<PAGE> 1
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:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-12
ERLY Industries Inc.
- --------------------------------------------------------------------------------
(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:
---------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
---------------------------------------------------------------------
(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):
---------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
---------------------------------------------------------------------
(5) Total fee paid:
---------------------------------------------------------------------
[ ] 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
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
---------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
---------------------------------------------------------------------
(3) Filing Party:
---------------------------------------------------------------------
(4) Date Filed:
---------------------------------------------------------------------
<PAGE> 2
<TABLE>
<S> <C>
GERALD D. MURPHY [LOGO] ERLY Industries Inc.
Chairman and Chief Executive Officer 10990 Wilshire Boulevard
Suite 1800
Los Angeles, California
90024
</TABLE>
September 15, 1997
Dear Fellow 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, October 17, 1997, at
the Summit Hotel Bel-Air, 11461 Sunset Boulevard, Los Angeles, California 90049.
Information regarding business to be conducted at the Meeting is set forth in
the accompanying Notice of Meeting and Proxy Statement.
Once a year, on this occasion, shareholders of ERLY Industries Inc. have an
opportunity to exercise an important role in the future of the Company by voting
upon critical proposals submitted for your approval. This year, your
support -- regardless of how many shares you own is very important.
A group of dissident shareholders is seeking to remove your entire board of
directors and replace them with a hand picked slate of their own people. We
believe this dissident group is intending to enrich themselves at the expense of
other shareholders. Accordingly, we urge you NOT to sign a blue proxy card, or,
if you have already done so, to execute, date and return the white Proxy Card
enclosed with these materials which will NEGATE ANY PRIOR SUBMISSION OF THE
DISSIDENTS' PROXY CARD.
For the reasons outlined in our letter of August 19th and further
information detailed in the enclosed Proxy Statement, we believe the replacement
of your board of directors would be extremely detrimental to the future of the
Company and the value of your investment. Please see "The Powell Group's
Solicitation."
We are also asking you to support your board of directors by voting FOR two
additional proposals that are equally compelling. These proposals are to
eliminate cumulative voting and shareholder action by written consent. By voting
FOR the two amendments you will ensure that a small group of dissident
shareholders cannot act to disrupt the business of the Company and promote their
own agenda. For example, with cumulative voting, shareholders holding only 16.7%
of the outstanding Common Stock could band together to elect one director to a
five person Board of Directors to support and pursue that group's agenda as
opposed to acting in the best interest of all shareholders. Without cumulative
voting, all directors would be elected by holders of a majority of the
outstanding Common Stock and other shareholders would not be able to elect any
directors.
Amendment of the Articles of Incorporation to require shareholder action at
a meeting would prevent shareholder actions by written consent, thereby
preventing the dissident group from resurrecting its recent proposal to remove
the Board of Directors without immediately electing a new Board of Directors.
The Company's proposals would not affect the rights of shareholders to call
shareholder meetings, but may have the effect of entrenching Management.
<PAGE> 3
We urge you to disregard the blue proxy and to vote FOR the reelection of
the current Board of Directors, and FOR the adoption of the two proposed
amendments by signing, dating and returning the WHITE proxy card in the enclosed
postage-paid envelope.
If you have any questions or require assistance, please call MacKenzie
Partners, Inc. who is assisting us in our solicitation at (800) 322-2885 [TOLL
FREE].
Thank you for your continued support and we look forward to seeing you at
the Meeting.
Sincerely,
/s/ GERALD D. MURPHY
-------------------------------
Gerald D. Murphy
Chairman of the Board and Chief
Executive Officer
<PAGE> 4
ERLY INDUSTRIES INC.
10990 WILSHIRE BOULEVARD
SUITE 1800
LOS ANGELES, CALIFORNIA 90024
------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD OCTOBER 17, 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, October 17, 1997
at 10:00 a.m., at the Summit Hotel Bel-Air, 11461 Sunset Boulevard, 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 Bylaws 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,
/s/ THOMAS A. WHITLOCK
--------------------------------------
Thomas A. Whitlock
Vice President and Assistant Secretary
Los Angeles, California
September 15, 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
ERLY INDUSTRIES INC.
10990 WILSHIRE BOULEVARD
SUITE 1800
LOS ANGELES, CALIFORNIA 90024
PROXY STATEMENT
------------------------
ANNUAL MEETING OF SHAREHOLDERS TO BE HELD
OCTOBER 17, 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 October 17,
1997, and at any adjournment thereof, for the purposes set forth herein and in
the accompanying Notice of Annual Meeting of Shareholders. The Annual Meeting
was originally scheduled for September 26, 1997 but has now been rescheduled to
October 17, 1997. It is anticipated that this Proxy Statement will be mailed to
shareholders on or about September 17, 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 AND DATING A WHITE PROXY CARD,
YOU WILL BE REVOKING ANY AND ALL PRIOR PROXIES SOLICITED BY THE COMPANY OR THE
POWELL GROUP. SEE "THE POWELL GROUP'S 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 5,221,337 shares of Common Stock. Each share is entitled to one
vote, subject, however, to the possible right of each shareholder to cumulate
his or her votes in the election of directors. For an explanation of cumulative
voting, see "Proposal 1 -- Amendment to the Bylaws to Eliminate Cumulative
Voting" and "Proposal 3 -- 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 PROXY CARD OR CONSENT CARD
SENT TO YOU BY THE POWELL GROUP. IF YOU HAVE ALREADY DONE SO, YOU MAY REVOKE
YOUR PREVIOUSLY SIGNED PROXY OR CONSENT BY DELIVERING A WRITTEN NOTICE OF
REVOCATION TO THE SECRETARY OF THE COMPANY OR A LATER DATED AND EXECUTED WHITE
PROXY CARD IN THE ENCLOSED ENVELOPE. SEE "THE POWELL GROUP'S SOLICITATION."
1
<PAGE> 6
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) 322-2885.
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 Bylaws to eliminate cumulative voting (PROPOSAL 1) and to the
Articles of Incorporation 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. At the 1994, 1995, and
1996 annual meeting of shareholders, 84.0%, 88.9% and 78.5%, respectively, of
the outstanding shares voted for the election of directors. At each of such
meetings approximately 50 shareholders were present, including officers,
directors and employees of the Company.
As further discussed below, the Board of Directors opposes the Powell
Group's proxy solicitation and urges the shareholders of the Company NOT to
return their proxy 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 POWELL GROUP'S PROXY CARD.
The Board of Directors believes that the implementation of the Powell
Group's goal, the installation of their management team, to be ill-founded and
not in the best interest of shareholders. Further, the Company believes that one
of the principal organizers of the Powell Group is Noble Trenham. Mr. Trenham
has been sued by the Securities and Exchange Commission for violating Federal
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 family company. Finally, the Powell Group has only a small
interest in the Company (approximately 3.6% 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.
Therefore, if the Powell Group is successful, the Company will be asked
indirectly to reward a holder of twelve shares with over a half million dollars,
without shareholder approval. The reimbursement of such expenses, and the
expenses that the Company is incurring in response to the Powell Group, will
reduce cash and shareholders' equity. For further information regarding the
Powell Group, see "The Powell Group's Solicitation."
2
<PAGE> 7
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 by such shareholder, has sole voting
and investment power with respect to such shares and each shareholder does not
own of record any shares for which such shareholder is not the beneficial owner.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS*
- ----------------------------------------------------------- -------------------- ----------
<S> <C> <C>
Gerald D. Murphy, Chairman................................. 1,564,545 shares(1)(2) 30.0%
ERLY Industries Inc.
10990 Wilshire Blvd.
Los Angeles, CA 90024
Douglas A. Murphy, President and Director.................. 606,993 shares 11.6%
ERLY Industries Inc.
10990 Wilshire Blvd.
Los Angeles, CA 90024
Kennedy Capital Management, Inc............................ 585,518 shares(3) 11.2%
10829 Olive Boulevard
St. Louis, MO 63141
William H. Burgess, Director............................... 202,750 shares 3.9%
550 Palisades Drive
Palm Springs, CA 92262
Richard N. McCombs, Vice President and Chief Financial 137,461 shares 2.6%
Officer..................................................
ERLY Industries Inc.
10990 Wilshire Blvd.
Los Angeles, CA 90024
Bill J. McFarland, Director................................ 35,613 shares 0.7%
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.(4)
1133 20th Street, N.W.
Washington, D.C. 20036
All directors and executive officers as a group (11 1,969,328 shares(5) 37.1%
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 952,502 shares.
(2) Shares beneficially owned by Gerald D. Murphy include 612,043 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 606,993 shares owned directly by his son,
Douglas A. Murphy.
3
<PAGE> 8
(3) 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 of the shares.
(4) Chemonics Industries, Inc. is a wholly-owned subsidiary of the Company.
(5) The number of shares shown as beneficially owned by all directors and
officers as a group includes 88,550 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 -- Certain Transactions."
PROPOSED AMENDMENTS TO THE BYLAWS AND ARTICLES OF INCORPORATION
GENERAL
The Company's Board of Directors has unanimously approved the following
amendments to the Company's Bylaws and 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 would effect an amendment to the Bylaws to
eliminate cumulative voting and PROPOSAL 2 would effect an amendment to the
Articles of Incorporation to provide 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 either (i) elect one or
more directors or (ii) 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 Preliminary Consent Solicitation
originally filed by the Powell Group. See "The Powell Group's 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 planned and announced a short lived
proxy contest 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 3.6% 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 will 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 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 3.6% 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 37% of the Company's outstanding shares), step down and be
replaced by the Powell Group's designees. Members of Management had their first
substantive discussions and first met with Ms. Nanette Kelley and other
representatives of the Powell Group on July 17, 1997. At that time Management
was advised that the Powell Group wanted Management of the Company to resign and
be replaced by representatives of the Powell Group. Management was also advised
that shareholders of a majority of the Company's outstanding shares supported
the efforts of the Powell Group. Management was given 24 hours to acquiesce to
these demands or face the threat of removal. The Company believes that at no
time during the meetings with Management nor at any time thereafter, did the
representatives of the Powell Group
4
<PAGE> 9
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. Instead they asked that Management cede control to them
merely because they demanded that they do so. Despite the Powell Group's threats
to Management, in subsequent filings with the Securities and Exchange Commission
they have only acknowledged support from 3.6% 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 Powell Group has not indicated that they are
willing to make any additional significant investment in the Company as part of
their demands for control, although they indicated that they would help to
facilitate a sale of the shares held by Gerald D. Murphy and Douglas A. Murphy.
ADOPTION OF PROPOSAL 1, ELIMINATING CUMULATIVE VOTING, WILL MAKE IT
DIFFICULT, IF NOT IMPOSSIBLE, FOR MINORITY SHAREHOLDERS, SUCH AS THE POWELL
GROUP, TO ELECT ONE OR MORE DIRECTORS AND MAY MAKE IT EASIER FOR MANAGEMENT TO
CONTROL THE ELECTION OF ALL DIRECTORS. BOTH AMENDMENTS MAY IMPEDE OR DELAY
TRANSACTIONS WHICH ARE OPPOSED BY THE BOARD OF DIRECTORS EVEN THOUGH FAVORED BY
A MAJORITY OF THE SHAREHOLDERS. For instance, Management of the Company could
alone elect all the members of the Board of Directors without cumulative voting
if less than 74% of the shares were represented at a meeting. In any event, even
if 100% of the shares were represented at a meeting, without cumulative voting,
Management would currently only need proxies or votes from holders of about 13%
of the outstanding shares to assure election of the Board of Directors'
nominees, a feasible scenario in light of Management's control of the Company's
proxy materials and access to Company funds which may be required in that
connection. On the other hand, cumulative voting allows shareholders holding
only 16.7% of the outstanding Common Stock to elect one director to a five
person Board of Directors. Adoption of PROPOSAL 2, eliminating shareholder
action by written consent, will defeat any future attempts by the Powell Group
to remove the entire Board of Directors through the written consent of
shareholders and will make it more difficult for minority shareholders 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 minority shareholders of the Company, such as the Powell 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 Bylaws and 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 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, the
Board of Directors believes that 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 Powell 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 best 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 a
majority of
5
<PAGE> 10
companies whose shares are traded publicly do not use cumulative voting for the
election of directors, since many states, including Delaware where a substantial
number of public corporations are incorporated, do not require cumulative
voting.
The 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. Most 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 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
Powell Group proposal, if implemented, could trigger an option of the holders of
the outstanding mortgage notes of the Company's subsidiary to require repayment
of such notes. Further, the Powell Group originally filed written consent
soliciting material to remove the entire Board of Directors and call a special
meeting to elect a new Board of Directors, which would have left the Company
without a Board of Directors for at least 45 days. The second proposed Amendment
would also help ensure that the Board of Directors, if confronted by a surprise
proposal from a third party, such as that by the Powell Group, who has only
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 Powell Group, from attempting to enact a
surprise corporate action or elect one or more members to the Board of
Directors, it will not significantly impede actions by holders of substantial
blocks of stock, since California law enables holders of 10% or more of the
outstanding shares to call a meeting of shareholders. 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 to call a meeting to address it.
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 Powell 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.
Takeovers or changes in Management of the Company which are proposed and
effected without prior consultation and negotiation with the Company's
Management are not necessarily detrimental to the Company and its shareholders.
However, the Board of Directors feels that the benefits of seeking to protect
its ability to negotiate with the proponent of an unfriendly or unsolicited
proposal to take over or restructure the Company outweigh the disadvantages of
discouraging such proposals.
THE ADOPTION OF THE PROPOSED AMENDMENTS MAY DISCOURAGE A PROXY CONTEST OR
THE ASSUMPTION OF CONTROL BY A HOLDER OF A SUBSTANTIAL BLOCK OF THE COMPANY'S
COMMON STOCK OR MAY MAKE THE REMOVAL OF THE INCUMBENT BOARD OF DIRECTORS MORE
DIFFICULT AND COULD THUS HAVE THE EFFECT OF ENTRENCHING INCUMBENT MANAGEMENT. At
the same time, the amendments would help ensure that the Board, 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 and
appropriate alternatives to the proposal and to seek a premium price for the
shareholders.
6
<PAGE> 11
The proposed Amendments are intended to 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 Amendments, if they are adopted, could also have the effect of discouraging
a third party from making a tender offer or otherwise attempting to obtain
control of the Company, even though such an attempt might be beneficial to the
Company and its shareholders, or supported by a majority of shareholders. It is
possible that one effect of the Amendments, if they are adopted, would be a
reduction in the price of the Common Stock since certain shareholders, including
institutions, may not want to invest in a company with anti-takeover provisions
in its charter documents.
Also of note is the fact that 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 the shareholder's equity position at a substantial premium over the
market. The Powell Group is not taking any action the Company is aware of which
would indicate that the Powell Group is seeking to have its shares repurchased
at a premium.
The Company's Articles of Incorporation and Bylaws do not contain any other
anti-takeover provisions except for the proposed Amendments. However, the
Articles of Incorporation authorize the issuance of 6,000 shares of preferred
stock and authorize the Board of Directors to determine the rights, preferences,
privileges and restrictions thereof. Rights could be granted to the holders of
preferred stock that could reduce the Company's attractiveness as a potential
takeover target, make the removal of Management more difficult, or adversely
impact the rights of holders of Common Stock. No preferred stock is currently
outstanding and the Company has no present intention to issue any preferred
stock.
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.
The rules of the Nasdaq National Market System do not prohibit the proposed
Amendments. Such rules do require the Company to actually hold an annual meeting
of shareholders to elect directors and to solicit proxies at each meeting of
shareholders.
PROPOSAL 1 -- AMENDMENT TO THE BYLAWS
TO ELIMINATE CUMULATIVE VOTING
California law generally requires cumulative voting in the election of
directors of a California corporation. 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 New York Stock
Exchange, the American Stock Exchange or the Nasdaq National Market System and
with at least 800 shareholders of record to eliminate cumulative voting by an
amendment to its Bylaws or Articles of Incorporation. The Company meets the
latter requirements and thereby proposes an Amendment to the Bylaws 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 or her votes for a single candidate, or
allocate them among as many candidates and in such proportions as he or she
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.
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 proposes
that the second paragraph of Section 6 of Article II of the Bylaws be amended to
provide for voting by simple plurality in lieu of cumulative voting in the
elections of directors. Without
7
<PAGE> 12
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
(the maximum of 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 Powell Group as reflected in its filings with
the Securities and Exchange Commission is not sufficient to elect any director
with cumulative voting unless the Powell Group obtains proxies representing
substantial additional shares. Accordingly, the adoption of this proposed
Amendment will not affect the Powell 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. The Powell Group's original consent
solicitation proposals would have expanded the Board of Directors to seven
directors. If the Board of Directors were increased to seven members, the Powell
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 another person
acquires over 50% of the Common Stock. However, Management of the Company could
alone elect all the members of the Board of Directors without cumulative voting
if less than 74% of the shares were represented at a meeting. In any event, even
if 100% of the shares were represented at a meeting, without cumulative voting,
Management would currently only need proxies or votes from holders of about 13%
of the outstanding shares to assure election of the Board of Directors'
nominees, a feasible scenario in light of Management's control of the Company's
proxy materials and access to Company funds which may be required in connection
with any such solicitation. On the other hand, cumulative voting provisions
allow shareholders holding only 16.7% of the outstanding Common Stock to elect
one director to a five person Board of Directors. Without cumulative voting,
shareholders voting a majority of the outstanding Common Stock could elect all
of the Board of Directors, and other shareholders would NOT be able to elect any
directors.
The Amendment to the Bylaws also provides that in order to change, amend or
eliminate the Amendment, the approval of the holders of a majority of the
outstanding shares is required. This provision is necessary to prevent a
majority of the Board of Directors from changing, amending or eliminating the
Amendment. Under the Code, the Board of Directors can amend the Bylaws, unless
otherwise provided in the Articles of Incorporation or Bylaws or unless the
amendment relates to changing the range of authorized directors or a fixed
number of directors when a range is not provided for in the Bylaws. This
provision is intended to make the change, modification, or elimination of the
Amendment require the same vote of shareholders as if the Amendment was added to
the Articles of Incorporation.
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.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF THE ADOPTION OF THE
AMENDMENT TO THE BYLAWS TO ELIMINATE CUMULATIVE VOTING.
8
<PAGE> 13
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 California
corporation 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, but 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 filled only by the unanimous
written consent of the shareholders, although directors may be removed by
written consent of a majority of the outstanding shares.
This Amendment would eliminate the situation originally proposed by the
Powell Group 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 Powell Group's original proposals would have left 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. Thus, under the Powell Group's
original proposals, the officers' ability to act would also be impeded.
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 SIXTH 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. In such a case, a shareholder's only recourse would be to seek an
injunction to block such action.
The Board of Directors believes that the approval of Proposal 2 is
advantageous to the Company and its shareholders in many instances where
California law allows for corporate actions without notice to shareholders. For
instance, it is possible under California law for holders of a majority of the
outstanding shares to remove the entire Board of Directors without advance
notice to other shareholders. The provision of Proposal 2 prohibiting
shareholder 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 or until a
special meeting can be called and held, the initiation or consummation of
9
<PAGE> 14
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 special shareholder meeting.
IF THE AMENDMENT TO ELIMINATE SHAREHOLDERS ACTION BY WRITTEN CONSENT IS
ADOPTED, ANY ATTEMPT TO TAKE A SHAREHOLDERS ACTION BY WRITTEN CONSENT, INCLUDING
ANY WRITTEN CONSENTS WHICH MAY BE SOLICITED BY THE POWELL 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 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 the election of directors, assuming a quorum is present,
the five candidates receiving the highest number of votes will be 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. Management believes that ARI is
the largest U.S.-based and one of the world's leading processors and marketers
of branded rice products and it is among the largest U.S. processors and sellers
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.
10
<PAGE> 15
<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., a subsidiary of the Company since 1988,
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 H. Burgess 80 September 1975
</TABLE>
Mr. Burgess is a private business consultant, Chairman of CMS 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).
<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.
11
<PAGE> 16
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.
THE POWELL GROUP'S SOLICITATION
The Powell Group includes Noble Trenham, his broker/dealer firm, First
Global Securities, Inc., Nanette Kelley, her private holding company, The Powell
Group, and its subsidiary, Farmers Rice Milling Company, Inc.
Mr. Trenham and his firm own only twelve shares of stock of the Company. If
The Powell Group succeeds in taking control of the Board of Directors of the
Company, Mr. Trenham's firm will receive a fee of $505,000 plus expenses from
Ms. Kelley's company, for which she will then force YOUR Company to reimburse
HER company.
This is not the first time that Mr. Trenham has initiated an effort to
elect directors of the Company. In 1989, he and two other individuals, with
collective shareholdings of less than 5%, planned, but quickly abandoned, a
proxy contest for election of directors of the Company, although through an
agreement with the Company, Mr. Mark C. Hungerford was elected as a director of
the Company. The Company is also not the only publicly-held company that Mr.
Trenham has attempted -- unsuccessfully -- to take over. In 1987, Mr. Trenham
was sued by the United States Securities and Exchange Commission ("SEC") and was
permanently enjoined by the United States District Court from violating federal
securities laws as a result of improper actions relating to at least eight other
publicly-held companies.
Ms. Kelley and her company own 3.6% of the outstanding shares of the
Company -- which they bought just a few months ago at a price well below the
current market price, in a private transaction arranged by Mr. Trenham, whose
firm was then hired for a fee of over half a million dollars to help her take
control of the Company. Ms. Kelley, who is 38 years old, operates a family-owned
company. Nothing disclosed in her public filings indicates that she has ever run
a large, diversified, international agribusiness like the Company or a
publicly-held company. By comparison, the current Management of your Company
which she seeks to remove have an aggregate of over 230 years of experience in
the food business. On July 17, 1997, without any warning, Ms. Kelley confronted
Gerald Murphy, the chief executive officer of the Company, with her demand to
take control of the Board of Directors of the Company. She claimed that she
controlled the vote of 51% of the outstanding shares of the Company when, in
fact, based on filings with the SEC, she and her affiliates actually controlled
a small minority of the outstanding shares. She stated that Mr. Murphy had less
than 24 hours to accede to her demand for control of the Board of Directors or
she would initiate a solicitation of written consents of shareholders for
removal of all of the directors of the Company. She offered to help Mr. Murphy
and his son sell their shares of stock of the Company and to continue as
directors and consultants of the Company for a period of time. She did not offer
to buy the Murphys' shares and they did not offer to sell them. Mr. Murphy did,
however, tell Ms. Kelley that, if she wanted to buy the Company at a premium,
that proposal would have to be seriously considered by the Board of Directors of
the Company. She has made no such offer.
A week after Ms. Kelley's demands for control of the Company were rejected,
the Powell Group filed documents with the SEC indicating that they intended to
solicit written consents from shareholders of the Company to remove all of the
directors of the Company, call a special meeting of shareholders for election of
new directors, amend the Bylaws of the Company to increase the number of
directors from five to seven, and prohibit the Management of the Company from
taking certain actions between the proposed removal of directors and special
meeting of shareholders. In furtherance of the Powell Group's efforts to gain
control of the Company and to discredit current Management, Ms. Kelley and her
company also filed a shareholder derivative suit against Gerald D. Murphy and
Douglas A. Murphy, the chief executive officer and president of the Company,
respectively.
The Management of the Company attempted to dissuade the Powell Group from
taking such disruptive and costly actions right after the events of July 17 and
18. The Powell Group was promptly advised that the
12
<PAGE> 17
annual meeting of shareholders of the Company would be held in the near future
at the usual time of year, that the Powell Group would have an opportunity to
solicit proxies for election of its own slate of directors at that meeting if
that is what they wished to do, and that it was not necessary -- or even
feasible -- to remove the entire Board of Directors without replacing them at
the same time at a shareholders meeting. Nevertheless, the Powell Group filed
paperwork with the SEC pointing toward an attempt to remove all of the directors
by written consent without concurrent election of new directors at a meeting of
shareholders.
Your Board of Directors believes that you should not give your proxy to the
Powell Group or vote for any of their director nominees. We do not believe that
it would be in your best interest to turn control of the Company over to Ms.
Kelley, Mr. Trenham, and their associates. We also do not believe that it would
be in your best interest to elect any of their nominees to serve as a director
of the Company in light of the hostility they have demonstrated toward the
current Management of the Company. That is why the Board of Directors has voted
to eliminate cumulative voting for election of directors, so that the Board of
Directors will not be hampered by divisiveness as a result of election of one or
more hostile directors by the Powell Group based on proxies from a minority of
shareholders.
In making your decision on supporting your current Management or the Powell
Group, we hope that you will give careful consideration to the following:
1. For the five fiscal years ended March 31, 1997, the Company's stock
outperformed the average return for Nasdaq (U.S. companies) approximately
50% and the average return for S&P Food Products Index by over 62%. For
further information regarding the performance of the Company's Common
Stock, see "Stock Price Performance."
2. The Powell Group have said they intend to install Ms. Kelley as
chief executive officer and John Spain (one of Ms. Kelley's employees) as
managing director of the Company if they win control. Until two years ago,
Mr. Spain was manager of a television station in Baton Rouge, Louisiana. He
has never run a company like the Company. Thus, neither Ms. Kelley nor Mr.
Spain have indicated any experience in running a publicly traded company.
By comparison, your Management has an aggregate of over 230 years of
experience in the food business.
3. The Powell Group have said they will relocate the Company's rice
business from Houston, Texas, and its corporate headquarters from Los
Angeles, California, to Baton Rouge, Louisiana, Ms. Kelley's home town. The
success of the Company, like that of all businesses, is totally dependent
on the skill, experience, and dedication of its people and the relations of
its people with customers and suppliers. The actions the Powell Group
intend to take if they win control of the Company could result in the loss
of a number of loyal employees who are vital to the Company's operations.
Ms. Kelley has also misrepresented the facts regarding the Company's
headquarters in Los Angeles by claiming that the Company spends $1,000,000
a year "to rent a penthouse on Wilshire Boulevard." The fact is that the
Company occupies approximately 11,000 square feet of typical corporate
office space in an office building in Los Angeles for annual rent of
approximately $300,000.
4. The Company's subsidiary, ARI, has outstanding $99,000,000 of
mortgage notes (the "Notes") the holders of which can demand immediate
payment in the event of a change in control of the Company and ARI. The
Powell Group have claimed that they might be able to refinance the Notes at
a lower interest rate but they have not explained how that would be
possible since the Notes are not currently redeemable and are redeemable in
the future at a very substantial premium over par. Management does not
believe that it is currently feasible to pay off or refinance the Notes.
5. The Powell Group have said that Farmers Rice Milling Company, Inc.
is not a competitor of ARI since it buys its rice in Louisiana and ARI is
located 300 miles away. That is just not true. ARI buys more than one
million cwt of rice per year in Louisiana and competes with Farmers Rice
for the purchase of rice from the same farmers. Farmers Rice also supplies
one of ARI's competitors in Haiti.
6. The Powell Group have said they expect to spend $750,000 in
connection with their takeover attempt and, if they win control of the
Company, will have the Company reimburse them for their expenditures
without even asking for shareholder approval. Most of that money, $505,000
plus expenses,
13
<PAGE> 18
will go to Mr. Trenham's firm. The Company cannot afford that expenditure,
not to mention the impact that payment would have on earnings and stock
value.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS DO NOT EXECUTE
PROXIES OR CONSENTS PROVIDED BY THE POWELL GROUP AND THAT THE SHAREHOLDERS
EXECUTE PROXIES SOLICITED BY THE MANAGEMENT OF THE COMPANY.
The Company has sent and will send additional letters to its shareholders
in connection with the Annual Meeting. In a letter dated September 10, 1997, the
Company made certain statements about the Powell Group which are the opinion of
the Management of the Company. Therefore, some of the characterizations of the
Powell Group and its activities and some of the statements labeled as "Powell
FICTION" in the letter are the opinions and beliefs of the Company's Management.
For instance, the statements that Nanette Kelley and Noble Trenham are
opportunistic dissidents who distort the truth and seek to enrich themselves at
the expense of other shareholders and that the Powell Group is attempting to
gain control of your Company by making misleading statements to get your proxy
or your vote, are opinions and beliefs of Management of the Company. Further,
the letter indicated that certain changes were made in the Powell Group
soliciting material about the size of the Powell Group in response to comments
of the SEC. Again, this belief as to why changes were made in the Powell Group's
material is based on the changes and subsequent statements made by the Powell
Group. The Company does not know what comments the SEC actually made to the
Powell Group.
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.
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 DATE OF
NAME PURCHASED (SOLD) TRANSACTION(S)
-------------------------- ---------------- ---------------------
<S> <C> <C>
ERLY Industries Inc....... 512,314 October 1995(1)
430,417 October 1996(1)
25,030 Various(2)
351,773 July 24, 1997(4)
33,949 Various(3)
104,582 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)
1,700 August 8, 1997(3)
</TABLE>
14
<PAGE> 19
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE OF
NAME PURCHASED (SOLD) TRANSACTION(S)
-------------------------- ---------------- ---------------------
<S> <C> <C>
Douglas A. Murphy......... 3,256 April 16, 1995(3)
(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, 1996
10,000 June 1, 1997(3)
351,773 July 24, 1997(4)
23,175 August 5, 1997(5)
1,300 August 8, 1997(3)
34,906 August 20, 1997(5)
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
(250) August 19, 1997
(5,000) August 21, 1997
(2,000) August 22, 1997
Bill J. McFarland......... 1,260 April 16, 1995(3)
1,069 August 8, 1997(3)
22,765 August 20, 1997(5)
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 Interlocks and Insider Participation -- Litigation."
(7) Gift.
B. PURCHASE AND SALE OF OTHER SECURITIES.
See "Compensation Committee Interlocks and Insider Participation -- Certain
Transactions."
15
<PAGE> 20
COMMON STOCK OF THE COMPANY OWNED BY ANY ASSOCIATES OF THE DIRECTORS OR NOMINEES
<TABLE>
<CAPTION>
NAME ADDRESS ASSOCIATE OF NUMBER OF SHARES
- ------------------------------ ------------------- ------------------- ----------------
<S> <C> <C> <C>
Wells Fargo Bank, Pasadena, CA 91105 William H. Burgess 63,553
as Trustee for
grandchildrens'
trusts
</TABLE>
SECURITIES OWNED BY ERLY INDUSTRIES INC.
Gerald D. Murphy, Douglas Murphy and William H. Burgess may be deemed to be
the beneficial owners of any shares of 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
THE POWELL GROUP LITIGATION
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 Stated 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. However, the business judgement of the Board
of Directors in making such decision could be reviewed by a court in a lawsuit.
Gerald D. Murphy and Douglas A. Murphy believe they have valid defenses against
the allegations in the complaint and Management believes that the complaint's
sole purpose is tactical, namely, to attempt to malign current Management as
part of the Powell Group's renewed effort to take control of the Company for its
own benefit. The plaintiff recently amended the complaint to add all other
directors of the Company and ARI as defendants. See "Compensation Committee
Interlocks and Insider Participation -- Litigation."
On August 13, 1997, Farmers Rice and Ms. Kelley filed a petition for writ
of mandate in California Supreme Court seeking an order allowing them to inspect
the accounting 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. A hearing is
currently scheduled for September 17, 1997.
17
<PAGE> 22
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>
LONG-TERM COMPENSATION
----------------------
ANNUAL COMPENSATION AWARDS
---------------------------------- ----------------------
FISCAL OTHER SECURITIES ALL
YEAR ANNUAL RESTRICTED UNDERLYING OTHER
NAME AND ENDED COMPEN- STOCK OPTIONS/ COMPEN-
PRINCIPAL POSITION MARCH 31 SALARY($) BONUS($) SATION($)(1) AWARDS($) SARS(#)(2) SATION($)(3)
- --------------------------- -------- --------- --------- ------------ --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Gerald D. Murphy 1997 $ 336,000 $ 101,535 $ 7,542 $99,525 $ -- $6,000
Chairman of the Board 1996 325,000 100,000 6,630 -- -- 5,609
and Chief Executive 1995 310,000 120,160 7,233 43,774 -- 9,060
Officer of 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 1996 250,000 100,000 5,000 -- -- 5,319
Operating Officer of 1995 230,000 93,280 5,791 36,858 -- 8,914
ERLY Industries Inc.
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 1996 204,000 -- 5,555 -- -- 4,002
ERLY 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 1996 200,000 253,000 5,058 -- -- 7,500
Chemonics Industries, 1995 183,600 364,000 1,640 -- -- 7,500
Inc.
Richard N. McCombs 1997 180,000 -- 2,759 -- -- 6,000
Vice President and 1996 175,000 15,000 435 -- 88,550 3,392
Chief Financial Officer 1995 170,000 28,560 2,418 7,347 -- 8,106
of ERLY Industries Inc.
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 ($7,425); Thurston F.
Teele, none; and, Richard N. McCombs, none. Such shares are restricted for a
one-year period from the date of issuance. Although no cash dividends have
ever been paid on the Company's Common Stock, dividends, if any, would be
paid on restricted stock at the times and in the same amounts as dividends
paid to all shareholders.
(3) Amounts represent Company contributions to the Company's Employees Profit
Sharing Retirement Plan.
18
<PAGE> 23
The following table presents information on stock options held by the
executive officers named in the Summary Compensation Table at the end of fiscal
1997.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1997(1)
AND MARCH 31, 1997 OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
MARCH 31, 1997(#) MARCH 31, 1997($)(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
meaning of Section 2800 of the Internal Revenue Code and, as such, would not be
deductible by ARI for federal income tax purposes.
19
<PAGE> 24
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. The Company also pays 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 3.9% of the
Company's Common Stock. Mr. Murphy is Chairman and Chief Executive Officer of
the Company and is the beneficial owner of 30.0% 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
by a limited partnership owned by them. The limited partnership
20
<PAGE> 25
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. Further, both sought to
stop interference by the plaintiffs in the lawsuit with ARI's Note financing.
The lawsuit also alleges certain other activities by the Company and ARI,
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. A restraining order was
issued preventing foreclosure on the shares pledged by Mr. Murphy but such
restraining order was subsequently terminated. The plaintiffs then obtained
333,333 shares of the pledged stock which was thereafter sold in part to Farmers
Rice and Ms. Kelley. 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 with the Company bearing 50% of
such expenses after any insurance recoveries. However, the business judgment of
the Board of Directors in making such decision, could be reviewed by a court in
a lawsuit. On September 9, 1997, the jury in this litigation returned two
alternative verdicts in favor of the plaintiffs and the plaintiffs will be
required to elect between those verdicts. The jury's breach of contract verdict
was rendered only against Gerald D. Murphy and Douglas A. Murphy in the total
amount of $9,657,000 plus an award of attorneys' fees totaling $4,885,200. The
jury's alternative tort claim verdict in the amount of $9,657,000 was rendered
jointly and severally against Gerald D. Murphy, Douglas A. Murphy, the Company
and ARI, along with separate awards of punitive damages against Gerald D. Murphy
of $3,000,000, Douglas A. Murphy of $500,000, the Company of $100,000, and ARI
of $100,000. The defendants intend to file motions before the trial court for
judgment in defendants' favor notwithstanding the verdict and for a reduction of
the amounts awarded by the jury based, in part, on the absence of evidence to
support those amounts. In the event any judgment is entered against the Company
or ARI, the Company and ARI intend to appeal that judgment. At this time, prior
to the plaintiffs' election of which verdict they will elect and, prior to the
trial court's rulings on the defendants' expected motions to set aside or reduce
the verdicts, the Company cannot state whether or not the outcome of this
litigation may have a material impact on its or ARI's financial condition. It
may be some time before an actual judgement is entered.
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
21
<PAGE> 26
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, which is described in the immediately preceding paragraph.
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. However,
the business judgment of the Board of Directors in making such decision could be
reviewed by a court in a lawsuit. Gerald D. Murphy and Douglas A. Murphy believe
they have valid defenses against the allegations in the complaint. Management
believes that the complaint's sole purpose is tactical, namely, to attempt to
malign current Management as part of the Powell Group's effort to take control
of the Company for its own benefit. The plaintiff recently amended the complaint
to add all the other directors of the Company and ARI as defendants.
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 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, and the fiscal year
1996 performance of the Company and the subsidiary or division to which the
executive is assigned. In reviewing compensation, the Compensation Committee
considered the salary and bonus paid by other entities as compared to the
salaries and bonuses paid by the Company. In determining compensation, the
Compensation Committee also reviewed a formal survey of compensation of top and
midlevel managers at food and kindred products companies from Watson Wyatt Data
Sources for Survey of Top and Middle Management. The Compensation Committee only
reviewed the combined salary and bonuses of companies in such survey which had
sales comparable to the Company. The Compensation Committee believes that the
Company's compensation of salary and bonuses is approximately in the mid-range
of the companies used in its comparisons. The companies used for such
comparisons are not the same as are in the indices used in "Stock Price
Performance." 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) the 6% increase in sales from $460,000,000 in 1995 to
$487,000,000 in 1996, (3) the successful completion of a $100,000,000 Note
public offering by ARI, and (4) the securing of a new $20,000,000 line of credit
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.
The Compensation Committee occasionally grants stock options based on a
given event or circumstances, such as an overseas assignment, and does not
generally consider any option previously granted to an executive officer. The
grant of an option is generally intended to encourage equity ownership in the
Company and to provide long-term performance-based compensation to officers and
key employees.
22
<PAGE> 27
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
as evidenced by the Company's recorded net income of $7,200,000 for fiscal year
1997, the increase in stockholders' equity to $24,800,000 at March 31, 1997, and
the 26% increase in sales from $487,000,000 in 1996 to $614,000,000 in 1997, and
(2) the successful acquisition and integration of the olive business.
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,
23
<PAGE> 28
in fiscal year 1997, and the successful acquisition and integration of the Early
California Olive division during the year.
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."
February 27, 1997 COMPENSATION COMMITTEE
William H. Burgess, Chairman
Gerald D. Murphy
Alan M. Wiener
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.
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>
Measurement Period
(Fiscal Year Covered) ERLY Industries NASDAQ Stock S&P Food
<S> <C> <C> <C>
1992 100 100 100
1993 94 115 109
1994 135 124 101
1995 333 138 120
1996 299 187 151
1997 304 208 190
</TABLE>
24
<PAGE> 29
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 Powell Group may bring up their
proposal to expand the Board of Directors to seven persons or any other proposal
described under "The Powell Group's 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 Powell
Group.
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 May 18, 1998.
By order of the Board of Directors
/s/ THOMAS A. WHITLOCK
-------------------------------------
Thomas A. Whitlock
Vice President and Assistant Secretary
Los Angeles, California
September 15, 1997
PLEASE COMPLETE, SIGN AND DATE THE ENCLOSED WHITE PROXY AND RETURN IT PROMPTLY
IN THE ENCLOSED, SELF-ADDRESSED POSTAGE PREPAID ENVELOPE.
25
<PAGE> 30
APPENDIX A
PROPOSED AMENDMENT OF THE BYLAWS*
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. At
any election of directors, assuming a quorum is present, the candidates
receiving the highest number of votes up to the number of directors to be
elected shall be elected. This second paragraph of Section 6 of this Article II
may not be changed, amended or eliminated without the approval of the holders of
a majority of the outstanding shares.
PROPOSED AMENDMENT TO THE ARTICLES OF INCORPORATION
SIXTH: Any action required or permitted to be taken by shareholders of this
corporation must be taken at a duly called annual meeting or special meeting of
shareholders of the corporation and no action may be taken by the written
consent of the shareholders.
- ---------------
* Amending the second paragraph of Section 6 of Article II of the Bylaws.
A-1
<PAGE> 31
PROXY ERLY INDUSTRIES INC. PROXY
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 22, 1997, at the Annual Meeting of Shareholders to be held on October 17,
1997, or any adjournment thereof.
1. ELIMINATION OF CUMULATIVE VOTING: The adoption of an amendment to the Bylaws
to eliminate cumulative voting.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
2. ELIMINATION OF SHAREHOLDERS 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 [ ] AGAINST [ ] ABSTAIN [ ]
3. ELECTION OF DIRECTORS: Election of Gerald D. Murphy, Douglas A. Murphy,
William H. Burgess, Bill J. McFarland and Alan M. Wiener.
FOR [ ] WITHHELD [ ] FOR ALL EXCEPT [ ]
(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.)
<PAGE> 32
(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. This proxy card votes all shares in all capacities.
BY EXECUTING AND DATING THIS WHITE PROXY, ALL PREVIOUSLY EXECUTED PROXIES
EXECUTED BY THE UNDERSIGNED SOLICITED BY ANYONE, INCLUDING THE COMPANY OR THE
POWELL GROUP, IS HEREBY REVOKED.
<TABLE>
<C> <S>
Dated:__________ , 1997
-----------------------
-----------------------
Signature(s)
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.
</TABLE>
PLEASE MARK, SIGN, DATE AND RETURN THIS WHITE PROXY CARD PROMPTLY USING THE
ENCLOSED ENVELOPE.
