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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
_________________
FOR THE FISCAL YEAR ENDED COMMISSION FILE
MARCH 31, 1994 NUMBER 1-7894
ERLY INDUSTRIES INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 95-2312900
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
10990 WILSHIRE BOULEVARD, #1800 90024-3913
LOS ANGELES, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL
EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (213) 879-1480
_________________
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months, and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
As of June 17, 1994, there were 3,674,765 common shares outstanding
(including redeemable common stock), and the aggregate market value of the
common shares of ERLY Industries Inc. (based upon the closing bid price for
these shares on the "OTC Bulletin Board") held by non-affiliates was
approximately $16.2 million.
Documents Incorporated by Reference
Portions of the 1994 Proxy Statement to Shareholders are incorporated
by reference in Part III.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.[X]
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ERLY INDUSTRIES INC.
FORM 10-K ANNUAL REPORT
FOR THE YEAR ENDED MARCH 31, 1994
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
Part I
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Item 1: Business See pages 2-13
Item 2: Properties See pages 14-15
Item 3: Legal Proceedings See page 15 and "Commitments and
Contingencies" on page 66
Item 4: Submission of Matters See page 15
to a Vote of Security
Holders
Part II
- - -------
Item 5: Market for the Company's See pages 15-16 and "Quarterly Results
Common Stock and Related of Operations" on pages 68-69
Stockholder Matters
Item 6: Selected Financial Data See pages 22-23
Item 7: Management's Discussion See pages 24-34
and Analysis of Financial
Condition and Results of
Operations
Item 8: Consolidated Financial See pages 35-70
Statements
Item 9: Changes in and See page 16
Disagreements with
Accountants on Accounting
and Financial Disclosure
Part III
- - --------
Item 10: Directors and Executive See pages 17-18
Officers of the Company
Item 11: Executive Compensation See Proxy Statement
Item 12: Security Ownership of See Proxy Statement
Certain Beneficial Owners
and Management
Item 13: Certain Relationships See Proxy Statement
and Related Transactions
Part IV
- - -------
Item 14: Exhibits, Financial See pages 19-81
Statement Schedules and
Reports on Form 8-K
</TABLE>
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PART I
ITEM 1. BUSINESS
ERLY Industries Inc., (the "Company" or "ERLY"), incorporated in California in
1964, is primarily a food company engaged in rice processing and marketing both
in domestic and international markets. In May 1993, ERLY combined its
investment in its wholly owned subsidiary, Comet Rice, Inc., into American
Rice, Inc., an international rice company active in all phases of processing,
trading and marketing. As a result of the Transaction, ERLY increased its
ownership in the voting power of American Rice, Inc., from 48% to 81%.
The Company also owns Chemonics Industries, Inc., a subsidiary with an
international consulting division and a fire retardant chemicals business.
The Company discontinued its juice business in December 1993 with the sale of
its ERLY Juice trademarks and Eau Claire Packing Company.
Its executive offices are located at 10990 Wilshire Boulevard, Suite #1800, Los
Angeles, California, 90024.
AMERICAN RICE, INC.
BACKGROUND:
American Rice, Inc. ("American Rice" or "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, 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% of ARI's outstanding voting
stock. The remaining approximate 48% of ARI's voting stock was issued to ERLY
and to it's wholly owned subsidiary, Comet Rice, Inc. ("Comet") in exchange for
cash and Comet's 50% interest in Comet American Marketing ("CAM"), a Texas
joint venture between Comet and Predecessor ARI. After the Reorganization,
Predecessor ARI distributed the shares of stock ARI received pursuant to the
Reorganization to its patrons and was later dissolved.
Comet has been in the rice business since 1902 when it was formed in Beaumont,
Texas. In 1952, Comet merged with Wonder Rice Mills of Stuttgart, Arkansas and
Adolphus Rice Mills of Houston, Texas. Comet was purchased by ERLY in 1970.
Comet's Maxwell, California facility was purchased in 1979 from United Rice
Growers.
On May 26, 1993, ARI consummated a transaction ("Transaction") to acquire
substantially all of the assets of Comet (except the ARI capital stock owned by
Comet) and assume all of Comet's liabilities. Comet was a wholly owned
subsidiary of ERLY. Comet's combined holdings of ARI common stock and ARI
Series A Preferred Stock, prior to the Transaction, represented approximately
48% of the voting power of the outstanding ARI stock. In connection with the
Transaction, ERLY has succeeded to the ARI stock held by Comet by the
liquidation of Comet.
Pursuant to the Transaction, in exchange for the assets acquired from Comet,
ARI issued to Comet 14 million shares of a newly created Series B $1 par value
preferred stock. Each share of Series B Preferred Stock provides for annual
cumulative, non-
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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. The current loan agreements
prohibit the payment of any dividends and do not provide any basis on which the
lenders would approve a dividend payment. As a result of the Transaction, ERLY
held 81% of the combined voting power of ARI stock outstanding after the
Transaction.
Since ERLY, the sole shareholder of Comet at the time of the Transaction, owned
the larger portion of the voting rights in the surviving corporation, the
Transaction was accounted for as a reverse step acquisition of ARI by ERLY
through its subsidiary, Comet, reflecting the change of control which occurred.
The fair value of ARI was estimated to be approximately $35 million based upon
a valuation study by an investment banker. The Transaction was accounted for
under the guidelines of APB Opinion No. 16, "Business Combinations" and
Emerging Issues Task Force ("EITF") Issue No. 90-13, "Accounting for
Simultaneous Common Control Mergers." The accounting consists of three steps:
Step one consists of a recognition by ARI of ERLY's historical cost of its
original 48% interest. When ERLY purchased 48% of ARI in 1988 for $20 million
and its 50% interest in CAM, 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 (which was $5.2 million at March 31, 1993) was
added to the book value of the Houston property on ARI financial statements
with a corresponding increase in its equity. Step two recognizes the
acquisition by ERLY of an additional equity interest in ARI of approximately
33% in exchange for substantially all of the assets of Comet and all of Comet's
liabilities. ARI's assets are valued at fair market value to the extent
acquired. In accordance with EITF 90-13, under step three, the fair value of
Comet's net assets was determined. ERLY accounted for the Transaction as a
partial sale of 19% of Comet Rice (19% is the percentage ownership of ARI by
minority shareholders), and a step acquisition of ARI, increasing its ownership
from 48% to 81%.
Because Comet was the acquirer for accounting purposes, the financial
information entitled "ARI" presented in this Form 10-K at March 31, 1993 and
for the years ended March 31, 1993 and 1992 is that of Comet, not ARI. The
operating results for the period April 1, 1993 through May 26, 1993 are those
of Comet, not ARI. Operating results thereafter reflect the combined
operations of Comet and ARI. For convenience purposes, unless otherwise
specifically indicated, the entity is hereafter referred to as ARI for all
periods presented.
In May 1993, ARI also refinanced the combined indebtedness of ARI and Comet
("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. ("ING"), 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. ARI issued to the former lenders a combined total of 1.5 million
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. The current loan agreements with the new lenders
prohibit the payment of any dividends and do not provide any basis on which the
lenders would approve a dividend payment. ARI's former lenders agreed to a
debt discount in the
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approximate amount of $10.3 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 is reflected in
the ARI financial statements as a reduction in the receivable from ERLY. In
addition, ERLY is a guarantor for all of the new ARI debt, and the loan
agreements contain certain restrictive covenants applicable to ERLY.
The Comet-ARI Transaction provides a significant benefit to the Company. The
Company's investment in ARI (carried on the Company's books as of March 31,
1993 at $13.1 million) is enhanced as a result of the Refinancing. As a result
of the Transaction, ARI should have 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.
The Transaction is expected to reduce manufacturing and distribution costs and
increase gross margin for both companies since they now process and package
product closer to the ultimate customer. ARI's Freeport facility, which
operated at 85% and 72% capacity in fiscal 1993 and 1992, respectively,
provides Comet access to a Texas rice facility located on a deepwater port.
ARI is utilizing excess capacity at the Freeport facility to process and
package rice for sales to Comet's historical Caribbean customers. ARI may
utilize the Company's California facility to package rice for sales to ARI's
historical California customers.
Selling, general and administrative costs are also expected to be lower due to
the consolidation of these functions as a result of the Transaction. It is
estimated that most of these savings will come from lower personnel costs and
similar expenses such as legal, insurance and auditing fees than occurred in
both companies combined.
The Transaction will allow better utilization of facilities due to increased
bank credit lines and working capital which will allow the Company to purchase
additional raw product and sell to more export markets.
As part of the Transaction, ARI and the Company have entered into a management
agreement. This agreement recognizes that ARI will be part of ERLY's group of
affiliated companies and as such will participate in the benefits of the
overall management and administrative expertise of ERLY. ARI will pay $900,000
per year to ERLY under the terms of this agreement. The amount to be paid by
ARI to ERLY is expected to provide a reasonable but not precise allocation of
management costs incurred by ERLY on behalf of ARI. There are no comparable
costs for such services as compared to those that could be obtained from
non-affiliated parties; however, the Company believes such costs are not in
excess of those that would be required to obtain such management services from
non-affiliated parties.
RECENT EVENTS:
On April 15, 1994, ARI entered into a joint venture agreement with Vinafood II,
a company owned by the Ministry of Agriculture of the government of Vietnam.
The agreement provides that ARI and Vinafood II will jointly operate a mill in
the city of Can Tho, Vietnam. The joint venture will be 55% owned by ARI and
45% owned by Vinafood II.
Sales are estimated to be approximately $50 million in the first year of
operations with rice volume anticipated to be approximately 4.9 million cwts.
(Hereinafter, the
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term "cwt." denotes hundredweight, which equals 100 pounds.) ARI is currently
awaiting the issuance of the joint venture license by the Vietnam government.
ARI expects to receive the license within six months and will commence joint
venture operations shortly thereafter. In anticipation of the operations, ARI
has already purchased and sold 30,000 metric tons of rice from Vinafoods and is
assisting them in upgrading their rice operations.
OPERATIONS:
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 domestically 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, 1994, 1993 and 1992 were
$284.5 million, $169.6 million and $214.1 million, respectively, of which
export sales accounted for approximately 58%, 47% and 53% of the total sales
for each year, respectively.
The following table presents a comparison of ARI's domestic and export rice
sales in cwt. and dollars for the three years ended March 31, 1994:
Net Sales of American Rice, Inc.
--------------------------------
(Cwt. and dollars in thousands)
<TABLE>
<CAPTION>
Domestic Export Total
Years ended --------------------- --------------------- ---------------------
March 31 Cwt. $ % Cwt. $ % Cwt $ %
- - ----------- ----- ------- ---- ------ ------- --- ------ ------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1994 7,754 120,107 42 10,760 164,357 58 18,514 284,464 100
1993 6,948 90,288 53 5,970 79,329 47 12,918 169,617 100
1992 6,542 101,373 47 7,921 112,717 53 14,463 214,090 100
</TABLE>
Net sales are not necessarily indicative of operating profit since rough rice
costs vary significantly resulting in corresponding changes in selling prices.
This is particularly true in the export market where the volume of rice sold,
the cost of rough rice and ARI's milling margins vary from time to time
depending on fluctuations in the world market.
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.
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ARI believes that it has a significant competitive advantage because of its
diversification of sales between domestic and export markets, branded and
unbranded markets, long grain and medium grain markets and diversified sources
of supply in California and the South. ARI knows of no other U.S. competitor
similar in size that enjoys the same degree of diversification. With the
addition of sourcing rice from Vietnam, ARI further enhances its
diversification efforts to include rice sales from outside the U.S.
INTERNATIONAL MARKETS:
According to U.S. Department of Agriculture (USDA) estimates, world rice
production was 515.0 million metric tons in the 1991 crop year (August 1, 1991
- - - July 30, 1992), 520.7 million metric tons in the 1992 crop year, and is
estimated to be 515.7 million metric tons in the 1993 crop year. The world's
major rice producing countries include China, India, Indonesia, Bangladesh,
Thailand and Vietnam. China and India account for over 50% of world rice
production. Less than 5% of total worldwide rice production is traded
internationally. Thailand exports approximately 32% of total world exports and
is the single largest rice exporting nation. The U.S. and Vietnam's exports
each represent approximately 18% and 12% respectively of world trade.
The largest importing regions of the world include Africa, South America and
the Middle East. Historically the largest importing nations include Iran, Iraq
and Saudi Arabia. In the 1993 crop year, because of very poor weather during
Japan's 1993 crop, Japan was the world's largest importer of rice, with imports
estimated at 2.4 million metric tons of rice. In prior years, Japanese rice
imports were negligible.
Rice supplies, which are dependent on certain weather conditions such as the
timing and severity of monsoon rains, can significantly influence world and
United States prices. Higher prices for rice generally reduce the ability of
U.S. exports to be competitive in those world markets with lower per capita
income. U.S. export sales are also impacted by such factors as the relative
strength of the United States dollar to other foreign currencies, and 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 are not material. This is
because ARI requires most 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.
Historically, United States exports account for approximately 35-45% of total
United States production. In fiscal 1994, ARI export sales accounted for
approximately 58% of ARI's total sales, slightly above the three year average
of 53%. Because of ARI's large percentage of rice exports as a percent of ARI
sales, factors affecting world export sales can have a significant impact on
rough rice costs and milled rice sales prices for ARI.
Based on statistics compiled by USDA, the United States is estimated to have
exported 2.6 million metric tons of rice in calendar 1993 and is forecast to
export 2.6 million metric tons in calendar 1994. During ARI's fiscal years
ended March 31, 1994 and 1993, ARI exports of milled rice, net of foreign
sourced rice, totaled 483,000 metric tons and 271,000 metric tons (Comet only),
respectively. For fiscal 1994, ARI represented approximately 20% of total
United States exports. For fiscal year 1993,
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on a pro forma basis, ARI and Comet combined exports were 580,000 metric tons
and represented approximately 25% of total U.S. exports.
Historically, the largest importing countries of U.S. rice have been Saudi
Arabia, Iran, Iraq (pre-embargo), Canada and Haiti. ARI believes it has had a
significant share of the historical exports to these markets.
ARI produces both white and parboiled rice. The largest branded parboiled rice
market in the world is Saudi Arabia. Saudi Arabia averaged imports of 686,000
metric tons of rice during the past three calendar years. During this same
time period, USDA estimates approximately 200,000 metric tons of high quality
parboiled rice have been annually imported into Saudi Arabia from the United
States . ARI's market share of these United States rice sales registered with
the USDA for Saudi Arabia averaged approximately 70% for the same period. ARI
exports to Saudi Arabia are under the Golden Chopstick brand name. ARI
believes that its Golden Chopstick Brand, known as Abu Bint in Saudi Arabia, is
one of the most recognized names of any branded food product in Saudi Arabia.
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% of total
sales of ARI. The loss of any one of these customers 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 Iran, Turkey and the United
Arab Emirates. Prior to the Iraqi embargo in 1990, ARI was the largest U.S.
exporter of rice to Iraq.
During the 1993 crop year, Japan is expected to import approximately 2.4
million metric tons and has been the largest rice importer in the world. USDA
forecasts approximately 525,000 metric tons will be imported from the United
States. ARI through its Maxwell, California, operations estimates that it will
mill approximately 60% of the rice from the United States destined for Japan.
Because Japan's imports were caused by weather problems, there are no
assurances that Japan will continue to be a major importer once current needs
are satisfied, although under the minimum access provision of the new GATT
Agreement, Japan has agreed to import 379,000 metric tons next year increasing
to 758,000 tons by the year 2000.
The Caribbean is one of the highest per capita rice consumption marketplaces in
the world. Since 1992, ARI has been the largest U.S. exporter of rice to Haiti
and prior to 1992 sold through a Haitian distributor. Bulk exports with
destination bagging was established in 1992 in Haiti by Rice Corporation of
Haiti S.A., ("RCH") a wholly-owned ARI subsidiary. RCH is located at a self-
contained deep water port 25 miles outside of the capital city of Port au
Prince. ARI operations have continued uninterrupted through a succession of
changes of Haitian governments, although there is no assurance that operations
will be allowed to continue uninterrupted. The current embargo on imports into
Haiti specifically excludes food products such as rice.
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During the three years ended March 31, 1994, ARI's export sales by geographical
area were as follows (in thousands):
<TABLE>
<CAPTION>
Years ended March 31
---------------------------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Export sales
Middle East $ 88,186 $46,208 $ 31,181
Far East 37,332 1,193 1,375
Caribbean 21,250 11,016 30,355
Europe 5,810 8,974 15,089
Africa 4,025 2,114 11,380
Canada 2,949 1,163 3,245
Mexico 1,060
South America 216 51 9,953
Other 3,529 8,610 10,139
-------- ------- --------
Total export sales $164,357 $79,329 $112,717
======== ======= ========
</TABLE>
ARI entered into a joint venture with Vinafood II (see "Recent Events"). ARI
will be responsible for marketing the rice from the joint venture in the world
export markets. ARI believes that the Vietnamese rice is not a comparable
product to the product it is selling from the U.S. and therefore will represent
incremental sales to ARI's existing markets.
ARI's primary international marketing objectives are to expand and strengthen
established markets by building branded franchises in major rice importing
countries and to develop new sources of raw product in order to increase its
sales in existing and new markets.
DOMESTIC MARKETS (UNITED STATES, CANADA AND PUERTO RICO):
Based upon statistics compiled by the USDA, U.S. production of rough rice was
156.1 million cwt. in the 1993 crop year. Domestically, rice is produced in
six states: Arkansas, California, Louisiana, Mississippi, Texas and Missouri,
with Arkansas accounting for approximately 40% of total U.S. production and
California accounting for approximately 23%.
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 57 million cwt. of milled rice in the
United States in the 1993 crop year, an increase of 2.5% from 1992. Total U.S.
rice consumption is growing at a rate of approximately 4.0% annually. Sales
of rice products indicate consistent consumption patterns with no substantial
variance due to seasonality.
Domestic rice consumption and distribution networks have developed into three
distinct markets: grocery products, food service and food products.
Based on statistics published by A.C. Nielsen & Co. ("ACN") (a firm that
conducts consumer research studies), ARI has a market share of approximately
11% of the domestic branded market for rice.
ARI sells its rice products for use in domestic markets through direct contact
with major accounts and representation by a small network of independent food
brokers.
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The grocery division of ARI markets national and regional brands in
approximately 15 major markets throughout the United States. The major
national brands marketed by ARI include Blue Ribbon, Adolphus, Comet and Texas
AA. Regional brands marketed include Cinta Azul and Wonder. ARI plans to
continue to emphasize its brand marketing efforts.
One of the fastest growing areas of the rice business in the United States is
the ethnic trade market. ARI 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 ARI brands have strong consumer acceptance with
Hispanic-American consumers in the southwest.
Based upon reports compiled by the U.S. Bureau of Economic Analysis, after
adjustment for inflation, "real" (constant dollars) at-home food expenditures
grew an estimated .5% to 1.1% from 1992 to 1993 while "real" away-from-home
outlays rose between 3.6% to 4.7% making the away-from-home segment the fastest
growing component of the food business in the U.S. ARI believes that it can
grow its food service division to supply this away-from-home segment due to its
emphasis on convenience, quality service and product needs. In addition to
white rice, ARI's food service rice products include white and brown rice
mixes, wild rice mixes, rice pilaf and a parboiled rice.
In 1992, ARI through its 90% owned subsidiary, Comet Ventures, Inc., began
producing and marketing rice flour, bran and instant rice products to customers
in the bakery and specialty food industries. ARI believes that these products
will grow rapidly as part of ARI's sales mix due to the increased awareness of
food producers and consumers of the health benefits of rice.
The primary objectives of ARI's domestic marketing programs are to achieve
regional brand prominence with emphasis on the top 15 branded dried rice
consumption markets, to minimize selling, general and administrative expenses,
to achieve prominence as a branded supplier to America's ethnic bulk consumer,
and to increase its sales in the food product markets.
SOURCES OF ROUGH RICE AND MILLED RICE:
ARI obtains rough rice from rice farmers in the states of Arkansas, California,
Louisiana, Mississippi, Missouri and Texas. For the 1993 crop year ARI had
pre-harvest agreements to purchase approximately 5.0 million cwt. of rough rice
from farmers in the southern states and approximately 4.4 million cwt. from
farmers in California, which represents approximately 36% and 46% of ARI
purchases, respectively. ARI obtains additional domestic rough rice through
competitive bidding in the rice producing states. As needed, ARI obtains
milled rice from other United States and foreign rice mills. Although the 1994
rice crop is forecast by USDA to be one of the largest ever planted in the
United States, in future years, management of ARI perceives the possibility of
a decrease in the availability of rice in the areas from which ARI has
historically obtained rough rice. While such matters cannot be accurately
predicted, several factors could contribute to a decrease in the availability
of rough rice. Among these are limits imposed by the United States Government
on the number of acres from which a rice farmer may produce rice that will be
eligible for the USDA price support program and general economic pressures
caused by such factors as higher production costs and, decreases in the
availability of suitable water and general weather conditions. See "Certain
Governmental Effects on
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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 a significant share of 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. and General Foods, Inc. in the national
branded markets and Riceland Foods, Inc. and Farmers Rice Cooperative in the
food service markets. According to ACN statistics, no company currently
controls more than 25% of the domestic branded markets. There are a number of
small regional competitors in the branded segment of the rice industry and
approximately 15 to 20 rice millers who compete in either the bulk or the
ethnic trade.
ARI's U.S. competitors in the export market include Riceland Foods, Inc.,
Producers Rice Mills, Archer Daniels Midland, Cargil Corporation and Farmers
Rice Cooperative. No one U.S. company has more than 25% of the U.S. rice
exporting business. In addition, ARI's competitors include competitors from
other exporting countries such as Thailand and Pakistan which compete on the
basis of quality and price and other countries such as Vietnam and Burma, which
compete primarily based on price. Competition in the international market is
based upon the quality of rice, brand recognition, price, quality of service,
seller's relationships with the purchasers and ability to arrange financing.
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 significant 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
10
<PAGE> 12
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 each of the crop years 1991- 1994. 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.
The government also provides certain export subsidy programs to encourage sales
of U.S. agricultural products. At different periods, ARI has utilized these
programs as part of its sales efforts. However, in fiscal years 1994 and 1993,
sales under these programs were less than 10%.
CHEMONICS INDUSTRIES, INC.
Chemonics Industries, Inc., headquartered in Phoenix, Arizona, consists of two
divisions: Chemonics International and Fire-Trol. Chemonics International
consulting activities are coordinated from its Washington, D.C. office.
Chemonics' Fire-Trol also maintains facilities in Northern California and
Western Canada from which fire retardant chemicals are manufactured and sold.
Total Chemonics' sales in each of the Company's last three fiscal years were
$50,360,000 (1994), $49,814,000 (1993) and $41,198,000 (1992).
Chemonics International Consulting offers technical assistance and related
services to developing countries worldwide under contracts with the Agency for
International Development (AID), the World Bank, and other international
development agencies as well as private firms. Services are provided in a
range of areas including agriculture, agribusiness, natural resources and the
environment, and rural development. A major focus is aiding the development of
private enterprise, especially in countries where government controlled
enterprise once dominated, and privatization of state farms and land in these
countries.
The Consulting Division has 35 long-term contracts which are regional or
worldwide in scope. The countries or regions with the largest amount of
business include Egypt, Oman, Central and South America, Philippines, Guinea,
Indonesia, Nepal, South Africa, Botswana, Swaziland, and the newly independent
states of the former Soviet Union.
At March 31, 1994, Chemonics International Consulting has a funded contract
backlog of approximately $160 million covering 1995 through 1999. Of this
amount, $53 million relates to services expected to be provided in fiscal year
1995. Contracts are subject to cancellation in the event of severe political
turmoil in the country or region, subject to appropriate compensation for
winding down the contract involved. Revenues for 1994 were $41,944,000, a 13%
increase over the prior year. Revenues were $37,185,000 in 1993, up 20% from
1992 revenues of $31,035,000. Chemonics International is one of the largest
for-profit AID contractors, in terms of volume of service to AID, in an
industry dominated by non-profit entities including universities. The Company
is one of the leaders in trying to enhance the role of profit-making firms in
providing consulting services to AID.
11
<PAGE> 13
The Fire-Trol Division's primary products are forest fire retardants. These
products are patented, United States Forest Service tested and qualified
materials designed to combat forest, brush and grass fires through
dissemination from air tankers and helicopters. These products are sold under
contract to the U.S. and Canadian Forest Services through competitive bidding,
on contracts ranging in length from one to ten years. The chemical components
are generally available throughout the year and are combined in a manufacturing
process at Orland, California; Kamloops, British Columbia; and Edmonton,
Alberta. Fire-Trol is available throughout all major forest fire areas in
North America. It is distributed in Canada through Chemonics' Canadian
subsidiary, Chemonics Industries (Canada) Ltd. Fire-Trol is also developing
overseas with established operations in France, Portugal, Italy, South Africa
and South America.
Chemonics holds significant patents for Fire-Trol (which expire in various
years through the year 2000), but it faces substantial competition in its fire
retardant business from Monsanto Chemical Company, a corporation with far
greater resources than the Company. Annual sales fluctuate according to the
number and severity of forest fires in the geographical areas serviced by
Chemonics Fire-Trol. A comparison of this year's numbers proves this point as
sales for 1994 were $8,416,000 as compared to $12,629,000 for 1993 and
$10,163,000 in 1992. This volume variation, based upon weather and fire
conditions is an important aspect of Chemonics' overall sales and
profitability.
DISCONTINUED OPERATIONS
ERLY JUICE INC.
In July 1993, ERLY Juice sold its primary orange juice processing plant in
Lakeland, Florida to Florida Juice, Inc. for $11.9 million. This transaction
resulted in a loss of $2.7 million. ERLY Juice had access to the facility for
processing and packaging its retail and food service business through December
1993 under a co-pack agreement. This sale was intended in part to reduce
operating losses. One of ERLY Juice's primary creditors agreed to discount
term debt and accounts payable obligations in exchange for cash. This resulted
in a gain of $5.6 million which is reflected as extraordinary income as
described in Note 8 to the consolidated financial statements.
On December 21, 1993, Eau Claire Packing Company, a wholly owned subsidiary of
ERLY Industries Inc. operating in the juice business, sold its manufacturing
facility located in Eau Claire, Michigan, together with the inventory, accounts
receivable and certain trademarks associated with the plant facility, to Seneca
Foods Corporation ("Seneca"). Seneca paid approximately $5.1 million for the
plant facility and the related assets. ERLY Juice Inc., a wholly owned
subsidiary of ERLY Industries, also sold trademarks, inventory and accounts
receivable to Seneca for approximately $3.3 million. The purchase price was
paid in cash at the closing. The net proceeds from both sales were used to
reduce outstanding obligations under loans from the State of Michigan
Retirement System ("SMRS") and ING Capital as required by each Company's
respective secured loan agreements.
As a part of discontinuing ERLY's juice operations, ING Capital, the lender to
ERLY Juice Inc., agreed to a $6 million forgiveness in the amount of total
debt. In exchange, ERLY guaranteed to ING Capital the remaining balance of the
obligations owed by ERLY Juice Inc. and issued warrants to ING Capital to
obtain up to 10% of ERLY stock at $.01 per share. The amount of the ERLY Juice
obligations to ING
12
<PAGE> 14
Capital immediately prior to the transaction was approximately $17.1 million
and, after application of the forgiveness and amounts paid, the current amount
of the debt is approximately $8.4 million (which is included in notes payable
in the Company's consolidated balance sheets) plus accrued interest. Under the
terms of the guarantee, ERLY is required to pay down the remaining $8.4 million
of debt plus accrued interest within one year (by December 21, 1994) or ING
Capital may declare a default with the right to foreclose on ERLY's subsidiary,
Chemonics Industries, Inc. ING Capital currently has $9.0 million of loans
outstanding directly to Chemonics.
As a result of the sale of the above assets, ERLY has no operating assets or
continuing operations remaining in the juice business. It is ERLY's intention
to liquidate the remaining assets of ERLY Juice for the benefit of the ERLY
Juice creditors.
THE BEVERAGE SOURCE
The Beverage Source ("TBS") is classified as a discontinued operation for
financial reporting purposes. In fiscal year 1990, all of its wine brands and
labels were sold in separate transactions. The direct sales force, main office
and bottling operations were shut down. The remaining wine business was a
streamlined bulk wine processing operation utilizing two wineries at Sanger and
Tulare, California. In June 1992, the winery at Sanger was sold. Management
will continue to consider and evaluate opportunities to dispose of the
remaining assets of TBS in an orderly manner.
EMPLOYEES
The Company employs approximately 807 people full-time in continuing
operations, of which 573 are in the rice business. None of the Company's
operations are covered by collective bargaining agreements.
All eligible employees of the Company are covered by a profit sharing
retirement plan and a group insurance plan providing life insurance, medical,
dental and hospitalization benefits. The Company makes a mandatory 1% matching
contribution to the profit sharing retirement plan on a monthly basis and an
annual contribution solely at the discretion of the Board of Directors of the
Company.
13
<PAGE> 15
ITEM 2. PROPERTIES
The following table summarizes the principal properties owned and/or occupied
by the Company and its subsidiaries:
<TABLE>
<CAPTION>
Approximate Owned or Leased-
Square Footage of Expiration Date of
Location Buildings Lease
-------- ----------------- -----------------
<S> <C> <C>
CONTINUING OPERATIONS
- - ---------------------
Administrative offices:
Los Angeles, California 11,086 sq. ft. Leased 1996
Houston, Texas 46,400 sq. ft. Leased 1997
Phoenix, Arizona 10,300 sq. ft. Leased 2002
Washington, D.C. 27,270 sq. ft. Leased 1998
Washington, D.C. 11,314 sq. ft. Leased 1996
Washington, D.C. 6,830 sq. ft. Leased 1998
Washington, D.C. 4,190 sq. ft. Leased 1998
Miami, Florida 1,785 sq. ft. Leased 1994
Processing and shipping of
rice and rice products:
Freeport, Texas (1) 256,500 sq. ft. Owned and
Leased 2022
Stuttgart, Arkansas 142,900 sq. ft. Owned
Maxwell, California 124,500 sq. ft. Owned
Laffiteau, Haiti 30,024 sq. ft. Leased 2001
Spanish Town, Jamaica 29,000 sq. ft. Leased 1998
Purchasing, drying and
storage of rough rice prior
to processing:
Maxwell, California 136,500 sq. ft. Leased 2034
Freeport, Texas 16,400 sq. ft. Leased 2022
Greenville, Mississippi 10,000 sq. ft. Leased 1994
Processing, warehousing and
shipping of fire retardants:
Phoenix, Arizona 20,600 sq. ft. Leased 2002
Orland, California 20,000 sq. ft. Owned
Kamloops, British Columbia,
Canada 10,000 sq. ft. Leased 2016
Edmonton, Alberta, Canada 4,800 sq. ft. Leased 1998
DISCONTINUED OPERATIONS
- - -----------------------
Grape crushing, fermenting,
processing, and warehousing
of wine:
Tulare, California 49,000 sq. ft. Owned
Delano, California* 121,000 sq. ft. Owned
</TABLE>
(1) Only the land and storage facility are leased.
* Leased to a third party.
14
<PAGE> 16
ITEM 2. PROPERTIES (CONTINUED)
All properties owned or leased by the Company are maintained in good repair,
and management believes them to be adequate for their respective purposes. All
machinery and equipment are considered to be in sound and efficient operating
condition. Facilities reflected as discontinued operations above are
classified as assets held for sale in the consolidated balance sheets.
Substantially all property, plant and equipment detailed above (in addition to
all receivables, inventories and the capital stock of American Rice, Inc.,
Chemonics Industries, Inc. and ERLY Juice Inc.) are pledged as collateral on
notes payable and certain other long-term obligations.
ITEM 3. LEGAL PROCEEDINGS
The U.S. Department of Agriculture has had a series of ongoing investigations
of companies, including Comet, who sold products to Iraq utilizing U.S.
Government subsidized financing. The current investigation, which began in
February 1994, includes the U.S. Department of Justice. The Company is
cooperating with the investigation, there have been no allegations of any
violations directed towards ARI, and the Company does not believe it has
violated any laws or believe it is subject to any liability.
The Company is involved in litigation in the ordinary course of business. It
is the opinion of management that resolutions of such litigation will have not
have a material adverse affect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders, through a solicitation
of proxies or otherwise, since the last Annual Meeting of Shareholders held on
November 22, 1993.
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
(A) MARKET INFORMATION
The Company's common stock was listed in the National Market Issue Section of
the Over-the-Counter Market as ERLY Industries Inc. - NASDAQ Symbol "ERLY"
through July 1993. Due to non-compliance with NASDAQ's minimum capital
requirement, ERLY was removed from the National Market Issue Section of NASDAQ
and the stock is currently traded in the "OTC Bulletin Board" through security
dealers who act as market makers for ERLY stock.
15
<PAGE> 17
PRICE RANGE OF ERLY COMMON STOCK
<TABLE>
<CAPTION>
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Fiscal Year 1994
High $5-1/4 $4-1/2 $4-1/2 $5-1/2
Low 2-3/4 2-3/4 2 4-1/2
Fiscal Year 1993
High $3-3/8 $2-5/8 $4-1/4 $4-3/4
Low 1-7/8 1-1/2 1-1/2 2-7/8
</TABLE>
(B) HOLDERS
There were approximately 1,109 shareholders of record as of May 31, 1994.
(C) DIVIDENDS
The Company has never paid cash dividends on ERLY Common Stock and has no
present intention to declare or pay cash dividends on the Common Stock in the
foreseeable future. The Company intends to retain any earnings which it may
realize in the foreseeable future to finance its operations.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no disagreements on accounting or financial disclosures to
report.
16
<PAGE> 18
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following is a list of the directors of ERLY Industries Inc. with
information provided as of June 30, 1994:
<TABLE>
<CAPTION>
Date Elected
as Director
Name of Director Age of Company
- - ---------------- --- ------------
<S> <C> <C>
Gerald D. Murphy 66 April 1964
</TABLE>
Mr. Murphy is Chairman of the Board and Chief Executive Officer (since 1964) of
the Company, and is Chairman of the Board (since 1993) and Director (since
1988) of American Rice, Inc. (which is 81% owned by ERLY effective May 1993).
He also serves as a Director of Pinkerton's, Inc., a security and investigation
services firm, and High Resolution Sciences, Inc., a technological corporation.
<TABLE>
<S> <C> <C>
Douglas A. Murphy 38 January 1988
</TABLE>
Mr. Murphy is President (since 1990) and Chief Operating Officer (since 1992)
of ERLY Industries Inc., President, Chief Executive Officer (since 1993) and
Director (since 1990) of American Rice, Inc. and President of ERLY Juice Inc.
(since 1988), a subsidiary of the Company. He was President of Comet American
Marketing, a division of American Rice, Inc. from 1986 to 1990. He is also a
Director of Compass Bank Houston.
<TABLE>
<S> <C> <C>
William H. Burgess 77 September 1975
</TABLE>
Mr. Burgess is a private business consultant, Chairman of CMS Digital, Inc., a
privately held company, and a Director of American Rice, Inc. From 1978 to
1986 Mr. Burgess was Chairman of International Controls Corp., an
internationally diversified manufacturing company.
<TABLE>
<S> <C> <C>
Bill J. McFarland 57 August 1986
</TABLE>
Mr. McFarland is Vice President of the Company (since 1975), President of Comet
American Marketing (since 1993), Senior Vice President of American Rice, Inc.
(since 1993) and President of ERLY Food Group (since 1990). He was formerly
President of The Beverage Source (from 1979 to 1990) and President of Early
California Foods from 1975 until its sale in 1985 (both subsidiaries of the
Company).
17
<PAGE> 19
The following is a list of the executive officers of ERLY Industries Inc.,
their ages and their positions as of June 30, 1994:
<TABLE>
<S> <C> <C>
Gerald D. Murphy 66 Chairman of the Board and Chief Executive Officer of ERLY
Industries since formation of the Company in 1964 and President
of the Company from 1964 to 1990; and Chairman of the Board of
American Rice, Inc. (since 1993).
Douglas A. Murphy 38 President since 1990 and Chief Operating Officer since 1992 of
ERLY Industries; President and Chief Executive Officer since
1993 and Director since 1990 of American Rice, Inc.; President
of ERLY Juice Inc. since 1988; and President of Comet American
Marketing from 1986 to 1990.
Bill J. McFarland 57 Vice President of the Company since 1975; President of Comet
American Marketing since 1993; Senior Vice President of American
Rice, Inc. since 1993; President of ERLY Food Group from 1990;
President of The Beverage Source from 1979 to 1990; and
President of Early California Foods from 1975 until its sale in
1985.
Richard N. McCombs 48 Vice President and Chief Financial Officer of the Company since
1990; Executive Vice President of Finance and Administration,
Secretary, Treasurer and Director of American Rice, Inc. since
1993; President of ISC Wines of California from 1984 to 1986;
and Executive Vice President of The Beverage Source from 1986
to 1990 and President since 1990.
Kurt A. Grey 53 Vice President of the Company since 1982; President, Cicero
Industries from 1981 to 1982; and Vice President, Union Bank,
from 1976 to 1981.
Lolan M. Pullen 60 Vice President of the Company since 1986; Vice President of
Comet Rice, Inc. from 1986 to 1993; and Vice President - Finance
of Early California Foods from 1976 until its sale in 1985.
Thomas A. Whitlock 44 Vice President and Corporate Controller of the Company since
1991; and Vice President and Controller of The Beverage Source
from 1987 to 1990.
</TABLE>
Douglas A. Murphy, President of ERLY Industries Inc., American Rice, Inc. and
ERLY Juice Inc., is the son of Gerald D. Murphy, Chairman of the Board of the
Company. There are no other family relationships among the directors or
executive officers of the Company.
18
<PAGE> 20
PART IV
ERLY INDUSTRIES INC.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
<TABLE>
<CAPTION>
Page
Number
------
<S> <C> <C> <C>
(a) 1. Financial Statements
--------------------
Selected Financial Data 22-23
Management's Discussion and Analysis of
Financial Condition and Results of Operations 24-34
Consolidated Statements of Operations 35-36
Consolidated Balance Sheets 37
Consolidated Statements of Cash Flows 38-39
Consolidated Statements of Stockholders' Equity 40
Notes to Consolidated Financial Statements 41-69
Independent Auditors' Report 70
2. Financial Statement Schedules
-----------------------------
Schedule III - Condensed Financial
Information of ERLY Industries Inc.
(Parent Only) 71-73
Schedule V - Property, Plant and Equipment 74
Schedule VI - Accumulated Depreciation,
Depletion and Amortization of Property,
Plant and Equipment 75
Schedule VIII - Valuation and Qualifying
Accounts 76
Schedule X - Supplementary Income Statement
Information 77
</TABLE>
All other schedules are omitted because they are
inapplicable, not required under the instructions or the
information is included in the financial statements and
schedules of the registrant.
19
<PAGE> 21
PART IV
ERLY INDUSTRIES INC.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K (CONTINUED)
3. Exhibits
<TABLE>
<CAPTION>
Exhibit Exhibit
Number Description Reference
------- ----------- ---------
<S> <C> <C>
(3) Articles of Incorporation and
By-Laws (as amended November 22, 1993). Exhibit III
(4) The Indenture dated as of December 1, 1993
for $8,880,000 12 1/2% Subordinated Sinking
Fund Debentures due 2002. Exhibit IV
(4) The Indenture dated as of December 1,
1978 for $20 million 12 1/2%
Subordinated Sinking Fund Debentures
due 1993 (incorporated by reference
to Exhibit 2(b) to the Company's
Registration Statement on Form S-7,
filed December 6, 1978, Registration
No. 2-62870).
(11) Calculation of Primary Income
(Loss) Per Share. Exhibit I.1
(11) Calculation of Fully Diluted Income
(Loss) Per Share. Exhibit I.2
(22) Subsidiaries of ERLY Industries Inc. Exhibit II
(28) Asset Purchase Agreement dated
March 23, 1993, between and among
American Rice, Inc., Comet Rice, Inc.
and ERLY Industries Inc. (incorporated
by reference to Exhibit 1. to the Company's
Form 8-K, filed June 16, 1993,
File No. 1-7894).
(28) Amendment to Asset Purchase Agreement dated
May 25, 1993, between and among American
Rice, Inc., Comet Rice, Inc. and ERLY
Industries Inc. (incorporated by reference
to Exhibit 2. to the Company's Form 8-K,
filed June 16, 1993, File No. 1-7894).
(28) American Rice, Inc. 1994 Annual Report and
Form 10-K (incorporated by reference to ARI's
1994 Form 10-K, filed June 30, 1994, File
No. 0-17039).
</TABLE>
20
<PAGE> 22
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K (CONTINUED)
(b) 1. Reports on Form 8-K
No reports on Form 8-K were filed by the Company
during the fiscal quarter ended March 31, 1994.
21
<PAGE> 23
ERLY INDUSTRIES INC. AND SUBSIDIARIES
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31: 1990* 1991* 1992* 1993* 1994
------- ------- ------- ------- -------
(In thousands except
per share data)
<S> <C> <C> <C> <C> <C>
Net sales
American Rice (1) $263,002 $218,919 $214,090 $169,617 $284,464
Consulting 20,611 20,414 31,035 37,185 41,944
Fire-Trol 9,649 13,445 10,163 12,629 8,416
Other 6,094 8,697
-------- -------- -------- -------- --------
Total net sales $299,356 $261,475 $255,288 $219,431 $334,824
Operating profit (loss)
(before interest expense,
corporate overhead and
minority interest)
American Rice $ 13,849 $ 11,515 $ 4,882 ($ 55) $ 15,442
Consulting 1,416 307 1,669 1,536 1,455
Fire-Trol 370 2,342 623 1,532 (188)
Other (44) (90)
-------- -------- -------- -------- --------
Total operating
profit $ 15,591 $ 14,074 $ 7,174 $ 3,013 $ 16,709
Income (loss) from
continuing operations $ 2,884 $ 5,626 ($ 6,361) ($ 10,989) $ 14,765
Net income (loss) $ 455 $ 3,260 ($ 12,539) ($ 8,673) $ 17,669
Income (loss) from
continuing operations
per share
Primary $ .95 $ 1.82 ($ 2.03) ($ 3.19) $ 3.66
Fully diluted $ .95 $ 1.73 ($ 2.03) ($ 3.19) $ 3.43
Net income (loss)
per share
Primary $ .15 $ 1.06 ($ 4.01) ($ 2.52) $ 4.83
Fully diluted $ .15 $ 1.01 ($ 4.01) ($ 2.52) $ 4.53
Average common shares
outstanding**
Primary 3,029,000 3,089,000 3,127,000 3,444,000 3,655,000
Fully diluted 3,029,000 3,301,000 3,127,000 3,444,000 3,922,000
Cash dividends per
common share $ - $ - $ - $ - $ -
Stock dividend issued 10% 10% - - -
At year-end:
Total assets $242,139 $225,059 $196,726 $135,100 $199,150
Long-term debt*** $ 75,668 $ 73,274 $ 64,080 $ 40,565 $ 67,971
Subordinated debt*** $ 14,122 $ 12,634 $ 11,139 $ 9,941 $ 8,880
Stockholders' equity
(deficiency) $ 9,759 $ 13,141 $ 21 ($ 9,194) $ 8,394
Shares outstanding** 3,086,744 3,088,731 3,429,513 3,486,956 3,674,765
</TABLE>
22
<PAGE> 24
ERLY INDUSTRIES INC. AND SUBSIDIARIES
ITEM 6. SELECTED FINANCIAL DATA (CONTINUED)
On May 26, 1993, ERLY consummated a Transaction in which it acquired an
additional 33% of the voting interest of ARI in exchange for the net assets of
Comet, other than the ARI capital stock already owned by Comet. Comet was a
wholly owned subsidiary of ERLY. The Transaction is accounted for as a reverse
step acquisition of ARI by ERLY through its subsidiary, Comet.
Because Comet was the acquirer for accounting purposes, the selected financial
data presented herein for periods prior to the Transaction includes the
accounts of Comet, not ARI. In addition, the fiscal year 1994 operating
results for the period April 1, 1993 through the date of the Transaction, May
26, 1993, include those of Comet, not ARI. Operating results thereafter
reflect the combined operations of Comet and ARI.
Because ERLY holds convertible preferred stock in ARI, ERLY's share of ARI's
net income since the Transaction consists of ERLY's allocated share (32%) of
ARI's earnings applicable to common stock plus dividends earned on ARI Series B
Preferred Stock. For fiscal year 1994, ERLY's share of ARI's common stock
earnings was $2.6 million. ERLY also earned Series B Preferred dividends of
$4.3 million from the date of the Transaction to the end of the fiscal year
(See Note 9 of Notes to the Consolidated Financial Statements).
This information should be read in conjunction with the consolidated financial
statements and related notes included in Item 8 and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included in Item
7 of this Form 10-K.
NOTES TO SELECTED FINANCIAL DATA:
(1) Rice sales decreased in fiscal 1991 compared to fiscal 1990 primarily
as a result of the embargo of rice sales to Iraq. Rice sales decreased
in 1993 compared to 1992 due to the disposition of Comet's Greenville,
Mississippi facility. Rice sales increased in 1994 due to the
combination of Comet and ARI.
* Restated for discontinued operations.
** Retroactively adjusted to give effect to a 10% stock dividend in
September 1990 and November 1989.
*** Including current portion.
23
<PAGE> 25
ERLY INDUSTRIES INC. AND SUBSIDIARIES
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the year ended March 31, 1994, ERLY Industries recorded net income of $17.7
million or $4.53 per fully diluted share of common stock on sales of $335
million. Because ERLY holds convertible preferred stock in ARI, ERLY's share
of ARI's net income since the Transaction consists of ERLY's allocated share
(32%) of ARI's earnings applicable to common stock plus dividends earned on ARI
Series B Preferred Stock. For fiscal year 1994, ERLY's share of ARI's common
stock earnings was $2.6 million. ERLY also earned Series B Preferred dividends
of $4.3 million from the date of the Transaction to the end of the fiscal year
(See Note 9 of Notes to the Consolidated Financial Statements). This compares
with a net loss in 1993 of $8.7 million or $2.52 per fully diluted share on
sales of $219 million and a net loss in 1992 of $12.5 million or $4.01 per
fully diluted share on sales of $255 million.
Results for 1994 include extraordinary income of $16.8 million relating to
discounts on extinguishment of debt. Results for 1993 and 1992 also include
extraordinary income of $7.3 million and $4.4 million, respectively, relating
to discounts on extinguishment of debt. See Notes 8 and 19 to the
Consolidated Financial Statements.
Fiscal year 1994 reported income from continuing operations of $14.8 million
(including a gain on sale of partial interest in subsidiary of $11.8 million)
compared to a loss from continuing operations in 1993 of $11.0 million and a
loss from continuing operations of $6.4 million in 1992. Results from
continuing operations include ERLY's equity interest in the net income (loss)
of American Rice, Inc. (prior to the combination of ARI and Comet Rice in May
1993) which amounted to $426,000 (two months), $1,560,000 and ($2,607,000) in
1994, 1993 and 1992, respectively.
RESULTS OF CONTINUING OPERATIONS
AMERICAN RICE
On May 26, 1993, ERLY consummated a Transaction in which it acquired an
additional 33% of the voting interest in ARI in exchange for the net assets of
Comet, other than the ARI capital stock owned by Comet. Comet was a
wholly owned subsidiary of ERLY.
Because Comet was the acquirer for accounting purposes, the financial
statements presented at March 31, 1993 and for the years ended March 31, 1993
and 1992 include the accounts of Comet, not ARI. In addition, the fiscal year
1994 operating results for the period April 1, 1993 through the date of the
Transaction, May 26, 1993, include those of Comet, not ARI. Operating results
thereafter include the combined operations of Comet and ARI. For convenience
purposes, unless otherwise specifically indicated, the entity is hereafter
referred to as ARI for all periods presented.
ARI reported gross profit of $36.4 million on sales of $284.5 million in the
year ended March 31, 1994, $8.4 million on sales of $169.6 million in 1993, and
$11.7 million on sales of $214.1 million in 1992.
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 earnings in the short
term because consumer prices usually do not rise as fast as rapidly increasing
commodity prices; conversely, rapid
24
<PAGE> 26
ERLY INDUSTRIES INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
rough rice price decreases could have the effect of increasing earnings in the
short term because consumer prices usually do not fall as fast as rapidly
decreasing commodity prices. In both increasing and decreasing rough rice cost
markets the timing of rough rice costs and competitive price pressures on
milled rice will significantly affect ARI's earnings. ARI management believes
the Transaction has significantly improved ARI's ability to manage rapid
changes in rough rice costs by expanding and further diversifying its markets
for milled rice.
FISCAL YEAR ENDED MARCH 31, 1994 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1993:
Sales for 1994 of $285 million increased $115 million or 68% from the prior
year due to $85.0 million in export sales increases and $29.8 million in
domestic sales increases. The approximate amount of sales included in 1994 as
a result of the Transaction amounted to $140 million including $70 million
export and $70 million domestic.
Export sales increased due to higher volume and higher average prices. Total
export sales volume increased approximately 8 million equivalent rough rice
cwt., an 80% increase, due primarily to approximately 5 million cwt. in
increases as a result of the Transaction and increased exports from California.
Export sales increases were also experienced in Haiti and through ARI's 90%
owned subsidiary, Comet Ventures. Comet Ventures' total sales more than
tripled in fiscal 1994. Total average milled rice export prices increased 23%
due primarily to a higher proportion of branded sales as a result of the
Transaction.
Domestic sales added by the Transaction in 1994 included $2 million in rough
rice sales. The increase in domestic sales from the Transaction is partially
offset by lower sales from the Greenville, Mississippi facility disposed of by
ERLY in July 1992. Average domestic milled rice sales prices increased 24% due
primarily to the higher value-added retail sales from the new customer base.
Gross profit was 13% of sales for 1994 and 5% of sales for 1993, increasing $28
million from the prior year. Sales resulting from the Transaction contributed
approximately $20 million. Gross profit on other domestic sales increased $2.8
million, while gross profit on other export sales increased $4.3 million.
Exports to Japan from ARI's California facilities contributed significant gross
profit increases. Other divisions also reporting significant improvements were
Comet Ventures, Haiti and Puerto Rico.
Market prices of rough rice as measured by futures trading approximately
doubled in October and November 1993, and had eased somewhat by the end of the
fiscal year. In response to this increase in raw material cost, ARI increased
prices in some markets. In other markets, however, forward sales commitments
delayed price increases. The overall effect of the increase in rough rice
prices on ARI's 1994 gross profit is thought to be small. The potential
negative impact of the higher rough rice prices on ARI's gross profits was
mitigated by substantial inventories acquired at lower price levels and the
ability to quickly increase prices in some markets offsetting the negative
impact from forward sales commitments at lower price levels in other markets.
25
<PAGE> 27
ERLY INDUSTRIES INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Selling, general and administrative expense of $21.5 million increased $10.7
million due to advertising and selling expenses associated with the higher
value-added sales from the new customer base.
Interest expense of $9.9 million increased $4.6 million due to higher average
interest rates and balances.
In fiscal year 1994, an extraordinary gain of $10.3 million was recorded to
recognize the debt discount from ARI's former lenders. (See Note 8 of Notes to
the Consolidated Financial Statements.)
FISCAL YEAR ENDED MARCH 31, 1993 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1992:
Sales for 1993 of $170 million were $44 million, or 21% lower than 1992 sales.
Domestic sales were down in 1993 by $11 million or 11% from 1992 although
volume increased by 6%. The average sales price per cwt. for domestic rice
declined by 16% from $15.50 in 1992 to $12.99 in 1993 primarily due to lower
rough rice costs. Export sales in 1993 declined by $33 million or 30% from
1992 due to the disposition of the Greenville, Mississippi mill in July 1992.
Discontinuation of significant amounts of marginal export business as a result
of the disposition of the Greenville mill resulted in lower sales to all
geographical areas except the Middle East and South America. Expected profit
margins on sales to Turkey caused increased sales to the Middle East. Sales to
South America in 1992 were primarily rough rice sales which became uneconomical
in 1993 due to changes in world supply and demand. The average sales price per
cwt. for export rice declined by only 7%, considerably lower than the 16%
domestic decline, while volume decreased by 25%.
Cost of sales declined by $41 million in 1993 from 1992. This represents a 20%
reduction which is proportionate to the 21% decline in sales. Lower rough rice
costs and reductions of fixed expenses resulting from the disposition of the
Greenville mill allowed the cost of sales decline to remain proportionate with
the sales decline.
Gross profit declined 28% from $11.7 million in fiscal 1992 to $8.4 million in
fiscal 1993. Operations in the Southern U.S. had a decline in gross profit of
33% reflecting a 42% lower sales volume due, in part, to decreased milling
capacity with the disposition of the Greenville mill and transfer of Southern
U.S. operations from Greenville to the Stuttgart, Arkansas mill. The Southern
U.S. decline was largely offset by an increase in gross profit by the
California operations attributable to a 14% sales increase. The Puerto Rico
operations contributed no gross profit due to expenses associated with the
closure of the Puerto Rico mill and conversion of sales to toll packed product.
Operating results for the year ended March 31, 1993 include the sale through
foreclosure of the Greenville, Mississippi rice mill in July 1992. Due to
continuing operating losses resulting from low margins and uncertainty about
future U.S. rice exports, payments were ceased in January 1992 on a $16 million
non-recourse obligation secured by the Company's rice plant in Greenville,
Mississippi. In July 1992, the facility was sold through foreclosure sale and
in conjunction therewith, debt of $16 million was eliminated as was the related
property, plant and equipment. The disposition of the facility was accounted
for in accordance with: (1) Statement
26
<PAGE> 28
ERLY INDUSTRIES INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
of Financial Accounting Standards No. 15, "Accounting by Debtors and Creditors
for Troubled Debt Restructurings," and (2) Emerging Issues Task Force Issue No.
91-2, "Debtor's Accounting for Forfeiture of Real Estate Subject to a
Nonrecourse Mortgage."
These guidelines require a two-step approach in accounting for the disposition.
Prior to the disposition, the plant was written down by $4,000,000 to its
estimated fair market value. This writedown is included in results of
operations prior to taxes on income and extraordinary items in the consolidated
statements of operations for fiscal 1993. Secondly, the difference between the
estimated fair market value of the facility and the amount of debt extinguished
(net of estimated shut-down and relocation expenses) resulted in a gain of
$4,726,000 on the extinguishment of debt which was recorded as extraordinary
income for fiscal 1993.
Jamaica operations suffered losses due to a continuation of preferential
tariffs causing a competitive disadvantage for commercial sales of rice from
the U.S.
Selling, general and administrative expenses increased in 1993 over 1992 by
$2.4 million or 28% due to increases in the allowance for doubtful accounts of
approximately $2.4 million.
Interest expense declined by $2.8 million or 35% during 1993 from 1992 due to
the disposition of indebtedness related to the Greenville mill, lower average
borrowings due to lower inventories and lower average interest rates.
CHEMONICS INDUSTRIES
Chemonics reported combined sales in 1994 of $50.4 million compared to $49.8
million in 1993 and $41.2 million in 1992.
Chemonics International continues to expand its consulting business with sales
of $42.0 million in 1994, up 13% from 1993 sales of $37.2 million. Sales in
1993 were up 20% from 1992 sales of $31.0 million. Funded contract backlog at
March 31, 1994 was approximately $160 million, covering 1995 through 1999, up
from $143 million at the end of fiscal 1993. Fire-Trol sales, which are
directly affected by weather, location and severity of fires, have varied over
the last three years with sales of $8.4 million in 1994, $12.6 million in 1993
and $10.2 million in 1992.
INVESTMENT INCOME
In fiscal 1994, ERLY reported investment income of $426,000 representing ERLY's
equity interest in ARI's net income for April and May 1993. In fiscal 1993,
ERLY reported an investment loss of $1.6 million representing: (1) a $3.2
million write-down on the portion of its investment in ARI attributed to ARI's
Houston property, partially offset by (2) income of $1,560,000 from ERLY's
equity interest in ARI's net income for fiscal year 1993. In fiscal 1992, ERLY
reported an investment loss of $1.6 million comprised of a $2.6 million loss on
its equity interest in ARI's net loss, offset by a $1.0 million decrease in the
reserve on the Company's note receivable from California CoPackers (due to
reduced loss exposure to ERLY since
27
<PAGE> 29
ERLY INDUSTRIES INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
California CoPackers was sold and ERLY received $5.2 million in cash and a
$4 million note receivable).
CORPORATE
Consolidated interest expense was $12.1 million, $7.5 million and $10.8 million
in 1994, 1993 and 1992, respectively. Interest expense increased $4.6 million
from 1993 to 1994 due to the higher average balances and interest rates on the
loans at ARI due to the Transaction. Interest declined to $7.5 million in 1993
from $10.8 million in 1992 due to the declining prime interest rate and
reductions in long-term and subordinated debt.
The $11.8 million gain on sale of subsidiary in 1994 reflects the sale of 19%
of Comet Rice in the May 1993 Transaction (See Note 6 to the Consolidated
Financial Statements).
RESULTS OF DISCONTINUED OPERATIONS
ERLY JUICE INC.
In July 1993, ERLY Juice sold its primary orange juice processing plant in
Lakeland, Florida to Florida Juice, Inc. for $11.9 million. This transaction
resulted in a loss of $2.7 million. ERLY Juice had access to the facility for
processing and packaging its retail and food service business through December
1993 under a co-pack agreement. This sale was intended in part to reduce
operating losses. One of ERLY Juice's primary creditors agreed to discount
term debt and accounts payable obligations in exchange for cash. This resulted
in a gain of $5.6 million which is reflected as extraordinary income as
described in Note 8 to the Consolidated Financial Statements.
On December 21, 1993, Eau Claire Packing Company, a wholly owned subsidiary of
ERLY Industries Inc. operating in the juice business, sold its manufacturing
facility located in Eau Claire, Michigan, together with the inventory, accounts
receivable and certain trademarks associated with the plant facility, to Seneca
Foods Corporation ("Seneca"). Seneca paid approximately $5.1 million for the
plant facility and the related assets. ERLY Juice Inc., a wholly owned
subsidiary of ERLY Industries, also sold trademarks, inventory and accounts
receivable to Seneca for approximately $3.3 million. The purchase price was
paid in cash at the closing. The net proceeds from both sales were used to
reduce the outstanding indebtedness under loans from the State of Michigan
Retirement System ("SMRS") and ING Capital as required by each Company's
respective secured loan agreements.
As a part of discontinuing ERLY's juice operations, ING Capital, the lender to
ERLY Juice Inc., agreed to a $6 million forgiveness in the amount of total
debt. In exchange, ERLY guaranteed to ING Capital the remaining balance of the
obligations owed by ERLY Juice Inc. and issued warrants to ING Capital to
obtain up to 10% of ERLY stock at $.01 per share. The amount of the ERLY Juice
obligation to ING Capital immediately prior to the transaction was
approximately $17.1 million and, after application of the forgiveness and
amounts paid, the current amount of the debt is approximately $8.4 million
(which is included in notes payable in the Company's
28
<PAGE> 30
ERLY INDUSTRIES INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
consolidated balance sheets) plus accrued interest. Under the terms of the
guarantee, ERLY is required to paydown the remaining $8.4 million of debt plus
accrued interest within one year (by December 21, 1994) or ING Capital may
declare a default with the right to foreclose on ERLY's subsidiary, Chemonics
Industries, Inc. ING Capital currently has $9.0 million of loans outstanding
directly to Chemonics. The Company expects to sell sufficient assets or
refinance Chemonics Industries in order to pay down the remaining obligations
prior to December 21, 1994.
As a result of the sale of the above assets, ERLY has no operating assets or
continuing operations remaining in the juice business. It is ERLY's intention
to liquidate the remaining assets of ERLY Juice for the benefit of the ERLY
Juice creditors.
The results of ERLY Juice have been reported separately as discontinued
operations in the consolidated statements of operations. Prior period
consolidated financial statements have been restated to present ERLY Juice as a
discontinued operation (See Note 7 to the Consolidated Financial Statements).
THE BEVERAGE SOURCE
The Beverage Source ("TBS") is classified as a discontinued operation for
financial reporting purposes. In fiscal year 1990, all wine brands and labels
were sold in separate transactions. The direct sales force, main office and
bottling operations were shut down. The remaining business was a streamlined
bulk wine processing operation with two wineries at Sanger and Tulare,
California. In June 1992, the winery at Sanger was sold.
TBS continued to operate with slightly positive cash flow in fiscal year 1994.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The following amounts and ratios are indicative of ERLY's consolidated
liquidity and capital resources:
<TABLE>
<CAPTION>
March 31,
-----------------------
1994 1993
----- ------
<S> <C> <C>
Working capital (in millions) $ 1.5 ($44.5)
Current ratio 1.01 .61
Term debt to term debt and
equity ratio .90 1.23
</TABLE>
Cash declined $807,000 from the prior year as a result of $9.0 million in cash
used in operating activities, $28.1 million provided by investing activities,
offset by a $19.8 million use of cash in financing activities.
Cash used in operating activities resulted from an increase in inventory levels
at ARI of $23.7 million offset by a decrease in juice inventories of $7.7
million, a decrease in payables of $3.8 million partially offset by other net
operating cash inflows of $10.8 million. The inventory changes at ARI were
primarily due to the increased levels and prices of raw product.
29
<PAGE> 31
ERLY INDUSTRIES INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cash provided by investing activities primarily was from the sale of the
Lakeland facility and the other juice assets and from the $12.6 million
associated with the May 1993 Transaction with ARI.
Cash used in financing activities primarily reflected the $70 million paydown
of ARI and Comet term loans and notes payable as part of the Transaction,
paydown on notes payable of $21.2 million and $6.9 million principal payments
on long-term debt, partially offset by the $79.3 million in notes and term debt
proceeds from the Refinancing.
ARI's cash flow in 1994 was significantly improved from 1993 primarily as a
result of the combining of ARI and Comet and the ensuing operating profit and
increased sales. ARI's gross profit in dollars increased over 300% due to an
increase of 68% in sales and increase in gross profit as a percent of sales to
13% in 1994 from 5% in 1993.
ARI capital expenditures in 1995 are expected to be approximately $4 million
and will be financed out of operating earnings and a $1 million capital lease.
Chemonics' operations for 1995 are expected to provide positive cash flows,
similar to those experienced in 1990 through 1994. The Company expects to
split Chemonics International and Chemonics Fire-Trol into separate
corporations in 1995. Currently discussions are underway to provide separate
financing for each entity. The significant growth in International's sales
requires an increased revolving credit line with a new lender which the Company
hopes to have in place by the third quarter.
The parent company's operating cash requirements for corporate overhead are
expected to be met from management fees received from subsidiaries and through
positive cash flows from investments and remaining wine operations. Lines of
credit have been arranged through subsidiary companies, with the result that
cash distributions are either not permitted to the parent company or limited
to certain amounts under management agreements. Under the current ARI lending
agreements, no dividends nor tax payments under the tax agreement and only
limited payments under the management agreement are permitted. ARI is
considering refinancing its revolving line of credit and term debt in 1995.
ERLY will be negotiating for reduced restrictions on contractual payments to
ERLY.
The Company's 12-1/2% Subordinated Sinking Fund Debentures (the "Old
Debentures") with an outstanding principal balance of $8,880,000 matured on
December 1, 1993. The Company has offered to exchange $8,880,000 12-1/2%
Subordinated Sinking Fund Debentures due 2002 (the "New Debentures") for the
Old Debentures. As of June 29, 1994, holders of approximately 95% of the Old
Debentures have agreed to the exchange. The Company is in the process of
paying the June 1, 1994 semi-annual interest to holders of both the Old and New
Debentures. The Company does not currently have adequate cash reserves to
redeem the principal amount of all of the Old Debentures (having debentures
with a face value of approximately $449,000) which have not agreed to the
exchange but is exploring alternatives for those debentureholders who will not
exchange and believes that the remaining debentures can be exchanged through
the exchange offer.
For the year ended March 31, 1993, ERLY recorded an $8.7 million net loss.
Cash remained equal to the prior year as a result of $15.3 million in cash
provided by
30
<PAGE> 32
ERLY INDUSTRIES INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
operating activities, $7.4 million provided by investing activities, offset by
a $22.7 million use of cash in financing activities.
Cash provided by operating activities resulted from decreases in inventory
levels and receivables at Comet Rice of $19.4 million and $9.1 million,
respectively, offset by decreases in accounts payable and other current
liabilities at Comet Rice of $11.4 million. These changes at Comet Rice were
primarily due to the sale of the Greenville facility.
Cash provided by investing activities primarily was due to the $5.2 million
payment received from California CoPackers and the $3.5 million proceeds from
the sale of ERLY Juice's Puerto Rico subsidiary, offset by capital expenditures
of $5.2 million.
Cash used in financing activities primarily reflected the $16.3 million
decrease in notes payable due to lower inventory and receivable levels as well
as $6.7 million principal payments on long-term and subordinated debt.
ARI's cash flow in 1993 was significantly reduced from 1992 primarily as a
result of its operating loss and reduced export sales of $33.4 million.
For the year ended March 31, 1992, ERLY recorded a $12.5 million net loss.
Cash increased by $887,000 from the prior fiscal year due to $6.1 million in
cash provided by operating activities, offset by $586,000 in cash used in
investing activities, and $4.6 million used in financing activities.
Cash provided by operating activities resulted primarily from $24 million in
decreases of inventory partially offset by a $6 million decrease in accounts
payable and other current liabilities in both Comet Rice and ERLY Juice, offset
by a net operating cash loss of $12 million.
Cash used in investing activities consisted primarily of $2.3 million in
capital expenditures.
Cash used in financing activities consisted primarily of $7.1 million of
principal payments on long-term and subordinated debt.
A plan to improve liquidity, reduce term debt, and overcome financial
limitations of ERLY Industries Inc. was initiated in 1989. Accomplishments to
date with respect to this plan are as follows:
Most importantly, ERLY completed the multiyear effort to combine ERLY's wholly
owned subsidiary, Comet Rice, Inc., and its 48% owned American Rice, Inc. in
May 1993. This transaction involved refinancing the combined indebtedness of
Comet and ARI. See Notes 3 and 4 to the Consolidated Financial Statements for
additional discussion.
Chronologically, the remaining accomplishments to overcome the financial
limitations of ERLY started when California CoPackers purchased Hansen Foods
out of bankruptcy in January 1990 and ERLY received approximately $11.3 million
in cash and a note receivable for the balance of ERLY's $24 million notes
receivable from Hansen Foods. In July 1992, the assets and business, subject
to certain liabilities, of California CoPackers were purchased by a third
party. In exchange for its $8 million net receivable (net of a $3 million
reserve), ERLY received a payment of $5.2 million
31
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ERLY INDUSTRIES INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(which was used to pay down bank debt as required by Comet's loan agreements)
and a $4 million note receivable, secured by the Hansen trademark license.
The liquidation of The Beverage Source's trademarks, inventory and receivables
was substantially completed by April 1990. In June 1992, ERLY sold its Sanger,
California facility, further reducing its operations in the wine business.
In March 1991, ERLY Industries sold its 50% share in Kasco Media Trading
Company to its joint venture partner, resulting in a $3 million gain.
In July 1992, Comet's Greenville, Mississippi rice facility, which was secured
by a $16 million non-recourse obligation, was disposed through foreclosure
sale. In conjunction therewith, the Company eliminated $16 million of debt and
property, plant and equipment of $14 million.
In January 1993, ERLY Juice sold its wholly owned subsidiary, TreeSweet of
Puerto Rico, Inc. Sale proceeds of $3.5 million were used to reduce debt.
In May 1993, due to the Refinancing of the combined debt of ARI and Comet, term
debt of the rice operations increased by $39 million as the debt of ARI was
consolidated with Comet. This increase is net of the debt forgiveness by ARI
term lenders (See Note 8).
In July 1993, ERLY Juice sold its primary orange juice processing plant in
Lakeland, Florida for $11.9 million. One of ERLY Juice's primary creditors
agreed to discount term debt and accounts payable obligations in exchange for
cash. As a result of these two transactions, term debt and accounts payable
were reduced by over $16 million. In December 1993, ERLY sold the trademarks
of ERLY Juice and the assets of the Eau Claire Packing Company and discontinued
its juice operations. Short-term and long-term debt were reduced by $15
million as a result of the sale and associated debt discounts negotiated as
part of the transaction.
As a result of the foregoing, term debt (both long-term and current portion)
had been reduced to $76.9 million as of March 31, 1994 compared to $89.8
million as of March 31, 1990, a net decrease of $12.9 million. This represents
debt reductions of $61.4 million over the period as a result of asset sales,
debt forgiveness and scheduled principal payments, partially offset by
increases of $21.1 million and $27.4 million in term debt due to the
Transaction and Refinancing, respectively,.
Chemonics was in violation of certain debt covenants at March 31, 1994.
Negotiations are in process for a refinancing with new lenders and to provide
an increased working capital facility for Chemonics and paydown Chemonics'
existing lender. These negotiations are expected to be completed in the third
quarter of 1995.
As a result of the discontinuation of the juice operations, there still remains
$8.4 million plus accrued interest of ERLY Juice's obligation to ING Capital
which the Company guaranteed in conjunction with a $6 million write-down of
ERLY Juice obligations. Under the terms of the guarantee, ERLY is required to
pay down the remaining $8.4 million (plus accrued interest) of debt by December
21, 1994 or ING Capital may declare a default with the right to foreclose on
ERLY's subsidiary, Chemonics Industries, Inc. The Company expects to sell
sufficient assets or
32
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ERLY INDUSTRIES INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
refinance Chemonics Industries in order to paydown the remaining obligations
prior to December 21, 1994.
With the combination of Comet Rice with ARI which was completed on May 26,
1993, the combined rice operations are expected to provide sufficient cash flow
to make payments to ERLY under its management agreement. Under the terms of
the ARI Series B Preferred Stock issued to ERLY in exchange for the assets and
liabilities of Comet, ERLY is entitled to an aggregate dividend of
approximately $5.2 million per year. The current loan agreements with the new
ARI lenders prohibit the payment of any dividends and do not provide any basis
on which the lenders would approve a dividend payment. As of March 31, 1994,
the Preferred B dividend accumulated, but not declared, is $4.3 million.
In the May 1993 Refinancing, proceeds of $65.3 million from term loans from
three new term lenders (Chase, ING and TCB) were used to pay the remaining
balances outstanding under the old debt. Interest rates on the new loans range
from prime plus 3% to prime plus 8% by June 1997. Terms of the loans preclude
dividend payments, restrict investments and capital expenditures and require
the maintenance of certain financial covenants. These loans are collateralized
by substantially all of ARI's fixed assets and trademarks and have junior liens
on collateral for the revolving credit line.
As part of the Refinancing, ARI also received $47.5 million in credit lines
(subject to borrowing base limitations) from a new revolving credit lender,
Congress. The $47.5 million credit line with Congress expires on May 23, 1995,
carries an interest rate of prime plus 2%, requires that all ARI cash receipts
be paid to Congress as payment on the loan, requires that collateral and
borrowing base reports be prepared frequently by ARI to support requests for
borrowing, and is collateralized by receivables, inventory, cash, a $2 million
key man life insurance policy on Gerald D. Murphy, Chairman, and junior liens
on ARI assets pledged to the term lenders.
Through March 31, 1994, ARI's maximum borrowing under its $47.5 million credit
line was $41.4 million. At April 3, 1994, the borrowing base under the line of
credit was $36.8 million, for $33.4 million in revolving credit borrowings.
ARI intends to refinance the existing revolver loan in the next twelve months
either by renewing the line with the existing lender, or seeking a new
revolving credit line from a new lender.
ARI's new term and revolving debt agreements require ERLY to guarantee the debt
of ARI. These agreements contain certain cross- default provisions with ERLY
debt agreements which 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 covenants.
Under the provisions of the tax sharing agreement between ARI and ERLY, ARI
owes ERLY the amount of U.S. taxes currently payable of $1.5 million upon
filing of the fiscal year 1994 tax return by ERLY. Current loan agreements
prohibit the payment of these amounts unless ERLY is required to pay taxes.
33
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ERLY INDUSTRIES INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. In 1994, the Company earned $3.0
million on continuing operations (excluding a one time gain from the sale of a
partial interest in subsidiary); however, the Company is in default on certain
of its bank debt covenants at its Chemonics subsidiary and the Company has
certain obligations due in fiscal 1995 which it will be unable to meet without
selling assets or refinancing indebtedness. These conditions raise doubt about
its ability to continue as a going concern. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
34
<PAGE> 36
ERLY INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------
Years ended March 31 1994 1993* 1992*
- - ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $334,824,000 $219,431,000 $255,288,000
Cost of sales 284,090,000 195,803,000 230,883,000
------------ ------------ ------------
Gross profit 50,734,000 23,628,000 24,405,000
------------ ------------ ------------
Selling, general and
administrative expenses 35,582,000 21,989,000 19,286,000
Interest expense 12,090,000 7,518,000 10,780,000
Interest income (381,000) (610,000) (1,057,000)
Investment (income) loss (426,000) 1,630,000 1,607,000
Other (income) expense 556,000 (291,000) (289,000)
Gain on sale of partial
interest in subsidiary (11,768,000)
Write-down of rice facility 4,000,000
------------ ------------ ------------
35,653,000 34,236,000 30,327,000
------------ ------------ ------------
Income (loss) before
taxes on income,
discontinued operations,
extraordinary items and
minority interest 15,081,000 (10,608,000) (5,922,000)
Taxes on income 316,000 381,000 439,000
------------ ------------ ------------
Income (loss) from
continuing operations
before discontinued
operations, extraordinary
items and minority interest 14,765,000 (10,989,000) (6,361,000)
Discontinued operations:
Loss on discontinued operations (5,248,000) (4,972,000) (10,614,000)
Loss on disposal of
discontinued business (3,562,000)
------------ ------------ ------------
Income (loss) before
extraordinary items and
minority interest 5,955,000 (15,961,000) (16,975,000)
Extraordinary items 16,792,000 7,288,000 4,436,000
------------ ------------ ------------
Income (loss) before
minority interest 22,747,000 (8,673,000) (12,539,000)
Minority interest in earnings of
consolidated subsidiary (5,078,000)
------------ ------------ ------------
Net income (loss) $17,669,000 ($8,673,000) ($12,539,000)
============ ============ ============
Net income (loss) per common
and common share equivalents:
Primary:
Continuing operations** $ 3.66 ($ 3.19) ($ 2.03)
Discontinued operations (2.41) (1.44) (3.40)
Extraordinary items** 3.58 2.11 1.42
------------ ------------ ------------
$ 4.83 ($ 2.52) ($ 4.01)
============ ============ ============
</TABLE>
35
<PAGE> 37
ERLY INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------
Years ended March 31 1994 1993* 1992*
- - -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fully diluted:
Continuing operations** $ 3.43 ($ 3.19) ($ 2.03)
Discontinued operations (2.24) (1.44) (3.40)
Extraordinary items** 3.34 2.11 1.42
-------- -------- --------
$ 4.53 ($ 2.52) ($ 4.01)
======== ======== ========
Weighted average common and
common share equivalents:
Primary 3,655,000 3,444,000 3,127,000
Fully diluted 3,922,000 3,444,000 3,127,000
</TABLE>
* Restated for discontinued operations and write-down of property (1993)
described in Note 25.
** Net of applicable minority interest.
See Notes to Consolidated Financial Statements.
36
<PAGE> 38
ERLY INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------
March 31 1994 1993*
- - ----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 3,065,000 $ 3,872,000
Notes and accounts receivable,
less allowance for doubtful
accounts of $1,865,000 (1994)
and $3,280,000 (1993) 34,894,000 35,534,000
Inventories 63,296,000 27,725,000
Prepaid expenses and other
current assets 1,522,000 2,524,000
------------ ------------
Total current assets 102,777,000 69,655,000
Long-term notes receivable, net 1,792,000 6,623,000
Property, plant and equipment, net 55,034,000 30,857,000
Assets held for sale, net 22,546,000 4,210,000
Investment in American Rice, Inc. 13,104,000
Other assets 17,001,000 10,651,000
------------ ------------
$199,150,000 $135,100,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable, collateralized $ 49,273,000 $ 62,359,000
Accounts payable 37,000,000 20,106,000
Accrued payroll and other
current liabilities 2,724,000 7,298,000
Income taxes payable 3,339,000 1,829,000
Current portion of long-term and
subordinated debt 8,946,000 22,531,000
------------ ------------
Total current liabilities 101,282,000 114,123,000
Long-term debt 60,592,000 26,881,000
Subordinated debt 7,313,000 1,094,000
Minority interest 19,769,000 790,000
Redeemable common stock,
300,000 shares issued and outstanding 1,800,000 1,406,000
Stockholders' equity:
Common stock, par value $.01 a share
(1994) and $1.00 a share (1993):
Authorized: 5,000,000 shares
Issued and outstanding:
3,374,765 shares (1994) and
3,186,956 shares (1993) 34,000 3,187,000
Additional paid-in capital 16,157,000 12,687,000
Retained earnings (deficit) (6,450,000) (24,119,000)
Cumulative foreign currency
adjustments (1,347,000) (949,000)
------------ ------------
Total stockholders' equity 8,394,000 (9,194,000)
------------ ------------
$199,150,000 $135,100,000
============ ============
</TABLE>
* Restated. See Note 25.
See Notes to Consolidated Financial Statements.
37
<PAGE> 39
ERLY INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------
Years ended March 31 1994 1993* 1992
- - ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $17,669,000 ($8,673,000) ($12,539,000)
Adjustments to reconcile net
income (loss) to net cash
provided by operating activities:
Depreciation and amortization 6,497,000 2,816,000 3,623,000
Minority interest in earnings
of consolidated subsidiary 5,078,000
(Increase) decrease in equity
investment in American Rice, Inc. (426,000) 1,630,000 2,607,000
Extraordinary income on disposal
of rice facility (4,726,000)
Write-down of rice facility 4,000,000
Loss on sale of property 1,230,000
Gain on sale of partial
interest in subsidiary (11,768,000)
Extraordinary income on
extinguishment of debt (16,792,000) (2,562,000) (4,436,000)
Income on investments (1,000,000)
Loss on disposition of
juice business 3,562,000
Provision for loss on receivables 3,257,000 2,359,000 208,000
Change in assets and liabilities,
net of effects of acquisition
and sale of businesses:
(Increase) decrease in receivables 8,623,000 8,561,000 (1,743,000)
(Increase) decrease in inventories (15,950,000) 22,757,000 24,014,000
Decrease in prepaid and
other current assets 853,000 186,000 117,000
(Increase) in other assets (7,607,000)
(Decrease) in accounts
payable and other current
liabilities (3,787,000) (11,060,000) (6,057,000)
Increase (decrease) in taxes
payable 522,000 22,000 (176,000)
Decrease in assets
held for sale 1,479,000
----------- ----------- ------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (9,039,000) 15,310,000 6,097,000
INVESTING ACTIVITIES:
Acquisition of American Rice, Inc. 12,608,000
Disposition of juice business 14,499,000
Disposition of rice subsidiary 2,923,000
Payment on note receivable from
California CoPackers 5,200,000
Sale of juice subsidiary 3,460,000
</TABLE>
38
<PAGE> 40
ERLY INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------
Years ended March 31 1994 1993* 1992
- - ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INVESTING ACTIVITIES (continued):
Disposition of property, plant
and equipment $ 1,035,000 $ 2,531,000 $ 289,000
Additions to property, plant
and equipment (3,303,000) (5,200,000) (2,302,000)
Other, net 312,000 1,426,000 1,427,000
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 28,074,000 7,417,000 (586,000)
FINANCING ACTIVITIES:
Increase (decrease) in
notes payable** (21,231,000) (16,337,000) 1,334,000
Proceeds from notes and
long-term debt 79,300,000 159,000 1,091,000
Repayment on notes and term
debt on rice refinancing (69,955,000)
Principal payments on
long-term debt (6,888,000) (5,304,000) (5,519,000)
Principal reduction on
subordinated debt (1,094,000) (1,360,000) (1,557,000)
Proceeds from sale of stock 26,000 145,000 27,000
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (19,842,000) (22,697,000) (4,624,000)
----------- ----------- -----------
INCREASE (DECREASE) IN CASH
DURING THE YEAR (807,000) 30,000 887,000
CASH, BEGINNING OF YEAR 3,872,000 3,842,000 2,955,000
----------- ----------- -----------
CASH, END OF YEAR $ 3,065,000 $ 3,872,000 $ 3,842,000
=========== =========== ===========
Supplemental cash flow information -
Net cash paid during the year for:
Interest expense $11,032,000 $10,346,000 $13,683,000
Income taxes $ 599,000 $ 392,000 $ 620,000
Non-cash financing activities:
During 1992, the Company issued 300,000 shares of redeemable common stock valued at $1.0
million in exchange for debt in the amount of $5.4 million, resulting in an extraordinary
gain of $4.4 million.
</TABLE>
* Restated. See Note 25.
** Reflects net changes in borrowing arrangements which are
related to levels of inventories and accounts receivable.
See Notes to Consolidated Financial Statements.
39
<PAGE> 41
ERLY INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------------------------
Cumulative
Common Stock Additional Retained Foreign Total
------------------------ Paid-in Earnings Currency Stockholders'
Shares Dollars Capital (Deficit) Adjustments Equity*
- - --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE
April 1, 1991 3,088,731 $3,089,000 $12,763,000 ($ 2,907,000) $196,000 $13,141,000
Net income (loss) (12,539,000) (12,539,000)
Foreign currency
adjustments (852,000) (852,000)
Common stock
issued 40,782 41,000 230,000 271,000
--------- ---------- ----------- ----------- -------- -----------
BALANCE
March 31, 1992 3,129,513 3,130,000 12,993,000 (15,446,000) (656,000) 21,000
Net income (loss) (8,673,000) (8,673,000)
Foreign currency
adjustments (293,000) (293,000)
Common stock
issued 57,443 57,000 88,000 145,000
Accretion of
redeemable
common stock (394,000) (394,000)
--------- ---------- ----------- ----------- -------- -----------
BALANCE
March 31, 1993 3,186,956 3,187,000 12,687,000 (24,119,000) (949,000) (9,194,000)
Net income 17,669,000 17,669,000
Foreign currency
adjustments (398,000) (398,000)
Common stock
issued 187,809 60,000 651,000 711,000
Accretion of
redeemable
common stock (394,000) (394,000)
Reclassification
to reflect
reduction in
par value
of ERLY
common stock (3,213,000) 3,213,000
--------- ---------- ----------- ----------- -------- -----------
BALANCE
March 31, 1994 3,374,765 $ 34,000 $16,157,000 ($6,450,000) ($1,347,000) $ 8,394,000
========= ========== =========== =========== =========== ===========
</TABLE>
* Restated. See Note 25.
See Notes to Consolidated Financial Statements.
40
<PAGE> 42
ERLY INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation--The accompanying consolidated financial statements
include the accounts of ERLY Industries Inc. and its subsidiaries (the
"Company" or "ERLY"). All significant intercompany accounts, intercompany
profits and intercompany transactions are eliminated. As discussed in Note 3,
substantially all of the assets and liabilities of ERLY's wholly owned
subsidiary, Comet Rice, Inc. ("Comet"), were acquired by American Rice, Inc.
("ARI") on May 26, 1993. Prior to the transaction, ERLY owned 48% of the
voting rights of ARI, and its investment in ARI was accounted for using the
equity method. ERLY's equity in ARI's net results of operations was reflected
as investment income or loss in ERLY's consolidated statements of operations.
As a result of the transaction, ERLY's ownership increased to 81% of the voting
rights of ARI; therefore, beginning in June 1993, ARI's balance sheet and
results of operations are consolidated with ERLY's with appropriate adjustments
to reflect minority interest of 19%.
Inventories--Certain rice inventories are stated at the lower of cost or market
on an identified lot basis, which approximates the first-in, first-out (FIFO)
method. Other inventories are stated primarily at the lower of average cost or
market. Inventory cost includes direct materials, direct labor and
manufacturing overhead. Market value is determined by deducting the costs of
disposition from estimated selling prices.
The Company, from time to time, buys and sells futures and options contracts as
an operational tool to manage its inventory position. These contracts are
accounted for in accordance with Statement of Financial Accounting Standards
("SFAS") No. 80, "Accounting for Futures Contracts." Gains and losses on
contracts that meet defined criteria are recognized upon completion of the
transaction, while gains and losses from all other current contracts are
recognized in the period in which the market value of the contracts change.
Property, plant and equipment--Fixed assets are stated at cost and are
depreciated, using the straight-line method of depreciation over the estimated
useful lives of the related assets as follows: buildings and improvements--3
to 30 years; machinery and equipment--3 to 25 years; and, leasehold
improvements--the lessor of useful life or lease term.
Other assets--Included in other assets are trademarks and tradenames which are
being amortized over 40 years and deferred costs related to long-term debt and
subordinated debentures which are being amortized over the respective terms of
the related debt.
Federal and state income taxes--The Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," effective April 1,
1992. This Statement requires an asset and liability approach to financial
accounting and reporting for income taxes. Deferred income taxes and
liabilities are computed annually for differences between the financial
statement basis and tax basis of assets and liabilities that will result in
taxable or deductible amounts in the future. Such deferred income tax asset
and liability computations are based on enacted tax laws and rates applicable
to periods in which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized.
41
<PAGE> 43
ERLY INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Foreign currency translation--All assets and liabilities of operations outside
the United States are translated at the foreign exchange rates in effect at
year end. Revenues and expenses for the year are translated at average
exchange rates during the year. Translation gains and losses are not included
in determining net income but are accumulated and reported as a separate
component of stockholders' equity. Net realized and unrealized gains or losses
resulting from foreign currency transactions are credited or charged to income.
Earnings per share--Primary earnings per share are based on the weighted
average number of: (1) common shares, and (2) dilutive common share
equivalents (consisting of stock options and warrants) outstanding during each
year. Fully diluted earnings per share assumes conversion of a convertible
note, unless conversion would be antidilutive.
Reclassifications--Certain reclassifications have been made to prior year
consolidated financial statements to conform to current year presentation.
NOTE 2 - MANAGEMENT PLAN
A plan to improve liquidity, reduce term debt, and overcome financial
limitations of ERLY Industries Inc. was initiated in 1989. Accomplishments to
date with respect to this plan are as follows:
Most importantly, ERLY completed the multiyear effort to combine ERLY's wholly
owned subsidiary, Comet Rice, Inc., and its 48% owned American Rice, Inc. in
May 1993. This transaction involved refinancing the combined indebtedness of
Comet and ARI. See Notes 3 and 4 to the Consolidated Financial Statements for
additional discussion.
The Comet-ARI Transaction provides a significant benefit to the Company. The
Company's investment in ARI (carried on the Company's books as of March 31,
1994 and 1993 at $20.6 million and $13.1 million, respectively) is enhanced as
a result of the restructuring and simultaneous Refinancing. As a result of the
Transaction, ARI should have 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.
Chronologically, the remaining accomplishments to overcome the financial
limitations of ERLY started when California CoPackers purchased Hansen Foods
out of bankruptcy in January 1990 and ERLY received approximately $11.3 million
in cash and a note receivable for the balance of ERLY's $24 million notes
receivable from Hansen Foods. In July 1992, the assets and business, subject
to certain liabilities, of California CoPackers were purchased by a third
party. In exchange for its $8 million net receivable (net of a $3 million
reserve), ERLY received a payment of $5.2 million (which was used to pay down
bank debt as required by Comet's loan agreements) and a $4 million note
receivable, secured by the Hansen trademark license.
The liquidation of The Beverage Source's trademarks, inventory and receivables
was substantially completed by April 1990. In June 1992, ERLY sold its Sanger,
California facility, further reducing its operations in the wine business.
42
<PAGE> 44
ERLY INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - MANAGEMENT PLAN (CONTINUED)
In March 1991, ERLY Industries sold its 50% share in Kasco Media Trading
Company to its joint venture partner, resulting in a $3 million gain.
In July 1992, Comet's Greenville, Mississippi rice facility, which was secured
by a $16 million non-recourse obligation, was disposed through foreclosure
sale. In conjunction therewith, the Company eliminated $16 million of debt and
property, plant and equipment of $14 million.
In January 1993, ERLY Juice sold its wholly owned subsidiary, TreeSweet of
Puerto Rico, Inc. Sale proceeds of $3.5 million were used to reduce debt.
In May 1993, due to the refinancing of the combined debt of ARI and Comet, term
debt of the rice operations increased by $39 million as the debt of ARI was
consolidated with Comet. This increase is net of the debt forgiveness by ARI
term lenders (See Notes 3 and 8).
In July 1993, ERLY Juice sold its primary orange juice processing plant in
Lakeland, Florida for $11.9 million. One of ERLY Juice's primary creditors
agreed to discount term debt and accounts payable obligations in exchange for
cash. As a result of these two transactions, term debt and accounts payable
were reduced by over $16 million. In December 1993, ERLY sold the trademarks
of ERLY Juice and the assets of the Eau Claire Packing Company and discontinued
its juice operations. Short-term and long-term debt were reduced by $15
million as a result of the sale and associated debt discounts negotiated as
part of the transaction.
As a result of the foregoing, term debt (both long-term and current portion)
had been reduced to $76.9 million as of March 31, 1994 compared to $89.8
million as of March 31, 1990, a net decrease of $12.9 million. This represents
debt reductions of $61.4 million over the period as a result of asset sales,
debt forgiveness and scheduled principal payments, partially offset by
increases of $21.1 million and $27.4 million in term debt due to the
Transaction and Refinancing, respectively.
Chemonics was in violation of certain debt covenants at March 31, 1994.
Negotiations are in process for a refinancing with new lenders and to provide
an increased working capital facility for Chemonics and paydown Chemonics'
existing lender. These negotiations are expected to be completed in the third
quarter of 1995.
As a result of the discontinuation of the juice operations, there still remains
$8.4 million plus accrued interest of ERLY Juice's obligation to ING Capital
which the Company guaranteed in conjunction with a $6 million write-down of
ERLY Juice obligations. Under the terms of the guarantee, ERLY is required to
pay down the remaining $8.4 million (plus accrued interest) of debt by December
21, 1994 or ING Capital ("ING") may declare a default with the right to
foreclose on ERLY's subsidiary, Chemonics Industries, Inc. The Company expects
to sell sufficient assets or refinance Chemonics Industries in order to paydown
the remaining obligations prior to December 21, 1994.
With the combination of Comet Rice with ARI which was completed on May 26,
1993, the combined rice operations are expected to provide sufficient cash flow
to make payments to ERLY under its management agreement. Under the terms of
the ARI Series B Preferred
43
<PAGE> 45
ERLY INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - MANAGEMENT PLAN (CONTINUED)
Stock issued to ERLY in exchange for the assets and liabilities of Comet, ERLY
is entitled to an aggregate dividend of approximately $5.2 million per year.
The current loan agreements with the new ARI lenders prohibit the payment of
any dividends and do not provide any basis on which the lenders would approve a
dividend payment. As of March 31, 1994, the Preferred B dividend accumulated,
but not declared, is $4.3 million.
In the May 1993 refinancing of the combined debt of ARI and Comet
("Refinancing"), proceeds of $65.3 million from term loans from three new term
lenders were used to pay the remaining balances outstanding under the old debt.
Interest rates on the new loans range from prime plus 3% to prime plus 8% by
June 1997. Terms of the loans preclude dividend payments, restrict investments
and capital expenditures and require the maintenance of certain financial
covenants. These loans are collateralized by substantially all of ARI's fixed
assets and trademarks and have junior liens on collateral for the revolving
credit line.
As part of the Refinancing, ARI also received $47.5 million in credit lines
(subject to borrowing base limitations) from a new revolving credit lender,
Congress Financial Corporation ("Congress"). The $47.5 million credit line
with Congress expires on May 23, 1995, carries an interest rate of prime plus
2%, requires that all ARI cash receipts be paid to Congress as payment on the
loan, and is collateralized by receivables, inventory, cash, a $2 million key
man life insurance policy on Gerald D. Murphy, Chairman, and junior liens on
ARI assets pledged to the term lenders.
Through March 31, 1994, ARI's maximum borrowing under its $47.5 million credit
line was $41.4 million. At March 31, 1994, the borrowing base under the line
of credit was $36.8 million for $33.4 million in revolving credit borrowings.
ARI intends to refinance the existing revolver loan in the next twelve months
either by renewing the line with the existing lender, or seeking a new
revolving credit line from a new lender.
ARI's new term and revolving debt agreements require ERLY to guarantee the debt
of ARI. These agreements contain certain cross- default provisions with ERLY
debt agreements which 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 covenants.
Under the provisions of the tax sharing agreement between ARI and ERLY, ARI
owes ERLY the amount of U.S. taxes currently payable of $1.5 million upon
filing of the fiscal year 1994 tax return by ERLY. Current loan agreements
prohibit the payment of these amounts unless ERLY is required to pay taxes.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. In 1994, the Company earned $3.0
million on continuing operations (excluding a one time gain from the sale of a
partial interest in subsidiary); however, the Company is in default on certain
of its bank debt covenants at its Chemonics subsidiary and the Company has
certain obligations due in fiscal 1995 which it will be unable to meet without
selling assets or refinancing such indebtedness. These conditions raise doubt
about its ability to continue as a going concern. The
44
<PAGE> 46
ERLY INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - MANAGEMENT PLAN (CONTINUED)
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
NOTE 3 - ACQUISITION OF COMET RICE, INC. BY AMERICAN RICE, INC.
American Rice, Inc. is a public company involved in the rice business. Formed
in 1987, ARI succeeded an agricultural cooperative in a reorganization.
Pursuant to the reorganization, which was consummated in April 1988, ARI
acquired all of the assets of the cooperative in exchange for approximately 52%
of ARI's outstanding voting stock. The remaining 48% of ARI's voting stock was
acquired by ERLY's wholly owned subsidiary, Comet Rice, Inc. in exchange for
$20 million cash and Comet's 50% ownership in an ARI and Comet joint venture,
Comet American Marketing ("CAM").
In March 1990, ERLY, Comet and ARI entered into an agreement to merge Comet
into ARI. The planned combination would result in all of the assets and
liabilities formerly held by Comet to be held by ARI and would result in ERLY
owning 81% of the voting securities.
In March 1991, the shareholders of ARI approved the merger agreement subject to
obtaining necessary short and long-term financing. However, the merger
financing was not completed and in August 1992 the prior merger agreement was
terminated.
On May 26, 1993, ARI consummated a transaction ("Transaction") to acquire
substantially all of the assets of Comet (except the ARI capital stock owned by
Comet) and assume all of Comet's liabilities. In connection with the
Transaction, ERLY has succeeded to the ARI stock held by Comet upon the
liquidation of Comet (See Note 4 for additional discussion).
Pursuant to the Transaction, in exchange for the assets acquired from Comet,
ARI issued to Comet 14 million 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. The
current loan agreements prohibit the payment of any dividends and do not
provide any basis on which the lenders would approve a dividend payment. As a
result of the Transaction, ERLY held 81% of the combined voting power of ARI
stock outstanding after the Transaction.
Since ERLY, the sole shareholder of Comet at the time of the Transaction, owned
the larger portion of the voting rights in the surviving corporation, the
Transaction was accounted for as a reverse step acquisition of ARI by ERLY
through its subsidiary, Comet, reflecting the change of control which occurred.
The fair value of ARI was estimated to be approximately $35 million based upon
a valuation study by an investment banker. The Transaction was accounted for
under the guidelines of APB Opinion No. 16, "Business Combinations" and
Emerging Issues Task Force ("EITF") Issue No. 90-13, "Accounting for
Simultaneous Common Control Mergers." The accounting consists of three steps:
Step one consists of a recognition by ARI of ERLY's historical cost of its
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
45
<PAGE> 47
ERLY INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - ACQUISITION OF COMET RICE, INC. BY AMERICAN RICE, INC.
(CONTINUED)
excess to ARI's 39 acres of land in Houston and thus the excess (which was $5.2
million at March 31, 1993) was added to the book value of the Houston property.
Step two recognizes the acquisition by ERLY of an additional equity interest in
ARI of approximately 33% in exchange for substantially all of the assets of
Comet and all of Comet's liabilities. ARI's assets are valued at fair market
value to the extent acquired.
Step three, in accordance with EITF 90-13, the fair value Comet's assets to the
extent sold to the non-ERLY shareholders of ARI was determined. ERLY accounted
for the Transaction as a partial sale of 19% of Comet Rice (19% is the
percentage ownership of ARI by minority shareholders), and a step acquisition
of ARI, increasing its ownership from 48% to 81%. Under EITF 90-13, a gain of
$11.8 million was recognized by ERLY to the extent of the 19% of Comet Rice
sold.
In May 1993, ARI also refinanced the combined indebtedness of ARI and Comet.
ARI received $47.5 million in credit lines from a new revolving credit lender,
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. ("ING"), 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.
ARI issued to the former lenders a combined total of 1.5 million 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. The current loan agreements with the new lenders
prohibit the payment of any dividends and do not provide any basis on which the
lenders would approve a dividend payment.
ARI's former lenders agreed to a debt discount in the approximate amount of
$10.3 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. In addition, ERLY is a guarantor for all of the new ARI
debt, and the loan agreements contain restrictive covenants applicable to ERLY.
PRO FORMA FINANCIAL STATEMENTS
The operating results reflected in the accompanying financial statements do not
include ARI's operating activities prior to May 26, 1993, the date of the
Transaction. The following summarized consolidated pro forma information
assumes the Transaction and the Refinancing occurred on April 1, 1992.
46
<PAGE> 48
ERLY INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
Pro Forma
Years Ended March 31,
-----------------------------------------
1994 1993
------------ ------------
<S> <C> <C>
Net sales $362,000,000 $359,000,000
Income (loss) from continuing
operations before discontinued
operations, extraordinary items
and minority interest* $ 3,451,000 $ 1,948,000
Income (loss) per common share from
continuing operations*
Primary $ .94 $ .57
Fully diluted $ .90 $ .55
</TABLE>
* Excluding one-time gain on sale of partial interest in subsidiary of
$11,768,000.
NOTE 4 - INVESTMENT IN AMERICAN RICE, INC.
Comet Rice, Inc. recorded its initial investment in American Rice, Inc. at its
cost of $20,000,000 at date of acquisition (April 1988). The cost was
allocated first to the 48% of ARI's equity ($11,610,000) acquired by Comet and
the remainder ($8,390,000) to ARI's Houston property.
The investment in ARI was accounted for under the equity method and was
adjusted by Comet's equity interest in the results of ARI's operations, which
resulted in income (loss) to Comet of $426,000, ($1,630,000) and ($2,607,000)
for the years ended March 31, 1994, 1993 and 1992, respectively. In 1993, the
Company recorded a $3,190,000 write-down of the portion of its investment in
ARI attributed to the Houston property (See Note 5). The carrying value of
ERLY's investment in ARI at March 31, 1993 was $13.1 million.
Upon completion of the Transaction and the increase in ERLY's ownership
interest from 48% to 81%, ARI's financial statements have been consolidated
with those of ERLY.
At March 31, 1994, the average of the bid and ask price of ARI's stock was
$1.25 per share as quoted by NASDAQ. The low price for the month was $1.00 per
share and the high price was $1.50 per share.
47
<PAGE> 49
ERLY INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - INVESTMENT INCOME (LOSS)
Investment income (loss) consists of the following for the years ended March
31, 1994, 1993 and 1992:
<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Equity in income (loss)
of American Rice, Inc. $ 426,000 $1,560,000 ($2,607,000)
Write-down portion of
investment in ARI
attributed to Houston
property (3,190,000)
Decrease in reserve on
note receivable from
California CoPackers 1,000,000
---------- ---------- ----------
$ 426,000 ($1,630,000) ($1,607,000)
========== ========== ==========
</TABLE>
As discussed in Note 4, Comet originally attributed $8.4 million of its initial
investment in ARI to Comet's 48% share of ARI's Houston property. In 1993,
based upon an updated appraisal of the property which indicated a lower value
for the property than at the time of the original investment, the Company
recorded a $3,190,000 write-down of the portion of its investment in ARI
attributed to the Houston property. As of March 31, 1993, the excess was then
carried at $5.2 million.
At March 31, 1991, the Company had an $11 million note receivable from
California CoPackers, the purchaser of the assets of Hansen Foods, a business
in which ERLY previously had a $24 million investment. At March 31, 1991 the
note was carried net of a $3 million reserve for loss established in 1989. In
1992, the assets and business, subject to certain liabilities, of California
CoPackers were purchased by a third party. In exchange for its $8 million net
receivable (net of the $3 million reserve), ERLY received a cash payment of
$5.2 million and a $4 million note receivable (with an effective interest rate
of 8.41%, due in fiscal 1998), secured by the Hansen trademark license. The
loss exposure on the California CoPackers note was therefore reduced and the
reserve for loss was reduced by $1,000,000 in 1992. The note was transferred
to the State of Michigan Retirement System ("SMRS") in conjunction with debt
extinguishment described in Note 8.
NOTE 6 - GAIN ON SALE OF PARTIAL INTEREST IN SUBSIDIARY
In conjunction with the May 26, 1993 Transaction, ERLY received an additional
33% interest in ARI in exchange for all of the assets (except for the ARI stock
owned by Comet) and assumed all of the liabilities of ERLY's wholly owned
subsidiary, Comet Rice, Inc.
Since ERLY, the sole shareholder of Comet at the time of the Transaction, owned
the larger portion of the voting rights in the surviving corporation, the
Transaction was accounted for as a reverse step acquisition of ARI by ERLY
through its subsidiary, Comet, reflecting the change of control that occurred.
The Transaction was accounted for under the guidelines of APB Opinion No. 16,
"Business Combinations" and Emerging Issues Task Force ("EITF") Issue No.
90-13, "Accounting for Simultaneous Common Control Mergers."
48
<PAGE> 50
ERLY INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - GAIN ON SALE OF PARTIAL INTEREST IN SUBSIDIARY (CONTINUED)
The accounting consists of three steps: Step one consists of a recognition by
ARI of ERLY's historical cost of its 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
Houston property and thus the excess (which was $5.2 million at March 31, 1993)
was added to the book value of the Houston property.
Step two recognizes the acquisition by ERLY of an additional equity interest in
ARI of approximately 33% in exchange for substantially all of the assets of
Comet and all of Comet's liabilities. ARI's assets are valued at fair market
value to the extent acquired.
Step three, in accordance with EITF 90-13, the fair value of Comet's net assets
was determined. ERLY accounted for the Transaction as a partial sale of 19% of
Comet Rice (19% is the percentage ownership of ARI by minority shareholders),
and a step acquisition of ARI, increasing its ownership from 48% to 81%. Under
EITF 90-13, a gain of $11.8 million was recognized by ERLY to the extent of the
19% of Comet Rice sold.
In accordance with EITF 90-13, Comet's net assets were revalued in ERLY's
consolidated financial statements to the extent that Comet was acquired by the
minority shareholders of ARI. This resulted in an $11.6 million increase in
the carrying value of Comet assets. This increase was attributed to Comet's
Maxwell, California facility, now owned by ARI. It is being depreciated over
30 years (buildings and improvements) and 15 years (machinery and equipment).
Depreciation expense for 1994 relating to this step-up was $479,000.
NOTE 7 - DISCONTINUED OPERATIONS - DISPOSITION OF JUICE BUSINESS
In July 1993, ERLY Juice sold its primary orange juice processing plant in
Lakeland, Florida to Florida Juice, Inc. for $11.9 million. This transaction
resulted in a loss of $2.7 million. This sale was intended in part to reduce
operating losses. One of ERLY Juice's primary creditors agreed to discount
term debt and accounts payable obligations in exchange for cash. This resulted
in a gain of $5.6 million which is reflected as extraordinary income as
described in Note 8.
On December 21, 1993, Eau Claire Packing Company, a wholly owned subsidiary of
ERLY Industries Inc. operating in the juice business, sold its manufacturing
facility located in Eau Claire, Michigan, together with the inventory, accounts
receivable and certain trademarks associated with the plant facility, to Seneca
Foods Corporation ("Seneca"). Seneca paid approximately $5.1 million for the
plant facility and the related assets. ERLY Juice Inc., a wholly owned
subsidiary of ERLY Industries, also sold trademarks, inventory and accounts
receivable to Seneca for approximately $3.3 million. The purchase price was
paid in cash at the closing. The net proceeds from both sales were used to
paydown debt to the State of Michigan Retirement System ("SMRS") and ING as
required by each Company's respective secured loan agreements.
In connection with the payment on the ING debt and the issue of stock purchase
warrants to obtain up to 10% of ERLY's stock at $.01 per share, ING agreed to a
$6 million write-down in the amount of total debt. In exchange, ERLY also
guaranteed the remaining balance of the obligations owed by ERLY Juice Inc. to
ING. The amount of the ERLY Juice
49
<PAGE> 51
ERLY INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - DISCONTINUED OPERATIONS - DISPOSITION OF JUICE BUSINESS
(CONTINUED)
obligation to ING immediately prior to the transaction was approximately $17.1
million and, after application of the write down and amounts paid, the current
amount of the debt is approximately $8.4 million (which is included in notes
payable in the Company's consolidated balance sheets) plus accrued interest.
Under the terms of the guarantee, ERLY is required to pay down the remaining
$8.4 million (plus accrued interest) of debt within one year (by December 21,
1994) or ING may declare a default with the right to foreclose on ERLY's
subsidiary, Chemonics Industries, Inc.
As a result of the sales of the above assets, ERLY has no operating assets or
continuing operations remaining in the juice business. It is ERLY's intention
to liquidate the remaining assets of ERLY Juice for the benefit of the ERLY
Juice creditors.
The results of ERLY's juice business have been reported separately as
discontinued operations in the consolidated statements of operations. Prior
period consolidated financial statements have been restated to present the
juice business as a discontinued operation. Summarized results of ERLY Juice
for the years ended March 31, 1994, 1993 and 1992 are as follows:
<TABLE>
<CAPTION>
1994 1993 1992
------------ ------------ -------------
<S> <C> <C> <C>
Net sales $31,337,000 $82,213,000 $ 96,386,000
Costs and expenses (34,744,000) (83,652,000) (102,860,000)
Interest expense (1,841,000) (3,533,000) (4,140,000)
------------ ------------ -------------
Loss from discontinued
operations ($ 5,248,000) ($ 4,972,000) ($ 10,614,000)
============ ============ =============
Loss on disposal
of discontinued
operations ($ 3,562,000) $ - $ -
============ ============ =============
</TABLE>
At March 31, 1994, ERLY's remaining juice business assets of $720,000 are
included in prepaid expenses and other current assets in the consolidated
balance sheet. In addition, the March 31, 1994, consolidated balance sheet
includes liabilities of the juice business as follows:
<TABLE>
<S> <C>
Current liabilities:
Notes payable to ING $ 8,397,000
Accounts payable 5,075,000
Other current liabilities 197,000
Current portion of long-term debt 245,000
-----------
$13,914,000
===========
</TABLE>
50
<PAGE> 52
ERLY INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - EXTRAORDINARY ITEMS
The Company had the following extraordinary items for the years ended March 31,
1994, 1993 and 1992:
<TABLE>
<CAPTION>
1994 1993 1992
----------- ---------- ----------
<S> <C> <C> <C>
Gain on extinguishment of
debt related to ARI $10,270,000 $ - $ -
Gain on extinguishment of
debt related to ERLY Juice 5,625,000 2,562,000 4,436,000
Gain on extinguishment of debt
related to the State of
Michigan Retirement System 897,000
Gain on extinguishment of
debt on rice facility 4,726,000
----------- ---------- ----------
$16,792,000 $7,288,000 $4,436,000
=========== ========== ==========
</TABLE>
In December 1993, the Company exchanged various debt obligations to the State
of Michigan Retirement System for a note receivable with a net book value of
$3.8 million, 60,000 shares of ERLY Industries common stock, $100,000 cash and
a new note for approximately $800,000. This resulted in extraordinary income
on debt extinguishment of $897,000.
During the quarter ended September 30, 1993, ERLY Juice settled approximately
$6.3 million of term debt and trade payables with a primary creditor in
exchange for $650,000. This resulted in a gain of $5,625,000 which is
reflected as extraordinary income.
Results for the first quarter ended June 30, 1993 included extraordinary income
of $10.3 million (before applicable minority interest) relating to debt
discounts by ARI's former lenders (See Note 3).
Due to continuing operating losses resulting from low margins, Comet ceased
payments in January 1992 on a $16 million non-recourse obligation secured by
its rice plant in Greenville, Mississippi. In July 1992, the facility was sold
through foreclosure sale and in conjunction therewith, the Company eliminated
the related non-recourse debt of $16 million and the related property, plant
and equipment. The disposition of the facility was accounted for in accordance
with: (1) Statement of Financial Accounting Standards No. 15, "Accounting by
Debtors and Creditors for Troubled Debt Restructurings," and (2) Emerging
Issues Task Force Issue No. 91-2, "Debtor's Accounting for Forfeiture of Real
Estate Subject to a Nonrecourse Mortgage."
These guidelines require a two-step approach in accounting for the disposition.
Prior to the disposition, the plant was written- down by $4,000,000 to its
estimated fair market value. This write-down is included in results of
continuing operations prior to taxes on income and extraordinary items in the
consolidated statements of operations
51
<PAGE> 53
ERLY INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - EXTRAORDINARY ITEMS (CONTINUED)
in fiscal 1993. Secondly, the difference between the estimated fair market
value of the facility and the amount of debt extinguished (net of estimated
shut-down and relocation expenses) resulted in a gain of $4,726,000 on the
extinguishment of debt which was recorded as extraordinary income in fiscal
1993. The net gain on the transaction was therefore $726,000.
In February 1993, the Company entered into settlement arrangements with two
creditors of ERLY Juice whereby $3.1 million of debt and accrued interest was
satisfied in exchange for payments of $569,000. These transactions resulted in
a combined gain of $2,562,000 on extinguishment of debt which is reflected as
extraordinary income in fiscal 1993.
In fiscal year 1992, the Company entered into an agreement with a creditor
whereby ERLY exchanged $5.4 million of long-term debt for 300,000 shares of
redeemable ERLY common stock. This resulted in a gain of $4,436,000 on
extinguishment of debt which is reflected as extraordinary income (See Note
19).
NOTE 9 - MINORITY INTEREST
ERLY owns 81% of ARI. Most often, parent companies hold interests in
subsidiaries by ownership of the common stock of the subsidiary. ERLY's
ownership of ARI is more complex, including both common stock and convertible
preferred stock. ERLY's 81% interest in ARI consists of the following
securities of ARI:
o 3,888,888 shares of ARI common stock which represent 32% of ARI's
total outstanding common stock and 9% of ARI's common shares on a
fully converted basis.
o 3,888,888 shares of ARI Series A Preferred Stock, which is convertible
one for one, has voting rights, liquidation preferences of $5.14 per
share, but has no stated dividend. These shares represent 9% of ARI's
common shares on a fully converted basis.
o 14,000,000 shares of ARI Series B Preferred Stock, which is
convertible into 28,000,000 common shares, has voting rights and an
annual cumulative dividend of approximately $5.2 million. These
shares represent 63% of ARI's common shares on a fully converted
basis.
In addition to the preferred stocks issued to ERLY, ARI issued a Series C
Preferred Stock to third parties. This Series C Preferred Stock does not have
voting or conversion rights but does have an annual cumulative dividend of
$750,000. The Series A, Series B and Series C Preferred Stocks are unique
securities with certain benefits which are superior to common stock rights.
The Minority Interest of ARI in ERLY's consolidated financial statements
represents the 68% of the common stock of ARI which ERLY does not own and the
Series C Preferred Stock.
In the usual situation where ownership of a subsidiary is represented entirely
by common stock, the minority interest in the earnings or losses of the
subsidiary is the percentage ownership by the minority interest in the common
stock. However, in the case
52
<PAGE> 54
ERLY INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - MINORITY INTEREST (CONTINUED)
where ownership of a subsidiary involves complex securities like convertible
preferred stocks in addition to common stocks, specific rules under generally
accepted accounting principles (APB Opinion No. 18, "The Equity Method of
Accounting for Investments in Common Stock") require that earnings or losses of
the subsidiary be allocated between the parent and the minority interest in
accordance with the underlying terms of the various securities, rather than
allocation based on ownership of the subsidiary. No conversion is assumed in
the case of convertible preferred stocks for purposes of this calculation, even
though conversion may occur at any time at the option of the holder.
ARI's cumulative dividends of $5.2 million related to the Series B Preferred
Stock and $750,000 related to the Series C Preferred Stock are deducted from
ARI earnings to yield earnings or loss to be allocated to common stock. The
Series B Preferred Stock dividend is allocated entirely to ERLY, while the
Series C Preferred Stock dividend is allocated entirely to Minority Interest.
The Series B and Series C Preferred Stock dividends are allocated to ERLY and
to the Minority Interest, respectively, even if this allocation results in a
loss being attributed to the common stock as these preferred stock dividends
are based on the underlying terms of the securities. Similarly, these
dividends are allocated even if not declared as the dividends are cumulative.
However, dividends are allocated only if determined to be ultimately
recoverable.
The remaining earnings or losses to be allocated to common stock after
deduction of the preferred stock dividends is divided in accordance with the
relative common stock ownership of ERLY (32%) and the Minority Interest (68%).
If ERLY had converted the Series A Preferred Stock to ARI common stock at the
beginning of fiscal year 1994 (April 1, 1993) and converted the Series B
Preferred Stock to common stock at the date of issuance (May 26, 1993),
earnings of ARI allocated to ERLY would have increased ERLY's reported income
and retained earnings by approximately $2.1 million with a corresponding
decrease in Minority Interest on ERLY's consolidated statements of operations
and consolidated balance sheets.
The Minority Interest reflected on the balance sheets represents: (1) original
investment in the equity of ARI on a historical cost basis on the part of the
Minority Interest, (2) an entry to record the acquisition by the Minority
Interest of a partial interest in Comet Rice, Inc. as of May 26, 1993 in
accordance with EITF 90-13 as described in Note 6, and (3) the effects of the
allocation of ARI's earnings and losses from May 26, 1993 based on the
ownership terms of the various equity securities of ARI as previously
described.
Minority Interest does not represent amounts distributable to minority
shareholders. Amounts, if any, ultimately distributable to minority
shareholders will depend on the ownership interests which exist at such time as
distributions are made, including the potential conversions of convertible
securities and potential issuance or retirement of other securities. The
timing of distributions and conversions, if any, is at the discretion of ERLY,
since ERLY owns 81% of the voting interest in ARI.
53
<PAGE> 55
ERLY INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - NATURE OF THE BUSINESS - SEGMENT INFORMATION
The Company's rice operations are subject to significant fluctuations due to
wide variations in world-wide rice supplies, which are dependent on certain
weather conditions such as the timing and severity of monsoon rains. These
variations can significantly influence world and United States prices. Higher
prices for rice generally reduce the ability of U.S. exports to be competitive
in those world markets with lower per capita income. U.S. export sales are
also impacted by such factors as the relative strength of the United States
dollar to foreign currencies and 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 is not material. This is
because ARI requires most 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 Company's revenues include export rice sales of $164.4 million or 49%,
$79.3 million or 36% and $112.7 million or 44% of consolidated sales for the
years ended March 31, 1994, 1993 and 1992, respectively.
54
<PAGE> 56
ERLY INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - NATURE OF THE BUSINESS - SEGMENT INFORMATION (CONTINUED)
The Company's sales, operating profit and other financial data by industry
segment for the three years ended March 31, 1994 follow:
<TABLE>
<CAPTION>
Years ended March 31
---------------------------------------------------
1994 1993 1992
------------ ------------ ------------
$ % $ % $ %
------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Net sales (in thousands)
Export sales - Rice
Middle East $ 88,186 $ 46,208 $ 31,181
Far East 37,332 1,193 1,375
Caribbean 21,250 11,016 30,355
Europe 5,810 8,974 15,089
Africa 4,025 2,114 11,380
Canada 2,949 1,163 3,245
Mexico 1,060
South America 216 51 9,953
Other 3,529 8,610 10,139
--------------- -------------- --------------
164,357 49% 79,329 36% 112,717 44%
Domestic sales
Rice 120,107 36 90,288 41 101,373 40
Consulting 41,944 13 37,185 17 31,035 12
Fire-Trol 8,416 2 12,629 6 10,163 4
--------------- -------------- --------------
Total $334,824 100% $219,431 100% $255,288 100%
=============== ============== ==============
Income (loss) from
continuing operations
before taxes on income
and minority interest
Rice $ 15,442 ($ 55) $ 4,882
Consulting 1,455 1,536 1,669
Fire-Trol (188) 1,532 623
-------- -------- --------
Operating profit 16,709 3,013 7,174
General corporate expense (2,185) (1,091) (2,360)
Interest expense (12,090) (7,518) (10,780)
Interest income 381 610 1,057
Investment income (loss) 426 (1,630) (1,607)
Other income (loss) * 72 (3,992) 594
Gain on sale of partial
interest in subsidiary 11,768
-------- -------- --------
$ 15,081 ($ 10,608) ($ 5,922)
======== ======== ========
</TABLE>
* Fiscal year 1993 includes a $4 million loss on write-down of rice facility
(See Note 8).
55
<PAGE> 57
ERLY INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - NATURE OF BUSINESS - SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
Years ended March 31
-----------------------------------------
1994 1993 1992
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Identifiable assets
Rice $176,142 $ 74,325 $124,602
Consulting 14,753 13,282 11,074
Fire-Trol 6,713 8,413 8,289
Corporate 15,757 4,386 11,796
Discontinued operations:
Juice 720 45,897 54,234
Other 3,782* 4,210* 7,339*
Intercompany eliminations (18,717) (15,413) (20,608)
-------- -------- --------
Total $199,150 $135,100 $196,726
======== ======== ========
* Net of reserve of $518,000, $1.6 million and
$2.2 million at March 31, 1994, 1993 and 1992,
respectively.
Depreciation and amortization
Rice $ 5,083 $ 1,991 $ 2,814
Consulting 290 202 193
Fire-Trol 447 510 488
Corporate 677 113 128
-------- -------- --------
Total $ 6,497 $ 2,816 $ 3,623
======== ======== ========
Capital expenditures
Rice $ 2,844 $ 2,651 $ 772
Consulting 27 455 250
Fire-Trol 301 273 801
Corporate 12
Juice 119 1,821 479
-------- -------- --------
Total $ 3,303 $ 5,200 $ 2,302
======== ======== ========
</TABLE>
NOTE 11 - INVENTORIES
A summary of inventories at March 31, 1994 and 1993 follows:
<TABLE>
<CAPTION>
1994 1993
----------- -----------
<S> <C> <C>
Raw materials $28,182,000 $14,817,000
Finished goods 35,114,000 12,908,000
----------- -----------
$63,296,000 $27,725,000
=========== ===========
</TABLE>
56
<PAGE> 58
ERLY INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - LONG-TERM NOTES RECEIVABLE
Long-term notes receivable at March 31, 1994 and 1993 consist of the following:
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
Note receivable from Hansen
Natural Corporation, due 1997,
interest at 8.41%, collateralized
by Hansen trademark license $ - $4,000,000
Note receivable from Aqaba
Packaging Company, a 49% owned
subsidiary of Comet, amounts
due to be deducted from
payments for future services,
non-interest bearing 1,592,000
Other notes receivable 1,792,000 1,637,000
Less current portion of long-term
notes receivable (406,000)
Less reserve for loss (200,000)
---------- ----------
$1,792,000 $6,623,000
========== ==========
</TABLE>
The Company had a note receivable from Hansen Natural Corporation (the
successor to Hansen Foods) which was recorded at a net carrying amount of $3.8
million at March 31, 1993. In 1994, the note was exchanged for various debt
obligations with the State of Michigan Retirement System (See Note 8).
NOTE 13 - PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment at March 31, 1994 and 1993 follows:
<TABLE>
<CAPTION>
1994 1993
------------ -----------
<S> <C> <C>
Land $ 506,000 $ 980,000
Buildings and improvements 29,380,000 10,730,000
Machinery and equipment 45,382,000 42,258,000
------------ -----------
75,268,000 53,968,000
Less accumulated depreciation
and amortization (20,234,000 (23,111,000)
------------ -----------
$ 55,034,000 $30,857,000
============ ===========
</TABLE>
57
<PAGE> 59
ERLY INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - ASSETS HELD FOR SALE - LONG-TERM
The consolidated balance sheets include assets held for sale classified as
long-term of $23 million at March 31, 1994. This includes ARI property held
for sale in Houston, Texas ($19 million) and the remaining net assets of the
Company's discontinued winery operations ($4 million) which management intends
to dispose of in an orderly manner.
ARI's Board of Directors previously adopted a resolution authorizing its
management to sell 39 acres of land in Houston. Management has had
conversations with developers interested in the property, however, no decision
has yet been made about how to market the property. Management's intention is
an orderly, outright sale to a third party rather than to develop the property.
However, ARI might consider some form of joint venture with a developer in
order to maximize the property's value. ARI has the ability and intent to hold
the property over a normal marketing period. The proceeds of any such sale,
when and if it occurs, are required by the terms of ARI's debt agreements to be
used to reduce debt.
In conjunction with the management plan initiated in 1989 as described in Note
2, the Company established a $7 million reserve in 1989 to provide for
estimated losses on disposition of assets and projected losses on discontinued
operations. To date, the reserve has been charged for $5.1 million in
write-offs, operating losses and losses on asset dispositions relating to
discontinued operations and business restructuring. In 1991, the reserve was
also reduced by $1.4 million to eliminate reserves no longer considered
necessary. At March 31, 1994 the reserve had a remaining balance of
approximately $500,000.
NOTE 15 - OTHER ASSETS
Other assets at March 31, 1994 and 1993 consist of the following:
<TABLE>
<CAPTION>
1994 1993
----------- -----------
<S> <C> <C>
Trademarks and tradenames $12,139,000 $ 6,434,000
Deferred debt issue costs 7,192,000 2,767,000
Investment in joint venture 1,291,000
Other 657,000 3,854,000
--------- -----------
19,988,000 14,346,000
Less accumulated amortization
of intangible assets (2,987,000) (3,695,000)
----------- -----------
$17,001,000 $10,651,000
=========== ===========
</TABLE>
The investment in joint venture at March 31, 1993 consisted of Comet's
investment in the Aqaba, Jordan rice finishing and packaging facility which was
sold in April 1993.
58
<PAGE> 60
ERLY INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - NOTES PAYABLE
The Company and its subsidiaries have utilized short-term lines of credit with
commercial banks in addition to other short-term loans. Interest expense on
notes payable to banks and on other short-term borrowings amounted to
$3,237,000 (1994), $3,501,000 (1993) and $5,129,000 (1992).
A comparison of information relating to the Company's lines of credit for the
years ended March 31, 1994, 1993 and 1992 follows:
<TABLE>
<CAPTION>
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
Average during the year:
Short-term borrowings $53,494,000 $69,238,000 $78,775,000
Weighted average interest
rate* 7.87% 8.10% 8.90%
Average bank prime rate 6.00% 6.13% 7.71%
At March 31:
Lines of credit, subject to
collateral availability $66,003,000 $82,850,000 $84,514,000
Short-term borrowings $49,273,000 $62,359,000 $78,696,000
Average interest rate 8.29% 7.52% 7.81%
Bank prime rate 6.00% 6.00% 6.50%
Unused short-term
borrowing capacity $ 4,904,000 $ 800,000 $ 2,264,000
Maximum month-end
short-term borrowings
during the year $62,236,000 $76,454,000 $79,600,000
</TABLE>
*Based on outstanding borrowings
Substantially all receivables, inventories, property, plant and equipment and
the capital stock of American Rice, Inc., Chemonics Industries, Inc. and ERLY
Juice Inc. are pledged as collateral on notes payable and certain other
long-term obligations.
Chemonics was in violation of certain debt covenants at March 31, 1994.
Negotiations are in process for a refinancing with new lenders to provide a
temporary increased working capital facility for Chemonics and paydown
Chemonics' existing lender.
59
<PAGE> 61
ERLY INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - INCOME TAXES
The provision for income taxes is composed of the following:
<TABLE>
<CAPTION>
Years ended March 31
--------------------------------------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Currently payable
Federal $ - $ - $ -
State 206,000 2,000 23,000
Foreign 110,000 379,000 416,000
Deferred
Federal
State
-------- -------- --------
Total provision $316,000 $381,000 $439,000
======== ======== ========
</TABLE>
The reconciliation of the Company's effective tax rate on continuing operations
to the statutory federal tax rate is as follows:
<TABLE>
<CAPTION>
Years ended March 31
----------------------------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Federal rate 35% (34%) (34%)
Foreign taxes 1 4 3
State taxes
Utilization of prior year
deferred tax assets not
previously recognized (35)
Current year operating
loss not tax benefitted 34 34
---- ---- ----
Effective tax rate 1% 4% 3%
==== ==== ====
</TABLE>
The tax effect of the temporary differences and carryforwards which give rise
to deferred tax assets and liabilities at March 31, 1994 and 1993 are as
follows (in thousands):
<TABLE>
<CAPTION>
1994 1993
------- -------
<S> <C> <C>
Deferred tax assets
Allowance for doubtful accounts
and other reserves $ 3,796 $ 2,200
Alternative minimum tax credit 1,456
Net operating loss carryovers 10,985 15,024
Other 2,768 888
Deferred tax liabilities
Depreciation (12,525) (5,910)
Other (281)
------- -------
Subtotal 6,199 12,202
Valuation allowance (6,199) (12,202)
------- -------
Net deferred tax asset (liability) $ - $ -
======= =======
</TABLE>
60
<PAGE> 62
ERLY INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - INCOME TAXES (CONTINUED)
The pre-tax income (loss) from continuing operations (before discontinued
operations, extraordinary items and minority interest) related to domestic and
foreign operations is as follows:
<TABLE>
<CAPTION>
Years ended March 31,
--------------------------------------------------
1994 1993 1992
----------- ------------ -----------
<S> <C> <C> <C>
Domestic $14,790,000 ($11,293,000) ($6,760,000)
Foreign 291,000 685,000 838,000
----------- ------------ -----------
Total $15,081,000 ($10,608,000) ($5,922,000)
=========== ============ ===========
</TABLE>
In 1993 the Company adopted the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes", effective April 1, 1992.
SFAS No. 109 requires the asset and liability method of accounting for income
taxes, under which 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 financial statement carrying
amounts and the tax bases of existing assets and liabilities. The cumulative
effect of this accounting change on prior years was zero.
Subsequent to the Transaction, ARI's current taxable income and loss is
included in the consolidated federal income tax return filed by ERLY. Under
the terms of the tax sharing agreement between ARI and ERLY, ARI will pay to or
receive from ERLY the amount of income taxes currently payable or refundable
computed as if ARI filed its annual tax return on a separate company basis.
The tax sharing agreement provides that ERLY will receive the benefit of any
pre-Transaction tax net operating loss carryforwards generated by Comet. Under
the provisions of the tax sharing agreement between ARI and ERLY, ARI owes ERLY
the amount of U.S. taxes currently payable of $1.5 million upon filing of the
fiscal year 1994 tax return by ARI and ERLY.
The Company and certain subsidiaries file consolidated federal income and
combined state franchise tax returns. At March 31, 1994, the Company has net
operating loss carryforwards for tax reporting purposes of approximately $32
million, which expire at various dates through 2008.
The Company's income tax returns for fiscal years 1979 through 1992 are
currently under examination by tax authorities. The tax authorities have
issued notices of proposed assessments for certain of those years. The Company
has formally protested various positions taken by the tax authorities and
believes that a majority of the Company's positions will be upheld. A portion
of the net operating loss carryforwards may be utilized for additional taxes
assessed. Management believes that adequate provisions for income taxes have
been made and that the ultimate outcome of this matter will not have a material
adverse effect on the Company's financial position.
61
<PAGE> 63
ERLY INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - LONG-TERM AND SUBORDINATED DEBT
A schedule of outstanding long-term and subordinated debt at March 31, 1994 and
1993 follows:
<TABLE>
<CAPTION>
1994 1993
----------- -----------
<S> <C> <C>
Long-term debt:
Term loans due 1997, interest
at bank prime rate plus 3.0% $32,000,000 $ -
Term loans due 1997, interest
at bank prime rate plus 5.0% 15,800,000
Term loans due 1996, interest
at bank prime rate plus 3.0% 13,300,000
Term loans due 2008, interest
at 6.0% 3,000,000
Term loan due 1993, interest
at bank prime rate plus 2.25% 1,000,000 1,000,000
Convertible note payable to
officer, due 1995, interest
at bank prime rate plus 2% 1,000,000 1,000,000
Term loan due 1993, interest
at bank prime rate plus 1.5% 15,225,000
Term loan due 1993, interest
at bank prime rate plus 2% 6,493,000
Term loan due 1993, interest
at 22% 5,245,000
Note payable on juice facility,
interest at 10%, maturities based
on volume 3,100,000
Note payable on juice facility,
interest at 13.5%, maturities
through 1999 1,101,000
Various obligations with maturities
to 2000, interest rates ranging from
10% to 15% 1,871,000 2,401,000
Deferred trade payables to supplier 5,000,000
Less current portion of
long-term debt (7,379,000 (13,684,000)
----------- ------------
$60,592,000 $ 26,881,000
=========== ============
Subordinated debt:
12-1/2% subordinated sinking fund
debentures, net of unamortized
discount of $0 (1994) and
$33,000 (1993), due 2002 $ 8,880,000 $ 8,847,000
Note payable on rice facility,
non-interest bearing 1,094,000
Less current portion of
subordinated debt (1,567,000 (8,847,000)
----------- ------------
$ 7,313,000 $ 1,094,000
=========== ============
</TABLE>
62
<PAGE> 64
ERLY INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - LONG-TERM AND SUBORDINATED DEBT (CONTINUED)
Bond discount related to the 12 1/2% subordinated sinking fund debentures
issued in 1978 was amortized over the 15-year life of the debentures and was
fully amortized in 1994.
Certain of the Company's and subsidiaries' long-term debt agreements require
maintenance of minimum amounts or ratios related to working capital, long-term
debt and net worth, in addition to the observance of other covenants. These
restrictions also preclude the payment of cash dividends.
Chemonics was in violation of certain debt covenants at March 31, 1994 by not
making the last term loan principal payment of $1.0 million on December 31,
1993. Negotiations are in process for a refinancing with new lenders to
provide a temporary increased working capital facility for Chemonics and
paydown Chemonics' existing lender.
As a result of the discontinuation of the juice operations, there still remains
$8.4 million plus accrued interest of ERLY Juice's obligation to ING Capital
which the Company guaranteed in exchange for a $6 million write-down of ERLY
Juice obligations. Under the terms of the guarantee, ERLY is required to
paydown the remaining $8.4 million (plus accrued interest) of debt within one
year (by December 21, 1994) or ING Capital may declare a default with the right
to foreclose on ERLY's subsidiary, Chemonics Industries, Inc. The Company
expects to sell sufficient assets or refinance Chemonics Industries in order to
paydown the remaining obligations prior to December 21, 1994.
The $61.1 million term loans at ARI mature on December 31, 1997 with annual
principal repayments required of $5.9 million, $6.0 million, $19.1 million and
$30.1 million in fiscal years ending March 31, 1995, 1996, 1997 and 1998,
respectively. Interest rates on the new loans range from prime plus 3% to
prime plus 5% through May 31, 1995, increasing to a range of prime plus 6% to
prime plus 8% by June 1997. Terms of the loans preclude dividend payments,
restrict investments and capital expenditures and require the maintenance of
certain financial covenants. These loans are collateralized by substantially
all of ARI's fixed assets and trademarks and have junior liens on collateral
for the revolving credit line.
ARI is required to maintain a minimum net book value, working capital and
certain financial ratios by its lenders. A comparison of the current
requirements with March 31, 1994 actual data is as follows (dollars in
thousands):
<TABLE>
<CAPTION>
Actual as of
Required March 31, 1994
-------- --------------
<S> <C> <C>
Net book value Greater than $26,456 $40,299
Working capital (adjusted) Greater than $8,896 $14,764
Financial leverage Less than 4.8 to 1 3.34 to 1
Working capital leverage Less than 8.0 to 1 4.86 to 1
Coverage ratio Greater than 1.0 to 1 1.25 to 1
</TABLE>
In addition, ERLY is a guarantor for all of the new ARI debt and the loan
agreements contain certain restrictive covenants applicable to ERLY.
Consequently, the new ARI debt contains cross default provisions with the debt
of ERLY.
63
<PAGE> 65
ERLY INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - LONG-TERM AND SUBORDINATED DEBT (CONTINUED)
The Company's 12-1/2% Subordinated Sinking Fund Debentures (the "Old
Debentures") with an outstanding balance of $8,880,000 matured on December 1,
1993. The Company has offered to exchange $8,880,000 12-1/2% Subordinated
Sinking Fund Debentures due 2002 (the "New Debentures") for the Old Debentures.
As of June 29, 1994, holders of approximately 95% of the Old Debentures have
agreed to the exchange. The Company is in the process of paying the June 1,
1994 semi-annual interest to all of the debentureholders. The Company does not
currently have adequate cash reserves to redeem the principal amount of all of
the Old Debentures (with a face value of approximately $449,000) which have not
agreed to the exchange but is exploring ways to deal with those
debentureholders who will not exchange and believes that it can refinance the
remaining amounts.
Principal maturities on ERLY's long-term and subordinated debt are as follows:
1995--$8,946,000; 1996--$7,160,000; 1997--$19,260,000;
1998--$30,260,000; 1999--$160,000; thereafter--$11,065,000.
Interest expense on long-term and subordinated debt amounted to $8,853,000
(1994), $4,017,000 (1993) and $5,651,000 (1992).
NOTE 19 - REDEEMABLE COMMON STOCK
In fiscal 1992, ERLY issued 300,000 shares of ERLY common stock in exchange for
$5.4 million of debt (See Note 8). In conjunction with this transaction, ERLY
entered into an agreement to repurchase all of such stock at a price of $6 per
share, at the option of the stockholder, over a four-year period beginning
January 1, 1994. These shares are classified as redeemable common stock in the
consolidated balance sheets. At issuance, the shares were recorded at their
fair market value of $1,012,000. The difference between the fair value of the
common stock at issuance and its redemption value was accreted to redeemable
common stock over the redemption period through charges to equity which
amounted to $394,000 in 1994 and $394,000 in 1993.
NOTE 20 - STOCKHOLDERS' EQUITY
At March 31, 1994, the Company has outstanding warrants issued in conjunction
with certain financing and restructuring agreements to purchase approximately
634,000 shares of ERLY common stock. The warrants are exercisable at prices
ranging from $.01 to $6.87 per share, subject to adjustment, and expire from
1994 to 1998.
Included in long-term debt is a $1 million note payable to D.A. Murphy,
President. The note is convertible into ERLY common stock at a conversion
price of $3.75 per share.
In November 1993, the ERLY shareholders approved an amendment to the Articles
of Incorporation which reduced the par value of ERLY common stock from $1.00
per share to $.01 per share. A reclassification of $3.2 million was made from
common stock to paid-in capital to reflect this change.
Six thousand shares of $100 par value preferred stock are presently authorized
but unissued.
64
<PAGE> 66
ERLY INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20 - STOCKHOLDERS' EQUITY (CONTINUED)
Under the Company's 1982 Incentive Stock Option Plan, 250,000 shares of common
stock were reserved for the granting of options to key employees. The purchase
price for shares may not be less than the market value of the shares at the
date of grant. The options are exercisable 25% a year over a four-year period
beginning one year after the date of issuance. Options generally expire ten
years from the date of grant. The following table summarizes the activity in
stock options under the Plan for 1994, 1993 and 1992:
<TABLE>
<CAPTION>
Number of Exercise Price
Options Per Option
------- --------------
<S> <C> <C>
Outstanding at April 1, 1991 147,342 $3.73 - $4.51
Granted -
Exercised -
Cancelled or expired -
-------
Outstanding at March 31, 1992 147,342 $3.73 - $4.51
Granted -
Exercised -
Cancelled or expired (24,158) $4.35
-------
Outstanding at March 31, 1993 123,184 $3.73 - $4.51
Granted -
Exercised -
Cancelled or expired -
-------
Outstanding at March 31, 1994 123,184 $3.73 - $4.51
=======
Exercisable at March 31, 1994 123,184
=======
</TABLE>
NOTE 21 - PROFIT-SHARING PLAN
The Company has a defined contribution profit-sharing plan covering
substantially all of its employees. The Company makes a mandatory 1% matching
contribution to the plan on a monthly basis and an annual contribution solely
at the discretion of the Board of Directors. Total profit-sharing plan expense
was $424,000 (1994), $410,000 (1993) and $412,000 (1992).
65
<PAGE> 67
ERLY INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 22 - COMMITMENTS AND CONTINGENCIES
The Company is involved in litigation in the ordinary course of business. It
is the opinion of management that resolution of such litigation will not have a
material adverse effect on the Company.
The Company's Chemonics subsidiary has operated in the chemical and pesticide
business and has potential liability for the correction of environmental
contamination relating to certain of its property. Chemonics has contracted
with an independent laboratory to perform sample testing and provide
consultation to assess various cleanup options available. The estimated costs
of such remedies are not presently determinable because the extent and scope of
the cleanup required is unknown and the method by which such cleanup can be
accomplished is under investigation. Management does not believe, however,
that the costs associated with this matter will have a material adverse effect
on the financial condition of the Company.
The Company and its subsidiaries are obligated under operating leases for plant
facilities and equipment. Aggregate minimum rental commitments under operating
leases with noncancellable terms of more than one year are as follows:
<TABLE>
<S> <C>
Year ending March 31
- - --------------------
1995 $ 3,446,000
1996 3,284,000
1997 2,677,000
1998 1,671,000
1999 1,009,000
Thereafter 16,844,000
-----------
$28,931,000
===========
</TABLE>
Included in minimum rental commitments is an assumed $360,000 per year on
certain rice drying and storage facilities where rental payments are based on
rice milling volume. Rental expense resulting from this milling volume factor
was $360,000 in 1994, 1993 and 1992.
Total rental expense amounted to $3,846,000 (1994), $2,515,000 (1993) and
$2,279,000 (1992). Certain leases provide for options to renew and for payment
of taxes, insurance and maintenance costs.
NOTE 23 - RELATED PARTY TRANSACTIONS
In August 1989, ERLY entered into a management agreement with ARI, under which
ERLY was paid a monthly management fee of $25,000 for certain marketing,
operating and management services. The management agreement expired in August
1992. ERLY recorded management fee income under this agreement of $-0- (1994),
$119,000 (1993) and $300,000 (1992).
ERLY had a $921,000 note payable to ARI at March 31, 1993 and 1992, with an
interest rate of prime plus 2%. As a result of the Comet and ARI combination,
the note payable to ARI was combined with amounts owed to Comet Rice. The
total amount payable to ARI after the May 1993 combination is approximately $10
million and is payable from dividends to be received from ARI.
66
<PAGE> 68
ERLY INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 23 - RELATED PARTY TRANSACTIONS (CONTINUED)
As a result of the Transaction, 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 pays ERLY a monthly management fee of $75,000. The $900,000
annual fee will be paid monthly and will be adjusted annually based on the most
recent published Consumer Price Index. The agreement is for a period of two
years with two-year automatic renewals unless one party notifies the other that
it wishes to terminate the agreement.
The Company believes that the fee is as favorable as might have been obtained
from a non-affiliated party, however because of its uniqueness, a comparison to
possible arrangements to parties who are not affiliated with ARI is not
available.
Comet Rice also purchased milled and rough rice from ARI prior to the
Transaction, and sold milled and rough rice to ARI. Management believes that
all such transactions with ARI were conducted at prevailing market rates or
rates that were based on production cost formulas. For the two months ended
May 26, 1993, Comet sales to ARI were $3,000 and purchases from ARI were
$222,000. Comet had sales of milled rice to ARI of $8.9 million and $27.8
million for the years ended March 31, 1993 and 1992. Purchases from ARI
amounted to $5.4 million and $17.5 million for the years ended March 31, 1993
and 1992. As a result of transactions with ARI in the ordinary course of
business, Comet had a net receivable from ARI of $4.2 million and $7.2 million
at March 31, 1993 and 1992 included in notes and accounts receivable in the
accompanying consolidated balance sheets.
NOTE 24 - SUBSEQUENT EVENTS
On April 15, 1994, ARI entered into a joint venture agreement with Vinafood II,
a company owned by the Ministry of Agriculture of the government of Vietnam.
The agreement provides that ARI and Vinafood II will jointly operate a mill in
the city of Can Tho, Vietnam. The joint venture will be 55% owned by ARI and
45% owned by Vinafood II.
ARI is currently awaiting the issuance of the joint venture license by the
Vietnam government. ARI expects to receive the license within six months and
will commence joint venture operations shortly thereafter. In anticipation of
the operations, ARI has already purchased and sold 30,000 metric tons of rice
from Vinafood and is assisting them in upgrading their rice operations.
NOTE 25 - 1993 RESTATEMENT
Fiscal year 1993 has been restated to reflect a $3,190,000 write-down of a
property (See Notes 4 and 5). The effect of the restatement is to increase the
stockholders' deficit at March 31, 1993 from $6,004,000 to $9,194,000, to
increase the loss for the year from $5,483,000 to $8,673,000 and to increase
the loss per share from $1.59 to $2.52.
67
<PAGE> 69
ERLY INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 26 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Fiscal Year 1994
(In thousands except per share data)
-------------------------------------------------------------
1st 2nd 3rd 4th
Quarter* Quarter* Quarter* Quarter Total
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Net sales $51,150 $84,600 $99,573 $99,501 $334,824
Gross profit 7,154 12,879 11,760 18,941 50,734
Income from continuing
operations 11,189 858 379 2,339 14,765
Loss on discontinued
operations (2,016) (4,140) (2,510) (144) (8,810)
Extraordinary income 10,270 5,625 897 16,792
Minority interest (5,108) 156 291 (417) (5,078)
Net income (loss) 14,335 2,499 (943) 1,778 17,669
Primary income (loss)
per share:
Continuing operations** 2.81 .29 .19 .48 3.66
Discontinued operations (.58) (1.19) (.70) (.04) (2.41)
Extraordinary income** 1.88 1.62 .25 3.58
Net income (loss) per share 4.11 .72 (.26) .44 4.83
Fully diluted income (loss)
per share:
Continuing operations** 2.61 .27 .19 .45 3.43
Discontinued operations (.54) (1.10) (.70) (.03) (2.24)
Extraordinary income** 1.75 1.50 .25 3.34
Net income (loss) per share 3.82 .67 (.26) .42 4.53
Weighted average shares
outstanding:
Primary 3,487 3,484 3,563 4,013 3,655
Fully diluted 3,754 3,751 3,563 4,280 3,922
Price range of common stock:
High $5-1/4 $4-1/2 $4-1/2 $5-1/2
Low 2-3/4 2-3/4 2 4-1/2
</TABLE>
* Restated for discontinued operations and/or allocation of earnings to
minority interest in ARI.
** Net of applicable minority interest.
68
<PAGE> 70
ERLY INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 26 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
Fiscal Year 1993*
(In thousands except per share data)
-----------------------------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net sales $72,641 $59,123 $41,579 $46,088 $219,431
Gross profit 6,855 7,073 5,354 4,346 23,628
Income (loss) from
continuing operations 713 (2,560) 167 (9,309) (10,989)
Income (loss) on discontinued
operations 205 (842) (2,123) (2,212) (4,972)
Extraordinary income 4,726 2,562 7,288
Net income (loss) 918 1,324 (1,956) (8,959) (8,673)
Primary income (loss) per share:
Continuing operations .21 (.75) .05 (2.67) (3.19)
Discontinued operations .06 (.24) (.62) (.64) (1.44)
Extraordinary income 1.38 .74 2.11
Net income (loss) per share .27 .39 (.57) (2.57) (2.52)
Fully diluted income
(loss) per share:
Continuing operations .19 (.69) .05 (2.67) (3.19)
Discontinued operations .06 (.23) (.62) (.64) (1.44)
Extraordinary income 1.28 .74 2.11
Net income (loss) per share .25 .36 (.57) (2.57) (2.52)
Weighted average shares
outstanding:
Primary 3,430 3,430 3,438 3,480 3,444
Fully diluted 3,697 3,697 3,438 3,480 3,444
Price range of common stock:
High $3-3/8 $2-5/8 $4-1/4 $4-3/4
Low 1-7/8 1-1/2 1-1/2 2-7/8
</TABLE>
* Restated for discontinued operations.
Significant items increasing (decreasing) net income for the fourth quarter of
1993 are as follows (in thousands): write-down of portion of ERLY's investment
in ARI relating to Houston property - ($3,190); extraordinary income on
extinguishment of debt related to ERLY Juice - $2,562; gain on sale of
subsidiary - $1,392; increase in allowances for doubtful accounts - ($2,000);
write-down of year-end inventories by ERLY Juice - ($945); and, accounts
payable adjustment by ERLY Juice -($1,000).
69
<PAGE> 71
Independent Auditors' Report
Board of Directors
ERLY Industries Inc.
Los Angeles, California
We have audited the accompanying consolidated balance sheets of ERLY Industries
Inc. and subsidiaries (the "Company") at March 31, 1994 and 1993, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended March 31, 1994. Our
audits also included the financial statement schedules listed in the Index at
Item 14. These consolidated financial statements and financial statement
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of ERLY Industries Inc. and
subsidiaries at March 31, 1994 and 1993, and the results of their operations
and cash flows for each of the three years in the period ended March 31, 1994,
in conformity with generally accepted accounting principles. Also, in our
opinion, such financial statement schedules, when considered in relation to the
basic consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company is in default on certain
of its bank debt covenants at its Chemonics subsidiary and the Company has
certain obligations due in fiscal 1995 which it will be unable to meet without
selling assets or refinancing indebtedness. These conditions raise doubt about
its ability to continue as a going concern. Management's plan is described in
Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
As discussed in Note 3 to the consolidated financial statements, in May 1993
the Company consummated a transaction whereby it increased its ownership in
American Rice, Inc. ("ARI") from 48% to 81% of the voting rights of ARI stock in
exchange for substantially all of the assets, subject to all of the
liabilities, of its wholly owned subsidiary, Comet Rice, Inc. The transaction
also involved the refinancing of the combined indebtedness of Comet Rice, Inc.
and American Rice, Inc.
As discussed in Notes 4, 5 and 25, the 1993 consolidated financial statements
have been restated from amounts previously reported to reflect a $3,190,000
write-down of a property.
DELOITTE & TOUCHE
July 8, 1994
Los Angeles, California
70
<PAGE> 72
ITEM 14(A)2. FINANCIAL STATEMENT SCHEDULES
ERLY INDUSTRIES INC. (PARENT COMPANY ONLY)
SCHEDULE III - CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Years ended March 31,
-------------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Corporate overhead expenses ($ 2,185) ($ 1,091) ($ 2,360)
Income from subsidiaries 909 1,092 769
Interest expense (1,508) (1,517) (1,833)
Interest income 268 165 670
Other income 72 9 594
Gain on sale of partial interest
in subsidiary 11,768
Income on investments 1,000
------- ------- -------
Income (loss) before taxes on income
(benefit), extraordinary item and
minority interest 9,324 (1,342) (1,160)
Taxes on income (benefit) (3,011) 2
------- ------- -------
Income (loss) before extraordinary
item and minority interest 12,335 (1,344) (1,160)
Extraordinary item - gain on
debt discount 897 - -
------- ------- --------
Income (loss) before undistributed
earnings (losses) of subsidiaries
and minority interest 13,232 (1,344) (1,160)
Undistributed earnings (losses)
of subsidiaries 9,515 (7,329) (11,379)
------- ------- -------
22,747 (8,673) (12,539)
Minority interest in earnings
of consolidated subsidiary (5,078)
------- ------- -------
Net income (loss) $17,669 ($ 8,673) ($12,539)
======= ======= =======
</TABLE>
71
<PAGE> 73
ERLY INDUSTRIES INC. (PARENT COMPANY ONLY)
SCHEDULE III - CONDENSED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
March 31,
---------------------------
1994 1993
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash $ 50 $ 26
Notes and accounts receivable, net 5 298
Other current assets 4 291
------- -------
Total current assets 59 615
Long-term notes receivable 1,019 4,890
Property, plant and equipment, net 11,085 6
Investment in subsidiaries* 32,280 392
Other assets 139 31
------- -------
$44,582 $ 5,934
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to ARI $ - $ 921
Accounts payable and other
current liabilities 4,349 2,953
Current portion of long-term
and subordinated debt 1,641 8,847
-------- -------
Total current liabilities 5,990 12,721
Long-term debt 4,444 1,001
Subordinated debt 7,313
Minority interest 19,700
Deferred income taxes (3,059)
Redeemable common stock 1,800 1,406
Stockholders' equity:
Common stock 34 3,187
Additional paid-in capital 16,157 12,687
Retained earnings (deficit) (6,450) (24,119)
Cumulative foreign currency
adjustments (1,347) (949)
------- -------
Total stockholders' equity 8,394 (9,194)
------- -------
$44,582 $ 5,934
======= =======
</TABLE>
* Recorded at equity in net assets of subsidiaries.
72
<PAGE> 74
ERLY INDUSTRIES INC. (PARENT COMPANY ONLY)
SCHEDULE III - CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Years ended March 31,
------------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $17,669 ($ 8,673) ($12,539)
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Undistributed (earnings) losses
of subsidiaries, net of minority interest (4,437) 7,329 11,379
Depreciation and amortization 677 113 128
Provision for loss on receivables (250) 250
Income on investments (1,000)
Gain on sale of partial investment
in subsidiary (11,768)
Extraordinary income - debt discount (897)
Change in assets and liabilities
net of effects of acquisition
and sale of businesses:
Decrease in receivables 293 941 370
(Increase) decrease in prepaid
expenses and other current assets 287 (286) 58
Decrease in assets held for sale 1,379
Increase (decrease) in accounts payable
and other current liabilities (1,659) (882) 1,100
-------- ------- -------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 165 (1,708) 1,125
INVESTING ACTIVITIES:
Additions to property, plant and equipment (12)
Payment on note receivable from
California CoPackers 5,200
Distributions (to) from subsidiaries (278) (1,885) (275)
Other, net 123 46 218
------- ------- -------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (167) 3,361 (57)
FINANCING ACTIVITIES:
Principal payments on long-term debt (214) (81)
Principal payments on subordinated debt (1,360) (1,360)
Proceeds from sale of stock 26 145 27
-------- ------- -------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 26 (1,429) (1,414)
-------- ------- -------
INCREASE (DECREASE) IN CASH DURING THE YEAR 24 224 (346)
CASH, BEGINNING OF YEAR 26 (198) 148
-------- ------- -------
CASH, END OF YEAR $ 50 $ 26 ($ 198)
======== ======= ========
</TABLE>
73
<PAGE> 75
ERLY INDUSTRIES INC. AND SUBSIDIARIES
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
Balance at Balance at
beginning Additions Retirements end of
Description of period at cost or sales Other (a) period
- - ----------- --------- --------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Year ended
March 31, 1994
- - --------------
Land $ 980,000 $ - ($ 739,000) $ 265,000 $ 506,000
Buildings and
improvements 10,730,000 14,000 (7,117,000) 25,753,000 29,380,000
Machinery and
equipment 42,258,000 3,289,000 (20,320,000) 20,155,000 45,382,000
----------- ----------- ----------- ----------- ------------
Total $53,968,000 $ 3,303,000 ($28,176,000) $46,173,000 $ 75,268,000
=========== =========== =========== =========== ============
Year ended
March 31, 1993
- - --------------
Land $ 979,000 $ - $ - $ 1,000 $ 980,000
Buildings and
improvements 10,817,000 111,000 (124,000) (74,000) 10,730,000
Machinery and
equipment 44,034,000 5,089,000 (6,901,000) 36,000 42,258,000
----------- ----------- ----------- ---------- -----------
55,830,000 5,200,000 (7,025,000) (37,000) 53,968,000
Rice facility
disposed in
July 1992 21,828,000 (21,828,000)
----------- ----------- ----------- ----------- -----------
Total $77,658,000 $ 5,200,000 ($28,853,000) ($ 37,000) $53,968,000
=========== =========== =========== =========== ===========
Year ended
March 31, 1992
- - --------------
Land $ 1,236,000 $ - $ - ($ 257,000) $ 979,000
Buildings and
improvements 17,210,000 393,000 (27,000) (6,759,000) 10,817,000
Machinery and
equipment 57,552,000 1,909,000 (411,000) (15,016,000) 44,034,000
----------- ----------- ----------- ----------- -----------
75,998,000 2,302,000 (438,000) (22,032,000) 55,830,000
Rice facility
disposed in
July 1992 21,828,000 21,828,000
----------- ----------- ----------- ----------- -----------
Total $75,998,000 $ 2,302,000 ($ 438,000) ($ 204,000) $77,658,000
=========== =========== =========== =========== ===========
</TABLE>
(a) Includes (1) adjustments relating to application of Statement of
Financial Accounting Standards No. 52, "Foreign Currency
Translation", (2) 1994 addition of $34.9 million of American Rice,
Inc. assets upon the May 26, 1993 combination with Comet Rice, (3)
1994 step-up of Comet's Maxwell, California rice facility by $11.6
million as described in Note 6 to the consolidated financial
statements, and (4) reclassification in 1992 of assets relating to the
Greenville, Mississippi rice facility to segregate as a separate
caption.
74
<PAGE> 76
ERLY INDUSTRIES INC. AND SUBSIDIARIES
SCHEDULE VI - ACCUMULATED DEPRECIATION, DEPLETION
AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
Additions
Balance at charged to Balance at
beginning costs and Retirements end of
Description of period expenses or sales Other (a) period
- - ----------- ------------ ---------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Year ended
March 31, 1994
- - --------------
Buildings and
improvements $ 3,114,000 $ 738,000 ($ 1,416,000) $ 1,097,000 $ 3,533,000
Machinery and
equipment 19,997,000 3,974,000 (6,521,000) (749,000) 16,701,000
----------- ---------- ----------- ----------- -----------
Total $23,111,000 $4,712,000 ($ 7,937,000) $ 348,000 $20,234,000
=========== ========== =========== =========== ===========
Year ended
March 31, 1993
- - --------------
Buildings and
improvements $ 2,606,000 $ 497,000 ($ 3,000) $ 14,000 $ 3,114,000
Machinery and
equipment 20,660,000 2,953,000 (3,498,000) (118,000) 19,997,000
----------- ---------- ----------- ---------- -----------
23,266,000 3,450,000 (3,501,000) (104,000) 23,111,000
Rice facility
disposed in
July 1992 7,797,000 (7,797,000) -
----------- ---------- ----------- ---------- -----------
Total $31,063,000 $3,450,000 ($11,298,000) ($ 104,000) $23,111,000
=========== ========== =========== ========== ===========
Year ended
March 31, 1992
- - --------------
Buildings and
improvements $ 3,398,000 $ 616,000 ($ 127,000) ($1,281,000) $ 2,606,000
Machinery and
equipment 23,621,000 3,769,000 (159,000) (6,571,000) 20,660,000
----------- ---------- ---------- ---------- -----------
27,019,000 4,385,000 (286,000) (7,852,000) 23,266,000
Rice facility
disposed in
July 1992 7,797,000 7,797,000
----------- ---------- ---------- ---------- -----------
Total $27,019,000 $4,385,000 ($ 286,000) ($ 55,000) $31,063,000
=========== ========== ========== ========== ===========
</TABLE>
(a) Includes (1) adjustments relating to application of Statement of
Financial Accounting Standards No. 52, "Foreign Currency Translation",
and (2) reclassification in 1992 of accumulated depreciation relating
to the Greenville, Mississippi rice facility to segregate as a
separate caption.
75
<PAGE> 77
ERLY INDUSTRIES INC.
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
------------------------
Balance at Charges to Charges Deductions Balance at
beginning costs and to other from end of
Description of period expenses accounts reserves(a) period
- - ----------- --------- ---------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Year ended
March 31, 1994
- - --------------
Allowance for
doubtful
accounts $3,280,000 $3,247,000 ($3,919,000) ($ 743,000) $1,865,000
========== ========== ========== ========== ==========
Reserve for
notes
receivable $ 200,000 ($ 200,000) $ -
========== ========== ========== ========== ==========
Reserve for
discontinued
businesses $1,582,000 ($1,064,000) $ 518,000
========== ========== ========== ========== ==========
Year ended
March 31, 1993
- - --------------
Allowance for
doubtful
accounts $ 956,000 $2,474,000 ($ 34,000) ($ 116,000) $3,280,000
========== ========== ========== ========== ==========
Reserve for
notes
receivable $2,000,000 ($1,800,000) $ 200,000
========== ========== ========== ========== ==========
Reserve for
discontinued
businesses $2,189,000 ($ 607,000) $1,582,000
========== ========== ========== ========== ==========
Year ended
March 31, 1992
- - --------------
Allowance for
doubtful
accounts $ 748,000 $ 883,000 ($ 14,000) ($ 661,000) $ 956,000
========== ========== ========== ========== ==========
Reserve for
notes
receivable $3,000,000 ($1,000,000) $2,000,000
========== ========== ========== ========== ==========
Reserve for
discontinued
businesses $3,455,000 ($1,266,000) $2,189,000
========== ========== ========== ========== ==========
</TABLE>
(a) Uncollectible accounts written off to allowance for doubtful accounts;
reduction of reserve for notes receivable in 1994, 1993 and 1992; and,
charges to restructure reserve for discontinued businesses.
76
<PAGE> 78
ERLY INDUSTRIES INC. AND SUBSIDIARIES
SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION
<TABLE>
<CAPTION>
Years ended March 31,
---------------------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Maintenance and repairs $5,102,000 $1,368,000 $2,680,000
Amortization of intangible
assets (A) (A) (A)
Taxes, other than payroll
and income taxes:
Property taxes (A) (A) (A)
Other taxes (A) (A) (A)
Advertising costs (A) (A) (A)
</TABLE>
(A) Amounts are not presented as they do not exceed one percent of sales.
77
<PAGE> 79
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, ERLY Industries Inc. has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
ERLY INDUSTRIES INC.
By /s/ Gerald D. Murphy
---------------------------------------
Gerald D. Murphy, Chairman of the Board
(Chief Executive Officer)
By /s/ Richard N. McCombs
---------------------------------------
Richard N. McCombs, Vice President and
Chief Financial Officer
(Chief Accounting Officer)
Date: July 8, 1994
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of ERLY
Industries Inc. and in the capacities and on the dates indicated:
/s/ Gerald D. Murphy /s/ Douglas A. Murphy
- - --------------------------- -----------------------------
Gerald D. Murphy, Director Douglas A. Murphy, Director
/s/ Bill J. McFarland /s/ William H. Burgess
- - --------------------------- -----------------------------
Bill J. McFarland, Director William H. Burgess, Director
78
<PAGE> 80
EXHIBIT I.1
ERLY INDUSTRIES INC. AND SUBSIDIARIES
CALCULATION OF PRIMARY INCOME (LOSS) PER SHARE
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Years ended March 31,
-------------------------------------------------------------
1994 1993* 1992* 1991* 1990*
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Income (loss) from
continuing operations $14,765 ($10,989) ($ 6,361) $ 5,626 $ 2,884
Income (loss) on
discontinued operations (5,248) (4,972) (10,614) (3,766) (2,429)
Income (loss) on disposal of
discontinued businesses (3,562) 1,400
Income from extraordinary items 16,792 7,288 4,436
Minority interest (5,078)
------- ------- ------- ------- -------
Net income (loss) $17,669 ($ 8,673) ($12,539) $ 3,260 $ 455
======= ======= ======= ======= =======
Average number of shares of
common stock and common
stock equivalents outstanding**:
Average number of shares of
common stock outstanding 3,535 3,444 3,127 3,089 3,029
Common stock equivalents:
Dilutive effect of stock
options and warrants based
on application of treasury
stock method 120 (a) (a) (b) (b)
------ ------ ------ ------ ------
Total 3,655 3,444 3,127 3,089 3,029
====== ====== ====== ====== ======
Primary income (loss)
per common share:
Income (loss) from
continuing operations (c) $ 3.66 ($ 3.19) ($ 2.03) $ 1.82 $ .95
Income (loss) on
discontinued operations (1.44) (1.44) (3.40) (1.21) (.80)
Income (loss) on disposal of
discontinued businesses (.97) .45
Income from extraordinary items (c) 3.58 2.11 1.42
------ ------ ------ ------ ------
Primary income (loss)
per common share $ 4.83 ($ 2.52) ($ 4.01) $ 1.06 $ .15
====== ====== ====== ====== ======
</TABLE>
* Restated for discontinued operations.
** Retroactively adjusted to give effect to 10% stock dividends in September
1990 and November 1989.
(a) Exercise of stock options and warrants is not assumed as the computation
would be anti-dilutive.
(b) The dilutive effect of stock options and warrants was less than 3%;
therefore none are shown above.
(c) Net of applicable minority interest.
79
<PAGE> 81
EXHIBIT I.2
ERLY INDUSTRIES INC. AND SUBSIDIARIES
CALCULATION OF FULLY DILUTED INCOME (LOSS) PER SHARE
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Years ended March 31,
-------------------------------------------------------------
1994 1993* 1992* 1991* 1990*
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Income (loss) from
continuing operations $14,765 ($10,989) ($ 6,361) $ 5,626 $ 2,884
Interest adjustment 80 80 80 80 80
------- ------- ------- ------- -------
14,845 (10,909) (6,281) 5,706 2,964
Income (loss) on
discontinued operations (5,248) (4,972) (10,614) (3,766) (2,429)
Income (loss) on disposal of
discontinued businesses (3,562) 1,400
Income from extraordinary items 16,792 7,288 4,436
Minority interest (5,078)
------- ------- ------- ------- -------
Net income (loss)
as adjusted $17,749 ($ 8,593) ($12,459) $ 3,340 $ 535
======= ======= ======= ======= =======
Average number of shares of
common stock and common
stock equivalents outstanding** 3,655 3,444 3,127 3,089 3,029
Other potentially
dilutive securities:
Common stock issuable upon
conversion of note payable 267 (a) (a) 212 (a)
------ ------ ------ ------ ------
Total 3,922 3,444 3,127 3,301 3,029
====== ====== ====== ====== ======
Fully diluted income (loss)
per common share:
Income (loss) from
continuing operations (b) $ 3.43 ($ 3.19) ($ 2.03) $ 1.73 $ .95
Income (loss) on dis-
continued operations (1.33) (1.44) (3.40) (1.14) (.80)
Income (loss) on disposal of
discontinued businesses (.91) .42
Income from extraordinary items (b) 3.34 2.11 1.42
------ ------ ------ ------ ------
Fully diluted income (loss)
per common share $ 4.53 ($ 2.52) ($ 4.01) $ 1.01 $ .15
====== ====== ====== ====== ======
</TABLE>
* Restated for discontinued operations.
** Retroactively adjusted to give effect to 10% stock dividends in September
1990 and November 1989.
(a) Exercise of stock options, warrants and convertible notes is not assumed
as the computation would be anti-dilutive.
(b) Net of applicable minority interest.
80
<PAGE> 82
EXHIBIT II
ERLY INDUSTRIES INC.
SUBSIDIARIES
The following is a list of all parents and principal subsidiaries of the
Company reflecting ownership and the state or country of incorporation:
<TABLE>
<CAPTION>
% of Voting
Securities
Parent Subsidiaries Owned
- - ------ ------------ ------------
<S> <C> <C>
ERLY Industries Inc. American Rice, Inc. 81%
(California) (Texas)
Chemonics Industries, Inc. 100%
(Arizona)
The Beverage Source Inc. 100%
(California)
ERLY Juice Inc. 100%
(California)
Worldmark, Inc. 100%
(Michigan)
American Rice, Inc. Comet Rice of Puerto Rico, Inc. 100%
(Texas) (Delaware)
Comet Ventures, Inc. 90%
(California)
Comet Rice of Jamaica, Ltd. 100%
(Jamaica)
Rice Corporation of Haiti 100%
(Haiti)
Chemonics Industries, Inc. Chemonics Industries (Canada) Ltd. 100%
(Arizona) (Canada)
Worldmark, Inc. Eau Claire Packing Company 100%
(Michigan) (Michigan)
</TABLE>
All subsidiaries are included in the consolidated financial statements.
81
<PAGE> 1
EXHIBIT 3
ARTICLES OF INCORPORATION
OF
ERLY INDUSTRIES INC.
(As Amended November 22, 1993)
We, the undersigned, have this day voluntarily associated
ourselves together for the purpose of forming a corporation under the laws of
the State of California, and do hereby certify as follows:
FIRST: Name. The name of the corporation is:
ERLY INDUSTRIES INC.
SECOND: Purposes. The purposes for which the corporation is
formed are:
(a) The specific business in which the corporation
intends primarily to engage in is the business of producing, purchasing,
grading, processing, canning, manufacturing, and marketing of
agriculture-related products of all kinds.
(b) To manufacture, buy, sell, deal in, and to engage in,
conduct and carry on the business of manufacturing, buying, selling and dealing
in goods, wares and merchandise of every class and description.
(c) To purchase or otherwise acquire, own, hold, lease,
hypothecate, sell or otherwise dispose of, and exercise all privileges of
ownership over, real and personal property within and without the state, and to
take real and personal property by will, gift or bequest.
1
<PAGE> 2
(d) To purchase or otherwise acquire, own, hold, and
exercise all rights of ownership in, and to sell, transfer, or pledge, or
guarantee the payment of dividends or interest on, shares of the capital stock
or bonds of any corporation engaged in any related activity or which may be
necessary, convenient or desirable for furthering the best interest of the
corporation.
(e) To apply for, take out, acquire, own, use, license
the use of, and dispose of, trademarks, copyrights and patents.
(f) To borrow money without limitation as to amount of
corporate indebtedness and liability, and to secure the payment thereof by note,
mortgage, bond, deed of trust, trust receipt, or by any other lawful means; to
lend money in connection with the corporation's other lawful activities and to
take and receive notes, mortgages, bonds, deeds of trust, trust receipts, or
any other evidence of indebtedness or security for such loans.
(g) To guarantee the performance of such obligations of
customers, clients, or others as may be directly or indirectly for the benefit
of the corporation.
(h) To designate and employ agents, employees, and
representatives.
(i) To do everything suitable or proper for the
accomplishment of any of the purposes or the attainment of any of the objects
herein enumerated, or necessary or desirable for the interest or benefit of the
corporation, and, in addition, to exercise and possess all powers, rights, and
privileges necessary and incidental to the purposes for which the corporation
is organized or to the activities in which it is engaged.
(j) To participate in any transaction or to engage in any
business whatsoever related or unrelated to the purpose in paragraph (a), in
any legal capacity including, but not limited to, principal, agent, general or
limited partner, and joint venturer, to exercise from time
2
<PAGE> 3
to time all of the rights, powers, and privileges conferred by law upon a
corporation, to engage in any lawful activity and to conduct all of the above
activities in any part of the world.
The enumerated purposes of this corporation shall be deemed
powers as well as purposes. The foregoing statement of purposes and powers
shall be liberally construed and no general provision shall be limited by
reference to or inference from any other provision of these Articles.
THIRD: Principal Office. The County in the State of
California where the principal office for the transaction of the business of
the corporation is to be located is Los Angeles County.
FOURTH: Capital Stock. The Corporation is authorized to
issue two classes of shares of stock to be classified and designated
respectively, as Common Stock and Preferred Stock. The total number of shares
of stock which the corporation is authorized to issue is Five Million and Six
Thousand (5,006,000) shares; and the aggregate par value of all of the shares
is Six Hundred Fifty Thousand Dollars ($650,000).
The total number of shares of Common Stock which the
corporation is authorized to issue is Five Million (5,000,000) shares; the
aggregate par value of all of said shares of Common Stock is Fifty Thousand
Dollars ($50,000); and the par value of each such share is One Cent ($.01).
3
<PAGE> 4
The total number of shares of Preferred Stock which the
corporation is authorized to issue is Six Thousand (6,000) shares; the
aggregate par value of all such shares of Preferred Stock is Six Hundred
Thousand Dollars ($600,000); and the par value of each share is One Hundred
Dollars ($100.00).
The authorized shares of Preferred Stock may be issued from
time to time in one or more series. The Board of Directors is hereby
authorized to fix or alter the dividend rights, dividend rate, conversion
rights, voting rights, rights and terms of redemption (including sinking fund
provisions), redemption price or prices, and liquidation preferences of any
wholly unissued series of shares of Preferred Stock, and the number of shares
constituting any such series and the designation thereof, or any of them; and
to increase or decrease the number of shares of any series subsequent to the
issue of shares of that series, but not below the number of shares of such
series then outstanding. In case the number of shares of any series shall be
so decreased, the shares constituting such decrease shall resume the status
which they had prior to the adoption of the resolution originally fixing the
number of shares of such series.
FIFTH: Directors. The number of Directors of the
corporation, until changed either by amendment of the Articles or by a By-Law
duly adopted by the shareholders, is six (6) (as amended by an Amendment to the
Company's Bylaws November 17, 1989). The names and addresses of the persons
who are appointed to act as the first Directors are:
Carlisle B. Lane 225 Bush Street
San Francisco, CA
4
<PAGE> 5
Bruce M. Mann 225 Bush Street
San Francisco, CA
John G. Clancy 225 Bush Street
San Francisco, CA
Thomas J. Harbinson 225 Bush Street
San Francisco, CA
Gary B. Christiansen 225 Bush Street
San Francisco, CA
Ronald W. Ingram 225 Bush Street
San Francisco, CA
Richard W. Johnson 225 Bush Street
San Francisco, CA
IN WITNESS, WHEREOF, the undersigned hereby certify that these
are the currently effective Articles of Incorporation of ERLY Industries Inc.
as amended on the 22nd day of November, 1993.
/s/ Gerald D. Murphy
------------------------------------
Gerald D. Murphy, Chairman
/s/ Richard N. McCombs
------------------------------------
Richard N. McCombs, Secretary
5
<PAGE> 1
EXHIBIT 4
ERLY INDUSTRIES INC.
AND
TRUST COMPANY OF TEXAS,
TRUSTEE
_____________
INDENTURE
Dated as of December 1, 1993
________________
$8,880,000
12 1/2% Subordinated Sinking Fund Debentures due 2002
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE ONE - DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
SECTION 1.01. Definitions and Trust Indenture Act Terms . . . . . . . . . . . . . . . . 8
Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Authenticating Agent . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Authorized Newspaper . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Business Day . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Certified Resolution . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Commission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Debenture or Debentures; Outstanding . . . . . . . . . . . . . . . . . . 10
Debentureholder; Registered Holder . . . . . . . . . . . . . . . . . . . 11
Event of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Officers' Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Opinion of Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Person . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Regular Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Responsible Officer . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Senior Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Special Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Trust Indenture Act of 1939 . . . . . . . . . . . . . . . . . . . . . . . 13
ARTICLE TWO - ISSUE, DESCRIPTION, EXECUTION, REGISTRATION, REGISTRATION OF TRANSFER AND
EXCHANGE OF DEBENTURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
SECTION 2.01. Designation, Amount, Authentication and Delivery of Debentures . . . . . 13
SECTION 2.02. Form of Debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
SECTION 2.03. Denomination and Date of Debentures; Payment of Interest . . . . . . . . 14
SECTION 2.04. Execution of Debentures . . . . . . . . . . . . . . . . . . . . . . . . . 15
SECTION 2.05. Exchange, Registration and Registration of Transfer of Debentures . . . . 16
</TABLE>
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<TABLE>
<S> <C>
SECTION 2.06. Temporary Debentures . . . . . . . . . . . . . . . . . . . . . . . . . . 17
SECTION 2.07. Mutilated, Destroyed, Lost or Stolen Debentures . . . . . . . . . . . . . 17
SECTION 2.08. Cancellation of Debentures . . . . . . . . . . . . . . . . . . . . . . . 18
ARTICLE THREE - SUBORDINATION OF DEBENTURES . . . . . . . . . . . . . . . . . . . . . . . . 18
SECTION 3.01. Agreement to Subordinate . . . . . . . . . . . . . . . . . . . . . . . . 18
SECTION 3.02. No Payment on Debentures if Senior Indebtedness in Default . . . . . . . 19
SECTION 3.03. Priority of Senior Indebtedness upon Distribution of Assets . . . . . . . 19
SECTION 3.04. Notice to Trustee of Specified Events; Reliance on Certificate of
Liquidating Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
SECTION 3.05. Subrogation of Debentures . . . . . . . . . . . . . . . . . . . . . . . . 20
SECTION 3.06. Obligation to Pay Not Impaired . . . . . . . . . . . . . . . . . . . . . 21
SECTION 3.07. Trustee to Effect Subordination . . . . . . . . . . . . . . . . . . . . . 21
SECTION 3.08. Notice to Trustee of Effectuation of Subordination . . . . . . . . . . . 21
SECTION 3.09. No Prejudice to Holders of Senior Indebtedness . . . . . . . . . . . . . 22
SECTION 3.10. All Indenture Provisions Subject to Article Three . . . . . . . . . . . . 22
SECTION 3.11. Trustee's Compensation Not Prejudiced . . . . . . . . . . . . . . . . . . 22
ARTICLE FOUR - REDEMPTION AND REPURCHASE OF DEBENTURES --
MANDATORY AND OPTIONAL SINKING FUND . . . . . . . . . . . . . . . . . . . . . . . . 22
SECTION 4.01. Redemption Prices -- Voluntary and for Sinking Fund . . . . . . . . . . . 22
SECTION 4.02. Notice of Redemption; Selection of Debentures . . . . . . . . . . . . . . 23
SECTION 4.03. Payment of Debentures Called for Redemption . . . . . . . . . . . . . . . 23
SECTION 4.04. Mandatory and Optional Sinking Fund . . . . . . . . . . . . . . . . . . . 24
SECTION 4.05. Credits Against Mandatory Sinking Fund . . . . . . . . . . . . . . . . . 25
SECTION 4.06. Officers' Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . 25
</TABLE>
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<TABLE>
<S> <C>
SECTION 4.07. Right to Present Debentures For Repurchase . . . . . . . . . . . . . . . 26
ARTICLE FIVE - PARTICULAR COVENANTS OF THE COMPANY . . . . . . . . . . . . . . . . . . . . 28
SECTION 5.01. Payment of Principal, Premium and Interest . . . . . . . . . . . . . . . 28
SECTION 5.02. Office for Exchange, Registration of Transfer, Notices and Payment . . . 29
SECTION 5.03. Maintenance of Franchises, Rights and Licenses, Corporate
Existence and Property . . . . . . . . . . . . . . . . . . . . . . . . . 29
SECTION 5.04. Payment of Taxes and Assessments . . . . . . . . . . . . . . . . . . . . 30
SECTION 5.05. Maintenance of Insurance . . . . . . . . . . . . . . . . . . . . . . . . 30
SECTION 5.06. Officers' Certificate as to Breach and Annual Review Statement . . . . . 30
SECTION 5.07. Appointment to Fill a Vacancy in Office of Trustee . . . . . . . . . . . 31
SECTION 5.08. Further Instruments and Acts . . . . . . . . . . . . . . . . . . . . . . 31
ARTICLE SIX - REMEDIES OF THE TRUSTEE AND DEBENTUREHOLDERS IN
THE EVENT OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
SECTION 6.01. Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
SECTION 6.02. Payment of Debentures After Non-Payment; Suit Therefor . . . . . . . . . 33
SECTION 6.03. Application of Moneys Collected by Trustee . . . . . . . . . . . . . . . 35
SECTION 6.04. Limitation on Suits by Holders of Debentures . . . . . . . . . . . . . . 36
SECTION 6.05. Remedies Cumulative and Continuing . . . . . . . . . . . . . . . . . . . 36
SECTION 6.06. Direction of Proceedings and Waiver of Breaches by Majority of
Debentureholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
SECTION 6.07. Notice of Breaches . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
SECTION 6.08. Trustee Appointed Attorney-in-Fact . . . . . . . . . . . . . . . . . . . 37
SECTION 6.09. Undertaking to Pay Costs . . . . . . . . . . . . . . . . . . . . . . . . 38
SECTION 6.10. Debentures Owned by Company Not to Share in Payments . . . . . . . . . . 38
</TABLE>
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<TABLE>
<S> <C>
SECTION 6.11. Waiver of Usury Laws . . . . . . . . . . . . . . . . . . . . . . . . . . 38
ARTICLE SEVEN - LISTS OF HOLDERS OF DEBENTURES AND REPORTS BY
THE COMPANY AND THE TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
SECTION 7.01. Debentureholders' Lists . . . . . . . . . . . . . . . . . . . . . . . . . 39
SECTION 7.02. Preservation and Disclosure of Lists . . . . . . . . . . . . . . . . . . 39
SECTION 7.03. Reports by the Company . . . . . . . . . . . . . . . . . . . . . . . . . 40
SECTION 7.04. Reports by the Trustee . . . . . . . . . . . . . . . . . . . . . . . . . 41
ARTICLE EIGHT - THE TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
SECTION 8.01. Acceptance of Trusts . . . . . . . . . . . . . . . . . . . . . . . . . . 43
SECTION 8.02. Duties and Liabilities of Trustee . . . . . . . . . . . . . . . . . . . . 43
SECTION 8.03. Certain Rights and Duties of the Trustee . . . . . . . . . . . . . . . . 44
SECTION 8.04. Moneys to Be Held in Trust . . . . . . . . . . . . . . . . . . . . . . . 45
SECTION 8.05. Trustee May Perform Duties by Agents; Reimbursement of
Expenses; Holding of Debentures . . . . . . . . . . . . . . . . . . . . . 45
SECTION 8.06. Conflicting Interest of Trustee . . . . . . . . . . . . . . . . . . . . . 46
SECTION 8.07. Eligibility of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . 51
SECTION 8.08. Resignation or Removal of Trustee . . . . . . . . . . . . . . . . . . . . 51
SECTION 8.09. Acceptance of Appointment by Successor Trustee . . . . . . . . . . . . . 52
SECTION 8.10. Merger or Consolidation of Trustee . . . . . . . . . . . . . . . . . . . 53
SECTION 8.11. Limitation on Rights of Trustee as a Creditor . . . . . . . . . . . . . . 53
SECTION 8.12. Paying Agents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
SECTION 8.13 Authenticating Agent . . . . . . . . . . . . . . . . . . . . . . . . . . 57
ARTICLE NINE - CONCERNING THE HOLDERS OF DEBENTURES . . . . . . . . . . . . . . . . . . . . 58
SECTION 9.01. Action By Debentureholders . . . . . . . . . . . . . . . . . . . . . . . 58
</TABLE>
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<TABLE>
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SECTION 9.02. Proof of Execution of Instruments and of Holding of Debentures . . . . . 58
SECTION 9.03 Debentures Owned by Company Deemed Not Outstanding . . . . . . . . . . . 59
SECTION 9.04 Revocation of Consents; Future Holders Bound . . . . . . . . . . . . . . 59
SECTION 9.05. Obligation to Disclose Beneficial Ownership of Debentures . . . . . . . . 60
ARTICLE TEN - MEETINGS OF HOLDERS OF DEBENTURES . . . . . . . . . . . . . . . . . . . . . . 60
SECTION 10.01 Purposes of Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . 60
SECTION 10.02. Call of Meetings by Trustee . . . . . . . . . . . . . . . . . . . . . . . 60
SECTION 10.03 Call of Meetings by Company or Debentureholders . . . . . . . . . . . . . 61
SECTION 10.04 Persons Entitled to Vote at Meeting . . . . . . . . . . . . . . . . . . . 61
SECTION 10.05 Regulations for Meeting . . . . . . . . . . . . . . . . . . . . . . . . . 61
SECTION 10.06 Counting Vote and Recording Action of Meeting . . . . . . . . . . . . . . 62
SECTION 10.07 No Delay of Rights by Meeting . . . . . . . . . . . . . . . . . . . . . . 62
ARTICLE ELEVEN - SUPPLEMENTAL INDENTURES . . . . . . . . . . . . . . . . . . . . . . . . . 62
SECTION 11.01 Supplemental Indentures Without Consent of Debentureholders . . . . . . . 62
SECTION 11.02 Supplemental Indentures With Consent of Debentureholders . . . . . . . . 63
SECTION 11.03 Effect of Supplemental Indentures . . . . . . . . . . . . . . . . . . . . 64
SECTION 11.04. Notation on Debentures . . . . . . . . . . . . . . . . . . . . . . . . . 64
SECTION 11.05. Officers' Certificate and Opinion of Counsel to the Trustee . . . . . . . 65
SECTION 11.06 Conformity With the Trust Indenture Act of 1939 . . . . . . . . . . . . . 65
ARTICLE TWELVE - CONSOLIDATION, MERGER, SALE, CONVEYANCE OR LIQUIDATING DISTRIBUTION . . . 65
SECTION 12.01 Consolidation, Merger, Sale, Conveyance, or Liquidating
Distribution Permitted . . . . . . . . . . . . . . . . . . . . . . . . . 65
SECTION 12.02 Rights and Duties of Successor Corporation . . . . . . . . . . . . . . . 66
SECTION 12.03. Officers' Certificate and Opinion of Counsel to the Trustee . . . . . . . 67
ARTICLE THIRTEEN - SATISFACTION AND DISCHARGE OF INDENTURE; UNCLAIMED MONEYS . . . . . . . 67
</TABLE>
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<TABLE>
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SECTION 13.01 Satisfaction and Discharge of Indenture . . . . . . . . . . . . . . . . . 67
SECTION 13.02 Application By Trustee of Funds Deposited for Payment of Debentures . . . 67
SECTION 13.03 Repayment of Moneys Held by Paying Agent . . . . . . . . . . . . . . . . 68
SECTION 13.04 Unclaimed Moneys . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
ARTICLE FOURTEEN - MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
SECTION 14.01 Rights Confined to Parties and Holders of Debentures and Senior
Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
SECTION 14.02 Indenture and Debentures Solely Corporate Obligations . . . . . . . . . . 68
SECTION 14.03 Officers' Certificates and Opinions of Counsel . . . . . . . . . . . . . 69
SECTION 14.04 Payments Due on Business Day . . . . . . . . . . . . . . . . . . . . . . 70
SECTION 14.05 Trust Indenture Act of 1939 to Control . . . . . . . . . . . . . . . . . 70
SECTION 14.06. Provisions Binding Upon Successors and Assigns . . . . . . . . . . . . . 70
SECTION 14.07. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
SECTION 14.08. Table of Contents and Headings . . . . . . . . . . . . . . . . . . . . . 71
SECTION 14.09 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
SECTION 14.10. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
</TABLE>
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RECONCILIATION AND TIE SHEET*
Between
PROVISIONS OF THE TRUST INDENTURE ACT OF 1939
And
INDENTURE, DATED AS OF DECEMBER 1, 1993,
Between
ERLY INDUSTRIES INC.
And
TRUST COMPANY OF TEXAS, Trustee
<TABLE>
<CAPTION>
Section of Section of
Act Indenture
--- ---------
<S> <C>
310(a)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.07
310(a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.07
310(a)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable
310(a)(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable
310(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.06, 8.08
311(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.11(a), 8.11(c)(I)
311(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.11(b)
311(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable
312(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.01, 7.02(a)
312(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.02(b)
312(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.02(c)
313(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.04(a)
313(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.04(a)
313(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.04(c)
313(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.04(d)
314(a)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.03(a)
314(a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.03(b)
314(a)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.03(c)
314(a)(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.03(e)
314(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable
314(c)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.01, 14.03
314(c)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.01, 14.03
314(c)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable
314(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable
314(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.03
315(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.02(a)(1), (2)
315(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.07
315(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.02
315(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.02
315(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.09
316(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.03
316(a)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.01, 6.06
316(a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable
</TABLE>
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<TABLE>
<S> <C>
316(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.04
317(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.02
317(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.12
318(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.05
- - -------------
</TABLE>
* This Reconciliation and Tie Sheet is not part of the Indenture
as executed.
- ii -
<PAGE> 10
THIS INDENTURE, dated as of the first day of December, 1993, between
ERLY INDUSTRIES INC., a corporation duly organized and existing under the laws
of the State of California (hereinafter sometimes referred to as the
"Company"), and TRUST COMPANY OF TEXAS, a trust company organized and existing
under the laws of Texas (hereinafter sometimes referred to as the "Trustee"):
W I T N E S S E T H:
WHEREAS, for its lawful corporate purposes, the Company has duly
authorized the creation of an issue of its 12 1/2% Subordinated Sinking Fund
Debentures due 2002 (hereinafter referred to as the "Debentures"), in the
aggregate principal amount of eight million eight hundred eighty thousand
dollars ($8,880,000), to be issued as registered debentures without coupons,
and to be authenticated by the certificate of the Trustee as hereinafter
provided; and
WHEREAS, to provide the terms and conditions upon which the Debentures
are to be authenticated, issued and delivered, the Company has duly authorized
the execution of this Indenture; and
WHEREAS, the Debentures and the endorsement thereto and the Trustee's
certificate of authentication to be borne by the Debentures are to be
substantially in the following forms, respectively:
[FORM OF FACE OF DEBENTURE]
No. __________ $__________
ERLY INDUSTRIES INC.
12 1/2% Subordinated Sinking Fund Debenture due 2002
ERLY INDUSTRIES INC., a corporation duly organized and existing under
the laws of the State of California (herein referred to as the "Company," which
term includes any successor corporation under the Indenture hereinafter
referred to), for value received, hereby promises to pay to _________________,
or registered assigns, the principal sum of __________________ Dollars, on
December 1, 2002, in any coin or currency of the United States of America as at
the time of payment is legal tender for the payment of public and private
debts, and to pay interest on said principal sum at the rate of 12 1/2% per
annum, in like coin or currency, from
- 1 -
<PAGE> 11
the December 1 or the June 1 to which interest has been paid next preceding the
date hereof (unless the date hereof is a December 1 or a June 1 to which
interest has been paid, in which case from the date hereof, or unless no
interest has been paid on the Debentures, in which case from December 1, 1993,
or unless the date hereof is after November 15 or May 15 and before the
following respective December 1 or June 1 to which interest is paid, in which
case from such December 1 or June 1), semi-annually on December 1 and June 1 in
each year, until payment of said principal sum has been made or duly provided
for. The interest so payable on any December 1 or June 1 will, subject to
certain exceptions in the Indenture hereinafter referred to, be paid to the
person in whose name this Debenture is registered at the close of business on
the respective November 15 or May 15 next preceding such December 1 or June 1,
or, if such November 15 or May 15 is not a Business Day (as defined in the
Indenture), the Business Day next preceding such November 15 or May 15. Both
principal of (including premium, if any) and interest on this Debenture are
payable at the office of the paying agent of the Company maintained for that
purpose in the State of Texas; provided that interest will be paid, unless
other arrangements are made by the holder hereof, by check drawn against an
account maintained with a bank or branch thereof located in the State of Texas
and mailed in the State of Texas to the registered address of the person
entitled thereto as such address shall appear on the registry books of the
Company.
The indebtedness evidenced by the Debentures is, to the extent
provided in the Indenture, subordinated and subject in right of payment to the
prior payment in full of the principal of, premium, if any, on and interest on
all Senior Indebtedness, as defined in the Indenture. Each holder of this
Debenture, by accepting the same, agrees to and shall be bound by such
provisions of the Indenture.
This Debenture is continued on the reverse hereof, and the additional
provisions there set forth shall for all purposes have the same effect as if
set forth at this place.
The Indenture and this Debenture are, and shall In all respects be,
contracts made under the laws of the State of Texas. The validity and
enforceability of the Indenture and this Debenture (including without
limitation the payment of Interest hereon at the rate borne hereby) and the
obligations, rights and remedies of the parties thereunder and hereunder shall
in all respects be determined In accordance with and governed by such laws, all
provisions of the Indenture and this Debenture shall in all respects be
construed in accordance with such laws and such laws are hereby expressly
chosen to be exclusively applicable in all respects to any and all of the
foregoing.
This Debenture shall not be valid or become obligatory for any purpose
until the certificate of authentication hereon shall have been signed by or on
behalf of the Trustee under the Indenture.
IN WITNESS WHEREOF, ERLY INDUSTRIES INC. has caused this Debenture to
be duly executed in its corporate name by the facsimile signature of its
President or one of its Vice
-2-
<PAGE> 12
Presidents and impressed or imprinted with its corporate seal or a facsimile
thereof attested to by its Secretary or one of its Assistant Secretaries.
Dated ____________________________
ERLY INDUSTRIES INC.
By: ________________________________
President
[Corporate Seal]
Attest:
__________________________________
Secretary
-3-
<PAGE> 13
[FORM OF REVERSE OF DEBENTURE]
This Debenture is one of a duly authorized issue of Debentures of the
Company, designated as its 12 1/2% Subordinated Sinking Fund Debentures due
2002 (herein referred to as the "Debentures"), limited to the aggregate
principal amount of eight million eight hundred eighty thousand dollars
($8,880,000), except for Debentures issued in substitution for destroyed, lost
or stolen Debentures, all issued or to be issued under and pursuant to an
Indenture dated as of December 1, 1993 (herein referred to as the "Indenture"),
duly executed and delivered between the Company and Trust Company of Texas, a
trust company duly organized and existing under the laws of the State of Texas,
Trustee (herein referred to as the "Trustee," which term includes any successor
trustee under the Indenture), to which Indenture and all indentures
supplemental thereto reference is hereby made for a description of the
respective rights, limitation of rights, obligations, duties and immunities
thereunder of the Trustee, the Company and the holders of the Debentures.
In case an Event of Default, as defined in the Indenture, shall have
occurred and be continuing, the principal hereof may be declared, and upon such
declaration shall become due and payable, in the manner, with the effect and
subject to the conditions provided in the Indenture. The Indenture provides
that in certain events such declaration and its consequences may be waived by
the holders of a majority in aggregate principal amount of the Debentures then
outstanding (excluding certain Debentures, as set forth in the Indenture). It
is also provided in the Indenture that under certain circumstances the holders
of a majority in aggregate principal amount of the Debentures at the time
outstanding (excluding certain Debentures, as set forth in the Indenture) may
on behalf of the holders of all the Debentures waive any past breach under the
Indenture and its consequences, except a failure to pay the principal of (or
premium, if any, on) or interest on any of the Debentures. Any such consent or
waiver by the holder of this Debenture (unless revoked as provided in the
Indenture) shall be conclusive and binding upon such holder and upon all future
holders of this Debenture and of any Debenture issued in exchange or
substitution herefor, irrespective of whether or not any notation of such
consent or waiver is made upon this Debenture. Except as provided in the
Indenture, no holder of a Debenture will be permitted to institute any
proceeding to enforce the Indenture or to appoint a receiver or trustee.
The Indenture contains provisions permitting the Company and the
Trustee, with the consent of the holders of not less than 66-2/3% in aggregate
principal amount of the Debentures at the time outstanding, evidenced as in the
Indenture provided, to execute supplemental indentures adding any provisions to
or changing in any manner or eliminating any of the provisions of the Indenture
(including, but not limited to, those relating to the Company's Sinking Fund
obligations, hereinafter described) or of any supplemental indenture or
modifying in any manner the rights or obligations of the holders of the
Debentures or the Company; provided, however, that no such supplemental
indenture shall, without the consent of the holder of each outstanding
Debenture affected thereby, (i) change the fixed maturity of the principal of
any Debenture or extend the time of payment of interest thereon, or reduce the
principal amount thereof or the interest thereon or any premium payable upon
the redemption thereof, or change the coin or currency in which any Debenture
or the interest thereon is payable, or impair the right to institute suit for
the enforcement of such payment on or after the fixed maturity
-4-
<PAGE> 14
thereof (or, in the case of redemption, on or after the date fixed for
redemption), or modify the provisions of the Indenture with respect to
subordination of the Debentures, (ii) reduce the percentage in principal amount
of the outstanding Debentures, the consent of whose holders is required for any
such supplemental indenture, or the consent of whose holders is required for
any waiver (of compliance with certain provisions of the Indenture or certain
defaults thereunder or their consequences) provided for in the Indenture, or
(iii) modify any of the provisions of the Indenture concerning supplemental
indentures as set forth above in this paragraph, except to increase any such
percentage or to provide that certain other provisions of the Indenture cannot
be modified or waived without the consent of the holder of each outstanding
Debenture affected thereby.
No reference herein to the Indenture and no provision of this
Debenture or of the Indenture shall alter or impair the obligation of the
Company, which is absolute and unconditional, to pay the principal of (and
premium, if any, on) and interest on this Debenture at the place, at the
respective times, at the rate and in the currency herein prescribed.
The Debentures are issuable as registered debentures without coupons.
In the manner and subject to the limitations provided in the Indenture and upon
payment of any tax and other governmental charge, Debentures may be exchanged
for a like aggregate principal amount of Debentures of other authorized
denominations, at the office or agency of the Company to be maintained for that
purpose in the State of Texas. The Debentures are issuable only in
denominations of $ 1,000 and any integral multiple thereof.
The Debentures are entitled to the benefits of a mandatory Sinking
Fund, through the operation of which Debentures are subject to redemption (upon
notice as set forth below) at a redemption price equal to 100% of the principal
amount thereof, together with interest accrued and unpaid thereon to the date
fixed for redemption, in the aggregate principal amount of $1,000,000 on
October 1 of each of the years 1994 through 2001. Debentures acquired or
redeemed by the Company under certain circumstances may be credited against
subsequent Sinking Fund requirements, as provided in the Indenture.
The Debentures are subject to redemption, as a whole or from time to
time in part (otherwise than through the operation of the Sinking Fund), at any
time at the option of the Company, on not less than 30 nor more than 60 days'
prior notice given as provided in the Indenture, at the following redemption
prices (expressed as percentages of the principal amount thereof):
<TABLE>
<CAPTION>
If redeemed
during the twelve
month period Optional
beginning redemption
December 1. price
----------- -----
<S> <C>
1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110%
1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108%
</TABLE>
-5-
<PAGE> 15
<TABLE>
<S> <C>
1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106%
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104%
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102%
1998 and each year thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . 100%
</TABLE>
together with interest accrued and unpaid thereon to the date fixed for
redemption.
Notwithstanding anything to the contrary contained in this Debenture,
if any date fixed for redemption is subsequent to the record date for a
semi-annual interest payment date and on or prior to such interest payment
date, the interest which is payable on such date (and which would otherwise be
payable together with the applicable redemption price) shall be payable to the
person who would otherwise be paid such interest notwithstanding such
redemption.
Subject to the limitations provided for in the Indenture, the holder
of any Debenture shall have the right to present such Debenture, in whole or in
part, to the Trustee for repurchase by the Company at the repurchase price of
100% of the principal amount thereof plus accrued interest to the date of
repurchase. The Company will repurchase the Debentures so presented on October
1, 1994 and on October 1 of each year thereafter, to and including October 1,
2001; provided, however, that the Company shall not be obligated to repurchase
Debentures with an aggregate principal amount in excess of $1,000,000 in each
of the years of 1994 through 2001. The foregoing amounts are referred to as
the "maximum mandatory repurchase amounts." If Debentures with an aggregate
principal amount in excess of the applicable maximum mandatory repurchase
amount are duly presented to the Trustee for repurchase by the Company on any
such October 1, the Company at its option may, but shall not be obligated to,
repurchase on such October 1, such principal amount of Debentures as the
Company may elect in excess of the applicable maximum mandatory repurchase
amount which were duly presented for repurchase. In order to exercise the
repurchase rights provided for in the Indenture, the holder of any Debenture to
be repurchased in whole or in part shall surrender such Debenture, duly
endorsed or accompanied by a written instrument of transfer in form
satisfactory to the Trustee, to the Trustee at its principal office in the
State of Texas, accompanied by a written request for repurchase signed by the
registered holder or his duly authorized representative stating that the holder
elects to present such Debenture, or a specified portion thereof, for
repurchase. If the repurchase request is made on behalf of a deceased
debentureholder by his personal representative or surviving joint tenant, it
shall be accompanied by evidence in form and substance satisfactory to the
Trustee of the death of such deceased debentureholder and the authority of the
personal representative or surviving joint tenant to make such request. To be
effective, a request for repurchase must be actually received by the Trustee
during the twelve-month period ending at 3:30 p.m. local Dallas, Texas time on
the September 15 immediately preceding the October 1 on which the Debentures
are to be repurchased. Any Debenture presented to the Trustee for repurchase
may be withdrawn, in whole or in part, and any written request previously
submitted may be amended, by an appropriate written request in form and
substance satisfactory to the Trustee, signed by the registered holder or his
duly authorized representative, which request is actually received by the
Trustee no later than 3:30 p.m. local Texas time on the September 15
immediately preceding the October 1 on which the Debentures are to be
repurchased. No Debenture of the denomination of $1,000 shall be repurchased
or presented for repurchase in part, and Debentures may be presented for
repurchase and may be
-6-
<PAGE> 16
repurchased in part only in integral multiples of $1,000. If more than the
principal amount of Debentures to be repurchased by the Company on any October
1 has been presented to the Trustee for repurchase during the twelve-month
period ending at 3:30 p.m. local Dallas, Texas time on the September 15
immediately preceding such October 1, the Trustee shall select, in such manner
as in its sole discretion it shall deem appropriate and fair, the Debentures or
portions thereof to be repurchased by the Company on the succeeding October 1,
except that if any Debentures are presented for repurchase during such
twelve-month period on behalf of a deceased debentureholder by his personal
representative or surviving joint tenant, all Debentures so presented for the
account of or on behalf of such deceased debentureholder shall be repurchased
by the Company before any Debentures, or portions thereof, presented by any
other debentureholder are so repurchased. If more than the principal amount of
Debentures to be repurchased by the Company on any October 1 has been presented
to the Trustee for repurchase during any such twelve- month period by the
personal representatives or surviving joint tenants of deceased
debentureholders, the Trustee shall select, in such manner as in its sole
discretion it shall deem appropriate and fair, the Debentures or portions
thereof so presented for the account of or on behalf of such deceased
debentureholders to be repurchased by the Company on the next succeeding
October 1. Upon the repurchase of any Debenture in part only, a new Debenture
or Debentures of authorized denominations in aggregate principal amounts equal
to that portion of the Debenture not repurchased by the Company will be issued
to the holder thereof. Debentures which are not repurchased by the Company on
any such October 1 shall be returned by the Trustee to the holder thereof as
soon as practicable after such October 1, without charge to the holder thereof.
Any Debentures so repurchased by the Company may be applied by it against any
mandatory sinking fund payment required to be made by the Company on December
1, 1994 or any December 1 thereafter.
The transfer of this Debenture is registrable by the registered holder
hereof or by his attorney duly authorized in writing on the registry books of
the Company at the office or agency of the Company to be maintained for that
purpose in the State of Texas, subject to the terms of the Indenture but
without payment of any charge other than a sum sufficient to cover any tax or
other governmental charge incidental thereto, upon surrender and cancellation
of this Debenture. Upon any such transfer, a new Debenture or Debentures of
authorized denomination or denominations, for the same aggregate principal
amount, will be issued to the transferee or transferees in exchange herefor.
Prior to due presentment for registration of transfer of this
Debenture, the Company, the Trustee and their agents, including without
limitation any authenticating or paying agent and any Debenture registrar, may
deem and treat the person in whose name this Debenture shall be registered upon
the registry books of the Company as the absolute owner of this Debenture
(whether or not this Debenture shall be overdue and notwithstanding any
notation of ownership or other writing hereon), for the purpose of receiving
payment of or on account of the principal hereof and premium, if any, and
interest due hereon and for all other purposes, and neither the Company, the
Trustee nor their agents as aforesaid, shall be affected by any notice to the
contrary.
All terms used in this Debenture which are defined in the Indenture
shall have the meanings assigned to them in the Indenture.
-7-
<PAGE> 17
[FORMS OF CERTIFICATE OF AUTHENTICATION]
The following are the forms of certificate of authentication of the
Trustee and, if an Authenticating Agent is appointed, then of such agent, to be
endorsed on the face of such Debentures substantially as follows:
This is one of the Debentures referred to in the within-mentioned
Indenture.
TRUST COMPANY OF TEXAS, as Trustee
By: ______________________________ or By: ________________________________
Authorized Signature as Authenticating Agent for
the Trustee
By: ____________________________
Authorized Signature
[END OF FORM OF DEBENTURE]
AND WHEREAS, all acts and things necessary to make the Debentures,
when executed by the Company and authenticated and delivered by the Trustee as
in this Indenture provided, the valid, binding and legal obligations of the
Company, and to constitute this Indenture a valid indenture according to its
terms, have been done and performed, and the execution of this Indenture and
the issue hereunder of the Debentures have in all respects been duly
authorized;
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
That in order to declare the terms and conditions upon which the
Debentures are authenticated, issued and delivered, and the performance of the
covenants therein and herein contained, and in consideration of the premises
and of the covenants and warranties herein contained and of the purchase and
acceptance of the Debentures by the holders thereof, the Company covenants and
agrees with the Trustee, for the equal and proportionate benefit of all holders
from time to time of the Debentures as follows:
ARTICLE ONE
DEFINITIONS
SECTION 1.01. Definitions and Trust Indenture Act Terms. The terms
defined in this Section 1.01 (except as otherwise expressly provided or unless
the context otherwise
-8-
<PAGE> 18
requires) for all purposes of this Indenture and of any indenture supplemental
hereto shall have the respective meanings specified in this Section 1.01. All
other terms used in this Indenture which are defined in the Trust Indenture Act
of 1939 or which are by reference therein defined in the Securities Act of 1933
(except as herein otherwise expressly provided or unless the context otherwise
requires) shall have the meanings assigned to such terms in said Trust
Indenture Act and in said Securities Act as they were in force at the date of
the execution of this Indenture.
Application:
The term "application" for any action to be taken by the Trustee under
any Section of this Indenture shall mean an instrument in writing signed by the
Chief Executive Officer, the President or a Vice President of the Company
requesting such action under such Section of this Indenture. Unless the
Section otherwise provides or allows, the application shall consist of, and
shall not be deemed made or complete until the Trustee shall have been
furnished with, such resolutions, certificates, opinions, cash, and other
instruments as are required by such Section to establish the right of the
Company to such action by the Trustee, and, if the application is so required
to consist of additional matters, the date of such application shall be deemed
to be the date upon which such application shall be so completed.
Authenticating Agent:
The term "Authenticating Agent" shall mean the agent of the Trustee,
if any, which at the time shall be appointed and acting pursuant to Section
8.13.
Authorized Newspaper:
The term "Authorized Newspaper" shall mean a newspaper printed in the
English language and customarily published at least once a day for at least
five days in each calendar week, and of general circulation in The City of
Dallas, Texas. Whenever successive publications are required to be made in an
Authorized Newspaper, the successive publications may be made in the same or in
different newspapers meeting the foregoing requirements and in each case on any
day of the week. If, because of temporary or permanent suspension of
publication or general circulation of any newspaper or for any other reason, it
is impossible or impracticable to publish any notices required by this
Indenture in the manner herein provided, then such publication in lieu thereof
as shall be made with the approval of the Trustee shall constitute a sufficient
publication of such notice.
Board of Directors:
The term "Board" or "Board of Directors" shall mean the Board of
Directors of the Company or the Executive Committee of the Board of Directors,
if there shall be an Executive Committee.
-9-
<PAGE> 19
Business Day:
The term "Business Day" shall mean any day of the week other than
Saturday, Sunday or a day which shall be, in the locality of the principal
office of the Trustee in the State of Texas, a legal holiday or a day on which
banking institutions are authorized or obligated by law or executive order to
close.
Certified Resolution:
The term "Certified Resolution" shall mean a copy of a resolution
certified by the Secretary or an Assistant Secretary of the Company to have
been duly adopted by the Board and to be in full force and effect on the date
of such certification.
Commission:
The term "Commission" shall mean the United States Securities and
Exchange Commission, as from time to time constituted, created under the
Securities Exchange Act of 1934, or if at any time after the execution of this
Indenture such Commission is not existing and performing the duties now
assigned to it under the Trust Indenture Act of 1939, then the body performing
such duties on such date.
Company:
The term "Company" shall mean ERLY Industries Inc., a California
corporation, and shall also include its successors and assigns.
Corporation:
The term "corporation" shall also include voluntary associations,
joint stock companies and business trusts.
Counsel:
The term "counsel" shall mean counsel acceptable to the Trustee who
may be counsel to the Company. The acceptance by the Trustee (without written
objection to the Company during the 15-day period following receipt) of, or its
action on, an opinion of counsel shall be sufficient evidence that such counsel
(and all counsel relied upon by such counsel as provided in Section 14.03) is
acceptable to the Trustee.
Debenture or Debentures; Outstanding:
The term "Debenture" or "Debentures" shall mean any Debenture or all
the Debentures, as the case may be, authenticated and delivered under this
Indenture.
-10-
<PAGE> 20
The term "outstanding under this Indenture" or "outstanding hereunder"
or "outstanding," when used with reference to Debentures, shall, subject to the
provisions of Section 9.03, mean as of any particular time all Debentures
issued under this Indenture, except:
(a) Debentures cancelled by the Trustee or delivered to
the Trustee for cancellation at or prior to the particular time;
(b) Debentures or portions thereof for which cash
sufficient to provide for the payment or redemption thereof shall have
theretofore been deposited with the Trustee in trust (whether upon or
prior to the maturity or redemption date of such Debentures), provided
that if such Debentures or portions thereof are to be redeemed prior
to the maturity thereof, notice of such redemption shall have been
given as in Article Four provided or provision satisfactory to the
Trustee shall have been made for such notice; and
(c) Debentures in lieu of and in substitution for which
other Debentures shall have been authenticated and delivered pursuant
to Section 2.07, unless proof satisfactory to the Trustee and the
Company is presented that any such Debentures for which others were
issued are held by holders in due course.
The term "issued," when used with respect to Debentures, shall mean
Debentures authenticated and delivered under this Indenture and sold, otherwise
disposed of for value or delivered in exchange or substitution for other
Debentures or portions thereof by the Company.
Debentureholder; Registered Holder:
The term "debentureholder," "holder of Debentures," "owner of
Debentures," "registered holder" or other similar term shall mean any person
who shall at the time be the registered owner of any Debenture or Debentures on
the books of the Company kept for that purpose in accordance with the
provisions of the Indenture.
Event of Default:
The term "Event of Default" shall be as defined in Section 6.01.
Indenture:
The term "the Indenture" or "this Indenture" shall mean this
instrument as originally executed or as it may from time to time be
supplemented, modified or amended by any supplemental indenture entered into
pursuant to the provisions hereof.
The term "supplemental indenture" or "indenture supplemental hereto"
shall mean any indenture hereafter duly authorized and entered into between the
Company and the Trustee in accordance with the provisions of this Indenture.
-11-
<PAGE> 21
All references herein to "Articles," "Sections" and other subdivisions
are to the corresponding Articles, Sections or subdivisions of this Indenture;
and the words "herein," "hereof," "hereunder" and other words of similar import
refer to this Indenture as a whole and not to any particular Article, Section
or subdivision hereof.
Officers' Certificate:
The term "Officers' Certificate" shall mean a certificate signed by
the Chief Executive Officer, the President or a Vice President and the
Secretary or an Assistant Secretary of the Company and conforming to the
requirements of Section 14.03.
Opinion of Counsel:
The term "Opinion of Counsel" shall mean an opinion in writing signed
by counsel and conforming to the requirements of Section 14.03.
Person:
The term "person" shall mean and include an individual, a partnership,
a corporation, a trust, an unincorporated Organization and a government or any
department or agency thereof.
Regular Record Date:
The term "Regular Record Date," as used with respect to any interest
payment date (other than concerning the payment of defaulted interest), shall
mean the fifteenth day of the month preceding the month in which such interest
payment date falls, or, if such first day is not a Business Day, the Business
Day next preceding such first day.
Responsible Officer:
The term "Responsible Officer," when used with respect to the Trustee,
shall mean any one of the following: the chairman of the board of directors,
the president, every vice president, every assistant vice president, every
cashier, every assistant cashier, the secretary, every assistant secretary, the
treasurer, every assistant treasurer, every trust officer, every assistant
trust officer, and every other officer and assistant officer of the Trustee
customarily performing functions similar to those performed by the persons who
at the time shall be such officers or to whom any corporate trust matter is
referred because of his knowledge of and familiarity with a particular subject.
Senior Indebtedness:
The term "Senior Indebtedness" shall mean the principal of and
premium, if any, on and interest on the following, whether outstanding at the
date hereof or hereafter incurred or created: (a) indebtedness of the Company
for money borrowed (including purchase money obligations), (b) indebtedness of
the Company evidenced by notes, debentures, bonds or securities sold by it for
money, (c) any other indebtedness created, incurred or assumed by the Company,
which is
-12-
<PAGE> 22
evidenced by a note or other written obligation, (d) indebtedness of others of
the kind described in either of the preceding clauses (a), (b) or (c) assumed
or guaranteed in any manner by the Company or in effect guaranteed by the
Company through an agreement to purchase or otherwise, and (e) renewals,
extensions or refundings of indebtedness of the kind described in any of the
preceding clauses (a), (b), (c) and (d); unless, in the case of any particular
indebtedness, renewal, extension or refunding, the instrument creating or
evidencing the same or the assumption or guarantee thereof expressly provides
that such indebtedness, renewal, extension or refunding is not superior or is
made pari passu in right of payment to the Debentures.
Special Record Date:
The term "Special Record Date" shall mean with respect to any payment
of defaulted interest the date established by or on behalf of the Company
pursuant to Section 2.03.
Subsidiary:
The term "Subsidiary" shall mean any corporation at least a majority
of the outstanding voting stock of which is at the time owned (either alone or
through Subsidiaries or together with Subsidiaries) by the Company or another
Subsidiary.
Trustee:
The term "Trustee" shall mean Trust Company of Texas and its successor
in the trusts hereunder.
Trust Indenture Act of 1939:
Except as provided in Section 11.06, the term "Trust Indenture Act of
1939" shall mean the Trust Indenture Act of 1939 as it was in force at the date
of execution of this Indenture.
ARTICLE TWO
ISSUE, DESCRIPTION, EXECUTION, REGISTRATION, REGISTRATION OF
TRANSFER AND EXCHANGE OF DEBENTURES
SECTION 2.01. Designation, Amount, Authentication and Delivery of
Debentures. The Debentures shall be designated as 12 1/2% Subordinated Sinking
Fund Debentures due 2002. Debentures in an aggregate principal amount not
exceeding eight million eight hundred eighty thousand dollars ($8,880,000) at
any one time outstanding, upon the execution of this Indenture, or from time to
time thereafter, may be executed by the Company and delivered to the Trustee
for authentication, and the Trustee shall thereupon authenticate and deliver
said Debentures to or upon the written order of the Company, signed by its
Chief Executive Officer, its President or a Vice President, without any further
corporate action by the Company.
-13-
<PAGE> 23
The aggregate principal amount of Debentures authorized by this
Indenture is limited to eight million eight hundred eighty thousand dollars
($8,880,000), and the Trustee shall not authenticate and the Company shall not
execute or deliver Debentures in excess of such aggregate principal amount.
Nothing contained in this Section 2.01 or elsewhere in this Indenture,
or in the Debentures, is intended to or shall limit execution by the Company or
authentication or delivery by the Trustee of Debentures under the circumstances
contemplated by Sections 2.05, 2.06, 2.07 and 11.04 hereof.
SECTION 2.02. Form of Debentures. The Debentures, the endorsement
with respect to deposit of Common Stock and the Trustee's certificate of
authentication to be borne thereby shall be substantially in the forms set
forth or provided for in the recitals hereto and shall be executed,
authenticated and delivered in accordance with the provisions of, and shall in
all respects be subject to, all the terms, conditions and covenants of this
Indenture. The Debentures may have such letters, numbers or other marks of
identification or designation and such legends or endorsements printed,
lithographed or engraved thereon as the Board of Directors of the Company may
deem appropriate and as are not inconsistent with the provisions of this
Indenture, or as may be required to comply with any law or with any rule or
regulation made pursuant thereto or with any rule or regulation of any stock
exchange on which the Debentures may be listed or of any quotation service on
which prices for the Debentures may be quoted, or to conform to usage.
SECTION 2.03. Denomination and Date of Debentures; Payment of
Interest. The Debentures shall be issuable as registered debentures without
coupons in denominations of $1,000 and any integral multiple of $1,000. Each
Debenture shall be dated the date of its authentication and shall bear interest
at the rate of 12 1/2% per annum from the December 1 or June 1 to which
interest has been paid, next preceding the date of such Debenture (unless the
date of such Debenture is a December 1 or June 1 to which interest has been
paid, in which case such Debenture shall bear interest from its date, or unless
the date of such Debenture is prior to the date of the first payment of
interest, in which case it shall bear interest from December 1, 1993).
However, so long as there is no existing failure to pay interest when due on
the Debentures, all Debentures authenticated by the Trustee after the close of
business on the Regular Record Date for an interest payment date (December 1 or
June 1) and prior to such interest payment date shall bear interest from such
interest payment date; provided however, that if and to the extent that the
Company shall fail to pay the interest due on such interest payment date, then
any such Debenture shall bear interest from the December 1 or June 1 to which
interest has been paid next preceding the date of such Debenture, or if no
interest has been paid on the Debenture, from December 1, 1993.
The person in whose name any Debenture is registered at the close of
business on any Regular Record Date with respect to any interest payment date
shall be entitled to receive the interest payable on such interest payment date
(subject to the provisions of Article Four in the case of any Debenture or
Debentures, or portions thereof, redeemed on a date subsequent to the Regular
Record Date and on or prior to such interest payment date), notwithstanding the
cancellation of such Debenture upon any transfer or exchange thereof subsequent
to the Regular
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<PAGE> 24
Record Date and prior to such interest payment date, except as and to the
extent the Company should fail to pay interest due on such interest payment
date, in which case such unpaid interest shall forthwith cease to be payable to
the registered holder on the relevant Regular Record Date; and such unpaid
interest may be paid by the Company, at its election in each case, in either of
the ways provided in Clause (1) or Clause (2) below:
(1) The Company may elect to make payment of any such
unpaid interest to the persons in whose names the Debentures are
registered at the close of business on a Special Record Date for the
payment of such unpaid interest, which shall be fixed in the following
manner. The Company shall notify the Trustee in writing of the amount
of unpaid interest proposed to be paid on each Debenture and the date
of the proposed payment, and at the same time the Company shall
deposit with the Trustee an amount of money equal to the aggregate
amount proposed to be paid in respect of such unpaid interest or shall
make arrangements satisfactory to the Trustee for such deposit prior
to the date of the proposed payment, such money when deposited to be
held in trust for the benefit of the persons entitled to such unpaid
interest as in this clause provided. Thereupon the Trustee shall fix
a special Record Date for the payment of such unpaid interest which
shall be not more than fifteen days nor less than five days prior to
the date of the proposed payment. The Trustee shall promptly notify
the Company of such Special Record Date and, in the name and at the
expense of the Company, shall cause notice of the proposed payment of
such unpaid interest and the Special Record Date therefor to be
mailed, first class postage prepaid, to each debentureholder at his
address as it appears upon the registry books not less than 10 days
prior to such Special Record Date. The Trustee may, in its discretion
in the name and at the expense of the Company, cause a similar notice
to be published at least once in an Authorized Newspaper, but such
publication shall not be a condition precedent to the establishment of
such Special Record Date. Notice of the proposed payment of such
unpaid interest and the Special Record Date therefor having been
mailed as aforesaid, such unpaid Interest shall be paid to the persons
in whose names the Debentures are registered at the close of business
on such Special Record Date and shall no longer be payable pursuant to
the following Clause (2).
(2) The Company may make payment of any such unpaid
interest in any other lawful manner not inconsistent with the
requirements of any securities exchange on which the Debentures may be
listed, and upon such notice as may be required by such exchange, if,
after notice given by the Company to the Trustee of the proposed
payment pursuant to this Clause, such payment shall be deemed
practicable by the Trustee.
Interest will be paid by check drawn against an account maintained
with a bank or branch thereof located in the State of Texas mailed in the State
of Texas to the debentureholder entitled thereto at the address shown on the
registry books of the Company, unless arrangements are made by the
debentureholder for payment other than by check so mailed.
SECTION 2.04. Execution of Debentures. The Debentures shall be
signed in the name and on behalf of the Company, manually or in facsimile, by
its President or one of its Vice Presidents under its corporate seal,
reproduced thereon by facsimile or otherwise, attested by the manual or
facsimile signature of its Secretary or one of its Assistant Secretaries. Only
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<PAGE> 25
such Debentures as shall bear thereon a certificate of authentication
substantially in the form hereinbefore recited, manually executed on behalf of
the Trustee either by its authorized officer or by its Authenticating Agent (if
one is appointed pursuant to Section 8.13) by an authorized officer, shall be
entitled to the benefits of this Indenture or be valid or obligatory for any
purpose. Such executed certificate upon any Debenture executed by the Company
shall be conclusive evidence that the Debenture so authenticated has been duly
authenticated and delivered hereunder and that the holder is entitled to the
benefits of this Indenture.
In case any officer of the Company who shall have signed any of the
Debentures, manually or in facsimile, shall cease to be such officer before the
Debentures so signed shall have been authenticated and delivered by the
Trustee, or disposed of by the Company, such Debentures nevertheless may be
authenticated and delivered or disposed of as though the person who signed such
Debentures had not ceased to be such officer of the Company; and any Debentures
may be signed on behalf of the Company, manually or in facsimile, by such
persons as, at the actual date of the execution of such Debentures, shall be
the proper officers of the Company, although at the date of the Debentures or
of the execution of this Indenture any such person was not such officer.
SECTION 2.05. Exchange, Registration and Registration of Transfer
of Debentures. Each Debenture delivered upon exchange or in substitution for
the whole or any part of one or more other Debentures shall carry all the
rights to interest accrued and unpaid, and to accrue, which were carried by the
whole or such part of such one or more other Debentures.
Debentures may be exchanged for a like aggregate principal amount of
Debentures of other authorized denominations. The Debentures to be exchanged
shall be surrendered at the office or agency to be maintained by the Company in
accordance with the provisions of Section 5.02, and the Company shall execute
and the Trustee shall authenticate and deliver in exchange therefor the
Debenture or Debentures which the debentureholder making the exchange shall be
entitled to receive.
The Company shall keep a register or registers in which, subject to
such reasonable regulations as it may prescribe, the Company shall register
Debentures and shall register the transfer of Debentures as in this Article Two
provided. Upon surrender of any Debenture for registration of transfer at the
office or agency, as aforesaid, the Company shall execute and the Trustee shall
authenticate and deliver in the name of the transferee or transferees a new
Debenture or Debentures for a like aggregate principal amount.
All Debentures presented or surrendered for exchange, registration of
transfer, redemption or payment shall, if so required by the Trustee or the
Company, be accompanied by a written instrument or instruments of transfer, in
form satisfactory to the Company and the Trustee, duly executed by the
registered owner or by his duly authorized attorney.
No service charge shall be made for any exchange or registration of
transfer of Debentures, but the Company may require payment of a sum sufficient
to cover any tax or other governmental charge that may be imposed in relation
thereto.
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The Company shall not be required to register transfers or exchange
Debentures for a period of fifteen days next preceding any mailing of notice of
Debentures to be redeemed. The Company shall not be required to exchange or
register transfers of any Debentures called or being called for redemption in
whole or in part except, in the case of any Debenture to be redeemed in part,
the portion thereof not to be redeemed.
Anything in this Indenture to the contrary notwithstandIng, but
subject to the provisions of Section 2.03 as to payment of interest to holders
on a Regular Record Date or Special Record Date for such payment, the parties
hereto and any agent thereof may deem and treat the registered holder of any
Debenture, prior to due presentment thereof for registration of transfer, as
the absolute owner of such Debenture for all purposes (whether or not the
Debentures shall be overdue and notwithstanding any notation of ownership or
other writing thereon) and shall not be affected by any notice to the contrary.
SECTION 2.06. Temporary Debentures. Pending the preparation of
definitive Debentures, the Company may execute and the Trustee shall
authenticate and deliver temporary Debentures (printed or lithographed) of any
denomination, and substantially in the form of the definitive Debentures, but
with or without a recital of specific redemption prices and with such other
omissions, insertions and variations as may be appropriate for temporary
Debentures, all as may be determined by the Company. Temporary Debentures may
contain such reference to any provisions of the Indenture as may be
appropriate. Every such temporary Debenture shall be authenticated by the
Trustee upon the same conditions and in substantially the same manner, and with
the same effect, as the definitive Debentures. Without unnecessary delay the
Company will execute and deliver to the Trustee definitive Debentures and
thereupon any or all temporary Debentures may be surrendered in exchange
therefor, at the office or agency to be maintained by the Company in accordance
with the provisions of Section 5.02, and the Trustee shall authenticate and
deliver in exchange for such temporary Debentures an equal aggregate principal
amount of definitive Debentures of authorized denominations without charge to
the holders thereof. Until so exchanged, the temporary Debentures shall in all
respects be entitled to the same benefits under this Indenture as definitive
Debentures authenticated and delivered hereunder.
SECTION 2.07. Mutilated, Destroyed, Lost or Stolen Debentures. In
case any temporary or definitive Debenture shall become mutilated or be
destroyed, lost or stolen, the Company shall, subject to the conditions
described below, execute, and upon its request the Trustee shall authenticate
and deliver, a new Debenture for a like principal amount, in exchange and
substitution for the mutilated Debenture, or in lieu of and substitution for
the Debenture so destroyed, lost or stolen, or, if any such Debenture shall
have matured or shall be about to mature, instead of issuing a substituted
Debenture, the Company may pay or authorize the payment of the same without
surrender thereof (except in the case of a mutilated Debenture). The Company
shall have no obligation to execute a new Debenture in lieu of and in
substitution for any Debenture which is destroyed, lost or stolen if the
Company has notice that such Debenture has been acquired by a bona fide
purchaser. In every case the applicant for a substituted Debenture or for such
payment shall furnish to the Company and to the Trustee such security or
indemnity as may be required by them to save each of them harmless, and, in
every case of destruction, loss or theft, the applicant shall also furnish to
the Company and to the
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<PAGE> 27
Trustee evidence to their satisfaction of the destruction, loss or theft of
such Debenture and of the ownership thereof. The Trustee may authenticate any
such substituted Debenture and deliver the same, or the Trustee or any paying
agent of the Company may make any such payment, upon the written request or
authorization of any officer of the Company, and shall incur no liability to
anyone by reason of anything done or omitted to be done by it in good faith
under the provisions of this Section 2.07. Upon the issuance of any
substituted Debenture, the Company may require the payment of a sum sufficient
to cover any tax or other governmental charge that may be imposed in relation
thereto and any other expenses connected therewith.
Every substituted Debenture issued pursuant to the provisions of this
Section 2.07 in substitution for any destroyed, lost or stolen Debenture shall
constitute an additional contractual obligation of the Company, whether or not
the destroyed, lost or stolen Debenture shall be found at any time, and shall
be entitled to all the benefits of this Indenture equally and proportionately
with any and all other Debentures duly issued hereunder.
All Debentures shall be held and owned upon the express condition that
the foregoing provisions are exclusive with respect to the replacement or
payment of mutilated, destroyed, lost or stolen Debentures, and shall preclude
any and all other rights or remedies, notwithstanding any law or statute
existing or hereafter enacted to the contrary with respect to the replacement
or payment of negotiable instruments or other securities without their
surrender.
SECTION 2.08. Cancellation of Debentures. All Debentures
surrendered for the purpose of payment, redemption, exchange, substitution or
registration of transfer shall, if surrendered to the Company or any paying
agent, be delivered to the Trustee and the same, together with Debentures
surrendered to the Trustee for cancellation and Debentures surrendered to the
Trustee in discharge of any Sinking Fund payment, shall be cancelled by it upon
receipt, and no Debentures shall be issued in lieu thereof except as expressly
permitted by any of the provisions of this Indenture. The Trustee may destroy
cancelled Debentures and deliver a certificate of destruction thereof to the
Company. If the Company shall acquire any of the Debentures, however, such
acquisition shall not operate as a redemption or satisfaction of the
indebtedness represented by such Debentures, which shall be considered
outstanding (subject to the provisions of Section 9.03) unless and until the
same are delivered or surrendered to the Trustee for cancellation.
ARTICLE THREE
SUBORDINATION OF DEBENTURES
SECTION 3.01. Agreement to Subordinate. The Company, for itself,
its successors and assigns, covenants and agrees, and each holder of Debentures
issued hereunder by his acceptance thereof likewise covenants and agrees, that
all Debentures issued hereunder shall be issued subject to the provisions of
this Article Three; and each person holding any Debenture, whether upon
original issue or upon transfer or assignment thereof, accepts and agrees to
and shall be bound by such provisions.
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<PAGE> 28
All Debentures issued hereunder shall, to the extent and in the manner
hereinafter in this Article Three set forth, be subordinated and subject in
right of payment to the prior payment in full of the principal of, premium, if
any, on and interest on all Senior Indebtedness.
SECTION 3.02. No Payment on Debentures if Senior Indebtedness in
Default. No payment on account of principal, premium, if any, or interest on
the Debentures (whether pursuant to the Sinking Fund or otherwise) shall be
made if, at the time of such payment or immediately after giving effect
thereto, (a) there shall exist a default in the payment of principal, premium,
if any, sinking funds, or interest with respect to any Senior Indebtedness, or
(b) there shall have occurred an event of default (other than a default in the
payment of principal, premium, if any, sinking funds, or interest) with respect
to any Senior Indebtedness, as defined therein or in the instrument under which
the same is outstanding, permitting the holders thereof to accelerate the
maturity thereof, and such event of default shall not have been cured or waived
or shall not have ceased to exist. In the event that the Debentures are
declared due and payable before their expressed maturity because of the
occurrence of an Event of Default, the holders of Senior Indebtedness shall be
entitled to receive payment in full of all principal (and premium, if any) and
interest with respect to such indebtedness before the holders of the Debentures
shall be entitled to receive any payment on account of principal (or premium,
if any) or interest.
SECTION 3.03. Priority of Senior Indebtedness upon Distribution of
Assets. Upon any payment or distribution of assets of the Company of any kind
or character, whether in cash, property or securities, to creditors in the
event of any insolvency or bankruptcy proceedings, and any receivership,
liquidation, reorganization or other similar proceedings in connection
therewith, relative to the Company or to its creditors as such, or to its
property, or upon any such payment in the event of proceedings for voluntary or
involuntary liquidation, dissolution or other winding up of the Company,
whether or not involving insolvency or bankruptcy, or upon any assignment by
the Company for the benefit of creditors or upon any other marshalling of the
assets and liabilities of the Company, all principal, premium, if any, and
interest due or to become due upon all Senior Indebtedness shall first be paid
in full, or payment thereof duly provided for, before any payment is made on
account of the principal of, premium, if any, on or interest on the
Indebtedness evidenced by the Debentures; and upon any such proceedings (but
subject to the power of a court of competent jurisdiction to make other
equitable provision reflecting the rights conferred by the provisions of the
Debentures and this Indenture upon Senior Indebtedness and the holders thereof
with respect to Debentures and the holders thereof by a lawful plan of
reorganization under applicable bankruptcy law) any payment or distribution of
assets of the Company of any kind or character, whether in cash, property or
securities, to which the holders of the Debentures or the Trustee under this
Indenture would be entitled, except for the provisions of this Article Three,
shall be paid or delivered by the Company or by any receiver, trustee in
bankruptcy, liquidating trustee, agent or other person making such payment or
distribution, or by the holders of the Debentures or by the Trustee under this
Indenture if received by them or it, directly to the holders of Senior
Indebtedness (pro rata to each such holder on the basis of the respective
amounts of Senior Indebtedness held by such holder) or their representatives,
to the extent necessary to pay all Senior Indebtedness in full after giving
effect to any concurrent payment or distribution to or for the holders of
Senior Indebtedness, before any payment or distribution is made to the holders
of the indebtedness evidenced by the Debentures or to the Trustee under this
Indenture.
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<PAGE> 29
In the event that, notwithstanding the foregoing provisions of this
Section 3.03, any such payment or distribution of assets of the Company of any
kind or character, whether in cash, property or securities, shall be received
by the Trustee or the holders of the Debentures before all Senior Indebtedness
is paid in full, or provision made for such payment, in accordance with its
terms, such payment or distribution shall be held for the benefit of, and shall
be paid over or delivered to, the holders of such Senior Indebtedness or their
representative or representatives, or to the trustee or trustees under any
Indenture pursuant to which any instruments evidencing any of such Senior
Indebtedness may have been issued, as their respective Interests may appear,
for application to the payment of all Senior Indebtedness remaining unpaid to
the extent necessary to pay all such Senior Indebtedness in full in accordance
with its terms, after giving effect to any concurrent payment or distribution
to the holders of such Senior Indebtedness.
SECTION 3.04. Notice to Trustee of Specified Events; Reliance on
Certificate of Liquidating Agent. The Company shall give prompt written notice
to the Trustee of any proceedings of the type specified in Section 3.03. The
Trustee and any paying agent for the Debentures shall be entitled to assume
that no such event has occurred unless the Company or any one or more holders
of Senior Indebtedness or any trustee therefor or any other person has given
such notice. Upon any payment or distribution of assets of the Company
referred to in this Article Three, the Trustee shall be entitled to rely upon a
certificate of the receiver, trustee in bankruptcy, liquidating trustee, agent
or other person making such payment or distribution, delivered to the Trustee
or to the holders of Debentures, for the purpose of ascertaining the persons
entitled to participate in such distribution, the holders of the Senior
Indebtedness and other indebtedness of the Company, the amount thereof or
payable thereon, the amount or amounts paid or distributed thereon and all
other facts pertinent thereto or to this Article Three. In the event that the
Trustee determines, in good faith, that further evidence is required with
respect to the right of any person as a holder of Senior Indebtedness to
participate in any payments or distribution pursuant to this Article Three, the
Trustee may request such person to furnish evidence to the reasonable
satisfaction of the Trustee as to the amount of Senior Indebtedness held by
such person, as to the extent to which such person is entitled to participate
in such payment or distribution, and as to other facts pertinent to the rights
of such person under this Article Three, and if such evidence is not furnished,
the Trustee may defer any payment to such person pending judicial determination
as to the right of such person to receive such payment.
SECTION 3.05. Subrogation of Debentures. Subject to the payment in
full of the principal of, premium, if any, on and interest on all Senior
Indebtedness, the holders of the Debentures shall be subrogated to the rights
of the holders of Senior Indebtedness to receive payments or distributions of
assets of the Company made on the Senior Indebtedness until the principal of,
premium, if any, on and interest on the Debentures shall be paid in full; and,
for the purposes of such subrogation, no payments or distributions to the
holders of Senior Indebtedness of any cash, property or securities to which the
holders of the Debentures or the Trustee would be entitled except for the
provisions of this Article Three shall, as between the Company, its creditors
other than the holders of Senior Indebtedness, and the holders of Debentures,
be deemed to be a payment by the Company to or on account of Senior
Indebtedness, it being understood that the provisions of this Article Three are
and are intended
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<PAGE> 30
solely for the purpose of defining the relative rights of the holders of the
Debentures, on the one hand, and the holders of Senior Indebtedness, on the
other hand.
SECTION 3.06. Obligation to Pay Not Impaired. Nothing contained in
this Article Three or elsewhere in this Indenture, or in the Debentures, is
intended to or shall impair as among the Company, its creditors other than the
holders of Senior Indebtedness, and the holders of the Debentures, the
obligation of the Company, which is absolute and unconditional, to pay to the
holders of the Debentures the principal of, premium, if any, on and interest on
the Debentures, as and when the same shall become due and payable in accordance
with their terms, or to affect the relative rights of the holders of the
Debentures and creditors of the Company other than the holders of Senior
Indebtedness, nor shall anything herein or therein prevent the Trustee or the
holder of any Debenture from exercising all remedies otherwise permitted by
applicable law upon default under this Indenture, subject to the rights, if
any, under this Article Three of the holders of Senior Indebtedness in respect
of cash, property or securities of the Company received upon the exercise of
any such remedy.
SECTION 3.07. Trustee to Effect Subordination. Each holder of any
Debentures by his acceptance thereof authorizes and directs the Trustee in his
behalf to take such action as may be necessary or appropriate to effectuate the
subordination as provided in this Article Three and appoints the Trustee his
attorney-in-fact for any and all such purposes. The Trustee shall be entitled
to all the rights set forth in this Article Three with respect to any Senior
Indebtedness at the time held by it in its individual capacity, to the same
extent as any other holder of Senior Indebtedness.
With respect to the holders of Senior Indebtedness, the Trustee
undertakes to perform or to observe only such of its covenants and obligations
as are specifically set forth in this Article Three, and no implied covenants
or obligations with respect to the holders of Senior Indebtedness shall be read
into this Indenture against the Trustee. The Trustee shall not be deemed to
owe any fiduciary duty to the holders of Senior Indebtedness and, subject to
the provisions of Section 8.02, the Trustee shall not be liable to any holder
of Senior Indebtedness if it shall pay over or deliver to holders of
Debentures, the Company or any other Person monies or assets to which any
holder of Senior Indebtedness shall be entitled by virtue of this Article Three
or otherwise.
SECTION 3.08. Notice to Trustee of Effectuation of Subordination.
Notwithstanding any of the provisions of this Article Three or any other
provision of this Indenture, the Trustee and any paying agent shall not at any
time be charged with knowledge of the existence of any facts which would
prohibit the making of any payment of moneys to or by the Trustee or any paying
agent, or the taking of any other action by the Trustee or the paying agent,
unless and until the Trustee or the paying agent, as the case may be, shall
have received written notice thereof from the Company or from one or more
holders of Senior Indebtedness or from any trustee therefor.
Prior to the receipt of any such written notice, the Trustee, subject
to the provisions of Section 8.02, shall be entitled in all respects to assume
that no such facts exist; provided, that if on a date not less than 3 business
days prior to the date upon which it be determined
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<PAGE> 31
hereunder that any such monies may become payable for any purpose (including,
without limitation, the payment of the principal of or Interest on any
Debentures) the Trustee shall not have received with respect to such monies the
notice provided for in this Section 3.08, then, anything herein contained to
the contrary notwithstanding, the Trustee shall have full power and authority
to receive such monies and to apply the same to the purpose for which they were
received, and shall not be affected by any notice to the contrary which may be
received by it on or after such prior date.
The Trustee shall be entitled to rely on the delivery to it of a
written notice by a Person representing himself to be a holder of Senior
Indebtedness (or a trustee on behalf of such holder) to establish that such
notice has been given by a holder of Senior Indebtedness or a trustee on behalf
of any such holder. In the event the Trustee determines in good faith that
further evidence is required with respect to the right of any Person as a
holder of Senior Indebtedness to participate in any payment or distribution
pursuant to this Article Three, the Trustee may request such Person to furnish
evidence to the reasonable satisfaction of the Trustee as to the amount of
Senior Indebtedness held by such Person, the extent to which such Person is
entitled to participate in such payment or distribution and any other facts
pertinent to the rights of such Person under this Article Three, and if such
evidence is not furnished the Trustee may defer any payment to such Person
pending judicial determination as to the right of such Person to receive such
payment.
SECTION 3.09. No Prejudice to Holders of Senior Indebtedness. No
present or future holder of Senior Indebtedness shall be prejudiced in his
right to enforce subordination of the Debentures by any act or failure to act
on the part of the Company.
SECTION 3.10. All Indenture Provisions Subject to Article Three.
Notwithstanding anything herein contained to the contrary, all the provisions
of this Indenture shall be subject to the provisions of this Article Three, so
far as the same may be applicable thereto. The provisions of this Article
Three shall not apply to amounts due the Trustee under Section 8.05.
SECTION 3.11. Trustee's Compensation Not Prejudiced. Nothing in
this Article Three shall apply to claims of, or payments to, the Trustee
pursuant to Section 8.05.
ARTICLE FOUR
REDEMPTION AND REPURCHASE OF DEBENTURES -- MANDATORY AND
OPTIONAL SINKING FUND
SECTION 4.01. Redemption Prices -- Voluntary and for Sinking Fund.
(a) The Company may, at its option, redeem all or from time to time any part of
the Debentures on any date prior to maturity, upon notice as set forth in
Section 4.02, and at the redemption prices set forth in the form of Debenture
hereinabove recited, together with accrued interest to the date fixed for
redemption.
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<PAGE> 32
(b) The Debentures may also be redeemed in part on December 1,
1994 and on each December 1 thereafter to and including December 1, 2001,
through the operation of the mandatory Sinking Fund as set forth in Section
4.04, at 100% of the principal amount thereof, together with accrued interest
to the date fixed for redemption.
SECTION 4.02. Notice of Redemption; Selection of Debentures. In
case the Company shall desire to exercise the right to redeem all or any part
of the Debentures pursuant to Section 4.01 (a), it shall fix a date for
redemption and shall mail a notice of such redemption at least 30 and not more
than 60 days prior to the date fixed for redemption to the holders of
Debentures so to be redeemed as a whole or in part at their last address as the
same appears on the registry books of the Company. Such mailing shall be by
first class mail. The notice if mailed in the manner herein provided shall be
conclusively presumed to have been duly given, whether or not the holder
receives such notice. In any case, failure to give such notice by mail or any
defect in the notice to the holder of any Debenture designated for redemption
as a whole or in part shall not affect the validity of the proceedings for the
redemption of any other Debenture.
Each such notice of redemption shall be given in the name of the
Company and shall specify the date fixed for redemption, the redemption price
at which Debentures are to be redeemed and shall state that payment of the
redemption price of the Debentures to be redeemed will be made at the office or
agency of the Company to be maintained in accordance with the provisions of
Section 5.02, upon presentation and surrender of such Debentures, that interest
accrued to the date fixed for redemption will be paid as specified in said
notice, and that on and after said date interest thereon or on the portions
thereof to be redeemed will cease to accrue. In case any Debenture is to be
redeemed in part only, the notice of redemption shall state the portion of the
principal amount thereof to be redeemed and shall state that on and after the
date fixed for redemption, upon surrender of such Debenture, a new Debenture or
Debentures in aggregate principal amount equal to the unredeemed portion
thereof will be issued without charge to the holder. No Debenture of the
denomination of $1,000 shall be redeemed in part and Debentures may be redeemed
in part only in integral multiples of $1,000.
If less than all the Debentures are to be redeemed the Company will
notify the Trustee not less than 60 days prior to the date fixed for redemption
as to the aggregate principal amount of Debentures to be redeemed, and
thereupon the Trustee shall select, in such manner as in its sole discretion it
shall deem appropriate and fair, the Debentures or portions thereof to be
redeemed, and shall as promptly as practicable, and in any event at least 45
days prior to the date fixed for redemption, notify the Company of the
Debentures or portions thereof so selected.
Prior to the date fixed for redemption specified in the notice of
redemption given as provided in this Section 4.02, the Company will deposit
with the Trustee or with the paying agent an amount of money sufficient to
redeem on the date fixed for redemption all the Debentures so called for
redemption at the appropriate redemption price, together with accrued Interest
to the date fixed for redemption.
SECTION 4.03. Payment of Debentures Called for Redemption. If
notice of redemption has been given as above provided, the Debentures or
portions of Debentures with
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respect to which such notice has been given shall become due and payable on the
date and at the place stated in such notice at the applicable redemption price,
together with interest accrued to the date fixed for redemption, and on and
after said date (unless the Company shall fail to timely deposit money for the
payment of such Debentures or portions thereof at the redemption price,
together with interest accrued to said date) Interest on the Debentures or
portions of Debentures so called for redemption shall cease to accrue, and such
Debentures and portions of Debentures shall be deemed not to be outstanding
hereunder and shall not be entitled to any benefit under this Indenture except
to receive payment of the redemption price, together with accrued interest to
the date fixed for redemption. On presentation and surrender of such
Debentures at the place of payment in said notice specified, the said
Debentures or the specified portions thereof shall be paid and redeemed by the
Company at the applicable redemption price, together with interest accrued
thereon to the date fixed for redemption.
Upon presentation and surrender of any Debentures redeemed in part
only, the Company shall execute and the Trustee shall authenticate and deliver
to the holder thereof, at the expense of the Company, a new Debenture or
Debentures, of authorized denominations, in aggregate principal amount equal to
the unredeemed portion of the Debenture so presented and surrendered.
SECTION 4.04. Mandatory and Optional Sinking Fund. As and for a
mandatory Sinking Fund for the retirement of Debentures and so long as any of
the Debentures remain outstanding and unpaid, the Company will pay to the
Trustee in cash, except as hereinafter provided, not less than one Business Day
before December 1, 1994 and before December 1 of each year thereafter to and
including December 1, 2001, an amount sufficient to redeem, at 100% of the
principal amount thereof, $1,000,000 principal amount of Debentures. The last
date on which such payment may be made each year is herein referred to as the
"sinking fund payment date."
At its option the Company may pay into the Sinking Fund for the
retirement of Debentures not less than one business day before December in any
one or more year, such additional sum as the Company may desire.
If the sinking fund payment or payments (mandatory or Optional) made
in cash plus any unused balance of any preceding sinking fund payments made in
cash shall exceed $50,000 (or a lesser sum if the Company shall so request), it
shall be applied by the Trustee on the December 1 next following the date of
such payment to the redemption of Debentures at the principal amount (the
sinking fund redemption price) together with accrued interest to the date fixed
for redemption. The Trustee shall select, in the manner provided in Section
4.02, for redemption on such December 1 a sufficient principal amount of
Debentures to absorb said cash, as nearly as may be, and shall, at the expense
and in the name of the Company, thereupon cause notice of redemption of the
Debentures to be given in substantially the manner provided in Section 4.02 for
the redemption of Debentures in part at the option of the Company, except that
the notice of redemption shall also state that the Debentures are being
redeemed for the Sinking Fund. Any sinking fund moneys not so applied or
allocated by the Trustee to the redemption of Debentures shall be added to the
next cash sinking fund payment received by the Trustee and, together with such
payment shall be applied in accordance with the provisions of this Section
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4.04. Any and all sinking fund moneys held by the Trustee on December 1, 2002,
and not held for the payment or redemption of particular Debentures shall be
applied by the Trustee, together with other moneys, if necessary, to be
deposited sufficient for the purpose, to the payment of the principal of the
Debentures at maturity.
Prior to each sinking fund payment date, the Company shall pay to the
Trustee in cash a sum equal to all interest accrued to the date fixed for
redemption on Debentures to be redeemed on the next following December pursuant
to this Section 4.04.
The Trustee shall not redeem any Debentures with sinking fund moneys
or mail any notice of redemption of Debentures by operation of the sinking fund
during the continuance of any failure to pay interest due on the Debentures or
of any Event of Default, except that if the notice of redemption of any
Debentures shall theretofore have been mailed in accordance with the provisions
hereof, the Trustee shall redeem such Debentures if cash sufficient for that
purpose shall be deposited with the Trustee for that purpose in accordance with
the terms of this Article Four. Except as aforesaid, any moneys in the Sinking
Fund at the time when any such failure to pay interest or Event of Default
shall occur and any moneys thereafter paid into the Sinking Fund shall, during
the continuance of such failure to pay interest or Event of Default, be held as
security for the payment of all the Debentures; provided, however, that in case
such failure to pay interest or Event of Default shall have been cured or
waived as provided herein, such moneys shall thereafter be applied not later
than the next December 1 on which such moneys may be applied pursuant to the
provisions of this Section 4.04.
SECTION 4.05. Credits Against Mandatory Sinking Fund. In lieu of
making all or any part of any mandatory sinking fund payment as required by
Section 4.04 hereof in cash, the Company may (a) deliver to the Trustee for
cancellation Debentures theretofore issued and acquired by the Company at any
time prior to 30 days preceding the due date of such payment and not
theretofore made the basis for the reduction of a mandatory sinking fund
payment, (b) take credit for the principal amount of any Debentures theretofore
redeemed pursuant to the provisions of this Article Four (otherwise than
through the operation of the mandatory Sinking Fund) or which shall have been
duly called for redemption (otherwise than through the operation of the
mandatory Sinking Fund) and the redemption price of which, together with
accrued interest thereon, shall have been deposited in trust for that purpose,
as in this Article Four provided, and not theretofore made the basis of the
reduction of a mandatory sinking fund payment, and (c) take credit for the
principal amount of any Debentures theretofore repurchased pursuant to the
provisions of Section 4.07 or which shall have been duly presented to the
Trustee for repurchase and the repurchase price of which, together with accrued
interest thereon, shall have been deposited in trust, as provided in Section
4.07, and not theretofore made the basis of the reduction of a mandatory
sinking fund payment; and in each such case the principal amount of Debentures
required by Section 4.04 to be redeemed shall be reduced to the extent of the
principal amount of the Debentures so delivered or so redeemed or so called for
redemption or so repurchased or so presented for repurchase.
SECTION 4.06. Officers' Certificate. On or before October 1 of
each year in which the Company is obligated to make a mandatory sinking fund
payment, the Company shall deliver to the Trustee an Officers' Certificate
stating:
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(i) the manner in which the Company will fulfill
its mandatory sinking fund obligation under this Article Four
for such year;
(ii) whether or not it elects to make any optional
sinking fund payment on or before the next succeeding Business
Day immediately prior to December 1, as permitted by Section
4.04, and, if so, the amount thereof;
(iii) the amount of cash, if any, which the Company
will pay to the Trustee on or before the next succeeding
Business Day immediately prior to December 1;
(iv) the principal amount of Debentures, if any,
which the Company will surrender to the Trustee for
cancellation in lieu of the payment of cash, and that such
Debentures were theretofore issued and acquired by the Company
prior to said December 1 and have not theretofore been made
the basis for the reduction of a mandatory sinking fund
payment;
(v) the principal amount of any Debentures for
which credit is claimed pursuant to clause (b) of Section
4.05, together with such facts as shall demonstrate that the
Company is entitled to such credit; and
(vi) the principal amount of any Debentures for
which credit is claimed pursuant to clause (c) of Section
4.05, together with such facts as shall demonstrate that the
Company is entitled to such credit.
The election of the Company to make any optional sinking fund payment, as
evidenced by said Officers' Certificate, shall be irrevocable.
SECTION 4.07. Right to Present Debentures For Repurchase. (a)
Subject to and upon compliance with the provisions of this Section 4.07, the
holder of any Debenture shall have the right to present such Debenture, in
whole or in part, to the Trustee for repurchase by the Company at the
repurchase price of 100% of the principal amount thereof plus accrued interest
to the date of repurchase. The Company will repurchase the Debentures so
presented on October 1, 1994 and on October 1 of each year thereafter, to and
including October 1, 2001; provided, however, that the Company shall not be
obligated to repurchase Debentures with an aggregate principal amount in excess
of $1,000,000 in any single year. The foregoing amounts hereinafter are
referred to as the "maximum mandatory repurchase amounts." If Debentures with
an aggregate principal amount in excess of the applicable maximum mandatory
repurchase amount are duly presented to the Trustee for repurchase by the
Company on any such October 1, the Company at its option may repurchase on such
October 1 such principal amount of Debentures as the Company may elect in
excess of the applicable maximum mandatory repurchase amount which were duly
presented for repurchase.
(b) In order to exercise the repurchase rights provided for in
this Section 4.07, the holder of any Debenture to be repurchased in whole or in
part shall surrender such Debenture, duly endorsed or accompanied by a written
instrument of transfer in form satisfactory to the
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Trustee, to the Trustee at its place of business as provided for in Section
14.07, accompanied by a written request for repurchase signed by the registered
holder or his duly authorized representative stating that the holder elects to
present such Debenture, or a specified portion thereof, for repurchase. If the
repurchase request is made on behalf of a deceased debentureholder by his
personal representative or surviving joint tenant, it shall be accompanied by
evidence in form and substance satisfactory to the Trustee of the death of such
deceased debentureholder and the authority of the personal representative or
surviving joint tenant to make such request. To be effective, said Debentures,
such written request and any such evidence must be actually received by the
Trustee during the twelve-month period ending at 3:30 p.m. local Dallas, Texas
time on the September 15 immediately preceding the October 1 on which the
Debentures are to be repurchased. Any Debenture presented to the Trustee for
repurchase pursuant to this Section 4.07 may be withdrawn, in whole or in part,
and any written request previously submitted may be amended, by an appropriate
written request in form and substance satisfactory to the Trustee, signed by
the registered holder or his duly authorized representative, which request is
actually received by the Trustee no later than 3:30 p.m. local Dallas, Texas
time on the September 15 immediately preceding the October 1 on which the
Debentures are to be repurchased. No Debenture of the denomination of $1,000
shall be repurchased or presented for repurchase in part and Debentures may be
presented for repurchase and may be repurchased in part only in integral
multiples of $1,000.
(c) On or before September 21 in each year in which the Company is
obligated to repurchase Debentures pursuant to this Section 4.07, the Trustee
shall notify the Company in writing of the aggregate principal amount of
Debentures which have been duly presented to the Trustee pursuant to the
provisions of this Section 4.07 for repurchase by the Company on the next
succeeding October 1. On or before the next following September 26, the
Company shall deliver to the Trustee an Officers' Certificate stating the
aggregate principal amount of Debentures which it will repurchase on such
October 1, which amount shall be not greater than the aggregate principal
amount of the Debentures duly presented as specified in the notice of the
Trustee, and shall not be less than the lesser of (i) the amount so specified
in the Trustee's notice or (ii) the applicable maximum mandatory repurchase
amount. The Company shall pay to the Trustee in cash not less than one
Business Day before such October 1 an amount sufficient to repurchase the
principal amount of Debentures specified in such Officers' Certificate at the
repurchase price together with accrued interest to the date of repurchase. All
cash so paid to the Trustee shall be applied by it on the October 1 next
following the date of such payment to the repurchase of Debentures at the
repurchase price together with accrued interest to the date of repurchase. For
the purpose of this Section 4.07, the "date of repurchase" of all Debentures
shall be October 1.
(d) If more than the principal amount of Debentures to be
repurchased by the Company on any October 1 (as specified in its Officers'
Certificate) has been presented to the Trustee for repurchase during the
twelve-month period ending at 3:30 p.m. local Dallas, Texas time on the
September 15 immediately preceding such October 1, the Trustee shall select, in
such manner as in its sole discretion it shall deem appropriate and fair, the
Debentures or portions thereof to be repurchased by the Company on the
succeeding October 1, except that if any Debentures are presented for
repurchase during such twelve-month period on behalf of a deceased
debentureholder by his personal representative or surviving joint tenant, all
Debentures
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so presented for the account of or on behalf of such deceased debentureholder
shall be repurchased by the Company before any Debentures, or portions thereof,
presented by any other debentureholder are so repurchased. If more than the
principal amount of Debentures to be repurchased by the Company on any October
1 has been presented to the Trustee for repurchase during any such twelve-month
period on behalf of deceased debentureholders by their personal representatives
or surviving joint tenants, the Trustee shall select, in such manner as in its
sole discretion it shall deem appropriate and fair, the Debentures or portions
thereof so presented for the account of or on behalf of such deceased
debentureholder or debentureholders to be repurchased by the Company on the
next succeeding October 1.
Upon the repurchase of any Debenture in part only, the Company shall
execute and the Trustee shall authenticate and deliver to the holder thereof,
at the expense of the Company, a new Debenture or Debentures of authorized
denominations, in aggregate principal amounts equal to that portion of the
Debenture not repurchased by the Company. Debentures which are not repurchased
by the Company on any such October 1 shall be returned by the Trustee to the
holder thereof as soon as practicable after such October 1, without charge to
the holder thereof.
(e) The Trustee shall not repurchase any Debentures with moneys
paid to it under the provisions of this Section 4.07 during the continuance of
a failure to pay interest due on the Debentures or of any Event of Default
(other than an Event of Default as provided in subsection (c) of Section 6.01).
Any moneys held by the Trustee under the provisions of this Section 4.07 at any
time when any such failure to pay interest or Event of Default shall occur and
any moneys thereafter paid to the Trustee pursuant to the provisions of this
Section 4.07 shall, during the continuance of such failure to pay interest or
Event of Default, be held as security for the payment of all of the Debentures;
provided, however, that in case such failure to pay interest or Event of
Default shall have been cured or waived as provided in this Indenture, such
moneys shall thereafter be applied not later than the next October 1 on which
such moneys may be applied pursuant to the provisions of this Section 4.07.
(f) The Company's obligations under this Section 4.07 are not
cumulative, and, if the Company is obligated to repurchase less than the
maximum mandatory repurchase amount in any year, the difference between the
principal amount of Debentures actually so repurchased by the Company in such
year and the maximum mandatory repurchase amount shall not be carried forward
as an obligation of the Company to repurchase Debentures in excess of the
applicable maximum mandatory repurchase amount in any subsequent year.
ARTICLE FIVE
PARTICULAR COVENANTS OF THE COMPANY
The Company covenants with the Trustee for the benefit of the Trustee
and of the holders of the Debentures as hereinafter in this Article Five set
forth.
SECTION 5.01. Payment of Principal, Premium and Interest. The
Company will duly and punctually pay the principal of (and premium, if any, on)
and interest on each and
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every Debenture, at the dates and the places and in the manner mentioned in the
Debentures and in this Indenture.
SECTION 5.02. Office for Exchange, Registration of Transfer,
Notices and Payment. So long as any of the Debentures shall remain
outstanding, the Company will maintain an office or agency only in the State of
Texas where the Debentures may be presented for exchange or registration of
transfer as in this Indenture provided, and where notices and demands to or
upon the Company in respect of the Debentures or of this Indenture may be
served, and where the Debentures may be presented for payment. The Company
will give prompt written notice to the Trustee of the location, and any change
in the location, of such office or agency. In case the Company shall at any
time fail to maintain such an office or agency, or shall fail to give such
notice of any change in the location thereof, presentations and demands may be
made and notices may be served at the principal office of the Trustee.
SECTION 5.03. Maintenance of Franchises, Rights and Licenses,
Corporate Existence and Property. The Company will:
(a) obtain and maintain and cause its Subsidiaries to
obtain and maintain in full force and effect all franchises, rights,
licenses, permits and approvals necessary for the ownership, operation
and maintenance of the properties of the Company and its Subsidiaries;
provided, however, that the Company shall not be required to preserve
any franchise, right, license, permit or approval if the Company shall
determine the preservation thereof is no longer necessary for the
conduct of the business of the Company and the loss thereof is not
disadvantageous in any material respect to the holders of the
Debentures;
(b) cause to be done all things necessary to preserve and
keep in full force and effect its corporate existence and to comply
with all applicable laws, provided, however, that nothing in this
subsection (b) shall prevent a consolidation or merger of the Company
not prohibited by the provisions of Article Twelve nor shall the
Company be required to preserve such corporate existence if the Board
of Directors shall determine the preservation thereof is no longer
necessary for the conduct of the business of the Company and the loss
thereof is not disadvantageous in any material respect to the holders
of the Debentures; and
(c) at all times keep, maintain and preserve all the
property of the Company and its Subsidiaries in good repair, working
order and condition and from time to time make all needful and proper
repairs, renewals, replacements, betterments and improvements thereto,
all as in the judgment of the Company may be reasonably necessary so
that the business carried on in connection therewith may be properly
and advantageously conducted at all times; provided, however, that
nothing in this subsection (c) shall prevent the Company from
discontinuing the operation and maintenance of any such properties if
such discontinuance is, in the judgment of the Company, desirable in
the conduct of its business or the business of any Subsidiary and not
disadvantageous in any material respect to the holders of the
Debentures.
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SECTION 5.04. Payment of Taxes and Assessments. The Company will
cause to be paid and discharged all lawful taxes, assessments and governmental
charges or levies imposed upon the Company or any Subsidiary or upon the income
or profits of the Company or any Subsidiary or upon property or any part
thereof belonging to the Company or any Subsidiary before the same shall be in
default, as well as all lawful claims for labor, materials and supplies which,
if unpaid, might become a lien or charge upon such property or any part
thereof; provided, however, that the Company shall not be required to cause to
be paid or discharged any such tax, assessment, charge, levy or claim so long
as the validity or amount thereof shall be contested in good faith by
appropriate proceedings and the nonpayment thereof does not, in the judgment of
the Company, materially adversely affect the rights of the holders of the
Debentures; and provided further that the Company shall not be required to
cause to be paid or discharged any such tax, assessment, charge, levy or claim
if, in the judgment of the Company, such payment shall no longer be
advantageous to the Company in the conduct of its business and if the failure
so to pay or discharge does not, in its judgment, materially adversely affect
the rights of the holders of the Debentures.
SECTION 5.05. Maintenance of Insurance. The Company at all times
will provide and maintain at its own expense, or cause to be provided and
maintained, on all the property owned by it and its Subsidiaries, which is of a
character usually insured by responsible corporations engaged in businesses
similar to those of the Company and its Subsidiaries, insurance with reputable
and responsible insurers, or with the Company or a Subsidiary under such
program of self-insurance as the Board of Directors shall determine to be
desirable in the conduct of the Company's business and not disadvantageous in
any material respect to the holders of Debentures, in such amounts and against
such risks as is customarily maintained by such corporations in similar
businesses.
SECTION 5.06. Officers' Certificate as to Breach and Annual Review
Statement. The Company will, so long as any of the Debentures are outstanding:
(a) deliver to the Trustee, forthwith upon becoming aware
of any breach or failure to perform any covenant, agreement or
condition contained in this Indenture, an Officers' Certificate
specifying each such breach or failure; and
(b) deliver to the Trustee within 120 days after the end
of each fiscal year of the Company an Officers' Certificate stating
that a review of the activities of the Company and of its Subsidiaries
during the preceding fiscal year has been made under the supervision
of the signing officers, with a view to determining whether the
Company has kept, observed, performed and fulfilled its obligations
under this Indenture, and further stating, as to each officer signing
such certificate, that to the best of his knowledge the Company has
kept, observed, performed and fulfilled each and every such covenant
in this Indenture contained and has not breached or failed to perform
or observe any of the terms, provisions and conditions hereof (or, if
the Company shall have so breached or failed to perform or observe,
specifying all such breaches or failures and the nature thereof of
which he may have knowledge) and that to the best of his knowledge no
event has occurred and remains in existence by reason of which
payments on account of the principal of, premium, if any, on or
interest on the Debentures are prohibited.
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SECTION 5.07. Appointment to Fill a Vacancy in Office of Trustee.
The Company, whenever necessary to avoid or fill a vacancy in the office of
Trustee, will appoint, in the manner provided in Section 8.08, a Trustee, so
that there shall at all times be a Trustee hereunder.
SECTION 5.08. Further Instruments and Acts. The Company will, upon
request of the Trustee, execute and deliver such further instruments and do
such further acts as may reasonably be necessary or proper to carry out more
effectually the purposes of this Indenture.
ARTICLE SIX
REMEDIES OF THE TRUSTEE AND
DEBENTUREHOLDERS IN THE EVENT OF DEFAULT
SECTION 6.01. Events of Default. In case one or more of the
following Events of Default shall have occurred and be continuing:
(a) failure in the payment of any installment of interest
upon any of the Debentures as and when the same shall become due and
payable, whether or not such payment is prohibited by the provisions
of Section 3.02, and continuance of such failure for a period of
thirty days; or
(b) failure in the payment of the principal of (or
premium, if any, on) any of the Debentures as and when the same shall
become due and payable either at maturity, upon redemption, by
declaration or otherwise, or failure in making any Sinking Fund
payment, and in each case whether or not such payment is prohibited by
the provisions of Section 3.02 and continuance of such failure for a
period of five Business Days; or
(c) failure in the making of any payment for the
repurchase of Debentures pursuant to the provisions of Section 4.07,
as and when such repurchase obligation shall become due and payable
and continuance of such failure for a period of five Business Days; or
(d) failure on the part of the Company duly to observe or
perform any other of the covenants or agreements on the part of the
Company in the Debentures or in this Indenture contained, and
continuance of such failure unremedied for a period of ninety days
after the date on which written notice of such failure, requiring the
Company to remedy the same, shall have been given to the Company by
the Trustee, or to the Company and the Trustee by the holders of at
least twenty-five per cent in principal amount of the Debentures at
the time outstanding; or
(e) an event of default as defined in any mortgage,
indenture or instrument under which there may be issued, or by which
there may be secured or evidenced, any indebtedness of the Company for
borrowed money or any Senior Indebtedness, whether such indebtedness
now exists or shall hereafter be created, shall happen and shall
result
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in such debentures or indebtedness becoming or being declared due and
payable prior to the date on which they would otherwise become due and
payable, and such acceleration shall not be rescinded or annulled or
such debentures or indebtedness shall not be paid within fifteen days
after written notice to the Company from the Trustee or to the Company
and to the Trustee from the holders of not less than twenty-five per
cent in principal amount of the Debentures then outstanding under this
Indenture, provided that no Event of Default shall occur hereunder so
long as the existence of an event of default under any such mortgage,
indenture or instrument shall be contested in good faith by the
Company; or failure of the Company, within fifteen days after the
maturity or extended maturity of any such debentures or indebtedness,
to pay off or refund the same, and such debentures or indebtedness
shall not be paid or refunded within fifteen days after written notice
of such failure to pay or refund shall be given to the Company by the
Trustee or to the Company and to the Trustee by the holders of at
least twenty-five per cent in principal amount of the Debentures at
the time outstanding; provided that no Event of Default shall occur
hereunder so long as the amount of such debentures or indebtedness due
prior to, at, or after maturity does not exceed $250,000; or
(f) a judgment, decree or order by a court having
jurisdiction in the premises shall have been entered adjudging the
Company a bankrupt or insolvent, or approving as properly filed a
petition seeking reorganization of the Company under the Federal
Bankruptcy Act or any similar applicable Federal or state law, and
such judgment, decree or order shall have continued undischarged and
unstayed for a period of sixty days; or a judgment, decree or order of
a court having jurisdiction in the premises for the appointment of a
receiver or liquidator or trustee or assignee in bankruptcy or
insolvency of the Company or of all or a major part of its property,
or for the winding up or liquidation of its affairs, shall have been
entered, and such judgment, decree or order shall have remained in
force undischarged and unstayed for a period of sixty days; or
(g) the Company shall institute proceedings to be
adjudicated a voluntary bankrupt, or shall consent to the institution
of a bankruptcy proceeding against it, or shall file a petition or
answer or consent seeking reorganization under the Federal Bankruptcy
Act or any other similar applicable Federal or state law, or shall
consent to the filing of any such petition, or shall consent to the
appointment of a receiver or liquidator or trustee or assignee in
bankruptcy or insolvency of it or of all or a major part of its
property, or shall make an assignment for the benefit of creditors, or
shall admit in writing its inability to pay its debts generally as
they become due;
then and in each and every such case, unless the principal of all the
Debentures shall have already become due and payable, either the Trustee or the
holders of not less than twenty-five per cent in aggregate principal amount of
the Debentures then outstanding hereunder, by notice in writing to the Company
(and to the Trustee if given by debentureholders), may declare the principal of
all the outstanding Debentures to be due and payable immediately, and upon any
such declaration the same shall become and shall be immediately due and
payable, anything in this Indenture or in the Debentures contained to the
contrary notwithstanding. This provision, however, is subject to the condition
that if, at any time after the principal of the Debentures shall have been so
declared due and payable, and before any judgment or decree for the payment of
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the moneys due shall have been obtained or entered as hereinafter provided, the
Company shall have paid or shall have deposited with the Trustee a sum
sufficient to pay all matured installments of interest upon all the Debentures
and the principal of (and premium, if any, on) any and all Debentures which
shall have become due otherwise than by declaration (with interest upon such
principal and premium, if any, and, to the extent that payment of such interest
is enforceable under applicable law, upon overdue installments of interest, at
the rate borne by the Debentures to the date of such payment or deposit) and
such amount as shall be sufficient to cover reasonable compensation to the
Trustee, its agents, attorneys and counsel, and all other reasonable expenses
and liabilities incurred, and all reasonable advances made, by the Trustee, and
any and all Events of Default (other than the nonpayment of the principal of
and accrued interest on Debentures which shall have become due by declaration)
shall have been remedied or waived (to the extent that such can be waived
hereunder) to the satisfaction of the Trustee--then, and in every such case,
the holders of a majority in aggregate principal amount of the Debentures then
outstanding, by written notice to the Company and to the Trustee, may waive any
such Event of Default and rescind and annul such declaration and its
consequences; but no such waiver or rescission and annulment shall extend to or
shall affect any subsequent Events of Default, or shall impair any right or
power consequent thereon.
In case the Trustee shall have proceeded to enforce any right under
this Indenture and such proceedings shall have been discontinued or abandoned
because of such rescission or annulment or for any other reason or shall have
been determined adversely to the Trustee, then and in every such case the
Company, the Trustee and the holders of the Debentures shall, subject to any
determination in such proceeding, be restored respectively to their former
positions and rights hereunder, and all rights, remedies and powers of the
Company and the Trustee shall continue as though no such proceedings had been
taken.
SECTION 6.02. Payment of Debentures After Non-Payment; Suit
Therefor. The Company covenants that (a) in case of failure to pay any
installment of interest on any of the Debentures, as and when the same shall
become due and payable, and such failure shall have continued for a period of
thirty days, or (b) in case of failure to pay the principal of (or premium, if
any, on) any of the Debentures as and when the same shall have become payable,
whether upon maturity of the Debentures or upon redemption or upon declaration
or otherwise, and such failure shall have continued for a period of five
Business Days then, upon written demand of the Trustee, the Company will pay to
the Trustee, for the benefit of the holders of the Debentures, the whole amount
that then shall have become due and payable on all such Debentures for
principal (and premium, if any) or interest, or both, as the case may be, with
interest upon the overdue principal (and premium, if any) and (to the extent
that payment of such interest is enforceable under applicable law) upon overdue
installments of interest at the rate borne by the Debentures; and, in addition
thereto, such further amount as shall be sufficient to cover reasonable
compensation to the Trustee, its agents, attorneys and counsel, and all other
reasonable expenses and liabilities incurred (except as a result of negligence
or bad faith), and all reasonable advances made, by the Trustee, and any other
amounts due the Trustee under Section 8.05.
In case the Company shall fail forthwith to pay such amounts upon such
demand, the Trustee, in its own name and as trustee of an express trust, shall
be entitled and empowered to
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institute any actions or proceedings at law or in equity for the collection of
the sums so due and unpaid, and may prosecute any such action or proceeding to
judgment or final decree, and may enforce any such judgment or final decree
against the Company or other obligor upon the Debentures and collect in the
manner provided by law out of the property of the Company or other obligor upon
the Debentures wherever situated the moneys adjudged or decreed to be payable.
In case there shall be pending proceedings for the bankruptcy or for
the reorganization of the Company or any other obligor upon the Debentures
under the Federal Bankruptcy Act or any other applicable law relative to the
Company or to such other obligor, its creditors or its property, or in
connection with the insolvency thereof or in case a receiver or trustee shall
have been appointed for its property, or in case of any other judicial
proceedings relative to the Company or other obligor upon Debentures, its
creditors or its property, the Trustee, irrespective of whether the principal
of the Debentures shall then be due and payable as therein expressed or by
declaration or otherwise and irrespective of whether the Trustee shall have
made any demand pursuant to the provisions of this Section 6.02, shall be
entitled and empowered, by intervention in such proceedings or otherwise, to
file and prove a claim or claims for the whole amount of principal, premium, if
any, and interest owing and unpaid in respect of the Debentures, and to file
such other papers or documents as may be necessary or advisable in order to
have the claims of the Trustee (including any claim for reasonable compensation
to the Trustee, its agents, attorneys and counsel, and for reimbursement of all
reasonable expenses and liabilities incurred [except as a result of negligence
or bad faith], and all reasonable advances made, by the Trustee) and of the
debentureholders allowed in any such judicial proceedings relative to the
Company or other obligor upon the Debentures, its creditors or its property,
and to collect and receive any moneys or other property payable or deliverable
on any such claims, and to distribute all amounts received with respect to the
claims of the debentureholders and of the Trustee on their behalf; and any
receiver, assignee or trustee in bankruptcy or reorganization is hereby
authorized by each of the debentureholders to make such payments to the Trustee
and, in the event that the Trustee shall consent to the making of payments
directly to the debentureholders, to pay to the Trustee such amount as shall be
sufficient to cover reasonable compensation to the Trustee, its agents,
attorneys and counsel, and all other reasonable expenses and liabilities
incurred (except as a result of negligence or bad faith), and all reasonable
advances made, by the Trustee, and any other amounts due to the Trustee under
Section 8.05.
All rights of action and of asserting claims under this Indenture, or
under any of the Debentures, may be enforced by the Trustee without the
possession of any of the Debentures, or the production thereof on any trial or
other proceedings relative thereto, and any such action or proceedings
instituted by the Trustee shall be brought in its own name as trustee of an
express trust, and any recovery of judgment shall be for the ratable benefit of
the holders of the Debentures, subject to the provisions of Article Three.
In case of an Event of Default hereunder which is continuing, the
Trustee may in its discretion proceed to protect and enforce the rights vested
in it by this Indenture by such appropriate judicial proceedings as the Trustee
shall deem most effectual to protect and enforce any of such rights, either at
law or in equity or in bankruptcy or otherwise, whether for the specific
enforcement of any covenant or agreement contained in this Indenture or in aid
of the
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exercise of any power granted in this Indenture, or to enforce any other legal
or equitable right vested in the Trustee by this Indenture or by law.
SECTION 6.03. Application of Moneys Collected by Trustee. Subject
to the provisions of Article Three, any moneys collected by the Trustee,
pursuant to this Article Six, shall be applied in the order following, at the
date or dates fixed by the Trustee for the distribution thereof and, in case of
the distribution of such moneys on account of principal (or premium, if any) or
interest, upon presentation of the several Debentures, and notation thereon of
the payment if only partially paid, and upon surrender thereof if fully paid:
FIRST: To the payment of costs and expenses of collection and
reasonable compensation to the Trustee, its agents, attorneys and
counsel, and to the payment of all other reasonable expenses, charges
and liabilities incurred, and all reasonable advances made, by the
Trustee, and any other amounts due to the Trustee under Section 8.05;
SECOND: In case the principal of the outstanding Debentures
shall not have become due, to the payment of interest on the
Debentures, in order of the maturity of the installments of such
interest, with interest (to the extent that such interest has been
collected by the Trustee) upon the overdue installments of interest
(to the extent that payment of such interest is enforceable under
applicable law) at the rate borne by the Debentures, such payments to
be made ratably to the persons entitled thereto, without
discrimination or preferences;
THIRD: In case the principal of the outstanding Debentures
shall have become due and payable at maturity, upon redemption, by
declaration or otherwise, to the payment of the whole amount then
owing and unpaid upon such Debentures for principal (and premium, if
any) and interest, with interest on the overdue principal (and
premium, if any) and (to the extent that such interest has been
collected by the Trustee) upon overdue installments of interest (to
the extent that payment of such interest is enforceable under
applicable law) at the rate borne by such Debentures; and in case such
moneys shall be insufficient to pay in full the whole amount so due
and unpaid upon all of the Debentures, then to the payment of such
principal (and premium, if any) and interest, without preference or
priority of principal (and premium, if any) over interest, or of
interest over principal (and premium, if any) or of any installment of
interest over any other instalment of interest, or of any Debentures
over any other Debentures, ratably to the aggregate of such principal
(and premium, if any) and accrued and unpaid interest; and
FOURTH: In case the principal of all the outstanding
Debentures shall have become due and payable at maturity, upon
redemption, by declaration or otherwise, and all of such Debentures
shall have been fully paid together with all interest (including any
interest on overdue payments) and premium, if any, thereon, to the
Company, its successors or assigns, or to whomsoever may be lawfully
entitled to receive the same, or as a court of competent jurisdiction
may direct.
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SECTION 6.04. Limitation on Suits by Holders of Debentures. No
holder of any Debenture shall have any right by virtue or by availing of any
provision of this Indenture to institute any action, suit or proceeding at law
or in equity or in bankruptcy or otherwise, upon or under or with respect to
this Indenture, or for the appointment of a receiver or trustee, or for any
other remedy hereunder, unless such holder previously shall have given to the
Trustee written notice of an Event of Default and of the continuance thereof,
as hereinbefore provided, and unless also the holders of not less than
twenty-five per cent in aggregate principal amount of the Debentures then
outstanding shall have made written request upon the Trustee to institute such
action, suit or proceeding in its own name as Trustee hereunder and shall have
offered to the Trustee such reasonable indemnity as it may require against the
costs, expenses and liabilities to be incurred therein or thereby, and the
Trustee, for sixty days after its receipt of such notice, request and offer of
indemnity, shall have failed to institute any such action, suit or proceeding
and no direction inconsistent with such written request shall have been given
to the Trustee pursuant to Section 6.06; it being understood and intended, and
being expressly covenanted by the taker and holder of every Debenture with
every other taker and holder and the Trustee, that no one or more holders of
Debentures shall have any right in any manner whatever by virtue or by availing
of any provision of this Indenture to affect, disturb or prejudice the rights
of the holders of any other of such Debentures, or to obtain or seek to obtain
priority over or preference to any other such holder, or to enforce any right
or remedy under this Indenture, except in the manner herein provided and for
the equal, ratable and common benefit of all holders of Debentures. For the
protection and enforcement of the restrictions upon remedies available to
holders of Debentures under the provisions of this Section 6.04, each and every
debentureholder and the Trustee shall be entitled to such relief as can be
given either at law or in equity.
Notwithstanding any other provisions in this Indenture, however, but
subject to the provisions of Article Three, the rights of any holder of any
Debenture to receive payment of the principal of (and premium, if any) and
interest on such Debenture, on or after the respective due dates expressed in
such Debenture (or, in case of redemption, on the redemption date fixed for
such Debenture) or to institute suit for the enforcement of any such payment on
or after such respective dates shall not be impaired or affected without the
consent of such holder.
SECTION 6.05. Remedies Cumulative and Continuing. All rights,
powers and remedies given by this Article Six to the Trustee or to the
debentureholders shall, to the extent permitted by law, be deemed cumulative
and not exclusive of any thereof or of any other rights, powers and remedies
available to the Trustee or to the debentureholders, by judicial proceedings or
otherwise, to enforce the performance and observance of the covenants and
agreements contained in this Indenture, and no delay or omission of the Trustee
or of any holder of any of the Debentures to exercise any right, remedy or
power accruing upon any Event of Default occurring and continuing as aforesaid
shall impair any such right, remedy or power, or shall be construed to be a
waiver of any such default or an acquiescence therein; and, subject to the
provisions of Section 6.04, every right, power and remedy given by this Article
Six or by law to the Trustee or to the Trustee or to the debentureholder may be
exercised from time to time, and as often as shall be deemed expedient, by the
Trustee or by the debentureholders.
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SECTION 6.06. Direction of Proceedings and Waiver of Breaches by
Majority of Debentureholders. The holders of a majority in aggregate principal
amount of the Debentures at the time outstanding shall have the right, by an
instrument in writing executed and delivered to the Trustee, to direct the
time, method and place of conducting any proceeding for exercising any right or
remedy available to the Trustee, or exercising any trust or power conferred on
the Trustee; provided, however, that, subject to Section 8.02, the Trustee
shall have the right to decline to follow any such direction if the Trustee,
being advised by counsel, determines that the action so directed may not
lawfully be taken, or if the Trustee in good faith shall, by a Responsible
Officer or Officers, determine that the action so directed would be illegal or
contrary to this Indenture or involve the Trustee in personal liability; and
provided further, that nothing in this Indenture shall impair the right of the
Trustee in its discretion to take any action deemed proper by the Trustee and
which is not inconsistent with such direction by the debentureholders. Prior
to the declaration of the acceleration of the maturity of the Debentures as
provided in Section 6.01 hereof, the holders of a majority in aggregate
principal amount of the Debentures at the time outstanding may on behalf of the
holders of all the Debentures waive any prior breach or failure to perform any
covenant, agreement or condition contained herein and its consequences, except
a failure in the payment of the principal of (or premium, if any, on) or
interest on, or any Sinking Fund payment with respect to, or any payment for
the repurchase of, any of the Debentures. In the case of any such waiver, the
Company, the Trustee and the holders of the Debentures shall be restored to
their former positions and rights hereunder, respectively; but no such waiver
shall extend to any subsequent or other breach or failure to perform or impair
any right consequent thereon.
SECTION 6.07. Notice of Breaches. The Trustee shall, within ninety
days after the occurrence of each breach hereunder, give to the
debentureholders, in the manner and to the extent provided in Section 7.04(c)
with respect to reports pursuant to Section 7.04(a), notice of such breaches
known to the Trustee unless such breaches shall have been cured or waived
before the giving of such notice (the term "breach" or "breaches" for the
purposes of this Section 6.07 being hereby defined to be any event or events,
as the case may be, specified in clauses (a), (b), (c), (d), (e), (f) and (g)
of Section 6.01; not including periods of grace, if any, provided for therein
and irrespective of the giving of the written notice specified in clauses (d)
and (e) of Section 6.01); provided that, in the case of any failure of the
character specified in clause (d) of Section 6.01, no such notice shall be
given until at least sixty days after the occurrence thereof, and provided
further that except in the case of failure in the payment of the principal of
(or premium, if any, on) or interest on any of the Debentures, or in the
payment of any Sinking Fund Instalment, the Trustee shall be protected in
withholding such notice if and so long as the board of directors, the executive
committee, or a trust committee of directors or Responsible Officers of the
Trustee in good faith determines that the withholding of such notice is in the
interests of the debentureholders.
SECTION 6.08. Trustee Appointed Attorney-in-Fact. The Trustee is
hereby empowered and is hereby irrevocably appointed the true and lawful
attorney-in-fact of the respective holders of the Debentures to intervene and
become a party in any equity receivership, insolvency, liquidation, bankruptcy,
reorganization or other proceedings to which the Company shall be a party; to
file any and all claims, proofs of debt, petitions or other documents; to
execute any other papers and documents; to participate in any and all
proceedings, including
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preparation of any plan of reorganization or other plan or proposal; to take or
join in appeals from any order entered in any such proceeding; to receive
payment for the debentureholders in respect of claims allowed; and to do and
perform any and all acts and things which, in its judgment or as it may be
advised by counsel, are necessary and desirable for the protection of the
debentureholders: provided, however, that in no case shall the Trustee have any
right to accept or consent to any plan of reorganization on behalf of any
debentureholder, or waive or consent to the reduction of any claim of any
debentureholder; nor shall the right of any debentureholder or any committee of
debentureholders to intervene in any such proceeding on his or their own behalf
as elsewhere herein provided be prejudiced hereby or by any action of the
Trustees pursuant hereto. This Section 6.08 shall not limit or restrict any
rights or powers of the Trustee granted pursuant to any other provision of this
Indenture.
SECTION 6.09. Undertaking to Pay Costs. All parties to this
Indenture agree, and each holder of any Debenture by his acceptance thereof
shall be deemed to have agreed, that any court may in its discretion require,
in any suit for the enforcement of any right or remedy under this Indenture, or
in any suit against the Trustee for any action taken or omitted by it as
Trustee, the filing by any party litigant in such suit of an undertaking to pay
the costs of such suit, and that such court may in its discretion assess
reasonable costs, including reasonable attorneys' fees, against any party
litigant in such suit, having due regard to the merits and good faith of the
claims or defenses made by such party litigant; but the provisions of this
Section 6.09 shall not apply to any suit instituted by the Trustee, to any suit
instituted by any debentureholder, or group of debentureholders, holding in the
aggregate more than ten per cent in aggregate principal amount of the
Debentures outstanding, or to any suit instituted by any debentureholder for
the enforcement of the payment of the principal of (or premium, if any, on) or
interest on any Debenture, on or after the due date expressed in such Debenture
(or, in case of redemption, on or after the redemption date fixed for such
Debenture).
SECTION 6.10. Debentures Owned by Company Not to Share in Payments.
Any Debentures owned by or held by, for the account of or benefit of, the
Company shall not be entitled to share in any payment or distribution provided
for in this Article Six.
SECTION 6.11. Waiver of Usury Laws. The Company covenants (to the
extent that it may lawfully do so) that it will not at any time insist upon, or
plead, or in any manner whatsoever claim or take the benefit or advantage of,
any usury, stay or extension law wherever enacted, now or at any time hereafter
in force, which may affect the covenants or the performance of this Indenture;
and the Company (to the extent that it may lawfully do so) hereby expressly
waives all benefit or advantage of any such laws, and covenants (to the extent
it may lawfully do so) that it will not hinder, delay or impede the execution
of any power herein granted to the Trustee as a result of any such laws; but
will suffer and permit the execution of every such power as though no such laws
had been enacted.
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ARTICLE SEVEN
LISTS OF HOLDERS OF DEBENTURES AND
REPORTS BY THE COMPANY AND THE TRUSTEE
SECTION 7.01. Debentureholders' Lists. The Company covenants and
agrees that it will furnish or cause to be furnished to the Trustee, not more
than 15 days after each Regular Record Date, and at such other times as the
Trustee may request in writing, within 30 days after receipt by the Company of
any such request, a list in such form as the Trustee may reasonably require
containing all the information in the possession or control of the Company, or
any of its paying agents other than the Trustee, as to the names and addresses
of the holders of Debentures. Any such list may be dated as of the date not
more than 15 days prior to the time such information is furnished or caused to
be furnished and need not include information received after such date.
Provided, however, so long as the Trustee is the Debenture registrar no such
list shall be required to be furnished.
SECTION 7.02. Preservation and Disclosure of Lists. (a) The
Trustee shall preserve, in as current a form as is reasonably practicable, all
information as to the names and addresses of the holders of Debentures (i)
contained in the most recent list furnished to it as provided in Section 7.01
hereof, (ii) received by it in the capacity of paying agent (if so acting)
hereunder and (iii) filed with it within the two preceding years pursuant to
the provisions of clause (2) of Section 7.04(c) hereof.
The Trustee may (1) destroy any list furnished to it as provided in
Section 7.01 hereof upon receipt of a new list so furnished, (2) destroy any
information received by it as paying agent (if so acting) hereunder upon
delivering to itself as Trustee a list containing the names and addresses of
the holders of Debentures obtained from such information since the delivery of
the next previous list, if any, (3) destroy any list delivered to itself as
Trustee which was compiled from information received by it as paying agent (if
so acting) hereunder upon the receipt of a new list so delivered and (4)
destroy, not earlier than two years after filing, any information filed with it
pursuant to the provisions of clause (2) of Section 7.04(c) hereof.
(b) In case three or more holders of Debentures (hereinafter
referred to as "applicants") apply in writing to the Trustee, and furnish to
the Trustee reasonable proof that each such applicant has owned a Debenture for
a period of at least six months preceding the date of such application, and
such application states that the applicants desire to communicate with other
holders of Debentures with respect to their rights under this Indenture or
under the Debentures and such application is accompanied by a copy of the form
of proxy or other communication which such applicants propose to transmit, then
the Trustee shall, within five business days after the receipt of such
application, at its election, either:
(1) afford such applicants access to the information
preserved at the time by the Trustee in accordance with the provisions
of Section 7.02(a), or
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(2) inform such applicants of the approximate number of
holders of Debentures whose names and addresses appear in the
information preserved at the time by the Trustee in accordance with
the provisions of Section 7.02(a), and of the approximate cost of
mailing to such holders of the Debentures the form of proxy or other
communication, if any, specified in such application.
If the Trustee shall elect not to afford to such applicants access to
such information, the Trustee shall, upon the written request of such
applicants, mail to each holder of a Debenture whose name and address appears
in the information preserved at the time by the Trustee in accordance with the
provisions of Section 7.02(a) a copy of the form of proxy or other
communication which is specified in such request, with reasonable promptness
after a tender to the Trustee of the material to be mailed and of payment, or
provision for the payment, of the reasonable expenses of mailing, unless within
five days after such tender the Trustee shall mail to such applicants, and file
with the Commission together with a copy of the material to be mailed, a
written statement to the effect that, in the opinion of the Trustee, such
mailing would be contrary to the best interests of the holders of Debentures or
would be in violation of applicable law. Such written statement shall specify
the basis of such opinion. If the Commission, after opportunity for a hearing
upon the objections specified in the written statement so filed, shall enter an
order refusing to sustain any of such objections or if, after the entry of an
order sustaining one or more of such objections, the Commission shall find,
after notice and opportunity for hearing, that all the objections so sustained
have been met, and shall enter an order so declaring, the Trustee shall mail
copies of such material to all such holders of the Debentures with reasonable
promptness after the entry of such order and the renewal of such tender;
otherwise, the Trustee shall be relieved of any obligation or duty to such
applicants respecting their application.
(c) Each and every holder of the Debentures, by receiving and
holding the same, agrees with the Company and the Trustee that neither the
Company nor the Trustee nor any paying agent shall be held accountable by
reason of the disclosure of any such information as to the names and addresses
of the holders of the Debentures in accordance with the provisions of Section
7.02(b), regardless of the source from which such information was derived, and
that the Trustee shall not be held accountable by reason of mailing any
material pursuant to a request made under Section 7.02(b).
SECTION 7.03. Reports by the Company. The Company covenants:
(a) to file with the Trustee, within 15 days after the
Company is required to file the same with the Commission, copies of
the annual and quarterly reports and of the information, documents,
and other reports (or copies of such portions of any of the foregoing
as the Commission may from time to time by rules and regulations
prescribe) which the Company may be required to file with the
Commission pursuant to Section 13 or Section 15(d) of the Securities
Exchange Act of 1934; or, if the Company is not required to file
information, documents, or reports pursuant to either of said
Sections, then to file with the Trustee and the Commission, in
accordance with rules and regulations prescribed from time to time by
the Commission, such of the supplementary and periodic information,
documents, and reports which may be required pursuant to
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Section 13 of the Securities Exchange Act of 1934 in respect of a
security listed and registered on a national securities exchange as
may be prescribed from time to time in such rules and regulations:
(b) to file with the Trustee and the Commission, in
accordance with rules and regulations prescribed from time to time by
the Commission, such additional information, documents, and reports
with respect to compliance by the Company with the conditions and
covenants provided for in this Indenture as may be required from time
to time by such rules and regulations;
(c) to transmit to the holders of the Debentures, within
30 days after the filing thereof with the Trustee, in the manner and
to the extent provided in Section 7.04(c) with respect to reports
pursuant to Section 7.04(a), such summaries of any information,
documents, and reports required to be filed by the Company pursuant to
Section 7.03(a) and (b) as may be required by rules and regulations
prescribed from time to time by the Commission; and
(d) to furnish to the Trustee annually, within one
hundred twenty days after the close of its fiscal year, a copy of the
consolidated balance sheet of the Company and its consolidated
subsidiaries as at the end of its annual accounting period and a
consolidated profit and loss statement of the Company and its
consolidated subsidiaries for such period, accompanied by the
certificate of a firm of independent public accountants, together with
such additional information concerning the Company as may be
reasonably requested and reasonably deemed necessary by the Trustee in
the conduct of its duties hereunder.
(e) to furnish to the Trustee, not less often than
annually, a brief certificate from the Company's principal executive
officer, principal financial officer, or principal accounting officer
as to his or her knowledge of the Company's compliance with all
conditions and covenants under this Indenture. For the purposes
hereof, such compliance shall be determined without regard to any
period of grace or requirement of notice provided under this
Indenture.
SECTION 7.04. Reports by the Trustee. (a) On or before July 15,
1994, and on or before July 15 in every year thereafter, so long as any
Debentures are outstanding hereunder, the Trustee shall transmit to the holders
of the Debentures, as hereinafter in this Section 7.04 provided, a brief report
dated as of the preceding May 15 with respect to any of the following events
which may have occurred within the previous twelve months (but if no such event
has occurred within such period no report need be transmitted):
(1) any change in the eligibility of the Trustee under
Section 8.07 and the qualifications of the Trustee under Section 8.06;
(2) the creation or any material change to a relationship
specified in clauses (1) through (10) of Section 8.06(c);
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(3) the character and amount of any advances (and if the
Trustee elects so to state, the circumstances surrounding the making
thereof) made by the Trustee (as such) which remain unpaid on the date
of such report, and for the reimbursement of which it claims or may
claim a lien or charge, prior to that of the Debentures, on any
property or funds held or collected by the Trustee, except that the
Trustee shall not be required (but may elect) to report such advances
if such advances so remaining unpaid aggregate not more than 1/2 of
1% of the principal amount of the Debentures outstanding on the date
of such report;
(4) the amount, interest rate, and maturity date of all
other Indebtedness owing by the Company (or by any other obligor on
the Debentures) to the Trustee in its individual capacity, on the date
of such report, with a brief description of any property held as
collateral security therefor, except an indebtedness based upon a
creditor relationship arising in any manner described in clauses (2),
(3), (4), or (6) of Section 8.11(b) hereof;
(5) any change to the property and funds, if any,
physically in the possession of the Trustee in its capacity as such on
the date of such report;
(6) any action taken by the Trustee in the performance of
its duties under this Indenture which has not previously been reported
and which in the opinion of the Trustee materially affects the
Debentures, except action in respect of a breach, notice of which has
been or is to be withheld by it in accordance with the provisions of
Section 6.07; and
(7) any additional issue of Debentures under this
Indenture which the Trustee has not previously reported.
(b) The Trustee shall transmit to the holders of the Debentures,
as provided in Section 7.04(c), a brief report with respect to the character
and amount of any advances (and if the Trustee elects so to state, the
circumstances surrounding the making thereof) made by the Trustee (as such)
since the date of the last report transmitted pursuant to the provisions of
Section 7.04(a) (or if no such report has yet been so transmitted, since the
date of execution of this Indenture), for the reimbursement of which the
Trustee claims or may claim a lien or charge, prior to that of the Debentures,
on property or funds held or collected by the Trustee, and which have not
previously been reported pursuant to this Section 7.04(b), except that the
Trustee shall not be required (but may elect) to report such advances if at the
time of the last of such advances all advances remaining unpaid aggregate 10%
or less of the principal amount of Debentures outstanding at such time, such
report to be transmitted within 90 days after such time.
(c) Reports pursuant to this Section 7.04 shall be transmitted by
mail:
(1) to all registered holders of Debentures, as the names
and addresses of such holders appear upon the registration books of
the Company;
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(2) to such holders of Debentures as have, within the two
years preceding such transmission, filed their names and addresses
with the Trustee for that purpose; and
(3) except in the case of reports pursuant to Section
7.04(b), to each holder of a Debenture whose name and address is
preserved at the time by the Trustee, as provided in Section 7.02(a).
(d) A copy of each such report pursuant to this Section 7.04
shall, at the time of such transmission to holders of the Debentures, be
furnished to the Company and be filed by the Trustee with each stock exchange,
if any, upon which the Debentures are listed and also with the Commission. The
Company agrees to notify the Trustee when and as the Debentures become listed
on any stock exchange.
ARTICLE EIGHT
THE TRUSTEE
SECTION 8.01. Acceptance of Trusts. The Trustee hereby accepts the
trusts imposed upon it by this Indenture and covenants and agrees to perform
the same as herein expressed.
SECTION 8.02. Duties and Liabilities of Trustee. In case an Event
of Default has occurred (which has not been cured or waived), the Trustee shall
exercise such of the rights and powers vested in it by this Indenture, and use
the same degree of care and skill in their exercise, as a prudent man would
exercise or use under the circumstances in the conduct of his own affairs.
No provision of this Indenture shall be construed to relieve the
Trustee from liability for negligent action, negligent failure to act, or
wilful misconduct thereof, except that:
(a) prior to the occurrence of an Event of Default and
after the curing or waiving of all Events of Default which may have
occurred:
(1) the duties and obligations of the Trustee
shall be determined solely by the express provisions of this
Indenture, and the Trustee shall not be liable except for the
performance of such duties and obligations as are specifically
set forth in this Indenture, and no implied covenants or
obligations shall be read into this Indenture against the
Trustee; and
(2) in the absence of bad faith on the part of
the Trustee, the Trustee may conclusively rely, as to the
truth of the statements and the correctness of the opinions
expressed therein, upon any certificates or opinions furnished
to the Trustee and conforming to the requirements of this
Indenture; but in the case of any such certificates or
opinions which by any provision hereof are specifically
required to be furnished to the Trustee, the Trustee shall
examine the same to determine whether or not they conform to
the requirements of this Indenture;
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(b) the Trustee shall not be liable for any error of
judgment made in good faith by a Responsible Officer, unless it shall
be proved that the Trustee was negligent in ascertaining the pertinent
facts; and
(c) the Trustee shall not be liable with respect to any
action taken or omitted to be taken by it in good faith in accordance
with the direction of the holders of a majority in aggregate principal
amount of the Debentures at the time outstanding relating to the time,
method and place of conducting any proceeding for any remedy available
to the Trustee or exercising any trust or power conferred upon it
under this Indenture.
Notwithstanding the foregoing, if the Company shall fail to perform any of its
covenants under this Indenture, the Trustee may, but shall not be under any
duty to, at any time and from time to time, make advances to effect performance
of any such covenants on behalf of the Company. All moneys so advanced or paid
pursuant to this Section 8.02, together with interest thereon at the Trustee's
prime lending rate which is in effect at that time, shall be repaid by the
Company upon demand.
No provision of this Indenture shall require the Trustee to expend or
risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder, or in the exercise of its rights or
powers, if there shall be reasonable grounds for believing that repayment of
such funds or adequate indemnity against such risk or liability is not
reasonably assured.
SECTION 8.03. Certain Rights and Duties of the Trustee. Except as
otherwise provided in Section 8.02:
(a) the Trustee, in acting or refraining from acting, may
rely and shall be protected when relying upon any resolution,
certificate, statement, instrument, opinion, report, notice, request,
consent, order, trust certificate, guaranty or other paper or document
believed by it to be genuine and to have been signed or presented by
the proper party or parties;
(b) whenever in the administration of this Indenture the
Trustee shall deem it desirable that a matter be proved or established
prior to taking, suffering or omitting any action hereunder, the
Trustee (unless other evidence be herein specifically prescribed) may,
in the absence of bad faith on its part, rely on an Officers'
Certificate;
(c) the Trustee may consult with counsel, and the written
advice of such counsel or any Opinion of Counsel shall be full and
complete authorization and protection in respect of any action taken,
suffered or omitted by it hereunder in good faith and in reliance
thereon;
(d) the Trustee shall be under no obligation to exercise
any of the rights or powers vested in it by this Indenture at the
request, order or direction of any of the holders of the Debentures,
pursuant to the provisions of this Indenture, unless such
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holders shall have offered to the Trustee reasonable security or
indemnity against the costs, expenses and liabilities which might be
incurred by the Trustee therein or thereby;
(e) the Trustee shall not be liable for any action taken,
suffered or omitted by it in good faith and believed by it to be
authorized or within the discretion or rights or powers conferred upon
it by this Indenture; and
(f) the Trustee shall not be bound to make any
investigation into the facts or matters stated in any resolution,
certificate, statement, instrument, opinion, report, notice, request,
direction, consent, order, bond, debenture or any other paper
document, but the Trustee, in its discretion, may make such further
inquiry or investigation into such facts or matters as it may see fit,
and, if the Trustee shall determine to make such further inquiry or
investigation, it shall be entitled to examine the books, records and
premises of the Company personally or by agent or attorney.
SECTION 8.04. Moneys to Be Held in Trust. Any money at any time
paid to or held by the Trustee or any paying agent hereunder shall, until used
or applied by the Trustee or the paying agent as herein provided, be held in
trust for the purposes for which it is received, but may be carried by the
Trustee or the paying agent on deposit with itself and need not be segregated
from other funds except to the extent required by law, and the Trustee and the
paying agent shall be under no liability for interest upon any such money
except as otherwise agreed with the Company.
The Company shall be entitled to receive any interest allowed as
provided in this Section 8.04. The Trustee shall pay to the Company any
interest to which it is entitled upon application and upon receipt of an
Officers' Certificate stating that there exists no Event of Default and no
condition, event or act which, with notice or lapse of time or both, would
constitute an Event of Default hereunder.
SECTION 8.05. Trustee May Perform Duties by Agents; Reimbursement
of Expenses; Holding of Debentures. The Trustee may execute any of the trusts
or powers hereunder or perform any duties hereunder either directly or by or
through agents or attorneys, and the Trustee shall not be responsible for any
misconduct or negligence on the part of any agent or attorney appointed with
due care by it hereunder. The Trustee shall not be responsible in any way for
the recitals herein contained or for the execution or validity of this
Indenture or any indenture supplemental hereto or of the Debentures (except for
its own execution thereof). The Trustee makes no representation as to the
validity or sufficiency of this Indenture or of the Debentures. The Trustee
shall not be accountable for the use or application by the Company of
Debentures or the proceeds thereof.
The Trustee shall be entitled to receive payment of all of its
reasonable expenses, advances and disbursements hereunder, including reasonable
compensation of the Trustee's agents, attorneys, counsel and all other persons
not regularly in its employ, and to receive reasonable compensation for all
services rendered in the execution of the trusts hereby created (which
compensation shall not be limited by any provision of law in regard to the
compensation of a trustee of an express trust), all of which shall be paid by
the Company. The Company also
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covenants and agrees to indemnify the Trustee for, and to hold it harmless
against, any loss, liability or expense incurred without negligence or bad
faith on the part of the Trustee, arising out of or in connection with the
acceptance or administration of this trust, including the costs and expenses of
defending itself against any claim of liability in the premises. The
obligations of the Company under this Section 8.05 to compensate the Trustee
and to pay or reimburse the Trustee for such expenses, disbursements and
advances shall constitute additional indebtedness hereunder. Such additional
indebtedness shall be secured by a lien prior to that of the Debentures upon
all property and funds held or collected by the Trustee as such, except funds
held in trust for the benefit of the holders of particular Debentures.
The Trustee, any paying or authenticating agent, Debenture registrar
or any other agent of the Company, in its individual or any other capacity, may
become the owner or pledgee of Debentures and, subject to Sections 8.06 and
8.11, if operative, may otherwise deal with the Company with the same rights it
would have if it were not Trustee, paying or authenticating agent, Debenture
registrar or such other agent.
SECTION 8.06. Conflicting Interest of Trustee. (a) If the Trustee
has or shall acquire any conflicting interest, as defined in this Section 8.06,
it shall unless such conflicting interest has been cured or duly waived or
otherwise eliminated, within 90 days after ascertaining that it has such
conflicting interest, either eliminate such conflicting interest or resign in
the manner and with the effect specified in Section 8.08 and the Company shall
take prompt steps to have a successor appointed in the manner provided herein.
(b) In the event that the Trustee shall fail to comply with the
provisions of Section 8.06(a) the Trustee shall, within 10 days after the
expiration of such 90-day period, transmit notice of such failure to the
holders of the Debentures in the manner and to the extent provided in Section
7.04(c) with respect to reports pursuant to Section 7.04(a).
(c) For the purposes of this Section 8.06 the Trustee shall be
deemed to have a conflicting interest if:
(1) the Trustee is trustee under another indenture under
which any other securities, or certificates of interest or
participation in any other securities, of the Company are outstanding
or is trustee for more than one outstanding series of securities, as
hereafter defined, under a single indenture under which the Company is
an obligor, unless such other indenture is a collateral trust
indenture under which the only collateral consists of Debentures
issued under this Indenture, provided that there shall be excluded
from the operation of this paragraph any other series under this
Indenture or any indentures under which other securities, or
certificates of interest or participation in other securities, of the
Company are outstanding, if (A) this Indenture and such other
indenture or indentures (and all series of securities issuable
thereunder) are wholly unsecured and rank equally and such other
indenture or indentures (and such series) are hereafter qualified
under the Trust Indenture Act of 1939, unless the Commission shall
have found and declared by order pursuant to subsection (b) of Section
305 or subsection (c) of Section 307 of the Trust Indenture Act of
1939 that differences exist between the provision of this Indenture
(or such series) and the provisions of such other indenture or
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indentures (or such series) which are so likely involve a material
conflict of interest as to make it necessary in the public interest or
for the protection of investors to disqualify the Trustee from acting
as trustee under both this Indenture and such other indenture or
indentures, or (B) the Company shall have sustained the burden of
proving, on application to the Commission and after opportunity for
hearing thereon, that trusteeship under this Indenture and such other
indenture or indentures or under more than one outstanding series
under a single indenture is not so likely to involve a material
conflict of interest as to make it necessary in the public interest or
for the protection of investors to disqualify the Trustee from acting
as such under one of such indentures or with respect to such series;
(2) the Trustee or any of its directors or executive
officers is an underwriter for an obligor upon the Debentures;
(3) the Trustee directly or indirectly controls or is
directly or indirectly controlled by or is under direct or indirect
common control with the Company or an underwriter for an obligor upon
the Debentures;
(4) the Trustee or any of its directors or executive
officers is a director, officer, partner, employee, appointee, or
representative of the Company, or of an underwriter (other than the
Trustee itself) for the Company who is currently engaged in the
business of underwriting, except that (A) one individual may be a
director or an executive officer, or both, of the Trustee and a
director or an executive officer, or both, of the Company, but may not
be at the same time an executive officer of both the Trustee and the
Company, (B) if and so long as the number of directors of the Trustee
in office is more than nine, one additional individual may be a
director or an executive officer, or both, of the Trustee and a
director of the Company and (C) the Trustee may be designated by the
Company or by any underwriter for the Company to act in the capacity
of transfer agent, registrar, custodian, paying agent, fiscal agent,
escrow agent, or depositary, or in any other similar capacity, or,
subject to the provisions of clause (1) of this Section 8.06(c), to
act as trustee, whether under an indenture or otherwise;
(5) 10% or more of the voting securities of the Trustee
is beneficially owned either by the Company or by any director,
partner, or executive officer thereof, or 20% or more of such voting
securities is beneficially owned, collectively, by any two or more of
such persons; or 10% or more of the voting securities of the Trustee
is beneficially owned either by an underwriter for the Company or by
any director, partner, or executive officer thereof, or is
beneficially owned, collectively, by any two or more such persons;
(6) any change to the Trustee is the beneficial owner of,
or holds as collateral security for an obligation which is in default,
(A) 5% or more of the voting securities, or 10% or more of any other
class of security, of the Company, not including the Debentures and
securities issued under any other indenture under which the Trustee is
also trustee or (B) 10% or more of any class of security of an
underwriter for the Company;
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(7) the Trustee is the beneficial owner of, or holds as
collateral security for an obligation which is in default, 5% or more
of the voting securities of any person who, to the knowledge of the
Trustee, owns 10% or more of the voting securities of, or controls
directly or indirectly or is under direct or indirect common control
with, the Company;
(8) the Trustee is the beneficial owner of, or holds as
collateral security for an obligation which is in default, 10% or more
of any class of security of any person who, to the knowledge of the
Trustee, owns 50% or more of the voting securities of the Company;
(9) the Trustee owns, on May 15th in any calendar year,
in the capacity of executor, administrator, testamentary or inter
vivos trustee, guardian, committee or conservator, or in any other
similar capacity, an aggregate of 25% or more of the voting
securities, or of any class of security, of any person, the beneficial
ownership of a specified percentage of which would have constituted a
conflicting interest under clause (6), (7) or (8) of this Section
8.06(c). As to any such securities of which the Trustee acquired
ownership through becoming executor, administrator, or testamentary
trustee of an estate which included them, the provisions of the
preceding sentence shall not apply, for a period of two years from the
date of such acquisition, to the extent that such securities included
in such estate do not exceed 25% of such voting securities or 25% of
any such class of security. Promptly after May 15th in each calendar
year, the Trustee shall make a check of its holdings of such
securities in any of the above-mentioned capacities as of such May
15th. If the Company fails to make payment in full of the principal
of, or the premium, if any, or interest, on, any of the Debentures
when and as the same become due and payable, and such failure
continues for 30 days thereafter, the Trustee shall make a prompt
check of its holdings of such securities in any of the above-mentioned
capacities as of the date of the expiration of such 30-day period, and
after such date, notwithstanding the foregoing provisions of this
paragraph, all such securities so held by the Trustee, with sole or
joint control over such securities vested in it, shall, but only so
long as such failure shall continue, be considered as though
beneficially owned by the Trustee for the purposes of clauses (6), (7)
and (8) of this Section 8.06(c); or
(10) except under the circumstances described in clauses
(1), (3), (4), (5) or (6) of Section 8.11(b), the Trustee shall become
a creditor of the Company.
For the purposes of Section 8.06(c) and Section 6.06 the term "series
of securities" or "series" means a series, class or group of securities
issuable under an indenture pursuant to whose terms holders of one such series
may vote to direct the Trustee, or otherwise take action pursuant to a vote of
such holders, separately from holders of another such series; provided, that
"series of securities" or "series" shall not include any series of securities
issuable under an indenture if all such series rank equally and are wholly
unsecured.
The specification of percentages in clauses (5) to (9), inclusive, of
this Section 8.06(c) shall not be construed as indicating that the ownership of
such percentages of the securities of
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a person is or is not necessary or sufficient to constitute direct or indirect
control for the purposes of clause (3) or (7) of this Section 8.06(c).
For the purposes of clauses (6), (7), (8) and (9) of this Section
8.06(c) only, (A) the terms "security" and "securities" shall include only such
securities as are generally known as corporate securities, but shall not
include any note or other evidence of indebtedness issued to evidence an
obligation to repay moneys lent to a person by one or more banks, trust
companies or banking firms, or any certificate of interest or participation in
any such note or evidence of indebtedness; (B) an obligation shall be deemed to
be "in default" when a default in payment of principal shall have continued for
30 days or more and shall not have been cured; and (C) the Trustee shall not be
deemed to be the owner or holder of (i) any security which it holds as
collateral security, as trustee or otherwise, for an obligation which is not in
default as defined in clause (B) above, or (ii) any security which it holds as
collateral security under this Indenture, irrespective of any non-performance
hereunder, or (iii) any security which it holds as agent for collection, or as
custodian, escrow agent, or depositary, or in any similar representative
capacity.
(d) For the purposes of this Section 8.06:
(1) The term "underwriter" when used with reference to
the Company shall mean every person who, within one year prior to the
time as of which the determination is made, has purchased from the
Company with a view to, or has offered or sold for the Company in
connection with, the distribution of any security of the Company
outstanding at such time, or has participated or has had a direct or
indirect participation in any such undertaking, or has participated or
has had a participation in the direct or indirect underwriting of any
such undertaking, but such term shall not include a person whose
interest was limited to a commission from an underwriter or dealer not
in excess of the usual and customary distributors' or sellers'
commission.
(2) The term "director" shall mean any director of a
corporation, or any individual performing similar functions with
respect to any organization whether incorporated or unincorporated.
(3) The term "person" shall mean an individual, a
corporation, a partnership, an association, a joint-stock company, a
trust, an unincorporated organization, or a government or political
subdivision thereof. As used in this clause (3), the term "trust"
shall include only a trust where the interest or interests of the
beneficiary or beneficiaries are evidenced by a security.
(4) The term "voting security" shall mean any security
presently entitling the owner or holder thereof to vote in the
direction or management of the affairs of a person, or any security
issued under or pursuant to any trust, agreement or arrangement
whereby a trustee or trustees or agent or agents for the owner or
holder of such security are presently entitled to vote in the
direction or management of the affairs of a person.
(5) The term "Company" shall mean any obligor upon the
Debentures.
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(6) The term "executive officer" shall mean the
president, every vice-president, every trust officer, the cashier, the
secretary, and the treasurer of a corporation, and any individual
customarily performing similar functions with respect to any
organization whether incorporated or unincorporated, but shall not
include the chairman of the board of directors as such.
The percentages of voting securities and other securities specified in
this Section 8.06 shall be calculated in accordance with the following
provisions:
(A) A specified percentage of the voting securities of
the Trustee, the Company or any other person referred to in this
Section 8.06 (each of whom is referred to as a "person" in this
paragraph) means such amount of the outstanding voting securities of
such person as entitles the holder or holders thereof to cast such
specified percentage of the aggregate votes which the holders of all
the outstanding voting securities of such person are entitled to cast
in the direction or management of the affairs of such person.
(B) A specified percentage of a class of securities of a
person means such percentage of the aggregate amount of securities of
the class outstanding.
(C) The term "amount," when used in regard to securities,
means the principal amount if relating to evidences of indebtedness,
the number of shares if relating to capital shares, and the number of
units if relating to any other kind of security.
(D) The term "outstanding" means issued and not held by
or for the account of the issuer. The following securities shall not
be deemed outstanding within the meaning of this definition:
(i) securities of an issuer held in a sinking
fund relating to securities of the issuer of the same class;
(ii) securities of an issuer held in a sinking
fund relating to another class of securities of the issuer, if
the obligation evidenced by such other class of securities is
not in default as to principal or interest or otherwise;
(iii) securities pledged by the issuer thereof as
security for an obligation of the issuer not in default as to
principal or interest or otherwise; and
(iv) securities held in escrow if placed in escrow
by the issuer thereof;
provided, however, that any voting securities of an issuer shall be
deemed outstanding if any person other than the issuer is entitled to
exercise the voting rights thereof.
(E) A security shall be deemed to be of the same class as
another security if both securities confer upon the holder or holders
thereof substantially the same rights and privileges, provided,
however, that, in the case of secured evidences of indebtedness, all
of which are issued under a single indenture, differences in the
interest rates or maturity
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dates of various series thereof shall not be deemed sufficient to
constitute such series different classes, and provided, further, that,
in the case of unsecured evidences of indebtedness, differences in the
interest rates or maturity dates thereof shall not be deemed
sufficient to constitute them securities of different classes, whether
or not they are issued under a single indenture.
SECTION 8.07. Eligibility of Trustee. There shall at all times be
a Trustee hereunder which shall be a corporation organized and doing business
under the laws of the United States of America or of any State thereof or of
the District of Columbia, having a combined capital and surplus of at least
$1,500,000, and which is authorized under such laws to exercise corporate trust
powers, is subject to supervision or examination by federal or state authority
and has its principal office and place of business in the State of Texas. If
such corporation publishes reports of condition at least annually, pursuant to
law or to the requirements of the aforesaid supervising or examining authority,
then for the purposes of this Section 8.07, the combined capital and surplus of
such corporation shall be deemed to be its combined capital and surplus as set
forth in its most recent report of condition so published. In case at any
tithe the Trustee shall cease to be eligible in accordance with the provisions
of this Section 8.07, the Trustee shall resign immediately in the manner and
with the effect specified in Section 8.08.
SECTION 8.08. Resignation or Removal of Trustee. (a) The Trustee
may at any time resign by giving written notice of resignation to the Company,
and, in such event, shall also mail notice of such resignation to all holders
of Debentures at their last addresses appearing on the registry books. Any
failure to mail such notice to any one or more debentureholders, or any defect
therein, shall not, however, in any way impair or affect the validity of such
resignation. Upon receiving such notice of resignation, the Company shall
promptly appoint a successor trustee by written instrument, in duplicate,
executed by order of the Board of Directors of the Company, one copy of which
instrument shall be delivered to the Trustee so resigning and one copy to the
successor trustee. If no successor trustee shall have been so appointed and
have accepted appointment within 30 days after the giving of such notice of
resignation, the resigning trustee may petition any court of competent
jurisdiction for the appointment of a successor trustee, or any holder of a
Debenture who has been a bona fide holder of a Debenture or Debentures for at
least six months may, subject to the provisions of Section 6.09, on behalf of
himself and all others similarly situated, petition any such court for the
appointment of a successor trustee. Such court may thereupon, after such
notice, if any, as it may deem proper and prescribe, appoint a successor
trustee.
(b) In case at any time any of the following shall occur:
(1) the Trustee shall fail to comply with the provisions
of Section 8.06(a) after written request therefor by the Company or by
any holder of a Debenture who has been a bona fide holder of a
Debenture or Debentures for at least six months; or
(2) the Trustee shall cease to be eligible in accordance
with the provisions of Section 8.07 and shall fail to resign after
written request therefor by the Company or by any such holder of a
Debenture; or
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(3) the Trustee shall become incapable of acting, or
shall be adjudged a bankrupt or insolvent, or a receiver of the
Trustee or of its property shall be appointed, or any public officer
shall take charge or control of the Trustee or of its property or
affairs for the purpose of rehabilitation, conservation or
liquidation;
then, in any such case, the Company may remove the Trustee, and the Company
shall in such event take prompt steps to appoint a successor trustee by written
instrument, in duplicate, executed by order of its Board of Directors, one copy
of which instrument shall be delivered to the Trustee so removed and one copy
to the successor trustee, or, subject to the provisions of Section 6.09, any
holder of a Debenture who has been a bona fide holder of a Debenture or
Debentures for at least six months may, on behalf of himself and all others
similarly situated, petition any court of competent jurisdiction for the
removal of any Trustee and the appointment of a successor trustee. Such court
may thereupon, after such notice, if any, as it may deem proper and prescribe,
remove the Trustee and appoint a successor trustee.
(c) The holders of a majority in aggregate principal amount of the
Debentures at the time outstanding may at any time remove the Trustee and
appoint a successor trustee by delivering to the Trustee, to the successor
trustee so appointed and to the Company the evidence provided for in Section
9.01 of the action taken by the holders of the Debentures.
(d) Except in the case of a default in the payment of the
principal, premium, if any, or interest on the Debentures, or in payment of any
Sinking Fund payment, the Trustee shall not be required to resign if the
Trustee shall have sustained the burden of proving, on application to the
Commission and after opportunity for hearing, that:
(1) the default under the Indenture may be cured or
waived during a reasonable period and under the procedures described
in the application, and
(2) a stay in the Trustee's duty to resign will not be
inconsistent with the interests of holders of the Debentures. The
filing of such an application shall automatically stay the performance
of the duty to resign until the Commission orders otherwise.
(e) Any resignation or removal of the Trustee and any appointment
of a successor trustee pursuant to any of the provisions of this Section 8.08
shall become effective upon acceptance of appointment by the successor trustee
as provided in Section 8.09.
SECTION 8.09. Acceptance of Appointment by Successor Trustee. Any
successor trustee appointed as provided in Section 8.08 shall execute,
acknowledge and deliver to the Company and to its predecessor trustee an
instrument accepting such appointment hereunder, and thereupon the resignation
or removal of the predecessor trustee shall become effective and such successor
trustee, without any further act, deed or conveyance, shall become vested with
all the title, rights, powers, trusts, duties and obligations of its
predecessor hereunder, with like effect as if originally named as trustee
herein, and every provision hereof applicable to the retiring trustee shall
apply to such successor trustee with like effect as if such successor trustee
had been originally named herein; but, nevertheless, on the written request of
the Company or of the
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successor trustee, upon payment of all amounts then due to it pursuant to this
Indenture, the trustee ceasing to act shall execute and deliver an instrument
transferring to such successor trustee all the rights, trusts and powers of the
trustee so ceasing to act and shall execute and deliver such instruments of
transfer as may be reasonably requested by such successor trustee. Upon
request of any such successor trustee, the Company shall execute any and all
instruments in writing in order to more fully and certainly vest in and confirm
to such successor trustee all such rights, trusts and powers as aforesaid. Any
trustee ceasing to act shall, nevertheless, retain a lien upon all property or
funds held or collected by such trustee to secure any amount then due it
pursuant to the provisions of Section 8.05.
No successor trustee shall accept appointment as provided in this
Section 8.09 unless at the time of such acceptance such successor trustee shall
be qualified under the provisions of Section 8.06 and eligible under the
provisions of Section 8.07.
Upon acceptance of appointment by a successor trustee as provided in
this Section 8.09, such successor trustee shall mail notice of the succession
of such trustee hereunder to the holders of the Debentures at their last
addresses as they shall appear upon the registry books of the Company.
SECTION 8.10. Merger or Consolidation of Trustee. Any corporation
into which the Trustee may be merged or converted or with which it may be
consolidated, or any corporation resulting from any merger or conversion or
consolidation to which the Trustee shall be a party, or any corporation
succeeding to the corporate trust business of the Trustee, shall be the
successor of the Trustee hereunder, provided such corporation shall be
qualified under the provisions of Section 8.06 and eligible under the
provisions of Section 8.07, without the execution or filing of any paper or any
further act on the part of any of the parties hereto, anything herein to the
contrary notwithstanding. In case any Debenture shall have been authenticated,
but not delivered, by the Trustee then in office, any successor by merger,
conversion or consolidation to such authenticating Trustee may adopt such
authentication and deliver the Debenture so authenticated with the same effect
as if such successor trustee had itself authenticated such Debenture.
SECTION 8.11. Limitation on Rights of Trustee as a Creditor. (a)
Subject to the provisions of Section 8.11(b), if the Trustee shall be or shall
become a creditor, directly or indirectly, secured or unsecured, of the Company
within three months prior to a breach, as defined in Section 8.11(c), or
subsequent to such a breach, then, unless and until such breach shall be cured,
the Trustee shall set apart and hold in a special account for the benefit of
the Trustee individually, the holders of the Debentures and the holders of
other indenture securities (as defined in Section 8.11(c)):
(1) an amount equal to any and all reductions in the
amount due and owing upon any claim as such creditor in respect of
principal or interest, effected after the beginning of such three
month period and valid as against the Company and its other creditors,
except any such reduction resulting from the receipt or disposition of
any property described in clause (2) of this Section 8.11(a), or from
the exercise of any right
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of set-off which the Trustee could have exercised if a petition in
bankruptcy had been filed by or against the Company upon the date of
such breach; and
(2) all property received by the Trustee in respect of
any claim as such creditor, either as security therefor, or in
satisfaction or composition thereof, or otherwise, after the beginning
of such three month period, or an amount equal to the proceeds of any
such property, if disposed of, subject, however, to the rights, if
any, of the Company and its other creditors in such property or such
proceeds.
Nothing herein contained, however, shall affect the right of the
Trustee:
(A) to retain for its own account (i) payments made on
account of any such claim by any person (other than the Company) who
is liable thereon, and (ii) the proceeds of the bona fide sale of any
such claim by the Trustee to a third person, and (iii) distributions
made in cash, securities, or other property in respect of claims filed
against the Company in bankruptcy or receivership or in proceedings
for reorganization pursuant to the Federal Bankruptcy Act or
applicable state law;
(B) to realize, for its own account, upon any property
held by it as security for any such claim, if such property was so
held prior to the beginning of such three month period;
(C) to realize, for its own account, but only to the
extent of the claim hereinafter mentioned, upon any property held by
it as security for any such claim, if such claim was created after the
beginning of such three month period and such property was received as
security therefor simultaneously with the creation thereof, and if the
Trustee shall sustain the burden of proving that at the time such
property was so received the Trustee had no reasonable cause to
believe that a breach as defined in Section 8.11(c) would occur within
three months; or
(D) to receive payment on any claim referred to in
paragraph (B) or (C), against the release of any property held as
security for such claim as provided in paragraph (B) or (C), as the
case may be, to the extent of the fair value of such property.
For the purposes of paragraphs (B), (C) and (D), property substituted
after the beginning of such three-month period for property held as security at
the time of such substitution shall, to the extent of the fair value of the
property released, have the same status as the property released, and, to the
extent that any claim referred to in any of such paragraphs is created in
renewal of or in substitution for or for the purpose of repaying or refunding
any pre-existing claim of the Trustee as such creditor, such claim shall have
the same status as such pre-existing claim.
If the Trustee shall be required to account, the funds and property
held in such special account and the proceeds thereof shall be apportioned
between the Trustee, the holders of the Debentures and the holders of other
indenture securities in such manner that the Trustee, the holders of the
Debentures and the holders of other indenture securities realize, as a result
of
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payments from such special account and payments of dividends on claims filed
against the Company in bankruptcy or receivership or in proceedings for
reorganization pursuant to the Federal Bankruptcy Act or applicable state law,
the same percentage of their respective claims, figured before crediting to the
claim of the Trustee anything on account of the receipt by it from the Company
of the funds and property in such special account and before crediting to the
respective claims of the Trustee, the holders of the Debentures and the holders
of other indenture securities dividends on claims filed against the Company in
bankruptcy or receivership or in proceedings for reorganization pursuant to the
Federal Bankruptcy Act or applicable state law, but after crediting thereon
receipts on account of the indebtedness represented by their respective claims
from all sources other than from such dividends and from the funds and property
so held in such special account. As used in this paragraph, with respect to
any claim, the term "dividends" shall include any distribution with respect to
such claims, in bankruptcy or receivership or in proceedings for reorganization
pursuant to the Federal Bankruptcy Act or applicable state law, whether such
distribution is made in cash, securities, or other property, but shall not
include any such distribution with respect to the secured portion, if any, of
such claim. The court in which such bankruptcy, receivership, or proceedings
for reorganization is pending shall have jurisdiction (i) to apportion between
the Trustee, the holders of the Debentures and the holders of other indenture
securities, in accordance with the provisions of this paragraph, the funds and
property held in such special account and the proceeds thereof, or (ii) in lieu
of such apportionment, in whole or in part, to give to the provisions of this
paragraph due consideration in determining the fairness of the distributions to
be made to the Trustee, the holders of the Debentures and the holders of other
indenture securities with respect to their respective claims, in which event it
shall not be necessary to liquidate or to appraise the value of any securities
or other property held in such special account or as security for any such
claim, or to make a specific allocation of such distributions as between the
secured and unsecured portions of such claims, or otherwise to apply the
provisions of this paragraph as a mathematical formula.
Any Trustee who has resigned or been removed after the beginning of
such three month period shall be subject to the provisions of this Section
8.11(a) as though such resignation or removal had not occurred. If any Trustee
has resigned or been removed prior to the beginning of such three month period,
it shall be subject to the provisions of this Section 8.11(a) if and only if
the following conditions exist:
(i) the receipt of property or reduction of claim, which
would have given rise to the obligation to account, if such Trustee
had continued as trustee, occurred after the beginning of such three
months' period; and
(ii) such receipt of property or reduction of claim
occurred within three months after such resignation or removal.
(b) There shall be excluded from the operation of Section 8.11(a)
a creditor relationship arising from:
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(1) the ownership or acquisition of securities issued
under any indenture, or any security or securities having a maturity
of one year or more at the time of acquisition by the Trustee;
(2) advances authorized by a receivership or bankruptcy
court of competent jurisdiction, or by this Indenture, for the purpose
of preserving any property which shall at any time be subject to the
lien of this Indenture or of discharging tax liens or other prior
liens or encumbrances thereon, if notice of such advance and of the
circumstances surrounding the making thereof is given to the holders
of the Debentures at the time and in the manner provided in this
Indenture;
(3) disbursements made in the ordinary course of business
in the capacity of trustee under an indenture, transfer agent,
registrar, custodian, paying agent, fiscal agent or depositary or
other similar capacity;
(4) an indebtedness created as a result of services
rendered or premises rented: or an indebtedness created as a result of
goods or securities sold in a cash transaction as defined in Section
8.11(c);
(5) the ownership of stock or of other securities of a
corporation organized under the provisions of Section 25(a) of the
Federal Reserve Act, as amended, which is directly or indirectly a
creditor of the Company; or
(6) the acquisition, ownership, acceptance or negotiation
of any drafts, bills of exchange, acceptances or obligations which
fall within the classification of self-liquidating paper as defined in
Section 8.11(c).
(c) As used in this Section 8.11:
(1) The term "breach" shall mean any failure to make
payment in full of the principal of or interest on any of the
Debentures or upon the other indenture securities when and as such
principal or interest becomes due and payable.
(2) The term "other indenture securities" shall mean
securities upon which the Company is an obligor (as defined in the
Trust Indenture Act of 1939) outstanding under any other indenture (a)
under which the Trustee is also trustee, (b) which contains provisions
substantially similar to the provisions of this Section 8.11, and (c)
under which a breach exists at the time of the apportionment of the
funds and property held in such special account.
(3) The term "cash transaction" shall mean any
transaction in which full payment for goods or securities sold is made
within seven days after delivery of the goods or securities in
currency or in checks or other orders drawn upon banks or bankers and
payable upon demand.
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(4) The term "self-liquidating paper" shall mean any
draft, bill of exchange, acceptance or obligation which is made,
drawn, negotiated or incurred by the Company for the purpose of
financing the purchase, processing, manufacture, shipment, storage or
sale of goods, wares or merchandise and which is secured by documents
evidencing title to, possession of, or a lien upon, the goods, wares
or merchandise or the receivables or proceeds arising from the sale of
the goods, wares or merchandise previously constituting the security,
provided the security is received by the Trustee simultaneously with
the creation of the creditor relationship with the Company arising
from the making, drawing, negotiating or incurring of the draft, bill
of exchange, acceptance or obligation.
(5) The term "Company" shall mean any obligor upon the
Debentures.
SECTION 8.12. Paying Agents. The Company shall appoint a paying
agent and shall cause such paying agent to execute and deliver to it an
instrument in which such agent shall agree with the Trustee, subject to the
provisions of this Section 8.12:
(a) that it will hold all sums held by it as such agent
for the payment of the principal of, and the premium, if any, or
interest on, the Debentures (whether such sums have been paid to it by
the Company or by any other obligor on the Debentures) in trust for
the benefit of the holders of the Debentures;
(b) that it will at any time during the continuance of
any Event of Default specified in Section 6.01, upon written request
from the Trustee, deliver to the Trustee all sums so held in trust by
it; and
(c) that it will give the Trustee notice of any failure
of the Company (or by any other obligor on the Debentures) in the
payment of any instalment of the principal of, or the premium, if any,
on or interest on, the Debentures when the same shall be due and
payable.
The Company initially appoints Trust Company of Texas as paying agent
and registrar hereunder. So long as any of the Debentures shall remain
outstanding, the Trustee shall act as paying agent whenever there is no other
paying agent duly appointed and acting. Any such paying agent shall have a
place of business in the State of Texas and all sums held or delivered by it
hereunder shall be held or delivered by it at or from such place of business.
SECTION 8.13 Authenticating Agent. If the Company so requests,
the Trustee shall appoint an Authenticating Agent for the Debentures which (a)
shall be a corporation organized and doing business under the laws of the
United States or of any State thereof or of the District of Columbia, (b) shall
have a combined capital and surplus and undivided profits of at least
$4,000,000, (c) shall be authorized to exercise corporate trust powers and be
subject to supervision or examination by federal or state authority, and (d)
shall have its principal corporate trust office in the State of Texas in such
city as the Company requests, and all Debentures authenticated or delivered by
it hereunder shall be authenticated or delivered by it at or from such office.
The Authenticating Agent shall be appointed by the Trustee by an instrument in
writing, shall be subject in all respects to the direction of the Trustee, and
may be removed at
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any time by the Trustee by notice in writing, but upon any such removal the
Trustee shall forthwith (if the Company requests) appoint a successor
Authenticating Agent. Any Debenture shall be sufficiently authenticated by the
Trustee if the certificate of authentication is executed on behalf of the
Trustee either by its authorized officer or by its Authenticating Agent by an
authorized officer of said Authenticating Agent. Any delivery by the Trustee
of authenticated Debentures provided for herein shall be sufficiently made if
such delivery is made on behalf of the Trustee by its Authenticating Agent.
Any Authenticating Agent by the acceptance of its appointment shall be
deemed to have agreed with the Trustee that: it will perform and carry out the
duties of an Authenticating Agent as herein set forth, including, among other
things, the duties to authenticate and deliver Debentures when presented to it
in connection with exchanges, registrations of transfer or redemptions thereof
it will furnish from time to time as requested by the Trustee appropriate
records of all transactions carried out by it as Authenticating Agent and will
furnish the Trustee such other information and reports as the Trustee may
reasonably require; it is eligible for appointment as Authenticating Agent
under this Section 8.13 and will notify the Trustee promptly if it shall cease
to be so qualified; and it will indemnify the Trustee against any loss,
liability or expense incurred by the Trustee and will defend any claim asserted
against the Trustee by reason of any act or failure to act of the
Authenticating Agent but it shall have no liability for any action taken by it
at the specific written direction of the Trustee.
ARTICLE NINE
CONCERNING THE HOLDERS OF DEBENTURES
SECTION 9.01. Action By Debentureholders. Whenever in this
Indenture it is provided that the holders of a specified percentage in
aggregate principal amount of the Debentures may take any action (including the
making of any demand or request, the giving of any notice, consent or waiver or
the taking of any other action), the fact that at the time of taking any such
action the holders of such specified percentage have joined therein may be
evidenced (a) by any instrument or any number of instruments of similar tenor
executed by holders of Debentures in person or by agent or proxy appointed in
writing, or (b) by the record of the holders of Debentures voting in favor
thereof at any meeting of holders of Debentures duly called and held in
accordance with the provisions of Article Ten, or (c) by a combination of such
instrument or instruments and any such record of such a meeting of holders of
Debentures.
SECTION 9.02. Proof of Execution of Instruments and of Holding of
Debentures. Subject to the provisions of Section 8.02 and 10.05, proof of the
execution of any instrument by a holder of Debentures or his agent or proxy and
proof of the holding by any person of any of the Debentures shall be sufficient
if made in the following manner:
(a) The fact and date of the execution by any such person
of any instrument may be proved by the certificate of any notary
public or other officer of any jurisdiction authorized to take
acknowledgments of deeds to be recorded in such jurisdiction that the
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person executing such instrument acknowledged to him the execution
thereof, or by an affidavit of a witness to such execution sworn to
before any such notary or other such officer. Such certificate or
affidavit shall also constitute sufficient proof of the authority of
the person executing any instrument tn cases where Debentures are not
held by persons in their individual capacities.
(b) The fact and date of the execution of any such
instrument may also be proved in any other manner which the Trustee
deems sufficient.
(c) The ownership of Debentures shall be proved by the
register of such Debentures or by a certificate of the registrar
thereof.
The Trustee may require such additional proof of any matter referred
to in this Section 9.02 as it shall deem necessary.
The record of any meeting of holders of Debentures shall be proved in
the manner provided in Section 10.06.
SECTION 9.03 Debentures Owned by Company Deemed Not Outstanding.
In determining whether the holders of the requisite principal amount of the
Debentures have concurred in any direction, request, consent or waiver under
this Indenture, other than directions, request, consents and waivers referred
to in Sections 6.01, 6.06 or 8.02(c), Debentures which are owned by the Company
or by any other obligor on the Debentures or by any person directly or
indirectly controlled by the Company or any such other obligor shall be
disregarded and deemed not to be outstanding for the purpose of any such
determination, except that for the purpose of determining whether the Trustee
shall be protected in relying on any such direction, request, consent or
waiver, only Debentures which the Trustee knows are so owned shall be
disregarded.
In determining whether the holders of the requisite principal amount
of the Debentures have concurred in any direction, request, consent or waiver
under Sections 6.01, 6.06 or 8.02(c) of this Indenture, Debentures which are
owned by the Company or by any other obligor on the Debentures or by any person
directly or indirectly controllIng or controlled by, or under direct or
indirect common control with, the Company or any such other obligor shall be
disregarded and deemed not to be outstanding for the purpose of any such
determination, except that for the purpose of determining whether the Trustee
shall be protected in relying on any such direction, request, consent or
waiver, only Debentures which the Trustee knows are so owned shall be
disregarded.
SECTION 9.04 Revocation of Consents; Future Holders Bound. At any
time prior to (but not after) the evidencing to the Trustee, as provided in
Section 9.01, of the taking of any action by the holders of the percentage in
aggregate principal amount of the Debentures specified in this Indenture in
connection with such action, any holder of a Debenture which is shown by the
evidence to be included in the Debentures the holders of which have consented
to such action may, by filing written notice with the Trustee at its principal
office and upon proof of holding as provided in Section 9.02, revoke such
action so far as concerns such Debenture. Except as
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aforesaid any such action taken by the holder of any Debenture shall be
conclusive and binding upon such holder and upon all future holders and owners
of such Debenture and of any Debenture issued in exchange or substitution
therefor, irrespective of whether or not any notation in regard thereto is made
upon such Debenture. Any action taken by the holders of the percentage in
aggregate principal amount of the Debentures specified in this Indenture in
connection with such action shall be conclusive and binding upon the Company,
the Trustee and the holders of all the Debentures.
SECTION 9.05. Obligation to Disclose Beneficial Ownership of
Debentures. All Debentures shall be held and owned upon the express condition
that, upon demand of any regulatory agency having jurisdiction over the
Company, and pursuant to law or regulation empowering such agency to assert
such demand, any registered holder shall disclose to such agency the identity
of the beneficial owner of all Debentures held thereby.
ARTICLE TEN
MEETINGS OF HOLDERS OF DEBENTURES
SECTION 10.01 Purposes of Meetings. A meeting of holders of
Debentures may be called at any time and from time to time pursuant to the
provisions of this Article Ten for any of the following purposes:
(a) to give any notice to the Company or to the Trustee,
or to give any direction to the Trustee, or to waive any non-
performance hereunder and its consequences, or to take any other
action authorized to be taken by holders of Debentures, pursuant to
any of the provisions of Article Six;
(b) to remove the Trustee and appoint a successor trustee
pursuant to the provisions of Section 8.08;
(c) to consent to the execution of an indenture or
indentures supplemental hereto pursuant to the provisions of Section
11.02; or
(d) to take any other action authorized to be taken by or
on behalf of the holders of any specified aggregate principal amount
of the Debentures under any other provision of this Indenture or under
applicable law.
SECTION 10.02. Call of Meetings by Trustee. The Trustee may at any
time call a meeting of holders of Debentures to take any action specified in
Section 10.01, to be held at such time and at such place in the State of Texas,
as the Trustee shall determine. Notice of every meeting of the holders of
Debentures, setting forth the time and the place of such meeting and in general
terms the action proposed to be taken at such meeting, shall be mailed by the
Trustee to the holders of the Debentures, not less than 15 nor more than 90
days prior to the date fixed for the meeting, at their last addresses as they
shall appear upon the registry books.
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SECTION 10.03 Call of Meetings by Company or Debentureholders. In
case at any time the Company, pursuant to a resolution of its Board of
Directors, or the holders of at least 10% in aggregate principal amount of the
Debentures then outstanding, shall have requested the Trustee to call a meeting
of holders of Debentures to take any action authorized in Section 10.01, by
written request setting forth in reasonable detail the action proposed to be
taken at the meeting, and the Trustee shall not have mailed notice of such
meeting within 20 days after receipt of such request, then the Company or the
holders of the Debentures in the amount above specified may determine the time
and the place in the State Texas, for such meeting and may call such meeting by
mailing notice thereof as provided in Section 10.02.
SECTION 10.04 Persons Entitled to Vote at Meeting. To be entitled
to vote at any meeting of holders of Debentures a person shall (a) be a holder
of one or more Debentures or (b) be a person appointed by an instrument in
writing as proxy by a holder of one or more Debentures. The only persons who
shall be entitled to be present or speak at any meeting of the holders of the
Debentures shall be the persons entitled to vote at such meeting and their
counsel and any representatives of the Trustee and its counsel and any
representatives of the Company and its counsel.
SECTION 10.05 Regulations for Meeting. Notwithstanding any other
provisions of this Indenture, the Trustee may make such reasonable regulations
as it may deem advisable for any meeting of holders of the Debentures, in
regard to the appointment of proxies, in regard to the proof of the holding of
Debentures and in regard to the appointment and duties of inspectors of votes,
the submission and examination of proxies and other evidence of the right to
vote, and such other matters concerning the conduct of the meeting as it shall
think fit. Except as otherwise permitted or required by any such regulations,
the holding of Debentures shall be proved in the manner specified in Section
9.02 and the appointment of any proxy shall be proved in the manner specified
in said Section 9.02 or by having the signature of the person executing the
proxy witnessed or guaranteed by any bank, banker, trust company or Texas Stock
Exchange, Inc. member firm satisfactory to the Trustee.
The Trustee shall, by an instrument in writing, appoint a temporary
chairman of the meeting, unless the meeting shall have been called by the
Company or by holders of the Debentures as provided in Section 10.03, in which
case the Company or the holders of the Debentures calling the meeting, as the
case may be, shall in like manner appoint a temporary chairman. A permanent
chairman and a permanent secretary of the meeting shall be elected by vote of
the holders of a majority in principal amount of the Debentures represented at
the meeting and entitled to vote.
Subject to the provisions of Section 9.03, at any meeting each holder
of Debentures or proxy shall be entitled to one vote for each $1,000 principal
amount of Debentures held or represented by him; provided, however, that no
vote shall be cast or counted at any meeting in respect of any Debenture
challenged as not outstanding and ruled by the chairman of the meeting to be
not outstanding. The chairman of the meeting shall have no right to vote except
as a holder of Debentures or proxy. Any meeting of holders of Debentures duly
called pursuant to the provisions of Sections 10.02 or 10.03 may be adjourned
from time to time, and the meeting may be held as so adjourned without further
notice.
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At any meeting of holders of Debentures, the presence of persons
holding or representing Debentures in an aggregate principal amount sufficient
to take action upon the business for the transaction of which such meeting was
called shall be necessary to constitute a quorum; but, if less than a quorum be
present, the persons holding or representing a majority in aggregate principal
amount of the Debentures represented at the meeting may adjourn such meeting
with the same effect, for all intents and purposes, as though a quorum had been
present.
Section 10.06. Counting Vote and Recording Action of Meeting. The
vote upon any resolution submitted to any meeting of holders of Debentures
shall be by written ballots on which shall be subscribed the signatures of the
holders of Debentures or proxies. The permanent chairman of the meeting shall
appoint two inspectors of votes who shall count all votes cast at the meeting
for or against any resolution and who shall make and file with the secretary of
the meeting their verified written reports in duplicate of all votes cast at
the meeting. A record in duplicate of the proceedings of each meeting of
holders of Debentures shall be prepared by the secretary of the meeting, and
there shall be attached to said record the original reports of the inspectors
of votes on any vote by ballot taken thereat and affidavits by one or more
persons having knowledge of the facts, setting forth a copy of the notice of
the meeting and showing that said notice was mailed as provided in Section
10.02. If requested by the Company the record shall show the serial numbers of
the Debentures voting in favor of or against any resolution. The record shall
be signed and verified by the permanent chairman and secretary of the meeting,
and one of the duplicates shall be delivered to the Company and the other to
the Trustee to be preserved by the Trustee, the latter to have attached thereto
the ballots voted at the meeting.
Any record so signed and verified shall be conclusive evidence of the
matters therein stated.
SECTION 10.07 No Delay of Rights by Meeting. Nothing in this
Article Ten contained shall be deemed or construed to authorize or permit, by
reason of any call of a meeting of holders of Debentures or any rights
expressly or impliedly conferred hereunder to make such call, any hindrance or
delay in the exercise of any right or rights conferred upon or reserved to the
Trustee or to the holders of Debentures under any of the provisions of this
Indenture or of the Debentures.
ARTICLE ELEVEN
SUPPLEMENTAL INDENTURES
SECTION 11.01 Supplemental Indentures Without Consent of
Debentureholders. Without the consent of the holders of any Debentures, the
Company, when authorized by a resolution of its Board of Directors, and the
Trustee, at any time and from time to time, may enter into one or more
indentures supplemental hereto, in form satisfactory to the Trustee, for any of
the following purposes:
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(a) to evidence the succession of another corporation to
the Company, and the assumption by any such successor of the covenants
of the Company herein and in the Debentures contained;
(b) to add to the covenants of the Company, for the
benefit of the holders of the Debentures, or to surrender any right or
power herein conferred upon the Company; or
(c) to cure any ambiguity, to correct or supplement any
provision herein or in any supplemental indenture which may be
inconsistent with any other provision herein, or to make any other
provisions with respect to matters or questions arising under this
Indenture which shall not be inconsistent with the provisions of this
Indenture, provided such action shall not adversely affect the
interests of the holders of the Debentures.
The Trustee is hereby authorized to join with the Company in the
execution of any supplemental indenture authorized or permitted by the terms of
this Indenture and to make any further appropriate agreements and stipulations
which may be therein contained, but the Trustee shall not be obligated to enter
into any such supplemental indenture which affects its own rights, duties or
immunities under this Indenture or otherwise.
A supplemental indenture authorized by the provisions of this Section
11.01 may be executed by the Company and the Trustee without the consent of the
holders of any of the Debentures at the time outstanding, notwithstanding any
of the provisions of Section 11.02.
SECTION 11.02 Supplemental Indentures With Consent of
Debentureholders. With the consent (evidenced as provided in Section 9.01) of
the holders of not less than 66 2/3% in aggregate principal amount of the
Debentures at the time outstanding, the Company, when authorized by a
resolution of its Board of Directors, and the Trustee may from time to time and
at any time enter into an indenture or indentures supplemental hereto for the
purpose of adding any provisions to or changing in any manner or eliminating
any of the provisions of this Indenture (including but not limited to those
relating to the Sinking Fund) or of any supplemental indenture or modifying in
any manner the rights or obligations of the holders of the Debentures or of the
Company; provided, however, that no such supplemental indenture shall, without
the consent of the holder of each outstanding Debenture affected thereby:
(a) change the fixed maturity of the principal of any
Debenture or extend the time of payment of interest thereon, or reduce
the principal amount thereof or the interest thereon or any premium
payable upon the redemption thereof, or change the coin or currency in
which any Debenture or the interest thereon is payable, or impair the
right to institute suit for the enforcement of such payment on or
after the fixed maturity or date of payment thereof (or, in the case
of redemption, on or after the date fixed for redemption), or modify
the provisions of this Indenture with respect to subordination of the
Debentures; or
(b) reduce the percentage in principal amount of the
outstanding Debentures, the consent of whose holders is required for
any such supplemental indenture, or the
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consent of whose holders is required for any waiver (of compliance
with certain provisions of this Indenture or certain non- performances
hereunder or their consequences) provided for in this Indenture; or
(c) modify any of the provisions of this Section, except
to increase any such percentage or to provide that certain other
provisions of this Indenture cannot be modified or waived without the
consent of the holder of each outstanding Debenture affected thereby.
Upon the request of the Company, accompanied by a Certified Resolution
authorizing the execution of any such supplemental indenture, and upon the
filing with the Trustee of evidence of the consent of the debentureholders as
aforesaid, the Trustee shall join with the Company in the execution of such
supplemental indenture unless such supplemental indenture affects the Trustee's
own rights, duties or immunities under this Indenture or otherwise, in which
case the Trustee may in its discretion but shall not be obligated to enter into
such supplemental indenture.
It shall not be necessary for the consent of the debentureholders
under this Section 11.02 to approve the particular form of any proposed
supplemental indenture, but it shall be sufficient if such consent shall
approve the substance thereof.
Promptly after the execution by the Company and the Trustee of any
supplemental indenture pursuant to the provisions of this Section 11.02, the
Company shall mail a notice, setting forth in general terms the substance of
such supplemental indenture, to all debentureholders at their addresses as
shown by the register maintained by the Company. Any failure of the Company to
mail such notice, or any defect therein, shall not, however, in any way impair
or affect the validity of any such supplemental indenture.
SECTION 11.03 Effect of Supplemental Indentures. Upon the
execution of any supplemental indenture pursuant to the provisions of this
Article Eleven, this Indenture shall be deemed to be modified and amended in
accordance therewith and the respective rights, limitations of rights,
obligations, duties and immunities under this Indenture of the Trustee, the
Company and the holders of Debentures shall thereafter be determined, exercised
and enforced hereunder subject in all respects to such modifications and
amendments, and all the terms and conditions of any such supplemental indenture
shall be and be deemed to be part of the terms and conditions of this Indenture
for any and all purposes.
SECTION 11.04. Notation on Debentures. Debentures issued and
delivered after the execution of any supplemental indenture pursuant to the
provisions of this Article Eleven, or after any action at a debentureholders'
meeting pursuant to Article Ten, may bear a notation in form approved by the
Trustee as to any matter provided for in such supplemental indenture or as to
any action taken at any such meeting; and, in such case, suitable notation may
be made upon outstanding Debentures after proper presentation and demand. If
the Company shall so determine, new Debentures so modified to conform, in the
opinion of the Trustee and the Board of Directors of the Company, to any
modification of this Indenture contained in any such supplemental indenture, or
any action taken at any such meeting, may be prepared and executed by the
Company and delivered by the Company to the Trustee and thereafter, upon
surrender
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by the holders thereof of outstanding Debentures, the same shall be
authenticated by the Trustee and delivered in exchange for the Debentures then
outstanding, without cost to the holders thereof (subject to the provisions of
Section 2.05), upon surrender of such Debentures; but any such exchange shall
not be necessary to make such modification effective as to outstanding
Debentures.
SECTION 11.05. Officers' Certificate and Opinion of Counsel to the
Trustee. The Trustee subject to the provisions of Section 8.02, may receive an
Officers' Certificate and an Opinion of Counsel as conclusive evidence that any
supplemental indenture executed pursuant to this Article Eleven is authorized
or permitted by the terms of this Indenture and that it is not inconsistent
herewith.
SECTION 11.06 Conformity With the Trust Indenture Act of 1939.
Each supplemental indenture executed pursuant to this Indenture shall conform
to the requirements of the Trust Indenture Act of 1939 in effect at the time of
the execution thereof.
ARTICLE TWELVE
CONSOLIDATION, MERGER, SALE,
CONVEYANCE OR LIQUIDATING DISTRIBUTION
SECTION 12.01 Consolidation, Merger, Sale, Conveyance, or
Liquidating Distribution Permitted. Subject to the provisions of this Article
Twelve, nothing contained in this Indenture or in any of the Debentures shall
prevent any consolidation or merger of the Company with or into any other
corporation or corporations or successive consolidations or mergers in which
the Company or its successor or successors shall be a party or parties, or
shall prevent any sale, conveyance or liquidating distribution of the property
of the Company as an entirety or substantially as an entirety to any other
corporation authorized to acquire and operate the same; provided, however, and
the Company hereby covenants and agrees, that any such consolidation, merger,
sale, conveyance or liquidating distribution shall be upon the condition that
(a) immediately after such consolidation, merger, sale, conveyance or
liquidating distribution the corporation (whether the Company or such other
corporation) formed by or surviving any such consolidation or merger, or to
which such sale, conveyance or liquidating distribution shall have been made,
shall not be in breach of or have failed to perform or observe any of the
terms, covenants and conditions of this Indenture to be kept or performed by
the Company; (b) the corporation (if other than the Company) formed by or
surviving any such consolidation or merger, or to which such sale, conveyance
or liquidating distribution shall have been made, shall be a corporation
organized under the laws of the United States of America or any state thereof
or the District of Columbia; (c) the corporation to which any such liquidating
distribution shall have been made shall have owned, immediately prior to such
liquidating distribution, all of the outstanding capital stock of the Company;
and (d) the due and punctual payment of the principal of, premium, if any, on
and interest on all of the Debentures, according to their tenor, and the due
and punctual performance and observance of all the covenants and conditions of
this Indenture to be performed or observed by the Company, shall be expressly
assumed by supplemental indenture complying with the requirements of Article
Eleven satisfactory in form
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to the Trustee, executed and delivered to the Trustee by the corporation formed
by such consolidation, or into which the Company shall have been merged, or by
the corporation which shall have acquired such property. If at any time there
be any consolidation or merger or sale, conveyance or liquidating distribution
of property to which the covenant of this Section 12.01 is applicable, then in
any such event the successor corporation will promptly deliver to the Trustee:
(1) an Officers' Certificate stating that as of the time
immediately after the effective date of any such transaction the
covenants of the Company contained in this Section 12.01 have been
complied with and the successor corporation is not in breach of or
non-compliance with the provisions of the Indenture; and
(2) an Opinion of Counsel stating that in his opinion
such covenants (other than as set forth in subclause (a) above) have
been complied with and that any instrument or instruments executed in
the performance of such covenants comply with the requirements
thereof.
SECTION 12.02 Rights and Duties of Successor Corporation. In case
of any such consolidation, merger, sale, conveyance or liquidating distribution
and upon the assumption by the successor corporation, by supplemental
indenture, executed and delivered to the Trustee and satisfactory in form to
the Trustee, of the due and punctual payment of the principal of, premium, if
any, and interest on all of the Debentures and the due and punctual performance
and observance of all of the covenants and conditions of this Indenture to be
performed or observed by the Company, such successor corporation shall succeed
to and be substituted for the Company, with the same effect as if it had been
named herein as the Company, and, in the case of any such sale, conveyance or
liquidating distribution the person named herein as "the Company" in the first
paragraph of this Indenture or any a successor corporation which shall
theretofore have become such in the manner prescribed in this Article Twelve
shall be released from its liability as obligor hereunder and as obligor on all
the Debentures. Such successor corporation thereupon may cause to be signed,
and may issue either in its own name or in the name of the Company as set forth
herein, any or all of the Debentures issuable hereunder which theretofore shall
not have been signed by the Company and delivered to the Trustee; and, upon the
order of such successor corporation, instead of the Company, and subject to all
the terms, conditions and limitations in this Indenture prescribed, the Trustee
shall authenticate and shall deliver any Debentures which previously shall have
been signed and delivered by the officers of the Company to the Trustee for
authentication, and any Debentures which such successor corporation thereafter
shall cause to be signed and delivered to the Trustee for that purpose.
Debentures so issued shall in no respect differ in legal rank, benefit or
otherwise under this Indenture from Debentures theretofore or thereafter issued
in accordance with the terms of this Indenture.
In case of any such consolidation, merger, sale, conveyance or
liquidating distribution such changes in phraseology and form (but not in
substance) may be made in the Debentures thereafter to be issued as may be
deemed appropriate by the successor corporation and the Trustee.
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Subject to the provisions of Section 12.01, nothing contained in this
Indenture or in any of the Debentures shall prevent the Company from merging
into itself any other corporation (whether or not affiliated with the Company)
or acquiring by purchase or otherwise all or any part of the property of any
other person (whether or not affiliated with the Company).
SECTION 12.03. Officers' Certificate and Opinion of Counsel to the
Trustee. The Trustee, subject to the provisions of Section 8.02, may receive an
Officers' Certificate and an Opinion of Counsel as conclusive evidence that any
such consolidation, merger, sale or conveyance, and any such assumption,
complies with the provisions of this Article Twelve.
ARTICLE THIRTEEN
SATISFACTION AND DISCHARGE OF INDENTURE; UNCLAIMED MONEYS
SECTION 13.01 Satisfaction and Discharge of Indenture. If at any
time (a) there shall have been delivered to the Trustee for cancellation all
Debentures theretofore authenticated (other than any Debentures which shall
have been destroyed, lost or stolen and which shall have been replaced or paid
as provided in Section 2.07) and not theretofore cancelled, or (b) all such
Debentures not theretofore delivered to the Trustee for cancellation shall have
become due and payable, or are by their terms to become due and payable within
one year or are to be called for redemption within one year under arrangements
satisfactory to the Trustee for the giving of notice of redemption, and the
Company shall deposit with the Trustee as trust funds the entire amount
sufficient to pay at maturity or upon redemption all such Debentures not
theretofore delivered to the Trustee for cancellation (other than any
Debentures which shall have been destroyed, lost or stolen and which shall have
been replaced or paid as provided in Section 2.07), including principal (and
premium, if any) and interest due or to become due to such date of maturity or
redemption date, and the Company shall also pay or cause to be paid all other
sums payable hereunder by the Company, and shall deliver to the Trustee an
Officers' Certificate stating that all conditions precedent to the satisfaction
and discharge of this Indenture have been complied with, and an Opinion of
Counsel to the same effect, then this Indenture shall cease to be of further
effect (except as to the remaining rights of registration of transfer and
exchange in respect of outstanding Debentures), and the Trustee, on demand of
the Company and at the cost and expense of the Company, shall execute proper
instruments acknowledging satisfaction of and discharging this Indenture. The
Company agrees to reimburse the Trustee for any costs or expenses thereafter
reasonably and property incurred by the Trustee after notice by the Trustee to
the Company in connection with this Indenture or the Debentures.
Notwithstanding the satisfaction and discharge of the Indenture the obligations
of the Company to the Trustee under Section 8.05 shall survive.
SECTION 13.02 Application By Trustee of Funds Deposited for Payment
of Debentures. Subject to the provisions of Article Three and Section 13.04,
all moneys deposited with the Trustee pursuant to Section 13.01 shall be held
in trust and applied by it to the payment, either directly or through any
paying agent (including the Company acting as its own paying agent), to the
holders of the particular Debentures, for the payment or redemption of
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which such moneys have been deposited with the Trustee, of all sums due and to
become due thereon for principal and interest and premium, if any.
SECTION 13.03 Repayment of Moneys Held by Paying Agent. In
connection with the satisfaction and discharge of this Indenture all moneys
then held by any paying agent under the provisions of this Indenture shall,
upon demand of the Company, be paid to the Trustee, and thereupon such paying
agent shall be released from all further liability with respect to such moneys.
SECTION 13.04 Unclaimed Moneys. Any moneys deposited with the
Trustee or any paying agent for the payment of the principal of, premium, if
any, on or interest on any Debentures and not applied but remaining unclaimed
by the holders of Debentures for six years after the date upon which such
payment shall have become due shall be repaid to the Company by the Trustee or
by such paying agent on demand; and the holder of any of the Debentures
entitled to receive such payment shall thereafter look only to the Company for
the payment therefor; provided, however, that the Trustee or such paying agent,
before being required to make any such repayment, may at the expense of the
Company cause to be published once a week for two successive weeks (in each
case on any day of the week) in an Authorized Newspaper a notice that said
moneys have not been so applied and that after a date named therein any
unclaimed balance of said moneys then remaining will be returned to the
Company.
ARTICLE FOURTEEN
MISCELLANEOUS
SECTION 14.01 Rights Confined to Parties and Holders of Debentures
and Senior Indebtedness. Nothing expressed or implied herein is intended or
shall be construed to confer upon or to give to any person, firm or
corporation, other than the parties hereto and the holders of the Debentures
and Senior Indebtedness, any right, remedy or claim under or by reason of this
Indenture or of any term, covenant, condition, promise or agreement hereof, and
all the terms, covenants, conditions, promises and agreements contained herein
shall be for the sole and exclusive benefit of the parties hereto and their
successors and of the holders of the Debentures and Senior Indebtedness.
SECTION 14.02 Indenture and Debentures Solely Corporate
Obligations. No recourse shall be had for the payment of the principal of,
premium if any, on, or the interest on any of the Debentures, or under any
obligation, covenant or agreement of this Indenture of any indenture
supplemental hereto, or of any Debenture, against any incorporator,
stockholder, officer, or director, as such, past, present, or future, of the
Company or of any successor corporation, either directly or through the Company
or through any successor corporation, by the enforcement of any assessment or
penalty or otherwise, or by any legal or equitable proceeding, by virtue of any
statute, constitution, rule of law, or otherwise; it being expressly agreed and
understood that this Indenture and the Debentures are solely corporate
obligations, and that no personal liability whatever shall attach to or be
incurred by the incorporators, stockholders, officers or directors, as such,
past, present or future of the Company or of any
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successor corporation, or any of them, under or by reason of any of the
obligations, covenants or agreements contained in this Indenture or in any of
the Debentures, or implied therefrom, and that any and all personal liability,
either at common law or in equity, or by statute, constitution, rule of law or
otherwise, of every such incorporator, stockholder, officer or director is
hereby expressly waived as a condition of and consideration for the execution
of this Indenture and the issue of such Debentures.
SECTION 14.03 Officers' Certificates and Opinions of Counsel. Upon
any application or request by the Company to the Trustee to take any action
under any of the provisions of this Indenture, the Company shall furnish to the
Trustee an Officers' Certificate stating that all conditions precedent, if any,
provided for in this Indenture relating to the proposed action have been
complied with and an Opinion of Counsel stating that in the opinion of such
counsel all such conditions precedent have been complied with.
Each certificate or opinion provided for in this Indenture and
delivered to the Trustee with respect to compliance with a condition or
covenant provided for in this Indenture (other than certificates provided
pursuant to Section 7.03(e)) shall include (a) a statement that the person
signing such certificate or opinion has read such condition or covenant and the
definitions herein relating thereto; (b) a brief statement as to the nature and
scope of the examination or investigation upon which the statements or opinions
contained in such certificate or opinion are based; (c) a statement that, in
the opinion of such person, he has made such examination or investigation as is
necessary to enable him to express an informed opinion as to whether or not
such condition or covenant has been complied with; and (d) a statement as to
whether or not, in the opinion of such person, such condition or covenant has
been complied with.
Any certificate or opinion of an officer of the Company may be based,
insofar as it relates to legal matters, upon a certificate or opinion of or
upon representations by counsel, unless such officer knows that the certificate
or opinion or representations with respect to the matters upon which his
opinion may be based as aforesaid are erroneous, or in the exercise of
reasonable care should have known that the same were erroneous. Any such
certificate or Opinion of Counsel may be based, insofar as it relates to
factual matters with respect to which the Company is in possession of
information, upon the certificate or opinion of or representations by an
officer or officers of the Company unless such counsel knows that the
certificate or opinion or representations with respect to the matters upon
which his certificate or opinion may be based as aforesaid are erroneous, or in
the exercise of reasonable care should have known that the same were erroneous.
Any Opinion of Counsel may be based and rely upon, insofar as it
relates to matters of law involving any jurisdiction in which the counsel
rendering such opinion is not licensed to practice, an Opinion of Counsel of
counsel licensed to practice in such jurisdiction.
Wherever in this Indenture in connection with any application,
certificate or report to the Trustee it is provided that the Company shall
deliver any document as a condition of the granting of such application or as
evidence of the Company's compliance with any term hereof, it is intended that
the truth and accuracy at the time of the granting of such application or at
the effective date of such certificate or report, as the case may be, of the
facts and opinions stated
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in such document shall in each such case be a condition precedent to the right
of the Company to have such application granted or to the sufficiency of such
certificate or report; provided, however, notwithstanding the foregoing, but
subject to Section 8.02, to the extent that the compliance with any term hereof
by its provisions is based upon a determination made in a person's opinion
(other than an Opinion of Counsel), such document (insofar as it relates to
such determination and opinion) shall be deemed truthful and accurate if such
determination has been made and such opinion has been given in good faith.
Nevertheless, in the case of any such application, certificate or report, any
document required by any provision of this Indenture to be delivered to the
Trustee as a condition of the granting of such application or as evidence of
such compliance may, subject to Section 8.02, be received by the Trustee as
conclusive evidence of any statement therein contained and shall be full
warrant, authority and protection to the Trustee.
SECTION 14.04 Payments Due on Business Day. Except as otherwise
provided in Section 4.02(a), in any case where the date of an interest payment
or a date fixed for redemption or the date of maturity of any Debenture shall
not be a Business Day, then (notwithstanding any other provision of the
Debentures or this Indenture) payment of the principal of (and premium, if any,
on) or interest on any Debenture need not be made on such date, but may be made
on the next succeeding Business Day with the same force and effect as if made
on the nominal date of any such interest payment or date fixed for redemption
or date of maturity, and no interest shall accrue for the period from and after
such nominal date.
SECTION 14.05 Trust Indenture Act of 1939 to Control. If and to the
extent that any provision of this Indenture limits, qualifies or conflicts with
another provision hereof which is required to be included herein by any of
Sections 3.10 to 3.17, inclusive, of the Trust Indenture Act of 1939, such
provision hereof which is required so to be included shall control.
SECTION 14.06. Provisions Binding Upon Successors and Assigns.
Except as otherwise provided herein, the provisions of this Indenture shall be
binding upon and shall inure to the benefit of the parties hereto and their
respective successors and assigns.
SECTION 14.07. Notices. All demands, notices and communications
hereunder shall be in writing and shall be deemed to have been duly given if
personally delivered at or mailed by registered mail addressed to (a) in the
case of the Company, ERLY Industries Inc., 10990 Wilshire Boulevard, Suite
1800, Los Angeles, California 90024, Attention: President, or such other
address as may hereafter be furnished to the Trustee in writing by the Company,
with a copy to Vial, Hamilton, Koch & Knox, 1717 Main Street, Suite 4400,
Dallas, Texas 75201 or such other address as may be hereafter furnished to the
Trustee in writing by Vial, Hamilton, Koch & Knox and (b) in the case of the
Trustee, Trust Company of Texas, P.O. Box 7346, Dallas, Texas 75209,
Attention: Corporate Trust Administration Division, or such other address as
may hereafter be furnished to the Company in writing by the Trustee. An
affidavit by any person representing or acting on behalf of the Company or the
Trustee as to such mailing, having the registry receipt attached, shall be
conclusive evidence of the giving of such demand, notice or communication. Any
notice required or permitted to be mailed to debentureholders shall be given by
first class mail, postage prepaid. Any notice so mailed within the time
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prescribed in this Indenture shall be conclusively presumed to have been duly
given, whether or not the debentureholder receives such notice.
SECTION 14.08. Table of Contents and Headings. The table of
contents, titles and headings of the articles and sections of this Indenture
have been inserted for convenience of reference only, are not to be considered
part hereof and shall not affect the construction hereof.
SECTION 14.09 Counterparts. This Indenture may be executed in any
number of counterparts each of which shall be deemed to be an original, and all
such counterparts shall together constitute but one and the same instrument.
SECTION 14.10. Governing Law. This Indenture and the Debentures
are, and shall in all respects be, contracts made under the laws of the State
of Texas. The validity and enforceability of this Indenture and the Debentures
(including without limitation the payment of interest thereon at the rate borne
thereby) and the obligations, rights and remedies of the parties hereunder and
thereunder shall in all respects be determined in accordance with and governed
by such laws, all provisions of this Indenture and the Debenture shall in all
respects be construed in accordance with such laws and such laws are hereby
expressly chosen to be exclusively applicable in all respects to any and all of
the foregoing. This Indenture has been delivered and accepted by the parties
hereto in the State of Texas.
IN WITNESS WHEREOF, the Company and the Trustee have caused their
names to be signed hereto by their respective officers thereunto duly
authorized and their respective corporate seals, duly attested, to be hereunto
affixed, all as of the day and year first above written.
ERLY INDUSTRIES INC.
By: /s/ Gerald D. Murphy
--------------------------------
President
[Corporate Seal]
Attest:
/s/ Richard N. McCombs
- - ----------------------------------
Secretary
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TRUST COMPANY OF TEXAS
By: /s/ John A. Norman
--------------------------------
President
[Corporate Seal]
Attest:
/s/ Bradley K. Uhr
- - ----------------------------------
Secretary
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