of Financial
Accounting Standards No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets (Statement 144).
Statement 141 requires that all business combinations initiated after
June 30, 2001 be accounted for under the purchase method. Statement 141
also specifies the criteria that intangible assets acquired in a business
combination must meet to be recognized and reported apart from goodwill.
The Company does not believe Statement 141 will have a significant impact
on its consolidated financial statements. Statement 142 requires that
goodwill and intangible assets with indefinite lives no longer be
amortized, but instead be tested for impairment at least annually.
Statement 142 also requires that intangible assets with estimated useful
lives be amortized over their respective useful lives to their estimated
residual values, and reviewed for impairment. Statement 142 is effective
for fiscal years beginning after December 15, 2001. Amortization expense
related to goodwill that will not be amortized under Statement 142 was
$242,000, $142,000 and $228,000 for Fiscal 2001, 2000 and 1999,
respectively. Because of the extensive effort needed to comply with
adopting Statement 142, it is not practicable to reasonably estimate the
impact of adopting this standard at the date of this report, including
whether we will be required to recognize any transitional impairment
losses as the cumulative effect of a change in accounting principle.
Statement 143 establishes requirements for the accounting for removal
costs associated with asset retirements and is effective for fiscal years
beginning after June 15, 2002, with earlier adoption encouraged. The
Company is currently assessing the impact of Statement 143 on its
consolidated financial statements. Statement 144 supercedes Statement
121, Accounting for the Impairment of Long Lived Assets and for Long
Lived Assets to be Disposed Of, and the accounting and reporting
provisions of Accounting Principles Board Opinion No. 30, Reporting the
Results of Operations, Reporting the Effects of Disposal of a Segment of
a Business, and Extraordinary, Unusual and Infrequently Occurring Events
and Transactions. Statement 144 retains the fundamental provisions of
Statement 121 but eliminates the requirement to allocate goodwill to long
lived assets to be tested for impairment. Statement 144 also requires
discontinued operations to be carried at the lower of cost or fair value
less costs to sell and broadens the presentation of discontinued
operations to include a component of an entity rather than a segment of a
business. Statement 144 is effective for fiscal years beginning after
December 15, 2001 and interim periods within those years with early
adoption encouraged. The Company does not expect the adoption of
Statement 144 to have a material impact on its consolidated financial
statements.
F-39
SCHEDULE II
Valuation and Qualifying Accounts
(In thousands)
Additions Charged to:
Balance at --------------------- Balance at
Beginning Costs and End of
Description of Period Expenses Other Deductions Period
-------------------------------------------- ------------- -------------- -------------- --------------- ----------
Accumulated amortization of
collection routes and contracts:
Year ended December 29, 2001 $ 18,828 $ 5,014 $ - $ 1,703 $ 22,139
======= ======== ===== ========= =========
Year ended December 30, 2000 $ 15,819 $ 5,498 $ - $ 2,489 $ 18,828
======= ======== ===== ========= =========
Year ended January 1, 2000 $ 12,101 $ 5,686 $ 4 $ 1,972 $ 15,819
======= ======== ===== ========= =========
Accumulated amortization of
goodwill:
Year ended December 29, 2001 $ 883 $ 242 $ - $ 48 $ 1,077
========= ========== ===== ========== ========
Year ended December 30, 2000 $ 741 $ 142 $ - $ - $ 883
========= ========== ===== ========= ========
Year ended January 1, 2000 $ 513 $ 228 $ - $ - $ 741
========= ========== ===== ========= ========
Note: Deductions consist of the write-off of fully amortized collection routes
and contracts and goodwill.
Reserve for bad debts:
Year ended December 29, 2001 $ 680 $ 582 $ - $ 795 $ 467
========= ========== ===== ======== ========
Year ended December 30, 2000 $ 2,408 $ 641 $ - $ 2,369 $ 680
======== ========== ===== ======== ========
Year ended January 1, 2000 $ 1,169 $ 1,604 $ - $ 365 $ 2,408
======== ========= ===== ======== ========
Deferred tax valuation allowance:
Year ended December 29, 2001 $ 21,705 $ 4,289 $ - $ - $ 25,994
======= ========= ===== ======== ========
Year ended December 30, 2000 $ 14,151 $ 7,554 $ - $ - $ 21,705
======= ========= ===== ======== ========
Year ended January 1, 2000 $ 14,462 $ - $ - $ 311 $ 14,151
======= ========= ===== ======== ========
Note: Deductions consist of write-offs of uncollectable accounts receivable.
F-40
DARLING INTERNATIONAL INC.
INTRODUCTION TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following unaudited pro forma consolidated financial information
was prepared to give effect to the transactions outlined under the heading
"Recapitalization."
The unaudited pro forma consolidated balance sheet data as of March 30,
2002 and December 29, 2001 gives effect to the Recapitalization as if it had
occurred on such dates. The unaudited consolidated statement of operations data
for the three months ended March 30, 2002 and the year ended December 29, 2001
gives effect to the Recapitalization at the beginning of such periods.
The unaudited pro forma consolidated financial statements are not
necessarily indicative of what our results would have been if the
Recapitalization had actually occurred as of the dates indicated or of what our
future operating results will be.
The unaudited pro forma consolidated financial statements should be
read in conjunction with our unaudited consolidated financial statements as of
and for the three months ended March 30, 2002, our audited consolidated
financial statements as of and for the year ended December 29, 2001, and the
information set forth under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contained in this registration
statement.
F-41
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
As of March 30, 2002
(in thousands, except shares and per share data)
Pro Forma
Historical Adjustments Pro Forma
Assets
Current Assets:
Cash and cash equivalents $ 2,999 $ -- $ 2,999
Accounts receivable 18,957 -- 18,957
Inventories 7,874 -- 7,874
Prepaid expenses 5,316 -- 5,316
Deferred income taxes 2,203 -- 2,203
Other current assets 184 -- 184
----------------- --------- ------------
Total current assets 37,533 -- 37,533
Property, Plant and Equipment
less accumulated depreciation and amortization 75,064 -- 75,064
Collection Routes and Contracts, less accumulated 26,231 -- 26,231
amortization
Goodwill, less accumulated amortization 4,429 -- 4,429
Assets held for sale 3,002 -- 3,002
Other Noncurrent Assets 8,197 2,273 (a) 3,421
(7,049)(b)
Debt Issuance Costs -- 4,478 (b) 4,478
----------------- ----------------- -----------
Total Assets $ 154,456 $ (298) $ 154,158
================= ================= ===========
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities:
Current portion of long-term debt $ 5,120 $ (5,097)(c) $ 3,646
3,623 (c)
Accounts payable, principally trade 7,864 -- 7,864
Accrued expenses 22,310 2,273 (a) 20,728
(3,855)(c)
Accrued interest 5,525 (4,775)(c) 750
----------------- ----------------- -----------
Total current liabilities 40,819 (7,831) 32,988
Long-term debt, less current portion 112,127 (112,127)(c) 76,328
76,328 (c)
Other noncurrent liabilities 8,591 -- 8,951
Deferred income taxes 1,990 -- 1,990
----------------- ----------------- ------------
Total liabilities 163,527 (43,630) 119,897
Series A 6% Cumulative Redeemable Preferred Stock,
Liquidation Preference $10,000,000; none
(historical) -- 8,072 (c) 7,619
and 100,000 (pro forma) shares issued and
outstanding (453)(b)
Stockholders' Equity (Deficit):
Preferred stock, $0.01 par value; 1,000,000 shares
authorized, none issued -- -- --
Common stock, $0.01 par value; 25,000,000
(historical) and 100,000,000 (pro forma) shares
authorized; 15,589,362 (historical) and 62,294,448
(pro forma) shares issued and outstanding 156 467 (c) 623
Additional paid-in capital 35,235 37,364 (c) 70,481
(2,118)(b)
Treasury stock, at cost, 21,000 shares (172) -- (172)
Accumulated comprehensive loss (533) -- (533)
Accumulated deficit (43,757) -- (43,757)
----------------- ----------------- ------------
Total stockholders' equity (deficit) (9,071) 35,713 26,642
------------------ ----------------- ------------
Total Liabilities and Stockholders' Equity (Deficit) $ 154,456 $ (298) $ 154,158
================== ================= ============
F-42
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
As of December 29, 2001
(in thousands, except shares and per share data)
Pro Forma
Historical Adjustments Pro Forma
Assets
Current Assets:
Cash and cash equivalents $ 3,668 $ -- $ 3,668
Accounts receivable 23,719 -- 23,719
Inventories 7,698 -- 7,698
Prepaid expenses 4,394 -- 4,394
Deferred income taxes 2,203 -- 2,203
Other current assets 209 -- 209
----------------- --------------- ------------
Total current assets 41,891 -- 41,891
Property, Plant and Equipment
less accumulated depreciation and amortization 74,744 -- 74,744
Collection Routes and Contracts, less accumulated
amortization 27,366 -- 27,366
Goodwill, less accumulated amortization 4,429 -- 4,429
Assets held for sale 3,002 3,002
Other Noncurrent Assets 7,647 3,715 (a) 3,885
(7,049) (b)
(428) (c)
Debt Issuance Costs -- 4,892 (b) 4,892
----------------- --------------- ------------
Total Assets $ 159,079 $ 1,130 $ 160,209
================= =============== ============
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities:
Current portion of long-term debt $ 120,053 $ (120,027)(c) $ 5,097
5,071 (c)
Accounts payable, principally trade 11,104 -- 11,104
Accrued expenses 24,069 3,715 (a) 25,214
(2,570)(c)
Accrued interest 3,383 (3,383)(c) --
----------------- --------------- ------------
Total current liabilities 158,609 (117,194) 41,415
Long-term debt, less current portion -- 82,051 (c) 82,051
Other noncurrent liabilities 8,134 -- 8,134
Deferred income taxes 1,990 -- 1,990
----------------- --------------- ------------
Total liabilities 168,733 (35,143) 133,590
Series A 6% Cumulative Redeemable Preferred Stock,
Liquidation Preference $10,000,000; none
(historical) -- 8,072 (c) 7,619
and 100,000 (pro forma) shares issued and
outstanding (453)(b)
Stockholders' Equity (Deficit):
Preferred stock, $0.01 par value; 1,000,000 shares
authorized, none issued -- -- --
Common stock, $0.01 par value; 25,000,000
(historical) and 100,000,000 (pro forma) shares
authorized; 15,589,362 (historical) and 62,294,448
(pro forma) shares issued and outstanding 156 467 (c) 623
Additional paid-in capital 35,235 29,891 (c) 63,422
(1,704)(b)
Treasury stock, at cost, 21,000 shares (172) -- (172)
Accumulated comprehensive loss (533) -- (533)
Accumulated deficit (44,340) -- (44,340)
------------------ --------------- ------------
Total stockholders' equity (deficit) (9,654) 28,654 19,000
------------------ --------------- ------------
Total Liabilities and Stockholders' Equity (Deficit) $ 159,079 $ 1,130 $ 160,209
================== =============== ============
F-43
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 30, 2002
(in thousands, except per share data)
Pro Forma
Historical Adjustments Pro Forma
Net sales $ 61,681 $ -- $ 61,681
----------------- -------------- ---------------
Costs and Expenses:
Cost of sales and operating expenses 46,395 -- 46,395
Selling, general and administrative 7,160 -- 7,160
Depreciation and amortization 4,392 -- 4,392
----------------- ---------------
Total costs and expenses 57,947 -- 57,947
----------------- ---------------
Operating Income 3,734 -- 3,734
----------------- ---------------
Other Income (Expense):
Interest expense (3,885) 3,220 (d) (665)
Other, net 734 (223)(e) 511
----------------- -------------- ---------------
Total costs and expense (3,151) 2,997 (154)
------------------ -------------- ----------------
Income Before Income Taxes 583 2,997 3,580
Income Taxes -- 1,083 (f) 1,083
------------------ ------------------ ---------------
Net Income 583 1,914 2,497
Preferred Dividends and Accretion -- (380)(g) (380)
------------------ ------------------ ----------------
Net Income Applicable to Common Shareholders $ 583 $ 1,534 $ 2,117
================= ================== ===============
Basic and Diluted Income Per Share: $ 0.04 $ 0.03
================== ===============
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 29, 2001
(in thousands, except per share data)
Pro Forma
Historical Adjustments Pro Forma
Net sales $ 255,974 $ -- $ 255,974
----------------- ----------------- ---------------
Costs and Expenses:
Cost of sales and operating expenses 196,778 -- 196,778
Selling, general and administrative 28,594 -- 28,594
Depreciation and amortization 26,634 -- 26,634
----------------- ----------------- ---------------
Total costs and expenses 252,006 -- 252,006
----------------- ----------------- ---------------
Operating Income 3,968 -- 3,968
----------------- ----------------- ---------------
Other Income (Expense):
Interest expense (14,162) 12,747 (d) (1,415)
Other, net (1,651) (349) (e) (2,000)
------------------ ------------------ ----------------
Total costs and expense (15,813) 12,398 (3,415)
------------------ ------------------ ----------------
Income (Loss) Before Income Taxes (11,845) 12,398 553
Income Taxes -- -- --
------------------ ------------------ ---------------
Net Income (Loss) (11,845) 12,398 553
Preferred Dividends and Accretion -- (1,465) (g) (1,465)
------------------ ------------------ ----------------
Net Loss Applicable to Common Shareholders $ (11,845) $ 10,933 $ (912)
================= ================== ================
Basic and Diluted Loss Per Share: $ (0.76) $ (0.01)
================== ================
F-44
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS
(a) Represents estimated additional issuance costs of $2.3 and $3.7 million to
be incurred after March 30, 2002 and December 29, 2001, respectively,
related to the term loan, the revolving credit facility, the issuance of
shares of Series A Preferred Stock and the issuance of shares of common
stock.
(b) Represents the reclassification of total estimated capitalized issuance
costs of $7.0 million related to the term loan, the revolving credit
facility, the issuance of shares of Series A Preferred Stock and the
issuance of shares of common stock on a pro rata basis as follows: $4.5
million and $4.9 million to debt issuance cost as of March 30, 2002 and
December 29, 2001, respectively, $2.1 million and $1.7 million to
additional paid in capital as of March 30, 2002 and December 29, 2001,
respectively and $0.5 million to cumulative redeemable preferred stock.
(c) For accounting purposes, the Recapitalization is treated as the exchange
of:
i. Revolving debt (approximately $117.2 million and $120.0 million at
March 30, 2002 and December 31, 2001, respectively),
ii. Accrued and unpaid interest thereon (approximately $4.8 million and
$3.4 million at March 30, 2002 and December 31, 2001, respectively),
and
iii. Forbearance fees (approximately $3.9 million and $2.2 million
(consisting of a $2.6 million liability less a $0.4 million deferred
cost included in other noncurrent assets) at March 30, 2002 and
December 31, 2001, respectively), all under the previous credit
facility,
For:
i. Term loan (face value of $68.25 million and $69.0 million and a
carrying value of $80.0 million and $87.1 million at March 30, 2002
and December 31, 2001, respectively) due to troubled debt
restructuring accounting,
ii. Issuance of approximately 46.7 million shares of common stock
(constituting 75% of the total issued and outstanding common shares as
of both March 30, 2002 and December 29, 2001) with a market value of
$0.81 per share and $0.65 per share at March 30, 2002 and December 29,
2001, respectively, and iii. Issuance of $10.0 million of Series A
Preferred Stock with a dividend rate of 6% per annum and an estimated
fair value of $8.1 million at both March 30, 2002 and December 31,
2001.
Statement of Financial Accounting Standards No. 15, "Accounting by
Debtors and Creditors for Troubled Debt Restructurings," requires that
the existing amount of debt owed by our company to the Lenders be
reduced by the fair value of the equity interest granted and that no
gain from restructuring our company's debt be recognized unless the
remaining carrying amount of the debt exceeds the total future cash
payments specified by the terms of the debt remaining unsettled after
the restructuring. Accordingly, the remaining amount of debt owed by
us to the Lenders has been adjusted to $80.0 million and $87.1 million
at March 30, 2002 and December 31, 2001, respectively, which exceeds
the contractual amount of the term loan by $11.8 million and $18.1
million at March 30, 2002 and December 31, 2001, respectively.
Interest expense on the remaining carrying amount of debt reported in
our financial statements will be based on a new effective interest
rate that equates the present value of the future cash payments
specified by the new terms of the term loan with the carrying amount
of the debt.
F-45
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Unaudited Pro Forma Consolidated Financial Statements (continued)
(d) Represents the reduction in interest expense associated with the
exchange of the revolving debt for the term loan, the revolving credit
facility, the issuance of shares of Series A Preferred Stock and the
issuance of shares of common stock. Interest expense for financial
reporting purposes subsequent to the Recapitalization will be
determined as described in note (c) above and will be substantially
less than the amount based on the contractual amount of outstanding
debt ($68.2 million and $69.0 million at May 30, 2002 and December 31,
2001, respectively) and the current interest rate (6.75% at both March
30, 2002 and December 31, 2001 based on our choice of the lesser of
the prime rate plus 2% and LIBOR plus 5%). Interest expense reported
over the term of the debt will be the amount by which the total cash
payments for retirement of the debt and interest ($89.3 million and
$90.3 million for the three months ended March 30, 2002 and year ended
December 31, 2001, respectively, based on a current interest rate of
6.75%) exceed the adjusted carrying amount of our debt ($80.0 million
and $87.1 million at March 30, 2002 and December 31, 2001,
respectively). The effective interest rate on the term loan subsequent
to the Recapitalization reflected in the accompanying pro forma
statement of operations is 0.7% and 0.2% for the three months ended
March 30, 2002 and year ended December 31, 2001, respectively. A 1/8
per cent variance in the interest rate utilized would have an effect
of $0.1 million for both the three months ended March 30, 2002 and for
the year ended December 29, 2001.
(e) Represents the increase in debt issuance cost amortization associated
with the exchange of the revolving debt for the term loan, the
revolving credit facility, the issuance of shares of Series A
Preferred Stock and the issuance of shares of common stock.
(f) Represents estimated income tax expense.
(g) Represents dividends on and accretion of the Series A Preferred Stock.
(h) Pro forma basic and diluted loss per share is based on 62.3 million
weighted average shares outstanding and includes the issuance of 46.7
million shares of new common stock in the exchange for the revolving
commitments under the existing credit facility.
F-46
[Logo of Darling International Inc.]
46,705,086 shares of Common Stock
100,000 shares of Series A Preferred Stock
------------------
P R O S P E C T U S
------------------
June 6, 2002