<PAGE>
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 March 31, 1999
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)
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 May 13, 1999.
32,191,910 shares.
<PAGE>
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
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 15
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
______________________
The statements regarding future market prices, anticipated cost savings,
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.
- 2 -
<PAGE>
PART I - FINANCIAL INFORMATION
IMPERIAL SUGAR COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, 1999 September 30, 1998
-------------- ------------------
(Unaudited)
(In Thousands of Dollars)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and temporary investments $ 9,278 $ 2,877
Marketable securities 70,847 59,478
Accounts receivable 133,431 139,870
Inventories 286,383 204,929
Deferred costs and prepaid expenses 30,395 39,135
---------- ----------
Total current assets 530,334 446,289
OTHER INVESTMENTS 5,392 20,872
PROPERTY, PLANT AND EQUIPMENT - net 417,280 398,193
GOODWILL & OTHER INTANGIBLES 401,747 279,410
OTHER ASSETS 25,620 35,036
---------- ----------
TOTAL $1,380,373 $1,179,800
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable -- trade $ 133,801 $ 106,041
Short-term borrowings 30,640 1,161
Current maturities of long-term debt 13,523 7,555
Other current liabilities 69,893 71,303
---------- ----------
Total current liabilities 247,857 186,060
LONG-TERM DEBT 632,142 525,893
DEFERRED INCOME TAXES, EMPLOYEE BENEFITS
AND OTHER CREDITS 119,659 114,940
SHAREHOLDERS' EQUITY
Preferred stock - -
Common stock 309,410 268,804
Stock held by benefit trust (14,367) (14,367)
Treasury stock (1,452) (1,452)
Retained earnings 61,966 80,150
Unrealized securities gains - net 25,158 19,772
---------- ----------
Total shareholders' equity 380,715 352,907
---------- ----------
TOTAL $1,380,373 $1,179,800
========== ==========
</TABLE>
See notes to consolidated financial statements.
- 3 -
<PAGE>
IMPERIAL HOLLY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
--------------------------- ---------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
(In Thousands of Dollars, Except per Share Amounts)
<S> <C> <C> <C> <C>
NET SALES $ 428,997 $ 414,967 $ 900,758 $ 849,834
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Cost of sales 395,635 383,835 819,617 779,571
Selling, general and administrative 17,465 16,718 33,957 34,208
Depreciation and amortization 12,496 12,333 25,060 22,421
Asset impairment and other charges - 18,287 - 18,287
----------- ----------- ----------- -----------
Total 425,596 431,173 878,634 854,487
----------- ----------- ----------- -----------
OPERATING INCOME 3,401 (16,206) 22,124 (4,653)
INTEREST EXPENSE (16,350) (14,598) (30,467) (22,978)
REALIZED SECURITIES GAINS 2,292 2,069 2,292 2,179
LOSS ON INVESTMENT IN PARTNERSHIP (16,706) - (16,706) -
OTHER INCOME -- Net 398 2,183 814 2,758
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES & MINORITY INTEREST (26,965) (26,552) (21,943) (22,694)
PROVISION FOR INCOME TAXES (8,406) (9,335) (5,749) (7,101)
MINORITY INTEREST IN INCOME OF SAVANNAH - - - 1,766
----------- ----------- ----------- -----------
INCOME BEFORE EXTRAORDINARY ITEM (18,559) (17,217) (16,194) (17,359)
EXTRAORDINARY ITEM - NET OF TAX - - - (1,999)
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (18,559) $ (17,217) $ (16,194) $ (19,358)
=========== =========== =========== ===========
BASIC EARNINGS (LOSS) PER SHARE OF COMMON STOCK:
Income before extraordinary item ($0.58) ($0.64) ($0.52) ($0.82)
=========== =========== =========== ===========
Net income (loss) ($0.58) ($0.64) ($0.52) ($0.91)
=========== =========== =========== ===========
DILUTED EARNINGS (LOSS) PER SHARE OF COMMON STOCK:
Income before extraordinary item ($0.58) ($0.64) ($0.52) ($0.82)
=========== =========== =========== ===========
Net income (loss) ($0.58) ($0.64) ($0.52) ($0.91)
=========== =========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 32,138,541 27,028,990 31,227,182 21,287,413
=========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
- 4 -
<PAGE>
IMPERIAL SUGAR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
March 31,
----------------------
1999 1998
--------- ---------
(In Thousands of Dollars)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (16,194) $ (19,358)
Adjustments for non-cash and non-operating items:
Loss on investment in partnership 16,706 -
Extraordinary item - net - 1,999
Minority interest in earnings of Savannah - 1,766
Impairment loss - 12,538
Depreciation & amortization 25,060 22,421
Other (723) (2,798)
Changes in operating assets and liabilities
(excluding amounts acquired in the Savannah
and Diamond Crystal acquisitions):
Receivables 15,646 8,306
Inventory (67,565) (55,474)
Deferred and prepaid costs 9,685 23,421
Accounts payable 20,760 31,404
Other liabilities (24,118) (33,375)
--------- ---------
Operating cash flow (20,743) (9,150)
--------- ---------
INVESTMENT ACTIVITIES:
Acquisition of Diamond Crystal, net of cash acquired (111,442) -
Acquisition of Savannah, net of cash acquired - (364,290)
Capital expenditures (9,605) (20,896)
Investment in marketable securities (4,656) (880)
Proceeds from sales of securities 10,066 4,918
Proceeds from sales of fixed assets 45 111
Other 5,086 6,927
--------- ---------
Investing cash flow (110,506) (374,110)
--------- ---------
FINANCING ACTIVITIES:
Short-term debt:
CCC borrowings - advances 30,630 37,037
CCC borrowings - repayments - (12,000)
Other - net (1,151) -
Revolving credit borrowings 113,100 (33,090)
Long-term debt:
Proceeds - 520,874
Repayment (3,707) (128,646)
Dividends paid (1,990) (1,264)
Issuance of stock and other 768 5,074
--------- ---------
Financing cash flow 137,650 387,985
--------- ---------
INCREASE (DECREASE) IN CASH AND TEMPORARY INVESTMENTS 6,401 4,725
CASH AND TEMPORARY INVESTMENTS, BEGINNING OF PERIOD 2,877 9,354
--------- ---------
CASH AND TEMPORARY INVESTMENTS, END OF PERIOD $ 9,278 $ 14,079
========= =========
</TABLE>
See notes to consolidated financial statements.
- 5 -
<PAGE>
IMPERIAL SUGAR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Six Months Ended March 31, 1999
(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 (loss) - - - - - - (16,194) - (16,194)
Cash dividends - - - - - - (1,990) - (1,990)
Stock issued in Diamond
Crystal acquisition 4,972,060 - - 39,776 - - - - 39,776
Employee stock purchase
plan & stock option exercises 76,029 - - 499 - - - - 499
Director compensation plan 39,776 331 331
Change in unrealized
securities
gains - net - - - - - - - 5,386 5,386
---------- ---------- -------- -------- -------- -------- -------- ---------- --------
BALANCE MARCH 31, 1999 33,473,856 (1,199,053) (121,197) $309,410 $(14,367) $(1,452) $ 61,966 $25,158 $380,715
========== ========== ======== ======== ======== ======== ======== ========== ========
</TABLE>
See notes to consolidated financial statements.
- 6 -
<PAGE>
IMPERIAL SUGAR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED MARCH 31, 1999 AND 1998
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 March 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 March 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 during 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. Comprehensive income (loss) was:
March 31,
1999 1998
-------- --------
Three Months Ended (19,844) (14,240)
Six Months Ended (10,808) (15,021)
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
- 7 -
<PAGE>
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 the 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.
Loss on Investment in Partnership - During the second quarter of fiscal
1999, the Company recorded charges totaling $16.7 million to write-off its
investment in Pacific Northwest Sugar Company, a partnership in which a
subsidiary of the Company was a 43% limited partner. In connection with the
restructuring of the partnership's debt, the Company transferred its limited
partnership interest to an affiliate of the general partner. An agreement dated
April 26, 1999 terminated the Company's involvement with the project and
includes mutual releases among the parties. As a result of the agreement, the
general partner becomes the sole owner of the partnership, which constructed,
owns and operates a beet sugar processing facility in Moses Lake, Washington.
The facility experienced substantial operating losses in its first year of
operation due principally to critical equipment failures, exacerbated by warmer
than normal weather during the processing campaign. The Company's share of such
losses, which first exceeded the general partner's capital accounts in the
current quarter, totaled approximately $10.5 million and is included in the
above mentioned charge.
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 paid at
closing 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 adjustments based on an acquisition date balance
sheet of Diamond Crystal and other factors. In April 1999, additional
consideration of $555,000 cash and 34,710 shares of Company common stock was
issued based on the resolution of certain of such 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 paid at
closing, 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
administrative employees.
The Company acquired Savannah Foods & Industries, Inc. ("Savannah") in a
two step transaction 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 Diamond Crystal and Savannah 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
- 8 -
<PAGE>
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, 1997, and assuming effective tax rates of 35%
to 38%, are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
--------------------------- ---------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
(In Thousands of Dollars, Except Per Share Amounts)
<S> <C> <C> <C> <C>
Net Sales $ 428,997 $ 449,075 $ 911,842 $ 983,437
----------- ----------- ----------- -----------
Cost of Sales 395,635 409,268 828,385 890,581
Selling, General and
Administrative Expenses 17,465 21,632 36,009 46,447
Asset Impairment and Other Charges - 18,287 - 18,287
Depreciation and Amortization 12,496 13,561 25,493 26,200
----------- ----------- ----------- -----------
Operating Income 3,401 (13,673) 21,955 1,922
Interest Expense (16,350) (16,520) (31,170) (29,793)
Loss on Investment in Partnership (16,706) - (16,706) -
Other Income 2,690 4,272 3,806 5,271
----------- ----------- ----------- -----------
Income Before Income Taxes (26,965) (25,921) (22,115) (22,600)
Provision for Income Taxes (8,406) (8,451) (5,571) (6,011)
----------- ----------- ----------- -----------
Net Income $ (18,559) $ (17,470) $ (16,544) $ (16,589)
=========== =========== =========== ===========
Basic Earnings Per Share $(0.58) $(0.55) $(0.51) $(0.52)
=========== =========== =========== ===========
Diluted Earnings Per Share $(0.58) $(0.55) $(0.51) $(0.52)
=========== =========== =========== ===========
Weighted Average Shares
Outstanding 32,138,541 32,000,990 32,101,572 31,998,846
=========== =========== =========== ===========
</TABLE>
Goodwill acquired in these transactions is being amortized over 40 years.
- 9 -
<PAGE>
Earnings per Share - The following table presents information necessary to
calculate basic and diluted earnings per share.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
--------------------------- ---------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
(In Thousands of Dollars, Except per Share Amounts)
<S> <C> <C> <C> <C>
Earnings for basic and diluted computation:
Income (loss) before extraordinary
item $ (18,559) $ (17,217) $ (16,194) $ (17,359)
Adjustments - None - - - -
----------- ----------- ----------- -----------
Adjusted income (loss) before
extraordinary item $ (18,559) $ (17,217) $ (16,194) $ (17,359)
=========== =========== =========== ===========
Net income (loss) $ (18,559) $ (17,217) $ (16,194) $ (19,358)
Adjustments - None - - - -
----------- ----------- ----------- -----------
Adjusted net income $ (18,559) $ (17,217) $ (16,194) $ (19,358)
=========== =========== =========== ===========
Basic earnings per share:
Weighted average shares outstanding 32,138,541 27,028,990 31,227,182 21,287,413
=========== =========== =========== ===========
Income (loss) per share before
extraordinary item $ (0.58) $ (0.64) $ (0.52) $ (0.82)
=========== =========== =========== ===========
Net income (loss) per share $ (0.58) $ (0.64) $ (0.52) $ (0.91)
=========== =========== =========== ===========
Diluted earnings per share:
Weighted average shares outstanding 32,138,541 27,028,990 31,227,182 21,287,413
Incremental shares issuable from
assumed exercise of stock options
under the treasury stock method - - - -
----------- ----------- ----------- -----------
Weighted average shares outstanding
- as adjusted 32,138,541 27,028,990 31,227,182 21,287,413
=========== =========== =========== ===========
Income (loss) per share before
extraordinary item $ (0.58) $ (0.64) $ (0.52) $ (0.82)
=========== =========== =========== ===========
Net income (loss) per share $ (0.58) $ (0.64) $ (0.52) $ (0.91)
=========== =========== =========== ===========
</TABLE>
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):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
-------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Income Statement Data
- ---------------------
Net Sales $372,271 $350,512 $773,911 $710,195
Operating income (15,210) (11,773) (2,949) 2,258
Net income (loss) (6,714) (9,024) 405 (4,191)
March 31,
1999
--------
Balance Sheet Data
- ------------------
Current assets $434,059
Property, plant and equipment, net 362,958
Goodwill - net 401,747
Current liabilities 230,591
Long-term debt, net 25,150
</TABLE>
- 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 acquisition on November 2,
1998. Accordingly, the results of operations reported for the six months ended
March 31, 1998 do not include Savannah operations for the first 16 days of the
period and do not include Diamond Crystal for any part of the period. Savannah
operations are included for the entire six months ended March 31, 1999, while
Diamond Crystal's results are included for five of the six months. 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, 1997.
Liquidity and Capital Resources
The Company's primary capital requirements are expected to 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 credit 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 March 31, 1999, the Company had $35 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 million of the term loans at a
weighted average annual rate of 7.96% as of March 31, 1999. 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;
. 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.
- 11 -
<PAGE>
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'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 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 decrease in pro forma net sales for both the three and six month
periods ended March 31, 1999 compared to 1998 resulted from lower volumes of
refined sugar sales, lower consumer private label prices and lower byproduct
sales prices, which were partially offset by higher industrial sugar sales
prices. Byproduct sales prices declined significantly due to competitive feed
grain prices. Pro forma gross margin as a percent of sales declined from 8.9%
to 7.8% for the quarter and from 9.4% to 9.1% for the six months primarily due
to higher costs at the Company's Montana and Michigan factories resulting from
lower sugar content in sugarbeets harvested, and warmer temperatures during
sugarbeet storage which adversely affected sugar recovery. Raw cane sugar unit
costs were relatively flat for the periods.
Pro forma sales by the Company's Food Service division were $205.2
million for the six months and $104.5 million for the three months ended March
31, 1999, increases of $21.7 million and $9.5 million from the same periods of
the prior year. Food Service gross margin was $27.4 million for the six months
and $13.5 million for the three months of the current year, down by $2.0 million
and $1.3 million respectively, 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. As of March 31, 1999, the Company's sales commitments
were closer to historical levels, as a result of significant contracting after
December 31, 1998.
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 purchases. 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
industrial 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 $4.2 million
lower for the three months and $10.4 million lower for the six months ended
March 31, 1999 compared to the same periods of the prior year, due to cost
savings in general and administrative expenses as well as reductions in volume
related selling costs. Following the Savannah acquisition the Company undertook
significant cost savings initiatives and reorganized its administrative
functions to remove duplication and streamline such functions.
Interest expense for the three and six months ended March 31, 1999 was
higher than the comparable period of the prior year primarily as a result of
higher borrowings to finance the Diamond Crystal acquisition.
The loss on investment in partnership resulted from the write-off of the
Company's investment in a limited partnership as discussed in the notes of
consolidated financial statements.
- 14 -
<PAGE>
The asset impairment and other charges included in the prior year's
results were primarily charges in connection with the closing of the Company's
Hereford, Texas beet sugar factory and charges to record a loss the Company
incurred in meeting it contractual sales obligations as a result of poor weather
conditions at its Northern California factories.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company uses raw sugar futures and options in its inventory
purchasing programs. Gains and losses on such transactions are matched to
specific inventory purchases and charged or credited to cost of sales as such
inventory is sold. The Company does not enter into futures or option
transactions for trading purposes.
The information below presents the Company's domestic futures position
outstanding as of March 31, 1999. The Company's world sugar futures and option
positions are not material to its consolidated financial position, results of
operations or cash flow.
Expected Maturity Expected Maturity
Fiscal 1999 Fiscal 2000
----------------- -----------------
Futures Contract (long positions):
Contract Volumes (cwt.) 234,080 1,274,560
Weighted Average Contract Price
(per cwt.) $22.82 $22.31
Contract Amount $5,342,073 $28,432,463
Weighted Average Fair Value
(per cwt.) $22.89 $22.39
Fair Value $5,358,091 $28,542,674
The above information does not include either the Company's physical
inventory or its fixed price purchase commitments for raw sugar.
The Company's position in derivative financial instruments and other
financial instruments has not changed materially since September 30, 1998,
except the addition of interest rate swaps with notional amounts totaling $40
million at an average fixed rate of 7.55% maturing in 2003.
- 15 -
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The exhibits required to be filed with this report are listed below:
Exhibit 27 Financial Data Schedule
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 March 31, 1999, the Company did not
file a current report on Form 8-K. In May 1997, the Company filed a current
report on Form 8-K dated May 3, 1999.
- 16 -
<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: May 14, 1999 By: /s/ Mary L. Burke
-------------------
Mary L. Burke
Managing Director
and Chief Financial Officer
(Principal Financial Officer)
- 17 -
<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 six
months ended March 31, 1999 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 9,278
<SECURITIES> 70,847
<RECEIVABLES> 133,431
<ALLOWANCES> 0
<INVENTORY> 286,383
<CURRENT-ASSETS> 530,334
<PP&E> 620,237
<DEPRECIATION> 202,957
<TOTAL-ASSETS> 1,380,373
<CURRENT-LIABILITIES> 247,857
<BONDS> 632,142
0
0
<COMMON> 309,410
<OTHER-SE> 71,305
<TOTAL-LIABILITY-AND-EQUITY> 1,380,373
<SALES> 900,578
<TOTAL-REVENUES> 900,578
<CGS> 819,617
<TOTAL-COSTS> 819,617
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30,467
<INCOME-PRETAX> (21,943)
<INCOME-TAX> (5,749)
<INCOME-CONTINUING> (16,194)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,194)
<EPS-PRIMARY> (0.52)
<EPS-DILUTED> (0.52)
</TABLE>
