UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 28, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _______________ to _______________
Commission File Number
0-24620
DARLING INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
Delaware 36-2495346
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
251 O'Connor Ridge Blvd.
Suite 300
Irving, Texas 75038
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 717-0300
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $0.01 par value per share
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such report(s)), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant was approximately $61,000,000 as of March 25, 1997 based upon the
average bid and asked prices of such stock as reported in the National Market
System of the National Association of Securities Dealers Automated Quotation
System (the "Nasdaq National Market") on that day.
There were 5,166,394 shares of common stock, $0.01 par value, outstanding
at March 25, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Selected designated portions of the Registrant's definitive Proxy Statement
are incorporated by reference into Part III of this Annual Report.
<PAGE>
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 28, 1996
TABLE OF CONTENTS
Page No.
PART I.
ITEM 1. BUSINESS...........................................................3
ITEM 2. PROPERTIES.........................................................7
ITEM 3. LEGAL PROCEEDINGS..................................................7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................9
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS........................................9
ITEM 6. SELECTED FINANCIAL DATA............................................9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION.......................11
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................16
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE................................38
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.................38
ITEM 11. EXECUTIVE COMPENSATION.............................................38
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.....................................................38
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................38
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K........................................................39
SIGNATURES ...................................................41
<PAGE>
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 28, 1996
PART I
ITEM 1. BUSINESS
GENERAL
Founded by the Swift meat packing interests and the Darling family in
1882, Darling International Inc. ("Darling" or the "Company") was incorporated
in Delaware in 1962 under the name "Darling-Delaware Company, Inc." On December
28, 1993, the Company changed its name from "Darling-Delaware Company, Inc." to
"Darling International Inc." The address of the Company's principle executive
office is 251 O'Connor Ridge Boulevard, Suite 300, Irving, Texas, 75038, and
its telephone number at such address is (972)717-0300.
The Company is a recycler of food processing by-products and believes
that it is the largest independent processor in the United States in terms of
raw material processed annually.
The Company collects and recycles animal processing by-products, used
restaurant cooking oil and bakerage by-products from restaurants, butcher shops,
grocery stores, bakeries, and independent meat and poultry processors
nationwide. The Company processes such raw materials at 47 facilities located
throughout the United States into finished products such as tallow, meat and
bone meal, yellow grease, and dried bakery product. The Company sells these
products nationally and internationally, primarily to producers of various
industrial and commercial oleo-chemicals, soaps, pet foods and livestock feed,
for use as ingredients in their products or for further processing into basic
chemical compounds.
PROCESSING OPERATIONS
The Company creates finished products primarily through the drying,
grinding, separating and blending of its various raw materials. The process
starts with the collection of animal processing by-products (fat, bones,
feathers and offal), used restaurant cooking oil, and bakery by-products from
meat packers, grocery stores, butcher shops, meat markets, poultry processors,
restaurants and bakeries.
The animal processing by-products are ground and heated to extract
water and separate oils from animal tissue as well as to sterilize and make the
material suitable as an ingredient for animal feed. Meat and bone meal is
separated from the cooked material by pressing the material, then grinding and
sifting it through screens. The separated tallow is centrifuged and/or refined
for purity. The primary finished products derived from the processing of animal
by-products are tallow and meat and bone meal. Other by-products include poultry
meal, feather meal and blood meal. Used restaurant cooking oil is processed
under a separate procedure that involves heating, settling and sterilizing, as
well as refining, resulting in derived yellow grease, feed-grade animal fat, or
oleo-chemical feedstocks. Bakery by-products are ground, heated to extract
moisture, and blended to produce a high-calorie animal feed ingredient.
PURCHASE AND COLLECTION OF RAW MATERIALS
The Company operates a fleet of approximately 1,200 trucks and
tractor-trailers to collect raw materials from more than 80,000 restaurants,
butcher shops, grocery stores, bakeries, and independent meat and poultry
processors. The Company replaces or upgrades its vehicle fleet to maintain
efficient operations.
Raw materials are collected in one of two manners. Certain large
suppliers, such as large meat processors, poultry processors, and bakeries are
furnished with bulk trailers in which the raw material is loaded. The Company
transports these trailers directly to a processing facility. The Company
provides the remaining suppliers, primarily grocery stores, butcher shops, and
smaller bakeries and confectioners, with containers in which to deposit the raw
material. The containers are picked up by or emptied into Company trucks on a
periodic basis. The type and frequency of service is determined by individual
supplier requirements, the volume of raw material generated by the supplier,
supplier location, and weather, among other factors.
Used restaurant cooking oil is placed in various sizes and types of
containers which are supplied by the Company. In some instances, these
containers are loaded directly onto the trucks, while in other instances the oil
is pumped through a vacuum hose into the truck. The Company also provides an
alternative collection service to restaurants, CleanStar 2000TM, a
newly-patented, self-contained collection system that is housed inside the
restaurant, with the used cooking oil pumped directly into collection vehicles
via an outside valve. The frequency of all forms of collection service is
determined by the volume of oil generated by the restaurant.
<PAGE>
The raw materials collected by the Company are transported either
directly to a processing plant or to a transfer station, where materials from
several collection routes are loaded into trailers and transported to a
processing plant. Collections of animal processing by-products generally are
made during the day, and materials are delivered to plants for processing within
24 hours of collection to eliminate spoilage. Collection of used restaurant
cooking oil and bakery by-products 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.
During the past year, the Company's largest single supplier accounted
for less than 5% of the total raw material processed by the Company, and the 10
largest raw materials suppliers accounted for approximately 27% of the total raw
material processed by the Company. For a discussion of the Company's competition
for raw materials, see "Competition."
RAW MATERIALS PRICING
The Company has two primary pricing arrangements with its raw materials
suppliers. More than half of the Company's annual volume of raw materials is
acquired on a "formula" basis. Under a formula arrangement, the charge or credit
for raw materials is tied to published finished product commodity prices after
deducting a fixed service charge. The service charge is designed to enable the
Company to cover all of its collection and processing costs and realize a
profit. The Company acquires the remaining annual volume of raw material under
"non-formula" arrangements whereby suppliers either are paid a fixed price, are
not paid, or are charged for the collection service, depending on various
economic factors.
The credit received or amount charged for raw material under both
formula and non-formula arrangements is based on various factors, including the
type of raw materials, the expected value of the finished product to be
produced, the anticipated yields, the volume of material generated by the
supplier, and processing and transportation costs. Competition among processors
to procure raw materials also affects the price paid for raw materials. See
"Competition."
Formula prices are generally adjusted on a weekly or monthly basis
while non-formula prices or charges are adjusted as needed to respond to
significant changes in finished product prices.
FINISHED PRODUCTS
The finished products that result from the processing of animal
by-products are oils (primarily tallow and yellow grease) and proteins
(primarily meat and bone meal). Raw material received from bakeries are
processed into dried bakery product. 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. Dried bakery product is used primarily as an additive in animal
feed.
Predominantly all of the Company's finished products are commodities
which are quoted on established commodity markets or are priced relative to such
commodities. While the Company's finished products are generally sold at prices
prevailing at the time of sale, the Company's ability to deliver large
quantities of finished products from multiple locations and to coordinate sales
from a central location enables the Company to occasionally receive a premium
over the then-prevailing market price.
MARKETING, SALES AND DISTRIBUTION OF FINISHED PRODUCTS
The Company markets its finished products worldwide. Marketing
activities are primarily conducted through the Company's marketing department
which is headquartered in Irving, Texas. The Company also maintains sales
offices in Los Angeles, California, Atlanta, Georgia, and Newark, New Jersey for
sales and distribution of selected products. This sales force is in contact with
several hundred customers daily and coordinates the sale and assists in the
distribution of most finished products produced at the Company's processing
plants. The Company sells its finished products internationally through
commodities brokers and through Company agents in various countries.
The Company sells to numerous foreign markets, including the European
Economic Community, Asia, the Pacific Rim, North Africa, Mexico and South
America. The level of export sales is typically 20-40% of the total Company
sales and may vary from year to year depending on the relative strength of
domestic versus overseas markets. The Company obtains payment protection for
most of its foreign sales by requiring payment before shipment or by requiring
bank letters of credit or guarantees of payment from U.S. government agencies.
The Company ordinarily is paid for its products in U.S. dollars and has not
experienced any material currency translation losses or any material foreign
exchange control difficulties.
<PAGE>
The Company has not experienced any material restrictions on the export
of its products, although certain countries, including India, the European
Economic Community, and certain Middle East countries restrict the import of
particular products. See Note 14 of Notes to Consolidated Financial Statements
for information regarding the Company's export sales.
Finished products produced by Darling are distributed primarily by
truck and rail from the Company's plants shortly following production. While
there are some temporary inventory accumulations at various port locations for
export shipments, inventories rarely exceed three weeks' production and,
therefore, the Company uses limited working capital to carry inventories and
reduces its exposure to fluctuations in commodity prices.
COMPETITION
Management of the Company believes that the most competitive aspect of
the business is the procurement of raw materials rather than the sale of
finished products. During the last ten years, pronounced consolidation within
the meat packing industry has resulted in bigger and more efficient slaughtering
operations, the majority of which utilize "captive" processors. Simultaneously,
the number of small meat packers, which have historically been a dependable
source of supply for non-captive processors, has decreased significantly.
Although the total amount of slaughtering may be flat or only moderately
increasing, the availability, quantity and quality of raw materials available to
the independent processors from these sources have all decreased. These factors
have been offset, in part, however, by increasing environmental consciousness.
The need for restaurants to comply with environmental regulations concerning the
proper disposal of used restaurant cooking oil is offering a growth area for
this raw material source.
In marketing its finished products, the Company faces competition from
other processors and from producers of other suitable commodities. Tallows and
greases are in certain instances substitutes for soybean oil and palm stearine,
while meat and bone meal is a substitute for soybean meal. Dried bakery product
is a substitute for corn in animal feed. Consequently, the prices of tallow,
yellow grease, meat and bone meal, and dried bakery product correlate to some
degree with these commodities. The markets for finished products are impacted
mainly by the worldwide supply of fats, oils, proteins and grains. Among other
factors that influence the prices that the Company receives for its finished
products include the worldwide supply of oils and proteins, the quality of the
Company's finished products, consumer health consciousness, and worldwide credit
conditions and U.S. government foreign aid. From time to time, the Company
enters into arrangements with its suppliers of raw materials pursuant to which
such suppliers buy back the Company's finished products.
SEASONALITY
The amount of raw materials made available to the Company by its
suppliers is relatively stable on a weekly basis except for those weeks
including a major holiday during which availability of raw materials declines
because major meat and poultry processors are not operating. Weather is also a
factor. Extremely warm weather adversely affects the ability of the Company to
make higher quality products because the raw material deteriorates more rapidly
than in cooler weather, while extremely cold weather, in certain instances, can
hinder the collection of raw materials.
EMPLOYEES AND LABOR RELATIONS
As of December 28, 1996, the Company employed approximately 1,900 persons
full-time. Approximately 41% of the total number of employees are covered by
collective bargaining agreements; however, the Company has no national or
multi-plant union contracts. Management believes that the Company's relations
with its employees and their representatives are good. There can be no
assurance, however, that new agreements will be reached without union action or
will be on terms satisfactory to the Company.
REGULATIONS
The Company is subject to the rules and regulations of various federal,
state and local governmental agencies. These include, but are not limited to,
the FDA, USDA, EPA, local and state agencies governing air and water discharge,
and various others. Such rules and regulations may influence the Company's
operating results at one or more facilities.
On January 3, 1997, the FDA issued a proposed ruling to prohibit the
feeding of ruminant derived proteins to ruminant animals as a measure to prevent
the potential occurrence of BSE (Bovine Spongiform Encephalopathy) in the
United States. The public hearing period on the proposed rule expired on
February 18, 1997. The FDA is currently preparing the final rule for
publication. It is not clear as to what effect, if any, this proposed rule will
have on the operations of the Company.
SETTLEMENT
On December 29, 1993, the Company consummated the settlement (the
"Settlement") of a class action lawsuit (the "Class Action") filed against the
Company on August 15, 1991, in connection with, among other things, the
Company's issuance and subsequent default in payment of interest due under
approximately $175.0 million of 14% Senior Subordinated Notes due March 15, 1999
(the "Original Notes") and breach of the indenture governing the Original Notes
(the "Original Notes Indenture"). As part of the Settlement and the attendant
restructuring (the "Restructuring") of the Company's capitalization, Original
Noteholders received, upon surrender of their Original Notes, 4,749,484 shares
of Common Stock (the "Noteholders' Common Stock"), $70.0 million aggregate
principal amount of First Priority Senior Subordinated Notes due July 15, 2000
(the "Subordinated Notes") and approximately $5.0 million in cash. In addition,
pursuant to the Settlement, the Company issued 249,975 shares of Class A Common
Stock, options to purchase 128,205 shares of Class A Common Stock and options to
purchase 494,500 shares of Common Stock.
ITEM 2. PROPERTIES
The Company's 47 operating facilities consist of 27 full service rendering
plants, eleven bakery recycling plants, four yellow grease plants, two blending
plants, two research and technology plants, and one edible plant. Except for
nine leased facilities, all of these facilities are owned by the Company. The
following is a listing of the Company's operating facilities:
Location Description Location Description
-------- ----------- -------- -----------
Alton, IA ............Rendering Linkwood, MD.............Rendering
Billings, MT..........Rendering Los Angeles, CA..........Rendering
Blue Earth, MN .......Rendering Milwaukee, WI............Rendering
Boise, ID.............Rendering Mt. Pleasant, TX (IPC)...Bakerage
Calhoun, GA (IPC).....Bakerage Newark, NJ...............Rendering
Carteret, NJ (IPC)....Bakerage Norfolk, NE..............Rendering
Chicago, IL (IPC).....Bakerage Norfolk, NE .............R&T
Cincinnati, OH (IPC)..Bakerage Omaha, NE................Rendering
Cleveland, OH ........Rendering Omaha, NE ...............Blending
Coldwater, MI.........Rendering Omaha, NE................Edible
Collinsville, OK......Rendering Russellville, AR.........Rendering
Conley, GA (IPC) .....Bakerage San Angelo, TX...........Rendering
Dallas, TX............Rendering San Antonio, TX (IPC)....Bakerage
Detroit, MI...........Rendering San Francisco, CA........Rendering
Durham, NC (IPC)......Bakerage Sioux City, IA...........Rendering
Fort Lauderdale, FL...Yellow Grease St. Louis, MO............Rendering
Fresno, CA............Rendering Tacoma, WA...............Rendering
Henderson, NV.........Yellow Grease Tampa, FL................Yellow Grease
Houston, TX...........Rendering Terre Haute, IN (IPC)....Bakerage
Houston, TX ..........Yellow Grease Turlock, CA..............Rendering
Kansas City, KS.......Rendering Wahoo, NE................Rendering
Kansas City, KS (IPC).Bakerage Wahoo, NE ...............R&T
Kearny, NJ ...........Blending West Point, NE...........Rendering
Lake City, GA (IPC)...Bakerage
In addition, the Company owns or leases 20 transfer stations in the
United States and one transfer station in Canada that serve as collection points
for routing raw material to the processing plants set forth above.
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
(a) ENVIRONMENTAL
BLUE EARTH
The U. S. Attorney for the District of Minnesota and the State of
Minnesota since 1992 have been conducting an investigation of alleged
state and federal wastewater violations at the Company's Blue Earth,
Minnesota plant. The Company has fully cooperated with the government
in its investigation and continues to do so. The Company and the U.S.
Attorney have reached a settlement providing for payment of a total of
$4,000,000. This settlement payment is intended to resolve all federal
and state civil, criminal and administrative claims, through payment
of civil and criminal fines and penalties, as well as funding the
restitution, remediation and community service required as part of the
criminal settlement. The settlement is subject to court approval, and
is subject to the resolution of pending negotiations with the U.S.
Environmental Protection Agency of the terms of a Consent Decree. The
Company recorded a provision for loss contingency of $6,100,000 during
Fiscal 1996 to cover the expected cost of the settlement as well as
legal, environmental and other related costs.
CHULA VISTA
The Company is the owner of an undeveloped property located in Chula
Vista, California (the "Site"). A rendering plant was operated on the Site
until 1982. From 1959 to 1978, a portion of the Site was used as an
industrial waste disposal facility which was closed pursuant to Closure
Order No. 80-06 issued by the State of California Regional Water Quality
Control Board for the San Diego Region (the "RWQCB"). The Site has been
listed by the State of California as a site for which expenditures for
removal and remedial actions may be made by the State pursuant to the
California Hazardous Substances Account Act, California Health & Safety
Code Section 25300 et seq. Technical consultants retained by the Company
have conducted various investigations of the environmental conditions at
the Site, and in 1996, requested that the RWQCB issue a "no further action"
letter with respect to the Site. The RWQCB has not yet taken any formal
action in response to such request.
UNDERGROUND STORAGE TANKS
The Company's processing operations do not produce hazardous or toxic
wastes; however, the Company does operate underground fuel storage tanks
("USTs") that are subject to federal, state and local laws and regulations.
As of December 28 1996, the Company has removed or closed 165 of its 177
UST's. The Company plans to remove an additional number of UST's in 1997.
(b) LITIGATION
PETRUZZI
An antitrust class action suit was filed in 1986 by Petruzzi IGA
Supermarkets in the United States District Court for the Middle District
of Pennsylvania (the "Class Action Suit") seeking damages from the
Company. On September 14, 1995, the Company entered into a settlement
agreement providing for the disposal of all claims in the Class Action
Suit. The settlement agreement was approved by the District Court on
December 20, 1995. The District Court has yet to rule on the petitions for
attorneys' fees.
OTHER LITIGATION
The Company is also a party to several other lawsuits, claims and loss
contingencies incidental to its business.
Although the ultimate liability cannot be determined with certainty, the
Company has estimated its probable liability and established a reserve with
respect to these contingencies. The Company believes that any additional
liability relative to such lawsuits and claims which may not be covered by
insurance would not likely have a material adverse effect on the Company's
financial position, although it could potentially have a material impact on the
results of operations in any one year.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fiscal quarter ended December 28, 1996.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock became eligible for trading on the Nasdaq National
Market under the symbol "DARL" on September 8, 1994. Prior to that date, there
was no established public trading market for these shares. The following table
sets forth, for the quarters indicated, the high and low sales prices per share
for the common stock as reported on the Nasdaq National Market.
Fiscal Quarter Market Price
High Low
---------------- -----------------
1996:
First Quarter $30.625 $26.625
Second Quarter $29.000 $21.750
Third Quarter $28.250 $24.750
Fourth Quarter $31.875 $27.250
1995:
First Quarter $14.125 $13.000
Second Quarter $23.375 $13.750
Third Quarter $30.000 $22.250
Fourth Quarter $29.000 $21.750
As of March 24, 1997, there were 67 holders of record of the common stock.
The Company has not declared or paid any dividend on the common stock
since January 3, 1989. The Company's senior debt agreements restrict the
Company's ability to pay dividends. The Company does not currently anticipate
paying cash dividends on the common stock in the foreseeable future, but intends
instead to retain future earnings for reinvestment in its business or reduction
of its indebtedness.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table presents selected consolidated historical financial
data for the periods indicated. The Company accounted for the resolution of a
class action lawsuit (the "Settlement") in accordance with fresh start reporting
("Fresh Start Reporting"), as set forth in Statement of Position 90-7. See Note
3 of Notes to Consolidated Financial Statements. As a result, the Company's
Consolidated Balance Sheets at December 28, 1996, December 30, 1995, December
31, 1994 and January 1, 1994 and the Consolidated Statement of Operations for
the years ended December 28, 1996, December 30, 1995 and December 31, 1994 are
presented on a different basis than that for periods before Fresh Start
Reporting, and, therefore, are not comparable. The selected historical
consolidated financial data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of the Company for the
three years ended December 28, 1996, December 30, 1995, and December 31, 1994
and the related notes thereto.
<PAGE>
<TABLE>
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 28, 1996
PART II
<CAPTION>
Predecessor
---------------------------
Fiscal 1996 Fiscal 1995 Fiscal 1994 Fiscal 1993 Fiscal 1992
Fifty-two Fifty-two Fifty-two Fifty-two Fifty-three
Weeks Ended Weeks Ended Weeks Ended Weeks Ended Weeks Ended
December 28, December 30, December 31, January 1, January 2,
1996 1995 1994 1994 1993
- -------------------------------------------- -------------- -------------- -------------- -------------- --------------
(amounts in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Operating Data:
Net sales $488,914 $421,608 $354,333 $332,780 $ 330,550
------- ------- ------- ------- -------
Cost of sales and operating expenses 395,025 336,248 282,908 269,979 264,078
Selling, general & administrative expenses 32,767 26,675 25,680 21,139 21,303
Depreciation and amortization 27,611 22,576 19,871 18,975 21,304
Provision for loss contingencies 6,075 - - 1,595 -
-------- ------- ------- ------- ------
Operating profit 27,436 36,109 25,874 21,092 23,865
Interest expense 12,994 13,311 15,206 29,644 31,230
Other (income) expense, net (537) (322) (80) (487) (1,759)
-------- ------- ------- ------- ------
Income (loss) before reorganization
items, income taxes, extraordinary
item and cumulative effect of
accounting changes 14,979 23,120 10,748 (8,065) (5,606)
Reorganization items:
Professional fees - - - (5,336) (2,947)
Fresh start valuation adjustment - - - 80,843 -
--------- -------- ------- ------- ------
Income (loss) before income taxes,
extraordinary item, and cumulative
effect of accounting changes 14,979 23,120 10,748 67,442 (8,553)
Income tax expense 7,305 8,740 3,391 8,464 1,449
Extraordinary gain (a) - - - (167,007) -
Cumulative effect of accounting changes (b) - - - - 9,536
--------- -------- ------- ------- ------
Net earnings (loss) 7,674 14,380 7,357 225,985 (19,538)
Redeemable preferred stock dividends
and interest - - - 5,956 5,154
-------- ------- ------- ------- -------
Income (loss) attributable to common
stock $ 7,674 $ 14,380 $ 7,357 $220,029 ($ 24,692)
======= ======= ======= ======= =======
Primary earnings (loss) per common share 1.38 2.70 1.47 43.94 (4.93)
Fully diluted earnings (loss) per
common share (c) 1.38 2.67 1.47 45.13 (4.93)
Fully diluted weighted average common
shares outstanding (c) 5,558 5,388 5,000 5,008 5,011
Other Data:
EBITDA (d) 61,122 58,685 45,745 41,662 45,169
Depreciation 22,282 18,595 15,994 16,569 16,829
Amortization 5,329 3,981 3,877 2,406 4,475
Capital expenditures 28,631 24,636 17,822 16,320 14,274
Balance Sheet Data:
Working capital (deficiency) (8,015) 12,936 (2,959) (281) (308,243)
Total assets 329,645 266,062 245,505 236,294 155,097
Current portion of long-term debt 15,598 9,060 11,577 11,098 244,537
Total long-term debt less current portion 138,173 117,096 109,132 122,566 3,973
Redeemable preferred stock - - - - 37,437
Stockholders' equity (deficit) 64,033 54,833 39,482 27,027 (270,851)
<FN>
(a) Under the terms of the Settlement, as of December 29, 1993, the Original
Noteholders received $70.0 million in Subordinated Notes, 4,749,484 shares
of Noteholders' common stock and other consideration in exchange for the
Original Notes, which had a balance due of $267.7 million, including $92.7
million of accrued interest. See Note 3 of Notes to Consolidated Financial
Statements. Using Fresh Start Reporting, as set forth in SOP 90-7, the
Company recognized an extraordinary gain of $167.0 million in connection
with the consummation of the Settlement.
(b) The cumulative effect of accounting changes for Fiscal 1992 includes a $7.5
million charge for the adoption of Statement of Financial Accounting
Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes," and a $2.1
million charge for the adoption of Statement of Financial Accounting
Standards No. 106 ("SFAS 106"), "Employers' Accounting for Postretirement
Benefits Other Than Pensions," as of December 29, 1991.
(c) The effect of the assumed conversions of the preferred stock on fully
diluted earnings (loss) per common share for the year ended January 2, 1993
was antidilutive; therefore, the amounts reported for primary and fully
diluted earnings (loss) per common share are the same. Fully diluted
earnings per common share for the year ended January 1, 1994 assumes that
the exchange of the redeemable preferred stock for common stock contributed
by settling shareholders occurred as of the beginning of the year.
(d) "EBITDA" represents, for any relevant period, operating profit plus
depreciation and amortization and provision for loss contingencies. EBITDA
is presented here not as a measure of operating results, but rather as a
measure of the Company's debt service ability and is not intended to be a
presentation in accordance with generally accepted accounting principles.
</FN>
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the Company's financial condition and
results of operations should be read in conjunction with the historical
consolidated financial statements and notes thereto included in Item 8.
Results of Operations
Fiscal Year Ended December 28, 1996 ("Fiscal 1996") Compared to Fiscal Year
Ended December 30, 1995 ("Fiscal 1995")
GENERAL
The Company recorded net earnings of $7.7 million for Fiscal 1996 compared
to net earnings of $14.4 million for Fiscal 1995. The decrease was mainly due
to: 1) a $6.1 million provision for loss contingency recorded in Fiscal 1996 to
cover estimated costs related to environmental violations at the Company's Blue
Earth, Minnesota plant; and 2) approximately $5 million in depreciation and
amortization expense related to acquisitions and capital expenditures.
Additionally, as a result of an extreme fourth quarter 1996 drop in the price of
corn, bakerage operating margins were not adequate to offset the related
depreciation, amortization and interest costs associated withthe acquisition of
IPC. Operating profit before the provision for loss contingency decreased from
$36.1 million in Fiscal 1995 to $33.5 million in Fiscal 1996. Interest expense
decreased from $13.3 million in Fiscal 1995 to $13.0 million in Fiscal 1996,
primarily due to decreased interest rates.
NET SALES
The Company collects and processes animal by-products (fat, bones and
offal), used restaurant cooking oil, and bakery by-products to produce finished
products of tallow, meat and bone meal, yellow grease and dried bakery product.
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 as well as finished goods purchased for resale, which
constitute less than 10% of the total. During Fiscal 1996, net sales increased
16.0%, to $488.9 million as compared to $421.6 million during Fiscal 1995.
Of the increase in sales in Fiscal 1996, approximately $31.6 million was
due primarily to the acquisitions of Standard Tallow Company ("Standard Tallow")
and International Processing Corporation ("IPC"). The remainder was primarily
due to improvements in finished goods prices and increases in the volume of raw
materials processed, offset by yield reductions due to raw material quality. The
Company experienced significantly higher domestic finished market prices while
overseas markets were considerably depressed compared to the prior year.
Compared to Fiscal 1995, the Company's average yellow grease prices were 8.6%
higher during Fiscal 1996. Average tallow prices were 1.8% lower during the same
period. Average meat and bone meal prices were 31.3% higher during Fiscal 1996
as compared to Fiscal 1995.
COST OF SALES AND OPERATING EXPENSES
Cost of sales and operating expenses includes prices paid to raw material
suppliers, the costs of product purchased for resale, and the cost to collect
and process the raw material. The Company utilizes both fixed and formula
pricing methods for the purchase of raw materials. Fixed prices are adjusted
where possible as needed for changes in competition and significant changes in
finished goods market conditions, while raw materials purchased under formula
prices are correlated with specific finished goods prices.
During Fiscal 1996, cost of sales and operating expenses increased $58.8
million (17.5%), to $395.0 million as compared to $336.2 million during Fiscal
1995. Cost of sales grew due to the acquisitions of Standard Tallow and IPC,
greater volumes of raw material purchased, and higher raw material prices paid,
correlating to increased prices for fats and oils and meat and bone meal.
Operating expenses increased as a result of collecting and processing higher
volumes of material, higher steam expense attributable to increased natural gas
prices, and expenses attributable to the expansion of CleanStar 2000, the
Company's internal used restaurant cooking oil collection system.
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
AND PROVISIONS FOR LOSS CONTINGENCY
Selling, general and administrative expenses were $32.7 million during
Fiscal 1996, a $6.0 million increase from $26.7 million during Fiscal 1995. The
increase in expenses was primarily attributable to the acquisitions of Standard
Tallow and IPC, increases in compensation and related costs, product development
costs, and professional fees. The Company recorded $6.1 million in charges to
the provision for loss contingency during Fiscal 1996 to cover costs related to
environmental violations at the Company's Blue Earth, Minnesota plant.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization charges increased $5.0 million, to $27.6
million during Fiscal 1996 as compared to $22.6 million during Fiscal 1995. This
increase was due to additional depreciation on fixed asset additions and
amortization on intangibles acquired as a result of the acquisitions of Standard
Tallow and IPC.
INTEREST EXPENSE
Interest expense decreased $0.3 million, to $13.0 million during Fiscal
1996 as compared to $13.3 million during Fiscal 1995, primarily due to decreased
interest rates.
INCOME TAXES
In Fiscal 1996, the Company recorded a $7.3 million income tax expense
which consisted of $6.7 million of federal tax expense and $0.6 million for
various state taxes, after taking into account the expected non-tax deductible
nature of approximately $3.0 million of the expenses related to the settlement
of environmental claims at the Company's Blue Earth, Minnesota plant. In Fiscal
1995, the Company recorded a $8.7 million income tax expense which consisted of
$7.8 million of federal tax expense and $0.9 million of state tax expense.
CAPITAL EXPENDITURES
The Company's capital expenditures consist primarily of investments in
facilities, collection operations and environmental equipment. The Company made
capital expenditures of $28.6 million during Fiscal 1996 as compared to $24.6
million in Fiscal 1995.
-------------------------------
Fiscal Year Ended December 30, 1995 ("Fiscal 1995") Compared to Fiscal Year
Ended December 31, 1994 ("Fiscal 1994")
GENERAL
The Company recorded net earnings of $14.4 million for Fiscal 1995
compared to net earnings of $7.4 million for Fiscal 1994. Operating profit
increased $10.2 million, to $36.1 million in Fiscal 1995 from $25.9 million in
Fiscal 1994. Interest expense, relating primarily to the Subordinated Notes,
decreased from $15.2 million in Fiscal 1994 to $13.3 million in Fiscal 1995 due
to a scheduled rate reduction.
NET SALES
Net sales include the sales of produced and purchased finished goods.
During Fiscal 1995, net sales increased 19.0%, to $421.6 million as compared to
$354.3 million during Fiscal 1994.
This increase in sales in Fiscal 1995 was due to improvements in the
finished goods markets and an increase of 6.3% in the volume of raw material
processed. Average yellow grease prices were 11.4% higher during Fiscal 1995 as
compared to Fiscal 1994 and average tallow prices were 11.1% higher during the
same period. These price increases were primarily due to strengthening worldwide
demands for fats and oils. Average meat and bone meal prices were 6.2% lower
during Fiscal 1995 as compared to Fiscal 1994.
COST OF SALES AND OPERATING EXPENSES
During Fiscal 1995, the cost of sales and operating expenses increased
$53.3 million (18.9%), to $336.2 million as compared to $282.9 million during
Fiscal 1994. Cost of sales grew due to increased purchases of finished product,
greater volumes of raw material purchased, and higher raw material prices paid
due to increased prices for fats and oils, offset somewhat by lower prices for
meat and bone meal. Operating expenses increased as a result of collecting and
processing higher volumes of material, offset somewhat by lower steam expense
attributable to decreased natural gas prices.
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $26.7 million during
Fiscal 1995, a $1.0 million increase from $25.7 million during Fiscal 1994. The
increase in expenses was primarily related to increases in compensation and
related costs and increases in product development costs.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization charges increased $2.7 million, to $22.6
million during Fiscal 1995 as compared to $19.9 million during Fiscal 1994. This
increase was due to additional depreciation on fixed asset additions.
INTEREST EXPENSE
Interest expense decreased $1.9 million, to $13.3 million during Fiscal
1995 as compared to $15.2 million during Fiscal 1994. This decrease is a result
of the interest rate on the Company's outstanding Subordinated Notes decreasing
from 13.75% in Fiscal 1994 to 11.0% per annum in Fiscal 1995.
INCOME TAXES
In Fiscal 1995, the Company recorded a $8.7 million income tax expense
which consisted of $7.8 million of federal tax expense and $0.9 million for
various state taxes. In Fiscal 1994, the Company recorded a $3.4 million income
tax expense which consisted of $3.6 million of federal tax expense and $0.5
million of state tax expense, offset by $0.7 million of foreign tax benefit.
CAPITAL EXPENDITURES
The Company's capital expenditures consist primarily of investments in
facilities, collection operations and environmental equipment. The Company made
capital expenditures of $24.6 million during Fiscal 1995 as compared to $17.8
million in Fiscal 1994.
------------------------------
LIQUIDITY AND CAPITAL RESOURCES
Effective May 23, 1995, the Company entered into a Credit Agreement (the
"Credit Agreement") which provides for borrowings in the form of a Term Loan
Facility ("Term Loan Facility"), Revolving Loan Facility ("Revolving Loan
Facility"), and an Acquisition Line ("Acquisition Line"). As of December 28,
1996, the Company was in compliance with all provisions of the Credit Agreement.
The Term Loan Facility bears interest, payable monthly, at LIBOR
(5.6055% at December 28, 1996) plus a margin (1.0% at December 28, 1996) which
floats depending on the Company's compliance with certain financial covenants.
The Term Loan Facility is payable by the Company in quarterly installments of
$2,000,000 commencing March 31, 1996 through December 31, 1999; and an
installment of $6,000,000 due on March 31, 2000, with the remaining balance due
on June 30, 2000. As of December 28, 1996, $38,000,000 was outstanding under the
Term Loan Facility.
The Revolving Loan Facility provides for borrowings up to a maximum of
$25,000,000 with sublimits available for letters of credit and a swingline.
Outstanding borrowings on the Revolving Loan Facility bear interest, payable
monthly, at LIBOR (5.6055% at December 28, 1996) plus a margin (1.0% at December
28, 1996) or, for swingline advances, at a Base Rate (8.25% at December 28,
1996). Additionally, the Company must pay a commitment fee equal to 0.375% on
the unused portion of the Revolving Loan Facility. The Revolving Loan Facility
matures on June 30, 2000. As of December 28, 1996, $5,000,000 was outstanding
under the Revolving Loan Facility. As of December 28, 1996, the Company had
outstanding irrevocable letters of credit aggregating $8,513,648.
The Acquisition Line provides for borrowings to a maximum of $40,000,000.
Outstanding borrowings on the Acquisition Line bear interest, payable monthly,
at LIBOR (5.6055% at December 28, 1996) plus a margin (1.25% at December 28,
1996). Outstanding borrowings under the Acquisition Line as of June 30, 1997
convert to term debt on that date. At that time, the Acquisition Line is payable
by the Company in quarterly installments of $2,500,000 commencing October 1,
1997 through June 30, 1999; and $5,000,000 commencing October 1, 1999 through
June 30, 2000. On May 8, 1996, the Company borrowed $10,400,000 against the
Acquisition Line to purchase 100% of the stock of Standard Tallow. On August 30,
1996, the Company borrowed $29,600,000 against the Acquisition Line to purchase
100% of the stock of IPC. As of December 28, 1996, $40,000,000 was outstanding
under the Acquisition Line.
All accounts receivable, inventory and certain related intangibles of
the Company are pledged 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, payment of cash
dividends, and expenditures for capital and environmental needs and requires the
maintenance of certain minimum ratios. As of December 28, 1996, no cash
dividends could be paid to the Company's stockholders pursuant to the Credit
Agreement.
<PAGE>
The Company has Subordinated Notes outstanding with a face amount of
$69,976,000. The Subordinated Notes bear interest payable semi-annually at 11%
per annum until maturity, July 15, 2000.
On December 28, 1996, the Company had a working capital deficit of $8.0
million and its working capital ratio was 0.90 to 1 compared to working capital
of $12.9 million and a working capital ratio of 1.25 to 1 on December 30, 1995.
The decrease in working capital is primarily the result of the acquisitions of
IPC and Standard Tallow combined with the $6.5 million increase in current
maturities of long-term debt and the $5.1 million increase in the Company's
reserves for loss contingencies related to the anticipated settlement of
environmental violations at the Company's Blue Earth, Minnesota plant. Net cash
provided by operating activities has increased $12.2 million from $34.2 million
during Fiscal 1995 to $46.4 million during Fiscal 1996. The Company believes
that cash from operations and current cash balances, together with the undrawn
balance from the Company's loan agreements, will be sufficient to satisfy the
Company's planned capital requirements.
ACCOUNTING MATTERS
In June 1996, the Financial Accounting Standards Board issued SFAS No. 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities. SFAS No. 125 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after December 31,
1996, and is to be applied prospectively. This Statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities based on consistent application of a
financial-components approach that focuses on control. It distinguishes
transfers of financial assets that are sales from transfers that are secured
borrowings. Management of the Company does not expect that adoption of SFAS No.
125 will have a material impact on the Company's financial position, results of
operations, or liquidity.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Pages
Independent Auditors' Report 17
Consolidated Balance Sheets-
December 28, 1996 and December 30, 1995 18
Consolidated Statements of Operations -
Three years ended December 28, 1996 19
Consolidated Statements of Stockholders' Equity -
Three years ended December 28, 1996 20
Consolidated Statements of Cash Flows -
Three years ended December 28, 1996 21
Notes to Consolidated Financial Statements -
December 28, 1996 and December 30, 1995 22
Financial Statement Schedule:
II - Valuation and Qualifying Accounts 37
All other schedules are omitted since the required
information is not present or is not present in
amounts sufficient to require submission of the
schedule, or because the information required is
included in the consolidated financial statements and
notes thereto.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Darling International Inc.:
We have audited the consolidated financial statements of Darling International
Inc. and subsidiaries as listed in the accompanying index. In connection with
our audits of the consolidated financial statements, we also have audited the
financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Darling
International Inc. and subsidiaries as of December 28, 1996 and December 30,
1995, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 28, 1996, in conformity with
generally accepted accounting principles. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
KPMG Peat Marwick LLP
Dallas, Texas
February 7, 1997
<PAGE>
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 28, 1996 and December 30, 1995
(in thousands, except share and per share data)
December 28, December 30,
1996 1995
ASSETS (note 8)
Current assets:
Cash and cash equivalents $ 12,956 $ 11,649
Accounts receivable, principally trade, less
allowance of $302 and $147 35,966 30,230
Inventories (note 4) 12,643 11,584
Prepaid expenses 1,493 2,963
Deferred income tax assets (note 11) 6,184 4,281
Other 484 3,394
------- -------
Total current assets 69,726 64,101
Property, plant and equipment, net (note 5) 175,786 155,065
Collection routes and contracts, less accumulated
amortization of $3,222 and 7,854 59,940 42,893
Goodwill, less accumulated amortization of
$293 at December 28, 1996 (note 2) 19,905 -
Other assets (note 6) 4,288 4,003
------- -------
$329,645 $266,062
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (note 9) $ 15,598 $ 9,060
Accounts payable, principally trade 27,732 17,378
Accrued expenses (note 7) 30,118 20,831
Accrued interest (note 9) 4,293 3,896
------- -------
Total current liabilities 77,741 51,165
Long-term debt, less current portion (note 9) 138,173 117,096
Other noncurrent liabilities (note 10) 20,376 15,233
Deferred income taxes (note 11) 29,322 27,735
------- -------
Total liabilities 265,612 211,229
------- -------
Stockholders' equity (notes 3, 9, 11 and 12):
Common stock, $.01 par value; 10,000,000 shares
authorized, 5,151,979 and 5,085,510 shares
issued and outstanding 52 51
Additional paid-in capital 34,570 33,045
Retained earnings 29,411 21,737
------- -------
Total stockholders' equity 64,033 54,833
------- -------
Commitments and contingencies (notes 8 and 15)
$329,645 $266,062
======= =======
The accompanying notes are an integral part
of these consolidated financial statements.
<PAGE>
<TABLE>
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Three years ended December 28, 1996
(in thousands, except per share data)
<CAPTION>
December 28, December 30, December 31,
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
Net sales (note 14) $488,914 $421,608 $354,333
------- ------- -------
Costs and expenses:
Cost of sales and operating expenses 395,025 336,248 282,908
Selling, general and administrative expenses 32,767 26,675 25,680
Depreciation and amortization 27,611 22,576 19,871
Provision for loss contingencies 6,075 - -
------- ------- -------
Total costs and expenses 461,478 385,499 328,459
------- ------- -------
Operating profit 27,436 36,109 25,874
------- ------- -------
Other income (expense):
Interest expense (note 9) (12,994) (13,311) (15,206)
Other, net 537 322 80
------- ------- -------
Total other income (expense) (12,457) (12,989) (15,126)
------- ------- -------
Income before income taxes 14,979 23,120 10,748
Income tax expense (note 11) 7,305 8,740 3,391
------- ------- -------
Net earnings $ 7,674 $ 14,380 $ 7,357
======= ======= =======
Net earnings per common share (note 1) $ 1.38 $ 2.70 $ 1.47
===== ===== =====
Fully diluted earnings per common share (note 1) $ 1.38 $ 2.67 $ 1.47
===== ===== =====
The accompanying notes are an
integral part of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Three years ended December 28, 1996
(In thousands, except share data)
<CAPTION>
Common stock Class A common stock
-------------------- --------------------
Additional
Number $.01 par Number $.01 par paid-in Retained Total
of shares value of shares value capital earnings stockholders'
equity
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1994 4,749,620 $ 47 249,975 $ 3 $ 26,977 $ - $27,027
Exchange of Class A common stock
for common stock 249,975 3 (249,975) (3) - - -
Tax benefits relating to January
1, 1994 valuation allowance - - - - 5,098 - 5,098
Net earnings - - - - - 7,357 7,357
--------- ----- --------- ---- --------- ------ ------
Balances at December 31, 1994 4,999,595 50 - - 32,075 7,357 39,482
Issuance of common stock 85,915 1 - - 759 - 760
Tax benefits relating to January
1, 1994 valuation allowance - - - - 211 - 211
Net earnings - - - - - 14,380 14,380
--------- ----- -------- ---- --------- ------ -------
Balances at December 30, 1995 5,085,510 51 - - 33,045 21,737 54,833
Issuance of common stock 66,469 1 - - 619 - 620
Tax benefits relating to January
1, 1994 valuation allowance - - - - 906 - 906
Net earnings - - - - - 7,674 7,674
--------- ----- -------- ---- --------- ------ -------
Balances at December 28, 1996 5,151,979 $ 52 - $ - $ 34,570 $ 29,411 $ 64,033
========= ==== ======== ==== ======== ======= =======
The accompanying notes are an integral
part of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three years ended December 28, 1996
(in thousands)
<CAPTION>
December 28, December 30, December 31,
1996 1995 1994
--------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 7,674 $ 14,380 $ 7,357
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 27,611 22,576 19,871
Deferred income tax expense (benefit) (88) 6,319 1,263
Loss on sale of assets 294 196 465
Changes in operating assets and liabilities,
net of effects from acquisitions:
Accounts receivable 1,978 (3,418) (3,853)
Inventories and prepaid expenses 3,724 2,244 (7,752)
Accounts payable and accrued expenses 4,007 (2,170) 10,453
Accrued interest 391 (653) 4,260
Other 824 (5,278) 510
-------- --------- ----------
Net cash provided by operating activities 46,415 34,196 32,574
-------- --------- ----------
Cash flows from investing activities:
Recurring capital expenditures (25,111) (22,649) (17,822)
Capital expenditures related to acquisitions (3,520) (1,987) -
Net proceeds from sale of property, plant and equipment,
assets held for disposition and other assets 507 721 754
Payments for routes (707) (4,051) (1,725)
Net cash paid as a result of acquisitions (note 1) (2,098) - -
-------- --------- ----------
Net cash used in investing activities (30,929) (27,966) (18,793)
-------- --------- ----------
Cash flows from financing activities:
Proceeds from long-term debt 20,124 107,178 53,013
Payments on long-term debt (33,223) (105,931) (65,968)
Contract payments (1,700) (916) (1,048)
Deferred loan costs - (740) -
Issuance of common stock 620 760 -
-------- --------- ----------
Net cash provided by (used in)
financing activities (14,179) 351 (14,003)
-------- --------- ----------
Net increase (decrease) in cash and cash equivalents 1,307 6,581 (222)
Cash and cash equivalents at beginning of year 11,649 5,068 5,290
-------- --------- ---------
Cash and cash equivalents at end of year $ 12,956 $ 11,649 $ 5,068
======== ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 12,603 $ 13,964 $ 10,947
======== ========= =========
Income taxes, net of refunds $ 1,647 $ 3,920 $ 1,689
======== ========= =========
The accompanying notes are an integral part
of these consolidated financial statements.
</TABLE>
<PAGE>
DARLING INTERNATIONAL INC.
Notes to the Consolidated Financial Statements
December 28, 1996 and December 30, 1995
(1) GENERAL
(a) NATURE OF OPERATIONS
Darling International Inc. (the "Company") believes it is the largest
independent recycler of food processing by-products in the United
States, operating a fleet of vehicles, through which it collects
animal by-products, used restaurant cooking oil and bakery by-
products from butcher shops, grocery stores, independent meat and
poultry processors, restaurants and bakeries nationwide. The
Company processes raw materials through facilities located throughout
the United States into finished products, such as tallow, meat and
bone meal, yellow grease and dried bakery product. 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.
(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.
(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, 1996, the 52 weeks ended December 30, 1995, and the 52 weeks
ended December 31, 1994.
(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
Historically, property, plant and equipment are recorded at
cost. Depreciation is computed by the straight-line method over
the estimated useful lives of assets, which range from three to
30 years. In accordance with Fresh Start Reporting (see Note 3),
property, plant and equipment were restated to their approximate
fair value. Subsequent additions are recorded at cost.
Maintenance and repairs are charged to expense as incurred and
expenditures for major renewals and improvements are
capitalized.
(5) Collection Routes and Contracts
Collection routes, restrictive covenants and consulting
agreements are recorded at cost and are amortized using the
straight-line method over periods ranging from three to 15
years.
(6) Goodwill
Goodwill, which represents the excess of purchase price over
fair value of net assets acquired, is amortized on a
straight-line basis over the expected periods to be benefited,
not exceeding 30 years. Annually, the Company makes an assesment
to determine the recoverability of this intangible asset.
<PAGE>
(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) Income Per Common Share
Net earnings per common share are computed by dividing net
earnings attributable to outstanding common stock by the
weighted average number of common stock shares outstanding
during the year increased by dilutive common equivalent shares
(stock options) determined using the treasury stock method.
Primary weighted average equivalent shares are determined based
on the average market price exceeding the exercise price of the
stock options. Fully diluted weighted average equivalent shares
are determined based on the higher of the average or ending
market price exceeding the exercise price of the stock options.
Stock options are excluded from the computations for the year
ended December 31, 1994 because the effect is antidilutive or
immaterial.
(10) Stock Option Plans
Prior to January 1, 1996, the Company accounted 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 would be recorded on the date of grant only
if the current market price of the underlying stock exceeded the
exercise price. On January 1, 1996, the Financial Accounting
Standards Board issued SFAS No. 123, Accounting for Stock-Based
Compensation, which 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 also
allows entities to continue to apply the provisions of APB
Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants
made in 1995 and future years as if the fair-value-based method
defined in SFAS No. 123 had been applied. The Company has
elected to continue to apply the provisions of APB Opinion
No. 25 and provide the pro forma disclosure provisions of
SFAS No. 123.
(11) Statements of Cash Flows
The Company considers all short-term highly liquid instruments,
with an original maturity of three months or less, to be cash
equivalents.
<PAGE>
(12) Supplemental Schedule of Non-cash Investing and Financing
Activities
During the year ended December 28, 1996, non-cash investing and
financing activities included the purchase of 100% of the common
stock of Standard Tallow for $10,400,000. Assets acquired,
liabilities assumed, and consideration paid for this acquisition
are as follows (in thousands):
Fair value of assets acquired, less cash $ 20,066
Liabilities assumed and incurred (11,094)
Bank debt incurred (10,400)
-------
Cash (received)paid upon purchase $ (1,428)
========
In addition, the Company purchased 100% of the common stock of
International Processing Corporation and International
Transportation Service, Inc. (collectively referred to as "IPC")
for $30,000,000. Assets acquired, liabilities assumed and
consideration paid for this acquisition are as follows (in
thousands):
Fair value of assets acquired, less cash $ 47,835
Liabilities assumed and incurred (14,710)
Bank debt incurred (29,600)
------
Cash (recieved)paid upon purchase $ 3,525
========
(13) Use of Estimates
The preparation of the consolidated financial statements in
conformity with generally ccepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could
differ from those estimates.
(14) Impairment of Long-Lived Assets and Long-Lived Assets To Be
Disposed Of
The Company adopted the provisions of SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, on December 31, 1995. This Statement
requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount
of an asset to future net cash flows expected to be generated by
the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceed the fair value of the
assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell. Adoption
of this Statement did not have a material impact on the
Company's financial position, results of operations, or
liquidity.
(15) Financial Instruments
The carrying amount of cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses approximates
approximates the fair value due to the short maturity of these
instruments.
The carrying amount of outstanding borrowings under the Credit
Agreement at December 28, 1996 and December 30 1995 approximates
the fair value since the borrowings bear interest at current
market rates.
The fair market value of the Subordinated Notes approximated
$73,000,000 at December 28, 1996 and $72,000,000 at December
30, 1995. The fair value of the Subordinated Notes was based
on current borrowing rates available for financings with
non-rated, non-investment grade bonds with similar terms and
maturities.
<PAGE>
(2) ACQUISITIONS
On August 30, 1996, the Company acquired 100% of the outstanding capital
stock of IPC in accordance with a Stock Purchase Agreement (dated August
30, 1996, between the Company, IPC and the stockholders of IPC (the
"Sellers")). IPC processes by-products collected from bakeries, pasta
manufacturers, confectioners and snack food producers for sale to the
animal feed industry. The purchase price for the capital stock of
IPC was $30,000,000. The purchase price was paid in cash and was
determined by agreement between the Company and the Seller. The Company
funded $29.6 million of the purchase price with funds financed under the
Acquisition Facility pursuant to the Credit Agreement among the Company,
The First National Bank of Boston, as agent, and Harris Trust and Savings
Bank, as co-agent. The remaining $400,000 of the purchase price was
funded out of cash on hand. In connection with the acquisition, the
Company also paid approximately $2.8 million in full payment and
retirement of certain indebtedness of IPC. The Company used cash on hand
to fund the repayment of such indebtedness.
The acquisition was accounted for under the purchase method of accounting
in accordance with Accounting Principles Board Opinion No. 16 and
operations since the acquisition date have been included in the
consolidated statements of earnings. The excess of the total acquisition
cost over the recorded value of assets acquired was allocated to goodwill
in the amount of $15.9 million and will be amortized over 30 years.
The pro forma results of operations which follow assume that the
acquisition had occurred at the beginning of each period presented. In
addition to combining the historical results of operations of the two
companies, the pro forma calculations include adjustments for the
estimated effect on the Company's historical results of operations for
depreciation and amortization and interest related to the acquisition.
(in thousands, except per share data)
Year ended Year ended
December 28, December 31,
1996 1995
(unaudited) (unaudited)
------------- -------------
Sales $ 544,436 $ 477,459
Net earnings 10,298 14,227
Earnings per share $1.86 $2.67
On May 8, 1996, the Company acquired 100% of the common stock of Standard
Tallow for $10,400,000. The Company recorded goodwill associated with
this acquisition in the amount of $4.3 million which will be amortized
over 30 years.
(3) THE SETTLEMENT AND FRESH START REPORTING
On October 22, 1993, the Company entered into a settlement agreement
providing for a restructure of the Company's debt and equity and
resolution of a class action lawsuit ("the Settlement"). On December
29, 1993 (the "Effective Date"), the Settlement was consummated and
became binding on all original note holders.
The Settlement was accomplished pursuant to a court order which was
tantamount to a prepackaged bankruptcy despite the fact that the
Settlement did not occur under the Bankruptcy Code. Accordingly, 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" ("SOP 90-7") 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. The
historical values of the Company's liabilities, other than deferred
income taxes, approximated fair value at January 1, 1994. Deferred
income taxes were recorded in conformity with generally accepted
accounting principles. The Company's accumulated deficit was eliminated
as of January 1, 1994.
<PAGE>
(4) INVENTORIES
A summary of inventories follows (in thousands):
December 28, December 30,
1996 1995
------------- -----------
Finished product $ 12,005 $ 11,038
Supplies and other 638 546
--------- ---------
$ 12,643 $ 11,584
======= =======
(5) PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment follows (in thousands):
December 28, December 30,
1996 1995
------------- ------------
Land $ 20,717 $ 18,545
Buildings and improvements 26,113 22,730
Machinery and equipment 122,195 100,632
Vehicles 50,269 39,994
Construction in process 12,465 7,362
--------- ----------
231,759 189,263
Accumulated depreciation (55,973) (34,198)
--------- ---------
$175,786 $155,065
======= =======
(6) OTHER ASSETS
Other assets consist of the following (in thousands):
December 28, December 30,
1996 1995
-------------- ------------
Prepaid pension cost (note 13) $ 2,028 $ 2,250
Deposits and other 2,260 1,753
------- -------
$ 4,288 $ 4,003
======= =======
(7) ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
December 28, December 30,
1996 1995
------------- ------------
Insurance $ 2,257 $ 3,787
Compensation and benefits 4,854 5,328
Utilities and sewage 2,904 2,240
Reserve for environmental and
litigation matters (note 15) 7,350 2,000
Income taxes payable 3,034 297
Other 9,719 7,179
-------- -------
$ 30,118 $ 20,831
======= =======
(8) LEASES
The Company leases nine plants and storage locations, four office
locations and a portion of its transportation equipment. Leases are
noncancellable and expire at various times through the year 2028. Minimum
rental commitments under noncancellable leases as of December 28, 1996,
are as follows (in thousands):
Period Ending Fiscal Operating Leases
------------------- ----------------
1997 $ 2,143
1998 1,732
1999 1,442
2000 1,280
2001 1,058
Thereafter 9,733
------
Total $17,388
======
Rent expense for the years ended December 28, 1996, December 30, 1995 and
December 31, 1994 was $1,929,000, $1,163,000 and $1,081,000,
respectively.
<PAGE>
(9) LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
December 28, December 30,
1996 1995
------------- -----------
Credit Agreement:
Revolving Loan Facility $ 5,000 $ 5,000
Term Loan Facility 38,000 47,000
Acquisition Line 40,000 -
First Priority Senior Subordinated Notes 69,976 69,976
Other notes 795 4,180
---------- ---------
153,771 126,156
Less current maturities 15,598 9,060
--------- ---------
$138,173 $117,096
======= =======
CREDIT AGREEMENT
Effective May 23, 1995, the Company entered into a Credit Agreement (the
"Credit Agreement") which provides for borrowings in the form of a
Revolving Loan Facility, Term Loan Facility, and an Acquisition Line.
The Revolving Loan Facility provides for borrowings up to a maximum of
$25,000,000 with sublimits available for letters of credit and a
swingline. Outstanding borrowings on the Revolving Loan Facility bear
interest, payable monthly, at LIBOR (5.6055% at December 28, 1996) plus a
margin (1.0% at December 28, 1996) or, for swingline advances, at a Base
Rate (8.25% at December 28, 1996). Additionally, the Company must pay a
commitment fee equal to 0.375% on the unused portion of the Revolving
Loan Facility. The Revolving Loan Facility matures on June 30, 2000. As
of December 28, 1996, $5,000,000 was outstanding under the Revolving Loan
Facility. As of December 28, 1996, the Company had outstanding
irrevocable letters of credit aggregating $8,513,648.
The Term Loan Facility bears interest, payable monthly, at LIBOR (5.6055%
at December 28, 1996) plus a margin (1.00% at December 28, 1996) which
floats depending on the Company's compliance with certain financial
covenants. The Term Loan Facility is payable by the Company in quarterly
installments of $2,000,000 commencing on March 31, 1996 through December
31, 1999; and an installment of $6,000,000 due on March 31, 2000, with
the remaining balance due on June 30, 2000. As of December 28, 1996,
$38,000,000 was outstanding under the Term Loan Facility.
The Acquisition Line provides for borrowings to a maximum of $40,000,000.
Outstanding borrowings on the Acquisition Line bear interest, payable
monthly, at LIBOR (5.6055% at December 28, 1996) plus a margin (1.25% at
December 28, 1996). Outstanding borrowings under the Acquisition Line as
of June 30, 1997 convert to term debt on that date. At that time, the
Acquisition Line is payable by the Company in quarterly installments of
$2,500,000 commencing October 1, 1997 through June 30, 1999; and
$5,000,000 commencing October 1, 1999 through June 30, 2000. On May 8,
1996, the Company borrowed $10,400,000 against the Acquisition Line to
purchase 100% of the stock of Standard Tallow. On August 30, 1996
the Company borrowed $29,600,000 against the Acquisition Line to purchase
100% of the stock of IPC. As of December 28, 1996, $40,000,000 was
outstanding under the Acquisition Line.
All accounts receivable, inventory and certain related intangibles of the
Company are pledged 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, payment of cash dividends, and expenditures for capital and
environmental needs and require the maintenance of certain minimum
financial ratios. As of December 28, 1996, no cash dividends could be
paid to the Company's stockholders pursuant to the Credit Agreement.
SUBORDINATED NOTES
The Subordinated Notes have a face amount of $69,976,000, are unsecured,
and bear interest at a rate of 13.75% per annum for the period from
December 29, 1993 through December 30, 1995 and 11% per annum thereafter
until maturity. Interest is payable in cash on each January 15 and July
15, beginning July 15, 1994. The Subordinated Notes are subject to
redemption in whole or in part at the option of the Company at redemption
prices, plus accrued and unpaid interest. The Subordinated Notes mature
on July 15, 2000 and are subordinate to all outstanding borrowings under
the Credit Agreement.
The Subordinated Notes indenture contains certain terms and covenants,
which primarily relate to asset sales, additional indebtedness, dividend
payments and early redemption of capital stock. Under the Subordinated
Notes indenture, the Company is permitted to incur additional
indebtedness within certain limits and subject to certain performance
criteria.
<PAGE>
OTHER
Aggregate maturities of long-term debt subsequent to December 28, 1996
are as follows (in thousands):
1997 $15,598
1998 18,113
1999 23,084
2000 96,976
(10) OTHER NONCURRENT LIABILITIES
Other noncurrent liabilities consist of the following (in thousands):
December 28, December 30,
1996 1995
------------ -----------
Reserve for insurance, environmental
and litigation matters (note 15) $ 9,829 $10,395
Liabilities associated with consulting
and noncompete agreements 9,356 3,714
Other 1,191 1,124
------- -------
$ 20,376 $15,233
====== ======
The Company sponsors a defined benefit health care plan that provides
postretirement medical and life insurance benefits to certain employees.
The Company accounts for this plan in accordance with Statement of
Financial Accounting Standards No. 106 and the effect on the Company's
financial position and results of operations is immaterial.
(11) INCOME TAXES
Income tax expense (benefit) attributable to income before income taxes
consists of the following (in thousands):
December 28, December 30, December 31,
1996 1995 1994
------------ ------------ -----------
Current:
Federal $6,801 $1,883 $1,755
State 592 509 373
Foreign - 29 -
Deferred:
Federal (62) 5,921 1,884
State (26) 398 161
Foreign - - (782)
----- ----- -----
$7,305 $8,740 $3,391
===== ===== =====
Income tax expense for the years ended December 28, 1996, December 30,
1995, and December 31, 1994 differed from the amount computed by applying
the statutory U.S. federal income tax rate (35%) to income before income
taxes as a result of the following (in thousands):
<TABLE>
<CAPTION>
December 28, December 30, December 31,
1996 1995 1994
----------- ------------ -----------
<S> <C> <C> <C>
Computed "expected" tax expense $ 5,243 $ 8,092 $ 3,762
State income taxes, net of federal benefit 368 590 347
Tax-exempt income of foreign sales corporation (323) (448) (587)
Nondeductible fines and penalties (note 15) 1,058 - -
Other, net 959 506 (131)
-------- -------- --------
$ 7,305 $ 8,740 $ 3,391
======= ======= =======
</TABLE>
<PAGE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 28, 1996 and December 30, 1995 are presented below (in
thousands):
<TABLE>
<CAPTION>
December 28, December 30,
1996 1995
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 29,859 $ 32,042
Foreign tax credits and capital loss carryforwards 4,434 4,434
Loss contingency reserves 6,038 5,700
Deferred loan and other costs capitalized and
amortized for tax purposes 890 1,142
Other 2,112 2,333
------- -------
Total gross deferred tax assets 43,333 45,651
Less valuation allowance (19,472) (20,402)
------- -------
Net deferred tax assets 23,861 25,249
------- -------
Deferred tax liabilities:
Collection routes and contracts (13,337) (13,352)
Property, plant and equipment (32,812) (34,456)
Other (850) (895)
-------- -------
Total gross deferred tax liabilities (46,999) (48,703)
------- -------
$(23,138) $(23,454)
======= =======
</TABLE>
The portion of the deferred tax assets and liabilities expected to be
recognized in fiscal 1997 has been recorded at December 28, 1996 in the
accompanying consolidated balance sheet as a net current deferred income
tax asset of $6,184,000. The remaining non-current deferred tax assets
and liabilities have been recorded as a net deferred income tax liability
of $29,322,000 at December 28, 1996 in the accompanying consolidated
balance sheet.
The valuation allowance for deferred tax assets as of December 28, 1996
and December 30, 1995 was $19,472,000 and $20,402,000, respectively. The
net changes in the total valuation allowance for the years ended December
28, 1996 and December 30, 1995 were decreases of $930,000 and $1,329,000,
respectively. The Company believes that the remaining net deferred tax
assets at December 28, 1996 and December 30, 1995 will be realized
primarily through future reversals of existing taxable temporary
differences.
At December 28, 1996, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $78,575,000 which are
available to offset future federal taxable income through 2008. The
availability of the net operating loss carryforwards to reduce future
taxable income is subject to various limitations. As a result of the
change in ownership, the Company believes utilization of its net
operating loss carryforwards is limited to $3,400,000 per year for the
remaining life of the net operating losses. The Company also has
approximately $3,780,000 of foreign tax credits and approximately
$314,000 of capital loss carryforwards which are available to reduce
future federal income taxes, if any, through 1998.
The Company reports tax benefits utilized related to the January 1, 1994
valuation allowance ($906,000 in 1996, $211,000 in 1995 and $5,098,000 in
1994) as a direct addition to additional paid-in capital.
(12) STOCKHOLDERS' EQUITY
(a) COMMON EQUITY
On December 29, 1993, the Company issued 4,749,620 and 249,975
shares of the Company's common stock and Class A common stock,
respectively. On November 2, 1994, all shares of Class A common
stock were converted to common stock on a one-for-one basis.
<PAGE>
(b) STOCK OPTIONS
At December 29, 1993, the Company granted options to purchase
128,205 shares of the Company's Class A 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 $10.35 per share (approximated market value at the date
of grant). On November 2, 1994, all outstanding shares of Class A
common stock were converted into an equal number of shares of
common stock and all options to purchase Class A common stock
became options to purchase common stock.
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, 1996, options to purchase 82,000 shares of common
stock had been granted pursuant to this plan. The options have a
term of ten years from the date of grant and may be exercised at a
price of $10.00 - $27.125 per share (approximated 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 1996 and 1995 was $13.89 and $8.22, respectively, on the
date of grant using the Black Scholes option-pricing model with
the following weighted assumptions:
1996 1995
---------- --------
Expected dividend yield 0.0% 0.0%
Risk-free interest rate 6.6% 6.5%
Expected life 10 years 10 years
Expected volatility 6.20 5.59
The Company applies APB Opinion No. 25 in accounting for its Plans
and, accordingly, no compensation cost has been recognized for its
stock options in the financial statements as stock options were
granted at market value on the grant date. Had the Company
determined compensation cost based on the fair value at the grant
date for its stock options under SFAS No. 123, the Company's net
earnings would have been reduced to the pro forma amounts
indicated below (in thousands, except per share):
1996 1995
------- ------
Net earnings:
As reported $7,674 $14,380
Pro forma $7,104 $14,308
Primary earnings per common share:
As reported $1.38 $2.70
Pro forma $1.28 $2.69
Pro forma net earnings reflects only options granted in 1996 and
1995. Therefore, the full impact of calculating compensation cost
for stock options under SFAS No. 123 is not reflected in the pro
forma net income amounts presented above because compensation cost
is reflected over the options vesting period and compensation cost
for options granted prior to January 1, 1995 are not considered.
<PAGE>
A summary of transactions for all stock options granted follows:
<TABLE>
<CAPTION>
Option exercise Weighted-average
Number of price exercise price
shares per share per share
----------- --------------- ----------------
<S> <C> <C> <C>
Options outstanding at January 1, 1994 622,705 $8.57 - 10.35 $ 8.94
Granted 182,300 10.00 - 12.375 12.01
Canceled (49,450) 8.57 8.57
--------
Options outstanding at December 31, 1994 755,555 8.57 - 12.375 9.70
Granted 247,700 13.875 - 27.75 17.08
Canceled (9,430) 10.00 - 12.375 8.85
Exercised (85,915) 8.57 - 12.375 11.04
--------
Options outstanding at December 30, 1995 907,910 8.57 - 27.75 11.78
Granted 145,900 26.375-30.875 28.84
Canceled (9,536) 8.57 - 12.375 9.30
Exercised (66,564) 8.57 - 12.375 10.20
--------
Options outstanding at December 28, 1996 977,710 8.57 - 30.875 14.51
========
Options exercisable at December 28, 1996 490,587 $8.57 - 30.875 $11.89
========
<FN>
At December 28, 1996, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $8.57 - $30.875
and 7.89 years, respectively.
At December 28, 1996 and December 31, 1995, the number of options
exercisable was 349,335 and 490,587, respectively, and the weighted-
average exercise price of those options was $10.31 and $11.89,
respectively.
</FN>
</TABLE>
(13) EMPLOYEE BENEFIT PLANS
The Company has retirement and pension plans covering substantially all
of its employees. Most retirement benefits are provided by the Company
under separate final-pay noncontributory pension plans for all salaried
and hourly employees (excluding those covered by union-sponsored plans)
who meet service and age requirements. Benefits are based principally on
length of service and earnings patterns during the five years preceding
retirement.
The Company's funding policy for those plans is to contribute annually
not less than the minimum amount required nor more than the maximum
amount that can be deducted for federal income tax purposes.
Contributions are intended to provide not only for benefits attributed to
service to date but also for those expected to be earned in the future.
The following table sets forth the plans' funded status and amounts
recognized in the Company's consolidated balance sheets based on the
measurement date (October 1, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
December 28, 1996 December 30, 1995
------------------------- -------------------------
Assets Benefits Assets Benefits
exceed exceed exceed exceed
benefits assets benefits assets
------------------------ -------------------------
<S> <C> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $29,317 $ 2,023 $ 3,184 $ 27,057
====== ======= ======= =======
Accumulated benefit obligation,
including vested benefits 29,103 2,163 3,352 27,205
======= ====== ======= =======
Projected benefit obligation for
services rendered to date 32,341 2,163 3,352 30,100
Plan assets at fair value (primarily equity and
debt instruments) 33,234 1,978 3,996 29,452
------- ------- ------- -------
Plan assets in excess of (less than)
projected benefit obligation 893 (185) 644 (648)
Unrecognized net loss from past
experience different from that assumed
and effects of changes in assumptions 840 468 344 1,720
Adjustment for contributions made from
measurement date to year end - 12 23 167
------- -------- ------- -------
Prepaid pension cost
included in consolidated balance sheet $ 1,733 $ 295 $ 1,011 $ 1,239
======= ======== ======= =======
</TABLE>
<PAGE>
Net pension cost includes the following components (in thousands):
December 28, December 30, December 31,
1996 1995 1994
----------- ----------- ------------
Service cost $ 1,033 $ 779 $ 906
Interest cost 2,463 2,241 2,086
Actual return on plan assets (2,737) (4,363) 892
Net amortization and deferral (154) 1,839 (3,445)
-------- -------- ------
Net pension cost $ 605 $ 496 $ 439
======== ======== =======
Assumptions used in accounting for the employee benefit pension plans
were:
December 28, December 30,
1996 1995
------------ -----------
Weighted average discount rate 7.75% 7.50%
Rate of increase in future compensation levels 5.02% 5.90%
Expected long-term rate of return on assets 8.75% 8.75%
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 $1,333,000, $1,288,000, and $1,252,000 for the years ended
December 28, 1996, December 30, 1995, and December 31, 1994,
respectively.
(14) NET SALES
The Company has no foreign operations, other than those associated with a
former plant in Canada, but exports a portion of its products to
customers in various foreign counties. Total export sales were
$119,055,000, $169,829,000, and $105,698,000 for the years ended December
28, 1996, December 30, 1995, and December 31, 1994, respectively.
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 1996,
1995 and 1994.
(15) CONTINGENCIES
(a) ENVIRONMENTAL
Blue Earth
The U. S. Attorney for the District of Minnesota and the State of
Minnesota since 1992 have been conducting an investigation of alleged
state and federal wastewater violations at the Company's Blue Earth,
Minnesota plant. The Company has fully cooperated with the government
in its investigation and continues to do so. The Company and the U.S.
Attorney have reached a settlement providing for payment of a total of
$4,000,000. This settlement payment is intended to resolve all federal
and state civil, criminal and administrative claims, through payment
of civil and criminal fines and penalties, as well as funding the
restitution, remediation and community service required as part of the
criminal settlement. The settlement is subject to court approval, and
is subject to the resolution of pending negotiations with the U.S.
Environmental Protection Agency of the terms of a Consent Decree. The
Company recorded a provision for loss contingency of $6,100,000 during
Fiscal 1996 to cover the expected cost of the settlement as well as
legal, environmental and other related costs.
Chula Vista
The Company is the owner of an undeveloped property located in Chula
Vista, California (the "Site"). A rendering plant was operated
on the Site until 1982. From 1959 to 1978, a portion of the Site
was used as an industrial waste disposal facility which was closed
pursuant to Closure Order No. 80-06 issued by the State of
California Regional Water Quality Control Board for the San Diego
Region (the "RWQCB"). The Site has been listed by the State of
California as a site for which expenditures for removal and remedial
actions may be made by the State pursuant to the California Hazardous
Substances Account Act, California Health & Safety Code Section 25300
et seq. Technical consultants retained by the Company have conducted
various investigations of the environmental conditions at the Site,
and in 1996, requested that the RWQCB issue a "no further action"
letter with respect to the Site. The RWQCB has not yet taken any
formal action in response to such request.
<PAGE>
Underground Storage Tanks
The Company's processing operations do not produce toxic wastes;
however, the Company does operate underground fuel storage tanks
("UST's") that are subject to federal, state and local laws and
regulations. As of December 28, 1996, the Company has removed or
closed 165 of its 177 UST's. The Company plans to remove an
additional number of UST's in 1997.
(b)LITIGATION
Petruzzi
An antitrust class action suit was filed in 1986 by Petruzzi IGA
Supermarkets in the United States District Court for the Middle
District of Pennsylvania (the "Class Action Suit") seeking damages
from the Company. On September 14, 1995, the Company entered into a
settlement agreement providing for the disposal of all claims in the
Class Action Suit. The settlement agreement was approved by the
District Court on December 20, 1995. The District Court has yet to
rule on the petitions for attorneys' fees.
Other Litigation
The Company is also a party to several other lawsuits, claims and
loss contingencies incidental to its business.
The Company purchases its workers compensation, auto and general
liability insurance on a retrospective basis. The Company accrues its
expected ultimate costs related to claims occurring during each fiscal
year and carries this accrual as a reserve until such claims are paid by
the Company.
The Company has established loss reserves for insurance, environmental
and litigation matters as a result of the matters discussed above.
Although the ultimate liability cannot be determined with certainty,
management of the Company believes that reserves for contingencies are
reasonable and sufficient based upon present governmental regulations and
information currently available to management. The Company estimates the
range of possible losses related to environmental and litigation matters,
based on certain assumptions, is between $10,000,000 and $19,100,000 at
December 28, 1996. The accrued expenses and other noncurrent liabilities
classifications in the Company's consolidated balance sheets include
reserves for insurance, environmental and litigation contingencies of
$20,847,000 and $16,325,000 at December 28, 1996 and December 30, 1995,
respectively. There can be no assurance, however, that final costs will
not exceed current estimates. The Company believes that any additional
liability relative to such lawsuits and claims which would not be covered
by insurance, although potentially material to the results of operations
in any one year, would not likely have a material adverse effect on the
Company's financial position.
(16) QUARTERLY FINANCIAL DATA
(UNAUDITED AND IN THOUSANDS EXCEPT PER SHARE AMOUNTS):
<TABLE>
<CAPTION>
Year Ended December 28, 1996
----------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
<S> <C> <C> <C> <C>
Net sales $109,741 $114,253 $127,249 $137,672
Operating profit 8,918 9,223 3,203 6,092
Net earnings (loss) 3,931 3,613 (1,253) 1,382
Primary earnings (loss) per share 0.72 0.65 (0.24) 0.25
<CAPTION>
Year Ended December 30, 1995
----------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
<S> <C> <C> <C> <C>
Net sales $106,590 $105,658 $95,467 $113,893
Operating profit 11,908 9,977 6,319 7,905
Net earnings 5,049 4,433 2,061 2,837
Primary earnings per share 1.01 0.84 0.38 0.52
</TABLE>
<PAGE>
DARLING INTERNATIONAL INC.
<TABLE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<CAPTION>
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:
<S> <C> <C> <C> <C> <C>
Year ended December 28, 1996 $ 7,854 $ 5,036 $ - $ 9,668 $ 3,222
======== ========= ======= ====== =======
Year ended December 30, 1995 $ 3,877 $ 3,977 $ - $ - $ 7,854
======== ======== ======= ====== ======
Year ended December 31, 1994 $ - $ 3,877 $ - $ - $ 3,877
======== ======== ======= ====== ======
Accumulated amortization of goodwill:
Year ended December 28, 1996 $ - $ 293 $ - $ - $ 293
======== ========= ======= ====== ======
<FN>
Note: Deductions consist of the write-off of fully amortized collection routes and contracts in 1996.
</FN>
</TABLE>
<PAGE>
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 28, 1996
PART II
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item with respect to items 401 and 405
of Regulation S-K appears in the sections entitled "Election of Directors,"
"Executive Officers" and "Compliance with Section 16(a) of the Exchange Act"
included in the Registrant's definitive Proxy Statement relating to the 1997
Annual Meeting of Stockholders, which information is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item appears in the section entitled
"Executive Compensation" included in the Registrant's definitive Proxy Statement
relating to the 1997 Annual Meeting of Stockholders, which information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item appears in the section entitled
"Security Ownership of Certain Beneficial Owners and Management" included in the
Registrant's definitive Proxy Statement relating to the 1997 Annual Meeting of
Stockholders, which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item appears in the section entitled
"Election of Directors" included in the Registrant's definitive Proxy Statement
relating to the 1997 Annual Meeting of Stockholders, which information is
incorporated herein by reference.
<PAGE>
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 28, 1996
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
(1) The following consolidated financial statements are included in Item 8.
Pages
Independent Auditors' Report 17
Consolidated Balance Sheets-
December 28, 1996 and December 30, 1995 18
Consolidated Statements of Operations -
Three years ended December 28, 1996 19
Consolidated Statements of Stockholders' Equity -
Three years ended December 28, 1996 20
Consolidated Statements of Cash Flows -
Three years ended December 28, 1996 21
Notes to Consolidated Financial Statements -
December 28, 1996 and December 30, 1995 22
Quarterly Data 36
(2) The following financial statement schedule is included in Item 8.
Schedule II - Valuation and Qualifying Accounts 37
All other schedules are omitted since the required information is not
present or is not present in amounts sufficient to require submission
of the schedule, or because the information required is included in
the consolidated financial statements and notes thereto.
(3) (a) Exhibits
Exhibit No. Description
2 * Settlement Agreement, dated December 29, 1993, relating to
the settlement of class action litigation styled IDS Life
Insurance Company Inc., et al v. Darling-Delaware Company,
Inc., et al., Case No. 91 C 5166, in the United States
District Court for the Northern District of Illinois.
2.1***** Stock Purchase Agreement dated as of August 30, 1996, among
Darling International Inc., International Processing Corp.,
International Transportation Service, Inc., and the
stockholders of International Processing Corporation and
International Transportation Service, Inc.
3.1 * Restated Certificate of Incorporation of the Company.
3.2 * Amended and Restated Bylaws of the Company.
4.1 * Specimen Common Stock Certificate.
4.2 * Specimen First Priority Senior Subordinated Note.
4.3 * Indenture, dated December 29, 1993,
between Darling International Inc. and LaSalle
National Bank, as Trustee, with respect to the
First Priority Senior Subordinated Notes due July
15, 2000.
10.1 *** Credit Agreement, dated as of May 23, 1995,
among Darling International Inc., the First
National Bank of Boston, as agent, Harris Trust
and Savings Bank, as co-agent, and the other
lenders named therein.
10.2* Registration Rights Agreement, as amended.
10.3* Form of Indemnification Agreement.
10.4* Lease, dated November 30, 1993, between the Company and
the Port of Tacoma.
10.5 P Leases, dated July 1, 1996, between the Company and
the City and County of San Francisco.
<PAGE>
10.6 * 1993 Flexible Stock Option Plan.
10.7 * Amended and Restated Employment Agreement, dated December
29, 1993, between Darling International Inc. and Kenneth
A. Ghazey.
10.7(a)**** First Amendment to Amended and Restated Employment
Agreement, dated as of September 26, 1995, between Darling
International Inc. and Kenneth A. Ghazey.
10.8 * Form of Executive Severance Agreement.
10.9 * 1994 Employee Flexible Stock Option Plan.
10.10* Non-Employee Directors Stock Option Plan.
10.11 ** Employment Agreement, dated as of March 31, 1995, between
Darling International Inc. and Dennis B. Longmire.
10.12 Separation Agreement dated as of September 24, 1996 by and
between Kenneth A. Ghazey and Darling International Inc.
11 Statement re computation of per share earnings.
21 Subsidiaries of Registrant.
23 Consent of KPMG Peat Marwick LLP.
27 Financial Data Schedule
* Incorporated by reference from the Registrant's Registration
Statement on Form S-1 filed July 15, 1994 (Registration No.
33-79478).
** Incorporated by reference to Form 10-Q filed May 8, 1995.
*** Incorporated by reference to Form 10-Q filed August 14, 1995.
**** Incorporated by reference to Form 10-Q filed November 13, 1995.
***** Incorporated by reference to Form 8-K filed September 13, 1996.
P Filed pursuant to temporary hardship exemption under cover of
Form SE.
(b) Reports on Form 8-K:
None.
<PAGE>
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 28, 1996
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Form 10-K for the Fiscal Year Ended December 28, 1996 on its
behalf by the undersigned, thereunto duly authorized, in the city of Irving,
State of Texas, on the 27th day of March, 1997.
DARLING INTERNATIONAL INC.
By: /s/ Dennis B. Longmire
------------------------------------
Dennis B. Longmire
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
the report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
Signature Title Date
/s/ Dennis B. Longmire Chairman of the Board and 3/27/97
- -------------------------- Chief Executive Officer
Dennis B. Longmire (Principal Executive Officer)
/s/ John R. Witt Vice President, Chief Financial Officer 3/27/97
- -------------------------- (Principal Financial Officer)
John R. Witt
/s/ Mark C. Levy Vice President and Controller 3/27/97
- --------------------------- (Principal Accounting Officer)
Mark C. Levy
/s/ Bruce Waterfall Director 3/27/97
- ---------------------------
Bruce Waterfall
/s/ Fredric J. Klink Director 3/27/97
- ---------------------------
Fredric J. Klink
/s/Craig Scott Bartlett, Jr Director 3/27/97
- ----------------------------
Craig Scott Bartlett, Jr
/s/ Denis J. Taura Director 3/27/97
- ---------------------------
Denis J. Taura
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description Page
----------- ----------- ----
2 * Settlement Agreement, dated December 29, 1993, relating to
the settlement of class action litigation styled IDS Life
Insurance Company Inc., et al v. Darling-Delaware Company,
Inc., et al., Case No. 91 C 5166, in the United States
District Court for the Northern District of Illinois.
2.1***** Stock Purchase Agreement dated as of August 30, 1996, among
Darling International Inc., International Processing Corp.,
International Transportation Service, Inc., and the
stockholders of International Processing Corporation and
International Transportation Service, Inc.
3.1 * Restated Certificate of Incorporation of the Company.
3.2 * Amended and Restated Bylaws of the Company.
4.1 * Specimen Common Stock Certificate.
4.2 * Specimen First Priority Senior Subordinated Note.
4.3 * Indenture, dated December 29, 1993,
between Darling International Inc. and LaSalle
National Bank, as Trustee, with respect to the
First Priority Senior Subordinated Notes due July
15, 2000.
10.1 *** Credit Agreement, dated as of May 23, 1995,
among Darling International Inc., the First
National Bank of Boston, as agent, Harris Trust
and Savings Bank, as co-agent, and the other
lenders named therein.
10.2* Registration Rights Agreement, as amended.
10.3* Form of Indemnification Agreement.
10.4* Lease, dated November 30, 1993, between the Company and
the Port of Tacoma.
10.5 P Leases, dated July 1, 1996, between the Company and
the City and County of San Francisco
10.6 * 1993 Flexible Stock Option Plan.
10.7 * Amended and Restated Employment Agreement, dated December
29, 1993, between Darling International Inc. and Kenneth
A. Ghazey.
10.7(a)**** First Amendment to Amended and Restated Employment
Agreement, dated as of September 26, 1995, between Darling
International Inc. and Kenneth A. Ghazey.
10.8 * Form of Executive Severance Agreement.
10.9 * 1994 Employee Flexible Stock Option Plan.
10.10* Non-Employee Directors Stock Option Plan.
10.11 ** Employment Agreement, dated as of March 31, 1995, between
Darling International Inc. and Dennis B. Longmire.
10.12 Separation Agreement dated as of September 24, 1996, by and
between Kenneth A. Ghazey and Darling International Inc........ 44
11 Statement re computation of per share earnings................ 49
21 Subsidiaries of Registrant. .................................. 50
23 Consent of KPMG Peat Marwick LLP. ............................ 51
27 Financial Data Schedule ...................................... 52
* Incorporated by reference from the Registrant's Registration
Statement on Form S-1 filed July 15, 1994 (Registration No.
33-79478).
** Incorporated by reference to Form 10-Q filed May 8, 1995.
*** Incorporated by reference to Form 10-Q filed August 14, 1995.
**** Incorporated by reference to Form 10-Q filed November 13, 1995.
***** Incorporated by reference to Form 8-K filed September 13, 1996.
P Filed pursuant to temporary hardship exemption under cover of Form SE.
<PAGE>
EXHIBIT 10.12
Separation Agreement dated as of September 24, 1996, by and
between Kenneth A. Ghazey ("Executive") and
Darling International Inc. (the "Company").
Reference is made to (1) the Amended and Restated Employment Agreement,
dated as of December 29, 1993, between Executive and the Company as amended by
the First Amendment, dated as of September 26, 1995 (the "Agreement"), (2) the
Company's Management Incentive Compensation Plan in effect for the year 1996
(the "Bonus Plan") in which Executive is a participant, (3) the Company's 1993
Flexible Stock Option Plan ("Option Plan"), pursuant to which Executive has been
granted options on 123,626 shares ("Option Shares") of the Company's common
stock, subject to certain vesting provisions specified in the Option Plan (as
modified by this Separation Agreement) and (4) the Indemnification Agreement
dated as of December 29, 1993 (the "Indemnification Agreement") between the
Company and Executive.
All capitalized terms which are not otherwise defined in this Separation
Agreement shall have the same meanings as in the Agreement, the Bonus Plan or
the Option Plan as the case may be.
Executive has informed the Company that he desires to resign as President,
Chief Operating Officer and a director of the Company, effective on December 31,
1996 (the "Effective Date"), and the Company has agreed to accept such
resignation, on the terms and conditions hereinafter set forth:
In consideration of the agreements hereinafter set forth the parties hereto
agree as follows:
1. The term of Executive's employment will expire on the Effective Date.
2. Executive's duties until the Effective Date will consist of
consultation with the Company's Chairman and Chief Executive to assure
continuity in the management of the Company.
3. Until the Effective Date Executive will continue to (a) receive his
current base salary in periodic installments in accordance with the
Company's normal salary payment dates for executives and (b)
participate in any employee benefit plans and programs for senior
executives of the Company now in effect.
4. As promptly as practicable after December 31, 1996, Executive shall be
entitled to receive termination pay of $350,000 (minus all applicable
withholding taxes). Executive hereby agrees that, except as otherwise
specified in this Separation Agreement, he shall be entitled to no
other termination or similar payments, including without limitation,
accrued vacation pay. Nothing contained in this Separation Agreement
shall limit in any way the rights and obligations of Executive and the
Company in respect of the insurance policy referenced in Section 6(b)
of the Agreement, including, without limitation, Executive's right to
own such policy and the Company's obligation to pay one (1) scheduled
annual premium payment following the Effective Date. In addition,
nothing contained in this Agreement shall limit in any way Executive's
right to receive (and the Company's obligation to provide) the
benefits set forth in Section 5 of the Agreement for a six (6) month
period following the Effective Date.
5. As promptly as practicable after the Company's operating results for
the fiscal year ending December 31, 1996 are finalized, Executive
shall be entitled to receive (notwithstanding the last sentence of
Section IX of the Annual Incentive Summary Fiscal 1996) any bonus to
which he is entitled based upon the Company achieving or exceeding the
"OCF", "FCF" and "EPS" (as such terms are defined in the Bonus Plan)
performance objectives specified in the 1996 operating budget approved
by the Company's Board of Directors, as adjusted to reflect
acquisition of Standard and IPC (with the bonus of the Company's
Chairman of the Board and CEO being determined on the same basis).
6. Executive shall be fully vested in 80% of the 123,626 stock options
issued to him under the Option Plan on the Effective Date, with the
remainder being vested as follows:
(a) 10% of such 123,626 stock options shall be vested and may be exercised
on or after December 31, 1997, if Executive has complied with his
obligations under the Agreement, including those specified in
paragraph 8 of this Separation Agreement, throughout the year 1997;
(b) 10% of such 123,626 stock options shall be vested and may be exercised
on or after December 31, 1998, if Executive has complied with his
obligations under the Agreement, including those specified in
paragraph 8 of this Separation Agreement throughout the year 1998;
<PAGE>
(c) if (i) all or substantially all of the assets of the Company shall be
acquired by a "Third Party," (ii) the Company shall be merged by a
Third Party or (iii) a majority of the Company's stock shall be
acquired by a Third Party, all of such 123,626 stock options shall
become vested and may be exercised immediately prior to the date such
acquisition of assets, merger or acquisition of stock shall become
effective. "Third Party" shall exclude Morgens, Waterfall, Vintiadis &
Company ("MWV") or any of its affiliates;
provided, however, that 100% of such 123,626 stock options
shall be deemed vested for purposes of Section 2.7(c) of the
Option Plan, with the effect that, at any time until June 30,
1997, the Company may cancel up to 123,626 of Executive's stock
options by paying the amount specified in Section 2.7(c) of the
Option Plan.
7. Notwithstanding the preceding paragraph 6(c), in the event that MWV or
its affiliates shall have completed a "Rule 13e-3 transaction" (as
such term is defined in Rule 13e-3 under the Securities Exchange Act
of 1934) at any time prior to December 31, 1998, with the effect that
MWV or its affiliates shall own beneficially 51% or more of the
Company's common stock on a fully diluted basis, the Company shall
cancel the unvested options referred to in subparagraphs (a) or (b) of
Section 6 by placing in escrow (pursuant to an escrow agreement and
with a nationally recognized bank mutually agreed by the parties) an
amount of cash (the "Escrow Amount") equal to the difference between
(x) Executive's aggregate exercise price for the shares of common
stock subject to such unvested options and (y) the average price paid
to stockholders of the Company pursuant to the Rule 13e-3 transaction
times the number of shares of common stock subject to such unvested
options. The Escrow Amount shall be paid to Executive only in
accordance with the vesting schedule set forth in the preceding
paragraph 6 as the options to which the Escrow Amount, or portions
thereof, is attributable would have become vested under the preceding
paragraph 6 (including with respect to Executive's compliance with his
obligations under the Agreement, including under paragraph 8 of this
Separation Agreement); provided that there shall be released from the
Escrow Amount, or the Company shall withhold, as the case may be, such
amounts as may be required to satisfy taxes required to be paid by
Executive for the cancellation of options pursuant to this paragraph
7.
8. Executive acknowledges that the foregoing provisions of this
Separation Agreement represent substantial amendments to the
Agreement, the Bonus Plan and the Option Plan which are of material
economic benefit to Executive and were agreed by the Company in
reliance upon Executive's agreement to the remaining provisions of
this paragraph 8. Until December 31, 1998, Executive hereby agrees
that he will (a) abide by the non-compete provisions of Section 9 of
the Agreement and such provisions shall be expanded to cover the
bakery by-product processing business of the Company's wholly-owned
subsidiary International Processing Corporation, (b) he will not
solicit any of the present employees of the Company to work for any
business with which he is associated in any capacity specified in
paragraph 9 of the Agreement whether or not such business is in
competition with the Company and (c) the Company may take action if
Executive shall breach such agreements as specified in Section 10 of
the Agreement (as well as the non-vesting of stock options as
specified in paragraph 6 of this Separation Agreement and the
non-payment of the Escrow Amount under paragraph 7 of this Separation
Agreement).
9. The parties hereby reaffirm their obligations under the
Indemnification Agreement.
10. Executive shall be entitled to acquire title to the Toyota Land
Cruiser he currently uses for $1.00 on or after January 1, 1997,
provided that Executive shall be responsible for all federal, state
and local taxes attributable to his acquisition of such vehicle and
hereby indemnifies and holds the Company harmless therefrom.
11. Attached is a form of mutually-agreed press release which describes
Executive's resignation. The Company agrees that any statement
authorized by the board of directors or the Chief Executive Officer of
the Company, whether written or oral, and Executive agrees that any
statement of Executive, whether written or oral, relating to
Executive's employment, or termination of employment, shall not be
inconsistent in any material respect with the attached form of press
release.
12. Executive hereby resigns his position with the Company as an officer,
director and employee effective as of the Effective Date and the
Company hereby accepts such resignation, on the terms specified in
this Separation Agreement.
<PAGE>
13. Except as specifically amended by this Separation Agreement, the terms
of the Agreement and the Option Plan shall remain in full force and
effect. In the event of a conflict between the provisions of this
Separation Agreement and the Agreement, the Option Plan and the Bonus
Plan, the provisions of this Separation Agreement shall control.
IN WITNESS WHEREOF the parties have duly executed this Separation Agreement.
------------------------------
Kenneth A. Ghazey
DARLING INTERNATIONAL INC.
By:
--------------------------------
<PAGE>
<TABLE>
EXHIBIT 11
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
The following table details the computation of primary and fully diluted
income per common share, in thousands except per share data.
<CAPTION>
December 28, December 30, December 31,
1996 1995 1994
------------ ------------ -----------
<S> <C> <C> <C>
Earnings (Primary):
Net income available to common stock $ 7,674 $ 14,380 $ 7,357
======= ======= =======
Shares (Primary):
Weighted average number of
common shares outstanding 5,125 5,046 5,000
Additional shares assuming exercise of
stock options 419 276 -
------- ------- ------
Average common shares outstanding
and equivalents 5,544 5,322 5,000
======= ======= =======
Primary income per common share $ 1.38 $ 2.70 $ 1.47
======= ======= =======
Earnings (Fully Diluted):
Net income available to common stock $ 7,674 $ 14,380 $ 7,357
======= ======= =======
Shares (Fully Diluted):
Weighted average number of
common shares outstanding 5,125 5,046 5,000
Additional shares assuming exercise of
stock options 427 342 -
------- ------- ------
Average common shares outstanding
and equivalents 5,552 5,388 5,000
======= ======= =======
Fully diluted income per common share $ 1.38 $ 2.67 $ 1.47
======= ======= =======
</TABLE>
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Subsidiary State of Incorporation
International Processing Corporation Georgia
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
-----------------------------
The Board of Directors
Darling International Inc.:
We consent to incorporation by reference in the registration statements on
Form S-3 (No. 33-79478) and Form S-8 (Nos. 33-99868 and 33-99866) of Darling
International Inc. of our report dated February 7, 1997, relating to the
consolidated balance sheets of Darling International Inc. and subsidiaries as of
December 28, 1996 and December 30, 1995, and the related consolidated statements
of operations, stockholders' equity, and cash flows for each of the years in the
three-year period ended December 28, 1996, and the related schedule, which
report appears in the December 28, 1996 annual report on Form 10-K of Darling
International Inc.
KPMG Peat Marwick LLP
Dallas, Texas
March 27, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-28-1996
<PERIOD-START> DEC-31-1995
<PERIOD-END> DEC-28-1996
<CASH> 12,956
<SECURITIES> 0
<RECEIVABLES> 35,966
<ALLOWANCES> 302
<INVENTORY> 12,643
<CURRENT-ASSETS> 69,726
<PP&E> 231,759
<DEPRECIATION> 55,973
<TOTAL-ASSETS> 329,645
<CURRENT-LIABILITIES> 77,741
<BONDS> 138,173
0
0
<COMMON> 52
<OTHER-SE> 63,981
<TOTAL-LIABILITY-AND-EQUITY> 329,645
<SALES> 488,914
<TOTAL-REVENUES> 488,914
<CGS> 395,025
<TOTAL-COSTS> 461,478
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,994
<INCOME-PRETAX> 14,979
<INCOME-TAX> 7,305
<INCOME-CONTINUING> 7,674
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,674
<EPS-PRIMARY> 1.38
<EPS-DILUTED> 1.38
</TABLE>
