SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the three months ended September 30, 1997
Commission File Number 0-17039
American Rice, Inc.
(Exact Name of Registrant as Specified in its Charter)
Texas 76-0231626
(State or other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
411 North Sam Houston Parkway East
Houston, Texas 77060
(Address of Principal Executive Offices) (Zip Code)
(281) 272-8800
Registrant's Telephone Number,
Including Area Code
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the registrant's common stock, $1 par
value, as of November 13, 1997 is 2,443,859 shares
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
AMERICAN RICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Thousands of Dollars)
(Unaudited)
Three Months Six Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
----------------------------------------
(As Restated) (As Restated)
Net sales $73,324 $121,513 $186,709 $218,920
Cost of sales 64,183 106,346 166,112 197,210
----------------------------------------
Gross profit 9,141 15,167 20,597 21,710
Selling, general and
administrative expenses 9,430 8,442 18,309 14,867
----------------------------------------
Operating income (289) 6,725 2,288 6,843
Interest expense 6,571 5,569 12,692 10,188
Interest income (604) (600) (1,278) (1,166)
Other (income) and expense 82 231 141 352
----------------------------------------
Earnings (loss) before
income taxes (6,338) 1,525 (9,267) (2,531)
Provision for
income taxes (benefit) (2,436) 549 (3,578) (911)
----------------------------------------
Net earnings (loss) ($3,902) $976 ($5,689) ($1,620)
========================================
Preferred stock dividend
requirements 1,483 1,483 2,965 2,965
----------------------------------------
Net loss applicable
to common stock ($5,385) ($507) ($8,654) ($4,585)
========================================
Loss per applicable
common and common equivalent
share:
Primary ($2.20) ($.21) ($3.54) ($1.88)
========================================
Fully diluted ($2.20) ($.21) ($3.54) ($1.88)
========================================
See Notes to Consolidated Financial Statements
<PAGE>
AMERICAN RICE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
September 30, March 31,
1997 1997
----------------------
(As Restated)
ASSETS (Unaudited)
Current assets:
Cash $2,923 $3,235
Accounts receivable, net 42,960 64,062
Inventories
Finished goods 83,907 75,969
Raw materials 46,633 46,289
Prepaid expenses 4,554 2,441
Deferred income taxes 2,791 2,791
----------------------
Total current assets 183,768 194,787
Other assets 21,313 21,216
Receivable from ERLY 24,755 24,166
Property, plant and equipment, net 58,429 57,959
----------------------
Total assets $288,265 $298,128
======================
Continued on next page
See Notes to Consolidated Financial Statement
<PAGE>
AMERICAN RICE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Thousands of Dollars, except share amounts)
September 30, March 31,
1997 1997
----------------------
(As Restated)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 73,387 $ 77,616
Accounts payable 53,649 57,845
Accrued expenses 17,881 18,733
Current portion of long-term debt 1,454 438
----------------------
Total current liabilities 146,371 154,632
Long-term debt 103,971 96,144
Deferred income taxes 2,291 5,905
Commitments and contingencies (Note 5) - -
Stockholders' equity:
Preferred stock, $1.00 par value; 4,000,000
shares authorized;
Series A- 777,777 convertible shares issued
and outstanding, liquidation preference
of $19,989 778 778
Series B- 2,800,000 convertible shares issued
and outstanding, liquidation preference
of $14,000 2,800 2,800
Series C- 300,000 shares issued
and outstanding, liquidation preference
of $1,500 300 300
Common stock, $1.00 par value; 10,000,000
shares authorized; 2,443,892 shares
issued and outstanding 2,444 2,444
Paid-in capital 25,286 25,286
Retained earnings 5,544 11,233
Cumulative foreign currency translation
adjustments (1,520) (1,394)
----------------------
Total stockholders' equity 35,632 41,447
----------------------
Total liabilities and stockholders' equity $288,265 $298,128
======================
See Notes to Consolidated Financial Statement
<PAGE>
AMERICAN RICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
(Unaudited)
Six Months
Ended September 30,
1997 1996
----------------------
(As Restated)
OPERATING ACTIVITIES:
Net earnings ($5,689) ($1,620)
Adjustments to reconcile net earnings to net cash
provided by (used in) in operating activities:
Depreciation and amortization 3,755 3,237
Mortgage note discount accretion 328 284
(Gain) loss on sales of property (150) 138
Deferred income taxes, net (3,614) (1,141)
Changes in assets and liabilities that
provided (used) cash:
Accounts receivable 21,102 (12,410)
Inventories (8,282) 9,266
Prepaid expenses (2,113) (643)
Other assets (949) (1,537)
Receivable from ERLY (589) 374
Accounts payable (4,196) (1,548)
Accrued expenses (852) 4,414
----------------------
Net cash used in
operating activities (1,249) (1,186)
INVESTING ACTIVITIES:
Property, plant and equipment additions (3,373) (1,998)
Campbell olive acquisition - (33,952)
Proceeds from sales of assets 150 2,299
----------------------
Net cash used in
investing activities (3,223) (33,651)
FINANCING ACTIVITIES:
Increase (decrease) in notes payable (4,229) 34,646
Proceeds from issuance of long-term debt 9,080 233
Repayment of long-term debt (565) (137)
Other, net (126) 3
----------------------
Net cash provided by
financing activities 4,160 34,745
----------------------
NET DECREASE IN CASH (312) (92)
CASH:
Beginning of the period 3,235 2,803
----------------------
End of the period $2,923 $2,711
======================
See Notes to Consolidated Financial Statement
<PAGE>
<TABLE>
AMERICAN RICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Six Months Ended September 30, 1997
(Thousands of Dollars)
(Unaudited)
<CAPTION>
Foreign Total
Additional Currency Stock -
Preferred Common Paid-in Retained Translation Holders'
Stock Stock Capital Earnings Adjustments Equity
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance April 1, 1997 $3,878 $2,444 $25,286 $11,233 ($1,394) $41,447
Net loss (as restated) - - - (5,689) - (5,689)
Foreign currency
translation - - - - (126) (126)
--------- --------- --------- --------- --------- ---------
Balance September 30, 1997 $3,878 $2,444 $25,286 $5,544 ($1,520) $35,632
(as restated) ========= ========= ========= ========= ========= =========
<FN>
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
AMERICAN RICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The consolidated financial statements presented herein at September 30, 1997
and for each of the three and six month periods ended September 30, 1997 and
1996 are unaudited; however, all adjustments which are, in the opinion of
management necessary for a fair presentation of the financial position,
results of operations and cash flows for the periods covered have been made
and are of a normal, recurring nature. The results of the interim periods are
not necessarily indicative of results for the full year. The consolidated
balance sheet at March 31, 1997 is derived from the March 31, 1997 audited
consolidated financial statements but does not include all disclosures
required by generally accepted accounting principles. Although management
believes the disclosures are adequate, certain information and disclosures
normally included in the notes to the financial statements has been condensed
or omitted as permitted by the rules and regulations of the Securities and
Exchange Commission. These financial statements should be read in conjunction
with the audited financial statements and notes thereto included in American
Rice, Inc.'s ("ARI" or the "Company") Annual Report on Form 10-K for the
fiscal year ended March 31, 1997.
2. Restatement
In August 1997 ARI reached an agreement with Aqaba Packaging Company ("APC")
whereby APC purchases and processes rice shipped in bulk to APC's facility at
Aqaba, Jordan. The Company has experienced continued problems with the
implementation of the provisions of this agreement. These problems include
APC's inability to meet its contractual commitments to purchase sufficient
rice from the Company to maintain adequate inventory levels in Jordan. The
Company is currently negotiating with APC for alternative arrangements for
this facility so that adequate inventory levels may be maintained. As a result
of these events, the Company has concluded that the facts supporting the
original sales to APC have changed to such an extent as to warrant reversing
the sales in the second quarter. Accordingly, the Company has reversed the
sales and recorded the rice in the APC facility as inventory. The following
table analyzes the impact of this event(in thousands of dollars, except per
share amounts):
Three Months Six Months
Ended September 30, 1997 Ended September 30, 1997
------------------------ ------------------------
Previously As Previously As
Reported Restated Reported Restated
---------- ---------- ---------- ----------
Net Sales $93,196 $73,324 $206,581 $186,709
Gross Profit 12,692 9,141 24,148 20,597
Net Loss (1,736) (3,902) (3,523) (5,689)
Loss per common share:
Primary (1.32) (2.20) (2.65) (3.54)
Fully Diluted (1.32) (2.20) (2.65) (3.54)
September 30, 1997
------------------------
Previously As
Reported Restated
---------- ----------
Accounts receivable, net $62,832 $42,960
Inventories 115,056 130,540
Total assets 292,653 288,265
Current liabilities 147,208 146,371
Stockholders' equity 37,798 35,632
3. Olive Business Acquisition
On July 5, 1996, the Company acquired the domestic and foreign olive business
from Campbell Soup Company ("CSC Olives") for approximately $38 million (the
"Olive Acquisition"). Assets acquired include domestic inventories and fixed
assets, all of the outstanding common stock of Compania Envasadora Loreto,
S.A., a Spanish company that comprises the foreign olive business and fifty-
one percent of the stock of Sadrym California, a marketer of olive processing
machinery. The purchase was funded primarily from ARI's credit facilities. The
Olive Acquisition was accounted for as a purchase, and the results of
operations of the acquired business are included in ARI's consolidated
financial statements after July 5, 1996.
Operating results reflected in the accompanying financial statements do not
include CSC Olives operating activities before July 5, 1996. The following
summarized unaudited pro forma information assumes the Olive Acquisition
occurred on the first day of the operating period presented (thousands of
dollars, except per share amounts):
Three Months Six Months
Ended September 30, Ended September 30,
1996 1996
-------- --------
Net Sales $122,314 $237,943
Net Earnings (loss) 865 (4,254)
Earnings (loss) per share:
Primary $(.25) $(2.95)
Fully diluted (.25) (2.95)
4. Notes Payable
ARI has an $85 million revolving credit line with Harris Trust and Savings
Bank ("Harris"). Funds available for borrowing (including letters of credit of
up to $20.0 million) under this revolving credit loan at any time may not
exceed 85% of eligible accounts receivable (or 90% of accounts receivable
backed by acceptable letters of credit from customers), 75% of eligible rough
rice inventory, and 70% of eligible finished goods inventory. The line is
collateralized by substantially all of ARI's accounts receivable and
inventory. In addition, this facility contains restrictive covenants which,
among other things, require the attainment of certain financial ratios and
provide limitations on capital expenditures, lease obligations, and prohibit
dividend payments. As of September 30, 1997, ARI was not in compliance with
certain of the covenants related to interest coverage, adjusted funded debt
and adjusted tangible net worth. Subsequently, the company obtained waivers
from compliance with these covenants from Harris covering the period up to and
including December 30, 1997 and amendments effective December 31, 1997. As of
December 31, 1997, ARI was not in compliance with the amended covenants
related to interest coverage, adjusted funded debt and adjusted tangible net
worth. The Company has requested waivers from compliance with these amended
covenants. The line also contains certain cross default provisions with the
indenture for the 13.0% Mortgage Notes due 2002 (the "Mortgage Notes"). The
Harris credit line bears interest at the prime rate, with outstanding
principal and interest due upon termination of the agreement, which continues
in full force and effect until May 31, 1999 or until terminated with five days
written notice from ARI subsequent to May 31, 1997. On December 19, 1997, ARI
received a 90 day $10 million increase to the revolving credit line from
Harris. At September 30, 1997 and March 31, 1997 respectively, the outstanding
balances on this loan were $69.1 million and $71.5 million, bearing interest
at the prime rate of 8.5%.
5. Statement of Cash Flows
Borrowings under the revolving credit line in the six months ended September
30, 1997 and 1996 totaled $96.7 million and $166.3 million, respectively, and
repayments during the same periods totaled $100.9 million and $131.7 million,
respectively. ARI made cash payments for interest and financing fees of
approximately $10.9 million and $9.3 million during the six months ended
September 30, 1997 and 1996, respectively. ARI did not pay any federal or
state income taxes during the six months ended September 30, 1997 and paid
$230 thousand during the six months ended September 30, 1996.
6. Commitments and Contingencies
In April 1995, a lawsuit was filed in the district court of Harris County,
Texas by Kingwood Lakes South, L.P. and Tenzer Company, Inc., as plaintiffs
against Gerald D. Murphy and Douglas A. Murphy. The Company and ERLY were also
named as defendants in the lawsuit by amendment to the original petition in
September 1995. This lawsuit arises from a dispute between the general partner
of a proposed real estate development and Gerald D. Murphy and Douglas A.
Murphy over their contractual obligations, if any, to the partnership. The
Company and ERLY were named as defendants in the lawsuit allegedly because of
their efforts to first obtain restraining orders to prevent threatened
foreclosures on the ERLY Common Stock pledged as collateral by Gerald D.
Murphy, which threatened ARI's Mortgage Note financing. The lawsuit also
alleges certain other activities by the Company and ERLY, including knowing
participation in breaches of fiduciary duties, fraud, and civil conspiracy
with Gerald D. Murphy and Douglas A. Murphy. A restraining order was issued
preventing foreclosure on the shares pledged by Mr. Murphy but such
restraining order was subsequently terminated. The plaintiffs then obtained
333,333 shares of the pledged stock which was thereafter sold. In order to
minimize legal expenses, the Company, ERLY, and Douglas A. Murphy are using
common legal counsel in this matter. Gerald D. Murphy retained separate legal
counsel in February 1997. He has agreed to pay up to 50% of legal expenses
after any insurance recoveries as determined by the members of the board of
directors not a party to the lawsuit. On September 9, 1997, the jury in this
litigation returned two alternative verdicts in favor of the plaintiffs and
the plaintiffs were required to elect between those verdicts. The plaintiffs
elected the jury's tort claim verdict in the aggregate amount of $9,657,000,
rendered jointly and severally against Gerald D. Murphy, Douglas A. Murphy,
the Company, and ERLY, along with separate awards of punitive damages against
Gerald D. Murphy of $3,000,000, Douglas A. Murphy of $500,000, the Company of
$100,000, and ERLY of $100,000. The defendants subsequently filed motions
before the trial court for judgment in defendants' favor notwithstanding the
verdict and for a reduction of the amounts awarded by the jury based, in part,
on the absence of evidence to support those awards. On January 13, 1998 a
final judgment was rendered in which the tort claim verdict was reduced to
$5.3 million plus prejudgment interest of $1.0 million. The punitive damages
against all defendants remained unchanged in the final judgment. The Company
filed a motion for a new trial on February 12, 1998. If a new trial is not
granted, the Company and ERLY intend to appeal this judgment and believe they
will be successful on appeal, however, there can be no assurance that the
Company will be successful in its appeal. At this time, the Company does not
have resources to post the bond and there is no assurance that they will do
so. The Company is attempting to arrange for the posting of a bond in order to
avoid execution of this judgment pending appeal. These efforts include
discussions with its insurors and other actions such as the sale of assets.
Without posting a bond or otherwise superseding the judgment by mid-April, the
Company would be at risk for execution of the judgment against it. If the bond
can not be posted or if the judgment can not be paid, the outcome of this
litigation will have a material adverse impact on its and ERLY's financial
condition.
The Company was named as a co-defendant with Messrs. John M. Howland and
George E. Prchal in a lawsuit filed in February 1997 in the U.S. District
Court for the Southern District of Texas by Rice Milling & Trading
Investments, LTD., an Isle of Man Company ("RMTI"). In 1994, ARI entered into
an agreement with RMTI for processing the Company's rice through RMTI's
facility in Jeddah, Saudi Arabia. Messrs. Howland and Prchal were officers of
RMTI through January 1997, and prior to October 1993 they were officers of
ARI. Messrs. Howland and Prchal were directors of ARI from October 1993
through October 1997. In January 1997, RMTI ceased shipping ARI's rice through
its Jeddah facility and terminated the employment of Messrs. Howland and
Prchal. The lawsuit alleges among other things ARI failed to perform under the
terms of the agreement and Messrs. Howland and Prchal breached their fiduciary
duties to RMTI. On April 21, 1997, ARI obtained a preliminary injunction from
the U.S. District Court for the Southern District of Texas ordering RMTI to
desist and refrain from purchasing rice of U.S. or Vietnam origin from any
supplier other than ARI and from introducing and/or marketing rice of U.S. and
Vietnam origin in Saudi Arabia targeted against ARI's U.S. origin and Vietnam
origin rice. In October 1997, ARI voluntarily terminated this injunction. RMTI
has added claims of fraud, participation in breach of duty, and tortuous
interference against ARI. The date for the trial is set for December 1, 1998.
On July 24, 1997, The Powell Group, a diversified holding company based in
Baton Rouge, Louisiana (the "Powell Group"), through its wholly owned
subsidiary, Farmers Rice Milling Company, Inc., a Louisiana corporation
("Farmers Rice") filed a shareholder derivative complaint purportedly on
behalf of the Company and ERLY against Gerald D. Murphy, Douglas A. Murphy,
the Company, and ERLY in the United States District Court, Central District of
California. On November 3, 1997, the Court dismissed the complaint without
prejudice.
The Company is considering a number of alternatives for paying the fixed
interest due on the Mortgage Notes on February 28, 1998, but due to the
current impairment of the liquidity of the Company and pending resolution of
the Company's ability to satisfy or appeal the final judgment in the Kingwood
Lakes South litigation, the Company will not be able to make such payment by
the due date. The Company anticipates that such payment will be made before
the end of the thirty day grace period, however, no assurances can be given
that such interest payment can be made by the end of the grace period.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results Of Operations (as Restated)
Restatement
In August 1997 ARI reached an agreement with Aqaba Packaging Company ("APC")
whereby APC purchases and processes rice shipped in bulk to APC's facility at
Aqaba, Jordan. The Company has experienced continued problems with the
implementation of the provisions of this agreement. These problems include
APC's inability to meet its contractual commitments to purchase sufficient
rice from the Company to maintain adequate inventory levels in Jordan. The
Company is currently negotiating with APC for alternative arrangements for
this facility so that adequate inventory levels may be maintained. As a result
of these events, the Company has concluded that the facts supporting the
original sales to APC have changed to such an extent as to warrant reversing
the sales in the second quarter. Accordingly, the Company has reversed the
sales and recorded the rice in the APC facility as inventory. Adjustments are
detailed in note 2 of Notes to Consolidated Financial Statements. The
following discussion and analysis reflects all such adjustments.
Overview
The Company purchases and processes rough rice into branded and commodity rice
for sale in both international and domestic markets. Demand for branded rice
products is relatively constant and margins are typically higher than those
for commodity rice products. Demand for commodity rice products is relatively
constant globally, but demand for U.S. grown commodity rice is dependent upon
supply and cost relative to other sources of supply. Supply and costs for both
branded and commodity products depend on many factors including governmental
actions, crop yields and weather, and such factors can persist through one or
more fiscal years.
On July 5, 1996, the Company acquired the domestic and foreign olive business
of Campbell Soup Company for approximately $38 million. Assets acquired
include domestic inventories and fixed assets, all of the outstanding common
stock of Compania Envasadora Loreto, S.A., a Spanish company which comprises
the foreign olive business, and fifty-one percent of the stock of Sadrym
California, a marketer of olive processing machinery. The purchase was funded
primarily from ARI's credit facilities. The Olive Acquisition is accounted for
as a purchase, and the results of operations of the acquired business are
included in the Company's consolidated financial statements after July 5,
1996.
Historically, sales of olives have pronounced seasonal elements, with higher
sales occurring in conjunction with holiday consumption. Accordingly, because
the quarterly period ending December 31 contains both the Thanksgiving and
Christmas holidays, the two holidays of highest consumption, it will have
significantly higher sales than the other three quarters of the fiscal year.
Margins normally follow the seasonal pattern of sales.
Three Months Ended September 30, 1997 Compared to
Three Months Ended September 30, 1996
Net Sales. Net sales decreased $48.2 million, or 39.7%, from $121.5 million in
the September quarter of fiscal 1997 to $73.3 million in the September quarter
of fiscal 1998. The sales decrease was composed of $53.2 million and $3.1
million in declines in export and U.S. rice sales, respectively, partially
offset by $8.1 million in increases in sales of olives. Export sales declines
were experienced in four Middle East markets and in Africa.
Gross Profit. Gross profit was 12.5% of sales in the fiscal 1998 quarter and
12.5% for the same period in 1997. Gross profit declined $6.1 million from
$15.2 million in the fiscal 1997 quarter to $9.1 million in fiscal 1998 due
primarily to lower sales.
Selling, general and administrative expense. Selling, general and
administrative expense increased $1.0 million to $9.4 million in the fiscal
1998 quarter due primarily to higher advertising and promotional expenses.
Interest. Interest expense increased $1.0 million from $5.6 million in the
fiscal 1997 period to $6.6 million in fiscal 1998 due primarily to higher
average balances outstanding. Interest expense in both periods includes
amortization of capitalized debt issuance costs and accretion of the $6
million original issue discount on the $100 million in principal amount of
13.0% mortgage notes due 2002.
Six Months Ended September 30, 1997 Compared to
Six Months Ended September 30, 1996
Net Sales. Net sales decreased $32.2 million, or 14.7%, from $218.9 million in
fiscal 1997 to $186.7 million in fiscal 1998. The sales decrease was composed
of $52.5 million and $4.0 million in declines in export and U.S. rice sales,
respectively, partially offset by and $24.3 million in increases in sales of
olives. Export sales declines were experienced primarily in Middle East
markets and in Africa.
Gross Profit. Gross profit was 11.0% of sales in fiscal 1998 and
9.9% for the same period in 1997. Gross profit declined $1.1 million from
$21.7 million in fiscal 1997 to $20.6 million in fiscal 1998, due primarily to
the Olive Acquisition.
Selling, general and administrative expense. Selling, general and
administrative expense increased $3.4 million to $18.3 million in fiscal 1998
due primarily to higher advertising and promotional expenses associated with
the Olive Acquisition.
Interest. Interest expense increased $2.5 million to $12.7 million in fiscal
1998 due primarily to higher average balances outstanding.
Liquidity and Capital Resources
ARI requires liquidity and capital primarily for the purchase of raw materials
and to invest in property, plant and equipment necessary to support
operations. Historically, ARI has financed both working capital and capital
expenditures through internally generated funds and by funds provided by
credit lines.
ARI has an $85 million revolving credit line with Harris Trust and Savings
Bank ("Harris"). Funds available for borrowing (including letters of credit of
up to $20.0 million) under this revolving credit loan at any time may not
exceed 85% of eligible accounts receivable (or 90% of accounts receivable
backed by acceptable letters of credit from customers), 75% of eligible rough
rice inventory, and 70% of eligible finished goods inventory. The line is
collateralized by substantially all of ARI's accounts receivable and
inventory. In addition, this facility contains restrictive covenants which,
among other things, require the attainment of certain financial ratios and
provide limitations on capital expenditures, lease obligations, and prohibit
dividend payments. As of September 30, 1997, ARI was not in compliance with
certain of the covenants related to interest coverage, adjusted funded debt
and adjusted tangible net worth. Subsequently, the company obtained waivers
from compliance with these covenants from Harris covering the period up to and
including December 30, 1997 and amendments effective December 31, 1997. As of
December 31, 1997, ARI was not in compliance with the amended covenants
related to interest coverage, adjusted funded debt and adjusted tangible net
worth. The Company has requested waivers from compliance with these amended
covenants. The line also contains certain cross default provisions with the
indenture for the 13.0% Mortgage Notes due 2002 (the "Mortgage Notes"). The
Harris credit line bears interest at the prime rate, with outstanding
principal and interest due upon termination of the agreement, which continues
in full force and effect until May 31, 1999 or until terminated with five days
written notice from ARI subsequent to May 31, 1997. On December 19, 1997, ARI
received a 90 day $10 million increase to the revolving credit line from
Harris. At September 30, 1997 and March 31, 1997 respectively, the outstanding
balances on this loan were $69.1 million and $71.5 million, bearing interest
at the prime rate of 8.5%. The borrowing base under this line of credit at
September 30, 1997 was $79.6 million and the maximum borrowing during the six
months ended September 30, 1997 was $84.7 million.
In July 1997 ARI completed a sale and leaseback transaction for substantially
all of its olive processing machinery and equipment located in Visalia,
California (the "Visalia Lease"). ARI realized proceeds from the sale of
approximately $8.9 million which were used for operating purposes. ARI has
leased these assets from for a seven year term with a two year extension
option. The transaction is accounted for as a capital lease with the proceeds
recorded as a liability that is reduced by lease payments over the lease term.
In August 1997 ARI reached an agreement with Aqaba Packaging Company ("APC")
whereby APC purchases and processes rice shipped in bulk to APC's facility at
Aqaba, Jordan. Additionally, the agreement provides that ARI purchase rice
from this facility for delivery to ARI's customers in the Middle East,
primarily Saudi Arabia. The Company has experienced continued problems with
the implementation of the provisions of this agreement. These problems include
APC's inability to meet its contractual commitments to purchase sufficient
rice from the Company to maintain adequate inventory levels in Jordan, and
delays in shipments to ARI's customers in Saudi Arabia. The Company is
negotiating with APC for alternative arrangements for this facility so that
adequate inventory levels may be maintained.
Beginning in the quarter ending June 30, 1997, the liquidity of the Company
has been significantly impaired in part as a result of the loss of financing
associated with the RMTI agreement (see Part II - Legal Proceedings). Without
the RMTI agreement, the general corporate financing required for the Company's
sales and marketing in Saudi Arabia is significantly greater. The Company has
had to utilize its credit lines to maintain the inventory position for its
Saudi Arabia sales and has thus reduced the availability for its domestic
activities. In addition to increasing the use of the Company's credit lines,
the Company has also experienced an increase in its accounts payable.
Management believes that its rice raw material costs have increased to the
extent the impairment of liquidity has precluded it from bidding on a
competitive basis. In addition to the Visalia Lease and the financing under
the APC agreement discussed above, management is exploring several other
opportunities to improve liquidity. However, no assurances can be given that
the Company can conclude the other arrangements being considered.
The Mortgage Notes provide for interest payments semiannually on February 28th
and August 31st, accruing fixed interest at an annual rate of 13.0%, an
effective yield rate of 14.4%. In addition to fixed interest, the Mortgage
Notes bear contingent interest of 4.0% of consolidated cash flow (as defined)
up to a limit of $40.0 million of consolidated cash flow during the fiscal
year in which such interest accrues. Contingent interest accrues in each
semiannual period (as defined) in which consolidated cash flow in such period
and the immediately preceding semiannual period is equal to or greater than
$20.0 million. Contingent interest is payable semiannually, but ARI may elect
to defer all or a portion of any such payment to the extent that (a) the
payment of such portion of contingent interest will cause ARI's adjusted fixed
charge coverage ratio (as defined) for the two consecutive applicable
semiannual periods to be less than 2.0:1 and (b) the principal of the Mortgage
Notes corresponding to such contingent interest has not then matured and
become due and payable. The consolidated cash flow for the quarter ended
September 30, 1997 was $1.5 million as restated (see Note 2 of Notes to
Consolidated Financial Statements). Contingent interest of $376.5 thousand was
accrued during the quarter. The total contingent interest accrued and unpaid
at September 30, 1997 was $1.4 million. Additional contingent interest of
$445.5 thousand will accrue over the period from October 1, 1997 to February
28, 1998. To date, no contingent interest has been paid because the applicable
fixed cost coverage ratio permits deferral of payment. The Company is
considering a number of alternatives for paying the fixed interest due on the
Mortgage Notes on February 28, 1998, but due to the current impairment of the
liquidity of the Company and pending resolution of the Company's ability to
satisfy or appeal the final judgment in the Kingwood Lakes South litigation
(see Legal Proceedings), the Company will not be able to make such payment by
the due date. The Company anticipates that such payment will be made before
the end of the thirty day grace period, however, no assurances can be given
that such interest payment can be made by the end of the grace period.
ARI's Preferred B and C stock carries annual cumulative, non-participating
dividends of $5.2 million and $750 thousand respectively. No dividends have
been declared or paid as of September 30, 1997. As of September 30, 1997, the
Preferred B dividends accumulated but not declared are $22.5 million and the
Preferred C dividends accumulated but not declared are $3.3 million.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In April 1995, a lawsuit was filed in the district court of Harris County,
Texas by Kingwood Lakes South, L.P. and Tenzer Company, Inc., as plaintiffs
against Gerald D. Murphy and Douglas A. Murphy. The Company and ERLY were also
named as defendants in the lawsuit by amendment to the original petition in
September 1995. This lawsuit arises from a dispute between the general partner
of a proposed real estate development and Gerald D. Murphy and Douglas A.
Murphy over their contractual obligations, if any, to the partnership. The
Company and ERLY were named as defendants in the lawsuit allegedly because of
their efforts to first obtain restraining orders to prevent threatened
foreclosures on the ERLY Common Stock pledged as collateral by Gerald D.
Murphy, which threatened ARI's Mortgage Note financing. The lawsuit also
alleges certain other activities by the Company and ERLY, including knowing
participation in breaches of fiduciary duties, fraud, and civil conspiracy
with Gerald D. Murphy and Douglas A. Murphy. A restraining order was issued
preventing foreclosure on the shares pledged by Mr. Murphy but such
restraining order was subsequently terminated. The plaintiffs then obtained
333,333 shares of the pledged stock which was thereafter sold. In order to
minimize legal expenses, the Company, ERLY, and Douglas A. Murphy are using
common legal counsel in this matter. Gerald D. Murphy retained separate legal
counsel in February 1997. He has agreed to pay up to 50% of legal expenses
after any insurance recoveries as determined by the members of the board of
directors not a party to the lawsuit. On September 9, 1997, the jury in this
litigation returned two alternative verdicts in favor of the plaintiffs and
the plaintiffs were required to elect between those verdicts. The plaintiffs
elected the jury's tort claim verdict in the aggregate amount of $9,657,000,
rendered jointly and severally against Gerald D. Murphy, Douglas A. Murphy,
the Company, and ERLY, along with separate awards of punitive damages against
Gerald D. Murphy of $3,000,000, Douglas A. Murphy of $500,000, the Company of
$100,000, and ERLY of $100,000. The defendants subsequently filed motions
before the trial court for judgment in defendants' favor notwithstanding the
verdict and for a reduction of the amounts awarded by the jury based, in part,
on the absence of evidence to support those awards. On January 13, 1998 a
final judgment was rendered in which the tort claim verdict was reduced to
$5.3 million plus prejudgment interest of $1.0 million. The punitive damages
against all defendants remained unchanged in the final judgment. The Company
filed a motion for a new trial on February 12, 1998. If a new trial is not
granted, the Company and ERLY intend to appeal this judgment and believe they
will be successful on appeal, however, there can be no assurance that the
Company will be successful in its appeal. At this time, the Company does not
have resources to post the bond and there is no assurance that they will do
so. The Company is attempting to arrange for the posting of a bond in order to
avoid execution of this judgment pending appeal. These efforts include
discussions with its insurors and other actions such as the sale of assets.
Without posting a bond or otherwise superseding the judgment by mid-April, the
Company would be at risk for execution of the judgment against it. If the bond
can not be posted or if the judgment can not be paid, the outcome of this
litigation will have a material adverse impact on its and ERLY's financial
condition.
The Company was named as a co-defendant with Messrs. John M. Howland and
George E. Prchal in a lawsuit filed in February 1997 in the U.S. District
Court for the Southern District of Texas by Rice Milling & Trading
Investments, LTD., an Isle of Man Company ("RMTI"). In 1994, ARI entered into
an agreement with RMTI for processing the Company's rice through RMTI's
facility in Jeddah, Saudi Arabia. Messrs. Howland and Prchal were officers of
RMTI through January 1997, and prior to October 1993 they were officers of
ARI. Messrs. Howland and Prchal were directors of ARI from October 1993
through October 1997. In January 1997, RMTI ceased shipping ARI's rice through
its Jeddah facility and terminated the employment of Messrs. Howland and
Prchal. The lawsuit alleges among other things ARI failed to perform under the
terms of the agreement and Messrs. Howland and Prchal breached their fiduciary
duties to RMTI. On April 21, 1997, ARI obtained a preliminary injunction from
the U.S. District Court for the Southern District of Texas ordering RMTI to
desist and refrain from purchasing rice of U.S. or Vietnam origin from any
supplier other than ARI and from introducing and/or marketing rice of U.S. and
Vietnam origin in Saudi Arabia targeted against ARI's U.S. origin and Vietnam
origin rice. In October 1997, ARI voluntarily terminated this injunction. RMTI
has added claims of fraud, participation in breach of duty, and tortuous
interference against ARI. The date for the trial is set for December 1, 1998.
On July 24, 1997, The Powell Group, a diversified holding company based in
Baton Rouge, Louisiana (the "Powell Group"), through its wholly owned
subsidiary, Farmers Rice Milling Company, Inc., a Louisiana corporation
("Farmers Rice") filed a shareholder derivative complaint purportedly on
behalf of the Company and ERLY against Gerald D. Murphy, Douglas A. Murphy,
the Company, and ERLY in the United States District Court, Central District of
California. On November 3, 1997, the Court dismissed the complaint without
prejudice.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11.1 Computation of Earnings Per Share
27 Financial Data Schedule
(b) During the quarter ended September 30, 1997, Registrant did not file any
Form 8-K Reports.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
American Rice, Inc.
-------------------
Registrant
By: /S/ Joseph E. Westover
---------------------------
Joseph E. Westover
Vice-President / Controlle
Exhibit 11.1
AMERICAN RICE, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(Thousands of Dollars Except Per Share Data)
Three Months Six Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
--------------------------------------------
PRIMARY EARNINGS (LOSS) PER SHARE
Net earnings (loss) ($3,902) $976 ($5,689) ($1,620)
Less dividends on preferred stock:
Series B (1,295) (1,295) (2,590) (2,590)
Series C (188) (188) (375) (375)
--------------------------------------------
(1,483) (1,483) (2,965) (2,965)
--------------------------------------------
Loss applicable to
common stock ($5,385) ($507) ($8,654) ($4,585)
============================================
Average common and common
equivalent shares outstanding:
Common 2,444 2,444 2,444 2,444
Preferred Series A - - - -
--------------------------------------------
2,444 2,444 2,444 2,444
============================================
Loss per share
applicable to common stock ($2.20) ($.21) ($3.54) ($1.88)
============================================
Continued on next pag
Exhibit 11.1 (Continued)
AMERICAN RICE, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(Thousands of Dollars Except Per Share Data)
Three Months Six Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
--------------------------------------------
FULLY DILUTED EARNINGS PER SHARE *
Net earnings (loss) ($3,902) $976 ($5,689) ($1,620)
Less dividends on preferred stock:
Series C (188) (188) (375) (375)
--------------------------------------------
Earnings (loss) applicable to
common stock ($4,090) $788 ($6,064) ($1,995)
============================================
Average common and common
equivalent shares outstanding:
Common 2,444 2,444 2,444 2,444
Preferred Series A 778 778 778 778
Preferred Series B 5,600 5,600 5,600 5,600
--------------------------------------------
8,822 8,822 8,822 8,822
============================================
Earnings (loss) per share
applicable to common stock ($.46) $.09 ($.69) ($.23)
============================================
* This calculation is presented in accordance with Regulation
S-K item 601(b)(11) although it is contrary to paragraphs 14, 30,
and 40 of APB Opinion No. 15 because it produces an antidilutive
result. The Opinion provides that a computation on a fully
diluted basis which results in an improvement in earnings
per share when compared to primary earnings per share
(antidilution) not be taken into account. Therefore fully diluted
earnings per share reported on the income statement are the same
as primary earnings per share.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> SEP-30-1997
<PERIOD-TYPE> 6-MOS
<CASH> 2,923
<SECURITIES> 0
<RECEIVABLES> 44,229
<ALLOWANCES> 1,269
<INVENTORY> 130,540
<CURRENT-ASSETS> 183,768
<PP&E> 87,566
<DEPRECIATION> 29,137
<TOTAL-ASSETS> 288,265
<CURRENT-LIABILITIES> 146,371
<BONDS> 94,296
0
3,878
<COMMON> 2,444
<OTHER-SE> 29,310
<TOTAL-LIABILITY-AND-EQUITY> 288,265
<SALES> 186,709
<TOTAL-REVENUES> 186,709
<CGS> 166,112
<TOTAL-COSTS> 166,112
<OTHER-EXPENSES> 141
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,692
<INCOME-PRETAX> (9,267)
<INCOME-TAX> (3,578)
<INCOME-CONTINUING> (5,689)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,689)
<EPS-PRIMARY> (3.54)
<EPS-DILUTED> (3.54)
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