<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 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 1-10307
______________________________
IMPERIAL SUGAR COMPANY
(Exact name of registrant as specified in its charter)
Texas 74-0704500
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Imperial Square, P.O. Box 9, Sugar Land, Texas 77487
(Address of principal executive offices, including Zip Code)
(281) 491-9181
(Registrant's telephone number, including area code)
IMPERIAL HOLLY CORPORATION
(Former name 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 reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of February 11, 1999.
32,151,608 shares.
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IMPERIAL SUGAR COMPANY
Index
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statements of Cash Flows 5
Consolidated Statement of Changes in
Shareholders' Equity 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
______________________
The statements regarding future market prices, agricultural results,
operating results and Year 2000 readiness and other statements that are not
historical facts contained in this Quarterly Report on Form 10-Q are forward-
looking statements. The words "expect", "project", "estimate", "believe",
"anticipate", "plan", "intend", "could", "may", "predict" and similar
expressions are also intended to identify forward-looking statements. Such
statements involve risks, uncertainties and assumptions, including, without
limitation, market factors, the effect of weather and economic conditions, farm
and trade policy, the ability of the Company to realize cost savings from
acquisitions, the ability of the Company and third party vendors and customers
to successfully remediate Year 2000 computer issues, the available supply of
sugar, available quantity and quality of sugarbeets and other factors detailed
elsewhere in this and other Company filings with the Securities and Exchange
Commission. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual outcomes may vary
materially from those indicated.
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PART I - FINANCIAL INFORMATION
IMPERIAL SUGAR COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1998 SEPTEMBER 30, 1998
(Unaudited)
------------------
(In Thousands of Dollars)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and temporary investments $ 2,436 $ 2,877
Marketable securities 69,750 59,478
Accounts receivable 110,082 139,870
Inventories 372,136 204,929
Deferred costs and prepaid expenses 24,287 39,135
---------- ----------
Total current assets 578,691 446,289
OTHER INVESTMENTS 19,359 20,872
PROPERTY, PLANT AND EQUIPMENT - net 421,503 398,193
GOODWILL & OTHER INTANGIBLES 403,882 279,410
OTHER ASSETS 26,693 35,036
---------- ----------
TOTAL $1,450,128 $1,179,800
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable -- trade $ 163,799 $ 106,041
Short-term borrowings 31,547 1,161
Current maturities of long-term debt 7,765 7,555
Other current liabilities 56,130 71,303
---------- ----------
Total current liabilities 259,241 186,060
LONG-TERM DEBT 671,519 525,893
DEFERRED INCOME TAXES, EMPLOYEE BENEFITS
AND OTHER CREDITS 118,162 114,940
SHAREHOLDERS' EQUITY
Preferred stock - -
Common stock 309,017 268,804
Stock held by benefit trust (14,367) (14,367)
Treasury stock (1,452) (1,452)
Retained earnings 81,565 80,150
Unrealized securities gains - net 26,443 19,772
---------- ----------
Total shareholders' equity 401,206 352,907
---------- ----------
TOTAL $1,450,128 $1,179,800
========== ==========
</TABLE>
See notes to consolidated financial statements.
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IMPERIAL SUGAR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
--------------------------
1998 1997
----------- -----------
(In Thousands of Dollars,
Except per Share Amounts)
<S> <C> <C>
NET SALES $ 471,761 $ 434,867
----------- -----------
COSTS AND EXPENSES:
Cost of sales 423,982 395,408
Selling, general and administrative 17,192 16,944
Depreciation and amortization 12,564 10,962
----------- -----------
Total 453,738 423,314
----------- -----------
OPERATING INCOME 18,023 11,553
INTEREST EXPENSE (14,117) (8,380)
REALIZED SECURITIES GAINS - 110
OTHER INCOME -- Net 1,116 575
----------- -----------
INCOME BEFORE INCOME TAXES & MINORITY INTEREST 5,022 3,858
PROVISION FOR INCOME TAXES 2,657 2,234
MINORITY INTEREST IN INCOME OF SAVANNAH - 1,766
----------- -----------
INCOME BEFORE EXTRAORDINARY ITEM 2,365 (142)
EXTRAORDINARY ITEM - NET OF TAX - (1,999)
----------- -----------
NET INCOME (LOSS) $ 2,365 $ (2,141)
=========== ===========
BASIC EARNINGS (LOSS) PER SHARE OF COMMON STOCK:
Income before extraordinary item $ 0.08 $ (0.01)
=========== ===========
Net income $ 0.08 $ (0.14)
=========== ===========
DILUTED EARNINGS (LOSS) PER SHARE OF COMMON STOCK:
Income before extraordinary item $ 0.08 $ (0.01)
=========== ===========
Net income $ 0.08 $ (0.14)
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 30,335,994 15,670,653
=========== ===========
</TABLE>
See notes to consolidated financial statements.
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IMPERIAL SUGAR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
----------------------
1998 1997
--------- ---------
(In Thousands of Dollars)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 2,365 $ (2,141)
Adjustments for non-cash and non-operating items:
Extraordinary item - net - 1,999
Minority interest in earnings of Savannah - 1,766
Depreciation & amortization 12,564 10,962
Other 791 (290)
--------- ---------
15,720 12,296
Changes in operating assets and liabilities
(excluding amounts acquired in the Savannah
and Diamond Crystal acquisitions):
Receivables 41,754 20,220
Inventory (153,318) (167,449)
Deferred and prepaid costs 17,585 27,625
Accounts payable 50,758 78,600
Other liabilities (19,123) (9,121)
--------- ---------
Operating cash flow (46,624) (37,829)
--------- ---------
INVESTMENT ACTIVITIES:
Acquisition of Diamond Crystal, net of cash acquired (111,216) -
Acquisition of Savannah, net of cash acquired - (360,961)
Capital expenditures (5,951) (10,148)
Investment in marketable securities - (653)
Proceeds from sales of securities 6,217 304
Proceeds from maturities of securities - 583
Proceeds from sales of fixed assets 15 60
Other 4,890 (7,131)
--------- ---------
Investing cash flow (106,045) (377,946)
--------- ---------
FINANCING ACTIVITIES:
Short-term debt:
CCC borrowings - advancements 10,017 -
Other - net (257) -
Revolving credit borrowings (repayments) - net 144,700 (42,306)
Long-term debt borrowings - 587,674
Repayment of long-term debt (1,688) (126,256)
Dividends paid (950) (428)
Issuance of stock and other 406 5,036
--------- ---------
Financing cash flow 152,228 423,720
--------- ---------
INCREASE (DECREASE) IN CASH AND TEMPORARY INVESTMENTS (441) 7,945
CASH AND TEMPORARY INVESTMENTS, BEGINNING OF PERIOD 2,877 9,354
--------- ---------
CASH AND TEMPORARY INVESTMENTS, END OF PERIOD $ 2,436 $ 17,299
========= =========
</TABLE>
See notes to consolidated financial statements.
- 5 -
<PAGE>
IMPERIAL SUGAR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Three Months Ended December 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Shares of Common Stock Common Stock
--------------------------------- ----------------------------
Held by Held by Unrealized
Benefit Treasury Benefit Treasury Retained Securities
Issued Trust Stock Issued Trust Stock Earnings Gains Total
---------- ---------- -------- -------- -------- -------- ------- ---------- --------
(In Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SEPTEMBER 30, 1998 28,385,991 (1,199,053) (121,197) $268,804 $(14,367) $(1,452) $80,150 $19,772 $352,907
Net income - - - - - - 2,365 - 2,365
Cash dividends - - - - - - (950) - (950)
Stock issued in Diamond
Crystal acquisition 4,972,060 - - 39,776 - - - - 39,776
Employee stock purchase plan
& stock option exercises 71,617 - - 437 - - - - 437
Change in unrealized
securities
gains - net - - - - - - - 6,671 6,671
---------- ---------- -------- -------- -------- -------- ------- ---------- --------
BALANCE DECEMBER 31, 1998 33,429,668 (1,199,053) (121,197) $309,017 $(14,367) $(1,452) $81,565 $26,443 $401,206
========== ========== ======== ======== ======== ======== ======= ========== ========
</TABLE>
See notes to consolidated financial statements.
- 6 -
<PAGE>
IMPERIAL SUGAR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997
Basis of Presentation - The unaudited condensed consolidated financial
statements included herein have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission and reflect, in the
opinion of management, all adjustments, consisting only of normal recurring
accruals, that are necessary for a fair presentation of financial position and
results of operations for the interim periods presented. These financial
statements include the accounts of Imperial Sugar Company (formerly Imperial
Holly Corporation) and its majority owned subsidiaries (the "Company"). All
significant intercompany balances and transactions have been eliminated in
consolidation. Certain information and footnote disclosures required by
generally accepted accounting principles have been condensed or omitted pursuant
to such rules and regulations. The financial statements included herein should
be read in conjunction with the financial statements and notes thereto included
in the Company's Annual Report on Form 10-K for the year ended September 30,
1998.
Cost of Sales - Payments to growers for sugarbeets are based in part upon the
Company's average net return for sugar sold (as defined in the participating
contracts with growers) during the grower contract years, some of which extend
beyond December 31. The contracts provide for the sharing of the net selling
price (gross sales price less certain marketing costs, including packaging
costs, brokerage, freight expense and amortization of costs for certain
facilities used in connection with marketing) with growers. Cost of sales
includes an accrual for estimated additional amounts to be paid to growers based
on the average net return realized for sugar sold in each of the contract years
through December 31. The final cost of sugarbeets cannot be determined until
the end of the contract year for each growing area. Manufacturing costs prior
to production are deferred and allocated to production costs based on estimated
total units of production for each sugar manufacturing campaign. Additionally,
the Company's sugar inventories, which are accounted for on a LIFO basis, are
periodically reduced at interim dates to levels below that of the beginning of
the fiscal year. When such interim LIFO liquidations are expected to be
restored prior to fiscal year-end, the estimated replacement cost of the
liquidated layers is utilized as the basis of the cost of sugar sold from
beginning of the year inventory. Accordingly, the cost of sugar utilized in the
determination of cost of sales for interim periods includes estimates which may
require adjustment in future fiscal periods.
Accounting Pronouncements - As of October 1, 1998, the Company adopted
Statement of Financial Accounting Standards No 130 "Reporting Comprehensive
Income", which requires the reporting of comprehensive income and its
components. For the three months ended December 31, 1998 and 1997, comprehensive
income (loss) was $9,036,000 and ($781,000), respectively. The difference
between comprehensive income and net income for each period was the change in
unrealized securities gains, net of related income taxes.
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and
Related Information" and Statement of Financial Accounting Standards No. 132,
"Employers' Disclosure About Pensions and Other Post Retirement Benefits". These
statements, which are effective for the Company's fiscal year ending September
30, 1999, establish additional disclosure requirements but do not affect the
measurement of results of operation. Additionally, Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," has been issued and will be effective for fiscal year ending
September 30, 2000. Management is evaluating what effect, if any, such
statements will have on the Company's results of operation and/or required
disclosures.
- 7 -
<PAGE>
Acquisitions - On November 2, 1998 the Company acquired all the outstanding
common stock of DSLT Inc. ("Diamond Crystal") in a merger of a wholly owned
subsidiary of the Company with and into Diamond Crystal. Consideration for the
acquisition consisted of $79.6 million cash, 4,972,060 shares of Company Common
Stock and the repayment of $28.3 million of Diamond Crystal debt. The Merger
consideration is subject to final adjustments based on an acquisition date
balance sheet of Diamond Crystal and other factors. The cash portion of the
Merger consideration was funded by borrowing under the Company's existing
revolving credit agreement.
Diamond Crystal produces nutritional dry mixes, sauces, seasonings, drink
mixes and desserts for distribution to the healthcare and food service
industries. A preliminary allocation of the aggregate purchase price, including
$34.0 million of liabilities assumed, has been made to current assets ($33.3
million), plant, property and equipment ($29.1 million) and goodwill ($122.3
million). Liabilities assumed include $2.5 million for the estimated costs to
close two production facilities currently operated by Diamond Crystal, as well
as cost related to the involuntary termination of certain adminstrative
employees.
The Company acquired Savannah Foods & Industries, Inc. ("Savannah") in a
two step transition concluded December 22, 1997, when Savannah merged with a
wholly owned subsidiary of the Company. Previously, the Company had purchased
50.1% of Savannah's outstanding common stock in a tender offer which was
completed October 17, 1997.
The acquisitions were accounted for by the purchase method, and these
consolidated financial statements include the results of Diamond Crystal since
November 2, 1998, and the results of Savannah since October 17, 1997, net of the
minority shareholders' interest in the earnings of Savannah through December 22,
1997. Pro forma operating results as if both the Diamond Crystal and the
Savannah acquisitions and related financing transactions had occurred as of
September 30, 1996, and assuming effective tax rates of 35% to 38%, are as
follows:
Three Months Ended
December 31,
---------------------------
1998 1997
------------ ------------
(In Thousands of Dollars)
Net Sales $ 482,845 $ 534,362
---------- ----------
Cost of Sales 432,750 481,313
Selling, General and Administrative Expenses 18,544 24,815
Depreciation and Amortization 12,997 12,639
---------- ----------
Operating Income 18,554 15,595
Interest Expense (14,820) (13,273)
Other Income 1,116 999
---------- ----------
Income Before Income Taxes 4,850 3,321
Provision for Income Taxes 2,835 2,440
---------- ----------
Net Income $ 2,015 $ 881
========== ==========
Basic Earnings Per Share $ 0.06 $ 0.03
========== ==========
Diluted Earnings Per Share $ 0.06 $ 0.03
========== ==========
Weighted Average Shares Outstanding 32,065,406 31,996,748
========== ==========
Goodwill acquired in these transactions is being amortized over 40 years.
- 8 -
<PAGE>
Earnings per Share - The following table presents information necessary to
calculate basic and diluted earnings per share.
<TABLE>
<CAPTION>
Three Months Ended
December 31,
--------------------------
1998 1997
----------- ------------
(In Thousands of Dollars)
<S> <C> <C>
Earnings for basic and diluted computation:
Income (loss) before extraordinary item $ 2,365 $ (142)
Adjustments - None - -
Adjusted income (loss) before extraordinary item $ 2,365 $ (142)
=========== ===========
Net income $ 2,365 $ (2,141)
Adjustments - None - -
----------- -----------
Adjusted net income $ 2,365 $ (2,141)
=========== ===========
Basic earnings per share:
Weighted average shares outstanding 30,335,994 15,670,653
=========== ===========
Income (loss) per share before
extraordinary item $ 0.08 $ (0.01)
=========== ===========
Net income (loss) per share $ 0.08 $ (0.14)
=========== ===========
Diluted earnings per share:
Weighted average shares outstanding 30,335,994 15,670,653
Incremental shares issuable from assumed
exercise of stock options under the
treasury stock method 7,962 -
----------- -----------
Weighted average shares outstanding -
as adjusted 30,343,956 15,670,653
=========== ===========
Income (loss) per share before
extraordinary item $ 0.08 $ (0.01)
=========== ===========
Net income (loss) per share $ 0.08 $ (0.14)
=========== ===========
</TABLE>
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<PAGE>
Substantially all of the Company's consolidated subsidiaries fully and
unconditionally guarantee the Company's 9-3/4% senior subordinated notes due
2007. The Company does not publish separate financial statements and other
disclosures for such guarantor subsidiaries because management has determined
that such information is not material to investors. Condensed, combined
financial information for such guarantor subsidiaries was as follows (in
thousands of dollars):
Three Months Ended
December 31,
------------
1998 1997
---- ----
Income Statement Data
- ---------------------
Net Sales $401,640 $359,673
Operating income 12,261 14,031
Net income (loss) 7,119 4,833
December 31,
------------
1998
----
Balance Sheet Data
- ------------------
Current assets $488,785
Property, plant and equipment, net 368,444
Goodwill - net 403,882
Current liabilities 244,957
Long-term debt, net 25,200
- 10 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company completed the first step of the Savannah acquisition on October
17, 1997 and completed the Diamond Crystal acquistion on November 2, 1998.
Accordingly, the results of operations reported for the quarter ended December
31, 1997 do not include Savannah operations for the first 16 days of the quarter
and do not include Diamond Crystal for any part of the period. Savannah
operations are included for the entire quarter ended December 31, 1998, while
Diamond Crystal's results are included for two of the three months on the
quarter. The pro forma financial information included in the Notes to
Consolidated Financial Statements present the combined results of the companies
as if the acquisitions and related financing transactions had occurred as of
September 30, 1996.
Liquidity and Capital Resources
The Company's primary capital requirements include debt service, capital
expenditures and working capital. The primary sources of capital are expected to
be cash flow from operations and borrowings under the revolving credit portion
of the Company's bank facility.
The Company's bank credit facility includes a $200 million revolving credit
facility (available through December 2002) and term loans initially aggregating
$255 million. At December 31, 1998, the Company had $4 million available under
the revolving credit facility. Interest on the facilities is at floating rates
(either a base rate plus a margin of from 0.25% to 1% or a Eurodollar rate plus
a margin of from 1.25% to 2%). The Company has entered into interest rate swap
agreements with major financial institutions to effectively fix the interest
rate on $214.4 million of the term loans at a weighted average annual rate of
7.96% as of December 31, 1998. The Company will be required to make prepayments
under the facilities, with certain exceptions, equal to 100% of the net proceeds
from certain indebtedness, the sale of equity securities and the disposition of
assets, including proceeds from the sale of stock of any subsidiaries, plus 75%
of excess cash flow. The facility is secured by substantially all of the assets
of the Company and its subsidiaries.
The Company's debt agreements impose various restrictions that could limit
the Company's ability to respond to market conditions, to provide for
unanticipated capital investments, to raise additional debt or equity capital,
or to take advantage of business opportunities. In particular, the Company and
each of its subsidiaries is subject to negative covenants contained in the bank
credit facility that restrict, subject to specified exceptions:
. the incurrence of additional indebtedness and other obligations and the
granting of additional liens;
. mergers, acquisitions and dispositions;
. investments, loans and advances;
. dividends, stock repurchases and redemptions;
. prepayment or repurchase of other indebtedness and amendments to certain
agreements governing indebtedness;
. transactions with affiliates;
- 11 -
<PAGE>
. capital expenditures;
. sales and leasebacks;
. changes in fiscal periods;
. changes of lines of business; and
. entering into agreements that prohibit the creation of liens or limit
the subsidiaries' ability to pay dividends.
In addition, the bank credit facility requires the Company to maintain
compliance with certain specified financial covenants, including a maximum ratio
of total debt to earnings before interest, taxes, depreciation and amortization
("EBITDA") and senior debt to EBITDA, a minimum interest coverage ratio and a
minimum fixed charge coverage ratio as well as a minimum adjusted current ratio
and a minimum level of net worth.
The indenture governing the Company's $250 million senior subordinated
notes contains covenants that limit, with certain exceptions, the ability of the
Company and most of its subsidiaries to:
. incur additional indebtedness or issue preferred stock;
. pay dividends or make certain other restricted payments by the Company
or its subsidiaries;
. enter into transactions with affiliates;
. make certain asset dispositions;
. in the case of the Company, merge or consolidate with, or transfer
substantially all of its assets to another person;
. encumber assets;
. issue capital stock of wholly owned subsidiaries; or
. engage in certain business activities.
In addition, under certain circumstances, the Company will be required to offer
to repurchase the notes at par, plus accrued and unpaid interest, with the
proceeds of certain asset sales.
The Company has a 43% limited partnership interest in a sugar beet
processing facility in Moses Lake, Washington that was commissioned in September
1998. The facility was slow in reaching full production due to operational
factors associated with the start-up which, together with poor weather affecting
sugarbeets in storage, have reduced operating cash flow to levels which are
insufficient to satisfy all of its obligations. The partnership is in
discussions with lenders concerning restructuring its existing debt and
obtaining additional financing of approximately $15 million to $25 million.
There can be no assurance that such discussions will be successful. Should the
partnership be unsuccessful in such discussions, and unable to secure additional
sources of financing, it may be required to consider bankruptcy protection
and/or be required to cease factory operations, potentially impairing the
Company's investments in and advances and loans to the partnership. The Company
has investments and subordinated advances to the partnership totaling $9.8
million plus a senior secured loan to the partnership of $5.6 million as of
December 31, 1998.
The Company's capital expenditures for fiscal 1999 are expected to be
approximately $32 million, including additional packaging and production
efficiency upgrades, as well as continuation of the Company's computer system
initiatives.
Based upon current and anticipated future operations and anticipated future
cost savings, the Company believes that capital resources will be adequate to
meet anticipated future capital requirements. There can be no assurance,
however, that the Company will realize sufficient cost savings or generate
sufficient cash flow that, together with the other sources of capital, will
enable the Company to service its indebtedness, or make anticipated capital
expenditures. If the Company is unable to generate sufficient cash flow from
operations or to borrow sufficient funds in the future to service its debt, it
may be required to sell assets, reduce capital expenditures, refinance all or a
portion of its existing indebtedness, or obtain additional financing.
Year 2000 Computer Issues
The Company has developed plans to address the possible exposures related
to the impact on its computer systems of the year 2000 ("Y2K"). Implementation
of some of these plans is completed and others are in process. The Company's
efforts have been focused in four areas: (1) technology infrastructure,
including hardware and computer operating software; (2) application software for
key financial, informational and operational systems; (3) process control
technology at each of the Company's production facilities; and (4) third party
readiness. These efforts are being coordinated with the Company's strategic
initiative to replace its major management information systems with newly
acquired client-server based software from PeopleSoft USA, Inc.
- 12 -
<PAGE>
The Company estimates that its infrastructure project is 80% complete,
including remediation of the mainframe and mid-range computers in the Company's
Savannah, Georgia and Sugar Land, Texas offices, and installation of the client-
server computers for the PeopleSoft implementation. The remaining
infrastructure effort is principally to complete testing and remediation or
replacement of personal computers and local area network servers.
The Company's plan for Y2K compliance of application software includes
remediation of certain systems and replacement of others. Remediation of
application software processed in Savannah, Georgia was completed in fiscal
1998. The Company expects to have completed remediation of systems processed in
Sugar Land, Texas by the end of the second quarter of fiscal 1999. The initial
phase of replacement with PeopleSoft applications of non-Y2K compliant
applications was implemented in fiscal 1998 and replaced the majority of the
Company's non-compliant systems. The replacement of remaining non-compliant
systems, principally human resource applications, is expected to be completed by
June 30, 1999. If such changes are not completed on a timely basis, the Company
believes it can utilize the Y2K compliant software currently being used by the
Savannah operations.
Management at each of the Company's production facilities is reviewing
and assessing the year 2000 impacts on hardware and software, including embedded
computer chips, utilized for manufacturing process control. The Company
believes that it has substantially completed identification of, and expects to
complete remediation by June 30, 1999 of, manufacturing control technology which
may materially affect its manufacturing operations.
The Company has also initiated discussions with major vendors and
customers concerning their year 2000 readiness, and is evaluating their
responses and developing contingency plans should such third parties not
complete required system modifications. Contingency plans could include
identifying alternate vendors for required services and materials or developing
manual procedures for automated processes.
Costs to modify existing application systems are expected to be less than
$1 million, approximately half of which was incurred in fiscal 1998. New
hardware and software purchases, including purchases related to the PeopleSoft
initiative, are estimated to total $8.5 million over a two year period,
including $3.5 million which was capitalized in fiscal 1998. No material costs
were incurred on these projects prior to fiscal 1998.
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 Y2K 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. The year 2000 efforts described above are
expected to significantly reduce the Company's level of uncertainty about the
Y2K problem and, in particular, about the year 2000 compliance and readiness of
such third parties. The Company believes that, with the implementation of new
business systems and completion of the projects as scheduled, the possibility of
significant interruptions of normal operations should be reduced.
Readers are cautioned that forward-looking statements contained in this
year 2000 discussion should be read in conjunction with the Company's
disclosures on page 2 of this Form 10-Q.
- 13 -
<PAGE>
Results of Operations
The 10% decrease in pro forma net sales for the three months ended December
31, 1998 compared to 1997 resulted from lower volumes of refined sugar sales and
lower byproduct sales prices, which were partially offset by somewhat higher
refined sugar sales prices in the current quarter. Byproduct sales prices
declined significantly due to competitive feed grain prices. Pro forma gross
margin declined $3.0 million to $50.1 million, but as a percent of sales
improved to 10.4% from 9.9%, as a result of the higher sugar sales prices. In
addition to the factors affecting revenues, gross margin was negatively impacted
by higher costs at the Company's Montana and Michigan factories due to lower
sugar content in sugarbeets harvested, and poor beet storage conditions due to
warm weather. Raw cane sugar unit costs were relatively flat for the two
quarterly periods.
Pro forma sales by the Company's Food Service division were $104.5
million for the three months ended December 31, 1998, an increase of $13.3
million from the same period of the prior year. Food Service gross margin was
$13.9 million or 13.3% of sales, down from $14.8 million due principally to
product mix and competitive pricing issues.
Historically, a significant portion of the Company's industrial sales are
made under forward sales contracts, most of which commence October 1 and extend
for up to a year, resulting in a lagging effect of market price changes on the
Company's sugar sales. Industrial sales contracting during the quarter ended
December 31, 1998 was slower than in past periods and many customers chose to do
business on a spot basis. Significant contracting after December 31, 1998 has
brought the Company's sales commitments closer to historical levels.
To mitigate its exposure to future price changes, the Company purchases raw
cane sugar under forward purchase contracts and manages the volume of refined
sugar sales contracted for future delivery relative to the volume of raw sugar
priced for future purchase. The Company purchases sugar beets under
participatory contracts which provide for a percentage sharing of the net
selling price realized on refined beet sugar sales and, in some cases,
byproducts, between the Company and the grower. Use of this type of contract
reduces the Company's exposure to price risk on sugarbeet purchases by causing
the price paid for sugarbeets to vary with the price received for refined sugar,
so long as the contract net selling price does not fall below the regional
minimum support prices established by the USDA. Consequently, the increase in
the unit selling price of refined beet sugar resulted in increases in the unit
cost of sugarbeets purchased, mitigating the impact on beet sugar sales margins.
Pro forma selling, general and administrative costs were $6.3 million
lower for the three months ended December 31, 1998 compared to the same period
of the prior year, due to reductions in volume related selling costs, as well as
cost savings in general and administrative expenses. Following the Savannah
acquisition the Company reorganized to remove duplication and streamline
administrative functions.
Interest expense for the three months ended December 31, 1998 was higher
than the comparable period of the prior year primarily as a result of higher
borrowings to finance the Diamond Crystal acquisition.
- 14 -
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the Annual Meeting of Shareholders held on January 29, 1999 the
following proposals were acted upon:
Proposal 1 - Nominees for Directors were elected to serve as Class II
Directors for terms of office expiring in 2002 by the vote totals as follow:
NUMBER OF VOTES
FOR WITHHELD
---------- --------
David J. Dilger 31,089,209 116,279
Edward O. Gaylord 31,119,901 85,587
Gerald Grinstein 31,116,208 89,280
Robert L. Harrison 31,098,416 107,072
W. W. Sprague III 31,092,866 112,622
Class III Directors, whose terms of office continue until 2000 are Ann O.
Hamilton, Harris L. Kempner, Jr., H. E. Lentz, Kevin C. O'Sullivan and Fayez
Sarofim. Class I Directors, whose terms of office continue until 2001 are John
D. Curtin, I. H. Kempner III, James C. Kempner and Daniel K. Thorne.
Proposal 2 - The proposal to amend the Company's Related Articles of
Incorporation to change the Company name to Imperial Sugar Company was approved
by a vote of 30,899,940 (93.7%) for and 162,231 (0.49%) against with 143,317
(0.43%) abstentions.
Proposal 3 - The appointment of Deloitte & Touche LLP as auditors of the
Company for the fiscal year ending September 30, 1999 was ratified by a vote of
31,046,530 (94.1%) for and 23,993 (0.07%) against with 134,965 (0.41 %)
abstentions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The exhibits required to be filed with this report are listed below:
Exhibit 3 Articles of Amendment to Restated Articles of
Incorporation.
Exhibit 27 Financial Data Schedules
Registrant is a party to several long-term debt instruments under which
in each case the total amount of securities authorized does not exceed 10% of
the total assets of Registrant and its subsidiaries on a consolidated basis.
Pursuant to paragraph 4(iii) (A) of Item 601(b) of Regulation S-K, Registrant
agrees to furnish a copy of such instruments to the Securities and Exchange
Commission upon request.
(b) During the three months ended December 31, 1998, the Company filed a
current report on Form 8-K dated as of November 2, 1998.
- 15 -
<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.
IMPERIAL SUGAR COMPANY
(Registrant)
Dated: February 16, 1999 By: /s/ Mary L. Burke
-----------------
Mary L. Burke
Managing Director
and Chief Financial Officer
(Principal Financial Officer)
- 16 -
<PAGE>
EXHIBIT 3
ARTICLES OF AMENDMENT
to
RESTATED ARTICLES OF INCORPORATION
of
IMPERIAL HOLLY CORPORATION
to be renamed
IMPERIAL SUGAR COMPANY
Pursuant to the provisions of Article 4.04 of the Texas Business
Corporation Act, the undersigned corporation adopts the following articles of
amendment to its Restated Articles of Incorporation:
1. The name of the corporation is Imperial Holly Corporation.
2. The following amendment to the Restated Articles of Incorporation of
the corporation changes the name of the corporation to "Imperial Sugar Company."
The amendment alters the first sentence of Article I of the Restated Articles of
Incorporation to read, in full:
"The name of the corporation is Imperial Sugar Company."
3. The amendment made by these articles of amendment was duly adopted by
the shareholders of the corporation at a meeting duly held on January 29, 1999.
4. The number of shares outstanding as of the date hereof is 33,205,606
shares of Common Stock, without par value; the number of shares outstanding as
of the close of business on December 3, 1998, the record date for such meeting
of shareholders, was 32,131,304 shares of Common Stock, without par value, and
all of such 32,131,304 shares were entitled to vote on the amendment; the number
of such shares voted for the amendment was 30,899,940; and the number of such
shares voted against the amendment was 162,231.
IN WITNESS WHEREOF, these articles of amendment have been executed on
January 29, 1999.
IMPERIAL HOLLY CORPORATION
By: /s/ James C. Kempner
-----------------------------
James C. Kempner
President
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's unaudited condensed consolidated financial statements for the three
months ended December 31, 1998 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,436
<SECURITIES> 69,750
<RECEIVABLES> 110,082
<ALLOWANCES> 0
<INVENTORY> 372,136
<CURRENT-ASSETS> 578,691
<PP&E> 617,011
<DEPRECIATION> 195,508
<TOTAL-ASSETS> 1,450,128
<CURRENT-LIABILITIES> 259,241
<BONDS> 671,519
0
0
<COMMON> 293,198
<OTHER-SE> 108,008
<TOTAL-LIABILITY-AND-EQUITY> 1,450,128
<SALES> 471,761
<TOTAL-REVENUES> 471,761
<CGS> 423,982
<TOTAL-COSTS> 423,982
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,117
<INCOME-PRETAX> 5,022
<INCOME-TAX> 2,657
<INCOME-CONTINUING> 2,365
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,365
<EPS-PRIMARY> 0.08
<EPS-DILUTED> 0.08
</TABLE>
