SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - K/A
AMENDMENT TO ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1993
Commission File Number 0-17039
American Rice, Inc.
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(Exact Name of Registrant as Specified in its Charter)
Texas 76-0231626
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(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
16825 Northchase, Suite 1500
Houston, Texas 77060
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(Address of Principal Executive Offices) (Zip Code)
(713) 873-8800
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(Registrant's Telephone Number, Including Area Code)
AMENDMENT NO. 2
The undersigned registrant hereby amends the following items, financial
statements, exhibits or other portions of its Annual Report on Form 10-K for
the year ended March 31, 1993, as set forth on the pages attached thereto:
Item 1. Recent Events, General, International Market
Item 2. Properties
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 8. Financial Statements and Supplementary Data
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this amendment to be signed on its behalf by the
undersigned, thereunto duly authorized.
American Rice, Inc.
----------------------
Registrant
Date: July 1, 1994 By: Richard N. McCombs
----------------------
Richard N. McCombs
Executive Vice President -
Finance & Administration
& Chief Financial Officer
<PAGE>
PART I
Item 1. Business
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Background
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American Rice, Inc. ("ARI") was formed in 1987 as a Texas business
corporation to succeed to the business of Predecessor American Rice, Inc., a
Texas agricultural cooperative marketing association ("Predecessor ARI"), in a
reorganization (the "Reorganization"). Pursuant to the Reorganization, which
was consummated on April 30, 1988, ARI acquired all of the assets of
Predecessor ARI in exchange for approximately 52 percent of ARI's outstanding
voting stock. The remaining approximately 48 percent of ARI's voting stock
was issued to ERLY Industries Inc. ("ERLY") and to Comet Rice, Inc. ("Comet")
in exchange for cash and Comet's 50 percent interest in Comet American
Marketing, a Texas joint venture between Comet and Predecessor ARI ("CAM"),
respectively. After the Reorganization, Predecessor ARI distributed the
shares of stock of ARI received pursuant to the Reorganization to its patrons
and was later dissolved.
Predecessor ARI was formed in 1969 by a group of Texas rice growers. Prior
to 1986, its chief marketing activities were international, and its domestic
marketing of branded milled rice was not significant until June 1986, when
Predecessor ARI and Comet formed CAM for the primary purpose of marketing rice
domestically. Substantially all domestic marketing of milled rice by Comet
and Predecessor ARI was transferred to CAM, and Predecessor ARI's domestic
milled rice marketing activities increased significantly through CAM. In 1986
and 1987, Predecessor ARI also moved its operations from Houston to a new
facility in Freeport, Texas. See Item 2 of this report.
Recent Events
- - -------------
On March 7, 1991, the shareholders of ARI (including a majority of
shareholders of ARI other than ERLY) approved the merger of ARI and Comet
subject to obtaining the required financing. On August 23, 1992, ARI entered
into an interim forbearance agreement with three of its lenders under which,
among other things, ARI agreed with its lenders that this merger agreement was
effectively terminated as a result of the delays in obtaining the necessary
financing. The merger agreement was subsequently terminated, as provided for
in the agreement, based on the mutual consent of both ARI and Comet.
On May 26, 1993, ARI consummated a transaction to acquire substantially all
of the assets of Comet and assume all of Comet's liabilities ("the
Transaction"). Comet is a wholly-owned subsidiary of ERLY. ARI also
refinanced the combined indebtedness of ARI and Comet ("Refinancing"). Since
ERLY, the sole shareholder of Comet, will own the larger portion of the voting
rights in the surviving corporation, the Transaction is accounted for as a
reverse acquisition of ARI by ERLY.
In exchange for the assets acquired from Comet, ARI issued to Comet
Page 2<PAGE>
14,000,000 shares of newly designated Series B preferred stock $1 par value.
Each share of Series B preferred stock provides for annual cumulative,
non-participating dividends of $.37, is convertible into two shares of ARI
common stock, is entitled to two votes, and has a liquidation preference of
$1.00. The Series B preferred stock issued to Comet carries an aggregate
dividend of approximately $5.2 million per year. ARI loan agreements with its
lenders contain various restrictions on the ability of ARI to pay such
dividends and, as a result, ARI is currently precluded from paying the
dividends. The assets acquired by ARI did not include any of the ARI stock
previously held by Comet. Comet's combined holdings of ARI common stock and
ARI Series A preferred stock, prior to the Transaction, represented
approximately 48 percent of the voting power of the outstanding ARI stock. As
a result of the Transaction, Comet holds 81 percent of the combined voting
power of ARI stock outstanding after the Transaction. In connection with the
Transaction, ERLY has succeeded to the ARI stock held by Comet by the
liquidation of Comet.
Major assets purchased include receivables, inventory, rice processing and
shipping facilities in Stuttgart, Arkansas and Maxwell, California, and major
leases assumed include rice drying and storage facilities in Maxwell,
California and Greenville, Mississippi.
For an extended period prior to the Refinancing, ARI was engaged in
negotiations with its lenders to effect a restructuring of its indebtedness.
In connection with the Refinancing, ARI received $47.5 million in credit lines
from a new revolving credit lender, Congress Financial Corporation
("Congress"), and loans from new term lenders totalling $65.3 million. The
new term lenders are Chase Manhattan Bank (National Association) ("Chase"),
Internationale Nederlanden Bank, N.V. ("INB"), and Texas Commerce Bank
National Association ("TCB"). As partial consideration for the new financing,
ARI issued warrants to two of these term lenders to purchase up to 776,000
shares of ARI's common stock at $1.00 per share. As additional consideration,
13 million shares of ARI Series B preferred stock were pledged by ERLY for the
benefit of the new term lenders. ARI's indebtedness to its former lenders
was partially satisfied by ARI's issuance to the former lenders of a combined
aggregate of 1,500,000 shares of newly designated Series C preferred stock
$1.00 par value, with annual cumulative non-participating dividends of $.50
per share. The preferred C stock is non-convertible and non-voting, has a
liquidation preference of $1.00 per share, and is callable by ARI at any time
at a price of $5.27 per share less aggregate dividend payments per share.
Applicable loan documentation with the new lenders contains various
restrictions on the ability of ARI to pay these dividends and, as a result,
ARI is currently precluded from paying the dividends. As part of the
Refinancing, ARI's former lenders agreed to a debt discount in the approximate
amount of $10.5 million, which is net of a $3 million note from ERLY. As
additional consideration for the satisfaction of the existing indebtedness of
ARI, one million shares of ARI Series B preferred stock were pledged by ERLY
to ARI's former lenders, ERLY issued $3 million of notes payable to those same
former lenders, and National Bank for Cooperatives ("NBC") received $1.3
million of NBC stock held by ARI. This $3 million benefit received by ARI was
offset against receivables owed to ARI by ERLY.
The amounts borrowed under the new credit lines in conjunction with the
Refinancing were $65.3 million from the new term lenders and $14 million from
Page 3<PAGE>
Congress. These amounts plus internally generated cash (net of the debt
discount) were used to pay off the following debt: ARI's long term debt of
$48.8 million, ARI's credit line notes of $15.3 million, Comet's long term
debt of $20.5 million and Comet's credit line notes of $25.1 million.
During the period from August 23, 1992 through May 26, 1993, ARI obtained
numerous extensions and forebearances. However, by December 1, 1992, several
legal actions by some of ARI's lenders to exercise remedies commenced. The
legal actions included several postings by one of ARI's lenders, Rabobank, to
foreclose on ARI's Freeport properties. The last foreclosure date was set for
June 1, 1993. The Transaction was structured as a sale of assets due to the
need to complete the Transaction in a form that was acceptable to the new
lenders, so that it could be accomplished before the June 1, 1993 foreclosure
date.
In connection with the Transaction, a fairness opinion, provided by an
investment banker prior to the Transaction, concluded that the Transaction was
fair to the non-Comet shareholders of ARI. Also, a mutual release of all
claims, prior to the Refinancing and the Transaction, was also signed between
ARI, ERLY, Comet and ARI's former lenders.
Prior to the Transaction, ARI's common stock was listed on Nasdaq as a
National Market ("NM") company. As a NM company, ARI was subject to Schedule
D, Part III, Section 5(i) of the By-Laws of the National Securities Dealers,
Inc. ("NASD") which requires NM companies to obtain shareholder consent to
certain transactions, including transactions that result in a change in
control of such companies (the "Shareholder Approval Requirement"). The
Shareholder Approval Requirement applies even when relevant state law, such as
the Texas Business Corporation Act, does not mandate shareholder approval of a
transaction that results in a change of control, Additionally, as a NM
company, ARI was subject to Schedule D, Part III, Section 5(j) of the By-Laws
of the NASD which prohibits such companies from issuing securities that have
per share voting rights greater than the per share voting rights of any
outstanding class of common stock of the issuer (the "Shareholder
Disenfranchisement Rule").
ARI issued shares of its Series B preferred stock in connection with the
Transaction. ARI's Series B preferred stock is entitled to vote with ARI's
common stock and is entitled to two votes per share. The rights of the Series
B preferred stock, including the voting rights, were negotiated with all
parties involved in the Transaction. As a result of the issuance of
additional shares of ARI capital stock, ERLY's beneficial ownership of ARI's
common stock increased from approximately 48% to 81.1%. However, the approval
of ARI's shareholders was not obtained in connection with the Transaction even
though the issuance of shares by ARI resulted in ERLY becoming the beneficial
ownership of more than a majority of ARI's common stock.
In connection with the Transaction, ARI sought an exemption from the
application of the Shareholder Approval Requirement and the Shareholder
Disenfranchisement Rule. The basis for requesting the exemption was ARI's
belief that the delay caused by calling a meeting of its shareholders to
secure approval would seriously jeopardize ARI's financial viability. The
NASD refused ARI's request for an exemption because the Series B preferred
stock is entitled to two votes per share. The NASD suggested ARI consider de-
Page 4<PAGE>
listing from the NM System and become an NASDAQ "Small Capitalization
Company". The Shareholder Approval Requirement to which NM companies are
subject does not apply to NASDAQ Small Capitalization Companies. The basic
requirements for listing as an NASDAQ Small Capitalization Company are as
follows:
1. The securities must be registered under Section 12(g)(1) of the
Securities Exchange Act of 1934;
2. There must be at least two registered and active market makers in the
security;
3. There must be a public float of at least 100,000 shares and at least
300 shareholders;
4. The public float must have a market value of at least $1,000,000;
5. The bid price for the securities must be at least $3.00 per share; and
6. The issuer must have assets of at least $4,000,000, and capital and
surplus of at least $2,000,000.
In connection with the issuance of the Series B preferred stock ARI
terminated its status as a NM company and was listed on NASDAQ as a "Small
Capitalization Company;" The issuance of the Class C preferred stock does not
have any effect on the ability of ARI to be listed as an NM Company. As a
result of the issuance of the Series B preferred stock in the Transaction,
with its voting power of two votes per share, ARI terminated its status as an
NM company, and is now listed on Nasdaq as a "Small Capitalization Company."
General
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ARI is currently involved in all phases of rice processing (including the
processing of parboiled rice, regular milled rice, instant rice and rice by-
products), rice packaging and rice marketing.
ARI is a significant marketer of branded rice in the international and
domestic markets. Rice products are sold directly by ARI through many
distribution channels and under a variety of brands. Distribution channels in
the international market vary from country to country and include sales to
government agencies and commercial importers as well as through wholesalers
and international brokers. ARI also markets unbranded and rough (unprocessed)
rice. Total sales for the years ended March 31, 1993, 1992 and 1991 were
$176.6 million, $176.2 million and $198.5 million, respectively, of which
export sales accounted for approximately 51, 46 and 54 percent of the total
sales for each year, respectively. (Hereinafter, the term "cwt." denotes
hundredweight, which equals 100 pounds.)
Page 5<PAGE>
<TABLE>
The following tables present a comparison of the domestic and export sales of ARI.
Sales of ARI (A)
(Thousands of Dollars)
<CAPTION>
Domestic (B) Export Total
Year Ended ------------------------------ ------------------------------- ------------------------------
March 31, Milled Rough Total (C) Milled Rough Total(D)(E) Milled Rough Total
- - --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1993 $87,007 $ 328 $87,335 $ 87,629 $1,655 $ 89,284 $174,636 $1,983 $176,619
1992 $92,800 $1,998 $94,798 $ 80,641 $ 762 $ 81,403 $173,441 $2,761 $176,201
1991 $86,575 $4,945 $91,520 $102,717 $4,225 $106,942 $189,292 $9,170 $198,462
<FN>
(A) Domestic and export sales include rice obtained from outside the U.S.
(B) Includes sales to the Caribbean Basin.
(C) Includes sales to affiliated companies of $13,306, $19,676, and $8,172
in the years ended March 31, 1993, 1992 and 1991, respectively.
(D) Includes sales to Saudi Arabia of $64,857, $58,439 and $65,210 in the
years ended March 31, 1993, 1992 and 1991, respectively.
(E) Includes sales to affiliated companies of $872 in the year ended March
31, 1991.
</TABLE>
<TABLE>
Sales of ARI (A)
(Thousands of Rough Rice cwt.)
<CAPTION>
Domestic (B) Export Total
Year Ended ------------------------------- ------------------------------- ------------------------------
March 31, Milled Rough Total Milled Rough Total (C) Milled Rough Total
- - --------- --------- --------- --------- --------- --------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1993 5,993 54 6,047 6,652 148 6,800 12,645 202 12,847
1992 6,238 256 6,494 5,788 68 5,856 12,026 324 12,350
1991 5,715 782 6,497 8,343 475 8,818 14,058 1,257 15,315
<FN>
(A) Domestic and export sales include rice obtained from outside the U.S.
(B) Includes sales to the Caribbean Basin.
(C) Includes sales to Saudi Arabia of 4,159 cwt., 3,625 cwt. and 4,140 cwt.
in the years ended March 31, 1993, 1992, and 1991, respectively.
Page 6<PAGE>
</TABLE>
Because ARI markets significant amounts of rice in branded consumer products
whose price levels do not fluctuate as fast as commodity costs, rapid rough
rice price increases usually have the effect of reducing the profits of ARI in
the short-term. Conversely, rapid decreases in rough rice prices could have
the effect of increasing the earnings of ARI in the short-term, because
consumer prices usually do not fall as fast as rapidly decreasing commodity
prices. In addition, the timing of rough rice purchases and competitive price
pressures on milled rice significantly affects ARI's earnings.
On August 30, 1989, ARI entered into a management agreement with ERLY,
whereby ERLY agreed to act as ARI's agent for the purpose of providing certain
marketing, operating and management services to ARI in exchange for a monthly
management fee of $25 thousand. Since the agreement took effect, numerous
operational changes have been implemented. The management agreement was
scheduled to expire upon the earlier of the consummation of a proposed merger
or August 30, 1992, unless sooner terminated upon 120 days' notice given by
either party. Notice of termination was given by ARI in November 1990, and as
a result the management agreement was terminated as of March 31, 1991. Since
certain services were still being performed by ERLY, ARI continued to pay the
$25 thousand monthly fee to ERLY until August 23, 1992.
During 1992 and 1991, Comet purchased a substantial portion of rough rice
required by ARI. In some cases, such purchases were made by Comet on behalf
of ARI, with ARI paying the rough rice seller directly for the product; in
other cases, such purchases were made by Comet directly and then sold by Comet
to ARI. In the past, the price paid by ARI for rough rice sold by Comet was
Comet's original cost plus a rough rice buying fee, but from August 1989 (when
ERLY and ARI entered into a management agreement) until August 1992 Comet sold
ARI rough rice at Comet's actual cost and ARI paid ERLY a management fee.
Since August 1992, rough rice purchases were managed by ARI. ARI has also
sold rough rice to Comet from time to time. Also during the last three years,
ARI has purchased a portion of Comet's processed rice output and in turn sold
it to third-party buyers in the domestic market (other than Puerto Rico). In
November 1991, ARI and Comet agreed that rice prices between ARI and Comet
would be based on full variable costs and that net margins earned on sales
from ARI's Freeport facility and Comet's Greenville and Stuttgart facilities
would be shared based on a formula. ARI has also sold processed rice to Comet
and ARI has entered into other transactions with ERLY and Comet.
As part of the Transaction, ARI and ERLY entered into a management agreement.
This agreement recognized that ARI will be part of ERLY's group of affiliated
companies and as such will participate in the overall management and
administrative expertise of ERLY. ARI will pay $900,000 per year to ERLY
under the terms of this agreement. Since a comparison to possible
arrangements with parties who are not affiliated with ARI is not available,
ARI cannot determine if the arrangement is more or less favorable to ARI than
a similar arrangement with a unaffiliated party. There are, of course, no
comparable costs for such services as compared to those that could be obtained
from non-affiliated parties; however, ARI believes such costs are not in
excess of those that would be required to obtain such management services from
non-affiliated parties.
As of May 25, 1993, ARI had 237 hourly and salaried employees. As a result
of the Transaction on May 26, 1993, ARI hourly and salaried employees
Page 7<PAGE>
increased to 591. ARI has no collective bargaining agreements with any labor
unions.
International Market
- - --------------------
According to U.S. Department of Agriculture ("USDA") estimates, world
production was 11,000 million cwt. in 1989-1990; 11,200 million cwt. in
1990-1991; 11,000 million cwt. in 1991-1992, and is forecast to be 11,400
million cwt. in 1992-93. The world's major rice producing countries include
China, India, Indonesia, Bangladesh, Vietnam and Thailand, with China and
India accounting for over 50 percent of world production. Less than 5 percent
of total worldwide production, however, is traded internationally. Thailand
exports approximately 40 percent of total world exports and is the single
largest rice exporting nation. The U.S. and Vietnam each export approximately
17 percent of world trade.
Export sales are subject to significant fluctuations due to wide variations
in supply and demand due to the impact of such factors as the relative
strength of the United States dollar to other foreign currencies and both U.S.
and foreign governmental agriculture and trade policies. Accordingly, sales
by geographical area will vary significantly from quarter to quarter and from
year to year. ARI's exposure to foreign currency fluctuations, other than
those causing variations in supply and demand, are not material as ARI
requires all sales to foreign customers, with the exception of a few
well-established accounts, which are not material, to be priced in U.S.
dollars, payable by irrevocable letters of credit and confirmed by a major
bank prior to shipment.
The largest rice importing regions of the world include Africa, South America
and the Middle East. The largest importing nations include the European
Community, India, Iran, Commonwealth of Independent States, Indonesia and
Saudi Arabia.
Rice supplies and availability of rice in Asia, which are dependent on
certain weather conditions such as the timing and severity of monsoon rains,
can significantly influence world and U.S. prices. Since U.S. exports account
for approximately 40 percent of total U.S. production and ARI export sales
account for approximately 50 percent of ARI's total sales, the supply of
foreign origin rice can also have a significant impact on rough rice costs and
milled rice sales prices for ARI.
Based on statistics compiled by the USDA, the U.S. exported approximately 44
million cwt. in year ended May 31, 1992 and is forecast to export
approximately 49 million cwt. in year ended May 31, 1993. During the years
ending March 31, 1993 and 1992, ARI exports of milled rice, net of foreign
sourced rice, totalled 4 million and 3.1 million cwt., respectively,
representing approximately 8 percent of total U.S. exports during the two year
period.
The largest branded parboil rice market in the world is Saudi Arabia. Saudi
Arabia imports approximately 12 million cwt. of milled rice per year,
including approximately 4 million cwt. in the year ended May 31, 1991,
approximately 3 million cwt. in the year ended May 31, 1992, and an estimated
Page 8<PAGE>
4.6 million cwt. in the year ended May 31, 1993 of high quality milled rice
from the U.S., based on statistics published by the USDA. ARI's market share
of U.S. exports to Saudi Arabia was approximately 70 percent, approximately 75
percent and approximately 60 percent during the years ended May 31, 1991, 1992
and 1993, respectively. ARI believes its Golden Chopstick Brand, known as
"Abu Bint" in Saudi Arabia, is one of the most recognized names of any branded
food product in that country. Rice products exported to Saudi Arabia by ARI
are marketed through a number of merchant families, and no one customer
accounts for more than 10 percent of the total sales of ARI. The loss of any
one of these customers in Saudi Arabia would not have a material adverse
effect on ARI, although the loss of the entire Saudi Arabian market would have
a material adverse effect.
Within the Middle East, ARI also markets rice in Jordan, the United Arab
Emirates, Kuwait and Qatar. ARI exports rice to certain African countries,
Sweden, Finland, New Zealand, Mexico, and to a lesser extent other countries.
ARI's primary international marketing objectives are to expand and strengthen
established markets and to develop new markets.
Domestic Markets (United States, Canada and the Caribbean Basin)
- - ----------------------------------------------------------------
Based upon statistics compiled by the USDA, U. S. production of rough rice
was 179 million cwt. in the 1992-1993 crop year. Domestically, rice is
produced in six states: Arkansas, California, Louisiana, Mississippi, Texas
and Missouri, with Arkansas accounting for approximately 40 percent of total
U. S. production and California accounting for approximately 20 percent.
Rice consumption and market potential in the U.S. show consistent growth
patterns on the whole. The most recent USDA rice distribution study shows
that U. S. rice millers and packagers marketed 54 million cwt. of milled rice
in the United States in 1991. Additionally, the total U. S. rice market is
growing at a rate of approximately 4 percent annually, making rice one of the
leading growth markets in the carbohydrates area of the food industry. Sales
of rice products indicate consistent consumption patterns with no substantial
variance in seasonality, although sales do show a very small decrease in the
domestic market during the months of June through August.
ARI is also a significant marketer of rice in the U.S. and, based on
statistics published by A.C. Nielsen & Co. ("ACN") (a firm that conducts
consumer research studies) has a market share of approximately 11 percent.
Before June 1986, Predecessor ARI's domestic marketing of branded milled rice
was not significant. In June 1986, Predecessor ARI purchased Comet's instant
rice plant, instant rice technology and blending and packaging machinery and
entered into the CAM joint venture with Comet. CAM assumed all retail and
food service marketing activities previously conducted by Predecessor ARI and
Comet in the U.S., Canada and the Caribbean basin. The joint venture improved
marketing ability and provided better opportunities for efficiencies in
advertising and warehousing than either Predecessor ARI or Comet alone could
have provided. Predecessor ARI's 50 percent interest in CAM and Comet's 50
percent interest in CAM were transferred to ARI in the Reorganization, and CAM
ceased to exist as a joint venture. ARI succeeded to and conducts, as its
domestic marketing division, the business formerly conducted by CAM.
Page 9<PAGE>
Effective in January 1990, nearly all CAM Division personnel were transferred
to ERLY Juice, Inc., a wholly owned subsidiary of ERLY ("Juice"), in order to
integrate the marketing, sales service, credit and general management of CAM
and Juice and thereby reduce CAM's total selling and administrative costs.
ARI paid Juice a service fee of $172,409 per month from January 1, 1991
through April 30, 1991, and $158,000 per month from May 1, 1991 through March
31, 1993 for such services.
Domestic rice consumption and distribution networks have developed into three
distinct markets: grocery products, food service and Caribbean basin. In
servicing each market, CAM's Consumer Research Department continually monitors
market growth, consumer habits and competitive activity so that CAM can
respond quickly to changes in purchasing patterns.
The grocery division of CAM markets highly accepted brands in approximately
15 major markets throughout the United States. The major national brands
marketed by CAM include Blue Ribbon, Adolphus, Comet and Texas AA. Regional
brands marketed include Cinta Azul, Wonder, and various rice mixes and instant
rice sold under a major brand. CAM plans to continue to emphasize its
regional brand prominence.
Management believes that, based upon reports compiled by the U. S. Bureau of
Census on food store and restaurant sales, the food service industry is one of
the fastest growing components of the food business in the U.S. CAM's
emphasis on convenience, service and product needs offers the food service
division opportunities for growth in this sector. CAM's food service rice
products include brown rice mixes, wild rice mixes, rice pilaf and a parboiled
rice.
The Caribbean area is one of the highest per capita rice consumption
marketplaces in the world and accounted for approximately 7 percent of ARI's
sales volume, which includes sales to affiliated parties for Caribbean basin
destinations, for the year ended March 31, 1993, and 11 percent of ARI's sales
volume for the year ended March 31, 1992. ARI's "Cinta Azul" brand is the
leading long grain rice brand in the Puerto Rican market. Effective December
1, 1989, CAM's Puerto Rican sales responsibilities were transferred to the
Puerto Rican division of Comet, and the balance of the Caribbean area sales
responsibilities, except Haiti, were transferred to the International Division
of ARI. Effective April 30, 1991, ARI entered into an agreement with Comet to
transfer to Comet ARI's receivable from a domestic exporter of rice to Haiti
in the amount of $2 million. In exchange, ARI's payable to Comet was reduced
by $2 million. From April 30, 1991, sales to the domestic exporter were made
by Comet. On January 1, 1992 all of ARI's sales responsibilities in Puerto
Rico were transferred from the Puerto Rican division of Comet to the
International Division of ARI.
One of the fastest growing areas of the rice business in the United States is
the ethnic trade market. CAM has the leading brand of long grain rice in the
Asian-American trade, which is "Texas AA", and dominates sales in the western
region of the United States and other areas with a large Asian-American
population. Other CAM brands have strong consumer acceptance with Hispanic-
American consumers in the southwest.
The primary objectives of CAM's marketing program in the domestic market are
Page 10<PAGE>
to achieve regional brand prominence with emphasis on the top 15 branded dried
rice consumption markets, to minimize CAM divisional selling, general and
administrative expenses, and to achieve prominence as a branded supplier to
America's ethnic bulk consumer.
Sources of Rough Rice and Milled Rice
- - -------------------------------------
ARI obtains rough rice from producers in the states of Texas, Louisiana,
Mississippi and Arkansas. For the 1988 crop, ARI had agreements to purchase
all the rice produced by certain rice farmers, totalling approximately 6
million cwt. of rough rice. For the 1989 crop, ARI had agreements to purchase
approximately 5 million cwt. of rough rice. For the 1990 crop, ARI had
agreements to purchase approximately 2.6 million cwt. of rough rice. For the
1991 crop, ARI had agreements to purchase approximately 1.9 million cwt. of
rough rice. For the 1992 crop, ARI had agreements to purchase approximately
3.4 million cwt. of rough rice. ARI obtains additional domestic rough rice
through Comet's rice buying group and on its own through competitive bidding
processes in several of the rice-producing states. See "General". As needed,
ARI obtains milled rice from other U. S. and foreign rice mills. In future
years, management of ARI perceives the possibility of a decrease in
availability of rice in the areas from which ARI historically has obtained
rice, although such matters cannot be accurately predicted. Several factors
could contribute to such decreases, including limits imposed by the U. S.
Government on the number of acres from which a producer may produce rice to be
eligible for the USDA farm rice program and general economic pressures caused
by factors such as higher production costs and decreases in the availability
of suitable water. See "Certain Governmental Effects on the Rice Industry".
The result of such limitations could be an increase in the prices paid by ARI
for rough rice.
Competition
- - -----------
Competition exists for procuring rough rice and marketing milled rice
products. Competition in the rice milling sector consists of both private
commercial mills, such as ARI, and mills operated by agricultural
cooperatives. In California and Arkansas, producers market their rice
primarily through farmer cooperatives. In other states, rice is most often
purchased by a mill either on a contractual basis or through a competitive
bidding process conducted by local sales offices.
Principal domestic competitors of ARI in the marketing of milled rice are
Uncle Ben's, Inc., Riviana Foods, Inc., Riceland Foods, Inc., and General
Foods, Inc. Quaker Oats, Inc. and Thomas J. Lipton, Inc. are also competitors
in the rice industry. According to ACN statistics, no company currently
controls more than 25 percent of the domestic markets. There are a number of
small regional competitors in the branded segment of the rice industry and
approximately 15 to 20 rice millers who compete in the bulk/ethnic trade.
International competition differs from domestic competition in that ARI is
competing in a global market with competitors from many different countries.
Thailand, Pakistan, Vietnam and Burma are the major foreign competitors who
compete primarily with unbranded and lower priced rice. Other major
Page 11<PAGE>
international competition comes from other rice millers (the most dominant of
which include Riceland Foods, Inc., Producers Rice Mills, Archer Daniels
Midland, Farmers Rice Cooperative and Comet) and other smaller exporters, none
of which has more than 25 percent of the U. S. rice exporting business.
Competition in the international market is based upon the quality of rice,
brand recognition, price, quality of service and a seller's relationship with
purchasers and other people involved in the trade.
Trademarks, Copyrights and Brand Names
- - --------------------------------------
Because a consumer's recognition of branded products adds significant value
to basic commodities, trademarks, copyrights and brand names are important to
the business of ARI. The trademarks, copyrights and brand names used by ARI
are registered in the countries in which they are used and have various
expiration dates. ARI believes that such registrations are currently adequate
to protect the rights to use the trademarks, copyrights and brand names
material to the business of ARI.
Certain Governmental Effects on the Rice Industry
- - -------------------------------------------------
The USDA announces a farm rice program each year before the rice planting
season (which generally begins in March). The announcement includes details
of requirements of rice producers to participate in benefits of the program
and sets support loan rates and target prices. A support loan rate is the
price at which an eligible producer can sell his production to the U. S.
Government. The target price serves as a basis for computing a deficiency
payment by the U. S. Government to the producer. The deficiency payment,
subject to certain limitations, is the difference between the target price and
the support loan rate or average U. S. market prices, whichever is higher. To
be eligible to participate in the program, a producer must, among other
things, plant within an acreage reduction limit imposed by the U. S.
Government. When the U. S. Farm Bill was enacted in December 1985, rice was
one of the two commodities that benefitted from the marketing loan concept
mandated for the 1986 through 1990 crops. The marketing loan concept was
established under the Food Securities Act of 1985 and allows rice farmers
eligible for the rice farm program to repay price support loans at a reduced
price if the prevailing world market price for rice is below the U. S. support
price. The Food Securities Act of 1985 expired at the end of the 1990 crop
year. A similar program was enacted for the 1991, 1992 and 1993 rice crop.
The USDA can significantly affect the supply and inventory of rice available
in the U.S. through the manner in which the acreage reduction limit is
established. In recent years there have been efforts to reduce subsidies to
farmers, including rice farmers, by the U. S. Government. While it is not
known whether such efforts will succeed, there can be no assurances that
government subsidies will continue at their present terms.
Item 2. Properties.
- - ------- -----------
ARI leases the land and improvements for its receiving, storage, milling,
packaging and shipping facility located on a 20-acre tract at the Port of
Freeport, Texas, adjacent to an exporting transit shed and exporting dock
Page 12<PAGE>
facility. The initial term of the lease, which commenced June 6, 1987, is 35
years and is renewable, at ARI's option, for seven subsequent five-year
periods, for a total possible term of 70 years. ARI has an option to buy the
improvements under the lease for $75 thousand. The processing facility has
the capacity to store approximately 700 thousand cwt. of unprocessed rough
rice and approximately 600 thousand cwt. of milled rice and to mill
approximately 11 million cwt. of rough rice annually. The mill operated at
approximately 85 percent of capacity during the year ended March 31, 1993 and
approximately 72 and 93 percent of capacity during the years ended March 31,
1992 and 1991. ARI has a right, in preference to that of third parties, to
the use of the transit sheds adjacent to the facility, which are owned by the
Port of Freeport. These sheds have a capacity of approximately 360 thousand
square feet and are suitable for multi-purpose use. ARI believes that it
enjoys an economic advantage as a result of the location of its Freeport
facility because it is able to ship its rice directly from shore to shore,
thereby saving inland freight costs and affording it with a readily available
alternative to shipping by train or truck to other areas of the U.S. ARI
believes that the capacity of its Freeport facilities is adequate for the
conduct of its business and that such facilities are well-maintained and
suitable for the operations of ARI.
ARI also owns approximately 39 acres of land neighboring downtown Houston,
Texas, which served as ARI's milling facility site before the construction of
the Freeport facility. In August 1990, certain of ARI's lenders requested ARI
to consider ways in which ARI could improve its liquidity. In response to
such request ARI's board of directors authorized ARI to market the Houston
property and, in September 1990, ARI entered into a listing agreement with an
outside broker to market the property which was canceled in March 1993. The
proceeds of any sale of the Houston property would be used to pay ARI's
indebtedness to lenders. The terms of any sale of the Houston property cannot
be predicted. ARI management believes that the net realizable value of the
Houston property exceeds its carrying value.
As a result of the Transaction, ARI acquired rice processing and shipping
facilities in Stuttgart, Arkansas and Maxwell, California, and leased rice
drying and storage facilities in Maxwell, California and Greenville,
Mississippi. The Stuttgart and Maxwell facilities have the capacity to mill
approximately 4 million cwt. and 11 million cwt. annually, respectively.
The Maxwell facility is secured as collateral for a loan with an insurance
company which was assumed by ARI as part of the Transaction. The Freeport,
Stuttgart and Houston properties and a junior position in the Maxwell
facility, are collateralized as security to the new lenders, in conjunction
with the Transaction.
As a result of the Transaction and a corresponding increase in credit lines,
ARI's management expects utilization of its Freeport facilities to increase
slightly and expects the Stuttgart facility to operate at near capacity and
Maxwell facility to be utilized at approximately 75% of capacity.
Page 13<PAGE>
Item 6 Selected Financial Data.
- - ------ -----------------------
<TABLE>
<CAPTION>
The selected financial data of ARI presented below are derived from financial statements and pro forma financial
statements included in Item 8 of this Form 10-K for the five fiscal years prior to March 31, 1993. This information
should be read in conjunction with such financial statements and related notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in Item 7 of this Form 10-K. (dollars in
thousands except per share).
ARI
- - ---
Balance Sheet Data:
Pro- March 31,
Forma --------------------------------------------------------
1993 (1) 1993 1992 1991 1990 1989
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Total Assets $167,057 $102,178 $95,515 $105,957 $134,094 $131,971
Long-Term Debt,
Less Current Portion 63,302 44,567 - 47,300 42,600 47,500
Stockholders' Equity 37,180 16,451 13,201 18,633 24,410 24,271
</TABLE>
<TABLE>
<CAPTION>
Statement of Operations Data:
Period
Year Ended From April 30, 1988
Pro March 31, (Date Operations
Forma ------------------------------------------ Commenced)
1993 (1) 1993 1992 1991 1990 to March 31, 1989
--------- --------- --------- --------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Net Sales $309,160 $176,619 $176,201 $198,462 $190,196 $180,163
Earnings (Loss) from (5,034) 3,250 (5,432) (5,777) 153 84
Continuing Operations
Earnings (Loss) from Continuing
Operations per Common and
Common Equivalent Share (.90) .20 (.44) (.47) .01 .01
<FN>
(1)See Pro Forma Financial Statements and Accompanying Notes - Page F-9. The pro forma information reflects
adjustments resulting from the Transaction and the Refinancing.
</TABLE>
Page 14<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
- - ------ ---------------------------------------------------------------
Results of Operations.
-----------------------
Liquidity and Capital Resources
- - -------------------------------
The following ratios are indicative of ARI's liquidity and ability to meet
future funding needs and debt service requirements:
March 31,
--------------------------------
1993 1992 1991
------ ------ -----
Current ratios 1.2 to 1 .45 to 1 1.1 to 1
Long-term debt to total capitalization 73 percent N/A 71.6 percent
At March 31, 1993, working capital was approximately $6.6 million and the
current ratio was 1.2 to 1. At March 31, 1992, current liabilities exceeded
current assets by approximately $45.3 and the current ratio was .45 to 1. At
March 31, 1991, working capital was approximately $4.9 million and the current
ratio was 1.1 to 1.
Cash increased by approximately $675 thousand during the year ended March 31,
1993, as a result of positive operating results partially offset by debt
reductions and capital expenditures. Cash decreased by approximately $2.6
million during the year ended March 31, 1992, as a result of negative
operating income results and capital expenditures. Cash increased by
approximately $3.7 million during the year ended March 31, 1991, as cash
provided by operating activities more than offset reductions to notes payable
and long-term debt, and additions to property, plant and equipment.
The ratio of long-term debt to total capitalization was 73 percent at March
31, 1993 due to the reclassification of a portion of term debt to long-term
from current as a result of the Refinancing. At March 31, 1992 this ratio was
non-existent, since all debt was classified as current. The ratio of long-
term debt to total capitalization at March 31, 1991 increased from the prior
year due to a decrease in stockholders' equity and an increase in long-term
debt. Stockholders' equity decreased during fiscal year 1991 due to the loss
sustained for the year.
Capital expenditures were approximately $762 thousand, $517 thousand, and
$830 thousand for the years ended March 31, 1993, 1992 and 1991, respectively.
Future capital expenditures are expected to be funded with internally
generated funds.
ARI had established lines of credit with a group of three banks, Cooperatieve
Centrale Raiffeisen-Boerenleenbank B.A. ("Rabobank"), TCB and Bank of America
National Trust and Savings Association ("Bank of America"). The interest rates
on the lines of credit were at the prevailing rate in effect at the time of
borrowing, which at March 31, 1993 was at prime rate (six percent) plus 3
percent for Rabobank and TCB and prime rate plus 2.5 percent for Bank of
America. Notes payable outstanding under these lines of credit at March 31,
Page 15<PAGE>
1993 and 1992 were $15.3 and $18 million, respectively, at weighted average
interest rates of approximately 8.96 and 9.63 percent, respectively.
Senior notes with an aggregate principal balance of $20 million were issued
in December 1986 and April 1988 to six insurance companies. At March 31, 1993
and 1992 the interest rate was 9 percent and the aggregate balances were $18
million. A term loan with NBC with a principal balance of $12.5 million was
due at March 31, 1993. The interest rate on the NBC loan at March 31, 1993
and 1992 was 7.6 and 8.11 percent, respectively. The interest rate at March
31, 1993 and 1992 was 9.125 percent on an original $4 million note due to TCB.
The variable rate demand marine terminal revenue bonds were payable to a non-
profit industrial development corporation. The effective interest rate at
March 31, 1992 was 3.94 percent and varied weekly based on prevailing market
conditions and was payable monthly. The bonds were collateralized by the
milling and storage facility at Freeport and an irrevocable letter of credit
issued by Rabobank in the amount of $13,584,000. The letter of credit was not
extended and was drawn upon to pay the bondholders. As a result, at March 31,
1993 Rabobank was a creditor of ARI in the principal amount of $13.3 million.
The interest rate with Rabobank was base rate plus 2 percent or 8 percent at
March 31, 1993.
For an extended period of time (approximately two and one-half years), ARI
has been in negotiations with its lenders to restructure its debt. During
this period there were numerous extensions and forebearances. Several legal
actions to exercise remedies were commenced, and negotiations transpired which
resulted in ARI continuing operations while pursuing the Transaction to
combine ARI and Comet. The legal actions included several postings by
Rabobank to foreclose on ARI's Freeport properties. The last foreclosure date
was June 1, 1993. Obtaining the financing to consummate the ARI and Comet
Refinancing was very difficult and took much longer than anyone anticipated,
however, the Refinancing was closed on May 26, 1993.
In connection with the Refinancing, an agreed upon payoff of all of the loans
to ARI's existing lenders was included. The amounts due the credit line banks
and Rabobank's $13.3 million loan were paid in full. The other term lenders
received approximately $21 million in cash, 1,500,000 shares of a newly
designated Series C preferred stock $1.00 par value, $3 million in notes
payable by ERLY, (which note amounts were offset against ARI's receivable from
ERLY), a pledge by ERLY of one million shares of ARI Series B preferred stock,
and NBC received $1.3 million of NBC stock held by ARI. In addition, these
other term lenders agreed to a debt discount of approximately $10.5 million,
which is net of the $3 million note from ERLY.
The Series C preferred stock is non-convertible and non-voting, carries
annual cumulative, non-participating dividends of $.50 per share, has a
liquidation preference of $1.00 per share, and is callable by ARI at any time
at a price of $5.27 per share less aggregate dividend payments per share.
The loan agreements with the new lenders prohibit the payment of any dividends
and do not list any basis on which the lenders would approve a dividend
payment.
As part of the Refinancing, ARI received $47.5 million in credit lines from a
new revolving credit lender, Congress, and loans from new term lenders,
Page 16<PAGE>
Chase, INB and TCB, for $65.3 million. The $47.5 million credit line with
Congress expires on May 23, 1995, carries an interest rate of prime plus 2
percent, requires all ARI cash receipts to be paid to Congress as payment on
the loan, requires collateral reports to be prepared frequently by ARI to
support requests for borrowing, and is collateralized by receivables,
inventory, cash, $2 million key man life insurance on Gerald Murphy, and
junior liens on ARI assets pledged to the new term lenders.
The new financing arrangements are not expected to have a material effect on
interest expenses. Since there was not an agreement with the prior lenders,
maturities cannot be compared between the new and prior lenders.
In accordance with Statement of Financial Accounting Standards No. 6, the
classification of the $48.8 million of long-term debt on the balance sheet at
March 31, 1993 reflects the effects of the Refinancing. The $65.3 million
term loans mature on December 31, 1997 with $4.2 million due by March 31,
1994, which is the amount classified as current maturities on March 31, 1993,
$5.9 million due in the year ended March 31, 1995, $6 million due in the year
ended March 31, 1996, $6 million due in the year ended March 31, 1997 and
$43.2 million due in the year ended March 31, 1998, and interest rates range
from prime plus 3 percent to prime plus 5 percent through May 31, 1995,
increasing to a range of prime plus 6 percent to a prime plus 8 percent by
1997. Terms of the loan restrict dividend payments, investments, capital
expenditures and require maintenance of certain working capital levels,
leverage and net worth. This loan is collateralized by substantially all of
ARI's fixed assets and trademarks, and has junior liens on collateral for the
credit lines.
In addition ERLY is a guarantor for all of the ARI new debt, and the loan
agreements contain certain restrictive covenants applicable to ERLY. This
guaranty of ERLY was a condition of the new financing. Consequently, the ARI
new debt contains cross default provisions with the debt of ERLY.
ERLY has incurred substantial consolidated losses in each of the years ended
March 31, 1993 and 1992 and has a consolidated working capital deficit and a
consolidated deficiency in assets at March 31, 1993. In addition, ERLY is in
default of certain of its bank debt covenants. These conditions raise
substantial doubt about ERLY's ability to continue as a going concern.
However, as a result of the Transaction, on a pro forma basis at March 31,
1993, ERLY's stockholders' equity increased.
ARI's new term and revolving debt agreements require ERLY to guarantee the
debt of ARI even though ARI management believes that ERLY will not be a source
of additional financing to ARI. These agreements also provide the lenders
with the option of accelerating repayment of the ARI debt and terminating the
agreements under certain conditions related to ERLY's ability to meet its
obligations as they come due, and to remain in compliance with its debt
agreements. ARI management does not believe that the new lenders will
accelerate repayment of outstanding loans or terminate the agreements based on
ERLY's financial condition or ERLY's ability to comply with debt covenants.
However, if the new lenders were to take such actions, ARI management believes
that ARI would be able to repay and/or replace such debt and borrowing
capacity as these obligations become due without impacting ARI's ability to
continue as a going concern.
Page 17<PAGE>
ARI has capitalized approximately $5 million in connection with the loan
restructure. The capitalized costs include attorney fees, bank fees, advisor
fees, appraisal costs, and other professional fees. See Notes A and D to the
Financial Statements on pages F-7 and F-15.
Prior to the Transaction, ARI's common stock was listed on Nasdaq as a NM
company. As a result of the issuance of the Series B preferred stock in the
Transaction, with its voting power of two votes per share, ARI's status as a
NM company was terminated, and ARI is now listed on Nasdaq as a "Small
Capitalization Company."
As a result of the Transaction and the Refinancing ARI should have: an
improved ability to service debt, a more diversified market for its products,
an expanded share of domestic and export rice markets, more diversified
sources for its supply of rough rice and improved abilities to reduce costs,
operate more efficiently and develop markets for its products. Also as a
result of the Transaction, ERLY possesses approximately 81 percent of all
outstanding voting shares and has the ability to effect changes in ARI's
corporate structure and direct operations and management of ARI. ERLY has the
right to receive dividends on the Class B Preferred Stock totalling $5.2
million annually (the payment is restricted by bank covenants) and ARI will
pay certain amounts to ERLY under a tax agreement. Any payments under the tax
agreement are restricted by bank covenants. The terms of the revolver
included a two year commitment at an interest rate of prime plus 2%. The
$65.3 million term loan matures on December 31, 1997 with annual principal
repayments required of $4.2 million, $5.9 million, $5.9 million, $5.9 million
and $43.4 million in years ending March 31, 1994, 1995, 1996, 1997, and 1998,
respectively. Interest rates range from prime plus 3% to prime plus 5%
through May 1995, increasing to a range of prime plus 6% to prime plus 8% by
1997.
Prior to the Refinancing, Comet and ARI receivables from ERLY were
$12,059,000 and $921,000 respectively. After the Refinancing and the
Transaction, the combined intercompany receivable from ERLY was reduced to
$9,980,000 as a result of ERLY offsetting $3.0 million of intercompany debt in
exchange for a note to the ARI term lenders.
As a result of the Transaction, ARI assumed the liabilities of Comet
including trade payables, payables on rice, contingent liabilities and term
debt.
Rice, which can be stored, is processed throughout the year. Prices for
rough rice vary due to changes in supply and demand in the U.S. and the world
market. These changes occur throughout the year and are not based on
predictable seasonal factors. Working capital requirements vary based on
sales requirements, price volatility, and available supplies, and do not
generally change based on seasonality.
Inventories increased in year ended March 31, 1993 over March 31, 1992 due to
quantities of rough rice increasing by 2.7 million cwts., partially offset by
lower cost per unit of both rough and milled rice. The supply of rough rice
available from producers at reasonable prices was substantially greater at
March 31, 1993 than at March 31, 1992. Due to ARI's financial uncertainty and
Page 18<PAGE>
pending foreclosure actions by it's lenders prior to the transaction, ARI
chose to utilize cash resources to purchase additional rice.
During the year ended March 31, 1991, the Board of Directors of ARI
authorized management to market the Houston property in order to improve
liquidity. ARI entered into a listing agreement with an outside broker to
market the property. This listing agreement has expired and no other listing
agreements are in effect. The proceeds from such sale, when and if it occurs,
are required by the terms of the new debt agreements to be used to reduce
debt.
Results of Operations
- - ---------------------
Revenues for the years ended March 31, 1993, 1992, and 1991 were $176.6
million, $176.2 million and $198.5 million, respectively, and earnings
(losses) were $3.3 million, $(5.4) million and $(5.8) million, respectively.
Results of future operations are dependent upon milled and rough rice prices.
Because ARI markets significant amounts of rice in branded consumer products
whose price levels do not fluctuate as fast as commodity costs, rapid rough
rice price increases could have the effect of reducing the profits of ARI in
the short-term, and rapid decreases in rough rice prices frequently has the
effect of increasing the earnings of ARI in the short-term, because consumer
prices usually do not fall as fast as rapidly decreasing commodity prices. In
both decreasing and increasing rough rice costs markets, the timing of rough
rice purchases and competitive price pressures on milled rice will
significantly affect ARI's earnings. Current rough rice costs have decreased
significantly from a year ago, however, the upcoming crop rough rice costs are
uncertain at this time.
ERLY intends to change ARI's inventory method from Last-In-First-Out ("LIFO")
to First-In-First-Out ("FIFO") after the Transaction to conform to Comet's
inventory method. The pro forma effects of this change on gross profit, if the
change was made on the indicated dates, follow:
Increase/(decrease)
In Gross Profit
-------------------
Year Ending March 31, 1993 $ 648 Thousand
Year Ending March 31, 1992 (413) Thousand
Year Ending March 31, 1991 7,438 Thousand
All of Comet's revenues and expenses will be consolidated into ARI's from the
date of the Transaction and, as a result, all items of ARI's revenues and
expenses will increase significantly. Revenues should increase in excess of
$125 million with all expense categories increasing, accordingly. The
Transaction is expected to reduce manufacturing and distribution costs since
processing and packaging facilities of the two companies should be, on the
average, closer to the ultimate customer.
Selling, general and administrative costs are also expected to be lower than
the combined amounts due to the consolidation of these functions. It is
Page 19<PAGE>
estimated that most of these savings will come from lower legal, insurance and
auditing fees, and some reduction of administrative personnel.
Fiscal Year March 1993 Compared to Fiscal Year March 1992
- - ---------------------------------------------------------
Sales for 1993 of $176.6 million increased $418 thousand from the prior year
due to foreign sales increases of $7.9 million partially offset by domestic
sales decreases of $7.5 million. Domestic sales include sales in the
Caribbean basin. Sales included rice purchased from Thailand of $9 million
and $11.1 million in 1993 and 1992, respectively.
Export sales of milled rice increased $7 million due primarily to volume
increases (15 percent). Export sales of rough rice were $1.7 million in 1993
versus 762 thousand in 1992. Total export sales volume increased 944 thousand
equivalent rough rice cwt., a 16 percent increase, due to higher sales to
Saudi Arabia, higher unbranded milled rice sales, and rough rice sales. ARI's
Saudi Arabia cwt. volume increased 6 percent to 4.2 million cwt. Overall
prices in milled rice export markets were the about the same as the prior
year, with a Saudi Arabia price increase of 5 percent being offset by lower
prices on unbranded milled rice sales.
The primary reason for the increase in other export sales in 1993 was an
increase of $6.5 million in sales to domestic exporters. The point of sale
for these sales is usually a United States port and the export destination is
not always identified. Also contributing to the increase was $2.6 million in
sales to South Africa versus none in 1992. No sales to Brazil were made in
1993 versus $14.0 million in 1992. Brazil, being a commodity market, can
fluctuate significantly from period to period and ARI generally sells in those
type of markets as sales are presented subject to availability of inventories.
Domestic sales decreased due to lower volume and to lower average prices.
Total volume of 6 million cwt. decreased 447 thousand cwt. as compared to
1992. Milled rice volume decreases were experienced in Caribbean markets and
in rough rice sales. United States and Canada grocery and food service markets
were about the same as the prior year. Average domestic milled rice prices
decreased 2 percent. Sales to related parties decreased due to lower sales to
Comet for resale in the United States and the Caribbean basin and to lower
rough rice sales to Comet.
At March 31, 1993, replacement cost of raw materials and finished goods
inventories (accounted for by the LIFO method) was approximately $26 million.
Cost of products sold in fiscal 1993 and 1992 was increased by approximately
$4.5 million and decreased by $300 thousand, respectively, to reflect the
differences in the market values and the carrying value of inventories. Net
adjustments decreasing 1993 gross profit by $600 thousand were caused by a
$3.9 million increase in inventory levels offset by the $4.5 million market
value adjustment.
Total gross profit (sales less cost of sales), which includes related party
gross profit as discussed below, was $32.4 million in 1993 and $21.3 million
in 1992, representing 18 percent of sales for 1993 and 12 percent of sales for
1992. Gross profit increased $11.1 million, of which $8.2 million was in the
Saudi Arabia market and the balance was primarily in domestic milled rice
Page 20<PAGE>
markets. The improvement in the Saudi Arabia market gross profit was due to
$2.9 million in price increases, $4.8 million in rough rice and other cost
decreases, and $463 thousand in volume increases.
Related party gross profit was a loss of $368 thousand in 1993 or 3 percent
of related party sales versus a profit of $110 thousand or 1 percent of
related party sales in 1992. The primary reason for the decline was increased
sales of specialized flour products to Comet Rice Ingredients at prices which
approximate variable costs of production.
Selling, general and administrative expense of $19.0 million increased $1.7
million due to an increase of $1.7 million in advertising and promotional
expenses primarily as a result of increased use of promotional off-invoice
allowances in domestic markets. Brokerage expenses increased $200 thousand.
General and administrative expenses decreased $318 thousand.
Interest expense of $7.2 million, which includes interest paid to Comet on
the net payable due Comet, increased $857 thousand due to an approximate 1
percent higher average rate and $1.1 million in higher average balances.
Interest expense includes legal and other expenses associated with existing
debt of $ 1.5 million in 1993 and $730 thousand in 1992. If legal and other
expenses had not been charged to interest, interest rates would have remained
approximately the same.
Income taxes are provided during the year which transactions affect the
determination of financial statement income, regardless of when they are
recognized for tax purposes. Deferred income taxes are provided for the
impact of temporary differences between the amounts of assets and liabilities
recognized for financial reporting purposes and such amounts recognized for
tax purposes. In accordance with SFAS 109, these deferred taxes are measured
by applying currently enacted tax laws. In years prior to 1993, deferred
taxes were accounted for in accordance with Accounting Principles Board
Opinion No. 11.
Fiscal Year March 1992 Compared to Fiscal Year March 1991
- - ---------------------------------------------------------
Sales for 1992 of $176.2 million declined $22.3 million or 11 percent from
the prior year due to export sales declines of $25.6 million, partially offset
by domestic sales increases of $3.3 million. Domestic sales include sales in
the Caribbean basin. Sales for 1992 includes $11.1 million of sales of rice
purchased from Thailand, of which $9.7 million was shipped directly to ARI
customers from Thailand.
Export sales of milled rice and rough rice declined $22.0 million (21
percent) and $3.5 million (8.2 percent), respectively, due to volume decreases
partially offset by higher average prices. Total export sales volume decreased
3 million equivalent rough rice cwt., a 34 percent decline, due to lower sales
to Saudi Arabia, lower unbranded milled rice sales, and lower rough rice
sales. ARI's Saudi Arabia cwt. volume declined 12 percent to 3.6 million
equivalent rough rice cwt., as total U.S. exports to Saudi Arabia declined
approximately 20 percent. Rice inventories in Saudi Arabia had increased in
year ended March 31, 1991 due to anticipated possible interruption in supplies
as a result of the Persian Gulf conflict. U.S. exports to Saudi Arabia were
reduced in the year ended March 31, 1992 due to a reduction of the above
Page 21<PAGE>
mentioned inventory levels and U.S. rice being less competitively priced as
compared to other exporters to Saudi Arabia. Average prices in Saudi Arabia
increased 2 percent and overall prices in milled rice export markets increased
12 percent due primarily to a lower proportion of lower priced unbranded
commodity sales. Unbranded milled rice sales decreased due to lower credit
lines available to fund these type of sales, and a reduction of markets
available for U.S. rice exports. Rough rice sales decreased due to lower
availability to ARI of rough rice for these markets.
The primary reason for the decrease in other export sales in 1992 was a
decrease in sales to domestic exporters. This was caused partially by
capacity constraints as a result of the higher sales to Brazil. Also, changes
in commodity sales from year to year are often due to not making such sales
when potential margins are low.
Domestic sales increased due to higher average prices primarily as a result
of a change in mix to lower rough rice sales and higher milled rice sales.
Total unit sales of 6.5 million equivalent rough rice cwt. were at the same
level as 1991. Milled rice cwt. increases were concentrated mainly in the
Caribbean basin, while rough rice declines were primarily due to decreased
sales to Comet. Average domestic milled rice prices, other than rough rice and
related party sales, increased 9 percent. Sales to related parties increased
primarily due to increases in sales of milled rice to Comet for resale to a
domestic exporter for shipment to Haiti. Through April 30, 1991, ARI made
these sales directly to the domestic exporter. Effective this date, ARI and
Comet entered into an agreement to transfer to Comet ARI's receivable from
the domestic exporter in the amount of $2 million. In exchange, ARI's payable
to Comet was reduced by $2 million.
Total gross profit (sales less cost of sales), which includes related party
gross profit as discussed below, was $21.3 million in 1992 and $23.5 million
in 1991, representing 12 percent of sales for both years. Adjustments
increased 1992 gross profit by $413 thousand due primarily to a reduction in
the reserve to reduce cost to market value. Adjustments decreasing 1991 gross
profit by $7.4 million were caused by a $6.3 million liquidation of higher
cost inventories acquired from Predecessor ARI and a $1.1 million increase in
the reserve to reduce cost to market. Gross profit prior to these adjustments
was $20.9 million and $30.9 million respectively in 1992 and 1991, a decline
of $10 million, of which $5.1 million was in the Saudi Arabia market, $4.5
million was in the domestic milled rice markets, and $400 thousand was in
other export markets. The decline in the Saudi Arabia market gross profit was
due to $5 million in rough rice and other cost increases and $1.5 million in
volume decreases, partially offset by $1.4 million in price increases. The
decline in gross profit in domestic milled rice markets was due to $2.5
million in rough rice and other cost increases not offset by price increases
and $2 million in volume decreases.
Related party gross profit was $110 thousand or 1 percent of related party
sales in 1992 and $356 thousand or 4 percent of related party sales in 1991.
The primary reason for the decline was decreased sales to Comet on shipments
to Puerto Rico due to direct marketing by ARI to the Puerto Rico distributor
beginning January 1, 1992. The gross profit percent on sales to related
parties is significantly lower than other sales due to pricing sales to Comet,
other than for shipment to Puerto Rico on which ARI and Comet shared the gross
Page 22<PAGE>
profit, at estimated production cost. In November 1991, ARI and Comet agreed
that rice prices between ARI and Comet would be based on full variable costs
and that net margins on sales earned at ARI's Freeport facility and Comet's
Greenville and Stuttgart facilities would be shared based on a formula.
Selling, general and administrative expense of $17.3 million declined $2.6
million primarily due to lower brokerage expenses and lower advertising and
promotional expenses. Brokerage expenses declined $755 thousand due primarily
to lower sales. Advertising and promotional expenses declined $1.8 million due
primarily to decreases in domestic market expenses, reflecting a trend toward
decreased cooperative advertising and promotional payments to retailers in
domestic markets.
Interest expense of $6.3 million increased $55 thousand with average
principal balances and average rates being about the same.
No provision was made for income taxes as a result of the loss incurred
during this period.
Item 8. Financial Statements and Supplementary Data.
- - ------ -------------------------------------------
The Financial Statements and Supplementary Data are included herein beginning
on Page F-1.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
- - -------- ---------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners.
The following table sets forth the share ownership of Comet, the only person
known by ARI to own more than five percent of the outstanding voting shares of
either the ARI Common Stock, ARI's Series A convertible preferred stock, $1.00
par value (the "Series A Preferred Stock"), and ARI's Series B convertible
preferred stock, $1.00 par value (the "Series B Preferred Stock") at June 1,
1993:
Name and Address Amount and
of Beneficial Title of Nature Percent of
Owner Class Beneficial Ownership Class
- - ---------------- -------- -------------------- -------
- - -
Comet Rice, Inc.(1) ARI Common Stock 35,777,778(3) (2) 81%
10990 Wilshire Blvd. Series A Preferred 3,888,889 (3) 100%
Suite 1800 Stock (2)
Los Angeles, CA 90024 Series B Preferred 14,000,000 (3) 100%
Stock (2)
(1) ERLY owns all of the outstanding shares of Comet. In connection with
the Transaction (See Note A to the Financial Statements), ERLY has succeeded
to the ARI stock held by Comet by the liquidation of Comet into ERLY. Gerald
D. Murphy, Chairman of the Board of ERLY, 10990 Wilshire Boulevard, Suite
1800, Los Angeles, California 90024, is the direct beneficial owner of
1,017,103 shares of the common stock, $1.00 par value of ERLY ("ERLY Common
Page 23<PAGE>
Stock") representing approximately 29.2 percent of the outstanding shares of
ERLY Common Stock, and is the indirect beneficial owner of 469,932 shares of
the ERLY Common Stock, representing approximately 12.3 percent of the
outstanding shares of ERLY Common Stock. Douglas A. Murphy, President and a
director of ERLY, 16825 Northchase Drive, Suite 1600, Houston, Texas 77060, is
the beneficial owner 465,939 shares of ERLY Common Stock, representing 12.2
percent of the outstanding shares of the ERLY Common Stock. William H.
Burgess, a director of ERLY, 550 Palisades Drive, Palm Springs, California
99262, beneficially owns 310,143 shares of ERLY Common Stock, representing
approximately 9 percent of the outstanding shares of ERLY Common Stock. ERLY
may be deemed to be the beneficial owner of any shares of ARI Common Stock,
Series A Preferred Stock or Series B Preferred Stock held by Comet, and
Messrs. Gerald D. Murphy, Douglas Murphy and Burgess may be deemed to be the
beneficial owners of any shares of ARI Common Stock, Series A Preferred Stock
or Series B Preferred Stock held by Comet as a result of their positions with
ERLY and their stock ownership of ERLY. See "Item 13 Certain Relationships
and Related Transactions" for information regarding an acquisition of Comet by
ARI.
(2) Because each share of the Series A Preferred Stock is convertible into
one share of the ARI Common Stock, and each share of Series B Preferred Stock
is convertible into two shares of ARI Common Stock, a holder of shares of
Series A Preferred Stock or Series B Preferred Stock may be deemed to be the
beneficial owner of shares of ARI Common Stock. If Comet were to convert all
of the shares of Series A Preferred Stock and Series B Preferred Stock owned
by it, Comet would hold 35,777,778 shares, or approximately 81 percent of the
outstanding shares, of ARI Common Stock.
(3) Comet has sole voting and dispositive power over such shares.
All of ARI's stock owned by Comet or ERLY is pledged to lenders on loans. If
any of these lenders would exercise their remedies in case of default, then
ERLY's ownership in ARI would change and it is possible that a change of
control could occur.
(b) ARI Security Ownership of Management
The following table sets forth the share ownership of the ARI Common Stock by
each director of ARI and by all directors and officers of ARI as a group:
Number of Shares
Beneficially Owned as Percent of
Name of June 1, 1993 (1) Class
- - ----- --------------------- -----------
S. C. Bain, Jr. 22,213 (2) *
William H. Burgess 35,777,778 (3) 81.1%
John M. Howland 5,000 *
Gerald D. Murphy 35,777,778 (3) 81.1%
Douglas A. Murphy 35,777,778 (3) 81.1%
George Prchal 10,000*
All directors and officers
as a group (7 persons) 35,820,591 81.2%
Page 24<PAGE>
* Less than one percent.
(1) Except as otherwise indicated, the persons indicated have sole voting
and dispositive power with respect to these shares.
(2) Mr. Bain has sole voting and dispositive power with respect to 1,482
shares and shared voting and dispositive power with respect to 20,731
shares.
(3) Messrs. Gerald Murphy, Douglas Murphy and Burgess could be deemed to be
the beneficial owners of 3,888,889 shares of the ARI Common Stock,
3,888,889 shares of the Series A Preferred Stock (which is convertible
into ARI Common Stock), and 14,000,000 shares of the Series B Preferred
Stock (which is convertible into ARI Common Stock) because of their
positions as directors and significant shareholders of ERLY. See "(a)
Security Ownership of Certain Beneficial Owners".
(c) ERLY Security Ownership of Management
The following table sets forth the share ownership of the ERLY Common Stock
by each director of ARI and by all directors and officers of ARI as a group:
Number of Shares
Beneficially Owned as Percent of
Name of June 30, 1993 Class
- - ------------------ --------------------- -----------
S. C. Bain, Jr. - -
William H. Burgess 310,143 8.9%
John M. Howland - -
Gerald D. Murphy 1,487,035 41.5%
Douglas A. Murphy 465,939 12.2%
George Prchal - -
All directors and officers
as a group (5 persons) 1,848,761 47.6%
(1) See notes in (d) "ERLY" Security Ownership of Certain Beneficial Owners
and ERLY Management.
(d) ERLY Security Ownership of Certain Beneficial Owners and ERLY
Management
The following table sets forth information regarding the ownership of ERLY
Common Stock as of June 30, 1993 of (i) each person known to ERLY to be the
beneficial owner of more than five percent of the outstanding shares of ERLY
Common Stock; (ii) each director and nominee for director of ERLY; (iii) each
executive officer named in the Compensation Table of ERLY; and (iv) all
directors and executive officers of ERLY and its subsidiaries as group.
Except as indicated, each of the stockholders has sole voting and investment
power with respect to the shares beneficially owned by each stockholder.
Name and address of Amount and nature of Percent of
beneficial owner beneficial ownership class
- - ------------------- -------------------- ----------
Gerald D. Murphy, Chairman 1,487,035 shares 41.5%*
Page 25<PAGE>
ERLY Industries, Inc. Direct (1) and
10990 Wilshire Blvd. Indirect (2)
Los Angeles, CA 90024
Douglas A. Murphy, President 465,939 shares 12.2%*
ERLY Industries, Inc. Direct (3)
10990 Wilshire Blvd.
Los Angeles, CA 90024
William H. Burgess, Director 310,143 shares 8.9%
550 Palisades Drive Direct
Palm Springs, CA 92262
State Treasurer of the 302,368 shares 8.7%
State of Michigan Direct
301W. Allegan Street
Lansing, MI 48922
Gentleness 220,000 shares 6.3%
P.O. Box N776 Direct (4)
Lyford Cay
Nassau, Bahamas
Bill J. McFarland 40,505 shares 1.2%
ERLY Industries, Inc. Direct
10990 Wilshire Blvd.
Los Angeles, CA 90024
Frank M. Feffer 3,100 shares .1%
ERLY Industries, Inc. Direct
10990 Wilshire Blvd.
Los Angeles, CA 90024
Richard N. McCombs 11,078 shares .3%
ERLY Industries, Inc. Direct
10990 Wilshire Blvd.
Los Angeles, CA 90024
All directors and executive
officers as a group (10 persons) 1,897,526 shares (5) 48.9%
______________
* All expressions of percentage of shares held assume that options or
convertible notes held by the particular individual have been exercised or
converted, and no others.
(1) Mr. Gerald D. Murphy, Chairman of the Board of ERLY, is the record
holder of 1,016,949 shares and has the right to acquire an additional 154
shares pursuant to the conversion features of a note receivable from the
Company with a principal balance of $857.
(2) Mr. Gerald D. Murphy's indirect beneficial ownership represents 469,932
shares owned (1) directly by his son Douglas A. Murphy, President of ERLY, and
Page 26<PAGE>
(2) held in trust for his grandson. Of this total, Gerald D. Murphy has
voting control of the 3,993 shares held in trust for his grandson, however, he
denies holding voting or investment control of the balance of the 465,939
shares owned directly by his son, Douglas A. Murphy.
(3) Mr. Douglas A. Murphy, President of ERLY, is the record holder of
132,793 shares and has the right to acquire an additional 66,550 shares
pursuant to options granted under the ERLY's 1982 Incentive Stock Option Plan.
In addition, Mr. D.A. Murphy has the right to acquire an additional 266,596
shares pursuant to the conversion features of a $1,000,000 note receivable
from ERLY.
(4) Based upon Schedule 13D filed as of October 30, 1992 with the Securities
and Exchange Commission. Gentleness is an Isle of Man Corporation indirectly
controlled by John M. Templeton. Mr. Templeton may be deemed to be the
beneficial owner of the shares of ERLY owned by Gentleness by virtue of his
ability to direct the voting or disposition of such shares.
(5) All directors and officers as a group owned of record or beneficially
1,897,526 shares, representing 48.9% of the Company's issued and outstanding
voting securities. This includes stock options held by officers to purchase
123,184 shares under ERLY's Incentive Stock Option Plan and 266,750 shares
issuable pursuant to notes payable by ERLY.
Mr. Gerald D. Murphy has pledged 431,805 shares of his ERLY Common Stock as
collateral for personal loans totalling $664,000 from three financial
institutions.
Mr. Douglas A. Murphy has pledged 174,375 shares of ERLY Common Stock as
collateral for personal loans totalling $482,500 from two financial
institutions.
ERLY holds 81% of the combined voting power of ARI stock outstanding
subsequent to the May 26, 1993 Transaction. ERLY's ownership in ARI consists
of 3,888,889 shares of the ARI Common Stock, 3,888,889 shares of Series A
Preferred Stock (which is convertible into ARI Common Stock), and 14,000,000
shares of Series B Preferred Stock (which is convertible into ARI Common
Stock). Because of their positions as directors and significant shareholders
of ERLY, Messrs. Gerald Murphy, Douglas Murphy, and Burgess could be deemed to
be the beneficial owners of the ARI stock owned by ERLY.
Page 27<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
- - ------- -----------------------------------------------------------------
(a) 1.Financial Statements Page
---------------------- ------
Independent Auditors' Report....................................... F - 1
Balance Sheets - March 31, 1993 and 1992 .......................... F - 2
Statements of Operations - Years Ended March 31, 1993, 1992
and 1991 .......................................................... F - 4
Statements of Stockholders' Equity - Years Ended March 31,
1993, 1992 and 1991 ............................................... F - 5
Statements of Cash Flows - Years Ended March 31, 1993, 1992
and 1991 .......................................................... F - 6
Notes to Financial Statements ..................................... F - 7
Page 28<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
American Rice, Inc.
Houston, Texas
We have audited the accompanying balance sheets of American Rice, Inc. as of
March 31, 1993 and 1992, and the related statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended March 31, 1993. Our audits also included the financial statement
schedules listed in the Index at Item 14 (a) 2. These financial statements
and financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe our audits provide a reasonable basis for
our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of March 31, 1993 and 1992
and the results of its operations and its cash flows for each of the three
years in the period ended March 31, 1993, in conformity with generally
accepted accounting principles. Also, in our opinion, such financial
statement schedules, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
As discussed in Note A of Notes to Financial Statements, in May 1993 the
Company consummated a transaction to acquire substantially all the assets and
assume all the liabilities of Comet Rice, Inc. ("Comet"), a wholly-owned
subsidiary of ERLY Industries, Inc. ("ERLY"). In May 1993 the Company also
refinanced the combined indebtedness of the Company and Comet. After the
acquisition, ERLY holds 81 percent of the voting power of the Company's stock.
The acquisition will be accounted for as a reverse step acquisition of the
Company by Comet.
As discussed in Note B of Notes to Financial Statements, in 1993 the Company
changed its method of accounting for income taxes.
DELOITTE & TOUCHE
Houston, Texas
August 3, 1993
Page F-1<PAGE>
AMERICAN RICE, INC.
BALANCE SHEETS
(Thousands of Dollars)
March
1993 1992
--------- ---------
ASSETS
CURRENT ASSETS:
Cash $1,926 $1,251
Accounts receivable - net of allowances of $700
for 1993 and $238 for 1992 10,543 13,223
Accounts receivable from related parties 941 1,341
Inventories 30,263 20,719
Prepaid expenses 459 449
Deferred income taxes 1,918 0
--------- ---------
Total current assets 46,050 36,983
INVESTMENTS AND OTHER ASSETS:
Net assets of Houston property held for sale 13,126 13,141
Trademarks 3,774 3,888
Investments and other assets 2,785 2,788
Receivable from related party 921 921
--------- ---------
Total investments and other assets 20,606 20,738
PROPERTY, PLANT AND EQUIPMENT - NET:
Buildings and improvements 22,867 22,845
Machinery and equipment 40,234 39,874
Transportation equipment 544 553
Furniture and fixtures 1,934 1,960
--------- ---------
65,579 65,232
Less accumulated depreciation 30,057 27,438
--------- ---------
Total property, plant and equipment - net 35,522 37,794
--------- ---------
Total Assets $102,178 $95,515
========= =========
See independent auditors' report and notes to financial statements
Page F-2<PAGE>
AMERICAN RICE, INC.
BALANCE SHEETS (CONTINUED)
(Thousands of Dollars)
March 31,
1993 1992
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $15,349 $18,000
Accounts payable and accrued expenses 14,683 7,374
Accounts payable to related parties 5,010 7,744
Current portion of long-term debt 4,200 49,196
Income taxes payable 205 -
--------- ---------
Total current liabilities 39,447 82,314
LONG-TERM DEBT, less current portion 44,567 -
COMMITMENTS AND CONTINGENCIES - -
DEFERRED INCOME TAXES 1,713 -
STOCKHOLDERS' EQUITY
Preferred stock, $1.00 par value; 20,000,000
shares authorized; 3,888,889 convertible shares
issued and outstanding, liquidation preference
of $5.14 per share 3,889 3,889
Common stock, $1 par value, 50,000,000 shares 12,219 12,219
authorized 12,219,461 shares issued and
outstanding
Paid-in capital 8,065 8,065
Deficit (7,722) (10,972)
--------- ---------
Total stockholders' equity 16,451 13,201
--------- ---------
Total liabilities and stockholders' equity $102,178 $95,515
========= =========
See independent auditors' report and notes to financial information.
Page F-3<PAGE>
AMERICAN RICE, INC.
STATEMENTS OF OPERATIONS
(Thousands of Dollars Except per Share)
Year Ended
March 31,
1993 1992 1991
--------- --------- ---------
NET SALES:
Sales $163,313 $156,525 $189,418
Sales to related parties 13,306 19,676 9,044
--------- --------- ---------
176,619 176,201 198,462
OPERATING COSTS AND EXPENSES:
Cost of products sold and operating
expenses 130,501 135,340 166,280
Cost of products sold to related part 13,674 19,566 8,688
Selling, general and administrative 18,957 17,287 19,882
Depreciation and amortization 3,070 3,130 3,365
--------- --------- ---------
166,202 175,323 198,215
--------- --------- ---------
EARNINGS BEFORE INTEREST AND INCOME TAX 10,417 878 247
INTEREST EXPENSE 7,167 6,310 6,255
--------- --------- ---------
EARNINGS (LOSS) BEFORE INCOME TAXES 3,250 (5,432) (6,008)
INCOME TAX (BENEFIT) - - (231)
--------- --------- ---------
EARNINGS (LOSS) $3,250 ($5,432) ($5,777)
========= ========= =========
PRIMARY AND FULLY DILUTED EARNINGS
(LOSS) PER COMMON AND COMMON
EQUIVALENT SHARE: $0.20 ($0.44) ($0.47)
========= ========= =========
See independent auditors' report and notes to financial statements.
Page F-4<PAGE>
<TABLE>
AMERICAN RICE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(Thousands of Dollars)
<CAPTION>
Total Retained
Stockholder Preferred Common Paid-in Earnings
Equity Stock Stock Capital (Defecit)
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE MARCH 31, 1990 $24,410 $3,889 $12,219 $8,065 $237
Earnings (loss) (5,777) 0 0 0 (5,777)
--------- --------- --------- --------- --------
BALANCE, MARCH 31, 1991 18,633 3,889 12,219 8,065 (5,540)
Earnings (loss) (5,432) 0 0 0 (5,432)
--------- --------- --------- --------- ---------
BALANCE, MARCH 31, 1992 13,201 3,889 12,219 8,065 (10,972)
Earnings (loss) 3,250 0 0 0 3,250
--------- --------- --------- --------- ---------
BALANCE, MARCH 31, 1993 $16,451 $3,889 $12,219 $8,065 ($7,722)
========= ========= ========= ========= =========
<FN>
See independent auditors' report and notes to financial statements.
</TABLE>
Page F-5<PAGE>
<TABLE>
AMERICAN RICE, INC.
STATEMENTS OF CASH FLOW
(Thousands of Dollars)
<CAPTION>
Year
Ended March 31,
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Earnings (loss) $3,250 ($5,432) ($5,777)
Adjustments to reconcile net income to net cash
provided by (used) in operating activities:
Depreciation and amortization 3,070 3,130 3,365
Increase (decrease) in net income taxes payabl 0 0 (236)
(Gain) loss on sale of equipment 64 52 46
(Increase) decrease in accounts receivable 2,680 1,096 (474)
(Increase) decrease in accounts receivable from
related parties 400 126 2,022
(Increase) decrease in inventories (9,544) 4,440 28,258
(Increase) decrease in prepaid expenses (10) (342) 293
(Increase) decrease in other assets (73) (233) (990)
Increase (decrease) in accounts payable
and accrued expenses 7,309 (6,344) 8,918
Increase (decrease) in accounts payable to
related parties (2,734) 1,334 (19,592)
--------- --------- ---------
Net cash provided (used) in operating activiti 4,412 (2,173) 15,833
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment additions (762) (517) (830)
Proceeds from sale of equipment 105 77 97
--------- --------- ---------
Net cash provided (used) in investing activiti (657) (440) (733)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in notes payable (2,651) 0 (11,250)
Long term debt payments (429) 0 (200)
--------- --------- ---------
Net cash provided (used) in financing activiti (3,080) 0 (11,450)
NET INCREASE (DECREASE) IN CASH 675 (2,613) 3,650
Beginning of the period 1,251 3,864 214
--------- --------- ---------
End of the period $1,926 $1,251 $3,864
========= ========= =========
<FN>
See independent auditors' report and notes to financial statements.
</TABLE>
Page F-6<PAGE>
AMERICAN RICE, INC.
NOTES TO FINANCIAL STATEMENTS
A. SUBSEQUENT EVENTS
On May 26, 1993, American Rice, Inc. ("ARI") consummated a transaction to
acquire substantially all of the assets of Comet Rice, Inc. ("Comet") and
assume all of Comet's liabilities ("Transaction"). Comet is a wholly-owned
subsidiary of ERLY Industries Inc. ("ERLY"), a company listed on Nasdaq. ARI
also refinanced the combined indebtedness of ARI and Comet ("Refinancing").
In exchange for the assets acquired from Comet, ARI issued to Comet 14,000,000
shares of a newly created Series B $1 par value preferred stock. Each share
of Series B preferred stock provides for annual cumulative, non-participating
dividends of $.37, is convertible into two shares of ARI common stock, is
entitled to two votes, and has a liquidation preference of $1.00 per share.
The Series B preferred stock issued to Comet carries an aggregate dividend of
approximately $5.2 million per year. Applicable loan documentation contains
various restrictions on the ability of ARI to pay such dividends and ARI is
currently precluded from paying the dividends. The assets acquired by ARI did
not include any of the ARI stock previously held by Comet. Comet's combined
holdings of ARI common stock and ARI Series A preferred stock, prior to the
transaction, represented approximately 48.3 percent of the voting power of the
outstanding ARI stock. As a result of the Transaction, Comet holds 81 percent
of the combined voting power of ARI stock outstanding after the Transaction.
In connection with the Transaction, ERLY has succeeded to the ARI stock held
by Comet by the liquidation of Comet.
For an extended period prior to the Refinancing, ARI was engaged in
negotiations with its lenders to effect a restructuring of its indebtedness.
In connection with the Refinancing, ARI received $47.5 million in credit lines
from a new revolving credit lender, Congress Financial Corporation
("Congress"), and loans from new term lenders for $65.3 million. The new term
lenders are Chase Manhattan Bank (National Association) ("Chase"),
Internationale Nederlanden Bank, N.V. ("INB"), and Texas Commerce Bank
National Association ("TCB"). As partial consideration for the new financing,
ARI issued warrants to these lenders to purchase up to 776,000 shares of ARI's
common stock at $1.00 per share. As additional consideration, 13 million
shares of ARI Series B $1 par value preferred stock were pledged by ERLY for
the benefit of the new term lenders. In connection with the Refinancing,
ARI's indebtedness to its former lenders was partially satisfied by ARI's
issuance to the former lenders of a combined aggregate of 1,500,000 shares of
a newly created Series C preferred stock, each of which carries annual
cumulative, non-participating dividends of $.50 per share, is non-convertible
and non-voting, has a liquidation preference of $1.00 per share, and is
callable by ARI at any time at a price of $5.27 per share less aggregate
dividend payments per share. Applicable loan documentation with new lenders
contains various restrictions on the ability of ARI to pay these dividends and
Page F-7<PAGE>
ARI is currently precluded from paying the dividends. As part of the
Refinancing, ARI's former lenders agreed to a debt discount in approximate
amount of $10.5 million. As additional consideration for the satisfaction of
the existing indebtedness of ARI, one million shares of ARI Series B preferred
stock were pledged by ERLY and ERLY issued $3 million of notes for the benefit
of the former lenders. This $3 million was offset by ARI against its
receivable from ERLY.
ERLY has incurred substantial consolidated losses in each of the years ended
March 31, 1993 and 1992 and has a consolidated working capital deficit and a
consolidated deficiency in assets at March 31, 1993. In addition, ERLY is in
default of certain of its bank debt covenants. These conditions raise
substantial doubt about ERLY's ability to continue as a going concern.
However, as a result of the Transaction, on a pro forma basis at March 31,
1993, ERLY's stockholders' equity increased.
ARI's new term and revolving debt agreements require ERLY to guarantee the
debt of ARI even though ARI management believes that ERLY will not be a source
of additional financing to ARI. These agreements also provide the lenders
with the option of accelerating repayment of the ARI debt and terminating the
agreements under certain conditions related to ERLY's ability to meet its
obligations as they come due, and to remain in compliance with its debt
agreements. ARI management does not believe that the new lenders will
accelerate repayment of outstanding loans or terminate the agreements based on
ERLY's financial condition or ERLY's ability to comply with debt covenants.
However, if the new lenders were to take such actions, ARI management believes
that ARI would be able to repay and/or replace such debt and borrowing
capacity as these obligations become due without impacting ARI's ability to
continue as a going concern.
The consummation of the Transaction included receipt of a fairness opinion
from an investment banker concluding that the Transaction is fair to the non-
Comet shareholders of ARI. A mutual release of all claims, prior to the
Transaction, was also signed between ARI, ERLY, Comet and ARI's former
lenders.
Prior to the Transaction, ARI's common stock was listed on Nasdaq as a
National Market ("NM") company. As a result of the issuance of the Series B
preferred stock in the Transaction, with its voting power of two votes per
share, ARI terminated its status as a NM company, and is now listed on Nasdaq
as a "Small Capitalization Company."
Included in "Investments and Other Assets" at March 31, 1993 is $715 thousand
of costs associated with the Refinancing and the Transaction and ARI has
capitalized costs of approximately $5 million at the date of closing.
Page F-8<PAGE>
PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
As described in Note A of Notes to Pro Forma Financial Statements, ARI was
acquired by Comet in a two step acquisition and the combined indebtedness of
ARI and Comet was refinanced. In 1988, Comet purchased 48% of ARI and in May
1993 purchased an additional 33% of ARI. The Refinancing also occurred in May
1993. The acquisition has been accounted for as a reverse step acquisition
using
the purchase method of accounting. The purchase method of accounting records
the assets acquired and liabilities assumed at their fair values. See Note A
of Notes to Pro Forma Financial Statements for a more detailed discussion of
the accounting for the Transaction and the Refinancing. For purposes of the
pro forma financial statements, the fair values of assets and liabilities have
been based on preliminary valuations and appraisals. Management does not
anticipate that the final valuations and appraisals will result in any
significant differences.
The pro forma balance sheet and statement of operations are not necessarily
indicative of the financial position and results of operations that would have
resulted had the Transaction and the Refinancing actually occurred on the
assumed dates and should not be used to predict future results.
The pro forma balance sheet and statement of operations presented herein have
been restated from those previously filed to reflect (1) the allocation from
ERLY of the $5.2 million of the excess purchase price over net book value
attributable to the 48% of ARI acquired in 1988 and (2) an increase in the
fair value of the 33% of ARI acquired in May 1993 resulting from a more recent
valuation study by an investment banker.
Page F-9<PAGE>
<TABLE> AMERICAN RICE, INC.
PRO FORMA BALANCE SHEET
March 31, 1993
(UNAUDITED)
(Thousands of Dollars)
<CAPTION> Eliminations and Pro
Forma Adjustments
Comet ARI -------------------- ARI
(Historical) (Historical) Amount Note (ProForma)
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash $ 2,740 $ 1,926 ($4,222) 4 $ 444
Accounts and notes receivable - net 17,692 11,484 (4,160) 2 24,807
Inventories 11,430 30,263 41,693
Prepaid expenses 819 459 1,278
Deferred income taxes 1,918 880 5 2,798
-------- -------- -------- --------
Total Current Assets 32,681 46,050 (7,502) 71,020
Investments and other asets - net 5,592 6,559 6,121 1
1,270 4
1,770 5 21,312
Net assets of Houston facility held for
sale 455 13,126 5,208 1 18,789
Investment in ARI 13,104 (13,104) 1 0
Receivable from Related Party 12,059 921 (3,000) 4 9,980
Property, Plant, and Equipment - Net 10,434 35,522 45,956
-------- -------- -------- --------
Total Assets $ 74,325 $102,178 ($ 9,237) $167,057
======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes Payable $ 25,121 $ 15,349 ($12,570) 4 $ 27,900
Accounts payable and accrued expenses 12,883 19,898 (4,160) 2 28,412
Current portion of long-term debt 160 4,200 4,360
-------- -------- -------- --------
Total Current Liabilities 38,164 39,447 (16,730) 60,672
Long-Term Debt, less current portion 22,672 44,567 (3,937) 4 63,302
Deferred Income Taxes 1,713 3,400 5 5,113
Minority Interest 790 790
Stockholders' Equity:
Convertible preferred stock - Series A,
$1.00 par value; 3,888,889 shares
issued and outstanding 3,889 3,889
Convertible preferred stock, Series B,
$1.00 par value; 14,000,000 shares
issued and outstanding 14,000 1 14,000
Preferred stock, Series C, $1.00 par
value, 1,500,000 shares issued and
outstanding 1,500 4 1,500
Common stock, $1.00 par value;
12,219,461 shares issued and
outstanding 10 12,219 (10) 1 12,219
Paid-in capital 13,597 8,065 (21,662) 1
(1,500) 4 0
Retained earnings (deficit) (908) (7,722) 10,555 4
(750) 5
5,897 1 5,572
-------- -------- -------- --------
12,699 16,451 8,030 37,180
-------- -------- -------- --------
Total Liabilities and Stockholders'
Equity $ 74,325 $102,178 ($ 9,237) $167,057
======== ======== ======== ========
<FN>
See Notes to Pro Forma Financial Statements
</TABLE>
Page F-10<PAGE>
<TABLE>
AMERICAN RICE, INC.
PRO FORMA STATEMENT OF EARNINGS
Year Ending March 31, 1993
(UNAUDITED)
(Thousands of Dollars)
<CAPTION> Eliminations and Pro
Forma Adjustments
Comet ARI ------------------- ARI
(Historical) (Historical) Amount Note (Pro Forma)
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Sales $169,617 $176,619 $(37,076) 2 $309,160
Operating Costs and Expenses:
Cost of products sold and
operating expenses 159,644 144,175 (37,076) 2 266,743
Selling, general and administrative 10,364 18,957 (1,318) 3 28,003
Depreciation and amortization 1,991 3,070 (110) 1 4,951
--------- --------- --------- ---------
171,999 166,202 (38,504) 299,697
--------- --------- --------- ---------
Earnings (Loss) Before Interest and
Income Taxes (2,382) 10,417 1,428 9,463
Interest Expense 3,296 7,167 78 4 10,541
Loss from Investment in ARI (1,630) 1,630 2 0
Minority Interest (44) (44)
Write down of plant facility 4,000 4,000
--------- --------- --------- ---------
Earnings (Loss) Before Income Taxes (11,264) 3,250 2,980 $ (5,034)
Income Tax Expense 1 0 (1) 5 0
--------- --------- --------- ---------
Earnings (Loss) from Continuing Operations $ (11,265) $ 3,250 $ 2,981 $ (5,034)
========= ========= ========= =========
Earnings (Loss) from Continuing Operations
Applicable to Common Stock $ (11,265) $ 3,250 $ 2,981
$ (5,930) 6 $ (10,964)
========= ========= ========= =========
Earnings (Loss) from Continuing Operations
per Share Applicable to Common Stock $ .20 $ (.90)
========= =========
Weighted Average Number of Common and
Common Equivalent Shares Outstanding 16,108,350 12,219,461
========== ==========
</TABLE>
Page F-11<PAGE>
Notes to Pro Forma Financial Statements (UNAUDITED)
1. General. The Pro Forma Balance Sheet sets forth the historical balances
of ARI and Comet and the adjustments necessary to reflect the Transaction and
the Refinancing as if it occurred on March 31, 1993. The Pro Forma Statements
of Earnings set forth the historical operations of ARI and Comet and the
adjustments necessary to reflect operations of ARI in the Transaction and the
Refinancing as if it had occurred at April 1, 1992. However, in accordance
with the rules of the Securities and Exchange Commission regarding such pro
forma information, the extraordinary item resulting from the debt forgiveness
described in note E of this footnote is not included in the Pro Forma
Financial Statements.
Under the terms of the Transaction, ARI purchases all the assets and
liabilities of Comet except the ARI stock Comet owns and ARI continues as the
surviving corporation. In the Transaction, all of the assets and liabilities
of Comet are transferred to ARI and 14,000,000 shares of ARI Series B
Preferred Stock are issued to Comet. The number of outstanding shares of ARI
Common Stock and ARI Series A Preferred Stock will not be affected by the
Transaction (although each share of ARI Series B Preferred Stock to be issued
to Comet pursuant to the Transaction will be convertible into two shares of
the ARI Common Stock upon election of the holder of such share). Based upon
the number of shares of ARI Common Stock outstanding as of the closing, ERLY
beneficially owns 3,888,889 shares, or approximately 32 percent of the
12,219,461 outstanding shares of ARI Common Stock (having one vote per share),
all of the 3,888,889 outstanding shares of ARI Series A Preferred Stock
(having one vote per share) and all of the 14,000,000 outstanding shares of
ARI Series B Preferred Stock (having two votes per share). In effect, as a
result of the Transaction, ERLY has a total of approximately 81 percent of the
voting power of ARI. In connection with the Transaction, ERLY will succeed
to the ARI stock held by Comet by the liquidation of Comet.
Since ERLY, the sole shareholder of Comet at the time of the Transaction, will
own the larger portion of the voting rights in the surviving corporation, the
Transaction is accounted for as a reverse step acquisition of ARI by Comet
reflecting the change of control that will occur. The fair value of ARI is
estimated to be approximately $35 million based upon a valuation study done by
an investment banker. The accounting consists of two steps: Step one consists
of a recognition by ARI of ERLY's historical cost of it's original 48%
interest. When ERLY purchased 48% of ARI in 1988 for $20 million, the
purchase price was greater than 48% of ARI stockholders' equity. ERLY
attributed the excess to ARI's 39 acres of land in Houston and thus the excess
($5.2 million) has been added to the book value of the
Houston property with a corresponding increase in equity. Step two recognizes
the step acquisition by ERLY of an additional equity interest in ARI of
approximately 33 percent, in exchange for substantially all of the assets of
Comet and all of Comet's liabilities. ARI's assets and liabilities are valued
at fair market value to the extent acquired. The assets and liabilities of
Comet have not been revalued.
Page F-12<PAGE>
2. Elimination Entries. The Pro Forma Financial Statements adjust the
historical amounts to eliminate intercompany transactions and balances and
reclassify certain Comet amounts to be consistent with ARI's classification.
3. Restructuring and Related Cost Reduction. Upon consummation of the
Transaction, a management agreement between ARI and ERLY was executed whereby
ERLY will provide services to ARI. Under the agreement, the management fee
will be $75 thousand per month. As a result of the Transaction, charges of
approximately $175 thousand per month in the year ended March 31, 1993,
allocated to Comet from ERLY will be eliminated. The Pro Forma Statements of
Earnings reflect the cost reductions described above, net of the management
fee of $75 thousand per month, as if the management agreement were in effect
at the beginning of the applicable period.
4. Refinancing. The proceeds from term lenders in the amount of $65.3
million were used to retire substantially all of ARI's and Comet's long term
debt prior to the Refinancing, and available cash and proceeds from a $47.5
million credit line with a new revolving credit lender were used to retire all
of ARI's and Comet's revolving credit borrowings prior to the Transaction.
The term lenders are Chase, INB and TCB. The new revolver credit lender is
Congress. As additional consideration for the new financing, ARI issued
warrants to certain of these term lenders to purchase up to 776,000 shares of
ARI's common stock, at a price of $1 per share and 13 million shares of ARI
Series B preferred stock were pledged by ERLY. ARI's indebtedness to its
former term lenders was partially satisfied by (i) ARI's issuance to the
former term lenders of a combined aggregate of 1,500,000 shares of a newly
created Series C preferred stock, each of which carries annual cumulative,
non-participating dividends of $.50 per share, is non-convertible and non-
voting, has a liquidation preference of $1.00 per share, and is callable by
ARI at any time at a price of $5.27 per share less aggregate dividend payments
per share (ii) ERLY's issuance of a $3 million term note and (3) the pledge by
ERLY of one million shares of ARI Series B preferred stock.
As part of the Refinancing, ARI's former term lenders agreed to debt discounts
resulting in a pre-tax extraordinary gain of approximately $10.5 million.
The Pro Forma Statement of Earnings reflects interest expense for the decrease
in indebtedness net of decreases in interest income as a result of the note
from ERLY and of approximated higher net interest rates as a result of
refinancing. Interest rates are estimated to average approximately 11 percent
for the year ended March 31, 1993.
5. Federal Income Taxes. The pro forma financial statements have been
prepared to reflect the adoption of SFAS No. 109.
6. Dividends. The Pro Forma Statements of Earnings reflect the dividend to
be paid on the ARI Series B Preferred Stock and Series C Preferred Stock,
which was issued pursuant to the Transaction and the Refinancing. The annual
cumulative dividend on the ARI Series B Preferred Stock is $.37 per share, or
$5.18 million and the annual cumulative dividend on the ARI Series C Preferred
Stock is $.50 per share or $750 thousand. Covenants with ARI's lenders
Page F-13<PAGE>
restrict the payment of these dividends and ARI does not expect to be in a
position for these dividends to be paid in the near future.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Operations
ARI is involved in all phases of rice processing (including the processing of
parboiled rice, regular milled rice, instant rice and rice by-products),
packaging and marketing. These rice products are sold in the international
and domestic markets directly by ARI through many distribution channels under
a variety of brands. Distribution channels in the international market vary
from country to country and include sales to government agencies and
commercial importers, as well as through wholesalers and international
brokers.
Accounting Changes
In 1993, ARI implemented Statement of Financial Accounting Standards ("SFAS")
No. 109, "Accounting for Income Taxes." This statement requires application
of an asset and liability approach for financial accounting and reporting of
income taxes and allows recognition of deferred tax assets if it is more
likely than not that a benefit will be realized.
The cumulative effect of this accounting change was immaterial to net earnings
for 1993, as previously unrecognized tax benefits for years prior to April 1,
1992 were offset by previously unrecognized tax liabilities and a valuation
allowance was established at April 1, 1992 for operating loss carryforwards
that may expire before ARI can utilize them. Income taxes for 1992 and 1991
have not been restated for this change. Further discussion is included in
Note H.
Inventories
Inventories of raw materials and finished goods are accounted for by the last-
in, first-out (LIFO) cost method, or market, if lower. Inventories of
supplies and parts are accounted for by the first-in, first-out (FIFO) cost
method, or market, if lower.
Statement of Cash Flows
ARI made cash payments for interest and financing fees of approximately $6.8
million, $4.8 million and $6.8 million during the years ended March 31, 1993,
1992 and 1991, respectively. ARI made a payment for state income taxes of
approximately $5 thousand during the year ended March 31, 1991, and made no
payments for income taxes during the years ended March 31, 1993 and 1992.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is provided by
the straight-line and declining-balance methods based on the estimated useful
Page F-14<PAGE>
lives of the various classes of property, which range from 10 to 45 years for
buildings and improvements, 5 to 25 years for machinery and equipment, 5 to 12
years for transportation equipment, and 3 to 12 years for furniture and
fixtures.
Expenditures for maintenance and repairs are charged to expense as incurred.
Houston Property
During the year ended March 31, 1991, ARI's Board of Directors adopted a
resolution authorizing ARI management to sell the Houston Property. The net
capitalized costs relating to this property have been segregated on the
balance sheet under "Investments and Other Assets." Management believes that
the net realizable value of the Houston property exceeds its carrying value.
Trademarks
Trademarks acquired from Comet Rice, Inc. are being amortized on a straight-
line basis over forty years.
Income Taxes
Income taxes are provided during the year in which transactions affect the
determination of financial statement income, regardless of when they are
recognized for tax purposes. Deferred income taxes are provided for the
impact of temporary differences between the amounts of assets and liabilities
recognized for financial reporting purposes and such amounts recognized for
tax purposes. In accordance with SFAS 109, these deferred taxes are measured
by applying currently enacted tax laws. In years prior to 1993, deferred
taxes were accounted for in accordance with Accounting Principles Board
Opinion No. 11.
Earnings Per Share
The computation of earnings per common share is based on the earnings
available to holders of common shares and the weighted average number of
common and common equivalent shares outstanding during the periods presented.
Current financial accounting standards prohibit the inclusion of common stock
equivalents in the computation of earnings per share when their inclusion
would increase earnings per share or decrease the loss per share
("antidilution"). During the years ended March 31, 1992 and 1991, the
3,888,889 shares of convertible preferred stock have an antidilutive effect on
earnings per share (decrease the loss per share); and therefore, are excluded
from the weighted average number of shares computation.
The weighted average number of outstanding common shares was 12,219,461
shares, which excludes the preferred stock, for the years ended March 31, 1992
and 1991. The weighted average number of outstanding common and common
equivalent shares was 16,108,350 shares for the year ended March 31, 1993.
Cash
Page F-15<PAGE>
The cash balance at March 31, 1993 included $1.9 million at TCB which was
restricted under the terms of an agreement with certain of ARI's lenders. See
Note D.
C. INVENTORIES
Inventories consisted of the following (thousands of dollars):
March 31, March 31,
1993 1992
--------- --------
Raw materials $ 20,404 $ 7,739
Finished goods 7,145 10,141
Supplies and parts 2,714 2,839
-------- --------
$ 30,263 $ 20,719
======== ========
At March 31, 1993, replacement cost of raw materials and finished goods
inventories (accounted for by the LIFO method) was approximately $26 million.
Cost of products sold in fiscal 1993 and 1992 was increased by approximately
$4.5 million and decreased by $.3 million, respectively, to reflect the
differences in the market values and the carrying values of inventories. Net
adjustments decreasing 1993 gross profit by $600 thousand were caused by a
$3.9 million increase in inventory levels offset by the $4.5 million market
value adjustment.
D. NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt consisted of the following, which includes interest accrued on
September 5, 1991 of $900 thousand to senior note holders, $515 thousand to
National Bank for Cooperatives, and $52 thousand to bank note holders
(thousands of dollars):
March 31, March 31,
1993 1992
---------- ---------
Senior notes payable to insurance companies $ 18,900 $ 19,201
Term loan with National Bank for Cooperatives 13,015 13,143
Bank note 3,552 3,552
Rabobank note 13,300 13,300
-------- --------
48,767 49,196
Less current maturities 4,200 49,196
-------- --------
$ 44,567 $ ---
======== ========
ARI had established lines of credit with a group of three banks, Cooperatieve
Centrale Raiffeisen-Boerenleenbank B.A. ("Rabobank"), TCB and Bank of America
National Trust and Savings Association ("Bank of America"). The interest rates
Page F-16<PAGE>
on the lines of credit were at the prevailing rate in effect at the time of
borrowing, which at March 31, 1993 was at prime rate (six percent) plus 3
percent for Rabobank and TCB and prime rate plus 2.5 percent for Bank of
America. Notes payable outstanding under these lines of credit at March 31,
1993 and 1992 were $15.3 and $18 million, respectively, at weighted average
interest rates of approximately 8.96 and 9.63 percent, respectively.
Senior notes with an aggregate principal balance of $20 million were issued in
December 1986 and April 1988 to six insurance companies. At March 31, 1993
and 1992 the interest rate was 9 percent and the aggregate balances were $18
million. A term loan with the National Bank for Cooperatives ("NBC") with a
principal balance of $12.5 million was due at March 31, 1993. The interest
rate on the NBC loan at March 31, 1993 and 1992 was 7.6 and 8.11 percent,
respectively. The interest rate at March 31, 1993 and 1992 was 9.125 percent
on an original $4 million note due to TCB.
The variable rate demand marine terminal revenue bonds were payable to a non-
profit industrial development corporation. The effective interest rate at
March 31, 1992 was 3.94 percent and varied weekly based on prevailing market
conditions and was payable monthly. The bonds were collateralized by the
milling and storage facility at Freeport and an irrevocable letter of credit
issued by Rabobank in the amount of $13,584,000. The letter of credit was not
extended and was drawn upon to pay the bondholders. As a result, at March 31,
1993 Rabobank was a creditor of ARI in the principal amount of $13.3 million.
The interest rate with Rabobank was base rate plus 2 percent or 8 percent at
March 31, 1993.
For an extended period of time (approximately two and one-half years), ARI has
been in negotiations with its lenders to restructure its debt. During this
period there were numerous extensions and forebearances. Several legal actions
to exercise remedies were commenced, and negotiations transpired which
resulted in ARI continuing operations while pursuing the Transaction to
combine ARI and Comet. The legal actions included several postings by
Rabobank to foreclose on ARI's Freeport properties during fiscal 1993. The
last foreclosure date was June 1, 1993. Obtaining the financing to consummate
the ARI and Comet Transaction was very difficult and took much longer than
anyone anticipated, however, the Transaction was closed on May 26, 1993.
In connection with the Refinancing, an agreed upon payoff of all of the loans
to ARI's existing lenders was included. The amounts due the credit line banks
and Rabobank's $13.3 million loan were paid in full. The other term lenders
received approximately $21 million in cash, 1,500,000 shares of a newly
designated Series C preferred stock $1.00 par value, $3 million in notes
payable by ERLY, (which note amounts were offset against ARI's receivable from
ERLY), a pledge by ERLY of one million shares of ARI Series B preferred stock,
and NBC received $1.3 million of NBC stock held by ARI. In addition, these
other term lenders agreed to a debt discount of approximately $10.5 million,
which is net of the $3 million note from ERLY.
The Series C preferred stock is non-convertible and non-voting, carries annual
cumulative, non-participating dividends of $.50 per share, has a liquidation
Page F-17<PAGE>
preference of $1.00 per share, and is callable by ARI at any time at a price
of $5.27 per share less aggregate dividend payments per share. The loan
agreements with the new lenders prohibit the payment of any dividends and do
not list any basis on which the lenders would approve a dividend payment.
As part of the Refinancing, ARI received $47.5 million in credit lines from a
new revolving credit lender, Congress, and loans from new term lenders,
Chase, INB and TCB, for $65.3 million. The $47.5 million credit line with
Congress expires on May 23, 1995, carries an interest rate of prime plus 2
percent, requires all ARI cash receipts to be paid to Congress as payment on
the loan, requires collateral reports to be prepared frequently by ARI to
support requests for borrowing, and is collateralized by receivables,
inventory, cash, $2 million key man life insurance on Gerald Murphy, and
junior liens on ARI assets pledged to the new term lenders.
In accordance with Statement of Financial Accounting Standards No. 6, the
classification of the $48.8 million of long-term debt on the balance sheet at
March 31, 1993 reflects the payment schedule of the new term debt. The $65.3
million term loans mature on December 31, 1997 with $4.2 million due by March
31, 1994, which is the amount classified as current maturities on March 31,
1993, $5.9 million due in the year ended March 31, 1995, $6 million due in the
year ended March 31, 1996, $6 million due in the year ended March 31, 1997 and
$43.4 million due in the year ended March 31, 1998, and interest rates range
from prime plus 3 to prime plus 5 percent through May 31, 1995, increasing
from a range of prime plus 6 percent to prime plus 8 percent by 1997. Terms
of the loan restrict dividend payments, investments, capital expenditures and
require maintenance of certain working capital levels, leverage and net worth.
This loan is collateralized by substantially all of ARI's fixed assets and
trademarks, and has junior liens on collateral for the credit lines.
In addition ERLY is a guarantor for all of the ARI new debt, and the loan
agreements contain certain restrictive covenants applicable to ERLY. This
guaranty of ERLY was a condition of the new financing. Consequently, the ARI
new debt contains cross default provisions with the debt of ERLY. ARI has
capitalized approximately $5 million in connection with the loan restructure.
The capitalized cost include attorney fees, bank fees, advisor fees, appraisal
costs, and other professional fees. See Note A.
Prior to the Transaction, ARI's common stock was listed on Nasdaq as a NM
company. As a result of the issuance of the Series B preferred stock in the
Transaction, with its voting power of two votes per share, ARI's status as a
NM company was terminated, and ARI is now listed on Nasdaq as a "Small
Capitalization Company."
During the year ended March 31 1991, the Board of Directors of ARI authorized
management to market the Houston property in order to improve liquidity. ARI
entered into a listing agreement with an outside broker to market the
property. This listing agreement has expired and no other listing agreements
are in effect. The proceeds from such sale, when and if it occurs, would be
required to reduce debt in accordance with the term loan agreements.
E. COMMITMENTS
Page F-18<PAGE>
ARI has a commitment for an operating lease relating to the milling and
storage facility in Freeport, Texas. The initial term of the lease expires in
2022 and may be renewed at ARI's option in five year increments through 2057.
ARI incurred total rental expense of approximately $889 thousand, $855
thousand, and $764 thousand for the years ended March 31, 1993, 1992 and 1991,
respectively. Aggregate minimum lease payments under all existing
noncapitalized long-term leases are as follows (thousands of dollars):
Year Ending March 31,
---------------------
1994 678
1995 663
1996 613
1997 600
1998 222
Thereafter 4,539
F. TRANSACTIONS WITH RELATED PARTIES
ARI has entered into a number of transactions in the ordinary course of
business with ERLY and its affiliates, significant holders of ARI's common and
preferred stocks.
On August 30, 1989, ARI entered into a management agreement between ERLY and
ARI whereby ERLY acts as ARI's agent for the purpose of providing certain
marketing, operating and management services to ARI. In exchange for such
services, ARI paid ERLY a monthly management fee of $25 thousand. The
agreement was terminated effective March 31, 1991; however some services were
still being provided and ARI continued to pay the $25 thousand monthly fee to
ERLY until August 23 , 1992. During the years ended March 31, 1993, 1992 and
1991, ARI incurred ERLY management fees under this agreement of $119 thousand,
$300 thousand and $300 thousand, respectively, and paid $144 thousand, $375
thousand and $200 thousand, respectively, under this agreement. ARI had a
payable to ERLY of $0 and $25 thousand at March 31, 1993 and 1992,
respectively.
At March 31, 1993, ARI had a note receivable from ERLY with an interest rate
of 9 percent and a balance due of $921 thousand plus accrued interest of $48
thousand. At March 31, 1992, the note had an interest rate of 9.5 percent and
a balance due of $921 thousand plus accrued interest of $7 thousand.
ARI also purchases milled and rough rice from Comet, and sells milled and
rough rice to Comet. Such transactions with Comet are conducted at prices
that approximate market rates or that are based on production cost formulas.
Total purchases from Comet and sales to Comet amounted to $23.8 million and
$13.3 million, respectively, during the year ended March 31, 1993; $32.2
million and $19.7 million, respectively, during the year ended March 31, 1992;
and were $30.6 million and $9 million, respectively, during the year ended
Page F-19<PAGE>
March 31, 1991. ARI had net payables to Comet of $4.2 million and $6.4
million at March 31, 1993 and 1992, respectively. In November 1991, ARI and
Comet agreed that rice prices between ARI and Comet would be based on full
variable costs and that net margins earned on sales from ARI's Freeport
facility and Comet's Greenville and Stuttgart facilities would be shared based
on a formula.
Effective December 1989, ARI entered into an agreement with Comet whereby
Comet acted as ARI's agent for the purpose of rendering certain sales services
to ARI with respect to ARI's Puerto Rican operations. Under the arrangement,
each of ARI and Comet had a 50 percent profit participation on sales. This
agreement was terminated effective December 31, 1991 and since December 1991
ARI has conducted its own business in Puerto Rico.
Effective January 1990, ARI entered into an agreement with ERLY Juice, Inc., a
wholly owned subsidiary of ERLY ("Juice"), whereby Juice acts as ARI's agent
for the purpose of providing certain marketing, sales, credit and general
management services to ARI's CAM Division operations. This arrangement was
intended to reduce CAM's total selling and administrative costs and improve
rice sales. As a result of this arrangement, nearly all employees of CAM
became employees of Juice. Pursuant to the arrangement, ARI pays Juice a
monthly fee for its services and provides space as described below. ARI
incurred and paid agency fees under such agreement of $1.9 million during the
year ended March 31, 1993; $1.9 million and $2.2 million, respectively, during
the year ended March 31, 1992; and $1.6 million and $1.5 million,
respectively, during the year ended March 31, 1991. At March 31, 1993 and
1992 ARI had a net (receivable) payable to Juice of $(42) thousand and $18
thousand, respectively. ARI's management believes its arrangement with Juice
was negotiated upon terms favorable to ARI since total administrative costs
may have been reduced for CAM as a result of such arrangement. Since a
comparison to possible arrangements to parties who are not affiliated with ARI
is not available, ARI cannot determine if the arrangement with Juice is more
or less favorable to ARI than a similar arrangement with an unaffiliated
party.
Between July 1990 and September 1992, ARI managed the marketing of Comet's
major international export sales of processed and unprocessed rice without a
fee.
ARI leases two floors of office space at 16825 Northchase Drive, Houston,
Texas. All but a portion of such space is used by ARI as its principal
executive offices. The remainder (not more than ten percent of the entire
leased space) is used by Comet. Comet pays ARI for the use of such space at
ARI's cost, based on the pro rata portion of space used by Comet. Juice
occupies an approximate additional 30 percent of such office space at no cost,
pursuant to the terms of its agreement with ARI.
Effective April 30, 1991, ARI entered into an agreement with Comet to transfer
to Comet ARI's receivable from a domestic exporter of rice to Haiti in the
amount of $2 million. In exchange, ARI's payable to Comet was reduced by $2
million. Since April 30, 1991, sales to the domestic exporter have been made
Page F-20<PAGE>
by Comet. ARI's management believes this transaction improved liquidity and
decreased credit risk without a significant loss of margins.
In December 1991, ARI and Juice commenced to combine their data processing
mainframe functions into one operation and eliminate the other to reduce total
cost. ARI's mainframe operation was used to integrate the two departments and
the combination was complete on or about April 1, 1992. Juice is reimbursing
ARI for approximately 50 percent of the total cost of operating the
department.
G. BENEFIT PLANS
ARI has a trusteed, defined contribution plan which covers substantially all
employees. The plan provides benefits based upon years of service and total
employer's and/or employees' contributions upon the death, retirement, or
disability of the participant and under certain circumstances as an active
employee. ARI contributions to the plan for the years ended March 31, 1993,
1992 and 1991 were $464 thousand, $172 thousand and $221 thousand,
respectively.
H. TAXES ON INCOME
The provision for taxes on income consists of (thousands of dollars):
1993
-------
U.S. taxes currently payable $ 205
Deferred U.S. taxes (205)
------
$ ---
======
In 1993, ARI elected early adoption of SFAS 109, "Accounting for Income Taxes"
effective April 1, 1992. The cumulative effect of the adoption of this new
accounting standard was immaterial to ARI's 1993 Statement of Earnings. Prior
years' financial statements have not been restated to apply the provisions of
SFAS 109. The standard requires a change from the deferred to the liability
method of computing deferred income taxes. Deferred income taxes are
recognized for the tax consequences of "temporary differences" by applying
enacted statutory tax rates, applicable to future years, to differences
between the financial reporting and the tax basis of existing assets and
liabilities.
Deferred income taxes for 1993 are provided for the temporary differences
between the financial reporting basis and the tax basis of ARI's assets and
liabilities. Temporary differences and carryforwards at March 31, 1993 are as
follows (dollars in thousands):
Deferred Tax
Asset Liability
-------- ---------
Depreciation $ - $ 6,342
Page F-21<PAGE>
Reserves 255 -
Inventory 2,106 -
Alternative minimum tax credit 205 -
General business credits - 395
Net operating loss carryovers 7,219 -
-------- --------
9,785 6,737
Valuation allowance 2,843 -
-------- --------
$ 6,942 $ 6,737
======== ========
In fiscal year 1993, the valuation allowance was reduced by approximately $900
thousand.
A comparison of income tax expense at the federal statutory rate of 34 percent
to ARI's provision for taxes is as follows:
1993
--------
Earnings (loss) before taxes on income $ 3,250
--------
Statutory taxes $ 1,105
Amortization of trademarks 39
Non-deductible entertainment and other 6
Net operating loss carryforwards/carrybacks (1,150)
--------
Provision for taxes on income (benefits) $ -
========
Effective tax rate 0%
As a result of the net operating losses incurred during the year ended March
31, 1992 and the existence of operating loss carryforwards from prior years,
no provision for income taxes was necessary for this period.
As a result of the net operating losses incurred during year ended March 31,
1991, ARI realized a tax benefit of $236 thousand for federal income taxes
which was partially offset by state income taxes of $5 thousand. Financial
accounting standards being applied during this period only allowed the
recognition of realizable loss carrybacks in determining the earnings (loss)
of the loss period, but limited the tax benefits of loss carryforwards until
they are actually realized unless realization is assured beyond any reasonable
doubt at the time the loss carryforward arises. As a result, the tax benefit
recognized in the year ended March 31, 1991 was limited to the tax provisions
of the prior periods, which was $236 thousand.
Under federal tax laws, tax operating losses occur when deductions are greater
than taxable income. These losses may be carried back to offset taxable
income in earlier years before being carried forward to offset taxable income
in future years. At March 31, 1993, operating loss carryforwards, for federal
Page F-22<PAGE>
tax return purposes, totaled approximately $21 million. These loss
carryforwards are not available for carryback to prior years for a refund. If
they do not offset future years' taxable income, these losses will expire in
2004 through 2007.
I. STOCKHOLDERS' EQUITY
Holders of the common stock are entitled to one vote per share on all matters
to be voted on by shareholders and are entitled, subject to any preferential
rights of holders of preferred stock, to receive dividends, if any, as may be
declared from time to time by the Board of Directors of ARI. Upon any
liquidation or dissolution of ARI, the holders of the common stock are
entitled, subject to any preferential rights of holders of preferred stock, to
receive pro rata per share all assets remaining available for distribution to
shareholders after payment of all liabilities.
The Board of Directors of ARI, without further action by the shareholders, is
authorized to issue shares of preferred stock in one or more series, and with
respect to each series, to determine the rate of dividends, terms of
redemption, amount payable upon liquidation, sinking fund provisions, terms of
conversion and voting rights. Rights with respect to dividends and
liquidation may be more favorable than those of the holders of the common
stock.
All preferred stock outstanding as of March 31, 1993 is owned by Comet. This
preferred stock has no rights of redemption or sinking fund provisions, but
upon any liquidation of ARI, ARI must pay the holders of the preferred stock
$5.14 per share before any amounts may be paid to the holders of the common
stock. The holders of the preferred stock are entitled to one vote per share
on all matters upon which the holders of common stock have the right to and
generally are entitled to vote as a class on any matters adversely affecting
their rights as holders of the preferred stock. Each share of preferred stock
is convertible to one share of common stock upon the election of the holder of
the preferred stock.
The new debt agreements include various restrictions on the ability of ARI to
pay dividends and ARI is currently precluded from paying any dividends.
J. EXPORT SALES
ARI's revenues include export sales as follows (dollars in thousands):
Years ended March 31,
1993 1992 1991
-------- -------- --------
Saudi Arabia $ 64,857 $ 58,439 $ 65,210
Brazil - 14,023 10,881
Peru 3,287 1,807 4,198
Other Middle East 2,509 1,846 1,871
West Africa 3,875 113 4,501
Page F-23<PAGE>
Other 14,756 5,175 20,281
-------- -------- --------
Total $ 89,284 $ 81,403 $106,942
======== ======== ========
Percent of total revenues 51% 46% 54%
======== ======== ========
