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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 June 30, 2002
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 by check mark whether the Registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes x No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of August 12, 2002.
10,000,000 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 Operations 4
Consolidated Statements of Cash Flows 5
Consolidated Statements 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 12
Item 3. Quantitative and Qualitative Disclosure
About Market Risk 18
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 19
----------------------
Forward-Looking Statements
Statements regarding market prices and margins, future operating results,
sugarbeet acreage, operating efficiencies, future government and legislative
action, cost savings, compliance with covenants in our financial agreements, the
future status of financing arrangements, our liquidity and ability to finance
our operations, proposed sales of assets or businesses, and other statements
that are not historical facts contained in this report on Form 10-Q are
forward-looking statements. We identify forward-looking statements in this
report by using the following words and similar expressions:
o expect o project o estimate
o believe o anticipate o likely
o plan o intend o could
o should o may o predict
o budget
Forward-looking statements involve risks, uncertainties and assumptions,
including, without limitation, market factors, energy costs, the effect of
weather and economic conditions, farm and trade policy, our ability to realize
planned cost savings, the available supply of sugar, available quantity and
quality of sugarbeets, court decisions and actions, the results of negotiations,
actual or threatened acts of terrorism or armed hostilities, legislative and
administrative actions and other factors detailed elsewhere in this report and
in our other filings with the SEC. Many of such factors are beyond our ability
to control or predict. Management cautions against placing undue reliance on
forward-looking statements or projecting any future results based on such
statements or present or future earnings levels. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual outcomes may vary materially from those indicated. All
forward-looking statements in this Form 10-Q are qualified in their entirety by
the cautionary statements contained in this section and elsewhere in this
report.
2
PART I - FINANCIAL INFORMATION
IMPERIAL SUGAR COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2002
(Unaudited) SEPTEMBER 30, 2001
------------- ------------------
ASSETS (In Thousands of Dollars)
CURRENT ASSETS:
Cash and temporary investments $ 39,180 $ 7,331
Marketable securities 3,798 2,770
Accounts receivable 22,698 17,768
Notes receivable - securitization affiliate 12,385 12,605
Inventories:
Finished products 92,352 82,466
Raw and in-process materials 57,154 52,826
Supplies 17,412 36,457
--------- ---------
Total inventory 166,918 171,749
Deferred costs and prepaid expenses 26,799 38,364
--------- ---------
Total current assets 271,778 250,587
OTHER INVESTMENTS 13,706 4,293
INVESTMENT IN SECURITIATION AFFILIATE 14,157 19,933
PROPERTY, PLANT AND EQUIPMENT - net 210,566 275,453
OTHER ASSETS 5,618 5,517
--------- ---------
TOTAL $ 515,825 $ 555,783
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade $ 63,467 $ 81,514
Short-term borrowings 21,393 532
Current maturities of long-term debt 6,673 3,746
Other current liabilities 74,091 77,142
--------- ---------
Total current liabilities 165,624 162,934
LONG TERM DEBT - net of current maturities 185,955 226,779
DEFERRED EMPLOYEE BENEFITS 64,517 86,413
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock, without par value,
issuable in series; 5,000,000 shares
authorized, none issued -- --
Common stock 90,000 90,000
Retained earnings (deficit) 9,777 (6,464)
Accumulated other comprehensive income (48) (3,879)
--------- ---------
Total shareholders' equity 99,729 79,657
--------- ---------
TOTAL $ 515,825 $ 555,783
========= =========
See notes to consolidated financial statements.
3
IMPERIAL SUGAR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Successor Predecessor Successor Predecessor
Company Company Company Company
------------ --------------- ------------ --------------
Three Months Ended Nine Months Ended
June 30, June 30,
----------------------------- ----------------------------
2002 2001 2002 2001
-------------- ------------- ------------- -------------
(In Thousands of Dollars, Except per Share Amounts)
NET SALES $ 319,854 $ 372,274 $ 948,525 $1,173,322
--------- --------- --------- ----------
COSTS AND EXPENSES:
Cost of sales 295,295 350,254 875,695 1,097,356
Selling, general and administrative 15,305 17,103 46,818 56,444
Discount on receivables sold to
securitization affiliate 688 1,424 2,845 5,040
Depreciation and amortization 4,288 12,514 14,390 37,859
--------- --------- --------- ----------
Total 315,576 381,295 939,748 1,196,699
--------- --------- --------- ----------
OPERATING INCOME (LOSS) 4,278 (9,021) 8,777 (23,377)
INTEREST EXPENSE (5,325) (6,918) (15,614) (28,165)
REORGANIZATION COSTS - (4,170) - (7,705)
CHANGE IN FAIR VALUE OF INTEREST
RATE SWAPS (340) 395 1,754 (6,795)
GAIN ON SALE OF ASSETS 3,913 2,239 21,786 4,331
OTHER INCOME (EXPENSE)- net 260 626 (462) 3,814
--------- --------- --------- ----------
INCOME (LOSS) BEFORE INCOME TAXES 2,786 (16,849) 16,241 (57,897)
PROVISION (BENEFIT) FOR INCOME TAXES - (2,751) - (15,964)
--------- --------- --------- ----------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGE 2,786 (14,098) 16,241 (41,933)
CUMULATIVE EFFECT OF ACCOUNTING CHANGE -
NET OF $1,266,000 OF INCOME TAX - - - 2,352
--------- --------- --------- ----------
NET INCOME (LOSS) $ 2,786 $ (14,098) $ 16,241 $ (39,581)
========= ========= ========= ==========
BASIC EARNINGS (LOSS) PER
SHARE OF COMMON STOCK:
Income (loss) before cumulative
effect of accounting change $ 0.28 $ (0.43) $ 1.62 $ (1.29)
Cumulative effect of accounting
change - - - 0.07
--------- --------- --------- ----------
Net income (loss) $ 0.28 $ (0.43) $ 1.62 $ (1.22)
========= ========= ========= ==========
DILUTED EARNINGS (LOSS) PER
SHARE OF COMMON STOCK:
Income (loss) before cumulative
effect of accounting change $ 0.28 $ (0.43) $ 1.62 $ (1.29)
Cumulative effect of accounting change - - - 0.07
--------- --------- --------- ----------
Net income (loss) $ 0.28 $ (0.43) $ 1.62 $ (1.22)
========= ========= ========= ==========
WEIGHTED AVERAGE SHARES OUTSTANDING 10,000,000 32,412,368 10,000,000 32,408,350
=========== ========== ========== ==========
See notes to consolidated financial statements.
4
IMPERIAL SUGAR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
Successor Predecessor
Company Company
--------------- ---------------
Nine Months Ended
June 30,
---------------------------------------
2002 2001
--------------- -----------------
(In Thousands of Dollars)
OPERATING ACTIVITIES:
Net income (loss) $ 16,241 $ (39,581)
Adjustments for non-cash and non-operating items:
Cumulative effect of accounting change, net - (2,352)
Reclassification adjustment from accumulated other
comprehensive income to net income (4,408) (9,866)
Change in fair value of interest rate swaps (1,754) 5,870
Cash settlements on derivative instruments - net 6,578 (9,409)
Depreciation and amortization 14,390 37,859
Gain on sales of assets (21,786) (4,331)
Other (6) 1,818
Changes in operating assets and liabilities:
Accounts receivables 6,567 (491)
Inventories (15,688) (18,531)
Deferred costs and prepaid expenses (1,584) 16,822
Accounts payable - trade (15,284) (111,689)
Other liabilities 986 77,137
-------- --------
Operating cash flow (15,748) (56,744)
-------- --------
INVESTING ACTIVITIES:
Capital expenditures (9,760) (6,710)
Proceeds from maturity of securities 1,263 3,006
Proceeds from sale of assets 59,210 56,072
Investment in marketable securities (2,219) (1,666)
Other (1,908) (1,138)
-------- --------
Investing cash flow 46,586 49,564
-------- --------
FINANCING ACTIVITIES:
Short-term debt:
Commodity Credit Corporation borrowings - advances 34,268 -
Commodity Credit Corporation borrowings - repayments (13,826) -
Other - net 419 -
Debtor-in-possession credit facility - net - 36,050
Pre-petition revolving credit borrowings - net - 94,000
Post-petition revolving credit borrowings - net 2,682 (116,950)
Repayment of long-term debt (22,532) (3,868)
Issuance of stock and other - 30
-------- --------
Financing cash flow 1,011 9,262
-------- --------
INCREASE (DECREASE) IN CASH AND TEMPORARY INVESTMENTS 31,849 2,082
CASH AND TEMPORARY INVESTMENTS, BEGINNING OF PERIOD 7,331 6,533
-------- --------
CASH AND TEMPORARY INVESTMENTS, END OF PERIOD $ 39,180 $ 8,615
======== ========
See notes to consolidated financial statements.
5
IMPERIAL SUGAR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
FOR THE NINE MONTHS ENDED JUNE 30, 2002
(UNAUDITED)
Accumulated
Other
Shares of Common Retained Comprehensive
Common Stock Stock Earnings Income(Loss) Total
------------ --------- -------- ------------ ---------
(In Thousands of Dollars)
---------------------------------------------------------
BALANCE SEPTEMBER 30, 2001 10,000,000 $90,000 $(6,464) $(3,879) $79,657
Comprehensive Income:
Net income - - 16,241 - 16,241
Change in derivative
fair value - - - 8,239 8,239
Recognition of deferred
Gains in net income - - - (4,408) (4,408)
-------
Total Comprehensive Income - - - - 20,072
---------- ------- ------- ------- -------
BALANCE JUNE 30, 2002 10,000,000 $90,000 $ 9,777 $ (48) $99,729
========== ======= ======= ======= =======
See notes to consolidated financial statements.
6
IMPERIAL SUGAR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 2002 AND 2001
1. ACCOUNTING POLICIES
Basis of Presentation and Management Plans
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 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
accounting principles generally accepted in the United States of America 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, 2001.
On January 16, 2001, Imperial Sugar Company and substantially all of its
subsidiaries filed petitions for relief under Chapter 11 of the U.S. Bankruptcy
Code in the District of Delaware. On August 29, 2001, the Company's Second
Amended and Restated Joint Plan of Reorganization (the "Plan of Reorganization")
became effective, and the Company emerged from bankruptcy court protection. The
Company applied the accounting principles provided for in the American Institute
of Certified Public Accountant's Statement of Position 90-7 "Financial Reporting
by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"), including
fresh start accounting upon emergence. Accordingly, the Company's financial
position, results of operations and cash flows for the periods after the
Company's emergence from bankruptcy are not comparable to earlier periods.
Upon emergence from bankruptcy, the Company's debt aggregated approximately
$230 million. The Company's accounts receivable securitization agreement and
senior bank agreement contain various financial covenants, which, among other
things, require that the Company maintain compliance with certain financial
ratios and limits. The financial covenants were set at levels based on financial
projections prepared in connection with the Plan of Reorganization, become more
restrictive over time and do not accommodate significant downward variations in
operating results. The Company's Plan of Reorganization and the related
financial projections were predicated on improvements in the domestic refined
sugar market from the historic lows experienced in 2001 which, along with the
deleveraging effects of the reorganization, are important to return the Company
to a more sound financial basis. The Company has a limited operating history
since its emergence from bankruptcy, and the refined sugar market, while
significantly improved over the prior year, has not attained the levels included
in the Company's projections.
In June 2002, the Company and its lenders agreed to an amendment to the
Restructuring Credit Agreement which, among other things, eliminated or reduced
the financial covenant requirements as of June 30 and, subject to attainment of
specified conditions, as of September 30, 2002. Financial covenants for
subsequent periods beginning with the quarter ending December 31, 2002 were
unaffected by this amendment. The specified conditions referred to above include
a requirement that we continue our efforts to refinance our debt through a
combination of asset sales, new borrowings or other forms of capital, and
establishes a timetable for certain actions we must take in that regard. The
Company was in compliance with the amended
7
financial covenants for the quarter ended June 30, 2002. Our ability to maintain
compliance with the amended covenants as of September 30 depends on our ability
to generate sufficient EBIDTA and to attain the specified conditions referred to
above, which we cannot predict with certainty. Our ability to maintain
compliance with these covenants in future periods depends on our ability to
generate sufficient EBITDA or to reduce our indebtedness, or both, and our
progress in the efforts describe above, which in turn depend on a number of
factors, including future operating results and sales of assets, that we cannot
predict with certainty. Our current forecast is below levels contained in the
projections prepared in connection with our plan of reorganization and indicates
that we will not meet certain of thesse covenants as soon as December 31, 2002.
If we fail to comply with some of these covenants, an event of default would
occur unless our lenders acted again to excuse compliance or to relax the
covenants.
As previously discussed in the Company's Annual Report on Form 10-K for the
year ended September 30, 2001, and referred to in the auditors' report contained
therein, the uncertainties described above raise substantial doubt about the
Company's ability to continue as a going concern. The accompanying consolidated
financial statements have been prepared on the going concern basis of
accounting, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The consolidated financial
statements do not include any adjustments that may result from the outcome of
this uncertainty.
Management is evaluating its operations and intends to continue to sell
assets of non-strategic operations and surplus assets and use the proceeds from
such sales to repay debt in an effort to improve the Company's working capital
and liquidity. Additionally, the Company continues its efforts to refinance its
debt through a combination of asset sales, new borrowings or other forms of
capital. However, there can be no assurances that the Company will be successful
in these efforts.
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 June
30. 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. These financial statements include 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
June 30. The final cost of sugarbeets cannot be determined until the end of the
contract year for each growing area. Manufacturing costs incurred 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.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires estimates
and assumptions that affect the reported amounts as well as certain disclosures.
The
8
Company's financial statements include amounts that are based on management's
best estimates and judgments. Actual results could differ from those estimates.
Reclassifications
Certain amounts have been reclassified to conform to the current period
presentation.
2. LONG-TERM DEBT
Long-term debt was as follows (in thousands of dollars):
June 30, September 30,
2002 2001
-------- -------------
Senior bank agreements:
Revolving credit facility $ 59,975 $ 57,293
Term loans 117,782 139,036
Industrial revenue bonds 3,920 22,500
Non-interest bearing notes 10,951 11,696
-------- --------
Total long-term debt 192,628 230,525
Less current maturities 6,673 3,746
-------- --------
Long-term debt, net $185,955 $226,779
======== ========
In connection with the sale of Michigan Sugar, the buyer assumed industrial
revenue bonds totaling $18.5 million, for which the Company remains contingently
liable. Additionally, the Company was obligated under $33.4 million of letters
of credit, primarily securing insurance obligations.
3. REPORTABLE SEGMENTS
The Company has identified two reportable segments: sugar and foodservice.
The segments are strategic business units that offer certain different products
to different customers. The segments are managed separately because each
business requires different production technologies and marketing strategies.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company accounts for
intersegment sales as if the sales were to third parties, that is, at current
market prices. The Company evaluates performance based on operating income of
the respective business units.
The sugar segment produces and sells refined sugar and related products.
The segment's products include granulated, powdered, liquid, liquid blends and
brown sugars, which are primarily sold to grocery and industrial customers and
by-products from the production of refined sugar. The foodservice segment sells
numerous products to foodservice customers, ranging from 50-pound bags of sugar
to individual packets of sugar, salt, pepper, non-dairy creamer, sauces,
seasonings, drink mixes and desserts.
Summarized financial information concerning the Company's reportable
segments for the three and nine months ended June 30, 2002 and 2001, is shown in
the following table. The "Corporate and Other" column includes corporate-related
items and securitization activities.
9
Corporate
Food and Reconciling
Sugar Service Other Eliminations Consolidated
----------- ------- ----------- ------------ ------------
(Thousands of Dollars)
For the Three Months Ending
June 30, 2002
- -------------
Revenues from external customers $246,336 $73,518 - - $319,854
Intersegment revenues 41,896 3,872 - $(45,768) -
Gross margin 15,688 8,624 - - 24,312
Operating income (loss) (9) 5,002 $(962) - 4,031
For the Three Months Ending
June 30, 2001
- -------------
Revenues from external customers $288,754 $ 83,520 - - $372,274
Intersegment revenues 21,219 1,953 - $(23,172) -
Gross margin 10,858 11,162 - - 22,020
Operating income (loss) (10,743) 3,146 $ (1,424) - (9,021)
For the Nine Months Ending
June 30, 2002
- -------------
Revenues from external customers $720,336 $228,189 - - $948,525
Intersegment revenues 108,251 11,383 - $(119,634) -
Gross margin 47,197 25,386 - - 72,583
Operating income (loss) 27 11,632 $(3,129) - 8,530
For the Nine Months Ending
June 30, 2001
- -------------
Revenues from external customers $898,249 $275,073 - - $1,173,322
Intersegment revenues 64,124 5,650 - $(69,774) -
Gross margin 38,235 37,731 - - 75,966
Operating income (loss) (28,418) 10,081 $ (5,040) - (23,377)
Total Assets of
- ---------------
June 30, 2002 $384,772 $54,284 76,769 - $515,825
September 30, 2001 445,791 91,852 18,140 - 555,783
4. SALES OF ASSETS
In December 2001, the Company completed the sale of its King Packaging
subsidiary for $28 million, subject to certain post-closing adjustments. Sales
proceeds of $2.8 million were escrowed until September 2002 and additional
proceeds of $2.8 million were escrowed until June 2003. The Company applied the
net proceeds to reduce debt and expects to apply a portion of any escrow funds
released to the Company to further reduce debt. King Packaging's revenues from
sales of kits containing plastic cutlery and seasonings totaled $27 million for
the twelve months ended September 30, 2001 and $5 million for the three months
ended December 31, 2001.
The Company completed the sale of its Michigan Sugar Company subsidiary in
February 2002 to a grower-owned cooperative. The sales price, subject to certain
post-closing adjustments, consisted of $29 million cash, $16 million in deferred
payments, and the assumption of $18.5 million in industrial revenue bonds, for
which the Company remains contingently liable. The Company entered into a sales
and marketing agreement under which it will continue to market the refined sugar
processed by Michigan Sugar Company for ten years following the sale.
10
Beginning in October 2001, the Company leased the four Michigan factories
to the cooperative and managed and operated these factories for the cooperative.
The lease agreement provided that the cooperative (1) pay all expenses necessary
to operate the four factories and (2) pay the Company a lease management fee
based on the number of tons of sugarbeets received at these factories for
processing.
Michigan Sugar Company's sales were $162 million for the twelve months
ended September 30, 2001. For the nine months ended June 30, 2002, lease,
management and marketing fees totaled $8 million.
Additionally, the Company has continued to pursue the sale of assets to
reduce debt. During the quarter ended June 30, 2002, the Company completed the
sale of its Worland, Wyoming factory and sold surplus land and other
non-operating assets for proceeds aggregating $7 million.
5. OTHER CHARGES
The Company accrued for certain future cash charges in conjunction with
closing production facilities during prior years as summarized below (in
thousands of dollars):
Accrued Accrued
Balance at Amounts Balance at
September 30, Paid in June 30,
2001 Fiscal 2002 2002
------------- ----------- ----------
Accrual for cash charges:
Severance $ 591 $ 552 $ 39
Environmental costs 5,031 138 4,893
Abandoned lease commitments and
other cash costs 1,357 320 1,037
------- ----- ------
Total $6,979 $1,010 $5,969
====== ====== ======
6. UNCONSOLIDATED SUBSIDIARY
In connection with a receivables securitization facility, subsidiaries of
the Company sell trade receivables to an unconsolidated, wholly-owned subsidiary
of the Company that, in turn, borrows from a third party lender. At June 30,
2002 the securitization affiliate had loans totaling $59 million from the third
party lender secured by trade accounts receivable totaling $88 million. Trade
receivables sold to the securitization affiliate aggregated $1.0 billion during
the nine months ended June 30, 2002.
7. STOCK OPTIONS
During the first nine months of fiscal 2002, the Company granted options to
purchase 1,202,456 shares of common stock at prices ranging from $5.55 to $4.00
per share. The options, which vest over a three year period, expire ten years
after the date of grant. For the three and nine month periods ended June 30,
2002, such options were anti-dilutive for purposes of earnings per share
calculations.
8. NEW ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 145 which, among other
things, amends prior statements to require that gains and losses from the
extinguishment of debt generally be classified within continuing operations. The
provisions of SFAS No. 145 are effective for fiscal years beginning after May
15,
11
2002 and early application is encouraged. The Company does not believe that the
adoption of SFAS No. 145 will have a significant impact on its financial
statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities", which replaces Emerging Issues
Task Force (EITF) Issue 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity". SFAS No. 146 requires
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an exit or disposal
plan. This statement is effective for exit or disposal activities that are
initiated after December 31, 2002. The Company does not believe that the
adoption of SFAS No. 146 will have a significant impact on its financial
statements.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This discussion should be read in conjunction with information contained in
the Consolidated Financial Statements and the notes thereto.
Overview
We emerged from bankruptcy protection on August 29, 2001. Our future
success will depend on our ability to return to profitability and generate
sufficient cash flow to meet our operational and financing requirements,
including servicing our indebtedness and maintain compliance with our credit
agreement. Other factors that may cause actual results of operations and future
financial condition to differ from those expressed or implied in any
forward-looking statements contained in this report include domestic prices for
refined sugar and raw cane sugar, the quantity and quality of sugarbeets
available to us and the availability and price of energy and other resources, as
well as legislative and regulatory actions. We caution that the foregoing list
of important factors is not exclusive.
A key part of our plan to reduce debt, reduce working capital requirements
and improve liquidity is the sale of surplus assets (for example, excess real
estate and idle factory assets) and the sale of assets used in non-strategic
operations. We expect to realize in excess of $100 million of proceeds from
sales after our reorganization. Through June 30, 2002, we have realized $59
million from asset sales, including the sale of our King Packaging operation in
December 2001 and the sale of our Michigan Sugar beet sugar operation in
February 2002. We can provide no assurance that we will complete any future
dispositions or as to the amount or timing of our receipt of any proceeds from
such dispositions.
Our financial results have been affected by our filing for reorganization
under chapter 11 of the Bankruptcy Code on January 16, 2001 and our emergence
from bankruptcy. The consolidated balance sheet information at September 30,
2001 and June 30, 2002, and the consolidated statements of operations and cash
flows for the three and nine months ended June 30, 2002 reflect results after
the consummation of our plan of reorganization and the application of the
principles of fresh start accounting in accordance with the provisions of SOP
90-7. Our company before and our company after adopting fresh start accounting
are different reporting entities and our consolidated financial statements have
not been prepared on the same basis.
We operate in two domestic business segments. Our sugar segment produces
and sells refined sugar and related products. Our foodservice segment sells and
distributes sugar and numerous other products to foodservice customers. The
segments are managed separately because each business requires different
production techniques and marketing strategies.
12
Liquidity and Capital Resources
We entered into a restructuring credit facility and a receivables facility
when we emerged from bankruptcy. These facilities replaced our
debtor-in-possession financing agreement which provided for financing that we
used during the pendency of our reorganization.
Restructuring Credit Agreement - As part of our plan of reorganization, we
entered into a restructuring credit agreement with a group of lenders led by
Harris Trust and Savings Bank as administrative and collateral agent. Our
obligations under the credit agreement are guaranteed by certain of our direct
and indirect subsidiaries. The credit agreement extends and continues, in part,
the revolving credit facility and term loans provided to us by substantially the
same group of lenders prior to our bankruptcy and during the pendency of the
bankruptcy. We have repaid the term loans and reduced the revolving credit
facility commitment by an aggregate of $39.7 million from the proceeds of asset
sales this fiscal year, leaving a balance of $117.8 million of term loans and a
revolving credit commitment of $98.9 million. At June 30, 2002, the balance of
the revolving credit facility was $60.0 million and we had cash and temporary
investments of $39.1 million. Additionally, we had short-term borrowings from
the Commodity Credit Corporation totaling $20 million to finance seasonal
inventory increases. We had unused capacity under the revolving credit facility
of approximately $13 million at August 12, 2002.
We are required to make mandatory prepayments of the term loans and reduce
proportionately the commitment under the revolving credit facility from net cash
proceeds of:
o asset sales, excluding receivables securing the receivables
securitization facility
o casualty and condemnation events
o certain equity issuances
o excess cash flow (as defined in the restructuring credit agreement).
Our obligations under the restructuring credit agreement are secured by a
lien on substantially all of our personal property and the personal property of
the subsidiaries guaranteeing our obligations (in each case, excluding
receivables that are securing the receivables securitization facility), as well
as substantially all of our real property and the real property of the
subsidiaries.
In addition, the restructuring credit agreement contains negative covenants
limiting our ability to, among other things:
o incur other indebtedness
o incur other liens
o undergo any fundamental changes
o sell assets
o declare or pay dividends
o make investments, loans, advances, acquisitions and specified capital
expenditures
o modify debt instruments
o engage in transactions with affiliates
o enter into sale and leaseback transactions
o change our fiscal periods
o enter into or permit to exist any agreement that restricts our ability
to pledge assets
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o enter into or permit to exist any agreement that restricts the ability
of a material subsidiary to pay dividends or other distributions
o engage in another type of business
o pay or incur repair and maintenance expenses related to certain plants
o make use of proceeds of borrowings under the credit facility for
purposes other than those specified in the agreement.
The restructuring credit agreement also contains financial covenants
requiring us to comply with the following:
o a minimum ratio of EBITDA to net interest expense
o a minimum ratio of current assets to current liabilities
o a minimum net worth requirement
o a minimum EBITDA requirement
o a maximum ratio of total net debt to EBITDA
o a minimum ratio of EBITDA less capital expenditures to fixed charges
The terms used in these financial covenants have specific meanings as
defined in the restructuring credit agreement.
The restructuring credit agreement also includes customary events of
default, including a change of control. Borrowings will generally be available
subject to the accuracy of all representations and warranties, including the
absence of a material adverse change and the absence of any default or event of
default.
The financial covenants contained in the restructuring credit facility were
set at levels based on projections prepared in connection with our plan of
reorganization, become more restrictive over time and do not accommodate
significant downward variations in operating results. Our plan of reorganization
and the related financial projections were predicated on improvements in the
domestic refined sugar markets from the historic lows experienced in 2001 which,
along with the deleveraging effects of the reorganization, are important to
return our company to a more sound financial basis. We have a limited operating
history since our emergence from bankruptcy, and the refined sugar market, while
significantly improved over the prior year, has not attained the levels included
in the projections.
In June 2002, we agreed with the lenders to an amendment to the
Restructuring Credit Agreement which, among other things, eliminated or reduced
the financial covenant requirements as of June 30 and, subject to attainment of
specified conditions, as of September 30, 2002. Financial covenants for
subsequent periods beginning with the quarter ending December 31, 2002 were
unaffected by this amendment. The specified conditions referred to above include
a requirement that we continue our efforts to refinance our debt through a
combination of asset sales, new borrowings or other forms of capital, and
establishes a timetable for certain actions we must take in that regard. We are
in compliance with the amended financial covenants for the quarter ended June
30, 2002. Our ability to maintain compliance with the amended covenants as of
September 30 depends on our ability to generate sufficient EBIDTA and to attain
the specified conditions referred to above, which we cannot predict with
certainty. Our ability to maintain compliance with these covenants in future
periods depends on our ability to generate sufficient EBITDA or to reduce our
indebtedness, or both, and our progress in the efforts described above, which in
turn depend on a number of factors, including future operating results and sales
of assets, that we cannot predict with certainty. Our current forecast is below
levels contained in the projections prepared in connection with our plan of
reorganization and indicates that we will not meet certain of these covenants as
soon as December 31, 2002. If we fail to comply with some of these covenants, an
event of default would occur unless our lenders acted again to excuse
14
compliance or to relax the covenants. If we do not cure or obtain a waiver for
an event of default, our lenders might accelerate our debt obligations so that
they would become payable immediately, we would be restricted from further
borrowings under the facility and we might be required to refinance, restructure
or reorganize all or a portion of our indebtedness, sell assets, obtain
additional debt or equity financing or take other actions. We cannot assure you
that we would be able to achieve any of these steps.
Interest rates on borrowings under the Restructuring Credit Agreement were
increased by 1.5% for the three months ended June 30, 2002 and by 6.5% for the
six months ending December 31, 2002, although there are certain provisions to
reduce the interest rate paid during the six months ending December 31, 2002 by
5.5% in the event the facility is refinanced or otherwise paid off. The amended
agreement provides that an amount equal to the increase would be added to the
outstanding balances of the loans at the end of each quarter, rather than paid
in cash.
Receivables Facility - On August 28, 2001, Imperial Sugar Securitization,
LLC, an indirect, wholly owned, unconsolidated subsidiary of Imperial Sugar,
entered into a Receivables Funding Agreement with, among others, General
Electric Capital Corporation ("GECC"), as lender and administrative agent. Under
this agreement, GECC and any other participating lenders agree to lend up to
$110 million to Imperial Sugar Securitization based on a variable advance rate
of up to 85% of eligible accounts receivable, as defined in the agreement. The
loans are secured primarily by the accounts receivable owned by Imperial Sugar
Securitization. The facility is available until August 28, 2004. Imperial Sugar
Securitization purchases accounts receivable from certain subsidiaries of
Imperial Sugar Company (the "Originators") under a receivables sale agreement.
This agreement requires each Originator to sell or contribute all accounts
receivable it generates to Imperial Sugar Securitization on a daily basis. The
Originators receive a combination of cash and notes for sold accounts and equity
in Imperial Sugar Securitization for contributed accounts. At June 30, 2002, the
Originators had sold $88 million of receivables and Imperial Sugar
Securitization had outstanding advances from GECC totaling $59 million. In June
2002, we agreed to an amendment of this facility on terms similar to the
amendment of the Restructuring Credit Agreement.
Our capital expenditures for fiscal 2002 are expected to be approximately
$15 million, including approximately $5 million in the fourth fiscal quarter,
primarily for environmental, safety and production replacement projects.
Our sugar production operations require substantial seasonal working
capital. This seasonal requirement generally increases during the first fiscal
quarter and peaks during our second fiscal quarter when inventory levels are
high, and a substantial portion of the payments to raw material suppliers have
been made.
New Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 145 which, among other
things, amends prior statements to require that gains and losses from the
extinguishment of debt generally be classified within continuing operations. The
provisions of SFAS No. 145 are effective for fiscal years beginning after May
15, 2002 and early application is encouraged. The Company does not believe that
the adoption of SFAS No. 145 will have a significant impact on its financial
statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities", which replaces Emerging Issues
Task Force (EITF) Issue 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity". SFAS No. 146 requires
companies to recognize
15
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. This statement is
effective for exit or disposal activities that are initiated after December 31,
2002. The Company does not believe that the adoption of SFAS No. 146 will have a
significant impact on its financial statements.
Results of Operations
Industry Environment
Our results of operations substantially depend on market factors, including
domestic prices for refined sugar and raw cane sugar, the quantity and quality
of sugarbeets available to us and the availability and price of energy and other
resources. These market factors are influenced by a variety of external forces
that we are unable to predict, including the number of domestic acres contracted
to grow sugar cane and sugarbeets, prices of competing crops, weather conditions
and United States farm and trade policy.
The domestic sugar industry is subject to substantial influence by
legislative and regulatory actions. The current farm bill limits the importation
of raw cane sugar, affecting the supply and cost of raw material available to
Imperial Sugar's cane refineries. A new farm bill, which becomes effective
October 1, 2002, extends the price support program for domestic crops of
sugarbeets and sugar cane, by continuing the existing tariff rate quota and the
CCC loan programs. The new farm bill will, in certain circumstances, institute
marketing allotments on sugarbeet processors like ourselves and domestic raw
cane sugar producers who supply raw sugar to us. The USDA has announced that
allotments will be in effect for the crop year beginning October 1, 2002, but
has not announced the processor by processor amounts. Additionally under the new
farm bill, CCC loans will be non-recourse in all circumstances and the
forfeiture penalty is eliminated. We are not able to predict the impact, if any,
this new law will have on our operations.
Weather conditions during the growing, harvesting and processing seasons,
the availability of acreage to contract for sugarbeets, as well as the effects
of diseases and insects, may materially affect the quality and quantity of
sugarbeets available for purchase as well as the costs of raw materials and
processing.
Three and Nine Months Ended June 30, 2002
Net sales decreased $52.4 million, or 14.1%, for the three months and
$224.8 million, or 19.2%, for the nine months ended June 30, 2002 compared to
2001, primarily as a result of the disposition of business assets during the
past twelve months. Sugar segment sales declined $35.6 million for the quarter
and $116.3 million for the nine months as a result of leasing the Michigan Sugar
beet factories in the fall of 2001; the sale of the Michigan facilities was
completed in February 2002. Additionally, current year sales were reduced
approximately $5.0 million for the quarter and $51.6 million for the nine
months, as a result of the closure of two northern California beet factories in
December 2000. Sugar sales prices increased 13% and 9% during the three and nine
month periods, respectively. Sale of the nutritional products business in April
2001 and the King Packaging operations in December 2001, reduced foodservice
segment sales by $11.7 million for the quarter and $46.7 million for the nine
months. Additionally, nonsugar prices were somewhat lower in certain product
categories in the foodservice segment. Future sales volumes are expected to
continue at lower levels than comparable historical periods as a result of the
sales of business assets.
Gross margin as a percent of sales improved from 5.9% for the three months
ending June 30, 2001 to 7.6% for the three months ending June 30, 2002, and
improved from 6.5% to 7.6% for the nine month periods. Sugar segment gross
margin as a
16
percent of sales increased from 3.8% to 6.4% for the quarter and from 4.3% to
6.6% for the nine months. Foodservice gross margin as a percent of sales
decreased from 13.4% to 11.7% for the quarter and from 13.7% to 11.1% for the
nine months. The increase in gross margin for the sugar segment is primarily due
to higher refined sugar prices and lower energy costs, partially offset by
higher raw sugar costs. The decrease in gross margin for the foodservice segment
was primarily due to the sale of the high margin nutritional products business
and an increase in sugar costs, partially offset by manufacturing cost
decreases.
A significant portion of the Company's industrial sales are made under
fixed price, forward sales contracts, most of which commence October 1 or
January 1, and extend for up to one year. Additionally, the Company prices a
portion of its raw sugar purchases in advance of the time of delivery either
through pricing provisions of its raw sugar contracts or through hedging
transactions in the raw sugar futures market. As a result, the Company's
realized sales prices, as well as its realized raw sugar costs, lag market price
changes.
An oversupplied domestic sugar market resulted in historically low refined
sugar prices last fiscal year. Certain government actions, including a
payment-in-kind program, helped reduce the supply of sugar, and a smaller
domestic sugarbeet crop processed in the fall of 2001 has resulted in increases
in industrial market prices on contracts commencing October 1, 2001 or January
1, 2002. However, the sugar market has not achieved the levels included in the
financial projections prepared in connection with the Company's Plan of
Reorganization.
Selling, general and administrative costs decreased $1.8 million or 10.5%
for the three months and decreased $9.6 million or 17.1% for the nine months
ended June 30, 2002 compared to 2001. Included in the current fiscal year totals
are costs relating to ongoing bankruptcy claims activity of $0.1 million for the
third quarter and $1.4 million for the nine month period. Last year's nine month
totals include $3.2 million of costs incurred prior to the Company filing a
petition for relief under chapter 11 of the U.S. Bankruptcy Code. Costs incurred
during the pendency of the bankruptcy case last year are reported separately as
Reorganization Costs. Excluding bankruptcy related costs, selling, general and
administrative costs decreased $1.3 million for the quarter and $7.3 million for
the nine months, primarily due to cost savings initiatives and reductions
related to the sale or leasing of certain operations, offset by increased
professional services costs.
Depreciation and amortization decreased primarily as a result of fresh
start accounting adjustments to plant, property and equipment, and intangible
assets, as well as a result of assets sales.
Interest expense decreased $1.8 million for the three months and $12.8
million for the nine months ending June 30, 2002 compared to 2001 primarily due
to the debt restructuring accomplished in the Company's bankruptcy, as well as
debt reductions from proceeds of asset sales. Interest rates on our
Restructuring Credit Agreement will increase by 5% during the quarters ending
September 30, 2002 and December 31, 2002, from the rate in effect in the quarter
ended June 30, 2002, as a result of the amendment agreed to in June 2002.
Other income decreased $0.4 million for the three months and $4.3 million
for the nine months ending June 30, 2002 compared to 2001 primarily due to gains
on the settlement of certain trade liabilities in the second quarter of the
prior fiscal year.
17
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We use raw sugar futures and options in our raw sugar purchasing programs
and natural gas futures and options to hedge natural gas purchases used in our
manufacturing operations.
The information in the table below presents our domestic and world raw
sugar futures positions outstanding as of June 30, 2002. Our world sugar option
positions are not material to our consolidated financial position, results of
operations or cash flows.
Expected Expected
Maturity Maturity
Fiscal 2003 Fiscal 2004
----------- -----------
Domestic Futures Contracts (net long positions):
Contract Volumes (cwt.) 816,480 48,160
Weighted Average Contract Price (per cwt.) $20.71 $20.74
Contract Amount $16,906,000 $999,000
Weighted Average Fair Value (per cwt.) $20.25 $20.55
Fair Value $16,538,000 $990,000
Expected Maturity
Fiscal 2003
-----------------
World Futures Contracts (net long positions):
Contract Volumes (cwt.) 1,291,360
Weighted Average Contract Price (per cwt.) $5.45
Contract Amount $7,032,000
Weighted Average Fair Value (per cwt.) $5.10
Fair Value $6,581,000
The above information does not include either our physical inventory or our
fixed price purchase commitments for raw sugar.
The information in the table below presents our natural gas futures and
options positions outstanding as of March 31, 2002.
Expected Maturity
Fiscal 2002
----------------
Futures Contracts (long positions):
Contract Volumes (mmbtu) 1,180,000
Weighted Average Contract Price (per mmbtu) $3.16
Contract Amount $3,727,000
Weighted Average Fair Value (per mmbtu) $3.28
Fair Value $3,866,450
Expected Maturity
Fiscal 2003
----------------
Natural Gas Option Contracts (long):
Contract Volumes (mmbtu) 3,500,000
Weighted Average Strike Price $3.46
Contract Amount $1,586,000
Fair Value $2,254,000
Natural Gas Option Contracts (short):
Contract Volumes (mmbtu) 1,300,000
Weighted Average Strike Price $3.67
Contract Amount $744,000
Fair Value $790,000
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The Company's interest rate swaps position has not changed materially since
September 30, 2001.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) None.
The Company is a party to several long-term debt instruments under which
the total amount of securities authorized does not exceed 10% of the total
assets of the Company and its subsidiaries on a consolidated basis. Pursuant to
paragraph 4(iii) (A) of Item 601(b) of Regulation S-K, the Company agrees to
furnish a copy of such instruments to the Securities and Exchange Commission
upon request.
(b) Reports on Form 8-K
The Company filed a current report on Form 8-K on April 10, 2002 in
connection with amendments to its Restructuring Credit Agreement and its
Receivable Funding Agreement.
The Company filed a current report on Form 8-K on July 2, 2002, in
connection with amendments to its Restructuring Credit Agreement and its
Receivable Funding Agreement.
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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: August 13, 2002 By: /s/ J. Chris Brewster
--------------------------------
J. Chris Brewster
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
20