ITEM 1. BUSINESS
GENERAL
Founded by the Swift meat packing interests and the Darling family in 1882, Darling International Inc. ("Darling" or the "Company") was incorporated in Delaware in 1962 under the name "Darling-Delaware Company, Inc." On December 28, 1993, the Company changed its name from "Darling-Delaware Company, Inc." to "Darling International Inc." The address of the Company's principle executive office is 251 O'Connor Ridge Boulevard, Suite 300, Irving, Texas, 75038, and its telephone number at such address is (972)717-0300.
The Company is a recycler of food processing by-products and believes that it is the largest independent processor in the United States in terms of raw material processed annually.
The Company collects and recycles animal processing by-products, used restaurant cooking oil and bakerage by-products from restaurants, butcher shops, grocery stores, bakeries, and independent meat and poultry processors nationwide. The Company processes such raw materials at 47 facilities located throughout the United States into finished products such as tallow, meat and bone meal, yellow grease, and dried bakery product. The Company sells these products nationally and internationally, primarily to producers of various industrial and commercial oleo-chemicals, soaps, pet foods and livestock feed, for use as ingredients in their products or for further processing into basic chemical compounds.
PROCESSING OPERATIONS
The Company creates finished products primarily through the drying, grinding, separating and blending of its various raw materials. The process starts with the collection of animal processing by-products (fat, bones, feathers and offal), used restaurant cooking oil, and bakery by-products from meat packers, grocery stores, butcher shops, meat markets, poultry processors, restaurants and bakeries.
The animal processing by-products are ground and heated to extract water and separate oils from animal tissue as well as to sterilize and make the material suitable as an ingredient for animal feed. Meat and bone meal is separated from the cooked material by pressing the material, then grinding and sifting it through screens. The separated tallow is centrifuged and/or refined for purity. The primary finished products derived from the processing of animal by-products are tallow and meat and bone meal. Other by-products include poultry meal, feather meal and blood meal. Used restaurant cooking oil is processed under a separate procedure that involves heating, settling and sterilizing, as well as refining, resulting in derived yellow grease, feed-grade animal fat, or oleo-chemical feedstocks. Bakery by-products are ground, heated to extract moisture, and blended to produce a high-calorie animal feed ingredient.
PURCHASE AND COLLECTION OF RAW MATERIALS
The Company operates a fleet of approximately 1,200 trucks and tractor-trailers to collect raw materials from more than 80,000 restaurants, butcher shops, grocery stores, bakeries, and independent meat and poultry processors. The Company replaces or upgrades its vehicle fleet to maintain efficient operations.
Raw materials are collected in one of two manners. Certain large suppliers, such as large meat processors, poultry processors, and bakeries are furnished with bulk trailers in which the raw material is loaded. The Company transports these trailers directly to a processing facility. The Company provides the remaining suppliers, primarily grocery stores, butcher shops, and smaller bakeries and confectioners, with containers in which to deposit the raw material. The containers are picked up by or emptied into Company trucks on a periodic basis. The type and frequency of service is determined by individual supplier requirements, the volume of raw material generated by the supplier, supplier location, and weather, among other factors.
Used restaurant cooking oil is placed in various sizes and types of containers which are supplied by the Company. In some instances, these containers are loaded directly onto the trucks, while in other instances the oil is pumped through a vacuum hose into the truck. The Company also provides an alternative collection service to restaurants, CleanStar 2000TM, a newly-patented, self-contained collection system that is housed inside the restaurant, with the used cooking oil pumped directly into collection vehicles via an outside valve. The frequency of all forms of collection service is determined by the volume of oil generated by the restaurant.
The raw materials collected by the Company are transported either directly to a processing plant or to a transfer station, where materials from several collection routes are loaded into trailers and transported to a processing plant. Collections of animal processing by-products generally are made during the day, and materials are delivered to plants for processing within 24 hours of collection to eliminate spoilage. Collection of used restaurant cooking oil and bakery by-products can be made at any time of the day or night, depending on supplier preference; these materials may be held for longer periods of time before processing.
During the past year, the Company's largest single supplier accounted for less than 5% of the total raw material processed by the Company, and the 10 largest raw materials suppliers accounted for approximately 27% of the total raw material processed by the Company. For a discussion of the Company's competition for raw materials, see "Competition."
RAW MATERIALS PRICING
The Company has two primary pricing arrangements with its raw materials suppliers. More than half of the Company's annual volume of raw materials is acquired on a "formula" basis. Under a formula arrangement, the charge or credit for raw materials is tied to published finished product commodity prices after deducting a fixed service charge. The service charge is designed to enable the Company to cover all of its collection and processing costs and realize a profit. The Company acquires the remaining annual volume of raw material under "non-formula" arrangements whereby suppliers either are paid a fixed price, are not paid, or are charged for the collection service, depending on various economic factors.
The credit received or amount charged for raw material under both formula and non-formula arrangements is based on various factors, including the type of raw materials, the expected value of the finished product to be produced, the anticipated yields, the volume of material generated by the supplier, and processing and transportation costs. Competition among processors to procure raw materials also affects the price paid for raw materials. See "Competition."
Formula prices are generally adjusted on a weekly or monthly basis while non-formula prices or charges are adjusted as needed to respond to significant changes in finished product prices.
FINISHED PRODUCTS
The finished products that result from the processing of animal by-products are oils (primarily tallow and yellow grease) and proteins (primarily meat and bone meal). Raw material received from bakeries are processed into dried bakery product. Oils are used as ingredients in the production of pet food, animal feed and soaps. Oleo-chemical producers use these oils as feedstocks to produce specialty ingredients used in paint, rubber, paper, concrete, plastics and a variety of other consumer and industrial products. Meals are used primarily as high protein additives in pet food and animal feed. Dried bakery product is used primarily as an additive in animal feed.
Predominantly all of the Company's finished products are commodities which are quoted on established commodity markets or are priced relative to such commodities. While the Company's finished products are generally sold at prices prevailing at the time of sale, the Company's ability to deliver large quantities of finished products from multiple locations and to coordinate sales from a central location enables the Company to occasionally receive a premium over the then-prevailing market price.
MARKETING, SALES AND DISTRIBUTION OF FINISHED PRODUCTS
The Company markets its finished products worldwide. Marketing activities are primarily conducted through the Company's marketing department which is headquartered in Irving, Texas. The Company also maintains sales offices in Los Angeles, California, Atlanta, Georgia, and Newark, New Jersey for sales and distribution of selected products. This sales force is in contact with several hundred customers daily and coordinates the sale and assists in the distribution of most finished products produced at the Company's processing plants. The Company sells its finished products internationally through commodities brokers and through Company agents in various countries.
The Company sells to numerous foreign markets, including the European Economic Community, Asia, the Pacific Rim, North Africa, Mexico and South America. The level of export sales is typically 20-40% of the total Company sales and may vary from year to year depending on the relative strength of domestic versus overseas markets. The Company obtains payment protection for most of its foreign sales by requiring payment before shipment or by requiring bank letters of credit or guarantees of payment from U.S. government agencies. The Company ordinarily is paid for its products in U.S. dollars and has not experienced any material currency translation losses or any material foreign exchange control difficulties.
The Company has not experienced any material restrictions on the export of its products, although certain countries, including India, the European Economic Community, and certain Middle East countries restrict the import of particular products. See Note 14 of Notes to Consolidated Financial Statements for information regarding the Company's export sales.
Finished products produced by Darling are distributed primarily by truck and rail from the Company's plants shortly following production. While there are some temporary inventory accumulations at various port locations for export shipments, inventories rarely exceed three weeks' production and, therefore, the Company uses limited working capital to carry inventories and reduces its exposure to fluctuations in commodity prices.
COMPETITION
Management of the Company believes that the most competitive aspect of the business is the procurement of raw materials rather than the sale of finished products. During the last ten years, pronounced consolidation within the meat packing industry has resulted in bigger and more efficient slaughtering operations, the majority of which utilize "captive" processors. Simultaneously, the number of small meat packers, which have historically been a dependable source of supply for non-captive processors, has decreased significantly. Although the total amount of slaughtering may be flat or only moderately increasing, the availability, quantity and quality of raw materials available to the independent processors from these sources have all decreased. These factors have been offset, in part, however, by increasing environmental consciousness. The need for restaurants to comply with environmental regulations concerning the proper disposal of used restaurant cooking oil is offering a growth area for this raw material source.
In marketing its finished products, the Company faces competition from other processors and from producers of other suitable commodities. Tallows and greases are in certain instances substitutes for soybean oil and palm stearine, while meat and bone meal is a substitute for soybean meal. Dried bakery product is a substitute for corn in animal feed. Consequently, the prices of tallow, yellow grease, meat and bone meal, and dried bakery product correlate to some degree with these commodities. The markets for finished products are impacted mainly by the worldwide supply of fats, oils, proteins and grains. Among other factors that influence the prices that the Company receives for its finished products include the worldwide supply of oils and proteins, the quality of the Company's finished products, consumer health consciousness, and worldwide credit conditions and U.S. government foreign aid. From time to time, the Company enters into arrangements with its suppliers of raw materials pursuant to which such suppliers buy back the Company's finished products.
SEASONALITY
The amount of raw materials made available to the Company by its suppliers is relatively stable on a weekly basis except for those weeks including a major holiday during which availability of raw materials declines because major meat and poultry processors are not operating. Weather is also a factor. Extremely warm weather adversely affects the ability of the Company to make higher quality products because the raw material deteriorates more rapidly than in cooler weather, while extremely cold weather, in certain instances, can hinder the collection of raw materials.
EMPLOYEES AND LABOR RELATIONS
As of December 28, 1996, the Company employed approximately 1,900 persons full-time. Approximately 41% of the total number of employees are covered by collective bargaining agreements; however, the Company has no national or multi-plant union contracts. Management believes that the Company's relations with its employees and their representatives are good. There can be no assurance, however, that new agreements will be reached without union action or will be on terms satisfactory to the Company.
REGULATIONS
The Company is subject to the rules and regulations of various federal, state and local governmental agencies. These include, but are not limited to, the FDA, USDA, EPA, local and state agencies governing air and water discharge, and various others. Such rules and regulations may influence the Company's operating results at one or more facilities.
On January 3, 1997, the FDA issued a proposed ruling to prohibit the feeding of ruminant derived proteins to ruminant animals as a measure to prevent the potential occurrence of BSE (Bovine Spongiform Encephalopathy) in the United States. The public hearing period on the proposed rule expired on February 18, 1997. The FDA is currently preparing the final rule for publication. It is not clear as to what effect, if any, this proposed rule will have on the operations of the Company.
SETTLEMENT
On December 29, 1993, the Company consummated the settlement (the "Settlement") of a class action lawsuit (the "Class Action") filed against the Company on August 15, 1991, in connection with, among other things, the Company's issuance and subsequent default in payment of interest due under approximately $175.0 million of 14% Senior Subordinated Notes due March 15, 1999 (the "Original Notes") and breach of the indenture governing the Original Notes (the "Original Notes Indenture"). As part of the Settlement and the attendant restructuring (the "Restructuring") of the Company's capitalization, Original Noteholders received, upon surrender of their Original Notes, 4,749,484 shares of Common Stock (the "Noteholders' Common Stock"), $70.0 million aggregate principal amount of First Priority Senior Subordinated Notes due July 15, 2000 (the "Subordinated Notes") and approximately $5.0 million in cash. In addition, pursuant to the Settlement, the Company issued 249,975 shares of Class A Common Stock, options to purchase 128,205 shares of Class A Common Stock and options to purchase 494,500 shares of Common Stock.
ITEM 2.
ITEM 2. PROPERTIES
The Company's 47 operating facilities consist of 27 full service rendering plants, eleven bakery recycling plants, four yellow grease plants, two blending plants, two research and technology plants, and one edible plant. Except for nine leased facilities, all of these facilities are owned by the Company. The following is a listing of the Company's operating facilities:
Location Description Location Description -------- ----------- -------- ----------- Alton, IA ............Rendering Linkwood, MD.............Rendering Billings, MT..........Rendering Los Angeles, CA..........Rendering Blue Earth, MN .......Rendering Milwaukee, WI............Rendering Boise, ID.............Rendering Mt. Pleasant, TX (IPC)...Bakerage Calhoun, GA (IPC).....Bakerage Newark, NJ...............Rendering Carteret, NJ (IPC)....Bakerage Norfolk, NE..............Rendering Chicago, IL (IPC).....Bakerage Norfolk, NE .............R&T Cincinnati, OH (IPC)..Bakerage Omaha, NE................Rendering Cleveland, OH ........Rendering Omaha, NE ...............Blending Coldwater, MI.........Rendering Omaha, NE................Edible Collinsville, OK......Rendering Russellville, AR.........Rendering Conley, GA (IPC) .....Bakerage San Angelo, TX...........Rendering Dallas, TX............Rendering San Antonio, TX (IPC)....Bakerage Detroit, MI...........Rendering San Francisco, CA........Rendering Durham, NC (IPC)......Bakerage Sioux City, IA...........Rendering Fort Lauderdale, FL...Yellow Grease St. Louis, MO............Rendering Fresno, CA............Rendering Tacoma, WA...............Rendering Henderson, NV.........Yellow Grease Tampa, FL................Yellow Grease Houston, TX...........Rendering Terre Haute, IN (IPC)....Bakerage Houston, TX ..........Yellow Grease Turlock, CA..............Rendering Kansas City, KS.......Rendering Wahoo, NE................Rendering Kansas City, KS (IPC).Bakerage Wahoo, NE ...............R&T Kearny, NJ ...........Blending West Point, NE...........Rendering Lake City, GA (IPC)...Bakerage
In addition, the Company owns or leases 20 transfer stations in the United States and one transfer station in Canada that serve as collection points for routing raw material to the processing plants set forth above.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
(a) ENVIRONMENTAL
BLUE EARTH
The U. S. Attorney for the District of Minnesota and the State of Minnesota since 1992 have been conducting an investigation of alleged state and federal wastewater violations at the Company's Blue Earth, Minnesota plant. The Company has fully cooperated with the government in its investigation and continues to do so. The Company and the U.S. Attorney have reached a settlement providing for payment of a total of $4,000,000. This settlement payment is intended to resolve all federal and state civil, criminal and administrative claims, through payment of civil and criminal fines and penalties, as well as funding the restitution, remediation and community service required as part of the criminal settlement. The settlement is subject to court approval, and is subject to the resolution of pending negotiations with the U.S. Environmental Protection Agency of the terms of a Consent Decree. The Company recorded a provision for loss contingency of $6,100,000 during Fiscal 1996 to cover the expected cost of the settlement as well as legal, environmental and other related costs.
CHULA VISTA
The Company is the owner of an undeveloped property located in Chula Vista, California (the "Site"). A rendering plant was operated on the Site until 1982. From 1959 to 1978, a portion of the Site was used as an industrial waste disposal facility which was closed pursuant to Closure Order No. 80-06 issued by the State of California Regional Water Quality Control Board for the San Diego Region (the "RWQCB"). The Site has been listed by the State of California as a site for which expenditures for removal and remedial actions may be made by the State pursuant to the California Hazardous Substances Account Act, California Health & Safety Code Section 25300 et seq. Technical consultants retained by the Company have conducted various investigations of the environmental conditions at the Site, and in 1996, requested that the RWQCB issue a "no further action" letter with respect to the Site. The RWQCB has not yet taken any formal action in response to such request.
UNDERGROUND STORAGE TANKS
The Company's processing operations do not produce hazardous or toxic wastes; however, the Company does operate underground fuel storage tanks ("USTs") that are subject to federal, state and local laws and regulations. As of December 28 1996, the Company has removed or closed 165 of its 177 UST's. The Company plans to remove an additional number of UST's in 1997.
(b) LITIGATION
PETRUZZI
An antitrust class action suit was filed in 1986 by Petruzzi IGA Supermarkets in the United States District Court for the Middle District of Pennsylvania (the "Class Action Suit") seeking damages from the Company. On September 14, 1995, the Company entered into a settlement agreement providing for the disposal of all claims in the Class Action Suit. The settlement agreement was approved by the District Court on December 20, 1995. The District Court has yet to rule on the petitions for attorneys' fees.
OTHER LITIGATION
The Company is also a party to several other lawsuits, claims and loss contingencies incidental to its business.
Although the ultimate liability cannot be determined with certainty, the Company has estimated its probable liability and established a reserve with respect to these contingencies. The Company believes that any additional liability relative to such lawsuits and claims which may not be covered by insurance would not likely have a material adverse effect on the Company's financial position, although it could potentially have a material impact on the results of operations in any one year.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fiscal quarter ended December 28, 1996.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock became eligible for trading on the Nasdaq National Market under the symbol "DARL" on September 8, 1994. Prior to that date, there was no established public trading market for these shares. The following table sets forth, for the quarters indicated, the high and low sales prices per share for the common stock as reported on the Nasdaq National Market.
Fiscal Quarter Market Price High Low ---------------- ----------------- 1996: First Quarter $30.625 $26.625 Second Quarter $29.000 $21.750 Third Quarter $28.250 $24.750 Fourth Quarter $31.875 $27.250
1995: First Quarter $14.125 $13.000 Second Quarter $23.375 $13.750 Third Quarter $30.000 $22.250 Fourth Quarter $29.000 $21.750
As of March 24, 1997, there were 67 holders of record of the common stock.
The Company has not declared or paid any dividend on the common stock since January 3, 1989. The Company's senior debt agreements restrict the Company's ability to pay dividends. The Company does not currently anticipate paying cash dividends on the common stock in the foreseeable future, but intends instead to retain future earnings for reinvestment in its business or reduction of its indebtedness.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table presents selected consolidated historical financial data for the periods indicated. The Company accounted for the resolution of a class action lawsuit (the "Settlement") in accordance with fresh start reporting ("Fresh Start Reporting"), as set forth in Statement of Position 90-7. See Note 3 of Notes to Consolidated Financial Statements. As a result, the Company's Consolidated Balance Sheets at December 28, 1996, December 30, 1995, December 31, 1994 and January 1, 1994 and the Consolidated Statement of Operations for the years ended December 28, 1996, December 30, 1995 and December 31, 1994 are presented on a different basis than that for periods before Fresh Start Reporting, and, therefore, are not comparable. The selected historical consolidated financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements of the Company for the three years ended December 28, 1996, December 30, 1995, and December 31, 1994 and the related notes thereto.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the Company's financial condition and results of operations should be read in conjunction with the historical consolidated financial statements and notes thereto included in Item 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Pages Independent Auditors' Report 17 Consolidated Balance Sheets- December 28, 1996 and December 30, 1995 18 Consolidated Statements of Operations - Three years ended December 28, 1996 19 Consolidated Statements of Stockholders' Equity - Three years ended December 28, 1996 20 Consolidated Statements of Cash Flows - Three years ended December 28, 1996 21 Notes to Consolidated Financial Statements - December 28, 1996 and December 30, 1995 22
Financial Statement Schedule: II - Valuation and Qualifying Accounts 37
All other schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and notes thereto.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders Darling International Inc.:
We have audited the consolidated financial statements of Darling International Inc. and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Darling International Inc. and subsidiaries as of December 28, 1996 and December 30, 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 28, 1996, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
Dallas, Texas February 7, 1997
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Balance Sheets December 28, 1996 and December 30, 1995 (in thousands, except share and per share data)
December 28, December 30, 1996 1995 ASSETS (note 8)
Current assets: Cash and cash equivalents $ 12,956 $ 11,649 Accounts receivable, principally trade, less allowance of $302 and $147 35,966 30,230 Inventories (note 4) 12,643 11,584 Prepaid expenses 1,493 2,963 Deferred income tax assets (note 11) 6,184 4,281 Other 484 3,394 ------- ------- Total current assets 69,726 64,101
Property, plant and equipment, net (note 5) 175,786 155,065 Collection routes and contracts, less accumulated amortization of $3,222 and 7,854 59,940 42,893 Goodwill, less accumulated amortization of $293 at December 28, 1996 (note 2) 19,905 - Other assets (note 6) 4,288 4,003 ------- ------- $329,645 $266,062 ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities: Current portion of long-term debt (note 9) $ 15,598 $ 9,060 Accounts payable, principally trade 27,732 17,378 Accrued expenses (note 7) 30,118 20,831 Accrued interest (note 9) 4,293 3,896 ------- ------- Total current liabilities 77,741 51,165
Long-term debt, less current portion (note 9) 138,173 117,096 Other noncurrent liabilities (note 10) 20,376 15,233 Deferred income taxes (note 11) 29,322 27,735 ------- ------- Total liabilities 265,612 211,229 ------- -------
Stockholders' equity (notes 3, 9, 11 and 12): Common stock, $.01 par value; 10,000,000 shares authorized, 5,151,979 and 5,085,510 shares issued and outstanding 52 51 Additional paid-in capital 34,570 33,045 Retained earnings 29,411 21,737 ------- ------- Total stockholders' equity 64,033 54,833 ------- ------- Commitments and contingencies (notes 8 and 15) $329,645 $266,062 ======= =======
The accompanying notes are an integral part of these consolidated financial statements.
DARLING INTERNATIONAL INC.
Notes to the Consolidated Financial Statements December 28, 1996 and December 30, 1995
(1) GENERAL
(a) NATURE OF OPERATIONS
Darling International Inc. (the "Company") believes it is the largest independent recycler of food processing by-products in the United States, operating a fleet of vehicles, through which it collects animal by-products, used restaurant cooking oil and bakery by- products from butcher shops, grocery stores, independent meat and poultry processors, restaurants and bakeries nationwide. The Company processes raw materials through facilities located throughout the United States into finished products, such as tallow, meat and bone meal, yellow grease and dried bakery product. The Company sells its finished products domestically and internationally to producers of soap, cosmetics, rubber, pet food and livestock feed for use as ingredients in such products.
(b) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(1) Basis of Presentation
The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
(2) Fiscal Year
The Company has a 52/53 week fiscal year ending on the Saturday nearest December 31. Fiscal years for the consolidated financial statements included herein are for the 52 weeks ended December 28, 1996, the 52 weeks ended December 30, 1995, and the 52 weeks ended December 31, 1994.
(3) Inventories
Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method.
(4) Property, Plant and Equipment
Historically, property, plant and equipment are recorded at cost. Depreciation is computed by the straight-line method over the estimated useful lives of assets, which range from three to 30 years. In accordance with Fresh Start Reporting (see Note 3), property, plant and equipment were restated to their approximate fair value. Subsequent additions are recorded at cost.
Maintenance and repairs are charged to expense as incurred and expenditures for major renewals and improvements are capitalized.
(5) Collection Routes and Contracts
Collection routes, restrictive covenants and consulting agreements are recorded at cost and are amortized using the straight-line method over periods ranging from three to 15 years.
(6) Goodwill
Goodwill, which represents the excess of purchase price over fair value of net assets acquired, is amortized on a straight-line basis over the expected periods to be benefited, not exceeding 30 years. Annually, the Company makes an assesment to determine the recoverability of this intangible asset.
(7) Environmental Expenditures
Environmental expenditures incurred to mitigate or prevent environmental contamination that has yet to occur and that otherwise may result from future operations are capitalized. Expenditures that relate to an existing condition caused by past operations and that do not contribute to current or future revenues are expensed or charged against established environmental reserves. Reserves are established when environmental assessments and/or clean-up requirements are probable and the costs are reasonably estimable.
(8) Income Taxes
The Company accounts for income taxes using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
(9) Income Per Common Share
Net earnings per common share are computed by dividing net earnings attributable to outstanding common stock by the weighted average number of common stock shares outstanding during the year increased by dilutive common equivalent shares (stock options) determined using the treasury stock method. Primary weighted average equivalent shares are determined based on the average market price exceeding the exercise price of the stock options. Fully diluted weighted average equivalent shares are determined based on the higher of the average or ending market price exceeding the exercise price of the stock options. Stock options are excluded from the computations for the year ended December 31, 1994 because the effect is antidilutive or immaterial.
(10) Stock Option Plans
Prior to January 1, 1996, the Company accounted for its stock option plan in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On January 1, 1996, the Financial Accounting Standards Board issued SFAS No. 123, Accounting for Stock-Based Compensation, which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
(11) Statements of Cash Flows
The Company considers all short-term highly liquid instruments, with an original maturity of three months or less, to be cash equivalents.
(12) Supplemental Schedule of Non-cash Investing and Financing Activities
During the year ended December 28, 1996, non-cash investing and financing activities included the purchase of 100% of the common stock of Standard Tallow for $10,400,000. Assets acquired, liabilities assumed, and consideration paid for this acquisition are as follows (in thousands):
Fair value of assets acquired, less cash $ 20,066 Liabilities assumed and incurred (11,094) Bank debt incurred (10,400) ------- Cash (received)paid upon purchase $ (1,428) ========
In addition, the Company purchased 100% of the common stock of International Processing Corporation and International Transportation Service, Inc. (collectively referred to as "IPC") for $30,000,000. Assets acquired, liabilities assumed and consideration paid for this acquisition are as follows (in thousands):
Fair value of assets acquired, less cash $ 47,835 Liabilities assumed and incurred (14,710) Bank debt incurred (29,600) ------ Cash (recieved)paid upon purchase $ 3,525 ========
(13) Use of Estimates
The preparation of the consolidated financial statements in conformity with generally ccepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
(14) Impairment of Long-Lived Assets and Long-Lived Assets To Be Disposed Of
The Company adopted the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on December 31, 1995. This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Adoption of this Statement did not have a material impact on the Company's financial position, results of operations, or liquidity.
(15) Financial Instruments
The carrying amount of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximates approximates the fair value due to the short maturity of these instruments.
The carrying amount of outstanding borrowings under the Credit Agreement at December 28, 1996 and December 30 1995 approximates the fair value since the borrowings bear interest at current market rates.
The fair market value of the Subordinated Notes approximated $73,000,000 at December 28, 1996 and $72,000,000 at December 30, 1995. The fair value of the Subordinated Notes was based on current borrowing rates available for financings with non-rated, non-investment grade bonds with similar terms and maturities.
(2) ACQUISITIONS
On August 30, 1996, the Company acquired 100% of the outstanding capital stock of IPC in accordance with a Stock Purchase Agreement (dated August 30, 1996, between the Company, IPC and the stockholders of IPC (the "Sellers")). IPC processes by-products collected from bakeries, pasta manufacturers, confectioners and snack food producers for sale to the animal feed industry. The purchase price for the capital stock of IPC was $30,000,000. The purchase price was paid in cash and was determined by agreement between the Company and the Seller. The Company funded $29.6 million of the purchase price with funds financed under the Acquisition Facility pursuant to the Credit Agreement among the Company, The First National Bank of Boston, as agent, and Harris Trust and Savings Bank, as co-agent. The remaining $400,000 of the purchase price was funded out of cash on hand. In connection with the acquisition, the Company also paid approximately $2.8 million in full payment and retirement of certain indebtedness of IPC. The Company used cash on hand to fund the repayment of such indebtedness.
The acquisition was accounted for under the purchase method of accounting in accordance with Accounting Principles Board Opinion No. 16 and operations since the acquisition date have been included in the consolidated statements of earnings. The excess of the total acquisition cost over the recorded value of assets acquired was allocated to goodwill in the amount of $15.9 million and will be amortized over 30 years.
The pro forma results of operations which follow assume that the acquisition had occurred at the beginning of each period presented. In addition to combining the historical results of operations of the two companies, the pro forma calculations include adjustments for the estimated effect on the Company's historical results of operations for depreciation and amortization and interest related to the acquisition.
(in thousands, except per share data)
Year ended Year ended December 28, December 31, 1996 1995 (unaudited) (unaudited) ------------- ------------- Sales $ 544,436 $ 477,459 Net earnings 10,298 14,227 Earnings per share $1.86 $2.67
On May 8, 1996, the Company acquired 100% of the common stock of Standard Tallow for $10,400,000. The Company recorded goodwill associated with this acquisition in the amount of $4.3 million which will be amortized over 30 years.
(3) THE SETTLEMENT AND FRESH START REPORTING
On October 22, 1993, the Company entered into a settlement agreement providing for a restructure of the Company's debt and equity and resolution of a class action lawsuit ("the Settlement"). On December 29, 1993 (the "Effective Date"), the Settlement was consummated and became binding on all original note holders.
The Settlement was accomplished pursuant to a court order which was tantamount to a prepackaged bankruptcy despite the fact that the Settlement did not occur under the Bankruptcy Code. Accordingly, the Company has accounted for the Settlement using "Fresh Start Reporting" as of January 1, 1994 in accordance with Statement of Position 90-7, "Financial Reporting by Entities In Reorganization Under the United States Bankruptcy Code" ("SOP 90-7") issued by the American Institute of Certified Public Accountants.
Using a valuation of the Company performed by an independent appraiser, the Company determined the total reorganization value of all its assets to be approximately $236,294,000 as of January 1, 1994. The historical values of the Company's liabilities, other than deferred income taxes, approximated fair value at January 1, 1994. Deferred income taxes were recorded in conformity with generally accepted accounting principles. The Company's accumulated deficit was eliminated as of January 1, 1994.
(4) INVENTORIES
A summary of inventories follows (in thousands):
December 28, December 30, 1996 1995 ------------- ----------- Finished product $ 12,005 $ 11,038 Supplies and other 638 546 --------- --------- $ 12,643 $ 11,584 ======= =======
(5) PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment follows (in thousands):
December 28, December 30, 1996 1995 ------------- ------------ Land $ 20,717 $ 18,545 Buildings and improvements 26,113 22,730 Machinery and equipment 122,195 100,632 Vehicles 50,269 39,994 Construction in process 12,465 7,362 --------- ---------- 231,759 189,263 Accumulated depreciation (55,973) (34,198) --------- --------- $175,786 $155,065 ======= =======
(6) OTHER ASSETS
Other assets consist of the following (in thousands):
December 28, December 30, 1996 1995 -------------- ------------ Prepaid pension cost (note 13) $ 2,028 $ 2,250 Deposits and other 2,260 1,753 ------- ------- $ 4,288 $ 4,003 ======= =======
(7) ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
December 28, December 30, 1996 1995 ------------- ------------ Insurance $ 2,257 $ 3,787 Compensation and benefits 4,854 5,328 Utilities and sewage 2,904 2,240 Reserve for environmental and litigation matters (note 15) 7,350 2,000 Income taxes payable 3,034 297 Other 9,719 7,179 -------- ------- $ 30,118 $ 20,831 ======= ======= (8) LEASES
The Company leases nine plants and storage locations, four office locations and a portion of its transportation equipment. Leases are noncancellable and expire at various times through the year 2028. Minimum rental commitments under noncancellable leases as of December 28, 1996, are as follows (in thousands):
Period Ending Fiscal Operating Leases ------------------- ---------------- 1997 $ 2,143 1998 1,732 1999 1,442 2000 1,280 2001 1,058 Thereafter 9,733 ------ Total $17,388 ======
Rent expense for the years ended December 28, 1996, December 30, 1995 and December 31, 1994 was $1,929,000, $1,163,000 and $1,081,000, respectively.
(9) LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
December 28, December 30, 1996 1995 ------------- ----------- Credit Agreement: Revolving Loan Facility $ 5,000 $ 5,000 Term Loan Facility 38,000 47,000 Acquisition Line 40,000 - First Priority Senior Subordinated Notes 69,976 69,976 Other notes 795 4,180 ---------- --------- 153,771 126,156 Less current maturities 15,598 9,060 --------- --------- $138,173 $117,096 ======= =======
CREDIT AGREEMENT
Effective May 23, 1995, the Company entered into a Credit Agreement (the "Credit Agreement") which provides for borrowings in the form of a Revolving Loan Facility, Term Loan Facility, and an Acquisition Line.
The Revolving Loan Facility provides for borrowings up to a maximum of $25,000,000 with sublimits available for letters of credit and a swingline. Outstanding borrowings on the Revolving Loan Facility bear interest, payable monthly, at LIBOR (5.6055% at December 28, 1996) plus a margin (1.0% at December 28, 1996) or, for swingline advances, at a Base Rate (8.25% at December 28, 1996). Additionally, the Company must pay a commitment fee equal to 0.375% on the unused portion of the Revolving Loan Facility. The Revolving Loan Facility matures on June 30, 2000. As of December 28, 1996, $5,000,000 was outstanding under the Revolving Loan Facility. As of December 28, 1996, the Company had outstanding irrevocable letters of credit aggregating $8,513,648.
The Term Loan Facility bears interest, payable monthly, at LIBOR (5.6055% at December 28, 1996) plus a margin (1.00% at December 28, 1996) which floats depending on the Company's compliance with certain financial covenants. The Term Loan Facility is payable by the Company in quarterly installments of $2,000,000 commencing on March 31, 1996 through December 31, 1999; and an installment of $6,000,000 due on March 31, 2000, with the remaining balance due on June 30, 2000. As of December 28, 1996, $38,000,000 was outstanding under the Term Loan Facility.
The Acquisition Line provides for borrowings to a maximum of $40,000,000. Outstanding borrowings on the Acquisition Line bear interest, payable monthly, at LIBOR (5.6055% at December 28, 1996) plus a margin (1.25% at December 28, 1996). Outstanding borrowings under the Acquisition Line as of June 30, 1997 convert to term debt on that date. At that time, the Acquisition Line is payable by the Company in quarterly installments of $2,500,000 commencing October 1, 1997 through June 30, 1999; and $5,000,000 commencing October 1, 1999 through June 30, 2000. On May 8, 1996, the Company borrowed $10,400,000 against the Acquisition Line to purchase 100% of the stock of Standard Tallow. On August 30, 1996 the Company borrowed $29,600,000 against the Acquisition Line to purchase 100% of the stock of IPC. As of December 28, 1996, $40,000,000 was outstanding under the Acquisition Line.
All accounts receivable, inventory and certain related intangibles of the Company are pledged as collateral for borrowings under the Credit Agreement. The Credit Agreement contains certain terms and covenants, which, among other matters, restrict the incurrence of additional indebtedness, payment of cash dividends, and expenditures for capital and environmental needs and require the maintenance of certain minimum financial ratios. As of December 28, 1996, no cash dividends could be paid to the Company's stockholders pursuant to the Credit Agreement.
SUBORDINATED NOTES
The Subordinated Notes have a face amount of $69,976,000, are unsecured, and bear interest at a rate of 13.75% per annum for the period from December 29, 1993 through December 30, 1995 and 11% per annum thereafter until maturity. Interest is payable in cash on each January 15 and July 15, beginning July 15, 1994. The Subordinated Notes are subject to redemption in whole or in part at the option of the Company at redemption prices, plus accrued and unpaid interest. The Subordinated Notes mature on July 15, 2000 and are subordinate to all outstanding borrowings under the Credit Agreement.
The Subordinated Notes indenture contains certain terms and covenants, which primarily relate to asset sales, additional indebtedness, dividend payments and early redemption of capital stock. Under the Subordinated Notes indenture, the Company is permitted to incur additional indebtedness within certain limits and subject to certain performance criteria.
OTHER
Aggregate maturities of long-term debt subsequent to December 28, 1996 are as follows (in thousands):
1997 $15,598 1998 18,113 1999 23,084 2000 96,976
(10) OTHER NONCURRENT LIABILITIES
Other noncurrent liabilities consist of the following (in thousands):
December 28, December 30, 1996 1995 ------------ ----------- Reserve for insurance, environmental and litigation matters (note 15) $ 9,829 $10,395 Liabilities associated with consulting and noncompete agreements 9,356 3,714 Other 1,191 1,124 ------- ------- $ 20,376 $15,233 ====== ======
The Company sponsors a defined benefit health care plan that provides postretirement medical and life insurance benefits to certain employees. The Company accounts for this plan in accordance with Statement of Financial Accounting Standards No. 106 and the effect on the Company's financial position and results of operations is immaterial.
(11) INCOME TAXES
Income tax expense (benefit) attributable to income before income taxes consists of the following (in thousands):
December 28, December 30, December 31, 1996 1995 1994 ------------ ------------ ----------- Current: Federal $6,801 $1,883 $1,755 State 592 509 373 Foreign - 29 - Deferred: Federal (62) 5,921 1,884 State (26) 398 161 Foreign - - (782) ----- ----- ----- $7,305 $8,740 $3,391 ===== ===== =====
Income tax expense for the years ended December 28, 1996, December 30, 1995, and December 31, 1994 differed from the amount computed by applying the statutory U.S. federal income tax rate (35%) to income before income taxes as a result of the following (in thousands):
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 28, 1996 and December 30, 1995 are presented below (in thousands):
The portion of the deferred tax assets and liabilities expected to be recognized in fiscal 1997 has been recorded at December 28, 1996 in the accompanying consolidated balance sheet as a net current deferred income tax asset of $6,184,000. The remaining non-current deferred tax assets and liabilities have been recorded as a net deferred income tax liability of $29,322,000 at December 28, 1996 in the accompanying consolidated balance sheet.
The valuation allowance for deferred tax assets as of December 28, 1996 and December 30, 1995 was $19,472,000 and $20,402,000, respectively. The net changes in the total valuation allowance for the years ended December 28, 1996 and December 30, 1995 were decreases of $930,000 and $1,329,000, respectively. The Company believes that the remaining net deferred tax assets at December 28, 1996 and December 30, 1995 will be realized primarily through future reversals of existing taxable temporary differences.
At December 28, 1996, the Company had net operating loss carryforwards for federal income tax purposes of approximately $78,575,000 which are available to offset future federal taxable income through 2008. The availability of the net operating loss carryforwards to reduce future taxable income is subject to various limitations. As a result of the change in ownership, the Company believes utilization of its net operating loss carryforwards is limited to $3,400,000 per year for the remaining life of the net operating losses. The Company also has approximately $3,780,000 of foreign tax credits and approximately $314,000 of capital loss carryforwards which are available to reduce future federal income taxes, if any, through 1998.
The Company reports tax benefits utilized related to the January 1, 1994 valuation allowance ($906,000 in 1996, $211,000 in 1995 and $5,098,000 in 1994) as a direct addition to additional paid-in capital.
(12) STOCKHOLDERS' EQUITY
(a) COMMON EQUITY
On December 29, 1993, the Company issued 4,749,620 and 249,975 shares of the Company's common stock and Class A common stock, respectively. On November 2, 1994, all shares of Class A common stock were converted to common stock on a one-for-one basis.
(b) STOCK OPTIONS
At December 29, 1993, the Company granted options to purchase 128,205 shares of the Company's Class A common stock to the former owners of the Redeemable Preferred Stock. The options have a term of ten years from the date of grant and may be exercised at a price of $10.35 per share (approximated market value at the date of grant). On November 2, 1994, all outstanding shares of Class A common stock were converted into an equal number of shares of common stock and all options to purchase Class A common stock became options to purchase common stock.
The 1993 Flexible Stock Option Plan and the 1994 Employee Flexible Stock Option Plan provide for the granting of stock options to key officers and salaried employees of the Company and its subsidiaries. Options to purchase common stock were granted at a price approximating fair market value at the date of grant. Options granted under the plans expire ten years from the date of grant. Vesting occurs on each anniversary of the grant date as defined in the specific option agreement. The plans also provide for the acceleration by one year of vesting of all non-vested shares upon the termination of the employee's employment in certain circumstances or upon a change in management control.
The Non-Employee Directors Stock Option Plan provides for the granting of options to non-employee directors of the Company. As of December 28, 1996, options to purchase 82,000 shares of common stock had been granted pursuant to this plan. The options have a term of ten years from the date of grant and may be exercised at a price of $10.00 - $27.125 per share (approximated market value at the date of grant). The options vest 25% six months after the grant date and 25% on each anniversary date thereafter.
The per share weighted average fair value of stock options granted during 1996 and 1995 was $13.89 and $8.22, respectively, on the date of grant using the Black Scholes option-pricing model with the following weighted assumptions:
1996 1995 ---------- -------- Expected dividend yield 0.0% 0.0% Risk-free interest rate 6.6% 6.5% Expected life 10 years 10 years Expected volatility 6.20 5.59
The Company applies APB Opinion No. 25 in accounting for its Plans and, accordingly, no compensation cost has been recognized for its stock options in the financial statements as stock options were granted at market value on the grant date. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net earnings would have been reduced to the pro forma amounts indicated below (in thousands, except per share):
1996 1995 ------- ------ Net earnings: As reported $7,674 $14,380 Pro forma $7,104 $14,308
Primary earnings per common share: As reported $1.38 $2.70 Pro forma $1.28 $2.69
Pro forma net earnings reflects only options granted in 1996 and 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net income amounts presented above because compensation cost is reflected over the options vesting period and compensation cost for options granted prior to January 1, 1995 are not considered.
A summary of transactions for all stock options granted follows:
(13) EMPLOYEE BENEFIT PLANS
The Company has retirement and pension plans covering substantially all of its employees. Most retirement benefits are provided by the Company under separate final-pay noncontributory pension plans for all salaried and hourly employees (excluding those covered by union-sponsored plans) who meet service and age requirements. Benefits are based principally on length of service and earnings patterns during the five years preceding retirement.
The Company's funding policy for those plans is to contribute annually not less than the minimum amount required nor more than the maximum amount that can be deducted for federal income tax purposes. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future.
The following table sets forth the plans' funded status and amounts recognized in the Company's consolidated balance sheets based on the measurement date (October 1, 1996 and 1995 (in thousands):
Net pension cost includes the following components (in thousands):
December 28, December 30, December 31, 1996 1995 1994 ----------- ----------- ------------ Service cost $ 1,033 $ 779 $ 906 Interest cost 2,463 2,241 2,086 Actual return on plan assets (2,737) (4,363) 892 Net amortization and deferral (154) 1,839 (3,445) -------- -------- ------ Net pension cost $ 605 $ 496 $ 439 ======== ======== =======
Assumptions used in accounting for the employee benefit pension plans were: December 28, December 30, 1996 1995 ------------ ----------- Weighted average discount rate 7.75% 7.50% Rate of increase in future compensation levels 5.02% 5.90% Expected long-term rate of return on assets 8.75% 8.75%
The Company participates in several multi-employer pension plans which provide defined benefits to certain employees covered by labor contracts. These plans are not administered by the Company and contributions are determined in accordance with provisions of negotiated labor contracts. Information with respect to the Company's proportionate share of the excess, if any, of the actuarially computed value of vested benefits over these pension plans' net assets is not available. The cost of such plans amounted to $1,333,000, $1,288,000, and $1,252,000 for the years ended December 28, 1996, December 30, 1995, and December 31, 1994, respectively.
(14) NET SALES
The Company has no foreign operations, other than those associated with a former plant in Canada, but exports a portion of its products to customers in various foreign counties. Total export sales were $119,055,000, $169,829,000, and $105,698,000 for the years ended December 28, 1996, December 30, 1995, and December 31, 1994, respectively.
Concentration of credit risk is limited due to the Company's diversified customer base and the fact that the Company sells commodities. No single customer accounted for more than 10% of the Company's net sales in 1996, 1995 and 1994.
(15) CONTINGENCIES
(a) ENVIRONMENTAL
Blue Earth
The U. S. Attorney for the District of Minnesota and the State of Minnesota since 1992 have been conducting an investigation of alleged state and federal wastewater violations at the Company's Blue Earth, Minnesota plant. The Company has fully cooperated with the government in its investigation and continues to do so. The Company and the U.S. Attorney have reached a settlement providing for payment of a total of $4,000,000. This settlement payment is intended to resolve all federal and state civil, criminal and administrative claims, through payment of civil and criminal fines and penalties, as well as funding the restitution, remediation and community service required as part of the criminal settlement. The settlement is subject to court approval, and is subject to the resolution of pending negotiations with the U.S. Environmental Protection Agency of the terms of a Consent Decree. The Company recorded a provision for loss contingency of $6,100,000 during Fiscal 1996 to cover the expected cost of the settlement as well as legal, environmental and other related costs.
Chula Vista
The Company is the owner of an undeveloped property located in Chula Vista, California (the "Site"). A rendering plant was operated on the Site until 1982. From 1959 to 1978, a portion of the Site was used as an industrial waste disposal facility which was closed pursuant to Closure Order No. 80-06 issued by the State of California Regional Water Quality Control Board for the San Diego Region (the "RWQCB"). The Site has been listed by the State of California as a site for which expenditures for removal and remedial actions may be made by the State pursuant to the California Hazardous Substances Account Act, California Health & Safety Code Section 25300 et seq. Technical consultants retained by the Company have conducted various investigations of the environmental conditions at the Site, and in 1996, requested that the RWQCB issue a "no further action" letter with respect to the Site. The RWQCB has not yet taken any formal action in response to such request.
Underground Storage Tanks
The Company's processing operations do not produce toxic wastes; however, the Company does operate underground fuel storage tanks ("UST's") that are subject to federal, state and local laws and regulations. As of December 28, 1996, the Company has removed or closed 165 of its 177 UST's. The Company plans to remove an additional number of UST's in 1997.
(b)LITIGATION
Petruzzi
An antitrust class action suit was filed in 1986 by Petruzzi IGA Supermarkets in the United States District Court for the Middle District of Pennsylvania (the "Class Action Suit") seeking damages from the Company. On September 14, 1995, the Company entered into a settlement agreement providing for the disposal of all claims in the Class Action Suit. The settlement agreement was approved by the District Court on December 20, 1995. The District Court has yet to rule on the petitions for attorneys' fees.
Other Litigation
The Company is also a party to several other lawsuits, claims and loss contingencies incidental to its business.
The Company purchases its workers compensation, auto and general liability insurance on a retrospective basis. The Company accrues its expected ultimate costs related to claims occurring during each fiscal year and carries this accrual as a reserve until such claims are paid by the Company.
The Company has established loss reserves for insurance, environmental and litigation matters as a result of the matters discussed above. Although the ultimate liability cannot be determined with certainty, management of the Company believes that reserves for contingencies are reasonable and sufficient based upon present governmental regulations and information currently available to management. The Company estimates the range of possible losses related to environmental and litigation matters, based on certain assumptions, is between $10,000,000 and $19,100,000 at December 28, 1996. The accrued expenses and other noncurrent liabilities classifications in the Company's consolidated balance sheets include reserves for insurance, environmental and litigation contingencies of $20,847,000 and $16,325,000 at December 28, 1996 and December 30, 1995, respectively. There can be no assurance, however, that final costs will not exceed current estimates. The Company believes that any additional liability relative to such lawsuits and claims which would not be covered by insurance, although potentially material to the results of operations in any one year, would not likely have a material adverse effect on the Company's financial position.
(16) QUARTERLY FINANCIAL DATA (UNAUDITED AND IN THOUSANDS EXCEPT PER SHARE AMOUNTS):
DARLING INTERNATIONAL INC.
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 28, 1996
PART II
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item with respect to items 401 and 405 of Regulation S-K appears in the sections entitled "Election of Directors," "Executive Officers" and "Compliance with Section 16(a) of the Exchange Act" included in the Registrant's definitive Proxy Statement relating to the 1997 Annual Meeting of Stockholders, which information is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item appears in the section entitled "Executive Compensation" included in the Registrant's definitive Proxy Statement relating to the 1997 Annual Meeting of Stockholders, which information is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item appears in the section entitled "Security Ownership of Certain Beneficial Owners and Management" included in the Registrant's definitive Proxy Statement relating to the 1997 Annual Meeting of Stockholders, which information is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item appears in the section entitled "Election of Directors" included in the Registrant's definitive Proxy Statement relating to the 1997 Annual Meeting of Stockholders, which information is incorporated herein by reference.
DARLING INTERNATIONAL INC. AND SUBSIDIARIES FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 28, 1996
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
(1) The following consolidated financial statements are included in Item 8.
Pages Independent Auditors' Report 17 Consolidated Balance Sheets- December 28, 1996 and December 30, 1995 18 Consolidated Statements of Operations - Three years ended December 28, 1996 19 Consolidated Statements of Stockholders' Equity - Three years ended December 28, 1996 20 Consolidated Statements of Cash Flows - Three years ended December 28, 1996 21 Notes to Consolidated Financial Statements - December 28, 1996 and December 30, 1995 22 Quarterly Data 36
(2) The following financial statement schedule is included in Item 8.
Schedule II - Valuation and Qualifying Accounts 37
All other schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and notes thereto.
(3) (a) Exhibits
Exhibit No. Description
2 * Settlement Agreement, dated December 29, 1993, relating to the settlement of class action litigation styled IDS Life Insurance Company Inc., et al v. Darling-Delaware Company, Inc., et al., Case No. 91 C 5166, in the United States District Court for the Northern District of Illinois.
2.1***** Stock Purchase Agreement dated as of August 30, 1996, among Darling International Inc., International Processing Corp., International Transportation Service, Inc., and the stockholders of International Processing Corporation and International Transportation Service, Inc.
3.1 * Restated Certificate of Incorporation of the Company.
3.2 * Amended and Restated Bylaws of the Company.
4.1 * Specimen Common Stock Certificate.
4.2 * Specimen First Priority Senior Subordinated Note.
4.3 * Indenture, dated December 29, 1993, between Darling International Inc. and LaSalle National Bank, as Trustee, with respect to the First Priority Senior Subordinated Notes due July 15, 2000.
10.1 *** Credit Agreement, dated as of May 23, 1995, among Darling International Inc., the First National Bank of Boston, as agent, Harris Trust and Savings Bank, as co-agent, and the other lenders named therein.
10.2* Registration Rights Agreement, as amended.
10.3* Form of Indemnification Agreement.
10.4* Lease, dated November 30, 1993, between the Company and the Port of Tacoma.
10.5 P Leases, dated July 1, 1996, between the Company and the City and County of San Francisco.
10.6 * 1993 Flexible Stock Option Plan.
10.7 * Amended and Restated Employment Agreement, dated December 29, 1993, between Darling International Inc. and Kenneth A. Ghazey.
10.7(a)**** First Amendment to Amended and Restated Employment Agreement, dated as of September 26, 1995, between Darling International Inc. and Kenneth A. Ghazey.
10.8 * Form of Executive Severance Agreement.
10.9 * 1994 Employee Flexible Stock Option Plan.
10.10* Non-Employee Directors Stock Option Plan.
10.11 ** Employment Agreement, dated as of March 31, 1995, between Darling International Inc. and Dennis B. Longmire.
10.12 Separation Agreement dated as of September 24, 1996 by and between Kenneth A. Ghazey and Darling International Inc.
11 Statement re computation of per share earnings.
21 Subsidiaries of Registrant.
23 Consent of KPMG Peat Marwick LLP.
27 Financial Data Schedule
* Incorporated by reference from the Registrant's Registration Statement on Form S-1 filed July 15, 1994 (Registration No. 33-79478). ** Incorporated by reference to Form 10-Q filed May 8, 1995. *** Incorporated by reference to Form 10-Q filed August 14, 1995. **** Incorporated by reference to Form 10-Q filed November 13, 1995. ***** Incorporated by reference to Form 8-K filed September 13, 1996. P Filed pursuant to temporary hardship exemption under cover of Form SE.
(b) Reports on Form 8-K:
None.
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 28, 1996
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Form 10-K for the Fiscal Year Ended December 28, 1996 on its behalf by the undersigned, thereunto duly authorized, in the city of Irving, State of Texas, on the 27th day of March, 1997.
DARLING INTERNATIONAL INC.
By: /s/ Dennis B. Longmire ------------------------------------ Dennis B. Longmire Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, the report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Dennis B. Longmire Chairman of the Board and 3/27/97 - -------------------------- Chief Executive Officer Dennis B. Longmire (Principal Executive Officer)
/s/ John R. Witt Vice President, Chief Financial Officer 3/27/97 - -------------------------- (Principal Financial Officer) John R. Witt
/s/ Mark C. Levy Vice President and Controller 3/27/97 - --------------------------- (Principal Accounting Officer) Mark C. Levy
/s/ Bruce Waterfall Director 3/27/97 - --------------------------- Bruce Waterfall
/s/ Fredric J. Klink Director 3/27/97 - --------------------------- Fredric J. Klink
/s/Craig Scott Bartlett, Jr Director 3/27/97 - ---------------------------- Craig Scott Bartlett, Jr
/s/ Denis J. Taura Director 3/27/97 - --------------------------- Denis J. Taura
INDEX TO EXHIBITS
Exhibit No. Description Page ----------- ----------- ----
2 * Settlement Agreement, dated December 29, 1993, relating to the settlement of class action litigation styled IDS Life Insurance Company Inc., et al v. Darling-Delaware Company, Inc., et al., Case No. 91 C 5166, in the United States District Court for the Northern District of Illinois.
2.1***** Stock Purchase Agreement dated as of August 30, 1996, among Darling International Inc., International Processing Corp., International Transportation Service, Inc., and the stockholders of International Processing Corporation and International Transportation Service, Inc.
3.1 * Restated Certificate of Incorporation of the Company.
3.2 * Amended and Restated Bylaws of the Company.
4.1 * Specimen Common Stock Certificate.
4.2 * Specimen First Priority Senior Subordinated Note.
4.3 * Indenture, dated December 29, 1993, between Darling International Inc. and LaSalle National Bank, as Trustee, with respect to the First Priority Senior Subordinated Notes due July 15, 2000.
10.1 *** Credit Agreement, dated as of May 23, 1995, among Darling International Inc., the First National Bank of Boston, as agent, Harris Trust and Savings Bank, as co-agent, and the other lenders named therein.
10.2* Registration Rights Agreement, as amended.
10.3* Form of Indemnification Agreement.
10.4* Lease, dated November 30, 1993, between the Company and the Port of Tacoma.
10.5 P Leases, dated July 1, 1996, between the Company and the City and County of San Francisco
10.6 * 1993 Flexible Stock Option Plan.
10.7 * Amended and Restated Employment Agreement, dated December 29, 1993, between Darling International Inc. and Kenneth A. Ghazey.
10.7(a)**** First Amendment to Amended and Restated Employment Agreement, dated as of September 26, 1995, between Darling International Inc. and Kenneth A. Ghazey.
10.8 * Form of Executive Severance Agreement.
10.9 * 1994 Employee Flexible Stock Option Plan.
10.10* Non-Employee Directors Stock Option Plan.
10.11 ** Employment Agreement, dated as of March 31, 1995, between Darling International Inc. and Dennis B. Longmire.
10.12 Separation Agreement dated as of September 24, 1996, by and between Kenneth A. Ghazey and Darling International Inc........ 44
11 Statement re computation of per share earnings................ 49
21 Subsidiaries of Registrant. .................................. 50
23 Consent of KPMG Peat Marwick LLP. ............................ 51
27 Financial Data Schedule ...................................... 52
* Incorporated by reference from the Registrant's Registration Statement on Form S-1 filed July 15, 1994 (Registration No. 33-79478). ** Incorporated by reference to Form 10-Q filed May 8, 1995. *** Incorporated by reference to Form 10-Q filed August 14, 1995. **** Incorporated by reference to Form 10-Q filed November 13, 1995. ***** Incorporated by reference to Form 8-K filed September 13, 1996. P Filed pursuant to temporary hardship exemption under cover of Form SE.
EXHIBIT 10.12
Separation Agreement dated as of September 24, 1996, by and between Kenneth A. Ghazey ("Executive") and Darling International Inc. (the "Company").
Reference is made to (1) the Amended and Restated Employment Agreement, dated as of December 29, 1993, between Executive and the Company as amended by the First Amendment, dated as of September 26, 1995 (the "Agreement"), (2) the Company's Management Incentive Compensation Plan in effect for the year 1996 (the "Bonus Plan") in which Executive is a participant, (3) the Company's 1993 Flexible Stock Option Plan ("Option Plan"), pursuant to which Executive has been granted options on 123,626 shares ("Option Shares") of the Company's common stock, subject to certain vesting provisions specified in the Option Plan (as modified by this Separation Agreement) and (4) the Indemnification Agreement dated as of December 29, 1993 (the "Indemnification Agreement") between the Company and Executive.
All capitalized terms which are not otherwise defined in this Separation Agreement shall have the same meanings as in the Agreement, the Bonus Plan or the Option Plan as the case may be.
Executive has informed the Company that he desires to resign as President, Chief Operating Officer and a director of the Company, effective on December 31, 1996 (the "Effective Date"), and the Company has agreed to accept such resignation, on the terms and conditions hereinafter set forth:
In consideration of the agreements hereinafter set forth the parties hereto agree as follows:
1. The term of Executive's employment will expire on the Effective Date.
2. Executive's duties until the Effective Date will consist of consultation with the Company's Chairman and Chief Executive to assure continuity in the management of the Company.
3. Until the Effective Date Executive will continue to (a) receive his current base salary in periodic installments in accordance with the Company's normal salary payment dates for executives and (b) participate in any employee benefit plans and programs for senior executives of the Company now in effect.
4. As promptly as practicable after December 31, 1996, Executive shall be entitled to receive termination pay of $350,000 (minus all applicable withholding taxes). Executive hereby agrees that, except as otherwise specified in this Separation Agreement, he shall be entitled to no other termination or similar payments, including without limitation, accrued vacation pay. Nothing contained in this Separation Agreement shall limit in any way the rights and obligations of Executive and the Company in respect of the insurance policy referenced in Section 6(b) of the Agreement, including, without limitation, Executive's right to own such policy and the Company's obligation to pay one (1) scheduled annual premium payment following the Effective Date. In addition, nothing contained in this Agreement shall limit in any way Executive's right to receive (and the Company's obligation to provide) the benefits set forth in Section 5 of the Agreement for a six (6) month period following the Effective Date.
5. As promptly as practicable after the Company's operating results for the fiscal year ending December 31, 1996 are finalized, Executive shall be entitled to receive (notwithstanding the last sentence of Section IX of the Annual Incentive Summary Fiscal 1996) any bonus to which he is entitled based upon the Company achieving or exceeding the "OCF", "FCF" and "EPS" (as such terms are defined in the Bonus Plan) performance objectives specified in the 1996 operating budget approved by the Company's Board of Directors, as adjusted to reflect acquisition of Standard and IPC (with the bonus of the Company's Chairman of the Board and CEO being determined on the same basis).
6. Executive shall be fully vested in 80% of the 123,626 stock options issued to him under the Option Plan on the Effective Date, with the remainder being vested as follows:
(a) 10% of such 123,626 stock options shall be vested and may be exercised on or after December 31, 1997, if Executive has complied with his obligations under the Agreement, including those specified in paragraph 8 of this Separation Agreement, throughout the year 1997;
(b) 10% of such 123,626 stock options shall be vested and may be exercised on or after December 31, 1998, if Executive has complied with his obligations under the Agreement, including those specified in paragraph 8 of this Separation Agreement throughout the year 1998;
(c) if (i) all or substantially all of the assets of the Company shall be acquired by a "Third Party," (ii) the Company shall be merged by a Third Party or (iii) a majority of the Company's stock shall be acquired by a Third Party, all of such 123,626 stock options shall become vested and may be exercised immediately prior to the date such acquisition of assets, merger or acquisition of stock shall become effective. "Third Party" shall exclude Morgens, Waterfall, Vintiadis & Company ("MWV") or any of its affiliates;
provided, however, that 100% of such 123,626 stock options shall be deemed vested for purposes of Section 2.7(c) of the Option Plan, with the effect that, at any time until June 30, 1997, the Company may cancel up to 123,626 of Executive's stock options by paying the amount specified in Section 2.7(c) of the Option Plan.
7. Notwithstanding the preceding paragraph 6(c), in the event that MWV or its affiliates shall have completed a "Rule 13e-3 transaction" (as such term is defined in Rule 13e-3 under the Securities Exchange Act of 1934) at any time prior to December 31, 1998, with the effect that MWV or its affiliates shall own beneficially 51% or more of the Company's common stock on a fully diluted basis, the Company shall cancel the unvested options referred to in subparagraphs (a) or (b) of Section 6 by placing in escrow (pursuant to an escrow agreement and with a nationally recognized bank mutually agreed by the parties) an amount of cash (the "Escrow Amount") equal to the difference between (x) Executive's aggregate exercise price for the shares of common stock subject to such unvested options and (y) the average price paid to stockholders of the Company pursuant to the Rule 13e-3 transaction times the number of shares of common stock subject to such unvested options. The Escrow Amount shall be paid to Executive only in accordance with the vesting schedule set forth in the preceding paragraph 6 as the options to which the Escrow Amount, or portions thereof, is attributable would have become vested under the preceding paragraph 6 (including with respect to Executive's compliance with his obligations under the Agreement, including under paragraph 8 of this Separation Agreement); provided that there shall be released from the Escrow Amount, or the Company shall withhold, as the case may be, such amounts as may be required to satisfy taxes required to be paid by Executive for the cancellation of options pursuant to this paragraph 7.
8. Executive acknowledges that the foregoing provisions of this Separation Agreement represent substantial amendments to the Agreement, the Bonus Plan and the Option Plan which are of material economic benefit to Executive and were agreed by the Company in reliance upon Executive's agreement to the remaining provisions of this paragraph 8. Until December 31, 1998, Executive hereby agrees that he will (a) abide by the non-compete provisions of Section 9 of the Agreement and such provisions shall be expanded to cover the bakery by-product processing business of the Company's wholly-owned subsidiary International Processing Corporation, (b) he will not solicit any of the present employees of the Company to work for any business with which he is associated in any capacity specified in paragraph 9 of the Agreement whether or not such business is in competition with the Company and (c) the Company may take action if Executive shall breach such agreements as specified in Section 10 of the Agreement (as well as the non-vesting of stock options as specified in paragraph 6 of this Separation Agreement and the non-payment of the Escrow Amount under paragraph 7 of this Separation Agreement).
9. The parties hereby reaffirm their obligations under the Indemnification Agreement.
10. Executive shall be entitled to acquire title to the Toyota Land Cruiser he currently uses for $1.00 on or after January 1, 1997, provided that Executive shall be responsible for all federal, state and local taxes attributable to his acquisition of such vehicle and hereby indemnifies and holds the Company harmless therefrom.
11. Attached is a form of mutually-agreed press release which describes Executive's resignation. The Company agrees that any statement authorized by the board of directors or the Chief Executive Officer of the Company, whether written or oral, and Executive agrees that any statement of Executive, whether written or oral, relating to Executive's employment, or termination of employment, shall not be inconsistent in any material respect with the attached form of press release.
12. Executive hereby resigns his position with the Company as an officer, director and employee effective as of the Effective Date and the Company hereby accepts such resignation, on the terms specified in this Separation Agreement.
13. Except as specifically amended by this Separation Agreement, the terms of the Agreement and the Option Plan shall remain in full force and effect. In the event of a conflict between the provisions of this Separation Agreement and the Agreement, the Option Plan and the Bonus Plan, the provisions of this Separation Agreement shall control.
IN WITNESS WHEREOF the parties have duly executed this Separation Agreement.
------------------------------ Kenneth A. Ghazey DARLING INTERNATIONAL INC.
By: --------------------------------
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Subsidiary State of Incorporation
International Processing Corporation Georgia
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT -----------------------------
The Board of Directors Darling International Inc.:
We consent to incorporation by reference in the registration statements on Form S-3 (No. 33-79478) and Form S-8 (Nos. 33-99868 and 33-99866) of Darling International Inc. of our report dated February 7, 1997, relating to the consolidated balance sheets of Darling International Inc. and subsidiaries as of December 28, 1996 and December 30, 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 28, 1996, and the related schedule, which report appears in the December 28, 1996 annual report on Form 10-K of Darling International Inc.
KPMG Peat Marwick LLP
Dallas, Texas March 27, 1997