<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 13D
(Rule 13d-101)
UNDER THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. 4)*
ERLY Industries Inc.
-----------------------------------------------------------------------------
(Name of Issuer)
Common Stock
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(Title of Class of Securities)
26883910
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(CUSIP Number)
Nanette N. Kelley, The Powell Group, P.O. Box 788, Baton Rouge, Louisiana 70821
-----------------------------------------------------------------------------
(Name, Address and Telephone Number of Person Authorized
to Receive Notices and Communications)
September 23, 1997
-----------------------------------------------------------------------------
(Date of Event which Requires Filing of this Statement)
If the filing person has previously filed a statement on Schedule 13G to
report the acquisition which is the subject of this
Schedule 13D, and is filing this schedule because of Rule 13d-1(b)(3) or
(4), check the following box
NOTE: Six copies of this statement, including all exhibits, should be filed
with the Commission. See Rule 13d-1(a) for other parties to whom copies
are to be sent.
(Continued on following pages)
(Page 1 of 10 Pages)
* The remainder of this cover page shall be filled out for a reporting
person's initial filing on this form with respect to the subject class of
securities, and for any subsequent amendment containing information which would
alter disclosures provided in a prior cover page.
The information required on the remainder of this cover page shall not be deemed
to be "filed" for the purpose of Section 18 of the Securities Exchange Act of
1934 ("Act") or otherwise subject to the liabilities of that section of the Act
but shall be subject to all other provisions of the Act (however, see the
Notes).
<PAGE>
- ----------------------- ---------------------
CUSIP NO. 26883910 SCHEDULE 13D PAGE 2 OF 10 PAGES
- ----------------------- ---------------------
- ------------------------------------------------------------------------------
NAME OF REPORTING PERSON
1 S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
The Powell Group
- ------------------------------------------------------------------------------
CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP*
2 (a) [_]
(b) [X]
- ------------------------------------------------------------------------------
SEC USE ONLY
3
- ------------------------------------------------------------------------------
SOURCE OF FUNDS*
4
N/A
- ------------------------------------------------------------------------------
CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO
5 ITEMS 2(d) or 2(e) [_]
- ------------------------------------------------------------------------------
CITIZENSHIP OR PLACE OF ORGANIZATION
6
Louisiana
- ------------------------------------------------------------------------------
SOLE VOTING POWER
7
NUMBER OF 0
SHARES -----------------------------------------------------------
SHARED VOTING POWER
BENEFICIALLY 8
OWNED BY 171,933
-----------------------------------------------------------
EACH SOLE DISPOSITIVE POWER
9
REPORTING 0
PERSON -----------------------------------------------------------
SHARED DISPOSITIVE POWER
WITH 10
171,933
- ------------------------------------------------------------------------------
AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
11
171,933
- ------------------------------------------------------------------------------
CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES*
12 [_]
- ------------------------------------------------------------------------------
PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
13
3.3%
- ------------------------------------------------------------------------------
TYPE OF REPORTING PERSON*
14
CO, HC
- ------------------------------------------------------------------------------
*SEE INSTRUCTIONS BEFORE FILLING OUT!
<PAGE>
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CUSIP NO. 26883910 SCHEDULE 13D PAGE 3 OF 10 PAGES
- ----------------------- ---------------------
- ------------------------------------------------------------------------------
NAME OF REPORTING PERSON
1 S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
Farmers Rice Milling Company, Inc.
- ------------------------------------------------------------------------------
CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP*
2 (a) [_]
(b) [X]
- ------------------------------------------------------------------------------
SEC USE ONLY
3
- ------------------------------------------------------------------------------
SOURCE OF FUNDS*
4
WC
- ------------------------------------------------------------------------------
CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO
5 ITEMS 2(d) or 2(e) [_]
- ------------------------------------------------------------------------------
CITIZENSHIP OR PLACE OF ORGANIZATION
6
Louisiana
- ------------------------------------------------------------------------------
SOLE VOTING POWER
7
NUMBER OF 171,933
SHARES -----------------------------------------------------------
SHARED VOTING POWER
BENEFICIALLY 8
171,933
OWNED BY
-----------------------------------------------------------
EACH SOLE DISPOSITIVE POWER
9
REPORTING 171,933
PERSON -----------------------------------------------------------
SHARED DISPOSITIVE POWER
WITH 10
171,933
- ------------------------------------------------------------------------------
AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
11
171,933
- ------------------------------------------------------------------------------
CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES*
12 [_]
- ------------------------------------------------------------------------------
PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
13
3.3%
- ------------------------------------------------------------------------------
TYPE OF REPORTING PERSON*
14
CO
- ------------------------------------------------------------------------------
*SEE INSTRUCTIONS BEFORE FILLING OUT!
<PAGE>
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CUSIP NO. 26883910 SCHEDULE 13D PAGE 4 OF 10 PAGES
- ----------------------- ---------------------
- ------------------------------------------------------------------------------
NAME OF REPORTING PERSON
1 S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
Nanette N. Kelley
- ------------------------------------------------------------------------------
CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP*
2 (a) [_]
(b) [X]
- ------------------------------------------------------------------------------
SEC USE ONLY
3
- ------------------------------------------------------------------------------
SOURCE OF FUNDS*
4
PF
- ------------------------------------------------------------------------------
CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO
5 ITEMS 2(d) or 2(e) [_]
N/A
- ------------------------------------------------------------------------------
CITIZENSHIP OR PLACE OF ORGANIZATION
6
United States
- ------------------------------------------------------------------------------
SOLE VOTING POWER
7
NUMBER OF 26,400
SHARES -----------------------------------------------------------
SHARED VOTING POWER
BENEFICIALLY 8
198,333
OWNED BY
-----------------------------------------------------------
EACH SOLE DISPOSITIVE POWER
9
REPORTING 26,400
PERSON -----------------------------------------------------------
SHARED DISPOSITIVE POWER
WITH 10
198,333
- ------------------------------------------------------------------------------
AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
11
198,333
- ------------------------------------------------------------------------------
CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES*
12 [_]
- ------------------------------------------------------------------------------
PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
13
3.8%
- ------------------------------------------------------------------------------
TYPE OF REPORTING PERSON*
14
IN
- ------------------------------------------------------------------------------
*SEE INSTRUCTIONS BEFORE FILLING OUT!
<PAGE>
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CUSIP NO. 26883910 SCHEDULE 13D PAGE 5 OF 10 PAGES
- ----------------------- ---------------------
- ------------------------------------------------------------------------------
NAME OF REPORTING PERSON
1 S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
First Global Securities, Inc.
- ------------------------------------------------------------------------------
CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP*
2 (a) [_]
(b) [X]
- ------------------------------------------------------------------------------
SEC USE ONLY
3
- ------------------------------------------------------------------------------
SOURCE OF FUNDS*
4
WC
- ------------------------------------------------------------------------------
CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO
5 ITEMS 2(d) or 2(e) [_]
- ------------------------------------------------------------------------------
CITIZENSHIP OR PLACE OF ORGANIZATION
6
California
- ------------------------------------------------------------------------------
SOLE VOTING POWER
7
NUMBER OF 5
SHARES -----------------------------------------------------------
SHARED VOTING POWER
BENEFICIALLY 8
5
OWNED BY
-----------------------------------------------------------
EACH SOLE DISPOSITIVE POWER
9
REPORTING 5
PERSON -----------------------------------------------------------
SHARED DISPOSITIVE POWER
WITH 10
5
- ------------------------------------------------------------------------------
AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
11
5
- ------------------------------------------------------------------------------
CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES*
12 [_]
- ------------------------------------------------------------------------------
PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
13
Less than 1%
- ------------------------------------------------------------------------------
TYPE OF REPORTING PERSON*
14
BD/IV
- ------------------------------------------------------------------------------
*SEE INSTRUCTIONS BEFORE FILLING OUT!
<PAGE>
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CUSIP NO. 26883910 SCHEDULE 13D PAGE 6 OF 10 PAGES
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- ------------------------------------------------------------------------------
NAME OF REPORTING PERSON
1 S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
Noble B. Trenham
- ------------------------------------------------------------------------------
CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP*
2 (a) [_]
(b) [X]
- ------------------------------------------------------------------------------
SEC USE ONLY
3
- ------------------------------------------------------------------------------
SOURCE OF FUNDS*
4
PF
- ------------------------------------------------------------------------------
CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO
5 ITEMS 2(d) or 2(e) [_]
- ------------------------------------------------------------------------------
CITIZENSHIP OR PLACE OF ORGANIZATION
6
United States
- ------------------------------------------------------------------------------
SOLE VOTING POWER
7
NUMBER OF 7
SHARES -----------------------------------------------------------
SHARED VOTING POWER
BENEFICIALLY 8
12
OWNED BY
-----------------------------------------------------------
EACH SOLE DISPOSITIVE POWER
9
REPORTING 7
PERSON -----------------------------------------------------------
SHARED DISPOSITIVE POWER
WITH 10
12
- ------------------------------------------------------------------------------
AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
11
12
- ------------------------------------------------------------------------------
CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES*
12 [_]
- ------------------------------------------------------------------------------
PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
13
Less than 1%
- ------------------------------------------------------------------------------
TYPE OF REPORTING PERSON*
14
IN
- ------------------------------------------------------------------------------
*SEE INSTRUCTIONS BEFORE FILLING OUT!
<PAGE>
This Amendment No. 4 ("Amendment No. 4") amends and supplements the
Schedule 13D ("Schedule 13D"), relating to the common stock, $.01 par value per
share (the "Common Stock"), of ERLY Industries Inc., a California corporation
(the "Company"), previously filed by The Powell Group, Farmers Rice Milling
Company, Inc. ("Farmers Rice"), Nanette N. Kelley, First Global Securities, Inc.
and Noble B. Trenham.
1. Item 4 of the Schedule 13D, "Purpose of Transaction," is hereby
amended to add the following:
On September 5, 1997, The Powell Group, Farmers Rice and Nanette N. Kelley
filed with the Securities and Exchange Commission a definitive proxy statement
(the "Proxy Statement") on Schedule 14A in connection with the Company's Annual
Meeting of Shareholders, which was originally scheduled to take place on
September 26, 1997, but has now been rescheduled by the Company to take place on
October 17, 1997. A copy of the Proxy Statement is attached to this Amendment
No. 4 as Exhibit 1 and is incorporated herein by reference.
As previously reported, on July 24, 1997, Farmers Rice filed a derivative
complaint on behalf of the Company and its 81% owned subsidiary, American Rice,
Inc. ("ARI"), against Gerald D. Murphy, Douglas A. Murphy, the Company and ARI
in the United States District Court, Central District of California, alleging
breach of fiduciary duty, waste of corporate assets and illegal corporate loan.
The derivative complaint further requested injunctive relief prohibiting the
Company and ARI from making on-going payments on behalf of the Murphys and
requiring on-going indemnification by the Murphys to the Company and ARI.
On September 12, 1997, Farmers Rice filed a first amended derivative
complaint against the Company, ARI and each member of the boards of directors of
both the Company and ARI, including Messrs. Gerald Murphy and Douglas Murphy. A
copy of the first amended derivative complaint is attached to this Amendment No.
4 as Exhibit 2 and is incorporated herein by reference.
2. Item 3 of the Schedule 13D, "Source and Amount of Funds or Other
Consideration," and Item 5 of the Schedule 13D, "Interest in Securities of the
Issuer," is hereby amended to add the following:
On September 23, 1997, Nanette N. Kelley purchased an additional 10,000
shares of Common Stock, making her the beneficial owner of 198,333 shares of
Common Stock (the "Kelley Shares"), or approximately 3.8% of the number of
shares of Common Stock outstanding (based on the number of shares outstanding as
of August 22, 1997). The number of Kelley Shares includes 171,933 shares of
Common Stock held by Farmers Rice and 26,400 shares of Common Stock held of
record by Ms. Kelley. Ms. Kelley purchased 3,000 shares for $8.56 per share and
7,000 shares for $9.30 per share on the open market. Ms. Kelley used personal
funds to purchase the Kelley Shares.
7 of 10
<PAGE>
3. Item 7 of the Schedule 13D, "Material to be Filed as Exhibits," is
hereby amended to add the following:
1. Definitive Proxy Statement of The Powell Group, Farmers Rice
Milling Company, Inc. and Nanette N. Kelley, as filed with the
Securities and Exchange Commission on September 5, 1997.
2. First Amended Derivative Complaint filed by Farmers Rice Milling
Company, Inc. against Gerald D. Murphy, Douglas A. Murphy, Bill
J. McFarland, William H. Burgess, Alan M. Wiener, S.C. Bain,
J.R., John M. Howland, Richard N. McCombs, George E. Prchal, ERLY
Industries Inc. and American Rice, Inc. on September 12, 1997 in
the United States District Court, Central District of California.
4. Except as specifically provided herein, this Amendment No. 4 does not
modify any of the information previously reported on the Schedule 13D.
8 of 10
<PAGE>
SIGNATURE
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
<TABLE>
<S> <C>
Date: October 3, 1997 The Powell Group
By: /s/ Nanette N. Kelley
------------------------------------------------
Name: Nanette N. Kelley
Title: President and Chief Executive Officer
Date: October 3, 1997 Farmers Rice Milling Company, Inc.
By: /s/ Nanette N. Kelley
------------------------------------------------
Name: Nanette N. Kelley
Title: President and Chief Executive Officer
Date: October 3, 1997 /s/ Nanette N. Kelley
------------------------------------------------
Nanette N. Kelley
Date: October 3, 1997 First Global Securities, Inc.
By: /s/ Noble B. Trenham
Name: Noble B. Trenham
Title: Co-Chairman
Date: October 3, 1997 /s/ Noble B. Trenham
------------------------------------------------
Noble B. Trenham
</TABLE>
9 of 10
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
1. Definitive Proxy Statement of The Powell Group, Farmers Rice
Milling Company, Inc. and Nanette N. Kelley, as filed with the
Securities and Exchange Commission on September 5, 1997.
2. First Amended Derivative Complaint filed by Farmers Rice Milling
Company, Inc. against Gerald D. Murphy, Douglas A. Murphy, Bill
J. McFarland, William H. Burgess, Alan M. Wiener, S.C. Bain,
J.R., John M. Howland, Richard N. McCombs, George E. Prchal, ERLY
Industries Inc. and American Rice, Inc. on September 12, 1997 in
the United States District Court, Central District of California.
</TABLE>
10 of 10
<PAGE>
EXHIBIT 1
IMPORTANT MATERIALS FOR SHAREHOLDERS OF ERLY INDUSTRIES INC.
PROXY STATEMENT
OF
THE POWELL GROUP
FARMERS RICE MILLING COMPANY, INC.
NANETTE N. KELLEY
IN OPPOSITION TO MANAGEMENT
ANNUAL MEETING OF SHAREHOLDERS
SEPTEMBER 26, 1997
Definitive copies of this proxy statement, the accompanying letter and the
enclosed form of proxy are expected to be furnished by and on behalf of The
Powell Group ("TPG"), Farmers Rice Milling Company, Inc. ("Farmers Rice") and
Nanette N. Kelley (together with TPG and Farmers Rice, "The Powell Group") on
or about September 5, 1997, in connection with the solicitation by The Powell
Group from the holders of shares of common stock, par value $.01 per share
(the "Common Stock"), of ERLY Industries Inc., a California corporation
("ERLY" or the "Company"), of proxies by The Powell Group for use at the
Annual Meeting of Shareholders scheduled for Friday, September 26, 1997 at
Westwood Marquis Hotel, 930 Hilgard Avenue, Los Angeles, California at 10:00
a.m. or any adjournments or postponements thereof (the "Annual Meeting").
At the Annual Meeting, five directors are to be elected to hold office until
the next annual meeting and until their successors have been elected and
qualified. In addition, the Company proposes to amend its Articles of
Incorporation to eliminate cumulative voting (the "Cumulative Voting
Proposal") and to eliminate the right of shareholders to take action by
written consent (the "Written Consent Proposal"). The Powell Group is
soliciting your proxy in support of the five nominees named below (the "Powell
Nominees") to the Company's Board of Directors (the "Board" or "Board of
Directors") and against the Cumulative Voting Proposal and the Written Consent
Proposal. Shares represented by proxies on the accompanying BLUE proxy card
(the "Blue Proxy") which are returned properly executed will be voted in
accordance with the instructions thereon and in the discretion of the proxies
named therein with respect to any other matter that properly comes before the
Annual Meeting. Where no vote is specified on the BLUE Proxy but such proxy is
returned and signed, the proxy represented thereby will be voted AGAINST the
Cumulative Voting Proposal, AGAINST the Written Consent Proposal, FOR the
election of the Powell Nominees and in the discretion of the proxies named
therein with respect to any other matter that properly comes before the Annual
Meeting.
YOUR VOTE IS IMPORTANT. If you agree with the reasons for The Powell Group's
solicitation set forth below and believe that the election of the Powell
Nominees to the Board of Directors can make a difference, The Powell Group
urges you to vote for the election of the Powell Nominees, no matter how many
or how few shares you own, by signing, dating and mailing the enclosed BLUE
Proxy.
The Powell Group urges you NOT to sign any proxy card sent to you by the
Company. If you have already voted the Board of Directors' proxy card, you
have every right to change your vote by signing and mailing the enclosed BLUE
Proxy to The Powell Group in the envelope provided. ONLY YOUR LATEST DATED
PROXY WILL COUNT AT THE ANNUAL MEETING.
If your shares are held in the name of a brokerage firm, bank or nominee,
only they can vote such shares and only upon receipt of your specific
instructions. Accordingly, please contact the person responsible for your
account and give instructions for such shares to be voted.
<PAGE>
If your shares are registered in more than one name, the BLUE Proxy must be
signed by all such persons to ensure that all shares are voted.
GENERAL
Only holders of Common Stock of record at the close of business on August
22, 1997 (the "Record Date") are entitled to vote at the Annual Meeting.
Holders of record of shares of Common Stock on the Record Date are urged to
submit a proxy even if such shares have been sold after the Record Date. The
Powell Group believes that on the Record Date, there were 5,220,337 shares of
Common Stock issued and outstanding and entitled to vote. Holders of shares of
Common Stock have one vote for each share, and may have cumulative voting
rights, with respect to the election of directors. No shareholder may cumulate
votes unless a shareholder has announced at the Annual Meeting his or her
intention to do so, but if any shareholder makes such an announcement, all
shareholders may cumulate votes. Cumulative voting rights entitle a
shareholder to give one nominee as many votes as is equal to the number of
directors to be elected, multiplied by the number of shares owned by him or
her, or to distribute his or her votes on the same principle among two or more
nominees, as he or she sees fit. The five nominees for director receiving the
highest number of votes at the Annual Meeting will be elected. The Powell
Group intends to exercise cumulative voting rights at the Annual Meeting so
cumulative voting will be applicable. The Powell Group proxyholders intend to
cumulate and cast their votes, at their discretion, in order to elect as many
of the Powell Nominees as possible. DISCRETIONARY AUTHORITY TO CUMULATE VOTES
IS HEREBY SOLICITED BY THE POWELL GROUP.
A proxy executed by a shareholder may be revoked at any time prior to the
time that the vote authorized by the executed proxy is taken by submitting a
written, dated revocation of such proxy covering the same shares. A revocation
may be in any written form validly signed by the record holder as long as it
clearly states that the proxy previously given is no longer effective and must
be executed and delivered prior to the time that the vote authorized by the
executed proxy is taken. The revocation may be delivered to The Powell Group,
P.O. Box 788, Baton Rouge, Louisiana 70821 Attn.: Nanette N. Kelley. Although
a revocation delivered only to the Company will be effective to revoke a
previously executed proxy, The Powell Group requests that if a revocation is
delivered to the Company, a photocopy of the revocation also be delivered to
The Powell Group, at the address set forth above, so that The Powell Group
will be aware of such revocation. The principal executive offices of the
Company are located at 10990 Wilshire Boulevard, Suite 1800, Los Angeles,
California 90024, and its phone number is (213) 879-1480.
REASONS FOR THE SOLICITATION
The Powell Group believes that shareholders should vote FOR the Powell
Nominees so that the Board of Directors may be replaced with a slate of
nominees, each of whom is committed to enhancing value for all shareholders by
turning the Company around and making it profitable on a consistent basis. The
Powell Group believes that the current management of ERLY is entrenched and
ineffective, has not operated the Company so as to enhance shareholder value
and lacks the capacity to manage the Company for the benefit of its
shareholders over the long term. The Powell Group believes that management,
particularly Gerald D. Murphy and his son Douglas A. Murphy, is interested in
running the Company for its own benefit, even when their actions may be to the
detriment of shareholders. In general, The Powell Group believes that, under
the circumstances, the only viable option for ERLY's shareholders is to
replace management entirely.
The Powell Group believes that since 1987, the management of ERLY has done
virtually nothing to enhance the value of the Company's Common Stock. During
this period, the Company has suffered through several failed diversification
attempts, a liquidity crisis which brought the Company close to bankruptcy, a
default on its public debt in 1993, delisting of its Common Stock from NASDAQ
for nearly a year, over-leverage with very expensive mortgage notes and a
dismal return to shareholders. In The Powell Group's estimation, the Company's
Common Stock has woefully underperformed the stock market since 1987. On
August 31, 1987, ERLY stock traded at
2
<PAGE>
$7 1/64 per share (as adjusted for stock dividends in the interim years). On
March 10, 1997, when Farmers Rice and Nanette N. Kelley first purchased shares
of the Company's Common Stock, it closed at $9.00 per share. On June 9, 1997,
the date on which The Powell Group first commenced meeting with a small group
of the Company's shareholders to discuss the Company's performance, the ERLY
Stock traded at $9 7/8 per share. On August 29, 1997, it traded at $8 7/8 per
share. During the same time period, the return of S&P Food Products Companies
has increased approximately 244% and the return of the S&P 500 has increased
approximately 173% while ERLY's stock price has increased only 26.5%.
On July 17, 1997, The Powell Group met with Mr. Gerald D. Murphy, the Chief
Executive Officer of the Company, to discuss The Powell Group's desire to
enhance shareholder value for the benefit of all shareholders of the Company.
The Powell Group also explained that in order to achieve its goals of
enhancing shareholder value that it was willing to engage in a consent/proxy
solicitation to remove the existing directors and to replace them with The
Powell Group's qualified and experienced nominees. At the meeting, Ms. Nanette
N. Kelley, President and Chief Executive Officer of each of TPG and Farmers
Rice, expressed The Powell Group's willingness to facilitate a sale of the
Common Stock owned by Mr. Gerald Murphy and Mr. Douglas Murphy, the President
and Chief Operating Officer of the Company, at or near fair market value. Ms.
Kelley also outlined various other terms and conditions including The Powell
Group's willingness to allow the Murphys to remain in a consulting capacity in
order to effect an orderly transition of the Board in the event that the Board
and management decided not to resist the proposed consent/proxy solicitation.
Mr. Murphy asked for a three-week period to consider the proposals and to talk
to shareholders. Ms. Kelley indicated that The Powell Group was prepared to
move forward promptly and requested another meeting on July 18, 1997 at 9:00
a.m. On July 18, 1997, The Powell Group met again briefly with Mr. Murphy,
whose counsel stated Mr. Murphy's rejection of The Powell Group's proposals to
nominate and/or elect The Powell Group's nominees as directors of the Company
and indicated that Mr. Murphy did not wish to sell his shares of Common Stock.
After the meetings on July 17 and 18, through intermediaries, Mr. Murphy
indicated a possible willingness to sell his shares in the Company at a price
of $25.00 per share, more than twice the stock's trading price. The Powell
Group disregarded Mr. Murphy's offer in the belief that it represented neither
a realistic proposal (in light of the then current trading price for the
stock) nor a good faith offer to sell his shares. As a result of Mr. Murphy's
rejection of The Powell Group's proposals, The Powell Group has determined to
proceed with the proxy solicitation.
On July 24, 1997, Farmers Rice filed a derivative complaint on behalf of the
Company and its 81% owned subsidiary American Rice, Inc. ("ARI") against
Gerald D. Murphy, Douglas A. Murphy, the Company and ARI in the United States
District Court, Central District of California. In the complaint, Farmers Rice
alleged (1) breach of fiduciary duty, (2) waste of corporate assets and (3)
illegal corporate loan. The derivative complaint further requested injunctive
relief prohibiting the Company and ARI from making on-going payments on behalf
of the Murphys and requiring on-going indemnification by the Murphys to the
Company and ARI. The Company and ARI, joined by the Murphys, have filed a
motion to dismiss the complaint solely for failure to make a demand on the
board of directors of the Company before filing the lawsuit. Farmers Rice
intends to vigorously oppose the motion. A hearing on such motion is scheduled
to take place on September 22, 1997.
On July 30, 1997, Nanette Kelley and Farmers Rice delivered to the Company a
request to inspect the accounting books and records of the Company pursuant to
California law. The Company denied this request and on August 13, 1997,
Farmers Rice and Nanette Kelley filed a petition for a writ of mandate in Los
Angeles Superior Court against the Company to compel inspection of the
accounting books and records. A hearing on the motion to grant the relief
requested is presently scheduled to take place on September 17, 1997.
On August 15, 1997, Farmers Rice and Nanette Kelley delivered to the Company
a request for a list of non-objecting beneficial owners ("NOBO List") of
shares of Common Stock. They also requested a Cede or similar list in the
Company's possession showing the identities of holders of Common Stock. The
Company denied the request and on August 20, 1997, Farmers Rice and Nanette
Kelley filed a petition for a writ of mandate to compel inspection and copying
of shareholders lists and to postpone the date of the Annual Meeting.
3
<PAGE>
On August 26, 1997, Farmers Rice and Nanette Kelley submitted to the Company
another request for a record shareholders list as of the Record Date and any
NOBO List or Cede list, as of the Record Date, which were in the Company's
possession or were to come into the Company's possession in connection with
the Annual Meeting. The parties have resolved the litigation with respect to
the shareholders' lists and Farmers Rice and Nanette Kelley will receive the
lists subject to the satisfaction of certain conditions on their part,
including taking the motion off calendar, dismissing the petition without
prejudice and providing an affidavit required by Rule 14a-7 of the federal
proxy rules. The date of the Annual Meeting will not be postponed.
In the event The Powell Group's proxy solicitation results in its obtaining
control of the ERLY Board of Directors, the new board of directors (the
"Powell Board") intends to restructure the Company's management and to elect
Ms. Kelley as the President and Chief Executive Officer and Mr. Spain as the
Managing Director of the Company.
The Powell Group also believes shareholders should vote AGAINST the
Cumulative Voting Proposal and the Written Consent Proposal. The Powell Group
believes that each of these proposals is being introduced by the Company in
order to entrench management in direct response to the efforts by The Powell
Group to exercise its shareholder rights. The Powell Group believes that the
ability of shareholders to act by written consent provides an important means
for shareholders to participate in corporate decision making and should be
retained. The Powell Group actively considered entering into a consent
solicitation, among other things, to remove the incumbent directors and to
call a special meeting of shareholders to elect their replacements. Although
The Powell Group did circulate preliminary consent materials to a very limited
number of shareholders, when it became apparent that the Company intended to
hold its Annual Meeting on September 26, 1997, The Powell Group elected not to
proceed with the removal effort by written consent and instead chose to engage
in a proxy contest with respect to the election of directors at the Annual
Meeting. However, should the Company decide to delay the Annual Meeting or
move the record date for the meeting, The Powell Group could decide to proceed
with the consent solicitation. The Powell Group believes that management's
Written Consent Proposal would make it more difficult for The Powell Group or
any other shareholder to hold management accountable and to act independently
from management to approve fundamental matters relating to the Company.
Cumulative voting in the election of directors as described above under
"General" is required under California law with certain exceptions and is
designed to provide for fair representation at the Board level for minority
shareholders. A simple majority of shareholders in attendance at any
shareholders meeting is required to elect each director, but with cumulative
voting, a group of minority shareholders can be assured of representation on
the board if it holds just over one-sixth ( 1/6) of the outstanding shares.
Absent cumulative voting, a simple majority of the Company's shareholders in
attendance at an annual meeting would be entitled to elect all of the members
of the Company's Board, which means that, if existing management, which
currently owns approximately 38% of the outstanding shares, can obtain proxies
for only 13% of the outstanding shares, management could remain in control of
the Company and, in the Powell Group's view, unaccountable to shareholders
indefinitely. Moreover, The Powell Group believes that cumulative voting for
directors promotes the presentation of differing views of shareholders and is
therefore an important element of corporate shareholder democracy.
Consequently, The Powell Group recommends you vote AGAINST the Cumulative
Voting Proposal and the Written Consent Proposal.
4
<PAGE>
YOUR VOTE IS IMPORTANT
Carefully review the Proxy Statement and the enclosed materials. YOUR VOTE
IS IMPORTANT. IF YOU ARE UNABLE TO ATTEND THE ANNUAL MEETING IN PERSON YOUR
PROXY IS THE ONLY MEANS AVAILABLE FOR YOU TO VOTE. No matter how many or how
few shares you own, please vote FOR the election of the Powell Nominees for
director and AGAINST the Cumulative Voting Proposal and the Written Consent
Proposal by so indicating and by signing, marking, dating and mailing the
enclosed BLUE Proxy promptly.
If you own shares of the Company but your stock certificate is held for you
by a brokerage firm, bank or other institution, it is very likely that the
stock certificate is actually in the name of such brokerage firm, bank or
other institution. If so, only it can execute a BLUE Proxy and vote your
shares of Common Stock. The brokerage firm, bank, or other institution holding
the shares for you is required to forward proxy materials to you and solicit
your instructions with respect to the granting of proxies; it cannot vote your
shares unless it receives your specific instructions.
If your shares are held in your name, please mark, sign, date and mail the
enclosed BLUE Proxy to The Powell Group in the postage-paid envelope provided.
If your shares are held in the name of a brokerage firm, bank nominee or other
institution, you should receive a voting instruction form and envelope from
such institution which should be used to give your instructions to the person
responsible for your account. Only that institution can vote your shares and
only upon receipt of specific instructions from you. Remember, no matter how
many shares you own, your vote is important. Please act promptly in executing
and mailing your BLUE Proxy.
The Powell Group has retained D.F. King & Co., Inc. ("D.F. King") to assist
in the proxy process. If you have any questions about giving your proxy or
require assistance in voting your shares, please contact:
D.F. KING & CO., INC.
77 Water Street
New York, New York 10005
(212) 269-5550 (call collect) or
CALL TOLL FREE: (800) 290-6430
5
<PAGE>
THE POWELL GROUP AND OTHER PARTICIPANTS
TPG is a diversified holding company based in Baton Rouge, Louisiana.
Founded in 1895, TPG owns and operates subsidiaries in the business of rice
milling, rice farming and rice hull-fired power generation. TPG also has
interests in radio broadcasting, travel management, land development,
commercial real estate development and holdings, timber holdings and
residential construction. Nanette N. Kelley, elected President and Chief
Executive Officer of TPG in 1991, led a restructuring of TPG's business which
occurred over the course of three years. Thereafter, she implemented a
strategic plan which included selling unprofitable assets, integrating TPG's
rice business and real estate business and acquiring positions in the radio
broadcast industry.
TPG's wholly-owned subsidiary, Farmers Rice Milling Company, Inc., a
Louisiana corporation ("Farmers Rice"), engages in the purchase and milling of
rough rice and the sale of rice and rice byproducts. Its mill is located at
Chloe, Louisiana, approximately five miles east of Lake Charles, Louisiana,
and is capable of milling 900 cwts (hundred weights) of rough paddy rice per
hour. Hardy Rice Dryer, a division of Farmers Rice, operates in Lacassane,
Louisiana as Louisiana's largest rough rice and soybean storage facility. The
mill is equipped with modern milling, sorting, conveying and aspirating
equipment and has the ability to mill a wide spectrum of rice mixtures to meet
government, export and domestic specifications. It purchases its rough rice
from farmers, agricultural cooperatives and brokers and sells the milled rice
to grain exporters in the United States, foreign governments and other large
consumer groups. The mill does not produce packaged rice for the domestic or
foreign retail trade. The mill also produces rice bran and broken rice for the
domestic brewing and animal feed businesses. The mill employs 56 people in the
milling process and operates 24 hours a day all year, with the exception of
downtime for fumigation, maintenance and unforeseen market conditions.
The Powell Group does not believe that it is a direct competitor of the
Company or ARI. Farmers Rice and ARI are approximately 300 miles apart, and,
as a result, the two companies purchase substantially all of their rice from
different suppliers. In fact, The Powell Group estimates that less than one-
half of one percent of the rough rice purchased by Farmers Rice is available
to ARI for purchase in its market area. Farmers Rice is in the rice commodity
business, with no private labels and no packaging in sizes smaller than 25
pound bags. ARI, according to its public filings, is in the private label rice
business and sells branded, packaged rice in sizes as small as one-pound bags.
As a consequence, ARI sells to different purchasers through different
distribution channels than Farmers Rice. Even though a portion of ARI's
business could be characterized as a commodity business similar to Farmers
Rice, given their geographic separation, rice processed and sold by the two
companies to private labellers is not, except in rare circumstances, resold at
the retail level in common market areas. Because the two companies are not in
direct competition, The Powell Group does not believe that there are material
conflicts of interest that would arise on the Board of Directors from the
operations of the two companies, if The Powell Group's nominees were elected
to the ERLY Board.
Although this Proxy Solicitation is being undertaken by TPG, Farmers Rice
and Nanette N. Kelley, certain other persons may be deemed "participants" in
this proxy solicitation, including each of the Powell Nominees (in addition to
Ms. Kelley, William D. Blake, Robert Arthur Seale, Eugene A. Cafiero and John
M. Spain), First Global Securities, Inc. ("First Global"), The Powell Group's
financial advisor, and Noble B. Trenham, the Co-Chairman and Chief Investment
Officer of First Global. In July 1987, Mr. Trenham and certain other parties
were the subject of a civil injunctive action by the Securities and Exchange
Commission (the "SEC") alleging certain violations of the securities laws,
including Section 13(d) of the Securities Exchange Act of 1934. Without
admitting or denying the allegations against him, Mr. Trenham consented to the
entry of a final judgment permanently enjoining and restraining him from
further violations of those provisions of the federal securities laws which he
was alleged to have violated. In connection with the entry of judgment, Mr.
Trenham waived, and the court did not enter, any findings of fact or
conclusions of law.
In connection with the Company's 1996 Annual Meeting of Shareholders, Mr.
Trenham discussed with Mr. Gerald Murphy the possibility of adding Mr. Cafiero
to the ERLY Board of Directors. Prior to the meeting, Mr. Murphy met Mr.
Cafiero and appeared to be agreeable to Mr. Trenham's proposal but suggested
that the addition should occur shortly after the meeting rather than at the
annual meeting and following a meeting
6
<PAGE>
between Mr. Cafiero and ERLY's outside directors. Although Mr. Cafiero met
with two outside directors of ERLY, no further steps were ever taken by Mr.
Murphy to add Mr. Cafiero to the Company's Board of Directors following the
annual meeting. In 1989, First Global, Mr. Trenham and certain other
shareholders considered, but did not pursue, a proxy contest for the election
of directors, after Mr. Murphy agreed to propose and elect Mr. Mark C.
Hungerford as a director of ERLY.
As of the date hereof, Farmers Rice owns an aggregate of 171,933 shares of
the Company's Common Stock and Nanette N. Kelley owns an aggregate of 16,400
shares of the Company's Common Stock, together, representing in the aggregate
approximately 3.6% of the Common Stock currently outstanding. The Powell Group
and the other participants in the proxy solicitation listed above together own
an aggregate of 202,975 shares of Common Stock, representing approximately
3.9% of the Common Stock currently outstanding. See "Security Ownership--
Security Ownership of The Powell Group and Other Participants." Accordingly,
The Powell Group believes that its interests are aligned with the interests of
all ERLY shareholders.
In the event The Powell Group's proxy solicitation results in its obtaining
control of the ERLY Board of Directors, the new board of directors of the
Company intends to restructure the Company's management as the first step in
its efforts to enhance shareholder value. The new board intends to elect
Nanette N. Kelley as President and Chief Executive Officer of the Company, and
John M. Spain, Managing Director of TPG and Farmers Rice, as Managing Director
of the Company. The Powell Group generally intends to reorganize the Company
and ARI, to reduce their combined annual operating costs, expand their global
sales, stabilize relations with major customers and enter into new markets.
Based upon discussions with potential financing sources and subject to the
repayment terms of the notes described below, The Powell Group believes that
under new management it will be possible to refinance ARI's $100 million
principal amount of 13% Mortgage Notes at more favorable interest rates
thereby further reducing the Company's combined expenses. The Powell Group
expects to consider elimination of the Company's non-core business operations
through the possible sale of such operations, although The Powell Group at
present has not identified any specific assets or operations for elimination.
The Powell Group further expects to consider combining the Company's
operations with that of The Powell Group, with Farmers Rice as a wholly-owned
subsidiary, but has no present plans to do so. If and to the extent that any
such transaction requires the approval of shareholders of the Company, the
shareholders of the Company will be given the opportunity to vote on such
transaction. The Powell Group may also consider reducing overhead costs by
closing the Company's headquarters in Los Angeles and consolidating executive
offices in Louisiana. Except for the election of officers described above, The
Powell Group does not currently have any specific plans to implement its
objectives and will require additional information and time to analyze and
understand fully the existing operations of ERLY before proposing any specific
plans. Any actions undertaken, however, will be with a view towards enhancing
value for all ERLY shareholders.
Upon a change in control of the Company which also results in a change in
control of ARI or in the event of certain changes in the composition of the
board of directors of ARI, the holders of ARI's 13% Mortgage Notes due 2002
shall have the right to require ARI to repurchase the notes at a purchase
price of 101% of the accreted value of the notes as defined. In such event,
Powell may seek a waiver from the lenders not to exercise such rights. Powell
may also seek, to the extent possible, to refinance such debt; however, the
notes by their terms are not redeemable prior to July 31, 1999 and then only
at a redemption price of 107% of par declining to 100% of par on July 31, 2001
and thereafter. In the event that the holders of the 13% Mortgage Notes
exercise their right of redemption at 101% of the accreted value of the notes,
The Powell Group estimates that the cost to the Company to refinance the
notes, including the payment of the redemption premium, would be approximately
$950,000, which The Powell Group believes would be substantially less than the
savings generated by reduced interest costs. By refinancing the 13% Mortgage
Notes at 9-10% fixed rates (which The Powell Group believes is a fair estimate
of new interest rates that might be obtainable), annual interest costs will be
reduced by almost $5 million.
7
<PAGE>
INTEREST OF CERTAIN PERSONS IN MATTERS TO BE ACTED
UPON AND RELATED ADDITIONAL INFORMATION
Except as described herein, neither The Powell Group, the other participants
in this proxy solicitation nor any of their respective associates (i) has
engaged in or has a direct or indirect interest in any transaction or series
of transactions since the beginning of the Company's last fiscal year or in
any currently proposed transaction, to which the Company or any of its
subsidiaries is a party where the amount involved was in excess of $60,000,
(ii) is the beneficial or record owner of any securities of the Company or any
parent or subsidiary thereof, (iii) is the record owner of any securities of
the Company of which it may not be deemed to be the beneficial owner, (iv) has
been within the past year, a party to any contract, arrangement or
understanding with any person with respect to any securities of the Company or
(v) has any agreement or understanding with respect to future employment by
the Company or any arrangement or understanding with respect to any future
transactions to which the Company will or may be a party.
See "Security Ownership" for information regarding beneficial ownership of
Common Stock by the participants in this proxy solicitation, persons who
beneficially own more than 5% of the Common Stock and the management of the
Company.
THE POWELL GROUP'S SLATE
William D. Blake, Eugene A. Cafiero, Nanette Noland Kelley, Robert Arthur
Seale and John M. Spain are the Powell Nominees for election to the Company's
Board of Directors at the Annual Meeting. Biographical data on each of the
Powell Nominees is set forth below.
WILLIAM D. BLAKE (64) is one of The Powell Group's nominees for director.
Mr. Blake has served since 1961 as General Manager of Quatre Parish Company
and of John A. Bel Estate and since 1988 as President of The Lacassane
Company. These companies are primarily focused in the agriculture/land
holdings field. Mr. Blake's experience extends particularly to the rice,
timber, oil and gas and real estate industries. Mr. Blake also manages a
substantial block of real estate in Louisiana. Mr. Blake has served on the
Board of Directors of the Arts and Humanities Council, the Chamber of
Commerce, the Coordinating Council on Drug Abuse, Kiwanis Club and Community
Development Foundation. He has also served on the Committee of 100 for
Economic Development (Louisiana), the Louisiana Association for Business and
Industry and the Louisiana Council for Fiscal Reform. Mr. Blake graduated from
Louisiana State University in 1955 with a degree in geology.
EUGENE A. CAFIERO (71) is one of The Powell Group's nominees for director.
Mr. Cafiero has been Chairman of Voltarc Technologies, Inc., a major
manufacturer of specialty lamps and wiring devices for germicidal, aerospace,
reprographic, illuminated sign and other applications, since 1993. From 1986
to 1993, Mr. Cafiero served as Chairman and Chief Executive Officer of KD
Holdings, Inc. and KDI Corporation, a diversified manufacturing company. Mr.
Cafiero also served as Chief Executive Officer of Ariadne Australia, Ltd. and
President and Chief Executive Officer of Mid-American Communications. Mr.
Cafiero is the past president and director of Keene Corporation, a
manufacturer of bearings, lighting fixtures, electronics and laminated
products for printed circuit boards and other applications; past president and
chief operating officer and vice chairman of Chrysler Corporation; principle
founder of Computerized Security Systems, maker of electronic locks for the
lodging industry. Mr. Cafiero is a graduate of Dartmouth College and holds a
Master of Science in Industrial Management from the Massachusetts Institute of
Technology and an Honorary Doctorate of Science from Wittenburg University. He
has served as an overseer at the Tuck School of Business and on the Visiting
Committee of the MIT Sloan School of Business Management.
NANETTE N. KELLEY (38) is one of The Powell Group's nominees for director.
Mrs. Kelley has been the President and Chief Executive Officer of The Powell
Group since 1991. Mrs. Kelley has served on the Board of Directors of the
Baton Rouge Symphony, on the Board of Directors and Executive Committee of the
Greater Baton Rouge Chamber of Commerce and as a Board Member and Vice
Chairman of the Academic Distinction
8
<PAGE>
Fund. She is currently serving as Secretary/Treasurer of St. James Place, an
accredited Continuing Care Retirement Center, after having served as Chairman
and Vice Chairman. She presently serves on the Board of Trustees of the
Pennington Biomedical Research Foundation, as well as on the Council for a
Better Louisiana, as a Board Member for the LSU College of Business
Administration Partnership for Excellence, as a Trustee for the Public Affairs
Research Council, as a Member of the Executive Committee of and Forum Officer
for the Young President's Organization, and as Vice Chairman of General Health
Systems, an integrated health care delivery system. She serves on the Board of
Directors of Union Planters Bank and The Lacassane Company. She has been
recognized by the Center for Creative Leadership and Beta Gamma Sigma Business
Fraternity. Mrs. Kelley teaches at Louisiana State University in the
undergraduate and MBA programs. She is Music Committee Chairman at her church
and sings in the choir. She holds pilot licenses for single-engine and multi-
engine land and instrument flying machines.
ROBERT ARTHUR SEALE (55) is one of The Powell Group's nominees for director.
Mr. Seale was a senior partner and administrative head of the Personal Tax &
Estates Group of the law firm Vinson & Elkins in Houston, Texas until his
retirement in March 1997. Mr. Seale had practiced law with Vinson & Elkins
since 1969. His practice focused on tax and financial structuring of
businesses involved in mining, aircraft manufacturing, thoroughbred racing and
breeding, banking and real estate development. During the last five years Mr.
Seale has been involved in the tax-free reorganizations of closely held
businesses into family partnerships and "split-offs" of corporations for
business purposes. Mr. Seale currently serves as the Chair of the University
of Texas Health Science Center Planned Giving Committee, President of The
Vivian L. Smith Foundation for Neurologic Research, President of The Lyons
Foundation, Director of The Margaret and J.A. Elkins, Jr. Foundation, Chairman
of Child Advocates, Inc. Endowment and a Director of Child Advocates, Inc. Mr.
Seale is a Fellow of the Texas Bar Association and a Fellow of the Houston Bar
Association. He earned both his undergraduate and Juris Doctor degrees from
Louisiana State University in 1964 and 1967, respectively.
JOHN M. SPAIN (48) is one of The Powell Group's nominees for director. Mr.
Spain has been the Managing Director of The Powell Group since 1995. From 1989
to 1995, Mr. Spain served as the Station Manager and Director of New
Operations for Baton Rouge television station WBRZ-TV. Prior to that time, Mr.
Spain was WBRZ-TV's News Director. Mr. Spain is the current Chairman of the
Baton Rouge Visitors and Convention Committee and President of the Executive
Committee for Louisiana Arts and Science Center. He is the Past President of
the Radio Television News Director's Association and Past Chairman of the ABC
Television Network's News Advisory Board and has served on the National
Accrediting Council for Journalism and Mass Communication (AEJMC) and the
National Board of Directors of the American Heart Association.
Each of the nominees has consented to serve as a director and, if elected,
intends to discharge his or her duties as director of the Company in
compliance with all applicable legal requirements, including the general
fiduciary obligations imposed upon corporate directors.
The Board of Directors of the Company has a single class of directors. At
each annual meeting of shareholders, the directors are elected to a one-year
term. The current board was elected on or about September 17, 1996. The
nominees proposed by The Powell Group, if elected, would serve as directors
for terms expiring in or about September 1998 or until the due election and
qualification of their successors. The Powell Group has no reason to believe
any of its nominees will be disqualified or unable or unwilling to serve if
elected. However, in the event that any member of The Powell Group's slate
should become unavailable for any reason, or should it become necessary or
appropriate for The Powell Group to nominate additional persons, The Powell
Group will seek to vote, to the extent permitted by law, the proxies for such
other persons as it nominates.
9
<PAGE>
VOTE REQUIRED
ELECTION OF DIRECTORS
Five directors shall be elected at the Annual Meeting to serve until the
next annual meeting and until their successors shall be elected and qualified.
As described above under "General," in voting for directors, each shareholder
has the right to cumulate his or her votes and give one candidate a number of
votes equal to the number of directors to be elected multiplied by the number
of votes to which his or her shares are entitled, or to distribute that total
number of votes among as many candidates as he or she desires. The five
candidates receiving the highest number of votes will be elected.
CUMULATIVE VOTING AND WRITTEN CONSENT PROPOSALS
The affirmative vote of a majority of the Company's outstanding shares of
Common Stock is required to approve each of these proposals which will be
voted on separately.
BROKER NON-VOTES
A "broker non-vote" is a vote withheld by a broker on a particular matter
because the broker has not received instructions from the customer for whose
account the shares are held. Broker non-votes and abstentions will be treated
as shares that are present and entitled to vote for purposes of determining
the presence of a quorum. Broker non-votes and abstentions will have no effect
on the election of directors. Broker non-votes and abstentions will have the
effect of a no vote on the Cumulative Voting and Written Consent Proposals
because, as stated above under "--Cumulative Voting and Written Consent
Proposals," the affirmative vote of a majority of the outstanding shares is
required to approve each of these proposals.
10
<PAGE>
SECURITY OWNERSHIP
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of August 22, 1997 (unless otherwise
indicated), to the knowledge of The Powell Group and based on a review of
publicly available information, each person reported to own beneficially more
than 5% of the Company's outstanding Common Stock and each of the directors
and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF
BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS(1)
- ------------------- -------------------- -------------------
<S> <C> <C>
Gerald D. Murphy(2)(3)................ 1,590,817 30.2%
Douglas A. Murphy(2)(4)............... 632,552 12.0%
William H. Burgess(5)(6).............. 210,000 4.0%
Richard N. McCombs(2)(6).............. 137,482 2.6%
Bill J. McFarland(2)(6)............... 46,522 *
Alan M. Wiener(2)(6).................. 4,009 *
Thurston F. Teele(6)(7)............... 0 --
Kennedy Capital Management, Inc.(8)... 585,518 11.2%
All directors and executive officers
as a group (11 persons)(6)(9)........ 2,013,501 37.3%
</TABLE>
- --------
* Less than 1%.
(1) Computed on the basis of 5,220,337 shares outstanding as of August 22,
1997 as reported in the Company's Preliminary Proxy Statement, filed with
the Securities and Exchange Commission on August 22, 1997 (the "ERLY
Proxy"). The percentage of shares held assumes that options held by the
particular individual, if any, that are exercisable on August 22, 1997, or
within 60 days of such date, have been exercised, and no others.
(2) The address of such beneficial owner is 10990 Wilshire Boulevard, Suite
1800, Los Angeles, California 90024.
(3) Such information, except percentages, is derived from the ERLY Proxy.
Includes 581,463 shares owned directly by Mr. Gerald Murphy's son, Douglas
A. Murphy, and 5,050 shares held in trust for Mr. Gerald Murphy's
grandson. Also includes 51,089 shares which Douglas A. Murphy has the
right to acquire pursuant to outstanding stock options.
(4) Such information, except percentages, is derived from the ERLY Proxy.
Includes 51,089 shares which Mr. Douglas Murphy has the right to acquire
pursuant to outstanding stock options.
(5) Mr. Burgess' address is 550 Palisades Drive, Palm Springs, California
92262.
(6) Such information, except percentages, is derived from the ERLY Proxy.
(7) Mr. Teele is the President of Chemtronics Industries, Inc., a wholly-owned
subsidiary of the Company. His address is 1133 20th Street, N.W.,
Washington, D.C. 20036.
(8) Such information is derived from a Schedule 13G dated February 7, 1997
filed by Kennedy Capital Management, Inc. with the Securities and Exchange
Commission. Kennedy Capital Management, Inc. is an investment advisor. The
address of Kennedy Capital Management, Inc. set forth in its Schedule 13G
is 10829 Olive Boulevard, St. Louis, Missouri 63141.
(9) Includes 173,314 shares which officers of the Company have the right to
acquire pursuant to outstanding stock options.
11
<PAGE>
SECURITY OWNERSHIP OF THE POWELL GROUP AND OTHER PARTICIPANTS
The names, business addresses, principal business occupations (unless
disclosed elsewhere in this Proxy Statement) and number of shares of Common
Stock beneficially owned as of August 22, 1997, unless otherwise noted, by The
Powell Group and other participants in this solicitation are set forth below.
The number of shares of Common Stock beneficially owned includes shares in
which the persons set forth in the table have either investment or voting
power. Unless otherwise indicated, all of such interests are owned directly,
and the indicated person or entity has sole voting and investment power.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF
BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS(1)
- ------------------- -------------------- -------------------
<S> <C> <C>
The Powell Group(2)..... 171,933(3) 3.3%
Farmers Rice Milling
Company, Inc.(2)....... 171,933 3.3%
Nanette N. Kelley(2)(4). 188,333(5) 3.6%
William D. Blake(6)..... 14,630 *
John M. Spain(2)........ 171,933(3) 3.3%
Eugene A. Cafiero(7).... 0 --
Robert Arthur Seale(8).. 0 --
First Global Securities,
Inc.(9)................ 5 *
Noble B. Trenham(10).... 12(11) *
</TABLE>
- --------
* Less than 1%.
(1) Computed on the basis of 5,220,337 shares outstanding as of August 22,
1997 as reported in the ERLY Proxy.
(2) The business address of such person is P.O. Box 788, Baton Rouge,
Louisiana 70821.
(3) Includes 171,933 shares held by Farmers Rice Milling Company, Inc.
(4) Ms. Kelley's husband is Timothy Kelley. Mr. Kelley disclaims beneficial
ownership of all of the shares owned by Ms. Kelley pursuant to the terms
of a marriage contract between Mr. and Mrs. Kelley.
(5) Includes 171,933 shares held by Farmers Rice Milling Company, Inc. and
16,400 shares held of record by Ms. Kelley.
(6) The business address of such person is P.O. Box 1447, Lake Charles,
Louisiana 70602. Mr. Blake's wife is Kay Blake. Ms. Blake may be deemed to
share beneficial ownership with respect to some or all of the shares owned
by Mr. Blake. Ms. Blake disclaims beneficial ownership of such shares.
(7) The business address of such person is 400 Captain Neville Drive,
Waterbury, Connecticut 06705.
(8) The business address of such person is 1331 Lamar Street, Suite 1170,
Houston, Texas 77010.
(9) First Global Securities, Inc. is a broker dealer. The business address of
First Global Securities, Inc. is 790 East Colorado Boulevard, Suite 500,
Pasadena, California 91101.
(10) Mr. Trenham's principal business occupation is serving as Co-Chairman and
Chief Investment Officer of First Global Securities, Inc. The business
address of Mr. Trenham is 790 East Colorado Boulevard, Suite 500,
Pasadena, California 91101. Mr. Trenham's wife is Susan W. Trenham whose
principal business occupation is Chief Executive Officer and Co-Chairman
of First Global Securities, Inc. Ms. Trenham may be deemed to share
beneficial ownership with respect to the shares owned by First Global
Securities, Inc. and Mr. Trenham.
(11) Includes 5 shares held by First Global, Securities, Inc. and 7 shares
held of record by Mr. Trenham.
12
<PAGE>
PURCHASES AND SALES BY FARMERS RICE MILLING COMPANY, INC. WITHIN THE LAST TWO
YEARS:
<TABLE>
<CAPTION>
DATE NUMBER OF SHARES
---- ------------------
<S> <C>
3/10/97................................................... 171,933 (purchase)
PURCHASES AND SALES BY NANETTE N. KELLEY WITHIN THE LAST TWO YEARS:
<CAPTION>
DATE NUMBER OF SHARES
---- ------------------
<S> <C>
3/10/97................................................... 16,400 (purchase)
PURCHASES AND SALES BY WILLIAM D. BLAKE WITHIN THE LAST TWO YEARS:
<CAPTION>
DATES NUMBER OF SHARES
----- ------------------
<S> <C>
9/23/96................................................... 1,000 (purchase)
2/24/97................................................... 1,000 (purchase)
4/1/97.................................................... 2,000 (purchase)
4/16/97................................................... 1,000 (purchase)
4/17/97................................................... 1,000 (purchase)
6/24/97................................................... 1,600 (purchase)
7/7/97.................................................... 2,000 (purchase)
7/21/97................................................... 1,000 (purchase)
7/25/97................................................... 500 (purchase)
</TABLE>
SOLICITATION EXPENSES
Proxies will be solicited by mail, telephone, facsimile and other electronic
means, telegram and/or personal solicitation, by officers, employees and
agents of The Powell Group, including its financial advisor, First Global, and
its employees. The Powell Board may also solicit proxies. Other than First
Global, no such persons shall receive additional compensation for such
solicitation. The Powell Group has agreed to pay First Global a fee of
$505,000, plus expenses, if the proxy solicitation is successful. Noble B.
Trenham, a participant in this solicitation, is Co-Chairman and Chief
Investment Officer of First Global.
In addition, The Powell Group has retained D.F. King to act as an advisor in
connection with this proxy solicitation. The Powell Group has agreed to pay
D.F. King a fee estimated not to exceed $50,000 plus reasonable out-of-pocket
expenses for services in connection with this proxy solicitation.
Approximately 50 persons will be used by D.F. King in its solicitation
efforts.
If your shares are registered in your own name, you may mail your proxy to
The Powell Group in the postage paid envelope provided.
If your shares are held in "street name"--held by your brokerage firm or
bank--immediately instruct your broker or bank representative to execute The
Powell Group's BLUE Proxy on your behalf. You should also mark, sign, date and
return your BLUE Proxy (or voting instruction form) to your broker or banker
when you receive it in the mail. If you have additional questions, please
call:
D.F. KING & CO., INC.
77 Water Street
New York, New York 10005
CALL: (800) 290-6430
FAX: (212) 809-8839
13
<PAGE>
The Powell Group anticipates that a total of approximately $750,000 will be
spent in connection with the proxy solicitation. Actual expenditures may vary
materially from the estimate, however, as many of the expenditures cannot be
readily predicted. To date, expenses of approximately $150,000 have been
incurred in connection with the solicitation. The entire expense of preparing,
assembling, printing and mailing this Proxy Statement and any other proxy
solicitation materials and the cost of soliciting proxies will initially be
borne by The Powell Group. The Powell Group believes that the actions it is
taking are in the best interest of all the Company's shareholders.
Accordingly, if the Powell Nominees are elected pursuant to this proxy
solicitation, The Powell Group intends to request reimbursement from the
Company for these expenses. This request will not be submitted to a vote of
the Company's shareholders. Banks, brokerage houses and other custodians,
nominees and fiduciaries may be requested to forward The Powell Group's
solicitation material to the beneficial owners of the shares they hold of
record, and The Powell Group will reimburse them for their reasonable out-of-
pocket expenses.
YOUR VOTE IS IMPORTANT. NO MATTER HOW MANY OR HOW FEW SHARES YOU OWN, PLEASE
VOTE FOR THE ELECTION OF THE POWELL NOMINEES BY MARKING, SIGNING, DATING AND
MAILING THE ENCLOSED BLUE PROXY PROMPTLY. PLEASE ACT TODAY.
WE ASK THAT YOU VOTE TO REMOVE THE CURRENT DIRECTORS--DIRECTORS WHO SHOULD
BE HELD RESPONSIBLE FOR THE FACT THAT IN OUR OPINION YOUR STOCK, AS
DEMONSTRATED IN THE COMPARATIVE STOCK PRICE PERFORMANCE INFORMATION INCLUDED
HEREIN, HAS WOEFULLY UNDERPERFORMED THE STOCK MARKET SINCE 1987.
IN ADDITION, WE ASK THAT YOU VOTE AGAINST THE CUMULATIVE VOTING PROPOSAL AND
THE WRITTEN CONSENT PROPOSAL, BOTH OF WHICH WE BELIEVE DIMINISH OUR RIGHTS AS
SHAREHOLDERS TO PARTICIPATE IN THE AFFAIRS OF OUR COMPANY.
14
<PAGE>
IMPORTANT
Your vote is important, no matter how many shares you own. To support The
Powell Group, please promptly take these few easy steps:
1. If your shares are registered in your own name(s), please mark, sign,
date and mail the enclosed BLUE Proxy to The Powell Group in the postage-paid
envelope provided.
2. If your shares are held in the name of a brokerage firm, bank nominee or
other institution, only it can sign a BLUE Proxy with respect to your shares
and only after receiving your specific instructions. Accordingly, please mark,
sign, date and mail the enclosed BLUE Proxy or voting instruction form you
received from the brokerage firm, bank nominee or other institution in whose
name your shares are held in the postage-paid envelope provided. Please do so
for each account you maintain. To ensure that your shares are voted, you
should also contact the person responsible for your account and give
instructions for a BLUE Proxy to be issued representing your shares.
3. After signing the enclosed BLUE Proxy or voting instruction form, do not
sign or return any card or form sent to you by ERLY, not even as a vote of
protest. Remember, only your latest dated proxy will count.
If you have ANY questions about giving your proxy or require assistance,
please call:
D.F. KING & CO., INC.
77 Water Street
New York, NY 10005
(212) 269-5550 (Collect)
or
CALL TOLL-FREE
(800) 290-6430
15
<PAGE>
- --------------------------------------------------------------------------------
PROXY
ERLY INDUSTRIES INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE
THE POWELL GROUP, FARMERS RICE MILLING COMPANY, INC.
AND NANETTE N. KELLEY
FOR THE ANNUAL MEETING OF SHAREHOLDERS ON
SEPTEMBER 26, 1997
The undersigned hereby revokes all prior proxies given by the undersigned
and appoints Nanette N. Kelley and John M. Spain, or any one of them, as
Proxies, each with the power to appoint his substitute, and hereby authorizes
them and each of them to represent and to vote, as designated below, at the
Annual Meeting of Shareholders to be held on September 26, 1997 or any
adjournment thereof, all the shares of Common Stock of ERLY Industries Inc.
which the undersigned is entitled to vote thereat.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED
HEREIN. UNLESS OTHERWISE SPECIFIED, THIS PROXY WILL BE VOTED FOR THE ELECTION
OF THE POWELL GROUP'S NOMINEES AS DIRECTORS, AGAINST THE PROPOSALS TO AMEND
THE ARTICLES OF INCORPORATION TO ELIMINATE CUMULATIVE VOTING AND TO ELIMINATE
SHAREHOLDER ACTION BY WRITTEN CONSENT AND IN THEIR DISCRETION ON ANY OTHER
MATTERS THAT PROPERLY COME BEFORE THE ANNUAL MEETING.
(Continued and to be signed on other side)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- FOLD AND DETACH HERE -
<PAGE>
- --------------------------------------------------------------------------------
[X] Please mark
your votes
as this
1. ELECTION OFDIRECTORS: FOR ALL WITHHOLD
NOMINEES AUTHORITY TO
LISTED VOTE FOR ALL
BELOW NOMINEES BELOW
[_] [_]
William D. Blake
Robert Arthur Seale
Nanette Noland Kelley
Eugene A. Cafiero
John M. Spain
TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, CHECK THE "FOR ALL
NOMINEES LISTED BELOW" BOX ABOVE AND STRIKE A LINE THROUGH THAT NOMINEE'S NAME
IN THE LIST ABOVE.
2. ELIMINATION OF FOR AGAINST ABSTAIN
CUMULATIVE VOTING: [_] [_] [_]
3. ELIMINATION OF FOR AGAINST ABSTAIN
SHAREHOLDER ACTION [_] [_] [_]
BY WRITTEN CONSENT:
4. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER
MATTERS AS MAY PROPERLY COME BEFORE THE ANNUAL MEETING.
This proxy, when properly executed, will be voted in the manner directed
herein by the undersigned shareholder. IF NO DIRECTION IS MADE, THIS PROXY
WILL BE VOTED FOR ALL OF THE NOMINEES LISTED ABOVE AND AGAINST PROPOSALS 2.
AND 3.
Please sign exactly as your name appears on the stock certificates evidencing
your shares. If your shares are registered in more than one name, the
signature of all such persons should be provided. A corporation should sign in
its full corporate name by a duly authorized officer, stating his/her title.
Trustees, guardians, executors, and administrators should sign in their
official capacity, giving their full title as such. If the shares are held in
the name of a partnership, please have the authorized persons sign on behalf
of the partnership. The proxy card votes all shares in all capacities.
A PROXY EXECUTED BY A SHAREHOLDER MAY BE REVOKED AT ANY TIME PRIOR TO THE TIME
THAT THE VOTE AUTHORIZED BY THE EXECUTED PROXY HAS BEEN TAKEN.
THE POWELL GROUP STRONGLY RECOMMENDS A VOTE FOR ALL NOMINEES LISTED ABOVE AND
A VOTE AGAINST PROPOSALS 2. AND 3.
Signature(s)__________________ Title:____________________ Dated:_______ , 1997
PLEASE MARK, SIGN, DATE AND MAIL YOUR BLUE PROXY TODAY. [IMPORTANT--PLEASE
FILL IN DATE]
<PAGE>
EXHIBIT 2
GIBSON, DUNN & CRUTCHER LLP
DANIEL S. FLOYD, SBN 123819
KEVIN S. ROSEN, SBN 133304
DANIEL N. SHALLMAN, SBN 180782
333 South Grand Avenue
Los Angeles, California 90071-3197
(213) 229-7000
Attorneys for Plaintiff FARMERS RICE MILLING COMPANY, INC., a Louisiana
Corporation
UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
WESTERN DIVISION
FARMERS RICE MILLING CASE NO. CV 97-5483 MRP (Anx)
COMPANY, INC., a Louisiana JURY TRIAL DEMANDED
Corporation, Derivatively ------------------------------------------------
on Behalf of Nominal VERIFIED FIRST AMENDED DERIVATIVE COMPLAINT FOR:
Defendants ERLY INDUSTRIES
INC., a California (1) BREACH OF FIDUCIARY DUTY;
Corporation, and AMERICAN (2) WASTE OF CORPORATE ASSETS;
RICE, INC., a Texas (3) ILLEGAL CORPORATE LOAN; AND
Corporation, (4) INJUNCTIVE RELIEF PROHIBITING ERLY
Plaintiff, INDUSTRIES AND AMERICAN RICE FROM MAKING
ON-GOING PAYMENTS ON BEHALF OF DEFENDANTS
AND REQUIRING ON-GOING INDEMNIFICATION
v. BY THE DEFENDANTS TO ERLY INDUSTRIES
GERALD D. MURPHY, DOUGLAS A. AND AMERICAN RICE
MURPHY, BILL J. McFARLAND,
WILLIAM H. BURGESS, ALAN M.
WIENER, S.C. BAIN, J.R.,
JOHN M. HOWLAND, RICHARD N.
McCOMBS, GEORGE E. PRCHAL,
and DOES 1 through 100,
Inclusive,
Defendants,
- and -
ERLY INDUSTRIES INC., a
California Corporation, and
AMERICAN RICE, INC., a
Texas Corporation,
Nominal Defendants.
- ------------------------------------
Plaintiff Farmers Rice Milling Company, Inc. ("Farmers"), on knowledge as
to plaintiff, and otherwise upon information and belief, alleges as follows:
<PAGE>
JURISDICTION AND VENUE
----------------------
1. Complete Diversity of Citizenship: Plaintiff Farmers is a corporation
---------------------------------
incorporated under the laws of the State of Louisiana having its principal place
of business in the State of Louisiana. None of the Defendants is a resident of
the state of Louisiana:
(a) The Murphy Defendants: Defendant Douglas A. Murphy ("Douglas Murphy")
---------------------
is a citizen of the State of Texas. Defendant Gerald D. Murphy ("Gerald
Murphy") is a citizen of the State of California.
(b) The Director Defendants: Defendant S.C. Bain Jr. ("Bain") is a citizen
-----------------------
of the state of Texas. Defendant William H. Burgess ("Burgess") is a
citizen of the state of California. Defendant John M. Howland ("Howland")
is a citizen of the State of Texas. Richard N. McCombs ("McCombs") is a
citizen of the State of Texas. Defendant Bill J. McFarland ("McFarland") is
a citizen of the State of California. Defendant George E. Prchal ("Prchal")
is a citizen of the State of Texas. Defendant Alan M. Wiener ("Wiener") is
a citizen of the State of California.
(c) The Nominal Defendants: Nominal Defendant Erly Industries Inc.
----------------------
("ERLY") is a corporation incorporated under the laws of the State of
California having its principal place of business in California. Nominal
Defendant American Rice, Inc. ("ARI") is a corporation incorporated under
the laws of the State of Texas having its principal place of business in
Texas.
2. Amount In Controversy Exceeds $75,000: The damage caused to Erly and
-------------------------------------
ARI by the wrongful acts of the Murphy Defendants and the Director Defendants,
exclusive of interest and costs, far exceeds the sum of seventy-five thousand
dollars ($75,000).
3. Venue Is Proper In The Central District Of California: Pursuant to 28
-----------------------------------------------------
USC (S) 1391(a)(3), venue is proper in the Central District of California --
Western Division in that all of the defendants are subject to personal
jurisdiction in this district at the time the action is commenced, and there is
no district in which the entire action may otherwise be brought. In addition,
defendants Gerald Murphy, Burgess, McFarland and Wiener reside in California and
the transactions challenged by this complaint took place in California.
2
<PAGE>
NATURE OF THE CASE
------------------
4. This action is to bring to account two directors of ERLY and ARI,
defendants Douglas Murphy and Gerald Murphy (collectively, "the Murphys"), who
have pursued a reckless course of conduct designed, in contravention of their
fiduciary duties, to benefit themselves financially to the detriment of the very
companies they purport to represent. This action also seeks to hold the
Murphys' self-interested fellow Board members responsible for knowingly and/or
recklessly authorizing the Murphys' wrongful conduct (defendants Bain, Burgess,
Howland, McCombs, McFarland, Prchal and Wiener, collectively, "the Director
Defendants"). In derogation of the fiduciary obligations they owed to ERLY, ARI
and their respective shareholders, the Murphys pledged $1.5 million of ERLY
stock as collateral to obtain a personal interest in a speculative land
--------
development on a golf course in Texas ("Murphy Land Deal"). The Murphys then
reneged on the deal and when the holder of the note sought to foreclose on the
stock, the Murphys used ERLY and ARI to fund a series of legal battles designed
to protect their own personal fortunes. Only the Murphys, not ERLY or ARI,
stood to gain from the pledge of ERLY stock for the Murphy Land Deal. Yet it
was ERLY and ARI, not the Murphys, who were called upon to bail the Murphys out
once the deal went sour. As a direct result of the Murphys' tortious conduct, a
Texas jury has now hit the Murphys, ERLY and ARI with an $18 million verdict.
This derivative lawsuit seeks reimbursement to ERLY and ARI of the millions in
unnecessary legal expenses and damages the Murphys have inflicted upon the two
companies with the willing participation of the self-interested Director
Defendants.
THE PARTIES
-----------
5. Plaintiff Farmers is a privately held corporation, organized and
existing under the laws of the State of Louisiana, with its principal place of
business at Baton Rouge, Louisiana. Farmers is the owner of 171,933 shares of
ERLY stock and has been the owner of ERLY stock during a substantial part of the
relevant time period, including for a substantial part of the time the wrongs
alleged herein occurred and to the present. Farmers is also the beneficial
owner of ARI stock and has been the owner of ARI stock during part of the
relevant time period, including for part of the time the wrongs alleged herein
occurred and to the present.
3
<PAGE>
6. At all times alleged herein, defendant Gerald Murphy was and is the
Chairman of the Board of ARI, Chief Executive Officer and Chairman of the Board
of ERLY, and a director of both ARI and ERLY.
7. At all times alleged herein, defendant Douglas Murphy was President
and Chief Operating Officer of ERLY, and since June 1993 served as President and
Chief Executive Officer of ARI. Douglas Murphy also has been and is a director
of both companies.
8. At all times alleged herein, defendant Bain was and is a director of
nominal defendant ARI. Bain has served as a director of ARI since 1987. He has
served as President of Bain, Inc., a farming corporation, since 1985 and has
been a partner in Bain Farms since April 1988. Bain owes his seat on the ARI
Board to the Murphys and receives substantial fees and benefits as a result.
Bain has re-paid the Murphys for his Board membership by consistently acceding
to the Murphys' demands. Bain has voted with the Murphys consistently since
joining the ARI Board on virtually all Board actions.
9. At all times alleged herein, defendant Burgess was and is a director
of nominal defendants ARI and ERLY. Burgess has served as a director of ERLY
since 1976 and a director of ARI since 1988. Burgess is a long-time intimate of
Gerald Murphy and a key member of the Murphys' inner circle. They both attended
the same schools and frequently play tennis together. Burgess has received
substantial fees from ERLY at the direction of the Murphys. In fiscal year 1997,
at the direction of the Murphys, Burgess received $22,500 for "public relations"
services allegedly provided to ERLY. In addition, Burgess' substantial health
benefits are fully covered by ERLY. Burgess has received over $100,000 in health
benefits over the past year. Burgess has re-paid the Murphys for his Board
membership by consistently acceding to the Murphys' demands. Burgess has voted
with the Murphys consistently since joining the Boards of ERLY and ARI on
virtually all Board actions. Indeed, in July of 1992, Burgess helped to vote
down a Board resolution which sought the ouster of Gerald Murphy as Chairman of
ERLY for mismanaging the company. The two members of the ERLY Board who voted
for that resolution are no longer on the ERLY Board. Burgess knows that he must
protect the Murphys or face a similar fate.
4
<PAGE>
10. At all times alleged herein, defendant Howland was and is a director
of nominal defendant ARI. Howland has served as a director of ARI since 1993.
Howland served as Chairman of the Board of Directors of ARI and Chief Executive
Officer of ARI before its acquisition by ERLY. Howland now sits on the ARI Board
at the insistence of the Murphys. He also receives substantial fees as a
consultant to ARI. Howland has re-paid the Murphys for his Board membership by
consistently acceding to the Murphys' demands. Howland has voted with the
Murphys consistently since joining the ARI Board on virtually all Board actions.
In 1993, Howland became the President and Chief Executive Officer of Rice
Milling and Trading Ltd., Inc., a company which processed ARI's rice in Saudi
Arabia. Howland held this position until January 1997. In February 1997, Howland
was named as a defendant along with ARI in a lawsuit brought by Rice Milling and
Trading Ltd., Inc. At the direction of the Murphys, ARI is funding Howland's
defense in that lawsuit.
11. At all times alleged herein, defendant McCombs was and is a director
of nominal defendant ARI. McCombs has served as a director of ARI since 1993.
McCombs has served as Executive Vice President of Finance and Administration,
Treasurer and Secretary since 1993. In addition, McCombs has served as Managing
Director of the ARI-Vinafood joint venture since September 1994 and as Vice
President and Chief Financial Officer of ERLY since 1990. McCombs was hired by
the Murphys and owes his seat on the ARI Board to the Murphys. His livelihood
depends on keeping the Murphys happy. McCombs has re-paid the Murphys for his
Board membership and his livelihood by consistently acceding to the Murphys'
demands. McCombs has voted with the Murphys consistently since joining the ARI
Board on virtually all Board actions.
12. At all times alleged herein, defendant McFarland was and is a director
of nominal defendant and ERLY. McFarland has served as a director of ERLY since
1986. McFarland is the Murphys' loyal subordinate who has been promoted through
the ranks of ERLY and ARI by the Murphys. He was hired by the Murphys and placed
on the ERLY Board at the Murphys' insistence. Because of the Murphys, McFarland
receives over $200,000 a year in salary, benefits and fees. He has served as
Senior Vice-President of ARI and President of the Comet American Marketing
division of ARI since 1993. McFarland has also been Vice-President of ERLY since
1976. McFarland has re-paid the Murphys for his Board membership and his
livelihood by consistently acceding to the
5
<PAGE>
Murphys' demands. McFarland has voted with the Murphys consistently since
joining the ARI Board on virtually all Board actions. Indeed, in July of 1992,
McFarland helped to vote down a Board resolution which sought the ouster of
Gerald Murphy as Chairman of ERLY for mismanaging the company. The two members
of the ERLY Board who voted for that resolution are no longer on the ERLY Board.
McFarland knows that he must protect the Murphys or face a similar fate.
13. At all times alleged herein, defendant Prchal was and is a director of
nominal defendant ARI. Prchal has served as a director of ARI since 1993. He
has also served as a consultant to ARI since 1993 for which he receives
substantial fees at the Murphys' direction. Prchal has re-paid the Murphys for
his Board membership by consistently acceding to the Murphys' demands. He has
voted with the Murphys consistently since joining the ARI Board on virtually all
Board actions. Prchal was defendant Howland's number-two man at ARI before it
was acquired by ERLY and also left to join Rice Milling and Trading Ltd., Inc.
In February 1997, Prchal was also named as a defendant along with ARI and
Howland in a lawsuit brought by Rice Milling and Trading Ltd., Inc. At the
direction of the Murphys, ARI is funding Prchal's defense of that lawsuit.
14. At all times alleged herein, defendant Wiener was and is a director of
nominal defendant ERLY. Wiener has served as a director of ERLY since 1995.
Wiener is a long-time intimate of Gerald Murphy and a key member of the Murphys'
inner circle. Wiener owes his seat on the ERLY Board to the Murphys and
receives substantial fees and benefits as a result. He has re-paid the Murphys
for his Board membership by consistently acceding to the Murphys' demands.
Wiener has voted with the Murphys consistently since joining the ERLY Board on
virtually all Board actions. In the past, Gerald Murphy has been an important
financial supporter of Wiener's business interests and has loaned Wiener a
substantial amount of money. Wiener was appointed to the ERLY Board at the
direction of the Murphys after the removal of the two directors who sought
Gerald Murphy's ouster as Chairman. Wiener was placed on the Board because the
Murphys knew that he would be a loyal Murphy ally and would not question their
management of ERLY and ARI.
15. Nominal defendant ERLY is a publicly held California corporation,
which owns approximately eighty-one percent (81%) of ARI. ERLY is principally
an international agribusiness company operating through its subsidiary ARI.
ERLY also has operations in international consulting
6
<PAGE>
and the manufacture and sale of forest fire retardant products through its
subsidiaries, Chemonics International, Inc. and Chemonics Fire-Trol, Inc.
16. Nominal defendant ARI is a publicly held Texas corporation,
approximately eight-one (81%) of which is owned by ERLY. ARI is a processor and
marketer of branded rice products in the United States, Saudi Arabia, Haiti and
other rice consuming markets.
17. The true names and capacities, whether individual, corporate,
associates or otherwise of the defendants named herein as Does 1 through 100,
inclusive, are unknown to plaintiff, who therefore sues such defendants by their
fictitious names. Plaintiff will amend this Complaint to insert the true names
and capacities of such Doe defendants, when the name becomes known to them. Each
such fictitiously named defendant is responsible in some manner and is therefore
liable for the acts and omissions hereinafter alleged.
18. At all times alleged herein, Douglas Murphy, Gerald Murphy, the
Director Defendants and the Doe defendants in doing or omitting to do the acts
and things alleged was the agent or representative of each other and acted
within the course and scope of such agency and representation.
19. Douglas Murphy, Gerald Murphy, the Director Defendants and the Doe
defendants each had advance knowledge of, authorized or ratified the acts and
conduct of each other hereinafter alleged.
FACTUAL BACKGROUND
------------------
THE MURPHY LAND DEAL IS HATCHED
-------------------------------
20. This story of greed and betrayal has its genesis in an affluent
enclave of Houston, Texas known as Kingwood. Kingwood, a large scale master
planned community, was developed by the Friendswood Development Company
("Friendswood"), headquartered in Houston. Approximately 196 acres of
Friendswood property located in Kingwood, situated along the prestigious
Kingwood Country Club Golf Course, remained undeveloped. In 1993, Friendswood
approached the Tenzer Company, Inc. ("Tenzer Co."), a developer of active adult
residential communities and single family subdivisions, concerning the
feasibility of developing the 196 acre property as an active adult residential
community. Thereafter, the Tenzer Co. investigated the potential for such a
project and, in coordination with Friendswood, created a plan for the
development of the property.
7
<PAGE>
21. On July 1, 1994, Tenzer Co., as purchaser, entered into a Sale and
Purchase Agreement with Friendswood (and King Ranch, Inc., a venturer with
Friendswood in Kingwood), as seller.
22. The President of Tenzer Co., Michael L. Tenzer ("Tenzer"), knew that
the development of the property would require a substantial investment of
capital -- at least $6 million of additional equity. Tenzer began to search for
one or more investors to furnish the necessary capital.
23. In July of 1994, Tenzer contacted Gerald Murphy (a former business
colleague) to see if he might be interested in investing in Tenzer Co.'s
proposed Kingwood development, then referred to as Kingwood Lake South.
Coincidentally, Gerald Murphy's son, Defendant Douglas Murphy, lived in Kingwood
in the vicinity of the property. Eager to take a personal stake in the venture,
the Murphys committed themselves -- not ARI or ERLY -- to provide substantial
----------
capital to the project.
24. Between August and December 1994, Tenzer Co., and the Murphys
negotiated concerning the various rights and obligations they would have with
one another in the development of the project. It was determined that a limited
partnership would be formed, with Tenzer Co. as general partner and the Murphys
as limited partners. The limited partnership would be called Kingwood Lakes
South, L.P. ("KLS"). In December 1994, another individual investor, Anthony M.
Frank ("Frank"), agreed to invest $500,000 cash to obtain a proportionate
limited partner interest in KLS.
25. It was agreed among the parties that, at the time of the acquisition
of the property from Friendswood by KLS in late December 1994, Mr. Frank would
fund his entire cash commitment of $500,000, the Murphys would fund $2 million
of their aggregate cash commitment of $5.5 million (with the balance of $3.5
million being funded within several months of the closing of the acquisition of
the property), and Tenzer Co. would contribute the Purchase and Sale Agreement
and all appurtenant rights to the contract, including all entitlements which had
been obtained by Tenzer Co. The lawyers selected by the Murphys for the
venture, Nathan Wood & Sommers (who are also the attorneys for ARI), then
prepared another revision to a draft of the proposed limited partnership
agreement to show the new capital contribution schedule.
8
<PAGE>
THE MURPHYS RECKLESSLY PLEDGE $1.5 MILLION OF ERLY STOCK AS COLLATERAL
----------------------------------------------------------------------
26. On or about December 20, 1994, Tenzer traveled to Houston from Los
Angeles to finalize the execution of the Agreement of Limited Partnership, so as
to evidence the agreement reached by Tenzer Co., the Murphys, and Mr. Frank, as
well as to close the acquisition of the real property. At a morning meeting on
December 22, 1994, the date scheduled for the closing with Friendswood, the
Murphys informed Tenzer for the first time that, notwithstanding their numerous
confirmations of their commitment to furnish cash for the closing of the land
purchase, they did not, in fact, have in available and ready funds the initial
$2 million cash portion of their total equity capital commitment of $5.5
million. Nevertheless, the Murphys assured Tenzer that they would be able to
come up with the cash -- they just needed more time.
27. No longer willing to simply take the Murphys' word that they would
honor their financial commitments to the project, Tenzer Co. sought additional
security. The Murphys in turn were desperate to obtain a personal interest in a
potentially lucrative development and did not want to see Tenzer Co. walk away
from the table and give the opportunity to another investor. Therefore, in
order to assure Tenzer Co., and to induce it to contribute the Purchase and Sale
Agreement to a venture to include the Murphys, Gerald Murphy agreed to execute
and deliver to KLS his unconditional Promissory Note in the amount of $1.5
million, payable on or before March 22, 1995.
28. Regardless of the consequences to ERLY and ARI, Gerald Murphy agreed
--------------------
to an unconditional pledge to KLS of 333,333 shares owned by him in ERLY, a
- ------------------------------------------------------------------------
public company, to secure payment of the Promissory Note (the "Murphy Stock
Pledge"). Douglas Murphy, as President and Chief Executive Officer of ERLY and
ARI, was a willing and active participant in the Murphy Stock Pledge. In order
to obtain a personal interest in the Murphy Land Deal, Douglas Murphy knowingly
and/or recklessly encouraged, aided, abetted and ratified the Murphy Stock
Pledge.
29. Regardless of the consequences to ERLY and ARI, Gerald Murphy further
agreed to execute a stock power for the entire block of shares of ERLY, so that
upon a default in payment of the Promissory Note, KLS could immediately sell the
-----------
shares, which it was holding as collateral, for cash to maintain operations of
KLS. Douglas Murphy, as President and Chief Executive Officer of ERLY and
9
<PAGE>
ARI, was a willing and active participant in the agreement to execute the stock
power for the entire block of ERLY shares. In order to obtain a personal
interest in the Murphy Land Deal, Douglas Murphy knowingly and/or recklessly
encouraged, aided, abetted and ratified Gerald Murphy's agreement to execute the
stock power for the entire block of ERLY shares.
30. In his capacity as an officer and director of ERLY, Gerald Murphy
promised to obtain for KLS, and later did obtain, a written opinion by ERLY's
legal counsel that KLS would be entitled to enforce the Pledge Agreement in
accordance to its terms. Douglas Murphy, as President of ERLY and ARI, was a
willing and active participant in obtaining this legal opinion. In order to
obtain a personal interest in the Murphy Land Deal, Douglas Murphy knowingly
and/or recklessly encouraged, aided, abetted and ratified Gerald Murphy's
agreement to obtain the legal opinion. Based on Douglas Murphy's own statements
(see paragraph 37, infra), ERLY's law firm possessed a conflict of interest in
--- -----
rendering this opinion. This conflict was known, or should have been known, to
counsel and to the Murphys but was not properly waived (nor could it have been
properly waived).
31. The Murphys' stake in the deal having been saved by the Murphy Stock
--------------------------------------------------------------------
Pledge, on or about December 12, 1994, the Agreement of Limited Partnership of
- ------
KLS (the "Partnership Agreement") was executed by the Murphys, Tenzer Co. and
Frank. In paragraph 3.1(b) of the Partnership Agreement, the Murphys agreed
that: (a) Gerald Murphy would deliver the Promissory Note in the amount of $1.5
million to KLS; (b) Douglas Murphy would make the initial $500,000 cash
contribution, which was required to close the acquisition of the property; and
(c) The Murphys would "collectively commit, covenant, and agree to contribute .
. ., [an additional] $3,500,000 (or such lesser amount as Tenzer Co. and the
Murphys might agree would be necessary)" as and when called for by [Tenzer Co.],
but in any event prior to the closing of the Acquisition and Development Loan."
32. After Tenzer Co. assigned to KLS the Purchase and Sale Agreement, KLS
acquired the real estate from Friendswood by paying the downpayment and
executing the purchase money promissory note. At this point, there was no
turning back for the Murphys.
THE MURPHYS RENEGE ON THE DEAL
------------------------------
33. Ultimately, unwilling to put their money where their mouths were, the
Murphys reneged on the deal. Gerald Murphy never made his $1.5 million payment
on March 22, 1995 as
10
<PAGE>
required by the Promissory Note. Likewise, Douglas Murphy never made his initial
$500,000 cash contribution.
34. Shortly after Gerald Murphy went into default on the Promissory Note,
Tenzer Co. brought suit on behalf of KLS on April 3, 1995. Predictably, the
lawsuit sought to enforce the Murphy Stock Pledge by foreclosing on the ERLY
stock.
AT THE BEHEST OF THE MURPHYS, ARI AND ERLY COME TO THEIR RESCUE --
------------------------------------------------------------------
THE BRAZORIA COUNTY SUIT
------------------------
35. Faced with the threat of a protracted and costly legal battle which
could threaten their own personal fortunes, the Murphys decided to use the
resources of ARI and ERLY as their own personal legal defense fund ("Murphy
Legal Defense"). Immediately after the KLS suit was filed, the Murphys, acting
in their capacity as officers and directors of ARI and ERLY directed ARI and
ERLY to join them in bringing suit in Brazoria County, Texas (the "Brazoria
County Suit"), a jurisdiction which had no relationship to the Murphy Land Deal
or to any of the parties thereto. The Brazoria County Suit sought an ex parte
-- -----
order restraining KLS from selling the ERLY stock which had been pledged as
collateral for Gerald Murphy's Promissory Note.
36. Why, given the lack of any connection whatsoever between the Murphy
Land Deal and Brazoria County, did the Murphys choose this rural Texas forum to
seek an injunction against the sale of ERLY stock? Simply put, because ARI has
a mill in the heart of Brazoria County which employs over 300 people. Indeed,
the Brazoria County Suit was specifically geared to make this parochial appeal.
37. Under penalty of perjury, less than four months after he had agreed to
the Murphy Stock Pledge, Douglas Murphy declared that the foreclosure by KLS of
the ERLY stock securing payment of Gerald Murphy's Promissory Note would
adversely affect ARI and ERLY. According to the Original Petition filed by ARI,
ERLY and the Murphys, and sworn to by Douglas Murphy, "the sale of said stock
would place [ARI] in technical default of its financing and it would materially
interfere with the ongoing re-financing which would cost [ARI] over $9 million a
year." Furthermore, the suit claimed that the stock foreclosure would adversely
impact the industrial revenue bond that had been used to build the ARI plant in
Freeport, Texas and thereby bring about the collapse of the rice
11
<PAGE>
plant in Brazoria County. Not surprisingly, the Brazoria County Court granted
the plaintiffs' request for a temporary restraining order.
38. The Brazoria County Suit is at the heart of this derivative lawsuit
because, regardless of the suits' underlying merit, the fact that it was filed
at all represents indisputable proof that the Murphys and the Director
Defendants violated their fiduciary duties to ARI, ERLY and their respective
shareholders:
(a) First, if the complaint, verified by Douglas Murphy as President of
ARI and ERLY, is true, then the Murphys knowingly and/or recklessly
violated their fiduciary duties to ARI an ERLY by entering into a personal
transaction --the pledge of ERLY stock to save their stake in the Murphy
Land deal --that threatened such adverse consequences to ERLY and ARI;
(b) On the other hand, if these adverse consequences were not true, then
the Murphys knowingly and/or recklessly violated their fiduciary duties to
ARI and ERLY by leading the companies into an expensive lawsuit to protect
their own personal fortunes without any basis whatsoever.
39. Later in the litigation, in connection with a hearing on a permanent
injunction, a deal was struck whereby the Brazoria County Suit would be
transferred to Harris County (Houston). Tenzer Co. (on behalf of KLS) agreed
that it would not undertake any effort to foreclose on the ERLY stock until
August 24, 1995. At that time, Tenzer Co. could petition the court for relief
from the injunction in order to consummate the foreclosure and the sale of the
stock. ARI (not the Murphys) agreed to post a $15,000 bond in connection with
the preliminary injunction that was issued.
40. At the behest of the Murphys, and with the express or implied consent
of the Director Defendants, ARI and/or ERLY picked up the entire tab for the
legal bills related to the Brazoria County Suit and the suit initiated by KLS,
including the fees incurred by the Murphys as individual plaintiffs. Once
informed of the suits, the Director Defendants willfully and/or recklessly
ratified the conduct of the Murphys.
12
<PAGE>
AT THE BEHEST OF THE MURPHYS, ARI AND ERLY LAUNCH STEP TWO IN THE MURPHY LEGAL
------------------------------------------------------------------------------
DEFENSE -- THE FRIENDSWOOD SUIT
-------------------------------
41. Two months before the Murphys, ARI and ERLY were scheduled to go to
trial with KLS on the original suit filed by KLS against the Murphys, the
Murphys enlisted ERLY and ARI in waging a legal battle on another front related
to the Murphy Land Deal: the Murphys, along with ERLY and ARI and with the
knowing and/or reckless express or implied authorization of the Director
Defendants, filed suit against Friendswood, the corporate owner of the land to
be developed in Kingwood, as third party defendants.
42. ERLY and ARI had no legitimate interest whatsoever in pursuing a
lawsuit against Friendswood. Indeed, their presence in the pleading caption was
merely a way for the Murphys to wage their own personal legal battles without
spending a dime of their own money. In addition, it was a transparent attempt
to delay the KLS trial.
43. During the course of the Friendswood litigation, Friendswood asked the
court for sanctions against plaintiffs and their counsel based on an allegation
that the lawsuit was frivolous. As a result of the Murphys' actions (taken with
the knowing and/or reckless express or implied authorization of the Director
Defendants), the court imposed stiff sanctions on the Murphys, ARI, ERLY and
their attorneys in the staggering amount of $134,000. Those sanctions were paid
-------------------------
for by ARI, not the Murphys. The sanctions are on appeal, further exposing ARI
- ---------------------------
and ERLY to additional costs and expenses.
THE MURPHYS SUBJECT ERLY AND ARI TO FURTHER LEGAL WOES
------------------------------------------------------
44. Shortly after August 24, 1995, Tenzer Co. (on behalf of KLS) had the
preliminary injunction lifted, thus obtaining permission from the court to
foreclose on the ERLY stock the Murphys pledged to secure the Promissory Note.
Accordingly, Tenzer Co. tendered the stock certificates to Chase Mellon Bank
("Chase Mellon") -- the transfer agent for ERLY.
45. Subsequently, at the behest of the Murphys and with the knowing and/or
express authorization of the Director Defendants, ARI's lawyers intervened and
threatened Chase Mellon in an attempt to stop the transfer. Chase Mellon then
filed an interpleader action.
13
<PAGE>
46. On December 9, 1995, Judge Harris in Harris County Texas granted
partial summary judgment to Tenzer Co. (on behalf of KLS). Immediately
thereafter, at the behest of the Murphys and with the consent of the Director
Defendants, ARI and ERLY filed another frivolous lawsuit in Los Angeles Superior
Court to enjoin Wedbush Securities from facilitating the sale. Judge Garcia in
Texas, however, suggested that ERLY and ARI withdraw the lawsuit they had filed
in California or face sanctions. The next day, ERLY and ARI withdrew the
lawsuit against Wedbush Securities.
47. In January 1997, the appeal of the summary judgment was rejected.
Shortly thereafter, ARI and ERLY moved to vacate the court's order. That motion
was also denied.
48. Next, with the knowing and/or reckless express or implied
authorization of the Director Defendants, the Murphys directed ARI and ERLY to
file a lawsuit in Texas to enjoin KLS from using the proceeds of the sale of
stock. That request for injunctive relief was denied. The sale of the stock
occurred shortly thereafter, and 145,000 shares were sold.
49. At the behest of the Murphys and with the knowing and/or reckless
express or implied authorization of the Director Defendants, once Chase Mellon
transferred the shares, ARI and ERLY fired Chase Mellon. Chase Mellon has now
sued ARI and ERLY.
50. At the September 16, 1996 meeting of the ERLY Board of Directors,
defendants Gerald Murphy, Burgess, McFarland and Wiener voted unanimously
(Douglas Murphy abstained) to continue to advance ERLY funds for the Murphy
Legal Defense. The Murphys were both present for the discussion, consideration
and vote on this proposal in which they had a personal financial interest.
Defendants Gerald Murphy, Burgess, McFarland and Wiener did not seek or rely on
expert advice or any independent legal advice in making this decision. ERLY
received absolutely no consideration from the Murphys for this loan and/or gift
of corporate assets and the Murphys did not provide ERLY with any security for
the loan.
51. At the June 28, 1997 meeting of the ARI Board of Directors, defendants
Bain, Howland, McCombs and Prchal voted unanimously (with the Murphys both
abstaining) to continue to advance ARI funds for the Murphy Legal Defense and
that Gerald Murphy would only be asked to repay no more than half of the total
legal bills. The Murphys were both present for the discussion, consideration and
vote on this proposal in which they had a personal financial interest.
Defendants
14
<PAGE>
Bain, Howland, McCombs and Prchal did not seek or rely on expert advice or any
independent legal advice in making this decision. ARI received absolutely no
consideration from the Murphys for this loan and/or gift of corporate assets and
the Murphys did not provide ARI with any security for the loan.
THE RESULT OF THE MURPHY LEGAL DEFENSE -- A TEXAS JURY HITS THE MURPHYS, ERLY
------------------------------------------------------------------------------
AND ARI WITH AN $18 MILLION VERDICT
-----------------------------------
52. The ill-advised Murphy Legal Defense has proved to be a disaster to
ERLY, ARI and its shareholders. On September 10, 1997, solely as a result of
the Murphys' wrongful conduct, a jury in Texas hit ERLY, ARI and the Murphys
with joint and several liability for a verdict which could end up being worth
$18 million. The jury found, inter alia, as follows:
(a) Gerald Murphy and Douglas Murphy agreed to be bound to the Partnership
Agreement;
(b) The failure of Gerald Murphy and Douglas Murphy to comply with the
Partnership Agreement proximately caused damages to Tenzer Co. and Frank;
(c) The Murphys' failure to comply with the Partnership Agreement was not
excused for any reason;
(d) The Murphys with malice breached their duties to their partners and
proximately caused damages to Tenzer Co. and Frank;
(e) ERLY and ARI willfully participated in the Murphys' breach of duties
to their partners;
(f) The Murphys, ERLY and ARI committed a fraud by affirmative
misrepresentation that proximately caused damages to Tenzer Co. and Frank;
(g) The Murphys committed a fraud by failure to disclose that proximately
caused damages to Tenzer Co. and Frank;
(h) ERLY, ARI and the Murphys were part of conspiracy that damaged Tenzer
Co. and Frank;
(I) ERLY, ARI and the Murphys are jointly and severally liable for damages
to Frank of $1,028,000;
15
<PAGE>
(j) ERLY, ARI and the Murphys are jointly and severally liable for damages
to Tenzer Co. in the amount of $8,629,000;
(k) ERLY, ARI and the Murphys must pay Tenzer Co.'s and Frank's attorneys'
fees in the amount of $4,342,400;
(l) ERLY, ARI and the Murphys must pay for the attorneys' fees of Tenzer
Co. and Frank if the case goes to appeal in an amount up to $542,800;
(k) Gerald Murphy and Douglas Murphy are not entitled to any damages;
(l) Gerald Murphy must pay $3,000,000 in exemplary damages;
(m) Douglas Murphy must pay $500,000 in exemplary damages;
(n) ARI must pay $100,000 in exemplary damages because of the tortious
acts of its agents the Murphys; and
(o) ERLY must pay $100,000 in exemplary damages because of the tortious
acts of its agents the Murphys.
53. All told, the Murphys and the Director Defendants have already
subjected ARI and ERLY to substantial unnecessary legal expenses and costs with
no end in sight to the legal woes of ARI and ERLY, precipitated by the misguided
Murphy Legal Defense and by the Murphys' breaches of fiduciary duty. ARI and
ERLY are also potentially subject to multi-million dollar claims by Chase Mellon
(in addition to the verdict in favor of Tenzer Co. and Frank) solely as a result
of the Murphys' breaches of fiduciary duty.
54. Defendants Gerald Murphy, Douglas Murphy, and the Doe Defendants, by
their wrongdoings herein alleged, breached their duties of loyalty to ERLY and
ARI; acted in bad faith; engaged in intentional misconduct; and engaged in a
knowing violation of law.
55. The Director Defendants were fully aware that the Murphy Legal Defense
was outrageously unfair to ERLY and ARI and that it was a waste of corporate
assets and would damage ERLY and ARI, but approved and acquiesced in this
misconduct.
56. By virtue of all of the foregoing, defendants Gerald Murphy, Douglas
Murphy, the Director Defendants and the Doe defendants are responsible for any
and all liabilities, damages and
16
<PAGE>
payments made or incurred by or as a result of defendants' wrongful acts and
conduct, including but not limited to, the Murphy Stock Pledge and/or the Murphy
Legal Defense.
57. The acts and conduct of defendants Gerald Murphy, Douglas Murphy, and
the Doe defendants heretofore alleged were oppressive, fraudulent, and
malicious, thereby subjecting these defendants, and each of them, to punitive
and exemplary damages.
DERIVATIVE ALLEGATIONS
----------------------
58. Plaintiff brings this action derivatively in the right of and for the
benefit of ERLY and ARI to redress injuries suffered and to be suffered by ERLY
and ARI as a direct result of the violations of law, breaches of fiduciary duty,
illegal loans, abuse of control, as well as the aiding and abetting thereof, by
the defendants. ERLY and ARI are named as nominal defendants solely in a
derivative capacity.
59. This is not a collusive action to confer jurisdiction on this Court
which it would not otherwise have.
60. Plaintiff will adequately and fairly represent the interests of ERLY,
ARI and their respective shareholders in enforcing and prosecuting their rights.
61. Plaintiff has not made any demand on the present Board of Directors of
ERLY or ARI to institute this action because the acts committed by defendants
violate Section 315 of the California Corporations Code in that they constitute
an illegal corporate loan and/or guarantee made by ERLY and ARI to two directors
and officers of ERLY and ARI. Pursuant to Section 316 of the California
Corporations Code, suit may be brought in the name of the corporation to seek
redress for such illegal loan and/or guarantee without regard to the provisions
of Section 800 of the California Corporations Code which requires derivative
plaintiffs to make a demand;
62. As a separate and additional reason for not making a pre-suit demand,
the particularized facts set forth above demonstrate that any such demand on the
Board of Directors of ERLY and ARI would have been futile and a useless act for
the following reasons:
(a) There is no disinterested majority of either Board of Directors that
is capable of exercising an independent judgment with regard to the
prosecution of this matter;
17
<PAGE>
(b) The Boards of Directors of ERLY and ARI have both considered the
claims of this lawsuit and have voted against taking action against the
Murphys, the principal wrongdoers;
(c) The Boards of Directors of ERLY and ARI participated in or approved
many of the acts and omissions or were on notice of and/or recklessly
disregarded the wrongs complained of herein;
(d) The acts complained of herein constitute violations of fiduciary
duties owed to the Boards of Directors of ERLY and ARI and these acts are
incapable of ratification;
(e) The acts complained of herein constitute violations of law and
breaches of the fiduciary duties owed by the Boards of Directors of ERLY
and ARI and these acts are incapable of ratification;
(f) As set forth with particularity in paragraphs 8 through 14, the known
principal wrongdoers and beneficiaries of the wrongdoing complained of
herein are in a position to, and do, dominate and control their fellow
directors on the Boards of ERLY and ARI. Thus, the Boards of Directors of
ERLY and ARI could neither exercise independent objective judgment in
deciding whether to bring this action nor vigorously prosecute this action.
The directors of ERLY and ARI cannot be relied upon to reach a truly
independent decision as to whether to commence the demanded actions against
themselves and the officers and directors responsible for the misconduct
alleged in this Complaint, in that, inter alia, the Board of Directors is
----- ----
totally dominated by the Murphys who were personally and directly involved
in the misconduct alleged and who each approved the actions complained of,
and to whose directives and views the Board has consistently acceded and
will continue to accede. This domination of the Boards of Directors of
ERLY and ARI by the Murphys has impaired the Boards' ability to validly
exercise its business judgment and rendered it incapable of reaching an
independent decision as to whether to accept plaintiff's demands;
(g) In order to bring this action for breaching their fiduciary duties, the
members of the Boards of Directors of ERLY and ARI would have been required
to sue
18
<PAGE>
themselves, their fellow directors and allies in the top ranks of the
companies, who are their good friends and with whom they have entangling
financial alliances, interests and dependencies, which they would not do.
Therefore, the ERLY and ARI Boards would not be able to vigorously
prosecute any such action.
(h) The members of the Boards of Directors of ERLY and ARI, including each
of the defendants herein, receive payments, stock options and other
benefits by virtue of their membership on the Boards and their control of
the two corporations. They have thus benefited from the wrongdoing herein
alleged and have engaged in such conduct to preserve their positions of
control and the perquisites thereof, and are incapable of exercising
independent judgment in deciding whether to bring this action. The members
of each Board also have close personal and business ties with each other
and are, consequently, interested parties and cannot in good faith exercise
independent business judgment to determine whether to bring this action
against themselves and one another.
(i) The composition of the Boards of Directors of ERLY and ARI are
designed to (and do) make them dependent on and deferential to the Murphys
who as a practical matter control and dominate the process by which
directors are selected for nomination or renomination to the two Boards.
Each Defendant Director owes his directorship (and the resulting
substantial fees and perks) to the two defendant directors. No director can
be independent as he has a direct economic incentive to please the two
director defendants in order to (a) maintain his position on the Board(s);
(b) maintain his position as an officer; and/or (c) continue to receive
substantial consulting fees authorized and approved by the Murphys.
(j) ERLY and ARI have suffered significant losses, and have been exposed
to significant future losses, due to the wrongful acts of the Murphys by
pledging ERLY stock as collateral to obtain a personal stake in a
speculative land deal. Yet, with full knowledge of these wrongful acts, the
Director Defendants have taken no action, and
19
<PAGE>
have expressly refused to take action, against the Murphys for their
wrongful conduct to recover for ERLY and/or ARI the damages suffered
thereby;
(k) The acts complained of herein are wrongful and the expenditure of
funds complained of constitutes a waste of ERLY's and/or ARI's assets, and
thus are acts incapable of ratification.
63. A true copy of this Verified First Amended Derivative Complaint will
be delivered to ERLY and ARI after its filing with the Court.
FIRST CAUSE OF ACTION
---------------------
Derivative Claim For Intentional Breach Of Fiduciary Duties And Waste Of
------------------------------------------------------------------------
Corporate Assets
----------------
64. Plaintiff incorporates by reference and realleges (P)(P) 1-63 as if
set forth fully herein. This Cause of Action is asserted against all defendants
on behalf of ERLY and ARI.
65. The defendants are fiduciaries of ERLY and ARI and of all of their
public shareholders and owe to them the duty to conduct the business of the
Company loyally, faithfully, carefully, diligently and prudently. These counts
are asserted based upon the defendants' acts in violation of California common
law (with respect to ERLY) and Texas common law (with respect to ARI), which
acts constitute breach of fiduciary duty and waste of ERLY's and ARI's corporate
assets.
66. The Murphys, in their roles as executives and directors of ARI and
ERLY, participated in the acts of mismanagement alleged herein, or acted in
reckless disregard of the facts known to them, and failed to exercise due care
and undivided loyalty in connection with the Murphy Land Deal, the Murphy Stock
Pledge, and the Murphy Legal Defense. The Murphys knew, or should have known
through reasonable inquiry, of the facts alleged herein including, among others
that the unconditional pledge of ERLY stock to obtain a personal interest in a
speculative land deal would expose ERLY and ARI to substantial risk in the event
of a foreclosure and thereby breached their duty of care, loyalty,
accountability and disclosure to the shareholders of ERLY and ARI by failing to
act as an ordinary or prudent person would have acted in a like position.
67. The Murphys, in their capacities as officers and directors of ARI and
ERLY, intentionally breached their fiduciary duties by (a) intentionally and/or
recklessly exposing ERLY and
20
<PAGE>
ARI to unnecessary litigation by issuing an unconditional pledge of ERLY stock
to secure a personal interest in a speculative land deal; and/or (b) directing
ERLY and ARI to engage in meritless litigation designed to protect defendants'
own personal fortunes. The Murphys and the Director Defendants, in their
capacities as officers and directors of ARI and ERLY, intentionally and/or
recklessly breached their fiduciary duties by directing ERLY and ARI to continue
to advance the Murphys' legal expenses and/or fund the legal expenses entirely
without consideration or security, and by failing to seek and provide separate
legal counsel and a separate legal defense for ERLY and ARI.
68. As a result of the Murphys and the Director Defendants' wrongful
conduct and wrongful action, ERLY and ARI have suffered considerable damage to
and drastic diminution in the value of its tangible and intangible assets.
69. The Murphys and the Director Defendants, singly and in concert,
engaged in the aforesaid conduct in intentional breach and/or reckless disregard
of their fiduciary duties to ERLY and ARI.
70. The Murphys and the Director Defendants conspired to abuse, and did
abuse, the control vested in them by virtue of their high-level positions with
ERLY and ARI.
71. By reason of the foregoing, the Murphys and the Director Defendants
have caused ERLY and ARI to waste its valuable assets and otherwise
unnecessarily expend its corporate funds, as a result of which ERLY and ARI have
been substantially damaged.
72. ERLY and ARI have been injured by reason of the Murphys' and the
Director Defendants' intentional breach and/or reckless disregard of their
fiduciary duties to the corporations. Plaintiff, as a shareholder and
representative of ERLY and ARI, seeks damages and other relief for the
corporations as hereinafter set forth.
SECOND CAUSE OF ACTION
----------------------
Derivative Claim For Negligent Breach Of Fiduciary Duties Against All Defendants
- --------------------------------------------------------------------------------
73. Except to the extent they allege intentional or reckless conduct by
any defendant, plaintiffs incorporate by reference and reallege (P)(P) 1-72 as
if set forth fully herein.
21
<PAGE>
74. The Murphys and the Director Defendants engaged in the aforesaid
conduct without exercising the reasonable and ordinary care owed to ERLY and ARI
by directors, officers, managing agents, employees, and/or controlling persons
of a corporation.
75. ERLY, ARI and their respective shareholders have been injured by
reason of the Murphys' and the Director Defendants' negligent breaches of their
fiduciary duties. Plaintiff, as shareholder and representative of ERLY and ARI,
seeks damages and other relief for the corporations as hereinafter set forth.
THIRD CAUSE OF ACTION
---------------------
Derivative Claim For Waste Of Corporate Assets Against All Defendants
---------------------------------------------------------------------
76. Plaintiff incorporates by reference and realleges (P)(P) 1-75 as if
set forth fully herein. This Cause of Action is asserted against all defendants
on behalf of ERLY and ARI.
77. The Murphys' breaches of fiduciary duty have and will continue to
subject ERLY and ARI to suits for, among other things, malicious prosecution and
abuse of process. The costs, expenses and fees incurred defending those suits
or any other suit against ERLY and/or ARI, and any recoveries to be paid by ERLY
and/or ARI, including possible punitive damages resulting from the intentional
misconduct, constitute a further waste of corporate assets arising out of
defendants' misconduct.
78. In addition, the Murphys have wasted the corporate assets of ERLY and
ARI by (a) intentionally and/or recklessly exposing ERLY and ARI to unnecessary
litigation by issuing an unconditional pledge of ERLY stock to secure a personal
interest in a speculative land deal; and or (b) by directing ERLY and ARI to
engage in meritless litigation designed to protect defendants' own personal
fortunes. The Director Defendants have likewise wasted the corporate assets of
ERLY and ARI by directing ERLY and ARI to advance and/or fund the legal expenses
of the Murphys without consideration or security.
79. ERLY and ARI have been injured by reason of the Murphys' and the
Director Defendants' waste of ERLY's and/or ARI's assets. Plaintiff, as
shareholder and representative of ERLY and ARI, seeks damages and other relief
for ERLY and ARI as hereinafter set forth.
22
<PAGE>
FOURTH CAUSE OF ACTION
----------------------
Derivative Claim For Violation Of California Corporations Code Section 315
--------------------------------------------------------------------------
80. Plaintiff incorporates by reference and realleges (P)(P) 1-79 as if
set forth fully herein. This Cause of Action is asserted against all defendants
on behalf of ERLY and ARI.
81. By reason of the aforesaid acts, the defendants have violated their
official duties and Section 315 of the California Corporations Code, which
provides, in pertinent part:
(a) A corporation shall not make any loan of money or property to, or
guarantee the obligation of, any director or officer of the corporation or
of its parent, unless the transaction, or an employee benefit plan
authorizing the loans or guarantees after disclosure of the right under
such a plan to include officers or directors, is approved by a majority of
the shareholders entitled to act thereon.
82. ERLY and ARI have made loans and/or guarantees in violation of Section
315 by, among other things, (a) paying for the Murphy Legal Defense and all
related legal actions; and (b) paying for the sanctions incurred in the
Friendswood Action.
83. These illegal loans and/or guarantees were not approved by a majority
of the shareholders entitled to act upon the transactions.
84. The Murphys were not entitled to indemnification for expenses incurred
as a result of actions taken on their own behalf and which were not incurred in
the performance of their duties as directors and/or officers.
85. As a proximate result of the violation of Section 315, ERLY, ARI and
their respective shareholders have been injured. Plaintiff, as a shareholder
and representative of ERLY and ARI, seeks damages and other relief for the
corporations as hereinafter set forth.
WHEREFORE, plaintiff prays for the following relief:
A. Determining that this action is a proper derivative action;
B. Against each defendant for restitution and/or damages in favor of the
plaintiff, on behalf of ERLY and ARI, plus pre-judgment interest;
C. Awarding punitive and exemplary damages as appropriate against the
Murphys;
D. Enjoining defendants from further breaches of their duties to ERLY and
ARI including, but not limited to, enjoining the further distribution of
corporate assets to fund the Murphy Legal
23
<PAGE>
Defense and mandating on-going indemnification by the Murphys for further costs
and expenses incurred by ERLY and ARI related to the Murphy Legal Defense;
E. Extraordinary equitable and/or injunctive relief as permitted by law,
equity and state statutory provisions sued hereunder, including attaching,
impounding, imposing a constructive trust or otherwise restricting defendants'
assets so as to assure that plaintiff has an effective remedy;
F. Awarding plaintiff the costs and disbursements of this action,
including reasonable attorneys', accountants' and experts' fees; and
G. Granting such other and further relief as this Court may deem just and
proper.
JURY TRIAL DEMAND
-----------------
Plaintiff hereby demands a trial by jury pursuant to Rule 38 of the Federal
Rules of Civil Procedure.
DATED: September 12, 1997
GIBSON, DUNN & CRUTCHER LLP
DANIEL S. FLOYD, SBN 123819
KEVIN S. ROSEN, SBN 133304
DANIEL N. SHALLMAN, SBN 180782
By: /s/ Daniel S. Floyd
-------------------------------
DANIEL S. FLOYD
Attorneys for Plaintiff FARMERS RICE
MILLING COMPANY, INC.
24
<PAGE>
VERIFICATION
------------
I, Nanette Kelley, hereby declare as follows:
I am President of Farmers Rice Milling Company, Inc., Plaintiff in the
above-entitled action. I have read the foregoing First Amended Derivative
Complaint and know the contents thereof; I am informed and believe the matters
therein are true and on that ground allege that the matters stated therein are
true.
I declare under penalty of perjury that the foregoing is true and correct
and that this verification was executed on September 10, 1997 in Baton Rouge,
Louisiana.
/s/ Nanette Kelley
---------------------------
Nanette Kelley
25
