-----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, PSd6JC3U/tPxxjN2zTprNbMr0/JO/rGeSI3dU94KBOQ3BYFoc6krYxykZbLPZc9k FFX9A5nhqYGJVOSB6rCyxA== 0000899243-98-002276.txt : 19981216 0000899243-98-002276.hdr.sgml : 19981216 ACCESSION NUMBER: 0000899243-98-002276 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981215 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: 0930 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-10307 FILM NUMBER: 98769294 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-K405 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 SEPTEMBER 30, 1998 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 P.O. BOX 9 SUGAR LAND, TEXAS 77487 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) Registrant's telephone number, including area code: (281) 491-9181 Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- COMMON STOCK, WITHOUT PAR VALUE AMERICAN STOCK EXCHANGE RIGHTS TO PURCHASE PREFERRED STOCK AMERICAN STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to the filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $189 million, based upon the last reported sales price of the registrant's Common Stock on the American Stock Exchange on December 10, 1998 and (solely for this purpose) treating all directors, executive officers and 10% shareholders of the registrant as affiliates. The number of shares outstanding of the registrant's Common Stock, as of December 10, 1998, was 32,131,304. DOCUMENTS INCORPORATED BY REFERENCE Certain portions of the registrant's definitive Proxy Statement relating to the registrant's 1999 Annual Meeting of Shareholders are incorporated by reference in Part III hereof. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- TABLE OF CONTENTS PART I Item 1. Business....................................................... 1 Item 2. Properties..................................................... 10 Item 3. Legal Proceedings.............................................. 10 Item 4. Submission of Matters to a Vote of Security Holders............ 10 Executive Officers of the Registrant........................... 11 PART II Item 5. Market for the Registrant's Common Equity and Related Shareholder Matters............................................ 13 Item 6. Selected Financial Data........................................ 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................... 14 Item 7A. Quantitative and Qualitative Disclosures About Market Risk..... 18 Item 8. Financial Statements and Supplementary Data.................... 20 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................................... 20 PART III Item 10. Directors and Executive Officers of the Registrant............. 21 Item 11. Executive Compensation......................................... 21 Item 12. Security Ownership of Certain Beneficial Owners and Management..................................................... 21 Item 13. Certain Relationships and Related Transactions................. 21 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................................................ 22
---------------- The statements regarding future market prices, operating results and Year 2000 readiness 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 ability of the Company to realize cost savings from acquisitions, the ability of the Company and third party vendors and customers to successfully remediate Year 2000 computer issues, 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 In the past 15 months, Imperial Holly Corporation ("Imperial Holly") has made a number of strategic acquisitions. In December 1997, Imperial Holly completed its two-step acquisition of Savannah Foods and Industries, Inc. ("Savannah Foods"), a Georgia-based producer and marketer of sugar and related products. In September 1998, Imperial Holly acquired Wholesome Foods L.L.C ("Wholesome Foods"), a leading supplier of organic sweetners. In November 1998, Imperial Holly acquired Diamond Crystal Specialty Foods, Inc. ("Diamond Crystal"), a leading distributor of nutritional dry mixes, sauces, seasonings, drink mixes and desserts for the foodservice industry. As used herein, the terms "Imperial Holly" and the "Company" refers to Imperial Holly Corporation and its subsidiaries, including Savannah Foods, Wholesome Foods and Diamond Crystal. THE COMPANY The Company is the largest, most geographically diverse and most balanced producer and marketer of refined sugar in the United States. The Company refines raw cane sugar at four refineries located in Texas, Georgia, Florida and Louisiana and produces beet sugar at 11 beet sugar factories located in California, Wyoming, Montana and Michigan. On a pro forma basis for the 12 months ended September 30, 1998, the Company sold approximately 60 million cwt. of refined sugar. The Company offers a broad product line and sells to a wide range of customers directly and through wholesalers and distributors. These customers include (i) retail grocers, (ii) foodservice companies, which include restaurants, healthcare institutions, schools and other institutions, and (iii) industrial customers, which are principally food manufacturers. The Company's sugar products include granulated, powdered, liquid, liquid blends and brown sugars sold in a variety of packaging options (one pound boxes to 100-pound bags, individual packets and in bulk) under various brands (Imperial(R), Holly(R), Spreckels(R), Dixie Crystals(R), Pioneer(R) and Wholesome(R)) or private labels. Complementary non-sugar products marketed by the Company include salt, pepper and other seasonings, non-nutritive sweeteners, non-dairy creamers, nutritional dry mixes, sauces, drink mixes, desserts, plastic cutlery and packets of plastic cutlery with seasonings and other items. In addition, the Company produces selected specialty sugar products including Savannah Gold(TM) (a premium-priced, free-flowing brown sugar), Imbrocon(TM) (a liquid flavoring), Sucanat(TM) (sugar milled from organically grown sugarcane) and specialty sugars used in confections and icings. For the 12 months ended September 30, 1998, the Company had pro forma revenues of approximately $2.0 billion. Imperial Holly was incorporated in 1924 as Imperial Sugar Company and is the successor to a cane sugar plantation and milling operation begun in Sugar Land in the early 1800s that began producing granulated sugar in 1843. In 1988, the Company purchased Holly Sugar Corporation ("Holly") and changed its name to Imperial Holly Corporation. In April 1996, the Company acquired Spreckels Sugar Company ("Spreckels"). The Company completed its acquisition of Savannah Foods in December 1997 and completed its acquisitions of Wholesome Foods and Diamond Crystal in September and November 1998, respectively. The future results of the Company depend in part on the ability of management to consolidate operations and to integrate departments, systems and procedures. This integration may require substantial attention of management. Any inability of the Company to integrate its operations with those of the acquired companies in a timely and efficient manner would adversely affect the Company's ability to realize the planned benefits of the acquisitions, including potential synergies and cost savings. INDUSTRY OVERVIEW Refined sugar can be produced by either processing sugar beets or processing and refining sugarcane. The profitability of cane sugar and beet sugar operations is affected by government programs designed to support the price of domestic crops of sugar beets and sugarcane, which affect cane sugar and beet sugar operations differently. See "-- Sugar Legislation and Other Market Factors". Cane Sugar Production Process. Sugarcane is grown in tropical and semi- tropical climates in the United States and some foreign countries. Raw sugarcane is processed by raw cane mills promptly after harvest into raw sugar, which is approximately 98% sucrose and may be stored for long periods and transported over long distances without affecting its quality. Raw cane sugar imports currently are limited by United States government programs. Cane sugar refineries like those operated by the Company purify raw sugar to produce refined sugar. Operating results of cane sugar refineries are driven primarily by the spread between raw sugar and refined sugar prices. See "-- Sugar Legislation and Other Market Factors". Beet Sugar Production Process. Sugar beets can flourish wherever a five- month growing season is possible. In the United States, sugar beets are grown in Minnesota, North Dakota, Idaho, California, Colorado, Nebraska, Michigan, Washington and Oregon. Harvest periods depend on the growing area, but are generally in the early fall, except in California, where spring and summer harvests occur. Sugar beets are highly perishable and must be processed into refined sugar quickly after harvest to avoid deterioration. Beets may be stored in piles awaiting processing where temperatures are sufficiently cool. Sugar beets are converted to refined sugar through a single continuous process at beet factories. Beet factories are located near the areas in which beets are grown in order to reduce freight costs and the risk of deterioration. The Company's staggered harvest seasons with respect to the sugar beet acreage supplying the Company's 11 sugar beet production facilities allows it to produce beet sugar year round even though the production campaign at any single facility generally lasts no more than 180 days. Operating results are driven primarily by the quantity and quality of sugar beets dedicated to the factory and the net sales prices received for the refined beet sugar. The beet processor shares a portion of the net sales price with growers through various participation or recovery contracts or cooperative arrangements. See "-- Raw Material and Processing Requirements -- Sugar Beet Purchases". Government Regulation. Federal government programs have existed to support the price of domestic crops of sugar beets and sugarcane almost continually since 1934. The regulatory framework that currently affects the domestic sugar industry includes the Federal Agricultural Improvement and Reform Act of 1996 (the "Farm Bill"), which provides for loans on sugar inventories to first processors (i.e., raw sugar mills and beet processors) and implements a tariff rate quota which limits the amount of raw and refined sugar that can be imported into the United States. The North American Free Trade Agreement ("NAFTA"), which limits the amount of sugar that can be imported to and exported from Mexico, has to date had a lesser impact on the United States sugar market. In the crop year ended September 1997, the USDA implemented a program of increasing the tariff rate quota in known quantities at three known dates based on the level of the projected ending stocks-to-use ratio. There was previously no target for the ending stocks-to-use ratio, and the USDA could increase or decrease the quota at will. The Company believes that this administration of the tariff rate quota for foreign sugar has caused the market to be less volatile. The USDA continued this management strategy for the crop year ended September 1998. See "-- Sugar Legislation and Other Market Factors." Domestic Demand. The Company considers its primary competition in the sugar industry to be other cane sugar refiners and beet sugar processors. Selling price and the ability to supply the buyer's quality and quantity requirements in a timely fashion are important competitive factors. The replacement of refined sugar by high fructose corn syrup ("HFCS") and non-nutritive sweeteners in the beverage market was substantially completed over a decade ago. The Company does not currently consider HFCS a significant competitive threat, as refined sugar and HFCS generally support different markets. HFCS is primarily a liquid sweetener and generally does not compete in the dry sugar market. Domestic demand for refined sugar has increased each year since 1986, and the average rate of growth over the five-year period ended September 1997 was 1.6%. The trend in the food manufacturing industry toward production of "low fat" products has increased industrial demand for sugar, as food manufacturers have added sugar to enhance flavor and texture as fat is removed. 2 Domestic Supply. Reduced demand in the early 1980s was absorbed principally by capacity reductions in the cane sugar refining sector. Approximately one- third of domestic cane sugar refining capacity was eliminated between 1981 and 1988. Cane sugar refining capacity remained relatively flat from 1988 until 1998, when the United States Sugar Corporation ("U.S. Sugar") completed construction of a refinery in Florida with a rated annual capacity of approximately 10 million cwt. Growth in refined sugar demand during the last decade has been largely satisfied through increased beet sugar production. In recent years, there have been a number of expansions to existing beet sugar factories to allow for increased acreage dedications. A partnership in which the Company owns a 43% interest recently built a new beet sugar factory in Moses Lake, Washington, which was commissioned in September 1998. The Company believes that the rate of growth of beet sugar production has slowed as most of the beet factory expansions that are economic under current conditions have been completed. The Company believes that further expansion of existing beet factories would require that beets be transported over greater distances, which is often uneconomical. Accordingly, construction of new factory sites would be required for further expansion. See "--Manufacturing Facilities". Domestic Refined Sugar Prices. Given the existing domestic supply and demand situation, the increasing role of beet production and the current status of government regulation, the price of refined sugar in the United States in recent years has been driven primarily by the amount of beet sugar supply. Historically, good crop years have led to relatively soft refined sugar prices, and weak crop years have led to relatively strong refined sugar prices. PRODUCTS AND SALES Refined Sugar. The Company's principal product line is refined sugar, which accounted for approximately 85% of the Company's pro forma consolidated net sales for the twelve months ended September 30, 1998. The Company has a balanced combination of cane and beet sugar sales, with cane sugar constituting approximately 65% and beet sugar constituting 35% of the Company's pro forma refined sugar sales for the 12 months ended September 30, 1998. With the acquisition of Wholesome Foods, the Company now also sells sugar produced from organically grown sugarcane. The Company markets its sugar products to retail grocery, foodservice, and industrial customers by direct sales and through brokers or wholesalers. For the 12 months ended September 30, 1998, the Company's pro forma sales of refined sugar products to retail grocery and foodservice customers accounted for approximately one third of sugar sales, and pro forma sales to industrial customers accounted for the remaining two thirds. Grocery Sales. The Company produces and sells granulated white, brown and powdered sugar to grocery customers in packages ranging from one-pound boxes to 25-pound bags. Retail packages are marketed under the trade names Imperial(R), Dixie Crystals(R), Holly(R), Spreckels(R), Pioneer(R) and Wholesome(R), and are also sold under retailers' private labels. Private label packaged sugar, which represents a significant percentage of the Company's grocery sales, is generally sold at prices lower than those received for branded sugar. The Company seeks to capitalize on its well-known brands to seek to increase sales of higher-margin branded products as a percentage of total grocery sales. Foodservice Sales (Including Sales of Non-Sugar Products). The Company sells numerous products to foodservice customers, including healthcare institutions, ranging from 50-pound bags of sugar to individual packets of sugar, salt, pepper, non-dairy creamer and plastic cutlery, nutritional dry mixes, sauces, seasonings, drink mixes, desserts and diet kits(R) (packets of plastic cutlery with seasonings and other items). The Company believes that the foodservice sector is one of the most rapidly growing segments of the domestic food industry. The Company believes its Savannah Foods and Diamond Crystal acquisitions have positioned the Company to participate in this growing sector. Industrial Sales. The Company produces and sells refined sugar, molasses and other ingredients to industrial customers, principally food manufacturers, in bulk, packaged or liquid form. Food manufacturers principally purchase sugar for use in the preparation of confections, baked products, frozen desserts, canned goods and various other food products. Historically, the majority of the Company's industrial sales are made to customers under fixed price contracts with terms of one year or less. Industrial sales generally provide lower margins than grocery or foodservice sales. 3 Specialty Product Sales. The Company produces and sells specialty sugar products to grocery, foodservice and industrial customers. Specialty sugar products include Savannah Gold(TM), a premium-priced free flowing brown sugar marketed primarily to industrial customers; Imbrocon(TM), a liquid flavoring also marketed to industrial customers; edible molasses; syrups; Sucanat(TM), sugar produced from organically grown sugarcane; and specialty sugars used in confections, fondants and icings. The Company also markets artificial sweeteners including Sweet Thing(R), a saccharin-based sweetener, and Sweet Thing II(R), an aspartame-based sweetener. Sales and Marketing. The Company's products are sold directly by the Company's sales force and through independent brokers. The Company maintains sales offices at its offices in Sugar Land, Texas and Savannah, Georgia and at regional locations across the United States. 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. No customer accounted for 10% or more of the Company's pro forma sales for the 12 months ended September 30, 1998. Seasonality. Sales of refined sugar are moderately seasonal, normally increasing during the summer months because of increased demand of various food manufacturers, including fruit and vegetable packers; shipments of specialty products (brown and powdered sugar) increase in the fourth calendar quarter due to holiday baking needs. Although the refining of cane sugar is not seasonal, the production of beet sugar is a seasonal activity. Each of the Company's beet sugar factories operates during sugar-making campaigns, which generally total 120 days to 180 days in length each year, depending upon the supply of sugar beets available to the factory. Because of the geographical diversity of its manufacturing facilities, the Company is generally able to produce beet sugar year-round. While the seasonal production of sugar beets requires the Company to store significant refined sugar inventory at each factory, the geographic diversity and staggered periods of production enable the Company's total investment in inventories to be reduced. Additionally, these factors reduce the likelihood that adverse weather conditions will affect all the Company's productive areas simultaneously and aid in distribution. Sales of the Company's products to the foodservices industry are not seasonal. By-Products. The Company sells by-products from its beet sugar processing as livestock feeds to dairymen, livestock feeders and livestock feed processors. Such by-products include beet pulp and molasses. The major portion of the beet pulp and molasses produced from sugar beet operations is sold during and shortly after the sugar-making campaigns. By-products from beet sugar processing are marketed in the United States, Europe and Japan. Both the domestic and export markets are highly competitive because of the availability and pricing of by-products of other sugar beet processors and corn wet millers, as well as other livestock feeds and grains. The market price of the Company's by-products relative to the price of competitive feeds and grains is the principal competitive determinant. Among other factors, the weather and seasonal abundance of such feeds and grains may affect the market price of by-products. The Company's by-products pro forma sales for the 12 months ended September 30, 1998 were about 3% of total pro forma sales for such period. Beet Seed. The Company develops, produces and markets commercial seed to beet growers under contract to the Company as well as growers under contract to grow for other beet sugar processors. The Company's beet seed sales program is conducted primarily in Sheridan, Wyoming and Tracy, California. The Company has an agreement with ADVANTA SEEDS, a partnership of D. J. van der Have B.V. and Societe Europeenne de Semences, N.V., S.A. ("ADVANTA"), granting ADVANTA access to the Company's proprietary beet seed breeding material for varietal seed development in exchange for the exclusive marketing rights to ADVANTA's beet seed in certain markets in the United States, Canada and Mexico. ADVANTA introduced novel and improved varietal genetic material into the beet seed industry, which the Company believes may lead to advances in crop yield, sugar content of the beets, resistance to disease and certain plant processing benefits. 4 The Company is also active in sugar beet disease control. Domestic sugar beet growing areas have varying levels of diseases that affect sugar beet quality and quantity as well as the cost of processing. The Company has a sugar beet plant pathology disease control research laboratory in Tracy, California that develops and implements disease control strategies for all of the Company's sugar beet growing areas. The Company communicates information about agricultural practices to growers through its computerized agriculture information systems and printed material, including its magazine Sugar Beet Update, published semiannually. The Company believes that these activities strengthen its relationship with its growers, which, in turn, leads to increased acreage available to the Company and enhanced production and profitability at its facilities. Inulin. In 1995, the Company and Cooperatie Cosun U.A., a Netherlands sugar processor ("Cosun"), formed Imperial-Suiker Unie, L.L.C. ("ISU"), a 50-50 joint venture to introduce and market inulin in North America. Inulin is a natural carbohydrate with multifunctional properties with potential both as a nutritional additive and as a functional food ingredient. Inulin is extracted from chicory roots by a process similar to sugar extraction from sugar beets. ISU has the exclusive right to market in Canada, Mexico and the United States inulin and inulin-based products produced by Cosun. The Company has also entered into various agreements to provide certain marketing and administrative services to the joint venture. MANUFACTURING FACILITIES The Company owns and operates four cane sugar refineries and 11 sugar beet factories. Each facility is served by adequate transportation and is maintained in good operating condition. The facilities operate continuously when in operation. The following table shows the location and capacity of each of the Company's refineries and processing plants:
APPROXIMATE DAILY MELTING CAPACITY CANE SUGAR REFINERIES (POUNDS OF RAW SUGAR) --------------------- --------------------- Port Wentworth, Georgia............................. 6,300,000 Gramercy, Louisiana................................. 4,200,000 Sugar Land, Texas................................... 4,000,000 Clewiston, Florida.................................. 1,700,000 ---------- Total............................................. 16,200,000 ==========
APPROXIMATE DAILY SLICING CAPACITY BEET SUGAR FACTORIES (TONS OF SUGAR BEETS) -------------------- --------------------- Brawley, California................................ 9,000 Mendota, California................................ 4,200 Tracy, California.................................. 5,000 Woodland, California............................... 4,000 Caro, Michigan..................................... 4,000 Carrollton, Michigan............................... 3,400 Sebewaing, Michigan................................ 6,000 Croswell, Michigan................................. 4,000 Sidney, Montana.................................... 7,000 Torrington, Wyoming................................ 5,700 Worland, Wyoming................................... 3,600 ------ Total............................................ 55,900 ======
The Company also has a 43% limited partnership interest in a partnership that owns a beet sugar factory in Moses Lake, Washington with a 6,000-ton per day slicing capacity. The partnership constructed the factory, which was commissioned in September 1998 and is now operating in its first campaign. The Company has an agreement with the partnership to manage the operations at the factory and market its sugar production. 5 In May 1998, the Company ceased sugar beet processing at its factory in Hereford, Texas. The Company continues to operate an ion exclusion facility at the factory to separate refined sugar from molasses, and also uses the facility as a distribution center. The following table shows the location and approximate square footage of the Company's foodservice manufacturing facilities, each of which is owned by the Company:
SQUARE FOODSERVICE MANUFACTURING FACILITIES FEET ------------------------------------ ------- Savannah, Georgia................................................. 314,500 Bondurant and Mitchellville, Iowa................................. 152,513 Bremen, Georgia................................................... 132,400 Perrysburg, Ohio.................................................. 131,000 Moore, Oklahoma................................................... 106,769 Visalia, California............................................... 101,500 Wilmington, Massachusetts......................................... 76,540 Indianapolis, Indiana............................................. 63,240
RAW MATERIALS AND PROCESSING REQUIREMENTS Raw Cane Sugar. The Company purchases raw cane sugar from both domestic and foreign sources of supply located in Louisiana, Florida and various foreign countries. The availability of foreign raw cane sugar is determined by the import quota level designated by applicable regulation. See "-- Industry Overview" and "-- Sugar Legislation and Other Market Factors". The Company has not experienced difficulties in the past in contracting sufficient quantities of raw cane sugar to supply its refineries. Raw cane sugar purchase contracts can provide for the delivery of a single cargo or for multiple cargoes over a specified period or a specified percentage of the seller's production over one or more crop years. Contract terms may provide for fixed prices but generally provide for prices based on the futures market during a specified period of time. The contracts provide for a premium if the quality of the raw cane sugar is above a specified grade or a discount if the quality is below a specified grade. Contracts generally provide that the seller pays freight, insurance charges and other costs of shipping. The Company contracts to purchase raw cane sugar substantially in advance of the time it delivers the refined sugar produced from that purchase. Historically, the majority of the Company's industrial sales are under fixed price contracts; in order to mitigate price risk in raw and refined sugar commitments, the Company manages the volume of refined sugar sales contracted for future delivery with the volume of raw cane sugar purchased for future delivery. The Company uses the raw sugar futures market as a hedging and purchasing mechanism as management deems appropriate. U.S. Sugar, which supplies approximately 14% of the Company's supply of raw cane sugar, has notified the Company that it intends to terminate its supply contract with the Company effective October 31, 2001. In addition, U.S. Sugar has completed construction of a refinery in Florida. See "Industry Overview-- Domestic Supply". The Company expects that adequate supplies of raw can sugar from other sources will be available upon the expiration of this contract. No assurance can be given, however, that such supplies will be available. The Company has access to approximately 350,000 short tons of aggregate raw sugar storage capacity, including 215,000 short tons of storage capacity at its Port Wentworth, Georgia refinery. At Port Wentworth, the Company has the ability to segregate its raw sugar inventory, which allows the Company to store bonded sugar for re-export. This capability facilitates the Company's participation in the re-export market. The Company has been active in such market in the past and expects to be active in the future when pricing and market conditions are favorable. 6 Sugar Beet Purchases. The Company purchases sugar beets from over 2,400 independent growers, which supply the Company's factories with approximately 310,000 acres of beets. The sugar beets are purchased under contracts negotiated with associations representing growers. The Company contracts for acreage prior to the planting season based on estimated demand, marketing strategy, processing capacity and historical crop yields. The type of contract used in the western United States provides for payments to the grower based on the sugar content of the sugar beets delivered by each grower and the net selling price of refined beet sugar during the specified contract year. The type of contract used in Michigan provides for growers to share in the revenues generated by sales of pulp and molasses, as well as sales of refined sugar. Most grower contracts provide for a premium to the growers for delivering beets of superior quality. The net selling price is the gross sales price less certain marketing costs, including packaging costs, brokerage, freight expense and amortization costs for certain facilities used in connection with marketing. Use of this type of participating contract reduces the Company's exposure to inventory price risks on its sugar beet purchases. The Company's beet sugar operations are dependent upon the quantity, quality and proximity of sugar beets available to its factories. Sugar beet acreage varies depending on factors such as prices anticipated by growers for sugar beets versus alternative crops, prior crop quality, productivity, availability of irrigation and weather conditions. In addition, the quantity and cost of refined sugar subsequently produced from the sugar beet crop may be materially affected by the acreage harvested, disease, insects and unfavorable weather conditions during the growing, harvesting, processing and storage season. Once harvested, sugar beets are purchased by the Company and, in some locations, stored in piles until processed. Under the contracts used in Michigan, the beet growers continue to share the risk of deterioration of the stored sugar beets with the Company. However, the Company contractually accepts the risk with respect to the majority of its stored sugar beets. The Company believes that the geographic diversity of its growing areas reduces the risk that adverse conditions will occur company-wide; however, there can be no assurance that the Company's results of operations will not be adversely affected by such risks. Energy. The primary fuel used by the Company is natural gas, although certain of the Company's factories use significant amounts of coal. The Company generates a substantial portion of the electricity used at its refineries and factories. Fuel oil can be used by the Company at certain locations both as an alternative energy source when the price is more attractive and as a backup to natural gas in the event of curtailment of gas deliveries. Natural gas and coal supplies are typically purchased under contracts for terms of one year or more, which do not contain minimum quantity requirements. Pricing of natural gas contracts is generally fixed for the term or indexed to a spot market index. The Company has also utilized financial tools such as swaps and caps to stabilize the price for gas purchases under indexed contracts. Coal is available in abundant supply domestically and the Company is able to purchase coal competitively. The Company owns a royalty interest in a coal seam methane gas project in the Black Warrior Basin of Alabama as an additional indirect hedge against future natural gas price increases. Other Raw Materials. Foundry coke and limestone are used in the beet sugar extraction process. The Company generally purchases coke under contracts with one to three-year terms and utilizes rail transportation to deliver the coke to factories. Domestic coke supplies may become tighter due to environmental restrictions; the Company has the option of converting existing coke-fired equipment to natural gas should the availability and economics of coke so dictate. The Company owns a 50% share of a limestone quarry in Warren, Montana that supplies the Sidney, Montana and Worland, Wyoming factories with their annual limestone requirements. The Company operates a limestone quarry in Cool, California that supplies the Company's Northern California beet processing factories with limestone. These quarries do not normally supply the Company's other factories because of high freight costs. Limestone required in the other factory operations is generally purchased from independent sources under contracts with one to five-year terms. 7 RESEARCH The Company operates research and development centers in Sugar Land, Texas and Savannah, Georgia where it conducts research relating to manufacturing process technology, factory operations, food science and new product development. In Savannah, the Company operates a "pilot plant" in connection with its research and development activities where it has developed sugar products co-crystallized with other flavors such as honey. The Company has begun to market the co-crystallized specialty products produced at the pilot plant to certain customers. COMPETITION The Company competes with other cane sugar refiners and beet sugar processors and, in certain product applications, with producers of other nutritive and non-nutritive sweeteners. Additionally, the Company's foodservice operations compete with other foodservice suppliers. Selling price and the ability to supply the buyer's quality and quantity requirements in a timely fashion are important competitive factors. Certain competing beet sugar processors have expanded their production capacity significantly over the past five years. The additional sugar marketed as a result of this expansion has acted to reduce refined sugar prices at times during this period. To a lesser extent, refined sugar also competes with non-nutritive or low-calorie sweeteners, principally aspartame and, to lesser extents, saccharin and acesulfam-k. SUGAR LEGISLATION AND OTHER MARKET FACTORS The Company's business and results of operations are substantially affected by market factors, principally the domestic prices for refined sugar and raw cane sugar, and the quality and quantity of sugar beets available to the Company. These market factors are influenced by a variety of forces, including the number of domestic acres contracted to grow sugar beets, prices of competing crops, weather conditions and United States farm and trade policies. See "-- Industry Overview" and "-- Raw Materials and Processing Requirements". The principal legislation currently supporting the price of domestic crops of sugar beets and sugarcane is the Farm Bill, which became effective July 1, 1996 and extended the sugar price support program for sugarcane and sugar beets until June 30, 2003. CCC Loans. Pursuant to the Farm Bill, the Commodity Credit Corporation ("CCC") is obligated annually to make loans available to domestic first processors of sugar on existing sugar inventories from the current crop year production. CCC loans under the Farm Bill are recourse loans unless the tariff rate quota for imported sugar is set at a level in excess of 1.5 million short tons raw value ("STRV"). If the tariff rate quota exceeds 1.5 million STRV, CCC loans will become non-recourse and processors will be obligated to pay participating growers a predetermined minimum support price. CCC loans mature September 30 of each year and in no event more than nine months after the month in which the loan was made. Under the Farm Bill, processors may forfeit sugar to the USDA; if the tariff rate quota is below 1.5 million STRV and the collateral for the loan is inadequate to cover the loan amount, the USDA may proceed against the processor for the difference between the loan amount and the proceeds from the sale of the forfeited sugar. Additionally, a processor will be penalized approximately 1 cent per pound for each pound of sugar forfeited. Tariff Rate Quota. Under the Farm Bill, the USDA utilizes the import quota and the forfeiture penalty to affect sugar price supports and prevent forfeitures under the CCC loan program. The USDA annually implements a tariff rate quota for foreign sugar, which has the effect of limiting the total available supply of sugar in the United States. The tariff rate quota controls the supply of raw sugar by setting a punitive tariff on all sugar imported for domestic consumption that exceeds the determined permitted imported quantity and is designed to make the importation of the over-quota sugar uneconomical. To the extent a processor sells refined sugar for export from the United States, it is entitled to import an equivalent quantity of non-quota eligible foreign raw sugar. The tariff rate quota for sugar to be allowed entry into the United States during the year ended September 30, 1998 was 1.7 million STRV; for the year ending September 30, 1999 the tariff rate quota is expected to be 1.3 million STRV. The USDA currently determines the quota by targeting an ending stocks-to-use ratio. A portion of the quota will be made available immediately with separate allocations made available periodically 8 depending on domestic production of raw cane sugar and refined beet sugar. The Company believes that this implementation of the tariff-rate quota for foreign sugar under the Farm Bill has caused the market for raw cane sugar to be less volatile, and as a result has helped to reduce fluctuations in profitability of the Company's cane sugar operations. NAFTA. NAFTA contains provisions that allow for Mexico to increase its sugar exports to the United States if Mexico is projected to produce a net surplus of sugar. The terms of NAFTA restrict Mexico's exports, which may be in the form of raw or refined sugar, to the United States to no more than 25,000 STRV annually until the year 2000. Mexico's exports to the United States will be further increased in the event Mexico produces a sugar surplus for two consecutive years prior to the year 2000 or at any time thereafter. The Company's management believes that increased importation of raw cane sugar from Mexico could benefit the Company because the proximity of its Sugar Land, Texas refinery to Mexico could allow the Company to import raw cane sugar more cheaply than its competition. However, if imports are in the form of refined cane sugar, the domestic refined sugar market may be adversely affected. EMPLOYEES At November 30, 1998, the Company employed approximately 3,800 year-round employees. In addition, the Company employed 4,200 seasonal employees over the course of the crop year ended September 1998. While the Company's Port Wentworth, Georgia and Clewiston, Florida refineries employ non-union labor, the Company has entered into collective bargaining agreements with union representatives with respect to the employees at all of the Company's other refineries and processing plants. The Company's Wilmington, Massachusetts; Bondurant and Mitchellville, Iowa; and Moore, Oklahoma foodservices facilities employ non-union labor and its Indianapolis, Indiana foodservices facility operates under a collective bargaining agreement. The Company believes its employee and union relationships are good. ENVIRONMENTAL REGULATION The Company's operations are governed by various federal, state and local environmental regulations. These regulations impose effluent and emission limitations, and requirements regarding management of water resources, air resources, toxic substances, solid waste and emergency planning. The Company has obtained or is making application for the permits required under these regulations. Waste water odor control is being addressed at the Company's facilities in Tracy and Woodland, California. The soil and ground water at the Company's Mendota, California facility have high concentrations of salts. The Company has developed a prevention plan to install a clay cap on the areas of concern and to treat the affected ground water. This plan will be accomplished over a 20 to 30-year period with an expected annual cost ranging from $40,000 to $120,000. The Company has recorded a liability for the estimated costs of this project. The Company's Torrington, Wyoming facility has made significant operational modifications in order to meet more restrictive state solid waste and groundwater regulations. In November 1998, the Company, through its Diamond Crystal subsidiary, received a Request for Information Pursuant to Section 104 of the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") and Section 3007 of Resource Conservation and Recovery Act ("RCRA") relative to the Beede Waste Oil Site in Plainstow, New Hampshire (the "Site"). A response to the information request is due January 4, 1999. The Company has initiated, but has not yet completed, its preliminary review and cannot identify a connection between Diamond Crystal and the transporters identified for the Site. 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 testing requirements and more stringent permit limitations have resulted in increasing environmental costs, and the Company expects that the cost of compliance will continue to increase. Additional capital expenditures will be required to comply with future environmental protection standards, although the amount of any further expenditures cannot be accurately estimated. Management does not believe that compliance will have a materially adverse impact on the Company's capital resources, operating results or financial condition. 9 ITEM 2. PROPERTIES The Company owns each of its cane sugar refineries, sugar beet processing plants and foodservices manufacturing facilities. The Company owns its corporate headquarters in Sugar Land, Texas and leases other office space and contracts for throughput and storage at warehouses and distribution stations. The Company owns additional acreage at its factories and refineries which is used primarily for settling ponds and as buffers from nearby communities or is leased as farm and pasture land. Substantially all of these assets are subject to liens securing the Company's bank debt. See "Business -- Manufacturing Facilities" and "Business -- Other Raw Materials". ITEM 3. LEGAL PROCEEDINGS The Company is a party to litigation and claims which are normal in the course of its operations; while the results of such litigation and claims cannot be predicted with certainty, the Company believes the final outcome of such matters will not have a materially adverse effect on its results of operations or consolidated financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders during the quarter ended September 30, 1998. 10 EXECUTIVE OFFICERS OF THE REGISTRANT Executive officers of Imperial Holly are elected annually to serve for the ensuing year or until their successors have been elected. The following table sets forth certain information with respect to the executive officers of Imperial Holly:
NAME AGE* POSITIONS ---- ---- --------- James C. Kempner........ 59 President and Chief Executive Officer Roger W. Hill........... 59 Managing Director; President of Holly William W. Sprague III.. 42 Managing Director; President of Savannah Foods Mary L. Burke........... 35 Managing Director and Chief Financial Officer Peter C. Carrothers..... 59 Managing Director Douglas W. Ehrenkranz... 41 Managing Director James M. Kelley......... 54 Managing Director Benjamin A. Oxnard, Jr.. 63 Managing Director John A. Richmond........ 52 Managing Director David Roche............. 50 Managing Director William F. Schwer....... 51 Managing Director, General Counsel and Assistant Secretary Mark S. Flegenheimer.... 37 Vice President; President of Michigan Sugar Company H. P. Mechler........... 45 Vice President -- Accounting Karen L. Mercer......... 36 Vice President and Treasurer Alan K. Lebsock......... 46 Controller Roy L. Cordes, Jr....... 51 Secretary
- -------- * As of December 10, 1998. 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. Kempner became President and Chief Executive Officer in 1993. Mr. Kempner served as Executive Vice President from 1988 to 1993 and also served as Chief Financial Officer from 1988 to April 1998. Mr. Hill became a Managing Director in October 1995. He served as Executive Vice President from 1988 to 1995. Mr. Hill also has been President of Holly since 1988. Mr. Hill joined Holly in 1963 and served in various capacities, including Vice President -- Agriculture and Executive Vice President. Mr. Sprague became a Managing Director in January 1998 and has been President of Savannah Foods since 1995. He served as President and Chief Operating Officer of Savannah Foods from 1993 to 1995. Mr. Sprague began his career with Savannah Foods in 1983 and has held various other positions with Savannah Foods since then. Ms. Burke joined the Company and was named a Managing Director and Chief Financial Officer in April 1998. Prior to joining the Company, Ms. Burke was Vice President, Food & Commodity Group with Harris Trust & Savings Bank from 1992 to 1998 and served in various other capacities from 1985 to 1992. Mr. Carrothers became a Managing Director in October 1995. He served as Senior Vice President -- Operations from March to October 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. Mr. Ehrenkranz joined the Company in April 1995 as Director of Sales, Planning & Marketing- Development and became Vice President -- Sales and Marketing in September 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. 11 Mr. Kelley became a Managing Director in February 1998. Since 1995, he has served as President of Dixie Crystals(R) Brands, Inc. Mr. Kelley joined Savannah Foods in 1973 and has held various other position with Savannah Foods since then. Mr. Oxnard became a Managing Director in February 1998. Since 1996, he has served as Senior Vice President -- Raw Sugar of Savannah Foods. Mr. Oxnard joined Savannah Foods in 1983 as Vice President -- Raw Sugar. 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 joined Holly in 1973 and has held various other positions with Holly since then. Mr. Roche became a Managing Director in February 1998. Since 1996, he has served as Senior Vice President of Savannah Foods and President of Michigan Sugar Company; in 1997 also became President of Savannah Foods Industrial Inc. Mr. Roche has held various other positions since he joined Savannah Foods in 1976. Mr. Schwer became a Managing Director in October 1995 and has served as General Counsel since 1989. Mr. Schwer became Assistant Secretary in 1998. He also served as Senior Vice President from 1993 to 1995. Mr. Schwer joined Holly as Assistant General Counsel in 1988. Mr. Flegenheimer became a Vice President of the Company and President of Michigan Sugar Company in October 1998. Mr. Flegenheimer joined Michigan Sugar in 1994 as Vice President of Administration and became Vice President and Chief Operating Officer in 1996. Prior to joining Michigan Sugar he was Executive Vice President and Chief Operating Officer of Amerop Sugar Corporation, New York, New York, a commodity trading firm. 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 in April 1997 and has served as Treasurer since 1994. She joined the Company in 1993. Prior to joining the Company, she was employed by First City, Texas -- Houston, National Association and Texas Commerce Bank, National Association. The last position she held at Texas Commerce Bank was Vice President -- Commercial Lending. 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. Mr. Cordes joined the Company as Deputy General Counsel in September 1997. He became Secretary of the Company in July 1998. Prior to joining the Company, Mr. Cordes was in private law practice from 1995 to 1997 and was a judge in Fort Bend County, Texas from 1991 to 1994. 12 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 December 3, 1998 there were 2,264 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 per share declared for the periods set forth below:
SALES PRICE ------------- CASH THREE MONTHS ENDED HIGH LOW DIVIDEND ------------------ ------ ------ -------- June 30, 1996...................................... $12.50 $ 7.50 -- September 30, 1996................................. 16.75 11.25 -- December 31, 1996.................................. 16.00 14.50 -- March 31, 1997..................................... 15.38 10.50 -- June 30, 1997...................................... 13.38 9.88 -- September 30, 1997................................. 16.00 11.63 $0.03 December 31, 1997.................................. 14.38 9.75 0.03 March 31, 1998..................................... 12.13 8.31 0.03 June 30, 1998...................................... 10.19 8.75 0.03 September 30, 1998................................. 9.94 6.44 0.03
ITEM 6. SELECTED FINANCIAL DATA. Selected financial data for the last six fiscal periods is as follows (in thousands of dollars, except per share data):
SIX MONTHS YEAR ENDED ENDED YEAR ENDED MARCH 31, SEPTEMBER 30, SEPTEMBER 30, -------------------------------------- 1998(1) 1997(2)(3) 1997(3) 1996 1995 1994 ------------- ------------- -------- -------- -------- -------- For The Period: Net Sales............. $1,783,091 $406,682 $752,595 $616,450 $586,925 $655,498 Operating Income (Loss)............... 38,939 20,359 28,423 (2,431) (2,091) (4,566) Income (Loss) Before Extraordinary Item (4).................. (5,835) 9,951 11,518 (3,218) (5,365) (7,965) Net Income (Loss)..... (7,834) 9,951 11,518 (2,614) (5,365) (7,965) Per Share Data: Basic Income (Loss) Per Share: Before Extraordinary Item(4)............ $ (0.24) $ 0.70 $ 0.92 $ (0.31) $ (0.52) $ (0.78) Net Income (Loss)... (0.32) 0.70 0.92 (0.25) (0.52) (0.78) Diluted Income (Loss) Per Share: Before Extraordinary Item............... (0.24) 0.69 0.90 (0.31) (0.52) (0.78) Net Income (Loss)... (0.32) 0.69 0.90 (0.25) (0.52) (0.78) Cash Dividends Declared............. 0.12 0.03 -- 0.04 0.16 0.32 At Period End: Total Assets.......... $1,179,800 $457,619 $449,933 $325,319 $374,124 $393,660 Long-term Debt--Net... 525,893 81,304 90,619 89,800 100,010 100,044 Total Shareholders' Equity............... 352,907 192,959 176,956 111,043 109,977 114,737
- -------- (1) Includes the results of Savannah Foods since October 17, 1997, net of minority interest through December 22, 1997, as discussed in Note 2 to the Consolidated Financial Statements. (2) In October 1997, the Company changed its fiscal year end from March 31 to September 30. (3) Includes the results of Spreckels since April 19, 1996, as discussed in Note 2 to the Consolidated Financial Statements. (4) See Note 6 to the Consolidated Financial Statements for description of extraordinary items. 13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. LIQUIDITY AND CAPITAL RESOURCES As a result of the completion of the Savannah acquisition, the Company had substantial increases in sales, costs and expenses, assets, liabilities and its level of indebtedness. The pro forma financial information included in Note 2 to the Consolidated Financial Statements present the combined results of the companies as if the acquisition and related financing transactions had occurred prior to the earliest period presented. The Company's primary capital requirements are expected to include debt service, capital expenditures and working capital. The primary sources of capital are expected to be cash flow from operations and borrowings under the Company's revolving credit facility. Long-term debt as of September 30, 1998 was $525.9 million. At September 30, 1998, the Company had $170 million available under its $200 million revolving credit facility. In November 1998, the Company borrowed $102 million under the revolving credit facility to finance the acquisition of Diamond Crystal as discussed in Note 2 to the Consolidated Financial Statements. Based upon current and anticipated future operations and anticipated future cost savings, the Company believes that capital resources will be adequate to meet anticipated future capital requirements. There can be no assurance, however, that the Company will realize sufficient cost savings or generate sufficient cash flow that, together with the other sources of capital, will enable the Company to service its indebtedness, or make anticipated capital expenditures. If the Company is unable to generate sufficient cash flow from operations or to borrow sufficient funds in the future to service its debt, it may be required to sell assets, reduce capital expenditures, refinance all or a portion of its existing indebtedness, or obtain additional financing. The Company's financing agreements described in Note 6 to the Consolidated Financial Statements impose various restrictions and covenants on the Company which could potentially limit the Company's ability to respond to market conditions, to provide for unanticipated capital investments, to raise additional debt or equity capital, or to take advantage of business opportunities. The Company's leverage also reduces the Company's ability to take these actions. The Company's senior credit facility incurs interest at variable rates. The Company has entered into interest rate swap arrangements with notional amounts aggregating $180 million, to limit its exposure to future increases in interest rates. Capital expenditures for fiscal 1998 were $42 million and included the completion of major projects to expand the Sidney, Montana factory, as well as to add bulk sugar storage and high speed packaging equipment at the Sugar Land refinery. Fiscal 1999 capital expenditures are expected to approximate $32 million, and include additional production and packaging efficiency upgrades, as well as continuation of the Company's computer systems initiative discussed below. The Company has a 43% limited partnership interest in a sugar beet processing facility in Moses Lake, Washington that was commissioned in September 1998. The facility has not reached full production due to operational factors associated with the start-up. The partnership may require additional financing in the future. The Company has developed, and is in the process of implementing, plans to address the possible exposures related to the impact on its computer systems of the year 2000 ("Y2K"). The Company's efforts have been focused in four areas: (1) technology infrastructure, including hardware and computer operating software; (2) application software for key financial, informational and operational systems; (3) process control technology at each of the Company's production facilities; and (4) third party readiness. These efforts are being coordinated with the Company's strategic initiative to replace its major management information systems with newly acquired client-server based software from PeopleSoft USA, Inc. The Company estimates that its infrastructure project is 80% complete, including remediation of the mainframe and mid-range computers in the Company's Savannah, Georgia and Sugar Land, Texas offices, and installation of the client-server computers for the PeopleSoft implementation. The remaining infrastructure effort is principally to complete testing and remediation or replacement of personal computers and local area network servers. The Company's plan for Y2K compliance of application software includes remediation of certain systems and replacement of others. Remediation of application software processed in Savannah, Georgia was completed 14 in fiscal 1998. The Company expects to complete remediation of systems processed in Sugar Land, Texas by the second quarter of fiscal 1999. The initial phase of replacement with PeopleSoft applications of non-Y2K compliant applications was implemented in fiscal 1998 and replaced the majority of the Company's non-compliant systems. The replacement of remaining non-compliant systems, principally human resource applications, is expected to be completed by June 30, 1999. If such changes are not completed on a timely basis, the Company believes it can utilize the Y2K compliant software currently being used by the Savannah operations. Management at each of the Company's production facilities is reviewing and assessing the year 2000 impacts on hardware and software, including embedded computer chips, utilized for manufacturing process control. The Company believes that it has substantially completed identification of, and expects to complete remediation by June 30, 1999 of, manufacturing control technology which may materially affect its manufacturing operations. The Company has also initiated discussions with major vendors and customers concerning their year 2000 readiness, and is evaluating their responses and developing contingency plans should such third parties not complete required system modifications. Contingency plans could include identifying alternate vendors for required services and materials or developing manual procedures for automated processes. Costs to modify existing application systems are expected to be less than $1 million, approximately half of which was incurred in fiscal 1998. New hardware and software purchases, including purchases related to the PeopleSoft initiative, are estimated to total $8.5 million over a two year period, including $3.5 million which was capitalized in fiscal 1998. No material costs were incurred on these projects prior to fiscal 1998. The failure to correct a material year 2000 problem could result in an interruption in, or a failure of, certain normal business activities or operations. Such failures could materially and adversely affect the Company's results of operations, liquidity and financial condition. Due to the general uncertainty inherent in the Y2K problem, resulting in part from the uncertainty of the year 2000 readiness of third party supplies and customers, the Company is unable to determine at this time whether the consequences of year 2000 failures will have a material impact on the Company's results of operations, liquidity or financial condition. The year 2000 efforts described above are expected to significantly reduce the Company's level of uncertainty about the Y2K problem and, in particular, about the year 2000 compliance and readiness of such third parties. The Company believes that, with the implementation of new business systems and completion of the projects as scheduled, the possibility of significant interruptions of normal operations should be reduced. Readers are cautioned that forward-looking statements contained in this year 2000 discussion should be read in conjunction with the Company's disclosures on the inside cover page of this Form 10-K. The Financial Accounting Standards Board has issued a number of new accounting standards discussed in Note 1 to the Consolidated Financial Statements. These standards, which become effective in future fiscal years, establish additional accounting and disclosure requirements. Management is evaluating what, if any, effects such requirements may have on the Company's consolidated financial statements. INDUSTRY ENVIRONMENT The Company's results of operations are substantially dependent on market factors, including domestic prices for refined sugar and raw cane sugar, and the quantity and quality of sugarbeets available to the Company. These market factors are influenced by a variety of external forces that the Company is unable to predict, including the number of domestic acres contracted to grow sugarcane and sugarbeets, prices of competing crops, weather conditions and United States farm and trade policy. The domestic sugar industry is subject to substantial influence by legislative and regulatory actions. The current farm bill limits the importation of raw cane sugar, affecting the supply and cost of raw material available to the Company's cane refineries. See "Business-- Sugar Legislation and Other Market Factors" and "--Competition" and "-- Industry Overview". Weather conditions during the growing, harvesting and processing seasons, the availability of acreage to contract for sugarbeets, as well as the effects of diseases and insects, may materially affect the quality and quantity of sugarbeets available for purchase as well as the costs of raw materials and processing. See "Business--Raw Materials and Processing Requirements". 15 RESULTS OF OPERATIONS Fiscal 1998 As a result of the Savannah acquisition, the Company had substantial increases in sales, costs and expenses. Additionally, in October 1997, the Company changed its fiscal year from March 31 to September 30. Accordingly the operating results of the fiscal year ended September 30, 1998 are not directly comparable to the results for any prior fiscal year. The following pro forma financial information presents the Company's results of operations for the twelve months ended September 30, 1998 and 1997 as if the acquisition of Savannah and related financing transactions had occurred on, and as if the Company had changed its fiscal year as of, September 30, 1996 (in thousands of dollars):
(PRO FORMA) TWELVE MONTHS ENDED SEPTEMBER 30, ---------------------- 1998 1997 ---------- ---------- Net sales........................................ $1,852,637 $1,957,537 Costs and expenses: Cost of sales.................................. 1,674,619 1,717,971 Selling, general and administrative............ 67,563 97,900 Asset impairment and other charges............. 18,287 -- Depreciation and amortization.................. 50,972 44,252 ---------- ---------- Operating income................................. 41,196 97,414 Interest expense................................. (51,689) (54,987) Realized securities gains........................ 2,181 43 Other income..................................... 7,073 1,750 ---------- ---------- Income (loss) before income taxes................ (1,239) 44,220 Provision for income taxes....................... 3,024 19,562 ---------- ---------- Net income (loss)................................ $ (4,263) $ 24,658 ========== ==========
Pro forma net sales decreased $104.9 million or 5.3% for the twelve months ended September 30, 1998, primarily due to lower market prices for refined sugar as a result of a larger domestic beet crop in the fall of 1997. Sugar sales volumes were approximately 1% lower on a pro forma basis. Historically, significant portions of the Company's industrial sales were 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 for industrial sales tend to lag market price changes. The Company has announced higher asking prices for refined sugar for industrial contracts commencing October 1, 1998. Contracting activity to date has taken place at a much slower rate than in past years and, as a result, industrial sales commitments for fiscal 1999 are at lower volumes with much of the industrial business being done on a spot sales basis. Pro forma cost of sales for the twelve months ended September 30, 1998 decreased $43.4 million or 2.6%, resulting in gross margin before depreciation of 9.6% compared to 12.1% for the prior twelve-month period. Margins on refined sugar sales were negatively affected by lower sugar prices and higher beet sugar costs. 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 and, in some cases, byproducts, between the Company and the grower. Use of this type of contract reduces the Company's exposure to price risk on sugarbeet purchases so long as the contract net selling price does not fall below the regional minimum support prices established by the USDA. Consequently, the decrease in the unit selling price of refined beet sugar resulted in decreases in the unit cost of sugarbeets purchased, mitigating the impact on beet sugar sales margins. Beet sugar costs during fiscal 1998 were adversely impacted by the unusually mild winter in the Northern Rocky Mountain Region, affecting sugarbeets in storage, reducing production yields, and increasing processing costs. Beet sugar cost continued to be adversely affected by low acreage at the Company's Torrington, Wyoming and Hereford, Texas factories. Record spring rains in California delayed factory start-ups, adversely impacting beet quality in the late summer and fall months. The Company recorded a $3.8 million charge in the second fiscal quarter for the expected impact on industrial sales commitments of higher costs resulting from such 16 abnormal weather. Partially offsetting these factors were efficient operations at the Company's Michigan and Southern California beet sugar factories and Savannah cane refineries. Raw cane sugar prices were not materially changed in fiscal 1998 compared to the pro forma prior period resulting in decreased margins as refined prices declined. In February 1998, the Company announced that it would not process sugar beets at the Hereford factory in fall 1998. Severance and other cash closure costs related to this decision totaling $974,000 were provided for in the quarter ended March 31, 1998. Additionally, the Company recorded an impairment loss of $12,538,000 on Hereford's assets for the difference in their fair value and their carrying costs. Pro forma selling, general and administrative costs were $30.3 million lower for the twelve months ended September 30, 1998 compared to the same periods of the prior year due to reductions in general and administrative costs, primarily incentive compensation, relocation and corporate overhead costs. Following the Savannah acquisition the Company reorganized to eliminate duplication and streamline administrative functions and recorded a charge in its second fiscal quarter of $975,000 in connection with a 14% reduction in staff. This and other measures produced cost savings in excess of $20 million in fiscal 1998, the majority of which was in selling, general and administrative expenses. Pro forma interest expense for the twelve months ended September 30, 1998 was lower than the comparable period of the prior year as a result of both lower short-term interest rates and reduced revolving credit borrowings. The minority interest in the earnings of Savannah charged to fiscal 1998 results of operations is for the period from October 17, 1997 through December 22, 1997, when Savannah became a wholly owned subsidiary. Other income increased due to higher dividends, lower costs related to farm land lease operations and gains recognized on sale of a former beet sugar factory site and a distribution facility. Six Months Ended September 30, 1997 Net sales increased $12.7 million or 3.2% in the six months ended September 30, 1997 compared to the six months ended September 30, 1996, primarily as a result of higher refined sugar prices. Price increases resulted from smaller sugar beet crops in the fall of 1995 and 1996. Sugar sales volumes increased modestly during the six months, principally due to higher beet sugar sales. Cost of sales increased $7.7 million or 2.2% which, coupled with the increase in sales, resulted in the gross margin before depreciation improving to 14.2% of sales from 13.4%. Unit sugar gross margins improved as reductions in raw sugar costs and improved beet sugar operations more than offset higher sugar beet costs resulting from high selling prices and higher cane refining costs. The increase in sales prices during the six month period resulted in an increase in the cost of sugar beets under the participatory purchase contracts, mitigating the improvement in gross margin. As discussed in Note 1 to the Consolidated Financial Statements, Imperial Holly utilizes LIFO inventory for sugar inventories. During the six months ended September 30, 1997, Imperial Holly liquidated beginning inventory layers at costs below current year levels, reducing cost of sales approximately $.7 million. Selling, general and administrative expenses increased $1.6 million or 5.5% during the six-month period as increases in warehousing and advertising costs more than offset reduction in general and administrative costs, principally resulting from closure of Spreckels Sugar Company's Pleasanton, California office. Interest expense declined $1.0 million during the six month period as reduced long and short-term borrowings more than offset higher short-term interest rates. In April 1997, Imperial Holly purchased and retired $8.3 million of its senior notes due 1999. Operating cash flow allowed the reduction in average short-term borrowings by approximately $19.0 million during the period. Realized gains on marketable securities decreased $383,000; net unrealized gains which have not been recognized in Imperial Holly's results of operations increased $8.3 million to $28.3 million during the six months ended September 30, 1997. Imperial Holly's effective income tax rate was 37% for the six months ended September 30, 1997, which is higher than the statutory federal rate primarily due to state income taxes. 17 Year Ended March 31, 1997 Net sales increased $136.1 million or 22.1% in fiscal 1997 as a result of almost equal contributions from higher sugar sales prices and volumes, as well as higher beet pulp sales prices. Sugar sales prices increased as a result of smaller than usual sugar beet crops in the fall of 1995 and 1996. Increases in cane sugar sales volumes and the additional volumes attributable to the Spreckels acquisition more than offset lower sales by Imperial Holly's beet sugar operations resulting from lower refined sugar inventories in the first half of the fiscal year. Beet pulp prices began increasing late in fiscal 1996 as a result of higher feed grain prices and returned to more normal levels in the latter part of fiscal 1997. Cost of sales increased $100.9 million or 18.3% and gross margin before depreciation improved to 13.4% of sales in fiscal 1997 from 10.6% in fiscal 1996. Unit sugar sales margins improved as reductions in cane sugar unit manufacturing costs resulting from increased volumes and reductions in raw cane sugar costs offset higher energy costs and higher beet sugar manufacturing costs owing to reduced throughput at three of Imperial Holly's beet sugar factories. Additionally, winter flooding disrupted rail service in Northern California requiring the diversion of harvested beets in Oregon and Washington to Imperial Holly's Sidney, Montana factory. The delays in processing these beets, as well as the Sidney beets, affected beet quality and impacted processing, reducing sugar recovery and increasing costs several million dollars. The increase in sales prices for beet sugar resulted in an increase in cost of sugar beets under the participatory purchase contracts described above. Selling, general and administrative expenses increased $4.5 million resulting from increases in volume related selling and distribution costs and incentive compensation as well as increases in administrative costs associated with Spreckels Sugar Company's Pleasanton, California office which was closed in Imperial Holly's second fiscal quarter. Interest expense--net, 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 Imperial Holly's results of operations increased $6.2 million and are detailed in Note 3 to Imperial Holly's Consolidated Financial Statements. The components of income tax expense and its relationship to statutory rates are detailed in Note 7 to the Consolidated Financial Statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company uses raw sugar futures and options in its inventory purchasing programs. Gains and losses on such transactions are matched to specific inventory purchases and charged or credited to cost of sales as such inventory is sold. The Company does not enter into futures or option transactions for trading purposes. The information below presents the Company's domestic futures positions outstanding as of September 30, 1998. The Company's world sugar futures and option positions are not material to its consolidated financial position, results of operations or cash flows.
EXPECTED MATURITY EXPECTED MATURITY 1999 2000 ----------------- ----------------- Futures Contracts (short positions): Contract Volumes (cwt.)............. 1,122,000 8,000 Weighted Average Contract Price (per cwt.).............................. $ 22.11 $ 22.13 Contract Amount..................... $24,810,000 $173,000 Weighted Average Fair Value (per cwt.).............................. $ 22.10 $ 22.20 Fair Value.......................... $24,799,000 $174,000
The above information does not include either the Company's physical inventory or its fixed price purchase commitments for raw sugar. 18 The Company has material amounts of long-term debt with interest rates that float with market rates, exposing the Company to interest rate risk. The Company has attempted to reduce this risk by entering into interest rate swap agreements for a portion of such floating rate debt. The table below provides information about the Company's derivative financial instruments and other financial instruments that are sensitive to changes in interest rates, including interest rate swaps and debt obligations. For debt obligations, the table presents principal cash flows and related weighted average interest rates by expected maturity dates. For interest rate swaps, the table presents notional amounts and weighted average interest rates by expected (contractual) maturity dates. Notional amounts are used to calculate the contractual payments to be exchanged under the contract. Weighted average variable rates are based on implied forward rates in the treasury yield curve at the reporting date. AT SEPTEMBER 30, 1998
EXPECTED MATURITY DATE FISCAL YEAR ENDING SEPTEMBER 30, --------------------------------------------------------- THERE- FAIR 1999 2000 2001 2002 2003 AFTER TOTAL VALUE ---- ----- ----- ----- ------ ------ ------ ------ (IN MILLIONS OF DOLLARS) LIABILITIES Long-term debt: Fixed rate debt....... $0.8 $ 6.5 $ 0.4 -- -- $250.0 $257.7 $245.2 Average interest rate................. 7.7% 8.3% 7.4% -- -- 9.7% 9.7% Variable rate debt.... $6.7 $11.6 $13.6 $10.6 $109.4 $123.8 $275.7 $275.7 Average interest rate................. 7.4% 7.3% 7.3% 7.3% 7.2% 7.2% 7.2% INTEREST RATE DERIVATIVES Interest rate swaps: Variable to fixed....... $6.7 $ 7.1 $ 8.6 $ 9.1 $ 30.5 $113.8 $175.8 $ (8.7) Average pay rate...... 6.1% 6.1% 6.1% 6.1% 6.1% 6.1% 6.1% Average receive rate.. 5.4% 5.3% 5.3% 5.3% 5.2% 5.2% 5.2%
19 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 ten fiscal quarters is as follows (in thousands of dollars, except per share amounts):
BASIC EARNINGS INCOME (LOSS) (LOSS) PER SHARE --------------------- -------------------- BEFORE NET BEFORE NET CASH NET GROSS EXTRAORDINARY INCOME EXTRAORDINARY INCOME DIVIDENDS SALES MARGIN ITEM (LOSS) ITEM (LOSS) PER SHARE -------- ------- ------------- ------- ------------- ------ --------- Fiscal Year Ended March 31, 1997: June 30, 1996......... $179,905 $22,978 $ 4,149 $ 4,149 $ 0.40 $ 0.40 -- September 30, 1996.... 214,050 18,761 2,928 2,928 0.25 0.25 -- December 31, 1996..... 189,935 16,166 1,496 1,496 0.11 0.11 -- March 31, 1997........ 168,705 19,737 2,945 2,945 0.21 0.21 -- Transition Period Ended September 30, 1997 (1): June 30, 1997......... $197,758 $26,952 $ 7,294 $ 7,294 $ 0.51 $ 0.51 $ -- September 30, 1997.... 208,924 16,121 2,657 2,657 0.19 0.19 0.03 Fiscal Year Ended September 30, 1998(2): December 31, 1997(3).. $434,867 $39,131 $ (142) $(2,141) $(0.01) $(0.14) $0.03 March 31, 1998(4)..... 414,967 31,132 (17,217) (17,217) (0.64) (0.64) 0.03 June 30, 1998......... 456,087 48,751 5,275 5,275 0.19 0.19 0.03 September 30, 1998.... 477,170 53,225 6,249 6,249 0.23 0.23 0.03
- -------- (1) In October 1997, the Company changed its fiscal year end from March 31 to September 30. (2) Includes the results of Savannah Foods since October 17, 1997, net of minority interest through December 22, 1997, as discussed in Note 2 to the Consolidated Financial Statements. (3) Net loss for the first quarter of fiscal 1998 included an extraordinary loss of $1,999,000 from the purchase of senior notes as discussed in Note 6 to the Consolidated Financial Statements. (4) Results of operations for the second quarter of fiscal 1998 include pre- tax charges of $975,000 related to costs of a workforce reduction, $3,800,000 related to expected losses on industrial sales commitments and $13,512,000 for costs associated with the closure of the Company's Hereford, Texas 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. 20 PART III ITEM 10. DIRECTOR AND EXECUTIVE OFFICERS OF THE REGISTRANT The information set forth under the captions "Election of Directors -- Nominees", "-- Continuing Directors" and "-- Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive Proxy Statement for its 1999 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. 21 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a)(1) Financial Statements.
ITEM PAGE ---- ---- Independent Auditors' Report.......................................... F-1 Consolidated Balance Sheets at September 30, 1998 and 1997............ F-2 Consolidated Statements of Income for the year ended September 30, 1998, the six months ended September 30, 1997, and the years ended March 31, 1997 and 1996.............................................. F-3 Consolidated Statements of Changes in Shareholders' Equity for the year ended September 30, 1998, the six months ended September 30, 1997 and the years ended March 31, 1997 and 1996..................... F-4 Consolidated Statements of Cash Flows for the year ended September 30, 1998, six months ended September 30, 1997, and the years ended March 31, 1997 and 1996.................................................... 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(e)(3) --Amendment to Rights Agreement dated December 11, 1998. *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")).
22 *3(g)(1) --Investor Agreement dated August 29, 1996 by and among the Company, Greencore Group plc and Earlsfort Holdings B.V. (incorporated by reference to Exhibit 4.3 to the Company's Current Report on Form 8-K dated September 5, 1996 (File No. 1-10307) (the "September 5, 1996 Form 8-K")). *3(g)(2) --Registration Rights Agreement dated August 29, 1996 by and among the Company, Greencore Group plc and Earlsfort Holdings B.V. (incorporated by reference to Exhibit 4.2 to the September 5, 1996 Form 8-K). 3(g)(3) --Amendment to Investor Agreement and Registration Rights Agreement dated November 19, 1998 by and among the Company, Greencore Group plc and Earlsfort Holdings B.V. *3(h)(1) --Agreement and Plan of Merger, dated September 12, 1997, among Imperial Holly Corporation, IHK Merger Sub Corporation and Savannah Foods & Industries, Inc. (incorporated by reference to Exhibit 2.1 to the Company's Registration Statement on Form S-4 (Registration No. 333-40445) (the "Savannah S-4")). *3(h)(2) --Agreement and Plan of Merger, dated September 4, 1998, as amended by amendment dated as of October 22, 1998, among Imperial Holly Corporation, IHK Acquisition Corp. and DSLT Inc. (incorporated by reference to Exhibit 99.2 to the Company's Current Report on Form 8- K dated November 2, 1998). *4(a)(1) --Amended and Restated Credit Agreement dated as of December 22, 1997 among Imperial Holly Corporation, as Borrower, the Several Lenders from time to time Parties thereto, Lehman Brothers, Inc., as Arranger, Lehman Brothers Commercial Paper, Inc., as Syndication Agent and Harris Trust and Savings Bank, as Administrative and Collateral Agent (incorporated by reference to Exhibit 4(a)(2) to the Company's Registration Statement on Form S-4 (Registration No. 333-44955)(the "Exchange Offer S-4")). *4(a)(2) --Amended and Restated Guarantee and Collateral Agreement dated, as of December 22, 1997, made by Imperial Holly Corporation and certain of its Subsidiaries in favor of Harris Trust and Savings Bank, as Collateral Agent (incorporated by reference to Exhibit 4(a)(2) to the Exchange Offer S-4). *4(b)(1) --Indenture dated as of December 22, 1997 between the Company, certain subsidiaries of the Company and The Bank of New York, as Trustee, relating to the Company's 9-3/4% Senior Subordinated Notes due 2007 (including form of 9-3/4% Senior Subordinated Note due 2007 and form of Subsidiary Guarantee) (incorporated by reference to Exhibit 4(b) to the Exchange Offer S-4)). *4(b)(2) --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) (incorporated by reference to Exhibit 10(a) to the Company's Annual Report on Form 10-K for the year ended March 31, 1997 (File No. 1-10307) (the "1997 Form 10- K")).
23 10(b)(1) --Specimen of the Company's Amendment to Employment Agreement for certain of its officers. 10(b)(2) --Schedule of Employment Agreements. 10(b)(3) --Employment Agreement with W.W. Sprague III dated as of December 23, 1997. *10(c) --Specimen of the Company's Severance Pay Agreements for certain of its officers (incorporated by reference to Exhibit 10.2 to the September 1990 Form 10-Q). *10(d)(1) --Imperial Holly Corporation Salary Continuation Plan (as amended and restated effective August 1, 1994) (incorporated by reference to Exhibit 10(b)(1) to the September 1994 Form 10-Q). *10(d)(2) --Specimen of the Company's Salary Continuation Agreement (Fully Vested) (incorporated by reference to Exhibit 10(b)(2) to the September 1994 Form 10-Q). *10(d)(3) --Specimen of the Company's Salary Continuation Agreement (Graduated Vesting) (incorporated by reference to Exhibit 10(b)(3) to the September 1994 Form 10-Q). *10(d)(4) --Schedule of Salary Continuation Agreements (incorporated by reference to Exhibit 10(d)(4) to the Company's Annual Report on Form 10-K for the year ended March 31, 1996 (File No. 1-10307) (the "1996 Form 10-K")). *10(e)(1) --Imperial Holly Corporation Benefit Restoration Plan (as amended and restated effective August 1, 1994) (incorporated by reference to Exhibit 10(c)(1) to the September 1994 Form 10-Q). *10(e)(2) --Specimen of the Company's Benefit Restoration Agreement (Fully Vested) (incorporated by reference to Exhibit 10(c)(2) to the September 1994 Form 10-Q). *10(e)(3) --Specimen of the Company's Benefit Restoration Agreement (Graduated Vesting) (incorporated by reference to Exhibit 10(c)(3) to the September 1994 Form 10-Q). *10(e)(4) --Schedule of Benefit Restoration Agreements (incorporated by reference to Exhibit 10(e)(4) to the 1996 Form 10-K). *10(f)(1) --Imperial Holly Corporation Executive Benefits Trust (incorporated by reference to Exhibit 10.5 to the September 1990 Form 10-Q). *10(f)(2) --First Amendment to the Company's Executive Benefits Trust dated June 4, 1991 (incorporated by reference to Exhibit 10(g)(2) to the 1994 Form 10-K). *10(g) --Imperial Holly Corporation 1989 Nonemployee Director Stock Option Plan (incorporated by reference to Exhibit A to the Company's Proxy Statement dated June 16, 1989 for the 1989 Annual Meeting of Shareholders, File No. 0-16674). *10(h) --Imperial Holly Corporation Retirement Plan For Nonemployee Directors (incorporated by reference to Exhibit 10(j) to the 1994 Form 10-K). *10(i)(1) --Specimen of the Company's Change of Control Agreement (incorporated by reference to Exhibit 10(d)(1) to the September 1994 Form 10-Q). *10(i)(2) --Schedule of Change of Control Agreements (incorporated by reference to Exhibit 10(i)(2) to the 1997 Form 10-K). *10(j) --Independent Consultant Agreement between I. H. Kempner III and the Company (incorporated by reference to Exhibit 10(k) to the 1996 Form 10-K). *10(k) --Specimen of the Company's Restricted Stock Agreement with certain of its officers (incorporated by reference to Exhibit 10(k) to the 1997 Form 10-K).
24 *10(l) --Schedule of Restricted Stock Agreements (incorporated by reference to Exhibit 10(l) to the 1997 Form 10-K). *10(m) --Agreement of Limited Partnership of ChartCo Terminal, L.P. (incorporated by reference to Exhibit 10(j) to the 1990 Form 10-K). 21 --Subsidiaries of the Company. 23 --Independent Auditors' Consent
(b)Reports on Form 8-K. During the three months ended September 30, 1998, the Company did not file a Current Report on Form 8-K. The Company filed a Current Report on Form 8-K dated November 2, 1998. 25 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, ON DECEMBER 11, 1998. 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 DECEMBER 11, 1998.
SIGNATURE CAPACITY --------- -------- /s/ James C. Kempner President, Chief Executive Officer, and - ------------------------------------ Director (Principal Executive Officer) James C. Kempner /s/ Mary L. Burke Managing Director and Chief Financial - ------------------------------------ Officer (Principal Financial Officer) Mary L. Burke /s/ H. P. Mechler Vice President, Accounting - ------------------------------------ (Principal Accounting Officer) H. P. Mechler /s/ I. H. Kempner, III Chairman of the Board of Directors - ------------------------------------ I. H. Kempner, III /s/ John D. Curtin, Jr. Director - ------------------------------------ John D. Curtin, Jr. /s/ David J. Dilger Director - ------------------------------------ David J. Dilger /s/ Edward O. Gaylord Director - ------------------------------------ Edward O. Gaylord /s/ Gerald Grinstein Director - ------------------------------------ Gerald Grinstein /s/ Ann O. Hamilton Director - ------------------------------------ Ann O. Hamilton
26
SIGNATURE CAPACITY --------- -------- /s/ Robert L. Harrison Director - ------------------------------------ Robert L. Harrison /s/ Harris L. Kempner, Jr. Director - ------------------------------------ Harris L. Kempner, Jr. /s/ Henry E. Lentz Director - ------------------------------------ Henry E. Lentz /s/ Kevin C. O'Sullivan Director - ------------------------------------ Kevin C. O'Sullivan /s/ Fayez Sarofim Director - ------------------------------------ Fayez Sarofim /s/ William W. Sprague, III Director - ------------------------------------ William W. Sprague, III /s/ Daniel K. Thorne Director - ------------------------------------ Daniel K. Thorne
27 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 consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Imperial Holly Corporation and subsidiaries at September 30, 1998 and 1997 and the results of their operations and their cash flows for the year ended September 30, 1998, the six-month transition period ended September 30, 1997 and for each of the two years in the period ended March 31, 1997 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Houston, Texas December 9, 1998 F-1 IMPERIAL HOLLY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, ------------------- 1998 1997 ---------- -------- (IN THOUSANDS OF DOLLARS) ASSETS ------ CURRENT ASSETS: Cash and temporary investments........................... $ 2,877 $ 9,354 Marketable securities.................................... 59,478 55,883 Accounts receivable--trade............................... 139,870 62,158 Inventories: Finished products...................................... 142,886 92,815 Raw and in-process materials........................... 25,869 17,623 Supplies............................................... 36,174 16,937 Deferred costs and prepaid expenses...................... 39,135 27,805 ---------- -------- Total current assets................................. 446,289 282,575 NOTES RECEIVABLE........................................... -- 1,285 OTHER INVESTMENTS.......................................... 20,872 14,646 PROPERTY, PLANT AND EQUIPMENT--Net......................... 398,193 154,751 GOODWILL AND OTHER INTANGIBLES--Net of accumulated amortization of $7,327,000 in 1998 and $402,000 in 1997... 279,410 1,310 OTHER ASSETS............................................... 35,036 3,052 ---------- -------- TOTAL................................................ $1,179,800 $457,619 ========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Accounts payable--trade................................. $ 106,041 $ 53,923 Short-term borrowings................................... 1,161 43,091 Current maturities of long-term debt.................... 7,555 1,173 Deferred income taxes--net.............................. 27,586 24,327 Other current liabilities............................... 43,717 29,659 ---------- -------- Total current liabilities........................... 186,060 152,173 ---------- -------- LONG-TERM DEBT--Net of current maturities................. 525,893 81,304 DEFERRED INCOME TAXES--Net................................ 33,781 21,236 DEFERRED EMPLOYEE BENEFITS AND OTHER CREDITS.............. 81,159 9,947 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............................................. 268,804 83,707 Stock held by benefit trust............................. (14,367) -- Treasury stock.......................................... (1,452) -- Retained earnings....................................... 80,150 90,870 Unrealized securities gains--net of income taxes........ 19,772 18,382 ---------- -------- Total shareholders' equity.......................... 352,907 192,959 ---------- -------- TOTAL............................................... $1,179,800 $457,619 ========== ========
See notes to consolidated financial statements. F-2 IMPERIAL HOLLY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED SIX MONTHS ENDED YEAR ENDED MARCH 31, SEPTEMBER 30, SEPTEMBER 30, ---------------------- 1998 1997 1997 1996 ------------- ---------------- ---------- ---------- (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS) NET SALES............... $1,783,091 $ 406,682 $ 752,595 $ 616,450 ---------- ---------- ---------- ---------- COSTS AND EXPENSES: Cost of sales......... 1,610,852 348,869 651,677 550,782 Selling, general and administrative....... 65,358 30,668 57,722 53,193 Asset impairment and other charges (Note 11)............ 18,287 -- -- 2,225 Depreciation and amortization......... 49,655 6,786 14,773 12,681 ---------- ---------- ---------- ---------- Total............... 1,744,152 386,323 724,172 618,881 ---------- ---------- ---------- ---------- OPERATING INCOME (LOSS)................. 38,939 20,359 28,423 (2,431) INTEREST EXPENSE--Net... (48,718) (5,301) (12,430) (11,207) REALIZED SECURITIES GAINS--Net............. 2,181 11 426 5,389 OTHER INCOME--Net....... 6,386 724 1,269 3,173 ---------- ---------- ---------- ---------- INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST...... (1,212) 15,793 17,688 (5,076) PROVISION (CREDIT) FOR INCOME TAXES........... 2,857 5,842 6,170 (1,858) MINORITY INTEREST IN EARNINGS OF SAVANNAH... 1,766 -- -- -- ---------- ---------- ---------- ---------- INCOME (LOSS) BEFORE EXTRAORDINARY ITEM..... (5,835) 9,951 11,518 (3,218) EXTRAORDINARY ITEM--Net of tax (Note 6)........ (1,999) -- -- 604 ---------- ---------- ---------- ---------- NET INCOME (LOSS)....... $ (7,834) $ 9,951 $ 11,518 $ (2,614) ========== ========== ========== ========== BASIC EARNINGS (LOSS) PER SHARE OF COMMON STOCK: Income (loss) before extraordinary item... $ (0.24) $ 0.70 $ 0.92 $ (0.31) Net income (loss)..... $ (0.32) $ 0.70 $ 0.92 $ (0.25) DILUTED EARNINGS (LOSS) PER SHARE OF COMMON STOCK: Income (loss) before extraordinary item... $ (0.24) $ 0.69 $ 0.90 $ (0.31) Net income (loss)..... $ (0.32) $ 0.69 $ 0.90 $ (0.25) WEIGHTED AVERAGE SHARES OUTSTANDING............ 24,177,762 14,247,193 12,576,489 10,300,487 ========== ========== ========== ==========
See notes to consolidated financial statements. F-3 IMPERIAL HOLLY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
SHARES OF COMMON STOCK COMMON STOCK --------------------------------- ------------------------------- UNREALIZED PENSION HELD BY TREASURY HELD BY TREASURY RETAINED SECURITIES LIABILITY ISSUED BENEFIT TRUST STOCK AMOUNT BENEFIT TRUST STOCK EARNINGS GAINS ADJUSTMENT TOTAL ---------- ------------- -------- -------- ------------- -------- -------- ---------- ---------- -------- (IN THOUSANDS OF DOLLARS) BALANCE, APRIL 1, 1995............. 10,283,445 -- -- $ 32,046 -- -- $72,854 $ 5,635 $(558) $109,977 Net income (loss).......... -- -- -- -- -- -- (2,614) -- -- (2,614) Cash dividends ($0.04 per share).......... -- -- -- -- -- -- (411) -- -- (411) Employee stock plans........... 29,062 -- -- 230 -- -- -- -- -- 230 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 -- 111,043 Net income...... -- -- -- -- -- -- 11,518 -- -- 11,518 Employee stock plans........... 23,928 -- -- 262 -- -- -- -- -- 262 Nonemployee director compensation plan............ 21,760 -- -- 301 -- -- -- -- -- 301 Sale 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 -- 176,956 Net income...... -- -- -- -- -- -- 9,951 -- -- 9,951 Cash dividends ($0.03 per share).......... -- -- -- -- -- -- (428) -- -- (428) Employee stock plans........... 100,920 -- -- 786 -- -- -- -- -- 786 Nonemployee director compensation plan............ 24,660 -- -- 301 -- -- -- -- -- 301 Change in unrealized securities gains -- net.......... -- -- -- -- -- -- -- 5,393 -- 5,393 ---------- ---------- -------- -------- -------- ------- ------- ------- ----- -------- BALANCE SEPTEMBER 30, 1997......... 14,283,775 -- -- 83,707 -- -- 90,870 18,382 -- 192,959 Net income (loss).......... -- -- -- -- -- -- (7,834) -- -- (7,834) Cash dividends ($0.12 per share).......... -- -- -- -- -- -- (2,886) -- -- (2,886) Stock issued in merger.......... 13,176,193 (814,810) -- 174,584 ($10,796) -- -- -- -- 163,788 Sale of common stock........... 377,358 -- -- 5,000 -- -- -- -- -- 5,000 Stock sold to benefit trust... 505,440 (505,440) -- 5,023 (5,023) -- -- -- -- -- Stock transferred from benefit trust... -- 121,197 (121,197) -- 1,452 (1,452) -- -- -- -- Employee stock plans........... 25,938 -- -- 325 -- -- -- -- -- 325 Nonemployee director compensation plan............ 17,287 -- -- 165 -- -- -- -- -- 165 Change in unrealized securities gains--net...... -- -- -- -- -- -- -- 1,390 - 1,390 ---------- ---------- -------- -------- -------- ------- ------- ------- ----- -------- BALANCE September 30, 1998......... 28,385,991 (1,199,053) (121,197) $268,804 ($14,367) ($1,452) $80,150 $19,772 -- $352,907 ========== ========== ======== ======== ======== ======= ======= ======= ===== ========
See notes to consolidated financial statements. F-4 IMPERIAL HOLLY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW
YEAR ENDED SIX MONTHS ENDED YEAR ENDED MARCH 31, SEPTEMBER 30, SEPTEMBER 30, --------------------- 1998 1997 1997 1996 ------------- ---------------- ---------- ---------- (IN THOUSANDS OF DOLLARS) OPERATING ACTIVITIES: Net income (loss)....... $ (7,834) $ 9,951 $ 11,518 $ (2,614) Adjustments for noncash and nonoperating items: Extraordinary item-- net................... 1,999 -- -- (604) Minority interest in earnings of Savannah.. 1,766 -- -- -- Impairment loss........ 12,538 -- -- -- Depreciation & amortization.......... 49,655 6,786 14,773 12,681 Deferred income tax provision............. (2,579) 5,155 5,760 (1,737) Other.................. 470 369 1,164 (5,203) Working capital changes (excluding working capital acquired in the purchase acquisitions): Receivables............ (9,077) (6,601) (10,172) (502) Inventory.............. 21,278 20,651 (22,564) 45,408 Deferred and prepaid costs................. 4,914 (2,923) (1,105) 627 Accounts payable....... (3,638) 11,431 (6,997) (6,819) Other liabilities...... (23,501) 1,011 (1,285) (3,361) -------- ------- --------- ---------- Operating cash flow..... 45,991 45,830 (8,908) 37,876 -------- ------- --------- ---------- INVESTING ACTIVITIES: Acquisition of Savannah, net of cash acquired... (361,218) -- -- -- Acquisition of Spreckels, net of cash acquired............... -- -- (36,287) -- Capital expenditures.... (42,419) (15,214) (12,322) (8,890) Investment in marketable securities............. (10,837) (5,395) (7,044) (6,537) Proceeds from sale or maturity of marketable securities............. 11,526 6,798 2,139 14,974 Proceeds from sale of fixed assets........... 4,989 205 109 1,478 Other................... (6,108) (2,657) 1,335 123 -------- ------- --------- ---------- Investing cash flow..... (404,067) (16,263) (52,070) 1,148 -------- ------- --------- ---------- FINANCING ACTIVITIES: Sale of common stock.... 5,000 -- 49,781 -- Short-term borrowings: Bank borrowings--net... (41,930) 34,391 4,180 (5,431) CCC borrowings-- advances.............. 37,037 -- 93,014 153,143 CCC borrowings-- repayments............ (37,037) (53,770) (79,125) (176,965) Long-term debt: Proceeds............... 523,274 -- -- -- Repayment.............. (132,229) (9,159) (1,595) (9,324) Dividends paid.......... (2,886) (428) -- (411) Stock option proceeds and other.............. 370 1,034 512 208 -------- ------- --------- ---------- Financing cash flow..... 351,599 (27,932) 66,767 (38,780) -------- ------- --------- ---------- INCREASE (DECREASE) IN CASH AND TEMPORARY INVESTMENTS............. (6,477) 1,635 5,789 244 CASH AND TEMPORARY INVESTMENTS, BEGINNING OF YEAR................. 9,354 7,719 1,930 1,686 -------- ------- --------- ---------- CASH AND TEMPORARY INVESTMENTS, END OF YEAR.................... $ 2,877 $ 9,354 $ 7,719 $ 1,930 ======== ======= ========= ==========
See notes to consolidated financial statements. F-5 IMPERIAL HOLLY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1998 AND 1997, MARCH 31, 1997 AND 1996 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 through 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, which extend for up to one year. The Company contracts to purchase raw cane sugar substantially in advance of the time it delivers the refined sugar produced from the purchase. To mitigate its exposure to future price changes, the Company attempts to manage the volume of refined sugar sales contracted for future delivery and the volume of raw cane sugar contracted for future delivery, when feasible. Additionally, the Company utilizes a participatory sugar beet purchase contract, described below, which relates the cost of sugarbeets to the net selling price realized on refined beet sugar sales. Change in Fiscal Year In October 1997, the Company changed its fiscal year end from March 31 to September 30. As used herein, the terms fiscal 1998 refers to the twelve months ended September 30, 1998; fiscal 1997 and fiscal 1996 refer to the twelve months ended March 31, 1997 and 1996, respectively. 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. F-6 IMPERIAL HOLLY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) SEPTEMBER 30, 1998 AND 1997, MARCH 31, 1997 AND 1996 Inventories Inventories are stated at the lower of cost or market. Cost of sugar is determined under the last-in first-out ("LIFO") method. All other costs are determined under the first-in first-out ("FIFO") method. If only the FIFO cost method had been used, inventories would have been higher by $16.7 million at September 30, 1998 and $18.9 million at September 30, 1997. Reductions in inventory quantities in the six month period ended September 30, 1997 and fiscal 1996 resulted in liquidations of LIFO inventory layers carried at costs prevailing in prior years. The effect of these liquidations was to increase net income by about $468,000 ($0.03 per share) in the six month period ended September 30, 1997, and $1,385,000 ($0.13 per share) in fiscal 1996. 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 the growers) during the grower contract years, some of which extend beyond the fiscal year end. The contracts provide for the sharing of the net selling price (gross sales price less certain marketing costs, including packaging costs, brokerage, freight expense and amortization of costs for certain facilities used in connection with marketing) with growers. Cost of sales includes an accrual for estimated additional amounts to be paid to growers based on the average net return realized to date for sugar sold in each of the contract years through the end of the fiscal year. The final cost of sugarbeets cannot be determined until the end of the contract year for each growing area. Manufacturing Costs Prior to Production Certain manufacturing costs incurred between processing periods which are necessary to prepare each factory for the next processing campaign are deferred and allocated to the cost of sugar produced in the subsequent campaign. Such amounts are included in deferred costs and prepaid expenses. 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. Interest Rate Swap Agreements The differential to be paid or received on interest rate swap agreements is accrued as interest rates change and is recognized over the life of the agreements as an increase or decrease in interest expense. The Company does not use these instruments for trading purposes, rather it uses them to hedge the impact of interest rate fluctuations on floating rate debt. 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 F-7 IMPERIAL HOLLY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) SEPTEMBER 30, 1998 AND 1997, MARCH 31, 1997 AND 1996 broker/dealers or interest rate information for similar instruments. The carrying amount of cash and temporary investments, accounts receivable, accounts payable, short-term borrowings and other current liabilities approximates fair value because of the short maturity and/or frequent repricing of those instruments. Federal Income Taxes Federal income tax expense includes the current tax obligation and the change in deferred income tax liability for the period. Deferred income taxes result from temporary differences between financial and tax bases of certain assets and liabilities. Earnings Per Share In December 1997, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128") which 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. Prior period EPS amounts have been restated to conform to SFAS No. 128. Pending Accounting Pronouncements The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income", Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information" and Statement of Financial Accounting Standards No. 132, "Employers' Disclosure About Pensions and Other Post Retirement Benefits". These statements, which are effective for the Company's fiscal year ending September 30, 1999, establish additional disclosure requirements but do not affect the measurement of results of operation. Additionally, Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," has been issued and will be effective for fiscal year ending September 30, 2000. Management is evaluating what effect, if any, such statements will have on the Company's results of operation and/or required disclosures. 2. ACQUISITIONS Savannah Foods During fiscal 1998, the Company acquired Savannah Foods and Industries, Inc. a Georgia based producer and marketer of sugar and related products ("Savannah Foods"), in a two step transaction. The Company completed the first step on October 17, 1997, when it accepted for payment pursuant to a tender offer shares representing 50.1% of Savannah Foods outstanding common stock for aggregate consideration of $261 million cash (the "Equity Tender"). The second step was completed December 22, 1997, when Savannah Foods was merged with a subsidiary of the Company (the "Merger"); Savannah Foods survived the Merger as a wholly-owned subsidiary of the Company. As a result of the two step acquisition, the consolidated financial statements include a minority interest in the earnings of Savannah Foods through December 22, 1997. In consideration for the Merger, Savannah Foods' stockholders received $106 million cash and 12.4 million shares of the Company's common stock. F-8 IMPERIAL HOLLY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) SEPTEMBER 30, 1998 AND 1997, MARCH 31, 1997 AND 1996 The purchase method was used to account for the acquisition and Savannah Foods' results of operations are included in the Company's consolidated financial statements commencing October 17, 1997, net of minority interest through December 22, 1997. Purchased intangibles, which include brand related intangibles and the excess of purchase price over the book value of net assets acquired ("goodwill"), totaled $283 million and are being amortized over 40 years. Unaudited, summarized pro forma operating results as if the acquisition and related financing transactions described in Note 6 had occurred on April 1, 1996, are as follows (in thousands of dollars, except per share amounts):
YEAR ENDED SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, MARCH 31, 1998 1997 1997 ------------- ---------------- ---------- (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS) Net sales.......................... $ 1,852,637 $ 1,018,911 $1,923,324 ----------- ----------- ---------- Cost of sales...................... 1,674,619 894,440 1,706,032 Selling, General and Administrative.................... 67,563 47,399 90,153 Depreciation and amortization...... 50,972 22,883 47,156 Nonrecurring charges............... 18,287 -- 11,003 ----------- ----------- ---------- Operating income................... 41,196 54,189 68,980 Interest expense................... (51,689) (26,066) (56,916) Other income....................... 9,254 1,029 1,410 ----------- ----------- ---------- Income before income taxes......... (1,239) 29,152 13,474 Provision for income taxes......... 3,024 12,342 7,434 ----------- ----------- ---------- Income before extraordinary item... $ (4,263) $ 16,810 $ 6,040 =========== =========== ========== Basic earnings per share........... $ (0.16) $ 0.63 $ 0.24 =========== =========== ==========
Diamond Crystal On November 2, 1998 the Company acquired all the outstanding common stock of DSLT Inc. in a merger of a wholly owned subsidiary of the Company with and into DSLT. Consideration for the acquisition consisted of $79.6 million cash and 4,972,060 shares of Company Common Stock. The Company retained an option to repurchase all or part of the Company Common Stock at a price of $7.00 per share, plus interest. The Company sold a portion of the option covering 2,147,978 shares to certain shareholders who exercised the option in November 1998. The Merger consideration is subject to final adjustments based on an acquisition date balance sheet of DSLT and other factors. The cash portion of the Merger consideration was funded by borrowing under the Company's existing revolving credit agreement. DSLT conducts its business principally through Diamond Crystal Specialty Foods, Inc., its subsidiary, which produces nutritional dry mixes, sauces, seasonings, drink mixes and desserts for distribution to the healthcare and food service industries. The Company intends to operate Diamond Crystal together with Dixie Crystals Brands, Inc., the Company's subsidiary which supplies sugar and non-sugar products to the food service industry. F-9 IMPERIAL HOLLY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) SEPTEMBER 30, 1998 AND 1997, MARCH 31, 1997 AND 1996 The acquisition will be accounted for by the purchase method and DSLT's results of operations will be included in the Company's consolidated financial statements commencing November 2, 1998. Unaudited, summarized pro forma operating results as if the acquisition of both DSLT and Savannah Foods and the related financing transactions had occurred on April 1, 1996, are as follows (in thousands of dollars, except per share amounts):
YEAR ENDED SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, MARCH 31, 1998 1997 1997 ------------- ---------------- ---------- Net sales............................ $1,982,351 $1,080,705 $2,026,099 Operating income..................... 48,033 57,997 72,020 Income before extraordinary item..... (5,388) 15,792 1,499 Basic earnings per share............. $ (0.17) $ 0.50 $ 0.05
Wholesome Foods In September 1998, the Company acquired all of the equity interest in Wholesome Foods, LLC for cash of $5.1 million, the majority of which is payable during fiscal 1999. Wholesome is a leading supplier of organic sweeteners to the U.S. consumer and industrial markets. Spreckels On April 19, 1996, the Company acquired all of the outstanding capital stock of Spreckels Sugar Company, Inc. and Limestone Products Company, Inc. (collectively "Spreckels"), a California based beet sugar processor, for $35.3 million. The acquisition was accounted for as a purchase and Spreckels' results of operations are included in these consolidated financial statements commencing April 19, 1996. 3. INVESTMENTS Marketable securities consisted of the following (in thousands of dollars):
SEPTEMBER 30, 1998 ----------------------------------- GROSS UNREALIZED FAIR HOLDING AMORTIZED MARKET ----------------- COST VALUE GAINS LOSSES --------- ------- -------- -------- US Government securities................... $ 5,906 $ 5,942 $ 36 $ -- Common stocks.............................. 23,155 53,536 30,832 (451) ------- ------- -------- ------- Total.................................... $29,061 $59,478 $ 30,868 $ (451) ======= ======= ======== =======
SEPTEMBER 30, 1997 ------------------------------------ GROSS UNREALIZED FAIR HOLDING AMORTIZED MARKET ------------------ COST VALUE GAINS LOSSES --------- ------- --------- -------- US Government securities.................. $ 7,646 $ 7,643 $ 8 $ (11) Common stocks............................. 19,957 48,240 28,283 -- ------- ------- --------- ------ Total................................... $27,603 $55,883 $ 28,291 $ (11) ======= ======= ========= ======
F-10 IMPERIAL HOLLY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) SEPTEMBER 30, 1998 AND 1997, MARCH 31, 1997 AND 1996 Realized securities gains are reported net of realized losses of $28,000, and $2,000 in fiscal years 1997 and 1996, respectively. There were no realized securities losses during fiscal 1998 or the six months ended September 30, 1997. 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 owns a beet sugar factory in Washington state, which is accounted for on the equity method. 4. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consisted of the following (in thousands of dollars):
SEPTEMBER 30, ----------------- 1998 1997 -------- -------- Land................................................... $ 52,355 $ 20,167 Buildings, machinery and equipment..................... 509,412 273,536 Construction in progress............................... 20,345 14,572 -------- -------- Total................................................ 582,112 308,275 Less accumulated depreciation.......................... 183,919 153,524 -------- -------- Property, Plant and Equipment--Net..................... $398,193 $154,751 ======== ========
5. SHORT-TERM BORROWINGS In the past the Company has borrowed short-term from banks under various unsecured lines of credit and from the Commodity Credit Corporation ("CCC") under the USDA's price support loan program. CCC borrowings are secured by refined beet sugar inventory and are recourse or nonrecourse to the Company depending upon certain regulatory conditions. CCC borrowings, which mature September 30 each year, reduce the availability of borrowings under the senior secured revolving credit facility (Note 6). Outstanding short-term borrowings were as follow (in thousands of dollars):
SEPTEMBER 30, --------------- 1998 1997 ------ ------- Commodity Credit Corporation............................. $ -- $ -- Bank working capital financing........................... -- 41,450 Other.................................................... 1,161 1,641 ------ ------- Total.................................................. $1,161 $43,091 ------ ------- Weighted Average Interest Rate........................... 6.98% 6.89% ====== =======
F-11 IMPERIAL HOLLY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) SEPTEMBER 30, 1998 AND 1997, MARCH 31, 1997 AND 1996 6. LONG-TERM DEBT Long-term debt was as follows (in thousands of dollars):
SEPTEMBER 30, ---------------- 1998 1997 -------- ------- Senior secured facilities: Revolving credit facility.............................. $ 2,400 $ -- Term loans............................................. 250,800 -- 9 3/4% Senior Subordinated Notes due 2007............... 250,000 -- Industrial revenue bonds................................ 22,500 -- 8 3/8% Senior Notes due 1999............................ 5,801 81,172 Other................................................... 1,947 1,305 -------- ------- Total long-term debt.................................. 533,448 82,477 Less current maturities................................. 7,555 1,173 -------- ------- Long-term debt, net..................................... $525,893 $81,304 ======== =======
To finance the Savannah Foods acquisition, finance a tender offer for the Company's 8 3/8% Senior Notes due 1999 (the "Debt Tender") and replace the Company's existing credit facilities, during fiscal 1998 the Company entered into new financing agreements consisting of senior secured term loans aggregating $255 million and a $200 million senior secured revolving credit facility and issued $250 million of 9 3/4% Senior Subordinated Notes due 2007. The senior secured facilities are secured by substantially all of the Company's assets. The senior secured facilities and the indenture for the 9 3/4% Senior Subordinated Notes due 2007 contain restrictive covenants which may limit, among other things, the Company's ability to incur additional indebtedness, make capital expenditures and investments or pay dividends. The Company had the ability under the most restrictive of such covenants to pay $22 million of dividends as of September 30, 1998. Interest on the senior secured facilities is at floating rates, however the Company has entered into interest rate swap agreements with major financial institutions to effectively fix the interest rate on all but $75 million of the senior secured term loans at a weighted average annual rate of 8.05%. In October and November 1998, the Company entered into additional interest rate swap agreements with notional amounts aggregating $40 million at an average annual rate of 7.55%. If the Company had been required to settle the interest rate swap agreements as of September 30, 1998, the Company would have been required to pay $8.7 million. The Company is exposed to credit risk in the event of nonperformance by counterparties to its interest rate swap agreements. The Company anticipates that its counterparties will fully perform their obligations under the agreements. Aggregate maturities of long-term debt at September 30, 1998 is as follows (in thousands of dollars): Year Ending September 30: 1999.......................................................... $ 7,555 2000.......................................................... 18,083 2001.......................................................... 14,035 2002.......................................................... 10,600 2003.......................................................... 109,375 Thereafter.................................................... 373,800
In connection with the Debt Tender, 8 3/8% Senior Notes due 1999 with a principal amount of $75,371,000 were purchased in October 1997, and the indenture relating to the Senior Notes was amended to, among other things, remove restrictions on the Company's ability to create liens on certain properties. The Company reported F-12 IMPERIAL HOLLY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) SEPTEMBER 30, 1998 AND 1997, MARCH 31, 1997 AND 1996 as an extraordinary item a loss of $1,999,000 on such purchase, net of tax of $1,075,000. In fiscal 1996, the Company purchased and retired a portion of the 8 3/8% Senior Notes due 1999 for amounts less than book value, and the Company reported such difference, net of tax, as an extraordinary item. Cash paid for interest on short and long-term debt was $45,155,000 for the year ended September 30, 1998, $6,987,787 for the six months ended September 30, 1997, $11,949,000, and $12,228,000, for the fiscal years ended March 31, 1997 and 1996, respectively. Interest capitalized as part of the cost of constructing assets was $1,229,000 for fiscal 1998, $272,000 for the six months ended September 30, 1997. Such amount was not significant in 1997 or 1996. 7. INCOME TAXES The components of the consolidated income tax provision (credit), including amounts reported as an extraordinary item, were as follows (in thousands of dollars):
YEAR ENDED SIX MONTHS ENDED YEAR ENDED MARCH 31, SEPTEMBER 30, SEPTEMBER 30, ---------------------- 1998 1997 1997 1996 ------------- ---------------- ---------- ---------- Federal: Current............... $2,419 $ -- $ 20 $ 109 Tax benefit of operating loss carryforward......... 3,332 1,551 (1,762) (1,452) Deferred.............. (4,663) 3,604 7,522 (285) State................... 694 687 390 95 ------ ------ ---------- ---------- Total................. $1,782 $5,842 $ 6,170 $ (1,533) ====== ====== ========== ==========
The tax effects of temporary differences which give rise to the Company's deferred tax assets and liabilities were as follows (in thousands of dollars):
SEPTEMBER 30, --------------------------------------------------------- 1998 1997 ---------------------------- --------------------------- ASSETS LIABILITIES TOTAL ASSETS LIABILITIES TOTAL ------- ----------- -------- ------ ----------- -------- Current: Marketable securities valuation differences.......... $ -- $ (10,676) $(10,676) $ -- $ (9,899) $ (9,899) Inventory valuation differences, principally purchase accounting........... -- (15,367) (15,367) -- (12,230) (12,230) Manufacturing costs prior to production deducted currently... -- (11,361) (11,361) -- (10,168) (10,168) Accruals not currently deductible........... 6,802 -- 6,802 2,272 -- 2,272 Alternate minimum tax differences.......... 902 -- 902 903 -- 903 Operating loss carryforward......... -- -- -- 3,332 -- 3,332 Other................. 2,114 -- 2,114 1,463 -- 1,463 ------- --------- -------- ------ -------- -------- Total current....... 9,818 (37,404) (27,586) 7,970 (32,297) (24,327) ------- --------- -------- ------ -------- -------- Noncurrent: Depreciation differences, including purchase accounting........... -- (65,678) (65,678) -- (22,329) (22,329) Accruals not currently deductible........... 29,332 -- 29,322 1,052 -- 1,052 Other................. 2,565 -- 2,565 1,174 (1,133) 41 ------- --------- -------- ------ -------- -------- Total noncurrent.... 31,897 (65,678) (33,781) 2,226 (23,462) (21,236) ------- --------- -------- ------ -------- -------- Total................... $41,715 $(103,082) $(61,367) $9,932 $(55,759) $(45,563) ======= ========= ======== ====== ======== ========
F-13 IMPERIAL HOLLY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) SEPTEMBER 30, 1998 AND 1997, MARCH 31, 1997 AND 1996 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 (including extraordinary item). The reasons for the differences from the statutory rate are as follows (in thousands of dollars):
YEAR ENDED SIX MONTHS ENDED YEAR ENDED MARCH 31, SEPTEMBER 30, SEPTEMBER 30, ---------------------- 1998 1997 1997 1996 ------------- ---------------- ---------- ---------- Income taxes computed at the statutory federal rate................... $(1,501) $5,527 $ 6,191 $ (1,451) Non deductible goodwill amortization......... 2,424 -- -- -- Non taxable interest and dividends........ (316) (121) (217) (251) State income taxes.... 451 447 253 62 Other................. 724 (11) (57) 107 ------- ------ ---------- ---------- Total............... $ 1,782 $5,842 $ 6,170 $ (1,533) ======= ====== ========== ==========
Income taxes paid were $4,000,000 in fiscal 1998, $1,937,000 in the six months ended September 30, 1997 and $2,300,000 in fiscal 1997 and $213,000 in fiscal 1996. 8. EMPLOYEE BENEFITS Retirement Plans Substantially all of the Company's nonseasonal employees are covered by retirement plans. Certain unionized employees are covered by an industry-wide plan, and other employees are covered by Company-sponsored defined benefit plans. Under the Company-sponsored defined benefit plans, retirement benefits are primarily a function of years of service and the employee's compensation for a defined period of employment. The Company funds pension costs at an actuarially determined amount based on normal cost and the amortization of prior service costs, gains, and losses over the remaining service periods. Additionally, the Company provides a supplemental non-qualified, unfunded pension plan for certain officers whose benefits under the qualified plan are limited by federal tax law. The Company provides a non-qualified retirement plan for non-employee directors, which provides benefits based upon years of service as a director and the retainer in effect at the date of a director's retirement. The aggregate net periodic pension cost for these plans included the following components (in thousands of dollars):
YEAR ENDED SIX MONTHS ENDED YEAR ENDED MARCH 31, SEPTEMBER 30, SEPTEMBER 30, ---------------------- 1998 1997 1997 1996 ------------- ---------------- ---------- ---------- Company-sponsored plans: Service cost for benefits earned during the period.... $ 4,897 $ 1,359 $ 2,756 $ 2,089 Interest cost on projected benefit obligation........... 14,304 2,927 5,883 2,653 Actual return on plan assets............... (33,564) (20,145) (15,675) (10,141) Net amortization and deferral............. 14,606 16,839 10,355 8,377 ------- ------- ---------- ---------- Net periodic pension cost-- Company-sponsored plans.............. 243 980 3,319 2,978 Industry-wide plan for certain unionized employees.............. 479 212 432 438 ------- ------- ---------- ---------- Total pension cost... $ 722 $ 1,192 $ 3,751 $ 3,416 ======= ======= ========== ==========
F-14 IMPERIAL HOLLY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) SEPTEMBER 30, 1998 AND 1997, MARCH 31, 1997 AND 1996 The funded status of the Company-sponsored plans was as follows (in thousands of dollars):
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997 ------------------------------- ------------------------------- 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............... $ 28,502 $ 159,765 $ 1,666 $65,352 Nonvested............ 1,334 6,737 19 5,071 --------- --------- ------- ------- Total accumulated benefit obligations.. 29,836 166,502 1,685 70,423 Effect of projected future salary increases............ 3,375 20,998 341 10,430 --------- --------- ------- ------- Projected benefit obligations.......... 33,211 187,500 2,026 80,853 Plan assets at fair value (primarily listed stocks and bonds)...... 14,277 215,723 -- 104,153 --------- --------- ------- ------- Projected benefit obligations over (under) plan assets.... 18,934 (28,223) 2,026 (23,300) Prior service cost of plan amendments........ (1,586) (3,388) (893) (3,136) Unrecognized net gains (losses): Arising at transition date................. (229) 99 (518) 176 Arising subsequent to transition date...... (4,561) 33,597 154 30,165 Adjustment for additional liability... 1,455 -- 916 -- --------- --------- ------- ------- Accrued pension cost.... $ 14,013 $ 2,085 $ 1,685 $ 3,905 ========= ========= ======= ======= Assumptions used: Current discount rate for plan liabilities.......... 6.75% 6.75% 7.5% 7.5% Projected annual rate of increase in compensation levels.. 4.5%--5.0% 4.5%--5.0% 5.0% 5.0% Assumed long-term return on plan assets............... 9.0% 9.0% 8.0% 8.0%
Other Postemployment Benefits The Company's Savannah Foods subsidiary sponsors benefit plans that provide postretirement health care and life insurance benefits to certain employees who meet the applicable eligibility requirements. The cost of postretirement health care and life insurance benefits is summarized as follows:
FISCAL YEAR ENDED SEPTEMBER 30, 1998 ------------------ (IN THOUSANDS) Costs related to services provided by employees during the year.................................... $ 149 Interest cost on accumulated benefit obligation..... 2,127 ------ Total postretirement benefit expense.............. $2,276 ======
F-15 IMPERIAL HOLLY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) SEPTEMBER 30, 1998 AND 1997, MARCH 31, 1997 AND 1996 The actuarial and recorded liabilities for these postretirement benefits, none of which have been funded, and the pertinent assumptions used to compute this information are as follows:
SEPTEMBER 30, 1998 ------------------ (IN THOUSANDS) Accumulated postretirement benefit obligation: Retirees............................................ $31,049 Active participants................................. 5,980 ------- Accumulated benefit obligation........................ 37,029 Unrecognized net loss................................. (7,365) ------- Accrued postretirement benefit obligation............. $29,664 ======= Actuarial assumptions: Discount rate....................................... 6.75% Health care cost trend rate Fiscal 1997--1999................................. 7.5% Fiscal 2000--2004................................. 6.0% Thereafter........................................ 5.0%
Increasing the health care cost trend rate assumption by one percentage point would have increased the accumulated postretirement benefit obligation as of September 30, 1998 by approximately $2,235,000 and would have increased postretirement benefit expense by approximately $142,000 in fiscal 1998. 401(k) Plans Substantially all of the employees may elect to defer up to 15% of their annual compensation in the Company sponsored 401(k) tax deferred savings plans. The Company makes matching contributions in some of these plans. The amounts charged to expense for each of the periods presented for these plans were not significant. Employee Stock Purchase Plan In July 1993, the shareholders approved an amended and restated employee stock purchase plan and reserved 1,000,000 shares of common stock. The plan provides substantially all year-round employees the option to purchase shares of common stock either through open market purchases at market value or directly from the Company at 85% of market value. The amounts charged to compensation expense for each of the periods presented for the discount on shares purchased under the latter alternative were not significant. F-16 IMPERIAL HOLLY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) SEPTEMBER 30, 1998 AND 1997, MARCH 31, 1997 AND 1996 9. SHAREHOLDERS' EQUITY Earnings per Share-- The following table presents information necessary to calculate basic and diluted earnings per share. Amounts for the six months ended September 30, 1997 and fiscal 1997 and 1996, have been restated to conform with the requirements of SFAS No. 128 which was adopted effective December 31, 1997.
YEAR ENDED SIX MONTHS ENDED YEAR ENDED MARCH 31, SEPTEMBER 30, SEPTEMBER 30, ---------------------- 1998 1997 1997 1996 ------------- ---------------- ----------- ---------- (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS) Earnings for basic and diluted computation: Income (loss) before extraordinary item.... $ (5,835) $ 9,951 $ 11,518 $ (3,218) Adjustments--None..... -- -- -- -- ---------- ---------- ----------- ---------- Adjusted income (loss) before extraordinary item.................. $ (5,835) $ 9,951 $ 11,518 $ (3,218) ========== ========== =========== ========== Net income (loss)...... $ (7,834) $ 9,951 $ 11,518 $ (2,614) Adjustments--None..... -- -- -- -- ---------- ---------- ----------- ---------- Adjusted net income (loss)................ $ (7,834) $ 9,951 $ 11,518 $ (2,614) ========== ========== =========== ========== Basic earnings per share: Weighted average shares outstanding........... 24,177,762 14,247,193 12,576,489, 10,300,487 ========== ========== =========== ========== Income (loss) per share before extraordinary item.................. $ (0.24) $ 0.70 $ 0.92 $ (0.31) ========== ========== =========== ========== Net income (loss) per share................. $ (0.32) $ 0.70 $ 0.92 $ (0.25) ========== ========== =========== ========== Diluted earnings per share: Weighted average shares outstanding........... 24,177,762 14,247,193 12,576,489 10,300,487 Incremental shares issuable from assumed exercise of stock options under the treasury stock method................ -- 137,896 151,013 -- ---------- ---------- ----------- ---------- Weighed average shares outstanding--as adjusted.............. 24,177,762 14,385,089 12,727,502 10,300,487 ========== ========== =========== ========== Income (loss) per share before extraordinary item.................. $ (0.24) $ 0.69 $ 0.90 $ (0.31) ========== ========== =========== ========== Net income (loss) per share................. $ (0.32) $ 0.69 $ 0.90 $ (0.25) ========== ========== =========== ==========
The Company adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123") in fiscal 1997. As permitted by Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" (SFAS No. 123), the Company measures compensation cost using the intrinsic value method prescribed in by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." F-17 IMPERIAL HOLLY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) SEPTEMBER 30, 1998 AND 1997, MARCH 31, 1997 AND 1996 The Company's reported net income and earnings per share would have been reduced had compensation cost for the Company's stock-based compensation plans been determined using the fair value method of accounting as set forth in SFAS No. 123. For purposes of estimating the fair value disclosures below, the fair value of each stock option has been estimated on the grant date with a Black- Scholes option-pricing model using the following weighted-average assumptions: expected volatility of 38% to 42%; risk-free interest rate of 5.49% to 7.06%; and expected lives of 7 to 10 years. The effects of using the fair value method of accounting on net income and earnings per share are indicated in the pro forma amounts below (in thousands of dollars, except per share amounts):
SIX MONTHS YEAR ENDED ENDED YEAR ENDED MARCH 31, SEPTEMBER 30, SEPTEMBER 30, --------------------- 1998 1997 1997 1996 ------------- ------------- ---------- ---------- Income (loss) before extraordinary item As reported.............. $(5,835) $9,951 $ 11,518 $ (3,218) Pro forma................ (6,725) 9,839 11,351 (3,260) Net income (loss) As reported.............. $(7,834) $9,951 $ 11,518 $ (2,614) Pro forma................ (8,724) 9,839 11,351 (2,656) Basic earnings per share: Income (loss) before extraordinary item As reported.............. $ (0.24) $ 0.70 $ 0.92 $ (0.31) Pro forma................ (0.28) 0.69 0.90 (0.32) Net Income (loss) As reported.............. $ (0.32) $ 0.70 $ 0.92 $ (0.25) Pro forma................ (0.36) 0.69 0.90 (0.26)
Shareholder Rights Plan-- In 1989, the Board of Directors declared a dividend of one Right for each outstanding share of the Company's common stock. Certain terms of the rights were amended in January 1995. Each of the Rights, which are currently attached to the common stock, entitle the holder to purchase two three-hundredths of a share of a new series of Junior Participating Preferred Stock (189,240 in total as of September 30, 1998) 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 October 31, 2007. In connection with the sale of common stock to Greencore Group plc ("Greencore") in 1996, 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%. Greencore had the right to designate two nominees for election as directors of the Company. During the term of the Investor Agreement, Greencore will be required to vote for the director nominees recommended by the Board of Directors. During F-18 IMPERIAL HOLLY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) SEPTEMBER 30, 1998 AND 1997, MARCH 31, 1997 AND 1996 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 3,562,500 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. Stock option activity in the plan was as follows:
YEAR ENDED SIX MONTHS ENDED SEPTEMBER 30, 1998 SEPTEMBER 30, 1997 ------------------------- ----------------------- WEIGHTED- WEIGHTED- AVERAGE AVERAGE EXERCISE PRICE EXERCISE PRICE OPTIONS PER SHARE OPTIONS PER SHARE --------- -------------- ------- -------------- Beginning Balance........... 582,895 $10.33 614,327 $10.39 Granted..................... 1,492,829 9.40 9,000 11.33 Expired..................... (80,049) 11.25 (30,800) 12.84 Exercised................... (15,169) 7.60 (9,632) 6.99 --------- ------- Balance, September 30....... 1,980,504 9.63 582,895 10.33 ========= ======= Exercisable as of September 30......................... 435,726 10.09 367,020 10.31 ========= =======
YEAR ENDED MARCH 31, 1997 ----------------------------------------------- 1997 1996 ----------------------- ----------------------- WEIGHTED- WEIGHTED- AVERAGE AVERAGE EXERCISE PRICE EXERCISE PRICE OPTIONS PER SHARE OPTIONS PER SHARE ------- -------------- ------- -------------- Beginning Balance.............. 528,589 $10.03 510,733 $10.67 Granted........................ 141,700 12.90 94,000 7.84 Expired........................ (41,551) 15.22 (66,199) 12.33 Exercised...................... (14,411) 7.97 (9,945) 6.67 ------- ------- Balance, March 31.............. 614,327 10.39 528,589 10.03 ======= ======= Exercisable as of March 31..... 364,964 10.23 330,964 11.05 ======= =======
Options outstanding at September 30, 1998 consisted of the following:
EXERCISABLE OPTIONS ------------------------ WEIGHTED- WEIGHTED- RANGE OF AVERAGE WEIGHTED-AVERAGE AVERAGE EXERCISE PRICES NUMBER OF EXERCISE PRICE REMAINING NUMBER OF EXERCISE PRICE PER SHARE OPTIONS PER SHARE CONTRACTUAL LIFE OPTIONS PER SHARE - --------------- --------- -------------- ---------------- --------- -------------- $ 6.44- $ 8.87 339,850 $ 7.88 4.4 years 292,913 $ 7.89 $ 9.12- $12.25 1,465,429 9.43 9.3 years 12,025 10.28 $13.19- $16.83 175,225 14.55 4.1 years 130,788 15.00
F-19 IMPERIAL HOLLY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) SEPTEMBER 30, 1998 AND 1997, MARCH 31, 1997 AND 1996 Certain stock options listed above were granted with SARs. The SARs provide that, in lieu of the exercise of options, the optionee may receive cash or shares of stock with a fair market value equal to the amount by which the fair market value on exercise date of the stock subject to the option exceeds the option price. No SARs have been exercised and, at September 30, 1998, options outstanding with SARs attached totaled 45,450 shares, all of which were exercisable. Nonemployee Director Stock Option Plan-- The shareholders have approved the Nonemployee Director Stock Option Plan and have reserved 30,000 shares of common stock for issuance. The plan provides for the automatic granting to each nonemployee director of options to purchase 1,500 shares of common stock at a price equal to 50% of the fair market value at date of grant. The options become exercisable upon the completion of three years of service as a director, and expire over a two-year period from the date first exercisable. Stock option activity in the plan was as follows:
YEAR ENDED SIX MONTHS ENDED YEAR ENDED MARCH 31, SEPTEMBER 30, SEPTEMBER 30, ------------------------------------ 1998 1997 1997 1996 ----------------- ----------------- ----------------- ------------------ PRICE PRICE PRICE PRICE OPTIONS PER SHARE OPTIONS PER SHARE OPTIONS PER SHARE OPTIONS PER SHARE ------- --------- ------- --------- ------- --------- ------- --------- Beginning Balance....... 2,250 $7.56 4,500 $6.53 3,000 $5.88 5,250 $6.93 Granted................. 1,500 5.38 -- -- 1,500 7.84 -- Expired................. (750) 7.00 -- -- -- (750) 8.84 Exercised............... -- 2,250 5.50 -- (1,500) 8.09 ----- ----- ----- ------ Ending Balance.......... 3,000 6.61 2,250 7.56 4,500 6.53 3,000 5.88 Exercisable at Period End.................... -- 750 7.00 3,000 5.88 -- ===== ===== ===== ======
Options outstanding at September 30, 1998 have a range of exercise prices of $5.38 to $7.84, and weighted-average remaining contractual life of 3.2 years. Nonemployee Director Compensation Plan-- In fiscal 1997, the shareholders approved the Nonemployee Director Compensation Plan which provides for the annual award of common stock to directors in lieu of their cash retainer. Shares of common stock awarded pursuant to this plan totaled 17,287 in fiscal 1998 and 21,760 in both the six months ended September 30, 1997 and in fiscal 1997. 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 leases certain facilities and equipment under cancelable and noncancelable operating leases. Total rental expenses for all operating leases amounted to $7,835,000 in fiscal 1998, $3,571,000 for the six month period ended September 30, 1997, $5,788,000, and $4,343,000 in fiscal 1997 and 1996 respectively. F-20 IMPERIAL HOLLY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) SEPTEMBER 30, 1998 AND 1997, MARCH 31, 1997 AND 1996 The aggregate future minimum lease commitments under noncancelable operating leases at September 30, 1998 are summarized as follows (in thousands of dollars):
OPERATING FISCAL YEAR ENDING SEPTEMBER 30, LEASES -------------------------------- --------- 1999.......................................................... $3,618 2000.......................................................... 2,783 2001.......................................................... 2,425 2002.......................................................... 1,861 2003.......................................................... 1,566 After 2003.................................................... 4,110
The aggregate future minimum amount to be received under sub-leases was $2,791,000 at September 30, 1998. 11. SUPPLEMENTARY INCOME STATEMENT INFORMATION In fiscal 1998, the Company incurred a $975,000 charge for severance and related costs in connection with the reorganization of administrative functions after the acquisition of Savannah Foods. Additionally, a charge of $3,800,000 was recorded for the loss the Company expected to incur in fulfilling its industrial sales commitments in California at higher costs as a result of the abnormal weather experienced there during the spring months. In fiscal 1998, the Company ceased sugarbeet processing at its Hereford, Texas factory, and provided $974,000 for the estimated cash closure costs, principally severance costs in connection with the layoff of approximately 60 employees. The Company also recorded a $12,538,000 asset impairment loss to reduce the carrying value of the Hereford assets to estimated fair value. 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. Additionally, in fiscal 1996, the Company recorded a charge of $475,000 related to costs in connection with a work force reduction. Other income--net includes interest and dividends totaling $2,718,000 for fiscal 1998, $1,184,000 for the six months ended September 30, 1997, and $1,792,000, and $1,820,000 for fiscal 1997 and 1996, respectively. F-21 IMPERIAL HOLLY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) SEPTEMBER 30, 1998 AND 1997, MARCH 31, 1997 AND 1996 Substantially all of the Company's consolidated subsidiaries are guarantors of the Company's 9 3/4% senior subordinated notes due 2007. The Company does not publish separate financial statements for such guarantor subsidiaries. Condensed, combined financial information for such guarantor subsidiaries was as follows (in thousands of dollars):
YEAR ENDED YEAR ENDED SIX MONTHS ENDED MARCH 31, SEPTEMBER 30, SEPTEMBER 30, ----------------- 1998 1997 1997 1996 ------------- ---------------- -------- -------- Income Statement Data - --------------------- Net sales................... $1,498,842 $253,543 $443,699 $365,172 Operating income............ 50,414 16,993 16,606 6,278 Net income (loss)........... 24,875 8,324 3,726 (698)
SEPTEMBER 30, 1998 ------------- Balance Sheet Data - ------------------ Current assets.................................................. $360,315 Plant, property and equipment--net.............................. 345,399 Goodwill--net................................................... 279,410 Current liabilities............................................. 174,057 Long-term debt.................................................. 22,500
F-22 EX-3.(E)(3) 2 AMEND. TO RIGHTS AGREEMENT AMENDMENT TO RIGHTS AGREEMENT This Amendment, dated as of December 11, 1998 (the "Amendment"), between Imperial Holly Corporation, a Texas corporation (the "Company"), and The Bank of New York (the "Rights Agent"), W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Company and the Rights Agent are parties to a Rights Agreement dated as of September 14, 1989, as amended by an Amendment to Rights Agreement dated as of January 27, 1995 (as amended, the "Rights Agreement"); and WHEREAS, pursuant to Section 27 of the Rights Agreement, the Company and the Rights Agent desire to amend the Rights Agreement as set forth below; NOW, THEREFORE, in consideration of the premises and the mutual agreements herein set forth, the parties hereby agree as follows: Section 1. Definition of Final Expiration Date. (a) The definition of "Final Expiration Date" in Section 1 of the Rights Agreement is amended to read in its entirety as follows: "Final Expiration Date" shall mean the close of business on October 31, 2007. (b) Any other provisions of the Rights Agreement (including those in the form of Rights Certificate) referring to September 25, 1999 are amended to refer to the date of the Final Expiration Date. Section 2. Severability. If any term, provision, covenant or restriction of this Amendment is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Amendment shall remain in full force and effect and shall in no way be affected, impaired or invalidated. Section 3. Governing Law. This Amendment shall be deemed to be a contract made under the laws of the State of Texas and for all purposes shall be governed by and construed in accordance with the laws of such State applicable to contracts made and to be performed entirely within such State. Section 4. Counterparts. This Amendment may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. Section 5. Descriptive Headings. Descriptive headings of the several Sections of this Amendment are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. Section 6. Confirmation of Rights Agreement. Except to the extent specifically amended hereby, the provisions of the Rights Agreement shall remain unmodified, and the Rights Agreement as amended hereby is confirmed as being in full force and effect. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed all as of the day and year first above written. IMPERIAL HOLLY CORPORATION By /s/ William F. Schwer ----------------------------------------------- Name: William F. Schwer Title: Managing Director and General Counsel THE BANK OF NEW YORK, as Rights Agent By /s/ Steven Myers ------------------------------------------------ Name: Steven Myers Title: Assistant Treasurer 2 EX-3.(G)(3) 3 AMEND. TO INVESTOR AGREEMENT AMENDMENT TO INVESTOR AGREEMENT and REGISTRATION RIGHTS AGREEMENT This Amendment to Investor Agreement and Registration Rights Agreement (this "Amendment") is entered into effective as of November 19, 1998 by and among Imperial Holly Corporation, a Texas corporation (the "Company"), and Greencore Group plc and Earlsfort Holdings B.V.(collectively, the "Investor"). RECITALS WHEREAS, the Company and Investor are parties to (i) that certain Investor Agreement dated as of August 29, 1996 (the "Investor Agreement") and (ii) that certain Registration Rights Agreement, dated as of August 29, 1996 (the "Registration Rights Agreement"), each setting forth certain rights and obligations of such parties relating to the Investor's ownership of shares of the Company's Common Stock, without par value ("Company Common stock"); WHEREAS, the Company recently consummated the acquisition (the "DC Acquisition") of DSLT Inc. ("DC"); WHEREAS, in connection with the DC Acquisition, the Company issued approximately 4,972,060 shares (the "DC Shares") of Company Common Stock to the former stockholders of DC; WHEREAS, under the terms of the merger agreement relating to the DC Acquisition, the Company retained a transferable option to acquire the DC Shares for the forty-five day period following the completion of the DC Acquisition; WHEREAS, the Company is selling to Investor an option (the "Option") to purchase 1,100,000 of the DC Shares, and the Investor is simultaneously exercising such Option pursuant to the terms thereof; WHEREAS, in connection with the transactions the parties desire to amend and restate certain provisions of the Investor Agreement and the Registration Rights Agreement. NOW THEREFORE, in consideration of the foregoing, the parties agree as follows: 1. Status of Investor Agreement. Except as expressly set forth herein, all terms, conditions and provisions of the Investor Agreement and the Registration Rights Agreement shall remain in full force and effect in accordance therewith. All capitalized terms not otherwise defined in this Amendment shall have the meanings specified for such terms in the Investor Agreement. 2. Company Waiver. The Company hereby waives compliance by the Investor with the provisions of Section 2.3 of the Investor Agreement with respect to the acquisition by the Investor of shares of Company Common Stock pursuant to the exercise of the Option by the Investor. 3. Amendment to Restrictions on Transfer in Investor Agreement. Section 3.1 (iv) of the Investor Agreement is hereby amended and restated to reach in its entirety as follows: "(iv) to a transferee where the amount of Voting Securities transferred to such transferee and its Affiliates (together with all other Voting Securities transferred by the Investor to such transferee and its Affiliates during the 12 months preceding such transfer) does not exceed 10% of the Voting Power," 4. Amendments to Sections 4 and 5 of Investor Agreement. Each reference to "90 days," "90-day period" or "90th day" contained in Section 4 and 5 of the Investor Agreement shall be deleted therefrom and shall be replaced by "45 days," "45-day period" or "45th day," as applicable. 5. Amendment to Registration Rights Agreement. The definition of the term "Registrable Securities" in the Registration Rights Agreement shall be amended and restated to reach in its entirety as follows: " "Registrable Securities" shall mean (i) the Common Stock issued to Investor pursuant to the Purchase Agreement, (ii) the 1,100,000 shares of Common Stock purchased by the Investor pursuant to the exercise of that certain Repurchase Option sold and assigned by the Company to the Investor under the terms of that certain letter agreement, dated August 29, 1998, among the Company, the Investor and certain other parties, and (iii) any securities issued in exchange for, as a dividend on, or in replacement of, or otherwise issued or distributed in respect of (including securities issued in a stock dividend, split or recombination or pursuant to the exercise of preemptive rights, if any), any shares of Common Stock referred to in clause (i) or (ii) above; provided, however, that any securities described in clause (i), (ii) or (iii) above shall cease to be Registrable Securities when and to the extent that such securities have been (A) distributed to the public pursuant to a registration statement covering such securities that has been declared effective under the Securities Act, (B) distributed in accordance with the provisions of Rule 144 (or any similar provision then in force) under the Securities Act, (C) transferred to any Person in a manner such that such securities are deemed to cease being Registrable Securities pursuant to the provisions of Sections 11(i) and (k) of this Agreement, or (D) repurchased by the Company." 6. Representation Regarding Rights Plan. The Company represents and warrants to the Investor that the resolution referred to in Section 2.7 of that certain Stock Purchase Agreement, entered into effective as of July 25, 1996, among the Company and the 2 investor, is in full force and effect, and has not been amended, altered, changed, repealed or terminated. 7. Governing Law. This Amendment shall be governed and construed in all respects in accordance with the laws of the State of Texas as applied to agreements made and performed in Texas by residents of the State of Texas. 8. Titles and Subtitles. The titles and subtitles used in this Amendment are used for convenience only and are not to be considered in construing or interpreting this Amendment. 9. Facsimile Signatures. Any signature page delivered by a fax machine or telecopy machine shall be binding to the same extent as an original signature page, with regard to any agreement subject to the terms hereof or any amendment thereto. Any party who delivers such a signature page agrees to later deliver an original counterpart to any party which requests it. 10. Counterparts. This Amendment may be executed in any number of counterparts, each of which shall be enforceable against the parties actually executing such counterparts, and all of which together shall constitute one instrument. 3 The foregoing Amendment is hereby executed as of the date first above written. IMPERIAL HOLLY CORPORATION a Texas corporation By: /s/ W.F. SCHWER --------------------------------- Title: Managing Director --------------------------------- GREENCORE GROUP PLC By: /s/ K. O'SULLIVAN --------------------------------- Title: CFO & Director --------------------------------- EARLSFORT HOLDINGS B.V. By: /s/ H. Samuel By: /s/ J.M.C. RASING --------------------------------- --------------------------------- Title: Title: Managing Director Managing Director --------------------------------- --------------------------------- AMENDMENT TO INVESTOR/REGISTRATION RIGHTS AGREEMENT SIGNATURE PAGE 4 EX-10.(B)(1) 4 SPEC. OF COMPANY'S EMPLOYMENT AGMT. EXHIBIT 10(b)(1) EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT, made and entered into as of the 1st day of February, 1998 (the "EFFECTIVE DATE"), by and between Imperial Holly Corporation, a Texas corporation (hereafter "COMPANY") and [NAME] (hereafter "EXECUTIVE"), an individual; W I T N E S S E T H: WHEREAS, Company wishes to continue to secure the services of the Executive subject to the terms and conditions hereafter set forth; and WHEREAS, the Executive is willing to enter into this Agreement upon the terms and conditions hereafter set forth, NOW, THEREFORE, in consideration of the mutual promises and agreements set forth herein, the parties hereto agree as follows: 1. EMPLOYMENT. During the Employment Period (as defined in Section 4 hereof), the Company shall employ Executive, and Executive shall serve, as [TITLE]. Executive's principal place of employment shall be . 2. COMPENSATION. The Company shall pay or cause to be paid to Executive during the Employment Period an annual base salary for his services under this Agreement of not less than $, payable in equal monthly or semi-monthly installments in accordance with the Company's normal payroll procedures. The Executive's base salary shall be subject to annual review and may be increased, depending upon the performance of the Company and Executive, upon the recommendation of the Company's President and approved by the Executive Compensation Committee of the Board of Directors of the Company (hereafter "Committee"). Nothing contained herein shall preclude the payment of a bonus or bonuses to Executive provided that the Committee authorizes any such bonus payment. 3. DUTIES AND RESPONSIBILITIES OF EXECUTIVE. During the Employment Period, Executive shall devote his services full time to the business of the Company and perform the duties and responsibilities assigned to him by the Company's President or the Company's Board of Directors ("BOARD OF DIRECTORS") to the best of his ability and with reasonable diligence. In determining Executive's duties and responsibilities, the Company's President and Board of Directors shall act in good faith and shall not assign duties and responsibilities to Executive that 1 are not appropriate or customary with respect to the position of Executive hereunder. This Section 3 shall not be construed as preventing Executive from engaging in reasonable volunteer services for charitable, educational or civic organizations, or from investing his assets in such form or manner as will not require a material amount of his services in the operations of the companies or businesses in which such investments are made. 4. TERM OF EMPLOYMENT. Executive's initial term of employment with the Company under this Agreement shall be for the period from the Effective Date through January 31, 1999. Thereafter, the term of employment hereunder shall be automatically extended repetitively for additional one (1) year periods on each annual anniversary of February 1, 1999, unless Notice of Termination pursuant to Section 7 is given by either the Company or Executive to the other party at least sixty (60) days prior to the end of the initial term of employment or any one-year extension thereof, as applicable. The Company and Executive shall each have the right to give Notice of Termination at will, with or without cause, at any time, subject, however, to the terms of this Agreement regarding rights and duties of the parties upon termination of employment. The initial period through January 31, 1999, or any one-year extension of employment hereunder, shall be referred to herein as the "TERM OF EMPLOYMENT." The period from the Effective Date through the date of Executive's termination of employment for whatever reason shall be referred to herein as the "EMPLOYMENT PERIOD." 5. BENEFITS. Subject to the terms and conditions of this Agreement, during the Employment Period, Executive shall be entitled to the following: (a) REIMBURSEMENT OF EXPENSES. The Company shall pay or reimburse Executive for all reasonable travel, entertainment (including club dues appropriate in the performance of Executive's service hereunder) and other reasonable expenses paid or incurred by Executive in performing his obligations hereunder. The Company shall also provide Executive with suitable office space and secretarial help. (b) OTHER BENEFITS. Executive shall be entitled to participate and shall be included in any pension, profit-sharing, stock option, deferred compensation, or similar plan or program of the Company established by the Company, to the extent that he is eligible under the provisions thereof. Executive shall also be entitled to participate in any group insurance, hospitalization, medical, health and accident, disability or similar plan or program established by the Company, to the extent that he is eligible under the provisions thereof. (c) PAID VACATION. Executive shall be entitled to the number of days of paid vacation each year that is accorded under the Company's vacation policy 2 for senior officers in the Office of the President of the Company. The number of days of paid vacation may be increased by the Company's President or Board of Directors at any time during the Employment Period. (d) ANNUAL PHYSICAL. Each year the Company shall pay for a complete physical examination of Executive at the Sid Richardson Institute in Houston, Texas or any comparable facility designated by the Company's President. 6. RIGHTS AND PAYMENTS UPON TERMINATION. The Executive's right to compensation and benefits for periods after the date on which his employment with the Company terminates for whatever reason (the "TERMINATION DATE") shall be determined in accordance with this Section 6: (a) Minimum Payments. Executive shall be entitled to the following payments, in addition to any payments or benefits to which the Executive is entitled under the terms of any employee benefit plan or the following provisions of this Section 6: (i) his unpaid salary for the full month in which his Termination Date occurred; provided, however, if Executive is terminated for Cause pursuant to Section 6(c) below, he shall only be entitled to receive his accrued but unpaid salary through his Termination Date; and (ii) his accrued but unpaid vacation pay for the period ending on his Termination Date. (b) CHANGE IN CONTROL PAYMENT. Executive and Savannah Foods & Industries, Inc., its subsidiaries or affiliates are parties to prior Change of Control Agreement(s) dated [DATE] (the "CHANGE OF CONTROL AGREEMENT"), and they hereby agree that the Change of Control Agreement shall be terminated and superseded in all respects by this Agreement on and after the effective date hereof. Notwithstanding any other provision of this Agreement to the contrary, in the event that Executive's employment is terminated within two (2) years following a Change in Control (as defined below) (i) by the Company for any reason except for (A) Cause (as defined in Section 6(c) hereof) or (B) Executive's death or Disability (as defined below) or (ii) by the Executive for Good Reason (as defined in Section 6(c) hereof), then Executive shall be entitled to receive, and the Company shall be obligated to pay, a lump sum payment equal to three hundred percent (300%) of Executive's base 3 annual salary pursuant to Section 2 or the annual salary then being paid to him, whichever is greater. Such payment shall be made within 30 days from the later of (i) the Change in Control date or (ii) the termination date. Also, such payment shall be in addition to, and shall not reduce or offset, any other payments that are due to Executive from the Company (or from any other source) under any other agreements except the Change of Control Agreement which has been terminated by this Agreement. For purposes of illustration and not limitation, if the Company should provide Notice of Termination to Executive pursuant to Section 4 hereof and the resultant termination of his employment occurs within two (2) years from the date of the Change in Control, Executive shall be entitled to the lump sum payment described in this paragraph. The provisions of this Section 6(b) shall supersede any conflicting provisions of this Agreement but shall not be construed to curtail, offset or limit Executive's rights to any other payments, whether contingent upon a Change in Control or otherwise, under the Agreement or any other agreement, contract, plan or other source of payment except as provided herein. In addition, Executive shall be entitled to receive the bonus payment described in Section 9 hereof, if applicable. A "CHANGE IN CONTROL" of the Company shall be deemed to have occurred if any of the following shall have taken place: (a) a change in control is reported by the Company in response to either Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934 (the "Exchange Act") or Item 1 of Form 8-K promulgated under the Exchange Act, or any successor provisions thereto; (b) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), or any successor provisions thereto, directly or indirectly, of securities of the Company representing forty percent (40%) or more of the combined voting power of the Company's then- outstanding securities; or (c) following the election or removal of directors, a majority of the Board of Directors consists of individuals who were not members of the Board of Directors two (2) years before such election or removal, unless the election of each director who is not a director at the beginning of such two-year period has been approved in advance by directors representing at least a majority of the directors then in office who were directors at the beginning of the two-year period. For purposes of this Section 6(b), "DISABILITY" shall mean a "permanent and total disability" as defined in Section 22(e)(3) of the Internal Revenue 4 Code of 1986, as amended (the "CODE") and Treasury regulations thereunder. Evidence of such Disability shall be certified by a physician acceptable to both the Company and Executive. In the event that the parties are not able to agree on the choice of a physician, each shall select a physician who, in turn, shall select a third physician to render such certification. All costs relating to the determination of whether Executive has incurred a Disability shall be paid by the Company. References in this Agreement to any Section of the Code shall include any "Successor Provisions" (as defined in Section 9(e) hereof). (c) OTHER TERMINATION PAYMENTS. In addition to any other payments due to Executive under this Agreement or otherwise, in the event that during the Term of Employment (1) Executive's employment is terminated by the Company for any reason other than a "Non-Salary Event" (as defined below), or (2) Executive terminates his own employment hereunder for "Good Reason" (as defined below), then, in either event, Executive shall be entitled to receive as damages hereunder, and the Company shall be obligated to pay, a lump sum payment equal to the present value of Executive's base salary pursuant to Section 2 or the salary then being paid to him, whichever is greater, for the greater of (A) the remaining Term of Employment as if there had been no termination or (B) twelve (12) months. For purposes of the preceding sentence, the "present value" of such amount shall be determined in accordance with the procedures under Section 280G of the Code and the Treasury regulations thereunder. Notwithstanding any provision of this Section 6(c) to the contrary, the Executive must first execute an appropriate release agreement whereby he agrees to release and waive, in return for the other termination payments described in this Section 6(c) only, any claims that he may have against the Company for (1) unlawful discrimination (including, without limitation, age discrimination) or (2) termination pay under any severance pay plan, program or arrangement maintained by the Company, its affiliates or subsidiaries, that covers Executive; provided, however, such release shall not release any claims by Executive for payments due under this Agreement, including, without limitation, any Change in Control payment described in Section 6(b), without Executive's express written consent. Any lump sum payment required under this Section 6(c) shall be paid within 10 days after Executive executes such release. Executive shall not be required to mitigate any damages under this Section 6(c) or any other provision of this Agreement. The Company shall make any lump sum payment due to Executive under this Section 6(c) within ten (10) days following the Termination Date. 5 (1) For purposes of this Section 6(c), a "NON-SALARY EVENT" means termination for "Cause" (as defined below), death, or Disability (as defined below). (2) For purposes of this Section 6(c), "CAUSE" means a termination directly resulting from (a) an act of dishonesty on the part of the Executive constituting a felony which adversely affects the Company, (b) a breach by the Executive during the Employment Period of the provisions of Sections 11, 12, 13 or 14 below, if such breach results in a material injury to the Company which is not cured to the reasonable satisfaction of the Board of Directors within 30 days after notice of such failure is provided to Executive, or (c) the continuing and material failure of Executive to fulfill his obligations under this Agreement. The termination of Executive's employment by the Company shall not be deemed to be for Cause unless the Board of Directors first provides written notice to Executive of the conduct on which the termination is based. (3) For purposes of this Section 6(c), "DISABILITY" means a "Disability" as defined in Section 6(b) hereof. (4) For purposes of this Section 6(c), "GOOD REASON" means the occurrence of any of the following events without Executive's express written consent: (i) A reduction in Executive's base salary; (ii) Any material breach by the Company or its successors of any provision of this Agreement; or (iii) Following a Change in Control (as defined in Section 6(b) hereof): 6 (A) the failure by the Company or its successor to expressly assume and agree to continue and perform this Agreement in the same manner and to the same extent that the Company would be required to perform if such Change in Control had not occurred; (B) a relocation of more than twenty-five (25) miles of Executive's principal office from the location of such office immediately prior to the Change in Control date; (C) A substantial increase in the business travel required of Executive by the Company or its successor; (D) The Company or its successor fails to continue in effect any pension plan, life insurance plan, health- and-accident plan, 401(k) plan, employee stock ownership plan, disability plan, deferred compensation SERP plan or executive incentive compensation plan in which Executive was participating at the time of the Change in Control (or plans providing Executive with substantially equal and similar benefits), or the taking of any action by the Company or its successor which would adversely affect Executive's participation in or materially reduce his benefits under any such plan, or deprive him of any material fringe benefit enjoyed by him immediately prior to the Change in Control; or (E) A substantial and adverse change in the Executive's duties, control, authority, status or position, or the assignment to the Executive of any duties or responsibilities which are materially inconsistent with such status or position, or a material reduction in the duties and responsibilities previously exercised by the Executive, or a loss of title, loss of office, loss of significant authority, power or control, or any removal of Executive from, or any failure to reappoint or reelect him to, such positions, except in connection with the termination of his employment for Cause, Disability or death; 7. NOTICE OF TERMINATION. Any termination by the Company or the Executive shall be communicated by Notice of Termination to the other party hereto. For purposes of this Agreement, the term "Notice of Termination" means a written notice which indicates the specific termination provision of this Agreement relied upon and sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. 8. NO MITIGATION REQUIRED. Executive shall not be required to mitigate the amount of any payment provided for under this Agreement by seeking other employment or in any other manner. 7 9. CHANGE IN CONTROL: REQUIREMENT OF BONUS PAYMENT IN CERTAIN CIRCUMSTANCES. (a) In the event that Executive is deemed to have received an "excess parachute payment" (as such term is defined in Section 280G(b) of the Code) which is subject to the excise taxes (the "EXCISE TAXES") imposed by Section 4999 of the Code in respect of any payment pursuant to this Agreement, or any other agreement, plan, instrument or obligation, in whatever form, the Company shall make the Bonus Payment (defined below) to Executive promptly after the date on which Executive received or is deemed to have received any excess parachute payment notwithstanding any contrary provision herein. (b) The term "BONUS PAYMENT" means a cash payment in an amount equal to the sum of (i) all Excise Taxes payable by Executive, plus (ii) all additional Excise Taxes and federal or state income taxes to the extent such taxes are imposed in respect of the Bonus Payment, such that Executive shall be in the same after-tax position and shall have received the same benefits that he would have received if the Excise Taxes had not been imposed. For purposes of calculating any income taxes attributable to the Bonus Payment, Executive shall be deemed for all purposes to be paying income taxes at the highest marginal federal income tax rate, taking into account any applicable surtaxes and other generally applicable taxes which have the effect of increasing the marginal federal income tax rate and, if applicable, at the highest marginal state income tax rate, to which the Bonus Payment and Executive are subject. An example of the calculation of the Bonus Payment is set forth below: Assume that the Excise Tax rate is 20%, that the highest federal marginal income tax rate is 40% and that Executive is not subject to state income taxes. Further assume that Executive has received an excess parachute payment in the amount of $200,000, on which $40,000 in Excise Taxes are payable. The amount of the required Bonus Payment is thus $100,000. The Bonus Payment of $100,000, less additional Excise Taxes on the Bonus Payment of $20,000 (i.e., 20% x $100,000) and income taxes of $40,000 (i.e., 40% x $100,000), yields $40,000, the amount of the Excise Taxes payable in respect of the original excess parachute payment. (c) Executive agrees to reasonably cooperate with the Company to minimize the amount of the excess parachute payments, including, without limitation, assisting the Company in establishing that some or all of the payments received by Executive that are "contingent on a change", as described in Section 280G(b)(2)(A)(i) of the Code, are reasonable compensation for personal services actually rendered by Executive before the date of such change or to be rendered by Executive on or after the date of such change. In the event that the Company is able to establish that the amount of the excess parachute payments is less than originally anticipated by Executive, Executive shall refund to the 8 Company any excess Bonus Payment to the extent not required to pay Excise Taxes or income taxes (including those incurred in respect of receipt of the Bonus Payment). Notwithstanding the foregoing, Executive shall not be required to take any action which his attorney or tax advisor advises him in writing (i) is improper or (ii) exposes Executive to material personal liability. Executive may require the Company to deliver to Executive an indemnification agreement in form and substance satisfactory to Executive as a condition to taking any action required by this subsection (c). (d) The Company shall make any payment required to be made under this Section 9 in cash and on demand. Any payment required to be paid by the Company under this Section 9 which is not paid within 30 days of receipt by the Company of Executive's written demand therefor shall thereafter be deemed delinquent, and the Company shall pay to Executive immediately upon demand interest at the highest nonusurious rate per annum allowed by applicable law from the date such payment becomes delinquent to the date of payment of such delinquent sum with interest. (e) In the event that there is any change to the Code which results in the recodification of Section 280G or Section 4999 of the Code, or in the event that either such section of the Code is amended, replaced or supplemented by other provisions of the Code of similar import ("SUCCESSOR PROVISIONS"), then this Agreement shall be applied and enforced with respect to such new Code provisions in a manner consistent with the intent of the parties as expressed herein, which is to assure that Employee is in the same after-tax position and has received the same benefits that he would have been in and received if any taxes imposed by Section 4999 or any Successor Provisions had not been imposed. 10. POST-EMPLOYMENT MEDICAL BENEFITS. If Executive's employment with the Company is terminated for any reason except Cause (as defined in Section 6(c)) after Executive has completed at least five (5) complete years of service with the Company (including, for this purpose, prior service with any corporation acquired by or merged into the Company), then the Company shall provide post-employment medical coverage in accordance with the terms and conditions of this Section 10. The Company shall continue to cover Executive and his spouse (hereinafter referred to as "SPOUSE") and his eligible dependent children, if any, from the date of Executive's termination of employment with the Company, under the group health care plan maintained by the Company to provide major medical insurance coverage for employees and their dependents (such group medical plan or its successor(s) shall be hereinafter referred to as the "HEALTH CARE PLAN"). The coverage of Executive and his Spouse under the Health Care Plan shall continue for each of their lives without interruption, but such coverage of his eligible dependent children shall continue only for such time period that they otherwise qualify for dependent coverage under the terms of the 9 Health Care Plan. In the event of any change to the Health Care Plan following the date of Executive's termination from employment with the Company, then Executive, his Spouse and dependents shall be treated consistently with the then-current senior officers of the Company (or its successor) with respect to the terms and conditions of coverage and other substantive provisions of the Health Care Plan. The provisions of this Section 10 shall be effective regardless of the reason for Executive's termination of employment with the Company except for Cause. The continuation coverage under the Health Care Plan provided to Executive and his Spouse pursuant to this Agreement shall continue and remain in full force and effect until the later of (a) Executive's date of death or (b) his Spouse's date of death. Executive and his Spouse hereby agree and consent to acquire and maintain any and all coverage that either or both of them are entitled to at any time during their lives under the Medicare program or any similar or succeeding plan or program that is sponsored or maintained by the United States Government or any agency thereof (hereinafter referred to as "MEDICARE"). The coverage described in the immediately preceding sentence includes, without limitation, parts A and B of Medicare and any additional or successor parts of Medicare. Executive and his Spouse further agree and consent to pay all required premiums and other costs for Medicare coverage from their personal funds. If Executive or Spouse are covered under Medicare, the "retiree" coverage provided under the Health Care Plan to such person shall be secondary payor to Medicare to the full extent permitted by law. In addition, if Executive, or his Spouse or other dependents should become covered under another major medical plan maintained by another employer or other entity, such coverage shall be primary payor to the coverage provided pursuant to this Section 10 to the full extent permitted by law. Executive, on behalf of himself and his Spouse and other dependents, if any, shall be required to pay premiums for their coverage under the Health Care Plan at the rates, if any, charged by the Company to active employees who are senior officers of the Company at the time the premium is charged. The Company shall not be responsible for the payment of any income or other taxes which may be imposed on Executive, or on his Spouse or dependents, as the result of receiving coverage under the Health Care Plan pursuant to this Section 10. 11. CONFLICTS OF INTEREST. In keeping with his fiduciary duties to Company, Executive hereby agrees that he shall not become involved in a conflict of interest, or upon discovery thereof, allow such a conflict to continue at any time during the Employment Period. Moreover, Executive agrees that he shall immediately disclose to the Board of Directors any facts which might involve a conflict of interest that has not been approved by the Board of Directors. Executive and Company recognize and acknowledge that it is not possible to provide an exhaustive list of actions or interests which may constitute a "conflict of interest." Moreover, 10 Company and Executive recognize there are many borderline situations. In some instances, full disclosure of facts by the Executive to the Board of Directors may be all that is necessary to enable Company to protect its interests. In others, if no improper motivation appears to exist and Company's interests have not demonstrably suffered, prompt elimination of the outside interest may suffice. In other egregious instances, it may be necessary for Company to terminate Executive's employment for Cause pursuant to Section 6(c) hereof. The Board of Directors reserves the right to take such action as, in its good faith judgment, will resolve the conflict of interest. Executive hereby agrees that any direct or indirect interest in, connection with, or benefit from any outside activities, particularly commercial activities, which interest might adversely affect the Company or any of its affiliated entities, involves a possible conflict of interest. Circumstances in which a conflict of interest on the part of Executive would or might arise, and which should be reported immediately to the Board of Directors, include, but are not limited to, any of the following: (a) Ownership of more than a de minimis interest in any lender, supplier, contractor, customer or other entity with which Company or any of its affiliated entities does business; (b) Misuse of information, property or facilities to which Executive has access in a manner which is demonstrably injurious to the interests of Company or any of its affiliated entities, including its business, reputation or goodwill; or (c) Materially trading in products or services connected with products or services designed or marketed by or for the Company or any of its affiliated entities. For purposes of this Agreement, "AFFILIATED ENTITY" means any entity which owns or controls, is owned or controlled by, or is under common ownership or control with, the Company. 12. CONFIDENTIAL INFORMATION. (A) CONFIDENTIAL INFORMATION DEFINED. Executive hereby acknowledges that in his senior management position, he will create, acquire and have access to confidential information and trade secrets pertaining to the business of Company (hereafter "Confidential Information" as defined below). Executive hereby acknowledges that such Confidential Information is unique and valuable to Company's business and that Company would suffer irreparable injury if Confidential Information was divulged to the public or to persons or entities in competition with Company. Therefore, Executive 11 hereby covenants and agrees to keep in strict secrecy and confidence, both during and after the Employment Period, any Confidential Information. Executive specifically agrees that he will not at any time disclose to others, use, copy or permit to be copied, except in pursuance of his duties on behalf of Company or with the prior consent of Company, Confidential Information relating to the Company or any of its affiliated entities. For purposes of this Agreement, "CONFIDENTIAL INFORMATION" shall mean and include, without limitation, information related to the business affairs, property, methods of operation, future plans, financial information, customer or client information, or other data which relates to the business or operations of Company or any of its affiliated entities, and all other information obtained by Executive from and during the Employment Period which concerns the affairs of Company or any of its affiliated entities and which Company has requested be held in confidence or could reasonably be expected to desire be held in confidence, or the disclosure of which would likely be embarrassing, detrimental or disadvantageous to the Company or any of its affiliated entities, or its and their directors, officers, employees or shareholders. Confidential Information, however, shall not include: (i) Information that is at the time of receipt by Executive in the public domain or is otherwise generally known in the industry or subsequently enters the public domain or becomes generally known in the industry through no fault of Executive; or (ii) Information that at any time is received in good faith by Executive from a third party who was lawfully in possession of the same and had the right to disclose the same. (b) REQUIRED DISCLOSURE. In the event that Executive is required by law which cannot be waived to disclose any Confidential Information, Executive agrees that he will provide prompt notice of such potential disclosure to Company so that an appropriate protective order may be sought and/or a waiver of compliance with the provisions of this Agreement may be granted. In the event that (i) such protection or other remedy is not obtained or (ii) Company waives in writing the compliance by Executive with this provision, Executive agrees that he may furnish only that portion of the Confidential Information which Executive is advised by written opinion of counsel is legally required to be disclosed, and Executive shall exercise his best efforts to obtain assurances that confidential treatment will be accorded such Confidential Information. (c) DELIVERY OF DOCUMENTS. Executive further agrees to deliver to Company at the termination of his employment, all correspondence, memoranda, notes, records, drawings, plans, customer lists or other documents, and all copies thereof made, composed or received by Executive, solely or jointly with others, and which are in 12 Executive's possession, custody or control at such date and which relate in any manner to the past, present or anticipated business of Company or any of its affiliated entities. (d) REMEDIES. In the event of a breach or threatened breach of any of the provisions of this Section 12, Company shall be entitled to an injunction ordering the return of all such documents, and any and all copies thereof, and restraining Executive from using or disclosing, for his benefit or the benefit of others, in whole or in part, any Confidential Information, including, but not limited to, the Confidential Information which such documents contain, constitute or embody. Executive further agrees that any breach or threatened breach of any of the provisions of this Section 12 would cause irreparable injury to Company, for which it would have no adequate remedy at law. Nothing herein shall be construed as prohibiting Company from pursuing any other remedies available to it for any such breach or threatened breach, including the recovery of damages. 13. PROPERTY RIGHTS. In keeping with his fiduciary duties to Company, Executive hereby covenants and agrees that during his Employment Period, and for a period of six (6) months following his Termination Date, Executive shall promptly disclose in writing to Company any and all information, ideas, concepts, improvements, discoveries, inventions and other intellectual properties, whether patentable or not, and whether or not reduced to practice, which are conceived, developed, made or acquired by Executive, either individually or jointly with others, and which relate to the business, products or services of Company or any of its affiliated entities. In consideration for his employment hereunder, Executive hereby specifically sells, assigns and transfers to Company all of his worldwide right, title and interest in and to all such information, ideas, concepts, improvements, discoveries, inventions and other intellectual properties. If during the Employment Period, Executive creates any original work of authorship or other property fixed in any tangible medium of expression which (a) is the subject matter of copyright (including computer programs) and (b) relates to Company's present or planned business, products, or services, whether such property is created solely by Executive or jointly with others, such property shall be deemed a work for hire, with the copyright automatically vesting in Company. To the extent that any such writing or other property is determined not to be a work for hire for whatever reason, Executive hereby consents and agrees to the unconditional waiver of "moral rights" in such writing or other property, and to assign to Company all of his right, title and interest, including copyright, in such writing or other property. Executive hereby agrees to (a) assist Company or its nominee at all times in the protection of any and all property subject to this Section 13, (b) not to disclose any such property to others without the written consent of Company or its nominee, except as required by his employment hereunder, and (c) at the request of Company, to execute such assignments, 13 certificates or other interests as Company or its nominee may from time to time deem desirable to evidence, establish, maintain, perfect, protect or enforce its rights, title or interests in or to any such property. 14. AGREEMENT NOT TO COMPETE. Executive hereby recognizes and acknowledges that: (a) in his executive capacity with Company he will be given knowledge of, and access to, the Confidential Information (as described in Section 12); (b) in the event that Executive was to enter into competition with Company, Executive's knowledge of such Confidential Information would be of invaluable benefit to a competitor of Company, and could cause irreparable harm to Company's business interests; and (c) Executive's consent and agreement to enter into the noncompetition provisions and covenants set forth herein is an integral condition of this Agreement, without which Company would not have agreed to provide Confidential Information to Executive nor to his compensation, benefits, and other terms of this Agreement. Accordingly, in consideration for his employment, compensation, benefits, access to and entrustment of Confidential Information, and the goodwill, training and experience provided to Executive during his Employment Period, Executive hereby covenants, consents and agrees (regardless of whether or not there has been a Change of Control) that during the Employment Period, and for a period of one (1) year after his employment is terminated for any reason except (i) termination by the Company without Cause (as defined in Section 6(c)) or termination by Executive for Good Reason (as defined in Section 6(c)) or (ii) termination of employment upon expiration of the Term of Employment (as defined in Section 4), Executive shall not, directly or indirectly, acting alone or in conjunction with others, for his own account or for the account of others, including, without limitation, as an officer, director, stockholder, owner, partner, joint venturer, employee, promoter, consultant, agent, representative, or otherwise: (a) Solicit, canvass, or accept any fees or business from any customer of Company for himself or any other person or entity engaged in a "Similar Business to Company" (as defined below); (b) Engage or participate in any Similar Business to Company within the entire continental United States (referred to herein as the "RESTRICTED AREA"); (c) Request or advise any service provider, supplier, or customer to reduce or cancel any business that it may transact with Company or any of its affiliated entities; (d) Solicit, induce, or otherwise attempt to influence any employee of the Company or any of its affiliated entities, to terminate his or her relationship with the Company or any of its affiliated entities; or 14 (e) Make any statement or perform any act intended to advance an interest of an existing or prospective competitor of the Company or any of its affiliated entities in any way that demonstrably injures the reputation, goodwill or any other business interest of Company or any of its affiliated entities. For purposes of this Agreement, "SIMILAR BUSINESS TO COMPANY" means any business or other enterprise that is competitive with the current or planned businesses, products, services or operations of the Company or any of its affiliated entities at the time of termination of Executive's employment. For purposes of clarity, the non-compete and other provisions of this Section 14 shall not apply to Executive if Executive's employment hereunder is terminated (i) by the Company without Cause (as defined in Section 6(c)), (ii) by the Executive for Good Reason (as defined in Section 6(c)), or (iii) after the Term of Employment (as defined in Section 4) has expired. Executive hereby agrees that the limitations set forth above on his rights to compete with Company after his termination of employment are reasonable and necessary for the protection of Company. In this regard, Executive specifically agrees that such limitations as to the period of time, geographic area and types and scopes of restriction on his activities, as specified above, are reasonable and necessary to protect the goodwill and other business interests of Company. However, should the time period, the geographic area or any other non- competition provision set forth herein be deemed invalid or unenforceable in any respect, then Executive acknowledges and agrees that, as set forth in Section 15 hereof, reformation may be made with respect to such time period, geographic area or other non-competition provision in order to protect Company's reasonable business interests to the maximum permissible extent. 15. REMEDIES. In the event of any pending, threatened or actual breach of any of the covenants or provisions of Section 11, 12, 13 or 14, it is understood and agreed by Executive that the remedy at law for a breach of any of the covenants or provisions of these Sections may be inadequate and, therefore, Company shall be entitled to a restraining order or injunctive relief from any court of competent jurisdiction, in addition to any other remedies at law and in equity. In the event that Company seeks to obtain a restraining order or injunctive relief, Executive hereby agrees that Company shall not be required to post any bond in connection therewith. Should a court of competent jurisdiction or an arbitrator (pursuant to Section 24) declare any provision of Section 11, 12, 13 or 14 to be unenforceable due to an unreasonable restriction of duration or geographical area, or for any other reason, such court or arbitrator is hereby granted the consent of each of the Executive and Company to reform such provision and/or to grant the Company any relief, at law or in equity, reasonably necessary to protect the reasonable business interests of Company or any of its affiliated entities. Executive hereby acknowledges and agrees that all of the covenants and other provisions of Sections 11, 12, 13 and 14 are reasonable and necessary for the protection of the Company's business interests. Executive hereby agrees that if the Company prevails in any action, suit or proceeding with respect to any matter arising out of 15 or in connection with Section 11, 12, 13 or 14, Company shall be entitled to all equitable and legal remedies, including, but not limited to, injunctive relief and compensatory damages. 16. DEFENSE OF CLAIMS. Executive agrees that, during the Employment Period and for a period of two (2) years after his Termination Date, upon reasonable request from the Company, he will cooperate with the Company and its affiliated entities in the defense of any claims or actions that may be made by or against the Company or any of its affiliated entities that affect his prior areas of responsibility, except if Executive's reasonable interests are adverse to the Company (or affiliated entity) in such claim or action. To the extent travel is required to comply with the requirements of this Section 16, the Company shall, to the extent possible, provide Executive with notice at least 10 days prior to the date on which such travel would be required. The Company agrees to promptly pay or reimburse Executive upon demand for all of his reasonable travel and other direct expenses incurred, or to be reasonably incurred, to comply with his obligations under this Section 16. 17. DETERMINATIONS BY THE BOARD OF DIRECTORS. (a) TERMINATION OF EMPLOYMENT. Prior to a Change in Control (as defined in Section 6(b) hereof), any question as to whether and when there has been a termination of Executive's employment, and the cause of such termination, shall be determined by the Board of Directors in its discretion. (b) COMPENSATION. Prior to a Change in Control (as defined in Section 6(b) hereof), any question regarding salary, bonus and other compensation payable to Executive pursuant to this Agreement shall be determined by the Committee in its discretion. 18. WITHHOLDINGS: RIGHT OF OFFSET. Company may withhold and deduct from any benefits and payments made or to be made pursuant to this Agreement (a) all federal, state, local and other taxes as may be required pursuant to any law or governmental regulation or ruling, (b) all other normal employee deductions made with respect to Company's employees generally, and (c) any advances made to Executive and any other amounts owed by Executive to Company. 19. NONALIENATION. The right to receive payments under this Agreement shall not be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge or encumbrance by Executive, his dependents or beneficiaries, or to any other person who is or may become entitled to receive such payments hereunder. The right to receive payments hereunder shall not be subject to or liable for the debts, contracts, liabilities, engagements or torts of any person who is or may become entitled to receive such payments, nor may the same be subject to attachment or seizure by any creditor of such person under any circumstances, and any such attempted attachment or seizure shall be void and of no force and effect. 16 20. INCOMPETENT OR MINOR PAYEES. Should the Board of Directors determine that any person to whom any payment is payable under this Agreement has been determined to be legally incompetent or is a minor, any payment due hereunder may, notwithstanding any other provision of this Agreement to the contrary, be made in any one or more of the following ways: (a) directly to such minor or person; (b) to the legal guardian or other duly appointed personal representative of the person or estate of such minor or person; or (c) to such adult or adults as have, in the good faith knowledge of the Board of Directors, assumed custody and support of such minor or person; and any payment so made shall constitute full and complete discharge of any liability under this Agreement in respect to the amount so paid. 21. SEVERABILITY. It is the desire of the parties hereto that this Agreement be enforced to the maximum extent permitted by law, and should any provision contained herein be held unenforceable by a court of competent jurisdiction or arbitrator (pursuant to Section 24), the parties hereby agree and consent that such provision shall be reformed to create a valid and enforceable provision to the maximum extent permitted by law; provided, however, if such provision cannot be reformed, it shall be deemed ineffective and deleted herefrom without affecting any other provision of this Agreement. 22. TITLE AND HEADINGS; CONSTRUCTION. Titles and headings to Sections hereof are for the purpose of reference only and shall in no way limit, define or otherwise affect the provisions hereof. Any and all Exhibits referred to in this Agreement are, by such reference, incorporated herein and made a part hereof for all purposes. The words "herein", "hereof", "hereunder" and other compounds of the word "here" shall refer to the entire Agreement and not to any particular provision hereof. 23. CHOICE OF LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAW. 24. ARBITRATION. (a) ARBITRABLE MATTERS. If any dispute or controversy arises between Executive and the Company as to their respective rights or obligations under this Agreement, then either party may submit the dispute or controversy to arbitration under the then-current National Employment Dispute Resolution Rules of the American Arbitration Association (AAA) (the "Rules"); provided, however, the Company shall retain its rights to seek a restraining order or injunctive relief pursuant to Section 15. Any arbitration hereunder shall be conducted before a single arbitrator unless the parties mutually agree to a panel of three arbitrators. The site for any arbitration hereunder shall be in Houston, Harris County, Texas unless otherwise mutually agreed by the parties. 17 (b) SUBMISSION TO ARBITRATION. The party submitting any matter to arbitration shall do so in accordance with the Rules. Notice to the other party shall state the question or questions to be submitted for decision or award by arbitration. Notwithstanding any provision in this Section 24, Executive shall be entitled to seek specific performance of the Executive's right to be paid during the pendency of any dispute or controversy arising under this Agreement. In order to prevent irreparable harm, the arbitrator may grant temporary or permanent injunctive or other equitable relief for the protection of property rights. (c) ARBITRATION PROCEDURES. The arbitrator shall set the date, time and place for each hearing, and shall give the parties advance written notice in accordance with the Rules. Any party may be represented by counsel or other authorized representative at any hearing. The arbitration shall be governed by the Federal Arbitration Act, 9 U.S.C. (S)(S) 1 et. seq. (or its successor). The arbitrator shall apply the substantive law (and the law of remedies, if applicable) of the State of Texas to the claims asserted to the extent that the arbitrator determines that federal law is not controlling. (d) COMPLIANCE WITH AWARD. (i) Any award of an arbitrator shall be final and binding upon the parties to such arbitration, and each party shall immediately make such changes in its conduct or provide such monetary payment or other relief as such award requires. The parties agree that the award of the arbitrator shall be final and binding and shall be subject only to the judicial review permitted by the Federal Arbitration Act. (ii) The parties hereto agree that the arbitration award may be entered with any court having jurisdiction and the award may then be enforced as between the parties, without further evidentiary proceedings, the same as if entered by the court at the conclusion of a judicial proceeding in which no appeal was taken. The Company and the Executive hereby agree that a judgment upon any award rendered by an arbitrator may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. (e) COSTS AND EXPENSES. Each party shall pay any monetary amount required by the arbitrator's award, and the fees, costs and expenses for its own counsel, witnesses and exhibits, unless otherwise determined by the arbitrator in the award. The compensation and costs and expenses assessed by the arbitrator and AAA shall be paid by the losing party unless otherwise determined by the arbitrator in the award. If court proceedings to stay litigation or compel arbitration are necessary, the party who 18 unsuccessfully opposes such proceedings shall pay all associated costs, expenses, and attorney's fees which are reasonably incurred by the other party as determined by the arbitrator. 25. BINDING EFFECT: THIRD PARTY BENEFICIARIES. This Agreement shall be binding upon and inure to the benefit of the parties hereto, and to their respective heirs, executors, personal representatives, successors and permitted assigns hereunder, but otherwise this Agreement shall not be for the benefit of any third parties. 26. ENTIRE AGREEMENT AND AMENDMENT. This Agreement contains the entire agreement of the parties with respect to Executive's employment and the other matters covered herein; moreover, this Agreement supersedes all prior and contemporaneous agreements and understandings, oral or written, between the parties hereto concerning the subject matter hereof. This Agreement may be amended, waived or terminated only by a written instrument executed by both parties hereto. 27. SURVIVAL OF CERTAIN PROVISIONS. Wherever appropriate to the intention of the parties hereto, the respective rights and obligations of said parties, including, but not limited to, the rights and obligations set forth in Sections 6 through 16 and 24 hereof, shall survive any termination or expiration of this Agreement. 28. WAIVER OF BREACH. No waiver by either party hereto of a breach of any provision of this Agreement by any other party, or of compliance with any condition or provision of this Agreement to be performed by such other party, will operate or be construed as a waiver of any subsequent breach by such other party or any similar or dissimilar provision or condition at the same or any subsequent time. The failure of either party hereto to take any action by reason of any breach will not deprive such party of the right to take action at any time while such breach continues. 29. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of Company and its affiliated entities, and its and their successors, and upon any person or entity acquiring, whether by merger, consolidation, purchase of assets or otherwise, all or substantially all of the assets and business of Company. This Agreement is personal to Executive, and Executive may not assign, delegate or otherwise transfer all or any of his rights, duties or obligations hereunder without the consent of the Board of Directors. Any attempt by the Executive to assign, delegate or otherwise transfer this Agreement, any portion hereof, or his rights, duties or obligations hereunder without the prior written consent of the Board of Directors shall be deemed void and of no force and effect. 30. NOTICES. Notices provided for in this Agreement shall be in writing and shall be deemed to have been duly received (a) when delivered in person or sent by facsimile 19 transmission, (b) on the first business day after it is sent by air express overnight courier service, or (c) on the third business day following deposit in the United States mail, registered or certified mail, return receipt requested, postage prepaid and addressed, to the following address, as applicable: (i) If to Company, addressed to: Imperial Holly Corporation P.O. Box 9 Sugar Land, Texas 77487-0009 Attention: President (ii) If to Executive, addressed to the address set forth below his name on the execution page hereof; or to such other address as either party may have furnished to the other party in writing in accordance with this Section 30. 31. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute one and the same instrument. Each counterpart may consist of a copy hereof containing multiple signature pages, each signed by one party hereto, but together signed by both of the parties hereto. 32. EXECUTIVE ACKNOWLEDGMENT/NO STRICT CONSTRUCTION. The Executive represents to Company that he is knowledgeable and sophisticated as to business matters, including the subject matter of this Agreement, that he has read the Agreement and that he understands its terms and conditions. The parties hereto agree that the language used in this Agreement shall be deemed to be the language chosen by them to express their mutual intent, and no rule of strict construction shall be applied against either party hereto. Executive also represents that he is free to enter into this Agreement including, without limitation, that he is not subject to any other contract of employment or covenant not to compete that would conflict in any way with his duties under this Agreement. 33. TERMINATION OF CHANGE OF CONTROL AGREEMENT. Only after this Agreement is effective and enforceable upon the proper execution of this Agreement by the parties hereto, that certain Change of Control Agreement between the Company and [NAME], dated [DATE] shall terminate and be superseded in all respects by this Agreement. All other agreements or arrangements between the Executive and Company in effect on the date hereof shall remain fully effective in accordance with their terms. [Signature page follows.] 20 IN WITNESS WHEREOF, the Executive has hereunto set his hand, and Company has caused these presents to be executed in its name and on its behalf, to be effective as of the Effective Date first above written. WITNESS: EXECUTIVE: Signature: Signature: -------------------------- ------------------------ Printed Name: Printed Name: ----------------------- --------------------- Date: Date: ------------------------------- ----------------------------- Address for Notices: -------------- ----------------------------- ----------------------------- ----------------------------- ATTEST: IMPERIAL HOLLY CORPORATION: By: By: --------------------------------- ------------------------------- Title: Its: ------------------------------ ------------------------------ Printed Name: Printed Name: ----------------------- --------------------- Date: Date: ------------------------------- ----------------------------- 21 EX-10.(B)(2) 5 SCHEDULE OF EMPLOYMENT AGMT EXHIBIT 10(b)(2) SCHEDULE OF EMPLOYMENT AGREEMENTS: J.C. Kempner R.W. Hill P.C. Carrothers W.F. Schwer M.L. Burke D.H. Roche J.M. Kelley B.A. Oxnard, Jr. M. S. Flegenheimer EX-10.(B)(3) 6 EMPLOYMENT AGREEMENT - W.W. SPRAGUE III EXHIBIT 10(b)(3) [IMPERIAL HOLLY CORPORATION LETTERHEAD APPEARS HERE] December 19, 1997 Mr. William W. Sprague III 56 East 54th Street Savannah, Georgia 31405 Employment Agreement -------------------- Dear Mr. Sprague: The following sets forth our agreement regarding the terms and conditions of your employment with Imperial Holly Corporation ("IHK") during the Term. Capitalized words which are not otherwise defined herein shall have the meanings assigned to such words in Section 8 of this Agreement. 1. Term of Employment Under the Agreement. The period of your employment under this Agreement (the "Term") shall commence on the Closing Date, as defined in the Agreement and Plan of Merger, dated as of the date hereof, among IHK, IHK Merger Sub Corporation and Savannah Foods & Industries, Inc. (the "Company") (the "Effective Date"), and shall continue until the fifth anniversary of the Effective Date. The Term will automatically be extended on the third anniversary of the Effective Date (and on each anniversary thereafter) for an additional one-year period unless either party to this Agreement gives the other party hereto written notice of this intention not to extend the Term at least ninety days prior to the applicable anniversary date. 2. Employment During the Term. During the Term, you shall be employed as the President of the Company and shall report directly and exclusively to the President and Chief Executive Officer of IHK. During the Term, you shall be initially elected as a member of the Board for a term ending January 29, 1999, and thereafter IHK shall cause you to be nominated for re-election to the Board. It is understood and agreed that you shall devote substantially all your business time and efforts during the Term to your duties hereunder but may devote reasonable amounts of time to the management of your and your family's personal finances or to charitable or community service. Your principal place of employment shall be the executive offices of the Company in Savannah, Georgia, (which shall not be moved from the Savannah, Georgia area without your consent), although you understand and agree that you may be required to travel from time to time for business purposes. 3. Compensation During the Term. (a) Base Salary. As compensation to you for all services rendered to the Company, IHK will cause the Company to pay you a base salary (the "Salary") at the rate of $430,000 per annum. Your salary will be paid to you in accordance with the Company's regular payroll practices applicable to its executive officers, as established from time to time. Your rate of salary will be reviewed at least annually by the Board and may be increased, but not decreased, on the basis of such review. (b) Annual Bonus. (i) For each Fiscal Year during the Term, you shall be eligible to earn an annual bonus (the "Annual Bonus") based upon IHK and/or the Company achieving one or more performance goals and targets set in good faith by the Compensation Committee of the Board (the "Compensation Committee") for such Fiscal year after reasonable consultation with you. The Annual Bonus for a given Fiscal year will be paid not later than one hundred eight days following the end of the Fiscal Year to which such Annual Bonus relates, or such earlier date as you and the Company may agree. (ii) The target amount for the Annual Bonus fore each Fiscal Year (the "Target Amount") shall be 50% of your annual rate of Salary as of the start of such year subject to the achievement of the performance goals and targets for such year. The Annual Bonus payable to you for a Fiscal Year may equal up to 150% of the Target Amount based upon performance in excess of the target or targets set by the Compensation Committee for that year, and may equal 50% of the Target Amount based upon performance that is at least equal to 50% of the target or targets for that year. The adjustment to the Annual Bonus between 50% and 150% of the Target Amount shall be determined in accordance with criteria set by the Compensation Committee after reasonable consultation with you. If the bonus payable under the criteria set forth in IHK's Performance Incentive Plan would be greater than the Annual Bonus, such larger amount shall be deemed the Annual Bonus. (iii) Beginning with the Annual Bonus for the Fiscal Year ending September 30, 1999 and each Fiscal Year thereafter during the Term, IHK will establish an annual bonus plan (which may be the IHK Performance Incentive Plan) in which you will participate that will meet the requirements applicable to "performance-based" compensation under Section 162(m) of the Internal Revenue Code ("Annual Plan") and that will provide you with the same bonus opportunity described in this Section 3(b). Annual bonuses under the Agreement for each Fiscal Year will thereafter be paid pursuant to the terms of the Annual Plan based upon IHK's attainment of performance targets related to one or more performance goals, which will include, without limitations (A) predicted economic value per share of Common Stock, (B) earnings per share, (C) return on average common equity, (D) pre-tax income, (E) pre-tax operating income, (F) net revenue, (G) net income, (H) profits before taxes, (I) book value per share, (J) stock price and (K) earnings available to common stockholders and (L) such other goals as IHK may include in the -2- Annual Plan. Subject to the terms of the Annual Plan, the Compensation Committee shall select and establish relative weights for the performance goals for each fiscal year after reasonable consultation with you. (iv) The amount of the Annual Bonus for any partial Fiscal Year during the Term shall be prorated by multiplying the amount of the Annual bonus that would be paid to you for the full Fiscal Year by a fraction, the numerator of which shall be the number of days in such Fiscal Year occurring during the Term, and the denominator of which shall be 365; provided, however, that no proration shall apply to the Annual Bonus payable to you for the Fiscal Year ending September 30, 1998. (c) Long-Term Incentive Compensation. (i) On January 31, 1998, IHK will grant you an option (the "Option") to purchase 135,000 shares of Common Stock, and will enter into a stock option agreement related to the Option. The Option will have an exercise price equal to the fair market value of a share of Common Stock on the date of grant. The Option will vest and become exercisable in five equal annual installments on each of the first through fifth anniversaries of the date of grant and will become fully vested and exercisable in full if your employment ends for any reason other than your termination for Cause or your resignation without Good Reason. The Option will have a ten-year term and will remain exercisable in full for the shorter of (A) the remaining term thereof or (B) one year (three years if after the fifth anniversary of the Effective Date), if your employment ends for any reason other than your termination for Cause or your resignation without Good Reason. (ii) During the Term, you will be eligible to receive additional stock option grants each year and to participate in each other long-term incentive program established by IHK for its senior executives in a manner consistent with your position as the senior most executive officer of the Company. (d) SERP and Deferred Compensation Agreement. (i) During the Term, you shall continue to participate in the Supplemental Executive Retirement Plan of the Company and Subsidiaries, as amended to date (the "SERP"), and to accrue service thereunder, notwithstanding the amendment of the SERP by the Board of Directors of the Company, effective June 30, 1996, to terminate future service accruals. At all times during the Term, the terms and provisions of the SERP shall be no less favorable to you than the terms and provisions of the SERP in effect immediately prior to the Effective Date. As of the Effective Date and at all times thereafter, your accrued benefit under the SERP shall be fully vested and nonforfeitable. If your employment ends in an Involuntary Termination or by reason of death or Disability, the accrual fraction used to calculate your SERP benefit shall be no less than twenty-nine thirty-ninths (29/39). -3- (ii) During the Term, the Deferred Compensation Agreement between you and the Company (the "Deferred Compensation Agreement") shall remain in full force and effect, and you shall continue to have the option to elect to defer compensation thereunder in accordance with the terms and conditions thereof. If your employment ends in an Involuntary Termination or by reason of death or Disability, you shall be entitled to elect to receive payment from the Company of your benefit under the Deferred Compensation Agreement as soon as practicable following such termination, provided that such benefit shall be actuarially reduced in accordance with the factors used to calculate such benefit set forth in the Deferred Compensation Agreement. (e) Benefit Plans and Perquisites. (i) During the Term, you and, where applicable, your eligible dependents shall be eligible to participate in each pension, welfare, insurance, perquisite and fringe benefit program made available generally to executives of IHK. Without limiting the foregoing, you and your eligible dependents also will continue to participate in any executive medical program currently in effect during the Term and following your retirement. During the Term, in addition to any other professional services to be provided under this Agreement, you also will be entitled to reimbursement of up to $5,000 for financial planning, accounting and legal advice each year. (ii) IHK will reimburse you for the cost and expenses (including initiation fees and annual dues) of two social clubs, and such other business clubs as you and IHK deem appropriate, it being understood and agreed that additional club membership in varying geographic locations may be approved if such memberships would benefit the business of IHK's enterprise situated near such locations. (iii) During the Term, you shall be provided with office space, secretarial and other staff support, and communications equipment no less favorable than those currently made to you. (iii) You shall be entitled to not less than four weeks of paid vacation per year of employment. (v) IHK will cause the Company to promptly reimburse you for all business expenses incurred by you in connection with the performance of your duties IHK, the Company and any subsidiaries thereof. (iii) In the event that you shall relocate or be required to relocate your principal or secondary residences for IHK's benefit, you shall be reimbursed for all out-of-pocket expenses involved in such move, including packing and transport of personal, family, and household goods and vehicles by suitable service providers, reimbursement for the relocation expenses of any personal staff (including personal goods), reimbursement for -4- any brokerage fees for the sale or purchase of any residences, of any loss of economic value occasioned by the timing of the sale or by your inability to recover monies invested in any personal residence sold, temporary housing costs in suitable alternative housing, all utility severance and hook-up costs, and any other typical expenses, all such sums to be grossed-up for the impact of any federal, state or local taxes levied against you for such portions of such reimbursement as shall be taxable and non-deductible to you. 4. Indemnification. IHK will, to the fullest extent permitted by law, indemnify and hold you harmless from any and all liability arising from your service as an employee, officer or director of IHK or the Company and its affiliates. To the fullest extent permitted by law, the Company will retain counsel to defend you or will advance legal fees and expenses to you for counsel selected by you in connection with any litigation or proceeding related to your service as an employee, officer and director of IHK or the Company. 5. Effect of Termination of Employment. Subject to the provisions of this Section 5, IHK may terminate your employment and you may resign your employment for any lawful reason or for no stated reason. (a) Termination or Resignation in General. In the event of your termination or resignation of employment, IHK shall cause the Company to pay you the full amount of the accrued but unpaid Salary and Annual Bonus for any completed Fiscal Year you may have earned through the Date of Termination (as defined in Section 5(c)), plus a cash payment (calculated on the basis of your rate of Salary then in effect) for all unused vacation time which you may have accrued as of the Date of Termination. In addition, IHK shall cause the Company to pay you a pro rata portion of your Annual Bonus for the Fiscal Year of IHK in which such termination or resignation occurs. Such Salary and accrued vacation shall be paid to you within five days following the Date of Termination. Such Annual Bonuses, if any, shall be paid at the time contemplated by Section 3(b). (b) Involuntary Termination. (i) In addition to any amount payable to you under Section 5(a), in the event of your Involuntary Termination, IHK will cause the Company to pay you within five days of the Date of Termination a cash lump sum amount equal to the product of "X" multiplied by "Y", where "X" equals the sum of the highest annual rate of Salary during the Term and the highest Annual Bonus paid to you during the Term (provided, however, that the bonus amount for this calculation shall be not less than $215,000, regardless of whether an Annual Bonus has been paid), and "Y" equals three. In addition, your benefit under the SERP shall be calculated in the manner contemplated by Section 3(d) and your Option shall vest fully and remain exercisable in the manner contemplated by Section 3(c). In addition, all other options and long-term incentive awards granted to you during the Term shall immediately vest and become nonforfeitable as of the Date of Termination, and the amount of any performance-based awards shall be determined assuming the greater of 100% achievement of all performance measures, or the actual achievement. -5- (ii) In the event of your Involuntary Termination, you and your eligible dependents shall continue to be eligible to participate during the Benefit Continuation Period in the medical, dental, health, life and other fringe benefit plans and arrangements applicable to you immediately prior to your Involuntary Termination on the same terms and conditions in effect for you and your dependents immediately prior to such Involuntary Termination or such more generous benefits as may thereafter be in effect at IHK for other peer executives, provided, however, that your coverage under such plans and arrangements shall end on the date that you and your dependents are eligible and elect coverage under the plans of a subsequent employer which provide substantially equivalent or greater benefits to you and your dependents. Furthermore, to the extent not heretofore paid or provided, IHK shall cause the Company to timely pay or provide to you any other amounts or benefits required to be paid or provided or which you or anyone claiming under you is eligible to receive under any other plan, program, policy or practice, contract or agreement of the Company ("Other Benefits"). (c) Termination for Cause; Resignation Without Good Reason. In the event you resign without Good Reason or you are terminated by IHK for Cause, IHK shall cause the Company to pay you the amounts contemplated by Section 5(a) and the Other Benefits. In the event of such a termination or resignation, you will immediately forfeit as of the Date of Termination the Option and all other long-term incentive compensation that is not then vested. You shall remain entitled to your SERP benefit, but you shall not accrue any additional service for purposes of the SERP after the Date of Termination. Except as noted in this Section 5(c), you shall be entitled to no additional compensation from IHK or the Company under this Agreement. (d) Death or Disability. If your employment with IHK ends as a result of your death or Disability during the Term, IHK shall cause the Company to pay you (or, in the event of your death, your Beneficiary) the full amount contemplated by Section 5(a). In addition, your benefit under the SERP and your benefit under the Deferred Compensation Agreement shall be calculated and payable to you (or, in the event of your death, to your Beneficiary) in the manner contemplated by Section 3(d) and your Option shall vest fully and remain exercisable in the manner contemplated by Section 3(d). In addition, all other options and long-term incentive awards granted to you during the Term shall immediately vest and become nonforfeitable as of the Date of Termination and the amount of any performance-based awards shall be determined assuming the greater of 100% achievement of all performance measures, or the actual achievement. (e) Date and Note of Termination. Any termination of your employment by IHK or by you during the Term shall be communicated by a notice of termination to the other party hereto (the "Notice of Termination"). The Notice of Termination shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of your employment under the provision so indicated. The date of your termination of employment with the Company (the "Date of Termination") shall be determined as follows: (i) if your employment is terminated for -6- Disability, thirty days after a Notice of Termination is given (provided that you shall not have returned to the full-time performance of your duties during such thirty-day period), (ii) if your employment is terminated by IHK in an Involuntary Termination, five days after the date the Notice of Termination is received by you, and (iii) if your employment is terminated by IHK for Cause, the later of the date specified in the Notice of Termination or ten days following the date such notice is received by you. If the basis for your Involuntary Termination is your resignation for Good Reason, the Date of Termination shall be ten days after the date your Notice of Termination is received by IHK. The Date of Termination for a resignation of employment other than for Good Reason shall be the date set forth in the applicable notice, which shall be no earlier than ten days after the date such notice is received by IHK. The Date of Termination in the event of your death shall be the date of your death. The date of your termination of employment is a result of the expiration of the Term in accordance with Section 1 (including an expiration of the Term that constitutes an Involuntary Termination) shall be the last day of the Term. No failure to include in the Notice of Termination any fact or circumstance which could support the basis of your termination shall waive your rights to present such reasons at a later date or to preclude you from relying upon such factors in support of any claim under this Agreement. 6. Additional Payment. (a) Gross-Up Payment. Notwithstanding anything herein to the contrary, if it is determined that any Payment would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code or any interest or penalties with respect to such excise tax (such excise tax, together with any interest or penalties thereon, is herein referred to as an "Excise Tax"), then you shall be entitled to an additional payment (a "Gross-Up Payment") in an amount that, after taking into account all excise, income and other taxes on such additional payment will place you in the same after-tax economic position that you would have enjoyed if the Excise Tax had not applied to the Payment. The amount of the Gross-Up Payment shall be determined by the Accounting Firm in accordance with such formula as the Accounting Firm deems appropriate. (b) Determination of Gross-Up Payment. Subject to the provisions of Section 6(c), all determinations required under this Section 6, including whether a Gross-Up Payment is required, the amount of the Payments constituting excess parachute payments, and the amount of the Gross-Up Payment, shall be made by the Accounting Firm, which shall provide detailed supporting calculations both to you and to IHK and the Company within fifteen days of any date reasonable requested by you or IHK on which a determination under this Section 6 is necessary or advisable, IHK shall cause the Company to pay to you the initial Gross-Up Payment with five days of the receipt by you and IHK of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by you, IHK shall cause the Accounting Firm to provide you with an opinion that the Accounting Firm has substantial authority under the Internal Revenue Code and Regulations for you not to report as Excise Tax on your federal income tax return. Any determination by the Accounting Firm shall be binding upon you, the Company and IHK. If the initial Gross-Up Payment is insufficient to cover the amount of the Excise Tax that is ultimately determined to be owing by you with respect to any Payment (hereinafter an "Underpayment"), IHK shall cause the Company after exhausting IHK's -7- remedies under Section 6(c) below, to promptly pay to you an additional Gross-Up Payment in respect of the Underpayment. (c) Procedure. You shall notify IHK in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of a Gross-Up Payment. Such notice shall be given as soon as practicable after you know of such claim and shall advise IHK of the nature of the claim and the date on which the claim is requested to be paid. You agree not to pay the claim until the expiration of the thirty-day period following the date on which you notify IHK, or such shorter period ending on the date the Taxes with respect to such claim are due (the "Notice Period"). If IHK notifies you in writing prior to the expiration of the Notice Period that it desires to contest the claim, you shall: (i) give IHK any information reasonably requested by IHK relating to the claim; (ii) take such action in connection with the claim as IHK may reasonably request, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by you and reasonably acceptable to IHK; (iii) cooperate with IHK in good faith in contesting the claim; and (iv) permit IHK to participate in any proceedings relating to the claim. You shall permit IHK to control all proceedings related to the claim and, at its option, permit IHK to pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim. If requested by IHK, you agree either to pay the tax claimed and sue for a refund or contest the claim in any permissible manner and to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts as IHK shall determine; provided, however, that if IHK directs you to pay such claim and pursue a refund, IHK shall, or shall cause the Company to, advance the amount of such payment to you on an after-tax and interest-free basis (the "Advance"). IHK's control of the contest related to the claim shall be limited to the issues related to the Gross-Up Payment and you shall be entitled to settle or contest, as the case may be, any other issues raised by the Internal Revenue Service or other taxing authority. If IHK does not notify you in writing prior to the end of the Notice Period of its desire to contest the claim, IHK shall cause the Company to pay to you an additional Gross-Up Payment in respect of the excess parachute payments that are the subject of the claim, and you agree to pay the amount of the Excise Tax that is the subject of the claim to the applicable taxing authority in accordance with applicable law. (d) Repayments. If, after receipt by you of an Advance, you become entitled to a refund with respect to the claim to which such Advance relates, you shall pay, at IHK's option, IHK or the Company the amount of the refund (together with any interest paid or credited thereon after Taxes applicable thereto). If, after receipt by you of an Advance, a determination is made that you shall not be entitled to any refund with respect to the claim and IHK does not promptly notify you of its intent to contest the denial or refund, then the amount of the Advance shall not be required to be repaid by you and the amount thereof shall offset the amount of the additional Gross-Up Payment then owing to you. (e) Further Assurances. IHK shall indemnify you and hold you harmless, on an after-tax basis, from any costs, expenses, penalties, fines, interest or other liabilities ("Losses") incurred by you with respect to the exercise by IHK of any of its rights under this Section 6, -8- including, without limitation, any Losses related to IHK's decision to contest a claim or any imputed income to you resulting from any Advance or action taken on your behalf by IHK hereunder. IHK shall pay all legal fees and expenses incurred under this Section 6, and shall promptly reimburse you for the reasonable expenses incurred by you in connection with any actions taken by IHK or required to be taken by you hereunder. IHK shall also pay (or cause the Company to pay) all of the fees and expenses of the Accounting Firm, including, without limitation, the fees and expenses related to the opinion referred to in Section 6(b). Any payments owing to you and not made to you within 30 days of delivery to IHK of evidence of your entitlement shall be paid to you together with interest at the maximum rate permitted by law. (f) Other Taxes. In the event that federal or state legislation is enacted imposing additional excise or supplementary income taxes on compensation payable to you (other than a mere change in marginal income tax rates), IHK agrees to review the Agreement with you and to consider in good faith any changes hereto that may be required to preserve the economic purposes of the Agreement; 7. Successors; Binding Agreement. (a) Assumption by Successor. IHK will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of IHK expressly to assume and to agree to perform this Agreement in the same manner and to the same extent that IHK would be required to perform it if no such succession had taken place; provided, however, that no such assumption shall relieve IHK of its obligations hereunder. (b) Enforcement; Beneficiaries. This Agreement shall be binding upon and inure to the benefit of you (and your personal representatives and heirs), the Company and IHK and any organization which succeeds to substantially all of the business or assets of IHK, whether by means of merger, consolidation, acquisition of all or substantially all of the assets of IHK or otherwise. This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees or other Beneficiary. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your Beneficiary. 8. Definitions. For purposes of this Agreement, the following capitalized words shall have the meanings set forth below: "Accounting Firm" shall mean a national accounting firm as shall be designated by agreement between you and the Company. "Annual Bonus" shall have the meaning set forth in Section 3(b). -9- "Beneficiary" shall mean the person or persons designated by you in writing to receive any benefits payable to you hereunder in the event of your death or, if no such persons are so designated, your estate. No Beneficiary designation shall be effective unless it is in writing and received by IHK prior to the date of your death. "Benefit Continuation Period" shall mean the period beginning on the Date of Termination and ending on the later to occur of (i) the third anniversary of the Date of Termination and (ii) the expiration of the Term as in effect immediately prior to the Date of Termination. "Board" shall mean the Board of Directors of IHK. "Cause" shall mean your willful, material and repeated nonperformance of your duties to the "Company (other than by reason of your illness, incapacity or Disability) after written notice from the Board of such nonperformance (which notice specifically identifies the manner and sets forth specific facts, circumstances and examples in which the Board believes that you have not substantially performed your duties) and your continued willful, material and repeated nonperformance of such duties after your receipt of such notice. For purposes of the previous sentence, no act or failure to act on your part shall be deemed "willful" unless done, or omitted to be done, by you not in good faith and without reasonable belief that your action or omission was in the best interest of IHK. (Assuming the disclosure of all pertinent facts any action taken by you after consultation with, and in accordance with the advice of, nationally recognized counsel reasonably acceptable to IHK shall be deemed to be taken in good faith and to not be willful under this Agreement). Notwithstanding the foregoing, you shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to you a copy of the resolution duly adopted by the Board at a meeting of the Board called and held for such purpose (after reasonable notice to you and an opportunity for you, together with your counsel, to be heard before the Board), finding that in the good faith opinion of the Board you were guilty of conduct set forth above and specifying the particulars thereof in reasonable detail. "Common Stock" shall mean the Common Stock, par value $.25 per share, of IHK. "Compensation Committee" shall have the meaning set forth in Section 3(b). "Deferred Compensation Agreement" shall have the meaning set forth in Section 3(d)(ii). "Disability" shall mean your incapacity due to physical or mental illness which causes you to be absent from the performance of your duties with the Company or IHK for six consecutive months, followed by your failure to return to performance of your duties with the Company or IHK within thirty days after written Notice of Termination due to disability is given to you. Any question as to the existence of your Disability upon which you and IHK cannot agree -10- shall be determined by a qualified independent physician selected by you (or, if you are unable to make such selection, such selection shall be made by any adult member of your immediate family), and approved by IHK, which approval shall not be unreasonably withheld. The determination of such physician made in writing to IHK and to you shall be final and conclusive for all purposes of this Agreement. "Fiscal Year" of IHK shall mean the twelve-month period ending on September, 30. "Good Reason" shall mean (i) an adverse and material change to your duties, titles, or reporting responsibilities (including, without limitation, your good faith determination that, as a consequence of either (a) a Change of Control or (b) the adoption by the Board, over your objection, of a business plan or strategy that you believe either cannot be achieved or is sufficiently outside the scope of IHK's traditional business lines or plans as to not be in the best interest of IHK, your role in managing and directing the business and affairs of the Company or IHK has been adversely and materially affected), (ii) a material breach by IHK of any term of this Agreement, (iii) a reduction in your Salary or Annual Bonus opportunity or the failure of IHK or the Company to pay you any material amount of compensation when due or (iv) the relocation of your principal place of employment from the Savannah, Georgia area without your prior written consent, or in the event that you consent to such a relocation, the failure of the Company or IHK to provide you with the benefits set forth in Section 3(c)(ix). For purposes of this definition, "Change of Control" shall be deemed to have occurred if any of the following shall have taken place: (a) a change in control is reported by IHK in response to either Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934 (the "Exchange Act") or Item 1 of Form 8-K promulgated under the Exchange Act; (b) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing forty percent (40%) or more of the combined voting power of IHK's then outstanding securities; or (c) following the election or removal of directors, a majority of the Board of Directors consists of individuals who were not members of the Board two (2) years before such election or removal, unless the election of each director who was not a director at the beginning of such two-year period has been approved in advance by directors representing at least a majority of the directors then in office who were directors at the beginning of the two-year period. "Internal Revenue Code" shall mean the Internal Revenue Code of 1986, as amended, and any successor provisions thereto. "Involuntary Termination" shall mean (i) your termination of employment by IHK during the Term other than for Cause or Disability, or (ii) your resignation of employment with IHK during the Term for Good Reason, or (iii) the expiration of the Term in accordance with Section 1 as a result of IHK's election not to extend the Term. "Option" shall have the meaning set forth in Section 3(c). -11- "Other Benefits" shall have the meaning set forth in Section 5(b)(ii). "Payment" means (i) any amount that is due or paid to you under this Agreement, (ii) any amount that is due or paid to you under any plan, program or arrangement of the Company or IHK, and (iii) any amount or benefit that is due or payable to you under this Agreement or under any plan, program or arrangement of the Company or IHK not otherwise covered under clause (i) or (ii) hereof which must reasonably be taken into account under Section 280G of the Internal Revenue Code and the Regulations in determining the amount of the "parachute payments" received by you, including, without limitation, any amounts which must be taken into account under the Internal Revenue Code and Regulations as a result of (A) the acceleration of the vesting of any option, restricted stock or other equity award granted hereunder or under any equity plan of IHK, (B) the acceleration of the time at which any payment or benefit is receivable by you or (C) any contingent severance or other amounts that are payable by you. "Regulations" shall mean the proposed, temporary and final regulations under Section 280G of the Internal Revenue Code or any successor provision thereto. "Salary" shall have the meaning set forth in Section 3(a). "SERP" shall have the meaning set forth in Section 3(d)(i). "Target Amount" shall have the meaning set forth in Section 3(b). "Taxes" shall mean the federal, state and local income or payroll taxes to which you are subject at the time of determination, calculated on the basis of the highest marginal rates then in effect, plus any additional payroll or withholding taxes to which you are then subject. 9. Notice. For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid addressed to the President and Chief Executive Officer of IHK, at One Imperial Square, P. O. Box 9, Sugar Land, Texas 77847, with a copy to the General Counsel of the Company at such address, or to you at the address set forth on the first page of this Agreement or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 10. Miscellaneous. (a) Amendments, Waivers, Etc. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing. No waiver by either party hereto at any time of any breach by the other party hereto of, -12- or of compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same time or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement and this Agreement shall supersede all prior agreements, negotiations, correspondence, undertakings and communications of the parties, oral or written, with respect to the subject matter hereof. In addition, upon the Effective Date, your change of control letter agreement with the Company, dated as of January 7, 1991, shall be of no further force or effect. (b) No Mitigation, Reduction or Offset. You shall not be required to mitigate the amount of any severance or termination payment provided for in this Agreement by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Agreement be reduced by any compensation earned by you as the result of employment by another employer or by any compensation or benefits paid by IHK or any other employer. No payments to you under this Agreement may be subject to any manner of offset or set off or shall be reduced by any amounts you may owe to IHK or by any claims that IHK may have against you. (c) Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. (d) Attorney's Fees. IHK will cause the Company to pay or reimburse you for the reasonable attorney's fees and expenses incurred by you in enforcing your rights under this Agreement, whether or not incurred in connection with litigation activities. IHK will cause the Company promptly to pay (or reimburse you) for all monies due under this paragraph. In the event that the Company does not so pay such sums within 30 days of receipt, IHK will or will cause the Company to pay to you interest at the maximum rate permissible under the law of the State of Georgia. (e) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. (f) Withholding. Amounts paid to you hereunder shall be subject to all applicable federal, state and local wage withholding. (g) Source of Payments. All payments provided under this Agreement shall be paid in cash from the general funds of IHK or the Company, and no special or separate fund shall be established, and no other segregation of assets made, to assure payment. You will have no right, title or interest whatsoever in or to any investments which IHK or the Company may make to aid it in meeting its obligations hereunder. To the extent that any person acquires a right to -13- receive payments from IHK or the Company hereunder, such right shall be no greater than the right of an unsecured creditor of IHK or the Company. (h) Headings. The headings contained in this Agreement are intended solely for convenience of reference and shall not affect the rights of the parties to this Agreement. (i) Governing Law. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Georgia, without regard to principles of conflicts of law. Any dispute under this Agreement shall be litigated or, at either party's option, arbitrated. Any litigation or arbitration by either party with respect to this Agreement must be filed in the county of your principal residence, and, if a litigation, must be proceeded by a 20-day notice, provided confidentially to the other party, during which period, such other party, at its option, may notify the party filing such litigation that any such claim(s) must be arbitrated pursuant to the rules of the American Arbitration Association with a panel to be composed of business executives or professionals of a peer group to you, including compensation levels. At either party's option, upon written notice, any such arbitration shall be confidential, including a prohibition against disclosures of any pertinent facts, save the amount of an award, in any litigation (whether brought to enforce the arbitration award, or otherwise). If you concur with the terms of this employment agreement, please so indicate by signing in the space provided below, whereupon this letter shall become a binding agreement between you and IHK. Very truly yours, IMPERIAL HOLLY CORPORATION [signature appears here] By: _______________________________ Name: Title: AGREED TO AND ACCEPTED this 23 day of December, 1997 /s/ William W. Sprague III By: __________________________ William W. Sprague III -14- EX-21 7 SUBSIDIARIES EXHIBIT 21 SUBSIDIARIES OF THE COMPANY JURISDICTION OF SUBSIDIARY INCORPORATION - ---------- ------------- Holly Sugar Corporation......................... New York Savannah Foods & Industries, Inc................ Delaware Savannah Foods Industrial, Inc.................. Delaware Dixie Crystals Brands, Inc...................... Delaware Michigan Sugar Company.......................... Michigan Imperial Sugar LP............................... Delaware Savannah Sugar LP............................... Delaware Imperial Distributing, Inc...................... Delaware Diamond Crystal Specialty Foods, Inc.(1)........ Michigan (1) Acquired November 2, 1998 EX-23 8 AUDITOR'S CONSENT EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 33-30328, 33-41769 and 33-68896 of Imperial Holly Corporation, each on Form S- 8, of our report dated December 9, 1998, appearing in this Form 10-K of Imperial Holly Corporation for the year ended September 30, 1998. /s/ Deloitte & Touche LLP Houston, Texas December 11, 1998 EX-27 9 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from Imperial Holly Corporation Annual Report on Form 10-K and is qualified in its entirety by reference to such financial statements. 1,000 YEAR SEP-30-1998 OCT-01-1997 SEP-30-1998 2,877 59,478 139,870 0 204,929 446,289 582,112 183,919 1,179,800 186,060 525,893 268,804 0 0 0 1,179,800 1,783,091 1,783,091 1,610,852 1,610,852 0 0 48,718 (1,212) 2,857 (5,835) 0 (1,999) 0 (7,834) (0.32) (0.32)
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