-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BxJRoYOpMy1LvMrjO8kH0ZFprwpyxxAmgnUo5GGEZcrRE9r3+EYRPVabIkIw9Ir4 biXIlvYxMqiDFiQK1GovbA== 0000899243-99-001090.txt : 19990517 0000899243-99-001090.hdr.sgml : 19990517 ACCESSION NUMBER: 0000899243-99-001090 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IMPERIAL SUGAR CO /NEW/ CENTRAL INDEX KEY: 0000831327 STANDARD INDUSTRIAL CLASSIFICATION: SUGAR & CONFECTIONERY PRODUCTS [2060] IRS NUMBER: 740704500 STATE OF INCORPORATION: TX FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10307 FILM NUMBER: 99624605 BUSINESS ADDRESS: STREET 1: ONE IMPERIAL SQ STE 200 STREET 2: P O BOX 9 CITY: SUGAR LAND STATE: TX ZIP: 77487 BUSINESS PHONE: 2814919181 FORMER COMPANY: FORMER CONFORMED NAME: IMPERIAL HOLLY CORP DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: IMPERIAL SUGAR CO /TX/ DATE OF NAME CHANGE: 19880606 10-Q 1 FORM 10-Q FOR QUARTER ENDED MARCH 31, 1999 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. 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 - PART I - FINANCIAL INFORMATION IMPERIAL SUGAR COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
March 31, 1999 September 30, 1998 -------------- ------------------ (Unaudited) (In Thousands of Dollars) 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 ========== ==========
See notes to consolidated financial statements. - 3 - IMPERIAL HOLLY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Six Months Ended March 31, March 31, --------------------------- --------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------ (In Thousands of Dollars, Except per Share Amounts) 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 =========== =========== =========== ===========
See notes to consolidated financial statements. - 4 - IMPERIAL SUGAR COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended March 31, ---------------------- 1999 1998 --------- --------- (In Thousands of Dollars) 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 ========= =========
See notes to consolidated financial statements. - 5 - IMPERIAL SUGAR COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY For the Six Months Ended March 31, 1999 (UNAUDITED)
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) 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 ========== ========== ======== ======== ======== ======== ======== ========== ========
See notes to consolidated financial statements. - 6 - 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 - 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 - 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:
Three Months Ended Six Months Ended March 31, March 31, --------------------------- --------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------ (In Thousands of Dollars, Except Per Share Amounts) 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 =========== =========== =========== ===========
Goodwill acquired in these transactions is being amortized over 40 years. - 9 - Earnings per Share - The following table presents information necessary to calculate basic and diluted earnings per share.
Three Months Ended Six Months Ended March 31, March 31, --------------------------- --------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------ (In Thousands of Dollars, Except per Share Amounts) 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) =========== =========== =========== ===========
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 Six Months Ended March 31, March 31, -------------------- ---------------------- 1999 1998 1999 1998 ---------- ---------- ---------- --------- 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
- 10 - 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 - 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 - 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 - 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 - 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 - 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 - 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 - EX-27 2 FINANCIAL DATA SCHEDULE
5 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. 1,000 6-MOS SEP-30-1999 OCT-01-1998 MAR-31-1999 9,278 70,847 133,431 0 286,383 530,334 620,237 202,957 1,380,373 247,857 632,142 0 0 309,410 71,305 1,380,373 900,578 900,578 819,617 819,617 0 0 30,467 (21,943) (5,749) (16,194) 0 0 0 (16,194) (0.52) (0.52)
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