-----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, GER1CfhgCOM9OkZ8MN+sn0bRB8Ia+fCXles+FriuUiEAu71PaneHn3JGHOvrK4hO lBQHfxMee7tWT7TStCap1A== 0000030966-97-000007.txt : 19970702 0000030966-97-000007.hdr.sgml : 19970702 ACCESSION NUMBER: 0000030966-97-000007 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970701 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ERLY INDUSTRIES INC CENTRAL INDEX KEY: 0000030966 STANDARD INDUSTRIAL CLASSIFICATION: GRAIN MILL PRODUCTS [2040] IRS NUMBER: 952312900 STATE OF INCORPORATION: CA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-07894 FILM NUMBER: 97634714 BUSINESS ADDRESS: STREET 1: 10990 WILSHIRE BLVD STREET 2: STE 1800 CITY: LOS ANGELES STATE: CA ZIP: 90024 BUSINESS PHONE: 2138791480 MAIL ADDRESS: STREET 1: 10990 WILSHIRE BOULEVARD STREET 2: SUITE 1800 CITY: LOS ANGELES STATE: CA ZIP: 90024 FORMER COMPANY: FORMER CONFORMED NAME: EARLY CALIFORNIA INDUSTRIES INC DATE OF NAME CHANGE: 19851202 FORMER COMPANY: FORMER CONFORMED NAME: EARLY CALIFORNIA FOODS INC DATE OF NAME CHANGE: 19700114 10-K 1 FORM 10-K FOR THE FISCAL YEAR ENDED MARCH 31, 1997 1 =============================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 _________________ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 _________________ FOR THE FISCAL YEAR ENDED MARCH 31, 1997 COMMISSION FILE NUMBER 1-7894 ERLY INDUSTRIES INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 95-2312900 (STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) 10990 WILSHIRE BOULEVARD, #1800, LOS ANGELES, CALIFORNIA 90024-3955 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (213) 879-1480 _________________ SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, PAR VALUE $.01 PER SHARE (TITLE OF CLASS) 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, and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- As of June 15, 1997, there were 4,764,415 common shares outstanding and the aggregate market value of the common shares of ERLY Industries Inc. (based upon the closing price for these shares on the NASDAQ National Market) held by non-affiliates was approximately $34.7 million. DOCUMENTS INCORPORATED BY REFERENCE Portions of the 1997 Proxy Statement to Shareholders are incorporated by reference in Part III. 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. [ ] 2 ERLY INDUSTRIES INC. FORM 10-K ANNUAL REPORT FOR THE YEAR ENDED MARCH 31, 1997 TABLE OF CONTENTS
Part I - ------ Item 1: Business See pages 3-16 Item 2: Properties See pages 17-18 Item 3: Legal Proceedings See page 19 and "Commitments and Contingencies" on page 61 Item 4: Submission of Matters See page 20 to a Vote of Security Holders Part II - ------- Item 5: Market for the Company's See page 21 and "Quarterly Results Common Stock and Related of Operations" on pages 63 and 64 Stockholder Matters Item 6: Selected Financial Data See pages 28-29 Item 7: Management's Discussion See pages 30-35 and Analysis of Financial Condition and Results of Operations Item 8: Consolidated Financial See pages 36-65 Statements Item 9: Changes in and See page 21 Disagreements with Accountants on Accounting and Financial Disclosure Part III - -------- Item 10: Directors and Executive See pages 22-23 Officers of the Company Item 11: Executive Compensation See Proxy Statement Item 12: Security Ownership of See Proxy Statement Certain Beneficial Owners and Management Item 13: Certain Relationships See Proxy Statement and Related Transactions Part IV - ------- Item 14: Exhibits, Financial See pages 25-73 Statement Schedules and Reports on Form 8-K
3 PART I Item 1. Business ERLY Industries Inc. (the "Company" or "ERLY") was incorporated in California in March 1964. The Company entered the rice business in 1970 with the acquisition of Comet Rice Mills, Inc. ERLY expanded its rice operations in 1979 with the acquisition of United Rice Growers and Millers and again in 1988 with the purchase of 48% of American Rice, Inc. ("ARI"). In May 1993, ERLY acquired an additional 33% voting interest in ARI and consolidated the rice operations into a single operating company (the "Acquisition"). ARI is a processor and marketer of food products, principally rice and olives. The company is currently involved in all phases of rice processing, rice packaging and rice marketing. ARI markets white rice, instant rice, parboiled rice, brown rice and rice mixes under proprietary, trademarked names and is a leading marketer of U.S. rice in many of the world's major importing countries. In July 1996, ARI added olives to its product lines by acquiring the domestic and foreign olive business of Campbell Soup Company (the "Olive Acquisition"). Assets acquired included olive inventories and processing facilities in Visalia, California and Seville, Spain. This acquisition positions ARI among the largest of four U.S. olive processors with the largest U.S. market share of branded sales of both ripe and green olives. The Company entered the forest fire retardant business in 1968 with the acquisition of Arizona Agrochemical Corporation. That company was primarily engaged in a fertilizer and pesticides business which was later sold. The forest fire retardant business and an agricultural consulting and advisory service business were retained and transferred to a newly incorporated company, Chemonics Industries, Inc. ("Chemonics"). The consulting business was expanded considerably in 1975 with the opening of an office in Washington, D.C. With continually expanding consulting revenues and operations, that business was separately incorporated in November 1994 as Chemonics International, Inc. ("International" or "Consulting"), a wholly-owned subsidiary of Chemonics Industries, Inc. In May 1996, the operations of the U. S. forest fire retardant business were incorporated as a wholly-owned subsidiary of Chemonics Industries, Inc. The Company's principal executive offices are located at 10990 Wilshire Boulevard, Suite 1800, Los Angeles, California 90024, (213) 879-1480. ARI's executive offices are located at 411 North Sam Houston Parkway East, Suite 600, Houston, Texas 77060, (281) 272-8800. Chemonics Industries' and Chemonic International's executive offices are located at 1133 20th Street, N.W., Suite 600, Washington, D.C. 20036. Chemonics Fire-Trol's executive offices are located at 734 E. Southern Pacific Drive, Phoenix, Arizona 85034. 4 AMERICAN RICE, INC. Background The Company's rice business dates back to 1901 when the predecessor company to Comet Rice, Inc. ("Comet") was formed in Beaumont, Texas. In 1952, the predecessor company to Comet merged with Wonder Rice Mills, Inc. of Stuttgart, Arkansas and Adolphus Rice Mills, Inc. of Houston, Texas. Comet was purchased by ERLY in 1970. In 1979, Comet acquired United Rice Growers and Millers which owned a rice processing facility in Maxwell, California which remains ARI's primary milling facility in the California rice producing region. In 1986, Comet and American Rice, Inc., a Texas agricultural cooperative marketing association formed in 1969 and comprised primarily of rice growers (the "ARI Cooperative"), formed a joint venture known as Comet American Marketing ("CAM") for the purpose of conducting joint domestic marketing operations. In connection with the formation of CAM, both companies contributed virtually all of their domestic brands to CAM and Comet transferred certain processing and packaging equipment, packaging supplies and production responsibilities to the ARI Cooperative. ARI was incorporated in 1987 by the ARI Cooperative and in 1988, the ARI Cooperative contributed all of its assets to ARI in exchange for 52% of ARI's voting capital stock, which the ARI Cooperative distributed to its members. Comet obtained the remaining 48% of ARI's voting capital stock in exchange for contributing cash and Comet's 50% interest in CAM. On May 26, 1993, ERLY consolidated its ownership interests in ARI and Comet through the Acquisition, pursuant to which ERLY transferred all of the operating assets and liabilities of Comet to ARI in exchange for shares of voting preferred stock that gave ERLY an additional 33% of the voting power of ARI. As a result of the Acquisition, ERLY holds 81% of the voting power of ARI, comprised of a 32% direct common stock equity interest and an additional 49% voting preferred stock interest. In July 1996, the Company added olives to its product lines by acquiring the domestic and foreign olive business of Campbell Soup Company. Assets acquired include olive inventories and processing facilities in Visalia, California and Seville, Spain. Company Overview ARI is the largest U.S.-based and one of the world's leading processors and marketers of branded rice products, with leading brand positions in many U.S. markets as well as Saudi Arabia, Haiti, Puerto Rico and certain other rice consuming markets. ARI annually markets approximately 20% of the total U.S. rice crop and is the only marketer of rice in the world with significant sources of rough rice and milling facilities in the two major rice producing regions of the United States as well as certain strategic locations overseas. This allows ARI to moderate the impact of regional trade imbalances caused by climate and geopolitical factors on operating performance. ARI is able to maximize its margins by purchasing rice grown domestically and abroad to take advantage of regional cost and supply availability. ARI is among the largest of four U.S. olive processors with the largest U.S. market share of branded sales of both black and green olives. Significant synergies have been attained through successful integration of the olive product lines with ARI's existing marketing, logistical, and support functions allowing effective marketing and efficient, lower cost operations for both rice and olives. 5 RICE PRODUCTS Rice Industry Overview Rice is the primary staple food consumed in most countries and is the cereal grain with the highest level of human consumption in the world, comprising approximately 40% of world cereal grain consumption. Primarily as a result of population increases, world rice consumption has increased approximately 125% during the last 30 years to approximately 350 million metric tons. U.S. consumption of rice has approximately doubled since 1984 and currently exceeds three million metric tons per year. The increase in U.S. rice consumption is primarily due to the substantial population growth of certain ethnic groups and increased awareness by the general population of the impact of diet on health. Measured on a per capita basis, average consumption of rice is estimated at 150 pounds per person on a worldwide basis, with Asia having the highest per capita annual consumption at approximately 225 pounds and the United States having one of the lowest at 28 pounds. International Trade. While over 95% of the rice grown worldwide is consumed in the country in which it is grown, international trade in rice has expanded steadily over the last decade from approximately 11 million metric tons to approximately 18 million metric tons. The demand for rice over time has increased proportionately with population increases, coupled with expansion in per capita consumption, and has exceeded agricultural productive capacity in some countries. In addition, due to the economic collapse of the former Soviet bloc nations, certain foreign government agricultural support programs have been reduced. This has reduced supply and increased international trade demand. The world's major rice producing countries include China, India, Indonesia, Bangladesh, Thailand, Vietnam and the United States, with China and India accounting for over 50% of world rice production. Thailand is the largest exporter of rice in the world, exporting approximately 30% of total world rice exports, followed by the United States, India and Vietnam, whose exports account for 16%, 14% and 11%, respectively, of the world rice trade. Rice produced in the United States is generally high quality and sells at premium prices relative to Asian rice. Based on statistics compiled by the U.S.D.A., exports of rice produced in the United States have sustained consistent growth over the last 20 years, growing from an average of 1.8 million metric tons per year in the years from 1972 to 1974 to an average of approximately three million metric tons per year in 1995 to 1996. Historically, the largest rice importing nations have included Brazil, Iran and Saudi Arabia with each nation importing in excess of 750,000 metric tons annually. In recent years, imports from Bangladesh, China and Indonesia have increased to this level. 6 In 1995, international trade was favorably impacted by the effects of the General Agreement on Tariff and Trade ("GATT"). Signatory countries, including the United States, the European Union, Japan and South Korea began implementation of their GATT commitments on January 1, 1995, which required, with some exceptions, the elimination of all import bans, and the reduction of all import tariffs. In the case of Japan, which was not required to eliminate rice import bans, highly beneficial quotas were established through bilateral negotiations. Japan imported approximately 450,000 metric tons of rice in the 1996 crop year, and its imports are scheduled to increase each year to 758,000 metric tons by 2000. In general, reductions on tariffs will make imports more attractive to foreign buyers and consumers and more competitive with domestic products. Under GATT, developed countries are committed to reduce tariffs by an average of 36% over six years, while developing nations will reduce tariffs 24% over 10 years. Management believes increases in U.S. medium grain rice production in recent years is primarily attributable to GATT and that over the longer term the agreement will stimulate additional production increases and world rice trade. Domestic Trade. U.S. consumption of rice has approximately doubled since 1984 and currently exceeds three million metric tons per year. U.S. per capita consumption of rice has increased primarily due to increases in the population of high rice-consuming Hispanic and Asian ethnic groups, which have grown from 6% of the U.S. propulation in 1970 to 26% in 1990 and are projected by the U.S. Census Bureau to increase to 38% of the U.S. population by 2020. For example, the Hispanic communities in the Southwest, and the Asian communities in California, each of which have grown significantly since 1985, consume over three times the average per capita amount of rice consumed in the United States. To a lesser extent, the growth in average per capita consumption of rice has also been caused by increased awareness of the impact of diet on health. Rice Production. Approximately two-thirds of total U.S. rice production is the long grain variety, which is produced almost entirely within Arkansas, Louisiana, Mississippi, Texas and Missouri and is marketed worldwide. Medium grain rice, which is grown in several rice producing states but is the dominant variety grown in California, accounts for effectively all of the remaining one-third of all rice grown in the United States. California medium grain, generically known as Calrose, is preferred within certain segments of the global market, including Japan, Korea, Turkey, Jordan and Lebanon. The difference between these rice varieties is reflected in the size and shape of the kernel as well as amylose or starch content. 7 Rice Brands and Markets ARI is one of the largest competitors in the global market for rice. ARI competes in all major rice importing regions in the world. ARI plans to continue to expand into new markets and increase its share in certain of its existing markets. The following table summarizes the regional concentrations of ARI's rice sales during the past three years (in thousands):
Years ended March 31, -------------------------------- 1997 1996 1995 --------- --------- --------- United States $ 146,880 $ 131,776 $ 123,530 Export sales: Middle East 165,666 117,359 91,449 Caribbean, Mexico and South America 64,991 64,654 84,806 Asia 31,583 49,453 49,963 Europe 13,993 18,111 13,632 Africa 14,352 2,275 3,864 Other 6,731 6,459 5,806 --------- --------- --------- Total export sales 297,316 258,311 249,520 --------- --------- --------- Total sales $ 444,196 $390,087 $373,050 ========= ========= =========
United States. ARI's domestic rice sales consist of branded rice products sold to retail outlets, primarily grocery stores, branded bulk sales to ethnic wholesale and retail outlets and sales to other industrial users and major food processors. ARI has targeted its domestic marketing programs to achieve regional brand prominence with such efforts primarily being focused on the top 15 rice consumption markets. These markets, located principally in New York, California, Texas and Florida account for over 50% of the rice consumed in the United States. ARI is the second largest seller by tonnage of retail branded long grain white rice products in the United States with a market share of approximately 15%. ARI's long grain rice brands have attained the number one or number two market share in many of the regions in which they compete including Comet in North Carolina, Blue Ribbon in South Carolina, Adolphus in Texas, Comet in California, Texas and the Southeast and AA in California. Certain ethnic groups represent some of the fastest growing segments of the rice business in the United States. Management believes that ARI's AA is the leading brand of long grain rice among Asian-Americans and dominates sales in the western region of the United States and certain other regions having large Asian-American populations. Other ARI brands have strong consumer acceptance with Hispanic-Americans in the Southwest. 8 In addition to its own branded retail products, ARI supplies long grain white and parboiled rice, instant rice, rice mixes, brown rice and other rice products to a full range of private label resellers including five of the top fifteen supermarket chains in the United States and Canada as well as other food retailers. Middle East. Saudi Arabia has been the largest market for U.S. grown rice, annually importing an average of approximately 750,000 metric tons from all sources, and is currently the largest branded parboiled rice market in the world. ARI's Abu Bint brand is considered to be one of the best recognized food products in Saudi Arabia leading all U.S. grown rice imports with approximately 60% of the market for this rice. Overall, Abu Bint is the number one brand with a market share of approximately 13% of the total Saudi Arabian market. Rice products exported to Saudi Arabia by ARI are marketed to various wholesalers and retailers through a number of major distributors. Historically, the rice ARI sold in Saudi Arabia was shipped from the United States in packaged form. In 1994, ARI began shipping rice in bulk form to the Middle East region and packing it under strict quality supervision in order to reduce vessel loading and freight costs while providing enhanced market competitiveness, improved customer service and product freshness. Until January 1997, products were packed at a facility in Jeddah, Saudi Arabia (see Item 3 - Legal Proceedings). Since January 1997 other Middle East facilities with similar advantages have been utilized. ARI also sells significant quantities of both branded and unbranded rice to a number of other Middle East countries including Turkey, Iran, Jordan and Syria. Caribbean, Mexico and South America. The Caribbean is one of the highest per capita rice consumption markets in the world. ARI sells branded products such as Comet, Blue Ribbon, D'Aqui and Cinta Azul in this region, with substantial ARI-controlled or owned assets in Haiti, Jamaica and the Netherlands Antilles. ARI is the largest processor and marketer of rice to Haiti. In Jamaica, ARI's subsidiary, Comet Rice of Jamaica Limited, is the second largest processor and one of the largest branded retail and food service marketers in the country. Within Aruba, Bonaire and Curacao, ARI has a long-term exclusive supply, processing and marketing agreement with the Antillean Rice Mill, a local marketing company. 9 Asia. As a participant in GATT, Japan imported approximately 450,000 metric tons of rice in the 1996 crop year, and its imports are scheduled to increase each year to 758,000 metric tons by the year 2000. In the first two years of the GATT agreement, the United States exported approximately half of Japan's GATT commitment, and ARI milled in excess of 40% of the U.S. exports. Management believes the Company will continue to have material involvement in this business. In 1994, ARI formed ARI-Vinafood, a Vietnamese limited liability company on a joint venture basis with a company owned by the government of the Socialist Republic of Vietnam (the "Vietnam Partner") for the purpose of producing rice and related products at rice processing facilities in Vietnam. ARI owns 55% of ARI-Vinafood. ARI's participation in ARI-Vinafood is subject to a buy-out by the Vietnam Partner after the fifth year of operation. ARI's participation in ARI-Vinafood has allowed ARI to participate in the world market for Asian origin rice. Rice Sourcing and Pricing ARI's market and source diversity enhances its ability to moderate the impact of regional trade imbalances caused by climate and geopolitical factors. ARI is the only marketer of rice in the world with sources and milling capacity in each of the major rice producing regions of the United States as well as overseas. As a result, ARI utilizes a variety of rice products grown in the United States and is able to take advantage of regional cost and supply availability. Each of ARI's milling facilities are strategically located to minimize shipping costs and maximize the convenience to the customer enabling ARI to capitalize on marketing opportunities as they develop around the world. ARI buys rough rice from a variety of farm sources. A large portion of these rough rice purchases are made under pre-harvest agreements. Pre-harvest agreements generally provide for delivery of rough rice from specified acreage at a price per hundredweight determined by the terms of the agreements. Generally, the price per hundredweight is determined based on local market conditions occurring between the time of harvest and on or after delivery to the buyers. ARI also obtains domestic rough rice through competitive bidding in all rice producing states. In addition to purchasing domestic rough rice, ARI obtains milled rice from other U.S. and foreign rice suppliers as needed. The Chicago Board of Trade maintains a futures and options market in rough rice. ARI buys and sells futures and options contracts as a mechanism to manage a portion of its rough rice requirements. ARI procures rice from a variety of locations, including five of the six significant U.S. rice growing states; Texas, Louisiana, Mississippi, Arkansas and California. 10 Southern Facilities. ARI's principal Southern rice processing facility is located in Freeport, Texas. The Freeport facility, is a 20-acre integrated processing complex with an annual milling capacity of over 600,000 metric tons located directly on a deep water port in the Gulf of Mexico. The facility is the only rice facility in the United States capable of handling large ocean-going vessels directly. The facility has a parboiled processing plant and separate milling facilities for both white and parboiled rice. The Freeport facility adds water polishing and electro-optical sorting to ensure that ARI's exacting quality standards are consistently met. The facility also has a rice flour mill that markets and meets the stringent quality standards of baby food processors and Japanese food ingredient purchasers. ARI also processes instant rice for retail and industrial markets. California Facilities. ARI operates two rice processing facilities in Maxwell and Biggs, California and has one of the state's largest single rice drying operations. The Maxwell facility is the largest capacity single rice mill operating in California. The Biggs facility, which was first leased by Comet in 1991 and recently extended, is an older milling facility which provides additional milling capacity to supplement ARI's domestic milling requirements. The combined capacity of the Maxwell facility and the Biggs facility exceeds the multi-mill capacities of ARI's largest California competitors. Other Facilities. ARI also operates packaging facilities in Port-au-Prince, Haiti and Kingston, Jamaica that receive bulk rice from ARI's Southern facilities and process and package the bulk rice into local retail branded rice products. ARI's Haitian facility is located on a self-contained deep water port 25 kilometers outside the capital city and principal market, Port-au-Prince. ARI operates an ocean-going vessel to service the Caribbean area facilities. These facilities provide ARI with competitive advantages in loading, transportation and labor costs as well as in customer service and product freshness. 11 OLIVE PRODUCTS Olive Industry Overview While rice is a primary staple food in the world, olives are typically used as a food ingredient, supplement or garnish. Therefore, while rice has estimated average per capita consumption of 150 pounds per year, olives are much lower with estimated average world per capita consumption of .4 pounds per year. Per capita consumption of olives in the U.S. is estimated to be 1.5 pounds per year. International Trade. The principal production regions for table olives are the Mediterranean and the valleys of California. Consumption is concentrated in the Mediterranean region and the U.S. In the five years ending with crop year 1996-1997, estimated world production and consumption of table olives has averaged approximately one million tons, while world trade between countries averaged approximately 230,000 tons. Due to favorable weather conditions, the 1996-1997 world crop is expected to exceed the average of the last four years by over 200,000 tons, with a consumption increase and replenishment of unusually low beginning inventories absorbing the production increase. Among the leaders in world trade in recent years, Morocco is the largest exporter (with approximately 85,000 tons), while the United States is the largest importer (with approximately 76,000 tons). Domestic Trade. California processors dominate the production and marketing of black olives sold domestically, accounting for about 80-85% of the market. The remaining 15-20% are imported from Spain, Morocco and Mexico. The California ripe olive processing industry is consolidating. The industry entered the 1990's with six processors, down from 27 during the early 1960's. Today only four domestic processors remain. The industry's increased mechanization, higher fixed environmental costs, and higher capital requirements in both production and marketing have raised breakeven volumes leaving smaller olive companies uncompetitive. In addition, growth in food service demand for sliced olives and price pressure from Spain and Morocco have shrunk industry margins. Among domestic processors, ARI is the second largest in production capacity handling approximately 30% of California's annual production. The green olive business, in contrast to the domestic black olive business, is fragmented with dozens of Spanish processors and marketers and U.S. importers. Natural industry consolidation has been delayed by Spanish laws making plant closures and mergers prohibitively expensive. These laws, however, are currently under review with the objective of increasing the global competitiveness of Spanish businesses. Changes which will favor industry consolidation are expected which will improve the economics of efficient operations such as that of ARI. ARI is one of a few international olive processors and marketers. The company operates modern, low cost production facilities in Visalia, California for ripe olives and in Seville, Spain for green olives. The Company has also allied itself with other processors of various olive styles in key producing regions to assure its customers a complete product line and reliable supply. 12 Olive Production. Olives have been produced and consumed in the Mediterranean region since history has been recorded. It is believed olive cultivation was spread throughout the Mediterranean by the Greeks and Romans and was brought to the Western Hemisphere by Spanish explorers. Olives are said to have been among the crops grown in the Jesuit mission settlements in California. Although there are numerous varieties of olives cultivated in the world, the principal varieties are the Manzanillo and Sevillano. Olives are harvested in the fall of the year and are either processed immediately or stored in a brine solution for processing later in the year. Regardless of variety, olives can be processed into two principal types, green olives (also known as Spanish olives) and black olives (also known as ripe olives), the determining factor being differences in the production process. Green olives are produced by fermentation under controlled temperatures in a brine solution for a period ranging from two to seven months. Black olives are produced by a caustic aeration process lasting about seven days. After bulk processing, olives are made into a variety of familiar products including pitted, unpitted, stuffed, sliced, or chopped olives or olive oil. The olive tree is an erratic, alternate bearing fruit because the stress to the olive tree caused by a large crop tends to depress new growth and production in the following year. The 1996-1997 crop was the second largest olive crop in history both in the U.S. and the world. Early indications suggest the 1997-1998 crop will be only 50% as large, and thus carryover inventory in the U.S. will be important to service olive customers. ARI's relatively large inventory position is expected to be ideal to meet anticipated demand in the next year. Olives Brands and Markets ARI annual sales of olive products in fiscal 1998 are expected to exceed $100 million. In the nine months from the Olive Acquisition to March 31, 1997 sales of $71.3 million included $64.2 million in the U.S. and $7.1 million in other world markets, primarily Europe. United States. ARI enjoys the largest market share of branded sales of both black and green olives in U.S. markets. In dollar sales of black olives, the company has 35.8% of the market compared to 23.4% for the nearest competitor. The dominance of ARI's share of branded green olive sales is more pronounced, with 25.2% compared to the nearest competitor with a 13.8% share. ARI's principal U.S. olive brand is Early California, although the Company also markets U.S. olives under the Franciscan and Senor brands. Through a fee arrangement with Campbell Soup Company, ARI uses Campbell's Vlasic brand in the Eastern United States. Sales under the Vlasic brand are being phased out in favor of the Early California brand. The Company is also a major private label supplier. 13 Other World Markets. ARI markets green olives produced in its Spanish facilities primarily to European and Caribbean countries in proprietary brands such as Tapas and Loreto. Several of ARI's rice markets, particularly the middle eastern countries, are also major olive consuming countries. Others are key olive producing countries. ARI is uniquely positioned to leverage its skills and relationships in international procurement, logistics and marketing over this new line of products. Competition Competition is based upon brand name recognition, quality, product availability, product innovation and price. On a global basis, ARI competes with approximately 15 entities that together trade or market over 50% of world trade in rice. These competitors are from the United States and other exporting countries such as Thailand, Pakistan and Vietnam. ARI's U.S. competitors in the domestic and export milled rice markets include Riviana Foods Inc., Riceland Foods, Inc., Producers Rice Mills, Inc., Continental Grain Company, Cargill Inc. and Farmers Rice Cooperative. There are other competitors in certain specialized marketing areas, such as Mars, Inc. (Uncle Ben's), Philip Morris Companies, Inc. (Minute) and the Quaker Oats Company (Rice-a-Roni). Within the United States, competition exists both for procuring and processing rough rice, and for marketing milled rice products. Competitors in the rice milling business include both private commercial mills, such as ARI, and mills operated by agricultural cooperatives. ARI's principal competitors in milling are Riceland Foods, Inc., Farmers Rice Cooperative and Cargill Inc. with estimated shares of operating domestic milling capacity of 19%, 8% and 7%, respectively. ARI's share of estimated operating domestic milling capacity is 20%. Domestic competitors of ARI in the marketing of retail branded milled rice on a national basis principally consist of Riviana Foods Inc. and Riceland Foods, Inc., and, in the food service markets, Farmers Rice Cooperative. According to syndicated market data, no company currently controls more than 25% of the domestic branded markets. There are a number of small regional competitors in the branded segment of the rice industry and approximately 15 to 20 rice millers who compete in the commodity rice markets. The California ripe olive processing industry is consolidating. The industry entered the 1990's with six processors, down from 27 during the early 1960's. Today only four domestic processors remain. ARI's competitors include Bell Carter Foods, Inc., Oberti Olive Company and Musco Olive Company. Bell Carter and Musco are privately held businesses. Oberti Olive is a subsidiary of Tri-Valley Growers, an agricultural cooperative. The industry's increased mechanization, higher environmental costs, and higher capital requirements in both production and marketing have raised breakeven volumes leaving smaller olive companies uncompetitive. In addition, growth in food service demand for sliced olives and price pressure from Morocco and Spain have shrunk industry margins. Among domestic processors, ARI is the second largest in production capacity handling approximately 30% of California's annual production. 14 Brand Names and Trademarks ARI's trademarks, copyrights and brand names are protected by numerous registrations in the U.S. and foreign jurisdictions. ARI believes that these trademarks, copyrights and brand names have significant value and are adequately protected. Regulation Although ARI is not involved in rice farming, certain government regulations affecting U.S. rice farmers have a significant impact on ARI's cost and availability of ARI's principal raw material, rough rice. Substantially all U.S. rice is grown under the influence of U.S. government programs. In April 1996, the Federal Agriculture Improvement and Reform Act ("1996 Farm Bill") was enacted to replace its 1990 predecessor, the Food, Agriculture, Conservation and Trade Act of 1990 ("1990 Farm Bill"). The 1996 Farm Bill provides marketing loans and agricultural market transition payments to qualifying farmers for seven years beginning with the 1996 crop. The agricultural market transition payments range on a declining scale from $2.75 per cwt. for the 1996 crop to $2.03 per cwt. in 2002 and replace similar payments of the 1990 Farm Bill. Unlike the predecessor bill payments, the agricultural market transition payments are fixed without reference to price levels. Other key provisions of the new law include the elimination of acreage reduction incentives and increased flexibility of farmers to change among different commodities as market conditions warrant. Management believes the 1996 Farm bill was primarily responsible for a reduction of approximately eight percent of rice tonnage harvested in the U.S. in 1996 and a general increase in price levels of rice. While price levels have remained somewhat higher, preliminary acreage surveys indicate production will increase in 1997. ARI is subject to various federal, state and local environmental laws and regulations governing, among other things, air and water quality, the generation, use and disposal of materials related to plant operations and the processing, storage and shipment of it's products. The Company believes it is in substantial compliance with all existing laws and regulations and has obtained or applied for the necessary permits to conduct its business. To date, and in management's belief for the foreseeable future, compliance with applicable environmental laws has not had and will not have a material adverse effect on ARI's financial or competitive positions. 15 CHEMONICS INTERNATIONAL, INC. - CONSULTING Chemonics International, Inc. offers management and technical assistance services to developing countries worldwide under contracts with the U.S. Agency for International Development (AID), the World Bank, development banks, municipalities and other government agencies as well as private firms. Services are provided in a range of areas including agriculture, agribusiness, natural resources and the environment, and rural development. A major focus is aiding the development of private enterprise, especially in countries where government controlled enterprise once dominated, and privatization of state farms and land in these countries. Chemonics International has over 30 long-term contracts which are regional or worldwide in scope and maintains offices in more than 30 countries. The countries or regions with the largest amount of business include Egypt, Oman, Central and South America, Philippines, Guinea, Indonesia, Nepal, South Africa, Botswana, Swaziland and the newly independent states of the former Soviet Union. At March 31, 1997, Chemonics International has a funded contract backlog of approximately $166 million covering 1997 through 2000. Of this amount, $65 million relates to services expected to be provided in fiscal year 1997. Contracts are subject to cancellation in the event of severe political turmoil in the country or region, subject to appropriate compensation for winding down the contract involved. Revenues for 1997 were $77,427,000, down slightly (.4%) from record revenues of the prior year. Revenues were $77,754,000 in 1996, up 22% from 1995 revenues of $63,546,000. Chemonics International is one of the largest for-profit AID contractors, in terms of volume of service to AID, in an industry dominated by non-profit entities including universities. The Company is one of the leaders in trying to enhance the role of profit-making firms in providing consulting services to AID. CHEMONICS FIRE-TROL, INC. Chemonics Fire-Trol Inc. is headquartered in Phoenix, Arizona. Chemonics Fire-Trol also maintains facilities in Northern California, Washington State and Western Canada from which forest fire retardant chemicals are manufactured and sold. Chemonics Fire-Trol's primary products are forest fire retardants. These products are patented, United States Forest Service tested and qualified materials designed to combat forest, brush and grass fires through dissemination from air tankers and helicopters. These products are sold under contract to the U.S. and Canadian Forest Services through competitive bidding, on contracts ranging in length from one to ten years. The chemical components are generally available throughout the year and are combined in a manufacturing process at Orland, California; Pasco, Washington; Kamloops, British Columbia; and Edmonton, Alberta. Fire-Trol is available throughout all major forest fire areas in North America. It is distributed in Canada through Chemonics' Canadian affiliate, Chemonics Industries (Canada) Ltd. Fire-Trol is also developing overseas with established operations in France, Portugal, Spain, South Africa and South America. 16 Chemonics holds significant patents for Fire-Trol (which expire in various years through the year 2012), but it faces substantial competition in its fire retardant business from Monsanto Chemical Company, a corporation with far greater resources than the Company. Annual sales fluctuate according to the number and severity of forest fires in the geographical areas serviced by Chemonics Fire-Trol. Sales for 1997 were $20,936,000 as compared to $14,034,000 for 1996 and $23,003,000 in 1995. This volume variation, based upon weather and fire conditions, is an important aspect of Chemonics' overall sales and profitability. EMPLOYEES The Company employs approximately 1,788 people full-time, 1,500 of which are in the rice and olive businesses. Approximately 600 employees in the Company's foreign operations in Vietnam and Spain are covered by collective bargaining agreements. There have been no significant labor disputes in the past several years and the Company considers its employee relations to be excellent. All eligible employees of the Company are covered by a profit sharing retirement plan and a group insurance plan providing life insurance, medical, dental and hospitalization benefits. The Company makes a mandatory 1% matching contribution to the profit sharing retirement plan on a monthly basis and an annual contribution solely at the discretion of the Board of Directors of the Company. 17 Item 2. Properties The following table summarizes the principal properties owned and/or occupied by the Company and its subsidiaries:
APPROXIMATE OWNED OR LEASED- SQUARE FOOTAGE OF EXPIRATION DATE OF LOCATION BUILDINGS LEASE Continuing Operations - --------------------- Administrative offices: Los Angeles, California 11,086 sq. ft. Leased 2001 Houston, Texas 49,900 sq. ft. Leased 2003 Phoenix, Arizona 10,300 sq. ft. Leased 1997 Washington, D.C. 68,475 sq. ft. Leased 2006 Washington, D.C. 27,270 sq. ft. Leased 1998 Warehousing, processing and shipping of rice, rice products and olives: Freeport, Texas 272,400 sq. ft. Leased 2022 Stuttgart, Arkansas 142,900 sq. ft. Owned Maxwell, California (1) 261,000 sq. ft. Owned and Leased 2034 Biggs, California 95,000 sq. ft. Leased 2001 Laffiteau, Haiti 30,024 sq. ft. Leased 2001 Spanish Town, Jamaica 29,000 sq. ft. Leased 1998 Can Tho, Vietnam (2) 250,000 sq. ft. Leased 2014 Visalia, California 333,000 sq. ft. Owned Seville, Spain 166,000 sq. ft. Owned Processing, warehousing and shipping of fire retardants: Phoenix, Arizona 20,600 sq. ft. Leased 1997 Orland, California 20,000 sq. ft. Owned Kamloops, British Columbia, Canada 10,000 sq. ft. Leased 2016 Edmonton, Alberta, Canada 4,800 sq. ft. Leased 1998 Discontinued Operations - ----------------------- Grape crushing, fermenting, processing and warehousing of wine: Tulare, California (3) 49,000 sq. ft. Owned Delano, California (4) 121,000 sq. ft. Owned
(1) Most of the storage facilities and approximately half of the land is leased. (2) Subject to an option to purchase by the joint venture partner commencing 1999. (3) Leased to a third party, with an option to buy. (4) Leased to a third party. 18 All properties owned or leased by the Company are maintained in good repair, and management believes them to be adequate for their respective purposes. All machinery and equipment are considered to be in sound and efficient operating condition. Facilities reflected as discontinued operations above are included in other assets in the consolidated balance sheets. Substantially all property, plant and equipment detailed above (in addition to all receivables and inventories of ARI and Chemonics Industries, Inc.) are pledged as collateral on notes payable and certain other long-term debt obligations. 19 Item 3. Legal Proceedings In April 1995, a lawsuit was filed in the district court of Harris County, Texas by Kingwood Lakes South, L.P. and Tenzer Company, Inc. as plaintiffs against G.D. Murphy and D.A. Murphy, Chairman and President of the Company and ARI, respectively. ERLY and ARI were named as codefendants in the lawsuit by an amendment to the original petition in September 1995. This is a dispute between the general partner of a proposed real estate development and G.D. Murphy and D.A. Murphy. Damages sought are in the range of $10 million, plus attorneys' fees and punitive damages. The Company and ARI were named as defendants in the lawsuit because of their actions to obtain restraining orders to prevent threatened foreclosures on ERLY common stock pledged as collateral by G.D. Murphy and to stop interference by the plaintiff in the lawsuit, with ARI's mortgage note financing, as well as certain other alleged activities, including knowing participation in breaches of fiduciary duties, civil conspiracy with the Murphys and conversion. The plaintiff recently added a reverse alter ego claim. The Company and ARI believe they have valid defenses in this case and that damages, if any, will not have a material effect on the Company's financial position or results of operations; however, as with any litigation, the ultimate outcome is unknown. In order to minimize legal expenses, ERLY, ARI, and the Murphys are using common legal counsel in this matter and have agreed to share legal expenses ratably. ARI has also been named as a codefendant with Messrs. John M. Howland and George E. Prchal in a lawsuit filed in February 1997 in U.S. district court in Houston, Texas by Rice Milling & Trading Investments, LTD., an Isle of Man Company ("RMTI"). In 1994, ARI entered into an agreement with RMTI for processing the Company's rice through RMTI's facility in Jeddah, Saudi Arabia. Messrs. Howland and Prchal were officers of RMTI through January 1997 and have also been directors of ARI since October 1993 and prior to October 1993 were officers of ARI. In January 1997, RMTI ceased shipping ARI's rice through its Jeddah facility and terminated the employment of Messrs. Howland and Prchal. The lawsuit alleges among other things ARI failed to perform under the terms of the agreement and Messrs. Howland and Prchal breached their fiduciary duties to RMTI. On April 21, 1997, the Company obtained a restraining order from the U.S. District Court for the Southern District of Texas ordering RMTI to desist and refrain from purchasing rice of U.S. or Vietnam origin from any supplier other than ARI and from introducing and/or marketing rice of U.S. and Vietnam origin in Saudi Arabia targeted against ARI's U.S. origin and Vietnam origin rice. The Company believes that this litigation will not have a material effect on the Company's financial position or results of operations; however, as with any litigation, the ultimate outcome is unknown. The Company is involved in other legal proceedings that arise in the ordinary course of its business, all of which are routine in nature. Management believes that the resolution of such legal proceedings will not have a material adverse affect on the consolidated financial position or consolidated results of operations of the Company. 20 Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders, through a solicitation of proxies or otherwise, since the last Annual Meeting of Shareholders held on September 17, 1996. 21 PART II Item 5. Market for the Company's Common Stock and Related Stockholder Matters (a) Market Information The Company's common stock is listed in the National Market Issue Section of the Over-the-Counter Market as ERLY Industries Inc. - NASDAQ Symbol "ERLY." PRICE RANGE OF ERLY COMMON STOCK High Low ----- ----- Fiscal Year 1997* 1st Quarter $ 10-1/8 $ 6-1/2 2nd Quarter 9-5/8 6-5/8 3rd Quarter 9-1/4 5-7/8 4th Quarter 9-1/4 6-7/8 Fiscal Year 1996* 1st Quarter $ 9 $ 8 2nd Quarter 8-3/4 7-1/8 3rd Quarter 8-1/8 6 4th Quarter 9-1/4 5-3/8 * Restated for a 10% stock dividend in September 1996. (b) Holders There were approximately 1,009 shareholders of record as of March 31, 1997. (c) Dividends The Company has never paid cash dividends on ERLY Common Stock and has no present intention to declare or pay cash dividends on the Common Stock in the foreseeable future. The Company intends to retain any earnings which it may realize in the foreseeable future to finance its operations. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There have been no disagreements on accounting or financial disclosures to report. 22 PART III Item 10. Directors and Executive Officers of the Company The following is a list of the directors of ERLY Industries Inc. with information provided as of June 15, 1997: DATE ELECTED AS DIRECTOR NAME OF DIRECTOR AGE OF COMPANY Gerald D. Murphy 69 April 1964 Mr. Murphy is Chairman of the Board and Chief Executive Officer (since 1964) of the Company, and is Chairman of the Board (since 1993) and Director (since 1988) of American Rice, Inc. (which is 81% owned by ERLY effective May 1993). He also serves as a Director of Pinkerton's, Inc., a security and investigation services firm. Douglas A. Murphy 41 January 1988 Mr. Murphy is President (since 1990) and Chief Operating Officer (since 1992) of ERLY Industries Inc., President, Chief Executive Officer (since 1993) and Director (since 1990) of American Rice, Inc. and President of ERLY Juice Inc. (since 1988), a subsidiary of the Company. He was President of Comet American Marketing, a division of American Rice, Inc. from 1986 to 1990. He is also a director advisor of Compass Bank Houston. William H. Burgess 80 September 1975 Mr. Burgess is a private business consultant, Chairman of CMS Digital, Inc., a privately held company, and a Director of American Rice, Inc. (since 1988). From 1978 to 1986 Mr. Burgess was Chairman of International Controls Corp., an internationally diversified manufacturing company. Bill J. McFarland 60 August 1986 Mr. McFarland has served as Vice President of the Company since 1975 and as Director since 1986. He has served as President of the Comet American Marketing division of American Rice, Inc. since 1993 and Senior Vice President of American Rice, Inc. since 1993. He was President of ERLY Food Group from 1990 to 1993, President of The Beverage Source from 1979 to 1990 and President of Early California Foods from 1975 until its sale in 1985 (all subsidiaries of the Company). Alan M. Wiener 59 March 1995 Mr. Wiener has served as a Director of the Company since 1995. He was President of Impulse Designs, Inc. from 1974 to 1995. He is also a Director of FloTool International, Inc. He previously served as a Director of Cal Fame Citrus Products, Inc. and Leisure Technology, Inc. 23 The following is a list of the executive officers of ERLY Industries Inc., their ages and their positions as of June 15, 1997: Gerald D. Murphy 69 Chairman of the Board and Chief Executive Officer of ERLY Industries since formation of the Company in 1964 and President of the Company from 1964 to 1990; and Chairman of the Board of American Rice, Inc. (since 1993). Douglas A. Murphy 41 President since 1990 and Chief Operating Officer since 1992 of ERLY Industries; President and Chief Executive Officer since 1993 and Director since 1990 of American Rice, Inc.; President of ERLY Juice Inc. since 1988; and President of Comet American Marketing from 1986 to 1990. Bill J. McFarland 60 Vice President of the Company since 1975; President of the Comet American Marketing division of American Rice, Inc. since 1993; Senior Vice President of American Rice, Inc. since 1993; President of ERLY Food Group from 1990; President of The Beverage Source from 1979 to 1990; and President of Early California Foods from 1975 until its sale in 1985. Richard N. McCombs 51 Vice President and Chief Financial Officer of the Company since 1990; Executive Vice President of Finance and Administration, Secretary, Treasurer and Director of American Rice, Inc. since 1993; Managing Director of the ARI-Vinafood joint venture since 1994; President of ISC Wines of California from 1984 to 1986; and Executive Vice President of The Beverage Source from 1986 to 1990 and President since 1990. Kurt A. Grey 56 Vice President of the Company since 1982; President, Cicero Industries from 1981 to 1982; and Vice President, Union Bank, from 1976 to 1981. Lolan M. Pullen 63 Vice President of the Company since 1986; Vice President - Finance of the Early California Foods division of American Rice, Inc. since 1996; Vice President of Comet Rice, Inc. from 1986 to 1993; and Vice President - Finance of Early California Foods from 1976 until its sale in 1985. Thomas A. Whitlock 47 Vice President and Corporate Controller of the Company since 1991, Vice President and Controller of The Beverage Source (a subsidiary of the Company) from 1987 to 1990 and Corporate Controller of the Company from 1981 to 1987. Douglas A. Murphy, President of ERLY Industries Inc. and American Rice, Inc. is the son of Gerald D. Murphy, Chairman of the Board of the Company. There are no other family relationships among the directors or executive officers of the Company. 24 Item 11. Executive Compensation Pursuant to General Instruction G(3), information concerning executive compensation is incorporated by reference to the Company's 1997 Proxy Statement to Shareholders. Item 12. Security Ownership of Certain Beneficial Owners and Management Pursuant to General Instruction G(3), information concerning security ownership of certain beneficial owners and management is incorporated by reference to the Company's 1997 Proxy Statement to Shareholders. Item 13. Certain Relationships and Related Transactions Pursuant to General Instruction G(3), information concerning certain relationships and related transactions is incorporated by reference to the Company's 1997 Proxy Statement to Shareholders. 25 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K Page Number (a) 1. Financial Statements Selected Financial Data 28-29 Management's Discussion and Analysis of Financial Condition and Results of Operations 30-35 Consolidated Statements of Operations 36-37 Consolidated Balance Sheets 38 Consolidated Statements of Cash Flows 39-40 Consolidated Statements of Stockholders' Equity 41 Notes to Consolidated Financial Statements 42-64 Independent Auditors' Report 65 2. Financial Statement Schedules Schedule I - Condensed Financial Information of ERLY Industries Inc. (Parent Only) 66-68 Schedule II - Valuation and Qualifying Accounts 69 All other schedules are omitted because they are inapplicable, not required under the instructions or the information is included in the financial statements and schedules of the registrant. 26 Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (continued) 3. Exhibits Exhibit Exhibit Number Description Reference (3)(i) Articles of Incorporation (as amended September 6, 1995) (incorporated by reference to Exhibit 3 to the Company's 1996 Form 10-K). (4) The Indenture dated as of December 1, 1993 for $8,880,000 12 1/2% Subordinated Sinking Fund Debentures due 2002 (incorporated by reference to Exhibit 4 to the Company's 1994 Form 10-K). (4) Trust Indenture dated August 24, 1995 by and among American Rice, Inc. and U. S. Trust Company of Texas for $100,000,000 13% Mortgage Notes due 2002 (incorporated by reference to Exhibit 4.1 of ARI's Form S-1, file No. 33-60539). (11) Calculation of Primary Income (Loss) Per Share. Exhibit 11.1 (11) Calculation of Fully Diluted Income (Loss) Per Share. Exhibit 11.2 (21) Subsidiaries of ERLY Industries Inc. Exhibit 21 (27) Financial Data Schedule (electronic filing) Exhibit 27 (28) Asset Purchase Agreement dated March 23, 1993, between and among American Rice, Inc., Comet Rice, Inc. and ERLY Industries Inc. (incorporated by reference to Exhibit 1 to the Company's Form 8-K, filed June 16, 1993, File No. 1-7894). (28) Amendment to Asset Purchase Agreement dated May 25, 1993, between and among American Rice, Inc., Comet Rice, Inc. and ERLY Industries Inc. (incorporated by reference to Exhibit 2 to the Company's Form 8-K, filed June 16, 1993, File No. 1-7894). (28) Asset Purchase and Sale Agreement between American Rice, Inc. and Campbell Soup Company, dated as of June 11, 1996 (incorporated by reference to Exhibit 2.1 of Form 8-K, filed July 22, 1996). (28) Share Sale Agreement between American Rice, Inc. and Campbell Soup Company, dated as of June 11, 1996 (incorporated by reference to Exhibit 2.2 of Form 8-K, filed July 22, 1996). (28) American Rice, Inc. 1997 Annual Report and Form 10-K (incorporated by reference to ARI's 1997 Form 10-K, filed June 30, 1997, file No. 0-17039). 27 (b) 1. Reports on Form 8-K A Form 8-K was filed in July 1996 to report the acquisition on July 6, 1996 of the ripe and green olive businesses of Campbell Soup Company. This was amended by the filing of Form 8-K/A-2 on February 27, 1997 to amend pro forma financial information previously submitted. 28 ERLY INDUSTRIES INC. AND SUBSIDIARIES Item 6. Selected Financial Data
Years ended March 31: 1993 1994 1995 1996 1997 (In thousands except ------- ------- ------- ------- ------- per share data) Net sales Rice and olives(1) $ 169,617 $ 284,464 $ 373,050 $ 394,838 $ 515,937 Consulting 37,185 41,944 63,546 77,754 77,427 Fire-Trol 12,629 8,416 23,003 14,034 20,936 - ------------------------------------------------------------------------------------------------ Total net sales $ 219,431 $ 334,824 $ 459,599 $ 486,626 $ 614,300 Operating profit (loss) (2) Rice and olives ($ 316) $ 16,002 $ 18,501 $ 14,338 $ 25,837 Consulting 1,539 1,508 4,920 4,157 2,907 Fire-Trol 1,507 (173) 5,348 1,329 3,483 - ------------------------------------------------------------------------------------------------ Total operating profit $ 2,730 $ 17,337 $ 28,769 $ 19,824 $ 32,227 Income (loss) from continuing operations before minority interest ($ 10,989) $ 14,765 $ 8,653 ($ 8,439) $ 6,637 Net income (loss) ($ 8,673) $ 17,669 $ 9,275 ($ 1,149) $ 7,352 Income (loss) from continuing operations per share* Primary ($ 2.52) $ 2.90 $ 1.68 ($ .24) $ 1.51 Fully diluted ($ 2.52) $ 2.71 $ 1.58 ($ .24) $ 1.46 Net income (loss) per share* Primary ($ 1.99) $ 3.82 $ 1.68 ($ .24) $ 1.51 Fully diluted ($ 1.99) $ 3.58 $ 1.58 ($ .24) $ 1.46 Average common and common equivalent shares outstanding* Primary 4,347,000 4,624,000 5,522,000 4,708,000 4,868,000 Fully diluted 4,357,000 4,962,000 5,943,000 4,708,000 5,123,000 Cash dividends per common share $ - $ - $ - $ - $ - Stock dividend issued - - - 15% 10% At year-end: Total assets $ 135,100 $ 199,150 $ 207,058 $ 235,135 $ 320,718 Long-term debt** $ 40,565 $ 67,971 $ 68,321 $ 100,276 $ 101,086 Subordinated debt** $ 9,941 $ 8,880 $ 7,670 $ 6,665 $ 5,665 Stockholders' equity (deficiency) ($ 9,194) $ 8,394 $ 16,799 $ 17,534 $ 24,780 Shares outstanding 3,486,956 3,674,765 3,718,272 4,284,985 4,740,415
29 Selected Financial Data (continued) On May 26, 1993, ERLY consummated the Acquisition in which it acquired an additional 33% voting interest in ARI in exchange for the net assets of Comet, other than the ARI capital stock already owned by Comet. Comet was a wholly owned subsidiary of ERLY. The Acquisition was accounted for as a reverse step acquisition of ARI by ERLY through its subsidiary, Comet. Because Comet was the acquirer for accounting purposes, the selected financial data presented herein for periods prior to the Acquisition includes the accounts of Comet, not ARI. In addition, the fiscal year 1994 operating results for the period April 1, 1993 through the date of the Acquisition, May 26, 1993, include those of Comet, not ARI. Operating results thereafter reflect the consolidated operations of Comet and ARI. Because ERLY holds both common and convertible preferred stock in ARI, ERLY's share of ARI's net income since the Acquisition consists of ERLY's proportionate share (32%) of ARI's earnings applicable to common stock plus dividends earned on ARI Series B Preferred Stock. ERLY's share of ARI's net earnings (loss) applicable to common stock after preferred dividend requirements was ($690,000), ($3,784,000), ($645,000) and $2.6 million in 1997, 1996, 1995 and 1994, respectively. ERLY also earned Series B Preferred dividends of $5.2 million in 1997, 1996 and 1995 and $4.3 million from the date of the Acquisition to the end of fiscal year 1994 (see Note 11 of Notes to the Consolidated Financial Statements). This information should be read in conjunction with the Consolidated Financial Statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Notes to Selected Financial Data: (1) ARI sales increased in 1994 due to the combination of Comet and ARI. ARI sales increased in 1997 with the acquisition of the Early California Foods division. (2) Operating profit represents gross profit less selling, general and administrative expenses, excluding corporate overhead. * Retroactively adjusted to give effect to a 10% stock dividend in September 1996. ** Including current portion. 30 ERLY INDUSTRIES INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations FISCAL YEAR ENDED MARCH 31, 1997 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1996 Consolidated Results For the year ended March 31, 1997, ERLY Industries recorded net income of $7.4 million or $1.46 per fully diluted share of common stock on sales of $614 million. This compares with a net loss in 1996 of $1.1 million or $.24 per share of fully diluted common stock on sales of $487 million. Results for fiscal year 1996 include a $7.2 million provision for loss on disposal of property held for sale (see Note 6). Excluding this non-recurring charge (and the related effect on taxes and minority interest), ERLY would have recorded net income of $2.9 million for fiscal 1996. Consolidated sales increased by $128 million in 1997 over 1996 due to increases by ARI ($122 million) and Fire-Trol ($7 million). ARI results reflect the acquisition of the olive business in fiscal 1997 which had sales of $71 million for the year plus a $55 million increase in sales of rice. American Rice Overview ARI purchases and processes rough rice into branded and commodity rice for sale in both international and domestic markets. Demand for branded rice products is relatively constant and margins are typically higher than those for commodity rice products. Demand for commodity rice products is relatively constant globally, but demand for U.S. grown commodity rice is dependent upon supply and cost relative to other sources of supply. Supply and costs for both branded and commodity products depend on many factors including governmental actions, crop yields and weather, and such factors can persist through one or more fiscal years. In general, management believes that it is insulated from many of the effects of rough rice price fluctuations for the following reasons: (i) the Company's net sales are proportionately weighted toward the relatively higher margin branded products, (ii) approximately one-half of the Company's rough rice purchases, excluding rough rice milled under contract for others, are made as spot market purchases and matched against commodity orders at prices providing a favorable margin to costs, (iii) the Company's high rice inventory turnover rate of approximately five times per year reduces the Company's exposure to seasonal price fluctuations, and (iv) the Company's diversity of rice sources and rice customers increases the ability of the Company to take advantage of supply and demand imbalances. 31 On July 5, 1996, ARI acquired the domestic and foreign olive business of Campbell Soup Company for approximately $36 million. Assets acquired include domestic inventories and fixed assets, all of the outstanding common stock of a Spanish olive company and fifty-one percent of the stock of a marketer of olive processing machinery. The purchase was funded primarily from ARI's credit facilities. The Acquisition is accounted for as a purchase, and the results of operations of the acquired business are included in the Company's consolidated financial statements after July 5, 1996. Historically, sales of olives have pronounced seasonal elements, with higher sales occurring in conjunction with holiday consumption. Accordingly, because the quarterly period ending December 31 contains both the Thanksgiving and Christmas holidays, the two holidays of highest consumption, it will have significantly higher sales than the other three quarters of the fiscal year. Margins normally follow the seasonal pattern of sales. Net Sales. ARI's net sales increased $121.7 million, or 30.9%, from $393.8 million in fiscal 1996 to $515.5 million in fiscal 1997. The sales increase of $121.7 million was composed of $67.6 million in olive sales derived from the Olive Acquisition in July 1996, $39.0 million in increases in sales of exported rice, and $15.1 million in increases in sales of rice in the U.S. Export rice sales increased due primarily to higher volume, while average export rice prices remained at approximately the same levels as the prior year. Export rice sales volume increased approximately 3.1 million equivalent rough rice hundredweight as a result of higher sales in the Middle East and Africa partially offset by lower sales to Asia and the Western Hemisphere. Domestic rice sales were higher as a result of higher average prices partially offset by lower volume. Gross Profit. Gross profit was 11.9% of sales for fiscal 1997 compared to 9.7 % for fiscal 1996. Gross profit increased $23.2 million, or 61.0%, from $38.1 million in fiscal 1996 to $61.3 million in fiscal 1997, due primarily to the Olive Acquisition. Selling, General and Administrative Expenses. Selling, general and administrative expense increased $11.1 million to $35.9 million in fiscal 1997 due primarily to higher advertising and promotional expenses associated with the Olive Acquisition. Chemonics International - Consulting Revenues for International decreased slightly by $327,000, or .4% to $77.4 million in 1997 from $77.7 million in 1996. Although sales were essentially flat, significant shifts occurred in the regions constituting these sales as revenue from contracts in the former Soviet Union declined, while new contracts began in Latin America with the World Bank and the International Development Bank. Gross profit as a percentage of revenues for 1997 was 28.6% compared to 27.4% for the prior fiscal year. This increase reflects a reduced level of subcontracted work and a greater utilization of Chemonic's staff as as percentage of cost input. Operating income was $2.9 million, or 3.8% of revenues in fiscal 1997 compared to $4.2 million or 5.3% of revenues in fiscal 1996. Selling, general and administrative expenses were up by approximately $2 million for the year due largely to intensified efforts to obtain new business and maintain Chemonic's current market share. 32 Chemonics Fire-Trol Fire-Trol reported net sales of $20.9 million in fiscal 1997 compared to net sales of $14.0 million in fiscal 1996, an increase of 49%. Fiscal 1997 represented a near record sales year for Fire-Trol due to the significant forest fire activity experienced in the Western United States in the summer of 1996. Fiscal year 1996 reflected a more normal fire season. Gross profit for fiscal year 1997 as a percentage of sales increased to 28.4% from 26.9% in fiscal 1996 due to the increase in sales. Operating income for fiscal year 1997 was $3.5 million, compared to $1.3 million in 1996, an increase of $2.2 million due to the increase in sales. Corporate Consolidated interest expense was $23.4 million in 1997 compared to $19.8 million in 1996, an increase of $3.6 million. ARI had a $3.8 million increase in interest expense, primarily due to higher average balances outstanding due to the addition of the olive business. Interest expense in both periods includes amortization of capitalized debt issuance costs and accretion of the $6 million original issue discount on the $100 million notes issued by ARI in August 1995. FISCAL YEAR ENDED MARCH 31, 1996 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1995 Consolidated Results For the year ended March 31, 1996, ERLY Industries recorded a net loss of $1.1 million or $.24 per fully diluted share of common stock on sales of $487 million. This compares with net income in 1995 of $9.3 million or $1.58 per fully diluted share on sales of $460 million. Results for fiscal year 1996 include a $7.2 million provision for loss on disposal of property held for sale (see Note 6). Excluding this non-recurring charge (and the related effect on taxes and minority interest), ERLY would have recorded net income of $2.9 million for fiscal 1996. The decline in operating results from last year is primarily due to decreases recorded by the Company's subsidiaries, ARI and Fire-Trol. American Rice Net Sales. ARI's net sales increased $20.7 million, or 5.5%, from $373.1 million in fiscal 1995 to $393.8 million in fiscal 1996. Export sales increased by $8.8 million while domestic sales increased by $11.9 million. Export sales increased due to higher average prices partially offset by lower volume. Average export prices increased approximately 23.0%, accounting for $48.4 million in sales increases. Total export sales volume declined approximately 4.1 million equivalent rough rice hundredweight or 16%, accounting for a $39.6 million sales decline. Export volume was lower primarily due to lower sales to the Caribbean partially offset by higher sales to the Middle East. Sales to Asia were approximately the same as the prior year. Domestic sales were higher primarily due to higher volume. 33 Gross Profit. Gross profit decreased $2.7 million, or 6.8%, from $40.8 million in fiscal 1995 to $38.1 million in fiscal 1996, primarily due to lower sales to Japan partially offset by increases in gross profit on U.S. sales. As a percentage of net sales, gross profit decreased from 10.9% in fiscal 1995 to 9.7% in fiscal 1996. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $1.5 million, or 6.6%, from $23.2 million in fiscal 1995 to $24.8 million in fiscal 1996. As a percentage of net sales, selling, general and administrative expenses were approximately the same as the prior year. Provision for Loss on Disposal of Properties. In fiscal year 1996 ARI entered into an agreement to sell its principal Houston property held for sale, for net proceeds of approximately $11.2 million after expenses associated with the sale. In anticipation of this transaction the carrying value of the property was reduced to its approximate net realizable value (after accrual of certain costs) by a non-recurring charge of $7.2 million in fiscal year 1996. Chemonics International - Consulting Revenues for International increased by $14.2 million, or 22.4%, to $77.7 million for fiscal 1996 from $63.5 million in the prior fiscal year. This increase was primarily due to increased revenues from projects in the former Soviet Union in addition to revenues from new clients, principally national and regional development banks. Gross profit for fiscal 1996, as a percentage of revenues, was 27.4% compared to 29.3% for the prior fiscal year. Operating income was $4.2 million, or 5.3% of revenues in fiscal 1996 compared to $4.9 million or 7.7% of revenues in fiscal 1995. Chemonics Industries - Fire-Trol Fire-Trol reported net sales of $14.0 million in fiscal 1996 compared to net sales of $23.0 million in fiscal 1995, a decrease of $9.0 million, or 39%. Fiscal 1995 represented a record sales year for Fire-Trol due to the significant amount of forest fire activity experienced in the United States and Canada in the summer of 1994. Fiscal year 1996 reflected a more normal sales year. Gross profit for fiscal year 1996 as a percentage of sales decreased to 26.9% from 31.6% in fiscal 1995 due to the decrease in sales. Operating income for fiscal 1996 was $1.3 million, compared to $5.3 million in 1995, a decrease of $4.0 million due to the reduction in sales. Corporate Consolidated interest expense was $19.8 million in 1996 compared to $15.9 million in 1995, an increase of $3.9 million. ARI had a $5.1 million increase in interest expense due to higher average balances outstanding and higher average interest rates. Interest expense in both periods includes amortization of capitalized debt issuance costs. Interest expense for 1996 also includes accretion of the $6 million original issue discount on the $100 million notes issued in August 1995. 34 FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES ARI requires liquidity and capital primarily for the purchase of rough rice and olives and to invest in property, plant and equipment necessary to support operations. Historically, ARI has financed both working capital and capital expenditures through internally generated funds and by funds provided by credit lines. Chemonics' international consulting operation requires capital to finance the costs of it's consulting projects, a significant portion which are labor related, prior to collection under applicable contract terms. The Company's normal working capital and operational requirements are currently provided by a combination of internally generated funds and external borrowings under three revolving lines of credit. ARI operations are funded by an $85 million line of credit and $7.3 million in short-term notes from foreign banks to finance Vietnam inventory. Chemonics is funded by a $19 million line for its international consulting activities and U.S. Fire-Trol operations and a $1.0 million line for Fire-Trol operations in Canada. Advances under the lines of credit are made as needed assuming required collateral, consisting primarily of accounts receivable and inventory, is available. At March 31, 1997, borrowing availability under ARI's line of credit was $8.5 million and borrowing availability under Chemonics' lines was $3.0 million. For fiscal year 1996, ARI had a $47.5 million revolving credit loan with interest at the prime rate of interest plus .5%. In June 1996, this loan was refinanced with a new lender and the borrowing limit was increased to $85.0 million. The new loan bears interest at ARI's option at either the prime rate or the London Interbank Offered Rate plus an applicable margin based upon ARI's adjusted funded debt ratio. Cash used in operations totaled $29.4 million for 1997 compared to cash flow used in operations of $2.5 million in 1996. The change was primarily attributable to increased inventory levels and increased receivables, partially offset by net income in 1997 and higher accounts payable and accrued liability levels. Inventories were up $52 million over last year with ARI accounting for $51 million of the increase. ARI's inventories increased due to a variety of factors which included the increased inventory associated with the Olive Acquisition and higher rice inventories in the Caribbean region and for the Saudi Arabia business. Historically, the rice ARI sold in Saudi Arabia was shipped from the United States in packaged form. In 1994, ARI began shipping rice in bulk form to the Middle East region and packing it under strict quality supervision in order to reduce vessel loading and freight costs while providing enhanced market competitiveness, improved customer service and product freshness. Until January 1997, products were packed at a facility in Jeddah, Saudi Arabia (see Item 3 - Legal Proceedings). Since January 1997 other Middle East facilities with similar advantages have been utilized. 35 Cash provided by financing activities totaled $57 million in 1997 compared to cash provided of $8.8 million in 1996. Cash provided by financing activities in 1997 primarily reflected the $60.3 million increase notes payable, due to the addition of the olive business. In September 1996, ARI closed the sale of its principal Houston property held for sale and received gross proceeds of approximately $13.1 million of which approximately $1 million was used to retire mortgage notes discussed below. Cash outlays for capital expenditures in 1997 totaled $6.2 million of which $5.1 million was invested in the Company's rice and olive operations for infrastructure, development and modernization of new and existing facilities. The significant growth in International's revenue in recent years necessitated increases in its revolving credit line for its working capital requirements. In November 1994, International obtained an $11 million line of credit which was increased to $16 million in fiscal 1996. This was increased to $19 million in fiscal 1997 and now provides financing for Chemonics' international consulting operations and its U.S. Fire-Trol operations. Chemonics Industries also has a $1.0 million line of credit to support its Canadian Fire-Trol operations. In a public offering completed in August 1995, ARI issued $100 million principal amount of 13.0% mortgage notes due 2002 (the "Notes"). Portions of the net proceeds of $94 million were used to repay the balance of ARI's existing term loans, to make a $10.5 million 15% loan to ERLY due 2001, and to reduce borrowings outstanding under ARI's revolving credit loan. The Notes provide for interest payments semi-annually, accruing fixed interest at an annual rate of 13.0%, an effective yield rate of 14.4% ARI intends to satisfy its obligations under the Notes as well as future capital expenditures and working capital requirements primarily with cash flow from operations and from funds available under existing and new revolving lines of credit. Management believes that cash flow from operations and the line of credit will provide sufficient liquidity to enable ARI to meet its currently foreseeable working capital and capital expenditure requirements. The parent company's operating cash requirements for corporate overhead are expected to be met from management fees received from subsidiaries, payments under tax sharing agreements with subsidiaries and through positive cash flows from investments. Lines of credit have been arranged through subsidiary companies, with the result that cash distributions are either not permitted to the parent company or limited to certain amounts under management agreements. The current ARI lending agreements include restrictions on dividend payments, tax payments and management fees. Under the terms of the ARI Series B Preferred Stock issued to ERLY in exchange for the assets and liabilities of Comet, ERLY is entitled to an aggregate dividend of approximately $5.2 million per year. The current loan agreements with the ARI lenders prohibit the payment of any dividends and do not provide any basis on which the lenders would approve a dividend payment. As of March 31, 1997, ARI Series B Preferred dividends accumulated, but not declared, total $19.9 million, and the Preferred C dividends accumulated but not declared total $2.9 million. 36 ERLY INDUSTRIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended March 31 1997 1996 1995 ------------ ------------ ------------ Net sales $614,300,000 $486,626,000 $459,599,000 Cost of sales 524,535,000 422,434,000 392,902,000 - ---------------------------------------------------------------------------------- Gross profit 89,765,000 64,192,000 66,697,000 Selling, general and administrative expenses 60,017,000 46,003,000 40,418,000 Interest expense 23,429,000 19,849,000 15,868,000 Interest income (617,000) (486,000) (451,000) Other (income) expense (381,000) (499,000) (196,000) Provision for loss on disposal of property 7,200,000 1,000,000 - ---------------------------------------------------------------------------------- 82,448,000 72,067,000 56,639,000 - ---------------------------------------------------------------------------------- Income (loss) before taxes on income and minority interest 7,317,000 ( 7,875,000) 10,058,000 Taxes on income 680,000 564,000 1,405,000 - ---------------------------------------------------------------------------------- Income (loss) before minority interest 6,637,000 (8,439,000) 8,653,000 Minority interest* 715,000 7,290,000 622,000 - ---------------------------------------------------------------------------------- Net income (loss) $ 7,352,000 ($1,149,000) $ 9,275,000 ==================================================================================
(Continued) 37 ERLY INDUSTRIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (continued)
Years ended March 31 1997 1996 1995 --------- --------- --------- Net income (loss) per common and common stock equivalents: Primary** $ 1.51 ($ .24) $ 1.68 ================================================================================== Fully diluted** $ 1.46 ($ .24) $ 1.58 ================================================================================== Weighted average common and common stock equivalents: Primary 4,868,000 4,708,000 5,522,000 Fully diluted 5,123,000 4,708,000 5,943,000
* Represents minority interest in net earnings or loss of American Rice, Inc. applicable to common stock, after preferred stock dividend requirements (see Note 11). ** Retroactively adjusted to give effect to 10% stock dividend in September 1996. See Notes to Consolidated Financial Statements. 38 ERLY INDUSTRIES INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
March 31 1997 1996 --------------- --------------- ASSETS Current assets: Cash and cash equivalents $ 5,584,000 $ 3,819,000 Notes and accounts receivable, less allowance for doubtful accounts of $1,326,000 (1997) and $1,715,000 (1996) 85,789,000 56,665,000 Inventories 129,695,000 78,004,000 Prepaid expenses and other current assets 3,354,000 2,020,000 Properties held for sale, net 13,535,000 - -------------------------------------------------------------------------------- Total current assets 224,422,000 154,043,000 Long-term notes receivable, net 1,503,000 1,574,000 Property, plant and equipment, net 71,571,000 56,360,000 Other assets 23,222,000 23,158,000 - -------------------------------------------------------------------------------- $ 320,718,000 $ 235,135,000 ================================================================================ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable, collateralized $ 87,740,000 $ 27,413,000 Accounts payable 64,069,000 48,670,000 Accrued payroll and other current liabilities 23,307,000 16,497,000 Income taxes payable 1,936,000 2,165,000 Current portion of long-term and subordinated debt 1,502,000 1,163,000 - -------------------------------------------------------------------------------- Total current liabilities 178,554,000 95,908,000 Long-term debt 100,584,000 100,113,000 Subordinated debt 4,665,000 5,665,000 Deferred income taxes payable 1,501,000 1,592,000 Minority interest 10,634,000 11,811,000 Commitments and contingencies Redeemable common stock warrants 2,512,000 Stockholders' equity: Common stock, par value $.01 a share: Authorized: 15,000,000 shares Issued and outstanding: 4,740,415 shares (1997) and 4,284,985 shares (1996) 47,000 43,000 Additional paid-in capital 27,533,000 23,879,000 Retained earnings (deficit) (1,249,000) (5,046,000) Cumulative foreign currency adjustments (1,551,000) (1,342,000) - -------------------------------------------------------------------------------- Total stockholders' equity 24,780,000 17,534,000 - -------------------------------------------------------------------------------- $ 320,718,000 $ 235,135,000 ================================================================================
See Notes to Consolidated Financial Statements. 39 ERLY INDUSTRIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended March 31 1997 1996 1995 ---------- ---------- ------------ OPERATING ACTIVITIES: Net income (loss) $7,352,000 ($1,149,000) $ 9,275,000 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 8,775,000 7,247,000 7,627,000 Minority interest (715,000) (7,290,000) (622,000) Provision for loss on disposal of property 7,200,000 1,000,000 Provision for loss on receivables 653,000 320,000 437,000 Gain on redemption of warrant repurchase obligation (387,000) Change in assets and liabilities, net of effects of acquisition and sale of businesses: (Increase) decrease in receivables (26,857,000) ( 3,553,000) (18,851,000) (Increase) decrease in inventories (30,336,000) (21,982,000) 7,274,000 Increase (decrease) in accounts payable, other current liabilities and taxes payable 15,917,000 17,987,000 7,343,000 Other, net (3,758,000) ( 1,241,000) (245,000) - ------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (29,356,000) ( 2,461,000) 13,238,000 INVESTING ACTIVITIES: Acquisition of Olive business (net of cash acquired) (33,952,000) Disposition of assets held for sale 13,118,000 Additions to property, plant and equipment (6,227,000) (6,306,000) (4,601,000) Disposition of property, plant and equipment 1,153,000 50,000 16,000 - ------------------------------------------------------------------------------------- NET CASH (USED IN) INVESTING ACTIVITIES (25,908,000) (6,256,000) (4,585,000)
(Continued) 40 ERLY INDUSTRIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Years ended March 31 1997 1996 1995 -------------- ----------- ------------- FINANCING ACTIVITIES: Increase (decrease) in notes payable $ 60,327,000 ($ 14,470,000) $ 1,188,000 Principal payments on long-term debt (275,000) (63,118,000) (8,237,000) Principal reduction on subordinated debt (1,000,000) (1,000,000) (1,201,000) Redemption of redeemable common stock warrants (2,125,000) Proceeds from notes and long-term debt 94,000,000 Mortgage notes issuance cost (5,000) (6,631,000) Proceeds from sale of stock 107,000 37,000 250,000 - ------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 57,029,000 8,818,000 ( 8,000,000) - ------------------------------------------------------------------------------------- INCREASE IN CASH DURING THE YEAR 1,765,000 101,000 653,000 CASH, BEGINNING OF YEAR 3,819,000 3,718,000 3,065,000 - ------------------------------------------------------------------------------------- CASH, END OF YEAR $ 5,584,000 $ 3,819,000 $ 3,718,000 ===================================================================================== Supplemental cash flow information - Net cash paid during the year for: Interest expense $ 22,360,000 $15,964,000 $ 11,583,000 Income taxes $ 1,008,000 $ 953,000 $ 686,000
Non-cash activities: In fiscal year 1997, the Company acquired the domestic and foreign olive business of Campbell Soup Company for $35,976,000. In conjunction with the acquisition, liabilities were assumed as follows: Fair value of assets acquired $ 43,961,000 Cash paid 35,976,000 ------------ Liabilities assumed $ 7,985,000 ============ In fiscal year 1996, the Company acquired $1,054,000 of property, plant and equipment through capital leases. See Notes to Consolidated Financial Statements. 41 ERLY INDUSTRIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Cumulative Additional Retained Foreign Total Common Stock Paid-in Earnings Currency Stockholders' Shares Dollars Capital (Deficit) Adjustments Equity --------- ----------------------------------------------------------------------------- Balance April 1, 1994 3,374,765 $ 34,000 $16,157,000 ($6,450,000) ($1,347,000) $8,394,000 Net income 9,275,000 9,275,000 Foreign currency adjustments (45,000) (45,000) Common stock issued 43,507 250,000 250,000 Accretion of redeemable common stock warrants (1,075,000) (1,075,000) --------- ---------------------------------------------------------------------------- Balance March 31, 1995 3,418,272 34,000 16,407,000 1,750,000 (1,392,000) 16,799,000 Net income (loss) (1,149,000) (1,149,000) Foreign currency adjustments 50,000 50,000 15% stock dividend 512,314 5,000 5,639,000 (5,644,000) -- Cash payments in lieu of fractional shares (3,000) (3,000) Reclassification from redeemable common stock 345,000 4,000 1,796,000 1,800,000 Common stock issued 9,399 37,000 37,000 --------- ----------------------------------------------------------------------------- Balance March 31, 1996 4,284,985 43,000 23,879,000 (5,046,000) (1,342,000) $17,534,000 Net income 7,352,000 7,352,000 Foreign currency adjustments (209,000) (209,000) 10% stock dividend 430,417 4,000 3,547,000 (3,551,000) -- Cash payments in lieu of fractional shares (4,000) (4,000) Common stock issued 25,013 107,000 107,000 --------- ----------------------------------------------------------------------------- Balance March 31, 1997 4,740,415 $ 47,000 $27,533,000 ($1,249,000) ($1,551,000) $24,780,000 ========= =============================================================================
See Notes to Consolidated Financial Statements. 42 ERLY INDUSTRIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Summary of Significant Accounting Policies Principles of consolidation--The accompanying consolidated financial statements include the accounts of ERLY Industries Inc. and its subsidiaries (the "Company" or "ERLY"). All significant intercompany accounts, intercompany profits and intercompany transactions are eliminated. As discussed in Note 2, substantially all of the assets and liabilities of ERLY's wholly owned subsidiary, Comet Rice, Inc. ("Comet"), were acquired by American Rice, Inc. ("ARI") on May 26, 1993, in a transaction accounted for as a reverse acquisition by its subsidiary, Comet. Prior to the transaction, ERLY owned 48% of the voting rights of ARI, and its investment in ARI was accounted for using the equity method. ERLY's equity in ARI's net results of operations was reflected as investment income or loss in ERLY's consolidated statements of operations. As a result of the transaction, ERLY's ownership increased to 81% of the voting rights of ARI; therefore, beginning in June 1993, ARI's balance sheet and results of operations are consolidated with ERLY's with appropriate adjustments to reflect minority interest of 19%. Use of estimates--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue recognition - The Company's ARI and Fire-Trol subsidiaries generally record revenues upon shipment of product to the customer. The Company's consulting business records revenues in the following manner--On cost- reimbursable contracts, revenues are recorded as contract costs are incurred, plus a proportionate amount of the fee expected to be realized on the contract. On time-and-materials contracts, revenues are recorded at contractual rates for labor hours incurred, plus other expenses. On fixed- price contracts, revenues are recorded using the percentage-of-completion method, generally based on costs incurred in relation to total estimated costs. Provisions for estimated losses on contracts are recorded when identifiable. Cash and cash equivalents--Cash and cash equivalents include cash on hand and highly liquid debt instruments purchased with a maturity of three months or less. Inventories--Inventories are accounted for by the first-in, first-out (FIFO) method or market, if lower. Inventory cost includes direct materials, direct labor and manufacturing overhead. Market value is determined by deducting the costs of disposition from estimated selling prices. The Company, from time to time, buys and sells futures and options contracts on rice as an operational tool to manage its inventory position. Gains and losses on contracts that meet defined criteria are recognized upon completion of the transaction, while gains and losses from all other contracts are recognized in the period in which the market value of the contracts change. 43 Note 1 - Summary of Significant Accounting Policies (continued) Property, plant and equipment--Property, plant and equipment are stated at cost and are depreciated, using the straight-line method of depreciation over the estimated useful lives of the related assets as follows: buildings and improvements--10 to 45 years; machinery and equipment--3 to 25 years; and, leasehold improvements--the lesser of useful life or lease term. Other assets--Included in other assets are trademarks and tradenames, which are being amortized on a straight-line basis over 40 years and deferred costs related to long-term debt and subordinated debentures, which are being amortized over the respective terms of the related debt. The Company utilizes estimated future undiscounted cash flows to evaluate any possible impairment of trademarks and tradenames. Federal and state income taxes--Deferred income tax assets and liabilities are computed annually for differences between the financial statement basis and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future. Such deferred income tax asset and liability computations are based on enacted tax laws and rates applicable to periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The Company does not provide U.S. federal income taxes on undistributed earnings of foreign subsidiaries as such earnings are intended to be permanently reinvested in those operations. Foreign currency translation--All assets and liabilities of operations outside the United States are translated from the functional currency to the reporting currency at the foreign exchange rates in effect at year end. Revenues and expenses for the year are translated at average exchange rates during the year. Such translation gains and losses are not included in determining net income but are accumulated and reported as a separate component of stockholders' equity. Net realized and unrealized gains or losses resulting from foreign currency transactions, including translations of local currencies to the functional currency, are credited or charged to income. The U.S. dollar is currently the functional currency for all operations except Canada, Vietnam and Spain, where the Canadian dollar, the Vietnamese dong and the Spanish peseta are the functional currencies, respectively. Fair value of financial instruments--The Company's financial instruments consist primarily of cash, trade accounts and notes receivable, accounts and notes payable, and debt instruments. The book values of cash, trade receivables and accounts payable are representative of their respective fair values due to the short-term maturity of these instruments. The book value of short-term debt instruments is considered to approximate the fair value as the interest rates of such instruments are based on the prime rate. The fair value of ARI's $99 million principal amount of 13% mortgage notes was approximately $98 million as of March 31, 1997, based on a dealer quote. Stock-based compensation--In October 1995, the Financial Accounting Standards Board issued Statement No. 123, "Accounting for Stock-Based Compensation," which is effective in fiscal 1997 for ERLY. As permitted by the new standard, the Company will continue applying accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees," and has included additional footnote disclosures, as necessary. 44 Note 1 - Summary of Significant Accounting Policies (continued) Impairment of long-lived assets--On April 1, 1996, the Company adopted Financial Accounting Standards Board Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This standard provides guidance on the carrying value of long-lived assets. The adoption of this statement did not have a material effect on the consolidated financial statements. The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. If the estimated future cash flows (undiscounted and without interest charges) from the use of an asset are less than the carrying value, a write down would be recorded to reduce the related asset to its estimated fair value. Earnings per share--Primary earnings per share are based on the weighted average number of: (1) common shares, and (2) dilutive common share equivalents (consisting of stock options and warrants) outstanding during each year. Fully diluted earnings per share assumes conversion of a convertible note payable, unless conversion would be antidilutive. Recent Accounting Pronouncement--In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings Per Share" ("SFAS 128"), which is effective for periods ending after December 15, 1997 and specifies the computation, presentation and disclosure requirements of earnings per share ("EPS"). SFAS 128 requires a dual presentation of basic and diluted EPS. Basic EPS, which excludes the impact of common stock equivalents, replaces primary EPS. Diluted EPS, which utilizes the average market price per share as opposed to the greater of the average market price per share or ending market price per share when applying the treasury stock method in determining common stock equivalents, replaces fully diluted EPS. Pro forma basic and diluted EPS for all historical periods presented, assuming SFAS No. 128 was effective at the beginning of such historical period, would not be materially different from the primary and fully diluted EPS presented. Reclassifications--Certain reclassifications have been made to prior year consolidated financial statements to conform to current year presentation. Note 2 - Acquisition of Comet Rice, Inc. by American Rice, Inc. American Rice, Inc. is a public company involved in all phases of rice processing, packaging and marketing. Pursuant to a reorganization, which was consummated in April 1988, ARI acquired all of the assets of an agricultural cooperative in exchange for approximately 52% of ARI's outstanding voting stock. The remaining 48% of ARI's voting stock was acquired by ERLY's wholly owned subsidiary, Comet Rice, Inc., at a cost of $20 million cash. The cost was allocated first to 48% of ARI's equity ($11,610,000) and the remainder to ARI's Houston, Texas property. The investment in ARI was accounted for under the equity method and was adjusted by Comet's equity interest in the results of ARI's operations. 45 Note 2 - Acquisition of Comet Rice, Inc. by American Rice, Inc. (continued) On May 26, 1993, ARI consummated a transaction (the "Acquisition") to acquire substantially all of the assets of Comet (except the ARI capital stock owned by Comet) and assume all of Comet's liabilities. In connection with the Acquisition, ERLY succeeded to the ARI stock held by Comet upon the liquidation of Comet. Pursuant to the Acquisition, in exchange for the assets acquired from Comet, ARI issued to Comet 2.8 million shares (as adjusted for a one-for-five reverse stock split for all issues of common and preferred stock effective September 1994) of a newly created Series B $1 par value preferred stock. Each share of Series B Preferred Stock provides for annual cumulative, non-participating dividends of $1.85, is convertible into two shares of ARI common stock, is entitled to two votes, and has a liquidation preference of $5.00 per share. The Series B Preferred Stock carries an aggregate dividend of approximately $5.2 million per year. The current ARI loan agreements prohibit the payment of any dividends and do not provide any basis on which the lenders would approve a dividend payment. As a result of the Acquisition, ERLY holds 81% of the combined voting power of ARI stock outstanding after the Acquisition. Note 3 - Olive Business Acquisition On July 5, 1996, the Company's subsidiary, ARI, acquired the domestic and foreign olive business of Campbell Soup Company ("CSC Olives") for approximately $36 million (the "Olive Acquisition"). Assets acquired include domestic inventories and fixed assets, all of the outstanding common stock of a Spanish company which comprises the foreign olive business, and 51% of the stock of Sadrym California, a marketer of olive processing machinery. The purchase was funded primarily from ARI's credit facilities. The Olive Acquisition was accounted for as a purchase and the results of operations of the acquired business have been included in the Company's consolidated financial statements after July 5, 1996. The olive business is operated as the Early California Foods division of ARI. Operating results reflected in the accompanying financial statements do not include CSC Olives' operating activities before July 5, 1996. The following summarized pro forma information assumes the Olive Acquisition occurred on the first day of the current fiscal year (in thousands, except per share data): Year ended March 31, 1997 -------------- Pro forma net sales $ 632,030 ========== Pro forma net income $ 5,553 ========== Pro forma earnings per share: Primary $ 1.14 Fully diluted $ 1.08 46 Note 4 - Inventories A summary of inventories at March 31, 1997 and 1996 follows: 1997 1996 ----------- ----------- Raw materials $ 49,745,000 $47,883,000 Finished goods 79,950,000 30,121,000 - ---------------------------------------------------------------------- $129,695,000 $78,004,000 ====================================================================== Note 5 - Property, Plant and Equipment A summary of property, plant and equipment at March 31, 1997 and 1996 follows: 1997 1996 -------------- -------------- Land $ 3,103,000 $ 596,000 Buildings and improvements 36,295,000 30,931,000 Machinery and equipment 67,753,000 54,813,000 - ---------------------------------------------------------------------- 107,151,000 86,340,000 Less accumulated depreciation and amortization (35,580,000) (29,980,000) - ---------------------------------------------------------------------- $ 71,571,000 $ 56,360,000 ====================================================================== Depreciation expense was $7,133,000 (1997), $5,484,000 (1996) and $5,099,000 (1995). Note 6 - Properties Held for Sale The consolidated balance sheet at March 31, 1996 included properties held for sale of $13.5 million which primarily represented 39 acres of land in Houston, Texas, held for sale by ARI. In fiscal year 1996, ARI entered into an agreement to sell this property and reduced the carrying value of the property to its approximate net realizable value (after the accrual of certain costs) by a non-recurring charge of $7.2 million in the quarter ended December 31, 1995. In September 1996, ARI completed the sale of the property and received gross proceeds of approximately $13.1 million. 47 Note 7 - Other Assets Other assets at March 31, 1997 and 1996 consist of the following: 1997 1996 -------------- -------------- Trademarks and tradenames $ 14,761,000 $ 14,360,000 Deferred debt issue costs 13,733,000 12,022,000 Winery assets held for sale 2,510,000 3,148,000 Other 903,000 778,000 - ---------------------------------------------------------------------- 31,907,000 30,308,000 Less accumulated amortization: Trademarks and tradenames (2,514,000) (2,149,000) Deferred debt issue costs (6,171,000) (5,001,000) - ---------------------------------------------------------------------- $ 23,222,000 $ 23,158,000 ====================================================================== Winery assets held for sale primarily represents two wineries of the Company's discontinued wine operations which management intends to dispose of in an orderly manner. Both plants are leased to third parties, one of which is under a lease that includes an option to buy. In fiscal 1995, a $1.0 million reserve for impairment was provided on these assets. 48 Note 8 - Notes Payable The Company and its subsidiaries have utilized short-term lines of credit with commercial banks in addition to other short-term loans. Interest expense on notes payable to banks and on other short-term borrowings amounted to $7,877,000 (1997), $5,386,000 (1996) and $4,980,000 (1995). A comparison of information relating to the Company's lines of credit for the years ended March 31, 1997, 1996 and 1995 follows:
1997 1996 1995 ----------- ----------- ----------- Average during the year: Short-term borrowings $64,709,000 $35,391,000 $31,739,000 Weighted average interest rate* 9.11% 10.68% 9.50% Average bank prime rate 8.25% 8.71% 7.84% At March 31: Lines of credit and short-term loans, subject to collateral availability $115,500,000 $74,364,000 $62,438,000 Short-term borrowings $ 87,740,000 $27,413,000 $41,883,000 Average interest rate 8.50% 8.50% 10.89% Bank prime rate 8.50% 8.25% 9.00% Unused short-term borrowing capacity $11,540,000 $23,278,000 $14,989,000 Maximum month-end short-term borrowings during the year $87,740,000 $46,418,000 $43,964,000
*Based on outstanding borrowings Substantially all receivables, inventories, property, plant and equipment and the capital stock of American Rice, Inc. and Chemonics Industries, Inc. are pledged as collateral on notes payable and certain other long-term debt obligations. For fiscal year 1996, ARI had a $47.5 million revolving credit loan with interest at the prime rate of interest plus .5%. In June 1996, this loan was refinanced with a new lender and increased to $85.0 million. The new loan bears interest at ARI's option at either the prime rate or the London Interbank Offered Rate plus an applicable margin based upon ARI's adjusted funded debt ratio. 49 Note 9 - Income Taxes The provision for income taxes is composed of the following:
Years ended March 31, ------------------------------------------ 1997 1996 1995 ----------- ----------- ---------- Currently payable Federal $ 171,000 $ -- $ 183,000 State 388,000 802,000 Foreign 143,000 564,000 420,000 - --------------------------------------------------------------------------- 702,000 564,000 1,405,000 Deferred (22,000) - --------------------------------------------------------------------------- Total provision $ 680,000 $ 564,000 $1,405,000 ===========================================================================
The pre-tax income (loss) (before minority interest) related to domestic and foreign operations is as follows: Years ended March 31, ----------------------------------------- 1997 1996 1995 ---------- ------------ ------------- Domestic $8,495,000 ($8,948,000) $8,937,000 Foreign (1,178,000) 1,073,000 1,121,000 - --------------------------------------------------------------------------- Total $7,317,000 ($7,875,000) $10,058,000 =========================================================================== The reconciliation of the Company's effective tax rate to the statutory federal tax rate is as follows: Years ended March 31, -------------------------------- 1997 1996 1995 ---- ---- ---- Federal rate 34% (35%) 35% State taxes 3 8 Foreign taxes 7 2 4 Change in valuation allowance (38) 40 (34) Other 3 1 - ----------------------------------------------------------------------- Effective tax rate 9% 7% 14% ======================================================================= 50 Note 8 - Income Taxes (continued) The tax effect of the temporary differences and carryforwards which give rise to deferred tax assets and liabilities at March 31, 1997 and 1996 are as follows: 1997 1996 ------------ ------------- Deferred tax assets: Allowance for doubtful accounts and other reserves $ 1,909,000 $ 2,270,000 Net operating loss carryforwards 11,811,000 16,001,000 Tax credit carryforwards 199,000 Other 910,000 1,217,000 Deferred tax liabilities: Difference in basis of property (12,574,000) (13,837,000) -------------------------------------------------------------------------- Subtotal 2,255,000 5,651,000 Valuation allowance (3,756,000) (7,243,000) - -------------------------------------------------------------------------- Net deferred tax asset (liability) ($1,501,000) ($1,592,000) ========================================================================== Subsequent to the Acquisition, ARI's current taxable income or loss is included in ERLY's consolidated federal income tax return. Under the terms of the tax sharing agreement between ARI and ERLY, ARI will pay to or receive from ERLY the amount of income taxes currently payable or refundable computed as if ARI filed its annual tax return on a separate company basis. The tax sharing agreement provides that ERLY will receive the benefit of any pre-Acquisition tax net operating loss carryforwards generated by Comet. The Company and certain subsidiaries file consolidated federal income and combined state franchise tax returns. The Company has provided a valuation allowance for the benefits of operating loss carryforwards in excess of net deferred tax liabilities. At March 31, 1997, the Company has net operating loss carryforwards for federal tax reporting purposes of approximately $34 million, which expire at various dates, primarily in years 2002 through 2011. The Company's California franchise tax returns for fiscal years 1982 through 1989 are currently under examination by the California Franchise Tax Board (FTB) which has issued notices of proposed assessments for certain of those years. The Company has formally protested various positions taken by the FTB and believes that a majority of the Company's positions will be upheld. Management believes that adequate provisions for income taxes have been made and that the ultimate outcome of this matter will not have a material adverse effect on the Company. 51 Note 10 - Long-term and Subordinated Debt A schedule of outstanding long-term and subordinated debt at March 31, 1997 and 1996 follows: 1997 1996 ----------- ----------- Long-term debt: ARI mortgage notes due 2002, interest at 13%, net of unamortized discount of $5,032,000 $93,968,000 $94,322,000 Term loans due 2008, interest at 6% 3,000,000 3,000,000 Convertible note payable to officer, due 1998, interest at bank prime rate plus 2% 1,000,000 1,000,000 (See Note 13) Various obligations with maturities to 2000, interest rates ranging from 5% to 12% 3,118,000 1,954,000 Less current portion of long-term debt (502,000) (163,000) - --------------------------------------------------------------------------- $100,584,000 $100,113,000 =========================================================================== Subordinated debt: 12-1/2% subordinated sinking fund debentures $5,665,000 $6,665,000 Less current portion of subordinated debt (1,000,000) (1,000,000) - --------------------------------------------------------------------------- $4,665,000 $5,665,000 =========================================================================== Certain of the Company's and subsidiaries' long-term debt agreements require maintenance of minimum amounts or ratios related to working capital, long-term debt and net worth, in addition to the observance of other covenants. These restrictions also preclude the payment of cash dividends. 52 Note 10 - Long-term and Subordinated Debt (continued) In a public offering completed in August 1995, ARI issued $100 million principal amount of 13.0% mortgage notes due 2002 (the "Notes"). Portions of the net proceeds of $94 million were used to repay the balance of ARI's existing term loans, to make a $10.5 million 15% loan to ERLY due 2001, and to reduce borrowings outstanding under ARI's revolving credit loan. ERLY utilized a portion of the proceeds to repay the remaining $9.5 million ERLY Juice Inc. debt, including accrued interest, which ERLY had guaranteed (see Note 12). The Notes provide for interest payments semiannually, mature on July 31, 2002 and are non-callable by ARI prior to July 31, 1999, after which date the Notes are callable at the option of ARI, in whole or in part, at any time upon not less than 30 nor more than 60 days notice, at 107.0% of the principal amount, declining ratably to par on or after July 31, 2001. Except under certain changes of control, upon remarketing of industrial revenue bonds, or asset sales, as defined in the related indenture, ARI is not required to make mandatory redemption payments on the Notes. The Notes accrue fixed interest at an annual rate of 13.0%, an effective yield of 14.4%. In addition to fixed interest, the Notes bear contingent interest of 4.0% of consolidated cash flow (as defined) up to a limit of $40 million of consolidated cash flow during the fiscal year in which such interest accrues. Contingent interest accrues in each semiannual period (as defined) in which consolidated cash flow in such period and the immediately preceding semiannual period is equal to or greater than $20 million. Contingent interest is payable semiannually, but ARI may elect to defer all or a portion of any such payment to the extent that (a) the payment of such portion of contingent interest will cause ARI's adjusted fixed charge coverage ratio (as defined) for the two consecutive applicable semiannual periods to be less than 2.0:1 and (b) the principal of the Notes corresponding to such contingent interest has not then matured and become due and payable. Contingent interest accrued in fiscal 1997 was zero and $143,000 for the semiannual periods ended June 30, 1996 and December 31, 1996, respectively. Contingent interest accrued in fiscal 1996 was $447,000 and zero for the semiannual periods ended June 30, 1995 and December 31, 1995, respectively. As the applicable fixed charge coverage ratio was less than 2.0:1, ARI elected to defer payments of the contingent interest. The Notes are secured by (a) a first or second priority security interest in substantially all of ARI's property, plant and equipment (including related leasehold interests), (b) a pledge agreement creating first priority security interests in the capital stock of ARI held by ERLY (other than 200,000 shares of ARI's Series B Preferred Stock pledged to the holders of ARI's Series C Preferred Stock), (c) notes receivable from ERLY (as defined), and (d) a security agreement creating a first priority security interest in all registered U.S. trademarks and a security interest in all other registered trademarks owned or licensed by ARI. 53 Note 10 - Long-term and Subordinated Debt (continued) The Notes rank senior in right of payment to all subordinated indebtedness and pari passu in right of payment with all existing and future senior indebtedness of ARI, including borrowings under the revolving credit loan. The indenture includes covenants that in certain instances restrict, among other things, (a) the payment of dividends, (b) the redemption of equity interests of ARI, (c) the payment on or redemption of indebtedness subordinate to the Notes, (d) certain investments (as defined), (e) the incurrence of certain indebtedness and issuance of preferred stock, (f) certain transactions with affiliates, and (g) certain mergers, consolidations or sales of assets. In addition, the indenture contains certain limitations on capital expenditures, operating lease obligations and rice contract polices and procedures. The Company's 12-1/2% Subordinated Sinking Fund Debentures due in 2002 require sinking fund payments of $1 million annually through 2001 and $665,000 in 2002. These debentures were issued in exchange for debentures which matured on December 1, 1993. Principal maturities on ERLY's long-term and subordinated debt (excluding annual amortization of debt discount) are as follows: 1998--$1,502,000; 1999--$3,506,000; 2000--$1,410,000; 2001--$1,360,000; 2002--$1,665,000; thereafter--$102,340,000. Interest expense on long-term and subordinated debt amounted to $15,552,000 (1997), $14,463,000 (1996) and $10,888,000 (1995). Note 11 - Minority Interest ERLY owns 81% of ARI's voting interests through ownership of ARI's common stock and convertible preferred stock. ERLY's 81% interest in ARI consists of the following securities of ARI: * 777,777 shares of ARI common stock which represent 32% of ARI's total outstanding common stock and 9% of ARI's common shares on a fully converted basis. * 777,777 shares of ARI Series A Preferred Stock, which is convertible one for one, has voting rights, liquidation preferences of $25.70 per share, but has no stated dividend. These shares represent 9% of ARI's common shares on a fully converted basis. * 2,800,000 shares of ARI Series B Preferred Stock, which is convertible into 5,600,000 common shares, has voting rights, liquidation preferences of $5.00 per share and an annual cumulative dividend of approximately $5.2 million. These shares represent 63% of ARI's common shares on a fully converted basis. ARI also issued a Series C Preferred Stock to third parties which does not have voting or conversion rights but does have an annual cumulative dividend of $750,000. The Series A, Series B and Series C Preferred Stocks are unique securities with preferential rights which are superior to common stock rights. 54 Note 11 - Minority Interest (continued) The Minority Interest of ARI in ERLY's consolidated financial statements represents the 68% of the common stock of ARI which ERLY does not own and the Series C Preferred Stock, for a total of 19% of the voting interest in ARI on a fully converted basis. The earnings or losses of ARI are allocated between ERLY and the minority interest in accordance with the underlying terms of the various securities, rather than allocation based on voting ownership of the subsidiary. No conversion is assumed in the case of convertible preferred stocks for purposes of this calculation, even though conversion may occur at any time at the option of ERLY. ARI's cumulative annual dividends of $5.2 million related to the Series B Preferred Stock and $750,000 related to the Series C Preferred Stock are deducted from ARI earnings or loss to yield earnings or loss to be allocated to common stock. The Series B Preferred Stock dividend is allocated entirely to ERLY, while the Series C Preferred Stock dividend is allocated entirely to Minority Interest. The current ARI loan agreements prohibit the payment of any dividends. These dividends are allocated even if not declared as the dividends are cumulative. The remaining earnings or losses to be allocated to common stock after deduction of the preferred stock dividends is allocated in accordance with the relative common stock ownership of ERLY (32%) and the Minority Interest (68%). ERLY's share of ARI's net earnings (loss) applicable to common stock after preferred stock dividend requirements was ($690,000), ($3,784,000) and ($645,000) in 1997, 1996 and 1995, respectively. ERLY also earned Series B Preferred dividends of $5.2 million in 1997, 1996 and 1995. Minority Interest does not represent actual amounts distributable to minority shareholders. Amounts, if any, ultimately distributable to minority shareholders will depend on the ownership interests which exist at such time as distributions are made, including the potential conversions of convertible securities and potential issuance or retirement of other securities. The timing of distributions and conversions, if any, is at the discretion of ERLY, since ERLY owns 81% of the voting interest in ARI. Note 12 - Redeemable Common Stock and Common Stock Warrants In connection with the discontinuation of the Company's juice business in December 1993, the Company issued warrants to acquire up to 10% of ERLY's common stock at $.01 per share. In conjunction with the repayment of the ERLY Juice debt in August 1995 described in Note 10, the Company had the right to call the warrants prior to September 30, 1996 for $2,512,000 and, accordingly, the warrants were classified as redeemable common stock warrants at March 31, 1996. In August 1996, the Company exercised its call option and redeemed all of the outstanding common stock warrants in exchange for a payment of $2,125,000, resulting in a gain of $387,000 which is included in other income. 55 Note 12 - Redeemable Common Stock and Common Stock Warrants (continued) In fiscal 1992, ERLY issued 379,500 shares (as adjusted) of ERLY common stock in exchange for $5.4 million of debt. In conjunction with this transaction, ERLY entered into an agreement to repurchase all of such stock at a price of $4.75 per share, as adjusted ($1,800,000 total obligation), at the option of the stockholder, through December 31, 1997. These shares were classified as redeemable common stock in the consolidated balance sheets. In October 1995, the stockholder sold the shares which were subject to the repurchase agreement to a third party, thereby canceling the repurchase agreement between ERLY and the stockholder. Accordingly, these shares and the related $1.8 million obligation were transferred to common stock and paid-in capital. Note 13 - Stockholders' Equity Included in long-term debt is a $1 million note payable to D.A. Murphy, President of the Company. The note is convertible into ERLY common stock at a conversion price of $2.97 per share (as adjusted). In September 1996, the Company declared a 10% stock dividend to shareholders of record at the close of business on September 23, 1996. All per share amounts have been retroactively adjusted to reflect this stock dividend. Six thousand shares of $100 par value preferred stock are presently authorized but unissued. In 1982, the Company adopted an Incentive Stock Option Plan (the "Plan"), under which 250,000 shares of ERLY common stock were reserved for the granting of options to key employees. The Plan had a term of 10 years and expired in 1992. The expiration of the Plan has no effect on outstanding options. The purchase price for shares could not be less than the market value of the shares at the date of grant. The options were exercisable 25% a year over a four-year period beginning one year after the date of issuance. The options generally expired ten years from the date of grant. At March 31, 1997, options for 124,595 shares issued under the Plan in 1988 remain outstanding. All of these options were exercisable at a price of $3.56 per share and expire in 1998. In fiscal 1996, the Company granted stock options to a key employee for 88,550 shares at a price of $4.55 per share (as adjusted for stock dividends). At March 31, 1997, all of the options were exercisable. These options expire in the year 2001. 56 Note 13 - Stockholders' Equity (continued) The following table summarizes stock option activity for the three years ended March 31, 1997, as adjusted for a 10% stock dividend declared in September 1996: Weighted Average Number of Exercise Price Options Per Option --------- ------------- Outstanding at March 31, 1994 155,827 $3.52 Granted - Exercised (10,186) $2.95 Canceled or expired - - --------------------------------------------------------------------------- Outstanding at March 31, 1995 145,641 $3.56 Granted 88,550 $4.55 Exercised (10,230) $3.56 Canceled or expired - - --------------------------------------------------------------------------- Outstanding at March 31, 1996 223,961 $3.95 Granted - Exercised (10,816) $3.56 Canceled or expired - - - --------------------------------------------------------------------------- Outstanding at March 31, 1997 213,145 $3.97 =========================================================================== Exercisable at March 31, 1997 213,145 ======================================================== In addition to the stock options described above, the Company has issued warrants to purchase 12,650 shares at $2.67 per share (as adjusted) which expire in September 1998. 57 Note 13 - Stockholders' Equity (continued) The Company has elected to follow Accounting Principals Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), and related Interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" (Statement 123) required use of option valuation models that were developed for use in valuing publicly traded stock options. Under APB 25, because of the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Pro forma information regarding net income (loss) and income (loss) per share is required by Statement 123 and has been determined as if the Company had accounted for its employee stock options under the fair value method. The weighted-average fair value of options granted during 1996 was $4.81. The fair value of options granted was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1996; risk-free interest rates of 6%; zero percent dividend yields; volatility factors of the expected market price of the Company's common stock of 25%; and a weighted-average expected life of the options of 5.65 years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated value of the options is amortized to expense over the options' vesting period. The Company's pro forma information is as follows (in thousands, except per share information): 1997 1996 -------- -------- Pro forma net income (loss) $ 7,154 ($ 1,362) ======== ======== Pro forma net income (loss) per share: Primary $ 1.47 ($ .29) Fully diluted $ 1.42 ($ .29) 58 Note 14 - Nature of the Business - Segment Information The Company operates principally in three industries - food processing, packaging and marketing; international consulting; and the manufacture and sale of forest fire retardant chemicals. The Company purchases and processes rough rice into branded and commodity rice for sale in both international and domestic markets. Demand for branded rice products is relatively constant and margins are typically higher than those for commodity rice products. Demand for commodity rice products is relatively constant globally, but demand for U.S. grown commodity rice is dependent upon supply and cost relative to other sources of supply. Supply and costs for both branded and commodity products depend on many factors including governmental actions, crop yields and weather, and such factors can persist through one or more fiscal years. Historically, sales of olives have pronounced seasonal elements, with higher sales occurring in conjunction with holiday consumption. Accordingly, because the quarterly period ending December 31 contains both the Thanksgiving and Christmas holidays, the two holidays of highest consumption, it will have significantly higher sales than the other three quarters of the fiscal year. Margins normally follow the seasonal pattern of sales. The Company's international consulting activities ("Consulting") include technical assistance and related services to a variety of countries worldwide, principally under contracts with the Agency for International Development. The forest fire retardant chemical business ("Fire-Trol") primarily consists of sales to the U.S. and Canadian forest services and the volume of its activities can vary significantly from year to year based upon fire and weather conditions. 59 Note 14 - Nature of the Business - Segment Information (continued) The Company's sales, operating profit and other financial data by industry segment for the three years ended March 31, 1997 follow:
Years ended March 31, --------------------------------------------------------------- 1997 1996 1995 ------------------ ------------------ ----------------- $ % $ % $ % -------- ----- --------- ----- -------- ----- Net sales (in thousands) Export sales - Rice and olives Middle East $165,666 $117,359 $ 91,449 Caribbean, Mexico and South America 65,410 64,654 84,806 Asia 31,583 49,453 49,963 Europe 21,114 18,111 13,632 Africa 14,352 3,338 3,864 Other 6,731 5,396 5,806 - ---------------------------------------------------------------------------------------------------------- 304,856 50% 258,311 53% 249,520 54% Domestic sales Rice and olives 211,081 34 136,527 28 123,530 27 Consulting 77,427 13 77,754 16 63,546 14 Fire-Trol 20,936 3 14,034 3 23,003 5 - ---------------------------------------------------------------------------------------------------------- Total $614,300 100% $486,626 100% $459,599 100% ========================================================================================================== Income (loss) before taxes on income and minority interest Rice and olives $ 25,837 $ 14,338 $ 18,501 Consulting 2,907 4,157 4,920 Fire-Trol 3,483 1,329 5,348 - ------------------------------------------------------------------------------------------------- Operating profit 32,227 19,824 28,769 General corporate expense (2,479) (1,635) (2,490) Interest expense (23,429) (19,849) (15,868) Interest income 617 486 451 Other income 381 499 196 Write-down of plant facilities* (7,200) (1,000) - ------------------------------------------------------------------------------------------------- $ 7,317 ($ 7,875) $10,058 =================================================================================================
* Fiscal year 1996 includes a $7.2 million write-down of ARI's Houston properties and fiscal year 1995 includes a $1 million write-down on the Company's remaining wine assets. 60 Note 13 - Nature of the Business - Segment Information (continued) Years ended March 31, ------------------------------------ 1997 1996 1995 -------- -------- -------- (in thousands) Identifiable assets Rice and olives $307,471 $222,080 $187,994 Consulting 24,517 25,310 21,748 Fire-Trol 11,564 10,244 8,455 Corporate 1,548 2,138 3,381 Discontinued operations 2,725 3,162 2,649 Intercompany eliminations (27,107) (27,799) (17,169) - ------------------------------------------------------------------------- Total $320,718 $235,135 $207,058 ========================================================================= Depreciation and amortization Rice and olives $ 7,554 $ 6,339 $ 6,981 Consulting 705 414 236 Fire-Trol 468 471 391 Corporate 48 23 19 - ------------------------------------------------------------------------- Total $ 8,775 $ 7,247 $ 7,627 ========================================================================= Capital expenditures Rice and olives $ 5,117 $ 3,690 $ 3,562 Consulting 370 1,947 493 Fire-Trol 740 669 546 - ------------------------------------------------------------------------- Total $ 6,227 $ 6,306 $ 4,601 ========================================================================= Note 15 - Profit-Sharing Plan The Company has a defined contribution profit-sharing plan covering substantially all of its employees. The Company makes a mandatory 1% matching contribution to the plan on a monthly basis and an annual contribution solely at the discretion of the Board of Directors. Total profit-sharing plan expense was $930,000 (1997), $618,000 (1996) and $1,407,000 (1995). 61 Note 16 - Commitments and Contingencies In April 1995, a lawsuit was filed in the district court of Harris County, Texas by Kingwood Lakes South, L.P. and Tenzer Company, Inc. as plaintiffs against G.D. Murphy and D.A. Murphy, Chairman and President of the Company and ARI, respectively. ERLY and ARI were named as codefendants in the lawsuit by an amendment to the original petition in September 1995. This is a dispute between the general partner of a proposed real estate development and G.D. Murphy and D.A. Murphy. Damages sought are in the range of $10 million, plus attorneys' fees and punitive damages. The Company and ARI were named as defendants in the lawsuit because of their actions to obtain restraining orders to prevent threatened foreclosures on ERLY common stock pledged as collateral by G.D. Murphy and to stop interference by the plaintiff in the lawsuit, with ARI's mortgage note financing, as well as certain other alleged activities, including knowing participation in breaches of fiduciary duties, civil conspiracy with the Murphys and conversion. The plaintiffs recently added a reverse alter ego claim. The Company and ARI believe they have valid defenses in this case and that damages, if any, will not have a material effect on the Company's financial condition; however, as with any litigation, the ultimate outcome is unknown. ARI has also been named as a codefendant with Messrs. John M. Howland and George E. Prchal in a lawsuit filed in February 1997 in U.S. district court in Houston, Texas by Rice Milling & Trading Investments, LTD., an Isle of Man Company ("RMTI"). In 1994, ARI entered into an agreement with RMTI for processing the Company's rice through RMTI's facility in Jeddah, Saudi Arabia. Messrs. Howland and Prchal were officers of RMTI through January 1997 and have also been directors of ARI since October 1993 and prior to October 1993 were officers of ARI. In January 1997, RMTI ceased shipping ARI's rice through its Jeddah facility and terminated the employment of Messrs. Howland and Prchal. The lawsuit alleges among other things ARI failed to perform under the terms of the agreement and Messrs. Howland and Prchal breached their fiduciary duties to RMTI. On April 21, 1997, the Company obtained a restraining order from the U.S. District Court for the Southern District of Texas ordering RMTI to desist and refrain from purchasing rice of U.S. or Vietnam origin from any supplier other than ARI and from introducing and/or marketing rice of U.S. and Vietnam origin in Saudi Arabia targeted against ARI's U.S. origin and Vietnam origin rice. The Company believes that this litigation will not have a material effect on the Company's financial condition; however, as with any litigation, the ultimate outcome is unknown. The Company is involved in other legal proceedings that arise in the ordinary course of its business, all of which are routine in nature. It is the opinion of management that the resolution of such legal proceedings will not have a material adverse effect on the consolidated financial position or consolidated results of operations of the Company. 62 Note 16 - Commitments and Contingencies (continued) The Company's subsidiary, Chemonics Industries, Inc., has operated in the chemical and pesticide business and has potential liability for the correction of environmental contamination relating to certain of its property. Chemonics has contracted with an independent laboratory to perform sample testing and provide consultation to assess various cleanup options available. The estimated costs of such remedies are not presently determinable because the extent and scope of the cleanup required is unknown and the method by which such cleanup can be accomplished is under investigation. Management does not believe, however, that the costs associated with this matter will have a material adverse effect on the financial condition of the Company. The Company and its subsidiaries are obligated under operating leases for offices, plant facilities and equipment. Aggregate minimum rental commitments under operating leases with noncancellable terms of more than one year are as follows: Year ending March 31, - ---------------------------------------------------------------------------- 1998 $ 5,545,000 1999 5,196,000 2000 4,822,000 2001 4,478,000 2002 4,009,000 Thereafter 33,196,000 - ---------------------------------------------------------------------------- $57,246,000 ============================================================================ Total rental expense amounted to $7,272,000 (1997), $5,543,000 (1996) and $5,589,000 (1995). Certain leases provide for options to renew and for payment of taxes, insurance and maintenance costs. In October 1996, ARI entered into a new seven year lease agreement for office space in Houston, Texas with a limited partnership owned directly and indirectly by the Chairman and President of the Company. ARI's annual lease expense under the lease ranges from approximately $600,000 in the first year to approximately $740,000 in the seventh year, which management believes is comparable to, or better than, rates for similar office space in the proximity. In connection with the lease, ARI performs building management services in exchange for certain reductions in the lease cost. 63 Note 17 - Quarterly Results of Operations (Unaudited)
Fiscal Year 1997 (In thousands, except per share data) ------------------------------------------------------------------------- 1st 2nd 3rd 4th Quarter Quarter Quarter Quarter Total ---------- ---------- ---------- ---------- ---------- Net sales $ 124,591 $ 155,966 $ 171,930 $ 161,813 $ 614,300 Gross profit $ 13,314 $ 24,350 $ 28,167 $ 23,934 $ 89,765 Income (loss) before minority interest ($ 3,836) $ 4,606 $ 3,832 $ 2,035 $ 6,637 Minority interest 2,586 157 (1,280) (748) 715 - ------------------------------------------------------------------------------------------------------ Net income (loss) ($ 1,250) $ 4,763 $ 2,552 $ 1,287 $ 7,352 ====================================================================================================== Earnings (loss) per share*: Primary ($ .27) $ .94 $ .53 $ .26 $ 1.51 Fully diluted ( .27) .88 .49 .25 1.46 Weighted average shares outstanding*: Primary 4,713 5,049 4,850 4,861 4,868 Fully diluted 4,713 5,387 5,192 5,198 5,123 Price range of common stock*: High $ 10-1/8 $ 9-5/8 $ 9-1/4 $ 9-1/4 Low 6-1/2 6-5/8 5-7/8 6-7/8
* Restated for 10% stock dividend in September 1996. 64 Note 19 - Quarterly Results of Operations (Unaudited) (continued)
Fiscal Year 1996 (In thousands, except per share data) ------------------------------------------------------------------------- 1st 2nd 3rd 4th Quarter Quarter Quarter** Quarter Total ---------- ---------- ---------- ---------- ---------- Net sales $ 112,889 $ 111,641 $ 123,384 $ 138,712 $ 486,626 Gross profit $ 16,714 $ 15,655 $ 15,618 $ 16,205 $ 64,192 Income (loss) before minority interest $ 1,699 $ 11 ($ 9,263) ($ 886) ($ 8,439) Minority interest 565 889 4,826 1,010 7,290 - ------------------------------------------------------------------------------------------------------ Net income (loss) $ 2,264 $ 900 ($ 4,437) $ 124 ($ 1,149) ====================================================================================================== Earnings (loss) per share*: Primary $ .39 $ .16 ($ .94) $ .02 ($ .24) Fully diluted .37 .15 ( .94) .02 ( .24) Weighted average shares outstanding*: Primary 5,847 5,562 4,704 5,385 4,708 Fully diluted 6,184 5,899 4,704 5,721 4,708 Price range of common stock*: High $ 9 $ 8-3/4 $ 8-1/8 $ 9-1/4 Low 8 7-1/8 6 5-3/8
* Restated for 10% stock dividend in September 1996. ** Results for the quarter include a $7.2 million non-recurring pre-tax provision for loss on disposal of property held for sale. 65 Independent Auditors' Report Board of Directors ERLY Industries Inc. Los Angeles, California We have audited the accompanying consolidated balance sheets of ERLY Industries Inc. and subsidiaries (the "Company") at March 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended March 31, 1997. Our audits also included the financial statement schedules listed in the Index at Item 14(a)(2). These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at March 31, 1997 and 1996, and the results of its operations and cash flows for each of the three years in the period ended March 31, 1997 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. /s/ DELOITTE & TOUCHE LLP Los Angeles, California June 20, 1997 66 Item 14(a)2. Financial Statement Schedules ERLY INDUSTRIES INC. (PARENT COMPANY ONLY) SCHEDULE I - CONDENSED STATEMENTS OF OPERATIONS (in thousands)
Years ended March 31, -------------------------------- 1997 1996 1995 ------ ------ ------- Corporate overhead expenses ($2,479) ($1,635) ($ 2,490) Income from subsidiaries 600 600 1,522 Intercompany interest (2,235) (1,705) (644) Interest expense (1,220) (1,294) (1,487) Interest income 273 330 186 Other income 1,308 1,331 27 - ---------------------------------------------------------------------------- Income (loss) before taxes on income (3,753) (2,373) (2,886) Taxes on income (benefit) (3,999) 2,185 (4,422) - ---------------------------------------------------------------------------- Income (loss) before undistributed earnings of subsidiaries 246 (4,558) 1,536 Undistributed earnings of subsidiaries 7,106 3,409 7,739 ---------------------------------------------------------------------------- Net income (loss) $7,352 ($1,149) $ 9,275 ============================================================================
67 ERLY INDUSTRIES INC. (PARENT COMPANY ONLY) SCHEDULE I - CONDENSED BALANCE SHEETS (in thousands) March 31,
------------------------- 1997 1996 -------- -------- Assets Current assets: Cash $ 430 $ 289 Accounts receivable, net 292 96 Other current assets 42 781 - -------------------------------------------------------------------- Total current assets 764 1,166 Intercompany receivable from Chemonics Industries, Inc. -- 1,957 Long-term notes receivable, net 819 819 Property, plant and equipment, net 7 10 Investment in subsidiaries* 55,922 51,935 Deferred income taxes 4,865 2,556 Other assets 121 124 - -------------------------------------------------------------------- $ 62,498 $ 58,567 ==================================================================== Liabilities and Stockholders' Equity Current liabilities: Accounts payable and other current liabilities $ 3,384 $ 2,934 Current portion of long-term and subordinated debt 1,064 1,057 - -------------------------------------------------------------------- Total current liabilities 4,448 3,991 Intercompany payable to American Rice, Inc. 24,165 24,361 Long-term debt 4,440 4,504 Subordinated debt 4,665 5,665 Redeemable common stock warrants 2,512 Stockholders' equity: Common stock 47 43 Additional paid-in capital 27,533 23,879 Retained earnings (deficit) (1,249) (5,046) Cumulative foreign currency adjustments (1,551) (1,342) - -------------------------------------------------------------------- Total stockholders' equity 24,780 17,534 - -------------------------------------------------------------------- $ 62,498 $ 58,567 ====================================================================
* Recorded at equity in net assets of subsidiaries. 68 ERLY INDUSTRIES INC. (PARENT COMPANY ONLY) SCHEDULE I - CONDENSED STATEMENTS OF CASH FLOWS (in thousands)
Years ended March 31, ------------------------------- 1997 1996 1995 ------- -------- -------- OPERATING ACTIVITIES: Net income (loss) $ 7,352 ($ 1,149) $ 9,275 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Undistributed earnings of subsidiaries (7,106) (3,409) (7,739) Depreciation and amortization 51 23 19 Provision for loss on receivables 200 Gain on redemption of warrant repurchase obligation (387) Change in assets and liabilities, net (1,361) 3,166 (3,531) - -------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (1,451) (1,369) (1,776) INVESTING ACTIVITIES: Change in intercompany payables, net 1,696 (745) 2,764 Other, net 2,971 1,072 256 - ------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 4,667 327 3,020 FINANCING ACTIVITIES: Intercompany loan from ARI 10,500 Additional long-term debt 200 Principal payments on long-term debt (57) (8,665) (84) Principal payments on subordinated debt (1,000) (1,000) (1,201) Redemption of redeemable common stock warrants (2,125) Proceeds from sale of stock 107 37 250 - ------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (3,075) 1,072 (1,035) - ------------------------------------------------------------------------------- INCREASE IN CASH DURING THE YEAR 141 30 209 CASH, BEGINNING OF YEAR 289 259 50 - ------------------------------------------------------------------------------- CASH, END OF YEAR $ 430 $ 289 $ 259 ===============================================================================
69 ERLY INDUSTRIES INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Additions -------------------------- Balance at Charges to Charges Deductions Balance at beginning costs and to other from end of Description of period expenses accounts reserves(a) period - ----------- ----------- ----------- ----------- ----------- ----------- Year ended March 31, 1997 - -------------- Allowance for doubtful accounts $ 1,715,000 $ 653,000 ($ 1,042,000) $ 1,326,000 ============================================================================================ Reserve for notes receivable $ 200,000 $ 200,000 ============================================================================================ Year ended March 31, 1996 - -------------- Allowance for doubtful accounts $ 1,831,000 $ 320,000 $ 22,000 ($ 458,000) $ 1,715,000 ============================================================================================ Reserve for notes receivable $ 200,000 $ 200,000 ============================================================================================ Year ended March 31, 1995 - -------------- Allowance for doubtful accounts $ 1,865,000 $ 237,000 $ 86,000 ($ 357,000) $ 1,831,000 ============================================================================================ Reserve for notes receivable $ -- $ 200,000 $ 200,000 ============================================================================================ Reserve for discontinued businesses $ 518,000 ($ 518,000) $ -- ============================================================================================
(a) Uncollectible accounts written off to allowance for doubtful accounts; and, charges to reserve for discontinued businesses. 70 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, ERLY Industries Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ERLY INDUSTRIES INC. By /s/ Gerald D. Murphy -------------------------------------- Gerald D. Murphy, Chairman of the Board (Chief Executive Officer) By /s/ Thomas A. Whitlock -------------------------------------- Thomas A. Whitlock, Vice President and Corporate Controller (Chief Accounting Officer) Date: June 30, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of ERLY Industries Inc. and in the capacities and on the dates indicated: /s/ Gerald D. Murphy /s/ Douglas A. Murphy - -------------------------- --------------------------- Gerald D. Murphy, Director Douglas A. Murphy, Director June 30, 1997 June 30, 1997 /s/ Bill J. McFarland /s/ William H. Burgess - --------------------------- ---------------------------- Bill J. McFarland, Director William H. Burgess, Director June 30, 1997 June 30, 1997 /s/ Alan M. Wiener - ------------------------ Alan M. Wiener, Director June 30, 1997 71 EXHIBIT 11.1 ERLY INDUSTRIES INC. AND SUBSIDIARIES CALCULATION OF PRIMARY INCOME (LOSS) PER SHARE (In thousands, except per share data)
Years ended March 31, --------------------------------------------------------- 1997 1996 1995 1994 1993 ------ ------ ------- ------- ------- Income (loss) from continuing operations $6,637 ($8,439) $ 8,653 $14,765 ($10,989) Minority interest on continuing operations 715 7,290 622 (1,376) - ---------------------------------------------------------------------------------------------------- Continuing operations, net 7,352 (1,149) 9,275 13,389 (10,989) Loss on discontinued operations (8,810) ( 4,972) Income from extraordinary items 16,792 7,288 Minority interest on extraordinary items (3,702) - ----------------------------------------------------------------------------------------------------- Extraordinary items, net 13,090 7,288 - ----------------------------------------------------------------------------------------------------- Net income (loss) $7,352 ($1,149) $ 9,275 $17,669 ($ 8,673) ===================================================================================================== Average number of shares of common stock and common stock equivalents outstanding*: Average number of shares of common stock outstanding 4,731 4,708 4,663 4,472 4,357 Common stock equivalents: Dilutive effect of stock options and warrants based on application of treasury stock method 137 (a) 859 152 (a) - ----------------------------------------------------------------------------------------------------- Total 4,868 4,708 5,522 4,624 4,357 ===================================================================================================== Primary income (loss) per common share*: Income (loss) from continuing operations (b) $ 1.51 ($ . 24) $ 1.68 $ 2.90 ($ 2.52) Loss on discontinued operations (1.91) (1.14) Income from extraordinary items (b) 2.83 1.67 - ----------------------------------------------------------------------------------------------------- Primary income (loss) per common share $ 1.51 ($ .24) $ 1.68 $ 3.82 ($ 1.99) =====================================================================================================
* Retroactively adjusted to give effect to 10% stock dividend in September 1996. (a) Exercise of stock options and warrants is not assumed as the computation would be anti-dilutive. (b) Net of applicable minority interest. 72 EXHIBIT 11.2 ERLY INDUSTRIES INC. AND SUBSIDIARIES CALCULATION OF FULLY DILUTED INCOME (LOSS) PER SHARE (In thousands, except per share data)
Years ended March 31, ---------------------------------------------------------- 1997 1996 1995 1994 1993 ------ ------- ------- ------- ------- Income (loss) from continuing operations $ 6,637 ($ 8,439) $ 8,653 $14,765 ($10,989) Minority interest 715 7,290 622 (1,376) Interest adjustment on convertible debt 103 (a) 98 80 (a) - ----------------------------------------------------------------------------------------------------- Continuing operations, net 7,455 ( 1,149) 9,373 13,469 (10,989) Loss on discontinued operations (8,810) (4,972) Income from extraordinary items 16,792 7,288 Minority interest on extraordinary items (3,702) - ---------------------------------------------------------------------------------------------------- Extraordinary items, net 13,090 7,288 - ---------------------------------------------------------------------------------------------------- Net income (loss), as adjusted $7,455 ($1,149) $ 9,373 $17,749 ($ 8,673) ==================================================================================================== Average number of shares of common stock and common stock equivalents outstanding*: Average number of shares of common stock outstanding 4,731 4,708 4,663 4,472 4,357 Common stock equivalents: Dilutive effect of stock options and warrants based on application of treasury stock method 55 (a) 942 152 (a) Other potentially dilutive securities: Common stock issuable upon conversion of note payable 337 (a) 338 338 (a) - ---------------------------------------------------------------------------------------------------- Total 5,123 4,708 5,943 4,962 4,357 ==================================================================================================== Fully diluted income (loss) per common share*: Income (loss) from continuing operations (b) $ 1.46 ($ .24) $ 1.58 $ 2.71 ($ 2.52) Loss on discontinued operations (1.77) (1.14) Income from extraordinary items (b) 2.64 1.67 - ----------------------------------------------------------------------------------------------------- Fully diluted income (loss) per common share $ 1.46 ($ .24) $ 1.58 $ 3.58 ($ 1.99) =====================================================================================================
* Retroactively adjusted to give effect to 10% stock dividend in September 1996. (a) Exercise of stock options, warrants and convertible note is not assumed as the computation would be anti-dilutive. (b) Net of applicable minority interest. 73 EXHIBIT 21 ERLY INDUSTRIES INC. SUBSIDIARIES The following is a list of all parents and principal subsidiaries of the Company reflecting ownership and the state or country of incorporation:
% of Voting Securities Parent Subsidiaries Owned - ------ ------------ -------- ERLY Industries Inc. American Rice, Inc. 81% (California) (Texas) Chemonics Industries, Inc. 100% (Arizona) The Beverage Source Inc. 100% (California) ERLY Juice Inc. 100% (California) American Rice, Inc. Comet Rice of Puerto Rico, Inc. 100% (Texas) (Delaware) Comet Ventures, Inc. 90% (California) Comet Rice of Jamaica Limited 100% (Jamaica) Rice Corporation of Haiti, S.A. 100% (Haiti) ARI-Vinafood 55% (Vietnam) BargeCarib, Inc. 100% (Texas) Compania Envasadora Loreto, S.A. 100% (Spain) Sadrym California, Inc. 51% (California) Chemonics Industries, Inc. Chemonics International, Inc. 100% (Arizona) (California) Chemonics Fire-Trol, Inc. 100% (Delaware) Chemonics Industries (Canada) Ltd. 100% (Canada)
All subsidiaries are included in the consolidated financial statements. EX-27 2 ART. 5 FDS FOR FISCAL YEAR ENDED MARCH 31, 1997
5 12-MOS MAR-31-1997 MAR-31-1997 5,584,000 0 87,115,000 1,326,000 129,695,000 224,422,000 107,151,000 35,580,000 320,718,000 178,554,000 103,665,000 47,000 0 0 24,733,000 320,718,000 614,300,000 614,300,000 524,535,000 524,535,000 0 0 23,429,000 8,032,000 680,000 7,352,000 0 0 0 7,352,000 1.51 1.46
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