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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended March 31, 2004

OR

For the transition period from                  to                

Commission file number 1-10307

IMPERIAL SUGAR COMPANY

(Exact name of registrant as specified in its charter)

One Imperial Square, P.O. Box 9, Sugar Land, Texas 77487

(Address of principal executive offices, including Zip Code)

(281) 491-9181

(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    Yes  x    No  ¨

As of May 10, 2004 there were 10,329,700 shares of common stock, without par value, of the registrant outstanding.

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IMPERIAL SUGAR COMPANY

Index

________________________

Forward-Looking Statements

Statements regarding future market prices and margins, future operating results, sugarbeet acreage, operating efficiencies, future government and legislative action, future cost savings, future pension costs, our liquidity and ability to finance our operations, and other statements that are not historical facts contained in this report on Form 10-Q are forward-looking statements. We identify forward-looking statements in this report by using the following words and similar expressions:

Forward-looking statements involve risks, uncertainties and assumptions, including, without limitation, market factors, energy costs, the effect of weather and economic conditions, farm and trade policy, our ability to realize planned cost savings, the available supply of sugar, available quantity and quality of sugarbeets, actual or threatened acts of terrorism or armed hostilities, legislative, administrative and judicial actions and other factors detailed elsewhere in this report and in our other filings with the SEC. Many of such factors are beyond our ability to control or predict. Management cautions against placing undue reliance on forward-looking statements or projecting any future results based on such statements or present or future earnings levels. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those indicated. All forward-looking statements in this Form 10-Q are qualified in their entirety by the cautionary statements contained in this section and elsewhere in this report.

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PART I - FINANCIAL INFORMATION

IMPERIAL SUGAR COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

See notes to consolidated financial statements.

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IMPERIAL SUGAR COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

See notes to consolidated financial statements.

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IMPERIAL SUGAR COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOW

(Unaudited)

See notes to consolidated financial statements.

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IMPERIAL SUGAR COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

For the Six Months Ended March 31, 2004

(Unaudited)

See notes to consolidated financial statements.

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IMPERIAL SUGAR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIX MONTHS ENDED MARCH 31, 2004 AND 2003

1. ACCOUNTING POLICIES

Basis of Presentation

The unaudited condensed consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and reflect, in the opinion of management, all adjustments, consisting only of normal recurring accruals, that are necessary for a fair presentation of financial position and results of operations for the interim periods presented. These financial statements include the accounts of Imperial Sugar Company and its majority owned subsidiaries (the “Company”). All significant intercompany balances and transactions have been eliminated in consolidation. Certain information and footnote disclosures required by accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. The financial statements included herein should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2003.

Cost of Sales

Payments to growers for sugarbeets are based in part upon the Company’s average net selling price for sugar sold (as defined in the participating contracts with growers) during the grower contract years, ending the last day of either February or June. The contracts provide for a variable purchase price which effectively results in 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. Sugarbeet purchases are recorded upon receipt, and a liability is established 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 period. The final cost of sugarbeets cannot be determined until the end of the contract year for each growing area. Manufacturing costs incurred prior to production are deferred and allocated to production costs based on estimated production for each sugar manufacturing campaign. Additionally, the Company’s sugar inventories, which are accounted for on a LIFO basis, are periodically reduced at interim dates to levels below that of the beginning of the fiscal year. When such interim LIFO liquidations are expected to be restored prior to fiscal year-end, the estimated replacement cost of the liquidated layers is utilized as the basis of the cost of sugar sold from beginning of the year inventory. Accordingly, the cost of sugar utilized in the determination of cost of sales for interim periods includes estimates which may require adjustment in future fiscal periods.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires estimates and assumptions, including those described above, that affect the reported amounts as well as certain disclosures. The Company’s financial statements include amounts that are based on management’s best estimates and judgments. Actual results could differ from those estimates.

Reportable Segments

The Company operates its business as one domestic segment - the production and sale of refined sugar and related products. The Company sold the majority of its foodservice division in December 2002, as discussed in Note 6 and has reported the results of that business as discontinued operations.

Accounting Pronouncements

In 2003, the Financial Accounting Standards Board revised Financial Accounting Standard No. 132, Employers’ Disclosures about Pensions and Other Postretirement Benefits (“SFAS 132”). The revised statement

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requires additional disclosures to those in the original Statement 132 about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans and provides for later effective dates for certain provisions in the statement. The interim-period disclosures required by this statement are effective for interim periods beginning after December 15, 2003, however the Company has adopted this revised statement effective October 1, 2003, and has provided the additional interim disclosures required by SFAS 132 in Note 8 to the financial statements.

Earnings Per Share

As permitted by Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” as amended by SFAS 148, 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 net income per share would have been different had compensation cost for the Company’s stock-based compensation plans been determined using the fair value method of accounting as shown in the pro forma amounts below (in thousands of dollars, except per share amounts):

For purpose of estimating the fair value of options on their date of grant, the Black-Scholes option-pricing model was used with the following assumptions:

Reclassifications

Certain amounts in the prior year presentation have been reclassified to be consistent with fiscal 2004.

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2. LONG-TERM DEBT

Long-term debt was as follows (in thousands of dollars):

The senior bank debt is secured by substantially all of the Company’s assets and all subsidiaries of the Company are borrowers or guarantors under the facility. The agreement contains a financial covenant which requires maintenance of a minimum EBITDA level defined in the agreement. The Company is in compliance with this covenant as of March 31, 2004.

In the six months ended March 31, 2004, the Company repaid in full the Term Loan portion of the Senior Debt. In addition, on February 26, 2004, the Company entered into the First Amendment to the Credit Agreement which, among other things, eliminated the minimum fixed charge coverage ratio and provided additional capital structure flexibility.

The revolving credit facility matures December 31, 2005. Although the maturity date is December 31, 2005, the Company classifies any outstanding borrowings under the senior bank facility as current, pursuant to Emerging Issues Task Force Issue 95-22, as the agreement contains a subjective acceleration clause if, in the opinion of the lender, there is a material adverse effect, and provides the lenders direct access to our cash receipts.

3. GAIN (LOSS) ON ASSET SALES, IMPAIRMENT AND OTHER COSTS

The Company had gains (losses) on asset sales, impairment and other costs, as follows (in thousands of dollars):

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Changes in the accrued balance for future cash expenditures in conjunction with closing production facilities are summarized below (in thousands of dollars):

4. 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 consolidated results of operations, financial position, or cash flows.

In conjunction with the cessation of refining operations in Sugar Land in December 2002, the Company offered its affected bargaining unit employees severance of $2.3 million, even though not required by the collective bargaining agreement, in return for certain changes to the agreement. The union leadership rejected the Company’s offer and filed a grievance in February 2003 alleging the Company owed unspecified severance and other benefits pursuant to the existing contract. The union filed similar grievances in April and June 2003 when other union members were separated from the Company. The Company estimated that severance and other benefits calculated pursuant to the methodology stated in the grievance would be between $4 million and $5 million. The Company believes that its interpretation of the collective bargaining agreement is correct and contested the grievances. The arbitrator’s decision on the first grievance, announced in December 2003, agreed with the Company’s position and denied the grievance. The union may appeal the arbitrator’s decision, but the Company believes a reversal of the decision on appeal is unlikely. The Company believes that the two open severance grievances are without merit and subject to the same contractual interpretation as the February 2003 grievance and that those grievances will either be withdrawn by the union or denied in the arbitration process.

In May 2003, sugarbeet growers from the Torrington, Wyoming area filed a complaint for unspecified damages alleging breach of contract, anticipatory repudiation and breach of an implied covenant of fair dealing in connection with the Company’s sale of a beet processing facility to a third party in 2002. In September 2003, the Wyoming Federal District Court granted the Company’s motion to dismiss all counts of the plaintiffs’ complaint and overruled the growers’ motion for a rehearing. The growers have since filed an appeal of the court’s decision. The Company believes these claims are without merit and that a reversal of the trial court decision is unlikely.

In connection with the sales of DCB and the beet factories described above, the Company made customary representations and warranties, and undertook indemnification obligations with regard to certain of these representations and warranties. These indemnification obligations are subject to certain deductibles, caps and expiration dates and, in some cases, may be deducted from the related escrow balance. To date, no significant indemnity claims have been asserted and the Company does not believe any future claim, if asserted, would be material to the Company’s consolidated financial position, results of operations or cash flows.

In February 2002, the Company sold its Michigan Sugar subsidiary for cash and notes. Additionally, the buyer assumed $18.5 million of industrial revenue bonds, with final maturity in 2025, issued by Michigan Sugar. The Company remains contingently liable for repayment of the bonds under a guaranty arrangement and does not believe that a liability is probable. The Company obligation under the guaranty was cross collateralized with a seller note receivable that provided the Company with a claim to substantially all Michigan Sugar’s production assets should the Company have to perform under the guaranty. In December 2003, the Company received $13.3 million in

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principal and interest from Michigan Sugar in full satisfaction of the seller note and released the collateral. The Company’s obligation pursuant to the guarantee is now unsecured. The Company accounted for this release of collateral as a modification of the guarantee and recorded a non-current liability for its fair value in the first quarter of fiscal 2004, pursuant to Financial Interpretation No. 45. The loss on recording the fair value of the guarantee was substantially offset by the gain from the early repayment of the seller note.

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5. EARNINGS PER SHARE

The following table presents information necessary to calculate basic and diluted earnings per share (in thousands of dollars, except per share amounts):

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During the six months ended March 31, 2004, the Company granted options to purchase 51,000 shares of common stock at a weighted average price of $13.52 per share. The options vest over a three-year period and expire ten years after the date of grant. Options to purchase 282,200 shares of common stock with an average price of $4.56, were exercised during the six months ended March 31, 2004, including options for 119,000 shares held by former employees.

6. DISCONTINUED OPERATIONS

The financial statements reflect the operating results of the Diamond Crystal Brands (“DCB”) foodservice business and the operating results of beet processing facilities in Sidney, Montana, Torrington, Wyoming and Hereford, Texas, each of which were sold during fiscal 2003, as discontinued operations. No provision for income taxes on discontinued operations was recorded because of differences in the book and tax basis of the stock of DCB that was sold in December 2002.

In conjunction with the sale of Sidney, Torrington, and Hereford, $0.9 million was placed in escrow for a period of time after the sale. In January 2004, this escrow was released and the proceeds were used to repay debt.

Summary operating results of discontinued operations are as follows (in thousands of dollars):

7. DERIVATIVES

The Company recognized gains of approximately $0.9 million in the three months and $1.3 million in the six months ended March 31, 2004, on natural gas hedge positions which no longer qualified for deferral accounting as “highly effective” under Statement of Financial Accounting Standards No. 133. As a result, these hedge gains will not be available to offset higher physical gas costs in the remainder of the year. Similarly, in March 2003, the Company recognized $0.9 million of gains on derivatives which no longer qualified for deferral accounting.

In the past, the Company had material amounts of debt with interest rates that floated with market rates, exposing the Company to interest rate risk. The Company’s policy was to reduce interest rate risk on its variable rate debt by entering into interest rate swap agreements for a portion of such floating rate debt. The Company had an interest rate swap agreement with a major financial institution under which the Company paid a fixed rate of 2.465% and received a floating interest payment based on 3 month LIBOR.

Since the Company had the ability to change the interest rate index of the debt, the interest rate swap agreements were not designated as hedging instruments under SFAS 133. Therefore, changes in the fair value of the interest rate swaps were recognized in earnings. In conjunction with the repayment of the Term Debt, the swap was terminated in March 2004.

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