UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 3, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number 0-24620
DARLING INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-2495346
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
251 O'CONNOR RIDGE BLVD., SUITE 300, IRVING, TEXAS 75038
(Address of principal executive offices)
(972) 717-0300
(Registrant's telephone number)
Not applicable
(Former name, address and fiscal year, if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such report(s)), and (2) has been subject to such filing
requirements for the past 90 days.
YES /X/ NO / /
The number of shares outstanding of the Registrant's common stock, $0.01 par
value, as of November 13, 1998 was 15,589,362.
<PAGE>
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
FORM 10-Q FOR THE THREE MONTHS ENDED OCTOBER 3, 1998
TABLE OF CONTENTS
Page No.
PART I: FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets. . . . . . . . . . . . . 3
October 3, 1998 (unaudited) and January 3, 1998
Consolidated Statements of Operations (unaudited). . . . . . 4
Three Months and Nine Months Ended October 3, 1998 and
September 27, 1997
Consolidated Statements of Cash Flows (unaudited). . . . . . 5
Nine Months Ended October 3, 1998 and September 27, 1997
Notes to Consolidated Financial Statements (unaudited). . . . 6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS. . . . . . . . 11
PART II: OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . 19
Item 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS. . . . . . . . . . . . . . . . . 19
Item 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . 20
Signatures. . . . . . . . . . . . . . . . . . . 21
Index to Exhibits. . . . . . . . . . . . . . . . . 22
<PAGE>
<TABLE>
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
October 3, 1998 and January 3, 1998
(in thousands, except shares and per share data)
<CAPTION>
October 3 January 3
1998 1998
--------- ---------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ......................................................... $ 3,398 $ 2,955
Accounts receivable ............................................................... 22,358 32,459
Inventories ....................................................................... 13,044 13,897
Prepaid expenses .................................................................. 6,318 3,459
Deferred income tax assets ........................................................ 2,916 4,006
Other ............................................................................. 689 383
-------- -------
Total current assets .......................................................... 48,723 57,159
Property, plant and equipment, less accumulated
depreciation of $103,074 at October 3, 1998 and
$81,552 at January 3, 1998 .......................................................... 159,886 170,636
Collection routes and contracts, less accumulated
amortization of $13,748 at October 3, 1998 and
$8,700 at January 3, 1998 ........................................................... 53,937 58,715
Goodwill, less accumulated amortization of $1,571
at October 3, 1998 and $949 at January 3, 1998 ...................................... 20,371 20,902
Other assets ........................................................................... 5,331 5,565
-------- -------
$288,248 $312,977
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (note 3) ........................................ $ 7,584 $ 5,113
Long-term debt currently being renegotiated (note 3) .............................. 135,064 -
Accounts payable, principally trade ............................................... 17,261 22,426
Accrued expenses .................................................................. 26,512 25,385
Accrued interest .................................................................. 1,330 911
-------- --------
Total current liabilities ..................................................... 187,751 53,835
Long-term debt, less current portion (note 3) .......................................... - 142,181
Other non-current liabilities .......................................................... 22,998 21,391
Deferred income taxes .................................................................. 18,583 25,814
-------- --------
Total liabilities ............................................................. 229,332 243,221
-------- --------
Stockholders' equity
Common stock, $.01 par value; 25,000,000 shares
authorized; 15,589,362 and 15,563,037 shares
issued and outstanding at October 3, 1998
and at January 3, 1998, respectively ........................................... 156 156
Preferred stock, $0.01 par value; 1,000,000 shares
authorized, none issued ........................................................ - -
Additional paid-in capital ........................................................ 34,871 34,780
Retained earnings ................................................................. 23,889 34,820
-------- --------
Total stockholders' equity .................................................... 58,916 69,756
-------- --------
Contingencies (note 4)
$288,248 $312,977
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
<TABLE>
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months and nine months ended
October 3, 1998 and September 27, 1997
(in thousands, except per share data)
<CAPTION>
Three Months Ended Nine Months Ended
--------------------- ----------------------
Oct. 3, Sept. 27, Oct. 3, Sept. 27,
1998 1997 1998 1997
--------- --------- --------- ---------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net sales ..................................................................... $ 89,234 $ 114,455 $ 296,589 $ 369,061
--------- --------- --------- ---------
Costs and expenses:
Cost of sales and operating expenses ..................................... 77,113 94,273 246,969 299,898
Selling, general and administrative expenses ............................. 10,141 9,591 29,633 28,316
Depreciation and amortization ............................................ 9,179 8,297 27,532 24,514
--------- --------- --------- --------
Total costs and expenses .............................................. 96,433 112,161 304,134 352,728
--------- --------- --------- --------
Operating income (loss) ............................................... (7,199) 2,294 (7,545) 16,333
--------- --------- --------- --------
Other income (expense):
Interest expense ......................................................... (2,963) (2,914) (8,673) (10,089)
Other, net ............................................................... (237) (113) (743) (44)
--------- --------- --------- --------
Total other income (expense) ........................................ (3,200) (3,027) (9,416) (10,133)
--------- --------- --------- --------
Income (loss) before income taxes ..................................... (10,399) (733) (16,961) 6,200
Income tax expense (benefit) .................................................. (3,502) (210) (6,031) 2,525
--------- --------- --------- --------
Net earnings (loss) ................................................... $ (6,897) $ (523) $ (10,930) $ 3,675
========= ========= ========= ========
Basic earnings (loss) per common share ........................................ $ (0.44) $ (0.03) $ (0.70) $ 0.24
========= ========= ========= ========
Diluted earnings (loss) per common share ...................................... $ (0.44) $ (0.03) $ (0.70) $ 0.22
========= ========= ========= ========
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
Nine months ended October 3, 1998 and September 27, 1997
(in thousands)
<CAPTION>
Nine Months Ended
Oct. 3, Sept. 27,
1998 1997
--------- ---------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) ....................................................... $ (10,930) $ 3,675
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization .......................................... 27,532 24,514
Deferred income tax expense (benefit) .................................. (6,144) (1,622)
(Gain) loss on sales of assets ......................................... (14) 14
Changes in operating assets and liabilities,
net of effects from acquisitions:
Accounts receivable ............................................... 10,101 5,372
Inventories and prepaid expenses .................................. (2,038) (4,463)
Accounts payable and accrued expenses ............................. (4,037) (7,357)
Accrued interest .................................................. 419 (3,220)
Other ............................................................. 3,208 124
--------- ---------
Net cash provided by operating activities ........................ 18,097 17,037
--------- ---------
Cash flows from investing activities:
Recurring capital expenditures ............................................ (11,646) (15,524)
Capital expenditures related to acquisitions .............................. - (1,005)
Net proceeds from sale of property, plant and
equipment and other assets ............................................. 379 5,790
Payments related to routes and other intangibles .......................... (158) (3,619)
--------- ---------
Net cash used in investing activities ............................ (11,425) (14,358)
--------- ---------
Cash flows from financing activities:
Proceeds from long-term debt .............................................. 71,881 233,246
Payments on long-term debt ................................................ (76,526) (245,272)
Contract payments ......................................................... (1,675) (1,047)
Deferred loan costs ....................................................... - (1,008)
Issuance of common stock .................................................. 91 262
--------- ---------
Net cash used in financing activities ............................ (6,229) (13,819)
--------- ---------
Net increase (decrease) in cash and cash equivalents ........................... 443 (11,140)
Cash and cash equivalents at beginning of period ............................... 2,955 12,956
--------- ---------
Cash and cash equivalents at end of period ..................................... $ 3,398 $ 1,816
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
<PAGE>
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 3, 1998
(unaudited)
(1) General
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. In addition, the Company provides grease trap
collection services to restaurants. The Company processes such raw
materials at 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.
The accompanying consolidated financial statements for the three
month and nine month periods ended October 3, 1998 and September 27,
1997 have been prepared by Darling International Inc. (Company)
without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission (SEC). The information furnished
herein reflects all adjustments (consisting only of normal recurring
accruals) which are, in the opinion of management, necessary to
present a fair statement of the financial position and operating
results of the Company as of and for the respective periods. However,
these operating results are not necessarily indicative of the results
expected for the full fiscal year. Certain information and footnote
disclosures normally included in annual financial statements prepared
in accordance with generally accepted accounting principles have been
omitted pursuant to such rules and regulations. However, management
of the Company believes that the disclosures herein are adequate to
make the information presented not misleading. The accompanying
consolidated financial statements should be read in conjunction with
the audited consolidated financial statements contained in the
Company's Form 10-K for the fiscal year ended January 3, 1998.
(2) Summary of Significant Accounting Policies
(a) Basis of Presentation
The consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.
(b) Fiscal Periods
The Company has a 52/53 week fiscal year ending on the Saturday
nearest December 31. Fiscal periods for the consolidated financial
statements included herein are as of January 3, 1998, and include the
13 and 39 weeks ended October 3, 1998, and the 13 and 39 weeks ended
September 27, 1997.
(c) Earnings (Loss) Per Common Share
In February, 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No.128, "Earnings
Per Share" ("SFAS No. 128"). SFAS No. 128 revised the previous
calculation methods and presentations of earnings per share and
requires that all prior-period earnings (loss) per share data be
restated. The Company adopted SFAS No. 128 in the fourth quarter of
1997 as required by this Statement.
Basic earnings (loss) per common share are computed by dividing net
earnings (loss) attributable to outstanding common stock by the
weighted average number of common shares outstanding during the year.
Diluted earnings (loss) per common share are computed by dividing net
earnings (loss) attributable to outstanding common stock by the
weighted average number of common shares outstanding during the year
increased by dilutive common equivalent shares (stock options)
determined using the treasury stock method, based on the average
market price exceeding the exercise price of the stock options. All
prior-period earnings (loss) per share amounts have been restated in
accordance with SFAS No. 128.
The weighted average common shares used for basic earnings (loss) per
common share was 15,585,000 and 15,578,000 for the three months and
nine months ended October 3, 1998, respectively, and 15,531,000 and
15,504,000 for the three months and nine months ended September 27,
1997, respectively. The effect of dilutive stock options added
1,107,000 shares for the nine months ended September 27, 1997. For the
three months and nine months ended October 3, 1998, no stock options
(362,000 shares and 733,000 shares respectively) were included in the
calculation of diluted earnings (loss) per common share as the effect
was antidilutive. In addition, for the three months ended September
27, 1997, no stock options (983,000 shares) were included in the
calculation of diluted earnings (loss) per common share as the effect
was antidilutive.
(3) Long-Term Debt Currently Being Renegotiated
Long-term debt currently being renegotiated consists of the following (in
thousands):
October 3, January 3,
1998 1998
------------- ------------
Credit Agreement:
Revolving Credit Facility $100,064 $100,875
Term Loan 42,500 46,250
Other Notes 84 169
-------- --------
142,648 147,294
Less current maturities:
Long-term debt currently
being renegotiated 135,064 -
Other long-term debt 7,584 5,113
-------- --------
$ - $142,181
======== ========
Effective June 5, 1997, the Company entered into a Credit Agreement (the
"Credit Agreement") which provided for borrowings in the form of a $50,000,000
Term Loan and $175,000,000 Revolving Credit Facility.
The Term Loan provides for $50,000,000 of borrowing. The Term Loan bears
interest payable monthly at LIBOR (5.5938% at October 3, 1998), plus a margin
(the "Credit Margin") (3.00% at October 3, 1998) which floats based on the
achievement of certain financial ratios. The Term Loan is payable by the Company
in quarterly installments of $1,250,000 commencing on June 30, 1997 through
March 31, 1999: $2,500,000 commencing on June 30, 1999 through March 31, 2002;
and an installment of $10,000,000 due on June 5, 2002. As of October 3, 1998,
$42,500,000 was outstanding under the Term Loan.
As further discussed below, the Revolving Credit Facility currently being
renegotiated provides for borrowings up to a maximum of $135,000,000 with
sublimits available for letters of credit. Outstanding borrowings on the
Revolving Credit Facility bear interest, payable monthly, at various LIBOR rates
(ranging from 5.500% to 5.6875% at October 3, 1998) plus the Credit Margin as
well as portions at a Base Rate (8.25% at October 3, 1998), plus a margin (the
"Base Margin") (0.50% at October 3, 1998) which floats based on the achievement
of certain financial ratios or, for swingline advances, at the Base Rate plus
the Base Margin. Additionally, the Company must pay a commitment fee equal to
0.375% per annum on the unused portion of the Revolving Credit Facility. The
Revolving Credit Facility matures on June 5, 2002. As of October 3, 1998,
$100,064,000 was outstanding under the Revolving Credit Facility and the Company
had outstanding irrevocable letters of credit aggregating $11,701,773, leaving
approximately $23 million available to borrow.
The Credit Agreement contains certain terms and covenants, which, among
other matters, restrict the incurrence of additional indebtedness, the payment
of cash dividends and the annual amount of capital expenditures, and requires
the maintenance of certain minimum financial ratios. As of October 3, 1998 the
Company had several existing events of default of certain financial covenants
(the "Defaults") under the Credit Agreement, as amended. On October 2, 1998, the
Company entered into an amendment (the "Amendment") of the Credit Agreement
whereby BankBoston, N.A., as agent, and the other participant banks in the
Credit Agreement (the "Banks") agreed to forbear from exercising rights and
remedies arising as a result of the Defaults until November 9, 1998. Included as
a part of the Amendment was a reduction in the commitment under the Revolving
Credit Facility from $175,000,000 to $135,000,000. In addition, the Amendment
included changes in the Company's costs of borrowing under the Credit Agreement
facilities as described herein.
On November 6, 1998, the Company entered into an extension of the
Amendment whereby the Banks agreed to forbear from exercising rights and
remedies arising as a result of the Defaults until December 14, 1998. The Banks
have agreed, pursuant to terms of the Credit Agreement as amended, to continue
to extend credit to the Company. No assurance can be given that the Company will
reach agreement with the Banks by December 14, 1998, (or whether the Banks will
agree to extension of such date) or what action the Banks will take if no such
agreement is reached. Because the aforementioned forbearance was for a period of
less than one year, in accordance with current accounting literature (EITF
86-30) relating to classification of debt, the Company has classified all of its
debt as current. At October 3, 1998, the long-term debt payable within one year
is $7,584,000, and the debt which has been classified as current, due to the
term of the forbearance, totals $135,064,000.
The Company is currently in discussions with the banks to further amend
its Credit Agreement. If such discussions result in an amended Credit Agreement
that extends payment of all or a portion of the debt beyond one year from the
Company's next reported balance sheet date and meets the other conditions of
EITF 86-30, that portion of the debt due after one year will be reclassified as
long-term.
(4) Contingencies
(a) ENVIRONMENTAL
Chula Vista
The Company is the owner of an undeveloped property located in Chula
Vista, California (the "Site"). A rendering plant was operated on the
Site until 1982. From 1959 to 1978, a portion of the Site was used as
an industrial waste disposal facility, which was closed pursuant to
Closure Order No. 80-06, issued by the State of California Regional
Water Quality Control Board for the San Diego Region (the "RWQCB"). In
June 1982, RWQCB staff approved a completed closure plan which
included construction of a containment cell (the "Containment Cell")
on a portion (approximately 5 acres) of the Site to isolate
contaminated soil excavated from the Site. The Site has been listed by
the State of California as a site for which expenditures for removal
and remedial actions may be made by the State pursuant to the
California Hazardous Substances Account Act, California Health &
Safety Code Section 25300 et seq. Technical consultants retained by
the Company have conducted various investigations of the environmental
conditions at the Site, and in 1996, requested that the RWQCB issue a
"no further action" letter with respect to the Site. In 1997 the RWQCB
issued Order No. 97-40 prescribing a maintenance and monitoring
program for the Containment Cell. In June 1998 the RWQCB provided a
letter to assure potential purchasers and lenders of limitations on
their liability connected to the balance of the Site (approximately 30
acres) in order to facilitate a potential sale. The Company continues
to work with the RWQCB to define the scope of an additional order
which will address the Company's future obligations for that remaining
portion of the Site.
Cleveland
In August, 1997, the Company received a Notice of Violation ("NOV")
from the United States Environmental Protection Agency ("EPA") for
alleged violations of the Ohio Air Quality Rules as they relate to
odor emissions. The NOV asserted that the Cleveland, OH facility was
in violation of the State's nuisance rule based on a City of Cleveland
record of complaints associated with odors emanating from its
facility. Since December, 1992, the Company has been working with the
City of Cleveland under a Consent Agreement to address such complaints
and concerns of the neighborhood in close proximity to the Plant. Upon
receipt of the NOV the Company initiated a cooperative effort with EPA
to address the NOV. In August, 1998, the Company received a second NOV
from EPA which encompassed the alleged violations from the first NOV
and alleged several violations of terms and conditions found in the
Cleveland plant's air permit. The Company again met with EPA to seek
an amicable resolution. Although rendering of animal by-products has
been discontinued at the Cleveland plant, EPA is not satisfied with
this as a resolution of the NOV and is seeking a monetary penalty. The
Company has challenged EPA's approach to resolution of the NOV as well
as EPA's authority to be involved with an enforcement action connected
with a state nuisance rule. The Company continues to seek an amicable
resolution.
(b) LITIGATION
Melvindale
A group of residents living near the Company's Melvindale, Michigan
plant has filed suit, purportedly on behalf of a class of persons
similarly situated. The class has not been certified. The suit is based
on legal theories of trespass, nuisance and negligence and/or gross
negligence, and is pending in the United States District Court, Eastern
District of Michigan. Plaintiffs allege that emissions to the air,
particularly odor, from the plant have reduced the value and enjoyment
of Plaintiffs' property, and Plaintiffs seek damages, including mental
anguish, exemplary damages and injunctive relief. In a lawsuit with
similar factual allegations, also pending in United States District
Court, Eastern District of Michigan, the City of Melvindale has filed
suit against the Company based on legal theories of nuisance, trespass,
negligence and violation of Melvindale nuisance ordinance seeking
damages and declaratory and injunctive relief. The Company or its
predecessors have operated a rendering plant at the Melvindale location
since 1927 in a heavily industrialized area down river south of
Detroit. The Company has taken and is taking all reasonable steps to
minimize odor emissions from its recycling processes and is defending
the lawsuit vigorously.
Other Litigation
The Company is also a party to several other lawsuits, claims and loss
contingencies incidental to its business, including assertions by
regulatory agencies related to the release of unacceptable odors from
some of its processing facilities.
The Company has established loss reserves for environmental and other
matters as a result of the matters discussed above. Although the
ultimate liability cannot be determined with certainty, management of
the Company believes that reserves for contingencies are reasonable and
sufficient based upon present governmental regulations and information
currently available to management. The Company estimates the range of
possible losses related to environmental and litigation matters, based
on certain assumptions, is between $3.8 million and $12.8 million at
October 3, 1998. The accrued expenses and other noncurrent liabilities
classifications in the Company's consolidated balance sheets include
reserves for insurance, environmental and litigation contingencies of
$20.8 million and $15.7 million at October 3, 1998 and January 3, 1998,
respectively. There can be no assurance, however, that final costs will
not exceed current estimates. The Company believes that any additional
liability relative to such lawsuits and claims which may not be covered
by insurance would not likely have a material adverse effect on the
Company's financial position, although it could potentially have a
material impact on the results of operations in any one year.
(5) Changes in Accounting Principles
Effective January 4, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." This Statement requires that all items recognized under
accounting standards as components of comprehensive earnings be
reported in an annual financial statement that is displayed with the
same prominence as the other annual financial statements. This
Statement also requires that the Company classify items of other
comprehensive earnings by their nature in an annual financial
statement. Comprehensive income (loss) did not differ from net income
(loss) for the periods ended October 3, 1998 and September 27, 1997.
<PAGE>
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
FORM 10-Q FOR THE THREE MONTHS AND NINE MONTHS
ENDED OCTOBER 3, 1998
PART I
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion summarizes information with respect to the
liquidity and capital resources of the Company at October 3, 1998 and factors
affecting its results of operations for the three months and nine months ended
October 3, 1998 and September 27, 1997.
RESULTS OF OPERATIONS
Three Months Ended October 3, 1998 Compared to
Three Months Ended September 27, 1997
GENERAL
The Company recorded a net loss of $6.9 million for the third quarter
of the fiscal year ending January 2, 1999 ("Fiscal 1998"), as compared to net
loss of $0.5 million for the third quarter of the fiscal year ended January 3,
1998 ("Fiscal 1997"). Operating income decreased $9.5 million to an operating
loss of $7.2 million in the third quarter of Fiscal 1998 from operating income
of $2.3 million in the third quarter of Fiscal 1997. The decrease in operating
income was primarily due to: 1) Declines in overall finished goods prices; 2)
Declines in the volume of raw materials processed; and 3) Approximately $0.9
million in increased depreciation and amortization expense related to
acquisitions and capital expenditures.
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.
In addition, the Company provides grease trap collection services to
restaurants. Sales are significantly affected by finished goods prices, quality
of raw material, and volume of raw material. Net sales include the sales of
produced finished goods, trap grease services, and finished goods purchased for
resale, which constitute less than 10% of total sales.
During the third quarter of Fiscal 1998, net sales decreased 22.1%, to
$89.2 million as compared to $114.5 million during the third quarter of Fiscal
1997 primarily due to the following: 1) Decreases in overall finished goods
prices resulted in a $21.5 million decrease in sales in the third quarter of
Fiscal 1998 versus the third quarter of Fiscal 1997. The Company's average
yellow grease prices were 16.3% lower, average tallow prices were 9.2% lower,
and average meat and bone meal prices were 46.9% lower. Average corn prices were
25.0% lower; 2) Decreases in the volume of raw materials processed combined with
a slight decrease in overall yields resulted in an $11.3 million decrease in
sales; 3) Decreases in finished hides sales accounted for $1.4 million in sales
decreases; 4) Increases in products purchased for resale resulted in a $5.3
million increase; 5) Inventory changes accounted for an increase of $2.3 million
in sales and 6) Service charge income increased $1.3 million to somewhat offset
the other decreases.
COST OF SALES AND OPERATING EXPENSES
Cost of sales and operating expenses includes prices paid to raw
material suppliers, the cost of product purchased for resale, and the cost to
collect and process raw material. The Company utilizes both fixed and formula
pricing methods for the purchase of raw materials. Fixed prices are adjusted
where possible as needed for changes in competition and significant changes in
finished goods market conditions, while raw materials purchased under formula
prices are correlated with specific finished goods prices.
During the third quarter of Fiscal 1998, cost of sales and operating
expenses decreased $17.2 million (18.2%) to $77.1 million as compared to $94.3
million during the third quarter of Fiscal 1997 primarily as a result of the
following: 1) Lower raw material prices paid, correlating to decreased prices
for fats and oils, meat and bone meal and corn resulted in decreases of $15.6
million in cost of sales; 2) Decreases in the volume of raw materials collected
and processed resulted in a decrease of approximately $5.7 million in cost of
sales and operating expenses; 3) Increases in products purchased for resale
resulted in a $5.3 million increase; and 4) Decreases in hides purchases
accounted for $1.2 million in cost of sales decreases.
SELLING, GENERAL AND ADMINISTRATIVE COSTS
Selling, general and administrative costs were $10.1 million during the
third quarter of Fiscal 1998, a $0.5 million increase from $9.6 million for the
third quarter of Fiscal 1997. Selling, general and administrative costs include
$0.3 million reorganization costs for severance and other costs related to the
consolidation of the Cleveland plant and a Regional office and certain corporate
reductions.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization charges increased $0.9 million to $9.2
million during the third quarter of Fiscal 1998 as compared to $8.3 million
during the third quarter of Fiscal 1997. This increase was primarily due to
additional depreciation on fixed asset additions and amortization on intangibles
acquired as a result of various acquisitions. The Company adopted Fresh Start
Accounting in 1994. Under this method of accounting, the assets acquired prior
to December 1994 were restated at fair market value and depreciated over
estimated remaining lives of 5-15 years.
INTEREST EXPENSE
Interest expense increased $0.1 million from $2.9 million during the
third quarter of Fiscal 1997 to $3.0 million during the third quarter of Fiscal
1998 due primarily to an increase in the interest rate credit spread applied to
the Company's outstanding debt.
INCOME TAXES
The income tax benefit of $3.5 million for the third quarter of Fiscal
1998 consists of federal tax benefit and various state and foreign taxes. This
is a change of $3.3 million from $0.2 million income tax benefit during the
third quarter of Fiscal 1997.
CAPITAL EXPENDITURES
The Company made capital expenditures of $3.0 million during the third
quarter of Fiscal 1998 compared to capital expenditures of $5.2 million during
the third quarter of Fiscal 1997.
Nine Months Ended October 3, 1998 Compared to
Nine Months Ended September 27, 1997
GENERAL
The Company recorded a net loss of $10.9 million for the first nine
months of Fiscal 1998, as compared to net earnings of $3.7 million for the first
nine months of Fiscal 1997. Operating income decreased from $16.3 million in the
first nine months of Fiscal 1997 to an operating loss of $7.5 million in the
first nine months of Fiscal 1998. The decrease in operating income was primarily
due to: 1) Declines in overall finished goods prices; 2) Declines in the volume
of raw materials processed; and 3) Approximately $3.0 million in increased
depreciation and amortization expense related to acquisitions and capital
expenditures. Interest expense decreased from $10.1 million to $8.7 million in
Fiscal 1998, primarily due to the refinancing of all outstanding debt on June 5,
1997, resulting in a lower overall interest rate.
NET SALES
During the first nine months of Fiscal 1998, net sales decreased by
$72.5 million (19.6%) to $296.6 million as compared to $369.1 million during the
first nine months of Fiscal 1997, primarily due to the following: 1) Decreases
in overall finished goods prices resulted in a $64.2 million decrease in sales
in the first nine months of Fiscal 1998, versus the first nine months of Fiscal
1997. The Company's average yellow grease prices were 14.3% lower, average
tallow prices were 11.8% lower, and average meat and bone meal prices were 33.7%
lower. Average corn prices were 16.3% lower; 2) Decreases in the volume of raw
materials processed resulted in a $17.3 million decrease in sales; 3) Decreases
in finished hides sales accounted for $6.3 million in sales decreases; 4)
Increases in products purchased for resale resulted in a $9.7 million increase
and 5) Increases in service charge income of $4.2 million and inventory changes
of $1.4 million somewhat offset the decreases.
COST OF SALES AND OPERATING EXPENSES
During the first nine months of Fiscal 1998, cost of sales and
operating expenses decreased $52.9 million (17.6%) to $247.0 million as compared
to $299.9 million during the first nine months of Fiscal 1997, primarily as a
result of the following: 1) Lower raw material prices paid, correlating to
decreased prices for fats and oils, meat and bone meal and corn resulted in
decreases of $45.9 million in cost of sales; 2) Decreases in the volume of raw
materials collected and processed resulted in a decrease of approximately $10.2
million in cost of sales and operating expenses; 3) Increases in products
purchased for resale resulted in a $9.7 million increase; 4) Decreases in hides
purchases accounted for $4.8 million in cost of sales decrease; and 5) Decreases
in operating expenses, primarily labor costs, resulted in a decrease of $1.7
million.
SELLING, GENERAL AND ADMINISTRATIVE COSTS
Selling, general and administrative costs were $29.6 million during the
first nine months of Fiscal 1998, a $1.3 million increase from $28.3 million for
the first nine months of Fiscal 1997. Approximately $1.3 million in increased
expenses related to the functional reorganization of the Company by line of
business and other expenses related to legal and environmental matters.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization charges increased by $3.0 million to
$27.5 million during the first nine months of Fiscal 1998, as compared to $24.5
million during the first nine months of Fiscal 1997. This increase was primarily
due to additional depreciation on fixed asset additions and amortization on
intangibles acquired as a result of various acquisitions.
INTEREST EXPENSE
Interest expense decreased by $1.4 million from $10.1 million during
the first nine months of Fiscal 1997, to $8.7 million during the first nine
months of Fiscal 1998, primarily due to the refinancing of all outstanding debt
on June 5, 1997, at a lower overall rate of interest.
INCOME TAXES
The income tax benefit of $6.0 million for the first nine months of
Fiscal 1998 consists of federal tax benefit and various state and foreign taxes.
This is a change of $8.5 million from the $2.5 million income tax expense during
the first nine months of Fiscal 1997.
CAPITAL EXPENDITURES
The Company made capital expenditures of $11.7 million during the first
nine months of Fiscal 1998, compared to capital expenditures of $15.5 million
during the first nine months of Fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
Effective June 5, 1997, the Company entered into a Credit Agreement
(the "Credit Agreement") which provided for borrowings in the form of a
$50,000,000 Term Loan and $175,000,000 Revolving Credit Facility.
The Term Loan provides for $50,000,000 of borrowing. The Term Loan
bears interest payable monthly at LIBOR (5.5938% at October 3, 1998), plus a
margin (the "Credit Margin") (3.00% at October 3, 1998) which floats based on
the achievement of certain financial ratios. The Term Loan is payable by the
Company in quarterly installments of $1,250,000 commencing on June 30, 1997
through March 31, 1999: $2,500,000 commencing on June 30, 1999 through March 31,
2002; and an installment of $10,000,000 due on June 5, 2002. As of October 3,
1998, $42,500,000 was outstanding under the Term Loan.
As further discussed below, the Revolving Credit Facility currently
being renegotiated provides for borrowings up to a maximum of $135,000,000 with
sublimits available for letters of credit. Outstanding borrowings on the
Revolving Credit Facility bear interest, payable monthly, at various LIBOR rates
(ranging from 5.500% to 5.6875% at October 3, 1998) plus the Credit Margin as
well as portions at a Base Rate (8.25% at October 3, 1998), plus a margin (the
"Base Margin") (0.50% at October 3, 1998) which floats based on the achievement
of certain financial ratios or, for swingline advances, at the Base Rate plus
the Base Margin. Additionally, the Company must pay a commitment fee equal to
0.375% per annum on the unused portion of the Revolving Credit Facility. The
Revolving Credit Facility matures on June 5, 2002. As of October 3, 1998,
$100,064,000 was outstanding under the Revolving Credit Facility and the Company
had outstanding irrevocable letters of credit aggregating $11,701,773, leaving
approximately $23 million available to borrow.
The Credit Agreement contains certain terms and covenants, which, among
other matters, restrict the incurrence of additional indebtedness, the payment
of cash dividends and the annual amount of capital expenditures, and requires
the maintenance of certain minimum financial ratios. As of October 3, 1998 the
Company had several existing events of default of certain financial covenants
(the "Defaults") under the Credit Agreement, as amended. On October 2, 1998, the
Company entered into an amendment (the "Amendment") of the Credit Agreement
whereby BankBoston, N.A., as agent, and the other participant banks in the
Credit Agreement (the "Banks") agreed to forbear from exercising rights and
remedies arising as a result of the Defaults until November 9, 1998. Included as
a part of the Amendment was a reduction in the commitment under the Revolving
Credit Facility from $175,000,000 to $135,000,000. In addition, the Amendment
included changes in the Company's costs of borrowing under the Credit Agreement
facilities as described herein.
On November 6, 1998, the Company entered into an extension of the
Amendment whereby the Banks agreed to forbear from exercising rights and
remedies arising as a result of the Defaults until December 14, 1998. The Banks
have agreed, pursuant to terms of the Credit Agreement as amended, to continue
to extend credit to the Company. No assurance can be given that the Company will
reach agreement with the Banks by December 14, 1998, (or whether the Banks will
agree to extension of such date) or what action the Banks will take if no such
agreement is reached.
The Company has only very limited involvement with derivative financial
instruments and does not use them for trading purposes. Interest rate swap
agreements are used to reduce the potential impact of increases in interest
rates on floating-rate long-term debt. At October 3, 1998, the Company was party
to three interest rate swap agreements, each with a term of five years (all
maturing June 27, 2002). Under terms of the swap agreements, the interest
obligation of $70 million of Credit Agreement floating-rate debt was exchanged
for fixed rate contracts which bear interest, payable quarterly, at an average
rate of 6.6% plus a credit margin.
On October 3, 1998, the Company had a working capital deficit of $139.0
million and its working capital ratio was 0.26 to 1 compared to working capital
of $3.3 million and a working capital ratio of 1.06 to 1 on January 3, 1998.
This decrease in working capital is mainly attributable to the classification of
all its debt as current (see note 3). Net cash provided by operating activities
has increased $1.1 million from $17.0 million during the first nine months of
Fiscal 1997 to $18.1 million during the first nine months of Fiscal 1998. 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.
The Company intends to dispose of under-performing and non-productive
assets and reduce expenses, which the Company believes will enable it to
effectively conduct its business, despite continuing low prices for (i) meat and
bone meal, which is one of the Company's principal products and (ii) corn, which
determines the price which the Company's bakery waste processing subsidiary
receives for its output.
ACCOUNTING MATTERS
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, Disclosures about Segments of an Enterprise and Related Information. SFAS
No. 131 is effective for annual periods beginning after December 15, 1997. This
Statement established standards for the way that public business enterprises
report information about operating segments in annual financial statements. The
Statement defines operating segments as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. The Company anticipates that this Statement will require
additional disclosure regarding operating segments in Fiscal 1998.
The Company is also assessing the reporting and disclosure requirements
of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities.
This statement establishes accounting and reporting standards for derivative
instruments and hedging activities. The statement is effective for financial
statements for fiscal years beginning after June 15, 1999. The Company believes
SFAS No. 133 will not have a material impact on its financial statements. The
Company will adopt the provisions of SFAS No.
133 in the first quarter of Fiscal 2000.
YEAR 2000
Readiness
Since many computer systems and other equipment with embedded chips or
processors (collectively, "Business Systems") use only two digits to represent
the year, these business systems may be unable to accurately process certain
data before, during or after the year 2000. As a result, business and
governmental entities are at risk for possible miscalculations or systems
failures causing disruptions in their business operations. This is commonly
known as the Year 2000 issue. The Year 2000 issue can arise at any point in the
Company's supply, manufacturing, distribution and financial chains.
The Company began work on the Year 2000 compliance issue in 1997. The
scope of the project includes: ensuring the compliance of all applications,
operating systems and hardware on PC and LAN platforms; addressing issues
related to non-IT embedded software and equipment; and addressing the compliance
of key suppliers and customers. The project has four phases: assessment of
systems and equipment affected by the Year 2000 issue; definition of strategies
to address affected systems and equipment; remediation or replacement of
affected systems and equipment; and testing that each is Year 2000 compliant.
With respect to ensuring the compliance of all applications, operating
systems and hardware on the Company's various computer platforms, the assessment
phase and definition of strategies phase have been completed. It is estimated
that 80% of the remediation or replacement phase has been completed with the
balance of this phase expected to be completed by mid 1999. The testing phase of
existing applications operating systems and hardware not being remediated or
replaced is expected to be completed by the end of the first quarter of 1999.
With respect to addressing issues related to Non-IT embedded software
and equipment, which principally exists in the Company's manufacturing plants,
the assessment phase and definition of strategies phase are expected to be
completed by the end of second quarter 1999. Testing will begin in 1999 and is
expected to be completed by the end of third quarter 1999 as well as the
remediation and replacement phase.
The Company relies on third party suppliers for raw materials, water,
utilities, transportation and other key services. Interruption of supplier
operations due to Year 2000 issues could affect Company operations. We have
initiated efforts to evaluate the status of our most critical suppliers'
progress. This process of evaluating our critical suppliers is scheduled for
completion by mid-1999. Options to reduce the risks of interruption due to
suppliers failures include identification of alternate suppliers where feasible
or warranted. These activities are intended to provide a means of managing risk,
but cannot eliminate the potential for disruption due to third party failure.
The Company is also dependent upon customers for sales and cash flow.
Year 2000 interruptions in customers' operations could result in reduced sales,
increased inventory or receivable levels, and cash flow reductions. The Company
is in the assessment phase with respect to the evaluation of critical customers'
progress and is scheduled for completion by mid-1999.
Contingency
The Company is in the process of developing contingency plans for those
areas that are critical to our business. These contingency plans will be
designed to mitigate serious disruptions to our business flow beyond the end of
1999, where possible. The major efforts related to contingency planning are
scheduled for completion by the end of the third quarter of 1999.
Costs
The Company does not separately track the internal costs incurred for
the Y2K project. Such costs, however, are principally the related payroll costs
for the Company's information systems group. The Company has incurred
approximately $30,000 in related internal expenses to date. Future expenses are
expected to be approximately $150,000. Such cost estimates are based upon
presently available information and may change as the Company continues with its
Y2K project. All estimated costs have been budgeted and are expected to be
funded through cash flows from operations. These costs do not include any cost
associated with the implementation of contingency plans, which are in the
process of being developed.
Risks
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers and customers,
the Company is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Company's results of
operations, liquidity or financial condition.
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes "forward-looking"
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All
statements other than statements of historical facts included in the Quarterly
Report on Form 10-Q, including, without limitation, the statements under the
sections entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Legal Proceedings" and located elsewhere herein
regarding industry prospects and the Company's financial position are
forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable; it can give no
assurance that such expectations will prove to be correct. Important factors
that could cause actual results to differ materially from the Company's
expectations include: the Company's continued ability to obtain sources of
supply for its rendering operations; general economic conditions in the European
and Asian markets; prices in the competing commodity markets which are volatile
and are beyond the Company's control, the Year 2000 readiness issue; and
likelihood of success in amending the Company's Credit Agreement to maintain the
existing financing. Future profitability may be affected by the Company's
ability to grow its restaurant services business and the development of its
value-added feed ingredients, all of which face competition from companies which
may have substantially greater resources than the Company.
<PAGE>
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
FORM 10-Q FOR THE THREE MONTHS AND NINE MONTHS
ENDED OCTOBER 3, 1998
PART II: Other Information
Item 1. LEGAL PROCEEDINGS
The information required by this item is included on pages 9 and 10 of
this report and is incorporated herein by reference.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter ended
October 3, 1998.
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibits No. Description
3.1* Restated Articles of Incorporation
3.2 Amended and Restated Bylaws, dated March 10, 1994 and March 31, 1995.
10.15 Fourth Amendment to Credit Agreement dated as of October 2, 1998
between Darling International Inc., the banks or other lending
institutions which are a signatory thereto, Comerica Bank, Credit
Lyonnais New York Branch and Wells Fargo Bank (Texas), National
Association and BankBoston, N.A.
10.16 The First Modification to Fourth Amendment to Credit Agreement dated as
of November 2, 1998 between Darling International Inc., the banks or
other lending institutions which are a signatory thereto, Comerica
Bank, Credit Lyonnais New York Branch and Wells Fargo Bank (Texas),
National Association and BankBoston, N.A.
11 Statement re-computation of per share earnings.
27 Financial Data Schedule
* Incorporated by reference to the Registrant's Registration Statement
on Form S-1(Registration No. 33-79478).
(b) REPORTS ON FORM 8-K
There were no reports filed on Form 8-K during the three months ended
October 3, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DARLING INTERNATIONAL INC.
Registrant
Date: November 23, 1998 By: /s/Dennis B. Longmire
------------------------------
Dennis B. Longmire
Chairman and
Chief Executive Officer
Date: November 23, 1998 By: /s/John O. Muse
-----------------------------
John O. Muse
Vice President and
Chief Financial Officer
(Principal Financial Officer)
<PAGE>
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
FORM 10-Q FOR THE THREE MONTHS AND NINE MONTHS ENDED
OCTOBER 3, 1998
INDEX TO EXHIBITS
Exhibits No. Description Page No.
3.1* Restated Articles of Incorporation
3.3 Amended and Restated Bylaws, dated March 10, 1994 and March 31, 1995.
10.15 Fourth Amendment to Credit Agreement dated as of October
2, 1998 between Darling International Inc., the banks
or other lending institutions which are a signatory thereto,
Comerica Bank, Credit Lyonnais New York Branch and Wells
Fargo Bank (Texas), National Association and BankBoston, N.A.
10.16 The First Modification to Fourth Amendment to Credit Agreement
dated as of November 2, 1998 between Darling International Inc.,
the banks or other lending institutions which are a signatory
thereto, Comerica Bank, Credit Lyonnais New York Branch and
Wells Fargo Bank (Texas), National Association and BankBoston, N.A.
11 Statement re-computation of per share earnings. 23
27 Financial Data Schedule
* Incorporated by reference to the Registrant's Registration Statement
on Form S-1(Registration No. 33-79478).
<PAGE>
EXHIBIT 11
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
The following table details the computation of basic and diluted earnings
(loss) per common share, in thousands except per share data.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------- -------------------------
Oct. 3, Sept. 27, Oct. 3, Sept. 27,
1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Earnings (Loss) (Basic):
Net earnings (loss) available $ (6,897) $ (523) $ (10,930) $ 3,675
to common stock ============ =========== ============= ========
- ---------------------------------------------------------------------------------------------------------
Shares (Basic):
Weighted average number of
common shares outstanding 15,585 15,531 15,578 15,504
============ =========== ============= ========
Basic earnings (loss) per common share $ (0.44) $ (0.03) $ (0.70) $ 0.24
============ =========== ============= ========
- ---------------------------------------------------------------------------------------------------------
Earnings (Loss) (Diluted):
Net earnings (loss) available $ (6,897) $ (523) $ (10,930) $ 3,675
to common stock ============ =========== =========== ========
- ---------------------------------------------------------------------------------------------------------
Shares (Diluted):
Weighted average number of
common shares outstanding 15,585 15,531 15,578 15,504
Additional shares assuming exercise of
stock options - - - 1,107
------------ ----------- ------------- --------
Average common shares outstanding
and equivalents 15,585 15,531 15,578 16,611
============ =========== ============= ========
Diluted earnings (loss) per common share $ (0.44) $ (0.03) $ (0.70) $ 0.22
============ =========== ============= ========
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> JAN-04-1998
<PERIOD-END> OCT-03-1998
<CASH> 3,398
<SECURITIES> 0
<RECEIVABLES> 22,358
<ALLOWANCES> 533
<INVENTORY> 13,044
<CURRENT-ASSETS> 48,723
<PP&E> 262,960
<DEPRECIATION> 103,074
<TOTAL-ASSETS> 288,248
<CURRENT-LIABILITIES> 187,751
<BONDS> 142,648
0
0
<COMMON> 156
<OTHER-SE> 58,760
<TOTAL-LIABILITY-AND-EQUITY> 288,248
<SALES> 296,589
<TOTAL-REVENUES> 296,589
<CGS> 246,969
<TOTAL-COSTS> 304,134
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,673
<INCOME-PRETAX> (16,961)
<INCOME-TAX> (6,031)
<INCOME-CONTINUING> (10,930)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,930)
<EPS-PRIMARY> (0.70)
<EPS-DILUTED> (0.70)
</TABLE>
FOURTH AMENDMENT TO CREDIT AGREEMENT
THIS FOURTH AMENDMENT TO CREDIT AGREEMENT (the "Amendment"), dated as of
October 2, 1998, is among DARLING INTERNATIONAL INC. ("Borrower"), the banks or
other lending institutions which are a signatory hereto (individually, a "Bank"
and, collectively, the "Banks"), COMERICA BANK, CREDIT LYONNAIS NEW YORK BRANCH
and WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION, each individually as a Bank
and as a co-agent and BANKBOSTON, N.A., individually as a Bank and as agent for
itself and the other Banks (in its capacity as agent, together with its
successors in such capacity, the "Agent").
RECITALS:
Borrower, the Banks and the Agent have entered into that certain Credit
Agreement dated as of June 5, 1997 (as amended by that certain First Amendment
to Pledge Agreement and Credit Agreement dated November 10, 1997 between the
Borrower and the Agent, as amended by that certain Second Amendment to Pledge
Agreement and Credit Agreement dated March 6, 1998 among the Borrower, the Banks
and the Agent, as amended by that certain Third Amendment to Credit Agreement
dated June 30, 1998 among the Borrower, the Banks and the Agent and as the same
may hereafter be amended or otherwise modified, the "Credit Agreement").
Agent has advised the Borrower that an Event of Default has occurred under
Section 12.1 (c) of the Credit Agreement as a result of the Borrower's failure
to comply with the covenant in Section 11.1 as evidenced by the Borrower's
financial statements dated as of August 27, 1998 (such Event of Default together
with any further violation of Section 11.1 of the Credit Agreement from August
27, 1998 through November 9, 1998, herein the "Net Worth Defaults"). The
Borrower has notified the Agent and the Banks that it anticipates that it will
be unable to comply with Section 11.1 after November 9, 1998, Section 11.2 of
the Credit Agreement as of and after the end of the third Fiscal Quarter of its
1998 Fiscal Year and Section 11.3 of the Credit Agreement as of and after the
end of the fourth Fiscal Quarter of its 1998 Fiscal Year, all of which will
create, or may have created, Defaults under the Credit Agreement (the "Potential
Defaults" and together with the Net Worth Defaults, herein the "Existing
Defaults").
Borrower has requested that the Agent and the Banks forbear from exercising
their rights and remedies arising as a result of the Existing Defaults in order
to allow the Borrower, the Banks and the Agent time possibly to agree to an
amendment to the Credit Agreement satisfactory to all parties to address the
Existing Defaults.
The Agent and the Banks are willing to so forbear subject to the amendment
to the Credit Agreement as contemplated hereby.
NOW, THEREFORE, in consideration of the premises herein contained and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows effective as of the date
hereof and conditioned upon the execution of this Amendment by Borrower, each
Obligated Party and all the Banks on or prior to October 14, 1998:
ARTICLE 1
Definitions
Section 1.1 Definitions. Capitalized terms used in this Amendment, to the
extent not otherwise defined herein, shall have the same meanings as in the
Credit Agreement, as amended hereby.
ARTICLE 2
Amendments
Section 2.1 Amendment to Section 1.1. The definition of the term "Revolving
Commitment" in Section 1.1 of the Credit Agreement is amended in its entirety to
read as follows:
"Revolving Commitment" means, as to each Bank, the obligation of
such Bank to make advances of funds and purchase participation
interests in (or with respect to the Agent as a Bank, hold other
interests in) Letters of Credit and Swingline Loans in an aggregate
principal amount at any one time outstanding up to but not exceeding
the amount set forth opposite the name of such Bank on Schedule 1.1
hereto under the heading "Revolving Commitment", as the same may be
reduced or terminated pursuant to Section 2.6, 12.2 or 14.8 or, if
applicable, in such Bank's most recent Assignment and Acceptance
executed after October 3, 1998. The aggregate amount of the Revolving
Commitments of all Banks equals One Hundred Thirty-Five Million
Dollars ($135,000,000).
Section 2.2 Amendment to Section 2.5. The first sentence of Section 2.5 of
the Credit Agreement is amended in its entirety to read as follows:
The Borrower agrees to pay to the Agent for the account of each Bank a
commitment fee on the daily average unused amount of such Bank's
Revolving Commitment for the period from and including the Closing
Date to the Termination Date, at a rate equal to (i) from and
including the Closing Date to October 3, 1998, one quarter of one
percent (0.25%) per annum and (ii) from and including October 3, 1998
to the Termination Date, three-eighths of one percent (.375%) per
annum.
Section 2.3 Amendment to Section 4.1. Section 4.1 of the Credit Agreement
is amended in its entirety to read as follows:
Section 4.1 Interest Rate. The Borrower shall pay to the Agent
for the account of each Bank interest on the unpaid principal amount
of each Loan made by such Bank for the period commencing on the date
of such Loan to but excluding the date such Loan is due, at a
fluctuating rate per annum equal to (a) with respect to the Revolving
Loans or Term Loans, (i) during the period that such Loans or portions
thereof are subject to a Base Rate Account, the Base Rate plus the
Base Margin and (ii) during the period that such Loans or portions
thereof are subject to a Libor Account, the Adjusted Libor Rate plus
the Libor Rate Margin; and (b) with respect to the Swingline Loans,
the Base Rate plus the Base Margin.
Section 2.4 Amendment to Section 4.2. All of Section 4.2 of the Credit
Agreement is amended in its entirety to read as follows:
Section 4.2 Determinations of Margins. The phrase "Libor Rate
Margin"(i) prior to October 3, 1998, shall have the meaning set forth in
this Section 4.2 prior to giving effect to the amendment thereof set out in
that certain Fourth Amendment to Credit Agreement dated as of October 2,
1998; (ii) during the period commencing on October 3, 1998 and at all times
thereafter until and excluding the date when the Term Loan is paid in cash
in full (the "Term Loan Payment Date"), shall mean three percent (3.00%)
per annum; (iii) during the period commencing on the Term Loan Payment Date
and ending on but excluding the first Adjustment Date (as defined below),
shall mean the percent per annum set forth in the table below under the
heading "Libor Rate Margin" and opposite the Adjusted Funded Debt to EBITDA
Ratio calculated for the completed four (4) Fiscal Quarters which
immediately preceded the Term Loan Payment Date; and (iv) during each
period, from and including one Adjustment Date to but excluding the next
Adjustment Date (herein a "Calculation Period"), shall mean the percent per
annum set forth in the table below under the heading "Libor Rate Margin"
and opposite the Adjusted Funded Debt to EBITDA Ratio calculated for the
completed four (4) Fiscal Quarters which immediately preceded the beginning
of the applicable Calculation Period. The phrase "Base Margin" (i) during
the period commencing on October 3, 1998 and at all times thereafter until
and excluding the Term Loan Payment Date, shall mean one-half of one
percent (0.50%) per annum; (ii) during the period commencing on the Term
Loan Payment Date and ending on but excluding the first Adjustment Date (as
defined below), shall mean the percent per annum set forth in the table
below under the heading "Base Margin" and opposite the Adjusted Funded Debt
to EBITDA Ratio calculated for the completed four (4) Fiscal Quarters which
immediately preceded the Term Loan Payment Date; and (iv) during each
Calculation Period, shall mean the percent per annum set forth in the table
below under the heading "Base Margin" and opposite the Adjusted Funded Debt
to EBITDA Ratio calculated for the completed four (4) Fiscal Quarters which
immediately preceded the beginning of the applicable Calculation Period.
MARGINS
---------------------------------------
Adjusted FUnded Debt
To EBITDA Base Margin Libor Rate Margin
----------------------------------------------------------------------
greater than or equal to 3.50 0.25% 2.75%
less than 3.50 0.00% 2.25%
The Libor Rate Margin (for Interest Periods commencing after the Term Loan
Payment Date) and the Base Margin shall automatically be adjusted on and as
of the Term Loan Payment Date in accordance with the Adjusted Funded Debt
to EBITDA Ratio set forth in the most recent Compliance Certificate
delivered under subsection 9.1 (c) prior to the Term Loan Payment Date and
the table set forth above. In furtherance of the foregoing, Borrower agrees
to add a calculation of the Adjusted Funded Debt to EBITDA Ratio to each
Compliance Certificate. Upon delivery of the Compliance Certificate
pursuant to subsection 9.1(c) in connection with the financial statements
of Borrower and the Subsidiaries required to be delivered pursuant to
subsection 9.1(b) at the end of each Fiscal Quarter commencing with the
first such Compliance Certificate delivered after the Term Loan Payment
Date, the Libor Rate Margin (for Interest Periods commencing after the
applicable Adjustment Date) and the Base Margin shall also be automatically
adjusted in accordance with the Adjusted Funded Debt to EBITDA Ratio set
forth therein and the table set forth above, such automatic adjustment to
take effect as of the first Business Day after the receipt by the Agent of
the related Compliance Certificate pursuant to subsection 9.1(c) (each such
Business Day when such margins change pursuant to this sentence or the next
following sentence, herein an "Adjustment Date"). If Borrower fails to
deliver such Compliance Certificate which so sets forth the Adjusted Funded
Debt to EBITDA Ratio within the period of time required by subsection
9.1(c), the Libor Rate Margin (for Interest Periods commencing after the
applicable Adjustment Date) shall automatically be adjusted to 2.75% per
annum and the Base Margin shall automatically be adjusted to .25% per
annum, such automatic adjustments to take effect as of the first Business
Day after the last day on which Borrower was required to deliver the
applicable Compliance Certificate in accordance with subsection 9.1(c) and
to remain in effect until subsequently adjusted in accordance herewith upon
the delivery of a Compliance Certificate. The phrase "Adjusted Funded Debt
to EBITDA Ratio" means the ratio, calculated as of the end of each Fiscal
Quarter, of Adjusted Funded Debt as of the date of determination to the
EBITDA of the Borrower and the Subsidiaries (determined on a consolidated
basis) for the four (4) Fiscal Quarters then ending. The phrase "Adjusted
Funded Debt" means, as of any Fiscal Quarter end, the sum of the following
calculated without duplication: (i) Funded Debt (as defined in Section
11.2) outstanding as of such Fiscal Quarter end plus (ii) all reimbursement
obligations of the Borrower and the Subsidiaries (whether contingent or
otherwise and determined on a consolidated basis) in respect of letters of
credit, bankers' acceptances, surety or other bonds and similar instruments
outstanding as of such Fiscal Quarter end (but excluding those supporting
Debt otherwise included in this definition) plus (iii) all obligations
outstanding as of such Fiscal Quarter end of the Borrower and the
Subsidiaries (determined on a consolidated basis) arising in connection
with noncompete, consulting and similar agreements which are classified as
liabilities on a balance sheet in accordance with GAAP.
Section 2.5 Amendment to Schedules. The schedules to the Credit Agreement
are amended to add Schedule 1.1 thereto to read in its entirety as set forth on
Schedule 1.1 hereto.
ARTICLE 3
Forbearance
Section 3.1 Forbearance; Obligations to Extend Credit. Subject to the terms
and provisions of this Amendment, Agent and each Bank agrees, until November 9,
1998, (i) to forbear from exercising any of their rights and remedies arising
under the Loan Documents or otherwise as a result of the Existing Defaults (the
"Forbearance") and (ii) to continue to extend credit to the Borrower and allow
Borrower to Continue Libor Accounts and Convert Base Rate Accounts to Libor
Accounts under the terms of the Credit Agreement (as amended hereby)
notwithstanding the fact that pursuant to subsections 7.2 (a) and 4.5 (c) the
Banks have no obligation to do so as a result of the Existing Defaults.
Notwithstanding the Forbearance, as a result of the Existing Defaults neither
Borrower nor any Subsidiary shall be allowed to enter into any of the
transactions permitted by the exceptions set forth in Section 10.3 or 10.4 (i)
of the Credit Agreement which are conditioned on no Default existing. However,
Borrower and the Subsidiaries shall be allowed to enter into the transactions
permitted by the exceptions set forth in Section 10.8 of the Credit Agreement
which are conditioned on no Default existing notwithstanding the Existing
Defaults.
Section 3.2 Termination of Forbearance. This Amendment does not constitute
a waiver or forbearance with respect to any Default other than the Existing
Defaults. In the event that prior to November 9, 1998 any further Defaults occur
under the Credit Agreement (i.e., other than the Existing Defaults), then the
Agent and the Banks shall have the right and option, in their discretion and
without notice to Borrower or any Obligated Party, to (i) terminate the
Forbearance, (ii) refuse to extend additional credit to the Borrower under the
Loan Documents, (iii) prohibit Borrower from Converting and Continuing Accounts
and (iv) exercise any and all of the rights and remedies under the Loan
Documents or otherwise arising as a result of such Existing Defaults (the
earlier of November 9, 1998 or the date of the termination of the Forbearance
under this Section 3.2, herein the "Forbearance Termination Date").
Section 3.3 No Waivers. Borrower and each Obligated Party (by its execution
of this Amendment below) agree that by entering into this Amendment, neither
Agent nor any Bank in any way waives, beyond the Forbearance Termination Date,
any rights and remedies it may have with respect to the Existing Defaults it
being agreed that the Forbearance is only to provide Borrower with an
opportunity to reach an agreement with the Agent and the Banks relating to the
amendment to the Credit Agreement to remedy the Existing Defaults and that the
Existing Defaults may be asserted after the Forbearance Termination Date if an
agreement relating to such amendment is not reached by such date (it being
understood and agreed that such amendment has not been and may not be reached).
After the Forbearance Termination Date, Agent and the Banks may pursue all
rights and remedies arising as a result of the Existing Defaults (including
without limitation the right to stop making additional extensions of credit
available to the Borrower under the Credit Agreement) without notice of any kind
to the Borrower or any Obligated Party.
Section 3.4 Tolling. All periods of limitations specified by statutes and
all defenses of laches or waiver as to the Existing Defaults will be tolled and
otherwise suspended during the period from the date hereof through the date
which is ninety (90) days after the Forbearance Termination Date.
ARTICLE 4
Miscellaneous
Section 4.1 Ratifications. The terms and provisions set forth in this
Amendment shall modify and supersede all inconsistent terms and provisions set
forth in the Credit Agreement and except as expressly modified and superseded by
this Amendment, the terms and provisions of the Credit Agreement and the other
Loan Documents are ratified and confirmed and shall continue in full force and
effect. Borrower, Agent and each Bank agree that the Credit Agreement, as
amended hereby, and the other Loan Documents shall continue to be legal, valid,
binding and enforceable in accordance with their respective terms.
Section 4.2 Representations and Warranties. Borrower hereby represents and
warrants to Agent and each Bank that (i) the execution, delivery and performance
of this Amendment has been authorized by all requisite action on the part of
Borrower and each Obligated Party, (ii) except for the existence of the Existing
Defaults and any matters disclosed to the Banks and the Agent in that certain
spiral bound booklet entitled "Bank Meeting, Thursday September 17, 1998," the
representations and warranties contained in the Loan Documents are true and
correct in all material respects on and as of the date hereof as though made on
and as of the date hereof (except with respect to any representations or
warranties limited by their terms to a specific date), (iii) except for the
Existing Defaults, no Default has occurred and is continuing and no event or
condition has occurred that with the giving of notice or lapse of time or both
would be a Default, (iv) except for the Existing Defaults, Borrower and each
Obligated Party are in full compliance with all covenants and agreements
contained in the Loan Documents, and (v) as of the date hereof, there are no
claims or offsets against or defenses or counterclaims to the obligations of
Borrower or any Obligated Party under the Loan Documents. TO INDUCE THE AGENT
AND THE BANKS TO ENTER INTO THIS AGREEMENT, THE BORROWER AND EACH OBLIGATED
PARTY (by its execution of this Amendment) WAIVE ANY AND ALL SUCH CLAIMS,
OFFSETS, DEFENSES, OR COUNTERCLAIMS, WHETHER KNOWN OR UNKNOWN, ARISING PRIOR TO
THE DATE HEREOF AND AGREE TO STRICTLY COMPLY WITH THE TERMS OF THE LOAN
DOCUMENTS.
Section 4.3 Survival of Representations and Warranties. All representations
and warranties made in this Amendment shall survive the execution and delivery
of this Amendment and the other Loan Documents, and no investigation by Agent or
any Bank or any closing shall affect the representations and warranties or the
right of Agent or any Bank to rely upon them.
Section 4.4 Reference to Agreements. Each of the Loan Documents, including
the Credit Agreement, are amended so that any reference in such Loan Documents
to the Credit Agreement shall mean a reference to the Credit Agreement as
amended hereby.
Section 4.5 Severability. Any provision of this Amendment held by a court
of competent jurisdiction to be invalid or unenforceable shall not impair or
invalidate the remainder of this Amendment and the effect thereof shall be
confined to the provision so held to be invalid or unenforceable.
Section 4.6 Applicable Law. This Amendment shall be governed by and
construed in accordance with the laws of the State of Texas.
Section 4.7 Successors and Assigns. This Amendment is binding upon and
shall inure to the benefit of Agent, the Banks and Borrower and their respective
successors and assigns, except Borrower may not assign or transfer any of its
rights or obligations hereunder without the prior written consent of the Banks.
Section 4.8 Counterparts. This Amendment may be executed in one or more
counterparts, each of which when so executed shall be deemed to be an original,
but all of which when taken together shall constitute one and the same
agreement.
Section 4.9 Effect of Waiver. No consent or waiver, express or implied, by
Agent or any Bank to or for any breach of or deviation from any covenant,
condition or duty by Borrower or any Obligated Party shall be deemed a consent
or waiver to or of any other breach of the same or any other covenant, condition
or duty.
Section 4.10 Headings. The headings, captions, and arrangements used in
this Amendment are for convenience only and shall not affect the interpretation
of this Amendment.
Section 4.11 ENTIRE AGREEMENT. THIS AMENDMENT EMBODIES THE FINAL, ENTIRE
AGREEMENT AMONG THE PARTIES HERETO AND SUPERSEDES ANY AND ALL PRIOR COMMITMENTS,
AGREEMENTS, REPRESENTATIONS AND UNDERSTANDINGS, WHETHER WRITTEN OR ORAL,
RELATING TO THIS AMENDMENT, AND MAY NOT BE CONTRADICTED OR VARIED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OR DISCUSSIONS OF THE
PARTIES HERETO. THERE ARE NO ORAL AGREEMENTS AMONG THE PARTIES HERETO.
Executed as of the date first written above.
Borrower:
---------
DARLING INTERNATIONAL INC.
By: /s/ Brad Phillips
Brad Phillips, Treasurer
AGENT:
------
BANKBOSTON, N.A., individually as a Bank
and as the Agent
By: /s/ Stephen Y. McGehee
Stephen Y. McGehee, Managing Director
CO-AGENTS:
----------
CREDIT LYONNAIS NEW YORK BRANCH
By:
Name:
Title:
COMERICA BANK
By:
Name:
Title:
WELLS FARGO BANK (TEXAS),
NATIONAL ASSOCIATION
By:
Name:
Title:
OTHER BANKS:
------------
<PAGE>
Each of the undersigned Obligated Parties consents and agrees to this
Amendment (including, without limitation, Sections 3.3 and 4.2) and agrees that
the Guaranty to which it is a party shall remain in full force and effect and
shall continue to be its legal, valid and binding obligation enforceable against
it in accordance with its terms.
Obligated Parties:
International Processing Corporation
International Transportation Service, Inc.
The Standard Tallow Corporation
Darling Restaurant Services Inc.
Esteem Products Inc.
By:
Brad Phillips, Treasurer of each
Obligated Party
<PAGE>
SCHEDULE 1.1
TO
DARLING INTERNATIONAL
FOURTH AMENDMENT TO CREDIT AGREEMENT
Bank
Revolver
Commitment
FIRST MODIFICATION TO
FOURTH AMENDMENT TO CREDIT AGREEMENT
THIS FIRST MODIFICATION TO FOURTH AMENDMENT TO CREDIT AGREEMENT
("Modification"), dated as of November 2, 1998, is among DARLING INTERNATIONAL
INC. ("Borrower"), the banks or other lending institutions which are a signatory
hereto (individually, a "Bank" and, collectively, the "Banks"), COMERICA BANK,
CREDIT LYONNAIS NEW YORK BRANCH and WELLS FARGO BANK (TEXAS), NATIONAL
ASSOCIATION, each individually as a Bank and as a co-agent and BANKBOSTON, N.A.,
individually as a Bank and as agent for itself and the other Banks (in its
capacity as agent, together with its successors in such capacity, the "Agent").
RECITALS:
Borrower, the Banks and the Agent have entered into that certain Credit
Agreement dated as of June 5, 1997 (as amended by that certain First Amendment
to Pledge Agreement and Credit Agreement dated November 10, 1997 between the
Borrower and the Agent, that certain Second Amendment to Pledge Agreement and
Credit Agreement dated March 6, 1998 among the Borrower, the Banks and the
Agent, that certain Third Amendment to Credit Agreement dated June 30, 1998
among the Borrower, the Banks and the Agent, that certain Fourth Amendment to
Credit Agreement dated as of October 2, 1998 among the Borrower, the Banks and
the Agent (the "Fourth Amendment") and as the same may hereafter be amended or
otherwise modified, the "Credit Agreement").
As set forth in the Fourth Amendment, the Agent has advised Borrower of the
Net Worth Default (as defined in the Fourth Amendment) and Borrower has notified
the Agent and the Banks of the Potential Defaults (as defined in the Fourth
Amendment).
Pursuant to the Fourth Amendment, the Agent and the Banks agreed to the
Forbearance (as defined in the Fourth Amendment), until November 9, 1998.
Borrower has requested that the Agent and the Banks extend the Forbearance
Termination Date (as defined in the Fourth Amendment) from November 9, 1998 to
December 14, 1998 in order to allow Borrower, the Banks and the Agent additional
time possibly to agree to an amendment to the Credit Agreement satisfactory to
all parties to address the Existing Defaults (as defined in the Fourth
Amendment).
The Agent and the Banks are willing to extend the Forbearance Termination
Date on the terms and subject to the conditions set forth herein.
NOW, THEREFORE, in consideration of the premises herein contained and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows effective as of the date
hereof and conditioned upon the execution of this Modification by Borrower, each
Obligated Party and all the Banks on or prior to November 2, 1998:
ARTICLE 1
Definitions
Section 1.1 Definitions. Capitalized terms used in this Modification, to
the extent not otherwise defined herein, shall have the same meanings as in the
Fourth Amendment or the Credit Agreement.
ARTICLE 2
Modifications
Section 2.1 Modification to Section 3.1 of the Fourth Amendment. Effective
as of the date hereof, Section 3.1 of the Fourth Amendment is hereby amended in
its entirety to read as follows:
Section 3.1 Forbearance; Obligations to Extend Credit. Subject to the
terms and provisions of this Amendment, Agent and each Bank agrees, until
December 14, 1998, (i) to forbear from exercising any of their rights and
remedies arising under the Loan Documents or otherwise as a result of the
Existing Defaults (the "Forbearance") and (ii) to continue to extend credit
to Borrower and allow Borrower to Continue Libor Accounts and Convert Base
Rate Accounts to Libor Accounts under the terms of the Credit Agreement (as
amended hereby) notwithstanding the fact that pursuant to subsections
7.2(a) and 4.5(c) the Banks have no obligation to do so as a result of the
Existing Defaults. Notwithstanding the Forbearance, as a result of the
Existing Defaults neither Borrower nor any Subsidiary shall be allowed to
enter into any of the transactions permitted by the exceptions set forth in
Sections 10.3 or 10.4(i) of the Credit Agreement which are conditioned on
no Default existing. However, Borrower and the Subsidiaries shall be
allowed to enter into the transactions permitted by the exceptions set
forth in Section 10.8 of the Credit Agreement which are conditioned on no
Default existing notwithstanding the Existing Defaults until December 14,
1998.
Section 2.2 Modification to Section 3.2 of the Fourth Amendment. Effective
as of the date hereof, Section 3.2 of the Fourth Amendment is hereby amended in
its entirety to read as follows:
Section 3.2 Termination of Forbearance. This Amendment does not
constitute a waiver or forbearance with respect to any Default other than
the Existing Defaults. In the event that prior to December 14, 1998 any
further Defaults occur under the Credit Agreement (i.e., other than the
Existing Defaults), then the Agent and the Banks shall have the right and
option, in their discretion and without notice to Borrower or any Obligated
Party, to (i) terminate the Forbearance, (ii) refuse to extend additional
credit to Borrower under the Loan Documents, (iii) prohibit Borrower from
Converting and Continuing Accounts and (iv) exercise any and all of the
rights and remedies under the Loan Documents or otherwise arising as a
result of such Existing Defaults (the earlier of December 14, 1998 or the
date of the termination of the Forbearance under this Section 3.2, herein
the "Forbearance Termination Date").
ARTICLE 3
Asset Dispositions
Section 3.1 Disposition of Russellville, Arkansas Property. Pursuant to
that certain spiral bound booklet entitled "Bank Meeting, Thursday September 17,
1998," prepared by the Borrower and distributed to the Banks, the Borrower
provided the Banks notice that the Borrower anticipated selling its property
located in Russellville, Arkansas (the "Arkansas Property") by September 30,
1998. The anticipated closing date of the sale of the Arkansas Property is now
anticipated to be sometime during the first week of November 1998. Borrower has
requested that the Required Banks consent to the Borrower's departure from
clause (e) (ii) of Section 10.8 of the Credit Agreement (the "Applicable
Covenant") in order to permit the sale of the Arkansas Property because the
Applicable Covenant requires that the Borrower provide certifications
demonstrating compliance with subclauses (iii) and (iv) of clause (e) not less
than ten (10) Business Days prior to the date of the proposed disposition. As of
the date hereof, the disposition of the Arkansas Property is anticipated to
occur prior to the expiration of ten (10) Business Days and the Borrower has not
provided the certifications required by the Applicable Covenant.
Section 3.2 Consent to Disposition of Russellville, Arkansas Property.
Subject to the other terms of this Modification (including, without limitation,
Section 3.3 hereof), each of the undersigned Banks consent to Borrower's
departure from the Applicable Covenant as specifically described above for
purposes of permitting the sale of the Arkansas Property prior to the expiration
of the ten (10) Business Day period required by the Applicable Covenant and
agree that such departure will not result in a Default.
Section 3.3 No Waiver: Application of Proceeds. To induce the Banks to
agree to the terms of Section 3.2 of this Modification, Borrower:
(a) Agrees that the consent set forth in Section 3.2 shall not be
deemed a consent to the departure from or waiver of (i) the Applicable
Covenant for any purpose other than to permit the sale of the Arkansas
Property or (ii) any other covenant or condition in any Loan Document or
(iii) any Default that otherwise may arise as a result of the sale of the
Arkansas Property. The failure to comply with the Applicable Covenant for
any other disposition of assets limited thereby shall constitute an Event
of Default;
(b) Agrees that the Net Proceeds of the sale of the Arkansas Property
and the Net Proceeds of the sale of any other property sold under the
permissions of clauses (d) and (e) of Section 10.8 of the Credit Agreement
shall be applied within two (2) Business Days of the receipt thereof as a
prepayment on the Loans, to be applied first to the installments due under
the Term Loan in the inverse order of maturity and in accordance with
Section 5.4 of the Credit Agreement and after the Term Loan is paid in
full, to the Revolving Loans with a permanent reduction of the Revolving
Commitments in the aggregate amount of each such prepayment made on the
Revolving Loans (the term "Net Proceeds" means the cash proceeds received
by Borrower or any Subsidiary from any disposition of assets (including
payments under notes or other debt securities received in connection with
any disposition of assets) net of (i) the costs of such disposition
(including taxes, brokerage fees, attorneys' fees and other professional
fees attributable thereto) and (ii) amounts applied to repayment of Debt
(other than the Obligations) secured by a lien, security interest, claim or
encumbrance on the asset or property disposed); and
(c) Certifies in accordance with Section 10.8 (e) (ii) of the Credit
Agreement as follows:
(i) the sales price for the Arkansas Property (as determined in
accordance with the applicable sale agreement) does not exceed Seven
Million Five Hundred Thousand Dollars ($7,500,000); and
(ii) the aggregate sales prices for all the assets sold (as
determined in accordance with the applicable sale agreements) in the
current Loan Year under the permissions of clause (e) of Section 10.8
of the Credit Agreement does not exceed the Annual Cap for this Loan
Year.
The Banks agree that the Net Proceeds from the sale of the Arkansas Property or
any other property sold under the permissions of clauses (d) and (e) of Section
10.8 of the Credit Agreement (as applied to installments due under the Term Loan
in the inverse order of maturity) will be credited against any mandatory
prepayment of the Term Loan which may be required in any amendment to the Credit
Agreement in the order in which such mandatory prepayments are established to be
due. The Borrower acknowledges that the Banks have not agreed to, and have no
obligation to agree to, any such amendment to the Credit Agreement.
ARTICLE 4
Miscellaneous
Section 4.1 Ratifications. The terms and provisions set forth in this
Modification shall modify and supersede all inconsistent terms and provisions
set forth in the Fourth Amendment and except as expressly modified and
superseded by this Modification, the terms and provisions of the Fourth
Amendment, the Credit Agreement and the other Loan Documents are ratified and
confirmed and shall continue in full force and effect. Borrower, the Agent and
each Bank agree that the Fourth Amendment, the Credit Agreement and the other
Loan Documents shall continue to be legal, valid, binding and enforceable in
accordance with their respective terms.
Section 4.2 Representations and Warranties. Borrower hereby represents and
warrants to the Agent and each Bank that (i) the execution, delivery and
performance of this Modification has been authorized by all requisite action on
the part of Borrower and each Obligated Party, (ii) except for the existence of
the Existing Defaults and any matters disclosed to the Banks and the Agent in
that certain spiral bound booklet entitled "Bank Meeting, Thursday September 17,
1998," the representations and warranties contained in the Loan Documents are
true and correct in all material respects on and as of the date hereof as though
made on and as of the date hereof (except with respect to any representations or
warranties limited by their terms to a specific date), (iii) except for the
Existing Defaults, no Default has occurred and is continuing and no event or
condition has occurred that with the giving of notice or lapse of time or both
would be a Default, (iv) except for the Existing Defaults, Borrower and each
Obligated Party are in full compliance with all covenants and agreements
contained in the Loan Documents, and (v) as of the date hereof, there are no
claims or offsets against or defenses or counterclaims to the obligations of
Borrower or any Obligated Party under the Loan Documents. TO INDUCE THE AGENT
AND THE BANKS TO ENTER INTO THIS MODIFICATION, THE BORROWER AND EACH OBLIGATED
PARTY (by its execution of this Modification) WAIVE ANY AND ALL SUCH CLAIMS,
OFFSETS, DEFENSES, OR COUNTERCLAIMS, WHETHER KNOWN OR UNKNOWN, ARISING PRIOR TO
THE DATE HEREOF AND AGREE TO STRICTLY COMPLY WITH THE TERMS OF THE LOAN
DOCUMENTS.
Section 4.3 Survival of Representations and Warranties. All representations
and warranties made in this Modification shall survive the execution and
delivery of this Modification and the other Loan Documents, and no investigation
by the Agent or any Bank or any closing shall affect the representations and
warranties or the right of the Agent or any Bank to rely upon them.
Section 4.4 Severability. Any provision of this Modification held by a
court of competent jurisdiction to be invalid or unenforceable shall not impair
or invalidate the remainder of this Modification and the effect thereof shall be
confined to the provision so held to be invalid or unenforceable.
Section 4.5 Applicable Law. This Modification shall be governed by and
construed in accordance with the laws of the State of Texas.
Section 4.6 Successors and Assigns. This Modification is binding upon and
shall inure to the benefit of the Agent, the Banks and Borrower and their
respective successors and assigns, except Borrower may not assign or transfer
any of its rights or obligations hereunder without the prior written consent of
the Banks.
Section 4.7 Counterparts. This Modification may be executed in one or more
counterparts, each of which when so executed shall be deemed to be an original,
but all of which when taken together shall constitute one and the same
agreement.
Section 4.8 Effect of Waiver. No consent or waiver, express or implied, by
the Agent or any Bank to or for any breach of or deviation from any covenant,
condition or duty by Borrower or any Obligated Party shall be deemed a consent
or waiver to or of any other breach of the same or any other covenant, condition
or duty.
Section 4.9 Headings. The headings, captions, and arrangements used in this
Modification are for convenience only and shall not affect the interpretation of
this Modification.
Section 4.10 ENTIRE AGREEMENT. THIS MODIFICATION EMBODIES THE FINAL, ENTIRE
AGREEMENT AMONG THE PARTIES HERETO AND SUPERSEDES ANY AND ALL PRIOR COMMITMENTS,
AGREEMENTS, REPRESENTATIONS AND UNDERSTANDINGS, WHETHER WRITTEN OR ORAL,
RELATING TO THIS MODIFICATION, AND MAY NOT BE CONTRADICTED OR VARIED BY EVIDENCE
OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OR DISCUSSIONS OF THE
PARTIES HERETO. THERE ARE NO ORAL AGREEMENTS AMONG THE PARTIES HERETO.
Executed as of the date first written above.
Borrower:
DARLING INTERNATIONAL INC.
By:
Brad Phillips, Treasurer
AGENT:
BANKBOSTON, N.A., individually as a Bank and as the
Agent
By:
Stephen Y. McGehee, Managing Director
CO-AGENTS:
CREDIT LYONNAIS NEW YORK BRANCH
By:
Name:
Title:
COMERICA BANK
By:
Name:
Title:
WELLS FARGO BANK (TEXAS),
NATIONAL ASSOCIATION
By:
Name:
Title:
OTHER BANKS:
<PAGE>
Each of the undersigned Obligated Parties consents and agrees to this
Modification (including, without limitation, Section 4.2) and agrees that the
Guaranty to which it is a party shall remain in full force and effect and shall
continue to be its legal, valid and binding obligation enforceable against it in
accordance with its terms.
Obligated Parties:
International Processing Corporation
International Transportation Service, Inc.
The Standard Tallow Corporation
Darling Restaurant Services Inc.
Esteem Products Inc.
By:
Brad Phillips, Treasurer of each
Obligated Party
ARTICLE 5
