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SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-12
ERLY Industries, Inc.
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(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(4) Date Filed:
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<PAGE> 2
PRELIMINARY COPY
GERALD D. MURPHY [LOGO] ERLY INDUSTRIES INC.
Chairman and Chief Executive Officer 10990 Wilshire Boulevard
Los Angeles, California 90024
August __, 1997
Dear Shareholder:
You are cordially invited to attend the Annual Meeting of
shareholders of ERLY Industries Inc., to be held at 10:00 a.m. on Friday,
September 26, 1997, at the Westwood Marquis Hotel, 930 Hilgard Avenue, Los
Angeles, California 90024.
At the Annual Meeting, we will vote on the proposals described in
the accompanying Notice and Proxy Statement. We will also report to you on the
operations of the Company. You will have the opportunity to ask questions about
the Company that may be of general interest to shareholders.
Your vote is very important regardless of how many shares you own.
Please take a few minutes to review the Proxy Statement and to sign and date
your WHITE Proxy Card and return it in the envelope provided.
You may have received a Consent Statement and a blue Consent Card
from the Trenham (Powell) Group (the "Trenham Group") seeking, among other
things, to remove the current Board of Directors and not to elect a new Board of
Directors until sometime in the future.
The Board of Directors of the Company believes that the proposed
Consent Statement is entirely unnecessary and if successful, could be very
detrimental to the ongoing operation of the Company. As representatives of the
Trenham Group were advised at their initial meeting with representatives of the
Company, this Annual Meeting of Shareholders will include the election of the
Board of Directors. If the Trenham Group wishes to remove one or all of the
existing directors, they are free to attempt to do so through the proxy
solicitation process at this Annual Meeting. Seeking to separately remove all of
the directors is not only a needless distraction but, if successful, would
create a situation where the Company would be without a Board of Directors to
manage the affairs of the Company.
The Trenham Group is seeking to obtain control of the Company after
the acquisition of approximately 3.9% of its outstanding shares. They have made
no offer to purchase any additional amount of shares or make any other
significant capital infusion, have not articulated any cohesive management plan
or strategy and have virtually no experience in operating a publicly-traded
international diversified agri-business such as the Company. Indeed, Noble
Trenham and his firm, First Global Securities, Inc., only own twelve shares. The
other members of the Trenham Group, Nanette Kelley and her companies, The Powell
Group and Farmers Rice Milling Company, Inc., bought their 3.9% interest in the
Company in March 1997 in a transaction arranged by Mr. Trenham and his firm. At
the same time, Mr. Trenham and his firm were retained by The Powell Group to
assist them in taking control of the Company for a fee of $505,000, plus
expenses, if they are successful.
Noble Trenham has previously attempted to take control of the
Company. In 1989, he, his firm, Gary Driggs, and Mark Hungerford, with
collective shareholdings of only approximately 5%, planned, but quickly
abandoned, a proxy contest for election of directors. At the last annual meeting
of shareholders, Mr. Trenham tried to vote certain proxies against the Board of
Directors' nominees from shareholders. In 1987, Mr. Trenham was sued by the
United States Securities and Exchange Commission and was permanently enjoined by
a federal court from violating federal securities laws as a result of actions
relating to at least eight other publicly-held companies. In 1994, Mr. Driggs
who has joined with the Trenham Group in its request for a special meeting of
shareholders was indicted on federal charges of fraud, conspiracy and
misapplication of funds stemming from the collapse of Arizona's second-largest
thrift, Western Savings, which he ran. Mr. Driggs pleaded guilty to two felony
counts in July 1995. OF THE ESTIMATED $750,000 OF EXPENSES THE TRENHAM GROUP
PROJECTS IT WILL SPEND IN ITS EFFORTS TO REMOVE THE BOARD OF DIRECTORS,
$505,000, PLUS EXPENSES, WILL BE PAID TO NOBLE TRENHAM'S
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BROKER/DEALERSHIP IF THE TRENHAM GROUP IS SUCCESSFUL. THE TRENHAM GROUP ALSO
INTENDS TO HAVE THE COMPANY REIMBURSE SUCH AMOUNTS IF IT ACQUIRES CONTROL OF THE
BOARD OF DIRECTORS.
Management of the Company owns approximately 38% of the outstanding
Common Stock, almost ten times the amount owned by the Trenham Group. The top
eleven executive officers of the Company and its subsidiary, American Rice,
Inc., have over 230 years of experience in managing and operating in the food
industry.
At the Annual Meeting, shareholders will be asked to reelect the
current Board of Directors and to adopt two amendments to the Articles of
Incorporation of the Company; one, to eliminate cumulative voting and the second
to require shareholder action only at a shareholders meeting and not by written
consent. The proposed changes to the Articles of Incorporation are designed to
make it more difficult for people like Noble Trenham with small investments in
the Company to wage proxy contests for the Board of Directors seeking to elect
one or more directors. They would also prevent shareholder actions by written
consent, thereby defeating the proposal by the Trenham Group that the
shareholders remove the Board of Directors without electing a new Board of
Directors. The Company's proposals would not affect the rights of shareholders
to call shareholder meetings for any legitimate purpose.
THE BOARD OF DIRECTORS BELIEVES THE PROPOSALS OF THE TRENHAM GROUP
ARE NOT IN THE BEST INTERESTS OF THE COMPANY AND ITS SHAREHOLDERS AND URGES YOU
TO REVIEW THE ENCLOSED PROXY STATEMENT BEFORE DECIDING HOW YOU WILL VOTE. THE
BOARD OF DIRECTORS ALSO RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE PROPOSALS SET
FORTH IN THE ENCLOSED PROXY STATEMENT AND ON THE WHITE PROXY CARD.
I look forward to seeing you at the Annual Meeting.
Sincerely,
/s/ GERALD D. MURPHY
Gerald D. Murphy
Chairman of the Board and
Chief Executive Officer
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PRELIMINARY COPY
ERLY INDUSTRIES INC.
10990 WILSHIRE BOULEVARD
LOS ANGELES, CALIFORNIA 90024
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To be Held September 26, 1997
TO THE SHAREHOLDERS OF ERLY INDUSTRIES INC.:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of
ERLY Industries Inc. (the "Company"), a California corporation, will be held on
Friday, September 26, 1997 at 10:00 a.m., at the Westwood Marquis Hotel, 930
Hilgard Avenue, Los Angeles, California, for the following purposes as more
fully described in the accompanying Proxy Statement:
1. To approve an amendment to the Company's Articles of
Incorporation to eliminate cumulative voting in the
election of directors;
2. To approve an amendment to the Company's Articles of
Incorporation to provide that actions required or
permitted to be taken by the shareholders must be
effected at a duly called annual or special meeting of
shareholders and not by written consent;
3. To elect five directors to serve until the next Annual
Meeting of Shareholders; and
4. To transact such other business as may properly come
before the Annual Meeting or any adjournment thereof.
The Board of Directors has fixed the close of business on Friday,
August 22, 1997 as the Record Date for the determination of shareholders
entitled to receive notice of, and to vote at, the Annual Meeting or any
adjournment thereof.
WHETHER YOU PLAN TO ATTEND THE ANNUAL MEETING OR NOT, MANAGEMENT
URGES YOU TO COMPLETE, SIGN AND RETURN YOUR WHITE PROXY CARD AS SOON AS
POSSIBLE. YOU MAY REVOKE YOUR PROXY AT ANY TIME PRIOR TO ITS USE. A
SELF-ADDRESSED POSTAGE PREPAID ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE IN
RETURNING THE SIGNED WHITE PROXY CARD.
By Order of the Board of Directors,
Thomas A. Whitlock
Vice President and
Assistant Secretary
Los Angeles, California
August ___, 1997
IMPORTANT
REGARDLESS OF WHETHER YOU EXPECT TO BE PRESENT PERSONALLY AT THE
MEETING, YOU ARE REQUESTED TO SIGN THE ENCLOSED WHITE PROXY CARD AND RETURN IT
PROMPTLY IN THE ENCLOSED SELF-ADDRESSED, POSTAGE-PREPAID ENVELOPE. BY SIGNING
AND RETURNING THE ENCLOSED WHITE PROXY CARD PROMPTLY, YOU WILL SAVE THE COMPANY
FOLLOW-UP EXPENSES IN CONNECTION WITH THIS PROXY SOLICITATION.
<PAGE> 5
PRELIMINARY COPY
ERLY INDUSTRIES INC.
10990 WILSHIRE BOULEVARD
LOS ANGELES, CALIFORNIA 90024
PROXY STATEMENT
----------------------
ANNUAL MEETING OF SHAREHOLDERS TO BE HELD
SEPTEMBER 26, 1997
This Proxy Statement is furnished in connection with the
solicitation of proxies by the Board of Directors of ERLY Industries Inc. (the
"Company") for use at the Company's Annual Meeting of Shareholders to be held on
September 26, 1997, and at any adjournment thereof, for the purposes set forth
herein and in the accompanying Notice of Annual Meeting. It is anticipated that
this Proxy Statement will be mailed to shareholders on or about August __, 1997.
Shares represented by proxies in the accompanying white Proxy Card
which are returned properly executed will be voted in accordance with the white
Proxy Card, unless previously revoked. A proxy given pursuant to the
solicitation may be revoked at the option of the person executing it at any time
prior to the exercise of the powers conferred, by the filing with the Secretary
of the Company of an instrument revoking such proxy, by the filing with the
Secretary of the Company a duly executed proxy bearing a later date, or by
attending the Annual Meeting and voting in person. BY EXECUTING A WHITE PROXY
CARD, YOU WILL BE REVOKING ANY AND ALL PRIOR PROXIES OR WRITTEN CONSENTS
SOLICITED BY THE COMPANY OR THE TRENHAM (POWELL) GROUP (THE "TRENHAM GROUP").
SEE "THE TRENHAM GROUP'S CONSENT SOLICITATION."
The Annual Meeting will be held whether or not the Trenham Group
is successful with its consent solicitation.
VOTING SECURITIES
Only shareholders of record of the Company's Common Stock at the
close of business on August 22, 1997 will be entitled to vote at the Annual
Meeting, or at any adjournment thereof (the "Record Date"). On that date, the
Company had outstanding 5,220,337 shares of Common Stock. Each share is entitled
to one vote, subject, however, to the possible right of each shareholder to
cumulate his votes in the election of directors. For an explanation of
cumulative voting, see "Election of Directors".
PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED WHITE PROXY CARD AND
RETURN IT PROMPTLY IN THE ENVELOPE PROVIDED. IF YOUR SHARES ARE HELD IN "STREET
NAME," ONLY YOUR BANK OR BROKER CAN VOTE YOUR SHARES AND ONLY UPON YOUR SPECIFIC
INSTRUCTIONS. PLEASE CONTACT THE PERSON RESPONSIBLE FOR YOUR ACCOUNT AND
INSTRUCT HIM OR HER TO VOTE THE WHITE PROXY CARD AS SOON AS POSSIBLE.
THE BOARD OF DIRECTORS URGES YOU NOT TO SIGN ANY CONSENT CARD OR
PROXY CARD SENT TO YOU BY THE TRENHAM GROUP. IF YOU HAVE ALREADY DONE SO, YOU
MAY REVOKE YOUR PREVIOUSLY SIGNED CONSENT OR PROXY BY DELIVERING A WRITTEN
NOTICE OF REVOCATION OR A LATER DATED WHITE PROXY CARD IN THE ENCLOSED ENVELOPE.
SEE "THE TRENHAM GROUP'S CONSENT SOLICITATION."
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IF YOU HAVE ANY QUESTIONS OR NEED FURTHER ASSISTANCE IN VOTING YOUR
SHARES, PLEASE CALL ERLY INDUSTRIES INC.'S PROXY SOLICITOR, MACKENZIE PARTNERS,
INC., TOLL FREE AT (800) ____________.
Where no vote is specified on the white proxy card but such white
proxy card is returned and signed, the proxy represented thereby will be voted
FOR Proposals 1 (elimination of cumulative voting), 2 (elimination of
shareholder action by written consent) and 3 (election of directors), and in the
discretion of the proxies named therein with respect to any other proposal that
properly comes before the Annual Meeting. Where no vote is specified or where a
vote for all nominees is marked with regard to Proposal 3, the votes represented
by a proxy will be cast, unless contrary instructions are given, at the
discretion of the proxies named therein in order to elect as many nominees as
believed possible under the then prevailing circumstances.
Under the Company's bylaws and California law, shares represented by
proxies that reflect abstentions or "broker non-votes" (i.e., shares held by a
broker or nominee which are represented at the Annual Meeting, but with respect
to which such broker or nominee is not empowered to vote on a particular
proposal) will be counted as shares that are present and entitled to vote for
purposes of determining the presence of a quorum. The Company believes that
brokers will not have the right to vote the shares they hold unless instructed
by the beneficial owners. Any shares not voted (whether by abstention, broker
non-vote or otherwise) will have no impact on the election of directors. Any
shares represented at the Annual Meeting but not voted (whether by abstention,
broker non-vote or otherwise) with respect to the proposal to adopt the
Amendments to the Articles of Incorporation to eliminate cumulative voting
(PROPOSAL 1) and to eliminate shareholder action by written consent (PROPOSAL 2)
will be equivalent to a no-vote since approval of a majority of the outstanding
shares is required to adopt each Amendment.
As further discussed below, the Board of Directors opposes the
Trenham Group's Consent Solicitation and urges the shareholders of the Company
NOT to return their Solicitation Card (the "Trenham Card") or, if any
shareholder has already done so, to execute, date and return the white Proxy
Card enclosed with these materials which WILL NEGATE ANY PRIOR SUBMISSION OF THE
TRENHAM CARD.
The Board believes that the Trenham Group's Consent Solicitation is
entirely unnecessary and counter-productive since the Company is holding its
Annual Meeting of Shareholders for the election of directors which will provide
the Trenham Group or other shareholders for that matter, an opportunity to elect
one or more new directors, if they so choose.
Aside from the wasteful and ill-advised nature of the Trenham
Group's actions, the Board of Directors believes that the implementation of
their goal, the installation of their management team, to also be ill-founded
and not in the best interest of shareholders. The Trenham Group has not
articulated any coherent strategy or plan for the future of the Company. The
Trenham Group's management team has virtually no experience in running
organizations comparable to the Company. Noble Trenham has been sued by the
Securities and Exchange Commission for violating the Securities Laws and had a
permanent injunction entered against him in connection with such suit. Ms.
Kelley's principal business experience has been running her privately owned
company which she inherited. Finally, the Trenham Group has only a small
interest in the Company (approximately 3.9% of the shares) and has not indicated
any willingness to invest significant additional funds to purchase shares or
otherwise to invest in the Company; however, if successful, they have indicated
that they will seek to have the Company reimburse them for their expenses which
they estimate to be approximately $750,000. Included in this amount will be
$505,000 IN FEES, PLUS EXPENSES, which will be paid to Mr. Trenham's firm. For
further information regarding the Trenham Group, see "The Trenham Group's
Consent Solicitation."
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth information regarding the ownership
of the Company's Common Stock as of the Record Date of (i) each person known to
the Company to be the beneficial owner of more than five percent of the
outstanding shares of Common Stock, (ii) each director and nominee for director
of the Company, (iii) each executive officer named in the Summary Compensation
Table and (iv) all directors and executive officers of the Company and its
subsidiaries as a group. Except as indicated, each of the shareholders directly
owns all of the shares beneficially owned
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by such shareholder, has sole voting and investment power with respect to the
such shares and each shareholder does not own of record any shares for which
such shareholder is not the beneficial owner.
<TABLE>
<CAPTION>
Name and address of Amount and nature of Percent of
beneficial owner beneficial ownership class*
------------------- -------------------- -----------
<S> <C> <C>
Gerald D. Murphy, Chairman 1,590,817 shares 30.5%
ERLY Industries Inc. (1) (2)
10990 Wilshire Blvd.
Los Angeles, CA 90024
Douglas A. Murphy, President 632,552 shares 12.1%
and Director (3)
ERLY Industries Inc.
10990 Wilshire Blvd.
Los Angeles, CA 90024
Kennedy Capital Management, Inc. 585,518 shares 11.4%
10829 Olive Boulevard (4)
St. Louis, MO 63141
William H. Burgess, Director 210,000 shares 4.1%
550 Palisades Drive
Palm Springs, CA 92262
Richard N. McCombs 137,482 shares 2.6%
Vice President and
Chief Financial Officer
ERLY Industries Inc.
10990 Wilshire Blvd.
Los Angeles, CA 90024
Bill J. McFarland, Director 46,522 shares 0.9%
ERLY Industries Inc.
10990 Wilshire Blvd.
Los Angeles, CA 90024
Alan M. Wiener, Director 4,009 shares 0.08%
ERLY Industries Inc.
10990 Wilshire Blvd.
Los Angeles, CA 90024
Thurston F. Teele, President -- --
Chemonics Industries, Inc.(5)
1133 20th Street, N.W.
Washington, D.C. 20036
All directors and executive officers 2,013,501 shares (6) 37.7%
as a group (11) persons)
</TABLE>
- ----------
* The percentages of shares held assume that options and warrants held
by the particular individual, if any, that are exercisable on the
Record Date, or within 60 days of such date, have been exercised,
and no others.
(1) Gerald D. Murphy, Chairman of the Board of the Company, is the
record holder of 953,215 shares.
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(2) Shares beneficially owned by Gerald D. Murphy include 637,602
shares indirectly owned by him which are (i) owned directly by his
son Douglas A. Murphy, President of the Company, and (ii) held in
trust for his grandson. Of this total, Gerald D. Murphy has voting
control of the 5,050 shares held in trust for his grandson, however,
he denies holding voting or investment control of the balance of the
632,552 shares owned directly by his son, Douglas A. Murphy.
(3) Shares beneficially owned by Douglas A. Murphy include 51,089 shares
which are issuable upon the exercise of options granted under the
1982 Incentive Stock Option Plan.
(4) Based on Schedule 13G filed February 7, 1997 with the Securities and
Exchange Commission. The filer is an investment advisor with
discretionary accounts for investment purposes. The filer indicated
that it has sole dipositive power of the entire 585,518 shares and
sole voting power for 336,080 shares.
(5) Chemonics Industries, Inc. is a wholly-owned subsidiary of the
Company.
(6) The number of shares shown as beneficially owned by all directors
and officers as a group includes 173,314 shares issuable upon the
exercise of stock options held by officers..
Gerald D. Murphy and Douglas A. Murphy have pledged a substantial
number of shares of Common Stock of the Company they own as collateral for
personal loans, including loans related to their acquisition of a building
partially leased by American Rice, Inc. See "Compensation Committee Interlocks
and Insider Participation-Litigation".
PROPOSED AMENDMENTS TO ARTICLES OF INCORPORATION
GENERAL
The Company's Board of Directors has unanimously approved the
following two amendments to the Company's Articles of Incorporation, as set
forth on Appendix A hereto, and has voted to recommend that the Company's
shareholders approve such amendments. PROPOSAL 1 eliminates cumulative voting
and PROPOSAL 2 provides that shareholders may not act by written consent but
only at an annual or a special meeting (the "Amendments").
The proposed Amendments are being presented to shareholders of the
Company for their individual approval as separate proposals. The Board of
Directors believes that, if adopted, the proposed Amendments, would effectively
reduce the possibility that dissident minority shareholders could seek to wield
disproportionate power over the affairs of the Company through either (i) the
election of one or more directors or (ii) an attempt to effect a sudden or
surprise shareholder action by way of written consent without the evaluation or
recommendations of the Company's Board of Directors, such as the consent
solicitation being proposed by the Trenham Group. See "The Trenham Group's
Consent Solicitation."
The Amendments are being proposed in response to the efforts of
Noble Trenham, an owner of only twelve shares of Common Stock, to try to
organize others to place his nominees on the Board of Directors or most
recently, to take control of the Company. In 1989, Mr. Trenham engaged in a
short lived proxy battle to elect certain directors to the Board of Directors.
At the last annual meeting of shareholders, he attempted to vote a number of
proxies against the Board of Directors nominees. More recently he was
instrumental in arranging for The Powell Group and its affiliates to purchase
their 3.9% interest in the Company after which he immediately began to work with
The Powell Group to seek control of the Company. The Company understands that
Mr. Trenham's broker/dealership and The Powell Group have entered into an
arrangement whereby such broker/dealership has been retained to assist The
Powell Group in seeking such control and receive a fee of $505,000, plus
reimbursement of expenses, if they are successful. The activities of Mr. Trenham
have in the past diverted and currently are diverting, Management's time from
operating the Company and also diverting the Company's resources from what would
otherwise in the view of Management be more productive uses.
The Powell Group and its affiliates acquired only 3.9% of the
outstanding Common Stock of the Company in March 1997 yet they are now demanding
that the Company's Management, including the current Board of Directors, (who
own approximately 38% of the Company's outstanding shares) step down and be
replaced by The Trenham Group's designees. Members of Management had their first
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substantive discussions and first met with Ms. Nanette Kelley and other
representatives of the Trenham Group on July 17, 1997. At that time Management
was advised that the Trenham Group wanted Management of the Company to resign
and be replaced by representatives of the Trenham Group. Management was also
advised that a majority of the Company's shareholders supported the efforts of
the Trenham Group. Management was given 24 hours to acquiesce to these demands
or face the threat of removal. At no time during the meetings with Management
nor at any time thereafter, did the representatives of the Trenham Group give
any sort of detailed explanation of why they wanted Management removed or give
the details of any potential strategy or course of action that they wished the
Company to pursue. Despite the Trenham Group's threats to Management, in
subsequent filings with the Securities and Exchange Commission they have only
acknowledged support from 3.9% of the Company's shareholders. The purported
group consists almost entirely of the holdings of The Powell Group and its
controlling shareholder Nanette Kelley with only nominal purported support from
other shareholders. The Trenham Group has not indicated that they are willing to
make any additional significant investment in the Company as part of their
demands for control, nor have they put forward any definitive plan or strategy
for the Company. Instead they ask that Management cede control to them merely
because they have demanded that they do so.
Adoption of PROPOSAL 1, eliminating cumulative voting, will make it difficult,
if not impossible, for minority shareholder groups, such as the Trenham Group,
to elect one or more directors as opposed to electing an entirely new slate of
directors. Adoption of PROPOSAL 2, eliminating shareholder action by written
consent, will defeat that pending attempt by the Trenham Group to remove the
entire Board of Directors through the written consent of shareholders and will
make it more difficult for minority shareholder groups to attempt to take
shareholder action without the input of the Board of Directors. Adoption of both
of the Amendments may have significant effects on the ability of small groups of
minority shareholders of the Company, such as the Trenham Group, to change the
composition of the incumbent Board of Directors. Accordingly, shareholders are
urged to read carefully the following sections of this Proxy Statement, which
describe the proposed Amendments and their purposes and effects.
PURPOSES AND EFFECTS OF THE PROPOSED AMENDMENTS
The Board of Directors of the Company is asking shareholders to
consider and adopt the proposed Amendments to the Articles of Incorporation in
order to prohibit: (i) cumulative voting for election of directors and (ii)
actions by written consent of shareholders. The Board of Directors believes that
elimination of cumulative voting is in the best interests of all of the
Company's shareholders. Cumulative voting potentially enables small groups of
minority shareholders to band together to elect directors to the Company's Board
of Directors to support and pursue that group's agenda as opposed to acting in
the best interests of all shareholders. While proportionate representation may
work for certain pluralistic societies, the Board of Directors believes that the
Company should have a strong management team with a shared vision and strategy
aligned with that of a majority of its shareholders for the future of the
Company. Allowing for the election of one or more directors representing
minority shareholder groups creates the possibility of a fragmented Board of
Directors where Management may have to cater to special interest groups in order
to solicit support for the ongoing activities of the Company. In addition,
allowing representatives of groups that are potentially overtly hostile to
management or the majority of the Board of Directors' views on the ongoing
operation of the Company, such as representatives of the Trenham Group, would
only serve to inhibit rather than open up the free flow of ideas and
deliberations which are essential to the Board of Directors' decision making
process. The Board of Directors believes that the shareholders should have the
ability to elect a Board of Directors which represents the bests interests of
all of the shareholders as opposed to the interests of any particular group. The
Company's entire Board of Directors is elected annually and the Company's
shareholders are given the opportunity to replace any and all of the directors
if they are not satisfied with the Company's performance. Consistent with its
views, Management believes that an overwhelming majority of companies whose
shares are traded publicly do not use cumulative voting for the election of
directors.
The second proposed amendment to the Articles of Incorporation would
prohibit shareholder action by written consent. The Board of Directors also
believes that the interests of all shareholders will be better served by
requiring that all shareholder actions be implemented by a duly authorized and
noticed meeting of shareholders, as opposed to by written consent. Requiring
that shareholder actions take place only after a shareholders' meeting has
numerous benefits such as allowing all shareholders to participate, express
their views and vote on the matter. Actions by written consent can be
implemented by a majority of shareholders without the prior input, participation
or recommendation of Management of the Company or the remaining shareholders.
Shareholders should have the benefit of Management's
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recommendations in deciding on the appropriate course of action. Actions which
on their face seem innocuous can have potentially adverse consequences. For
example, as discussed further below, the Trenham Group proposal, if implemented,
could trigger a default of the outstanding mortgage notes of the Company's
subsidiary and put the Company in a position where it has no effective governing
body for an extended period of time. In addition, the Trenham Group's proposal
was in this instance entirely unnecessary since the Company had advised them
that it intended to hold the annual meeting of shareholders to elect directors
in the Fall. Furthermore, California law requires that the Company call a
special meeting of shareholders to consider any legitimate shareholder action if
requested by at least 10% of the shareholders of record of the Company. This
statutory mandated threshold protects the Company and its shareholders since it
requires that at least a reasonable percentage of the shareholders request an
action before the Company is required call a meeting to address it. Under the
current circumstances, the Trenham Group is seeking to implement their written
consent action with the purported initial support of only 3.9% of the Company's
shareholders. The second proposed Amendment would also help ensure that the
Board of Directors, if confronted by a surprise proposal from a third party who
has recently acquired a block of the Company's Common Stock, will have
sufficient time to review the proposal, consider appropriate alternatives and
make its recommendation to shareholders.
Management believes that while the adoption of the proposed
Amendments would make it more difficult for and discourage the holder of a small
block of the Company's Common Stock, such as the Trenham Group, from attempting
to enact a surprise corporate action or elect one or members to the Board of
Directors; they will not significantly impede actions by holders of substantial
blocks of stock. As previously noted, California law enables holders of 10% or
more of the outstanding shares to call a meeting of shareholders for any
legitimate purpose. In addition, under the current circumstances where members
of the Management own approximately 38% of the outstanding shares elimination of
cumulative voting would have the effect of depriving Management of significant
Board of Directors representation in the event they lose a proxy contest for
control.
To the extent that the proposed Amendments would be deemed to
discourage small groups of shareholders from attempting to enact shareholder
actions or capture seats on the Board of Directors, they could be deemed to
impede the ability of shareholders to implement changes to the governance and
management of the Company. Also, since these Amendments would require that all
shareholder actions be implemented through a shareholder meeting, it is possible
that a group holding the majority of the Company's shares could be impeded or
delayed from implementing their plans. As such, the proposed Amendments could
deter or discourage certain attempted takeover attempts, such as the one
currently being proposed by the Trenham Group, and would encourage persons
seeking to acquire control of the Company to initiate such an acquisition
through arms-length negotiations with the Company's Management and Board of
Directors.
The proposed Amendments are specifically authorized under the
California Corporations Code (the "Code"). The Board of Directors, which
unanimously approved the Amendments and recommended that they be submitted to
the Company's shareholders for adoption, does not presently contemplate
recommending the adoption of any further amendments to the Articles of
Incorporation or the Bylaws which would affect the ability of third parties to
take over or change control of the Company.
PROPOSAL 1 -- AMENDMENT TO THE ARTICLES OF
INCORPORATION TO ELIMINATE CUMULATIVE VOTING
California law generally requires cumulative voting. See "Proposal 3
- -- Election of Directors" for a description of California cumulative voting
procedures. However, the Code specifically allows a company with its common
stock quoted on the Nasdaq National Market System and with at least 800
shareholders of record to eliminate cumulative voting by an amendment to its
Articles of Incorporation. The Company meets these requirements and thereby
proposes an Amendment to the Articles of Incorporation to eliminate cumulative
voting. Under cumulative voting, in an election of directors each share has a
number of votes equal to the number of directors to be elected and each
shareholder may cast all of his votes for a single candidate, or allocate them
among as many candidates and in such proportions as he chooses. As a result, a
minority shareholder or shareholders holding a significant percentage of
outstanding shares may be able to elect one or more directors.
6
<PAGE> 11
With cumulative voting, Board of Directors' representation might be
obtained by a corporation or group seeking to gain control of the Company or by
a faction unfriendly to Management and the majority of the Company's
shareholders. The Board of Directors believes that any such representation on
the Company's Board of Directors would be disruptive and could impair the
efficient operation of the Company. Accordingly, the Board of Directors propose
that the Articles of Incorporation be amended to add a new Article SIXTH which
would provide for voting by simple plurality in lieu of cumulative voting in
elections of directors. Without cumulative voting, each share has one vote for
each open director position which can be voted only for such position. Without
cumulative voting, the holder or holders of a majority of the shares of the
Company's Common Stock voting at a shareholders' meeting will be able to elect
all directors of the Company then being elected. This Amendment would eliminate
the possibility that the holders of a minority of the shares voting at such a
meeting (acquired through a proxy contest, tender offer or otherwise) might
elect one or more directors. It also could be argued that the elimination of
cumulative voting may deter takeover efforts on terms which some shareholders
might deem favorable. However, the absence of cumulative voting may shorten the
time required for a majority of the shareholders to elect an entirely new slate
of directors.
The Bylaws fix the number of directors to be within an authorized
range of from five to seven, with the exact number currently fixed at five.
Approval of a majority of the outstanding shares is required to change the range
of directors (which can not be more than twice the minimum less one and with the
minimum being not less than three) or to fix a specific number instead of a
range. Within a range, the Board of Directors can fix the exact number of
directors.
The Common Stock owned by The Trenham Group as reflected in its
filings with the Securities and Exchange Commission is not sufficient to elect
any director with cumulative voting unless The Trenham Group obtains proxies
representing substantial additional shares. Accordingly, the adoption of this
proposed Amendment will not affect the Trenham Group's ability to elect a
director with its present holdings, but might affect its ability to elect one or
more directors by soliciting proxies. If the Board of Directors is increased to
seven members as proposed by the Trenham Group, the Trenham Group would need
fewer proxies from other shareholders to elect a director under cumulative
voting.
The elimination of cumulative voting will also eliminate the current
ability of Gerald D. Murphy and Douglas A. Murphy to assure that one or both of
such persons are elected to the Board of Directors even if a person acquired
over 50% of the Common Stock.
IF ADOPTED, THE AMENDMENT WOULD APPLY AT THIS ANNUAL MEETING TO THE
ELECTION OF DIRECTORS AND CUMULATIVE VOTING WOULD NOT BE AVAILABLE.
The affirmative vote of a majority of the outstanding shares of the
Company's outstanding Common Stock is required to approve the Amendment
eliminating cumulative voting at the Annual Meeting and at subsequent meetings.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF THE ADOPTION OF
THE AMENDMENT TO THE ARTICLES OF INCORPORATION TO ELIMINATE CUMULATIVE VOTING.
PROPOSAL 2 -- AMENDMENT TO ARTICLES OF INCORPORATION TO
ELIMINATE SHAREHOLDERS ACTION BY WRITTEN CONSENT
Under the Code, unless otherwise provided in the Articles of
Incorporation, any action required or permitted to be taken by shareholders of a
company may be taken without a meeting, generally without prior notice and
without a shareholder vote, if a written consent setting forth the action to be
taken is signed by the holders of shares of outstanding stock having the
requisite number of votes that would be necessary to authorize such action at a
meeting of shareholders at which all shares entitled to vote thereon were
present and voted. After an action is taken by less than unanimous written
consent, prompt notice of such action must be given to those shareholders who
have not consented and if the action relates to approving a transaction with an
insider, indemnification of management, a corporate reorganization or a plan of
distribution following a decision to liquidate, notice of the shareholders'
approval must be given to those non-consenting shareholders at least 10 days
before the action can take place. Further, California law provides that a
vacancy of a directorship caused by removal may be filed only by the unanimous
written consent of the shareholders, although directors may be removed by
written consent of a majority of the outstanding shares.
7
<PAGE> 12
This Amendment would eliminate the situation proposed by the Trenham
Group Consent Solicitation whereby under California law the Board of Directors
may be removed by the written consent of holders of a majority of the
outstanding shares, but cannot be replaced by new directors except by unanimous
written consent or at a shareholders meeting. The Trenham Group would leave the
Company without a Board of Directors for a period of at least 45 days. Further,
under California law officers of the Company can only function under the
supervision and control of a Board of Directors.
The Articles of Incorporation currently contain no provision
restricting or regulating shareholder action by written consent. This Amendment
to the Articles of Incorporation would eliminate the authority of shareholders
to act by written consent without a meeting, thus requiring all shareholder
action to be taken at a shareholder meeting. The Amendment would add Article
SEVENTH of the Articles of Incorporation.
In the current business environment, efforts to take control of
public corporations are common and often result in a person or group acquiring a
majority, but not all, of the outstanding stock of a corporation. In that event,
under the Company's existing Articles of Incorporation, such a person or group
could seek shareholder action by written consent without a meeting. It is
possible that if a majority of shares are held by less than ten shareholders,
such shareholders would not have to send a proxy statement. However, in any such
action by written consent, the Company might have to send to the shareholders an
information statement before the action would be effected under the Federal
proxy rules.
The Board of Directors believes that the approval of Proposal 2 is
advantageous to the Company and its shareholders. The provision of Proposal 2
prohibiting shareholders action by written consent would give all shareholders
of the Company, entitled to vote on a particular matter, advance notice of and
the opportunity to participate in the determination of any proposed action on
such matter by requiring a shareholder meeting and the chance to take judicial
or other action to protect their interests.
In addition, the Board of Directors believes that elimination of
shareholder action by written consent is desirable to avoid untimely action in a
context that might not permit shareholders to have the full benefit of the
knowledge, advice and participation of the Company's Management and Board of
Directors.
The elimination of action by written consent may also deter
acquisitions of the Company's Common Stock and may delay, deter or impede
shareholder action not approved by the Board of Directors. Such actions may
include shareholder attempts to obtain control of the Board of Directors,
unsolicited tender offers or other efforts to acquire control of the Company.
Proposal 2 may impede or delay, at least until the next regularly scheduled
annual meeting, the initiation or consummation of business transactions, such as
reorganizations, mergers, or recapitalization, which are opposed by the Board of
Directors even though sought by a majority of the shareholders. Elimination of
action by written consent will not affect the rights of shareholders holding at
least 10% of the outstanding shares to require that the Company call a
shareholder meeting for any legitimate purpose.
IF THE AMENDMENT TO ELIMINATE SHAREHOLDERS ACTION BY WRITTEN CONSENT
IS ADOPTED, ANY ATTEMPT TO TAKE A SHAREHOLDERS ACTION BY WRITTEN CONSENT,
INCLUDING THE WRITTEN CONSENTS SOLICITED BY THE TRENHAM GROUP, AFTER SUCH
ADOPTION, WILL BE INVALID.
The affirmative vote of a majority of the outstanding shares of the
Company's outstanding Common Stock is required to approve the Amendment to
eliminate shareholder action by written consent.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF THE ADOPTION OF
THE AMENDMENT TO ELIMINATE ACTION BY WRITTEN CONSENT.
PROPOSAL 3 - ELECTION OF DIRECTORS
Five directors are to be elected at the Annual Meeting to serve
until the next annual meeting and until their successors shall be elected and
qualified. Subject to certain exceptions specified below, if the Amendment to
eliminate cumulative voting is not adopted, shareholders of record on the Record
Date will be entitled to cumulate their votes in the election of the Company's
directors (i.e., they then would be entitled to the number of votes determined
by multiplying
8
<PAGE> 13
the number of shares held by them times the number of directors to be elected)
and may cast all of their votes so determined for one person, or spread their
votes among two or more persons as they see fit. If cumulative voting is
available, no shareholder shall be entitled to cumulate votes for a given
candidate for director unless such candidate's name has been placed in
nomination prior to the vote and the shareholder has given notice at the Annual
Meeting, prior to the voting, of the shareholder's intention to cumulate his or
her votes. If any one shareholder has given such notice, all shareholders may
cumulate their votes for candidates in nomination. DISCRETIONARY AUTHORITY TO
CUMULATE VOTES IS HEREBY SOLICITED BY THE BOARD OF DIRECTORS IF CUMULATIVE
VOTING IS ALLOWED.
With respect to election of directors, assuming a quorum is present,
the five candidates receiving the highest number of votes are elected. A quorum
is the presence in person or by proxy of shares representing a majority of the
outstanding shares of the Common Stock.
NOMINEES FOR THE BOARD OF DIRECTORS
The names of the nominees and certain information about each of them
as of the Record Date are set forth below:
<TABLE>
<CAPTION>
Date elected
as director
Name of nominee Age of the Company
- --------------- --- --------------
<S> <C> <C>
GERALD D. MURPHY 69 April 1964
</TABLE>
Mr. Murphy has served as Chairman of the Board and Chief Executive Officer of
the Company since formation of the Company in 1964. He has served as Chairman of
the Board of American Rice, Inc. ("ARI")( which is 81% owned by the Company)
since 1993 and as a director of ARI since 1988. ARI is the largest U.S.-based
and one of the world's leading processor and marketers of branded rice products
and it is among the largest U.S. processor and seller of branded black and green
olives. ARI's executive offices are located at 411 North Sam Houston Parkway
East, Suite 600, Houston, Texas 77060. He also serves as a director of
Pinkerton's, Inc., a security and investigation services firm.
<TABLE>
<S> <C> <C>
DOUGLAS A. MURPHY 41 January 1988
</TABLE>
Mr. Murphy has served as President of the Company since 1990 and as Chief
Operating Officer since 1992. He has also served as President and Chief
Executive Officer of ARI since 1993 and as a director of ARI since 1990. He has
served as President of ERLY Juice Inc. since 1988, a subsidiary of the Company,
and was President of Comet American Marketing, a division of ARI, from 1986 to
1990. He is also a director advisor of Compass Bank Houston.
<TABLE>
<S> <C> <C>
WILLIAM R. BURGESS 80 September 1975
</TABLE>
Mr. Burgess is a private business consultant, Chairman of CKS Digital, Inc., a
privately-held company, and has served as a director of ARI since
1988. From 1978 to 1986 Mr. Burgess was Chairman of International Controls
Corp., an internationally diversified manufacturing company listed on the New
York Stock Exchange.
<TABLE>
<S> <C> <C>
BILL J. MCFARLAND 60 August 1986
</TABLE>
Mr. McFarland has served as Vice President of the Company since 1975. He has
served as President of Comet American Marketing and Senior Vice President of ARI
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).
9
<PAGE> 14
<TABLE>
<S> <C> <C>
ALAN M. WIENER 59 March 1995
</TABLE>
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.
Douglas A. Murphy is the son of Gerald D. Murphy. There are no other
family relationships among the directors of the Company.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" ELECTION OF THE
NOMINEES LISTED ABOVE AS DIRECTORS.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has four committees with specific
responsibilities to support the operations of the full Board of Directors. These
are the Executive Committee, the Audit committee, the Compensation Committee and
the Profit Sharing Plan Committee. The Board of Directors does not have a
Nominating Committee, as the entire Board acts in this capacity.
The Board of Directors has delegated to the Executive Committee the
powers and authority of the Board of Directors in the management of the
business, except that the Executive Committee is not to take any actions which
could await actions by the Board of Directors, approve capital expenditures
exceeding $100,000 or, authorize transactions which would be both material and
outside the ordinary and normal course of the business of the Company. Gerald D.
Murphy serves as Chairman of the Executive Committee and Douglas A. Murphy and
William H. Burgess are Executive Committee members.
The Audit Committee meets with the Company's independent certified
public accountants and reviews the scope and results of the annual audit. Alan
M. Wiener is Chairman of the Audit Committee and William H. Burgess and Bill J.
McFarland are members of the Audit Committee.
The Compensation Committee recommends to the Board of Directors
proposed compensation programs for all principal officers of the Company.
William H. Burgess is Chairman of the Compensation Committee and Gerald D.
Murphy and Alan M. Wiener are Compensation Committee members.
The Profit Sharing Plan Committee recommends to the Board of
Directors proposed contributions by the Company to the Company's Employees
Profit Sharing Retirement Plan. Gerald D. Murphy is Chairman of the Profit
Sharing Plan Committee and Bill J. McFarland is a member.
During the fiscal year ended March 31, 1997, the full Board of
Directors held five meetings; the Executive Committee took one action by written
consent; the Audit Committee met three times; the Compensation Committee met one
time; and the Profit Sharing Plan Committee met one time. Each director was in
attendance at 75% or more of all of the meetings of the full Board of Directors
and all committees on which each director served.
10
<PAGE> 15
THE TRENHAM GROUP'S CONSENT SOLICITATION
The Trenham Group, which consists of Noble Trenham, his
broker/dealership, First Global Securities, Inc., Nanette Kelley and her
company, The Powell Group and its subsidiary, Farmers Rice Milling Company,
Inc., has filed a Preliminary Consent Solicitation Statement (as amended) and
Solicitation Card (blue) and a Schedule 13D (as amended) with the Securities and
Exchange Commission and upon the completion of the processing of such material
by the Securities and Exchange Commission, intends to send such Consent
Solicitation Statement and Solicitation Card (blue) to the shareholders of the
Company to seek their consent to the following proposals: (a) the removal of the
entire Board of Directors; (b) the calling of a special meeting of shareholders
45 days after the removal of the Board of Directors to elect a new Board of
Directors; (c) the expansion of the Board of Directors from five to seven
members; and (d) and the prohibiting of the Management of the Company from
taking certain action between the removal of the Board of Directors and the
holding of the special meeting. In addition, the Trenham Group indicated that at
the special meeting it will vote for its own five nominees for directors
including Ms. Kelley and Mr. John M. Spain, the Managing Director of The Powell
Group, and solicit proxies for such nominees.
Aside from the fact that this Annual Meeting of Shareholders renders
the Trenham Group proposals entirely unnecessary, the Board of Directors of the
Company oppose the proposals made by the Trenham Group for several additional
important reasons:
(a) For the five fiscal years ended March 31, 1997, the Company's
stock out-performed the average return for NASDAQ (U.S. Companies) by
approximately 50% and the average return for S&P Food Products Index by over
62%. Further information regarding the performance of the Company's Common
Stock, see "Stock Price Performance".
(b) The removal of the entire Board of Directors without a
simultaneous election of a new Board of Directors, would leave the Company in a
unique position of not having anyone with the responsibility for the managment
of the business and affairs of the Company until a special meeting of
shareholders is held. While there is no controlling California case law, the
Company believes such action would be contrary to the Code provisions requiring
a board of directors to manage the business and affairs of a California
corporation and its officers. Further, it is unclear under California law
whether the officers could continue to function without a board of directors
with ultimate management powers. The failure to have a Board of Directors could
result in the Company not being able to take any material actions, or
implementing strategic and vital business decisions in a timely manner.
(c) The Company's subsidiary, ARI, has outstanding $99,000,000 of
13% Mortgage Notes (the "Notes"), which the Trenham Group has stated could be
refinanced at a lower rate. However, a change of control of the Company, which
results in a change of control of ARI (such as a replacement of a majority of
directors) would result in the holders of such Notes having an option to require
immediate repayment of such Notes at 101% of the original purchase price plus
any original issue discount. Further, the Notes are not redeemable until July
31, 1999, and then at a redemption price of 107% of par, declining to 100% of
par after July 31, 2001. The Trenham Group has not indicated that it has
obtained the consent of the holders of the Notes for either a change of control
or payoff at less than 107%. The holders of the Notes could demand immediate
payment upon a change of control of the Company and if such payments are not
made, a default could be declared, and the assets securing the Notes, which
includes certain real property and other assets of ARI and the Company's stock
in ARI (except for 200,000 shares of Series B Preferred Stock) could be subject
to foreclosure. If such events occur, unless it was able to obtain significant
additional financing, ARI would be forced to seek protection under the federal
Bankruptcy laws. Further, a default under the Notes would trigger a default
under ARI's other credit agreements, including its principal line of credit.
(d) The Trenham Group estimates in its soliciting material that the
cost of such solicitation would be about $750,000 and that it would seek to have
the Company pay such amounts if it is successful in having its nominees become a
majority of the Board of Directors. Management believes that amount would be
reduced had the Trenham Group simply solicited for their own slate of directors
at the Annual Meeting. Of the $750,000, Noble Trenham's broker/dealership will
receive $505,000, plus expenses. Therefore, if the Trenham Group is successful,
the Company will be asked indirectly to reward a holder of twelve shares with
over a half a million dollars. The reimbursement of such expenses, and the
expenses the Company is incurring in response to the Trenham Group, will reduce
cash and shareholders' equity.
11
<PAGE> 16
MANAGEMENT RECOMMENDS THAT THE SHAREHOLDERS DO NOT EXECUTE CONSENTS
PROVIDED BY THE TRENHAM GROUP SINCE THE BOARD OF DIRECTORS WILL BE ELECTED AT
THE ANNUAL MEETING. Further, Management believes it has the experience and
background to better manage the Company than the slate of nominees and the
officers proposed by the Trenham Group. Gerald D. Murphy founded the Company in
1964 and has built the Company and its subsidiaries into one of largest branded
rice and olive companies in the United States.
On July 17, 1997, Noble Trenham, Ms. Kelley, representing herself
and The Powell Group and its subsidiary, Farmers Rice and John M. Spain, an
employee of The Powell Group (collectively the "Trenham Group" but referred to
as The Powell Group in its soliciting material) met with Gerald D. Murphy,
Chairman of the Board of Directors and Chief Executive Officer of the Company,
and William H. Burgess, a director of the Company, at the Company's main office.
At the meeting, the Trenham Group, which owns only 3.9% of the outstanding
Common Stock of the Company, threatened to take control of the Company, elect
its own slate of directors and to try to find a buyer for the Common Stock of
the Company owned by Mr. Murphy. Although, Mr. Murphy requested three weeks to
analyze this proposal, the Trenham Group gave him only 24 hours. At a meeting on
July 18, 1997, Mr. Murphy rejected these demands. Before and after such
meetings, the Trenham Group has been soliciting shareholders of the Company with
regard to joining them in replacing the current Management of the Company.
Management also believes, based upon the actions of and disclosures
provided by the Trenham Group, that the Trenham Group's attempt to take control
of the Company is just part of a long-term plan by Noble Trenham to take such
control, although he only owns 12 shares of the outstanding Common Stock of the
Company. MR. TRENHAM AND HIS FIRM WILL RECEIVE FROM THE POWELL GROUP, WHICH WILL
THEN BE REIMBURSED BY THE COMPANY, $505,000, PLUS EXPENSES, IF THE TRENHAM GROUP
SUCCESSFULLY REMOVES THE BOARD OF DIRECTORS. In 1989, he and others who
collectively owned only 5% of the then outstanding Common Stock, conducted a
short lived proxy contest for the Board of Directors of the Company. At the last
annual meeting, Mr. Trenham sought to vote proxies for 530,000 shares against
Management's nominees for directors. Late last year and early this year he tried
to have an nominee of the Trenham Group, Eugene A. Cafiero, become a member of
the Board of Directors. He was instrumental in arranging for the purchase, in
March 1997 of the current shares held by Ms. Kelley and The Powell Group's
subsidiary, Farmers Rice. Mr. Trenham has recommended the proposed takeover of
the Company by the Trenham Group and has been retained, through his
broker/dealer firm, by The Powell Group to accomplish such goal. In 1987 Mr.
Trenham was permanently enjoined from violating certain provisions of the
federal securities laws and one of the persons he was associated with in his
1989 solicitations of proxies and who has signed a request to call a special
meeting, is Gary Driggs. Mr. Driggs is the former head of Arizona's
second-largest thrift, Western Savings, and he pleaded guilty to two felony
counts from the collapse in 1989 of such thrift.
Ms. Kelley and The Powell Group acquired their shares for $6.50 per
share in March 1997. The trading price of such shares significantly increased in
value prior to the July 17th meetings and continues to trade above such
acquisition price. During the July meetings with the Company, Ms. Kelley did not
identify any specific reasons for seeking a change of control of the Company nor
did she articulate any coherent strategy or plan which the Trenham Group would
seek to implement if they are successful in obtaining control.
The Trenham Group is attempting by its proposals to take over all or
at least a majority of the Company's Board of Directors, and did not merely
request a Board of Directors seat as a shareholder. In some cases, the
shareholder may not truly be interested in taking over a company, but uses the
threat of a proxy fight and/or a bid to take over a company as a means of
forcing such company to repurchase his equity position at a substantial premium
over market price.
The Board of Directors of the Company believes that an imminent
threat of removal of the Company's Management severely curtails its ability to
negotiate effectively with such a shareholder, particularly since Management of
the Company owns approximately 38% of the outstanding Common Stock and has
itself a substantial economic ownership in the Company. Surprise threats to take
over the Company deprives Management of the time and information necessary to
evaluate the takeover proposal, to study alternative proposals and to help
ensure that the best price is obtained in any transaction involving the Company
which may ultimately be undertaken. Further, given the hostile nature of the
Trenham Group's actions and their lack of disclosure as to their plans for the
Company, Management has been deprived of the opportunity to evaluate the
proposals made by them, such as the feasibility of refinancing the
12
<PAGE> 17
$100,000,000 principal amount of Notes, in light of the fact that the Notes can
not be redeemed prior to July 31, 1999 and then at 107% of par value, or the
actual role and compensation to be paid to Noble Trenham when he owns an
insignificant interest in the Company. If the real purpose of a takeover bid is
to force the Company to repurchase an accumulated stock interest at a premium
price, Management faces the risk that if it does not repurchase the
shareholder's stock interest, the Company's business and Management will be
disrupted, perhaps irreparably. On the other hand, such a repurchase diverts
valuable corporate resources to the benefit of a single stockholder. Further,
the Trenham Group estimates that it will cost about $750,000 to secure their
control of the Company and if successful, they will seek reimbursement of such
amount from the Company, INCLUDING A $505,000, PLUS EXPENSES, PAYMENT TO NOBLE
TRENHAM'S BROKER/DEALERSHIP. The Trenham Group therefore plans on all the
shareholders paying for its attaining control of the Company.
Finally, with the Trenham Group holding less than 4% of the
outstanding Common Stock and Management of the Company holding approximately
38%, Management believes that it will be unlikely the Trenham Group can acquire
control of the Board of Directors. With cumulative voting, Gerald D. Murphy and
Douglas A. Murphy can assure themselves to seats on a five or seven person Board
of Directors. Secondly, to remove the directors by written consent, the Trenham
Group must obtain consents from shareholders who are not members of Management
or members of the Trenham Group representing 46.2% of the outstanding shares
("Unaffiliated Shares"). Unaffiliated Shares represent approximately 58.4% of
the outstanding shares.
On July 24, 1997, Farmers Rice filed a shareholder derivative
complaint purportedly on behalf of the Company and ARI against Gerald D. Murphy,
Douglas A. Murphy, the Company and ARI in the United States District Court,
Central District of California. In the complaint, Farmers Rice alleges (1)
breach of fiduciary duty, (2) waste of corporate assets and (3) illegal
corporate loan. The derivative complaint further requests injunctive relief
prohibiting the Company and ARI from making allegedly ongoing litigation defense
payments on behalf of Gerald D. Murphy and Douglas A. Murphy and requiring
ongoing indemnification by such individuals to the Company and ARI. Both the
Company and ARI are nominal defendants with the lawsuit being brought on behalf
of the Company and ARI against Gerald D. Murphy and Douglas A. Murphy. The
complaint principally challenges certain litigation expenditures incurred by the
Company in connection with litigation to which the Company, ARI, Gerald D.
Murphy and Douglas A. Murphy are parties. While the complaint alleges that such
expenditures were improperly incurred, in fact, all expenditures and the
involvement of the Company in the underlying litigation were fully authorized by
the Company's Board of Directors. Gerald D. Murphy and Douglas A. Murphy believe
they have valid defenses against the allegations in the complaint and that the
complaint's sole purpose is tactical, namely, to attempt to malign current
Management as part of the Trenham Group's renewed effort to take control of the
Company for its own benefit. See "Compensation Committee Interlocks and Insider
Participation-Litigation".
In addition, on August 13, 1997, Farmers Rice and Ms. Kelley filed a
petition for writ of mandate in California Superior Court seeking an order
allowing them to inspect the books and records of the Company under the Code.
The Company believes that Farmers Rice and Ms. Kelley are seeking such
inspection for improper purposes and intends to defend the petition on that
basis.
PARTICIPANTS IN THE SOLICITATION
Under applicable regulations of the Securities and Exchange
Commission, each of the directors and nominees of the Company is deemed to be a
"participant" in the Company's solicitation of proxies, as well as the Company.
The following sets forth certain additional information regarding the Company's
nominees and directors.
13
<PAGE> 18
TRANSACTIONS IN THE COMPANY'S SECURITIES IN THE LAST TWO YEARS.
Listed below are the only purchases and sales of Company stock
within the past two years by the Company, the Company's directors and nominees
and certain information concerning such transactions.
A. Purchases and Sales of Common Stock
<TABLE>
<CAPTION>
Number of Shares
Name Purchased (Sold) Date of Transaction(s)
- ----------------------- ---------------- ----------------------
<S> <C> <C>
ERLY Industries Inc. 512,314 October 1995 (1)
430,417 October 1996 (1)
16,791 Various (2)
351,773 July 24, 1997 (4)
33,949 Various (3)
45,911 Various (5)
Gerald D. Murphy 3,857 April 16, 1995 (3)
(10,000) May 26, 1995
(5,000) June 14, 1995
(333,333) January 6, 1997 (6)
10,000 June 1, 1997 (3)
Douglas A. Murphy 3,256 April 16, 1995
(500) January 9, 1996
(500) January 15, 1996
(1,000) January 24, 1996
(1,000) March 15, 1996
(500) March 18, 1996
(1,000) April 11, 1996
(1,000) April 12, 1996
(1,000) April 17, 1996
(5,000) May 3, 1996
(5,000) May 16, 1996
(5,000) May 23, 1996
(2,000) June 4, 1996
(5,360) June 11, 1995
10,000 June 1, 1997 (3)
351,773 July 24, 1997 (4)
22,175 August 5, 1997 (5)
</TABLE>
14
<PAGE> 19
<TABLE>
<S> <C> <C>
William H. Burgess (40,000) March 20, 1996
(11,000) May 21, 1996 (7)
(10,000) June 26, 1996
(1,000) June 27, 1996
(5,000) July 10, 1996
(3,000) February 7, 1997
(2,000) February 12, 1997
(1,000) February 13, 1997
(2,000) February 14, 1997
(2,000) February 18, 1997
(3,000) February 24, 1997
(4,000) March 12, 1997
(1,000) March 13, 1997
(15,000) March 20, 1997
(2,560) March 26, 1997
(10,000) May 7, 1997
(10,000) May 9, 1997
(5,000) July 9, 1997
(13,735) July 10, 1997
Bill J. McFarland 1,260 April 16, 1995 (3)
Al Wiener 1,147 September 6, 1996
1,235 January 21, 1997
1,513 July 1, 1997
</TABLE>
- ----------
(1) Stock dividend.
(2) Miscellaneous stock issuances.
(3) Stock bonuses.
(4) Shares issued upon conversion of convertible promissory note.
(5) Shares issued upon exercise of options.
(6) Involuntarily transferred in connection with a lawsuit. See
"Compensation Committee Participation and Insider Participation-
Litigation".
(7) Gift
B. Purchase and Sale of Other Securities.
See "Compensation Committee Interlocks and Insider
Participation-Certain Transactions".
COMMON STOCK OF THE COMPANY OWNED BY ANY ASSOCIATES OF THE DIRECTORS OR NOMINEES
Name Address Associate of Number of Shares
-------------- --------------- ------------------ ----------------
S. B. Cadenhead 550 Palisades Drive William H. Burgess 63,553
and related Palm Springs, CA 92262
trusts
15
<PAGE> 20
SECURITIES OWNED BY AMERICAN RICE, INC.
Gerald D. Murphy, Douglas Murphy and William H. Burgess may be
deemed to be the beneficial owners of any shares of the American Rice, Inc.'s
Common Stock (35,777,778 shares), Series A Preferred Stock (3,888,889 shares)
and Series B Preferred Stock (14,000,000 shares) held by the Company as a result
of their positions with the Company and their stock ownership of the Company.
CERTAIN INFORMATION
Except as disclosed elsewhere in this Proxy Statement, to the
knowledge of the Company none of the Company's directors and nominees: (i) owns
of record any securities of the Company that are not also beneficially owned by
them; (ii) is, or was within the past year, a party to any contract,
arrangements or understandings with any person with respect to the securities of
the Company, including, but not limited to, joint ventures, loan or option
arrangements, puts or calls, guarantees against loss or guarantees of profit,
division of losses or profits, or the giving or withholding of proxies; (iii)
has any substantial interest, direct or indirect, by security holdings or
otherwise, in any matter to be acted upon at the Annual Meeting; (iv)
beneficially owns any securities of any parent or subsidiary of the Company; or
(v) borrowed any funds to purchase any securities set forth under "Participants
in the Solicitation." Except as disclosed elsewhere in this Proxy Statement, to
the knowledge of the Company none of the Company's directors or nominees nor any
of their associates has any arrangement or understanding with any person with
respect to future employment by the Company or its affiliates or with respect to
any future transactions to which the Company or any of its affiliates will or
may be a party, nor any material interest, direct or indirect, in any
transaction which has occurred since April 1, 1996 or any currently proposed
transaction, or series of similar transactions, to which the Company or any of
its affiliates was or is to be a party and in which the amount involved exceeds
$60,000.
METHOD AND COST OF SOLICITATION
In addition to the solicitation of proxies by use of the mails,
proxies may also be solicited by the Company and its directors, officers and
management-level employees (who will receive no compensation therefor in
addition to their regular salaries and fees) by telephone, telegram, facsimile
transmission and other electronic communication methods or personal contact. The
Company will reimburse banks and brokers who hold shares of the Company's Common
Stock in their name or custody, or in the name of nominees for others, for their
out-of-pocket expenses incurred in forwarding copies of the proxy materials to
those persons for whom they hold such shares.
The Company has retained MacKenzie Partners, Inc. ("MacKenzie") to
assist in the solicitation of proxies. Pursuant to the Company's agreement with
MacKenzie, it will provide various proxy advisory and solicitation services for
the Company at a cost of approximately $20,000, plus reasonable out-of-pocket
expenses and indemnification against certain liabilities. It is expected that
MacKenzie will use up to approximately 15 persons in such solicitation.
Although no precise estimate can be made at this time, the Company
anticipates that the aggregate amount to be spent by the Company in connection
with the solicitation of proxies by the Company will be approximately $200,000,
of which approximately $100,000 has been incurred to date. This amount includes
legal fees, printing costs and the fees payable to MacKenzie, but excludes (i)
the salaries and fees of officers, directors, and employees of the Company and
(ii) the normal expenses of an uncontested election. The aggregate amount to be
spent will vary depending on, among other things, any developments that may
occur in the proxy (consent) contest discussed herein.
16
<PAGE> 21
EXECUTIVE COMPENSATION
The following table sets forth information for each of the three
fiscal years ended March 31, 1997 for the Chief Executive Officer of the Company
and the four other most highly compensated executive officers of the Company and
its subsidiaries:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-term Compensation
---------------------------------- ----------------------
Awards
-----------------------
Fiscal Other Securities
Year Annual Restricted Underlying All Other
Name and ended Compen- Stock Options/ Compen-
Principal Position March 31 Salary($) Bonus($) sation($) Awards($) SARS(#) sation($)
- ------------------ -------- --------- -------- --------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(1) (2) (3)
Gerald D. Murphy 1997 $336,000 $101,535 $ 7,542 $ 99,525 $ -- $ 6,000
Chairman of the Board and 1996 325,000 100,000 6,630 -- -- 5,609
Chief Executive Officer of 1995 310,000 120,160 7,233 43,774 -- 9,060
ERLY Industries Inc.
Chairman of the Board of
American Rice, Inc.
Douglas A. Murphy 1997 259,000 88,665 6,784 93,225 -- 6,000
President and Chief Operating 1996 250,000 100,000 5,000 -- -- 5,319
Officer of ERLY Industries Inc. 1995 230,000 93,280 5,791 36,858 -- 8,914
President and Chief Executive
Officer of American Rice, Inc.
Bill J. McFarland 1997 210,000 29,325 3,893 7,425 -- 6,000
Vice President of ERLY 1996 204,000 -- 5,555 -- -- 4,002
Industries Inc. 1995 198,000 55,400 4,075 14,263 -- 7,500
Senior Vice President of
American Rice, Inc.
Thurston F. Teele 1997 206,000 85,000 10,852 -- -- 6,000
President of Chemonics 1996 200,000 253,000 5,058 -- -- 7,500
International, Inc. 1995 183,600 364,000 1,640 -- -- 7,500
Richard N. McCombs 1997 180,000 -- 2,759 -- -- 6,000
Vice President and Chief Financial 1996 175,000 15,000 435 -- 88,550 3,392
Officer of ERLY Industries Inc. 1995 170,000 28,560 2,418 7,347 -- 8,106
Executive Vice President of
Finance and Administration of
American Rice, Inc.
</TABLE>
- --------
(1) Amounts included in this column reflect: (i) the cost of Company
provided automobiles relating to personal use, (ii) the taxable
value of life insurance provided by the Company and (iii)
reimbursements under the Company's Executive Medical Plan (the
"Plan"). Under the Plan, key executive officers of the Company are
entitled to be reimbursed for expenses incurred for medical and
dental care provided to the key executive officer and his dependents
which are not otherwise covered by other sources.
(2) The number of shares of restricted stock and the market value
thereof held by the executive officers listed in the table at March
31, 1997, was as follows: Gerald D. Murphy, 11,700 shares ($99,525);
Douglas A. Murphy, 11,300 shares ($93,225); Bill J. McFarland, 900
shares ($7,425); Thurston F. Teele, none; and, Richard N. McCombs,
none. Such shares are restricted for a one-year period from the date
of issuance. Although no cash dividends have ever been paid on the
Company's Common Stock, dividends, if any, would be paid on
restricted stock at the times and in the same amounts as dividends
paid to all shareholders.
(3) Amounts represent Company contributions to the Company's Employees
Profit Sharing Retirement Plan.
17
<PAGE> 22
The following table presents information on stock options held by
the executive officers named in the Summary Compensation Table at the end of
fiscal 1997.
AGGREGATED OPTION EXERCISES (1) IN FISCAL YEAR 1997
AND MARCH 31, 1997 OPTION VALUES
<TABLE>
<CAPTION>
Number of securities Value of unexercised
underlying unexercised in-the-money
options at options at
March 31, 1997 (#) March 31, 1997($) (2)
------------------------------- ----------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ------------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Gerald D. Murphy -- -- -- --
Douglas A. Murphy 84,186 -- $394,832 --
Bill J. McFarland 33,674 -- $157,931 --
Thurston F. Teele -- -- -- --
Richard N. McCombs 88,550 -- $327,635 --
</TABLE>
(1) No options were exercised in fiscal 1997 and no stock appreciation
rights have been granted.
(2) Market value of underlying securities at March 31, 1997 ($8.25 per
share) less the exercise price. The values in the last two columns
have not been, and may never be, realized by the officers. Actual
gains, if any, on option exercises will depend on the value of the
Company's Common Stock on the date of the exercise.
EMPLOYMENT CONTRACTS
In June 1997, the Board of Directors of ARI approved an employment
agreement with Gerald D. Murphy which provides that, as an employee, he shall be
entitled to certain benefits for a five-year term commencing (i) on the date of
termination, if termination is by notice of ARI and there has been no Change of
Control (as defined below), (ii) on the occurrence of a Benefits Event (as
defined below) following a Change of Control, if termination is at the option of
Mr. Murphy or (iii) on the occurrence of the last Change of Control preceding
the date of termination, if termination is by notice of ARI. Under the terms of
the employment agreement, such benefits are provided unless termination is both,
at the option of Mr. Murphy and in the absence of a Change of Control. A Change
of Control is deemed to occur if (i) any person becomes beneficial owner of 25%
or more of the voting power of ARI (other than the Company) or the Company or
(ii) during any consecutive years, the individuals comprising a majority of the
Board of Directors of ARI or the Company at the beginning of such period shall
cease to constitute a majority. A Benefits Event, includes but is not limited to
a change in compensation of, responsibilities of or positions held by Mr. Murphy
without his consent.
Generally, benefits payable under the employment agreement include:
continuation of Mr. Murphy's base salary (currently $350,000), continuation of
Mr. Murphy's participation in profit sharing, pension and other executive
compensations plans, and various health care and disability plans, the right to
a cash bonus in the amount of the bonus last received if ARI awards a cash bonus
to any member of the Executive Group (generally defined as the executive
officers of ARI) during such five-year period, and indemnification for
judgments, fines and expenses incurred by Mr. Murphy by reason of his serving as
an officer. In consideration of these benefits, Mr. Murphy has agreed not to
compete with ARI or to disclose any confidential information of ARI during the
five-year period during which he is to receive such benefits. If ARI or its
successor fails to make timely payments as required by the employment agreement,
liquidated damages are set at treble the amount of such untimely payments.
Certain amounts that may be paid under the employment agreement upon Mr.
Murphy's termination may be deemed to be "excess parachute payments" within the
18
<PAGE> 23
meaning of Section 2800 of the Internal Revenue Code and, as such, would not be
deductible by ARI for federal income tax purposes.
COMPENSATION OF DIRECTORS
Members of the Board of Directors who are not officers of the
Company receive compensation of $2,000 per quarter plus a fee of $1,500 for each
meeting attended in person or by telephone. In addition, in fiscal 1997, William
H. Burgess received fees of $22,500 for public relations services provided to
the Company. Effective April 1, 1996, the Company will pay for outside Board of
Directors' members to participate in the Company's group insurance plan for
medical benefits.
COMPENSATION COMMITTEE INTERLOCKS
AND INSIDER PARTICIPATION
Decisions on the compensation of the Company's executive officers
are made by the Compensation Committee of the Board of Directors which consists
of William H. Burgess, Chairman, Gerald D. Murphy and Alan M. Wiener. Mr.
Burgess is a private business consultant, Chairman of CMS Digital, Inc. and a
Director of American Rice, Inc. ("ARI"). He is the beneficial owner of 4.1% of
the Company's Common Stock. Mr. Murphy is Chairman and Chief Executive Officer
of the Company and is the beneficial owner of 30.5% of the Company's Common
Stock. He is also Chairman of the Board of ARI. Mr. Wiener is retired and owns
less than 1% of the Company's Common Stock.
All decisions by the Compensation Committee were reviewed and
approved without change, by the full Board of Directors of the Company.
Committee members William H. Burgess and Alan M. Wiener were responsible for the
determination of Gerald D. Murphy's compensation as Chief Executive Officer and
Mr. Murphy did not participate in any Compensation Committee or Board of
Directors discussions or decisions concerning his own compensation. Except for
Mr. Murphy, who is the Chief Executive Officer of the Company, no other member
of the Compensation Committee is now or ever has been an officer or employee of
the Company or its subsidiaries.
Mr. Burgess and Mr. Murphy are also Directors of ARI, an 81% owned
subsidiary of the Company. Both serve on the Compensation Committee of the Board
of Directors of ARI, with Mr. Murphy as Chairman of the Committee. The Board of
Directors of ARI recently approved an employment agreement with Gerald D.
Murphy, with Mr. Murphy not participating in the decision. See "Executive
Compensation -- Employment Contracts."
Gerald D. Murphy, Douglas A. Murphy and William H. Burgess also
serve as directors of ARI. Douglas A. Murphy is also President of the Company
and President and Chief Executive Officer of ARI. Bill J. McFarland, a director
and Vice President of the Company, is a Senior Vice President of ARI. In
addition, Richard N. McCombs, Vice President and Chief Financial Officer of the
Company, is a director and Executive Vice President of ARI.
CERTAIN TRANSACTIONS
At March 31, 1997, the Company had a $1,000,000 convertible
promissory note payable to Douglas A. Murphy, President of the Company, which
arose in April 1992. The note was convertible at any time into the Company's
Common Stock at a conversion price of $2.95 per share, the average market price
of the Company's Common Stock for the seven trading days immediately prior to
the April 1, 1993 renewal of the note (as adjusted for stock dividends issued
through September 1996). The note was renewed on an annual basis each year and
on April 1, 1997, Mr. Murphy again renewed the note. The new note had an
interest rate of prime plus 2%, and was due in full on April 1, 1998. In July
1997, Mr. Murphy converted the entire note into 351,773 shares of the Company's
Common Stock in accordance with the conversion provisions of the note.
In 1996 ARI's lease for its office space in Houston, Texas expired.
In reviewing its alternatives, ARI located a building suitable for such office
space which was available for purchase. After careful consideration, ARI's Board
of Directors determined that the purchase of this building would not be in ARI's
best interest and that a leasing arrangement would be more appropriate for ARI.
Gerald D. and Douglas A. Murphy then arranged for the purchase of the building
19
<PAGE> 24
by a limited partnership owned by them. The limited partnership negotiated a
7-year leasing agreement with ARI for office space in October 1996. ARI's
negotiations with the limited partnership were on an arms-length basis and ARI
believes that the rental rates being paid by it are comparable to, if not better
than rates for similar office space in such area.
ARI's annual lease expense for such facility ranges from
approximately $600,000 in the first year to approximately $740,000 in the
seventh year. In connection with the lease, ARI performs building management
services in exchange for certain reductions in the lease cost. At June 30, 1997,
ARI had an account receivable of $101,639 related to amounts paid on behalf of
the limited partnership.
During the fiscal year ended March 31, 1997, Gerald D. Murphy
received officer advances of $85,000 from ARI, which was the largest aggregate
amount of indebtedness outstanding to ARI at any time during the fiscal year.
The amount outstanding at July 31, 1997, was $44,192. There was no interest
charged on such advances.
LITIGATION
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 Gerald D. Murphy and Douglas A. Murphy. The Company and ARI
were named as defendants in the lawsuit by amendment to the original petition in
September 1995. This lawsuit is a dispute between the general partner of a
proposed real estate development and Gerald D. Murphy and Douglas A. Murphy over
their contractual obligations, if any, to the partnership. Damages sought are in
the range of $15,000,000, plus attorneys' fees and punitive damages. The Company
and ARI were named as defendants in the lawsuit allegedly because of their
efforts to obtain restraining orders to prevent threatened foreclosures on the
Company's Common Stock pledged as collateral by Gerald D. Murphy and to stop
interference by the plaintiffs in the lawsuit, with ARI's Note financing, as
well as certain other alleged activities, including knowing participation in
breaches of fiduciary duties, civil conspiracy with Gerald D. Murphy and Douglas
A. Murphy and conversion. The plaintiffs recently added a reverse alter ego
claim. In those proceedings, the plaintiffs obtained 333,333 shares of the
pledged stock which was thereafter sold in part to Farmers Rice and Ms. Kelley.
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, the Company, ARI,
Gerald D. Murphy and Douglas A. Murphy are using common legal counsel in this
matter and have agreed to share legal expenses ratably. This matter is currently
being tried in Houston, Texas.
On July 24, 1997, Farmers Rice filed a shareholder derivative
complaint purportedly on behalf of the Company and ARI against Gerald D. Murphy,
Douglas A. Murphy, the Company and ARI in the United States District Court,
Central District of California. In the complaint, Farmers Rice alleges (1)
breach of fiduciary duty, (2) waste of corporate assets and (3) illegal
corporate loan. The derivative complaint further requests injunctive relief
prohibiting the Company and ARI from making allegedly ongoing litigation defense
payments on behalf of Gerald D. Murphy and Douglas A. Murphy and requiring
ongoing indemnification by such individuals to the Company and ARI. Both the
Company and ARI are nominal defendants with the lawsuit being brought on behalf
of the Company and ARI against Gerald D. Murphy and Douglas A. Murphy. The
complaint principally challenges certain litigation expenditures incurred by the
Company in connection with litigation to which the Company, ARI, Gerald D.
Murphy and Douglas A. Murphy are parties. While the complaint alleges that such
expenditures were improperly incurred, in fact, all expenditures and the
involvement of the Company in the underlying litigation were fully authorized by
the Company's Board of Directors. Gerald D. Murphy and Douglas A. Murphy
believe they have valid defenses against the allegations in the complaint and
that the complaint's sole purpose is tactical, namely, to attempt to malign
current Management as part of the Trenham Group's renewed effort to take control
of the Company for its own benefit.
REPORT OF THE COMPENSATION COMMITTEE
The Compensation Committee's objectives are to establish
compensation programs designed to attract and retain executives who are
responsible for achieving the business goals of the Company. The Compensation
Committee reviews and sets the compensation levels of members of Management. It
is also responsible for the administration of the
20
<PAGE> 25
Company's various compensation plans, except the Company's Employees Profit
Sharing and Retirement Plan which is administered by the Profit Sharing and
Retirement Plan Committee, and other benefits provided to executives.
BASE SALARY LEVELS
Base salary levels for the Company's executive officers increased by
approximately 3.2% from fiscal year 1996 to 1997. Historically, the compensation
of the executive officers of the Company, including the Chief Executive Officer,
has not been formally set by the Compensation Committee using specific
performance goals or formulas tied to financial benchmarks. Rather, base salary
levels for the executives of the Company and its subsidiaries are set annually
based on a variety of subjective factors such as: personal performance, current
responsibilities, specific accomplishments or events, increase in the consumer
price index, future potential contributions to the Company, informal surveys of
compensation paid to executive officers holding similar positions in other
publicly traded companies of comparable size, and the fiscal year 1996
performance of the Company and the subsidiary or division to which the executive
is assigned. When considering executive compensation for fiscal 1997, the
Compensation Committee considered various contributions in fiscal 1996,
including: (1) the continued improvement in the Company's financial position
(stockholders' equity increased by $735,000 to $17,500,00 at March 31, 1996;
working capital was $58,100,000 at March 31, 1996 compared to $15,900,000 at
March 31, 1995), (2) sales increased 6% from $460,000,000 in 1995 to
$487,000,000 in 1996, (3) the successful completion of a $100,000,000 Mortgage
Notes public offering by ARI, and (4) a new $20,000,000 line of credit was
obtained for Chemonics Industries, Inc.
All of the subjective factors were considered by the Compensation
Committee, and it is not reasonably possible to assign relative significance to
these factors on an individual basis.
BONUSES
In fiscal 1995, ARI's shareholders and Board of Directors adopted an
Incentive Compensation Plan (the "Incentive Plan"), pursuant to which certain
key officers of ARI are entitled to receive bonuses that are payable 80% in cash
and 20% in ARI's common stock if certain specified Returns on Equity (as defined
therein) of ARI are achieved. Bonuses under the Incentive Plan are 70% earned in
the year the Return on Equity is 15% or greater and the remaining 30% is earned
in the following fiscal year if ARI achieves a Return on Equity of 15% or
greater in such subsequent fiscal year. Any portion of the bonus that would
otherwise be available under the Incentive Plan in the subsequent fiscal year
will be forfeited upon a participant's voluntary termination of employment.
Furthermore, no shares of stock issued under the Incentive Plan can be
transferred for one year following issuance. The Incentive Plan is not subject
to any provisions of ERISA.
The Company's subsidiary, Chemonics Industries, Inc., has a bonus
plan covering certain executives, including the President of the subsidiary,
Thurston F. Teele, who is listed in the Summary Compensation Table. Bonuses are
paid according to computations which consider; (a) results for the year based on
a minimum return on equity (15%), and (b) results for the year in excess of
budgeted targets.
Under the Company's executive compensation program covering
corporate and divisional executives other than ARI personnel and Chemonics
Industries personnel (who are covered by the bonus plans described above),
bonuses of stock and/or cash may be awarded in recognition of achievement during
a year. Individual performance is assessed considering both qualitative and
quantitative performance; however, the individual performance reviews relating
to bonuses have been conducted on a subjective, non-formula basis. Cash bonuses
were awarded to executive officers in 1997 to acknowledge various contributions
in fiscal 1997, including: (1) the improvement in the Company's operating
results; the Company recorded net income of $7,200,000 million for fiscal year
1997 and stockholders' equity increased to $24,800,000 at March 31, 1997; and,
sales increased 26% from $487,000,000 in 1996 to $614,000,000 in 1997, and (2)
the successful acquisition and integration of the olive business.
21
<PAGE> 26
OTHER
The Company provides insured medical benefits to executive officers
that are generally available to all full-time employees of the Company.
Executive officers also are eligible to participate in the Company's Employees
Profit Sharing and Retirement Plan on the same basis as all other eligible
employees of the Company. The Company provides additional benefits to executive
officers through executive medical coverage and Company provided automobiles.
Amounts paid in fiscal 1997 under the above described plans and
programs for the Chief Executive officer and the four most highly compensated
executive officers of the Company and its subsidiaries are included in the
Summary Compensation Table.
COMPENSATION OF CHIEF EXECUTIVE OFFICER IN 1997
In considering the amount of compensation for fiscal year 1997 for
Mr. Gerald D. Murphy, Chief Executive Officer, the Compensation Committee
(excluding Gerald D. Murphy) and the Board of Directors considered the improved
financial results reported by the Company in 1997 and 1996 as described above,
and contributions made by Mr. Murphy to enhance the long-term growth of the
Company which included: the acquisition of the Early California Foods olive
business from the Campbell Soup Company in fiscal 1997, the significant export
sales of rice to the Far East in fiscal 1995 and 1996; the establishment of a
joint venture for rice operations in Vietnam; and, the coordination of other
potential export opportunities, especially in the Middle East.
As with the Company's other executives, Gerald D. Murphy's 1997
salary was based on the various subjective factors detailed under the caption
"Base Salary Levels" above. Mr. Murphy's base salary increased from $325,000 in
1996 to $336,000 in 1997, a 3.4% increase. Mr. Murphy also received a cash bonus
of $101,535 and a stock bonus of $99,525 for 1997. These bonuses were paid in
recognition of the favorable financial results recorded by the Company's
operating entities, ARI, Chemonics International and Fire-Trol, in fiscal year
1997, and the successful acquisition and integration of the Early California
Olive division during the year.
The Board of Directors of ARI, exclusive of Gerald D. Murphy,
approved an employment agreement with Gerald D. Murphy described in "Executive
Compensation -- Employment Contracts," partially to insure Mr. Murphy's
continuing role as Chairman of the Board of Directors of ARI due to his
extensive relationships with customers and banks of ARI and the need to maintain
continuity in such relationships.
TAX LIMITATIONS
In 1993, the U.S. Treasury Department issued regulations (Section
162(m) to the Internal Revenue Code) that prevent publicly traded companies from
receiving tax deductions on compensation paid to its executive officers in
excess of $1,000,000. The Company has not paid, and does not currently
anticipate paying compensation at these levels, and therefore, does not believe
that these provisions will be relevant to the Company's executive compensation
levels for the foreseeable future. However, see "Executive
Compensation-Employment Contracts".
COMPENSATION COMMITTEE
William H. Burgess, Chairman
Gerald D. Murphy
Alan M. Wiener
22
<PAGE> 27
STOCK PRICE PERFORMANCE
The graph below compares the cumulative total return on the
Company's Common Stock with the cumulative total return of (i) the Total Return
Index for the Nasdaq Stock Market (U.S. Companies) and (ii) the Total Return
Index for Standard and Poor's Food Products Companies. The comparison covers the
five-year period from April 1, 1992 to March 31, 1997, the end of the Company's
1997 fiscal year and assumes that $100 was invested at the beginning of the
period in the Company's Common Stock and in each Index and that any dividends
were reinvested.
The stock price performance shown on the graph is not necessarily
indicative of future price performance.
<TABLE>
<CAPTION>
Total return for the
NASDAQ Stock
ERLY Market - U.S. S&P Food Products
Measurement Period Industries Inc. companies Companies Index
- ------------------ ------------------- ---------------------- -----------------
<S> <C> <C> <C>
At April 1, 1992 $100 $100 $100
FYE March 31, 1993 94 115 109
FYE March 31, 1994 135 124 101
FYE March 31, 1995 333 138 120
FYE March 31, 1996 299 187 151
FYE March 31, 1997 304 208 190
</TABLE>
COMPLIANCE WITH SECTION 16(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
Executive officers and directors of the Company are required to file
initial reports of ownership and reports of changes in ownership with the
Securities and Exchange Commission pursuant to Section 16(a) of the Securities
Exchange Act of 1934. The Company has reviewed such reports received by it and
believes that, except as specified below, all of its executive officers and
directors complied with all applicable Section 16(a) filing requirements during
the fiscal year ended March 31, 1997 except as follows: Annual Report Form 5 to
report the effect of the stock dividend in fiscal year ended March 31, 1997, was
not timely filed for R.N. McCombs and a Form 4 to report a sale of stock in
August 1996 was not timely filed by John S. Poole, Senior Vice President of ARI.
RELATIONSHIP WITH INDEPENDENT ACCOUNTANTS
Deloitte & Touche LLP has been the Company's independent certified
public accountants since the inception of the Company in 1964 and will continue
to perform in this capacity for the coming year. Representatives of Deloitte &
Touche LLP are expected to be present at the Annual Meeting. Deloitte & Touche
LLP will have the opportunity to make a statement if it desires to do so and
will be available to respond to appropriate questions.
OTHER MATTERS
The Board of Directors knows of no business which will be presented
for consideration at the Annual Meeting other than that stated in the Notice of
Annual Meeting, although it is possible that the Trenham Group may bring up
their proposal to expand the Board of Directors to seven persons or any other
proposal described under "The Trenham Group's Consent Solicitation". However, if
any other business shall properly come before the Annual Meeting, votes may be
cast pursuant to the proxies solicited hereby in respect to such other business
in accordance with the best judgment of the person or persons acting under the
proxies and will be voted against any such proposals submitted by the Trenham
Group.
23
<PAGE> 28
1998 SHAREHOLDER PROPOSALS
Any proposal a shareholder of the Company wishes to have presented
at the 1998 Annual Meeting of Shareholders in the Company's Proxy Statement as
provided for in the Proxy Rules of the Securities and Exchange Commission must
be received by the Company on or before April ___, 1998.
By order of the Board of Directors
Thomas A. Whitlock
Vice President and
Assistant Secretary
Los Angeles, California
August ___, 1997
PLEASE COMPLETE, SIGN AND DATE THE ENCLOSED WHITE PROXY AND RETURN IT PROMPTLY
IN THE ENCLOSED, SELF-ADDRESSED POSTAGE PREPAID ENVELOPE.
24
<PAGE> 29
APPENDIX A
PROPOSED AMENDMENTS OF THE ARTICLES OF INCORPORATION
SIXTH: Except as otherwise provided by the California General
Corporation Law or the Articles of Incorporation, each shareholder shall have
one vote for each share held of record which has voting power upon the matter in
question. In an election of directors, each directorship shall constitute a
separate matter.
SEVENTH: Any action required or permitted to be taken by
shareholders of this Corporation must be taken at a duly called annual meeting
or at a special meeting of shareholders of the corporation and no action may be
taken by the written consent of the shareholders.
A-1
<PAGE> 30
PROXY
PRELIMINARY COPY
----------------
ERLY INDUSTRIES INC.
SHAREHOLDERS' PROXY
This Proxy is Solicited on Behalf of the Board of Directors
The undersigned hereby appoints GERALD D. MURPHY and DOUGLAS A.
MURPHY as Proxies, each of them with the power to appoint his substitute, and
hereby authorizes them to represent and to vote as designated below, all of the
shares of Common Stock of ERLY Industries, Inc. held on record by the
undersigned on August __, 1997, at the Annual Meeting of Shareholders to be
held on September 26, 1997, or any adjournment thereof.
PLEASE MARK, SIGN, DATE AND RETURN THIS WHITE PROXY CARD
PROMPTLY USING THE ENCLOSED ENVELOPE.
<PAGE> 31
FOR AGAINST ABSTAIN
1. ELIMINATION OF CUMULATIVE VOTING:
The adoption of an amendment to the [ ] [ ] [ ]
Articles of Incorporation to
eliminate cumulative voting.
FOR AGAINST ABSTAIN
2. ELIMINATION OF SHAREHOLDER ACTION
BY WRITTEN CONSENT: [ ] [ ] [ ]
The adoption of an amendment to the
Articles of Incorporation to provide
that actions required or permitted
to be taken by the shareholders must
be effected only at a duly called
annual or special meeting of shareholders
and not by written consent.
FOR WITHHOLD
all nominees listed AUTHORITY
below (except as (to vote for
marked to the all nominees
contrary below) listed below)
3. ELECTION OF DIRECTORS: [ ] [ ]
Gerald D. Murphy, Douglas A. Murphy,
William H. Burgess, Bill J. McFarland
and Alan M. Wiener.
(INSTRUCTION: To withhold authority to vote for any individual nominee,
write that nominee's name on the space provided below):
------------------------------------------------------------------------
4. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the Annual Meeting.
(Continued on Reverse Side)
- -----------------------------------------------------------------------------
(Continued from Reverse Side)
This Proxy, when properly executed, will be voted in the manner directed
herein. The individuals named above are authorized to vote in their discretion
on any other matters that properly come before the meeting. With respect to
Proposals 1 and 2, where no vote is specified, this proxy will be voted for
such proposals. With respect to the election of directors (Proposal 3), where
no vote is specified, or where the box FOR all nominees is marked a proxy will
be cast at the discretion of the proxies named herein in order to elect as many
nominees as believed possible under the then prevailing circumstances. If you
withhold your vote for an individual nominee, all of your cumulative votes, if
available, will be distributed among the remaining nominees at the discretion
of the proxies.
By executing and dating this White Proxy, all previously executed
consents or proxies executed by the undersigned solicited by anyone, including
the Company or the Trenham (Powell) Group, is hereby revoked.
Signature(s) ____________________________________________ Dated:_________, 1997
IMPORTANT: Please sign exactly as name appears herein. When shares are held by
joint tenants, both should sign. When signing as attorney, executor,
administrator, trustee or guardian, please give full title as such. If a
corporation, please sign in full corporate name by president or other
authorized officer. If a partnership, please sign in partnership name by
authorized person.
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