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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM COMMISSION FILE NUMBER 1-10307
APRIL 1, 1997 TO SEPTEMBER 30, 1997
IMPERIAL HOLLY CORPORATION
(Exact name of registrant as specified in its charter)
TEXAS 74-0704500
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
ONE IMPERIAL SQUARE, SUITE 200
P.O. BOX 9
SUGAR LAND, TEXAS 77487
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (281) 491-9181
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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COMMON STOCK, WITHOUT PAR VALUE AMERICAN STOCK EXCHANGE
RIGHTS TO PURCHASE PREFERRED STOCK AMERICAN STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: NONE
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 the
filing requirements for the past 90 days. Yes X No ___.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X].
The aggregate market value of the voting stock held by non-affiliates of
the registrant was approximately $77 million, based upon the last reported sales
price of the registrant's Common Stock on the American Stock Exchange on
December 10, 1997 and (solely for this purpose) treating all directors,
executive officers and 10% shareholders of the registrant (other than those
holding shares in a fiduciary capacity) as affiliates.
The number of shares outstanding of the registrant's Common Stock, as of
December 10, 1997, was 14,286,854.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's definitive Proxy Statement relating to
the registrant's 1998 Annual Meeting of Shareholders are incorporated by
reference in Part III hereof.
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TABLE OF CONTENTS
PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 11
Item 3. Legal Proceedings........................................... 12
Item 4. Submission of Matters to a Vote of Security Holders......... 12
Executive Officers of the Registrant........................ 12
PART II
Item 5. Market for the Registrant's Common Equity and Related
Shareholder Matters......................................... 14
Item 6. Selected Financial Data..................................... 14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of
Operations.................................................. 15
Item 8. Financial Statements and Supplementary Data................. 19
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial
Disclosure.................................................. 19
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 20
Item 11. Executive Compensation...................................... 20
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 20
Item 13. Certain Relationships and Related Transactions.............. 20
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 21
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The statements regarding future market prices and operating results and
other statements that are not historical facts contained in this report on Form
10-K are forward-looking statements. The words "expect", "project", "estimate",
"believe", "anticipate", "plan", "intend", "could", "may", "predict" and similar
expressions are also intended to identify forward-looking statements. Such
statements involve risks, uncertainties and assumptions, including, without
limitation, market factors, the effect of weather and economic conditions, farm
and trade policy, the available supply of sugar, available quantity and quality
of sugar beets and other factors detailed elsewhere in this and other Company
filings with the Securities and Exchange Commission. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual outcomes may vary materially from those indicated.
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PART I
ITEM 1. BUSINESS
In October 1997, Imperial Holly Corporation ("Imperial Holly") purchased
50.1% of the outstanding common stock of Savannah Foods and Industries, Inc.
("Savannah Foods") for aggregate consideration of $292 million pursuant to a
tender offer (the "Tender Offer"). Imperial Holly expects to complete the
acquisition of Savannah Foods by means of the merger of a wholly-owned
subsidiary with and into Savannah Foods (the "Merger"), in late December 1997.
As used herein, the terms "Imperial Holly" and "Savannah Foods" refer to each
company as it existed prior to the Merger and the "Company" refers to Imperial
Holly Corporation and its subsidiaries (including Savannah Foods and its
subsidiaries) following the consummation of the acquisition.
THE COMPANY
The Company is the largest, most geographically diverse and most balanced
producer and marketer of refined sugar in the United States. The Company refines
raw cane sugar at four refineries located in Texas, Georgia, Florida and
Louisiana and produces beet sugar at 12 beet sugar factories located in
California, Wyoming, Montana, Texas and Michigan. On a pro forma basis for the
12 months ended September 30, 1997, the Company sold approximately 61 million
cwt. of refined sugar.
The Company offers a broad product line and sells to a wide range of
customers, including (i) retail grocers, (ii) foodservice companies, which
include restaurants, schools and other institutions, and (iii) industrial
customers, which are principally food manufacturers. The Company's sugar
products include granulated, powdered, liquid, liquid blends and brown sugars
sold in a variety of packaging options (one pound boxes to 100-pound bags,
individual packets and in bulk) under various brands (Imperial(R), Holly(R),
Spreckels(R), Dixie Crystals(R), Evercane(R) and Pioneer(R)) or private market
labels. Complementary non-sugar products marketed by the Company include salt,
pepper, non-nutritive sweeteners, non-dairy creamers and plastic cutlery. In
addition, the Company produces selected specialty sugar products including
Savannah Gold(TM) (a premium-priced, free-flowing brown sugar), Imbrocon(TM) (a
liquid flavoring) and specialty sugars used in confections and icings. For the
12 months ended September 30, 1997, the Company had pro forma revenues of
approximately $2.0 billion.
Imperial Holly was incorporated in 1924 as Imperial Sugar Company and is
the successor to a cane sugar plantation and milling operation begun in Sugar
Land in the early 1800's that began producing granulated sugar in 1843. In 1988,
the Company purchased Holly Sugar Corporation ("Holly") and changed its name to
Imperial Holly Corporation. Holly was founded in 1905 and incorporated in 1916.
In April 1996, Holly acquired all of the outstanding capital stock of Spreckels
Sugar Company ("Spreckels").
INDUSTRY OVERVIEW
There are two methods for producing refined sugar: (i) processing sugar
beets and (ii) processing and refining sugarcane, each of which possesses
distinct operating characteristics. During the crop year ended September 1996,
total refined sugar sales in the United States consisted of approximately 57%
cane sugar and 43% beet sugar. The profitability of cane sugar and beet sugar
operations is affected by government programs designed to support the price of
domestic crops of sugar beets and sugarcane. These programs affect cane sugar
and beet sugar operations differently. See "-- Sugar Legislation and Other
Market Factors".
CANE SUGAR PRODUCTION PROCESS. Sugarcane takes 9 to 18 months to mature
and, as a consequence, is grown in tropical and semi-tropical climates. Primary
growing areas in the United States include Louisiana, Florida, Texas and Hawaii.
The harvesting of sugarcane generally begins in October or November.
Sugarcane is highly perishable and must be processed by raw cane mills into
raw cane sugar quickly to avoid deterioration in the quality of the sucrose. The
raw cane sugar which is produced in this process is approximately 98% sucrose
and may be stored for long periods and transported to refineries over long
distances without affecting its quality. In addition to the raw sugar produced
domestically, raw sugar is also imported
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from various foreign sources. The amount of such imports is currently limited by
United States government programs.
Cane sugar refineries, such as the Company's four refineries, purify raw
sugar to produce refined sugar. Operating results of cane sugar refineries are
driven primarily by the spread between raw sugar and refined sugar prices. See
"-- Sugar Legislation and Other Market Factors".
BEET SUGAR PRODUCTION PROCESS. Sugar beets can flourish wherever a
five-month growing season is possible. In the United States, sugar beets are
grown in the Red River Valley area of Minnesota and in North Dakota, Idaho,
California, Colorado, Nebraska, Michigan, Washington, Texas, Oregon and New
Mexico. Harvest periods depend on the growing area, but are generally in the
early fall, except in California, where spring and summer harvests also occur.
Sugar beets are highly perishable and must be processed into refined sugar
quickly after harvest to avoid deterioration. Beets may be stored in piles
awaiting processing where temperatures are sufficiently cool. Sugar beets are
converted to refined sugar through a single continuous process at beet
factories. Beet factories are located near the areas in which beets are grown in
order to reduce freight costs and the risk of deterioration. The Company's
staggered harvest seasons with respect to the sugar beet acreage supplying the
Company's 12 sugar beet production facilities allows it to produce beet sugar
year round even though the production campaign at any single facility generally
lasts no more than 180 days. Operating results are driven primarily by the
quantity and quality of sugar beets dedicated to the factory and the net sales
prices received for the refined beet sugar. The beet processor shares a portion
of the net sales price with growers through various participation or recovery
contracts or cooperative arrangements. See "-- Raw Material and Processing
Requirements -- Sugar Beet Purchases".
GOVERNMENT REGULATION. Federal government programs have existed to support
the price of domestic crops of sugar beets and sugarcane almost continually
since 1934. The regulatory framework that currently affects the domestic sugar
industry includes the Federal Agricultural Improvement and Reform Act of 1996
(the "Farm Bill"), which provides for loans on sugar inventories to first
processors (i.e., raw sugar mills and beet processors) and implements a tariff
rate quota which limits the amount of raw and refined sugar that can be imported
into the United States. The North American Free Trade Agreement ("NAFTA"), which
limits the amount of sugar that can be imported to and exported from Mexico, has
to date had a lesser impact on the United States sugar market.
In the crop year ended September 1997, the USDA implemented a program of
increasing the tariff rate quota in known quantities at three known dates based
on the level of the projected ending stocks-to-use ratio. There was previously
no target for the ending stocks-to-use ratio and the USDA could increase or
decrease the quota at will. The Company believes that this administration of the
tariff rate quota for foreign sugar has caused the market to be less volatile,
and as a result, has helped to reduce fluctuations in profitability of the
Company's cane sugar operations. The USDA's targeted ending stocks-to-use ratio
has historically correlated to a raw sugar price of approximately $22.50 per
cwt., substantially lower than the $25 per cwt. that was experienced in July
1995. The USDA is continuing this management strategy for the crop year ending
September 1998. See "-- Sugar Legislation and Other Market Factors."
DOMESTIC DEMAND. The Company considers its primary competition to be other
cane sugar refiners and beet sugar processors. Selling price and the ability to
supply the buyer's quality and quantity requirements in a timely fashion are
important competitive factors.
The decline in demand for refined sugar products attributable to the
replacement of refined sugar by high fructose corn syrup ("HFCS") and
non-nutritive sweeteners in the beverage market was completed a decade ago. The
Company does not currently consider HFCS a significant competitive threat, as
refined sugar and HFCS support different markets. HFCS is primarily a liquid
sweetener and generally does not compete in the dry sugar market.
Domestic demand for refined sugar has increased each year since 1986, and
the average rate of growth over the last five years has been 1.5%. The trend in
the food manufacturing industry toward production of "low
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fat" products has increased industrial demand for sugar, as food manufacturers
have added sugar to enhance flavor and texture as fat is removed. At the current
market level, a 1.5% increase in domestic demand translates into the sale of an
additional 150,000 tons of refined sugar per year, or the annual production
capacity of an average-sized sugar beet factory.
DOMESTIC SUPPLY. Reduced demand in the early 1980s was absorbed principally
by capacity reductions in the cane sugar refining sector. Approximately 33% of
domestic cane sugar refining capacity was eliminated between 1981 and 1988, and
cane sugar refining capacity has remained relatively flat since 1988. Growth in
refined sugar demand during the last decade has been largely satisfied through
increased beet sugar production. In recent years, there have been a number of
expansions to existing beet sugar factories to allow for increased acreage
dedications. The Company believes that the rate of growth of beet sugar
production has slowed as most of the beet factory expansions that are economic
under current conditions have been completed. The Company believes that further
expansion of existing beet factories would require that beets be transported
over greater distances, which is often uneconomical. Accordingly, construction
of new factory sites would be required for further expansion.
DOMESTIC REFINED SUGAR PRICES. Given the existing domestic supply and
demand situation, the increasing role of beet production and the current status
of government regulation, the price of refined sugar in the United States in
recent years has been driven primarily by the amount of beet sugar supply. Good
crop years have led to relatively soft refined sugar prices and weak crop years
have led to relatively strong refined sugar prices.
PRODUCTS AND SALES
REFINED SUGAR AND SPECIALTY PRODUCTS. The Company's principal product line
is refined sugar, which accounted for approximately 94% of the Company's pro
forma consolidated net sales for the twelve months ended September 30, 1997. The
Company has the most balanced combination of cane and beet sugar sales in the
industry, with cane sugar constituting approximately 72% and beet sugar
constituting 28% of the Company's pro forma refined sugar sales for the 12
months ended September 30, 1997. The Company markets its refined sugar products
to retail/grocery, foodservice and industrial customers by direct sales and
through brokers or wholesalers. For the twelve months ended September 30, 1997,
the Company's pro forma sales to grocery (retail) and foodservice customers
accounted for 36% of total sales, and pro forma sales to industrial customers
accounted for 58% of total sales.
GROCERY SALES. The Company produces and sells granulated white, brown and
powdered sugar to grocery customers in packages ranging from one-pound boxes to
25-pound bags. Retail packages are marketed under the trade names Imperial(R),
Dixie Crystals(R), Holly(R), Spreckels(R), Pioneer(R) and Evercane(R), and are
also sold under retailers' private labels. Private label packaged sugar, which
represents a significant percentage of the Company's grocery sales, is generally
sold at prices lower than those received for branded sugar. The Company plans to
capitalize on its well-known brands to seek to increase sales of higher-margin
branded products as a percentage of total grocery sales.
FOODSERVICE SALES (INCLUDING SALES OF NON-SUGAR PRODUCTS). The Company
produces and sells over 30 different products to foodservice customers, ranging
from 50-pound bags of sugar to individual packets of sugar, salt, pepper,
non-dairy creamer and plastic cutlery. The Company believes that the foodservice
sector is one of the most rapidly growing segments of the domestic food
industry. Savannah Foods' foodservice sales have grown at an average annual rate
of 10% over the past 10 years. The Company believes it can utilize Savannah
Foods' success in the foodservice industry to increase foodservice sales in the
markets historically served by Imperial Holly.
INDUSTRIAL SALES. The Company produces and sells refined sugar, molasses
and other ingredients to industrial customers, principally food manufacturers,
in bulk, packaged or liquid form. Food manufacturers principally purchase sugar
for use in the preparation of confections, baked products, frozen desserts,
canned goods and various other food products. The majority of the Company's
industrial sales are made to customers under fixed price contracts with terms of
one year or less. Although industrial sales provide lower margins than grocery
or foodservice sales, the Company believes that an opportunity exists to improve
profit contributions
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from this sector by offering major national customers a single source of supply
for distribution to multiple locations across the country.
SPECIALTY PRODUCT SALES. The Company produces and sells specialty sugar
products to grocery, foodservice and industrial customers. Specialty sugar
products include Savannah Gold(TM), a premium-priced free flowing brown sugar
marketed primarily to industrial customers, Imbrocon(TM), a liquid flavoring
also marketed to industrial customers, edible molasses, syrups and specialty
sugars used in confections and icings. The Company also markets artificial
sweeteners including Sweet Thing(R), a saccharin-based sweetener, and Sweet
Thing II(R), an aspartame-based sweetener.
SALES AND MARKETING. The Company's products are sold directly by the
Company's sales force and through independent brokers. The Company maintains
sales offices in the following locations: at its corporate headquarters in Sugar
Land, Texas; Chicago, Illinois; Tracy, California; Denver, Colorado; Mobile,
Alabama; Saginaw, Michigan; and Savannah, Georgia. The Company considers its
marketing and promotional activities important to its overall sales effort. The
Company advertises its brand names in both print and broadcast media and
distributes various promotional materials, including discount coupons and
compilations of recipes.
Using a value model utilized by many of the leading consumer goods
companies, Imperial Holly has worked to improve the consumer value of its
brands. By keeping its brands priced competitively versus private labels, and
advertising the brands' unique points of difference, Imperial Holly has been
able to increase its branded business during the last 12 months ended September
30, 1997 without major promotional expenditures.
Imperial Holly has also been successful in streamlining its grocery
promotional/trade allowances and marketing programs. This effort has enabled a
reduction of total marketing costs while improving efficiency of the marketing
program and increasing brand sales.
In all business segments the Company intends to use a customer
profitability model similar to the one developed by and utilized by Imperial
Holly. Through use of the model, the Company is able to track any given
customer's profit impact to the Company. This customer profitability model
enables the Company to direct its marketing efforts and resources toward those
customers which have the highest profit potential and to work closely with its
customers whose profit contribution is less than optimal. No customer accounted
for more than 3% of the Company's pro forma sales for the 12 months ended
September 30, 1997.
SEASONALITY. Sales of refined sugar are moderately seasonal, normally
increasing during the summer months because of increased demand of various food
manufacturers, including fruit and vegetable packers; shipments of specialty
products (brown and powdered sugar) increase in the fourth calendar quarter due
to holiday baking needs. Although the refining of cane sugar is not seasonal,
the production of beet sugar is a seasonal activity. Each of the Company's beet
sugar factories operates during sugar-making campaigns, which generally total
120 days to 180 days in length each year, depending upon the supply of sugar
beets available to the factory. Because of the geographical diversity of its
manufacturing facilities, the Company is generally able to produce beet sugar
year-round. While the seasonal production of sugar beets requires the Company to
store significant refined sugar inventory at each factory, the geographic
diversity and staggered periods of production enable the Company's total
investment in inventories to be reduced. Additionally, these factors reduce the
likelihood that adverse weather conditions will affect all the Company's
productive areas simultaneously and aid in distribution.
BY-PRODUCTS. The Company sells by-products from its beet sugar processing
as livestock feeds to dairymen, livestock feeders and livestock feed processors.
Such by-products include beet pulp and molasses. The major portion of the beet
pulp and molasses produced from sugar beet operations is sold during and shortly
after the sugar-making campaigns. By-products from beet sugar processing are
marketed in the United States, Europe and Japan.
Both the domestic and export markets are highly competitive because of the
availability and pricing of by-products of other sugar beet processors and corn
wet millers, as well as other livestock feeds and grains. The market price of
the Company's by-products relative to the price of competitive feeds and grains
is the principal competitive determinant. Among other factors, the weather and
seasonal abundance of such feeds
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and grains may affect the market price of by-products. The Company's by-products
pro forma sales for the 12 months ended September 30, 1997 were $74.6 million,
or 4% of total pro forma sales for such period.
BEET SEED. The Company develops, produces and markets commercial seed to
beet growers under contract to the Company as well as growers under contract to
grow for other beet sugar processors. The Company's beet seed sales program is
conducted primarily in Sheridan, Wyoming and Tracy, California.
The Company has entered into an agreement with D. J. van der Have B.V., a
Netherlands beet seed company ("VDH"), granting VDH access to the Company's
proprietary beet seed breeding material for varietal seed development in
exchange for the exclusive marketing rights to VDH's beet seed in certain
markets in the United States, Canada and Mexico. The Company has also
participated in a similar joint venture with Societe Europeenne de Semences,
N.V., S.A., a Belgian beet seed company ("SES"), to develop improved beet seed
varieties. VDH and SES recently agreed to merge their interests to form ADVANTA
SEEDS ("ADVANTA"). ADVANTA plans to introduce novel and improved varietal
genetic material into the beet seed industry, which the Company believes may
lead to advances in crop yield, sugar content of the beets, resistance to
disease and certain plant processing benefits.
The Company is also active in sugar beet disease control. Domestic sugar
beet growing areas have varying levels of diseases that affect sugar beet
quality and quantity as well as the cost of processing. The Company has a sugar
beet plant pathology disease control research laboratory in Tracy, California
that develops and implements disease control strategies for all of the Company's
sugar beet growing areas. The Company communicates information about
agricultural practices to growers through its computerized agriculture
information systems and printed material, including its magazine Sugar Beet
Update, published semiannually. The Company believes that these activities
strengthen its relationship with its growers, which, in turn, leads to increased
acreage available to the Company and enhanced production and profitability at
its facilities.
INULIN. In 1995, the Company and Cooperatie Cosun U.A., a Netherlands sugar
processor ("Cosun"), formed Imperial-Suiker Unie, L.L.C. ("ISU"), a 50-50 joint
venture to introduce and market inulin in North America. Inulin is a natural
carbohydrate with multifunctional properties with potential both as a
nutritional additive and as a functional food ingredient. Inulin is extracted
from chicory roots by a process similar to sugar extraction from sugar beets.
ISU has the exclusive right to market inulin and inulin-based products produced
by Cosun in Canada, Mexico and the United States. The Company has also entered
into various agreements to provide certain marketing and administrative services
to the joint venture. Inulin is in the early stages of market development,
although some commercial sales have occurred.
MANUFACTURING FACILITIES
The Company operates four cane sugar refineries and 12 sugar beet
factories. Each facility is served by adequate transportation and is maintained
in good operating condition. The facilities operate continuously when in
operation. The following table shows the location and capacity of each of the
Company's refineries and processing plants:
APPROXIMATE DAILY
MELTING CAPACITY
CANE SUGAR REFINERIES (POUNDS OF RAW SUGAR)
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Sugar Land, Texas........................................... 4,000,000
Port Wentworth, Georgia..................................... 6,300,000
Gramercy, Louisiana......................................... 4,200,000
Clewiston, Florida.......................................... 1,700,000
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Total............................................. 16,200,000
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APPROXIMATE DAILY
SLICING CAPACITY
BEET SUGAR FACTORIES (TONS OF SUGAR BEETS)
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Brawley, California......................................... 8,200
Mendota, California......................................... 4,200
Tracy, California........................................... 5,000
Woodland, California........................................ 4,000
Sidney, Montana............................................. 5,700
Hereford, Texas............................................. 7,700
Torrington, Wyoming......................................... 5,700
Worland, Wyoming............................................ 3,600
Caro, Michigan.............................................. 4,000
Carrollton, Michigan........................................ 3,400
Sebewaing, Michigan......................................... 6,000
Croswell, Michigan.......................................... 4,000
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Total............................................. 61,500
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The Company also has a 43% limited partnership interest in a partnership
that owns the site of a former beet sugar production facility in Moses Lake,
Washington. The partnership is constructing a beet processing facility on the
1,400 acre site that is scheduled for commissioning in 1998.
RAW MATERIAL AND PROCESSING REQUIREMENTS
RAW CANE SUGAR. The Company purchases raw cane sugar from both domestic and
foreign sources of supply located in Louisiana, Florida and various foreign
countries. The availability of foreign raw cane sugar is determined by the
import quota level designated by applicable regulation. See "-- Industry
Overview" and "-- Sugar Legislation and Other Market Factors." The Company has
not experienced difficulties in the past in contracting sufficient quantities of
raw cane sugar to supply its refineries.
Raw cane sugar purchase contracts can provide for the delivery of a single
cargo or for multiple cargoes over a specified period or a specified percentage
of the seller's production over one or more crop years. Contract terms may
provide for fixed prices but generally provide for prices based on the futures
market during a specified period of time. The contracts provide for a premium if
the quality of the raw cane sugar is above a specified grade or a discount if
the quality is below a specified grade. Contracts generally provide that the
seller pays freight, insurance charges and other costs of shipping.
The Company contracts to purchase raw cane sugar substantially in advance
of the time it delivers the refined sugar produced from that purchase. The
majority of the Company's industrial sales are under fixed price contracts; in
order to minimize price risk in raw and refined sugar commitments, the Company
generally matches refined sugar sales contracted for future delivery with the
purchase or pricing of raw cane sugar. The Company uses the raw sugar futures
market as a hedging and purchasing mechanism as management deems appropriate.
The Company has access to approximately 350,000 short tons of aggregate raw
sugar storage capacity, including 215,000 short tons of storage capacity at its
Port Wentworth, Georgia refinery. At Port Wentworth, the Company has the ability
to segregate its raw sugar inventory, which allows the Company to store bonded
sugar for re-export. This capability facilitates the Company's participation in
the re-export market. The Company has been active in such market and will
continue to be active in the future when pricing and market conditions are
favorable.
The Company supplements its beet sugar production by refining raw cane
sugar at certain of its sugar beet processing facilities.
SUGAR BEET PURCHASES. The Company purchases sugar beets from over 2,400
independent growers, which supply the Company's factories with approximately
310,000 acres of beets. The sugar beets are purchased under contracts negotiated
with associations representing growers. The Company contracts for acreage prior
to
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the planting season based on estimated demand, marketing strategy, processing
capacity and historical crop yields. The type of contract used in the western
United States provides for payments to the grower based on the sugar content of
the sugar beets delivered by each grower and the net selling price of refined
beet sugar during the specified contract year. The type of contract used in
Michigan provides for growers to share in the revenues generated by sales of
pulp and molasses, as well as sales of refined sugar. Most grower contracts
provide for a premium to the growers for delivering beets of superior quality.
The net selling price is the gross sales price less certain marketing costs,
including packaging costs, brokerage, freight expense and amortization costs for
certain facilities used in connection with marketing. Use of this type of
participating contract reduces the Company's exposure to inventory price risks
on its sugar beet purchases.
The Company's beet sugar operations are dependent upon the quantity,
quality and proximity of sugar beets available to its factories. Sugar beet
acreage varies depending on factors such as prices anticipated by growers for
sugar beets versus alternative crops, prior crop quality, productivity,
availability of irrigation and weather conditions. During the crop years ended
September 1995 through September 1997, the Company's sugar beet acreage under
contract declined. Although such acreage under contract has recently increased,
there can be no assurance that the Company's sugar beet acreage under contract
will not again decline in the future. In addition, the quantity and cost of
refined sugar subsequently produced from the sugar beet crop may be materially
affected by the acreage harvested, disease, insects and unfavorable weather
conditions during the growing, harvesting, processing and storage season.
Once harvested, sugar beets are purchased by the Company and, in some
locations, stored in piles until processed. Under some of the Company's
contracts, the beet growers continue to share the risk of deterioration of the
stored sugar beets with the Company. However, more frequently, the Company
contractually accepts most of the risk with respect to stored sugar beets.
Management believes that the geographic diversity of its growing areas reduces
the risk that adverse conditions will occur company-wide; however, there can be
no assurance that the Company's results of operations will not be adversely
affected in future years by such risks.
ENERGY. The primary fuel used by the Company is natural gas, although
certain of the Company's factories use significant amounts of coal. The Company
generates a substantial portion of the electricity used at its refineries and
factories. Fuel oil can be used by the Company at certain locations both as an
alternative energy source when the price is more attractive and as a backup to
natural gas in the event of curtailment of gas deliveries. Natural gas and coal
supplies are typically purchased under contracts for terms of one year or more,
which do not contain minimum quantity requirements.
Pricing of natural gas contracts is generally fixed for the term or indexed
to a spot market index. The Company has also utilized financial tools such as
swaps and caps to stabilize the price for gas purchases under indexed contracts.
Coal is available in abundant supply domestically and the Company is able to
purchase coal competitively.
The Company owns a royalty interest in a coal seam methane gas project in
the Black Warrior Basin of Alabama as an additional indirect hedge against
future natural gas price increases.
OTHER RAW MATERIALS. Foundry coke and limestone are used in the beet sugar
extraction process. The Company generally purchases coke under contracts with
one to three year terms and utilizes rail transportation to deliver the coke to
factories. Domestic coke supplies may become tighter due to environmental
restrictions; the Company has the option of converting existing coke-fired
equipment to natural gas should the availability and economics of coke so
dictate. The Company owns a 50% share of a limestone quarry in Warren, Montana
that supplies the Sidney, Montana and Worland, Wyoming factories with their
annual limestone requirements. A subsidiary of the Company operates a limestone
quarry in Cool, California that supplies the Company's Northern California beet
processing factories with limestone. These quarries do not normally supply the
Company's other factories because of high freight costs. Limestone required in
the other factory operations is generally purchased from independent sources
under contracts with one to five-year terms.
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RESEARCH
The Company operates research and development centers in Sugar Land, Texas
and Savannah, Georgia where it conducts research relating to manufacturing
process technology, factory operations, food science and new product
development. In Savannah, the Company operates a "pilot plant" in connection
with its research and development activities where it has developed sugar
products co-crystallized with other flavors such as honey. The Company has begun
to market the co-crystallized specialty products produced at the pilot plant to
certain customers.
COMPETITION
The Company competes with other cane sugar refiners and beet sugar
processors and, in certain product applications, with producers of other
nutritive and non-nutritive sweeteners. Selling price and the ability to supply
the buyer's quality and quantity requirements in a timely fashion are important
competitive factors. Certain competing beet sugar processors have expanded their
production capacity significantly over the past five years. The additional sugar
marketed as a result of this expansion has acted to reduce refined sugar prices
at times during this period. To a lesser extent, refined sugar also competes
with non-nutritive or low-calorie sweeteners, principally aspartame and, to
lesser extents, saccharin and acesulfam-k.
SUGAR LEGISLATION AND OTHER MARKET FACTORS
The Company's business and results of operations are substantially affected
by market factors, principally the domestic prices for refined sugar and raw
cane sugar, and the quality and quantity of sugar beets available to the
Company. These market factors are influenced by a variety of forces, including
the number of domestic acres contracted to grow sugar beets, prices of competing
crops, weather conditions and United States farm and trade policies. See
"-- Industry Overview" and "-- Raw Materials and Processing Requirements".
The principal legislation currently supporting the price of domestic crops
of sugar beets and sugarcane is the Farm Bill, which became effective July 1,
1996 and extended the sugar price support program for sugarcane and sugar beets
until June 30, 2003.
CCC LOANS. Pursuant to the Farm Bill, the Commodity Credit Corporation
("CCC") is obligated annually to make loans available to domestic first
processors of sugar on existing sugar inventories from the current crop year
production at 18.0 cents per pound of raw cane sugar and 22.9 cents per pound of
refined beet sugar (subject to a limited right of reduction by the USDA). CCC
loans under the Farm Bill are recourse loans unless the tariff rate quota for
imported sugar is set at a level in excess of 1.5 million short tons raw value
("STRV"). If the tariff rate quota exceeds 1.5 million STRV, CCC loans will
become non-recourse and processors will be obligated to pay participating
growers a predetermined minimum support price. CCC loans mature September 30 of
each year and in no event more than nine months after the month in which the
loan was made. Under the Farm Bill, processors may forfeit sugar to the USDA; if
the tariff rate quota is below 1.5 million STRV and the collateral for the loan
is inadequate to cover the loan amount, the USDA may proceed against the
processor for the difference between the loan amount and the proceeds from the
sale of the forfeited sugar. Additionally, a processor will be penalized
approximately 1 cent per pound for each pound of sugar forfeited. Although the
Company does not currently utilize this program, it has in the past and may do
so again in the future.
TARIFF RATE QUOTA. Under the Farm Bill, the USDA utilizes the import quota
and the forfeiture penalty to affect sugar price supports and prevent
forfeitures under the CCC loan program. The USDA annually implements a tariff
rate quota for foreign sugar, which has the effect of limiting the total
available supply of sugar in the United States. The tariff rate quota controls
the supply of raw sugar by setting a punitive tariff on all sugar imported for
domestic consumption that exceeds the determined permitted imported quantity and
is designed to make the importation of the over-quota sugar uneconomical. To the
extent a processor sells refined sugar for export from the United States, it is
entitled to import an equivalent quantity of non-quota eligible foreign raw
sugar. The tariff rate quota for sugar to be allowed entry into the United
States during the year ended September 30, 1997 was 2.3 million STRV; for the
year ended September 30, 1998 the tariff rate quota is expected to be 2.0
million STRV. The USDA currently determines the quota by targeting an ending
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stocks-to-use ratio. A portion of the quota will be made available immediately
with separate allocations made available periodically depending on domestic
production of raw cane sugar and refined beet sugar. The Company believes that
this implementation of the tariff-rate quota for foreign sugar under the Farm
Bill has caused the market for raw cane sugar to be less volatile, and as a
result has helped to reduce fluctuations in profitability of the Company's cane
sugar operations.
NAFTA. NAFTA contains provisions that allow for Mexico to increase its
sugar exports to the United States if Mexico is projected to produce a net
surplus of sugar. The terms of NAFTA restrict Mexico's exports, which may be in
the form of raw or refined sugar, to the United States to no more than 25,000
STRV annually until the year 2000. Mexico's exports to the United States will be
further increased in the event Mexico produces a sugar surplus for two
consecutive years prior to the year 2000 or at any time thereafter. The
Company's management believes that increased importation of raw cane sugar from
Mexico would benefit the Company because the proximity of its Sugar Land, Texas
refinery to Mexico would allow the Company to import raw cane sugar more cheaply
than its competition. However, if imports are in the form of refined cane sugar,
the domestic refined sugar market may be adversely affected.
EMPLOYEES
In November 1997, the Company employed approximately 3,500 year-round
employees. In addition, the Company employed 3,200 seasonal employees over the
course of the crop year ended September 1997. While the Company's Port
Wentworth, Georgia and Clewiston, Florida refineries use non-union labor, the
Company has entered into collective bargaining agreements with union
representatives with respect to the employees at all of the Company's other
refineries and processing plants. The Company believes its employee and union
relationships are good.
ENVIRONMENTAL REGULATION
The Company's operations are governed by various federal, state and local
environmental regulations. These regulations impose effluent and emission
limitations, and requirements regarding management of water resources, air
resources, toxic substances, solid waste and emergency planning. The Company has
obtained or is making application for the permits required under these
regulations.
Waste water odor control is being addressed at the Company's facilities in
Tracy, Mendota and Woodland, California. The soil and ground water at the
Company's Mendota, California facility have high concentrations of salts. The
Company has developed a prevention plan to install a clay cap on the areas of
concern and to treat the affected ground water. This plan will be accomplished
over a 20 to 30-year period with an expected annual cost ranging from $40,000 to
$120,000. The Company has recorded a liability for the estimated costs of this
project. The Company's Torrington, Wyoming facility has made significant
operational modifications in order to meet more restrictive state solid waste
and groundwater regulations.
Ongoing compliance with environmental statutes and regulations has not had,
and the Company does not anticipate that it will in the future have, a material
adverse effect on the Company's competitive position since its competitors are
subject to similar regulation. Additional capital expenditures will be required
to comply with future environmental protection standards, although the amount of
any further expenditures cannot be accurately estimated. Management does not
believe that compliance will have a materially adverse impact on the Company's
capital resources, operating results or financial condition.
ITEM 2. PROPERTIES
The Company owns each of its cane sugar refineries and sugar beet
processing plants and its corporate headquarters in Sugar Land, Texas. The
Company generally leases office space and contracts for throughput and storage
at warehouses and distribution stations. The Company owns additional acreage at
its factories and refineries which is used primarily for settling ponds and as
buffers from nearby communities or is leased as farm and pasture land. See
"Business -- Manufacturing Facilities" and "Business -- Other Raw Materials".
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ITEM 3. LEGAL PROCEEDINGS
The Company is a party to litigation and claims which are normal in the
course of its operations; while the results of such litigation and claims cannot
be predicted with certainty, the Company believes the final outcome of such
matters will not have a materially adverse effect on its results of operations
or consolidated financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the quarter
ended September 30, 1997.
EXECUTIVE OFFICERS OF THE REGISTRANT
Executive officers of Imperial Holly are elected annually to serve for the
ensuing year or until their successors have been elected. The following table
sets forth certain information with respect to the executive officers of
Imperial Holly:
NAME AGE* POSITIONS
---- ---- ---------
James C. Kempner.......................... 58 President, Chief Executive Officer and
Chief Financial Officer
Peter C. Carrothers....................... 58 Managing Director
Douglas W. Ehrenkranz..................... 40 Managing Director
Roger W. Hill............................. 58 Managing Director and President and Chief
Executive Officer of Holly
John A. Richmond.......................... 51 Managing Director
William F. Schwer......................... 50 Managing Director, Secretary and General
Counsel
Brian T. Harrison......................... 42 Vice President -- Operations Development
Roy E. Henderson.......................... 58 Vice President -- Administration
Calvin K. Jones........................... 51 Vice President -- Agriculture
Raymond Knecht............................ 49 Vice President -- Sugar Land Cane
Operations
H. P. Mechler............................. 44 Vice President -- Accounting
Karen L. Mercer........................... 35 Vice President and Treasurer
Roy F. Silva.............................. 58 Vice President -- Product Development
Robert W. Strickland...................... 51 Vice President -- Beet Operations
Alan K. Lebsock........................... 45 Controller
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* As of December 10, 1997.
Except as set forth below, executive officers have held their present
offices for at least the past five years. Positions, unless specified otherwise,
are with the Company.
Mr. James C. Kempner became President and Chief Executive Officer in 1993
and has been Chief Financial Officer since 1988. In 1994, Mr. Kempner became
President and Chief Executive Officer of Imperial. Mr. Kempner served as
Executive Vice President from 1988 to 1993.
Mr. Carrothers became a Managing Director in October 1995 and had been
Senior Vice President-Operations since March 1995. Mr. Carrothers joined the
Company as Senior Vice President -- Logistics in May 1994. From 1990 until
joining the Company, he was Vice President -- Logistics of PepsiCo Foods
International and had served in various other capacities with Frito Lay, Inc., a
subsidiary of PepsiCo, since 1973.
Mr. Ehrenkranz became a Managing Director in April 1997 and had been Vice
President -- Sales & Marketing since September 1995. Prior thereto, Mr.
Ehrenkranz had been Director of Sales, Planning & Marketing-Development since
joining the Company in April 1995. Prior to joining the Company, Mr. Ehrenkranz
was Marketing Manager with PepsiCo's Taco Bell subsidiary from 1993 to 1994 and
served in
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various positions at Procter & Gamble from 1979. His last position at Procter &
Gamble before joining PepsiCo was Category Sales Manager for Folgers Coffee.
Mr. Hill was named a Managing Director in October 1995 and had been
Executive Vice President since 1988. Mr. Hill also has been President and Chief
Executive Officer of Holly since 1988. Mr. Hill joined Holly in 1963 and served
in various capacities, including Vice President -- Agriculture and Executive
Vice President.
Mr. Richmond became a Managing Director in April 1997 and was named Vice
President -- Operations in October 1995. Mr. Richmond has been Senior Vice
President and General Manager, Beet Sugar Operations, of Holly since 1993. Mr.
Richmond was Senior Vice President and General Manager -- Eastern Division of
Holly from June 1992 to 1993; Vice President and General Manager -- Eastern
Division of Holly from December 1991 to June 1992; Vice President and Operations
Manager -- Eastern Division from September 1990 to December 1991; Vice
President, Technical Services and Assistant Operations Manager -- Eastern
Division from July 1989 to September 1990; and Vice President, Technical
Services from December 1982 to July 1989. Mr. Richmond joined Holly in 1973.
Mr. Schwer became a Managing Director in October 1995 and was named Senior
Vice President, Secretary and General Counsel of the Company in 1993. Mr. Schwer
had been Vice President, Secretary and General counsel since 1989. He joined
Holly as Assistant General Counsel in 1988.
Mr. Harrison became Vice President -- Operations Development in November
1996. Previously he was Vice President -- Refinery Operations from 1993 to 1996.
He was Refinery manager of Imperial from 1991 to 1992 and has served in various
other capacities since he joined the Company in 1980.
Mr. Henderson has been Vice President -- Administration since 1994. From
1981 until 1994, he was Vice President and Treasurer, and has been an employee
of the Company since 1967.
Mr. Jones was named Vice President -- Agriculture in April 1997 and had
been Vice President -- Commodities since 1985. Mr. Jones has served in various
positions with Holly since joining in 1969.
Mr. Raymond Knecht has been Vice President -- Sugar Land Cane Operations
since November 1996. Prior to joining the Company he was employed by Refined
Sugar Incorporated as Vice President -- Operations from 1993 to 1996 and he held
the same position with C & H Sugar from 1986 to 1993.
Mr. Mechler became Vice President -- Accounting in April 1997. Mr. Mechler
had been Controller since joining the Company in 1988.
Ms. Mercer became Vice President and Treasurer in April 1997. Ms. Mercer
became Treasurer in 1994 and has been an employee of the Company since 1993.
Prior to joining the Company she was employed by First City, Texas -- Houston,
National Association from 1988 to February 1993 and Texas Commerce Bank,
National Association from February 1993 to September 1993. the last position she
held at Texas Commerce Bank was Vice President -- Commercial Lending.
Mr. Silva has been Vice President -- Product Development of the Company
since 1992. Prior thereto, he served as Vice President of U.S. Food Operations
for Nattermann Phospholipid, Inc., a German subsidiary of Rhone-Poulenc Rorer,
from 1989 to 1992 and as its Director of Technical Development and Marketing
from 1988 to 1989.
Mr. Strickland was named Vice President -- Beet Operations in October 1995
and has been Vice President -- Operations of Holly since 1993. Mr. Strickland
was Operations Coordinator for holly from 1992 to 1993 and Operations Manager,
Western Division of Holly from 1988 to 1992, Mr. Strickland joined Holly in
1972.
Mr. Lebsock became controller in April 1997 and has been Controller for
Holly since October 1990. From October 1984 to September 1990, he was Assistant
Controller for Holly. Mr. Lebsock joined Holly in 1974.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
Imperial Holly's Common Stock is traded on the American Stock Exchange. At
December 10, 1997 there were 761 shareholders of record of the Common Stock. The
following table sets forth the high and low sales price per share of Common
Stock, as quoted by the American Stock Exchange, and cash dividends declared for
the periods set forth below:
SALES PRICE
-------------- CASH
THREE MONTHS ENDED HIGH LOW DIVIDEND
------------------ ------ ----- --------
June 30, 1995............................................... $ 9.50 $8.69 $0.04
September 30, 1995.......................................... 9.19 7.88 --
December 31, 1995........................................... 8.38 5.25 --
March 31, 1996.............................................. 9.63 5.38 --
June 30, 1996............................................... 12.50 7.50 --
September 30, 1996.......................................... 16.75 11.25 --
December 31, 1996........................................... 16.00 14.50 --
March 31, 1997.............................................. 15.38 10.50 --
June 30, 1997............................................... 13.38 9.88 --
September 30, 1997.......................................... 16.00 11.63 0.03
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data for the last six fiscal periods is as follows (in
thousands of dollars, except per share data):
SIX MONTHS
SEPTEMBER 30,(1)(2) YEAR ENDED MARCH 31,
------------------- -----------------------------------------------------
1997 1996 1997(2) 1996 1995 1994 1993
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
For The Period:
Net Sales................................ $406,682 $393,955 $752,595 $616,450 $586,925 $655,498 $647,825
Operating Income (Loss).................. 20,359 16,448 28,423 (2.431) (2,091) (4,566) 7,139
Income (Loss) Before Extraordinary
Item................................... 9,951 7,077 11,518 (3,218) (5,365) (7,965) 123
Extraordinary Item....................... -- -- -- 604(3) -- -- (3,509)(4)
Net Income (Loss)........................ 9,951 7,077 11,518 (2,614) (5,365) (7,965) (3,386)
Per Share Data:
Income (Loss) Before Extraordinary
Item................................... $ 0.70 $ 0.64 $ 0.92 $ (0.31) $ (0.52) $ 0.78 $ 0.01
Extraordinary Item....................... -- -- -- 0.06(3) -- -- (0.34)(4)
Net Income (Loss)........................ 0.70 0.64 0.92 (0.25) (0.52) (0.78) (0.33)
Cash Dividends Declared.................. 0.03 -- -- .04 .16 .32 .36
At Period End:
Total Assets............................. $457,899 $450,983 $449,933 $325,319 $374,124 $393,660 $398,202
Long-Term Debt -- Net.................... 81,304 90,947 90,619 89,800 100,010 100,044 108,181
Total Shareholders' Equity............... 192,959 169,993 176,956 111,043 109,977 114,737 122,462
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(1) In October 1997, the Company changed its fiscal year end from March 31 to
September 30.
(2) Includes the results of Spreckels since April 19, 1996, as discussed in Note
2 to the Consolidated Financial Statements.
(3) See Note 6 to the Consolidated Financial Statements.
(4) In fiscal 1993 the Company paid a make-whole premium in connection with the
prepayment of a series of senior notes and recorded the charge, net of tax,
as an extraordinary item.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Following completion of the acquisition of Savannah Foods and closing of
the financing transactions discussed in Note 2 to the Consolidated Financial
Statements, the Company will have term debt of approximately $546 million and a
$200 million revolving credit facility. The Company's primary capital
requirements are expected to include debt service, capital expenditures and
working capital. The primary sources of capital are expected to be cash flow
from operations and borrowings under the revolving credit facility. Based upon
current and anticipated future operations and anticipated future cost savings,
the Company believes that capital resources will be adequate to meet anticipated
future capital requirements. There can be no assurance, however, that the
Company's business will generate sufficient cash flow that, together with the
other sources of capital, will enable the Company to service its indebtedness,
or make anticipated capital expenditures. If the Company is unable to generate
sufficient cash flow from operations or to borrow sufficient funds in the future
to service its debt, it may be required to sell assets, reduce capital
expenditures, refinance all or a portion of its existing indebtedness, or obtain
additional financing.
As discussed in Note 2 to the Consolidated Financial Statements, the
Company's financing arrangements entered into in connection with the acquisition
of Savannah Foods will, and other debt instruments of the Company may, pose
various restrictions and covenants on the Company which could potentially limit
the Company's ability to respond to market conditions, to provide for
unanticipated capital investments, to raise additional debt or equity capital,
or to take advantage of business opportunities.
The senior credit facility will incur interest at variable rates. The
Company expects to enter into interest rate swap arrangements to limit its
exposure to future increases in interest rates. Savannah Foods currently has
forward swap arrangements which may be utilized to cover a portion of this
exposure.
The Company's capital expenditures for fiscal 1998 are expected to be
approximately $58 million, including the completion of major projects to expand
the Sidney, Montana factory, as well as to add bulk sugar storage and high speed
packaging equipment at the Sugar Land refinery.
The Company, as a 43% limited partner, and a Washington sugarbeet growers
cooperative, as the 57% general partner, have formed a partnership which is
building a new sugarbeet factory in Moses Lake, Washington. The Company has made
capital contributions and advances in the form of subordinated loans to the
partnership of $3 million and has contributed certain surplus production
equipment. The general partner has made capital contributions to the partnership
of $6 million and has contributed certain surplus equipment from an abandoned
sugarbeet processing facility. Additionally, the Company and the cooperative may
be required to make further subordinated loans of up to $1.7 million each,
depending upon final construction costs. The remainder of the $118 million
projected cash construction budget is expected to be financed by loans to the
general partner who in turn will advance such funds to the partnership.
The Company has developed plans to address the possible exposures related
to the impact on its computer systems of the Year 2000. Key financial,
information and operational systems have been assessed and plans are being
implemented to modify or replace each affected system on a timely basis. The
financial impact of making the required systems changes is not expected to be
material to the Company's consolidated financial position, results of operations
or cash flows.
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128").
This new standard requires dual presentation of basic and diluted earnings per
share ("EPS") on the face of the earnings statement and requires a
reconciliation of the numerators and denominators of basic and diluted EPS
calculations. This statement will be effective for both interim and annual
periods ending after December 15, 1997. The Company's current EPS calculation
conforms to basic EPS. Diluted EPS as defined by SFAS No. 128 is not expected to
be materially different from basic EPS.
Recently, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income", and
Statement of Financial Accounting Standards
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No. 131, "Disclosures About Segments of an Enterprise and Related Information".
These statements, which are effective for the Company's fiscal year ending
September 30, 1999, establish additional disclosure requirements but do not
affect the measurement of results of operation. Management is evaluating what,
if any, additional disclosures may be required when these statements are
implemented.
RESULTS OF OPERATIONS
Industry Environment
The Company's results of operations are substantially dependent on market
factors, including domestic prices for refined sugar and raw cane sugar. These
market factors are influenced by a variety of external forces, 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,
that the Company is unable to predict. Certain segments of the beet sugar
industry in the recent past have expanded sugarbeet acreage at rates exceeding
the rate of growth in the demand for refined sugar, which along with large crop
yields, put downward pressure on refined sugar prices. Smaller sugar beet crops
in the fall of 1995 and 1996 increased refined sugar prices. A larger crop in
the fall of 1997 has more recently caused a decrease in the market prices for
refined sugar. 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 the Company's cane refineries. See "Business -- Sugar Legislation
and Other Market Factors", "-- Competition" and "-- Industry Overview".
Weather conditions during the growing, harvesting, processing and storage
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 sugar beets available for purchase as well as the costs of raw materials and
processing. See "Business -- Raw Materials and Processing Requirements".
Combined Future Operations
As a result of the completion of the acquisition of Savannah Foods,
Imperial Holly's consolidated operating results will in the future include
Savannah Foods, resulting in substantial increases in sales and costs, including
the impact of interest on the higher level of indebtedness and increases in
depreciation and amortization.
Six Months Ended September 30, 1997 versus 1996
Net Sales. Net sales increased $12.7 million or 3.2% in the six months
ended September 30, 1997 compared to the six months ended September 30, 1996,
primarily as a result of higher refined sugar prices. Price increases resulted
from smaller sugar beet crops in the fall of 1995 and 1996; a larger crop in the
fall of 1997 has more recently caused a decrease in the market prices for
refined sugar. A significant portion of Imperial Holly's industrial sales are
made under fixed price, forward sales contracts, most of which commence October
1 and extend for up to one year. As a result, changes in Imperial Holly's
realized sales prices for industrial sales tend to lag market price changes.
Industrial sales contracts for the period beginning in October 1997 were written
at lower prices than the prior contract year. To mitigate its exposure to future
price changes, Imperial Holly enters into forward purchase contracts for raw
cane sugar and utilizes a participating sugar beet purchase contract described
below. Sugar sales volumes increased modestly during the six months, principally
due to higher beet sugar sales.
Cost of Sales. Cost of sales increased $7.7 million or 2.2% which, coupled
with the increase in sales, resulted in the gross margin before depreciation
improving to 14.2% of sales from 13.4%. Unit sugar gross margins improved as
reductions in raw sugar costs and improved beet sugar operations more than
offset higher sugar beet costs resulting from high selling prices and higher
cane refining costs. Imperial Holly purchases sugar beets under participatory
contracts which provide for a percentage sharing with the grower of the net
selling price realized on refined beet sugar sales. Use of this type of contract
reduces Imperial Holly's exposure to inventory price risk. The increase in sales
prices during the six month period resulted in an increase in the cost of sugar
beets under the participatory purchase contracts, mitigating the improvement in
gross margin. As
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discussed in Note 1 to the Consolidated Financial Statements, Imperial Holly
utilizes LIFO inventory for sugar inventories. During the six months ended
September 30, 1997, Imperial Holly liquidated beginning inventory layers at
costs below current year levels, reducing cost of sales approximately $.7
million.
In recent years Imperial Holly has experienced reductions in the
availability of acreage planted in sugar beets supplying its Hereford, Texas,
Torrington, Wyoming and Northern California factories, resulting in reduced
throughput and corresponding increases in unit manufacturing costs. Sugar beet
acreage supplying each of these factories is expected to increase in fiscal
1998, although acreage is expected to remain below Imperial Holly's targeted
levels. Imperial Holly has processed raw cane sugar at some of these factories,
which increases throughput and lowers unit fixed manufacturing costs.
Selling, General and Administrative. Selling, general and administrative
expenses increased $1.6 million or 5.5% during the six month period as increases
in warehousing and advertising costs more than offset reduction in general and
administrative costs, principally resulting from closure of Spreckels'
Pleasanton, California office.
Interest Expense. Interest expense declined $1.0 million during the six
month period as reduced long and short-term borrowings more than offset higher
short-term interest rates. In April 1997, Imperial Holly purchased and retired
$8.3 million of its senior notes due 1999. Operating cash flow allowed the
reduction in average short-term borrowings by approximately $19.0 million during
the period.
Other. Realized gains on marketable securities decreased $383,000; net
unrealized gains which have not been recognized in Imperial Holly's results of
operations increased $8.3 million to $28.3 million during the six months ended
September 30, 1997. Imperial Holly's effective income tax rate was 37% for the
six months ended September 30, 1997, which is higher than the statutory federal
rate primarily due to state income taxes.
Year Ended March 31, 1997 versus 1996
Net Sales. Net sales increased $136.1 million or 22.1% in fiscal 1997 as a
result of almost equal contributions from higher sugar sales prices and volumes,
as well as higher beet pulp sales prices. Sugar sales prices increased as a
result of smaller than usual sugar beet crops in the fall of 1995 and 1996.
Increases in cane sugar sales volumes and the additional volumes attributable to
the Spreckels acquisition more than offset lower sales by Imperial Holly's beet
sugar operations resulting from lower refined sugar inventories in the first
half of the fiscal year. Beet pulp prices began increasing late in fiscal 1996
as a result of higher feed grain prices and returned to more normal levels in
the latter part of fiscal 1997.
Cost of Sales. Cost of sales increased $100.9 million or 18.3% and gross
margin before depreciation improved to 13.4% of sales in fiscal 1997 from 10.6%
in fiscal 1996. Unit sugar sales margins improved as reductions in cane sugar
unit manufacturing costs resulting from increased volumes and reductions in raw
cane sugar costs offset higher energy costs and higher beet sugar manufacturing
costs owing to reduced throughput at three of Imperial Holly's beet sugar
factories. Additionally, winter flooding disrupted rail service in Northern
California requiring the diversion of harvested beets in Oregon and Washington
to Imperial Holly's Sidney, Montana factory. The delays in processing these
beets, as well as the Sidney beets, affected beet quality and impacted
processing, reducing sugar recovery and increasing costs several million
dollars. The increase in sales prices for beet sugar resulted in an increase in
cost of sugar beets under the participatory purchase contracts described above.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $4.5 million resulting from increases in
volume related selling and distribution costs and incentive compensation as well
as increases in administrative costs associated with Spreckels Sugar Company's
Pleasanton, California office which was closed in Imperial Holly's second fiscal
quarter.
Interest Expense -- Net. Interest expense -- net, increased primarily due
to higher average short-term borrowings. Other income -- net includes losses on
asset dispositions of approximately $700,000 in 1997 and gains of $400,000 in
1996.
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Other. Realized gains on marketable securities decreased $5.0 million in
fiscal 1997; net unrealized gains which have not been recognized in Imperial
Holly's results of operations increased $6.2 million and are detailed in Note 3
to Imperial Holly's Consolidated Financial Statements. The components of income
tax expense and its relationship to statutory rates are detailed in Note 7 to
the Consolidated Financial Statements.
Year Ended March 31, 1996 versus 1995
Net Sales. Net sales increased $29.5 million or 5.0% in fiscal 1996
resulting from increases in both sugar sales volumes and average sales prices.
Average sales prices of refined sugar increased modestly during fiscal 1996.
Spot prices began strengthening in the second-half of the fiscal year as a
result of the smaller domestic sugar beet crop. By-product sales revenues were
virtually unchanged as lower volumes offset the impact of higher prices. Prices
began rising significantly late in the fiscal year as a result of high feed
grain prices.
Cost of Sales. Cost of sales increased $29.8 million or 5.7% as a result of
both higher sales volumes and increases in unit costs. Raw cane sugar costs
increased significantly during the fiscal year, particularly during the first
six months, due to a tight raw sugar market. Average beet sugar manufacturing
costs increased slightly as the reduced throughput from the smaller fall sugar
beet crop offset cost reductions achieved in the spring processing campaigns. As
discussed in Note 1 to the Consolidated Financial Statements, Imperial Holly
liquidated beginning LIFO inventory layers at costs below current year cost, and
charged such beginning amounts to cost of sales.
Selling, General and Administrative. Selling, general and administrative
costs declined $1.4 million or 2.6% as increases in volume related selling and
distribution costs were more than offset by reductions in general and
administrative expenses as well as research and development costs. During the
third fiscal quarter, Imperial Holly commenced a cost reduction program in the
sales, administrative and manufacturing overhead areas and recorded a charge to
earnings of $475,000 for the cost of a work force reduction. Additionally,
Imperial Holly recorded a $1,750,000 charge in the fourth quarter related to the
closure of the Hamilton City, California factory.
Interest Expense. Interest expense for fiscal 1996 was lower than fiscal
1995 as lower balances of both short and long-term borrowings were partially
offset by higher short-term interest rates and a lower earnings credit from the
interest rate swap described in Note 6 to the Consolidated Financial Statements.
The interest rate swap, which was entered into to effectively convert a portion
of Imperial Holly's fixed rate debt to a floating rate basis and has provided
positive cash flow for each period during its term, expired in October 1996.
Other. Realized gains on marketable securities increased $3.7 million
during fiscal 1996; unrealized gains and losses, which have not been recognized
in Imperial Holly's results of operations, but are shown, net of tax, as a
component of shareholders' equity, are detailed in Note 3 to Imperial Holly's
Consolidated Financial Statements. The components of income tax expense and its
relationship to statutory rates are detailed in Note 7 to Imperial Holly's
Consolidated Financial Statements. The extraordinary item is discussed in Note 6
to Imperial Holly's Consolidated Financial Statements.
18
19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the index of financial statements and financial statement schedules
under Item 14.
Unaudited quarterly financial data for the last ten fiscal quarters is as
follows (in thousands of dollars, except per share amounts):
PER SHARE
----------------------------------
INCOME (LOSS) INCOME (LOSS)
----------------------- ----------------------
BEFORE NET BEFORE NET
GROSS EXTRAORDINARY INCOME EXTRAORDINARY INCOME CASH
NET SALES MARGIN ITEM (LOSS) ITEM (LOSS) DIVIDENDS
--------- ------- ------------- ------- ------------- ------ ---------
Transition Period Ended September 30, 1997(1)(2):
June 30, 1997.......... $197,758 $29,296 $ 7,294 $ 7,294 $ 0.51 $ 0.51 $ --
September 30, 1997..... 208,924 22,523 2,657 2,657 0.19 0.19 0.03
Fiscal Year Ended March 31, 1997(2):
June 30, 1996.......... $179,905 $24,268 $ 4,149 $ 4,149 $ 0.40 $ 0.40 $ --
September 30, 1996..... 214,050 22,121 2,928 2,928 0.25 0.25 --
December 31, 1996...... 189,935 19,334 1,496 1,496 0.11 0.11 --
March 31, 1997......... 168,705 22,026 2,945 2,945 0.21 0.21 --
Fiscal Year Ended March 31, 1996:
June 30, 1995.......... $148,824 $14,517 $ 766 $ 1,146 $ 0.07 $ 0.11 $0.04
September 30, 1995..... 165,786 13,958 (1,530) (1,530) (0.15) (0.15) --
December 31, 1995(3)... 171,569 13,760 (419) (195) (0.04) (0.02) --
March 31, 1996(4)...... 130,271 12,337 (2,035) (2,035) (0.20) (0.20) --
- ---------------
(1) In October 1997, the Company changed its fiscal year end from March 31 to
September 30.
(2) Includes the results of Spreckels Sugar Company since April 19, 1996. See
Note 2 to the Consolidated Financial Statements.
(3) Results of operations for the third quarter of fiscal 1996 include a pre-tax
charge of $475,000 related to the cost of a work force reduction as
discussed in Note 11 to the Consolidated Financial Statements.
(4) Results of operations for the fourth quarter of fiscal 1996 include a
pre-tax charge of $1,750,000 related to costs associated with the closure of
Imperial Holly's Hamilton City, California factory as discussed in Note 11
to the Consolidated Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
19
20
PART III
ITEM 10. DIRECTOR AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the captions "Election of
Directors -- Nominees", "-- Continuing Directors" and "-- Section 16(a)
Beneficial Ownership Reporting Compliance" in the Company's definitive Proxy
Statement for its 1998 Annual Meeting of Shareholders, to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended (the "Proxy Statement"), is
incorporated herein by reference. See also "Executive Officers of the
Registrant" included in Part I hereof.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the captions "Election of
Directors -- Director Remuneration", "-- Executive Compensation" and
"-- Compensation Committee Interlocks and Insider Participation" in the Proxy
Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Election of
Directors -- Security Ownership" in the Proxy Statement is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Election of
Directors -- Compensation Committee Interlocks and Insider Participation" and
"-- Other Information" in the Proxy Statement is incorporated herein by
reference.
20
21
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements.
ITEM PAGE
---- ----
Independent Auditors' Report................................ F-1
Consolidated Balance Sheets at September 30, 1997, March 31,
1997 and 1996............................................. F-2
Consolidated Statements of Income for the six months ended
September 30, 1997, and 1996 (unaudited) and the years
ended March 31, 1997, 1996 and 1995....................... F-3
Consolidated Statements of Changes in Shareholders' Equity
for the six months ended September 30, 1997 and the years
ended March 31, 1997, 1996 and 1995....................... F-4
Consolidated Statements of Cash Flow for the six months
ended September 30, 1997, and 1996 (unaudited) and the
years ended March 31, 1997, 1996 and 1995................. F-5
Notes to Consolidated Financial Statements.................. F-6
(a)(2) Financial Statement Schedules.
All schedules and other statements for which provision is made in the
applicable regulations of the Commission have been omitted because they are not
required under the relevant instructions or are inapplicable.
(a)(3) Exhibits.
Asterisk indicates exhibit previously filed with the Commission and
incorporated herein by reference as indicated.
*3(a) -- Restated Articles of Incorporation of the Company
(incorporated by reference to Exhibit 3(b) to the
Company's Registration Statement on Form S-4
(Registration No. 33-20959)).
*3(b) -- Articles of Amendment to Restated Articles of
Incorporation (incorporated by reference to Exhibit 3.1
to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1990 (File No. 1-10307)).
*3(c) -- Statement of Resolution establishing Series of Shares
designated Series A Junior Participating Preferred Stock
(incorporated by reference to Exhibit 3(b) to the
Company's Annual Report on Form 10-K for the year ended
March 31, 1990 (File No. 1-10307) (the "1990 Form
10-K")).
*3(d) -- Statement of Resolution increasing number of shares
designated Series A Junior Participating Preferred Stock
(incorporated by reference to Exhibit 3.2 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1990 (File No. 1-10307)).
*3(e)(1) -- Rights Agreement dated as of September 14, 1989 between
the Company and The Bank of New York, as Rights Agent
(incorporated by reference to Exhibit 1 to the Company's
Current Report on Form 8-K dated September 21, 1989 (File
No. 1-10307)).
*3(e)(2) -- Amendment to Rights Agreement dated as of January 27,
1995 (incorporated by reference to Exhibit 1 to the
Company's Current Report on Form 8-K dated January 27,
1995 (File No. 1-10307)).
*3(f) -- By-Laws of the Company (incorporated by reference to
Exhibit 3(b) to the Company's Annual Report on Form 10-K
for the year ended March 31, 1989 (File No. 0-16674) (the
"1989 Form 10-K")).
21
22
*3(g)(1) -- Investor Agreement dated August 29, 1996 by and among the
Company, Greencore Group plc and Earlsfort Holdings B.V.
(incorporated by reference to Exhibit 4.3 to the
Company's current report on Form 8-K dated September 5,
1996 (File No. 1-10307) (the "September 5, 1996 Form
8-K")).
*3(g)(2) -- Registration Rights Agreement dated August 29, 1996 by
and among the Company, Greencore Group plc and Earlsfort
Holdings B.V. (incorporated by reference to Exhibit 4.2
to the September 5, 1996 Form 8-K).
*3(h) -- Agreement and Plan of Merger, dated September 12, 1997,
among Imperial Holly Corporation, IHK Merger Sub
Corporation and Savannah Foods & Industries, Inc.
(incorporated by reference to Exhibit 2.1 to the
Company's Registration Statement on Form S-4
(Registration No. 333-40445)(the "Savannah S-4")).
*4(a)(1) -- Credit Agreement, dated as of October 17, 1997, among
Imperial Holly Corporation, as Borrower, the Several
Lenders from time to time Parties thereto, Lehman
Brothers, Inc., as Arranger, Lehman Brothers Commercial
Paper, Inc., as Syndication Agent and Lehman Brothers
Commercial Paper, Inc., as Administrative Agent
(incorporated by reference to Exhibit 10.1 to the
Savannah S-4).
*4(a)(2) -- Guarantee and Collateral Agreement, dated as of October
17, 1997, made by Imperial Holly Corporation and certain
of its Subsidiaries in favor of Harris Trust and Savings
Bank, as Collateral Agent (incorporated by reference to
Exhibit 10.2 to the Savannah S-4).
*4(b) -- Indenture dated as of October 15, 1992 by and between the
Company and Texas Commerce Bank National Association, as
Trustee, relating to the Company's 8 3/8% Senior Notes
due 1999 (incorporated by reference to Exhibit 4.1 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1992 (File 1-10307)).
*10(a) -- Imperial Holly Corporation Stock Incentive Plan (as
amended and restated effective May 1, 1997)(incorporated
by reference to Exhibit 10(a) to the Company's Annual
Report on Form 10-K for the year ended March 31, 1997
(File No. 1-10307)(the "1997 Form 10-K")).
*10(b) -- Specimen of the Company's Employment Agreement for
certain of its officers (incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1990 (File No.
1-10307)(the "September 1990 Form 10-Q")).
*10(b)(2) -- Specimen of the Company's Amendment to Employment
Agreement for certain of its officers (incorporated by
reference to Exhibit 10(c)(2) to the 1994 Form 10-K).
*10(b)(3) -- Schedule of Employment Agreements (incorporated by
referenced to Exhibit 10(a) to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1994 (File No. 1-10307) (the "September 1994 Form
10-Q")).
*10(c) -- Specimen of the Company's Severance Pay Agreements for
certain of its officers (incorporated by reference to
Exhibit 10.2 to the September 1990 Form 10-Q).
*10(d)(1) -- Imperial Holly Corporation Salary Continuation Plan (as
amended and restated effective August 1, 1994)
(incorporated by reference to Exhibit 10(b)(1) to the
September 1994 Form 10-Q).
*10(d)(2) -- Specimen of the Company's Salary Continuation Agreement
(Fully Vested) (incorporated by reference to Exhibit
10(b)(2) to the September 1994 Form 10-Q).
22
23
*10(d)(3) -- Specimen of the Company's Salary Continuation Agreement
(Graduated Vesting) (incorporated by reference to Exhibit
10(b)(3) to the September 1994 Form 10-Q).
*10(d)(4) -- Schedule of Salary Continuation Agreements (incorporated
by reference to Exhibit 10(d)(4) to the Company's Annual
Report on Form 10-K for the year ended March 31, 1996
(File No. 1-10307) (the "1996 Form 10-K")).
*10(e)(1) -- Imperial Holly Corporation Benefit Restoration Plan (as
amended and restated effective August 1, 1994)
(incorporated by reference to Exhibit 10(c)(1) to the
September 1994 Form 10-Q).
*10(e)(2) -- Specimen of the Company's Benefit Restoration Agreement
(Fully Vested) (incorporated by reference to Exhibit
10(c)(2) to the September 1994 Form 10-Q).
*10(e)(3) -- Specimen of the Company's Benefit Restoration Agreement
(Graduated Vesting) (incorporated by reference to Exhibit
10(c)(3) to the September 1994 Form 10-Q).
*10(e)(4) -- Schedule of Benefit Restoration Agreements (incorporated
by reference to Exhibit 10(e)(4) to the 1996 Form 10-K).
*10(f)(1) -- Imperial Holly Corporation Executive Benefits Trust
(incorporated by reference to Exhibit 10.5 to the
September 1990 Form 10-Q).
*10(f)(2) -- First Amendment to the Company's Executive Benefits Trust
dated June 4, 1991 (incorporated by reference to Exhibit
10(g)(2) to the 1994 Form 10-K).
*10(g) -- Imperial Holly Corporation 1989 Nonemployee Director
Stock Option Plan (incorporated by reference to Exhibit A
to the Company's Proxy Statement dated June 16, 1989 for
the 1989 Annual Meeting of Shareholders, File No.
0-16674).
*10(h) -- Imperial Holly Corporation Retirement Plan For
Nonemployee Directors (incorporated by reference to
Exhibit 10(j) to the 1994 Form 10-K).
*10(i)(1) -- Specimen of the Company's Change of Control Agreement
(incorporated by reference to Exhibit 10(d)(1) to the
September 1994 Form 10-Q).
*10(i)(2) -- Schedule of Change of Control Agreements (incorporated by
reference to Exhibit 10(i)(2) to the 1997 Form 10-K).
*10(j) -- Independent Consultant Agreement between I. H. Kempner
III and the Company (incorporated by reference to Exhibit
10(k) to the 1996 Form 10-K).
*10(k) -- Specimen of the Company's Restricted Stock Agreement with
certain of its officers (incorporated by reference to
Exhibit 10(k) to the 1997 Form 10-K).
*10(l) -- Schedule of Restricted Stock Agreements (incorporated by
reference to Exhibit 10(l) to the 1997 Form 10-K).
*10(m) -- Agreement of Limited Partnership of ChartCo Terminal,
L.P. (incorporated by reference to Exhibit 10(j) to the
1990 Form 10-K).
11 -- Computation of Income Per Common Share.
21 -- Subsidiaries of the Company.
23 -- Independent Auditors' Consent
(b) Reports on Form 8-K.
During the three months ended September 30, 1997, the Company filed a
Current Report on Form 8-K dated September 12, 1997. Additionally, the Company
filed a Current Report on Form 8-K on November 3, 1997, and an amendment to such
report on Form 8-K/A on December 8, 1997.
23
24
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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, ON DECEMBER 11, 1997.
Imperial Holly Corporation
By /s/ JAMES C. KEMPNER
-----------------------------------
President and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES INDICATED ON DECEMBER 11, 1997.
SIGNATURE CAPACITY
--------- --------
/s/ JAMES C. KEMPNER President, Chief Executive Officer, Chief
- ----------------------------------------------------- Financial Officer and Director (Principal
James C. Kempner Executive Officer and Principal Financial
Officer)
/s/ H. P. MECHLER Vice President, Accounting (Principal
- ----------------------------------------------------- Accounting Officer)
H. P. Mechler
/s/ I. H. KEMPNER, III Chairman of the Board of Directors
- -----------------------------------------------------
I. H. Kempner, III
/s/ JOHN D. CURTIN, JR. Director
- -----------------------------------------------------
John D. Curtin, Jr.
/s/ DAVID J. DILGER Director
- -----------------------------------------------------
David J. Dilger
/s/ EDWARD O. GAYLORD Director
- -----------------------------------------------------
Edward O. Gaylord
/s/ GERALD GRINSTEIN Director
- -----------------------------------------------------
Gerald Grinstein
/s/ ANN O. HAMILTON Director
- -----------------------------------------------------
Ann O. Hamilton
/s/ ROGER W. HILL Director
- -----------------------------------------------------
Roger W. Hill
/s/ HARRIS L. KEMPNER, JR. Director
- -----------------------------------------------------
Harris L. Kempner, Jr.
/s/ HENRY E. LENTZ Director
- -----------------------------------------------------
Henry E. Lentz
/s/ ROBERT L. K. LYNCH Director
- -----------------------------------------------------
Robert L. K. Lynch
24
25
SIGNATURE CAPACITY
--------- --------
/s/ KEVIN C. O'SULLIVAN Director
- -----------------------------------------------------
Kevin C. O'Sullivan
/s/ FAYEZ SAROFIM Director
- -----------------------------------------------------
Fayez Sarofim
/s/ DANIEL K. THORNE Director
- -----------------------------------------------------
Daniel K. Thorne
25
26
INDEPENDENT AUDITORS' REPORT
Imperial Holly Corporation:
We have audited the accompanying consolidated financial statements of
Imperial Holly Corporation and subsidiaries (the "Company"), listed in Item
14(a)(1). These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Imperial Holly Corporation and
subsidiaries at September 30, 1997 and March 31, 1997 and 1996, and the results
of their operations and their cash flows for the six-month transition period
ended September 30, 1997 and for each of the three years in the period ended
March 31, 1997 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
November 21, 1997
F-1
27
IMPERIAL HOLLY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
MARCH 31,
SEPTEMBER 30, --------------------
1997 1997 1996
------------- -------- --------
(IN THOUSANDS OF DOLLARS)
CURRENT ASSETS:
Cash and temporary investments......................... $ 9,354 $ 7,719 $ 1,930
Marketable securities.................................. 55,883 48,963 37,373
Accounts receivable -- trade........................... 62,158 52,157 37,251
Income tax receivable.................................. -- 3,400 1,485
Inventories:
Finished products................................... 92,815 119,206 61,702
Raw and in-process materials........................ 17,623 12,428 15,929
Supplies............................................ 16,937 16,392 12,124
Manufacturing costs prior to production................ 22,357 20,888 12,476
Prepaid expenses....................................... 5,448 3,994 3,260
-------- -------- --------
Total current assets........................... 282,575 285,147 183,530
NOTES RECEIVABLE......................................... 1,285 1,168 1,195
OTHER INVESTMENTS........................................ 14,646 11,949 6,702
PROPERTY, PLANT AND EQUIPMENT -- Net..................... 154,751 146,402 124,103
OTHER ASSETS............................................. 4,362 5,267 9,789
-------- -------- --------
TOTAL.......................................... $457,619 $449,933 $325,319
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable -- trade.............................. $ 53,923 $ 42,492 $ 37,937
Short-term borrowings.................................. 43,091 62,470 31,839
Current maturities of long-term debt................... 1,173 1,017 8
Deferred income taxes -- net........................... 24,327 16,256 8,248
Other current liabilities.............................. 29,659 29,006 23,772
-------- -------- --------
Total current liabilities...................... 152,173 151,241 101,804
-------- -------- --------
LONG-TERM DEBT -- Net of current maturities.............. 81,304 90,619 89,800
DEFERRED INCOME TAXES -- Net............................. 21,236 21,453 21,320
DEFERRED EMPLOYEE BENEFITS AND OTHER CREDITS............. 9,947 9,664 1,352
COMMITMENTS AND CONTINGENCIES (Note 10)
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.......................................... 83,707 82,620 32,276
Retained earnings...................................... 90,870 81,347 69,829
Unrealized securities gains -- net of income taxes..... 18,382 12,989 8,938
-------- -------- --------
Total shareholders' equity..................... 192,959 176,956 111,043
-------- -------- --------
TOTAL.......................................... $457,619 $449,933 $325,319
======== ======== ========
See notes to consolidated financial statements.
F-2
28
IMPERIAL HOLLY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
SIX MONTHS ENDED
SEPTEMBER 30, YEAR ENDED MARCH 31,
------------------------- ---------------------------------------
1997 1996 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
NET SALES............................ $ 406,682 $ 393,955 $ 752,595 $ 616,450 $ 586,925
----------- ----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Cost of sales...................... 348,869 341,157 651,677 550,782 520,996
Selling, general and
administrative................... 30,668 29,057 57,722 53,193 54,591
Depreciation and amortization...... 6,786 7,293 14,773 12,681 13,429
Restructuring charges (Note 11).... -- -- -- 2,225 --
----------- ----------- ----------- ----------- -----------
Total....................... 386,323 377,507 724,172 618,881 589,016
----------- ----------- ----------- ----------- -----------
OPERATING INCOME (LOSS).............. 20,359 16,448 28,423 (2,431) (2,091)
INTEREST EXPENSE -- Net.............. (5,301) (6,337) (12,430) (11,207) (11,426)
REALIZED SECURITIES GAINS -- Net..... 11 394 426 5,389 1,649
OTHER INCOME -- Net.................. 724 652 1,269 3,173 3,219
----------- ----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM................. 15,793 11,157 17,688 (5,076) (8,649)
PROVISION (CREDIT) FOR INCOME
TAXES.............................. 5,842 4,080 6,170 (1,858) (3,284)
----------- ----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY
ITEM............................... 9,951 7,077 11,518 (3,218) (5,365)
EXTRAORDINARY ITEM -- Net of tax of
$325 (Note 6)...................... -- -- -- 604 --
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS).................... $ 9,951 $ 7,077 $ 11,518 $ (2,614) $ (5,365)
=========== =========== =========== =========== ===========
EARNINGS (LOSS) PER SHARE OF COMMON
STOCK:
Income (loss) before extraordinary
item............................. $ 0.70 $ 0.64 $ 0.92 $ (0.31) $ (0.52)
Extraordinary item -- Net.......... -- -- -- 0.06 --
----------- ----------- ----------- ----------- -----------
Net income (loss).................. $ 0.70 $ 0.64 $ 0.92 $ (0.25) (0.52)
=========== =========== =========== =========== ===========
WEIGHTED AVERAGE SHARES
OUTSTANDING........................ 14,247,193 11,009,476 12,576,489 10,300,487 10,266,229
=========== =========== =========== =========== ===========
See notes to consolidated financial statements.
F-3
29
IMPERIAL HOLLY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
COMMON STOCK UNREALIZED PENSION
-------------------- RETAINED SECURITIES LIABILITY
SHARES AMOUNT EARNINGS GAINS ADJUSTMENT TOTAL
---------- ------- -------- ---------- ---------- --------
(IN THOUSANDS OF DOLLARS)
BALANCE, APRIL 1, 1994............. 10,252,959 $31,780 $79,862 $ 3,804 $(709) $114,737
Net loss......................... -- -- (5,365) -- -- (5,365)
Cash dividend ($.16 per share)... -- -- (1,643) -- -- (1,643)
Exercise of stock options........ 7,582 66 -- -- -- 66
Employee stock purchase plan..... 22,904 200 -- -- -- 200
Change in unrealized securities
gains -- net................... -- -- -- 1,831 -- 1,831
Pension liability adjustment..... -- -- -- -- 151 151
---------- ------- ------- ------- ----- --------
BALANCE, MARCH 31, 1995............ 10,283,445 32,046 72,854 5,635 (558) 109,977
Net loss......................... -- -- (2,614) -- -- (2,614)
Cash dividends ($.04 per
share)......................... -- -- (411) -- -- (411)
Exercise of stock options........ 11,445 85 -- -- -- 85
Employee stock purchase plan..... 17,617 145 -- -- -- 145
Change in unrealized securities
gains -- net................... -- -- -- 3,303 -- 3,303
Pension liability adjustment..... -- -- -- -- 558 558
---------- ------- ------- ------- ----- --------
BALANCE, MARCH 31, 1996............ 10,312,507 32,276 69,829 8,938 0 111,043
Net income....................... -- -- 11,518 -- -- 11,518
Exercise of stock options........ 14,411 147 -- -- -- 147
Employee stock purchase plan..... 9,517 115 -- -- -- 115
Nonemployee director compensation
plan........................... 21,760 301 -- -- -- 301
Private placement of common
stock.......................... 3,800,000 49,781 -- -- -- 49,781
Change in unrealized securities
gains -- net................... -- -- -- 4,051 -- 4,051
---------- ------- ------- ------- ----- --------
BALANCE, MARCH 31, 1997............ 14,158,195 82,620 81,347 12,989 0 176,956
Net income....................... -- -- 9,951 -- -- 9,951
Cash dividend ($0.03 per
share)......................... -- -- (428) -- -- (428)
Exercise of stock options........ 8,547 53 -- -- -- 53
Employee stock purchase and
compensation plans............. 92,373 733 -- -- -- 733
Nonemployee director compensation
plan........................... 24,660 301 -- -- -- 301
Change in unrealized securities
gains -- net................... -- -- -- 5,393 -- 5,393
---------- ------- ------- ------- ----- --------
BALANCE, SEPTEMBER 30, 1997........ 14,283,775 $83,707 $90,870 $18,382 $ 0 $192,959
========== ======= ======= ======= ===== ========
See notes to consolidated financial statements.
F-4
30
IMPERIAL HOLLY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
SIX MONTHS ENDED
SEPTEMBER 30, YEAR ENDED MARCH 31,
---------------------- -------------------------------
1997 1996 1997 1996 1995
-------- ----------- -------- --------- --------
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
OPERATING ACTIVITIES:
Net income (loss).................... $ 9,951 $ 7,077 $ 11,518 $ (2,614) $ (5,365)
Adjustments for noncash and
nonoperating items:
Extraordinary item -- net......... -- -- -- (604) --
Depreciation...................... 6,786 7,293 14,773 12,681 13,429
Deferred income tax provision..... 5,155 3,633 5,760 (1,737) (3,294)
Other............................. 369 185 1,164 (5,203) (2,021)
Working capital changes (excluding
working capital acquired in the
Spreckels acquisition):
Receivables....................... (6,601) (19,725) (10,172) (502) 5,380
Inventory......................... 20,651 (2,373) (22,564) 45,408 8,914
Deferred and prepaid costs........ (2,923) (546) (1,105) 627 1,814
Accounts payable.................. 11,431 (6,536) (6,997) (6,819) 989
Other liabilities................. 1,011 2,054 (1,285) (3,361) 2,358
-------- -------- -------- --------- --------
Operating cash flow.................. 45,830 (8,938) (8,908) 37,876 22,204
-------- -------- -------- --------- --------
INVESTING ACTIVITIES:
Acquisition of Spreckels............. -- (36,175) (36,287) -- --
Capital expenditures................. (15,214) (5,345) (12,322) (8,890) (7,850)
Investment in marketable
securities........................ (5,395) (3,908) (7,044) (6,537) (6,675)
Proceeds from sale or maturity of
marketable securities............. 6,798 1,612 2,139 14,974 4,344
Proceeds from sale of fixed assets... 205 35 109 1,478 5,915
Other investments.................... (3,007) -- (2,872) (741) 245
Other................................ 350 (857) 4,207 864 131
-------- -------- -------- --------- --------
Investing cash flow.................. (16,263) (44,638) (52,070) 1,148 (3,890)
-------- -------- -------- --------- --------
FINANCING ACTIVITIES:
Private placement of common stock.... -- 49,781 49,781 -- --
Short-term borrowings:
Bank borrowings -- net............ 34,391 48,322 4,180 (5,431) (15,721)
CCC borrowings -- advances........ -- 35,079 93,014 153,143 76,307
CCC borrowings -- repayments...... (53,770) (74,960) (79,125) (176,965) (76,280)
Repayment of long-term debt.......... (9,159) (806) (1,595) (9,324) (67)
Dividends paid....................... (428) -- -- (411) (1,643)
Stock option proceeds and other...... 1,034 372 512 208 221
-------- -------- -------- --------- --------
Financing cash flow.................. (27,932) 57,788 66,767 (38,780) (17,183)
-------- -------- -------- --------- --------
INCREASE IN CASH AND TEMPORARY
INVESTMENTS.......................... 1,635 4,212 5,789 244 1,131
CASH AND TEMPORARY INVESTMENTS,
BEGINNING OF YEAR.................... 7,719 1,930 1,930 1,686 555
-------- -------- -------- --------- --------
CASH AND TEMPORARY INVESTMENTS, END OF
YEAR................................. $ 9,354 $ 6,142 $ 7,719 $ 1,930 $ 1,686
======== ======== ======== ========= ========
See notes to consolidated financial statements.
F-5
31
IMPERIAL HOLLY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, MARCH 31, 1997, 1996 AND 1995
1. ACCOUNTING POLICIES
The Company -- The consolidated financial statements include the accounts
of Imperial Holly Corporation and its majority owned subsidiaries (the
"Company"). All significant intercompany balances and transactions have been
eliminated. The Company operates in one domestic business segment -- the
production and sale of refined sugar and related products. The Company is
significantly affected by market factors, including domestic prices for refined
sugar and raw cane sugar. These market factors are influenced by a variety of
external forces, 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. Federal legislation and regulations provide for
mechanisms designed to support the price of domestic sugar crops, principally
the limitations on importation of raw cane sugar for domestic consumption. In
addition, agricultural conditions in the Company's growing areas may materially
affect the quality and quantity of sugar beets available for purchase as well as
the unit costs of raw materials and processing.
A significant portion of the Company's industrial sales are made under
fixed price, forward sales contracts, most of which commence October 1 and
extend for up to one year. The Company contracts to purchase raw cane sugar
substantially in advance of the time it delivers the refined sugar produced from
the purchase. To mitigate its exposure to future price changes, the Company
attempts to match refined sugar sales contracted for future delivery with the
purchase or pricing of raw cane sugar when feasible. Additionally, the Company
utilizes a participatory sugar beet purchase contract, described below, which
relates the cost of sugarbeets to the net selling price realized on refined beet
sugar sales.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires estimates and assumptions
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.
Change in Fiscal Year -- In October 1997, the Company changed its fiscal
year end from March 31 to September 30. As used herein, the terms fiscal 1997,
fiscal 1996 and fiscal 1995 refer to the twelve months ended March 31, 1997,
1996 and 1995, respectively.
Cash and Temporary Investments -- Temporary investments consist of
short-term, highly liquid investments with maturities of 90 days or less at the
time of purchase.
Marketable Securities -- All of the Company's marketable securities are
classified as "available for sale", and accordingly, are reflected in the
Consolidated Balance Sheet at fair market value, with the aggregate unrealized
gain, net of related deferred tax liability, included as a component of
shareholders' equity. Cost for determining gains and losses on sales of
marketable securities is determined on the FIFO method.
Inventories -- Inventories are stated at the lower of cost or market. Cost
of sugar is determined under the last-in first-out ("LIFO") method. All other
costs are determined under the first-in first-out ("FIFO") method.
If only the FIFO cost method had been used, inventories would have been
higher by $18.9 million at September 30, 1997, $19.2 million at March 31, 1997
and $12.9 million at March 31, 1996. Reductions in inventory quantities in the
six month period ended September 30, 1997 and fiscal 1996 and 1995 resulted in
liquidations of LIFO inventory layers carried at costs prevailing in prior
years. The effect of these liquidations was to increase net income by about
$468,000 ($0.03 per share) in the six month period ended September 30, 1997,
$1,385,000 ($0.13 per share) in fiscal 1996 and decrease net income by about
$114,000 ($0.01 per share) in fiscal 1995.
Sugarbeets Purchased -- 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
F-6
32
contract years, some of which extend beyond the fiscal year end. The contracts
provide for the sharing of the net selling price (gross sales price less certain
marketing costs, including packaging costs, brokerage, freight expense and
amortization of costs for certain facilities used in connection with marketing)
with growers. Cost of sales includes an accrual for estimated additional amounts
to be paid to growers based on the average net return realized to date for sugar
sold in each of the contract years through the end of the fiscal year. The final
cost of sugarbeets cannot be determined until the end of the contract year for
each growing area.
Manufacturing Costs Prior to Production -- Certain manufacturing costs
incurred between processing periods which are necessary to prepare the factory
for the next processing campaign are deferred and allocated to the cost of sugar
produced in the subsequent campaign.
Property and Depreciation -- Property is stated at cost and includes
expenditures for renewals and improvements and capitalized interest. Maintenance
and repairs are charged to current operations. When property is retired or
otherwise disposed of, the cost and related accumulated depreciation are removed
from the respective accounts, and any gain or loss on disposition is included in
income.
Depreciation is provided principally on the straight-line or
sum-of-the-years' digits methods over the estimated service lives of the assets.
Fair Value of Financial Instruments -- The fair value of financial
instruments is estimated based upon market trading information, where available.
Absent published market values for an instrument, management estimates fair
values based upon quotations from broker/dealers or interest rate information
for similar instruments. The carrying amount of cash and temporary investments,
accounts receivable, accounts payable, short-term borrowings and other current
liabilities approximates fair value because of the short maturity and/or
frequent repricing of those instruments.
Federal Income Taxes -- Federal income tax expense includes the current tax
obligation and the change in deferred income tax liability for the period.
Deferred income taxes result from temporary differences between financial and
tax bases of certain assets and liabilities.
Earnings Per Share -- The computation of earnings per share is based on the
weighted average number of shares outstanding. Shares of common stock issuable
under stock options have not been included in the computation of earnings per
share as their effect would be insignificant.
Pending Accounting Pronouncements -- In March 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 128, "Earnings Per Share" (SFAS No. 128"). This new standard requires dual
presentation of basic and diluted earnings per share ("EPS") on the face of the
earnings statement and requires a reconciliation of the numerators and
denominators of basic and diluted EPS calculations. This statement will be
effective for both interim and annual periods ending after December 15, 1997.
The Company's current EPS calculation conforms to basic EPS. Diluted EPS as
defined by SFAS No. 128 is not expected to be materially different from basic
EPS.
Recently, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income", and
Statement of Financial Accounting Standards No. 131, "Disclosures About Segments
of an Enterprise and Related Information". These statements, which are effective
for the Company's fiscal year ending September 30, 1999, establish additional
disclosure requirements but do not affect the measurement of results of
operation. Management is evaluating what, if any, additional disclosures may be
required when these statements are implemented.
2. ACQUISITIONS
On September 12, 1997, the Company entered into an Agreement and Plan of
Merger with Savannah Foods and Industries, Inc., a Georgia based producer and
marketer of sugar and related products ("Savannah Foods"), wherein it agreed to
acquire Savannah Foods in a two step transaction. The Company completed the
first step on October 17, 1997, when it accepted for payment pursuant to a
tender offer shares representing 50.1% of Savannah Foods outstanding common
stock for aggregate consideration of $292 million cash (the "Equity Tender"). In
the second step, expected to be completed in December 1997, Savannah Foods will
be
F-7
33
merged with a subsidiary of the Company (the "Merger"); Savannah Foods will
survive the Merger as a wholly-owned subsidiary of the Company. In consideration
for the Merger, Savannah Foods stockholders will receive $78.6 million cash and
9.2 million to 12.0 million shares of the Company's common stock, depending on
the market value of the Company's common stock prior to the Merger.
To finance the Equity Tender, finance a tender offer for the Company's
8 3/8% Senior Notes due 1999 (The "Debt Tender") and replace the Company's
existing credit facilities, the Company obtained a credit facility, (the "Tender
Credit Facility") from an affiliate of Lehman Brothers, Inc. ("Lehman"),
consisting of a $292 million term loan and a $210 million revolving credit
facility. The Tender Credit Facility is secured by substantially all of the
Company's assets and matures on the earlier of the date of the Merger or January
15, 1998. The Company has a financing commitment letter from Lehman to provide
funds for the cash portion of the Merger and to refinance the Tender Credit
Facility under one of two options: a) senior secured term loans aggregating $255
million, a $200 million senior secured revolving credit facility and $250
million senior subordinated notes offering; or b) $505 million senior secured
term loans and a $200 million senior secured revolving credit facility. The
financing provided by Lehman is expected to contain various restrictions and
covenants that may limit the Company's ability to incur additional debt, make
capital expenditures or pay dividends.
The acquisition will be accounted for as a purchase and Savannah Foods'
results of operations will be included in the Company's consolidated financial
statements commencing October 17, 1997. Purchased intangibles, which include
brand related intangibles and the excess of purchase price over the book value
of net assets acquired ("goodwill"), are estimated to total $288 million and
will be amortized over 40 years. Unaudited, summarized pro forma operating
results as if the acquisition and related financing transactions had occurred on
April 1, 1996, and assuming the maximum number of shares of the Company's common
stock had been issued, are as follows (in thousands of dollars, except per share
amounts):
SIX MONTHS
ENDED TWELVE MONTHS
SEPTEMBER 30, ENDED
1997 MARCH 31, 1997
------------- --------------
Net sales.............................................. $1,018,911 $1,923,324
Operating income....................................... 54,189 68,980
Income before extraordinary item....................... 17,158 6,736
Income before extraordinary item per share
of common stock...................................... $ 0.64 $ 0.27
On April 19, 1996, the Company acquired all of the outstanding capital
stock of Spreckels Sugar Company, Inc. and Limestone Products Company, Inc.
(collectively "Spreckels"), a California based beet sugar processor for $35.3
million. The acquisition was accounted for as a purchase and Spreckels' results
of operations are included in these consolidated financial statements commencing
April 19, 1996.
3. INVESTMENTS
Marketable securities consisted of the following (in thousands of dollars):
SEPTEMBER 30, 1997
--------------------------------------
GROSS UNREALIZED
FAIR HOLDING
AMORTIZED MARKET ----------------
COST VALUE GAINS LOSSES
--------- ------- ------- ------
US Government securities due 1997 through
1998......................................... $ 7,646 $ 7,643 $ 8 $ (11)
Common stocks.................................. 19,957 48,240 28,283 --
------- ------- ------- ------
Total................................ $27,603 $55,883 $28,291 $ (11)
======= ======= ======= ======
F-8
34
MARCH 31, 1997
--------------------------------------
GROSS UNREALIZED
FAIR HOLDING
AMORTIZED MARKET ----------------
COST VALUE GAINS LOSSES
--------- ------- ------- ------
US Government securities....................... $ 9,226 $ 9,222 $ 8 $ (12)
Common stocks.................................. 19,755 39,741 20,085 (99)
------- ------- ------- ------
Total................................ $28,981 $48,963 $20,093 $ (111)
======= ======= ======= ======
MARCH 31, 1996
--------------------------------------
GROSS UNREALIZED
FAIR HOLDING
AMORTIZED MARKET ----------------
COST VALUE GAINS LOSSES
--------- ------- ------- ------
US Government securities....................... $ 4,881 $ 4,937 $ 56 $ --
Common stocks.................................. 18,740 32,436 13,696 --
------- ------- ------- ------
Total................................ $23,621 $37,373 $13,752 $ --
======= ======= ======= ======
Realized securities gains are reported net of realized losses of $28,000,
$2,000, and $106,000 in fiscal years 1997, 1996 and 1995, respectively. There
were no realized securities losses during the six months ended September 30,
1997. Marketable securities with a market value of $13.5 million at September
30, 1997 were pledged to secure certain insurance and other obligations.
Other investments include the Company's royalty interest in a coal seam
methane gas project, which is accounted for at amortized cost and its investment
in a limited partnership which is constructing a beet sugar factory in
Washington state which is accounted for on the equity method.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at September 30, 1997 consisted of the
following (in thousands of dollars):
MARCH 3L,
SEPTEMBER 30, --------------------
1997 1997 1996
------------- -------- --------
Land............................................. $ 20,167 $ 19,949 $ 13,682
Buildings, machinery and equipment............... 273,536 271,002 251,949
Construction in progress......................... 14,572 5,440 2,094
-------- -------- --------
Total.................................. 308,275 296,391 267,725
Less accumulated depreciation.................... 153,524 149,989 143,622
-------- -------- --------
Property, Plant and Equipment -- Net............. $154,751 $146,402 $124,103
======== ======== ========
5. SHORT-TERM BORROWINGS
At September 30, 1997, the Company had working capital financing available
from domestic banks under a $110,000,000 unsecured revolving credit line which
provided for interest on advances at floating or negotiated rates and required
commitment fees. The Company also has short-term borrowing facilities available
from banks on an uncommitted basis aggregating $55,000,000 at September 30,
1997; interest on these borrowings was on a negotiated rate basis. These credit
facilities were replaced in October 1997 by the Tender Credit Facility discussed
in Note 2.
Additionally, in the past the Company has borrowed short-term from the
Commodity Credit Corporation ("CCC") under the USDA's price support loan
program. CCC borrowings are secured by refined beet sugar inventory and are
recourse or nonrecourse to the Company depending upon certain regulatory
conditions.
F-9
35
Outstanding borrowings were as follows (in thousands of dollars):
MARCH 3L,
SEPTEMBER 30, ------------------
1997 1997 1996
------------- ------- -------
Commodity Credit Corporation....................... $ -- $53,770 $27,319
Bank working capital financing..................... 43,091 8,700 4,520
------- ------- -------
Total.................................... $43,091 $62,470 $31,839
======= ======= =======
Weighted Average Interest Rate..................... 6.89% 6.70% 5.36%
======= ======= =======
6. LONG-TERM DEBT
Long-term debt was as follows (in thousands of dollars):
MARCH 31,
SEPTEMBER 30, ------------------
1997 1997 1996
------------- ------- -------
8 3/8% senior notes................................ $81,172 $89,468 $89,800
Other, principally equipment capital leases........ 1,305 2,168 8
------- ------- -------
Total long-term debt............................... 82,477 91,636 89,808
Less current maturities............................ 1,173 1,017 8
------- ------- -------
Long-term debt, net................................ $81,304 $90,619 $89,800
======= ======= =======
The Company's 8 3/8% Senior Notes due 1999 do not require principal
payments prior to maturity. In connection with the Debt Tender discussed in Note
2, Senior Notes with a principal amount of $75,371,000 were purchased in October
1997, and the indenture relating to the Senior Notes was amended to, among other
things, remove restrictions on the Company's ability to create liens on certain
properties. The Company will report as an extraordinary item for the quarter
ending December 31, 1997 a loss of $1,967,000 on such purchase. In fiscal 1996,
the Company purchased and retired a portion of the Senior Notes for amounts less
than book value, and the Company reported such difference, net of tax, as an
extraordinary item.
The Company had an interest rate swap agreement which expired in October
1996; income (loss) on such swap was ($3,000) in fiscal 1997, $289,000 in fiscal
1996, and $643,000 in fiscal 1995 and is reported in interest expense-net.
Cash paid for interest on short and long-term debt was $6,987,787 for the
six month period ended September 30, 1997, $11,949,000, $12,228,000, and
$11,463,000 for the fiscal years ended March 31, 1997, 1996 and 1995
respectively. Interest capitalized as part of the cost of constructing assets
was $272,000 for the six months ended September 30, 1997. Such amount was not
significant in fiscal 1997, 1996 or 1995.
7. INCOME TAXES
The components of the consolidated income tax provision (credit), including
amounts reported as an extraordinary item, were as follows (in thousands of
dollars):
SIX MONTHS
ENDED YEAR ENDED MARCH 31,
SEPTEMBER 30, -----------------------------
1997 1997 1996 1995
------------- ------- ------- -------
Federal:
Current............................... $ -- $ 20 $ 109 $ (36)
Tax benefit of operating loss
carryforward....................... 1,551 (1,762) (1,452) (1,636)
Deferred.............................. 3,604 7,522 (285) (1,658)
State................................... 687 390 95 46
------ ------- ------- -------
Total................................. $5,842 $ 6,170 $(1,533) $(3,284)
====== ======= ======= =======
F-10
36
The tax effects of temporary differences which give rise to the Company's
deferred tax assets and liabilities were as follows (in thousands of dollars):
SEPTEMBER 30, 1997
-------------------------------
ASSETS LIABILITIES TOTAL
------ ----------- --------
Current:
Marketable securities valuation differences............... $ -- $ (9,899) $ (9,899)
Inventory valuation differences, principally purchase
accounting............................................. -- (12,230) (12,230)
Manufacturing costs prior to production deducted
currently.............................................. -- (10,168) (10,168)
Accruals not currently deductible......................... 2,272 -- 2,272
Alternate minimum tax differences......................... 903 -- 903
Operating loss carryforward (expiring in 2010, 2011 and
2012).................................................. 3,332 -- 3,332
Other..................................................... 1,463 -- 1,463
------ -------- --------
Total current..................................... 7,970 (32,297) (24,327)
------ -------- --------
Noncurrent:
Depreciation differences, including purchase accounting... -- (22,329) (22,329)
Pension cost differences.................................. 480 -- 480
Accruals not currently deductible......................... 1,052 -- 1,052
Other..................................................... 694 (1,133) (439)
------ -------- --------
Total noncurrent.................................. 2,226 (23,462) (21,236)
------ -------- --------
Total............................................. $9,932 $(55,759) $(45,563)
====== ======== ========
MARCH 31,
-----------------------------------------------------------------------
1997 1996
-------------------------------- ------------------------------------
ASSETS LIABILITIES TOTAL ASSETS LIABILITIES TOTAL
------- ----------- -------- ----------- ----------- --------
Current:
Marketable securities
valuation differences..... -- $ (6,994) $ (6,994) -- $ (4,813) $ (4,813)
Inventory valuation
differences, principally
purchase accounting....... -- (12,324) (12,324) -- (6,320) (6,320)
Manufacturing costs prior to
production deducted
currently................. -- (7,311) (7,311) -- (4,366) (4,366)
Accruals not currently
deductible................ $ 2,446 -- 2,446 $2,081 -- 2,081
Alternate minimum tax
differences............... 903 -- 903 903 -- 903
Operating loss
carryforward.............. 5,919 -- 5,919 3,172 -- 3,172
Other........................ 1,105 -- 1,105 1,135 (40) 1,095
------- -------- -------- ------ -------- --------
Total current........ 10,373 (26,629) (16,256) 7,291 (15,539) (8,248)
------- -------- -------- ------ -------- --------
Noncurrent:
Depreciation differences,
including purchase
accounting................ -- (22,160) (22,160) -- (18,443) (18,443)
Pension cost differences..... 1,153 -- 1,153 -- (1,711) (1,711)
Accruals not currently
deductible................ 658 -- 658 154 -- 154
Other........................ -- (1,104) (1,104) -- (1,320) (1,320)
------- -------- -------- ------ -------- --------
Total noncurrent..... 1,811 (23,264) (21,453) 154 (21,474) (21,320)
------- -------- -------- ------ -------- --------
Total................ $12,184 $(49,893) $(37,709) $7,445 $(37,013) $(29,568)
======= ======== ======== ====== ======== ========
F-11
37
The consolidated income tax provision is different from the amount which
would be provided by applying the statutory federal income tax rate of 35% to
the Company's income before taxes. The reasons for the differences from the
statutory rate are as follows (in thousands of dollars):
SIX MONTHS
ENDED YEAR ENDED MARCH 31,
SEPTEMBER 30, --------------------------
1997 1997 1996 1995
------------- ------ ------- -------
Income taxes computed at the statutory
federal rate.............................. $5,527 $6,191 $(1,451) $(3,027)
Nontaxable interest and dividends........... (121) (217) (251) (299)
State income taxes........................ 447 253 62 30
Foreign sales corporation................. (30) (60) (59) (68)
Other..................................... 19 3 166 80
------ ------ ------- -------
Total.................................. $5,842 $6,170 $(1,533) $(3,284)
====== ====== ======= =======
Income taxes paid were $1,937,000 in the six months ended September 30,
1997 and $2,300,000 in fiscal 1997 and $213,000 in fiscal 1996; income tax
refunds received were $3,778,000 in 1995.
8. EMPLOYEE BENEFITS
Retirement Plans -- Substantially all of the Company's nonseasonal
employees are covered by retirement plans. Certain unionized employees are
covered by an industry-wide plan, and other employees are covered by
Company-sponsored defined benefit plans. Under the Company-sponsored defined
benefit plans, retirement benefits are primarily a function of years of service
and the employee's compensation for a defined period of employment. The Company
funds pension costs at an actuarially determined amount based on normal cost and
the amortization of prior service costs, gains, and losses over the remaining
service periods. Additionally, the Company provides a supplemental
non-qualified, unfunded pension plan for certain officers whose benefits under
the qualified plan are limited by federal tax law. The Company provides a
non-qualified retirement plan for non-employee directors, which provides
benefits based upon years of service as a director and the retainer in effect at
the date of a director's retirement.
The aggregate net periodic pension cost for these plans included the
following components (in thousands of dollars):
MARCH 31,
SEPTEMBER 30, -------------------------------
1997 1997 1996 1995
------------- -------- -------- -------
Company-sponsored plans:
Service cost for benefits earned
during the period................. $ 1,359 $ 2,756 $ 2,089 $ 2,128
Interest cost on projected benefit
obligation........................ 2,927 5,883 2,653 2,348
Actual return on plan assets......... (20,145) (15,675) (10,141) (4,439)
Net amortization and deferral........ 16,839 10,355 8,377 3,254
-------- -------- -------- -------
Net periodic pension cost -- Company-
sponsored plans................... 980 3,319 2,978 3,291
Industry-wide plan for certain
unionized employees............... 212 432 438 459
-------- -------- -------- -------
Total pension cost........... $ 1,192 $ 3,751 $ 3,416 $ 3,750
======== ======== ======== =======
F-12
38
The funded status of the Company-sponsored plans was as follows (in
thousands of dollars):
SEPTEMBER 30, 1997
----------------------------------
PLANS FOR WHICH PLANS FOR WHICH
ACCUMULATED ASSETS EXCEED
BENEFITS ACCUMULATED
EXCEED ASSETS BENEFITS
--------------- ---------------
Actuarial present value of projected benefit
obligations:
Accumulated benefit obligations:
Vested............................................ $1,666 $ 65,352
Nonvested......................................... 19 5,071
------ --------
Total accumulated benefit obligations........ 1,685 70,423
Effect of projected future salary increases............ 341 10,430
------ --------
Projected benefit obligations........................ 2,026 80,853
Plan assets at fair value (primarily listed stocks and
bonds)............................................... -- 104,153
------ --------
Projected benefit obligations over (under) plan
assets............................................... 2,026 (23,300)
Prior service cost of plan amendments.................. (893) (3,136)
Unrecognized net gains (losses):
Arising at transition date........................... (518) 176
Arising subsequent to transition date................ 154 30,165
Adjustment for additional liability.................... 916 --
------ --------
Accrued pension cost................................... $1,685 $ 3,905
====== ========
Assumptions used:
Current discount rate for plan liabilities........... 7.5% 7.5%
Projected annual rate of increase in compensation
levels............................................ 5.0% 5.0%
Assumed long-term return on plan assets.............. 8.0% 8.0%
MARCH 31,
---------------------------------------------------------------------
1997 1996
--------------------------------- ---------------------------------
PLANS FOR WHICH PLANS FOR WHICH PLANS FOR WHICH PLANS FOR WHICH
ACCUMULATED ASSETS EXCEED ACCUMULATED ASSETS EXCEED
BENEFITS ACCUMULATED BENEFITS ACCUMULATED
EXCEED ASSETS BENEFITS EXCEED ASSETS BENEFITS
--------------- --------------- --------------- ---------------
Actuarial present value of projected
benefit obligations:
Accumulated benefit obligations:
Vested................................. $27,039 $37,458 $ 9,055 $17,832
Nonvested.............................. 1,210 1,049 668 433
------- ------- ------- -------
Total accumulated benefit
obligations..................... 28,249 38,507 9,723 18,265
Effect of projected future salary
increases................................ 1,219 8,279 715 8,434
------- ------- ------- -------
Projected benefit obligations............ 29,468 46,786 10,438 26,699
Plan assets at fair value (primarily listed
stocks and bonds)........................ 25,649 60,850 6,889 31,888
------- ------- ------- -------
Projected benefit obligations over (under)
plan assets.............................. 3,819 (14,064) 3,549 (5,189)
Prior service cost of plan amendments...... (2,651) (1,628) (2,118) 22
Unrecognized net gains (losses):
Arising at transition date............... (675) 215 (989) 293
Arising subsequent to transition date.... 2,793 16,902 (175) 3,108
Adjustment for additional liability........ 1,671 -- 2,567 --
------- ------- ------- -------
Accrued (prepaid) pension cost............. $ 4,957 $ 1,425 $ 2,834 $(1,766)
======= ======= ======= =======
Assumptions used:
Current discount rate for plan
liabilities............................ 8.0% 8.0% 7.5% 7.5%
Projected annual rate of increase in
compensation levels.................... 5.0% 5.0% 5.5% 5.5%
Assumed long-term return on plan
assets................................. 8.0% 8.0% 8.0% 8.0%
F-13
39
401(k) Plans -- Substantially all of the Company's nonbargaining unit
employees may elect to defer up to 15% of their annual compensation in the
Company's 401(k) Tax Deferred Savings Plan. The Company may make discretionary
matching contributions of up to 38% of the first $2,500 contributed by an
employee. The Company also provides 401(k) plans for certain bargaining unit
groups which allow participating employees to defer up to 15% of their annual
compensation. The amounts charged to expense for these plans were not
significant.
Employee Stock Purchase Plan -- In July 1993, the shareholders approved an
amended and restated employee stock purchase plan and reserved 1,000,000 shares
of common stock. The plan provides substantially all year-round employees the
option to purchase shares of common stock either through open market purchases
at market value or directly from the Company at 85% of market value. The amounts
charged to compensation expense for the discount on shares purchased under the
latter alternative were not significant.
9. SHAREHOLDERS' EQUITY
The Company adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123") in fiscal 1997. As
permitted by Statement of Financial Accounting Standards No. 123, "Accounting
for Stock Based Compensation" ("SFAS No. 123"), the Company measures
compensation cost using the intrinsic value method prescribed in by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
The Company's reported net income and earnings per share would have been
reduced had compensation cost for the Company's stock-based compensation plans
been determined using the fair value method of accounting as set forth in SFAS
No. 123. For purposes of estimating the fair value disclosures below, the fair
value of each stock option has been estimated on the grant date with a
Black-Scholes option-pricing model using the following weighted-average
assumptions: expected volatility of 38%; risk-free interest rate of 7.06%; and
expected lives of 10 years. The effects of using the fair value method of
accounting on net income and earnings per share are indicated in the pro forma
amounts below:
SIX MONTHS YEARS ENDING MARCH 31,
ENDED ----------------------
9/30/97 1997 1996
---------- -------- --------
Income (loss) before
extraordinary item As reported.................. $9,951 $11,518 $(3,218)
Pro forma.................... 9,839 11,351 (3,260)
Net loss income As reported.................. $9,951 $11,518 $(2,614)
Pro forma.................... 9,839 11,351 (2,656)
Earnings Per Share:
Income (loss) before
extraordinary item As reported.................. $ 0.70 $ 0.92 $ (0.31)
Pro forma 0.69 0.90 (0.32)
Net income As reported.................. $ 0.70 $ 0.92 $ (0.25)
Pro forma.................... 0.69 0.90 (0.26)
Shareholder Rights Plan -- In 1989, the Board of Directors declared a
dividend of one Right for each outstanding share of the Company's common stock.
Certain terms of the rights were amended in January 1995. Each of the Rights,
which are currently attached to the common stock, entitle the holder to purchase
two three-hundredths of a share of a new series of Junior Participating
Preferred Stock (95,225 in total as of September 30, 1997) at a price of $60
(subject to adjustment). The Rights are not exercisable until the earlier of ten
days after the public announcement that a person or group has acquired 15% or
more (25% or more for persons who were 10% shareholders on January 27, 1995) of
the Company's outstanding common stock (an "Acquiring Person") or ten business
days after the commencement of a tender offer to acquire such an interest. Under
certain circumstances, the Rights, other than the Rights held by the Acquiring
Person, will become exercisable for common stock of the Company (or an acquirer)
with a market value equal to two
F-14
40
times the exercise price of the Right. The Rights are redeemable, at 2/3 cents
per Right, at any time prior to a person becoming an Acquiring Person. The
Rights expire on September 25, 1999.
Stock Sale -- On August 29, 1996, the Company completed the private
placement of 3,800,000 shares of the Company's common stock to Greencore Group
plc ("Greencore"), an Irish sugar and agricultural products company, for net
proceeds of $49.8 million. In July, the Board of Directors took action under the
Shareholder Rights Plan to increase the ownership percentage that would trigger
the plan with respect to Greencore to 30% during the term of the Investor
Agreement between Greencore and the Company (not more than 5 years). Thereafter,
the trigger level would be increased to 35%, until such time as Greencore's
investment falls below 15%, at which time the trigger level becomes 15%. During
the term of the Investor Agreement, Greencore will have the right to designate
two nominees for election as directors of the Company, and will be required to
vote for the director nominees recommended by the Board of Directors. During the
term of the Investor Agreement, Greencore is also subject to restrictions
relative to certain actions regarding the Company.
Stock Incentive Plan -- The shareholders have approved the Imperial Holly
Corporation Stock Incentive Plan, and have reserved for issuance 1,062,500
shares of common stock. The Board of Directors has proposed an amendment to be
voted upon at the 1998 Annual Meeting of Shareholders, which would increase the
number of shares reserved under the Plan by 2,500,000. The plan provides for the
granting of incentive awards in the form of stock options, stock appreciation
rights (SARs), restricted stock, performance units and performance shares at the
discretion of the Executive Compensation Committee of the Board of Directors.
Stock options have an exercise price equal to the fair market value of the
shares of common stock at date of grant, become exercisable in annual increments
for up to five years commencing one year after date of grant, and expire not
more than ten years from date of grant.
Stock option activity in the plan was as follows:
SIX MONTHS ENDED
SEPTEMBER 30, 1997
-------------------------
WEIGHTED-
AVERAGE
EXERCISE PRICE
OPTIONS PER SHARE
------- --------------
Beginning Balance........................................... 614,327 $10.39
Granted..................................................... 9,000 11.33
Expired..................................................... (30,800) 12.84
Exercised................................................... (9,632) 6.99
-------
Balance, September 30....................................... 582,895 $10.33
=======
Exercisable as of September 30.............................. 367,020 $10.31
=======
YEAR ENDED MARCH 31,
------------------------------------------------------------------------------
1997 1996 1995
------------------------ ------------------------ ------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE PRICE EXERCISE PRICE EXERCISE PRICE
OPTIONS PER SHARE OPTIONS PER SHARE OPTIONS PER SHARE
------- -------------- ------- -------------- ------- --------------
Beginning Balance...... 528,589 $10.03 510,733 $10.67 494,815 $10.68
Granted................ 141,700 12.90 94,000 7.84 24,500 9.18
Expired................ (41,551) 15.22 (66,199) 12.33 (1,000) 8.69
Exercised.............. (14,411) 7.97 (9,945) 6.67 (7,582) 6.74
------- ------- -------
Balance, March 31...... 614,327 $10.39 528,589 $10.03 510,733 $10.67
======= ======= =======
Exercisable as of March
31................... 364,964 $10.23 330,964 $11.05 331,609 $11.58
======= ======= =======
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41
Options outstanding at September 30, 1997 consisted of the following:
EXERCISABLE OPTIONS
----------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
RANGE OF EXERCISE NUMBER OF EXERCISE PRICE REMAINING NUMBER OF EXERCISE PRICE
PRICES PER SHARE OPTIONS PER SHARE CONTRACTUAL LIFE OPTIONS PER SHARE
----------------- --------- ---------------- ---------------- --------- ----------------
$6.44-$8.87 356,370 $ 7.87 5.4 years 238,745 $ 7.72
$9.75-$12.25 21,000 10.79 8.5 years 5,250 10.11
$13.19-$16.83 205,525 14.55 6.2 years 123,025 15.35
Certain stock options listed above were granted with SARs. The SARs provide
that, in lieu of the exercise of options, the optionee may receive cash or
shares of stock with a fair market value equal to the amount by which the fair
market value on exercise date of the stock subject to the option exceeds the
option price. No SARs have been exercised and, at September 30, 1997, options
outstanding with SARs attached totaled 49,795 shares, all of which were
exercisable.
Nonemployee Director Stock Option Plan -- The shareholders have approved
the Nonemployee Director Stock Option Plan and have reserved 30,000 shares of
common stock for issuance. The plan provides for the automatic granting to each
nonemployee director of options to purchase 1,500 shares of common stock at a
price equal to 50% of the fair market value at date of grant. The options become
exercisable upon the completion of three years of service as a director, and
expire over a two year period from the date first exercisable. Stock option
activity in the plan was as follows:
SIX MONTHS ENDED YEAR ENDED MARCH 31
SEPTEMBER 30, ---------------------------------------------------------------
1997 1997 1996 1995
------------------- ------------------- ------------------- -------------------
PRICE PRICE PRICE PRICE
OPTIONS PER SHARE OPTIONS PER SHARE OPTIONS PER SHARE OPTIONS PER SHARE
------- --------- ------- --------- ------- --------- ------- ---------
Beginning Balance.... 4,500 $6.53 3,000 $5.88 5,250 $6.93 6,000 $7.17
Granted.............. -- -- 1,500 7.84 -- --
Expired.............. -- -- -- (750) 8.84 (750) 8.84
Exercised............ 2,250 5.50 -- (1,500) 8.09 --
----- ----- ------ -----
Balance, March 31.... 2,250 $7.56 4,500 $6.53 3,000 5.88 5,250 $6.93
===== ===== ====== =====
Exercisable as of
March 31........... 750 $7.00 3,000 $5.88 -- 2,250 $8.34
===== ===== ====== =====
Options outstanding at September 30, 1997 have a range of exercise prices
of $4.75 to $7.84, and weighted-average remaining contractual life of 2.0 years.
Nonemployee Director Compensation Plan -- In fiscal 1997, the shareholders
approved the Nonemployee Director Compensation Plan which provides for the
annual award of common stock to directors in lieu of their cash retainer. In the
six months ended September 30, 1997 and in fiscal 1997, 21,760 shares of common
stock each were awarded pursuant to this plan.
10. COMMITMENTS AND CONTINGENCIES
The Company is party to litigation and claims which are normal in the
course of its operations; while the results of such litigation and claims cannot
be predicted with certainty, the Company believes the final outcome of such
matters will not have a materially adverse effect on its results of operations
or consolidated financial position.
The Company has had $4.6 million of standby letters of credit issued by
banks to secure certain insurance obligations.
The Company has a contingent commitment to advance additional amounts to a
limited partnership which is constructing a beet sugar factory in Washington
state of up to $1.7 million, depending upon final construction costs.
F-16
42
The Company leases certain facilities and equipment under cancelable and
noncancelable operating leases. Total rental expenses for all operating leases
amounted to $3,571,000 for the six month period ended September 30, 1997, and
$5,788,000, $4,343,000, and $3,519,000 in fiscal 1997, 1996 and 1995,
respectively.
The aggregate future minimum lease commitments under noncancelable
operating leases at September 30, 1997 are summarized as follows (in thousands
of dollars):
FISCAL YEAR ENDING OPERATING
SEPTEMBER 30, LEASES
- ------------------ ---------
1998................................................................... $3,124
1999................................................................... 2,360
2000................................................................... 1,638
2001................................................................... 1,190
2002................................................................... 751
After 2002............................................................. 660
The aggregate future minimum amount to be received under sub-leases was
$3,113,000 at September 30, 1997.
11. SUPPLEMENTARY INCOME STATEMENT INFORMATION
In fiscal 1996 the Company recorded a charge of $1,750,000 related to the
announced closure of its Hamilton City California beet processing facility in
early fiscal 1997, including $650,000 related to the layoff of approximately 68
employees. Through September 30, 1997, substantially all of such amount had been
paid. Additionally, in fiscal 1996, the Company recorded a charge of $475,000
related to costs in connection with a work force reduction. As of March 31, 1997
substantially all of that amount had been incurred in connection with the
termination of 47 individuals.
Other income -- net includes interest and dividends totaling $1,184,000 for
the six months ended September 30, 1997, and $1,792,000, $1,820,000, and
$1,456,000 for fiscal 1997, 1996 and 1995, respectively. Amounts charged to
expense for research and development were $824,000 for the six months ended
September 30, 1997, and $1,445,000, $1,670,000, and $2,084,000 for fiscal 1997,
1996 and 1995, respectively.
F-17
43
INDEX TO EXHIBITS
Asterisk indicates exhibit previously filed with the Commission and
incorporated herein by reference as indicated.
*3(a) -- Restated Articles of Incorporation of the Company
(incorporated by reference to Exhibit 3(b) to the
Company's Registration Statement on Form S-4
(Registration No. 33-20959)).
*3(b) -- Articles of Amendment to Restated Articles of
Incorporation (incorporated by reference to Exhibit 3.1
to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1990 (File No. 1-10307)).
*3(c) -- Statement of Resolution establishing Series of Shares
designated Series A Junior Participating Preferred Stock
(incorporated by reference to Exhibit 3(b) to the
Company's Annual Report on Form 10-K for the year ended
March 31, 1990 (File No. 1-10307) (the "1990 Form
10-K")).
*3(d) -- Statement of Resolution increasing number of shares
designated Series A Junior Participating Preferred Stock
(incorporated by reference to Exhibit 3.2 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1990 (File No. 1-10307)).
*3(e)(1) -- Rights Agreement dated as of September 14, 1989 between
the Company and The Bank of New York, as Rights Agent
(incorporated by reference to Exhibit 1 to the Company's
Current Report on Form 8-K dated September 21, 1989 (File
No. 1-10307)).
*3(e)(2) -- Amendment to Rights Agreement dated as of January 27,
1995 (incorporated by reference to Exhibit 1 to the
Company's Current Report on Form 8-K dated January 27,
1995 (File No. 1-10307)).
*3(f) -- By-Laws of the Company (incorporated by reference to
Exhibit 3(b) to the Company's Annual Report on Form 10-K
for the year ended March 31, 1989 (File No. 0-16674) (the
"1989 Form 10-K")).
*3(g)(1) -- Investor Agreement dated August 29, 1996 by and among the
Company, Greencore Group plc and Earlsfort Holdings B.V.
(incorporated by reference to Exhibit 4.3 to the
Company's current report on Form 8-K dated September 5,
1996 (File No. 1-10307) (the "September 5, 1996 Form
8-K")).
*3(g)(2) -- Registration Rights Agreement dated August 29, 1996 by
and among the Company, Greencore Group plc and Earlsfort
Holdings B.V. (incorporated by reference to Exhibit 4.2
to the September 5, 1996 Form 8-K).
*3(h) -- Agreement and Plan of Merger, dated September 12, 1997,
among Imperial Holly Corporation, IHK Merger Sub
Corporation and Savannah Foods & Industries, Inc.
(incorporated by reference to Exhibit 2.1 to the
Company's Registration Statement on Form S-4
(Registration No. 333-40445)(the "Savannah S-4")).
*4(a)(1) -- Credit Agreement, dated as of October 17, 1997, among
Imperial Holly Corporation, as Borrower, the Several
Lenders from time to time Parties thereto, Lehman
Brothers, Inc., as Arranger, Lehman Brothers Commercial
Paper, Inc., as Syndication Agent and Lehman Brothers
Commercial Paper, Inc., as Administrative Agent
(incorporated by reference to Exhibit 10.1 to the
Savannah S-4).
*4(a)(2) -- Guarantee and Collateral Agreement, dated as of October
17, 1997, made by Imperial Holly Corporation and certain
of its Subsidiaries in favor of Harris Trust and Savings
Bank, as Collateral Agent (incorporated by reference to
Exhibit 10.2 to the Savannah S-4).
44
*4(b) -- Indenture dated as of October 15, 1992 by and between the
Company and Texas Commerce Bank National Association, as
Trustee, relating to the Company's 8 3/8% Senior Notes
due 1999 (incorporated by reference to Exhibit 4.1 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1992 (File 1-10307)).
*10(a) -- Imperial Holly Corporation Stock Incentive Plan (as
amended and restated effective May 1, 1997)(incorporated
by reference to Exhibit 10(a) to the Company's Annual
Report on Form 10-K for the year ended March 31, 1997
(File No. 1-10307)(the "1997 Form 10-K")).
*10(b) -- Specimen of the Company's Employment Agreement for
certain of its officers (incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1990 (File No.
1-10307)(the "September 1990 Form 10-Q")).
*10(b)(2) -- Specimen of the Company's Amendment to Employment
Agreement for certain of its officers (incorporated by
reference to Exhibit 10(c)(2) to the 1994 Form 10-K).
*10(b)(3) -- Schedule of Employment Agreements (incorporated by
referenced to Exhibit 10(a) to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1994 (File No. 1-10307) (the "September 1994 Form
10-Q")).
*10(c) -- Specimen of the Company's Severance Pay Agreements for
certain of its officers (incorporated by reference to
Exhibit 10.2 to the September 1990 Form 10-Q).
*10(d)(1) -- Imperial Holly Corporation Salary Continuation Plan (as
amended and restated effective August 1, 1994)
(incorporated by reference to Exhibit 10(b)(1) to the
September 1994 Form 10-Q).
*10(d)(2) -- Specimen of the Company's Salary Continuation Agreement
(Fully Vested) (incorporated by reference to Exhibit
10(b)(2) to the September 1994 Form 10-Q).
*10(d)(3) -- Specimen of the Company's Salary Continuation Agreement
(Graduated Vesting) (incorporated by reference to Exhibit
10(b)(3) to the September 1994 Form 10-Q).
*10(d)(4) -- Schedule of Salary Continuation Agreements (incorporated
by reference to Exhibit 10(d)(4) to the Company's Annual
Report on Form 10-K for the year ended March 31, 1996
(File No. 1-10307) (the "1996 Form 10-K")).
*10(e)(1) -- Imperial Holly Corporation Benefit Restoration Plan (as
amended and restated effective August 1, 1994)
(incorporated by reference to Exhibit 10(c)(1) to the
September 1994 Form 10-Q).
*10(e)(2) -- Specimen of the Company's Benefit Restoration Agreement
(Fully Vested) (incorporated by reference to Exhibit
10(c)(2) to the September 1994 Form 10-Q).
*10(e)(3) -- Specimen of the Company's Benefit Restoration Agreement
(Graduated Vesting) (incorporated by reference to Exhibit
10(c)(3) to the September 1994 Form 10-Q).
*10(e)(4) -- Schedule of Benefit Restoration Agreements (incorporated
by reference to Exhibit 10(e)(4) to the 1996 Form 10-K).
*10(f)(1) -- Imperial Holly Corporation Executive Benefits Trust
(incorporated by reference to Exhibit 10.5 to the
September 1990 Form 10-Q).
*10(f)(2) -- First Amendment to the Company's Executive Benefits Trust
dated June 4, 1991 (incorporated by reference to Exhibit
10(g)(2) to the 1994 Form 10-K).
45
*10(g) -- Imperial Holly Corporation 1989 Nonemployee Director
Stock Option Plan (incorporated by reference to Exhibit A
to the Company's Proxy Statement dated June 16, 1989 for
the 1989 Annual Meeting of Shareholders, File No.
0-16674).
*10(h) -- Imperial Holly Corporation Retirement Plan For
Nonemployee Directors (incorporated by reference to
Exhibit 10(j) to the 1994 Form 10-K).
*10(i)(1) -- Specimen of the Company's Change of Control Agreement
(incorporated by reference to Exhibit 10(d)(1) to the
September 1994 Form 10-Q).
*10(i)(2) -- Schedule of Change of Control Agreements (incorporated by
reference to Exhibit 10(i)(2) to the 1997 Form 10-K).
*10(j) -- Independent Consultant Agreement between I. H. Kempner
III and the Company (incorporated by reference to Exhibit
10(k) to the 1996 Form 10-K).
*10(k) -- Specimen of the Company's Restricted Stock Agreement with
certain of its officers (incorporated by reference to
Exhibit 10(k) to the 1997 Form 10-K).
*10(l) -- Schedule of Restricted Stock Agreements (incorporated by
reference to Exhibit 10(l) to the 1997 Form 10-K).
*10(m) -- Agreement of Limited Partnership of ChartCo Terminal,
L.P. (incorporated by reference to Exhibit 10(j) to the
1990 Form 10-K).
11 -- Computation of Income Per Common Share.
21 -- Subsidiaries of the Company.
23 -- Independent Auditors' Consent