As filed with the Securities and Exchange Commission on May 30, 2003
Registration No. 333-88944
===========================================================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
AMENDMENT NO. 3
(Post-Effective)
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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DARLING INTERNATIONAL INC.
(Exact name of Registrant as specified in its charter)
Delaware 2070 36-2495346
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number) Identification No.)
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251 O'Connor Ridge Boulevard, Suite 300
Irving, Texas 75038
972.717.0300
(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices)
--------------
Joseph R. Weaver, Jr.
General Counsel and Secretary
Darling International Inc.
251 O'Connor Ridge Boulevard, Suite 300
Irving, Texas 75038
972.717.0300
(Name, Address Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)
--------------
With copies to:
Fredric J. Klink, Esq.
Dechert LLP
30 Rockefeller Plaza
New York, New York 10112
212.698.3537
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Approximate date of commencement of proposed sale to the public: At such time or times on and after this
Registration Statement becomes effective as the selling stockholders may determine.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant
to Rule 415 under the Securities Act of 1933, check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the
Securities Act, please check the following box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] __________________
If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the
following box and list the Securities Act registration statement number of the earlier effective registration statement for
the same offering. [ ] __________________
If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the
following box and list the Securities Act registration statement number of the earlier effective registration statement for
the same offering. [ ] __________________
If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ]
Note: This Registration Statement as initially filed on May 23, 2002 covered the resale of 46,705,086 shares of the
Registrant's Common Stock and the resale of 100,000 shares of the Company's Series A Preferred Stock. Concurrently with
filing Amendment No. 2 on April 30, 2003, the Registrant terminated any secondary offering of its Common Stock under this
Registration Statement and separately filed a Registration Statement on Form S-3 covering the resale of the 46,205,086
shares of Common Stock that remained unsold under this Registration Statement.
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The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its
effective date until the Registrant shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this
Registration Statement shall become effective on such date as the Commission acting pursuant to said Section 8(a) may
determine.
The information in this prospectus is not complete and may be changed. The
selling stockholders may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and is not soliciting offers
to buy these securities in any state where the offer or sale is not permitted.
Subject to Completion
Preliminary Prospectus dated May 30, 2003
P R O S P E C T U S
-------------------
DARLING INTERNATIONAL INC.
100,000 Shares of Series A Preferred Stock
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Investing in 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 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, 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 63. We cannot assure you that the selling stockholders will
sell all or any portion of the Series A Preferred Stock offered under this
prospectus. Our company is not selling any shares of 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 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.
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 __________, 2002
TABLE OF CONTENTS
Page
Forward-Looking Statements........................................................................................1
Prospectus Summary................................................................................................1
Summary Historical Consolidated Financial Data....................................................................4
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 Consolidated Financial Data..................................................................18
Management's Discussion And Analysis Of Financial Condition And Results Of Operations............................21
Our Business.....................................................................................................31
Our Management...................................................................................................38
Report Of The Compensation Committee.............................................................................48
Compliance With Section 16(a) Of The Exchange Act................................................................50
Certain Relationships and Related Transactions...................................................................50
Performance Graph................................................................................................50
Security Ownership Of Certain Beneficial Owners And Management...................................................52
Description Of Senior Credit Agreement...........................................................................56
Description Of Capital Stock.....................................................................................57
Selling Stockholders.............................................................................................61
Plan Of Distribution.............................................................................................63
Material U.S. Federal Tax Considerations.........................................................................65
Legal Matters....................................................................................................71
Experts..........................................................................................................71
Where You Can Find More Information..............................................................................71
Index To Consolidated Financial Statements......................................................................F-1
- i -
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
7 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 cooking oil from food service
establishments. We process such raw materials at 24 facilities located
throughout the United States into finished products such as tallow, protein 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. In addition, we provide grease
trap service to food service establishments under the service mark TORVAC.
Grease trap service includes the scheduled periodic removal of grease and solids
from the grease trap to ensure the trap functions as intended, keeping these
materials from entering the sewer system. Many cities and municipalities have
ordinances and/or regulations that require periodic grease trap service as part
of restaurant operations.
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 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 Series A Preferred Stock
Securities offered for resale by the
selling stockholders.................................... Up to 100,000 shares of Series A Preferred 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 at 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 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.
-2-
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 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 Series A
Preferred Stock.
-3-
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
The following summary historical 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.
Fiscal Year Ended (a)
-------------------------------------------------------------------------
December 28, December 29, December 30, January 1, January 2,
2002(b) 2001(b) 2000(b) 1999(b) 1999 (b)
--------------------------------------------- -------------- -------------- -------------- -------------- -------------
(in thousands, except ratio and per share data)
Operating Data:
Net sales $ 262,236 $242,964 $229,273 $244,036 $318,706
--------- --------- --------- --------- ---------
Cost of sales and operating expenses 194,559 185,019 177,638 198,646 267,190
Selling, general and administrative
expenses 30,294 28,334 26,479 26,451 32,347
Depreciation and amortization 16,426 24,898 26,859 30,734 30,284
--------- --------- --------- --------- ---------
Operating income (loss) 20,957 4,713 (1,703) (11,795) (11,115)
Interest expense 6,409 14,162 13,971 15,533 12,747
Other (income) expense, net (2,001) 1,656 187 (1,805) 1,073
--------- --------- --------- --------- ---------
Income (loss) from continuing
operations before income taxes 16,549 (11,105) (15,861) (25,523) (24,935)
Income tax expense (benefit) 7,183 - - (9,942) (8,887)
--------- --------- --------- --------- ---------
Income (loss) from continuing
operations 9,366 (11,105) (15,861) (15,581) (16,048)
Loss from discontinued operations,
net of tax (403) (740) (3,328) (452) (16,045)
--------- --------- --------- --------- ---------
Net Income (loss) $8,963 $(11,845) $(19,189) $(16,033) $(32,093)
========= ========= ========= ========= =========
Basic earnings (loss) per common share $0.18 $(0.76) $(1.23) $(1.03) $(2.06)
Diluted earnings (loss) per common
share $0.18 $(0.76) $(1.23) $(1.03) $(2.06)
Weighted average shares outstanding 45,003 15,568 15,568 15,560 15,581
Diluted weighted average shares
outstanding 45,577 15,568 15,568 15,560 15,581
Other Data:
EBITDA (c) $37,383 $29,611 $25,156 $18,939 $19,169
Depreciation 12,146 19,642 21,219 24,820 24,298
Amortization 4,280 5,256 5,640 5,914 5,986
Capital expenditures 13,433 8,847 7,287 9,446 14,345
Ratio of Earnings to Fixed Charges (d) 2.55 0.29 - - -
Balance Sheet Data:
Working capital (deficiency) $9,152 $(116,718) $(106,809) $(5,223) $3,070
Total assets 162,912 159,079 174,505 197,804 263,166
Current portion of long-term debt 8,372 120,053 109,528 7,810 7,717
Total long-term debt less current
portion 60,055 - - 110,209 140,613
Stockholders' equity (deficit) 35,914 (9,654) 2,724 21,913 37,946
-4-
Three Months Ended
----------------------------
March 29, March 30,
2003 2002
------------------------------------------------------------------------------------------- ------------- --------------
(unaudited)
(in thousands, except
ratio and
per share data)
Operating Data:
Net sales $ 68,651 $ 58,679
Cost of sales and operating expenses 51,050 43,745
Selling, general and administrative expenses 8,520 7,158
Depreciation and amortization 3,657 4,088
-------- --------
Operating income 5,424 3,688
Interest expense (492) (3,885)
Other expense, net 583 734
-------- --------
Income from continuing operations before income taxes 5,515 537
Income tax expense (2,096) -
-------- --------
Income from continuing operations 3,419 537
Income from discontinued operations, net of tax - 46
-------- --------
Net Income $ 3,419 $ 583
======== ========
Basic earnings per common share $ 0.05 $ 0.04
Diluted earnings per common share $ 0.05 $ 0.04
Weighted average shares outstanding 62,282 15,568
Diluted weighted average shares outstanding 63,665 15,568
Other Data:
EBITDA (c) $ 9,081 $ 7,776
Depreciation 2,620 2,953
Amortization 1,037 1,135
Capital expenditures (2,679) (3,622)
Ratio of Earnings to Fixed Charges (d) 4.36 1.13
Balance Sheet Data:
Working capital (deficiency) $ 5,873 $ (3,286)
Total assets 158,554 154,456
Current portion of long-term debt 8,033 5,120
Total long-term debt less current portion 54,583 112,127
Stockholders' equity (deficit) 38,981 (9,071)
(a) The fiscal years ended December 28, 2002, December 29, 2001, December
30, 2000, January 1, 2000 and January 2, 1999 each consisted of 52
weeks.
(b) As disclosed in Note 1(b)(13) and Note 15 to the consolidated financial
statements included elsewhere herein, the Company adopted SFAS 144 in
Fiscal 2002. SFAS 144 requires the classification of prior year
operating results of discontinued operations to be consistent with the
current year presentation. Accordingly, prior years' financial
statements reflect reclassification of the Linkwood, MD results as
discontinued operations.
(c) "EBITDA" represents, for any relevant period, operating income (loss)
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.
-5-
Reconciliation of Net Cash Provided by Operating Activities To EBITDA (in thousands):
------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Net cash provided by operating activities 34,132 5,612 16,243 803 25,465
Interest 6,409 14,162 13,971 15,533 12,747
Net cash provided by discontinued operations (867) (996) (623) (2,178) (2,771)
Change in working capital (4,602) 9,097 (4,478) 4,557 (16,788)
Taxes 2,749 - - (31) 425
Other Income (2,001) 1,656 187 (1,805) 1,073
Gain on the sale of assets 1,563 80 (144) 2,060 (982)
------ ------- ------- ------- -------
EBITDA 37,383 29,611 25,156 18,939 19,169
------ ------- ------- ------- -------
March 29, 2003 March 30, 2002
-------------- --------------
(unaudited)
Net cash provided by operating activities 4,184 4,906
Interest 492 3,885
Net cash provided by discontinued operations - (351)
Change in working capital 2,600 (831)
Taxes 1,577 -
Other Income 233 (734)
Gain on the sale of assets (5) (901)
------ ------
9,081 7,776
------ ------
(d) 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, 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, earnings were insufficient to
cover fixed charges of $11.1 million, $15.9 million, $25.5 million and
$24.9 million, respectively.
-6-
Ratio of Earnings to Fixed Charges
(in thousands, except ratio and per share data)
December 28, December 29, December 30, January 1, January 2,
2002 2001 2000 2000 1999
---------------------------------------------- ------------- -------------- --------------- ------------- --------------
Income (loss) from continuing
operations before income taxes $ 16,549 $(11,105) $(15,861) $(25,523) $(24,935)
Fixed charges:
Interest expense 6,409 14,162 13,971 15,533 12,747
Estimated interest within rental
expense 1,409 1,382 1,069 851 543
Preference security dividend
requirements 1,756 - - - -
-------- --------- ---------- ---------- ---------
Total fixed charges 9,574 15,544 15,040 16,384 13,290
-------- --------- ---------- ---------- ---------
Earnings (loss) before preference
security dividend 26,123 4,439 (821) (9,139) (11,645)
Less preference security dividend
requirements (1,756) - - - -
-------- --------- ---------- ---------- ---------
- - -
Earnings (loss) $ 24,367 $ 4,439 $ (821) $ (9,139) $(11,645)
======== ========= ========== ========== =========
Ratio of earnings to fixed charges 2.55 0.29 - - -
Deficiency in income to cover fixed
charges $ - $ (11,105) $ (15,861) $ (25,523) $(24,935)
Three Months Ended
-----------------------------
March 29, March 30,
2003 2002
(unaudited)
------------------------------------------------------------------------------------------ -------------- --------------
Income from continuing operations before income taxes $ 5,515 $ 537
Fixed charges:
Interest expense 492 3,885
Estimated interest within rental expense 405 317
Preference security dividend requirements 573 -
---------- ---------
Total fixed charges 1,470 4,202
---------- ---------
Earnings before preference security dividend 6,985 4,739
Less preference security dividend requirements (573) -
---------- ---------
Earnings 6,412 4,739
========== =========
Ratio of earnings to fixed charges 4.36 1.13
Deficiency in income to cover fixed charges - -
-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 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 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 March 25, 2003, we owed a contractual amount of $56.4 million in
senior secured term loans with a carrying amount of $67.7 million and had no
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 $0.8 million, $3.7 million and $4.5 million,
respectively were issued and outstanding under the senior credit facility. We
will be able to incur additional indebtedness in the future, including $8.4
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, are secured and senior to the Series A
Preferred Stock and common stock.
-8-
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 incur net
losses, which in the future, 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. For the years ended December 29,
2001, December 30, 2000 and January 1, 2000, our net losses were approximately
$11.8 million, $19.2 million and $16.0 million, respectively. However, following
the Recapitalization completed in May 2002, as described below under "The
Recapitalization," we reported a net profit of $9.0 million for the year ended
December 28, 2002 and $3.4 million for the quarter ended March 29, 2003. If,
however, we incur net losses in the future, our ability to pay principal and
interest on our indebtedness could be adversely affected.
In order to establish consistent profitability, we must continue to do
one or more of the following:
o maintain our collection fees at levels sufficient to recover an
adequate portion of collection costs;
o increase gross margins to the extent of inflation;
o maintain our distribution capability;
o maintain competitiveness in pricing;
o continue to manage our operating expenses; and
o limit any increases in 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 will 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 5.01% for May 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;
o make restricted payments;
o create liens;
o merge, consolidate or acquire other businesses;
-9-
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. 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
under those circumstances. Any future credit agreement or other agreement
relating to our indebtedness to which we may become a party 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 may
be limited.
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.
Our ability to pay any cash or noncash dividends on the Series A
Preferred 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 so
long as any indebtedness or
-10-
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, 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 that we will be able
to pay dividends on the Series A Preferred 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 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.
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
-11-
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 April 28, 2003 we have
available for issuance 37,711,832 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 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 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.
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
-12-
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.
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. However, we were advised at the
time of the Recapitalization in May 2002, 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.
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.
-13-
Certain of our 24 operating facilities are highly dependent upon a few
suppliers.
Certain of our 24 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 and the war with Iraq may adversely
affect the U.S. and international economies, the markets for our common stock
and Series A Preferred Stock and our operations.
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 our financial condition and 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 (a) 46,705,086 shares of common
stock, such that the lenders collectively own 75% our issued and
outstanding common stock and (b) 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 $3.9 million 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, as of the
date of the Recapitalization;
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 and granting the lenders certain other
registration rights relating to the shares of common stock and
Series A Preferred Stock issued to them.
-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.
2003 2002 2001
---------------- ---------------- ----------------
Fiscal Quarter High Low High Low High Low
-------------- ---- --- ---- --- ---- ---
First Quarter $2.25 $1.72 $1.30 $0.30 $1.25 $0.44
Second Quarter 0.90 0.55 0.84 0.50
Third Quarter 1.50 0.67 1.00 0.50
Fourth Quarter 1.90 0.85 0.91 0.50
On May 28, 2003, the closing sales price of our common stock on the
American Stock Exchange was $2.10. We have been notified by our stock transfer
agent that as of April 21, 2003, there were 100 holders of record of our common
stock.
DIVIDEND POLICY
We have not declared or paid any dividends on our common stock since
January 3, 1989. In addition, our current 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 29, 2003.
March 29, 2003
(in thousands)
------------------------
Cash and cash equivalents....................................... $ 10,863
========
Current portion of long-term debt............................... $ 8,033
Long-term debt, less current portion ........................... 54,583
Series A 6% Cumulative Redeemable Preferred Stock, $0.01 par
value; 1,000,000 shares authorized; 100,000 shares issued and 8,955
outstanding.....................................................
Shareholders' Equity (Deficit):
Common stock, $0.01 par value per share; 100,000,000 shares
authorized; and 62,302,448 shares issued and outstanding ... 623
Additional paid-in capital...................................... 74,395
Treasury stock, at cost; 21,000 shares (172)
Accumulated comprehensive loss (3,907)
Accumulated deficit............................................. (31,958)
--------
Total shareholders' equity...................................... 38,981
--------
Total Capitalization...................................... $110,552
========
-17-
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following selected historical 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.
Fiscal Year Ended (a)
-------------------------------------------------------------------------
December 28, December 29, December 30, January 1, January 2,
2002(b) 2001(b) 2000(b) 1999(b) 1999 (b)
--------------------------------------------- -------------- -------------- -------------- -------------- -------------
(in thousands, except ratio and share data)
Operating Data:
Net sales $262,236 $242,964 $229,273 $244,036 $318,706
--------- --------- --------- --------- ---------
Cost of sales and operating expenses 194,559 185,019 177,638 198,646 267,190
Selling, general and administrative
expenses 30,294 28,334 26,479 26,451 32,347
Depreciation and amortization 16,426 24,898 26,859 30,734 30,284
--------- --------- --------- --------- ---------
Operating income (loss) 20,957 4,713 (1,703) (11,795) (11,115)
Interest expense 6,409 14,162 13,971 15,533 12,747
Other (income) expense, net (2,001) 1,656 187 (1,805) 1,073
--------- --------- --------- --------- ---------
Income (loss) from continuing
operations before income taxes 16,549 (11,105) (15,861) (25,523) (24,935)
Income tax expense (benefit) 7,183 - - (9,942) (8,887)
--------- --------- --------- --------- ---------
Income (loss) from continuing
operations 9,366 (11,105) (15,861) (15,581) (16,048)
Loss from discontinued operations,
net of tax (403) (740) (3,328) (452) (16,045)
--------- --------- --------- --------- ---------
Net Income (loss) $8,963 $(11,845) $(19,189) $(16,033) $(32,093)
========= ========= ========= ========= =========
Basic earnings (loss) per common share $0.18 $(0.76) $(1.23) $(1.03) $(2.06)
Diluted earnings (loss) per common
share $0.18 $(0.76) $(1.23) $(1.03) $(2.06)
Weighted average shares outstanding 45,003 15,568 15,568 15,560 15,581
Diluted weighted average shares
outstanding 45,577 15,568 15,568 15,560 15,581
Other Data:
EBITDA (c) $37,383 $29,611 $25,156 $18,939 $19,169
Depreciation 12,146 19,642 21,219 24,820 24,298
Amortization 4,280 5,256 5,640 5,914 5,986
Capital expenditures 13,433 8,847 7,287 9,446 14,345
Ratio of Earnings to Fixed Charges (d) 2.55 0.29 - - -
Balance Sheet Data:
Working capital (deficiency) $9,152 $(116,718) $(106,809) $(5,223) $3,070
Total assets 162,912 159,079 174,505 197,804 263,166
Current portion of long-term debt 8,372 120,053 109,528 7,810 7,717
Total long-term debt less current
portion 60,055 - - 110,209 140,613
Stockholders' equity (deficit) 35,914 (9,654) 2,724 21,913 37,946
-18-
Three Months Ended
----------------------------
March 29, March 30,
2003 2002
------------------------------------------------------------------------------------------- ------------- --------------
(unaudited)
(in thousands, except
ratio and
per share data)
Operating Data:
Net sales $ 68,651 $ 58,679
Cost of sales and operating expenses 51,050 43,745
Selling, general and administrative expenses 8,520 7,158
Depreciation and amortization 3,657 4,088
-------- --------
Operating income 5,424 3,688
Interest expense (492) (3,885)
Other expense, net 583 734
-------- --------
Income from continuing operations before income taxes 5,515 537
Income tax expense (2,096) -
-------- --------
Income from continuing operations 3,419 537
Income from discontinued operations, net of tax - 46
-------- --------
Net Income $ 3,419 $ 583
======== ========
Basic earnings per common share $ 0.05 $ 0.04
Diluted earnings per common share $ 0.05 $ 0.04
Weighted average shares outstanding 62,282 15,568
Diluted weighted average shares outstanding 63,665 15,568
Other Data:
EBITDA (c) $ 9,081 $ 7,776
Depreciation 2,620 2,953
Amortization 1,037 1,135
Capital expenditures (2,679) (3,622)
Ratio of Earnings to Fixed Charges (d) 4.36 1.13
Balance Sheet Data:
Working capital (deficiency) $ 5,873 $ 3,286
Total assets 158,554 154,456
Current portion of long-term debt 8,033 5,120
Total long-term debt less current portion 54,583 112,127
Stockholders' equity (deficit) 38,981 (9,071)
(a) The fiscal years ended December 28, 2002, December 29, 2001, December
30, 2000, January 1, 2000 and January 2, 1999 each consisted of 52
weeks.
(b) As disclosed in Note 1(b)(13) and Note 15 to the consolidated financial
statements included elsewhere herein, the Company adopted SFAS 144 in
Fiscal 2002. SFAS 144 requires the classification of prior year
operating results of discontinued operations to be consistent with the
current year presentation. Accordingly, prior years' financial
statements reflect reclassification of the Linkwood, MD results as
discontinued operations.
(c) "EBITDA" represents, for any relevant period, operating income (loss)
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.
-19-
Reconciliation of Net Cash Provided by Operating Activities to EBITDA (in thousands):
------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Net cash provided by operating activities 34,132 5,612 16,243 803 25,465
Interest 6,409 14,162 13,971 15,533 12,747
Net cash provided by discontinued operations (867) (996) (623) (2,178) (2,771)
Change in working capital (4,602) 9,097 (4,478) 4,557 (16,788)
Taxes 2,749 - - (31) 425
Other Income (2,001) 1,656 187 (1,805) 1,073
Gain on the sale of assets 1,563 80 (144) 2,060 (982)
------ ------ ------ ------ ------
EBITDA 37,383 29,611 25,156 18,939 19,169
------ ------ ------ ------ ------
March 29, 2003 March 30, 2002
-------------- --------------
(unaudited)
Net cash provided by operating activities 4,184 4,906
Interest 492 3,885
Net cash provided by discontinued operations - (351)
Change in working capital 2,600 (831)
Taxes 1,577 -
Other Income 233 (734)
Gain on the sale of assets (5) 901
----- -----
EBITDA 9,081 7,776
----- -----
(d) 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, 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, earnings were insufficient to
cover fixed charges of $11.1 million, $15.9 million, $25.5 million and
$24.9 million, respectively.
-20-
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 cooking oil from food service
establishments. We process such raw materials at 24 facilities located
throughout the United States into finished products such as tallow, protein 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. In addition, we provide grease
trap service to food service establishments under the service mark TORVAC.
Grease trap service includes the scheduled periodic removal of grease and solids
from the grease trap to ensure the trap functions as intended, keeping these
materials from entering the sewer system. Many cities and municipalities have
ordinances and/or regulations that require periodic grease trap service as part
of restaurant operations.
Results of Operations
3 Months Ended March 29, 2003 vs. 3 Months Ended March 30, 2002
General. We recorded income from continuing operations of $3.4 million
for the first quarter of the fiscal year ending January 3, 2004 (first quarter
of Fiscal 2003), as compared to income from continuing operations of $0.5
million for the first quarter of the fiscal year ended December 28, 2002 (first
quarter of Fiscal 2002), an improvement of $2.9 million. Principal factors
affecting these comparative results, which are discussed further in the
following section were higher sales prices and lower interest expense, partially
offset by higher raw material prices, lower yield on production, higher energy
expense, payroll and related benefits, and higher income tax expense.
Net sales. We collect and process animal by-products (fat, bones and
offal) and used restaurant cooking oil to produce finished products of tallow,
protein, and yellow grease. Sales are significantly affected by finished goods
prices, quality of raw material, and volume of raw material. Net sales include
the sales of produced finished goods, collection fees, grease trap services, and
finished goods purchased for resale, which constitutes approximately 6.8% of
total sales for the first quarter of Fiscal 2003 and approximately 8.8% of total
sales for the first quarter of Fiscal 2002.
During the first quarter of Fiscal 2003, net sales increased by $10.0
million (17.0%), to $68.7 million, as compared to $58.7 million during the first
quarter of Fiscal 2002, primarily due to the following: (1) increases in
aggregate finished goods prices resulted in an $8.8 million increase in sales in
the first quarter of Fiscal 2003, compared to the first quarter of Fiscal 2002,
(average yellow grease prices increased 50.4%; average tallow prices increased
51.1%; and average protein prices decreased 1.7%); (2) finished products
purchased for resale increased $1.3 million; (3) improved recovery of collection
expenses, $0.6 million; and (4) other net increase of $0.3 million; partially
offset by (5) lower yields on production of finished goods decreased sales by
$1.0 million.
-21-
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 for changes in competition
and significant changes in market conditions. Raw materials purchased under
formula prices are correlated with specific finished goods prices.
During the first quarter of Fiscal 2003, cost of sales and operating
expenses increased $7.4 million (16.9%) to $51.1 million as compared to $43.7
million during the first quarter of Fiscal 2002 primarily as a result of: (1)
higher raw material prices of $2.5 million, which are due in part to higher
finished product prices, which increase formula raw material pricing
arrangements with raw material suppliers; (2) higher energy prices, $1.5
million; (3) higher finished products purchased for resale increased cost of
sales $1.3 million; (4) higher factory and collection payroll and related
benefits of $0.8 million; (5) higher fleet fuel expense, $0.4 million; (6)
higher insurance expense of $0.3 million; and (7) other expense increased $0.6
million.
Selling, General and Administrative Costs. Selling, general and
administrative costs were $8.5 million during the first quarter of Fiscal 2003,
a $1.3 million increase from $7.2 million for the first quarter of Fiscal 2002,
primarily due to increases in employee benefits of $1.1 million, and other
increases of $0.2 million.
Depreciation and Amortization. Depreciation and amortization charges
decreased $0.4 million to $3.7 million during the first quarter of Fiscal 2003
as compared to $4.1 million during the first quarter of Fiscal 2002. The
decrease is primarily due to various property and equipment assets becoming
fully depreciated during Fiscal 2002.
Interest Expense. Interest expense decreased $3.4 million from $3.9
million during the first quarter of Fiscal 2002 to $0.5 million during the first
quarter of Fiscal 2003, primarily due to changes resulting from the effect of
the provisions of SFAS 15 as they apply to our May 13, 2002 Recapitalization
Agreement (see note 6 to the consolidated financial statements for the quarter
ended March 29, 2003 included elsewhere herein), which reduced interest expense
on bank debt by approximately $2.0 million, and due to forbearance fees accrued
in the first quarter of Fiscal 2002 of approximately $1.4 million.
Other Income (Expense). Other income (expense) decreased $0.1 million
from net other income of $0.7 million during the first quarter of Fiscal 2002 to
net other income of $0.6 million during the first quarter of Fiscal 2003,
primarily due to inclusion of a gain on extinguishment of debt of $0.8 million,
which resulted from retirement of debt with a carrying value of $4.9 million and
a cash payment of $4.1 million, due to SFAS 15 accounting, and other net expense
of $0.2 million. Included in net other income in the first quarter of Fiscal
2002 was a gain of $1.0 million resulting from insurance proceeds received in
excess of net book value of assets destroyed by fire at the Company's Norfolk,
NE facility, and other net expense of $0.3 million.
Income Taxes. Our recorded income tax expense of $2.1 million during
the first quarter of Fiscal 2003 is based on our estimate of the effective tax
rate for the entire year.
Capital Expenditures. We made capital expenditures of $2.7 million and
acquired rendering and grease businesses for a net investment of approximately
$1.1 million, which included machinery, equipment and routes during the first
quarter of Fiscal 2003 compared to capital expenditures of $3.6 million during
the first quarter of Fiscal 2002, an increase of $0.2 million.
52 Week Fiscal Year Ended December 28, 2002 (Fiscal 2002) vs. 52 Week Fiscal
Year Ended December 29, 2001 (Fiscal 2001)
General. We reported a sales increase of $19.2 million (7.9%) for
Fiscal 2002 and operating income of $21.0 million compared to operating income
of $4.7 million in Fiscal 2001, an improvement of $16.3 million. Principal
factors affecting these comparative results, which are discussed further in the
following section, were: (1) higher finished goods prices; (2) higher collection
fees which improved recovery of collection expenses; (3) lower depreciation
expense; and (4) lower energy expense; partially offset by (5) higher raw
material prices. We reported income from continuing operations of $9.4 million
for Fiscal 2002 compared to a loss from continuing operations of $11.1 million
for Fiscal 2001, an improvement of $20.5 million.
-22-
Net Sales. During Fiscal 2002, net sales increased by $19.2 million
(7.9%) to $262.2 million as compared to $243.0 million during Fiscal 2001. The
increase in net sales was primarily due to the following: (1) favorable finished
goods prices resulted in a $15.7 million increase (our average yellow grease
prices increased 15.4%, average tallow prices increased 13.3%, and average
protein prices decreased 0.2%); (2) improved recovery of collection expenses,
$5.6 million; and (3) improved yields on production increased $0.9 million;
partially offset by (4) raw material inage decrease, $1.6 million; (5) hide
sales decrease, $1.3 million; and (6) other net decreases, $0.1 million.
Cost of Sales and Operating Expenses. During Fiscal 2002, cost of sales
and operating expenses increased $9.6 million (5.2%) to $194.6 million as
compared to $185.0 million during Fiscal 2001. The increase in cost of sales and
operating expenses was primarily due to the following: (1) higher raw material
prices, $8.0 million; (2) higher payroll and related benefits, $5.1 million; (3)
higher insurance expense, $1.4 million; (4) higher contract hauling expense,
$1.0 million; (5) higher cost on sales of equipment, $0.6 million; and (6) other
net increases of $0.2 million; partially offset by (7) lower energy expense of
$6.3 million; and (8) lower inage of $0.4 million.
Selling, General and Administrative Costs. Selling, general and
administrative expenses were $30.3 million during Fiscal 2002, a $2.0 million
increase (7.1%) from $28.3 million during Fiscal 2001, primarily due to the
following: (1) higher payroll and related benefit expense of $0.9 million, which
included $1.0 million in charges for compensation to be paid to our former chief
executive officer over a two-year period due to the change in control of our
company; (2) higher legal and audit expense of $0.3 million; (3) higher
insurance expense of $0.2 million; (4) higher marketing, advertising and product
development expense of $0.2 million; and (5) other net increases of $0.4
million.
Depreciation and Amortization. Depreciation and amortization charges
decreased $8.5 million (34.1%), to $16.4 million during Fiscal 2002 as compared
to $24.9 million during Fiscal 2001. The decrease is primarily due to various
property and equipment assets becoming fully depreciated during Fiscal 2002.
Included in Fiscal 2001, depreciation and amortization expense is an impairment
charge of $0.8 million.
Interest Expense. Interest expense was $6.4 million during Fiscal 2002,
compared to $14.2 million during Fiscal 2001, a decrease of $7.8 million
(54.9%), primarily due to changes resulting from the effect of the provisions of
SFAS 15 as it applies to our Recapitalization (see Note 2 to the consolidated
financial statements elsewhere herein), which reduced interest expense on bank
debt by approximately $7.2 million; reduced interest expense resulting from
forbearance fees of approximately $0.4 million; and other decreases of $0.2
million.
Other Income (Expense). Other income was $2.0 million in Fiscal 2002, a
$3.7 million increase from other expense of $1.7 million in Fiscal 2001.
Included in other income in Fiscal 2002 is: a gain of $1.7 million resulting
from insurance proceeds received in excess of the net book value of assets
destroyed by fire at our Norfolk, Nebraska facility; a gain on extinguishment of
debt of $0.8 million, which resulted from retirement of debt with a carrying
value of $4.5 million with a cash payment of $3.7 million due to SFAS 15
accounting; and other net expense of $0.5 million. Included in net other expense
in Fiscal 2001 was: a loss on the early retirement of a non-compete liability of
$0.4 million; fair value adjustment on interest rate swap agreements of $1.4
million; and other net expense of $0.4 million; partially offset by gain related
to the ineffective portion of natural gas hedge transactions of $0.5 million.
Income Taxes. We recorded income tax expense of $7.2 million for Fiscal
2002. We also recorded tax benefits of $2.2 million from utilization of net
operating loss carryforwards which arose prior to our 1993 "Fresh Start
Reporting" as direct increases to additional paid in capital rather than as an
income tax benefit, in accordance with Statement of Position 90-7 (see Note 11
to the consolidated financial statements elsewhere herein).
-23-
We did not record a tax benefit in 2001 because of the inability to
carryback net operating losses and the uncertainty of future taxable income.
Discontinued Operations. We recorded a loss from discontinued
operations in Fiscal 2002 of $0.4 million, compared to a loss of $0.7 million in
Fiscal 2001, an improvement of $0.3 million. The loss from discontinued
operations both fiscal years relates to our Linkwood, Maryland facility, which
was sold October 18, 2002. Included in the loss incurred in Fiscal 2002, is an
impairment charge of $0.4 million, recorded to reduce the carrying value of the
Linkwood assets to fair value, based upon the cash consideration of $4.3 million
received from the third party purchaser.
Capital Expenditures. We made capital expenditures of $13.4 million
during Fiscal 2002 as compared to $8.8 million in Fiscal 2001, an increase of
$4.6 million (52.3%). The increase is primarily due to expansion of our Sioux
City plant location, completed during the third quarter of Fiscal 2002, which
will process raw material inage from the Norfolk, Nebraska plant which was
destroyed by fire.
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 $13.7 million (6.0%) for
Fiscal 2001 and operating income of $4.7 million compared to a $1.7 million
operating loss in Fiscal 2000, an improvement of $6.4 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 energy expense. We reported a loss from
continuing operations of $11.1 million for Fiscal 2001 compared to a loss from
continuing operations of $15.9 million for Fiscal 2000, a reduction of the
operating loss of $4.8 million.
Net Sales. During Fiscal 2001, net sales increased by $13.7 million
(6.0%) to $243.0 million as compared to $229.3 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 $3.8 million increase (our average yellow grease prices increased
6.7%, average tallow prices increased 10.4%, and average protein prices
decreased 3.2%); (3) hide sales increased $2.0 million; (4) higher inage
increased sales $1.9 million; (5) other net increases during Fiscal 2001 of $0.3
million; partially offset by (6) finished product purchased for resale decreased
$3.1 million; and (7) lower yields decreased sales $0.4 million.
Cost of Sales and Operating Expenses. During Fiscal 2001, cost of sales
and operating expenses increased $7.4 million (4.2%) to $185.0 million as
compared to $177.6 million during Fiscal 2000. The increase in cost of sales and
operating expenses was primarily due to the following: (1) energy expense
increased $5.7 million; (2) repairs expense increased $3.1 million; (3) leased
vehicle expenses increased $1.0 million; (4) contract hauling expenses increased
$0.6 million; (5) other net increased expenses during Fiscal 2001 of $0.1
million; partially offset by (6) finished product purchased for resale decreased
$3.1 million.
-24-
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $28.3 million during Fiscal 2001, a $1.8 million
(6.8%), $26.5 million during Fiscal 2000, primarily due to higher payroll
expense.
Depreciation and Amortization. Depreciation and amortization charges
decreased $2.0 million (7.4%), to $24.9 million during Fiscal 2001 as compared
to $26.9 million during Fiscal 2000. Included in Fiscal 2001 and Fiscal 2000
depreciation and amortization expense are impairment charges of $0.8 million and
$1.9 million, respectively.
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 $1.9 million consists of: (1) $0.1
million and $0.4 million related to restaurant services business segment
equipment and allocable goodwill, respectively, and (2) $1.4 million related to
our rendering business segment. The impairment charges of the assets were made
to reduce the carrying value to estimated fair value based on the discounted
future cash flows of the assets, or from 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 $ 0.3 $ -- $ 0.3
Equipment
and furniture 1.1 0.1 1.2
Goodwill -- 0.4 0.4
--------- --------- ---------
Total impairment $ 1.4 $ 0.5 $ 1.9
========= ========= =========
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.
Other Income (Expense). Other income (expense) in Fiscal 2001 was net
other expense of $1.7 million, compared to net other expense of $0.2 million in
Fiscal 2000, an increase in expense of $1.5 million. Included in other expense
in Fiscal 2001 were fair value adjustments on interest rate swap agreements of
$1.4 million and loss on the early retirement of a non-compete agreement of $0.4
million, partially offset by gain related to the ineffective portion of natural
gas hedge transactions of $0.5 million. Included in other expense in Fiscal 2001
were bank service charges and closed plant expenses, partially offset by gains
on the sale of fixed assets.
Income Taxes. We did not record a tax benefit in Fiscal 2001 because of
the inability to carryback net operating losses and the uncertainty of future
taxable income.
-25-
Discontinued Operations. We recorded a loss from discontinued
operations in Fiscal 2001, of $0.7 million, compared to a loss of $3.3 million
in Fiscal 2000, an improvement of $2.6 million. The losses from discontinued
operations in both Fiscal 2001 and Fiscal 2000 relate to our Linkwood, Maryland
facility, which was sold October 18, 2002; the loss in Fiscal 2000 includes our
Bakery By-Products Recycling business segment, which was sold in 1999. Included
in the loss incurred in Fiscal 2000, is an impairment charge of $2.1 million,
recorded to reduce the carrying value of the Linkwood assets to estimated fair
value, based upon the estimated discounted cash flows of the Linkwood facility.
Also included in the Fiscal 2000 loss is a net gain of $0.4 million recorded on
the Bakery By-Products Recycling business segment as a result of adjustment of
an indemnification liability in Fiscal 2000, upon termination of the
indemnification period.
Capital Expenditures. We made capital expenditures of $8.8 million
during Fiscal 2001 as compared to $7.3 million in Fiscal 2000, an increase of
$1.5 million (20.5%). 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. We incurred $0.3 million of capital
expenditures at our Linkwood, Maryland facility, which has been accounted for as
a discontinued operation.
Financing, Liquidity and Capital Resources
As described further under "Recapitalization" on May 13, 2002, we
consummated the Recapitalization and executed a new amended and restated credit
agreement with our lenders. The credit agreement reflects the effect of applying
the provisions of Statement of Financial Accounting Standards No. 15, Accounting
by Debtors and Creditors for Troubled Debt Restructurings (SFAS 15). SFAS 15
requires that the previously 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 bank debt be recognized. As a result the carrying amount
of the term loan of $62.5 million exceeds its contractual amount of $52.3
million by $10.2 million at March 29, 2003. Interest expense on the remaining
carrying amount of debt reported in our financial statements is based on a new
effective interest rate (0.20% at March 29, 2003) 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.
In connection with the Recapitalization and our entry into the credit
agreement, we exchanged borrowings outstanding under our previous credit
agreement, a portion of the accrued interest and commitment fees, and
forbearance fees payable for 46,705,086 shares of newly issued common stock,
equal to 75% of our then total outstanding common stock on a fully diluted basis
(exclusive of stock options issued and outstanding), and 100,000 shares of 6%
cumulative redeemable Series A Preferred Stock with a liquidation preference of
$100 per share and a face value of $10.0 million, recorded at a discount of
approximately $1.9 million, resulting in a yield of 10%, which approximates the
market yield at the date of issue. The term loan and the revolving credit
facility (under which there were no borrowings at the date of the
Recapitalization) mature on May 10, 2007.
-26-
Our credit agreement consists of the following elements at March 29,
2003 (in thousands):
Term loan:
Contractual amount $ 52,266
SFAS 15 effect 10,187
--------
Carrying amount $ 62,453
========
Revolving credit facility:
Maximum availability $ 17,337
Borrowings outstanding -
Letters of credit issued 8,950
---------
Availability $ 8,387
=========
Substantially all of our assets 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 of March 29, 2003, no cash dividends could be paid to our
stockholders pursuant to the credit agreement.
The classification of long-term debt in the accompanying December 28,
2002 and March 29, 2003 consolidated balance sheets is based on the contractual
and excess cash flow repayment terms of the debt issued under the credit
agreement pursuant to the Recapitalization. At December 29, 2001, all
indebtedness was classified as a current liability because the former credit
agreement had a maturity date of June 30, 2001, and we were subject to a
forbearance agreement. Under the terms of the credit agreement, 25% of the
excess cash flow (as defined in the credit agreement) in Fiscal 2002 is due to
the lenders in Fiscal 2003. Included in current maturities of long-term debt at
December 28, 2002, is $4.2 million, due under this provision of the credit
agreement.
On March 29, 2003, we had working capital of $5.9 million and our
working capital ratio was 1.13 to 1. On December 28, 2002, we had working
capital of $9.2 million a our working capital ratio was 1.19 to 1 compared to a
working capital deficit of $116.7 million and a working capital ratio of 0.26 to
1 on December 29, 2001. At March 29, 2003, we had unrestricted cash of $10.7
million and funds available under the revolving credit facility of $8.4 million.
Net cash provided by operating activities was $4.2 million and $4.9
million in the first quarter ending March 29, 2003 and March 30, 2002,
respectively. Cash used by investing activities was $3.8 million during the
first quarter ending March 29, 2003 compared to $2.7 million in the first
quarter ending March 30, 2002. Net cash used by financing activities was $5.1
million in the first quarter ending March 29, 2003 compared to cash used of $2.9
million in the first quarter ending March 30, 2002, principally due to
reductions of long-term debt.
-27-
Net cash provided by operating activities was $34.1 million, $5.6
million, and $16.2 million in Fiscal 2002, Fiscal 2001 and Fiscal 2000,
respectively. Net cash provided by operating activities in Fiscal 2002 increased
principally due to an increase in our profitability resulting from higher
finished goods prices, higher collection fees, and lower energy expense. Cash
used by investing activities was $8.1 million during Fiscal 2002 compared to
$9.3 million in Fiscal 2001; the $1.2 million decrease is primarily due to
increased capital expenditures for machinery and equipment, net of proceeds from
the sale of our Linkwood, Maryland facility and insurance proceeds on the
Norfolk, Nebraska facility which was destroyed by fire in Fiscal 2001. Net cash
used by financing activities was $14.2 million in Fiscal 2002 compared to cash
provided of $3.8 million in Fiscal 2001, principally due to reductions of
long-term debt in the Fiscal 2002 period compared to additions to indebtedness
during Fiscal 2001.
Based upon current actuarial estimates, we do not expect any payments
will be necessary in order to meet minimum pension funding requirements during
Fiscal 2003.
Our management believes that cash flows from operating activities at
the current level in Fiscal 2003, unrestricted cash, and funds available under
the credit agreement should be sufficient to meet our working capital needs and
capital expenditures for at least the next 12 months. However, the current
economic environment in our markets has the potential to adversely impact our
liquidity in a variety of ways, including through reduced sales, potential
inventory buildup, or higher operating costs.
The principal products that we sell are commodities, the prices of
which are quoted on established commodity markets and are subject to volatile
changes. Although the current market prices of these commodities are favorable,
a decline in these prices has the potential to adversely impact our liquidity. A
disruption in international sales, a decline in commodities prices, or a rise in
energy prices, resulting from the recent war with Iraq and the subsequent
political instability and uncertainty, has the potential to adversely impact our
liquidity. There can be no assurance that a decline in commodities prices, a
rise in energy prices, a slowdown in the U.S. or international economy, or other
factors, including the political instability in the Middle East or elsewhere,
and the macroeconomic effects of those events, will not cause us to fail to meet
management's expectations, or otherwise result in liquidity concerns.
Contractual Obligations and Other Commercial Commitments
The following table summarizes our expected material contractual
payment obligations, including both on- and off-balance sheet arrangements at
March 29, 2003 (in thousands):
Less Than 1 - 3 3 - 5 More than
Total 1 Year Years Years 5 Years
-------------- ------------- -------------- ------------- -------------
Contractual obligations:
Debt $62,616 $ 8,033 $20,822 $33,761 -
Operating lease obligations 20,298 3,646 5,404 2,264 8,984
Purchase commitments 3,386 3,386 - - -
Other liabilities 1,541 1,272 82 80 107
------- ------- --------- --------- ------
Total $87,841 $16,337 $26,308 $36,105 $9,091
====== ====== ====== ====== =====
Our off-balance sheet contractual obligations and commercial
commitments as of March 29, 2003 relate to operating lease obligations, letters
of credit, forward purchase agreements, and employment agreements. We have
excluded these items from the balance sheet in accordance with accounting
principles generally accepted in the United States of America.
The following table summarizes our other commercial commitments,
including both on- and off-balance sheet arrangements at March 29, 2003 (in
thousands):
Other commercial commitments:
Standby letters of credit $ 8,950
-------
Total other commercial commitments: $ 8,950
=======
-28-
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, availability of raw
material supply and the price of natural gas used in our plants. The amount of
raw materials available to us are impacted by seasonal factors, including
holidays, when raw material inage declines; warm weather, which can adversely
affect the quality of raw material processed and finished products produced; and
cold weather, which can impact the collection of raw material. Predominately all
of our finished products are commodities that are generally sold at prices
prevailing at the time of sale. We have used, through June 2002, interest rate
and, through March 2001, natural gas swaps to manage these related 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. We operate in international markets. Political and economic
instability in some regions of the world may result, and could negatively impact
our business and financial condition.
We were a party to two interest rate swap agreements at December 29,
2001. 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 matured June 27, 2002, bore interest at 6.5925% and our receive rate was
based on the three-month LIBOR. The second swap agreement for $20 million
matured on June 27, 2002, with a one-time option for the bank to cancel at June
27, 2001, which the bank declined to exercise, bore interest at 9.17% and the
Company's receive rate was based on the base rate.
As of March 29, 2003, we have forward purchase agreements in place for
purchases of approximately $2.1 million of natural gas for the period of April
and May, 2003, which approximates 62% of our usage for this period.
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 or assumptions which may deviate from actual results. In
particular, management makes estimates regarding the fair value of our reporting
units in assessing potential impairment of goodwill, estimates regarding future
undiscounted cash flows from the future use of long-lived assets whenever events
or changes in circumstances indicate that the carrying amount of a long-lived
asset may not be recoverable, estimates regarding the net realizable value of
long-lived assets held for sale, estimates regarding pension expense, estimates
of bad debts and estimates regarding self insured risks including insurance,
environmental and litigation contingencies.
In assessing impairment of goodwill we use estimates and assumptions in
determining the estimated 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 use of the asset
based on actual historical results and expectations about future economic
circumstances including future business volume, finished product prices and
operating costs. The estimates of fair value of reporting units and of future
net cash flows from use of the asset could change if actual prices and costs
differ due to industry conditions or other factors affecting the level of
business volume or 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. The estimate of reserve for bad debts is based upon our bad
debt experience, market conditions, aging of trade accounts receivable, and
interest rates, among other factors. Pension expense is based upon actuarial
estimates. These estimates could change based on changes in market conditions,
interest rates and other factors. In estimating liabilities for self insured
risks, 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.
-29-
Recent Accounting Pronouncements
Recently, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 143, Accounting for Asset
Retirement Obligations (SFAS 143); (SFAS 145 adopted early, insignificant
effect); Statement of Financial Accounting Standards No. 146, Accounting for
Costs Associated with Exit or Disposal Activities (SFAS 146); and Statement of
Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation
- Transition and Disclosure - an amendment of SFAS 123 (SFAS 148).
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. SFAS 143 requires us to record the fair value of an
asset retirement obligation as a liability in the period in which it incurs a
legal obligation associated with the retirement of tangible long-lived assets
that result from the acquisition, construction, development, and/or normal use
of the assets. We also record a corresponding asset that is depreciated over the
life of the asset. Subsequent to the initial measurement of the asset retirement
obligation, the obligation will be adjusted at the end of each period to reflect
the passage of time and changes in the estimated future cash flows underlying
the obligation. We are required to adopt SFAS 143 on December 29, 2002 (the
first day of Fiscal 2003). The adoption of SFAS 143 is not expected to have a
material effect on our financial statements.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity. The provisions of this statement are effective for exit or disposal
activities that are initiated after December 31, 2002, with early application
encouraged. The adoption of SFAS 146 is not expected to have a material effect
on our financial statements.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements of Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements No.
5, 57, and 107, and a rescission of FASB Interpretation No. 34. This
Interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under guarantees
issued. The Interpretation also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of the
Interpretation are applicable to guarantees issued or modified after December
31, 2002, and are not expected to have a material effect on our financial
statements The disclosure requirements are effective for financial statements of
interim or annual periods ending after December 15, 2002.
In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment of FASB
Statement No. 123. This Statement amends FASB Statement No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
Statement No. 123 to require prominent disclosures in both annual and interim
financial statements. Certain of the disclosure modifications are required for
fiscal years ending after December 15, 2002 and are included in the notes to the
accompanying consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, Consolidation
of Variable Interest Entities, an interpretation of ARB No. 51. This
Interpretation addressed the consolidation by business enterprises of variable
interest entities as defined in the Interpretation. The Interpretation applies
immediately to variable interests in variable interest entities created after
January 31, 2003, and to variable interests in variable interest entities
obtained after January 31, 2003. The application of this Interpretation is not
expected to have a material effect on our financial statements. The
Interpretation requires certain disclosures in financial statements issued after
January 31, 2003, if it is reasonably possible that we will consolidate or
disclose information about variable interest entities when the Interpretation
becomes effective.
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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 cooking oil from food service
establishments. We process such raw materials at 24 facilities located
throughout the United States into finished products such as tallow, protein 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. In addition, we provide grease
trap service to food service establishments under the service mark TORVAC.
Grease trap service includes the scheduled periodic removal of grease and solids
from the grease trap to ensure the trap functions as intended, keeping these
materials from entering the sewer system. Many cities and municipalities have
ordinances and/or regulations that require periodic grease trap service as part
of restaurant operations.
Commencing 1998, as part of an overall strategy to better commit
financial resources, our operations are currently organized 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 for further information regarding discontinued
operations. For the financial results of our business segments, see Note 17 of
Notes to Consolidated Financial Statements.
-31-
Our net external sales from continuing operations by operating segment
were as follows:
Fiscal Fiscal Fiscal
2002 2001 2000
------------------------ ----------------------- -------------------------
Continuing operations:
Rendering $177,234 67.6% $181,315 74.6% $171,966 75.0%
Restaurant Services 85,002 32.4 61,649 25.4 57,307 25.0
-------- ------ -------- ------ -------- ------
Total $262,236 100.0% $242,964 100.0% $229,273 100.0%
======== ====== ======== ====== ======== ======
Recent Events. On May 28, 2003, we announced that we are exploring our
strategic alternatives to enhance shareholder value and liquidity at the
direction of our Board of Directors. To assist in this process, we have engaged
BMO Nesbitt Burns, a Chicago-based investment banking firm, specializing in food
and agribusiness.
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)
from meat packers, grocery stores, butcher shops, meat markets, poultry
processors and food service establishments, as well as used cooking oil from
food service establishments and grocery stores.
The animal processing by-products are ground and heated to extract
water and separate oils from animal tissue as well as to make the material
suitable as an ingredient for animal feed. Protein 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 protein. Other by-products include poultry meal, feather meal and blood
meal. Used cooking oil from food service establishments is processed under a
separate procedure that involves heat processing and settling, as well as
refining, resulting in derived yellow grease, feed-grade animal fat, or
oleo-chemical feedstocks.
Purchase and Collection of Raw Materials
We operate a fleet of approximately 700 trucks and tractor-trailers to
collect raw materials from more than 80,000 food service establishments, butcher
shops, grocery stores, and independent meat and poultry processors. The raw
materials collected are manufactured into the finished products we sell. 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 cooking oil from food service establishments 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 sell or lease a
container for collection service to food service establishments called
CleanStar(R), which is a self-contained collection system that is housed either
inside or outside the establishment, with the used cooking oil pumped directly
into collection vehicles via an outside valve. Approximately 10% of our
restaurant suppliers utilize the CleanStar(R) system. The frequency of all forms
of raw material collection is determined by the volume of oil generated by the
food service establishment.
-32-
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 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 the past year, our largest single supplier accounted for
approximately 8.2% of the total raw material we processed, and the 10 largest
raw materials suppliers accounted for approximately 32.2% of the total raw
material we processed. For a discussion of our competition for raw materials,
see "--Competition."
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 expense of collection, 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. See
"--Competition."
Formula prices are generally adjusted on a weekly, monthly or quarterly
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 meat and bone meal
(protein). 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 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 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 $134.5 and $138.1 million for the years ended December
28, 2002 and December 29, 2001, 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.
-33-
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 (rendering
operations integrated with the meat or poultry packing operation).
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 food service establishments 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 for the collection of raw material 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
protein is a substitute for soybean meal. Consequently, the prices of tallow,
yellow grease, and protein 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 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.
-34-
Employees and Labor Relations
As of December 28, 2002, we employed approximately 1,200 persons
full-time. Approximately 45.9% 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 facility, where we lease approximately
20,000 square feet.
Our 24 operating facilities consist of 18 full service rendering
plants, 4 yellow grease/trap grease plants, 1 blending plant and 1 edible 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
Houston, TX Rendering/Yellow Grease/Trap
Kansas City, KS Rendering/Yellow Grease/Trap
Los Angeles, CA Rendering/Yellow Grease/Trap
Newark, NJ Rendering/Yellow Grease/Trap
San Francisco, CA * Rendering/Yellow Grease/Trap
Sioux City, IA Rendering/Yellow Grease
St. Louis, MO Rendering/Yellow Grease/Trap
Tacoma, WA * Rendering/Yellow Grease/Trap
Turlock, CA Rendering/Yellow Grease
Rendering Business Segment
--------------------------
Coldwater, MI Rendering
Omaha, NE Rendering
Omaha, NE * Blending
Omaha, NE Edible Oils
Wahoo, NE Rendering
Restaurant Services Business Segment
------------------------------------
Chicago, IL Yellow Grease/Trap
Ft. Lauderdale, FL * 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 $0.5 million in fiscal 2002.
-35-
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 ("Melvindale I"). 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, if any, 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. In
April, 2002, a group of residents living near our Melvindale, Michigan plant,
represented by named plaintiffs not listed in the Melvindale I lawsuit but
purportedly on behalf of a class of persons defined similarly to that in
Melvindale I, filed a suit ("Melvindale II"). Plaintiffs in Melvindale II rely
on essentially the same legal theories and factual allegations as originally set
forth in Melvindale I. However, the Melvindale II plaintiffs purportedly seek
only damages in an amount of more than $25,000 and less than $75,000 per member
of the putative class and do not seek injunctive relief. We removed Melvindale
II, which was originally filed in the Circuit Court of Wayne County, Michigan to
the United States District Court, Eastern District of Michigan where the
Melvindale I and the City of Melvindale lawsuits are pending. On October 21,
2002, the Melvindale II lawsuit was remanded to Wayne County Circuit Court. No
action has been taken by the court with respect to class certification. We are
unable to estimate our potential liability, if any, from this lawsuit. 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, if any, 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 have concluded a settlement agreement with Solutia
and Pharmacia to satisfy claims for remediation costs in the pending lawsuit
related to an environmental cleanup in or near Sauget, Illinois, and in return
have received an indemnity and hold harmless agreement from Solutia and
Pharmacia for any claims from others for costs related to the same remediation
effort. 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 cannot
predict what, if any, additional remediation efforts might be necessary in the
Sauget, Illinois area, or whether we might be made a party to any litigation
related to such additional remediation.
-36-
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 estimate and accrue our
expected ultimate costs related to claims occurring during each fiscal year and
carry this accrual as a reserve until these claims are paid by us.
As a result of the matters discussed above, we have established loss
reserves for insurance, environmental and litigation matters. At March 29, 2003
and December 28, 2002, the reserve for insurance, environmental and litigation
contingencies reflected on the balance sheet in accrued expenses and other
non-current liabilities, was approximately $12.5 million and $14.0 million,
respectively. Our management believes these reserves for contingencies are
reasonable and sufficient based upon present governmental regulations and
information currently available to management; however, we cannot assure you
that final costs related to these matters will not exceed current estimates. We
believe that any additional liability relative to these lawsuits and claims that
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.
-37-
OUR MANAGEMENT
Executive Officers and Directors
Our executive officers and directors, their ages and their positions as
of May 14, 2003, are as follows: Our executive officers serve at the discretion
of the Board of Directors.
Name Age Position
---- --- --------
Randall C. Stuewe 40 Chairman of the Board and Chief Executive Officer
James A. Ransweiler 59 President and Chief Operating Officer
John O. Muse 54 Executive Vice President - Finance and Administration
Neil Katchen 57 Executive Vice President - Operations
Mitchell Kilanowski 51 Executive Vice President - Marketing and Research
Gilbert L. Gutierrez 46 Senior Vice President - Business Development
Joseph R. Weaver, Jr. 56 General Counsel and Secretary
O. Thomas Albrecht (1) (2) (3) (4) (5) 56 Director
Fredric J. Klink (2) (3) (4) (5) 69 Director
Charles Macaluso (1) (2) (3) (4) (5) 59 Director
Richard A. Peterson (1) (2) (3) (4) (5) 61 Director
----------------
(1) Member of the audit committee
(2) Member of the compensation committee
(3) Member of the nominating committee
(4) Member of the search committee
(5) Member of the special committee
Randall C. Stuewe has served as our Chairman and Chief Executive
Officer since February 2003. From 1996 to 2002, Mr. Stuewe worked for ConAgra
Foods, Inc. as executive vice president and most recently as president of Gilroy
Foods. Prior to serving at ConAgra Foods, he spent twelve years in management,
sales and trading positions at Cargill, Inc.
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 FM
Global.
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.
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
-38-
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.
O. Thomas 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. Mr. Albrecht has served as a director of our company
since May 2002.
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 LLP. Prior thereto he was a partner at the law firm of Dechert LLP 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.
Richard A. 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. Mr. Peterson has served as a director of our company since
May 2002.
Charles Macaluso has been a principal of Dorchester Capital, LLC, a
management consulting and corporate advisory service firm focusing on
operational assessment, strategic planning and workouts, since 1998. From 1996
to 1998, he was a partner at Miller Associates, Inc., a workout, turnaround
partnership focusing on operational assessment, strategic planning and crisis
management. Mr. Macaluso is currently a director of Elder-Beerman Stores Corp.
(NASDAQ: EBSC), where he serves as Chairman of the Strategic Planning Committee
and serves on the Audit and Finance Committee and also serves as a director of
Flag Telecom, Ltd. and is a member of the audit committee. Mr. Macaluso also
serves as a director of the following companies: Crescent Public Telephone, Inc.
(chairman), Prime Succession, Inc. (chairman), and Lazy Days RV Centers, Inc.
Mr. Macaluso has served as a director of our company since May 2002.
-39-
Director Compensation
Prior to October 1, 2002, non-employee members of the Board of
Directors were paid a $25,000 annual retainer. Each outside director received
$1,500 for each board meeting or $1,000 for each committee meeting personally
attended, or $500 if a committee meeting was attended before or after a board
meeting, and $750 for each board or committee meeting attended by telephone.
Effective October 1, 2002, the annual retainer became $35,000. The chairman of
the audit, compensation, nominating and special committee each receive an
additional $5,000 annual retainer. The chairman of the search committee received
a one-time $10,000 fee for 2002. Also effective October 1, 2002, each outside
director receives $1,500 for each board or committee meeting attended in person
or by video where minutes are taken, or $1,000 if 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. 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 each of our outside 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.
-40-
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 in May 2002, all then outstanding options granted under the
Non-Employee Directors Stock Option Plan became exercisable in full, whether or
not they were otherwise exercisable.
On March 15, 2002, each outside director as of such date (Messrs.
Colonnetta, Klink, Longmire and Waterfall) was granted 4,000 options with a per
share exercise price of $0.56 under the Non-Employee Directors Stock Option Plan
because we achieved in excess of 90% of our targeted EBITDA for the fiscal year
ended December 29, 2001. 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. 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 with a per share exercise price of $0.80 per share.
In total, 28,000 options were granted under the Non-Employee Directors Plan
during the fiscal year ended December 28, 2002.
On March 26, 2003, each outside director as of such date (Messrs.
Albrecht, Klink, Macaluso and Peterson) was granted 4,000 options with a per
share exercise price of $1.99 under the Non-Employee Directors Stock Option Plan
because we achieved in excess of 90% of our targeted EBITDA for the fiscal year
ended December 28, 2002.
-41-
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 2002, 2001 and 2000 paid to our five most highly compensated executive
officers who were serving as such at December 28, 2002.
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 2002 $210,000 -- -- $805,815(4)
Chairman and Chief Executive 2001 700,000(2) -- -- --
Officer (1) 2000 520,000(3) -- 1,080,000(6) 13,200(5)
James A. Ransweiler 2002 335,000 $91,106 -- --
President and Chief Operating 2001 307,500 30,000 90,000(7) --
Officer 2000 300,000 -- --
John Muse 2002 252,788 54,844 -- --
Executive Vice President - 2001 216,924 20,000 45,000(7) --
Finance and Administration 2000 197,693 -- -- --
Neil Katchen 2002 220,000 71,250 -- --
Executive Vice President - 2001 200,000 20,000 73,800(7) --
Operations 2000 195,000 -- -- --
Mitchell Kilanowski 2002 180,000 23,911 -- --
Executive Vice President - 2001 164,000 10,000 45,000(7) --
Marketing and Research 2000 160,000 -- -- --
(1) Mr. Taura resigned as Chairman and Chief Executive Officer of our company on February 3, 2003 and was
replaced on such date by Mr. Stuewe. Mr. Taura continued to serve as a director of our company until May 13,
2003.
(2) 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.
(3) 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 did not
participate in any of our employee benefit plans.
(4) Of this amount, $346,667 represents severance payments as described below under "Employment Agreements" and
$459,148 represents consulting fees paid to Taura Flynn & Associates LLC. Upon the consummation of the
Recapitalization 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 was 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 consulting agreement. Mr. Taura's entry into the consulting agreement was a condition precedent to the
consummation of the Recapitalization Agreement.
(5) $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.
(6) 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 our common stock.
(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.
-42-
Option Grants
No options were granted by us to any of the executive officers named in
the summary compensation table above during the fiscal year ended December 28,
2002. Upon Randall Stuewe's appointment as Chairman and Chief Executive Officer
effective February 3, 2003, Messr. Stuewe was issued options under the 1994 Plan
to purchase 250,000 shares of our common stock at $1.96 per share.
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 28, 2002 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 28, 2002:
Options Exercised in
Fiscal 2002 Number of Securities Value of Unexercised In-
------------------------------ Underlying Unexercised the-Money Options at
Shares Options at December 28, 2002 December 28, 2002
Acquired on Value Exercisable (E) Exercisable (E)
Exercise Realized Unexercisable (U) Unexercisable (U)(1)
----------- -------- ---------------------------- -----------------------
Denis J. Taura -- -- 1,206,000(E) $675,000(E)
0(U) 0(U)
James A. Ransweiler -- -- 200,832(E) 45,000(E)
54,000(U) 67,500(U)
John O. Muse -- -- 18,000(E) 22,500(E)
27,000(U) 33,750(U)
Neil Katchen -- -- 29,520(E) 36,900(E)
44,280(U) 55,350(U)
Mitchell Kilanowski -- -- 18,000(E) 22,500(E)
27,000(U) 33,750(U)
(1) Based on the difference between the closing price of our common stock
on December 28, 2002 ($1.75 per share) and the exercise price of the
option.
-43-
Employment Agreements
We have entered into an employment agreement dated as of February 3,
2003 with Mr. Stuewe, our Chairman and Chief Executive Officer. The employment
is for an interim term of not less than four and not more than nine months from
the date of the agreement. Unless we notify Mr. Stuewe that the interim period
has been terminated and that the term shall not commence, the term of the
employment agreement will commence at the end of the interim period and continue
for a period of three years, subject to extension for successive one-year
periods thereafter unless terminated by not less than six months prior notice by
either us or Mr. Stuewe and termination with or without cause as defined in the
agreement.
Mr. Stuewe is employed as our Chairman and Chief Executive Officer and
serves as a member of our Board of Directors. The employment agreement provides
for an annual base salary of $400,000, subject to annual increases at the
discretion of the compensation committee of our Board of Directors. The
agreement also provides for Mr. Stuewe to receive our standard retirement and
welfare benefits for executive officers. Mr. Stuewe's employment agreement also
includes a severance agreement as described below.
On February 3, 2003, the effective date of the employment agreement, we
granted Mr. Stuewe stock options to purchase 250,000 shares of our common stock
at $1.96 per share (an exercise price equal to 100% of the fair market value of
our common stock on the effective date) pursuant to the terms of our 1994 Plan
and an individual stock option agreement between Mr. Stuewe and us. 62,500
options became exercisable on February 3, 2003 and 62,500 options become
exercisable on each of the first three anniversary dates of the grant.
In addition, at the commencement of the term (following the expiration
of the interim term) the employment agreement provides that we will grant to Mr.
Stuewe 250,000 additional options at an option exercise price equal to 100% of
the fair market value of our common stock on the date of commencement of the
term, pursuant to the terms of the 1994 Plan and of an individual stock option
agreement between Mr. Stuewe and us. 62,500 options will become exercisable
immediately and 62,500 options become exercisable on each of the first three
anniversary dates of the grant.
During the employment period, Mr. Stuewe is entitled to receive a bonus
in an amount equal to 60% or greater of Mr. Stuewe's then base salary (but not
in excess of Mr. Stuewe's base salary) based upon the relationship of actual
"EBITDA" (as defined in the employment agreement) for a fiscal year to budgeted
EBITDA as established by the Board of Directors for such fiscal year.
We have entered into severance agreements with Messrs. Stuewe,
Ransweiler, Muse, 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. Stuewe's case, during the interim term only, as
defined in his employment agreement, severance compensation is limited to
$75,000 plus, depending upon the date of termination, a portion of one year's
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 agreements.
The Recapitalization constituted a change of control under the terms of Mr.
Taura's severance agreement, which provided for payment of two years base
compensation. Pursuant to an amendment to the severance agreement that was
entered into as a condition precedent to closing of the Recapitalization, such
payments are payable in twenty-four equal monthly installments, commencing on
May 13, 2002; provided, that when Mr. Taura ceases to be a member of our Board
of Directors the balance of his severance will become immediately due and
payable.
-44-
Stock Option Plans
1993 Plan. The Board of Directors has suspended the 1993 Flexible Stock
Option 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
Employee Flexible Stock Option 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 approval at the annual meeting of
stockholders held May 17, 2000, the number of authorized shares under the 1994
Plan was reduced from 2,552,198 to 2,012,198 shares. Options granted pursuant to
the 1994 Plan typically vest 20% on 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 in
May 2002, all then outstanding 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.
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.
During fiscal 2002, no options to purchase shares of our common stock
were granted under the 1994 Plan.
Non-Employee Directors Stock Option Plan. For a description of the
Non-Employee Directors Stock Option Plan, see the disclosure set forth above
under "Director Compensation."
-45-
Equity Compensation Plans
The following table sets forth certain information as of December 28,
2002 with respect to our equity compensation plans (including individual
compensation arrangements) under which our equity securities are authorized for
issuance, aggregated by (i) all compensation plans previously approved by our
security holders, and (ii) all compensation plans not previously approved by our
security holders. The table includes:
o the number of securities to be issued upon the exercise of
outstanding options;
o the weighted-average exercise price of the outstanding options,
and
o the number of securities that remain available for future issuance
under the plans.
Number of securities
to be issued upon Number of securities
exercise of Weighted-average exercise remaining available
outstanding price of outstanding for future issuance
options, warrants options, warrants under equity
Plan Category and rights and rights compensation plans
------------------------------------- ---------------------- ------------------------- ---------------------
Equity compensation plans approved by
security holders 2,917,165 (1) $1.93 802,373
Equity compensation plans not approved
by security holders 0 - 0
------------- ----- -------
Total 2,917,165 $1.93 802,373
(1) Includes (i) shares underlying options that may be issued pursuant to
the 1993 Plan, the 1994 Plan and the Non-Employee Director Stock Option
Plan, all of which plans have been previously approved by our
stockholders, (ii) 540,000 shares underlying options that may be issued
outside of the 1994 Plan under an option agreement with Mr. Taura that
was previously approved by our stockholders and (iii) shares underlying
Former Class A Options that have been previously approved by our
stockholders.
Annual Incentive Plan
Our annual incentive plan is administered by our compensation committee
and provides incentive cash bonuses to corporate and regional executives. In
fiscal 2002, 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.
-46-
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, 2002, annual compensation in excess of $200,000 ($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. Stuewe, Ransweiler, Muse, Katchen and
Kilanowski will be as follows: Stuewe, 25 years; 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 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.
-47-
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 our five most highly compensated executive
officers who were serving as such at December 28, 2002 are set forth in the
summary compensation table located above. The base salary of Mr. Taura, our
former Chairman and Chief Executive Officer, 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 2002, 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 2002, 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.
Additionally, for fiscal 2002, our company paid certain other discretionary
bonuses outside the Annual Incentive Plan.
-48-
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.
Fredric J. Klink
O. Thomas Albrecht
Charles Macaluso
Richard A. Peterson
-49-
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 2002.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Taura served as our Chairman of the Board and Chief Executive
Officer from August 1999 to February 2003. 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. Upon consummation of the Recapitalization in May 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, Taura,
Flynn & Associates was paid an equivalent amount for his services. See "Our
Management--Executive Compensation" above for information regarding the amounts
paid to Mr. Taura and to Taura Flynn & Associates during fiscal 2002.
Fredric J. Klink, one of our directors, was a partner in the law firm
of Dechert LLP until December 31, 2001 when he became "of counsel" at Dechert
LLP. We paid Dechert LLP $463,631 during fiscal 2002 for the performance of
various legal services.
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 AMEX Stock Market - U.S. Index, the Dow Jones Industrial Pollution
Control/Waste Management Index, and the CSFB-Nelson Agribusiness Index for the
period from January 3, 1998 to December 28, 2002, assuming the investment of
$100 on January 3, 1998 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.
-50-
COMPARISON OF CUMULATIVE TOTAL RETURN
DARLING COMMON STOCK
AMEX STOCK MARKET- U.S.
DOW JONES INDUSTRIAL POLLUTION CONTROL/WASTE MANAGEMENT INDEX
CSFB-NELSON AGRIBUSINESS INDEX
[GRAPH OMITTED]
----------------------------------- --------------- ------------- ------------- ------------ -------------- ------------
Jan. 3, Jan. 2, Jan. 1, Dec. 30, Dec. 29, Dec. 28,
1998 1999 2000 2000 2001 2002
----------------------------------- --------------- ------------- ------------- ------------ -------------- ------------
Darling International Inc. 100 36.03 25.00 4.41 7.65 20.59
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Dow Jones Industrial Pollution
Control/Waste Management Index 100 105.26 58.46 82.14 93.56 71.74
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CSFB - Agribusiness Index 100 103.02 86.74 105.91 127.46 114.41
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AMEX Stock Market - US 100 107.75 142.17 131.86 124.20 100.19
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-51-
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 March
25, 2003, 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................................................ 6,374 *
Betje Partners.................................................. 2,278 *
Phaeton B.V.I................................................... 4,532 *
Morgens Waterfall Income Partners............................... 233,187 *
Morgens, Waterfall, Vintiadis & Company, Inc.................... 6,810(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........................ 1,648 *
Endowment Restart, L.L.C........................................ 1,080,975 1.7%
Edwin H. Morgens................................................ 6,454,825(3) 10.3%
Bruce Waterfall ................................................ 6,454,825(4) 10.3%
(collectively, the "Morgens, Waterfall Group")..................
Morgens, Waterfall Group (5).................................... 6,456,473(6) 10.3%
Credit Lyonnais New York Branch (7)............................. 4,359,141 7.0%
Daple, S.A. / PPM America Special Investments CBO II, L.P. / 17,902,607 28.8%
PPM America Special Investments Fund, L.P. (8) ............
Bank One N.A. (9)............................................... 6,434,923 10.3%
Cerberus Partners, L.P. (10).................................... 8,355,849 13.4%
Avenue Special Situations Fund II L.P. (11)..................... 6,538,530 10.5%
------------------------------
* 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 6,810 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 6. Mr. Morgens may be deemed to
indirectly beneficially own 6,454,825 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.
-52-
(4) Bruce Waterfall may be deemed to indirectly beneficially own 6,454,825
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 600 Fifth
Avenue, 27th Floor, New York, New York 10020.
(6) Includes options, which are immediately exercisable, in the following
amounts for each entity: Phoenix Partners (6,374 options); Betje Partners
(2,278 options); Phaeton B.V.I. (4,532 options); Morgens Waterfall Income
Partners (6,880 options); Restart Partners L.P. (26,096 options); Restart
Partners II, L.P. (51,561 options); Restart Partners III, L.P. (42,672
options); Restart Partners IV, L.P. (26,571 options); MWV Employee
Retirement Plan Group Trust (1,648 options); Endowment Restart, L.L.C.
(37,388 options), Edwin H. Morgens may be deemed to have indirect
beneficial ownership of 204,352 options. Bruce Waterfall may be deemed to
have indirect beneficial ownership of 204,352 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.
-53-
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, and 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) 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.
(11) The address for Avenue Special Situations Fund II L.P. is 535 Madison
Avenue, 15th Floor, New York, NY 10022.
-54-
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 March
25, 2003, by each director, each executive officer and by all executive officers
and directors as a group:
Common
Former Unexercised Stock Percent of
Common Class A Plan Beneficially Common
Name of Individual Stock Owned Options (1) Options (2) Owned (3) Stock Owned
------------------ ----------- ----------- ----------- ------------ -----------
Randall C. Stuewe 0 0 62,500 62,500 *
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 2,000 2,000 *
Charles Macaluso 0 0 2,000 2,000 *
Richard A. Peterson 0 0 2,000 2,000 *
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 1,500 0 18,000 19,500 *
Gilbert L. Gutierrez 1,300 0 9,120 10,420 *
All executive officers
and directors as a group
(12 persons) 140,300 30,000 1,634,012 1,804,312 2.8%
------------------
* 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 March 25, 2003.
(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.
-55-
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.
-56-
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 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.
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 April 28, 2003, there were 62,288,168 shares of our common stock
issued and outstanding and 100,000 shares of Series A Preferred Stock issued and
outstanding. 3,712,818 shares of common stock have been reserved for issuance
under our stock option plans.
-57-
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.
-58-
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.
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
-59-
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. 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.
-60-
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.
SELLING STOCKHOLDERS
The 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 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 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 Series A
Preferred Stock that will be held by the selling stockholders upon termination
of the offering. Shares of 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/or others and these persons
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 April 30,
2003, 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 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.
-61-
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 Series A Preferred Stock hereunder.
--------------------------------------------------------------------------------
Series A Preferred Stock
--------------------------------------------------------------------------------
Name of Selling Stockholder Shares Shares
Owned Offered
--------------------------------------------------------------------------------
Credit Lyonnais New York Branch 9,333 9,333
--------------------------------------------------------------------------------
PPM America Special Investments Fund, L.P. 22,531 22,531
--------------------------------------------------------------------------------
Daple, S.A. 1,541 1,541
--------------------------------------------------------------------------------
PPM America Special 14,259 14,259
Investments CBO II, L.P.
--------------------------------------------------------------------------------
Bank One N.A. 13,778 13,778
--------------------------------------------------------------------------------
Credit Agricole Indosuez 4,444 4,444
--------------------------------------------------------------------------------
Wells Fargo Bank (Texas) National Association 1 1
--------------------------------------------------------------------------------
Ark CLO 2000-1, Limited 2,222 2,222
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Cerberus Partners, L.P. 17,891 17,891
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Avenue Special Situations Fund II L.P. 14,000 14,000
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We have agreed to bear certain expenses (other than broker discounts
and commissions, if any) in connection with the registration of the securities.
-62-
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 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 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 Series A Preferred Stock from time to
time pursuant to this prospectus. The selling stockholders also may transfer and
donate the shares of 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 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
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 Series A Preferred Stock for
whom they may act as agent;
o by the writing of options on the Series A Preferred Stock;
o by the pledge of the 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
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 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.
-63-
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 Series A Preferred Stock in the course of
hedging the positions they assume. The selling shareholders may also engage in
the short sale of the Series A Preferred Stock and may deliver the 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 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
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 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 Series A Preferred Stock involved;
o the price at which such shares of 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.
-64-
The Registration Rights Agreement that was entered into among us and
the selling stockholders in connection with teh Recapitalization provides that
we will pay substantially all of the expenses incident to the registration,
offering and sale of the shares of 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 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 Series A
Preferred Stock offered by them under this prospectus.
MATERIAL U.S. FEDERAL TAX CONSIDERATIONS
The following discussion summarizes certain material United States
federal income tax considerations generally applicable to holders acquiring 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 Series A Preferred Stock.
The tax treatment of a holder of 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 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 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 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
Series A Preferred Stock.
-65-
Disposition of the Securities
Unless a nonrecognition provision applies, the sale, exchange,
redemption or other disposition of 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 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 Series A Preferred Stock. If the 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 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 Series A
Preferred Stock. The amount of any such excess distribution that is greater than
the holder's adjusted tax basis in the 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 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.
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, 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 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
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
Series A Preferred Stock as of the day before the ex-dividend date.
-66-
If a corporate holder receives an "extraordinary dividend" from Darling
with respect to Series A Preferred Stock that it has not held for more than two
years before the dividend announcement date, the basis of the 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 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 (iii) 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 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.
-67-
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 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.
-68-
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.
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.
-69-
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
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 2003) from dividends paid and redemption proceeds to the holders of
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 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.
-70-
LEGAL MATTERS
The validity of our Series A Preferred Stock offered hereby will be passed
upon by Dechert LLP, New York, New York. Fredric J. Klink, one of our directors,
was a partner in the law firm of Dechert LLP until December 31, 2001 when he
became "of counsel" at Dechert LLP. Mr. Klink beneficially owns 190,000 shares
of our common stock. We pay Dechert LLP fees for the performance of various
legal services.
EXPERTS
The consolidated financial statements and schedule as of December 28,
2002 and December 29, 2001 and for the years ended December 28, 2002, December
29, 2001 and December 30, 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 of KPMG LLP dated March 10, 2003 covering the
December 28, 2002 consolidated financial statements refers to a change in the
method of accounting for derivative instruments and hedging activities in 2001
and a change in the method of accounting for and reporting of disposals of
long-lived assets and discontinued operations in 2002.
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 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 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
-71-
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Pages
-----
Consolidated Financial Statements as of March 29, 2003 and March 30, 2002
and for the Three Months Ended March 29, 2003 and March 30, 2002 (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 28, 2002 and December 29, 2001
and for the Three Years Ended December 28, 2002
Independent Auditors' Report...............................................F-12
Consolidated Balance Sheets................................................F-13
Consolidated Statements of Operations......................................F-14
Consolidated Statements of Stockholders' Equity............................F-15
Consolidated Statements of Cash Flows......................................F-16
Notes to Consolidated Financial Statements.................................F-17
F-1
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Balance Sheets
March 29, 2003 and December 28, 2002
(in thousands, except shares and per share data)
March 29, December 28,
2003 2002
-------------- --------------
ASSETS (unaudited)
------
Current assets:
Cash and cash equivalents $ 10,863 $ 15,537
Accounts receivable 20,806 24,099
Inventories 10,984 7,006
Prepaid expenses 5,575 4,975
Deferred income taxes 2,637 3,659
Assets held for sale (note 10) 1,028 968
Other 35 63
------------ -----------
Total current assets 51,928 56,307
Property, plant and equipment, less accumulated depreciation
of $154,397 at March 29, 2003 and $153,029 at December 28, 2002 73,570 72,954
Collection routes and contracts, less accumulated amortization of
$24,991 at March 29, 2003 and $23,956 at December 28, 2002 22,617 23,088
Goodwill, less accumulated amortization of $1,077 at both March 29, 2003
and December 28, 2002 4,429 4,429
Deferred loan costs 3,601 3,822
Other noncurrent assets 2,409 2,312
--------- ---------
$158,554 $162,912
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (note 6) $ 8,033 $ 8,372
Accounts payable, principally trade 9,974 9,902
Accrued expenses 27,734 28,567
Accrued interest 314 314
---------- ----------
Total current liabilities 46,055 47,155
Long-term debt, less current portion (note 6) 54,583 60,055
Other non-current liabilities 7,343 7,530
Deferred income taxes 2,637 3,659
--------- ---------
Total liabilities 110,618 118,399
------- -------
Redeemable Preferred Stock, $0.01 par value, 1,000,000 shares
authorized, 100,000 shares outstanding (note 6) 8,955 8,599
Stockholders' equity (note 6):
Common stock, $0.01 par value; 100,000,000 shares authorized;
62,309,168 and 62,302,448 shares issued and outstanding at
March 29, 2003 and at December 28, 2002, respectively 623 623
Additional paid-in capital 74,395 74,747
Treasury stock, at cost; 21,000 shares at March 29, 2003 and
December 28, 2002 (172) (172)
Accumulated comprehensive loss (3,907) (3,907)
Accumulated deficit (31,958) (35,377)
-------- --------
Total stockholders' equity 38,981 35,914
-------- --------
Contingencies (note 3)
$158,554 $162,912
======= =======
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 29, 2003 and March 30, 2002
(in thousands, except per share data)
(unaudited)
Three Months Ended
March 29, March 30,
2003 2002
--------- ---------
Net sales $ 68,651 $ 58,679
Costs and expenses:
Cost of sales and operating expenses 51,050 43,745
Selling, general and administrative expenses 8,520 7,158
Depreciation and amortization 3,657 4,088
--------- ---------
Total costs and expenses 63,227 54,991
-------- --------
Operating income 5,424 3,688
--------- --------
Other income (expense):
Interest expense (492) (3,885)
Other, net 583 734
---------- ---------
Total other income (expense) 91 (3,151)
----------- --------
Income from continuing operations before income taxes 5,515 537
Income taxes (2,096) -
--------- -----------
Income from continuing operations 3,419 537
Discontinued operations
Income from discontinued operations, net of tax (note 11) - 46
------------ ---------
Net income 3,419 583
Preferred dividends and accretion (355) -
---------- ---------
Net income applicable to common shareholders $ 3,064 $ 583
========= =======
Basic and diluted income per share (note 2):
Continuing operations $ 0.05 $ 0.04
Discontinued operations - -
------------ ---------
Total $ 0.05 $ 0.04
========== ========
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 29, 2003 and March 30, 2002
(in thousands)
(unaudited)
Three Months Ended
----------------------------------
March 29, March 30,
2003 2002
------------------- -------------
Cash flows from operating activities:
Income from continuing operations $ 3,419 $ 537
Adjustments to reconcile net income to
net cash provided by continuing operating activities:
Depreciation and amortization 3,657 4,088
Loss on disposal of property, plant, equipment and other assets 5 (901)
Gain on early extinguishment of debt (816) -
Changes in operating assets and liabilities:
Accounts receivable 3,293 4,762
Inventories and prepaid expenses (4,578) (1,098)
Accounts payable and accrued expenses (761) (4,999)
Accrued interest - 2,142
Other (35) 24
----------- ---------
Net cash provided by continuing operations 4,184 4,555
Net cash provided by discontinued operations - 351
----------- ---------
Net cash provided by operating activities 4,184 4,906
----------- ---------
Cash flows from investing activities:
Capital expenditures (2,679) (3,622)
Business acquisitions (1,105) -
Gross proceeds from disposal of property, plant and equipment
and other assets 13 946
--------- ---------
Net cash used by investing activities (3,771) (2,676)
--------- ---------
Cash flows from financing activities:
Proceeds from debt 50,145 47,291
Payments on debt (55,151) (50,097)
Paid in capital on common stock issued 3 -
Contract payments (84) (93)
--------- ----------
Net cash used by financing activities (5,087) (2,899)
--------- ----------
Net decrease in cash and cash equivalents (4,674) (669)
Cash and cash equivalents at beginning of period 15,537 3,668
-------- ---------
Cash and cash equivalents at end of period $ 10,863 $ 2,999
======== =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 492 $ 1,743
======== =========
Income taxes, net of refunds $ 519 $ -
======== =========
The accompanying notes are an integral part
of these consolidated financial statements.
F-4
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
March 29, 2003
(unaudited)
(1) General
The accompanying consolidated financial statements for the three month
periods ended March 29, 2003 and March 30, 2002 have been prepared in
accordance with generally accepted accounting principles in the United
States of America by Darling International Inc. (the "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, to the best of
their knowledge, that the disclosures herein are adequate to make the
information presented not misleading. The accompanying consolidated
financial statements should be read in conjunction with the audited
consolidated financial statements contained in the Company's Form 10-K
for the fiscal year ended December 28, 2002.
(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 29, 2003, and include the 13 weeks ended
March 29, 2003, and the 13 weeks ended March 30, 2002.
(c) Earnings Per Share
Basic and diluted net income per common share are computed by dividing
net income applicable to common shareholders by the weighted average
number of common stock shares outstanding during the period. On May 13,
2002, the Company consummated a recapitalization and issued 46,705,086
shares of common stock (see note 6).
The weighted average common shares used for basic income per common share
were 62,281,670 and 15,568,362 for the three months ended March 29, 2003
and March 30, 2002, respectively.
The weighted average common shares used for diluted income per common
share were 63,665,325 and 15,568,362 for the three months ended March 29,
2003 and March 30, 2002, respectively.
1,321,430 outstanding stock options were excluded from diluted income per
common share for the three months ended March 29, 2003, as the effect was
antidilutive; and 2,343,938 outstanding stock options were excluded from
diluted income per common share for the three months ended March 30,
2002, as the effect was antidilutive.
F-5
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
March 29, 2003
(unaudited)
(d) Accounting for Stock-Based Compensation
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 APGB 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.
The following table illustrates the effect on net income (loss) and
income (loss) per share if the fair value based method had been applied
to all outstanding and invested awards in each period.
March 29, March 30,
2003 2002
----------------------- -----------------------
amount per share amount per share
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
Reported net income applicable to common shareholders
$ 3,064 $ 0.05 $ 583 $ 0.04
Deduct total stock-based employee compensation expense
determined under fair-value-based method for all
rewards, net of tax (95) - (32) -
--------- ----- --------- -----
Pro forma $ 2,969 $ 0.05 $ 551 $ 0.04
====== ===== ===== =====
(e) New Accounting Standards
The Company adopted Statement of Financial Accounting Standard No. 143,
Accounting for Asset Retirement Obligations ("SFAS 143"). The adoption of
SFAS 143 did not have a material effect on the Company's financial
statements.
The Company adopted Statement of Financial Accounting Standard No. 146,
Accounting for Costs Associated with Exit or Disposal Activities ("SFAS
146"). The adoption of SFAS 146 did not have a material effect on the
Company's 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 ("Melvindale I"). 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, if any, 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. The property damage claims in
Melvindale I have been dismissed, 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. In April, 2002, a
group of residents living near the Company's Melvindale, Michigan plant,
F-6
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
March 29, 2003
(unaudited)
represented by named plaintiffs not listed in the Melvindale I lawsuit
but purportedly on behalf of a class of persons defined similarly to that
in Melvindale I filed a suit ("Melvindale II"). Plaintiffs in Melvindale
II rely on essentially the same legal theories and factual allegations as
originally set forth in Melvindale I. However, the Melvindale II
Plaintiffs purportedly seek only damages in an amount of more than
$25,000 and less than $75,000 per member of the putative class and do not
seek injunctive relief. The Company removed Melvindale II, which was
originally filed in the Circuit Court of Wayne County, Michigan to the
United States District Court, Eastern District of Michigan where the
Melvindale I and the City of Melvindale lawsuits are pending. On October
21, 2002, the Melvindale II lawsuit was remanded to Wayne County Circuit
Court. No action has been taken by the court with respect to class
certification. The Company is unable to estimate its potential liability,
if any, from this lawsuit. 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 lawsuits vigorously.
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, if any, 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 has concluded a settlement agreement with Solutia and
Pharmacia to satisfy claims for remediation costs in the pending lawsuit
related to an environmental cleanup in or near Sauget, Illinois, and in
return has received an indemnity and hold harmless agreement from Solutia
and Pharmacia for any claims from others for costs related to the same
remediation effort. 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. 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 cannot predict what, if any, additional remediation efforts
might be necessary in the Sauget, Illinois area, or whether it might be
made a party to any litigation related to such additional remediation.
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-7
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
March 29, 2003
(unaudited)
Self Insured Risks
The Company purchases its workers compensation, auto and general
liability insurance on a retrospective basis. The Company estimates and
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.
As a result of the matters discussed above, the Company has established
loss reserves for insurance, environmental and litigation matters. At
March 29, 2003, and December 28, 2002, the reserve for insurance,
environmental and litigation contingencies reflected on the balance sheet
in accrued expenses and other non-current liabilities, was approximately
$12.5 million and $14.0 million, respectively. Management of the Company
believes these reserves for contingencies are reasonable and sufficient
based upon present governmental regulations and information currently
available to management; however, there can be no assurance 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 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 food service establishments and recycling them into
similar products such as high-energy animal feed ingredients and
industrial oils. Restaurant Services also provides grease trap
servicing and equipment sales.
Business Segment Net Sales (in thousands):
Three Months Ended
-----------------------------------
March 29, March 30,
2003 2002
-----------------------------------
Rendering:
Trade $ 46,153 $ 42,593
Intersegment 6,909 7,843
--------- ---------
53,062 50,436
-------- --------
Restaurant Services:
Trade 22,498 16,086
Intersegment 3,003 1,976
--------- ---------
25,501 18,062
-------- --------
Eliminations (9,912) (9,819)
-------- --------
Total $ 68,651 $ 58,679
======= ========
F-8
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
March 29, 2003
(unaudited)
Business Segment Profit (in thousands):
Three Months Ended
-----------------------------------
March 29, March 30,
2003 2002
-----------------------------------
Rendering $ 4,812 $ 4,102
Restaurant Services 6,032 3,839
Corporate (6,933) (3,519)
Interest Expense (492) (3,885)
-------- --------
Income from Continuing Operations $ 3,419 $ 537
======= =========
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):
March 29, December 28,
2003 2002
-----------------------------------
Rendering $ 54,210 $ 55,425
Restaurant Services 16,671 12,104
Combined Rendering/Restaurant Services 63,318 62,744
Corporate 24,355 32,639
-------- --------
Total $158,554 $162,912
======= =======
(5) Income Taxes
The Company has provided income taxes for the three-month period ended
March 29, 2003, based on its estimate of the effective tax rate for the
entire 2003 fiscal year.
In determining whether its deferred tax assets are more likely to be
recoverable, than not recoverable, the Company assessed its ability to
carryback net operating losses, scheduled reversals of future taxable and
deductible amounts, tax planning strategies, and the extent of evidence
currently available to support projections of future taxable income. The
Company is unable to carryback any of its net operating losses and recent
favorable operating results do not provide sufficient historical evidence
at this time of sustained future profitability sufficient to result in
taxable income against which the net operating losses can be carried
forward and utilized.
(6) Recapitalization
On May 13, 2002, the Company consummated a recapitalization and executed
a new amended and restated Credit Agreement with its lenders.
The Credit Agreement reflects the effect of applying the provisions of
Statement of Financial Accounting Standards No. 15, Accounting by Debtors
and Creditors for Troubled Debt Restructurings ("SFAS 15"). SFAS 15
requires that the previously existing amount of debt owed by the Company
to the lenders be reduced by the fair value of the equity interest
granted and that no gain from restructuring the Company's debt be
recognized. As a result, the carrying amount of the term loan of $62.5
million exceeds its contractual amount of $52.3 million by $10.2 million
at March 29, 2003. Interest expense on the remaining
F-9
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
March 29, 2003
(unaudited)
carrying amount of debt reported in our financial statements is based on
a new effective interest rate (0.20% at March 29, 2003) 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.
In connection with the Company's recapitalization and its entry into the
Credit Agreement, the Company exchanged borrowings outstanding under its
previous Credit Agreement, a portion of the accrued interest and
commitment fees, and forbearance fees payable for 46,705,086 shares of
newly issued common stock, equal to 75% of the Company's then total
outstanding common stock on a fully diluted basis (exclusive of stock
options issued and outstanding), and 100,000 shares of 6% cumulative
redeemable Series A Preferred Stock with a liquidation preference of $100
per share and a face value of $10.0 million, recorded at a discount of
approximately $1.9 million, resulting in a yield of 10% which
approximated the market yield at the date of issue. The term loan and the
revolving credit facility (under which there were no borrowings at the
date of the recapitalization) mature on May 10, 2007.
The Company's Credit Agreement consists of the following elements at
March 29, 2003 (in thousands):
Term loan:
Contractual amount $ 52,266
SFAS 15 effect 10,187
--------
Carrying amount $ 62,453
========
Revolving credit facility:
Maximum availability $ 17,337
Borrowings outstanding -
Letters of credit issued 8,950
---------
Availability $ 8,387
=========
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 of March 29, 2003, no
cash dividends could be paid to the Company's stockholders pursuant to
the Credit Agreement.
(7) Derivative Instruments
The Company makes limited use of derivative instruments to manage cash
flow risks related to natural gas expense. The Company does not use
derivative instruments for trading purposes.
Through March 29, 2003, the Company had forward purchase agreements in
place for purchases of approximately $2.1 million of natural gas for the
period April through May, 2003, which approximates 62% of the Company's
usage for this period. These agreements have no net settlement provisions
and the Company intends to take physical delivery, which it has done
under similar forward purchase agreements during Fiscal 2002 and the
first three months of Fiscal 2003. Accordingly, the agreements are not
subject to the requirements of SFAS 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 ("SFAS 130"). SFAS 130
establishes standards for reporting and presentation of comprehensive
income or loss and its components. In accordance with SFAS 130, the
Company has presented the components of comprehensive income or loss in
its consolidated balance sheets.
F-10
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
March 29, 2003
(unaudited)
(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.
(10) Assets Held for Sale
Assets held for sale consist of the following (in thousands):
March 29, 2003 December 28, 2002
---------------------------------------
Petaluma, CA $ 497 $ 497
Billings, MT 421 421
Goldsboro, NC 50 50
Shelbyville, IN 60 -
------- --------
$1,028 $ 968
===== ======
Assets held for sale are carried at the lower of cost, less accumulated
depreciation or fair value. The assets are expected to be sold within the
next 12 months. These assets were previously utilized in rendering
operations. From time to time, the Company receives offers from
prospective buyers of Company assets. Until the offers meet criteria
established by SFAS 144, the assets remain classified as property, plant
and equipment. The book value of the Company's Shelbyville, IN location
was included in operating property and equipment at December 29, 2002.
(11) Discontinued Operations
On October 18, 2002, the Company sold the Company's Linkwood, Maryland
rendering plant to a third party purchaser for cash consideration of $4.3
million, net of applicable costs of selling the plant location. Results
of operations of the Linkwood facility were previously included in
results of the Company's Rendering segment, and have been reclassified to
Discontinued Operations in the accompanying consolidated statements of
operations. Revenues, costs and expenses, net of applicable taxes, of the
plant are as follows (in thousands):
Three Months Ended
------------------------------------------
March 29, March 30,
2003 2002
------------------------------------------
$ - $ 3,280
Revenue
Cost of sales and operating expenses - 2,862
Selling, general and administrative - 67
Depreciation and amortization - 305
------ -------
Total costs and expenses - 3,234
Operating and pretax income, now classified as
income from discontinued operations - 46
Income taxes - -
----- --------
Income from discontinued operations, net of tax $ - $ 46
===== =======
F-11
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Darling International Inc.:
We have audited the consolidated financial statements of Darling International
Inc. and subsidiaries as listed in the accompanying index. In connection with
our audits of the consolidated financial statements, we also have audited the
financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with 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 28, 2002 and December 29,
2001, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 28, 2002, in conformity with
accounting principles generally accepted in the United States of America. Also
in our opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
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, and its method of accounting for and reporting of disposals
of long-lived assets and discontinued operations in 2002.
KPMG LLP
Dallas, Texas
March 10, 2003
F-12
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 28, 2002 and December 29, 2001
(in thousands, except share and per share data)
December 28, December 29,
ASSETS (Notes 2 and 9) 2002 2001
----------------------
------------- -------------
Current assets:
Cash and cash equivalents $ 15,537 $ 3,668
Accounts receivable, less allowance for bad debts of $628
at December 28, 2002 and $467 at December 29, 2001 24,099 23,719
Inventories (Note 3) 7,006 7,698
Prepaid expenses 4,975 4,394
Deferred income taxes (Note 11) 3,659 2,203
Assets held for sale (Note 5) 968 -
Other (Note 1) 63 209
-------- --------
Total current assets 56,307 41,891
Property, plant and equipment, net (Note 4) 72,954 74,744
Collection routes and contracts, less accumulated amortization of
$23,956 at Dec. 28, 2002 and $22,139 at Dec. 29, 2001 23,088 27,366
Goodwill, less accumulated amortization of $1,077 at
December 28, 2002 and December 29, 2001 4,429 4,429
Deferred loan costs 3,822 -
Assets held for sale (Note 5) - 3,002
Other assets (Note 6) 2,312 7,647
-------- --------
$162,912 $159,079
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current liabilities:
Current portion of long-term debt (Note 9) $ 8,372 $120,053
Accounts payable, principally trade 9,902 11,104
Accrued expenses (Note 7) 28,567 24,069
Accrued interest 314 3,383
-------- --------
Total current liabilities 47,155 158,609
Long-term debt, net (Note 9) 60,055 -
Other noncurrent liabilities (Note 10) 7,530 8,134
Deferred income taxes (Note 11) 3,659 1,990
-------- --------
Total liabilities 118,399 168,733
-------- --------
Redeemable preferred stock, $0.01 par value; 1,000,000 shares
authorized, 100,000 shares outstanding (Note 2) 8,599 -
Stockholders' equity (deficit) (Note 2 and 12):
Common stock, $.01 par value; 100,000,000 shares authorized, 62,302,448
and 15,589,362 shares issued and outstanding
at December 28, 2002 and December 29, 2001, respectively 623 156
Additional paid-in capital 74,747 35,235
Treasury stock, at cost; 21,000 shares at December 28, 2002
and December 29, 2001 (172) (172)
Accumulated comprehensive loss (Note 13) (3,907) (533)
Accumulated deficit (35,377) (44,340)
-------- --------
Total stockholders' equity (deficit) 35,914 (9,654)
-------- --------
Commitments and contingencies (Notes 8 and 16)
$162,912 $159,079
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
F-13
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Three years ended December 28, 2002
(in thousands, except per share data)
December 28, December 29, December 30,
2002 2001 2000
---------------- ---------------- ----------------
Net sales $262,236 $242,964 $229,273
-------- -------- --------
Costs and expenses:
Cost of sales and operating expenses 194,559 185,019 177,638
Selling, general and administrative expenses 30,294 28,334 26,479
Depreciation and amortization 16,426 24,898 26,859
-------- -------- ---------
Total costs and expenses 241,279 238,251 230,976
-------- -------- ---------
Operating income and (loss) 20,957 4,713 (1,703)
-------- -------- ---------
Other income (expense):
Interest expense (6,409) (14,162) (13,971)
Other, net 2,001 (1,656) (187)
-------- -------- ---------
Total other income (expense) (4,408) (15,818) (14,158)
-------- -------- ---------
Income (loss) from continuing operations before income taxes 16,549 (11,105) (15,861)
Income taxes (Note 11) 7,183 - -
-------- --------- ---------
Income (loss) from continuing operations 9,366 (11,105) (15,861)
Loss from discontinued operations, net of tax (Note 15) (403) (740) (3,328)
-------- -------- ---------
Net income (loss) 8,963 (11,845) (19,189)
Preferred dividends and accretion (994) - -
-------- --------- ---------
Net income (loss) applicable to common shareholders $ 7,969 $ (11,845) $ (19,189)
======== ========= =========
Basic and diluted earnings (loss) per share:
Continuing operations $ 0.19 $ (0.71) $ (1.02)
Discontinued operations (0.01) (0.05) (0.21)
--------- --------- ---------
Total $ 0.18 $ (0.76) $ (1.23)
========= ========= =========
The accompanying notes are an integral part
of these consolidated financial statements.
F-14
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Three years ended December 28, 2002
(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 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 adjustment - - - - (533) - (533)
Derivative transition adjustment
(Note 1) - - - - 2,220 - 2,220
Net change arising from current
period hedging transactions (Note 1) - - - - 376 - 376
Reclassifications of derivative hedging
changes 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)
Net income - - - - - 8,963 8,963
Minimum pension liability adjustment - - - - (3,374) - (3,374)
----------
Total comprehensive income - - - - - 5,589
Tax benefits relating to January 1,
1994 valuation allowance - - 2,247 - - - 2,247
Issuance of common stock 46,713,086 467 38,259 - - - 38,726
Preferred stock - accretion - - (589) - - - (589)
Preferred stock -
accumulative dividends - - (405) - - - (405)
---------- ------ -------- ------- ------- --------- ----------
Balances at December 28, 2002 62,281,448 $ 623 $ 74,747 $ (172) $(3,907) $ (35,377) $ 35,914
========== ====== ======== ======= ======= ========= ==========
The accompanying notes are an integral part
of these consolidated financial statements.
F-15
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three years ended December 28, 2002
(in thousands)
December 28, December 29, December 30,
2002 2001 2000
---------------- ---------------- ----------------
Cash flows from operating activities:
Income (loss) from continuing operations $ 9,366 $(11,105) $(15,861)
Adjustments to reconcile loss from continuing operations to
net cash provided by continuing operating activities:
Depreciation and amortization 16,426 24,898 26,859
Deferred income tax expense (benefit) 2,187 - -
Loss (gain) on sale of assets (1,563) (80) 144
Changes in operating assets and liabilities:
Accounts receivable (380) (1,882) (4,850)
Inventories and prepaid expenses 111 (746) 2,246
Accounts payable and accrued expenses 4,050 (4,898) 3,070
Accrued interest 2,262 345 2,928
Other 806 (1,916) 1,084
--------- --------- ---------
Net cash provided by continuing operating activities 33,265 4,616 15,620
Net cash provided by discontinued operations 867 996 623
--------- --------- ---------
Net cash provided by operating activities 34,132 5,612 16,243
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures (13,433) (8,847) (7,287)
Gross proceeds from sale of property, plant and equipment,
assets held for disposition and other assets 6,011 145 4,412
Payments related to routes and other intangibles - (279) (636)
Net cash used in discontinued operations (654) (295) (397)
--------- --------- ---------
Net cash used in investing activities (8,076) (9,276) (3,908)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from long-term debt 203,673 208,387 171,351
Payments on long-term debt (214,500) (197,862) (179,842)
Contract payments (459) (3,368) (2,163)
Recapitalization costs (2,901) (3,334) -
--------- --------- ---------
Net cash provided by (used in) financing
activities (14,187) 3,823 (10,654)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 11,869 159 1,681
Cash and cash equivalents at beginning of year 3,668 3,509 1,828
--------- --------- ---------
Cash and cash equivalents at end of year $ 15,537 $ 3,668 $ 3,509
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 3,740 $ 13,817 $ 9,161
========= ========= =========
Income taxes, net of refunds $ 2,103 $ (141) $ (1,777)
========= ========= =========
Noncash financing activity - Recapitalization transactions
(Note 2):
Debt reduction $ (39,986) - -
Accrued interest reduction (5,331) - -
Forbearance fees reduction (3,855) - -
Preferred stock, net of discount 8,072 - -
Common stock issued 41,100 - -
The accompanying notes are an integral part
of these consolidated financial statements
F-16
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 cooking
oil from food service establishments, butcher shops, grocery stores,
and independent meat and poultry processors nationwide. The Company
processes raw materials through facilities located throughout the
United States into finished products, such as tallow, protein, 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 noteholders. 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.
In May, 2002 the Company completed a recapitalization. See Note 2 below.
(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 and of the
Linkwood, MD facility, 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 28,
2002, the 52 weeks ended December 29, 2001 , and the 52 weeks
ended December 30, 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-17
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 and Other Intangible Assets
The Company adopted SFAS 142 on December 30, 2001 (the first day
of Fiscal 2002). SFAS 142 eliminates the amortization of 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. SFAS 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
of 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 has determined that the implied value of its goodwill
exceeded carrying value, and therefore, no impairment charge was
necessary.
The Company has identified its reporting units for purposes of
assessing goodwill impairment to be the individual plant
locations. Intangible assets subject to amortization under SFAS
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):
December 28, December 29,
2002 2001
--------------------------------------
Collection Routes and Contracts:
Routes $ 42,302 $ 42,307
Non-compete agreements 4,428 6,797
Royalty and consulting agreements 314 401
--------- ---------
47,044 49,505
Accumulated Amortization:
Routes (20,865) (17,498)
Non-compete agreements (2,903) (4,423)
Royalty and consulting agreements (188) (218)
--------- ---------
(23,956) (22,139)
--------- ---------
Collection routes and contracts,
less accumulated amortization $ 23,088 $ 27,366
========= =========
Amortization expense for the three years ended December 28, 2002,
December 29, 2001, and December 30, 2000, was approximately
$4,280,000, $5,014,000 and $5,498,000, respectively. Amortization
expense for the next five fiscal years is estimated to be
$4,196,000, $3,999,000, $3,889,000, $3,841,000 and $3,413,000.
The Company has also recorded an intangible asset related to
unrecognized prior service costs in connection with its minimum
pension liability as discussed in Note 13.
The effect of the adoption of SFAS 142 on net income (loss) and
earnings (loss) per share follows (in thousands, except per share
date):
F-18
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Fiscal Year Ended
--------------------------------------------------
December 28, December 29, December 30,
2002 2001 2000
--------------------------------------------------
Reported net income (loss) applicable to
common shareholders $7,969 $(11,845) $(19,189)
Add back: goodwill amortization - 242 142
------ -------- --------
Adjusted net income (loss) applicable to
common shareholders $7,969 $(11,603) $(19,047)
====== ======== ========
Basic earnings (loss) per share:
Reported net income (loss) $ 0.18 $ (0.76) $ (1.23)
Add back: goodwill amortization - 0.02 0.01
------ -------- -------
Adjusted net income (loss) $ 0.18 $ (0.74) $(1.22)
====== ======== =======
(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) Net Income (Loss) Per Common Share
Basic income (loss) per common share is computed by dividing net
earnings or loss attributable to outstanding common stock by the
weighted average number of common shares outstanding during the
year. Diluted income (loss) per common share is computed by
dividing net earnings or loss attributable to outstanding common
stock by the weighted average number of common shares outstanding
during the year increased by dilutive common equivalent shares
(stock options) determined using the treasury stock method, based
on the average market price exceeding the exercise price of the
stock options.
The weighted average common shares used for basic income (loss)
per common share was 45,003,008, 15,568,362 and 15,568,362 for
2002, 2001 and 2000, respectively. The weighted average common
shares used for diluted income (loss) per common share was
45,577,262, 15,568,362, and 15,568,362 for 2002, 2001 and 2000,
respectively. The numbers of shares for 2000 have been reduced for
21,000 treasury shares from numbers previously reported, which did
not effect previously reported earnings per share. For 2001 and
2000 the effect of all outstanding stock options was excluded from
diluted loss per common share because the effect was
anti-dilutive.
For Fiscal 2002, 2001 and 2000, respectively, 1,637,430, 3,025,865
and 2,334,380 outstanding stock options were excluded from diluted
income (loss) per common share as the effect was antidilutive.
F-19
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(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.
The following table illustrates the effect on net income (loss)
and income (loss) per share if the fair value based method had
been applied to all outstanding and invested awards in each
period.
December 28, December 29, December 30,
2002 2001 2000
----------------------- ------------------------ ------------------------
amount per share amount per share amount per share
----------- ----------- ------------ ----------- ------------ -----------
Reported net income (loss)
applicable to common
shareholders $7,969 $0.18 $(11,845) $(0.76) $(19,189) $(1.23)
Deduct total stock-based employee
compensation expense
determined under
fair-value-based method for
all rewards, net of tax (127) (0.01) (287) (0.02) (1,226) (0.08)
----- ----- -------- ------ -------- ------
Pro forma $7,842 $0.17 $(12,132) $(0.78) $(20,415) $(1.31)
====== ===== ======== ====== ======== ======
(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.
F-20
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(13) Impairment of Long-Lived Assets and Long-Lived Assets To Be
Disposed Of
Effective December 30, 2001 (the first day of Fiscal 2002), the
Company adopted Statement of Financial Accounting Standards No.
144, Accounting for the Impairment of Disposal of Long-Lived
Assets (SFAS 144). SFAS 144 supercedes SFAS 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. SFAS 144 retains the fundamental
provisions of SFAS 121 but eliminates the requirement to allocate
goodwill to long-lived assets to be tested for impairment. SFAS
144 also requires discontinued operations to be carried at the
lower of cost or fair value less costs to sell, broadens the
presentation of discontinued operations to include a component of
an entity rather than a segment of a business, and requires the
classification of prior year operating results of discontinued
operations to be consistent with the current year presentation.
The adoption of SFAS 144 resulted in reclassification of
approximately $335,000 and $1,700,000 of assets held for sale, to
property held for use during the second and third quarters of
2002, respectively, as management did not believe a sale of these
assets was probable within the next 12 months. Depreciation
expense on these assets of approximately $312,000 was recorded
during the third quarter of 2002, which would have been recognized
had these assets been continuously classified as held and used, in
accordance with SFAS 144. During the third quarter of Fiscal 2002,
the Company also recorded an impairment charge of approximately
$435,000 to reduce to fair value the carrying value of the assets
at the Company's Linkwood, Maryland rendering plant, which was
sold on October 18, 2002, to a third party purchaser for cash
consideration of $4.3 million, and is accounted for as a
discontinued operation.
Prior to Fiscal 2002, the Company applied the provisions of SFAS
No. 121, Accounting for Impairment or Disposal of Long-Lived
Assets.
The Fiscal 2002 impairment charge of $435,000 pertains to assets
held for sale (see Note 5) in the Company's Rendering business
segment at the Company's Linkwood, MD facility which is accounted
for as a discontinued operation. The impairment charge was
necessary to reduce the carrying value of these assets to
management's estimate of their net realizable value. Estimated net
realizable value was based upon the sales price received from the
third party purchaser. A summary of the impairment charge follows
(in thousands):
Land $200
Leaseholds and buildings 235
---
Total impairment $435
===
F-21
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
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 charge was 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
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)
$162,000 and $375,000 related to Restaurant Services business
segment equipment and allocable goodwill, respectively; 2)
$1,341,000 related to assets held for sale in the Company's
Rendering business segment; and 3) $293,000 and $1,341,000 related
to buildings and equipment, respectively, at the Company's
Linkwood, MD facility, which is accounted for as a discontinued
operation. 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 and the discontinued operation
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
charges follows (in thousands):
Discontinued Restaurant
Operations Rendering Services Total
---------------- ----------------- ----------------- ----------------
Leaseholds and buildings $ 293 $ 349 $ - $ 642
Equipment and furniture 1,845 992 162 2,999
Goodwill - - 375 375
-------- -------- ------- -------
Total impairment $ 2,138 $ 1,341 $ 537 $ 4,016
======== ======== ======= =======
(14) Financial Instruments
The carrying amount of cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses approximates
fair value due to the short maturity of these instruments.
The carrying amount (exclusive of the effect of SFAS No. 15 in
Fiscal 2002) of the Company's outstanding borrowings under the
Credit Agreement and Term Loan described in Note 9, approximates
the fair value due to the floating interest rates on the
borrowings.
The fair value of the interest rate swap agreements was a
liability of $1,020,000 at December 29, 2001. Current market
pricing models were used to estimate fair value of interest rate
swap agreements. See Note 9.
F-22
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(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 SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities SFAS No. 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 29, 2001 or December 28, 2002. 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 SFAS No. 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 matured June 27, 2002, bore interest at 6.5925% and the
Company's receive rate was 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 matured June
27, 2002, with a one-time option for the bank to cancel at June
27, 2001, which the bank declined to exercise, bore interest at
9.17% and the Company's receive rate was based on the Base Rate.
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 29, 2001, with the related charge recorded in
other expense. The Company continued to follow this policy in
Fiscal 2002. 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 $1.0 million
at December 29, 2001.
F-23
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
At December 28, 2002, the Company has forward purchase agreements
with suppliers obligating the Company to purchase approximately
449,800 mmbtu's of natural gas for the period January through
March, 2003, with a purchase price of $4.01/mmbtu.
As of December 29, 2001, the Company had 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 forward purchase agreements have no net settlement
provisions and the Company takes physical delivery, which it had
done under similar forward purchase agreements from March through
December 2001. Accordingly, the forward purchase agreements are
not subject to the requirements of SFAS No. 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 SFAS No. 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 $ 2,220
to accumulated
other comprehensive income
Net change arising from current period 376
hedging transactions
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 $ (487)
rate swap agreements
Gain to operating expenses related to natural 2,568
gas swap agreements (effective portion)
Gain to other income related to natural 515
gas swap agreements (ineffective portion) -------
Total reclassifications into earnings for $ 2,596
the year ended December 29, 2001
F-24
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, 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 SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 establishes standards for
reporting and presentation of comprehensive income and its
components. In accordance with SFAS No. 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
As required by SFAS 144, and as discussed in Notes 1(b)(13) and
15, the prior years results of operations of the Linkwood, MD
facility, which was sold in Fiscal 2002, have been reclassified
and reported as discontinued operations to facilitate
comparability of reported results of operations. Certain other
immaterial reclassifications of amounts previously reported have
been made to the Fiscal 2001 and Fiscal 2000 consolidated
financial statements to conform the presentation for each year.
F-25
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(2) RECAPITALIZATION
On May 13, 2002, the Company consummated a recapitalization and
executed a new amended and restated Credit Agreement with its lenders.
The new Credit Agreement reflects the effect of applying the provisions
of Statement of Financial Accounting Standards No. 15, Accounting by
Debtors and Creditors for Troubled Debt Restructurings ("SFAS No. 15").
SFAS No. 15 requires that the previously existing amount of debt owed
by the Company to the lenders be reduced by the fair value of the
equity interest granted and that no gain from restructuring the
Company's bank debt be recognized. As a result, the carrying amount of
the debt of $68.4 million exceeds its contractural amount of $56.7
million by $11.7 million at December 28, 2002. Interest expense on the
remaining carrying amount of debt reported in our financial statements
is based on a new effective interest rate (0.20% at December 28, 2002)
that equates the present value of the future cash payment specified by
the new terms of the term loan with the carrying amount of the debt.
In connection with the Company's recapitalization and its entry into
the new Credit Agreement, the Company exchanged borrowings outstanding
under its previous Credit Agreement, a portion of the accrued interest
and commitment fees, and forbearance fees payable for 46,705,086 shares
of newly issued common stock, equal to 75% of the Company's then total
outstanding common stock on a fully diluted basis (exclusive of stock
options issued and outstanding), and 100,000 shares of 6% cumulative
redeemable Series A Preferred Stock with a liquidation preference of
$100 per share and a face value of $10.0 million, recorded at a
discount of approximately $1.9 million, resulting in a yield of 10%,
which approximates the market yield at the date of issue. The term loan
and the revolving credit facility mature on May 10, 2007.
The Company's new Credit Agreement consists of the following
elements at December 28, 2002 (in thousands):
Term loan:
Contractual amount $ 56,655
SFAS 15 effect 11,750
--------
Carrying amount $ 68,405
--------
Revolving credit facility:
Maximum availability $ 17,300
Borrowings outstanding -
Letters of credit issued 11,687
--------
Availability $ 5,613
========
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 of December 28,
2002, no cash dividends could be paid to the Company's stockholders
pursuant to the Credit Agreement.
F-26
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(3) INVENTORIES
A summary of inventories follows (in thousands):
December 28, December 29,
2002 2001
----------------- ----------------
Finished product $ 5,084 $ 6,117
Supplies and other 1,922 1,581
------- -------
$ 7,006 $ 7,698
======= =======
(4) PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment follows (in thousands):
December 28, December 29,
2002 2001
-------------------------------
Land $ 9,193 $ 9,454
Buildings and improvements 26,893 25,906
Machinery and equipment 139,065 139,248
Vehicles 49,544 49,084
Construction in process 1,288 6,607
--------- ---------
225,983 230,299
Accumulated depreciation 153,029 155,555
--------- ---------
$ 72,954 $ 74,744
========= =========
(5) ASSETS HELD FOR SALE
Assets held for sale consist of the following (in thousands):
December 28, December 29,
2002 2001
-------------------------------
Petaluma, CA $ 497 $ 497
Billings, MT 421 421
Goldsboro, NC 50 50
Esteem (Norfolk, NE) - 1,200
Peptide (Norfolk, NE) - 500
West Point, NE - 118
Lynchburg, VA - 100
Shelbyville, IN - 62
Zanesville, OH - 54
----- ------
$ 968 $ 3,002
===== ======
Under provisions of SFAS 144, approximately $2,035,000 of assets held
for sale at December 29, 2001, have been reclassified to property,
plant and equipment in Fiscal 2002 because management does not believe
sale of the assets within one year is probable.
The remaining assets held for sale are carried at the lower of cost,
less accumulated depreciation or fair value. The assets are expected to
be sold within the next 12 months and, accordingly, are classified as
current assets at December 28, 2002. These assets were previously
utilized in rendering operations. From time to time, the Company
receives offers from prospective buyers of Company assets. Until the
offers meet criteria established by Statement 144, the assets remain
classified as property, plant and equipment.
F-27
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
As discussed in Note 1, the Company recorded impairment charges related
to certain of the assets held for sale in Fiscal 2002, Fiscal 2001 and
Fiscal 2000. Impairment recorded on the Company's Linkwood, MD facility
during Fiscal 2002 is included in loss from discontinued operations.
Included in the Fiscal 2002 and 2001 impairment charges are the
following amounts to reduce the carrying value of assets held for sale
to estimated net realizable value (in thousands):
December 28, December 29,
2002 2001
----------------- ---------------
Linkwood, MD $ 435 $ -
Esteem - 210
Peptide - 439
Other assets - 191
----- -----
Total $ 435 $ 840
===== =====
(6) OTHER ASSETS
Other assets consist of the following (in thousands):
December 28, December 29,
2002 2001
----------------------- -----------------------------
Prepaid pension cost (Note 13) $ - $ 2,359
Deposits and other 2,312 1,526
Deferred recapitalization costs - 3,762
------- -------
$ 2,312 $ 7,647
======= =======
(7) ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
December 28, December 29,
2002 2001
--------------------- ----------------
Compensation and benefits $ 11,338 $ 6,750
Utilities and sewage 2,428 3,944
Accrued plant expenses 2,179 2,590
Accrued forbearance fees - 2,570
Insurance 1,396 2,604
Accrued freight cost 899 1,208
Accrued interest rate swap liability - 1,020
Accrued income, ad valorem, and franchise taxes 2,424 888
Reserve for self insurance, environmental and litigation
matters (Note 16) 5,407 599
Non-compete agreements 406 363
Other accrued expense 2,090 1,533
-------- --------
$ 28,567 $ 24,069
======== ========
F-28
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(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 28, 2002, are as follows (in thousands):
Period Ending Fiscal Operating Leases
-------------------- ----------------
2003 $ 3,305
2004 2,729
2005 1,866
2006 922
2007 801
Thereafter 8,934
--------
Total $ 18,557
========
Rent expense for the years ended December 28, 2002, December 29, 2001,
and December 30, 2000 was $4.2 million, $4.2 million and $3.2 million,
respectively.
(9) DEBT
Debt consists of the following (in thousands):
December 28, December 29,
2002 2001
-----------------------------------
Credit Agreement:
Revolving Credit Facility $ - $ 120,027
Term Loan 68,405 -
Other notes 22 26
---------- ---------
68,427 120,053
Less current maturities 8,372 120,053
---------- ---------
$ 60,055 $ -
========== =========
See Note 2 for a description of the Credit Agreement.
Maturities of long-term debt at December 28, 2002 are as follows:
Contractual SFAS 15 Total
Debt Amount Effect Carrying Amount
-------------------------- -------------------------- -------------------------
2003 $ 5,401 $ 2,971 $ 8,372
2004 3,000 2,923 5,923
2005 4,800 2,721 7,521
2006 4,800 2,479 7,279
2007 38,676 656 39,332
------ ------ ------
$56,677 $11,750 $68,427
====== ====== ======
F-29
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Under the terms of the new Credit Agreement, 25% of the excess cash
flow (as defined by the new Credit Agreement) in Fiscal 2002 is due to
the lenders in Fiscal 2003. Included in current maturities of long-term
debt at December 28, 2002, is $4.2 million under this provision of the
Credit Agreement. The percentage of excess cash flow, as defined, due
to the lenders for each fiscal year through Fiscal 2007 follows:
Percentage of
Fiscal Year(s) Excess Cash Flow
----------------
2002 25%
2003 35%
2004 and thereafter 50%
The excess cash flow payment is due to the lenders the earlier of: the
date of delivery of the Company's annual financial statements to the
lenders, or within 115 days of the end of the Company's fiscal year.
(10) OTHER NONCURRENT LIABILITIES
Other noncurrent liabilities consist of the following (in thousands):
December 28, December 29,
2002 2001
---------------------------------------------
Reserve for insurance, environmental, litigation and tax $ 7,020 $ 7,184
matters (Note 16)
Liabilities associated with consulting and noncompete 352 758
agreements
Other 158 192
------- -------
$ 7,530 $ 8,134
======= =======
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 SFAS
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 28, December 29, December 30,
2002 2001 2000
---------------- ------------------ ------------------
Current:
Federal $ 4,530 $ - $ -
State 426 - -
Foreign 40 - -
Deferred:
Federal 2,187 - -
------- ------- -------
$ 7,183 $ - $ -
======= ======= =======
F-30
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Income tax benefit for the years ended December 28, 2002, December 29,
2001, and December 30, 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):
December 28, December 29, December 30,
2002 2001 2000
------------------- ---------------------- ------------------
Computed "expected" tax expense $ 5,792 $ (4,146) $ (6,846)
State income taxes 426 - -
Tax benefits related to January 1, 2,247 - -
1994 valuation allowance
Change in valuation allowance (948) 4,289 7,554
IRS tax settlement (490) - -
Other, net 156 (143) (708)
------- ------- -------
$ 7,183 $ - $ -
======= ======= =======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 28, 2002 and December 29, 2001 are presented below (in
thousands):
December 28, December 29,
2002 2001
----------------------- -------------------------
Deferred tax assets:
Net operating loss carryforwards $ 23,498 $ 31,305
Recapitalization effects of SFAS 15 4,465 -
Loss contingency reserves 2,456 3,396
Other 3,914 2,485
-------- --------
Total gross deferred tax assets 34,333 37,186
Less valuation allowance (20,591) (21,279)
-------- --------
Net deferred tax assets 13,742 15,907
-------- --------
Deferred tax liabilities:
Collection routes and contracts (3,972) (4,985)
Property, plant and equipment (8,661) (9,783)
Other (1,109) (926)
-------- --------
Total gross deferred tax liabilities (13,742) (15,694)
-------- --------
$ - $ 213
======== ========
The valuation allowance for deferred tax assets as of December 28, 2002
and December 29, 2001 was $20,591,000 and $21,279,000, respectively.
The net changes in the total valuation allowance was a decrease of
$688,000 for the year ended December 28, 2002 and an increase of
$4,289,000 for the year ended December 29, 2001.
At December 28, 2002, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $61,836,000 expiring
through 2020. 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 which occurred pursuant to the May
2002 recapitalization (see Note 2), the Company believes utilization of
its net operating loss carryforwards is limited to $687,000 per year
for the remaining life of the net operating losses.
The Company reports tax benefits utilized related to the January 1,
1994 valuation allowance as a direct addition to additional paid in
capital.
F-31
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(12) STOCKHOLDERS' EQUITY
At December 29, 1993, the Company granted options to purchase 384,615
shares of the Company's common stock to the former owners of the
Redeemable Preferred Stock. The options have a term of ten years from
the date of grant and may be exercised at a price of $3.45 per share
(approximated market value at the date of grant).
The 1993 Flexible Stock Option Plan and the 1994 Employee Flexible
Stock Option Plan provide for the granting of stock options to key
officers and salaried employees of the Company and its subsidiaries.
Options to purchase common stock were granted at a price approximating
fair market value at the date of grant. Options granted under the plans
expire ten years from the date of grant. Vesting occurs on each
anniversary of the grant date as defined in the specific option
agreement. The plans also provide for the acceleration by one year of
vesting of all non-vested shares upon the termination of the employee's
employment in certain circumstances or upon a change in management
control.
The Non-Employee Directors Stock Option Plan provides for the granting
of options to non-employee directors of the Company. As of December 28,
2002, options to purchase 483,000 shares of common stock had been
granted pursuant to this plan, of which 208,000 options remain
outstanding. The options have a term of ten years from the date of
grant and may be exercised at a price of $0.56 - $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 2002, 2001 and 2000 was $0.63, $0.46 and $1.65, respectively, on
the date of grant using the Black Scholes option-pricing model with the
following weighted assumptions:
2002 2001 2000
--------------------- -------------------- --------------------
Expected dividend yield 0.0% 0.0% 0.0%
Risk-free interest rate, weighted avg. 5.02% 5.14% 5.28%
Expected life 10 years 10 years 10 years
Expected annual volatility 59.95-109.09% 42.31-100.94% 42.31-98.64%
F-32
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. exercise
shares price per share price per share
--------------------- -------------------- -------------------------
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) 2.63-10.88 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) 4.13-9.50 6.38
----------
Options outstanding at December 29, 2001 3,025,865 0.50-9.04 2.08
==========
Granted 28,000 0.56-0.80 0.68
Exercised (8,000) 0.56-0.56 0.56
Canceled (128,700) 0.50-9.04 5.11
----------
Options outstanding at December 28, 2002 2,917,165 0.50-9.04 1.93
==========
Options exercisable at December 28, 2002 2,481,994 0.50-9.04 2.19
==========
At December 28, 2002, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $0.50-9.042 and 5.5 years,
respectively.
At December 28, 2002 and December 29, 2001, the number of options exercisable
was 2,481,994 and 2,407,867, respectively, and the weighted-average exercise
price of those options was $2.19 and $2.46, 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. Based upon current actuarial estimates, the Company does not
expect any payments will be necessary in order to meet minimum funding
requirements during Fiscal 2003.
F-33
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
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, 2002 and 2001) (in thousands):
December 28, December 29,
2002 2001
---------------------- ---------------------
Change in benefit obligation:
Benefit obligation at beginning of period $49,461 $45,404
Service cost 1,332 1,305
Interest cost 3,614 3,425
Amendments - 301
Actuarial (gain)/loss 2,155 1,541
Benefits paid (2,498) (2,515)
------- -------
Benefit obligation at end of period 54,064 49,461
------- -------
Change in plan assets:
Fair value of plan assets at beginning of period 42,349 48,881
Actual return on plan assets 2,856 (4,727)
Employer contribution 948 710
Benefits paid (2,498) (2,515)
------- -------
Fair value of plan assets at end of period 43,655 42,349
------ -------
Funded status (10,410) (7,112)
Unrecognized actuarial (gain)/loss 11,646 8,543
Unrecognized prior service cost 800 928
------- -------
Net amount recognized $ 2,036 $ 2,359
------- =======
Amounts recognized in the consolidated balance sheets consist
of:
Prepaid benefit cost $ 2,036 $ 2,359
Accrued benefit liability (6,681) (713)
Intangible asset 800 180
Accumulated other comprehensive income (a) 5,881 533
------- -------
Net amount recognized $ 2,036 $ 2,359
======= =======
(a) Reported as accumulated comprehensive loss, net of tax, at December
28, 2002, in the amount of $3.9 million.
The Company has recorded a minimum liability of $6.7 million and $0.7
million at December 28, 2002 and December 29, 2001, respectively,
related to the excess of the accumulated benefit obligations associated
with its pension plans over the fair value of the plans' assets.
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 period for Fiscal 2001 in the table above. The common stock
received was considered an asset of the plans for purposes of
determining Fiscal 2002 net pension cost.
F-34
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Net pension cost includes the following components (in thousands):
December 28, December 29, December 30,
2002 2001 2000
-------------------- ------------------- -----------------
Service cost $ 1,332 $ 1,305 $ 1,478
Interest cost 3,614 3,425 3,363
Expected return on plan assets (4,187) (4,424) (4,217)
Net amortization and deferral 511 98 98
------ ------ ------
Net pension cost $ 1,270 $ 404 $ 722
====== ====== ======
Assumptions used in accounting for the employee benefit pension plans
were:
December 28, December 29, December 30,
2002 2001 2000
----------------- --------------- ----------------
Weighted average discount rate 7.25% 7.50% 7.75%
Rate of increase in future compensation 5.16% 5.16% 5.08%
levels
Expected long-term rate of return on assets 8.75% 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 $1,441,000, $1,491,000,
and $1,384,000 for the years ended December 28, 2002, December 29,
2001, and December 30, 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 2002, 2001 and 2000.
F-35
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(15) DISCONTINUED OPERATIONS
As disclosed in Note 1(b)(13), the Company adopted SFAS 144 in Fiscal
2002. SFAS 144 requires discontinued operations to be carried at the
lower of cost or fair value less costs to sell, broadens the
presentation of discontinued operations to include a component of an
entity rather than a segment of a business, and requires the
classification of prior year operating results of discontinued
operations to be consistent with the current year presentation.
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 on disposal relates to write-off of an indemnification
liability in Fiscal 2000 upon termination of the indemnification
period.
F-36
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
In accordance with SFAS No. 144, the prior year operating results of
the Linkwood, MD, facility have been reclassified and reported as
discontinued operation to facilitate comparability of reported results
of operations. A summary of the components of loss from discontinued
operations net of tax follows (in thousands):
2002 2001 2000
------------------- ---------------- -----------------
Linkwood $ (403) $ (740) $ (3,699)
Bakery ByProducts - - 371
-------- -------- ---------
Total $ (403) $ (740) $ (3,328)
======== ======== =========
On October 18, 2002, the Company sold the Company's Linkwood, Maryland rendering
plant to a third party purchaser for cash consideration of $4.3 million, net of
applicable costs of selling the plant location. Results of operations of the
Linkwood facility were previously included in results of the Company's rendering
segment, and have been reclassified to Loss from Discontinued Operations in the
accompanying consolidated statements of operations. Revenues and losses, net of
applicable taxes, of the plant are as follows (in thousands):
Year Ended
December 28, December 29, December 30,
2002 2001 2000
------------------- ---------------- -----------------
Net sales $ 8,371 $ 13,645 $ 14,479
--------- -------- --------
Cost of sales and operating expenses 7,565 12,394 13,602
Selling, general and administrative 282 260 257
Depreciation and amortization 1,270 1,736 4,322
--------- -------- --------
Total costs and expenses 9,117 14,390 18,181
Operating and pretax loss, now classified (746) (745) (3,702)
as loss from discontinued operations
Other income (expense) - 5 3
--------- -------- --------
Loss before income taxes (746) (740) (3,619)
--------- -------- --------
Income tax benefit 343 - -
--------- -------- --------
Loss from discontinued operations, net of $ (403) $ (740) $ (3,699)
tax ========= ======== ========
F-37
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(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 ("Melvindale I"). 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, if any, 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. In April, 2002, a group of residents
living near the Company's Melvindale, Michigan plant, represented by
named plaintiffs not listed in the Melvindale I lawsuit but purportedly
on behalf of a class of persons defined similarly to that in Melvindale
I, filed a suit ("Melvindale II"). Plaintiffs in Melvindale II rely on
essentially the same legal theories and factual allegations as
originally set forth in Melvindale I. However, the Melvindale II
Plaintiffs purportedly seek only damages in an amount of more than
$25,000 and less than $75,000 per member of the putative class and do
not seek injunctive relief. The Company removed Melvindale II, which
was originally filed in the Circuit Court of Wayne County, Michigan to
the United States District Court, Eastern District of Michigan where
the Melvindale I and the City of Melvindale lawsuits are pending. On
October 21, 2002, the Melvindale II lawsuit was remanded to Wayne
County Circuit Court. No action has been taken by the court with
respect to class certification. The Company is unable to estimate its
potential liability, if any, from this lawsuit. 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 lawsuits vigorously.
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, if any, 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.
F-38
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
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 has concluded a settlement agreement with Solutia
and Pharmacia to satisfy claims for remediation costs in the pending
lawsuit, and in return has received an indemnity and hold harmless
agreement from Solutia and Pharmacia for any claims from others for
costs related to the same remediation effort. The Company cannot
predict what, if any, additional remediation efforts might be necessary
in the Sauget, Illinois area, or whether it might be made a party to
any litigation related to such additional remediation.
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.
Self Insured Risks
The Company purchases its workers compensation, auto and general
liability insurance on a retrospective basis. The Company estimates and
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.
As a result of the matters discussed above, the Company has established
loss reserves and accruals for insurance, environmental and litigation
matters. At December 28, 2002, and December 29, 2001, the reserve for
insurance, environmental and litigation contingencies reflected on the
balance sheet in accrued expenses and other non-current liabilities,
was approximately $14.0 million and $10.6 million, respectively. The
increase in these reserves is primarily due to letters of credit issued
in exchange for reduction of cash deposits held by the third party
insurance administrator. Management of the Company believes these
reserves for contingencies are reasonable and sufficient based upon
present governmental regulations and information currently available to
management; however, there can be no assurance 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.
F-39
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(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 food service establishments 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.
F-40
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Business Segment Net Revenues (in thousands):
-----------------------------
December 28, December 29, December 30,
2002 2001 2000
------------------- ---------------- -----------------
Rendering:
Trade $ 177,234 $ 181,315 $ 171,966
Intersegment 33,026 31,023 25,684
------------ ----------- -----------
210,260 212,338 197,650
------------ ----------- -----------
Restaurant Services:
Trade 85,002 61,649 57,307
Intersegment 9,309 6,854 7,781
------------ ----------- -----------
94,311 68,503 65,088
------------ ----------- -----------
Eliminations (42,335) (37,877) (33,465)
------------ ----------- -----------
Total $ 262,236 $ 242,964 $ 229,273
============ =========== ===========
Business Segment Profit (Loss) (in thousands):
-----------------------------
December 28, December 29, December 30,
2002 2001 2000
------------------- ---------------- -----------------
Rendering $ 22,406 $ 14,740 $ 11,869
Restaurant Services 17,235 7,436 3,487
Corporate Activities (23,867) (19,119) (17,246)
Interest expense (6,408) (14,162) (13,971)
------------ ----------- -----------
Income (loss) from continuing $ 9,366 $ (11,105) $ (15,861)
operations ============ =========== ===========
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.
F-41
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Business Segment Assets (in thousands):
-----------------------
December 28, December 29,
2002 2001
---------------- -----------------
Rendering $ 55,425 $ 56,847
Restaurant Services 12,104 14,779
Combined Rend./Rest. Svcs. 62,744 64,155
Corporate Activities 32,639 23,298
---------- ----------
Total $ 162,912 $ 159,079
========== ==========
Business Segment Property, Plant and Equipment (in thousands):
----------------------------------------------
December 28, December 29,
2002 2001
---------------- -----------------
Depreciation and amortization:
Rendering $ 8,009 $ 16,087
Restaurant Services 4,321 6,333
Corporate Activities 4,096 2,478
---------- ----------
Continuing Operations 16,426 24,898
Discontinued Operations 1,270 1,736
---------- ----------
Total $ 17,696 $ 26,634
========== ==========
Additions:
Rendering $ 1,184 $ 3,032
Restaurant Services 434 1,544
Combined Rend./Rest. Svcs. 10,898 1,292
Corporate Activities 917 2,979
---------- ----------
Continuing Operations 13,433 8,847
Discontinued Operations 654 295
---------- ----------
Total $ 14,087 $ 9,142
========== ==========
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 28, December 29, December 30,
2002 2001 2000
------------------- ---------------- -----------------
United States $127,757 $104,839 $100,580
Korea 5,181 3,538 6,041
Spain - 388 963
Mexico 19,046 23,390 25,090
Japan 1,831 1,075 1,916
N. Europe - 1,444 707
Pacific Rim 1,259 9,838 889
Taiwan 472 552 1,775
Canada 144 993 864
Latin/South America 6,267 9,192 13,408
Other/Brokered 100,279 87,715 77,040
------- ------- -------
Total $262,236 $242,964 $229,273
======= ======= =======
F-42
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Other/Brokered trade revenues represent product for which the ultimate
destination is not monitored and cannot be determined with certainty.
(18) QUARTERLY FINANCIAL DATA (UNAUDITED AND IN THOUSANDS EXCEPT PER SHARE
AMOUNTS):
Year Ended December 28, 2002
---------------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
Net sales $58,679 $60,189 $72,969 $70,399
Operating income 3,687 3,345 7,082 6,843
Income from continuing
operations 536 1,326 3,809 3,695
Income (loss) from discontinued
operations 47 (77) (356) (17)
Net income 583 1,249 3,453 3,678
Basic earnings per share 0.04 0.03 0.05 0.05
Diluted earnings per share 0.04 0.03 0.05 0.05
Year Ended December 29, 2001
---------------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
Net sales $60,178 $55,141 $61,500 $66,145
Operating income (loss) 1,816 (1,128) 1,257 2,768
Loss from continuing operations
(836) (5,507) (3,204) (1,558)
Income (loss) from discontinued
operations (313) (214) (315) 102
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)
As disclosed in Note 1(b)(13) and Note 15, the Company adopted SFAS 144
in Fiscal 2002. SFAS 144 requires the classification of previously
reported operating results of discontinued operations to be consistent
with the current year presentation. Accordingly, Fiscal 2002 first and
second quarter and prior years' financial statements reflect
reclassification of the Linkwood, MD results as discontinued
operations.
(19) RECENTLY ISSUED ACCOUNTING STANDARDS
Recently, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 143, Accounting for
Asset Retirement Obligations (SFAS 143); Statement of Financial
Accounting Standards No. 145, Rescission of SFAS 4, 44 and 64,
Amendment of SFAS 13, and Technical Corrections (SFAS 145); Statement
of Financial Accounting Standards No. 146, Accounting for Costs
Associated with Exit or Disposal Activities (SFAS 146); and Statement
of Financial Accounting Standards No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of SFAS 123
(SFAS 148).
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. SFAS 143 requires the Company to record the
fair value of an asset retirement obligation as a liability in the
period in which it incurs a legal obligation associated with the
retirement of tangible long-lived assets that result from the
acquisition, construction, development, and/or normal use of the
assets. The Company also records a corresponding asset that is
depreciated over the life of the asset. Subsequent to the initial
measurement of the asset retirement obligation, the obligation will be
adjusted at the end of each period to reflect the passage of time and
changes in the estimated future cash flows underlying the obligation.
F-43
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
The Company is required to adopt SFAS 143 on December 29, 2002 (the
first day of Fiscal 2003). The adoption of SFAS 143 is not expected to
have a material effect on the Company's financial statements.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS 146 addresses
financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force (EITF)
Issue 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity. The provisions of this
statement are effective for exit or disposal activities that are
initiated after December 31, 2002, with early application encouraged.
The adoption of SFAS 146 is not expected to have a material effect on
the Company's financial statements.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements of Guarantees, Including
Indirect Guarantees of Indebtedness to Others, an interpretation of
FASB Statements No. 5, 57, and 107, and a rescission of FASB
Interpretation No. 34. This Interpretation elaborates on the
disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under guarantees issued. The
Interpretation also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value
of the obligation undertaken. The initial recognition and measurement
provisions of the Interpretation are applicable to guarantees issued or
modified after December 31, 2002, and are not expected to have a
material effect on the Company's financial statements The disclosure
requirements are effective for financial statements of interim or
annual periods ending after December 15, 2002.
In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment of
FASB Statement No. 123. This Statement amends FASB Statement No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods
of transition for a voluntary change to the fair value method of
accounting for stock-based employee compensation. In addition, this
Statement amends the disclosure requirements of Statement No. 123 to
require prominent disclosures in both annual and interim financial
statements. Certain of the disclosure modifications are required for
fiscal years ending after December 15, 2002 and are included in the
notes to the accompanying consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, Consolidation
of Variable Interest Entities, an interpretation of ARB No. 51. This
Interpretation addressed the consolidation by business enterprises of
variable interest entities as defined in the Interpretation. The
Interpretation applies immediately to variable interests in variable
interest entities created after January 31, 2003, and to variable
interests in variable interest entities obtained after January 31,
2003. The application of this Interpretation is not expected to have a
material effect on the Company's financial statements. The
Interpretation requires certain disclosures in financial statements
issued after January 31, 2003, if it is reasonably possible that the
Company will consolidate or disclose information about variable
interest entities when the Interpretation becomes effective.
F-44
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 28, 2002 $ 22,139 $ 4,280 $ - $ 2,463 $ 23,956
======== ========== ======== ========= ==========
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
======== ========== ======== ========= ==========
Accumulated amortization of
goodwill:
Year ended December 28, 2002 $ 1,077 $ - $ - $ - $ 1,077
======== ========== ======== ========= ==========
Year ended December 29, 2001 $ 883 $ 242 $ - $ 48 $ 1,077
======== ========== ======== ========= ==========
Year ended December 30, 2000 $ 741 $ 142 $ - $ - $ 883
======== ========== ======== ========= ==========
Note: Deductions consist of the write-off of fully amortized collection routes and contracts and goodwill.
Reserve for bad debts:
Year ended December 28, 2002 $ 467 $ 416 $ - $ 255 $ 628
======== ========== ======== ========= ==========
Year ended December 29, 2001 $ 680 $ 582 $ - $ 795 $ 467
======== ========== ======== ========= ==========
Year ended December 30, 2000 $ 2,408 $ 641 $ - $ 2,369 $ 680
======== ========== ======== ========= ==========
Deferred tax valuation allowance:
Year ended December 28, 2002 $ 21,279 $ 688 $ - $ - $ 20,591
======== ========== ======== ========= ==========
Year ended December 29, 2001 $ 16,990 $ 4,289 $ - $ - $ 21,279
======== ========== ======== ========= ==========
Year ended December 30, 2000 $ 9,436 $ 7,554 $ - $ - $ 16,990
======== ========== ======== ========= ==========
Note: Deductions consist of write-offs of uncollectable accounts receivable.
F-45
DARLING INTERNATIONAL INC.
100,000 shares of Series A Preferred Stock
------------------
P R O S P E C T U S
------------------
____________, 2003
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The expenses to be paid by our company in connection with the
distribution of the securities being registered are as follows:
----------------
Amount (1)
Securities and Exchange Commission Registration Fee.................. $ 4,573
Accounting Fees and Expenses......................................... 35,000
Legal Fees and Expenses.............................................. 35,000
Transfer Agent and Registrar Fees and Expenses....................... 0
Printing and Engraving Expenses...................................... 6,000
Miscellaneous Fees and Expenses...................................... 1,000
--------------
Total..................................................... $ 81,573
==============
------------------------
(1) All amounts are estimates except the SEC filing fee. Includes estimated
expenses incurred in connection with the original filing and each amendment
to date.
Item 14. Indemnification of Directors and Officers
As permitted under Section 102(b)(7) of the Delaware General
Corporation Law, our restated certificate of incorporation, as amended, provides
that our directors (including any advisory director) shall not be liable to us
or our stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to us or to our stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) under Section 174 of the Delaware General Corporation Law, relating to
prohibited dividends or distributions or the repurchase or redemption of stock,
or (iv) for any transaction from which the director derives an improper personal
benefit.
In addition, as permitted by Section 145 of the Delaware General
Corporation Law our restated certificate of incorporation, as amended and our
amended and restated bylaws, as amended provide that we shall indemnify any
person, including officers and directors, who was or is, or is threatened to be
made, a party to any threatened, pending or completed action, suit or
proceedings, whether civil, criminal, administrative or investigative (other
than an action by or in the right of our company), by reason of the fact that
such person is or was a director, officer, employee or agent of our company or
is or was serving at the request of our company as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding, provided such person acted in
good faith and in a manner such person reasonably believed to be in or not
opposed to our best interests and, for criminal proceedings, had no reasonable
cause to believe that his conduct was unlawful.
Furthermore, as permitted by Section 145, expenses (including attorneys
fees) incurred by an officer or director defending or settling any civil,
criminal, administrative or investigative action, suit or proceeding shall be
paid by us in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such director or
officer to repay such amount if it shall ultimately be determined that such
person is not entitled to be indemnified by us. Such expenses (including
attorneys' fees) incurred by other employees and agents may be so paid upon such
terms and conditions, if any, as our board of directors deems appropriate.
And as provided in Section 145, the indemnification and advancement of
expenses provided by, or granted pursuant to, the above-described provisions
shall not be deemed exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under any bylaw,
agreement, vote of stockholders or disinterested directors or otherwise, both as
to action in such person's official capacity and as to action in another
capacity while holding such office.
II-1
We have obtained a policy of directors' and officers' liability
insurance that insures our directors and officers against the cost of defense,
settlement or payment of a judgment under certain circumstances.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers, and controlling persons
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by us of expenses incurred or paid by a director, officer or controlling
person in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, we will, unless in the opinion of our counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
Item 15. Recent Sales of Unregistered Securities
Within the past three years, Darling has issued and sold unregistered
securities in the transactions described below:
As part of the Recapitalization, on May 13, 2002, we issued an
aggregate of 46,705,086 shares of our common stock and 100,000 shares of our
Series A Preferred Stock to our lenders in exchange for the lenders canceling an
aggregate of $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 a forbearance agreement then existing. These securities were
issued in reliance on the exemption from registration provided by Section 4(2)
of the Securities Act.
Of such 46,705,086 shares of common stock, 4,359,141 were issued to
Credit Lyonnais New York Branch; 10,522,770 were issued to PPM America Special
Investments Fund, L.P.; 719,940 were issued to Daple, S.A.; 6,659,897 were
issued to PPM America Special Investments CBO II, L.P.; 6,434,923 were issued to
Bank One N.A.; 2,075,782 were issued to Credit Agricole Indosuez; 363 were
issued to Wells Fargo Bank (Texas) National Association; 1,037,891 were issued
to Ark CLO 2000-1, Limited; 8,355,849 were issued to Cerberus Partners, L.P.;
and 6,538,530 were issued to Avenue Special Situations Fund II, L.P.
Of such 100,000 shares of Series A Preferred Stock, 9,333 were issued
to Credit Lyonnais New York Branch; 22,531 were issued to PPM America Special
Investments Fund, L.P.; 1,541 were issued to Daple, S.A.; 14,259 were issued to
PPM America Special Investments CBO II, L.P.; 13,778 were issued to Bank One
N.A.; 4,444 were issued to Credit Agricole Indosuez; 1 was issued to Wells Fargo
Bank (Texas) National Association; 2,222 were issued to Ark CLO 2000-1, Limited;
17,891 were issued to Cerberus Partners, L.P.; and 14,000 were issued to Avenue
Special Situations Fund II, L.P.
II-2
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
Exhibit No. Document
----------- --------
3.1 Restated Certificate of Incorporation of the Company, as
amended.+
3.2 Amended and Restated Bylaws of the Company, as amended
(filed as Exhibit 3.2 to the Company's Quarterly Report on
Form 10-Q filed August 12, 1997 and incorporated herein by
reference).
4.1 Specimen Common Stock Certificate (filed as Exhibit 4.1 to
the Company's Registration Statement on Form S-1 filed May
27, 1994 and incorporated herein by reference).
4.2 Certificate of Designation, Preference and Rights of Series
A Preferred Stock.+
5.1 Opinion of Dechert as to the legality of the shares of
Series A Preferred Stock being registered.+
10.1 Recapitalization Agreement, dated as of March 15, 2002,
among Darling International Inc., each of the banks or
other lending institutions which is a signatory thereto or
any successor or assignee thereof, and Credit Lyonnais New
York Branch, individually as a bank and as agent (filed as
Annex C to the Company's Definitive Proxy Statement filed
on April 29, 2002 and incorporated herein by reference).
10.2 First Amendment to Recapitalization Agreement, dated as of
April 1, 2002, among Darling International Inc., each of
the banks party to the Recapitalization Agreement, and
Credit Lyonnais New York Branch, individually as a bank and
as agent (filed as Annex D to the Company's Definitive
Proxy Statement filed on April 29, 2002 and incorporated
herein by reference).
10.3 Second Amendment to Recapitalization Agreement, dated as of
April 29, 2002, among Darling International Inc., each of
the banks party to the Recapitalization Agreement, and
Credit Lyonnais New York Branch, individually as a bank and
as agent.+
10.4 Amended and Restated Credit Agreement, dated as of May 10,
2002, among Darling International Inc., Credit Lyonnais New
York Branch, individually as a bank and as agent, and the
other banks and secured parties named therein.+
10.5 Registration Rights Agreement, dated as of December 29,
1993, between Darling International Inc. and the signatory
holders identified therein (filed as Exhibit 10.3 to the
Company's Registration Statement on Form S-1 filed May 27,
1994 and incorporated herein by reference).
10.6 Registration Rights Agreement, dated as of May 10, 2002,
between Darling International Inc. and the holders
identified therein.+
10.7 Form of Indemnification Agreement (filed as Exhibit 10.7 to
the Company's Registration Statement on Form S-1 filed May
27, 1994 and incorporated herein by reference).
10.8 Form of Executive Severance Agreement (filed as Exhibit
10.6 to the Company's Registration Statement on Form S-1
filed May 27, 1994 and incorporated herein by reference).
10.9 Lease, dated November 30, 1993, between the Company and the
Port of Tacoma (filed as Exhibit 10.8 to the Company's
Registration Statement on Form S-1 filed May 27, 1994 and
incorporated herein by reference).
10.10 Leases, dated July 1, 1996, between the Company and the
City and County of San Francisco (filed pursuant to
temporary hardship exemption under cover of Form SE).
II-3
10.11 1993 Flexible Stock Option Plan (filed as Exhibit 10.2 to
the Company's Registration Statement on Form S-1 filed May
27, 1994 and incorporated herein by reference).
10.12 1994 Employee Flexible Stock Option Plan (filed as Exhibit
2 to the Company's Revised Definitive Proxy Statement filed
on April 20, 2001 and incorporated herein by reference).
10.13 Non-Employee Directors Stock Option Plan.+
10.14 International Swap Dealers Association, Inc. (ISDA) Master
Agreement and Schedule between Credit Lyonnais and Darling
International Inc. dated as of June 6, 1997, related to
interest rate swap transaction (filed as Exhibit 10.2 to
the Company's Quarterly Report on Form 10-Q filed August
12, 1997 and incorporated herein by reference).
10.15 International Swap Dealers Association, Inc. (ISDA) Master
Agreement and Schedule between Wells Fargo Bank, N.A. and
Darling International Inc. dated as of June 6, 1997,
related to interest rate swap transaction (filed as Exhibit
10.3 to the Company's Quarterly Report on Form 10-Q filed
August 12, 1997 and incorporated herein by reference).
10.16 Confirmation dated September 20, 1999 which supplements,
forms part of, and is subject to, the ISDA Master Agreement
dated as of June 6, 1997 between Credit Lyonnais and
Darling International Inc (filed as Exhibit 10.17B to the
Company's Annual Report on Form 10-K filed March 31, 2000
and incorporated herein by reference).
10.17 Master Lease Agreement between Navistar Leasing Company and
Darling International Inc. dated as of August 4, 1999
(filed as Exhibit 10.18 to the Company's Annual Report on
Form 10-K filed March 31, 2000 and incorporated herein by
reference).
10.18 Consulting Agreement, dated as of May 10, 2002, by and
between Darling International Inc., Taura Flynn and
Associates LLC, and Denis J. Taura (filed as Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q filed August
13, 2002 and incorporated herein by reference).
10.19 Employment Agreement, dated as of February 3, 2003, between
Darling International Inc. and Randall C. Stuewe (filed as
Exhibit 10.1 to the Company's Current Report on Form 8-K
filed February 3, 2003, and incorporated herein by
reference).
21.1 Subsidiaries of the Registrant.+
23.1 Consent of Dechert.+
23.2 Consent of KPMG (filed herewith).
24.1 Power of Attorney.+
------------------------
+ Previously filed.
(b) Financial Statement Schedules
Schedule II Valuation and Qualifying Accounts --
Three Years Ended December 28, 2002 (Page F-45)
Schedules other than those listed above have been omitted since they
are not required or are not applicable or the required information is shown in
the financial statements or related notes. Columns omitted from schedules filed
have been omitted since the information is not applicable.
II-4
Item 17. Undertakings
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective
amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the
information set forth in the registration statement.
Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the
total dollar value of securities offered would not
exceed that which was registered) and any deviation
from the low or high end of the estimated maximum
offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume
and price represent no more than a 20 percent change
in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the
effective registration statement; and
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in
the registration statement or any material change to
such information in the registration statement;
provided, however, that paragraphs (1)(i) and (1)(ii)
do not apply if the registration statement is on Form
S-3, Form S-8 or Form F-3, and the information
required to be included in a post-effective amendment
by those paragraphs is contained in periodic reports
filed with or furnished to the Commission by the
registrant pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 that are incorporated
by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies has duly caused this amendment to the registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Irving, Texas, on the 30th day of May, 2003.
DARLING INTERNATIONAL INC.
By: /s/ John O. Muse
--------------------------------
John O. Muse
Executive Vice President -
Finance and Administration
Pursuant to the requirements of the Securities Act of 1933, this
amendment to the registration statement has been signed by the following persons
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Randall C. Stuewe Chairman of the Board and May 30, 2003
----------------------------- Chief Executive Officer
Randall C. Stuewe
/s/ James A. Ransweiler President and Chief Operating Officer May 30, 2003
----------------------------- (Principal Executive Officer)
James A. Ransweiler
/s/ John O. Muse Executive Vice President - Finance and May 30, 2003
----------------------------- Administration (Principal Financing and
John O. Muse Accounting Officer)
* Director May 30, 2003
-----------------------------
O. Thomas Albrecht
* Director May 30, 2003
-----------------------------
Fredric J. Klink
* Director May 30, 2003
-----------------------------
Charles Macaluso
* Director May 30, 2003
-----------------------------
Richard A. Peterson
*By /s/ John O. Muse
--------------------------
John O. Muse
Attorney-In-Fact
II-6
EXHIBIT INDEX
Exhibit No. Document
---------- --------
3.1 Restated Certificate of Incorporation of the Company, as
amended.+
3.2 Amended and Restated Bylaws of the Company, as amended
(filed as Exhibit 3.2 to the Company's Quarterly Report on
Form 10-Q filed August 12, 1997 and incorporated herein by
reference).
4.1 Specimen Common Stock Certificate (filed as Exhibit 4.1 to
the Company's Registration Statement on Form S-1 filed May
27, 1994 and incorporated herein by reference).
4.2 Certificate of Designation, Preference and Rights of Series
A Preferred Stock.+
5.1 Opinion of Dechert as to the legality of the shares of
Series A Preferred Stock being registered.+
10.1 Recapitalization Agreement, dated as of March 15, 2002,
among Darling International Inc., each of the banks or
other lending institutions which is a signatory thereto or
any successor or assignee thereof, and Credit Lyonnais New
York Branch, individually as a bank and as agent (filed as
Annex C to the Company's Definitive Proxy Statement filed
on April 29, 2002 and incorporated herein by reference).
10.2 First Amendment to Recapitalization Agreement, dated as of
April 1, 2002, among Darling International Inc., each of
the banks party to the Recapitalization Agreement, and
Credit Lyonnais New York Branch, individually as a bank and
as agent (filed as Annex D to the Company's Definitive
Proxy Statement filed on April 29, 2002 and incorporated
herein by reference).
10.3 Second Amendment to Recapitalization Agreement, dated as of
April 29, 2002, among Darling International Inc., each of
the banks party to the Recapitalization Agreement, and
Credit Lyonnais New York Branch, individually as a bank and
as agent.+
10.4 Amended and Restated Credit Agreement, dated as of May 10,
2002, among Darling International Inc., Credit Lyonnais New
York Branch, individually as a bank and as agent, and the
other banks and secured parties named therein.+
10.5 Registration Rights Agreement, dated as of December 29,
1993, between Darling International Inc. and the signatory
holders identified therein (filed as Exhibit 10.3 to the
Company's Registration Statement on Form S-1 filed May 27,
1994 and incorporated herein by reference).
10.6 Registration Rights Agreement, dated as of May 10, 2002,
between Darling International Inc. and the holders
identified therein.+
10.7 Form of Indemnification Agreement (filed as Exhibit 10.7 to
the Company's Registration Statement on Form S-1 filed May
27, 1994 and incorporated herein by reference).
10.8 Form of Executive Severance Agreement (filed as Exhibit
10.6 to the Company's Registration Statement on Form S-1
filed May 27, 1994 and incorporated herein by reference).
10.9 Lease, dated November 30, 1993, between the Company and the
Port of Tacoma (filed as Exhibit 10.8 to the Company's
Registration Statement on Form S-1 filed May 27, 1994 and
incorporated herein by reference).
10.10 Leases, dated July 1, 1996, between the Company and the
City and County of San Francisco (filed pursuant to
temporary hardship exemption under cover of Form SE).
10.11 1993 Flexible Stock Option Plan (filed as Exhibit 10.2 to
the Company's Registration Statement on Form S-1 filed May
27, 1994 and incorporated herein by reference).
10.12 1994 Employee Flexible Stock Option Plan (filed as Exhibit
2 to the Company's Revised Definitive Proxy Statement filed
on April 20, 2001 and incorporated herein by reference).
10.13 Non-Employee Directors Stock Option Plan.+
10.14 International Swap Dealers Association, Inc. (ISDA) Master
Agreement and Schedule between Credit Lyonnais and Darling
International Inc. dated as of June 6, 1997, related to
interest rate swap transaction (filed as Exhibit 10.2 to
the Company's Quarterly Report on Form 10-Q filed August
12, 1997 and incorporated herein by reference).
10.15 International Swap Dealers Association, Inc. (ISDA) Master
Agreement and Schedule between Wells Fargo Bank, N.A. and
Darling International Inc. dated as of June 6, 1997,
related to interest rate swap transaction (filed as Exhibit
10.3 to the Company's Quarterly Report on Form 10-Q filed
August 12, 1997 and incorporated herein by reference).
10.16 Confirmation dated September 20, 1999 which supplements,
forms part of, and is subject to, the ISDA Master Agreement
dated as of June 6, 1997 between Credit Lyonnais and
Darling International Inc (filed as Exhibit 10.17B to the
Company's Annual Report on Form 10-K filed March 31, 2000
and incorporated herein by reference).
10.17 Master Lease Agreement between Navistar Leasing Company and
Darling International Inc. dated as of August 4, 1999
(filed as Exhibit 10.18 to the Company's Annual Report on
Form 10-K filed March 31, 2000 and incorporated herein by
reference).
10.18 Consulting Agreement, dated as of May 10, 2002, by and
between Darling International Inc., Taura Flynn and
Associates LLC, and Denis J. Taura (filed as Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q filed August
13, 2002 and incorporated herein by reference).
10.19 Employment Agreement, dated as of February 3, 2003, between
Darling International Inc. and Randall C. Stuewe (filed as
Exhibit 10.1 to the Company's Current Report on Form 8-K
filed February 3, 2003, and incorporated herein by
reference).
21.1 Subsidiaries of the Registrant.+
23.1 Consent of Dechert.+
23.2 Consent of KPMG (filed herewith).
24.1 Power of Attorney.+
------------------------
+ Previously filed.