-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GZXg/cQEUjqr0EeIYWYqe/wDr+nWi2WJa+SAtFBhKWfEvfUSLLrT0zqaQSR4ExHQ Ij39nFdCOOF9llxBSIqprg== 0000899243-97-001101.txt : 19970611 0000899243-97-001101.hdr.sgml : 19970611 ACCESSION NUMBER: 0000899243-97-001101 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970610 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: IMPERIAL HOLLY CORP CENTRAL INDEX KEY: 0000831327 STANDARD INDUSTRIAL CLASSIFICATION: SUGAR & CONFECTIONERY PRODUCTS [2060] IRS NUMBER: 740704500 STATE OF INCORPORATION: TX FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-10307 FILM NUMBER: 97622029 BUSINESS ADDRESS: STREET 1: ONE IMPERIAL SQ STE 200 STREET 2: P O BOX 9 CITY: SUGAR LAND STATE: TX ZIP: 77487 BUSINESS PHONE: 7134919181 FORMER COMPANY: FORMER CONFORMED NAME: IMPERIAL SUGAR CO /TX/ DATE OF NAME CHANGE: 19880606 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 1997 COMMISSION FILE NUMBER 1-10307 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 (ZIP CODE) OFFICES) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (281) 491-9181 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH Common Stock, without par value REGISTERED Rights to Purchase Preferred Stock American Stock Exchange 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 . The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $95.8 million, based upon the last reported sales price of the registrant's Common Stock on the American Stock Exchange on June 2, 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 June 2, 1997, was 14,250,293. DOCUMENTS INCORPORATED BY REFERENCE Certain portions of the registrant's definitive Proxy Statement relating to the registrant's 1997 Annual Meeting of Shareholders are incorporated by reference in Part III hereof. TABLE OF CONTENTS PART I Item 1. Business......................................................... 1 Item 2. Properties....................................................... 8 Item 3. Legal Proceedings................................................ 9 Item 4. Submission of Matters to a Vote of Security Holders.............. 10 Executive Officers of the Registrant............................. 10 PART II Item 5. Market for the Registrant's Common Equity and Related Shareholder Matters........................................................ 12 Item 6. Selected Financial Data ......................................... 12 Management's Discussion and Analysis of Financial Condition and Item 7. Results of Operations............................................ 13 Item 8. Financial Statements and Supplementary Data ..................... 16 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .......................................... 16 PART III Item 10. Directors and Executive Officers of the Registrant ............. 16 Item 11. Executive Compensation ......................................... 16 Item 12. Security Ownership of Certain Beneficial Owners and Management . 16 Item 13. Certain Relationships and Related Transactions ................. 16 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. 17
---------------- 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. PART I ITEM 1. BUSINESS. Imperial Holly Corporation is one of the nation's largest producers and marketers of refined sugar, producing both cane and beet sugar. As used herein, the "Company" refers to Imperial Holly Corporation and its subsidiaries; "Imperial" refers to the Company's cane sugar refinery operations, which are conducted directly by the Company under the name Imperial Sugar Company--a division of Imperial Holly Corporation; and "Holly" refers to the Company's wholly-owned subsidiary, Holly Sugar Corporation, and its subsidiaries, including Spreckels Sugar Company, Inc. ("Spreckels"). The Company refines raw cane sugar primarily at its Imperial Sugar Company refinery in Sugar Land, Texas. Through Holly, the Company extracts refined beet sugar by processing sugarbeets purchased from independent growers at processing plants in California, Wyoming, Montana and Texas. The Company sells its refined sugar directly and through brokers to wholesalers, retail grocers and food manufacturers. The Company sells by-products (primarily beet pulp and molasses) from the extraction and refining processes for use as livestock feed and markets commercial beet seed. The Company 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 and the Company's name was changed to Imperial Holly Corporation. Holly was founded in 1905 and incorporated in 1916. On April 19, 1996, Holly acquired all of the outstanding capital stock of Spreckels and Limestone Products Company, Inc. Effective March 31, 1997, Spreckels was merged into Holly Sugar Corporation and continues as a division of Holly. See Note 2 to the Consolidated Financial Statements for further discussion of the Spreckels acquisition. Spreckels operates beet sugar processing plants in Woodland and Mendota, California. Holly did not acquire Spreckels' Manteca, California factory, which was retained by the seller and has been closed. Spreckels has been in continuous operation since 1898. The Company ceased sugarbeet processing at Holly's Hamilton City, California factory in June 1996. A wholly-owned subsidiary of Holly has entered into a limited partnership agreement with a sugarbeet growers' cooperative in Washington state to build and operate a sugarbeet factory at Moses Lake, Washington. This facility is under construction with a current total budget of approximately $140 million and is expected to process sugarbeets for the first time in the 1998 fall campaign. PRODUCTS AND SALES Sugar. The Company's principal product line is refined sugar, which accounted for approximately 90% of consolidated net sales in the Company's fiscal year ended March 31, 1997. Cane sugar and beet sugar account for approximately 45% and 55%, respectively, of the Company's fiscal 1997 sugar production. The Company produces and sells granulated white, brown and powdered sugar to wholesalers, retail grocers and food manufacturers. Sugar is sold in consumer packages and industrial packages and in bulk and liquid form (including invert sugar and blended products). Sales to wholesalers and grocers consist primarily of consumer packages of granulated, brown and powdered sugar. These consumer packages, which range from one pound boxes to 25-pound bags and constitute approximately one-third of the sugar sold, are marketed under the Imperial(R) and Holly(R) brand names and under various private labels. Spreckels sells sugar under its Spreckels(R) and U&I(R) brands and under various private labels. Private label packaged sugar, which represents a significant percentage of the Company's sales, is generally sold at prices lower than that received for branded sugar. The Company continues to focus efforts on increasing sales of branded products as a percentage of total consumer sales. 1 Food manufacturers principally purchase sugar in industrial size packages and in bulk or liquid form 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. The Company's products are sold directly by the Company's sales force and through independent brokers. The Company maintains sales offices at its corporate headquarters in Sugar Land as well as in Chicago, Illinois and Tracy, California. 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. The Company's sales are concentrated in the western and mid-western portions of the United States. No customer accounted for more than 10% of the Company's sales during fiscal 1997. 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 sugarbeets 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 sugarbeets requires the Company to store significant refined sugar inventory at each factory, the geographical 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. Refined sugar is shipped by rail and truck, including Company-owned vehicles. By-Products. By-products from beet sugar processing (beet pulp and molasses) are sold primarily as livestock feeds to dairymen, livestock feeders, livestock feed processors and industrial customers. By-product sales accounted for approximately 7% of consolidated net sales during fiscal 1997. The major portion of the beet pulp and molasses produced from sugarbeet operations is sold during and shortly after the sugar-making campaigns. Marketing of by-products from beet sugar processing is concentrated in the western half of the United States and Japan. In fiscal 1997, export sales accounted for approximately 25% of by-product sales. Both the domestic and export markets are highly competitive because of the availability and pricing of by-products of other sugarbeet 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 and grains may affect the market price of by-products. Beet Seed. Holly Hybrids, a division of Holly, produces and markets commercial seed to beet growers under contract to Holly as well as growers under contract to grow for other beet sugar processors. In addition, Spreckels is active in the development and production of commercial seed for use by California beet growers. Holly's beet seed sales program is conducted primarily at Holly Hybrids' headquarters in Sheridan, Wyoming and at Holly's Tracy, California Agriculture Station. The Company consolidated Spreckels' and Holly's beet seed programs during the 1997 fiscal year. See "Research." Inulin. In October 1995, the Company and Cooperatie Cosun U.A., a Netherlands sugar processor (formerly known as Cooperatie Suiker Unie U.A.), formed Imperial-Suiker Unie, L.L.C. ("Imperial-Suiker Unie"), a 50-50 joint venture. In connection with the creation of Imperial-Suiker Unie, the Company has entered into various agreements with Cosun and Sensus, a business unit of Cosun, whereby the Company has agreed to 2 provide certain marketing and administrative services to the joint venture. Imperial-Suiker Unie has the exclusive right to market in Canada, Mexico and the United States inulin and inulin-based products produced by Cosun. Inulin is extracted from chicory roots by a process similar to sugar extraction from sugarbeets and is a natural carbohydrate with multifunctional properties with potential both as a nutritional additive and as a functional food ingredient. RAW MATERIAL AND PROCESSING REQUIREMENTS Raw Cane Sugar. The Company purchases raw cane sugar from both domestic and foreign sources. Sources of supply in the recent past have been Louisiana, Florida and countries in the Caribbean and Central America. The availability of foreign raw cane sugar is determined by the import quota level designated by applicable regulation. See "--Sugar Legislation and Other Market Factors". During fiscal 1997, approximately 48% of the raw sugar purchased by Imperial was produced domestically. The Company has not experienced difficulties in the past in contracting sufficient quantities of raw sugar to supply the refinery. Imperial receives raw sugar directly by rail in Sugar Land and by intercoastal barges and ocean-going vessels at the Company's facility in Galveston, Texas, approximately 60 miles from Sugar Land. Raw sugar received at the Galveston facility is unloaded, weighed, sampled and stored in Imperial's Galveston warehouse, which has a capacity of approximately 30,000 tons. Imperial is paid a stevedoring allowance by the raw sugar sellers to unload the raw sugar and receives additional dispatch payments from the carriers if the unloading is completed in less than the allotted time or pays demurrage if unloading takes more than the time allotted. In Sugar Land, the raw sugar is stored in a warehouse having a capacity of approximately 20,000 tons. Raw 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 of 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 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 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 attempts to match refined sugar sales contracted for future delivery with the purchase or pricing of raw sugar when feasible. Holly supplements its beet sugar production by refining raw cane sugar at its sugarbeet processing facilities. The cane sugar refined by Holly generally is co-processed with its beet sugar production, but Holly has also refined raw cane sugar during periods when it was not processing sugarbeets. Holly expects to continue to supplement its beet sugar production by refining raw cane sugar during fiscal 1998. Sugarbeet Purchases. Holly purchases sugarbeets, from which it extracts sugar and produces by-products, from independent growers under contracts negotiated with associations representing such growers. The grower contracts typically are for one crop; however, on occasion, contracts may cover multiple crops. Holly contracts for acreage prior to the planting season based on estimated demand, marketing strategy, processing capacity and historical crop yields. The type of contract used 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. Some 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 Holly's exposure to inventory price risks on its sugarbeet purchases so long as the net selling price does not fall below applicable regional minimum support prices, if any, established by the United States Department of Agriculture ("USDA"). See " -- Sugar Legislation and other Market Factors". 3 Acreage contracted at each factory location may vary from year to year on the basis of prior crop quality, productivity, weather conditions, availability of irrigation water, the prices anticipated by growers for alternate crops, and competition with other beet sugar processors. Sugarbeet acreage in Northern California, the North Platte Valley of Wyoming and the Texas Panhandle has declined in recent years but appears to have stabilized, with modest growth expected in fiscal 1998. Harvested beets are purchased by Holly and, in some locations, stored in piles until processed. Weather conditions during the growing, harvesting and processing seasons, as well as diseases, insects and other parasites, may materially affect the quality and quantity of sugarbeets available for purchase as well as the unit costs of raw materials and processing. Weather conditions can also adversely affect sugarbeets in storage piles awaiting processing. Energy. The refining of raw cane sugar and processing of sugarbeets are energy intensive. 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 the refinery and the 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 which do not contain minimum quantities for terms of one year or more. 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. Holly owns a 50% share of a limestone quarry in Warren, Montana which supplies the Sidney, Montana and Worland, Wyoming factories with their annual limestone requirements. Limestone Products Company, Inc., a subsidiary of Holly, operates a limestone quarry in Cool, California which supplies Holly's Northern California beet processing factories with limestone. These quarries do not normally supply other Holly 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. RESEARCH The Company has recently completed the relocation of its Research and Development Center, consolidating research relating to manufacturing process technology, factory operations, food science and new product development in Sugar Land. Holly has an agreement with D. J. van der Have B.V., a Netherlands beet seed company, granting D. J. van der Have access to Holly's proprietary beet seed breeding material for varietal seed development in exchange for the exclusive marketing rights to D. J. van der Have's beet seed in certain markets in the United States, Canada and Mexico. In addition, Holly is participating in a joint venture with Societe Europeenne de Semences, N.V.- S.A., a Belgian beet seed company, to develop improved beet seed varieties. 4 Holly is active in sugarbeet disease control. Holly's growing areas, like those of its competitors, have varying levels of diseases which affect sugarbeet quality and quantity as well as the cost of processing. Holly has a sugarbeet plant pathology disease control research laboratory in Tracy, California which develops and implements disease control strategies for all of the Company's sugarbeet growing areas. Holly communicates information about agricultural practices to growers through its computerized agriculture information systems and printed material, including Holly's magazine "Sugarbeet Update", published semiannually. 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 depress sugar market prices at times during this period. The most significant nutritive sweetener that competes with refined sugar is high fructose corn syrup ("HFCS"), which generally sells at a discount to refined sugar; in recent months such discount has increased. The level of per capita sucrose consumption in the United States has increased in recent years; the Company believes that future increases or decreases in sucrose consumption will be dependent upon technological improvements, changes in population, geographic shifts in population and changes in consumer sweetener preferences. In certain applications, refined sugar also competes with non-nutritive or low-calorie sweeteners, principally aspartame and, to lesser extents, saccharin and acesulfam-k. The table below is based on data published by the USDA and sets forth per capita consumption of nutritive sweeteners in the United States for the years indicated. ANNUAL PER CAPITA U. S. NUTRITIVE SWEETENER CONSUMPTION
1993 1994 1995 1996(1) ----------------- ----------------- ----------------- ----------------- POUNDS PERCENTAGE POUNDS PERCENTAGE POUNDS PERCENTAGE POUNDS PERCENTAGE ------ ---------- ------ ---------- ------ ---------- ------ ---------- Refined sugar........... 65.5 45% 65.8 45% 66.2 44% 66.9 44% HFCS.................... 54.4 38 56.4 38 58.4 39 59.8 39 Other corn sweeteners... 23.6 16 23.9 16 24.3 16 24.4 16 Other................... 1.4 1 1.5 1 1.5 1 1.5 1 ----- --- ----- --- ----- --- ----- --- Total................. 144.9 100% 147.6 100% 150.4 100% 152.6 100% ===== === ===== === ===== === ===== ===
- -------- (1)Estimate. 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 cane and sugarbeets, prices of competing crops, weather conditions and United States farm and trade policies. 5 Federal government programs, in the form of legislative or regulatory action, have existed to support the price of domestic crops of sugar beets and sugar cane almost continually since 1934. The principal legislation affecting the domestic sugar industry is the Federal Agricultural Improvement and Reform Act of 1996 (the "Act"), which became effective July 1, 1996 and extended the sugar price support program for sugar cane and sugarbeets until June 30, 2003. Pursuant to the Act, the Commodity Credit Corporation ("CCC") is obligated annually to make loans available to domestic sugar processors 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); however, unlike the predecessor act, the processor is generally not obligated to pay participating growers a predetermined minimum support price for such sugar. The CCC loans under the Act are recourse loans unless the tariff rate quota for import 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, the CCC loans will become non- recourse and processors will be obligated to pay participating growers a predetermined minimum support price. As under the predecessor act, 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 Act, processors may forfeit sugar to the USDA; if the tariff rate 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. A processor will be penalized approximately 1 cent per pound for each pound of sugar forfeited. Under the Act, the USDA utilizes the import quota and the forfeiture penalty to affect sugar price supports and prevent forfeitures under the CCC loan program. Unlike the predecessor act, marketing allotments are not authorized by the Act. 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 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 excess sugar uneconomical. To the extent the Company 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 ending September 30, 1997 is 2,339,000 STRV. The Act imposes a marketing assessment fee, which was increased to 24.8 cents per hundred pounds of raw cane sugar and 26.5 cents per hundred pounds of refined beet sugar, that is paid to the CCC by the processor. This fee is applicable to all refined beet sugar produced from domestically grown sugarbeets and all raw sugar produced from domestically grown sugar cane. The North American Free Trade Agreement contains provisions that allow Mexico to increase its sugar exports to the United States if Mexico is projected to produce a net surplus of sugar. The terms of the North American Free Trade Agreement restrict Mexico's exports to the United States to no more than 25,000 STRV annually until the year 2000. Mexico's exports to the United States would be further increased in the event Mexico produced a sugar surplus for two consecutive years during the seven years prior to the year 2000 or at anytime after the year 2000. EMPLOYEES As of March 31, 1997, the Company employed approximately 1,700 year-round employees. In fiscal 1997, the Company employed an additional approximately 2,500 seasonal employees during the sugarbeet processing seasons when beet sugar factories are operating around-the-clock. The Company's cane refinery and distribution employees are represented by the International Association of Machinists and Aerospace Workers, AFL-CIO under a three-year contract which expires October 5, 1997. The Company's beet sugar factory operating personnel are represented by the Distillery, Wine and Allied Workers International Division of the United Food and Commercial Workers International Union, AFL-CIO at 6 the California factories and by the American Federation of Grain Millers International Union, AFL-CIO at the Montana, Wyoming and Texas factories. The Distillery, Wine and Allied Workers International Union contract expires March 1, 1998. The American Federation of Grain Millers International Union contract expires April 30, 1999. Certain employees of the Company's Cool, California quarry are represented by the International Union of Operating Engineers, AFL-CIO under a three-year contract expiring July 31, 1998. Maintenance and repair employees at the Galveston, Texas facility are represented by the South Atlantic and Gulf Coast District of the International Longshoremen's Association under a three-year contract that expires September 30, 1998. The Company believes its employee and union relationships are good. ENVIRONMENTAL REGULATION Company 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 required permits. Each of the Company's manufacturing locations is permitted for the disposal of waste materials and the monitoring of air and water quality. Additional testing requirements and more stringent permit limitations have resulted in increasing environmental costs, and the Company expects the cost of compliance to continue to increase. Imperial's Sugar Land refinery is permitted to discharge waste water for treatment to the Sugar Land Regional Sewage System. Imperial's discharge of this waste water to the publicly owned treatment facility has become subject to more restrictive limitations, which will require capital expenditures of approximately $0.5 million in fiscal 1998. Waste water odor control is being addressed at Holly's Tracy, California and Spreckels' facilities at Mendota, California and Woodland, California. The soil and ground water at Spreckels' Mendota, California facility have high concentrations of salts. Spreckels 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. Holly's Torrington facility has made significant operational modifications in order to meet more restrictive state solid waste and groundwater regulations. The Clean Air Act Amendment of 1990 ("CAAA") are expected to require substantial capital expenditures, increased operational costs, and increased emissions and permitting fees over the next ten years. Each State's Implementation Plan will define permit parameters, monitoring requirements and reporting criteria as directed by the CAAA Title V permitting process. To date, application for Title V permits have been required at Holly's Wyoming and California factories. Applications for these permits have been filed. The Company will not be able to estimate compliance costs until the final regulations are issued and permits are obtained. 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 capital resources. 7 ITEM 2. PROPERTIES. Imperial's refinery in Sugar Land is located on 26 acres owned by the Company and consists of numerous buildings with approximately 600,000 square feet of factory space. The refinery operates 24 hours a day when sugar is being refined. The refinery has an estimated melting capacity in excess of 4,000,000 pounds of raw sugar per day. The refinery is served by adequate transportation and maintained in good operating condition. The following table shows the location and capacity of Holly's beet sugar production facilities, each of which is served by adequate transportation and is maintained in good operating condition. Each of the facilities operates continuously during the facility's sugar-making campaign, which generally total 120 to 180 days each year, depending upon the supply of sugarbeets available.
APPROXIMATE DAILY SLICING CAPACITY BEET SUGAR FACTORIES (TONS OF SUGARBEETS) - -------------------- -------------------- Brawley, California........................................ 8,200 Mendota, California (Spreckels)............................ 4,200 Tracy, California.......................................... 5,000 Woodland, California (Spreckels)........................... 4,000 Sidney, Montana............................................ 5,400 Hereford, Texas............................................ 7,700 Torrington, Wyoming........................................ 5,600 Worland, Wyoming........................................... 3,600 ------ Total...................................................... 43,700 ======
In June 1996, the Company ceased sugarbeet processing at Holly's Hamilton City, California factory. Holly operates ion exclusion facilities at its Hereford, Texas and Mendota, California factories, and a Steffens extraction process at its Woodland, California factory. These processes increase each factory's refined sugar production capacity without an increase in beet slicing capacity by extracting sugar from molasses, a by-product of the beet sugar production process. Holly participates in a venture with the sugarbeet growers' associations representing the sugarbeet growers supplying Holly's Rocky Mountain factories which significantly increased the refined sugar storage capacity available at Holly's Sidney factory by the construction of additional silos during fiscal 1996. The additional silos, built on land leased by Holly to the venture, are owned by the venture and leased to Holly. The Company's principal executive offices occupy approximately 64,500 square feet of office space in an office complex owned by the Company near the Sugar Land refinery. The office complex is located on nine acres owned by the Company. Holly currently leases approximately 3,897 square feet of office space for administrative offices in Colorado Springs, Colorado. As part of the Company's strategy to consolidate corporate functions in Sugar Land, in fiscal 1997 Holly negotiated a novation agreement with the landlord and was released from liability for the remainder of the Colorado Springs administrative office space. Holly has subleased, until the termination of the base lease, the Research and Development Center in Colorado Springs to a third party as part of the Company's consolidation efforts. Each of the leases in Colorado Springs expire in 2005. Spreckels leases 22,000 square feet of office space in Pleasanton, California. The Company closed the Pleasanton office and has subleased the space through the term of the lease, which terminates in 2003. Spreckels leases a 90,000 square foot raw sugar warehouse in Stockton, California under a lease which terminates June 30, 1998. Imperial's wharf and warehouse facilities in Galveston are located on property leased from the Port of Galveston under a lease which expires in 2013. The Company owns the raw sugar discharging equipment located at this facility. 8 The Company owns approximately 250 acres of land near its refinery and approximately 10,800 acres of land at the various beet sugar factory sites. Most of this acreage is used for the factories, settling ponds and as buffers from nearby communities. The remainder of the land is leased as farm and pasture land. Holly also owns approximately 100 acres of land, an agricultural research facility and a sugarbeet seed processing facility at Sheridan, Wyoming. Holly owns a 50% interest in The Bighorn Limestone Company, the owner of a limestone quarry in Warren, Montana. Limestone Products Company, Inc., a subsidiary of Holly, is the owner of a limestone quarry at Cool, California. Holly has a 43% limited partnership interest in a partnership which 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 which is scheduled for commissioning in 1998. ITEM 3. LEGAL PROCEEDINGS. Spreckels Industries, Inc. (the "Seller") sued the Company claiming the purchase price paid for Spreckels Sugar Company and Limestone Products Company was not properly calculated. The Company and the Seller have settled this dispute and the litigation was dismissed in May 1997. See Note 2 to the Consolidated Financial Statements for further discussion of the Spreckels acquisition. 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. 9 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year ended March 31, 1997 EXECUTIVE OFFICERS OF THE REGISTRANT Executive officers of the Company 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 the Company:
NAME AGE* POSITIONS ---- ---- --------- James C. Kempner................. 57 President, Chief Executive Officer and Chief Financial Officer Peter C. Carrothers.............. 57 Managing Director Douglas W. Ehrenkranz............ 39 Managing Director Roger W. Hill.................... 57 Managing Director and President and Chief Executive Officer of Holly John A. Richmond................. 50 Managing Director William F. Schwer................ 49 Managing Director, Secretary and General Counsel Brian T. Harrison................ 41 Vice President--Operations Development Roy E. Henderson................. 58 Vice President--Administration Calvin K. Jones.................. 51 Vice President--Agriculture Raymond Knecht................... 49 Vice President--Cane Operations H. P. Mechler.................... 43 Vice President--Accounting Karen L. Mercer.................. 35 Vice President and Treasurer Roy F. Silva..................... 57 Vice President--Product Development Robert W. Strickland............. 50 Vice President--Beet Operations Alan K. Lebsock.................. 44 Controller
- -------- * As of June 2, 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 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. 10 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--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. 11 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS. The Company's Common Stock is traded on the American Stock Exchange. At June 2, 1997 there were 906 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 during the last eight fiscal quarters.
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 --
ITEM 6. SELECTED FINANCIAL DATA. Selected financial data for the last five years is as follows (in thousands of dollars, except per share data):
YEAR ENDED MARCH 31, -------------------------------------------------- 1997(3) 1996 1995 1994 1993 -------- -------- -------- -------- -------- FOR THE PERIOD: - --------------- Net Sales............... $752,595 $616,450 $586,925 $655,498 $647,825 Operating Income (Loss). 28,423 (2,431) (2,091) (4,566) 7,139 Income (Loss) Before Ex- traordinary Item....... 11,518 (3,218) (5,365) (7,965) 123 Extraordinary Item...... -- 604 (2) -- -- (3,509)(1) Net Income (Loss)....... 11,518 (2,614) (5,365) (7,965) (3,386) PER SHARE DATA: - --------------- Income (Loss) Before Ex- traordinary Item....... $ 0.92 $ (0.31) $ (0.52) $ 0.78 0.01 Extraordinary Item...... -- 0.06 (2) -- -- (0.34)(1) Net Income (Loss)....... 0.92 (0.25) (0.52) (0.78) (0.33) Cash Dividends Declared. -- .04 .16 .32 .36 AT PERIOD END: - -------------- Total Assets............ $449,933 $325,319 $374,124 $393,660 $398,202 Long-Term Debt--Net..... 90,619 89,800 100,010 100,044 108,181 Total Shareholders' Eq- uity................... 176,956 111,043 109,977 114,737 122,462
- -------- (1) 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. (2) See Note 6 to the Consolidated Financial Statements. (3) Includes the results of Spreckels since April 19, 1996, as discussed in Note 2 to the Consolidated Financial Statements. 12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. LIQUIDITY AND CAPITAL RESOURCES The Company completed the Spreckels acquisition in April 1996, and funded the $35.3 million cash purchase price from short-term borrowings under the Company's bank credit lines. In August 1996, the Company sold 3.8 million shares of common stock in a private placement to Greencore Group plc for $49.8 million, and the proceeds were used initially to reduce short-term debt. The Company has announced a $35 million capital program, much of which is expected to be completed in fiscal 1998, and expects to fund such expenditures from cash generated from operations and existing bank borrowing agreements. Major projects in the program include an $11 million expansion of the Sidney, Montana factory, as well as the addition of bulk sugar storage and high speed packaging equipment at the Sugar Land refinery with costs totaling $16 million. The Company has an $110 million committed bank line of credit expiring in June 1998, as well as uncommitted bank lines which aggregate $55 million as described in Note 5 to the Consolidated Financial Statements. Loans outstanding under these bank lines total $8.7 million at March 31, 1997. Working capital financing is provided by a combination of trade credit and borrowings. In addition to the bank lines of credit, short-term inventory financing is available to the Company's beet sugar operations in the form of secured borrowings from the CCC under the USDA price support program. CCC loans may be recourse or non-recourse depending upon certain regulatory matters. See "Business--Sugar Legislation and Other Market Factors." Management believes that existing internal and external sources of liquidity are adequate to meet financing needs. Working capital increased $52.2 million to $133.9 million at March 31, 1997 and includes marketable securities which are recorded at a market value of $49.0 million, $20.0 million in excess of cost. The increase in working capital items during fiscal 1997 resulted primarily from the Spreckels acquisition and the return of refined inventory to more normal levels, after the reductions in fiscal 1996 resulting from the smaller than expected sugarbeet crop that year. The Company's current ratio was 1.9:1.0 at March 31, 1997. 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 sugar beet 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 will in turn advance such funds to the partnership. In fiscal 1996, the Company entered into a venture with the sugarbeet growers associations representing the growers supplying Holly's Rocky Mountain factories which built additional bulk refined sugar storage silos at Holly's Sidney, Montana factory. The additional silos are owned by the venture and are financed largely by the venture's non-recourse, term bank debt. In 1997 and 1996 the Company purchased and retired $0.3 million and $10.2 million principal amount, respectively, of its 8 3/8% senior notes due 1999. The Company purchased and retired an additional $8.3 million principal amount of the notes in April 1997. The remaining notes, with an aggregate principal amount of $81.2 million, require semi-annual interest only payments prior to maturity. Long-term debt at March 31, 1997 was approximately 34% of total long-term debt plus shareholders' equity. Shareholders' equity was $177.0 million at March 31, 1997, approximately 40% of total assets. 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 13 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. 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 have increased refined sugar prices. 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 Imperial Sugar refinery. See "Business--Sugar Legislation and Other Market Factors" and "--Competition". Weather conditions during the growing, harvesting and processing seasons, the availability of acreage to contract for sugarbeets, as well as the effects of diseases and insects, may materially affect the quality and quantity of sugar beets available for purchase as well as the unit costs of raw materials and processing. See "Business--Raw Materials and Processing Requirements". Year Ended March 31, 1997 versus 1996 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. 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. As a result, changes in the Company's realized sales prices tend to lag market price changes. To mitigate its exposure to future price changes, the Company enters into forward purchase contracts for raw cane sugar and utilizes a participatory sugarbeet purchase contract described below. See "Business--Raw Materials and Processing Requirements". Increases in cane sugar sales volumes and the additional volumes attributable to the Spreckels acquisition more than offset lower sales by Holly 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 increased $103.0 million or 18.3% and gross margin improved to 11.7% of sales in fiscal 1997 from 8.9% 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 the Company's beet sugar factories. Additionally, winter flooding disrupted rail service in Northern California requiring the diversion of harvested beets in Oregon and Washington to the Company's Sidney, Montana factory. The delays in processing these, as well as the Sidney beets affected beet quality and impacted processing, reducing sugar recovery and increasing costs several million dollars. The Company purchases sugar beets under participatory contracts which provide for a percentage sharing of the net selling price realized on refined beet sugar sales between the Company and the grower. Use of this type of contract reduces the Company's exposure to inventory price risk. The increase in sales prices for beet sugar resulted in an increase in cost of sugar beets under the participatory contracts. In recent years the Company has experienced reductions in the availability of acreage planted in sugarbeets supplying its Hereford, Texas, Torrington, Wyoming and Northern California factories, resulting in reduced 14 throughput and corresponding increases in unit manufacturing costs. Sugarbeet acreage supplying each of these factories is expected to increase in fiscal 1998, although acreage is expected to remain below the Company's targeted levels. The Company has processed raw cane sugar at some of these factories, which increases throughput and lowers unit fixed manufacturing costs. 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' Pleasanton, California office which was closed in the Company's second fiscal quarter. 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. Realized gains on marketable securities decreased $5.0 million in fiscal 1997; net unrealized gains which have not been recognized in the Company's results of operations increased $6.2 million and are detailed in Note 3 to the 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 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 sugarbeet 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 increased $29.5 million or 5.5% 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 sugarbeet crop offset cost reductions achieved in the spring processing campaigns. As discussed in Note 1 to the Consolidated Financial Statements, the Company liquidated beginning LIFO inventory layers at costs below current year cost, and charged such beginning amounts to cost of sales. Selling, general and administrative costs declined $1.8 million or 3.2% as increases in volume related selling and distribution costs were more than offset by reductions in general and administrative as well as research and development costs. During the third fiscal quarter, the Company 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, the Company recorded a $1,750,000 charge in the fourth quarter related to the closure of the Hamilton City factory. 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 the Company'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. Realized gains on marketable securities increased $3.7 million during fiscal 1996; unrealized gains and losses, which have not been recognized in the Company's results of operations, but are shown, net of tax, as a component of shareholders' equity, are detailed in Note 3 to the 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. The extraordinary item is discussed in Note 6 to the Consolidated Financial Statements. 15 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. See the index of financial statements and financial statement schedules under "Exhibits, Financial Statement Schedules and Reports on Form 8-K." Unaudited quarterly financial data for the last two fiscal years is as follows (in thousands of dollars, except per share amounts):
PER SHARE ------------------------------- INCOME (LOSS) INCOME (LOSS) --------------------- -------------------- BEFORE NET BEFORE NET NET GROSS EXTRAORDINARY INCOME EXTRAORDINARY INCOME CASH SALES MARGIN ITEM (LOSS) ITEM (LOSS) DIVIDENDS -------- ------- ------------- ------- ------------- ------ --------- Fiscal 1997(1): 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 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(2)........171,569..13,760 (419) (195) (0.04) (0.02) -- March 31, 1996(3)...........130,271..12,337 (2,035) (2,035) (0.20) (0.20) --
- -------- (1) Includes the results of Spreckels Sugar Company since April 19, 1996. See Note 2 to the Consolidated Financial Statements. (2) 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. (3) 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 the Company'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. 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 1997 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. 16 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 March 31, 1997 and 1996.................... F-2 Consolidated Statements of Income for the years ended March 31, 1997, 1996 and 1995................................................................. F-3 Consolidated Statements of Changes in Shareholders' Equity for the years ended March 31, 1997, 1996 and 1995...................................... F-4 Consolidated Statements of Cash Flows for 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")). *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")).
17 *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). *4(a)(1) --Credit Agreement dated as of June 10, 1993 among the Company, the signatory banks thereto and Harris Trust and Savings Bank, as Agent (incorporated by reference to Exhibit 4(b) to the Company's Annual Report on Form 10-K for the year ended March 31, 1993 (File No. 1-10307) (the "1993 Form 10-K")). *4(a)(2) --First Amendment to Credit Agreement dated December 1, 1993 (incorporated by reference to Exhibit 4(a)(2) to the Company's Annual Report on Form 10-K for the year ended March 31, 1994 (File No. 1-10307) (the "1994 Form 10-K")). *4(a)(3) --Second Amendment to Credit Agreement and First Amendment to Notes dated March 4, 1994 (incorporated by reference to Exhibit 4(a)(3) to the 1994 Form 10-K). *4(a)(4) --Third Amendment to Credit Agreement dated July 13, 1994 (incorporated by reference to Exhibit 4 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994 (File No. 1-10307)). *4(a)(5) --Fourth Amendment to Credit Agreement dated April 28, 1995 (incorporated by reference to Exhibit 4(a)(5) to the Company's Annual Report on Form 10-K for the year ended March 31, 1995 (File No. 1-10307)). *4(a)(6) --Fifth Amendment to Credit Agreement dated June 28, 1996 (incorporated by reference to Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996 (File No. 1-10307)). *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)). The Company is a party to several debt instruments under which the total amount of securities authorized does not exceed 10% of the total assets of the Company and its subsidiaries on a consolidated basis. Pursuant to paragraph 4(iii)(A) of Item 601(b) of Regulation S-K, the Company agrees to furnish a copy of such instruments to the Commission upon request. Exhibits 10(a) through 10(l) relate to management contracts or compensatory plans. 10(a) --Imperial Holly Corporation Stock Incentive Plan (as amended and restated effective May 1, 1997). *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).
18 *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. *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. *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. 10(l) --Schedule of Restricted Stock Agreements. *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. No reports on Form 8-K were filed by the Company during the three months ended March 31, 1997. 19 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 JUNE 10, 1997. Imperial Holly Corporation /s/ James C. Kempner By___________________________________ 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 JUNE 10, 1997.
SIGNATURE CAPACITY --------- -------- /s/ James C. Kempner - ------------------------------------------- James C. Kempner President, Chief Executive Officer, Chief Financial Officer and Director (Principal Executive Officer and Principal Financial Officer) /s/ H. P. Mechler - ------------------------------------------- H. P. Mechler Controller (Principal Accounting Officer) /s/ I. H. Kempner, III - ------------------------------------------- I. H. Kempner, III Chairman of the Board of Directors /s/ John D. Curtin, Jr. - ------------------------------------------- John D. Curtin, Jr. Director /s/ David J. Dilger - ------------------------------------------- David J. Dilger Director /s/ Edward O. Gaylord - ------------------------------------------- Edward O. Gaylord Director /s/ Gerald Grinstein - ------------------------------------------- Gerald Grinstein Director /s/ Ann O. Hamilton - ------------------------------------------- Ann O. Hamilton Director /s/ Roger W. Hill - ------------------------------------------- Roger W. Hill Director
20
SIGNATURE CAPACITY --------- -------- /s/ Harris L. Kempner, Jr. - ------------------------------------------- Harris L. Kempner, Jr. Director /s/ Henry E. Lentz - ------------------------------------------- Henry E. Lentz Director /s/ Robert L. K. Lynch - ------------------------------------------- Robert L. K. Lynch Director /s/ Kevin C. O'Sullivan - ------------------------------------------- Kevin C. O'Sullivan Director /s/ Fayez Sarofim - ------------------------------------------- Fayez Sarofim Director /s/ Daniel K. Thorne - ------------------------------------------- Daniel K. Thorne Director
21 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 March 31, 1997 and 1996, and the results of their operations and their cash flows 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 May 30, 1997 F-1 IMPERIAL HOLLY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
MARCH 31, ----------------- 1997 1996 ASSETS -------- -------- (IN THOUSANDS OF DOLLARS) CURRENT ASSETS: Cash and temporary investments............................. $ 7,719 $ 1,930 Marketable securities...................................... 48,963 37,373 Accounts receivable--trade................................. 52,157 37,251 Income tax receivable...................................... 3,400 1,485 Inventories: Finished products........................................ 119,206 61,702 Raw and in-process materials............................. 12,428 15,929 Supplies................................................. 16,392 12,124 Manufacturing costs prior to production.................... 20,888 12,476 Prepaid expenses........................................... 3,994 3,260 -------- -------- Total current assets................................... 285,147 183,530 NOTES RECEIVABLE............................................. 1,168 1,195 OTHER INVESTMENTS............................................ 11,949 6,702 PROPERTY, PLANT AND EQUIPMENT--Net........................... 146,402 124,103 OTHER ASSETS................................................. 5,267 9,789 -------- -------- TOTAL.................................................. $449,933 $325,319 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable--trade.................................... $ 42,492 $ 37,937 Short-term borrowings...................................... 62,470 31,839 Current maturities of long-term debt....................... 1,017 8 Deferred income taxes--net................................. 16,256 8,248 Other current liabilities.................................. 29,006 23,772 -------- -------- Total current liabilities.............................. 151,241 101,804 -------- -------- LONG-TERM DEBT--Net of current maturities.................... 90,619 89,800 DEFERRED INCOME TAXES--Net................................... 21,453 21,320 DEFERRED EMPLOYEE BENEFITS AND OTHER CREDITS................. 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, 14,158,195 and 10,312,507 shares issued and outstanding at March 31, 1997 and 1996, respectively...... 82,620 32,276 Retained earnings.......................................... 81,347 69,829 Unrealized securities gains--net of income taxes........... 12,989 8,938 -------- -------- Total shareholders' equity............................... 176,956 111,043 -------- -------- TOTAL.................................................. $449,933 $325,319 ======== ========
See notes to consolidated financial statements. F-2 IMPERIAL HOLLY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED MARCH 31, ---------------------------------- 1997 1996 1995 ---------- ---------- ---------- (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS) NET SALES.................................. $ 752,595 $ 616,450 $ 586,925 ---------- ---------- ---------- COSTS AND EXPENSES: Cost of sales............................ 664,846 561,878 532,423 Selling, general and administrative...... 59,326 54,778 56,593 Restructuring charges (Note 11).......... -- 2,225 -- ---------- ---------- ---------- Total.................................. 724,172 618,881 589,016 ---------- ---------- ---------- OPERATING INCOME (LOSS).................... 28,423 (2,431) (2,091) INTEREST EXPENSE--Net...................... (12,430) (11,207) (11,426) REALIZED SECURITIES GAINS--Net............. 426 5,389 1,649 OTHER INCOME--Net.......................... 1,269 3,173 3,219 ---------- ---------- ---------- INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY ITEM........................ 17,688 (5,076) (8,649) PROVISION (CREDIT) FOR INCOME TAXES........ 6,170 (1,858) (3,284) ---------- ---------- ---------- INCOME (LOSS) BEFORE EXTRAORDINARY ITEM.... 11,518 (3,218) (5,365) EXTRAORDINARY ITEM--Net of tax of $325 (Note 6).................................. -- 604 -- ---------- ---------- ---------- NET INCOME (LOSS).......................... $ 11,518 $ (2,614) $ (5,365) ========== ========== ========== EARNINGS (LOSS) PER SHARE OF COMMON STOCK: Income (loss) before extraordinary item.. $ 0.92 $ (0.31) $ (0.52) Extraordinary item--Net.................. -- 0.06 -- ---------- ---------- ---------- Net income (loss)........................ $ 0.92 $ (0.25) (0.52) ========== ========== ========== WEIGHTED AVERAGE SHARES OUTSTANDING........ 12,576,489 10,300,487 10,266,229 ========== ========== ==========
See notes to consolidated financial statements. F-3 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, EXCEPT SHARE AMOUNTS) 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 purhcase 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 ========== ======= ======== ======= ===== ========
See notes to consolidated financial statements. F-4 IMPERIAL HOLLY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW
YEAR ENDED MARCH 31, ----------------------------- 1997 1996 1995 -------- --------- -------- (IN THOUSANDS OF DOLLARS) OPERATING ACTIVITIES: Net income (loss)............................. $ 11,518 $ (2,614) $ (5,365) Adjustments for noncash and nonoperating items: Extraordinary item--net..................... -- (604) -- Depreciation................................ 14,773 12,681 13,429 Deferred income tax provision............... 5,760 (1,737) (3,294) Other....................................... 1,164 (5,203) (2,021) Working capital changes (excluding working capital acquired in the Spreckels acquisition): Receivables................................. (10,172) (502) 5,380 Inventory................................... (22,564) 45,408 8,914 Deferred and prepaid costs.................. (1,105) 627 1,814 Accounts payable............................ (6,997) (6,819) 989 Other liabilities........................... (1,285) (3,361) 2,358 -------- --------- -------- Operating cash flow........................... (8,908) 37,876 22,204 -------- --------- -------- INVESTING ACTIVITIES: Acquisition of Spreckels...................... (36,287) -- -- Capital expenditures.......................... (12,322) (8,890) (7,850) Investment in marketable securities........... (7,044) (6,537) (6,675) Proceeds from sale of marketable securities... 2,139 14,974 4,344 Proceeds from sale of fixed assets............ 109 1,478 5,915 Other investments............................. (2,872) (741) 245 Other......................................... 4,207 864 131 -------- --------- -------- Investing cash flow........................... (52,070) 1,148 (3,890) -------- --------- -------- FINANCING ACTIVITIES: Private placement of common stock............. 49,781 -- -- Short-term borrowings: Bank borrowings--net........................ 4,180 (5,431) (15,721) CCC borrowings--advances.................... 93,014 153,143 76,307 CCC borrowings--repayments.................. (79,125) (176,965) (76,280) Repayment of long-term debt................... (1,595) (9,324) (67) Dividends paid................................ -- (411) (1,643) Stock option proceeds and other............... 512 208 221 -------- --------- -------- Financing cash flow........................... 66,767 (38,780) (17,183) -------- --------- -------- INCREASE IN CASH AND TEMPORARY INVESTMENTS...... 5,789 244 1,131 CASH AND TEMPORARY INVESTMENTS, BEGINNING OF YEAR........................................... 1,930 1,686 555 -------- --------- -------- CASH AND TEMPORARY INVESTMENTS, END OF YEAR..... $ 7,719 $ 1,930 $ 1,686 ======== ========= ========
See notes to consolidated financial statements. F-5 IMPERIAL HOLLY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 that 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 sugar beets 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. 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 $19.2 million and $12.9 million higher at March 31, 1997 and 1996, respectively. Reductions in inventory quantities in 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 $1,385,000 ($0.13 per share) in 1996 and decrease net income by about $114,000 ($0.01 per share) in 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 contract years, some of which extend beyond March 31. The contracts provide for the sharing of the net selling price (gross sales price less certain marketing costs, including packaging costs, brokerage, freight expense and amortization of costs for certain facilities used in connection with marketing) with growers. Cost of sales includes an accrual F-6 IMPERIAL HOLLY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) MARCH 31, 1997, 1996 AND 1995 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 March 31. The final cost of sugarbeets cannot be determined until the end of the contract year for each growing area. Manufacturing Costs Prior to Production--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. The fair value of the $89.5 million principal amount of 8 3/8% senior notes as of March 31, 1997 was approximately par value, based on a dealer quote. 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. 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. 2. ACQUISITION OF SPRECKELS SUGAR 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. The purchase price was the sum of i) Spreckels' net working capital as of December 31, 1995, ii) $3 million and iii) net cash advanced to Spreckels by the seller between December 31, 1995 and the closing date. The Company funded from current borrowings under the Company's revolving credit line $35.3 million of the purchase price at closing. The Company notified the seller that it calculated the total purchase price as $29.3 million. The seller filed a lawsuit claiming that the final purchase price was $39.1 million, with $3.8 million remaining unpaid. The Company and the seller have settled their dispute and the litigation was dismissed in May 1997. Under such settlement, the purchase price was agreed to equal $35.3 million and the Company paid an additional $200,000 F-7 IMPERIAL HOLLY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) MARCH 31, 1997, 1996 AND 1995 to acquire certain former Spreckels' assets not included in the original purchase. These assets have an estimated value of approximately $2.5 million based on an independent appraisal. The acquisition was accounted for as a purchase and Spreckels' results of operations are included in these consolidated financial statements commencing April 19, 1996. Summarized pro forma operating results for the years ended March 31, 1997 and 1996, as if the acquisition had occurred on the first day of each of the respective years are as follows (in thousands of dollars, except per share amounts):
1997 1996 -------- -------- Net sales............................................. $760,432 $797,629 Income (loss) before extraordinary item............... 11,851 (11,744) Net income (loss)..................................... 11,851 (11,140) Earnings per share: Income (loss) before extraordinary item............. $ 0.94 $ (1.14) Net income (loss)................................... $ 0.94 $ (1.08)
3. INVESTMENTS Marketable securities consisted of the following (in thousands of dollars):
MARCH 31, 1997 MARCH 31, 1996 ------------------------------------ ------------------------------------- GROSS UNREALIZED GROSS UNREALIZED FAIR HOLDING FAIR HOLDING AMORTIZED MARKET ------------------ AMORTIZED MARKET ------------------- COST VALUE GAINS LOSSES COST VALUE GAINS LOSSES --------- ------- --------- -------- --------- ------- ---------- -------- US Government securities due 1997 through 1998.. $ 9,226 $ 9,222 $ 8 $ (12) $ 4,881 $ 4,937 $ 56 $ -- Common stocks........... 19,755 39,741 20,085 (99) 18,740 32,436 13,696 -- ------- ------- --------- ------- ------- ------- ---------- ------ Total................... $28,981 $48,963 $ 20,093 $ (111) $23,621 $37,373 $ 13,752 $ -- ======= ======= ========= ======= ======= ======= ========== ======
Realized securities gains are reported net of realized losses of $28,000 in 1997, $2,000 in 1996, and $106,000 in 1995. Marketable securities with a market value of $14.3 million at March 31, 1997 were pledged to secure certain insurance 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 March 31, 1997 and 1996 consisted of the following (in thousands of dollars):
1997 1996 -------- -------- Land................................................... $ 19,949 $ 13,682 Buildings, machinery and equipment..................... 271,002 251,949 Construction in progress............................... 5,440 2,094 -------- -------- Total.............................................. 296,391 267,725 Less accumulated depreciation.......................... 149,989 143,622 -------- -------- Property, Plant and Equipment--Net..................... $146,402 $124,103 ======== ========
The Company sold a distribution facility during fiscal 1995 in exchange for a three-year, fixed rate note and deferred the gain of $780,000 on the sale until collection of the note whose final maturity is in fiscal 1998. F-8 IMPERIAL HOLLY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) MARCH 31, 1997, 1996 AND 1995 5. SHORT-TERM BORROWINGS At March 31, 1997, the Company had working capital financing available from domestic banks under a $110,000,000 unsecured revolving credit line which expires in June 1998. The line of credit provides for interest on advances at floating or negotiated rates, requires commitment fees and is subject to a credit agreement which limits, among other things, the Company's right, without consent of the lenders, to take certain actions and requires the Company to maintain certain financial and operating ratios. At March 31, 1997, the Company had the ability to pay dividends of up to $75.0 million under the most restrictive of such financial covenants. The Company also has short-term borrowing facilities available from banks on an uncommitted basis aggregating $55,000,000 at March 31, 1997. Interest on these borrowings is on a negotiated rate basis. Additionally, the Company borrows 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 nonrecourse to the Company if the tariff rate import quota for raw sugar exceeds 1.5 million short tons raw value ("STRV"); such quota was 2.3 million STRV at March 31, 1997. Outstanding borrowings at March 31, 1997 and 1996 were as follows (in thousands of dollars):
1997 1996 ------- ------- Commodity Credit Corporation............................ $53,770 $27,319 Bank working capital financing.......................... 8,700 4,520 ------- ------- Total............................................... $62,470 $31,839 ======= ======= Weighted Average Interest Rate.......................... 6.70% 5.36% ======= =======
6. LONG-TERM DEBT Long-term debt at March 31, 1997 and 1996 was as follows (in thousands of dollars):
1997 1996 ------- ------- 8 3/8% senior notes...................................... $89,468 $89,800 Other, principally equipment capital leases.............. 2,168 8 ------- ------- Total long-term debt..................................... 91,636 89,808 Less current maturities.................................. 1,017 8 ------- ------- Long-term debt, net...................................... $90,619 $89,800 ======= =======
The Company's 8 3/8% senior notes due 1999 do not require principal payments prior to maturity. The indenture relating to the senior notes contains restrictions on the Company's ability to create liens on certain properties. During fiscal 1997 and 1996, the Company purchased and retired $0.3 million and $10.2 million principal amount, respectively, of the senior notes. The fiscal 1996 purchases were for amounts less than book value, and the Company reported such difference, net of tax, as an extraordinary item. In April 1997, the Company purchased and retired an additional $8.3 million principal amount of the senior notes at par value. The Company had an interest rate swap agreement with Lehman Brothers Inc. ("Lehman") under which the Company received payments based on a fixed rate of 7.77% and paid Lehman amounts based on the three month LIBOR rate. Income (loss) on the swap (which expired in October 1996) totaled ($3,000) in 1997, $289,000 in 1996, and $643,000 in 1995 and is reported in interest expense- net. F-9 IMPERIAL HOLLY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) MARCH 31, 1997, 1996 AND 1995 Cash paid for interest on short and long-term debt was $11,949,000 in 1997, $12,228,000 in 1996, and $11,463,000 in 1995. Interest capitalized as part of the cost of constructing assets was not significant in 1997, 1996 or 1995. 7. INCOME TAXES The components of the consolidated income tax provision (credit), including amounts reported as an extraordinary item, for each of the last three fiscal years were as follows (in thousands of dollars):
1997 1996 1995 ------- ------- ------- Federal: Current...................................... $ 20 $ 109 $ (36) Tax benefit of operating loss carryforward... (1,762) (1,452) (1,636) Deferred..................................... 7,522 (285) (1,658) State.......................................... 390 95 46 ------- ------- ------- Total........................................ $ 6,170 $(1,533) $(3,284) ======= ======= =======
The tax effects of temporary differences which give rise to the Company's deferred tax assets and liabilities at March 31, 1997 and 1996 were as follows (in thousands of dollars):
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 (expiring 2010, 2011 and 2012............. 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-10 IMPERIAL HOLLY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) MARCH 31, 1997, 1996 AND 1995 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):
1997 1996 1995 ------ ------- ------- Income taxes computed at the statutory federal rate......................................... $6,191 $(1,451) $(3,027) Nontaxable interest and dividends............. (217) (251) (299) State income taxes............................ 253 62 30 Foreign sales corporation..................... (60) (59) (68) Other......................................... 3 166 80 ------ ------- ------- Total....................................... $6,170 $(1,533) $(3,284) ====== ======= =======
Income taxes paid were $2,300,000 in 1997 and $213,000 in 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 for each of the past three fiscal years included the following components (in thousands of dollars):
1997 1996 1995 ------- ------- ------ Company-sponsored plans: Service cost for benefits earned during the period...................................... $ 2,756 $ 2,089 $2,128 Interest cost on projected benefit obligation.................................. 5,883 2,653 2,348 Actual return on plan assets................. (15,675) (10,141) (4,439) Net amortization and deferral................ 10,355 8,377 3,254 ------- ------- ------ Net periodic pension cost - Company-sponsored plans.................... 3,319 2,978 3,291 Industry-wide plan for certain unionized em- ployees....................................... 432 438 459 ------- ------- ------ Total pension cost............................. $ 3,751 $ 3,416 $3,750 ======= ======= ======
F-11 IMPERIAL HOLLY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) MARCH 31, 1997, 1996 AND 1995 The funded status of the Company-sponsored plans was as follows at March 31, 1997 and 1996 (in thousands of dollars):
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 obli- gations 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 addi- tional liability....... 1,671 -- 2,567 -- ------- ------- ------ ------- Accrued (prepaid) pen- sion 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%
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 amount charged to expense for these plans for fiscal 1997 was $85,000; no amount was charged to expense for these plans in 1996 and 1995. 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 amount charged to compensation expense for the discount on shares purchased under the latter alternative was $17,000 in 1997, $22,000 in 1996, and $30,000 in 1995. F-12 IMPERIAL HOLLY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) MARCH 31, 1997, 1996 AND 1995 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 SFAS No. 123, the Company elected to continue to follow Accounting Principles Board Opinion No. 25 to measure employee stock compensation cost, and to provide the pro forma disclosures required by SFAS No. 123. The pro forma effect on compensation costs, net income and earnings per share of measuring compensation cost pursuant to SFAS No. 123 in fiscal 1997 was not material. 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 (94,388 in total as of March 31, 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 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 will 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 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. F-13 IMPERIAL HOLLY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) MARCH 31, 1997, 1996 AND 1995 Stock option activity in the plan during the last three fiscal years was as follows:
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..................... 324,252 10.23 330,964 11.05 331,609 11.58 ======= ======= =======
Options outstanding at March 31, 1997 consisted of the following:
EXERCISABLE OPTIONS RANGE OF ------------------------- EXERCISE WEIGHTED- WEIGHTED- PRICES AVERAGE WEIGHTED-AVERAGE AVERAGE PER NUMBER EXERCISE PRICE REMAINING NUMBER EXERCISE PRICE SHARE OF OPTIONS PER SHARE CONTRACTUAL LIFE OF OPTIONS PER SHARE - -------- ---------- -------------- ---------------- ---------- -------------- $ 6.44- $ 8.81 370,677 $ 7.85 5.8 years 217,052 $ 7.55 $ 9.75- $12.25 12,000 10.38 8.9 years 4,250 9.75 $13.19- $16.83 231,650 14.46 6.9 years 102,950 15.91
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 March 31, 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 during the last three fiscal years was as follows:
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....... 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............... -- (1,500) 8.09 -- ----- ------ ----- Balance, March 31....... 4,500 6.53 3,000 5.88 5,250 6.93 ===== ====== ===== Exercisable as of March 31..................... 3,000 5.88 -- -- 2,250 8.34 ===== ====== =====
Options outstanding at March 31, 1997 have a range of exercise prices of $4.75 to $7.84, and a weighted-average remaining contractual life of 2.0 years. F-14 IMPERIAL HOLLY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) MARCH 31, 1997, 1996 AND 1995 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 fiscal 1997, 21,760 shares of common stock 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 $3.9 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. The Company leases certain facilities and equipment under cancelable and noncancelable operating leases. Total rental expenses for all operating leases amounted to $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 March 31, 1997 are summarized as follows (in thousands of dollars):
OPERATING FISCAL YEAR LEASES ----------- --------- 1998........................................................... $2,697 1999........................................................... 2,279 2000........................................................... 1,713 2001........................................................... 1,458 2002........................................................... 936 After 2002...................................................... 646
The aggregate future minimum amount to be received under sub-leases was $2,978,000 at March 31, 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 March 31, 1997, approximately $475,000 of such amount had been incurred. 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 $1,792,000 in 1997, $1,820,000 in 1996, and $1,456,000 in 1995. Amounts charged to expense for research and development were $1,445,000 in 1997, $1,670,000 in 1996, and $2,084,000 in 1995. F-15 EX-10.(A) 2 STOCK INCENTIVE PLAN EXHIBIT 10(a) IMPERIAL HOLLY CORPORATION STOCK INCENTIVE PLAN AS AMENDED AND RESTATED EFFECTIVE MAY 1, 1997 TABLE OF CONTENTS ----------------- PAGE ---- SECTION 1. - GENERAL PROVISIONS RELATING TO PLAN GOVERNANCE, COVERAGE AND BENEFITS......................................... 1 1.1 Purpose............................................................ 1 1.2 Definitions........................................................ 1 (a) Appreciation................................................ 1 (b) Board....................................................... 1 (c) Change in Control........................................... 1 (d) Code........................................................ 2 (e) Committee................................................... 2 (f) Common Stock................................................ 2 (g) Company..................................................... 2 (h) Covered Employee............................................ 2 (i) Deferred Stock.............................................. 2 (j) Disability.................................................. 2 (k) Employee.................................................... 3 (l) Employment.................................................. 3 (m) Exchange Act................................................ 3 (n) Fair Market Value........................................... 3 (o) Grantee..................................................... 3 (p) Incentive Award............................................. 4 (q) Incentive Plan Agreement.................................... 4 (r) Incentive Stock Option...................................... 4 (s) Independent SAR............................................. 4 (t) Nonstatutory Stock Option................................... 4 (u) Other Stock-Based Award..................................... 4 (v) Outside Director............................................ 4 (w) Parent...................................................... 4 (x) Performance Period.......................................... 4 (y) Performance Share or Performance Unit....................... 4 (z) Plan........................................................ 5 (aa) Restricted Stock............................................ 5 (bb) Restricted Stock Award...................................... 5 (cc) Restriction Period.......................................... 5 (dd) Retirement.................................................. 5 (ee) Spread...................................................... 5 (ff) Stock Appreciation Right or SAR............................. 5 (gg) Stock Option................................................ 5 (hh) Subsidiary.................................................. 5 (ii) Supplemental Payment........................................ 5 i (jj) Tandem SAR................................................... 5 1.3 Administration...................................................... 5 (a) Committee Powers............................................. 5 (b) No Liability................................................. 6 (c) Meetings..................................................... 6 1.4 Shares of Common Stock Subject to the Plan.......................... 7 (a) Common Stock Authorized...................................... 7 (b) Common Stock Available....................................... 7 (c) Incentive Award Adjustments.................................. 7 (d) Special Limitation........................................... 8 1.5 Participation....................................................... 8 (a) Eligibility.................................................. 8 (b) Incentive Stock Option Eligibility........................... 8 1.6 Incentive Awards.................................................... 9 SECTION 2. - STOCK OPTIONS AND STOCK APPRECIATION RIGHTS...................... 9 2.1 Grant of Stock Options.............................................. 9 2.2 Stock Option Terms.................................................. 9 (a) Written Agreement............................................ 9 (b) Number of Shares............................................. 9 (c) Exercise Price............................................... 9 (d) Term......................................................... 9 (e) Exercise..................................................... 9 (f) Incentive Stock Options......................................10 2.3 Stock Option Exercises..............................................10 (a) Method of Exercise...........................................10 (b) Notification with respect to Incentive Stock Options.........11 (c) Proceeds.....................................................11 2.4 Stock Appreciation Rights in Tandem with Nonstatutory Stock Option..11 (a) Grant........................................................11 (b) General Provisions...........................................11 (c) Exercise.....................................................11 (d) Settlement...................................................12 2.5 Stock Appreciation Rights Independent of Nonstatutory Stock Options.12 (a) Grant........................................................12 (b) General Provisions...........................................12 (c) Exercise.....................................................12 (d) Settlement...................................................12 2.6 Supplemental Payment on Exercise of Nonstatutory Stock Options or Stock Appreciation Rights...........................................13 SECTION 3. - RESTRICTED STOCK.................................................13 3.1 Award of Restricted Stock...........................................13 ii (a) Grant........................................................13 (b) Immediate Transfer Without Immediate Delivery of Restricted Stock........................................................13 3.2 Restrictions........................................................14 (a) Restrictive Conditions.......................................14 (b) Forfeiture of Restricted Stock...............................14 (c) Removal of Restrictions......................................14 3.3 Restriction Period..................................................15 3.4 Delivery of Shares of Common Stock..................................15 3.5 Supplemental Payment on Vesting of Restricted Stock.................15 SECTION 4. - PERFORMANCE UNITS AND PERFORMANCE SHARES.........................15 4.1 Performance Based Awards............................................15 (a) Grant........................................................15 (b) Performance Criteria.........................................15 (c) Modification.................................................16 (d) Payment......................................................16 (e) Special Rule for Covered Employees...........................16 4.2 Supplemental Payment on Vesting of Performance Units or Performance Shares..............................................................17 SECTION 5. - OTHER STOCK-BASED AWARDS.........................................17 5.1 Grant of Other Stock-Based Awards...................................17 5.2 Other Stock-Based Award Terms.......................................18 (a) Written Agreement............................................18 (b) Purchase Price...............................................18 (c) Performance Criteria and Other Terms.........................18 (d) Payment......................................................18 (e) Dividends....................................................18 SECTION 6. - PROVISIONS RELATING TO PLAN PARTICIPATION........................18 6.1 Plan Conditions.....................................................18 (a) Incentive Plan Agreement.....................................18 (b) No Right to Employment or Service............................19 (c) Securities Requirements......................................19 6.2 Transferability.....................................................19 (a) Non-Transferable Awards and Options..........................19 (b) Ability to Exercise Rights...................................19 6.3 Rights as a Stockholder.............................................20 (a) No Stockholder Rights........................................20 (b) Holder of Restricted Stock...................................20 6.4 Listing and Registration of Shares of Common Stock..................20 6.5 Change in Stock and Adjustments.....................................20 iii (a) Changes in Law or Circumstances..............................20 (b) Exercise of Corporate Powers.................................20 (c) Recapitalization of the Company..............................21 (d) Reorganization of the Company................................21 (e) Issue of Common Stock by the Company.........................22 6.6 Termination of Employment, Death, Disability and Retirement.........22 (a) Termination of Employment or Service.........................22 (b) Retirement...................................................22 (c) Disability or Death..........................................22 (d) Continuation.................................................23 6.7 Changes in Control..................................................23 (a) Changes in Control...........................................23 (b) Right of Cash-Out............................................24 6.8 Amendments to Incentive Awards......................................24 6.9 Exchange of Incentive Awards........................................25 6.10 Financing...........................................................25 SECTION 7. - MISCELLANEOUS....................................................25 7.1 Effective Date and Grant Period.....................................25 7.2 No Funding..........................................................25 7.3 Withholding Taxes...................................................26 (a) Mandatory Withholding........................................26 (b) Incentive Stock Options......................................26 7.4 Designation of Beneficiary by Participant...........................26 7.5 Conflicts with Plan.................................................26 7.6 No Guarantee of Tax Consequences....................................26 7.7 Miscellaneous Provisions............................................27 7.9 Gender, Tense and Headings..........................................27 7.10 Amendment and Termination...........................................28 7.11 Governing Law.......................................................28 7.12 Section 16 Compliance...............................................28 iv IMPERIAL HOLLY CORPORATION STOCK INCENTIVE PLAN SECTION 1. ---------- GENERAL PROVISIONS RELATING TO PLAN GOVERNANCE, COVERAGE AND BENEFITS 1.1 PURPOSE The purpose of the Imperial Holly Corporation Stock Incentive Plan (the "Plan") is to foster and promote the long-term financial success of Imperial Holly Corporation (the "Company") and to materially increase stockholder value by: (a) encouraging the long-term commitment of selected key Employees, (b) motivating superior performance of key Employees by means of long-term performance related incentives, (c) encouraging and providing key Employees and Outside Directors with a formal program for obtaining an ownership interest in the Company, (d) attracting and retaining key Employees by providing incentive compensation opportunities that are competitive with similar companies, and (e) enabling participation by key Employees and Outside Directors in the long-term growth and financial success of the Company. The Plan provides for payment of various forms of incentive compensation and, therefore, is not intended to be a plan that is subject to the Employee Retirement Income Security Act of 1974, as amended (ERISA). The Plan shall be interpreted, construed and administered consistent with its status as a plan that is not subject to ERISA. The Plan was previously last amended and restated effective April 29, 1993 and was approved by the Company's shareholders on July 29, 1993. The Plan originally became effective as of February 26, 1988 and was approved by the shareholders of the Company. 1.2 DEFINITIONS The following terms shall have the meanings set forth below: (a) Appreciation. The difference between the option exercise price per share of the Nonstatutory Stock Option to which a Tandem SAR relates and the Fair Market Value of a share of Common Stock on the date of exercise of the Tandem SAR. (b) Board. The Board of Directors of the Company. (c) Change in Control. Any of the events described in and subject to Section 6.7. (d) Code. The Internal Revenue Code of 1986, as amended. References herein to any provision of the Code shall refer to any successor provision thereto. (e) Committee. The Executive Compensation Committee of the Board, which shall be comprised of not less than two members of the Board, appointed by the Board to administer the Plan. The Board shall have the power to fill vacancies on the Committee arising by resignation, death, removal or otherwise. The Board may, in its sole discretion, bifurcate the powers and duties of the Committee among one or more separate Committees, or retain all powers and duties of the Committee in a single Committee; provided, however, to the extent that by reason of the position or relationship of any Employee to the Company, Section 16(b) of the Exchange Act applies to the Employee, the Committee with the power or authority with respect to such Employee shall be exclusively comprised of members of the Board who are "non-employee directors" (as defined under rules and regulations promulgated under Section 16(b) of the Exchange Act) and there shall not be less than two such non-employee directors serving as members of the Committee. In addition, if Section 162(m) of the Code applies to the Company (upon the expiration of any applicable transition period provided in the regulations promulgated under Section 162(m) of the Code, including Section 1.162-27(f) of the Treasury Regulations), at least two such Committee members shall also be "outside directors" as defined in Section 162(m) of the Code and the regulations promulgated thereunder. No member of the Committee shall be a Grantee hereunder. (f) Common Stock. The common stock of the Company, no par value, per share and any class of common stock into which such common shares may hereafter be converted, reclassified or recapitalized. (g) Company. Imperial Holly Corporation, a corporation organized under the laws of the State of Texas, and any successor thereto. (h) Covered Employee. Any Covered Employee as defined in Section 162(m) of the Code and the regulations promulgated thereunder. (i) Deferred Stock. Shares of Common Stock to be issued or transferred to a Grantee under an Other Stock-Based Award granted pursuant to Section 5 at the end of a specified deferral period, as set forth in the Incentive Plan Agreement pertaining thereto. (j) Disability. As determined by the Committee, a physical or mental condition of the Employee that (1) would entitle him to payment of disability income payments under the Company's Long Term Disability Plan or any successor long term disability insurance or other program maintained by the Company; or (2) in the event that the Employee is not covered, for whatever reason, under said Disability Plan or any other long term disability insurance or other program maintained by the Company, "Disability" means a permanent and total disability as defined in Section 22(e)(3) of the Code. 2 (k) Employee. Any common-law employee of the Company or any Parent or Subsidiary who, in the opinion of the Committee, is one of a select group of executive officers, other officers, or other key management personnel of the Company or any Parent or Subsidiary, who is in a position to contribute materially to the growth and development and to the financial success of the Company or any Parent or Subsidiary, including officers who are members of the Board. (l) Employment. Employment by the Company or any Parent or Subsidiary, or by any corporation issuing or assuming an incentive award in any transaction described in Section 424(a) of the Code, or by a parent corporation or a subsidiary corporation of such corporation issuing such incentive award, and the parent-subsidiary relationship shall be determined at the time of the corporate action described in Section 424(a) of the Code. In this regard, neither the transfer of a Grantee from Employment by the Company to Employment by any Parent or Subsidiary, nor the transfer of a Grantee from Employment by any Parent or Subsidiary to Employment by the Company, shall be deemed to be a termination of Employment of the Grantee. Moreover, the Employment of a Grantee shall not be deemed to have been terminated because of absence from active Employment on account of temporary illness or during authorized vacation or during temporary leaves of absence from active Employment granted for reasons of professional advancement, education, health, or government service, or during military leave for any period (if the Grantee returns to active Employment within 90 days after the termination of military leave), or during any period required to be treated by the Company as a leave of absence by virtue of any valid law or agreement. (m) Exchange Act. The Securities Exchange Act of 1934, as amended. (n) Fair Market Value. The fair market value of one share of Common Stock on the date in question, which is deemed to be the mean between the highest and lowest sales price per share of Common Stock on the American Stock Exchange (or any other national stock exchange or transaction reporting system on which the Common Stock is then listed or quoted); or if Common Stock is not listed or quoted on any national stock exchange or transaction reporting system, the mean between the highest closing bid and lowest closing asked price for Common Stock as reported by the National Association of Securities Dealers NASDAQ System; or if not reported by such system, the mean between the closing bid and asked price as quoted by such quotation source as shall be designated by the Committee on that date. If there was no public trade of Common Stock on the date in question, Fair Market Value shall be determined by reference to the last preceding date on which such a trade was so reported. (o) Grantee. Any Employee or Outside Director who, in the opinion of the Committee, performs significant services for the benefit of the Company and who is granted an Incentive Award under the Plan. 3 (p) Incentive Award. Any incentive award, individually or collectively, as the case may be, including any Nonstatutory Stock Option, Incentive Stock Option, Stock Appreciation Right, Restricted Stock Award, Performance Unit, Performance Share, or Other Stock-Based Award as well as any Supplemental Payment, granted under the Plan to a Grantee. (q) Incentive Plan Agreement. The written agreement (including any written notification signed only by an officer of the Company) entered into between the Company and the Grantee pursuant to which an Incentive Award shall be made under the Plan, as such agreement is further defined in Section 6.1(a). (r) Incentive Stock Option. A Stock Option granted by the Committee to an Employee under Section 2 of the Plan which is designated by the Committee as an Incentive Stock Option and intended to qualify as an Incentive Stock Option under Section 422 of the Code. (s) Independent SAR. A Stock Appreciation Right described in Section 2.5. (t) Nonstatutory Stock Option. A Stock Option granted by the Committee to a Grantee under Section 2, which is not designated by the Committee as an Incentive Stock Option. (u) Other Stock-Based Award. An award granted by the Committee to a Grantee under Section 5 that is valued in whole or in part by reference to, or is otherwise based upon, Common Stock. (v) Outside Director. A member of the Board who is not at the time of grant of an Incentive Award an employee of the Company or any Parent or Subsidiary. (w) Parent. Any corporation (whether now or hereafter existing) which constitutes a "parent" of the Company, as defined in Section 424(e) of the Code. (x) Performance Period. A period of time determined by the Committee over which performance is measured for the purpose of determining a Grantee's right to and the payment value of any Performance Units, Performance Shares or Other Stock-Based Awards. (y) Performance Share or Performance Unit. An Incentive Award representing a contingent right to receive cash or shares of Common Stock (which may be Restricted Stock) at the end of a Performance Period and which, in the case of Performance Shares, is denominated in Common Stock, and, in the case of Performance Units, is denominated in cash values. 4 (z) Plan. The Imperial Holly Corporation Stock Incentive Plan as set forth herein and as it may be amended from time to time. (aa) Restricted Stock. Shares of Common Stock issued or transferred to a Grantee subject to Section 3. (bb) Restricted Stock Award. An authorization by the Committee to issue or transfer Restricted Stock to a Grantee. (cc) Restriction Period. The period of time determined by the Committee during which Restricted Stock is subject to the restrictions under the Plan. (dd) Retirement. The termination of Employment from the Company or any Parent or Subsidiary constituting retirement as determined by the Committee or as specified in the Incentive Plan Agreement. (ee) Spread. The difference between the exercise price per share specified in any Independent SAR grant and the Fair Market Value of a share of Common Stock on the date of exercise of the Independent SAR. (ff) Stock Appreciation Right or SAR. A Tandem SAR described in Section 2.4 or an Independent SAR described in Section 2.5. (gg) Stock Option. Pursuant to Section 2, an Incentive Stock Option or Nonstatutory Stock Option granted to an Employee, or a Nonstatutory Stock Option granted to an Outside Director, whereunder the Grantee has the right to purchase shares of Common Stock. In accordance with Section 422 of the Code, no Outside Director shall be granted an Incentive Stock Option. (hh) Subsidiary. Any corporation (whether now or hereafter existing) which constitutes a "subsidiary" of the Company, as defined in Section 424(f) of the Code. (ii) Supplemental Payment. Any amounts described in Sections 2.6, 3.5 and/or 4.2 dedicated to payment of any federal income taxes that are or will be due and payable on an Incentive Award as determined by the Committee. (jj) Tandem SAR. A Stock Appreciation Right described in Section 2.4. 1.3 ADMINISTRATION (a) Committee Powers. The Plan shall be administered by the Committee which shall have full power and authority to: (i) designate Grantees; (ii) determine the Incentive Awards to be granted to Grantees; (iii) subject to Section 1.4, determine the 5 Common Stock to be covered by Incentive Awards and, in connection therewith, to reserve shares of Common Stock as needed in order to cover grants of Incentive Awards; (iv) determine the terms and conditions of any Incentive Award; (v) determine whether, to what extent, and under what circumstances Incentive Awards may be settled or exercised in cash, Common Stock, or other securities or property; or canceled, substituted, forfeited or suspended, and the method or methods by which Incentive Awards may be settled, exercised, canceled, substituted, forfeited or suspended; (vi) interpret, construe and administer the Plan and any instrument or agreement relating to, or Incentive Award made under, the Plan; (vii) establish, amend, suspend or waive rules and guidelines relating to the Plan and the Incentive Awards hereunder; (viii) appoint such agents as it deems appropriate for the administration of the Plan; provided, however that the Committee with the power and authority over Employees who are subject to Section 16(b) of the Exchange Act or who cause Section 162(m) of the Code to apply to the Company pursuant to Section 1.162-27(f) of the Treasury Regulations, shall not delegate any of the power or authority set forth in (i) through (vii) above in respect of such Employees; and (ix) make any other determination and take any other action that it deems necessary or desirable for such administration. All designations, determinations, interpretations and other decisions with respect to the Plan or any Incentive Award shall be within the sole discretion of the Committee, and shall be final, conclusive and binding upon all persons, including the Company or any Parent or Subsidiary, any Grantee, any holder or beneficiary of any Incentive Award, and any stockholder. The Committee may act only by a majority of its members then in office, except that said members may authorize any one or more of their number or any officer of the Company to execute and deliver documents on behalf of the Committee. No member of the Committee shall be liable for anything done or omitted by him or by any other member of the Committee in connection with the Plan, except for his own willful misconduct or as expressly provided by statute which cannot be waived. (b) No Liability. No member of the Committee shall be liable for any action or determination made in good faith by the Committee with respect to this Plan or any Incentive Award hereunder, and to the full extent permitted by the Company's Bylaws, the Company shall indemnify each member of the Committee. (c) Meetings. The Committee shall designate a chairman from among its members, who shall preside at all of its meetings, and shall designate a secretary, without regard to whether that person is a member of the Committee, who shall keep the minutes of the proceedings and all records, documents, and data pertaining to its administration of the Plan. Meetings shall be held at such times and places as shall be determined by the Committee. The Committee may take any action otherwise proper under the Plan by the affirmative vote, taken with or without a meeting, of a majority of its members. 6 1.4 SHARES OF COMMON STOCK SUBJECT TO THE PLAN (a) Common Stock Authorized. Subject to adjustment under Section 6.5, the aggregate number of shares of Common Stock available for granting Incentive Awards (including, without limitation, Stock Appreciation Rights) under the Plan shall be One Million, Sixty-two Thousand and Five Hundred (1,062,500) shares of Common Stock. If any Incentive Award shall (i) expire or terminate for any reason, without being exercised or purchased, or (ii) be forfeited or reacquired by the Company or Plan pursuant to rights reserved upon issuance of the Incentive Award, shares of Common Stock subject to the unexercised, forfeited or reacquired portion of such Incentive Award shall again be available for grant in connection with grants of subsequent Incentive Awards. With respect to any Stock Option or Stock Appreciation Right granted to a Grantee who is a Covered Employee that is canceled or repriced, the number of shares subject to such Stock Option or Stock Appreciation Right shall continue against the maximum number of shares that may be the subject of Stock Options or Stock Appreciation Rights granted to such Covered Employee and such maximum number shall be determined in accordance with Section 162(m) of the Code and the regulations promulgated thereunder. In addition to Common Stock actually issued, there shall be deemed to have been issued pursuant to the Plan (and therefore no longer available in connection with Incentive Awards) a number of shares equal to the aggregate number of shares of Common Stock under option in respect of which Stock Appreciation Rights have been exercised. If any Common Stock issued as Restricted Stock shall be repurchased by the Company or Plan pursuant to a repurchase option in the Grantee's Incentive Plan Agreement, or if any Common Stock issued under the Plan shall be reacquired pursuant to restrictions imposed at the time of issuance under the Plan or Incentive Plan Agreement, such shares may again be issued under the Plan. (b) Common Stock Available. The Common Stock available for issuance or transfer under the Plan shall be made available from shares now or hereafter (i) held in the treasury of the Company, (ii) authorized but unissued shares or (iii) shares to be purchased or acquired by the Company. No fractional shares shall be issued under the Plan; payment for fractional shares shall be made in cash. (c) Incentive Award Adjustments. Subject to the limitations set forth in Sections 6.8 and 7.10, the Committee, with the consent of the Grantee, may make any adjustment in the exercise price or the number of shares subject to, or the terms of, any Incentive Award other than an Incentive Stock Option. Such adjustment shall be made by amending, substituting or canceling and regranting such Incentive Award with the inclusion of terms and conditions that may differ from the terms and conditions of the original Incentive Award. If such action is effected by amendment, the effective date of such amendment shall be determined by the Committee (including an effective date that may be the same date as the original grant of the Incentive Award); provided, however, 7 such effective date shall not affect or contravene any treatment required by applicable securities law or otherwise with respect to the effective date of the grant or such amendment. In addition, any such action shall be effective only to the extent that such action would not cause (i) the Grantee of the Incentive Award to lose an exemption from liability under Section 16(b) of the Exchange Act, or (ii) an Incentive Award to fail to qualify as performance based compensation as defined in Section 162(m) of the Code, unless otherwise agreed to by the Grantee. (d) Special Limitation. In no event shall the number of shares of Common Stock subject to Stock Options or Stock Appreciation Rights awarded to any one Grantee who is a Covered Employee in any calendar year exceed Five Hundred Thousand (500,000) shares of the Common Stock. In all events, determinations under the preceding sentence shall be made in a manner that is consistent with Section 162(m) of the Code and regulations promulgated thereunder (including Treas. Reg. Section 1.162-27(f)). 1.5 PARTICIPATION (a) Eligibility. The Committee shall from time to time designate those selected Employees and Outside Directors, if any, to be granted Incentive Awards under the Plan, the type of Awards granted, the number of shares, options, rights or units, as the case may be, which shall be granted to each such person, and any other terms or conditions relating to the Awards as it may deem appropriate, to the extent not inconsistent with the provisions of the Plan. Any Grantee may, if otherwise eligible, be granted additional Incentive Awards at any time. (b) Incentive Stock Option Eligibility. No Employee shall be eligible for the grant of any Incentive Stock Option who owns or would own immediately before the grant of such Incentive Stock Option, directly or indirectly, stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company, or any Parent or Subsidiary. This restriction does not apply if, at the time such Incentive Stock Option is granted, the Incentive Stock Option exercise price is at least one hundred and ten percent (110%) of the Fair Market Value on the date of grant and the Incentive Stock Option by its terms is not exercisable after the expiration of five (5) years from the date of grant. For the purpose of the immediately preceding sentence, the attribution rules of Section 424(d) of the Code shall apply for the purpose of determining an Employee's percentage ownership in the Company or any Parent or Subsidiary. No Outside Director shall be eligible for the grant of any Incentive Stock Option. This paragraph shall be construed consistent with the requirements of Section 422 of the Code and the regulations issued thereunder. 8 1.6 INCENTIVE AWARDS The forms of Incentive Awards under this Plan are Stock Options, Stock Appreciation Rights and Supplemental Payments as described in Section 2, Restricted Stock and Supplemental Payments as described in Section 3, Performance Units or Performance Shares and Supplemental Payments as described in Section 4, and Other Stock-Based Awards and Supplemental Payments as described in Section 5, or any combination of the foregoing. SECTION 2. --------- STOCK OPTIONS AND STOCK APPRECIATION RIGHTS 2.1 GRANT OF STOCK OPTIONS The Committee is authorized to grant Stock Options to selected Employees and Outside Directors in accordance with the terms and conditions of the Plan, and with such additional terms and conditions not inconsistent with the Plan as the Committee shall determine. Successive grants may be made to the same Grantee whether or not any Stock Option previously granted to such person remains unexercised. 2.2 STOCK OPTION TERMS (a) Written Agreement. Each grant of a Stock Option shall be evidenced by an Incentive Plan Agreement. (b) Number of Shares. Each Stock Option shall specify the number of shares of Common Stock to which it pertains. (c) Exercise Price. The exercise price per share of Common Stock under each Stock Option shall be determined by the Committee; provided, however, that in the case of Incentive Stock Options such purchase price shall not be less than one hundred percent (100%) of the Fair Market Value per share of such stock on the date the Incentive Stock Option is granted, as determined by the Committee. Each Stock Option shall specify the method of exercise which shall be consistent with the requirements of Section 2.3(a). (d) Term. The Committee shall fix the term of each Stock Option which shall be not more than ten (10) years from the date of grant. In the event no term is fixed, such term shall be ten (10) years from the date of grant. (e) Exercise. The Committee shall determine the time or times at which a Stock Option may be exercised in whole or in part. Each Stock Option may specify the required period of continuous Employment (or service) and/or the performance objectives 9 to be achieved before the Stock Option or portion thereof will become exercisable. Each Stock Option, the exercise of which, or the timing of the exercise of which, is dependent, in whole or in part, on the achievement of designated performance objectives, may specify a minimum level of achievement in respect of the specified performance objectives below which no Stock Options will be exercisable, and may set forth a method for determining the number of Stock Options that will be exercisable if performance is at or above such minimum but short of full achievement of the performance objectives. All such terms shall be set forth in the Incentive Plan Agreement. (f) Incentive Stock Options. Anything in the Plan notwithstanding, to the extent that the aggregate Fair Market Value (determined as of the time the Incentive Stock Option is granted) of the shares of Common Stock with respect to which Incentive Stock Options are exercisable for the first time by any Grantee during any single calendar year (under the Plan and any other stock option plans of the Company and its Subsidiaries or any Parent) exceeds the sum of $100,000, such Incentive Stock Options shall be treated as Stock Options which are not Incentive Stock Options. This paragraph shall be applied by taking Incentive Stock Options into account in the order in which they are granted. 2.3 STOCK OPTION EXERCISES (a) Method of Exercise. To purchase shares under any Stock Option granted under the Plan, a Grantee must give notice in writing to the Company of his intention to purchase and specify the number of shares as to which he intends to exercise his Stock Option. Upon the date or dates specified for the completion of the purchase of the shares, the purchase price shall be payable in full. The purchase price may be paid in cash or an equivalent acceptable to the Committee. At the discretion of the Committee, and provided that such payment can be effected without causing the Grantee to incur liability under Section 16(b) of the Exchange Act, the exercise price may be paid by the assignment and delivery to the Company of shares of Common Stock owned by the Grantee or a combination of cash and such shares equal in value to the exercise price. Any shares so assigned and delivered to the Company in payment or partial payment of the purchase price shall be valued at their Fair Market Value on the exercise date. In addition, at the request of the Grantee and to the extent permitted by applicable law, the Company in its discretion may selectively approve "cashless exercise" arrangements with a brokerage firm under which such brokerage firm, on behalf of the Grantee, shall pay to the Company the exercise price of the Stock Options being exercised, and the Company, pursuant to an irrevocable notice from the Grantee, shall promptly deliver the shares being purchased to such firm. The Committee, in its discretion and to the extent permitted by applicable law, may determine to permit the holder of an Option to satisfy the purchase price of the shares as to which an Option is exercised by delivery of the Option holder's promissory note, such note to be subject to such terms and conditions as the Committee may determine. The 10 Committee may, in its discretion and to the extent permitted by applicable law, direct the Company to lend to the Option holder such funds, on such terms and conditions as the Committee determines to be appropriate, sufficient for the holder to pay the purchase price of the shares as to which an Option is exercisable. (b) Notification with respect to Incentive Stock Options. Notwithstanding any other provision of the Plan, a Grantee who disposes of shares of Common Stock acquired upon the exercise of an Incentive Stock Option by a sale or exchange either (i) within two (2) years after the date of the grant of the Incentive Stock Option under which the stock was acquired or (ii) within one (1) year after the transfer of such shares to him pursuant to exercise, shall notify the Company of such disposition, the amount realized and his adjusted basis in such shares. (c) Proceeds. The proceeds received by the Company from the sale of shares of Common Stock pursuant to Stock Options exercised under the Plan shall be used for general corporate purposes. 2.4 STOCK APPRECIATION RIGHTS IN TANDEM WITH NONSTATUTORY STOCK OPTIONS (a) Grant. The Committee may, at the time of grant of a Nonstatutory Stock Option, or at any time thereafter during the term of the Nonstatutory Stock Option, grant Stock Appreciation Rights with respect to all or any portion of the shares of Common Stock covered by such Nonstatutory Stock Option. A Stock Appreciation Right in tandem with a Nonstatutory Stock Option is referred to herein as a "Tandem SAR." (b) General Provisions. Each Tandem SAR shall be evidenced by, and subject to, the terms of the Grantee's Incentive Plan Agreement. The exercise price per share of Common Stock of a Tandem SAR shall be fixed in the Incentive Plan Agreement and shall not be less than one hundred percent (100%) of the Fair Market Value of a share of Common Stock on the date of the grant of the Nonstatutory Stock Option to which it relates. (c) Exercise. The Committee may impose conditions on the exercise of a Tandem SAR as may be required to satisfy the requirements of applicable securities laws. A Tandem SAR may be exercised at any time the Nonstatutory Stock Option to which it relates is then exercisable, but only to the extent such Nonstatutory Stock Option is exercisable, and shall otherwise be subject to the conditions applicable to such Nonstatutory Stock Option. When a Tandem SAR is exercised, the Nonstatutory Stock Option to which it relates shall terminate to the extent of the number of shares with respect to which the Tandem SAR is exercised. Similarly, when a Nonstatutory Stock Option is exercised, the Tandem SAR relating to the shares covered by such Nonstatutory Stock Option exercise shall terminate. Any Tandem SAR which is outstanding on the last day of the term of the related Nonstatutory Stock Option shall be automatically exercised on 11 such date for cash, without the need for any action by the Grantee, to the extent of any Appreciation. (d) Settlement. Upon exercise of a Tandem SAR, the holder shall receive, for each share with respect to which the Tandem SAR is exercised, an amount equal to the Appreciation. The Appreciation shall be payable in cash, Common Stock, or a combination of both, at the option of the Committee, and shall be paid within 30 calendar days of the exercise of the Tandem SAR. The number of shares of Common Stock which shall be issuable upon exercise of a Tandem SAR shall be determined by dividing (1) by (2) where (1) is the number of shares of Common Stock as to which the Tandem SAR is exercised multiplied by the Appreciation in such shares and (2) is the Fair Market Value of a share of Common Stock on the exercise date. 2.5 STOCK APPRECIATION RIGHTS INDEPENDENT OF NONSTATUTORY STOCK OPTIONS (a) Grant. The Committee may grant Stock Appreciation Rights independent of Nonstatutory Stock Options ("Independent SARs") to selected Employees and Outside Directors. (b) General Provisions. Each Independent SAR shall be evidenced by an Incentive Plan Agreement. The exercise price per share of Common Stock shall be not less than one hundred percent (100%) of the Fair Market Value of a share of Common Stock on the date of the grant of the Independent SAR. The term of an Independent SAR shall be determined by the Committee and no Independent SAR shall be exercised after the expiration of its term. (c) Exercise. Independent SARs shall be exercisable at such time or times and subject to such terms and conditions as the Committee shall specify in the Incentive Plan Agreement for the Independent SAR grant including, without limitation, conditions on the exercise of an Independent SAR as may be required to satisfy the requirements of applicable securities laws. Unless the Incentive Plan Agreement expressly specifies otherwise, the Committee shall have discretion at any time to accelerate such time or times and otherwise waive or amend any conditions in respect of all or any portion of the Independent SARs held by any Grantee. (d) Settlement. Upon exercise of an Independent SAR, the holder shall receive, for each share specified in the Independent SAR grant, an amount equal to the Spread. The Spread shall be payable in cash, Common Stock, or a combination of both, at the option of the Committee, and shall be paid within 30 calendar days of the exercise of the Independent SAR. The number of shares of Common Stock which shall be issuable upon exercise of an Independent SAR shall be determined by dividing (1) by (2) where (1) is the number of shares of Common Stock as to which the Independent SAR is exercised 12 multiplied by the Spread in such shares and (2) is the Fair Market Value of a share of Common Stock on the exercise date. 2.6 SUPPLEMENTAL PAYMENT ON EXERCISE OF NONSTATUTORY STOCK OPTIONS OR STOCK APPRECIATION RIGHTS The Committee, either at the time of grant or as of the time of exercise of any Nonstatutory Stock Option or Stock Appreciation Right, may provide in the Incentive Plan Agreement for a supplemental payment (the "Supplemental Payment") by the Company to the Grantee with respect to the exercise of any Nonstatutory Stock Option or Stock Appreciation Right. The Supplemental Payment shall be in the amount specified by the Committee, which amount shall not exceed the amount necessary to pay the federal income tax payable with respect to both the exercise of the Nonstatutory Stock Option and/or Stock Appreciation Right and the receipt of the Supplemental Payment, assuming the holder is taxed at the maximum effective federal income tax rate applicable thereto. The Committee shall have the discretion to grant Supplemental Payments that are payable solely in cash or Supplemental Payments that are payable in cash, Common Stock, or a combination of both, as determined by the Committee at the time of payment. Unless otherwise agreed to by the Grantee, the Supplemental Payment shall be paid within 30 calendar days of the date of exercise of a Nonstatutory Stock Option or Stock Appreciation Right (or, if later, within 30 calendar days of the date on which income is recognized for federal income tax purposes with respect to such exercise). SECTION 3. --------- RESTRICTED STOCK 3.1 AWARD OF RESTRICTED STOCK (a) Grant. In consideration of the performance of Employment or other services by any selected Employee or Outside Director, shares of Restricted Stock may be awarded under the Plan by the Committee on such terms and conditions and with such restrictions as the Committee may designate, all of which may differ with respect to each Grantee. Restricted Stock shall be awarded for no additional consideration or such additional consideration as the Committee may determine, which consideration may be less than, equal to or more than the Fair Market Value of the shares of Restricted Stock on the grant date. Each grant or sale of Restricted Stock shall be evidenced by an Incentive Plan Agreement. (b) Immediate Transfer Without Immediate Delivery of Restricted Stock. Subject to the terms of the Incentive Plan Agreement, each Restricted Stock Award shall constitute an immediate transfer of the record and beneficial ownership of the shares of Restricted Stock to the Grantee in consideration of the performance of services as an 13 Employee or Outside Director, as applicable, entitling such Grantee to all voting and other ownership rights, but subject to the restrictions hereinafter specified. Each Restricted Stock Award may limit the Grantee's dividend rights during the Restriction Period in which the shares of Restricted Stock are subject to a "substantial risk of forfeiture" within the meaning given to such term under Section 83 of the Code and restrictions on transfer. Shares of Common Stock awarded pursuant to a grant of Restricted Stock may be issued in the name of the Grantee and held, together with a stock power endorsed in blank, by the Committee or Company or in trust or in escrow pursuant to an agreement satisfactory to the Committee, as determined by the Committee, until such time as the restrictions on transfer have expired. All such terms shall be set forth in the Grantee's Incentive Plan Agreement. 3.2 RESTRICTIONS (a) Restrictive Conditions. Restricted Stock awarded to a Grantee shall be subject to the following restrictions until the expiration of the Restriction Period: (i) the shares of Common Stock included in the Restricted Stock Award shall be subject to one or more restrictions including, without limitation, a restriction that constitutes a "substantial risk of forfeiture" (as defined in Section 3.1(b) above), and to the restrictions on transferability set forth in Section 6.2; (ii) unless otherwise specified by the Committee in the Incentive Plan Agreement, the shares of Common Stock included in the Restricted Stock Award that are subject to restrictions which are not satisfied at the time the Grantee ceases Employment shall be forfeited and all rights of the Grantee to such shares shall terminate without further obligation on the part of the Company at such time; and (iii) any other restrictions that the Committee determines in advance are necessary or appropriate, including, without limitation, rights of repurchase or first refusal in the Company or provisions subjecting the Restricted Stock to a continuing substantial risk of forfeiture in the hands of any transferee. Any such restrictions shall be set forth in the Grantee's Incentive Plan Agreement. (b) Forfeiture of Restricted Stock. If for any reason, the restrictions imposed by the Committee upon Restricted Stock are not satisfied at the end of the Restriction Period, any Restricted Stock remaining subject to such restrictions shall thereupon be forfeited by the Grantee and reacquired by the Company. (c) Removal of Restrictions. The Committee, in its discretion, shall have the authority to remove any or all of the restrictions on the Restricted Stock if it determines that by reason of a change in applicable law or another change in circumstance arising after the grant date of the Restricted Stock Award that such action is appropriate. 14 3.3 RESTRICTION PERIOD The Restriction Period of Restricted Stock shall commence on the date of grant and shall be established by the Committee in the Incentive Plan Agreement setting forth the terms of the Restricted Stock award. 3.4 DELIVERY OF SHARES OF COMMON STOCK Subject to withholding taxes under Section 7.3 and to the terms of the Incentive Plan Agreement, at the expiration of the Restriction Period, a stock certificate evidencing the Restricted Stock (to the nearest full share) with respect to which the Restriction Period has expired shall be delivered to the Grantee free of all restrictions. 3.5 SUPPLEMENTAL PAYMENT ON VESTING OF RESTRICTED STOCK The Committee, either at the time of grant or vesting of Restricted Stock, may provide for a Supplemental Payment by the Company to the holder in an amount specified by the Committee which shall not exceed the amount necessary to pay the federal income tax payable with respect to both the vesting of the Restricted Stock and receipt of the Supplemental Payment, assuming the Grantee is taxed at the maximum effective federal income tax rate applicable thereto. The Committee shall have the discretion to grant Supplemental Payments that are payable solely in cash or Supplemental Payments that are payable in cash, Common Stock, or a combination of both, as determined by the Committee at the time of payment. SECTION 4. --------- PERFORMANCE UNITS AND PERFORMANCE SHARES 4.1 PERFORMANCE BASED AWARDS (a) Grant. The Committee is authorized to grant Performance Units and Performance Shares to selected Employees and Outside Directors. Each grant of Performance Units and/or Performance Shares shall be evidenced by an Incentive Plan Agreement. The Committee may make grants of Performance Units or Performance Shares in such a manner that more than one Performance Period is in progress concurrently. For each Performance Period, the Committee shall establish the number of Performance Units or Performance Shares and the contingent value of any Performance Units or Performance Shares, which may vary depending on the degree to which performance criteria established by the Committee are met. (b) Performance Criteria. At the beginning of each Performance Period, the Committee shall (i) establish for such Performance Period specific financial or non- 15 financial performance objectives as the Committee believes are relevant to the Company's business objectives; (ii) determine the value of a Performance Unit or the number of shares under a Performance Share grant relative to performance objectives; and (iii) notify each Grantee in writing of the established performance objectives and, if applicable, the minimum, target, and maximum Performance Unit or Share value for such Performance Period. (c) Modification. If the Committee determines, in its discretion exercised in good faith, that the established performance measures or objectives are no longer suitable to the Company's objectives because of a change in the Company's business, operations, corporate structure, capital structure, or other conditions the Committee deems to be appropriate, the Committee may modify the performance measures and objectives as it considers to be appropriate, unless such modification would cause the Performance Unit or Share to fail to qualify as "performance-based compensation" under Section 162(m) of the Code and the regulations promulgated thereunder to the extent applicable to the Covered Employee, unless otherwise agreed to by the Covered Employee. (d) Payment. The basis for payment of Performance Units or Performance Shares for a given Performance Period shall be the achievement of those financial and non-financial performance objectives determined by the Committee at the beginning of the Performance Period. If minimum performance is not achieved for a Performance Period, no payment shall be made and all contingent rights shall cease. If minimum performance is achieved or exceeded, the value of a Performance Unit or Performance Share shall be based on the degree to which actual performance exceeded the preestablished minimum performance standards, as determined by the Committee. The amount of payment shall be determined by multiplying the number of Performance Units or Performance Shares granted at the beginning of the Performance Period times the final Performance Unit or Performance Share value. Payments shall be made, in the discretion of the Committee, solely in cash or Common Stock, or a combination of cash and Common Stock, following the close of the applicable Performance Period, in such manner as may be permissible without causing the Grantee to incur liability under Section 16(b) of the Exchange Act. (e) Special Rule for Covered Employees. Without limiting the generality of the foregoing, it is intended that the Committee shall establish performance goals applicable to Performance Units or Performance Shares awarded to Grantees who, in the judgment of the Committee, may be Covered Employees in such a manner as shall permit payments with respect thereto to qualify as "performance-based compensation" as described in Section 162(m)(4)(C) of the Code and in accordance with the regulations promulgated thereunder (including Treas. Reg. Section 1.162-27(f)). It is specifically provided that the material terms of such performance goals for Grantees who, in the judgment of the Committee, may be Covered Employees, shall, until changed by the Committee with the approval of the stockholders, be as follows: (i) the business criteria on which the performance goals shall be based shall be the attainment of such target levels 16 of earnings per share from continuing operations, total stockholder return, Common Stock price per share, sales or market share as may be specified by the Committee; and (ii) the maximum amount of compensation that may be paid under Performance Units and Performance Shares to any one Grantee with respect to any one year shall be Five Million Dollars ($5,000,000). 4.2 SUPPLEMENTAL PAYMENT ON VESTING OF PERFORMANCE UNITS OR PERFORMANCE SHARES The Committee, either at the time of grant or at the time of vesting of Performance Units or Performance Shares (other than Restricted Stock), may provide in the Incentive Plan Agreement for a Supplemental Payment by the Company to the Grantee in an amount specified by the Committee which shall not exceed the amount necessary to pay the federal income tax payable with respect to both the vesting of such Performance Units or Performance Shares and receipt of the Supplemental Payment, assuming the Grantee is taxed at the maximum effective federal income tax rate applicable thereto. The Supplemental Payment shall be paid within 30 days of each date that such Performance Units or Performance Shares vest unless otherwise agreed to by the Grantee. The Committee shall have the discretion to grant Supplemental Payments that are payable in cash, Common Stock, or a combination of both, as determined by the Committee at the time of payment. SECTION 5. --------- OTHER STOCK-BASED AWARDS 5.1 GRANT OF OTHER STOCK-BASED AWARDS Other Stock-Based Awards may be awarded by the Committee to selected Employees and Outside Directors, that are denominated or payable in, valued in whole or in part by reference to, or otherwise related to, shares of Common Stock, as deemed by the Committee, in its discretion, to be consistent with the purposes of the Plan. Other types of Stock-Based Awards include, without limitation, Deferred Stock, purchase rights, shares of Common Stock awarded which are not subject to any restrictions or conditions, convertible or exchangeable debentures, other rights convertible into shares of Common Stock, Incentive Awards valued by reference to the value of securities of or the performance of a specified Subsidiary, division or department, and settlement in cancellation of rights of any person with a vested interest in any other plan, fund, program or arrangement that is or was sponsored, maintained or participated in by the Company or any Parent or Subsidiary. As is the case with other Incentive Awards, Other Stock-Based Awards may be awarded either alone or in addition to or in tandem with any other Incentive Awards or any other plan of the Company or any Parent or Subsidiary. 17 5.2 OTHER STOCK-BASED AWARD TERMS (a) Written Agreement. Each grant of an Other Stock-Based Award shall be evidenced by an Incentive Plan Agreement. (b) Purchase Price. Except to the extent that an Other Stock-Based Award is granted in substitution for an outstanding Incentive Award or is delivered upon exercise of a Stock Option, the amount of consideration required to be received by the Company shall be either (i) no consideration other than services actually rendered (in the case of authorized and unissued shares) or to be rendered, or (ii) in the case of an Other Stock- Based Award in the nature of a purchase right, consideration (other than services rendered or to be rendered) at least equal to 50% of the Fair Market Value of the Common Stock covered by such grant on the date of grant. (c) Performance Criteria and Other Terms. The Committee may specify such criteria, periods or goals for vesting in Other Stock-Based Awards and payment thereof to the Grantee as it shall determine; and the extent to which such criteria, periods or goals have been met shall be conclusively determined by the Committee. Any other terms and conditions of Other Stock-Based Awards shall be determined by the Committee and set forth in the Incentive Plan Agreement. The Committee may also provide for a Supplemental Payment as described in Section 4.2. (d) Payment. Other Stock-Based Awards may be paid in shares of Common Stock or other consideration related to such shares, in a single payment or in installments, and shall be payable on such dates as determined by the Committee, all as specified in the Incentive Plan Agreement. (e) Dividends. The Grantee of an Other Stock-Based Award shall be entitled to receive, currently or on a deferred basis, dividends or dividend equivalents with respect to the number of shares covered by the Other Stock-Based Award, as determined by the Committee and set forth in the Incentive Plan Agreement. The Committee may provide in the Incentive Plan Agreement that such amounts (if any) shall be deemed to have been reinvested in additional Common Stock. SECTION 6. --------- PROVISIONS RELATING TO PLAN PARTICIPATION 6.1 PLAN CONDITIONS (a) Incentive Plan Agreement. Each Grantee to whom an Incentive Award is granted shall be required to enter into an Incentive Plan Agreement with the Company, in 18 such form as is provided by the Committee. The Incentive Plan Agreement shall contain specific terms as determined by the Committee with respect to the Grantee's particular Incentive Award. The Incentive Plan Agreement may include, for example, vesting and other provisions particular to the Incentive Award, as well as provisions that the Grantee (i) shall not disclose any confidential information of the Company acquired during Employment or other service with the Company and (ii) shall abide by all the terms and conditions of the Plan and such other terms and conditions as may be imposed by the Committee. (b) No Right to Employment or Service. Nothing in the Plan or any instrument executed pursuant to the Plan shall create any Employment or service rights (including without limitation, rights to continued Employment or directorship) in any Grantee, or otherwise affect the right of the Company to terminate the Employment or service of any Grantee without regard to the Plan. (c) Securities Requirements. No shares of Common Stock shall be issued or transferred pursuant to an Incentive Award unless and until all then applicable requirements imposed by federal and state securities and other laws, rules and regulations, by any regulatory agencies having jurisdiction, and by any stock market or exchange upon which the Common Stock may be listed, have been fully met. As a condition precedent to the issuance of shares pursuant to the grant or exercise of an Incentive Award, the Company may require the Grantee to take any reasonable action to meet such requirements. The Company shall not be obligated to take any affirmative action in order to cause the issuance or transfer of shares pursuant to an Incentive Award to comply with any such law, rule or regulation. 6.2 TRANSFERABILITY (a) Non-Transferable Awards and Options. No Incentive Award and no right under the Plan, contingent or otherwise, other than Restricted Stock as to which restrictions have lapsed, will be (i) assignable, saleable, or otherwise transferable by a Grantee except by will or by the laws of descent and distribution or pursuant to a qualified domestic relations order, or (ii) subject to any encumbrance, pledge or charge of any nature. No transfer by will or by the laws of descent and distribution shall be effective to bind the Company unless the Committee has been furnished with a copy of the deceased Grantee's enforceable will or such other evidence as the Committee may deem necessary to establish the validity of the transfer. Any attempted transfer in violation of this subsection shall be void and ineffective for all purposes. (b) Ability to Exercise Rights. Subject to a beneficiary designation pursuant to Section 7.4, only the Grantee or his guardian (if the Grantee becomes Disabled), or in the event of his death, his legal representative or beneficiary, may exercise Stock Options, receive cash payments and deliveries of shares, or otherwise exercise rights under the 19 Plan. The executor or administrator of the Grantee's estate, or the person or persons to whom the Grantee's rights under any Incentive Award should pass by will or by the laws of descent and distribution, shall be deemed to be the Grantee's beneficiary or beneficiaries of the rights of the Grantee hereunder and shall thus be entitled to exercise such rights to the same extent as they would have been exercisable by Grantee. 6.3 RIGHTS AS A STOCKHOLDER (a) No Stockholder Rights. Except as otherwise provided in Section 6.3(b), a Grantee of an Incentive Award (or a permitted transferee of such Grantee) shall have no rights as a stockholder with respect to the shares of Common Stock covered by such Incentive Award until the issuance of a stock certificate for such shares. (b) Holder of Restricted Stock. Unless otherwise provided by the Committee in the Incentive Plan Agreement for the grant of a Restricted Stock Award, a Grantee of Restricted Stock, or a permitted transferee of such Grantee, shall have voting and dividend rights as a stockholder before a stock certificate has been issued to him with respect to the shares covered by such Restricted Stock Award. 6.4 LISTING AND REGISTRATION OF SHARES OF COMMON STOCK The Company, in its discretion, may postpone the issuance and/or delivery of shares of Common Stock pursuant to an Incentive Award until completion of such stock exchange listing, registration, or other qualification of such shares under any state and/or federal law, rule or regulation as the Company deems appropriate, and may require any Grantee to make such representations and furnish such information as it considers appropriate in connection with the issuance or delivery of the shares in compliance with such laws, rules and regulations. 6.5 CHANGE IN STOCK AND ADJUSTMENTS (a) Changes in Law or Circumstances. Subject to Section 6.7 which applies in the event of a Change in Control, in the event of any change in applicable laws or any change in circumstances which results in or would result in any dilution of the rights granted under the Plan, or which otherwise warrants equitable adjustment because it interferes with the intended operation of the Plan, then, if the Committee should determine, in its discretion, that such change equitably requires an adjustment in the number or kind of shares of stock or other securities or property theretofore subject, or which may become subject, to issuance or transfer under the Plan or in the terms and conditions of outstanding Incentive Awards, such adjustment shall be made in accordance with such determination. Such adjustments may include changes with respect to (i) the aggregate number of shares that may be issued under the Plan, (ii) the number of shares subject to Incentive Awards, and (iii) the price per share for outstanding Incentive Awards. Any adjustment of an Incentive Stock Option under this paragraph shall be made only to 20 the extent not constituting a "modification" within the meaning of Section 424(h)(3) of the Code unless otherwise agreed to by the Grantee. The Committee shall give notice to each applicable Grantee of such adjustment which shall be effective and binding. (b) Exercise of Corporate Powers. The existence of the Plan or outstanding Incentive Awards hereunder shall not affect in any way the right or power of the Company or its stockholders to make or authorize any or all adjustments, recapitalization, reorganization or other changes in the Company's capital structure or its business or any merger or consolidation of the Company, or any issue of bonds, debentures, preferred or prior preference stocks ahead of or affecting the Common Stock or the rights thereof, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding whether of a similar character or otherwise. (c) Recapitalization of the Company. Subject to Section 6.7 which applies in the event of a Change in Control, if while there are Incentive Awards outstanding, the Company shall effect any subdivision or consolidation of shares of Common Stock or other capital readjustment, the payment of a stock dividend, stock split, combination of shares, recapitalization or other increase or reduction in the number of shares of Common Stock outstanding, without receiving compensation therefor in money, services or property, then the number of shares of Common Stock available under the Plan and the number of Incentive Awards which may thereafter be exercised shall (i) in the event of an increase in the number of shares outstanding, be proportionately increased and the Fair Market Value of the Incentive Awards awarded shall be proportionately reduced; and (ii) in the event of a reduction in the number of shares outstanding, be proportionately reduced, and the Fair Market Value of the Incentive Awards awarded shall be proportionately increased. (d) Reorganization of the Company. Subject to Section 6.7 which applies in the event of a Change in Control, if the Company is reorganized, merged or consolidated, or is a party to a plan of exchange with another corporation, pursuant to which reorganization, merger, consolidation or plan of exchange stockholders of the Company receive any shares of Common Stock or other securities or property, or if the Company should distribute securities of another corporation to its stockholders, each Grantee shall be entitled to receive, in lieu of the number of unexercised Incentive Awards previously awarded, the number of Stock Options, Stock Appreciation Rights, Performance Shares, Restricted Stock shares, or other Stock-Based Awards, with a corresponding adjustment to the Fair Market Value of said Incentive Awards, to which such holder would have been entitled pursuant to the terms of the corporate agreement, if immediately prior to such corporate action, such Grantee had been the holder of record of a number of shares of Common Stock equal to the number of the unexercised Incentive Awards previously awarded to him. For this purpose, Restricted Stock shall be treated the same as unrestricted outstanding shares of Common Stock. 21 (e) Issue of Common Stock by the Company. Except as hereinabove expressly provided and subject to Section 6.7 which applies in the event of a Change in Control, the issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, for cash or property, or for labor or services, either upon direct sale or upon the exercise of rights or warrants to subscribe therefor, or upon any conversion of shares or obligations of the Company convertible into such shares or other securities, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number of, or Fair Market Value of, any Incentive Awards then outstanding under previous awards; provided, however, in such event, Grantees of Restricted Stock shall be treated the same as the holders of outstanding unrestricted shares of Common Stock. 6.6 TERMINATION OF EMPLOYMENT, DEATH, DISABILITY AND RETIREMENT (a) Termination of Employment or Service. Subject to Section 3.2 for Restricted Stock awards, and unless otherwise specifically provided in the Grantee's Incentive Plan Agreement, if the Grantee's Employment or service on the Board, as applicable, is terminated for any reason other than due to his death, Disability or Retirement, any outstanding Incentive Award at the time of such termination shall automatically expire and terminate and no further vesting shall occur. In such event, the Grantee shall be entitled to exercise his rights only with respect to the portion of the Incentive Award that was vested as of the termination date for a period that shall end on the earlier of (i) the expiration date set forth in the Incentive Plan Agreement with respect to the vested portion of such Incentive Award or (ii) the date that occurs sixty (60) calendar days after his termination date. (b) Retirement. Subject to Section 3.2 for Restricted Stock awards, and unless otherwise specifically provided in the Grantee's Incentive Plan Agreement, upon the Retirement of any Employee who is a Grantee: (i) any nonvested portion of any outstanding Incentive Award of the Grantee shall immediately terminate and no further vesting shall occur; and (ii) any vested Incentive Award shall expire on the earlier of (A) the expiration date set forth in the Incentive Plan Agreement with respect to such Incentive Award; or (B) the expiration of (1) six (6) months after the date of Retirement in the case of any Incentive Award other than an Incentive Stock Option, or (2) three (3) months after the date of Retirement in the case of an Incentive Stock Option. (c) Disability or Death. Subject to Section 3.2 for Restricted Stock Awards, and unless otherwise specifically provided in the Grantee's Incentive Plan Agreement, upon termination of Employment or service on the Board, as applicable, as a result of the Grantee's Disability or death: 22 (i) any nonvested portion of any outstanding Incentive Award of the Grantee shall immediately terminate upon termination of Employment or directorship service, as applicable, and no further vesting shall occur; and (ii) any vested Incentive Award shall expire upon the earlier of either (A) the expiration date set forth in the Incentive Plan Agreement or (B) the first anniversary of the Grantee's termination of Employment or directorship service, as applicable, as a result of his Disability or death. (d) Continuation. Subject to the conditions and limitations of the Plan and applicable law and regulation, the Committee and Grantee may provide for the continuation of any Incentive Award for such mutually period and upon such agreed terms and conditions in the event that a Grantee ceases to be an Employee or Outside Director. In the event of any such continuation, a written amendment to the Grantee's Incentive Plan Agreement shall be required. 6.7 CHANGES IN CONTROL (a) Changes in Control. Notwithstanding any contrary provision in the Plan, in the event of a Change in Control (as defined below), the following actions shall automatically occur unless otherwise specifically provided in the Grantee's Incentive Plan Agreement: (i) all of the Stock Options and Stock Appreciation Rights then outstanding shall become 100% vested and immediately and fully exercisable; (ii) all of the restrictions and conditions of any Restricted Stock and any Other Stock-Based Awards then outstanding shall be deemed satisfied, and the Restriction Period with respect thereto shall be deemed to have expired, as of the date of the Change in Control; and (iii) all of the Performance Shares, Performance Units and any Other Stock-Based Awards shall become fully vested, deemed earned in full and promptly paid within thirty (30) days to the Grantees without regard to payment schedules and notwithstanding that the applicable performance cycle, retention cycle or other restrictions and conditions have not been completed or satisfied. For purposes of this Section 6.7, a "Change in Control" means a change in control of the Company of such a nature that would be required to be reported in response to either (i) Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Exchange Act or (ii) Item 1 of Form 8-K promulgated under the Exchange Act, assuming at all times that the Exchange Act applies to the Company; provided further that such a Change in Control shall also be deemed to have occurred at such time as: 23 (i) any "person" (as that term is used in Section 13(d) and 14(d)(2) of the Exchange Act) is or becomes, directly or indirectly, the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of securities representing more than forty percent (40%) of any class of stock of the Company entitled to elect a majority of the Board of the Company or any successor of the Company; or (ii) during any period of two (2) consecutive years, individuals who at the beginning of such period constituted the Board of the Company cease, for any reason, to constitute at least a majority of the Board, unless the election or nomination for election of each new director was approved by a vote of more than one-half (50%) of the directors then in office who were directors at the beginning of the two-year period. (b) Right of Cash-Out. If approved by the Board prior to or within thirty (30) days after such time as a Change in Control has occurred, the Board shall have the right for a forty-five (45) day period immediately following the date that the Change in Control is deemed to have occurred to require all, but not less than all, Grantees to transfer and deliver to the Company all Incentive Awards previously granted to Grantees in exchange for an amount equal to the "cash value" (defined below) of the Incentive Awards. Such right shall be exercised by written notice to all Grantees. For purposes of this Section 6.7(b), the cash value of an Incentive Award shall equal the sum of (i) for cash-denominated Incentive Awards, all cash to which the Grantee would be entitled upon settlement or exercise of such Incentive Award, and/or (ii) for stock options and other stock-denominated Incentive Awards, the excess of the "market value" (defined below) per share over the option exercise price, multiplied by the number of shares subject to such Incentive Award. For purposes of the preceding sentence, "market value" per share shall mean the higher of (i) the average of the Fair Market Value per share on each of the five trading days immediately following the date a Change in Control is deemed to have occurred or (ii) the highest price, if any, offered in connection with the Change in Control. For purposes of this Section 6.7(b), any vesting and other restrictions on the outstanding Incentive Awards shall be deemed to have lapsed and be of no further force or effect as of the Change in Control date unless otherwise specifically provided in the particular Grantee's Incentive Plan Agreement or as agreed to by the Grantee. The amount payable to each Grantee by the Company pursuant to this Section 6.7(b) shall be paid in a cash lump sum, unless the Grantee agrees in writing to another form of distribution, and shall be subject to Section 7.3 for tax withholding. 6.8 AMENDMENTS TO INCENTIVE AWARDS The Committee may waive any conditions or rights with respect to, or amend, alter, suspend, discontinue, or terminate, any unexercised Incentive Award theretofore granted, prospectively or retroactively, with the written consent of the relevant Grantee; provided, however, with respect to a Grantee who is a Covered Employee, the Committee shall have no 24 authority to take any such action to the extent that such action would likely result in the failure of payments under an Incentive Award to qualify as "performance-based compensation" (as described in Section 162(m)(4)(C) of the Code and the regulations promulgated thereunder (including Treas. Reg. Section 1.162-27(f)) where such payments otherwise would have qualified as "performance- based compensation" with respect to the Covered Employee, unless otherwise agreed to by the Covered Employee. 6.9 EXCHANGE OF INCENTIVE AWARDS The Committee may, in its discretion, permit any Grantee to surrender outstanding Incentive Awards in order to exercise or realize his rights under other Incentive Awards or in exchange for the grant of new Incentive Awards, or require holders of Incentive Awards to surrender outstanding Incentive Awards (or comparable rights under other plans or arrangements) as a condition precedent to the grant of new Incentive Awards. 6.10 FINANCING The Company may extend and maintain, or arrange for and guarantee, the extension and maintenance of financing to any Grantee to purchase shares pursuant to exercise of an Incentive Award upon such terms as are approved by the Committee in its discretion. SECTION 7. --------- MISCELLANEOUS 7.1 EFFECTIVE DATE AND GRANT PERIOD This Plan is amended and restated effective May 1, 1997. Unless sooner terminated by the Board, no Incentive Award shall be granted under the Plan after April 29, 2003. 7.2 NO FUNDING Except as provided under Section 3 for Restricted Stock, no provision of the Plan shall require the Company, for the purpose of satisfying any obligations under the Plan, to purchase assets or place any assets in a trust or other entity to which contributions are made or otherwise to segregate any assets, nor shall the Company be required to maintain separate bank accounts, books, records or other evidence of the existence of a segregated or separately maintained or administered fund for such purposes. Grantees shall have no rights under the Plan other than as unsecured general creditors of the Company except that, insofar as they may have become entitled to payment of compensation through performance of services, they shall have the same rights as other Employees or Outside Directors under general law. 25 7.3 WITHHOLDING TAXES (a) Mandatory Withholding. The Company shall have the right to (i) make deductions from any settlement of an Incentive Award made under the Plan, including the delivery of shares, or require shares or cash or both be withheld from any Incentive Award, in each case in an amount sufficient to satisfy withholding of any federal, state or local taxes required by law, or (ii) take such other action as may be necessary or appropriate to satisfy any such withholding obligations. The Committee may determine the manner in which such tax withholding may be satisfied, and may permit whole shares of Common Stock to be used to satisfy required tax withholding based on their Fair Market Value as of the delivery date of such shares in exercise or other satisfaction of the applicable Incentive Award. (b) Incentive Stock Options. With respect to shares received by a Grantee pursuant to the exercise of an Incentive Stock Option, if such Grantee disposes of any such shares within (i) two years from the date of grant of such Option or (ii) one year after the transfer of such shares to the Grantee, the Company shall have the right to withhold from any salary, wages or other compensation payable by the Company to the Grantee an amount sufficient to satisfy federal, state and local tax withholding requirements attributable to such disqualifying disposition. 7.4 DESIGNATION OF BENEFICIARY BY PARTICIPANT A Grantee may name a beneficiary(ies) to receive any payment to which he may be entitled in respect of Incentive Awards in the event of his death, on a beneficiary designation form as is provided by the Committee. A Grantee may change his beneficiary designation from time to time in the same manner. If no designated beneficiary is living on the date on which any amount becomes payable to the beneficiary, such payment will be made to the Grantee's surviving spouse, if applicable, otherwise to the executor or administrator of the Grantee's estate. As used herein, the term "beneficiary" shall then include such person. 7.5 CONFLICTS WITH PLAN In the event of any inconsistency or conflict between the terms of the Plan and an Incentive Plan Agreement, the terms of the Plan shall govern. 7.6 NO GUARANTEE OF TAX CONSEQUENCES Neither the Company nor the Committee makes any commitment or guarantee that any federal, state or local tax treatment will apply or be available to any person participating or eligible to participate hereunder. 26 7.7 MISCELLANEOUS PROVISIONS (a) No Employee, Outside Director, or other person shall have any claim or right to be granted an Incentive Award under the Plan. Neither the Plan nor any action taken hereunder shall be construed as giving any Employee or Outside Director any right to be retained in the employ or other service of the Company or any Parent or Subsidiary. (b) A Grantee's rights and interest under the Plan and any Incentive Award may not be assigned or transferred in whole or in part either directly or by operation of law or otherwise (except in the event of the Grantee's death), including, without limitation, execution, levy, garnishment, attachment, pledge, bankruptcy or in any other manner; and no such right or interest of the Grantee shall be subject to any obligation or liability of such Grantee until paid. (c) No shares of Common Stock shall be issued hereunder unless counsel for the Company is then satisfied that such issuance will be in compliance with applicable federal and state securities laws. (d) The expenses of the Plan shall be borne by the Company. (e) The Plan shall be unfunded. The Company shall not be required to establish any special or separate fund, nor to make any other segregation of assets, to assure the payment of any Incentive Award under the Plan. (f) By accepting any Incentive Award granted under the Plan, each Grantee and each person claiming through him shall be deemed to have indicated his acceptance of the Plan. 7.8 SEVERABILITY In the event that any provision of this Plan shall be held illegal, invalid or unenforceable for any reason, such provision shall be fully severable, but shall not affect the remaining provisions of the Plan, and the Plan shall be construed and enforced as if the illegal, invalid, or unenforceable provision was not included herein. 7.9 GENDER, TENSE AND HEADINGS Whenever the context so requires, words of the masculine gender used herein shall include the feminine and neuter, and words used in the singular shall include the plural. Section headings as used herein are inserted solely for convenience and reference and constitute no part of the interpretation or construction of the Plan. 27 7.10 AMENDMENT AND TERMINATION The Plan may be amended or terminated at any time and from time to time by the Board; provided, however, (1) no amendment that increases the aggregate number of shares of Common Stock which may be issued pursuant to the Plan shall be effective unless and until the same is approved by the stockholders of the Company and (2) no amendment or termination of the Plan shall adversely affect any right of any Grantee with respect to any Incentive Award therefore granted without such Grantee's written consent. Unless earlier terminated, the Plan shall terminate as of midnight on April 29, 2003 and no Incentive Awards shall be issued hereunder after such date. In addition, to the extent that the Committee determines that the listing for qualification requirements of any national securities exchange or quotation system on which the Company's Common Stock is then listed or quoted, or the Code or Treasury regulations issued thereunder, require stockholder approval in order to maintain compliance with such listing or qualification requirements or to maintain any favorable tax advantages or qualifications, then the Plan shall not be amended in such respect without prior approval of the Company's stockholders. 7.11 GOVERNING LAW The Plan shall be interpreted, construed and constructed (a) in accordance with the laws of the State of Texas without regard to its conflicts of law provisions, except as superseded by applicable federal law, and (b) in accordance with applicable provisions of the Code and regulations or other authority issued thereunder by the appropriate governmental authority. 7.12 SECTION 16 COMPLIANCE The Plan, and transactions hereunder by persons subject to Section 16 of the Exchange Act, are intended to comply with all applicable conditions of Rule 16b-3 or any successor exemption provision promulgated under the Exchange Act. To the extent that any provision of the Plan or any action by the Committee or the Board fails, or is deemed to fail, to so comply, such provision or action shall be null and void but only to the extent permitted by law and deemed advisable by the Committee in its discretion. 28 IN WITNESS WHEREOF, Imperial Holly Corporation has caused this amended and restated Plan to be duly executed in its name and on its behalf by its duly authorized officer, to be effective as of May 1, 1997. ATTEST: IMPERIAL HOLLY CORPORATION By: By: ------------------------- -------------------------- Name: Name: ----------------------- ------------------------ Title: Title: ---------------------- ----------------------- 29 EX-10.(E).(4) 3 EXHIBIT 10(E)(4) Exhibit 10(e)(4) IMPERIAL HOLLY CORPORATION SCHEDULE OF BENEFIT RESTORATION AGREEMENTS Name Title - ---- ----- AGREEMENTS WITH FULL VESTING: J. C. Kempner President, Chief Executive Officer and Chief Financial Officer R. W. Hill Managing Director W. F. Schwer Managing Director, Secretary and General Counsel R. E. Henderson Vice President, Administration AGREEMENTS WITH GRADUATED VESTING: P. C. Carrothers Managing Director J. A. Richmond Managing Director EX-10.(I)(2) 4 EXHIBIT 10(I)(2) Exhibit 10(i)(2) IMPERIAL HOLLY CORPORATION SCHEDULE OF CHANGE OF CONTROL AGREEMENTS Name Title - ---- ----- P. C. Carrothers Managing Director D. W. Ehrenkranz Managing Director B. T. Harrison Vice President, Operations Development R. E. Henderson Vice President, Administration R. F. Silva Vice President, Product Development H. P. Mechler Vice President, Accounting K. L. Mercer Vice President and Treasurer C. K. Jones Vice President, Agriculture R. L. Knecht Vice President, Cane Operations R. W. Strickland Vice President, Beet Operations EX-10.(K) 5 SPECIMEN RESTRICTED STOCK AGREEMENT EXHIBIT 10(k) RESTRICTED STOCK AGREEMENT PURSUANT TO THE TERMS OF THE IMPERIAL HOLLY CORPORATION STOCK INCENTIVE PLAN (AS AMENDED AND RESTATED EFFECTIVE MAY 1, 1997) GRANT DATE: MAY 1, 1997 1. GRANT OF RESTRICTED STOCK. On May 1, 1997 (the "Grant Date"), Imperial Holly Corporation, a Texas corporation ("Company"), hereby grants to _______________ ("Grantee") all rights, title and interest in the record and beneficial ownership of _________________ (_______) shares of the common stock, no par value per share, of the Company (the "Restricted Shares"). The Restricted Shares are granted pursuant to the Imperial Holly Corporation Stock Incentive Plan, as amended and restated effective May 1, 1997 (the "Plan"), and are subject to this Agreement and the Plan. By execution of this Agreement, Grantee agrees to be bound by the terms and provisions of this Agreement and the Plan. All capitalized terms have the meanings set forth in the Plan unless otherwise specifically defined herein. All section references herein pertain to sections of this Agreement unless otherwise specifically provided. 2. CUSTODY OF RESTRICTED SHARES. The Restricted Shares shall be issued and registered in the name of the Grantee and held, together with a stock power endorsed in blank, by the Chairman of the Executive Compensation Committee (the "Committee") of the Board of Directors (the "Board") of the Company or his designee. The grant of Restricted Shares shall constitute an immediate transfer of the record and beneficial ownership of such shares to the Grantee; however, the Restricted Shares shall not be transferable by the Grantee until such time as the restrictions on their transfer imposed by the terms hereof have expired and such shares are delivered to or on behalf of the Grantee pursuant to Section 7. No interest, right or benefit in any Restricted Shares shall in any manner be liable for or subject to any debts, obligations, contracts, liabilities or torts of the Grantee until such time as the shares have been delivered pursuant to Section 7. Until such time as the Restricted Shares have been delivered pursuant to Section 7, the shares may not be transferred, pledged, hypothecated or otherwise disposed of, except by will or the laws of descent and distribution, by the Grantee. 3. RISK OF FORFEITURE; STOCK POWER. Grantee shall forfeit the right to receive the Restricted Shares in accordance with Section 5 and, in the event of any such forfeiture, and without any action on the part of Grantee, such forfeited shares shall be transferred to the Company or to any person designated by the Company. Grantee hereby appoints the Chairman of the Committee and any designee of said Chairman, and each of them, as Grantee's attorney-in-fact to transfer such shares in the event of any such forfeiture. Grantee cannot revoke this appointment prior to the delivery of such shares to or on his behalf pursuant to Section 7. 4. THREE-YEAR CLIFF VESTING. Subject to possible accelerated vesting pursuant to Sections 5(a), (b), (c) or (d), the total number of Restricted Shares subject to this Agreement shall become one hundred percent (100%) vested on the third annual anniversary of the Grant Date and shall not be vested in any percent before such vesting date. _________ Grantee's Initials 5. TERMINATION OF EMPLOYMENT OR CHANGE IN CONTROL. In the event of termination of employment of the Grantee, or the occurrence of a Change in Control (as defined in the Plan), Grantee's rights under this Agreement shall be affected as follows: (a) DEATH OR DISABILITY. If Grantee's employment with the Company is terminated due to his death or Disability (as defined in the Plan), then all his Restricted Shares hereunder shall automatically become 100% vested on such termination date. (b) RETIREMENT. If Grantee's employment with the Company is terminated due to his retirement at or after attaining age 62, as determined by the Committee in good faith, then all of his Restricted Shares hereunder shall automatically become 100% vested on such termination date. (c) TERMINATION FOR GOOD REASON. If Grantee is a party to an employment agreement between Grantee and the Company and if Grantee terminates his employment with the Company for Good Reason (as defined in such employment agreement), then all Grantee's Restricted Shares hereunder shall automatically become 100% vested on such termination date. (d) CHANGE IN CONTROL. If a Change in Control (as defined in the Plan) should occur before the Grantee's employment with the Company has been terminated for any reason, then all his nonvested Restricted Shares hereunder shall automatically become 100% vested as of the occurrence date of the Change in Control. Effective as of such Change in Control date, the Restricted Shares shall be fully vested and nonforfeitable regardless of whether Grantee's employment is thereafter terminated. (e) TERMINATION OF EMPLOYMENT. If there is a voluntary or involuntary termination of Grantee's employment with the Company for any reason other than due to one of the reasons specified above in parts (a), (b), (c) or (d) of this Section 5, as determined by the Committee in good faith, then Grantee shall forfeit the right to receive any Restricted Shares hereunder that have not vested pursuant to Section 4 before such termination date. 6. FORFEITURES. Any Restricted Shares forfeited by the Grantee pursuant to Section 5(e) shall be reacquired by the Company without charge or payment pursuant to Section 3. 7. TRANSFER AND DELIVERY OF RESTRICTED SHARES TO GRANTEE. The Committee shall cause to be issued and delivered to Grantee a certificate or certificates for all vested Restricted Shares, free of restrictions hereunder, to or on behalf of Grantee within 30 days from the date that he becomes 100% vested in such Restricted Shares pursuant to Sections 4 or 5 hereof, as applicable; provided, however, in the event of a Change in Control pursuant to Section 5(d), such non-restricted and fully vested shares shall be delivered to Grantee within five days from the Change in Control date. 8. VOTING AND DIVIDEND RIGHTS. The Grantee is entitled to exercise voting rights applicable to the Restricted Shares unless and until forfeited pursuant to Section 6. Dividends declared on the Restricted Shares shall be distributed to the Grantee, and included in his income, unless and until such shares are forfeited pursuant to Section 6. _________ Grantee's Initials 2 9. AMENDMENT AND TERMINATION. This Agreement may be amended or terminated at any time and from time to time. Any amendment or termination must be set forth in a written instrument that is approved by the Committee and executed by both the Grantee and by an appropriate officer on behalf of the Company. 10. NO GUARANTEE OF EMPLOYMENT. The Plan and this Restricted Stock Agreement shall not confer upon the Grantee any right with respect to continuance of employment or other service with the Company, nor shall it interfere in any way with any right that the Company would otherwise have to terminate such employment or service at any time. 11. WITHHOLDING OF TAXES. The Company shall have the right to (a) make deductions from the number of vested Restricted Shares otherwise deliverable to or on behalf of Grantee upon satisfaction of the conditions precedent of this Agreement in such amount as is sufficient to satisfy withholding of any federal, state or local taxes required by applicable law, and (b) take such other action as it deems to be necessary or appropriate to satisfy any tax withholding obligations. 12. NO GUARANTEE OF TAX CONSEQUENCES. The Company and the Committee do not make any commitment or guarantee that any tax treatment will apply or be available to the Grantee or any other person. 13 SEVERABILITY. In the event that any provision of this Agreement shall be held illegal, invalid, or unenforceable for any reason, such provision shall be fully severable and shall not affect the remaining provisions of this Agreement. In such event, the Agreement shall be construed and enforced as if the illegal, invalid, or unenforceable provision had not been included herein. 14. GOVERNING LAW. The Plan and this Agreement shall be construed in accordance with the laws of the State of Texas without regard to its conflicts of law provisions. 15. EFFECTIVE DATE OF GRANT. This Agreement is effective on the Grant Date. ATTEST: IMPERIAL HOLLY CORPORATION By:___________________________ By:__________________________ Name:_________________________ Name:________________________ Title:________________________ Title:_______________________ Date:_________________________ Date:________________________ _________ Grantee's Initials 3 ACCEPTED AND AGREED: ATTEST: GRANTEE By:___________________________ Signature:__________________________ Name:_________________________ Name:_______________________________ Date:_________________________ Date:_______________________________ SPOUSAL CONSENT I, the undersigned spouse, am married (or am deemed under applicable law to be married) to ____________ (the "Grantee). I hereby consent to the terms and provisions of this Restricted Stock Agreement. ____________________________________ Spouse's Signature ____________________________________ Printed Name ____________________________________ Date _________ Grantee's Initials 4 EX-10.(L) 6 SCHEDULE OF RESTRICTED STOCK AGREEMENTS EXHIBIT 10(l) IMPERIAL HOLLY CORPORATION SCHEDULE OF RESTRICTED STOCK AGREEMENTS Name Title - ---- ----- J. C. Kempner President, Chief Executive Officer and Chief Financial Officer P. C. Carrothers Managing Director D. W. Ehrenkranz Managing Director R. W. Hill Managing Director J. A. Richmond Managing Director W. F. Schwer Managing Director, Secretary and General Counsel EX-11 7 EXHIBIT 11 EXHIBIT 11 IMPERIAL HOLLY CORPORATION AND SUBSIDIARIES COMPUTATION OF INCOME (LOSS) PER COMMON SHARE (In Thousands of Dollars, Except Per Share Amounts)
Year Ended March 31, --------------------------------------- 1997 1996 1995 ----------- ------------ ------------ NET INCOME (LOSS) FOR PRIMARY AND FULLY DILUTED COMPUTATION: Income (Loss) Before Extraordinary Item: As reported $ 11,518 $ (3,218) $ (5,365) Adjustments - none ----------- ----------- ----------- As adjusted $ 11,518 $ (3,218) $ (5,365) =========== =========== =========== Extraordinary Item: As reported $ 604 Adjustments - none ----------- As adjusted $ 604 =========== Net Income (Loss): As reported $ 11,518 $ (2,614) $ (5,365) Adjustments - none ----------- ----------- ----------- As adjusted $ 11,518 $ (2,614) $ (5,365) =========== =========== =========== PRIMARY EARNINGS (LOSS) PER SHARE: Weighted average shares of common stock outstanding 12,576,489 10,300,487 10,266,299 Incremental shares issuable from assumed exercise of stock options under the treasury stock method 151,013 26,138 34,142 ----------- ----------- ----------- Weighted average shares of common stock outstanding, as adjusted 12,727,502 10,326,625 10,300,441 =========== =========== =========== Primary earnings (loss) per share: Income (loss) before extra-ordinary item $ 0.90 $ (0.31) $ (0.52) =========== =========== =========== Extraordinary item $ 0.06 =========== Net income (loss) $ 0.90 $ (0.25) $ (0.52) =========== =========== =========== FULLY DILUTED EARNINGS (LOSS) PER SHARE: Weighted average shares of common stock outstanding 12,576,489 10,300,487 10,266,299 Incremental shares issuable from assumed exercise of stock options under the treasury stock method 151,013 55,169 53,504 ----------- ----------- ----------- Weighted average shares of common stock outstanding, as adjusted 12,727,502 10,355,656 10,319,803 =========== =========== =========== Fully diluted earnings (loss) per share: Income (loss) before extra-ordinary item $ 0.90 $ (0.31) $ (0.52) =========== =========== =========== Extraordinary item $ 0.06 =========== Net income (loss) $ 0.90 $ 0.25 $ (0.52) =========== =========== =========== - --------------
This calculation is submitted in accordance with Item 601(b)(11) of Regulation S-K; the amount of dilution illustrated in this calculation is not required to be disclosed pursuant to paragraph 14 of Accounting Principles Board Opinion No. 15. EX-21 8 EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES OF THE COMPANY JURISDICTION OF SUBSIDIARY INCORPORATION ---------- ------------- Holly Sugar Corporation.............................. New York Spreckels Sugar Company, Inc. (1).................... Delaware (1) Merged into Holly Sugar Corporation effective March 31, 1997. EX-23 9 EXHIBIT 23 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 33-30328, Registration Statement No. 33-41769 and in Registration Statement No. 33-68896 of Imperial Holly Corporation, each on Form S-8, of our report dated May 30, 1997 appearing in this Annual Report on Form 10-K of Imperial Holly Corporation for the year ended March 31, 1997. DELOITTE & TOUCHE LLP Houston, Texas June 10, 1997 EX-27 10 EXHIBIT 27
5 This schedule contains summary financial information extracted from the Company's Consolidated Financial Statements for the year ended March 31, 1997 and is qualified in its entirety by reference to such financial statements. 1,000 YEAR MAR-31-1997 APR-01-1996 MAR-31-1997 7,719 48,963 52,157 0 148,026 285,147 296,391 149,989 449,933 151,241 90,619 82,620 0 0 94,336 449,933 752,595 752,595 664,846 664,846 0 0 12,430 17,688 6,170 11,518 0 0 0 11,518 0.92 0.92
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