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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to ............ 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 February 13, 2003.
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 14
Item 4 Controls and Procedures 17
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
----------------------
Forward-Looking Statements
Statements regarding future market prices and margins, future operating
results, sugarbeet acreage, operating efficiencies, future government action,
cost savings, our liquidity and ability to finance our operations, 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:
. expect . project . estimate
. believe . anticipate . likely
. plan . intend . could
. should . may . predict
. 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
DECEMBER 31, SEPTEMBER 30,
2002 2002
(Unaudited)
---------------- --------------
(In Thousands of Dollars)
ASSETS
CURRENT ASSETS:
Cash and temporary investments .......................................... $ 15,726 $ 5,885
Marketable securities ................................................... 2,552 2,907
Accounts receivable (Note 4) ............................................ 63,862 31,788
Notes receivable-securitization affiliate (Note 4) ...................... - 7,084
Inventories:
Finished products ..................................................... 58,788 92,303
Raw and in-process materials .......................................... 34,856 39,161
Supplies .............................................................. 9,536 11,544
----------- ------------
Total inventory ..................................................... 103,180 143,008
Deferred costs and prepaid expenses ..................................... 25,674 11,364
Net assets of discontinued operations (Note 6) .......................... - 51,679
----------- ------------
Total current assets ................................................ 210,994 253,715
OTHER INVESTMENTS ......................................................... 13,189 14,280
INVESTMENT IN SECURITIZATION AFFILIATE (Note 4) ........................... - 13,895
PROPERTY, PLANT AND EQUIPMENT - net ....................................... 145,454 151,071
OTHER ASSETS .............................................................. 17,272 4,770
----------- ------------
TOTAL ............................................................... $ 386,909 $ 437,731
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade ................................................ $ 47,714 $ 61,904
Short-term borrowings ................................................... 2,145 3,445
Current maturities of long-term debt (Note 2) ........................... 36,858 6,844
Other current liabilities ............................................... 52,762 50,340
----------- ------------
Total current liabilities ........................................... 139,479 122,533
LONG-TERM DEBT - net of current maturities (Note 2) ....................... 12,286 148,878
DEFERRED EMPLOYEE BENEFITS ................................................ 71,377 68,060
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock, without par value, issuable in
series; 5,000,000 shares authorized, none issued ....................... - -
Common stock, without par value;
50,000,000 shares authorized ........................................... 95,316 95,316
Retained earnings ....................................................... 73,412 9,953
Accumulated other comprehensive income .................................. (4,961) (7,009)
----------- ------------
Total shareholders' equity .......................................... 163,767 98,260
----------- ------------
TOTAL $ 386,909 $ 437,731
=========== ============
See notes to consolidated financial statements.
3
IMPERIAL SUGAR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
December 31,
------------------------
2002 2001
---------- ---------
(In Thousands of Dollars,
Except per Share Amounts)
NET SALES .................................................................... $ 277,209 $ 245,594
----------- -----------
COSTS AND EXPENSES:
Cost of sales .............................................................. 256,918 232,668
Selling, general and administrative ........................................ 14,541 11,754
Discount on receivables sold to securitization
affiliate ................................................................ 1,930 964
Depreciation and amortization .............................................. 3,355 3,814
Asset impairment and other charges (Note 3) ................................ 2,783 -
----------- -----------
Total .................................................................. 279,527 249,200
----------- -----------
OPERATING INCOME (LOSS) ...................................................... (2,318) (3,606)
INTEREST EXPENSE ............................................................. (584) (5,910)
COSTS ASSOCIATED WITH DEBT REPAID ............................................ (4,617) -
CHANGE IN FAIR VALUE OF INTEREST RATE SWAPS .................................. (315) 916
GAIN ON SALE OF ASSETS ....................................................... 1,424 (82)
OTHER INCOME (EXPENSE) - net ................................................. 862 (428)
----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES ........................................................ (5,548) (9,110)
PROVISION FOR INCOME TAXES ................................................... - -
----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS ..................................... $ (5,548) $ (9,110)
INCOME FROM DISCONTINUED OPERATIONS
(including gain on disposal of $64,141) (Note 6) ........................... 69,007 8,271
----------- -----------
NET INCOME (LOSS) ............................................................ $ 63,459 $ ( 839)
=========== ===========
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE
OF COMMON STOCK:
Income (loss) from continuing operations ................................. $ (0.55) $ (0.91)
Income from discontinued operations ...................................... 6.90 0.83
----------- -----------
Net income (loss) ........................................................ $ 6.35 $ (0.08)
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING........................................... 10,000,000 10,000,000
=========== ===========
See notes to consolidated financial statements.
4
IMPERIAL SUGAR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
Three Months Ended
December 31,
--------------------------------
2002 2001
------------- --------------
(In Thousands of Dollars)
OPERATING ACTIVITIES:
Net income (loss) ......................................................... $ 63,459 $ (839)
Adjustments for non-cash and non-operating items:
Recognition of deferred loss on hedge derivative
instruments in net income ............................................. - (645)
Unrealized loss on interest rate swaps .................................. (315) (916)
Inventory impairment .................................................... 1,920 -
Write off of deferred debt costs ........................................ 2,420 -
Cash settlements on derivative instruments .............................. 2,946
Depreciation and amortization ........................................... 3,355 3,814
Loss (Gain) on sale of assets ........................................... (1,424) (3,901)
Loss (Gain) on sale of discontinued operations .......................... (64,141) -
Income from discontinued operations ..................................... (4,866) (8,271)
Other ................................................................... (23) 673
Changes in operating assets and liabilities:
Accounts receivables .................................................... 10,122 5,932
Inventories ............................................................. 36,518 (16,339)
Deferred costs and prepaid expenses ..................................... (14,622) 7,116
Accounts payable - trade ................................................ (15,186) (24,606)
Other current liabilities ............................................... (1,565) 9,777
----------- ---------
Net cash (used in) provided by continuing operations ...................... 15,652 (24,851)
Net cash provided by discontinued operations .............................. 5,694 10,106
----------- ---------
Net cash provided by (used in) operating activities ............................ 21,346 (15,153)
----------- ---------
INVESTING ACTIVITIES:
Capital expenditures - discontinued operations ............................ (155) (126)
Capital expenditures - continuing operations .............................. (1,470) (1,188)
Proceeds from sale of marketable securities ............................... - 21,479
Proceeds from sale of assets .............................................. 6,093 -
Proceeds from sale of discontinued operations ............................. 135,116 -
Other ..................................................................... (5,943) (351)
----------- ---------
Investing cash flow ............................................................ 133,641 19,814
----------- ---------
FINANCING ACTIVITIES:
Short-term debt:
Commodity Credit Corporation - advances ................................. 14,478
Other - net ............................................................. (1,300) -
Long term debt borrowings ................................................. 35,000 -
Revolving credit repayment - net .......................................... (25,040) (11,481)
Repayment of long-term debt ............................................... (116,538) (8,834)
Repurchase accounts receivable ............................................ (37,268) -
----------- ---------
Financing cash flow ............................................................ (145,146) (5,837)
----------- ---------
INCREASE(DECREASE) IN CASH AND TEMPORARY INVESTMENTS ........................... 9,841 (1,176)
CASH AND TEMPORARY INVESTMENTS, BEGINNING OF PERIOD ............................ 5,885 7,331
----------- ---------
CASH AND TEMPORARY INVESTMENTS, END OF PERIOD .................................. $ 15,726 $ 6,155
=========== =========
See notes to consolidated financial statements.
5
IMPERIAL SUGAR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Three Months Ended December 31, 2002
(UNAUDITED)
Shares Accumulated
of Other
Common Common Retained Comprehensive
Stock Stock Earnings Income(Loss) Total
----------- ----------- -------- ------------- ---------
(In Thousands of Dollars)
-----------------------------------------------------------
BALANCE SEPTEMBER 30, 2002 .............. 10,000,000 $95,316 $ 9,953 $(7,009) $ 98,260
Comprehensive Income:
Net income (loss) ....................... - - 63,459 - 63,459
Change in derivative
fair value ........................... - - - 87 87
Recognition of deferred
losses in net income ................. - - - 1,961 1,961
--------
Total Comprehensive Income .............. - - - - 65,507
---------- ------- ------- ------- --------
BALANCE DECEMBER 31, 2002 ............... 10,000,000 $95,316 $73,412 $(4,961) $163,767
========== ======= ======= ======= ========
See notes to consolidated financial statements.
6
IMPERIAL SUGAR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 2002 AND 2001
1. ACCOUNTING POLICIES
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 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, 2002.
Cost of Sales
Payments to growers for sugarbeets are based in part upon the Company's
average net return for sugar sold (as defined in the participating contracts
with growers) during the grower contract years, some of which extend beyond
December 31. The contracts provide for the sharing of the net selling price
(gross sales price less certain marketing costs, including packaging costs,
brokerage, freight expense and amortization of costs for certain facilities used
in connection with marketing) with growers. 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
December 31. 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
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, including those described above, that affect the reported
amounts as well as certain disclosures. The Company's financial statements
include amounts that are based on management's best estimates and judgments.
Actual results could differ from those estimates.
Reportable Segments
The Company has previously identified two reportable segments: sugar and
foodservice. The Company sold the majority of its foodservice division in
December 2002, as discussed in footnote 6, and has reported the results of that
business as discontinued operations. Therefore, the Company now operates and
reports its business as one segment.
7
Accounting Pronouncements
Effective October 2002, the Company adopted the provisions of Statement of
Financial Accounting Standards 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.
Effective October 2002, the Company adopted Statement of Financial
Accounting Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or
Disposal of Long-Lived Assets," which requires that long-lived assets to be
disposed of by sale, including discontinued operations, be measured at the lower
of carrying amount or fair value less cost to sell, whether reported in
continuing operations or in discontinued operations. SFAS 144 also broadens the
reporting requirements of discontinued operations to include all components of
an entity that have operations and cash flows that can be clearly distinguished,
operationally and for financial reporting purposes, from the rest of the entity.
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146 ("SFAS 146"), "Accounting for Costs Associated with Exit or Disposal
Activities," which replaced Emerging Issues Task Force (EITF) Issue 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity." SFAS 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 146 will have a significant
impact on its financial statements.
Reclassifications
Certain amounts in the prior year presentation have been reclassified to be
consistent with fiscal 2003.
2. LONG-TERM DEBT
Long-term debt was as follows (in thousands of dollars):
December 31, September 30,
2002 2002
------------ -------------
Senior bank agreements:
Revolving credit facility $ - $ 25,040
Term loans 35,000 115,836
Industrial revenue bonds 3,840 3,840
Non-interest bearing notes 10,304 11,006
------- --------
Total long-term debt 49,144 155,722
Less current maturities 36,858 6,844
------- --------
Long-term debt, net $12,286 $148,878
======= ========
8
On December 31, 2002, the Company repaid its existing senior bank debt and
entered into a $175 million Senior Secured Credit Facility. The new debt
consists of a three-year $140 million (subject to a borrowing base calculation)
senior secured revolving credit facility ("Revolver") and a three-year $35
million term loan ("Term Loan"). The funds from the new borrowing along with the
proceeds of the sale of the foodservice division were used to repay existing
senior bank debt, repurchase accounts receivable from the Company's accounts
receivable securitization facility, and pay related fees and expenses associated
with these transactions. At December 31, 2002, the Company had no outstanding
borrowings under the Revolver and was obligated under $36 million of letters of
credit issued under the Revolver.
The new facility is secured by substantially all of the Company's assets
and guaranteed by all the Company's subsidiaries. The agreement contains
financial covenants which require, commencing September 30, 2003, maintenance of
a minimum EBITDA level and a minimum fixed charge coverage ratio.
Interest rates on the term loan are LIBOR plus a margin of 2.75% to 3.50%
or prime plus 0.25% to 1.00%. Interest rates on the revolver are LIBOR plus a
margin of 2.25% to 3.00% or prime plus zero to 0.50%.
The Term Loan is repayable in monthly installments of approximately
$583,000, commencing February 1, 2003 with final payment of the remaining
balance due January 1, 2006. Although it has a final maturity date of January 1,
2006, the Company classified debt under the Senior Secured Credit Facility as
current, pursuant to Emerging Issues Task Force Issue 95-22, as the agreement
contains a subjective acceleration clause if there is a material adverse effect,
in the opinion of the lender, and provides the lenders direct access to our cash
receipts.
The Company had interest rate swap agreements with a major financial
institution which were terminated in December 2002, under which the Company paid
a fixed interest rate of 6.01% on $90.6 million. The Company entered into a new
interest rate swap agreement with a major financial institution in January 2003
under which the Company pays a fixed rate of 2.465% and receives a floating
interest payment based on 3 month LIBOR, on a notional amount which starts at
$25 million and reduces $1.75 million per quarter, until final maturity in
December 2005.
In connection with the sale of Michigan Sugar, in February 2002, the buyer
assumed industrial revenue bonds totaling $18.5 million, for which the Company
remains contingently liable.
3. ASSET IMPAIRMENT AND OTHER CHARGES
In December 2002, the Company ceased sugar refining operations at its Sugar
Land, Texas facility and, subject to union negotiations, intends to continue
packaging and distribution operations in Sugar Land. The Company recorded a
charge in connection with this action as follows (in thousands of dollars):
Impairment of Supplies Inventory ....................... $1,920
Accrual for Cash Costs:
Severance(for 40 salaried employees) ................ 593
Environmental Costs ................................. 50
Abandoned Lease Commitments and Other Cash Costs .... 220
------
Total .................................................. $2,783
======
The supplies inventory impairment reduces to net realizable value
inventories that are not readily transferable to the Company's other production
facilities because of difference in equipment or process technologies.
9
In conjunction with the cessation of refining operations in Sugar Land,
the Company offered its affected bargaining unit employees severance of $2.3
million even though not required in the collective bargaining agreement in
return for certain changes in the agreement. The union leadership rejected the
Company's offer and filed a grievance alleging the Company owed unspecified
severance pursuant to the existing contract. The Company estimates that
severance calculated pursuant to the grievance calculations would be
approximately $4 million. Based on the advice of counsel, the Company believes
that its interpretation of the contract is correct and intends to contest the
union's grievance.
Changes in the accrued balance for future cash expenditures in
conjunction with closing production facilities is summarized below (in thousands
of dollars):
Accrued Accrued
Balance at Amounts Amounts Balance at
September 30, Accrued in Paid in December 31,
2002 Fiscal 2003 Fiscal 2003 2002
------------- ------------ ----------- ------------
Accrual for cash charges:
Severance $ 593 $ 593
Environmental costs $1,444 50 $ 22 1,472
Abandoned lease commitments
and other cash costs 842 220 - 1,062
------ ----- ----- ------
Total $2,286 $ 863 $ 22 $3,127
====== ===== ===== ======
4. SALE OF ACCOUNTS RECEIVABLE
Previously the Company sold trade receivables to an unconsolidated,
wholly-owned subsidiary of the Company that, in turn, borrowed from a third
party lender. In December 2002, in connection with the sale of the foodservice
segment and the refinancing of the Company's senior bank debt, the Company
repurchased all receivables sold under the securitization facility and
terminated the facility.
5. STOCK OPTIONS
During the three months ended December 31, 2002, the Company granted
options to purchase 155,000 shares of common stock at prices ranging from $1.17
to $2.48 per share. The options which vest over a three year period, expire ten
years after the date of grant.
A total of 1,185,986 options to purchase common stock, which are
potentially dilutive in future periods, were excluded from the computation of
earnings per share because they were antidilutive for the three months ended
December 31, 2002. There were no stock options outstanding during the three
months ended December 31, 2001.
6. DISCONTINUED OPERATIONS
In October 2002, the Company completed the sale of its beet processing
facilities in Sidney, Montana and Torrington, Wyoming, and its Hereford, Texas
beet factory. Proceeds from the transaction were $34 million, approximately
$925,000 of which was placed in escrow, resulting in a gain of approximately
$3.1 million. Sales from these facilities were $88 million for the twelve months
ended September 30, 2002.
In December 2002, the Company completed the sale of its Diamond Crystal
Brands ("DCB") foodservice division. The Company retained a substantial portion
of the sugar product sales to the foodservice segment as a result of this
disposition. The proceeds from the sale of this division were approximately $115
million (subject to certain post-closing adjustments), including $9.2 million
placed in escrow for two years, resulting in a gain of approximately $61.0
million. DCB sales, excluding the portion of sugar product sales retained by the
Company, were approximately $171.0 million for the twelve months ended September
30, 2002.
10
The financial statements have been reclassified to reflect these operations
as discontinued. The operating results of DCB have been included through
December 30, 2002 and the operating results of Sidney, Torrington, and Hereford
have been included through October 7, 2002. The net assets of discontinued
operations prior to the date of sale were segregated on the balance sheet and
components have been detailed below. No provision for income taxes on
discontinued operations was recorded because of differences in the book and tax
basis of the stock of DCB that was sold in December 2002.
Summary operating results of discontinued operations are as follows (in
thousands of dollars):
Three Months Ended
December 31,
--------------------------------
2002 2001
------------- ------------
NET SALES .................................................................. $ 49,986 $ 76,674
COST AND EXPENSES .......................................................... 44,625 70,564
DEPRECIATION ............................................................... 794 1,835
---------- ----------
OPERATING INCOME FROM DISCONTINUED OPERATIONS .............................. 4,567 4,275
OTHER INCOME ............................................................... 303 13
GAIN ON SALE OF ASSETS ..................................................... (4) 3,983
PROVISION FOR INCOME TAXES ................................................. - -
---------- ----------
INCOME FROM DISCONTINUED OPERATIONS ........................................ $ 4,866 $ 8,271
========== ==========
Net assets of discontinued operations are as follows (in thousands of dollars):
September 30, 2002
------------------
CURRENT ASSETS ............................................................. $ 21,665
PROPERTY, PLANT AND EQUIPMENT, NET ......................................... 55,648
--------
TOTAL ASSETS ........................................................ 77,313
--------
CURRENT LIABILITIES ........................................................ 17,395
OTHER LONG-TERM LIABILITIES ................................................ 8,239
--------
TOTAL LIABILITIES ................................................... 25,634
--------
Net assets of discontinued operations ................................. $ 51,679
========
11
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 have significantly de-leveraged our balance sheet and improved our
liquidity and our operating results since emerging from bankruptcy in August
2001. A key part of our strategy was the sale of surplus assets (for example,
excess real estate and idle factory assets) and certain operating units. In the
first quarter of fiscal 2003 we completed the sales of our Sidney, Montana,
Torrington, Wyoming and Hereford, Texas sugarbeet factories and our foodservice
business for gross proceeds of approximately $34 million and $115 million
respectively. As a result, our total debt has been reduced from $231 million
upon our emergence from bankruptcy to $51 million upon our refinancing completed
December 31, 2002.
In connection with our de-leveraging efforts, we have shifted our focus
to marketing and distributing our sugar products in core geographic markets in
the Southeast, Southwest and West Coast.
We have historically operated in two domestic business segments. Our
sugar segment produces and sells refined sugar and related products. Our
foodservice segment, which we sold in December 2002, sold and distributed sugar
and numerous other products to foodservice customers. The segments were managed
separately because each business required different production techniques and
marketing strategies.
Liquidity and Capital Resources
On December 31, 2002, we entered into a new credit facility with a group of
lenders led by Bank of America and General Electric Capital Corporation. The
initial funding under the new facility, together with the cash proceeds from the
sale of our foodservice operations, was used to repay our existing senior bank
debt and repurchase accounts receivable sold under our securitization agreement,
which were both terminated. The new facility consists of a $35 million
three-year term loan and a $140 million (subject to a borrowing base
calculation) three-year revolving credit facility, including a $50 million
sub-limit for letters of credit. At December 31, 2002 we had no outstanding
borrowings under the revolving credit facility. As of February 13, 2003, we had
no outstanding revolving credit facility borrowings and had unused borrowing
capacity of $27 million pursuant to the borrowing base calculation under the
revolving credit facility.
The facility is secured by substantially all of our assets and is
guaranteed by all of our subsidiaries. The agreement contains covenants limiting
our ability to, among other things:
. incur other indebtedness
. incur other liens
. undergo any fundamental changes
. declare or pay dividends
. engage in transactions with affiliates
. enter into sale and leaseback transactions
. change our fiscal periods
. enter into mergers or consolidations
. sell assets
. prepay other debt
In addition, the agreement requires that, commencing September 30,
2003, we comply each quarter with the following:
. a minimum level of earnings before interest, taxes, depreciation and
amortization ("EBITDA")
. a minimum fixed charge coverage ratio
The facility also includes customary events of default, including a change
of control. Borrowings will generally be available subject to a borrowing base
and 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.
Although the facility has a final maturity date of January 1, 2006, the Company
has classified debt under the new credit facility as current, pursuant to
Emerging Issues Task Force Issue 95-22 as the agreement contains a subjective
acceleration clause if there is a material adverse effect, in the opinion of the
lenders, and provides the lenders direct access to our cash receipts.
12
Interest on the term loan accrues at LIBOR plus a margin that varies
(based on utilization) between 2.75% and 3.50% or at a base rate (the Bank of
America prime rate) plus a margin that varies from 0.25% to 1.00%. Interest on
revolving credit borrowings accrue at LIBOR plus a margin of 2.25% to 3.00% or
the base rate plus a margin of zero to 0.50%.
Our capital expenditures for fiscal 2003 are expected to total $20
million, and include productivity, packaging, and computer systems improvements,
as well as normal replacement projects.
Our sugar production operations require seasonal working capital.
Following the sale of our Rocky Mountain sugarbeet factories, which had
substantial working capital requirements in the first half of our 2002 fiscal
year, this seasonal requirement is expected to peak during our third fiscal
quarter when inventory levels are high, and a substantial portion of the payment
to raw material supplies have been made. Management believes that the credit
facility and cash flow from operations will provide sufficient capital to meet
anticipated working capital and operational needs for at least the next twelve
months.
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 and the
marketing of refined beet and raw cane sugar, potentially affecting refined
sugar sales prices and volumes as well as the supply and cost of raw material
available to our cane refineries.
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.
Net sales increased $31.6 million, or 12.9%, for the three months ended
December 31, 2002 compared to 2001 primarily due to a 7% increase in sugar
prices as well as somewhat higher sales volumes. Following a period of
oversupply and low prices in prior years, the domestic sugar markets experienced
increases in sugar prices during fiscal 2002. Because of our forward priced
sales contracts, some of which are written on a calendar year basis, we saw
prices rising during the first quarter of fiscal 2002 and level off in later
quarters. Our prices realized in the first quarter of fiscal 2003 are higher
than those during the same period last year, and we expect that they will remain
above corresponding prior year levels for the remainder of the year.
Cost of sales for the three months ended December 31, 2002 increased by
$24.2 million or 10.4% compared to the same period for 2001. Increased cost of
sales was a result of higher raw material and manufacturing costs (both fixed
and variable) at sugar cane and sugarbeet facilities. Sugarbeet costs increased
in proportion to sales price increases and raw cane costs increased due to
market factors. Manufacturing costs were higher due primarily to increased
energy prices and employee benefit costs. Absent a change in the energy markets,
we expect that energy costs will continue to increase. Gross margin as a
percentage of revenue increased from 5.3% for the three months ended December
31, 2001 to 7.3% for the three months ended December 31, 2002,
13
as the increase in cost of sales was less than the increase in refined sugar
prices.
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, lagged market
price changes for the three months ended December 31, 2002.
The Company incurred approximately $2.8 million in charges in the
quarter ended December 31, 2002 associated with discontinuance of refining at
the Sugar Land refinery. These costs include severance, impairment of inventory
and environmental costs.
Selling, general and administrative costs increased $2.8 million or
23.7% for the three months ended December 31, 2002 compared to 2001, primarily
due to increased professional fees and other costs incurred in connection with
our initiatives to rationalize our businesses and restructure our capital
requirements, including trailing bankruptcy costs. Such costs totaled $2.1
million in the three months ended December 31, 2002 and $0.7 million in the
three months ended December 31, 2001. Additionally, increased medical and
pension costs, partially offset by a decrease in advertising and marketing
costs, contributed to the increase in selling general and administrative costs
in the quarter.
Depreciation and amortization decreased primarily as a result of sales
of assets disposed of in the Michigan and Worland beet factory sales in February
and June 2002, respectively.
Interest expense decreased $5.3 million for the three months ended December
31, 2002 compared to 2001 as a result of lower market interest rates and lower
borrowing levels resulting from the sale of business units. As a result of our
repaying the senior bank debt in December 2002, the prior bank agreement
provided for a refund of interest of $2.1 million which had been charged to
expense in fiscal 2002; interest expense in the first quarter of fiscal 2003 has
been reduced by this amount.
The Company incurred costs of $4.6 million for the three months ended
December 31, 2002, related to the write-off of prior deferred debt costs during
the refinancing of the senior secured debt facility, as well as restructuring
advisory fees incurred in the process of refinancing the prior credit facility.
We realized gains on sales of surplus real estate totaling $1.4 million
during the quarter ended December 31, 2002.
Income from discontinued operations includes the operating results of
DCB and the sugarbeet factories in Sidney, Torrington and Hereford through the
dates of their sale, as well as the gains realized on the sale of these
businesses.
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. Gains and losses on raw sugar futures and
options are matched to inventory purchases and charged or credited to cost of
sales as such inventory is sold. Gains and losses on natural gas futures are
matched to the natural gas purchases and charged to cost of sales in the period
of the purchase.
14
The information in the table below presents our domestic and world raw
sugar futures positions outstanding as of December 31, 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 (long positions):
Contract Volumes (cwt.) ................................................... 2,713,760 263,200
Weighted Average Contract Price (per cwt.) ................................ $ 22.18 $ 21.66
Contract Amount ........................................................... $60,201,527 $ 5,700,127
Weighted Average Fair Value (per cwt.) .................................... $ 22.25 $ 21.89
Fair Value ................................................................ $60,390,254 $ 5,762,445
Expected Maturity
Fiscal 2003
-----------
World Futures Contracts (long positions):
Contract Volumes (mmbtu) .................................................. 1,102,080
Weighted Average Contract Price (per mmbtu) ............................... $ 6.29
Contract Amount ........................................................... $6,937,507
Weighted Average Fair Value (per mmbtu) ................................... $ 6.75
Fair Value ................................................................ $7,436,166
The above information does not include either our physical inventory or
our fixed price purchase commitments for raw sugar.
15
The information in the table below presents our natural gas futures and
options positions outstanding as of December 31, 2002.
Expected Maturity
Fiscal 2003
-----------
Futures Contracts (long positions):
Contract Volumes (mmbtu) ............................................. 1,650,000
Weighted Average Contract Price (per mmbtu) .......................... $ 3.85
Contract Amount ...................................................... $6,346,795
Weighted Average Fair Value (per mmbtu) .............................. $ 4.44
Fair Value ........................................................... $7,332,450
Natural Gas Option Contracts (long positions):
Contract Volumes ..................................................... 2,000,000
Weighted Average Strike Price ........................................ $ 3.60
Contract Amount ...................................................... $ 975,999
Fair Value ........................................................... $2,087,450
Natural Gas Option Contracts (short positions):
Contract Volumes ..................................................... 300,000
Weighted Average Strike Price ........................................ $ 3.80
Contract Amount ...................................................... $ 152,499
Fair Value ........................................................... $ 37,950
16
During December 2002, the Company terminated its interest swap agreement.
The Company entered into a new swap agreement in January 2003 as described in
footnote 2 to the financial statements.
Item 4. CONTROLS AND PROCEDURES
Within 90 days prior to the filing of this report, an evaluation was
performed under the supervision and with the participation of our management,
including our President and Chief Executive Officer and our Executive Vice
President and Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures. Based on that evaluation,
our management, including our President and Chief Executive Officer and our
Executive Vice President and Chief Financial Officer, concluded that our
disclosure controls and procedures were effective in ensuring that material
information relating to us with respect to the period covered by this report was
made known to them. There have been no significant changes in our internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of that evaluation.
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
During the three months ended December 31, 2002, the Company
filed one current report on Form 8-K on October 15, 2002, in
connection with the sale of its beet processing facilities in
Sidney, Montana, Torrington, Wyoming and Hereford, Texas.
The Company filed a current report on Form 8-K on January 9,
2003 in connection with the adoption of its Shareholder Rights
Plan.
The Company filed a current report on Form 8-K on January 14,
2003 in connection with the sale of its Diamond Crystal Brands
foodservice business.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
IMPERIAL SUGAR COMPANY
(Registrant)
Dated: February 14, 2003 By: /s/ Darrell D. Swank
-----------------------------
Darrell D. Swank
Executive Vice President and
Chief Financial Officer
18
CERTIFICATION
I, Robert A. Peiser, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Imperial Sugar
Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have;
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the
"Evaluation Date"); and
c. presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b. any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: February 14, 2003 By: /s/ Robert A. Peiser
---------------------------------------
Robert A. Peiser
President and Chief Executive Officer
19
CERTIFICATION
I, Darrell D. Swank, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Imperial Sugar
Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have;
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
d. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
e. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: February 14, 2003 By: /s/ Darrell D. Swank
----------------------------------
Darrell D. Swank
Executive Vice President and
Chief Financial Officer
20