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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported) February 15, 1999
ERLY Industries Inc.
(Exact Name of Registrant as Specified in Charter)
California 001-07894 95-231-2900
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No)
8641 United Plaza Boulevard
Baton Rouge, Louisiana 70809
(Address of Principal Executive (Zip Code)
Offices)
Registrant's telephone number, including area code (225) 922-4664
10900 Wilshire Boulevard, #1800
Los Angeles, California 90024
(Former Name or Former Address, if Changed Since Last Report)
<PAGE>
Item 2. Acquisition or Disposition of Assets.
Sale of Chemonics
- -----------------
On February 15, 1999, Watch-Edge International, Inc., formerly known as
Chemonics Industries, Inc. ("Watch-Edge"), and Chemonics International, Inc.
("Chemonics"), a wholly owned subsidiary of Watch-Edge, entered into an
Agreement of Purchase and Sale of Assets with FIA Investment Company L.L.C.
pursuant to which Watch-Edge and Chemonics agreed to sell all of the assets of
Chemonics for an aggregate purchase price that is expected to be $30.4 million,
consisting of $8.25 million in cash and the assumption by the buyer of
liabilities of Watch-Edge and Chemonics. The transaction remains subject to the
satisfaction of certain conditions, including the expiration of the applicable
waiting period under the Hart-Scott-Rodino Anti-Trust Improvements Act of 1976.
The transaction is expected to close on or about March 31, 1999.
Item 3. Bankruptcy or Receivership.
Action by ERLY Creditors Committee
- ----------------------------------
On March 1, 1999, the Official Committee of Unsecured Creditors of ERLY
Industries, Inc. filed a motion in the Chapter 11 bankruptcy case of the Company
pending in the United States Bankruptcy Court for the Southern District of Texas
(Corpus Christi Division Case No. 98-21515-C-11), seeking to convert the
bankruptcy case from a Chapter 11 (reorganization) case to a Chapter 7
(liquidation) case on the basis that following the Chemonics transaction, the
Company no longer owns any operating assets to reorganize. The Company is
considering its response at this time and will be holding a meeting of the Board
of Directors on March 11, 1999 to review its options.
Item 5. Other Events.
Settlement of Tenzer Litigation
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On February 17, 1999, ERLY Industries Inc. (the "Company") and Watch-Edge
entered into a Joint Compromise and Settlement Agreement (the "Settlement
Agreement") with Kingwood Lakes South, L.P., Anthony M. Frank, Tenzer Company,
Inc. and Michael L. Tenzer (collectively, the "Tenzer Group") to settle certain
disputes arising in connection with a prior settlement agreement entered into
between the Tenzer Group, the Company, Watch-Edge and others as of August 20,
1998 (the "August Settlement"). Pursuant to the August Settlement, Watch-Edge
issued a note to certain members of the Tenzer Group in the principal amount of
$3,800,000, which was payable by its terms on the earlier of February 13, 1999
and the occurrence of a sale of the assets or stock of Chemonics. The Company
and Watch-Edge took the position that they had the right to set aside the
obligations incurred in the August Settlement in the Company's current Chapter
11 case.
Pursuant to the Settlement Agreement, (i) the Company and Watch-Edge
released any and all claims against the Tenzer Group and others relating to the
August Settlement, (ii)
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Watch-Edge agreed to pay to certain members of the Tenzer Group the sum of
$2,500,000 on the earlier of February 26, 1999 and the occurrence of a sale of
the stock or assets of Chemonics and (iii) the Company agreed that the claim of
the Tenzer Group presently filed in the Company's Chapter 11 case would be
reduced and allowed in full as a general unsecured claim in the amount of
$5,000,000 (the "Tenzer claim"). Pursuant to the Settlement Agreement, the
Tenzer Group released any remaining claims against the Company and Watch-Edge
and each of the current directors of the Company and Watch-Edge.
Watch-Edge made the $2,500,000 payment to the Tenzer Group on February 26,
1999. Pursuant to the Settlement Agreement, the Company has the right, but is
not obligated, to redeem the remaining $5 million Tenzer claim in full by paying
to the Tenzer Group in good and valid funds an amount equal to $650,000 on or
before June 26, 1999. If such a redemption does not occur, the Company will
have the right, but will not be obligated, to redeem the Tenzer claim in whole
or in part according to the following schedule by paying such amounts on or
before October 26, 1999.
<TABLE>
<CAPTION>
Face amount of Tenzer Claim
Subject to Redemption Payment to Tenzer due
--------------------------- ---------------------
<S> <C>
$1.0 million $ 150,000
$2.0 million $ 300,000
$3.0 million $ 500,000
$4.0 million $ 750,000
$5.0 million $1,050,000
</TABLE>
Item 7. Financial Statements and Exhibits.
The following exhibits are filed with this report:
Exhibit Description
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2.1 Agreement of Purchase and Sale of Assets, by and among Chemonics
International, Inc., Watch-Edge International, Inc., FIA Investment
Company L.L.C., and Mike Boudloche, dated February 15, 1999.
99.1 Joint Compromise and Settlement Agreement, by and between ERLY
Industries Inc., Watch-Edge International, Inc., Kingwood Lakes South,
L.P., Anthony M. Frank, Tenzer Company, Inc., and Michael L. Tenzer,
dated February 17, 1999.
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99.2 Expedited Motion of the Official Committee of Unsecured Creditors for
Conversion of the Case to one under Chapter 7 and Points and
Authorities in Support Thereof, dated March 1, 1999.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
ERLY INDUSTRIES, INC.
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(Registrant)
Date: March 10, 1999 By: /s/ NANETTE N. KELLEY
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Nanette N. Kelley
Chairman, President and
Chief Executive Officer
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EXHIBIT 2.1
AGREEMENT OF PURCHASE AND SALE OF ASSETS
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THIS AGREEMENT is entered into on February 15, 1999, by and among CHEMONICS
INTERNATIONAL, INC., a California corporation ("Chemonics"), WATCH-EDGE
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INTERNATIONAL, INC., an Arizona corporation ("Watch-Edge") (Chemonics and Watch-
----------
Edge are collectively referred to herein as the "Seller"), FIA INVESTMENT
------
COMPANY L.L.C., an Arizona limited liability company, or its assignee
("Purchaser"), and MIKE BOUDLOCHE, solely in his capacity as responsible person
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("Boudloche").
---------
RECITALS
Boudloche was appointed as the responsible person to negotiate a sale
of Watch-Edge's stock in its wholly-owned non-debtor subsidiary, Chemonics, or,
alternatively, to structure on behalf of and with the consent of Watch-Edge, as
Chemonics' sole shareholder, and with the further consent of Board of Directors
of Chemonics, a sale of all of the assets of Chemonics itself, in either case
together with a sale of those assets of Watch-Edge which are used in conjunction
with and/or relate or contribute to Chemonics' business, pursuant to the
January 5, 1999, order of the United States Bankruptcy Court for the Southern
District of Texas entitled: Order on Motion to Sell Assets Free of Liens, Claims
and Encumbrances, Chemonics International, Inc. (the "Sale Order").
----------
In consideration of the terms and conditions contained herein, Purchaser
and Seller each hereby agree as follows:
ARTICLE 1
PURCHASE AND SALE OF ASSETS
1.1 Purchase and Sale of Assets. Subject to the terms and conditions of
---------------------------
this Agreement, Seller shall sell, transfer, assign, and deliver to Purchaser,
and Purchaser shall purchase and obtain from Seller, all of Seller's right,
title, and interest in and to the assets, contracts, leases and property of
Seller described herein that relate to or are used directly or indirectly in the
operation of the business of Chemonics, including, but not limited to, the
business as described in that certain Offering Memorandum (attached as Exhibit
"A") prepared by Seller (the "Business"), whether tangible, intangible, real,
--------
personal, or mixed and wherever located, including, but not limited to, those
specified below:
(1) All of the assets reflected on the Financial Statements (as defined
below) and all assets subsequently acquired, except for those assets disposed of
in the ordinary course of business consistent with past practices;
(2) All of Chemonics' furniture, improvements, fixtures, equipment, and
other personal property, including but not limited to, computer hardware and
software, peripherals, communication products and accessories and all other
supplies and materials;
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(3) All of Chemonics' cash, cash equivalents, deposits in transit, credits,
prepaid expenses, deferred charges, advance payments, security deposits, and
prepaid items and deposits, including any cash surrender value thereof;
(4) All of Chemonics' title, claims, and rights under contracts and
subcontracts, including consulting and sales contracts, accounts receivable,
notes, evidences of indebtedness, including, without limitation, contracts with
the Agency for International Development, the International Bank for
Reconstruction and Development, the United Nations, or any other international
assistance donor, foreign aid agency or regional development bank (including,
but not limited to, any payments relating to such contracts received either
prior to or after any assignment of such contract);
(5) All of Chemonics' federal, state, and foreign and common law
copyrights, service marks, trademarks, trade names (specifically, including,
without limitation, the name "Chemonics International, Inc." and "Chemonics"),
trade secrets, licenses, permits and royalty rights;
(6) All of Chemonics' securities, notes, bank accounts, certificates of
deposit, and bonds;
(7) All outstanding invoices, studies, reports, plans and information,
including customer lists, employee files, technical information sheets, and
other materials and data associated with, used or employed by Chemonics in the
Business;
(8) All of Chemonics' interests, claims, and rights, including all
deposits, under certain leases, including, but not limited to, all of Seller's
interests, claims, and rights under that certain lease for the premises at 1133
20th St. NW, Washington, D.C. 20036;
(9) All of Chemonics' interest in any subsidiaries or any joint ventures or
other business arrangements with third parties;
(10) All of Watch-Edge's interests, claims, and rights relating to, or set
forth in, any computer lease or contract with Dell Computer as evidenced by such
companies' "UCC-1 filing";
(11) Any additional items of tangible or intangible property used or owned
by Chemonics which are not included above;
(12) All of Seller's right, title and interest in any assets or contracts
held by them that are used in the Business; and
(13) All of Chemonics' employment agreements.
For purposes of this Agreement, all of the property and assets described in
this Section 1.1 shall be referred to collectively as "Purchased Assets". Such
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sale shall be made free and
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clear of all liabilities, obligations, and encumbrances provided that Purchaser
shall assume those specific liabilities obligations, and encumbrances of Seller
specifically assumed by Purchaser under Section 1.2 hereof.
Notwithstanding anything to the contrary set forth above, Seller is not
hereby selling, and Purchaser is not hereby acquiring, any claims, causes of
action or rights Seller may have (i) against Anthony Frank, the Tenzer Company,
Inc., or Edwin Marzec, or the current or former officers, or directors, agents,
employees or professionals thereof or (ii) arising under title 11, of the United
States Code, or (iii) against Ashraf Rizk, Thurston F. Teele, or any past or
present officer, director, employee or professional of Seller (the "Retained
Assets").
1.2 Assumed Liabilities. On the Closing Date (as hereinafter defined), in
-------------------
partial consideration of the transfer to the Purchaser of the Purchased Assets,
Purchaser shall assume and pay or discharge only those liabilities or
obligations (the "Assumed Liabilities") of Seller reflected on Schedule 1.2. It
-------------------
is expressly understood and agreed that Purchaser shall not be liable for any of
the obligations or liabilities of Seller of any kind or nature other than those
specifically assumed by Purchaser under this Section as specified on Schedule
1.2 hereto as they exist on the Closing Date and only up to the amounts
indicated on Schedule 1.2.
1.3 Liabilities Not Being Assumed. Except as set forth in Section 1.2,
-----------------------------
notwithstanding any other provision hereof or any schedule or exhibit hereto and
regardless of any disclosure to Purchaser, neither Purchaser nor any of its
Affiliates shall assume any liabilities, obligations or commitments, whether
fixed or contingent, known or unknown, matured or unmatured, executory or non-
executory of Seller, or any other person other than those obligations and
commitments comprising the Assumed Liabilities (collectively, the "Excluded
--------
Liabilities"). In particular, and subject to Section 7.15, the term "Excluded
- -----------
Liabilities" shall include, but not be limited to, the following: (i) any
liabilities owed by Seller to ERLY, Watch-Edge or their Affiliates (including
liabilities pursuant to tax sharing agreements, if any), (ii) any claims or
liabilities relating to any of the Marzec Contingency, the Tenzer Contingency,
or any other litigation pending or threatened against Seller or the Purchased
Assets that is not disclosed in the Financial Statements, (iii) any arrangement,
liability to or claim resulting from, or made with, any investment banker, agent
or broker, including AIG and (iv) any Environmental Liabilities and Costs.
1.4 Purchase Price. On the terms and subject to the conditions set forth
--------------
in this Agreement, Purchaser agrees to pay Seller the amounts set forth in this
Section 1.4 (the "Purchase Price"). The Purchase Price for the Purchased Assets
--------------
is the total of (a) $1,500,000 in cash previously deposited in trust with
Boudloche in connection with this transaction, (b) the Assumed Liabilities, (c)
$6,750,000 in cash or other immediately available funds which shall be delivered
at the Closing; and if not, the failure to do so shall be an event of default,
(d) satisfaction or release of all amounts owed by Seller to Purchaser, and (e)
satisfaction of all amounts owed by Seller to Farmer's Rice Milling Inc., such
amount being agreed on as the principal sum of $2,217,470.88, fees (if any),
plus accrued interest at the contract rate through the Closing Date.
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1.5 Characterization of Transaction; Allocation. Purchaser and Seller
-------------------------------------------
acknowledge and agree that, to the extent applicable, the purchase and sale
contemplated by this Agreement constitutes an "applicable asset acquisition"
within the meaning of Section 1060 of the Internal Revenue Code and the
corresponding provisions of state and local law. Purchaser shall deliver to
Seller a proposed allocation of the Purchase Price among the Purchased Assets
(the "Proposed Allocation") as soon as practicable after the Closing Date.
-------------------
Within twenty (20) days after the receipt of the Proposed Allocation, Seller
shall propose Seller's changes to the Proposed Allocation, if any. Any dispute
with respect to the Proposed Allocation that Purchaser and Seller, acting in
good faith, are thereafter unable to resolve within twenty (20) days shall be
conclusively resolved by an independent appraisal firm mutually agreed on by
Purchaser and Seller. The fees and expenses of such appraisal firm shall be
borne equally by Purchaser and Seller. Neither Purchaser nor Seller will take a
position inconsistent with the allocation of the Purchase Price as finally
determined pursuant to this Section 1.5; provided, however, that, if the
Internal Revenue Service ("IRS") takes a position with respect to either
---
Purchaser or Seller that is inconsistent with such allocation, then either
Purchaser or Seller, as the case may be, may take a protective position adopting
the IRS' contention until the controversy has been resolved.
1.6 Consent of Third Parties. Notwithstanding anything to the contrary in
------------------------
this Agreement, this Agreement shall not constitute an agreement to assign or
transfer any Governmental Approval, instrument, contract, lease, permit or other
agreement or arrangement or any claim right or benefit arising thereunder or
resulting therefrom if an assignment or transfer or an attempt to make such an
assignment or transfer without the Consent of a third party would constitute a
breach or violation thereof or affect adversely the rights of Purchaser or
Seller thereunder; and any transfer or assignment to Purchaser by Seller of any
interest under any such instrument, contract, lease, permit or other agreement
or arrangement that requires the Consent of a third party shall be made subject
to such Consent or approval being obtained. In the event any such Consent or
approval is not obtained on or prior to the Closing Date, unless the parties
hereto shall otherwise agree, Seller, shall use reasonable efforts to obtain any
such approval or Consent after the Closing Date in any lawful arrangement to
provide that Purchaser shall receive the interests of Seller in the benefits
under any such instrument, contract, lease or permit or other agreement or
arrangement, including performance by Seller, as agent without requiring that
Purchaser provide additional consideration; except that Purchaser shall
undertake to pay or satisfy the corresponding liabilities for the enjoyment of
such benefit to the extent Purchaser would have been responsible therefor
hereunder if such Consent or approval had been obtained. This provision is
subject to the provisions of Paragraph 4.2b. Purchaser shall attempt to obtain
releases of Seller from any and all contracting entities releasing Seller from
responsibility under such contracts after the Closing Date. Subject to Section
4.2, nothing in this Section 1.6 shall be deemed a waiver by Purchaser of its
right to receive an effective assignment of all of the Purchased Assets nor
shall this Section 1.6 be deemed to constitute an agreement to exclude from the
Purchased Assets any assets set forth in Section 1.1.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF SELLER
As of the date hereof and as of the Closing Date, Sellers jointly and
severally represent,
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warrant, and agree as follows:
2.1 Authorization, etc. Seller has the corporate power and authority to
-------------------
execute and deliver this Agreement and to carry out and consent to the
transactions contemplated hereby. The execution and delivery by Seller of this
Agreement, and the consummation of the transactions contemplated hereby, have
been duly authorized by all requisite corporate action of Seller. This Agreement
is the legal, valid and binding obligation of Seller enforceable against Seller
in accordance with its terms. Seller specifically adopts all actions taken by
Boudloche consistent with the Sale Order.
2.2 Corporate Existence. Seller is a corporation duly organized, validly
-------------------
existing, and in good standing under the laws of the jurisdiction of
incorporation with full corporate power and authority to carry on its business
as it is now conducted.
2.3 Financial Statements. Seller has delivered to Purchaser the unaudited
--------------------
balance sheets of Chemonics at October 31, 1998, and the related statements of
income for the seven months then ended, together with the related notes thereto
(collectively, the "Financial Statements"). With the exception of those matters
--------------------
listed on Schedule 2.4, the Financial Statements are materially complete and
correct and in accordance with the books of account and records of Chemonics,
and present fairly Chemonics' financial position. The Financial Statements have
been prepared in accordance with generally accepted accounting principles
consistently applied.
2.4 Absence of Certain Material Changes or Events. Since October 31, 1998
---------------------------------------------
(and with respect to subsections 10, 11 and 12 below, December 31, 1997), other
than that known by Thurston F. Teele ("Teele") and Ashraf W. Rizk ("Rizk"), or
----- ----
as provided in any court order or this Agreement, there has not been any
material (i.e. in excess of the sum of $25,000.00 per occurrence or $100,000.00
in the aggregate):
(1) Except for the loan from Farmer's Rice Milling Inc. or other
transactions approved by the bankruptcy court, transaction by Chemonics outside
the ordinary course of business consistent with past practices;
(2) Adverse change in the financial condition, liabilities, assets,
business, or prospects of Chemonics;
(3) Increase in the salary or other compensation payable or to become
payable by Chemonics to any of its officers or directors or the declaration,
payment, or commitment or obligation of any kind for the payment, by Chemonics,
of a bonus or other additional salary or compensation to any such person;
(4) Amendment or termination of any contract, agreement, or license to
which Chemonics is a party, or by which it or any of its assets or properties
are subject, except in the ordinary course of business;
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(5) Waiver or release of any right or claim of Chemonics, except in
the ordinary course of business or except for any release in connection with
settlement of the Marzec Contingency or the Tenzer Contingency;
(6) Declaration of or agreement to make any distribution of any assets
of any kind whatsoever;
(7) Citations, notices, or communications received for any violations
of any act, law, rule or regulation of any Governmental Authority;
(8) Claim incurred for damages or alleged damages for actual or
alleged negligence or other tort or breach of contract which is not fully
covered by insurance underwritten by responsible insurers;
(9) Sales, transfers, disposals of or agreements to sell, transfer or
otherwise dispose of any of the assets, properties or rights of Chemonics,
except in the ordinary course of business consistent with the past practices of
Chemonics;
(10) Change in the liabilities or obligations of Seller. Chemonics
has not incurred, and none of its assets or properties are subject to, any
liabilities or obligations (accrued, absolute, contingent, or otherwise
including but not limited to accrued but not yet payable tax liabilities)
whether or not such liabilities are normally shown or reflected on a balance
sheet prepared in a manner consistent with generally accepted accounting
principles, and Chemonics is not in default in respect of any term or condition
of any indebtedness or liability (except for defaults with respect to
indebtedness owed to Purchaser). There are no facts in existence on the date
hereof and known to Seller and not known to Teele or Rizk that might reasonably
serve as the basis for any material liabilities or obligations of Chemonics not
disclosed in this Agreement, Schedule 2.4, or the Financial Statements;
(11) Claims, actions, lawsuits, proceedings, arbitration issues,
unsettled workers compensation claims, or investigations pending or threatened
(except for the Marzec Contingency) against or affecting Chemonics, the
Business, or any of its assets or properties, at law or in equity or before or
by any court or federal, state, municipal or other governmental department,
commission, board, agency, instrumentality, or unit;
(12) Contract, agreement, commitment and other instrument and
arrangement (whether written or oral), except as set forth in this Agreement,
any schedule hereto, or the Financial Statements, to which the Seller is a
party, or by which it, or any of its property is bound, which affects the
Purchased Assets, entered into by anyone other than Teele or Rizk, or any person
authorized to do so by the foregoing individuals, including but not limited to
asset purchase agreements and other acquisition or divestiture agreements,
leases, joint venture or partnership agreements, investment letters, financing
arrangements, escrow agreements, bonds, liens, pledges or other security
agreements, employment or consulting contracts, bonus, pension, group insurance
or similar employee benefit plans, insurance policies, or license agreements; or
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(13) Agreements to do any of the things described in the preceding
clauses (1) through (12).
2.5 Tax Matters. Except as set forth in the Financial Statements or known
-----------
to Teele and Rizk and except as to the 1997 consolidated tax return, all
federal, state, county, local and other taxes, including without limitation,
income taxes, excise taxes, payroll taxes, corporate franchise taxes, sales,
and ad valorem taxes, due and payable by Chemonics on or before the date of this
Agreement have been paid, and Chemonics has filed on a timely basis all tax
returns and reports required to be filed by it with all applicable taxing
authorities and Seller does not expect any penalties to be assessed against
Chemonics with respect to such returns and reports. Seller is responsible for
filing all post-closing tax returns of Chemonics and for complying with all tax
related audits and inquiries relating to Chemonics. Nothing herein shall require
that Purchaser pay or assume any liability for such audit or as a result of such
audit. No assessments or deficiencies have been made against Chemonics and no
extensions of time are in effect for the assessment of deficiencies. Seller will
not cause or voluntarily permit a change in any method of accounting for tax
purposes during or applicable to Chemonics current tax year which would render
inaccurate, misleading, or incomplete the information concerning taxes set forth
in or referred to in this Section 2.5, or which would have an adverse effect on
Chemonics for any period ending on or before the Closing Date. A copy of the
current accounting information and software shall be delivered to Seller within
fifteen (15) days of Closing. Purchaser agrees to preserve for the benefit of
Seller a copy of all data on the accounting system(s). Subsequent to Closing,
Purchaser agrees to assist, cooperate and provide to Seller accounting
information in the event that Seller shall need such accounting information for
(1) tax matters involving Seller, or (2) to respond to any government, contract,
or IRS audits or inquiries, or (3) on any other matter reasonably requested by
Seller.
2.6 Title to Purchased Assets. Seller has and will transfer to Purchaser
-------------------------
good and marketable fee simple to the Purchased Assets and upon the consummation
of the transactions contemplated hereby, Purchaser will acquire good and
marketable title to all of the Purchased Assets, free and clear of any liens or
encumbrances.
2.7 Environmental Matters.
---------------------
(1) Chemonics (and Watch-Edge solely as to any assets conveyed to
Purchaser hereunder) has complied and is currently in compliance with, all
Environmental Laws, and no action, suit, proceeding, investigation, charge,
complaint, notice, claim or demand has been filed, commenced or asserted against
Chemonics alleging any failure to comply, nor is there any basis upon which such
action, suit, proceeding, investigation, charge, complaint, notice, claim or
demand could be so filed, commenced or asserted.
(2) No work, repair, construction or capital expenditure is required
to be performed or expended by Chemonics as a result of any Environmental Law.
(3) Chemonics has no liability for damage under any Environmental Law
with respect to (i) any site, location or body of water (surface or sub-surface)
or (ii) any illness of or
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personal injury to, any employee or other individual.
(4) All properties and equipment, including the Purchased Assets,
occupied or used by Chemonics are and have been free of Hazardous Substances.
Section 2.8 Disputed Liabilities. Seller and Purchaser dispute whether
--------------------
the items set forth on Schedule 2.4 (the "Disputed Liabilities") are items which
Purchaser agreed to assume or pay under that certain letter agreement dated
January 15, 1999 (the "January 15 Letter").
ARTICLE 3
REPRESENTATIONS, WARRANTIES AND COVENANTS OF PURCHASER
As of the date hereof and as of the Closing Date, the Purchaser represents,
warrants, and agrees as follows:
3.1 Authorization, etc. Purchaser has the power and authority to execute
------------------
and deliver this Agreement and to carry out and consent to the transactions
contemplated hereby. The execution and delivery by Purchaser of this Agreement
and the consummation of the transactions contemplated hereby have been duly
authorized by all requisite action of Purchaser. This Agreement is the legal,
valid and binding obligation of Purchaser enforceable against Purchaser in
accordance with its terms.
3.2 Existence. Purchaser is an Arizona limited liability company, duly
---------
authorized, validly existing and in good standing under the laws of Arizona with
full power and authority to carry on its business as it is now conducted.
3.3 Covenant. Purchaser agrees to timely perform and discharge all
--------
Assumed Liabilities and to perform all obligations of Seller and Purchaser under
any contracts or leases assumed or to be acquired hereunder.
ARTICLE 4
CONDITIONS PRECEDENT
4.1 Conditions to Obligations of Each Party. The obligations of the
---------------------------------------
parties to consummate the transactions contemplated hereby shall be subject to
the fulfillment on or prior to the Closing Date of the following conditions:
4.1.a HSR Act Notification . In respect of any necessary
---------------------
notifications of Purchaser and Seller pursuant to the Hart-Scott-Rodino Anti-
Trust Improvements Act of 1976, as amended (the "HSRA"), the applicable waiting
period and any extensions thereof shall have expired or been terminated.
4.1.b No Injunction, etc. Consummation of the transactions
------------------
contemplated hereby shall not have been restrained, enjoined or otherwise
prohibited by any applicable law, including any order, injunction, decree or
judgment of any court or other Governmental
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Authority.
4.1.c Section 363(m) Order. Entry of an order, which has not been
--------------------
stayed or the effectiveness thereof enjoined, under 11 U.S.C. (S) 363(m)
determining that Purchaser (or its assignee) and any person who participated in
submitting the bid set forth in the January 15 Letter is a "good faith"
purchaser as that term is utilized in Section 363(m), that the parties hereto
negotiated the terms of the sale authorized under the agreement in, and
conducted themselves at all relevant times in, good faith, that there is no
undisclosed agreement or other contract which affects or is related to the sale
or the consideration to be provided by Purchaser, that Purchaser (or its
assignee) is entitled to the protections set forth under Section 363(m), that
Boudloche's execution of this Agreement is approved, and that Boudloche's
actions in connection therewith are appropriate and approved.
4.1.d Free and Clear Order; Transfer Documents. Entry of an order,
----------------------------------------
which has not been stayed or the effectiveness thereof enjoined, (i) declaring
that the sale of the assets of Chemonics acquired by Purchaser is free and clear
of all liens, claims, or encumbrances (subject only to Assumed Liabilities) and
(ii) providing for the assignment to Purchaser by Watch-Edge of leases or
executory contracts required to be conveyed or assigned hereunder. Seller shall
also have delivered to Purchaser at the Closing all documents, certificates and
agreements necessary to transfer to Purchaser good and marketable title to the
Purchased Assets, free and clear of any and all liens, claims, and encumbrances
thereon to the extent provided herein.
4.2 Conditions to Obligations of Purchaser. The obligations of Purchaser
--------------------------------------
to consummate the transactions contemplated hereby shall be subject to the
fulfillment (or waiver by Purchaser, in its sole discretion) on or prior to the
Closing Date of the following additional conditions, which Seller agrees to use
reasonable good faith efforts to cause to be fulfilled:
4.2.a Representations; Performance. The representations and
----------------------------
warranties of Seller contained herein shall be true and correct in all respects
on and as of the Closing Date as though made at that time. Seller shall have
duly performed and complied in all material respects with all agreements and
conditions required by this Agreement to be performed or complied with by it
prior to or on the Closing Date.
4.2.b Consents. Seller shall have obtained and shall have delivered
--------
to Purchaser copies of (i) all Governmental Approvals required to be obtained by
Seller in connection with the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby, and (ii) all Consents
necessary to be obtained in order to consummate the sale and transfer of the
Purchased Assets pursuant to this Agreement and the consummation of the
transactions contemplated hereby. Notwithstanding any other provision contained
in this Agreement, nothing shall require Seller to obtain any governmental or
third party consent to any assignment or transfer of the Purchased Assets as a
prerequisite to Purchaser's obligations herein. Any costs and expenses
associated with obtaining such consents after Closing shall be the sole
responsibility of Purchaser.
4.2.c Board of Directors Approval. This Agreement, and all
---------------------------
transactions
9
<PAGE>
contemplated hereby, shall have been approved by the Board of Directors of
Chemonics at a duly called meeting ratifying Mr. Boudloche's actions and, as to
Chemonics, adopting them as the actions of the corporation and shall have been
approved by the Board of Directors of Watch-Edge in a similar manner.
4.2.d No Adverse Change. There shall have been no material adverse
-----------------
change in the financial condition, liabilities, assets, business, or prospects
of Chemonics since the date of this Agreement through and including the Closing.
4.3 Conditions to Obligations of Seller. The obligations of Seller to
-----------------------------------
consummate the transactions contemplated hereby shall be subject to the
fulfillment (or waiver by Seller, in its sole discretion) on or prior to the
Closing Date of the following additional condition, which Purchaser agrees to
use reasonable good faith efforts to cause to be fulfilled.
4.3.a Representations; Performance, etc. The representations and
----------------------------------
warranties of Purchaser contained herein shall be true and correct in all
respects on and as of the Closing Date as though made at that time. Purchaser
has duly performed and complied in all material respects with all agreements and
conditions required by this Agreement to be performed or complied with by it
prior to or on the Closing Date.
ARTICLE 5
THE CLOSING
5.1 Closing. The Closing (and the payment of monies required hereunder)
-------
with respect to the transactions contemplated by this Agreement the ("Closing")
-------
shall take place at 3:00 p.m. local time on the earlier of (a) February 25, 1999
or (b) such other time as the parties hereto agree. The Closing shall occur at
the offices of Chemonics International, Inc. or at such other place as the
parties may agree. The day on which the Closing actually occurs is herein
sometimes referred to as the ("Closing Date").
------------
5.2 Seller's Obligations. At the Closing, Seller shall deliver to
--------------------
Purchaser the following:
(a) Instruments of transfer transferring to Purchaser all of Seller's
rights, title, and interest in and to the Purchased Assets, all in form and
substance satisfactory to Purchaser;
(b) All books, records, and other data relating to the Business (other
than its corporate records);
(c) Instruments of assignment and transfer of all other Purchased
Assets of every kind and description and wherever situated;
(d) Seller, at any time before or after the Closing, will execute,
acknowledge, and deliver any further deeds, assignments, conveyances, and other
assurances, documents and instruments of transfer, reasonably requested by
Purchaser, and will take any other action
10
<PAGE>
consistent with the terms of this Agreement that may reasonably be requested by
Purchaser, for the purpose of assigning, transferring, granting, conveying, and
confirming to Purchaser, or reducing to possession, any or all property to be
conveyed and transferred by this Agreement, and
(e) Evidence of the satisfaction of all requirements of Sections 4.1
and 4.2.
5.3 Purchaser's Obligations. At the Closing, Purchaser shall deliver to
-----------------------
Seller the following:
(1) Delivery of $6,750,000 payable as provided in Section 1.4 hereof
and release to Seller of the $1,500,000.00 previously deposited by Purchaser;
(2) Satisfaction or release of the amount owed by Seller to Purchaser;
(3) Satisfaction of all amounts owed by Seller to Farmer's Rice
Milling Inc.; (principal amount limited to $2,217,470.88, plus accrued interest
at the base rate through the Closing Date);
(4) An assumption agreement pertaining to the Assumed Liabilities in
form and substance reasonably acceptable to Seller;
(5) A certificate of satisfaction or release which releases any claim
against the stock of either Chemonics or Watch-Edge which stock is held as
collateral by Purchaser; and
(6) To the extent Purchaser has the original of any such stock
certificates of Watch-Edge or Chemonics, same shall be returned to Seller along
with the certificate indicating the satisfaction of this indebtedness.
ARTICLE 6
POST CLOSING
6.1 Survival of Representations and Warranties. All covenants,
------------------------------------------
agreements, representations, and warranties made hereunder or pursuant hereto or
in connection with the transactions contemplated hereby shall survive the
Closing.
6.2 Indemnification by Seller. Seller shall indemnify, defend, and hold
-------------------------
harmless Purchaser and its successors and assigns from and against any and all
claims, demands, obligations, liabilities, losses, costs, damages, and expenses,
including interest, penalties, and reasonable attorneys' fees caused by or
arising out of
(1) any Excluded Liability;
(2) any breach or default in the performance by Seller of any covenant
or agreement of Seller contained in this Agreement;
11
<PAGE>
(3) any breach of warranty or materially inaccurate or erroneous
representation made by Seller herein;
(4) all Environmental Liabilities and Costs arising out of the
Seller's operations or its business prior to the Closing Date; and/or
(5) any liability arising out of any and all actions, suits,
proceedings, claims, demands, judgments, costs, and expenses incident to any of
the foregoing.
Purchaser and its successors and assigns shall promptly notify Seller of
any such liability, breach of warranty, inaccuracy, misrepresentation, or any
other claim arising under the foregoing indemnification provision. Seller may
contest and defend in good faith any claim of third parties covered by this
Section, provided such contest is made without cost or prejudice to Purchaser,
and provided that within thirty (30) days of Seller's receipt of notice of such
claim Seller notifies Purchaser of its desire to defend and contest such claim.
Any allowed claim of Purchaser under Section 6.2 hereof shall be considered and
deemed to be an administrative claim in the Watch-Edge and to, the extent
applicable, Erly Industries, Inc. bankruptcy case and provided for in any plan
or, in the event the case is converted, in any subsequently converted case under
Chapter 7 of the Bankruptcy Code.
6.3 Indemnification by Purchaser. Purchaser agrees to indemnify and hold
----------------------------
harmless Seller against, and in respect of, any and all claims, losses,
expenses, costs, obligations, and liabilities Seller may incur by reason of (i)
Purchaser's material breach of any covenant or agreement made by Purchaser in or
pursuant to this Agreement, or (ii) the material inaccuracy of any
representation or warranty made by Purchaser in or pursuant to this Agreement.
ARTICLE 7
MISCELLANEOUS
7.1 Definitions. The terms defined in this Section 7.1, whenever used in
-----------
this Agreement, shall have the respective meanings indicted below for all
purposes of this Agreement.
Affiliate: of (a) any Person means any other Person that directly or
indirectly through one or more intermediaries, controls, is controlled by, or is
under direct or indirect common control with, such first Person and (b) the
Seller includes any Affiliate as defined in clause (a) above. For purposes of
this definition, the term "control" (including the correlative meanings of the
terms "controls"- "controlled by" and "under common control with"), as used with
respect to any Person (including Seller), shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of the management
policies of such Person, whether through the ownership of voting securities, by
contract or credit arrangement, as trustee or executor, or otherwise.
Consent: any consent, approval, authorization, waiver, permit, grant,
franchise,
12
<PAGE>
concession, agreement, license, exemption or order of, registration,
certificate, declaration or firms with, or report or notice to, any Person,
including but not limited to any Governmental Authority.
Environmental Laws: all applicable laws relating to the protection of
the environment, to human health and safety, or to any emission, discharge,
generation, processing, storage, holding, abatement, existence, release,
threatened release or transportation of any Hazardous Substances, including,
without limitation, (i) the Comprehensive Environmental Response, Compensation
and Liability Act, the Resource Conservation and Recovery Act, and the
Occupational Safety and Health Act, (ii) all other requirements pertaining to
reporting, licensing, permitting, investigation or remediation of emissions,
discharges, releases or threatened releases of Hazardous Substances into the
air, surface water, ground water or land, or relating to the manufacture,
processing, distribution, use, sale, treatment, receipt, storage, disposal,
transport or handling of Hazardous Substances, and (iii) all other requirements
pertaining to the protection of the health and safety of employees or the
public.
Environmental Liabilities and Costs: all losses, whether direct or
indirect, known or unknown, current or potential, past, present or future,
imposed by, under or pursuant to Environmental Laws, including, without
limitation, all losses related to remedial actions, and all fees, disbursements
and expenses of counsel, experts, personnel, and consultants based on, arising
out of, or otherwise in respect of (i) the ownership or operation of the Seller,
the Business, or any real properties, assets, equipment, or facilities, by the
Seller, or any of its predecessors or Affiliates; (ii) the environmental
conditions, whether known or unknown, existing on the Closing Date on, under,
above, or about any real properties, assets, equipment, or facilities currently
or previously owned, leased, or operated by the Seller, or any of its
predecessors or Affiliates; and (iii) expenditures necessary to cause any aspect
of the Seller's business to be in compliance with. any and all requirements of
Environmental Laws as of the Closing Date, including, without limitation, all
environmental permits, licenses, registrations, certificates or otherwise issued
under or pursuant to such Environmental Laws, and reasonably necessary to make
full economic use of any leased real property.
Governmental Approval: any Consent of, with or from any Governmental
Authority.
Governmental Authority: any nation or government, any state or other
political subdivision thereof, any entity exercising executive, legislative,
judicial, regulatory or administrative functions of or pertaining to government,
including, without limitation, any government authority, agency, department,
board, commission or instrumentality of the United States, any State of the
United States or any political subdivision thereof, and any tribunal or
arbitrator(s) of competent jurisdiction, and any self-regulatory organization.
Hazardous Substances: any substance that: (i) is or contains asbestos,
urea formaldehyde foam insulation, polychlorinated biphenyls, petroleum or
petroleum derived substances or wastes, radon gas or related materials (ii)
requires investigation, removal or remediation under any Environmental Law, or
is defined, listed or identified as a "hazardous
13
<PAGE>
waste" - or "hazardous substance" - thereunder, or (iii) is toxic, explosive,
corrosive, flammable, infectious, radioactive, carcinogenic, mutagenic, or
otherwise hazardous and is regulated by any Governmental Authority or
Environmental Law.
Marzec Contingency: means the case entitled Edwin Marzec v. Chemonics
-------------------------
International, Inc., et al, originally filed in the Superior Court of the State
- ---------------------------
of California, County of Los Angeles, Case No. B0198654 and subsequently removed
to the United States District Court, Southern District of California and that
certain case entitled Edwin Marzec v. Ashraf Rizk and Thurston F. Teele, filed
-------------------------------------------------
as C.A. No. 0009467-98 in the Superior Court for the District of Columbia, or
any lawsuit, claim, or cause of action relating thereto asserting, as a basis
for such claim or suit, substantially similar facts.
Person: any natural person, firm, partnership, association,
corporation, company, limited liability company, limited partnership, trust,
business trust, Governmental Authority or other entity.
Tax or Taxes: any federal, state, provincial, local, foreign or other
income, alternative, minimum, accumulated earnings, personal holding company,
franchise, capital stock, net worth, capital, profits, windfall profits, gross
receipts, value added, sales, use, goods and services, excise, customs duties,
transfer, conveyance, mortgage, registration, stamp, documentary, recording,
premium, severance, environmental (including taxes under Section 59A of the
Internal Revenue Code of 1986, as amended), real property, personal property, ad
valorem, intangibles, rent, occupancy, license, occupational, employment,
unemployment insurance, social security, disability, workers' compensation,
payroll, health care, withholding, estimated or other tax, duty or other
governmental charge or assessment or deficiencies thereof (including all
interest and penalties thereon and additions thereto whether disputed or not).
Tenzer Contingency: means the Settlement Agreement among Anthony
Frank, Tenzer Company, Inc. and Chemonics Industries, Inc.
7.2 Expenses. Seller and Purchaser shall each pay its own expenses
--------
incident to the negotiation, preparation, and carrying out of this Agreement and
the consummation of the transactions contemplated hereby, whether or not the
transactions contemplated hereby shall be consummated; provided, however, that
Purchaser shall be solely responsible for the cost of any filing pursuant to the
HSR Act or the cost associated with compliance with any applicable bulk sales or
similar law in connection with the transactions contemplated hereby. Neither
Seller nor Purchaser has employed or engaged a broker with respect to this
transaction.
7.3 Notices. All notices, requests, consents, and other communications
-------
hereunder shall be in writing and shall be deemed to have been delivered on the
date personally delivered or on the date mailed first class certified mail,
postage prepaid, if addressed as follows:
If to Seller, to: If to Purchaser, to:
Ms. Nanette Kelley, Chairman FIA Investment Company L.L.C.
ERLY Industries, Inc. 5670 Echo Canyon Drive
14
<PAGE>
P. O. Box 788 Phoenix, Arizona 85018-1245
Baton Rouge, Louisiana 70821 Attention Scott Spangler
Fax: (504) 922-5120 Fax: (602) 840-9286
Copies to: Copies to:
Glen Ayers & David Gragg Todd Jones
Attorneys for Watch-Edge International Snell & Wilmer L.L.P.
Jeffers & Banack, Incorporated One South Church Avenue
745 East Mulberry, Suite 900 Suite 1500
San Antonio, Texas 78212 Tucson, Arizona 85701-1612
Fax: (210) 735-6889 Fax: (520) 884-1294
Matthew Rosenstein David B. Tatge
Attorney for ERLY Industries, Inc. Attorney for Tony Teele & Ashraf Rizk
American Bank Plaza Epstein Becker & Green PC
711 North Caranchua , Suite 420 1227 25th Street, NW
Corpus Christi, Texas 78475 Washington, D.C. 20037
Fax: (512) 883-5590 Fax: (202) 296-2882
Bill Finkelstein & Howard Spector Samuel R. Kastner
Attorneys for ERLY Creditors Committee Wilkes, Artis, Hedrick & Lane Charter
Hughes & Luce Suite 1100
1717 Main Suite 2800 1666 K Street N.W.
Dallas, Texas 75201 Washington, D.C. 20006
Fax: (214) 939-5849 Fax: (202) 457-7814
Any party may change its address for purposes of this Section by giving the
other party written notice of the new address in the manner set forth above.
7.4 Costs. If any legal action or other proceeding is brought for the
-----
enforcement of this Agreement, or because of an alleged dispute, breach,
default, or misrepresentation in connection with any of the provisions of this
Agreement, the successful or prevailing party or parties shall be entitled to
recover reasonable attorneys' fees and other costs incurred in that action or
proceeding, in addition to any other relief to which it or they may be entitled.
7.5 Assignment. This Agreement may be assigned by Purchaser to any
----------
Affiliate of Purchaser without the consent of the Seller. For purposes of this
section, it is expressly agreed that Purchaser intends to create a new company
whose shareholders will include the current equity holders of Purchaser and
Teele and Rizk to accept the Purchased Assets and that such entity will be
considered an Affiliate of Purchaser. Any such assignee shall assume all
obligations of Purchaser hereunder, including, but not limited to, any indemnity
hereunder.
7.6 Entire Agreement. This Agreement and the schedules, exhibits,
----------------
certificates, and documents referred to herein constitute the entire agreement
of the parties hereto, and supersede all prior understandings with respect to
the subject matter hereof. All schedules and exhibits
15
<PAGE>
attached to this Agreement are deemed to be fully incorporated herein by this
reference for all purposes, as though fully set forth at length herein.
7.7 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original, but all of which shall
constitute the same instrument.
7.8 Governing Law. This Agreement shall be construed in accordance with,
-------------
and governed by, the laws of the State of Arizona.
7.9 Responsible Person. Boudloche, solely in his capacity as responsible
------------------
person, is executing this Agreement pursuant to the Order on Motion to Sell
Assets Free of Liens, Claims, and Encumbrances: Chemonics International, Inc.,
entered on January 5, 1999, by the United States Bankruptcy Court for the
Southern District of Texas, Corpus Christi Division, in the case captioned In
re: Watch-Edge International. Inc., Case No. 98-21895.
7.10 Teele and Rizk. The parties acknowledge and consent to the
--------------
participation, as shareholders and officers of Purchaser's assignee, of Teele
and Rizk and to their resignations effective on the Closing Date from their
positions as officers and directors of Chemonics and Watch-Edge.
7.11 Releases. Effective as of the Closing, Chemonics, Watch-Edge, ERLY
--------
Industries, Inc. (on behalf of themselves, their estate, and any subsequently
appointed Chapter 7 trustee) and each of their Affiliates, and to the maximum
extent permitted under law, their insiders, officers, directors, managers,
members, principals, insurers, professionals and agents, and their respective
successors and assigns, hereby irrevocably and forever release, acquit and
discharge each of Purchaser, Scott M. Spangler, and, to the maximum- extent
permitted under law, their present Affiliates, insiders, officers, directors,
managers, members, principals, insurers, professionals and agents, and their
respective successors and assigns, from any and all rights, liabilities, claims,
contract rights, obligations, offsets, suits, demands, debts and grievances of
any kind, whether known or unknown, contingent or not, in any way arising out
of, set forth in, or related to (i) any offer made to acquire any assets of
Chemonics or Watch-Edge, (ii) that certain Revolving Credit and Security
Agreement, dated May 30, 1996, (iii) that certain Credit and Security Agreement,
dated as of November 30, 1998, and (iv) any action, inaction, omission, order or
agreement relating thereto, except to the extent expressly set forth herein; all
parties hereto having agreed that the obligation of Purchaser expressly set
forth herein shall be the sole obligations Purchaser has to Seller, provided,
however, that nothing contained in this provision shall constitute a release of
any current or former insider, officer or director of either Chemonics or Watch-
Edge.
7.12 Releases. Effective as of the Closing, Purchaser, Scott M. Spangler,
--------
and each of their Affiliates, and to the maximum extent permitted under law,
their insiders, officers, directors, managers, members, principals, insurers,
professionals and agents, and their respective successors and assigns, hereby
irrevocably and forever release, acquit and discharge each of Chemonics, Watch-
Edge, ERLY Industries, Inc., their Affiliates, Mike Boudloche, as Responsible
Person, and, to the maximum extent permitted under law, their insiders,
officers,
16
<PAGE>
directors, managers, members, principals, insurers, professionals and agents,
and their respective successors and assigns from any and all rights,
liabilities, claims, contract rights, obligations, offsets, suits, demands,
debts and grievances of any kind, whether known or unknown, contingent or not,
in any way arising out of, set forth in, or related to (i) any offer made to
acquire any assets of Chemonics or Watch-Edge, (ii) that certain Revolving
Credit and Security Agreement, dated May 30, 1996, (iii) that certain Credit and
Security Agreement, dated as of November 30, 1998, and (iv) order or agreement
relating thereto, except to the extent expressly set forth herein (including,
expressly, the indemnification obligations of Seller herein); all parties hereto
having agreed that the obligation of Seller expressly set forth herein shall be
the sole obligations Seller has to Purchaser.
7.13 Jurisdiction. The United States Bankruptcy Court for the Southern
------------
District of Texas, Corpus Christi Division, shall have jurisdiction to resolve
any disputes arising hereunder.
7.14 Conveyance of Stock. Seller hereby agrees, that for no additional
-------------------
consideration, Purchaser shall have the option to acquire all of the outstanding
stock of Chemonics for the sum of One Dollar ($1.00). The parties hereto agree
that such purchase price will be fair and adequate consideration therefore.
This option will expire on September 1, 1999. The parties acknowledge and agree
that Watch-Edge shall have the right to take an assignment and conveyance of the
Retained Assets and the Purchase Price prior to the closing of the conveyance of
the outstanding stock of Chemonics to Purchaser pursuant to the option.
7.15 Disputed Liabilities. The obligation of Purchaser to pay Seller the
--------------------
Disputed Liabilities under the January 15 Letter shall be determined by (i) an
arbitrator selected by the parties (to the extent the parties can so agree) or
(ii) upon entry of a final order of the Bankruptcy Court. Within ten (10) days
(i) of the date of the arbitrator's decision or, if applicable, (ii) the entry
of a final order as set forth above, Purchaser shall pay to Seller such amounts
that are determined to be due, if any.
7.16 No Personal Liability. The individual signatories hereto shall have
---------------------
no personal liability hereunder based solely on their execution hereof.
7.17 Successors. This agreement shall inure to the benefit of any
----------
successors-in-interest to the parties hereto.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
17
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
date first above written.
SELLER: PURCHASER
CHEMONICS INTERNATIONAL, INC. FIA INVESTMENT COMPANY L.L.C.
/s/ NANETTE N. KELLEY /s/ SCOTT M. SPANGLER
- ---------------------------- -------------------------------
By: Nanette Kelley, Chairman By: Scott M. Spangler, Member Manager
Duly Authorized Duly Authorized
/s/ MIKE BOUDLOCHE
- ----------------------------
By: Mike Boudloche,
Solely in his capacity as Responsible Person
without warranties or representations
512-883-5786, Ext. 12; fax 512-883-4381.
711 N. Carancahua, Suite 1508
Corpus Christi, TX 78475
WATCH-EDGE INTERNATIONAL, INC. ERLY Industries, Inc.
/s/ NANETTE N. KELLEY /s/ NANETTE N. KELLEY
- ---------------------------- --------------------------------
By: Nanette Kelley, Chairman By: Nanette Kelley, Chairman
Duly Authorized Duly Authorized
18
<PAGE>
SCHEDULE 1.2
------------
(ASSUMED LIABILITIES)
Purchaser shall assume and pay only the liabilities (to the extent they remain
due and owing) listed on this Schedule 1.2 plus any additional liabilities of
Chemonics which arose or arise between October 31, 1998 and Closing in the
normal course of business.
1. Accounts Payable $4,818,083.00(l)
2. Note Payable to CIB $1,068,356.00
3. Accrued Payroll and $2,180,550.00(l)
other current liabilities
4. Profit Sharing Reserve $ 250,000.00
5. Billings in Excess of Cost $ 348,110.00
6. Deferred Rent $1,227,801.00
Total Assumed Liabilities $9,892,902.00
Notes
(1) A detailed list of accounts payable and accruals is attached.
(2) The amounts set forth in items 1-6 above are not Disputed Liabilities.
19
<PAGE>
SCHEDULE 2.4
------------
(DISPUTED LIABILITIES)
<TABLE>
<S> <C>
1. All accrued unpaid management fees at the rate of $40,000.00 per month.
Prior to October 19, 1998 Included in Item No. 4 below
October 1998 $ 40,000.00
November 1998 $ 40,000.00
February 1999 $ 40,000.00
-----------
Subtotal $120,000.00
[It is our understanding that December 1998
and January 1999 have been paid.]
2. Fees owed to Ostrander for loan brokerage: $ 20,000.00
3. Unreimbursed Fees for Director's
Meetings, travel, etc. No more than $ 15,000.00
4. Pre-petition intercompany
receivables on the ERLY books
and records from Watch-Edge
not on the books and records
of Chemonics Approx. $232,000.00
-----------
TOTAL: $387,000.00
===========
</TABLE>
20
<PAGE>
EXHIBIT 99.1
JOINT COMPROMISE AND SETTLEMENT AGREEMENT
-----------------------------------------
This is a Joint Agreement of Settlement and Compromise ["Agreement"], made
and entered into, as of the date written below, by and between ERLY Industries,
Inc. ["ERLY"] and Watch-Edge International, Inc., formerly known as Chemonics
Industries, Inc. ["Watch-Edge"], the "ERLY Group"] and Kingwood Lakes South,
L.P. ["KLS"]; Anthony M. Frank ["Frank"]; Tenzer Company, Inc. ["Tenzer Co."]
(Frank and Tenzer Co. being collectively the "Tenzer Plaintiffs"); and Michael
L. Tenzer ["Tenzer"]; [hereinafter all referred to collectively as the "Tenzer
Group"]. The purpose of this Agreement is to set forth and embody a negotiated
compromise and settlement, and to provide for releases, as set forth herein.
PARTIES
-------
ERLY filed for relief under chapter 11 of the Bankruptcy Code on September
28, 1998, (the "ERLY Petition Date") and is continuing in possession of its
properties and is operating its business, as debtor in possession, pursuant to
sections 1107 and 1108 of the Bankruptcy Code. The ERLY chapter 11 case is
pending in the United States Bankruptcy Court for the Southern District of
Texas, Corpus Christi Division in Case No. 98-21515-C-11.
Watch-Edge filed for relief under chapter 11 of the Bankruptcy Code on
November 30, 1998, (the "Watch-Edge Petition Date") and is continuing in
possession of its properties and is operating its business, as debtor in
possession, pursuant to sections 1107 and 1108 of the Bankruptcy Code. The
Watch-Edge chapter 11 case is pending in the United States Bankruptcy Court for
the Southern District of Texas, Corpus Christi Division in Case No. 98-21895-C-
11.
The Tenzer Group consists of Kingwood Lakes South, L.P.; Anthony M. Frank;
Tenzer Company, Inc.; and Michael L. Tenzer. The Tenzer Plaintiffs consist of
Tenzer Co. and Anthony M. Frank.
BACKGROUND
----------
The Tenzer Group obtained a Texas State Court judgment against ERLY and
others. A judgment was originally signed on January 13, 1998; a corrected
judgment was signed on January 16, 1998; and the "Second Corrected Final
Judgment" (the "Judgment") was entered on March 30, 1998 and became final on or
about June 12, 1998. Subsequent thereto, the ERLY Group and others, entered
into a settlement agreement with the Tenzer Group as of August 20, 1998 [the
"August Settlement"], to which reference is hereby made for all purposes.
- --------------------------------------------------------------------------------
COMPROMISE AND SETTLEMENT AGREEMENT, PAGE 1 of 14.
<PAGE>
Pursuant to the August Settlement, Watch-Edge became obligated to Tenzer
Co. and Frank pursuant to a note in the principal amount of $3,800,000 (the
"Watch-Edge Note") which is payable by its terms no later than February 13,
1999. By its terms, the Watch-Edge Note is payable prior to that date in the
event that the assets or stock of Chemonics International, Inc.["Chemonics"],
the wholly owned subsidiary of Watch-Edge, is sold or refinanced. Chemonics is
presently the subject of a present sale order in the Watch-Edge chapter 11. All
parties hereto anticipate that the assets or stock of Chemonics will shortly be
sold.
In order to secure payment of the Judgment and any other obligation of ERLY
to the Tenzer Plaintiffs, ERLY granted the Tenzer Plaintiffs a security interest
in and pledge in and to 100% of the issued and outstanding stock of Watch-Edge,
which security interest and pledge are junior to a prior pledge and security
interest in favor of NationsBank, N.A.
The Tenzer Plaintiffs also assigned to Watch-Edge their rights under the
Judgment against American Rice, Inc. ("ARI") only. Those assigned rights have
become a claim in the ARI Chapter 11 case then and now pending in the United
States Bankruptcy Court for the Southern District of Texas, Corpus Christi
Division, in Case No. 98-21254-C-11; the August Settlement further provided that
the Tenzer Plaintiffs would forbear from enforcing the Judgment against the
"Settling Defendants" (as defined in the August Settlement) provided, however,
that this forbearance obligation would terminate against some or all of the
Settling Defendants under certain specified circumstances and in certain
specified ways.
ERLY and Watch-Edge each believe that each of them has causes of action to
set aside the August Settlement and the granting of the pledge and security
interest in and to the Watch-Edge stock. The Tenzer Group denies all of these
claims and assertions. The parties have negotiated this agreement in order to
avoid litigation among them over the August Settlement and to fully and finally
resolve (i) any and all claims or challenges which Watch-Edge and/or ERLY may
assert with respect to the August Settlement or against the Tenzer Group,
including, without limitation, any challenge to the August Settlement as a
preference, fraudulent conveyance, or under any other avoiding powers contained
in the Bankruptcy Code, and any claim or challenge under applicable non-
bankruptcy law; and (ii) conditioned upon the timely payment to the Tenzer
Plaintiffs of all amounts payable at the Closing, all claims of the Tenzer Group
under the August Settlement.
In order to make their respective peace, and provided that the Tenzer Group is
paid at the Closing, each member of the Tenzer Group and the ERLY Group does
hereby enter into this Agreement to completely release and settle their claims
at the Closing.
- --------------------------------------------------------------------------------
COMPROMISE AND SETTLEMENT AGREEMENT, PAGE 2 of 14.
<PAGE>
CONSIDERATION
-------------
NOW THEREFORE, IN CONSIDERATION OF THE SUM OF TEN ($10.00) AND NO/100
DOLLARS, AND OTHER GOOD AND VALUABLE CONSIDERATION, THE RECEIPT, SUFFICIENCY AND
FAIRNESS OF WHICH IS HEREBY ACKNOWLEDGED, THE PARTIES HERETO AGREE AS FOLLOWS:
SETTLEMENT TERMS
================
Obligations of Watch-Edge
-------------------------
At the Closing, Watch-Edge agrees to do the following:
1. Completely release the Tenzer Group and each member thereof and the
directors of Tenzer Co., consisting, in addition to Tenzer of Gary Tenzer and
Melanie May ("Tenzer Directors") from any and all liability, including but not
limited to any and all liability relating to the August Settlement and the
Watch-Edge Note, save and except those arising under the Agreement.
2. Execute and deliver to Tenzer Group and each member thereof and the Tenzer
Directors the Release Agreement in the form of Exhibit A attached hereto and
herein incorporated by reference.
3. Pay to the Tenzer Plaintiffs the sum of $2,500,000.00 in good funds.
Obligations of ERLY:
--------------------
At the Closing, ERLY agrees to do the following
1. Completely release the Tenzer Group and each member thereof and Tenzer
Directors from any and all liability, including but not limited to any and all
liability relating to the August Settlement and the Watch-Edge Note, save and
except those arising under the Agreement.
2. Execute and deliver to Tenzer Group and each member and the Tenzer
Directors the Release Agreement in the form of Exhibit A attached hereto and
herein incorporated by reference.
3. The claim of the Tenzer Group presently filed in the ERLY chapter 11 case
shall be reduced and allowed in full as a general unsecured claim in the amount
of $5 million and not subject to any challenge of any type, as set forth in the
next sentences. The Order
- --------------------------------------------------------------------------------
COMPROMISE AND SETTLEMENT AGREEMENT, PAGE 3 of 14.
<PAGE>
of the Bankruptcy Court in the ERLY chapter 11 case authorizing ERLY to enter
into this Agreement shall specifically provide that the Tenzer Plaintiffs shall
have an allowed general unsecured claim in the ELRY chapter 11 case (which shall
share ratably with other general unsecured claims) in the amount of $5 million
(the "Tenzer Claim"), which shall not be subject to challenge of any type,
whether as to amount, validity, priority, allowance, or otherwise and whether
based on any principal of law, equity or otherwise, by any party in interest in
the ERLY or Watch-Edge chapter 11 cases, including, without any limitation,
trustee that may be appointed in either of their chapter 11 cases or in any
subsequent chapter 7 case for either of them.
4. Notwithstanding the foregoing, ERLY shall have the option, but not the
obligation to redeem the Tenzer Claim in the manner and amounts and on or before
the dates specified below:
Early Redemption: ERLY shall have the right, but not the obligation, to
redeem the Tenzer Claim by paying to Tenzer, in good and valid funds, an amount
equal to SIX HUNDRED FIFTY THOUSAND AND NO/100 ($650,000) on or before June 26,
1999, after obtaining an order of the Bankruptcy Court on notice to all of
ERLY's creditors authorizing such payment. Upon ERLY's timely payment of such
funds, the Tenzer Claim shall be deemed to be fully satisfied and Tenzer
thereafter shall receive no further distribution from ERLY on account of the
Tenzer Claim. In no event and under no circumstances may this option be
exercised after June 26, 1999.
Later Redemption: If the Early Redemption option specified above is not
exercised by ERLY, ERLY shall have the right, but not the obligation, to redeem
the Tenzer Claim according to the following schedule after obtaining an order of
the Bankruptcy Court on notice to all of ERLY's creditors authorizing such
payments:
<TABLE>
<CAPTION>
Face Amount of Tenzer Claim
Subject to Redemption Payment to Tenzer Due
<S> <C>
$1.0 million $ 150,000
$2.0 million $ 300,000
$3.0 million $ 500,000
$4.0 million $ 750,000
$5.0 million $1,050,000
</TABLE>
Payments to Tenzer under this provision in good and valid funds must be
made on or before October 26, 1999. Upon ERLY's timely payment of the specified
payment amount, the redeemed portion of the Tenzer Claim shall be deemed to be
fully satisfied and Tenzer thereafter shall receive no further distribution from
ERLY on account of that portion of the Tenzer Claim. Any portion of the Tenzer
Claim not subject to redemption hereunder shall continue to share ratably with
other general unsecured claims as an
- --------------------------------------------------------------------------------
COMPROMISE AND SETTLEMENT AGREEMENT, PAGE 4 of 14.
<PAGE>
allowed claim against ERLY's estate. In no event and under no circumstances may
this option be exercised after October 26, 1999.
OBLIGATIONS OF THE TENZER GROUP:
--------------------------------
At the Closing, the Tenzer Group, and each member thereof will do the
following:
1. Effective only upon the Tenzer Plaintiffs' receipt of all cash to be paid
to the Tenzer Plaintiffs at the Closing, each member of the Tenzer Group will
release all claims against ERLY and Watch-Edge other than those arising out of
this Agreement and shall each sign and deliver to ERLY and to Watch-Edge the
Release Agreement in the form of Exhibit B attached hereto and herein
incorporated by reference. The Release Agreement shall apply to the following
current or former directors and officers of ERLY or Watch-Edge only: Nanette
Kelley; Beryl Anthony; Billy Blake; Eugene Califero; Robert A. Seale, Jr.;
Thurston F. Teele; Ashraf Rizk and Curt Grey, who shall be required to execute a
release in favor of the Tenzer Group in the form of the Release Agreement in
order to be released under the Release Agreement.
THE CLOSING
-----------
The Closing shall occur on or before the earlier of the closing of the sale
of Chemonics and February 26, 1999. As used herein, the phrase "sale of
Chemonics" means a sale of the stock or assets of Chemonics. The Closing shall
take place on or before the close of business on the date of the Closing at the
offices of the Tenzer Group's attorney, McClanahan & Clearman L.L.P., 4100
NationsBank Center, 700 Louisiana Street, Houston, Texas 77002. If the closing
of the sale of Chemonics occurs on or before February 26, 1999, the Closing
shall occur concurrently with such closing, and the $2.5 million to be paid to
the Tenzer Plaintiffs at the Closing shall be paid directly out of the proceeds
of the sale of Chemonics, through any escrow established in connection with the
closing of such sale. If the sale of Chemonics does not close on or before
February 26, 1999, Watch-Edge shall pay the $2.5 million to the Tenzer
Plaintiffs out of the proceeds of a loan which FIA Investment Company L.L.P.
("FIA") has agreed to make to Watch-Edge for the express purpose of funding that
payment if the sale of Chemonics does not close on or before February 26, 1999.
If the sale of Chemonics does not close on or before February 26, 1999, and
Watch-Edge and ERLY do not otherwise pay the Tenzer Plaintiffs $2.5 million on
or before that date, then this Agreement shall terminate automatically and be of
no further force or effect, and the parties shall be restored to their position
immediately prior to the execution of this Agreement, without prejudice to any
rights, claims, obligations or defenses which they may have had at that time.
Provided, however, that notwithstanding such termination, the Tenzer Plaintiffs
- -----------------
shall retain any and all claims that they may have, and any and all rights that
they may
- --------------------------------------------------------------------------------
COMPROMISE AND SETTLEMENT AGREEMENT, PAGE 5 of 14.
<PAGE>
have to bring actions, against FIA, as beneficiaries of FIA's agreement to fund
the $2.5 million payment; and the assertion of any such claims and the
prosecution of any such action shall in no way be deemed an election of remedies
or otherwise prejudice Tenzer's rights and claims against Watch-Edge (including,
without limitation, under the Watch-Edge Note), ERLY (including, without
limitation, under the Tenzer Plaintiffs Judgment and claim against ERLY), or
otherwise.
CONDITIONS PRECEDENT
--------------------
This Agreement is subject to the following conditions:
1. The entry of orders by the Bankruptcy Court approving this Agreement in
both the ERLY and Watch-Edge chapter 11 cases, which orders (1) either
become final and non-appealable; or (2) are not stayed on appeal. Each
party to this Agreement will use their best efforts in obtaining such
approval. If for whatever reason, the Bankruptcy Court does not approve
this Settlement Agreement, the parties will return to their position as
existed prior to the execution of this Settlement Agreement, without waiver
or prejudices to any claim, rights, obligations or defenses.
2. This Agreement must be approved by the Boards of ERLY and Watch-Edge and
written evidence of such approval signed by each of their directors must be
provided to the Tenzer Group, on or before the Closing.
3. Orders approving the Agreements must be entered before the Closing occurs.
WARRANTIES AND REPRESENTATIONS BY THE TENZER GROUP AND EACH MEMBER
------------------------------------------------------------------
1. The Tenzer Group, and each member thereof, expressly warrant and represent
to ERLY and to Watch-Edge, that as of the signing of this Agreement and that as
of the Closing none of them have assigned, pledged, or otherwise, in any manner
whatsoever, sold or transferred, either by instrument in writing or otherwise
transferred, any rights, demands, causes of action and/or claims which are the
subject matter of this Agreement, or which may be owed by either of them, or any
of them aside from the interests assigned to counsel for the Tenzer Plaintiffs.
(The Tenzer Plaintiffs shall deliver to ERLY Group proof that the Tenzer
Plaintiffs have been authorized by Dow, Cogburn & Friedman, P.C. and McClanahan
& Clearman, L.L.P., to enter into this Settlement Agreement.)
2. The Tenzer Group, and each member thereof, expressly warrant and
represent to ERLY and to Watch-Edge that they have approved of all of the terms,
- --------------------------------------------------------------------------------
COMPROMISE AND SETTLEMENT AGREEMENT, PAGE 6 of 14.
<PAGE>
conditions and covenants of this Agreement as evidenced by their duly authorized
signatures to this Agreement.
WARRANTIES AND REPRESENTATIONS BY ERLY AND WATCH-EDGE
-----------------------------------------------------
1. ERLY and Watch-Edge, expressly warrant and represent to the Tenzer Group,
that as of the signing of this Agreement and that as of the Closing, none of
them have assigned, pledged, or otherwise, in any manner whatsoever, sold or
transferred, either by instrument in writing or otherwise, any rights, demands,
causes of action and/or claims which are the subject matter of this Agreement,
or which may be owed by either of them, or any of them.
2. ERLY and Watch-Edge expressly each warrant and represent to the Tenzer
Group and each member thereof that as of the signing of this Agreement and as of
the Closing that the Boards of ERLY and Watch-Edge have authorized this
Agreement.
WARRANTIES AND REPRESENTATIONS BY ALL PARTIES
---------------------------------------------
1. Each party, and each person who signs this Agreement, further expressly
warrants and represents that they are competent and authorized to sign this
Agreement; that before signing this Agreement they have read, have been fully
informed about, and understand all of the terms, contents, conditions and
effects of this Agreement; that no promise, representation, inducement or
agreement, other than expressly stated in this Agreement, has been made by any
person; that this Agreement contains the entire agreement between the parties;
and that each party has relied solely and completely on their own judgment and
the advice of their attorneys.
2. Each party represents that the individual signing this Agreement on behalf
of such party has authority to bind the party for whom he or she acts.
MISCELLANEOUS PROVISIONS
------------------------
Gender. The use of the masculine gender shall be interpreted to include any
------
feminine gender references which may be applicable to any one who is included in
the definition of each party as set forth above.
- --------------------------------------------------------------------------------
COMPROMISE AND SETTLEMENT AGREEMENT, PAGE 7 of 14.
<PAGE>
Notices. All notices, requests, demands, and other communications under
--------
this Agreement shall be in writing and shall be deemed to have been duly given
on the date of service if served personally or by facsimile transmission on the
Party to whom directed; or on the third day after mailing if mailed to the Party
to whom directed, by first class mail, postage prepaid, registered or certified
and properly addressed to such Party as follows:
<TABLE>
<S> <C> <C>
If to ERLY Ms. Nanette N. Kelley, Matthew A. Rosenstein
Chairman, ERLY Industries, Inc. Attorney at Law
P.O. Box 788 Attorney for ERLY Industries, Inc.
Baton Rouge, LA 70821 711 N. Carancahua,
Fax 504-922-5120 Suite 420
Corpus Christi, TX 78475
Fax 512-883-5577
William Finkelstein/Howard Spector
Hughes & Luce
Attorneys for ERLY Creditors
Committee
1717 Main Street, Suite 2800
Dallas, Texas 75201
Fax 214-939-6100
R. Glenn Ayers
Jeffers & Banack
Attorneys for Watch-Edge
745 East Mulberry, Suite 900
San Antonio, TX 78212
Fax 210-735-6889
</TABLE>
- --------------------------------------------------------------------------------
COMPROMISE AND SETTLEMENT AGREEMENT, PAGE 8 of 14.
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
<S> <C> <C>
If to Watch Ms. Nanette N. Kelley, R. Glenn Ayers
Edge: Chairman, Watch-Edge Jeffers & Banack
International, Inc. Attorneys for Watch-Edge
P.O. Box 788 745 East Mulberry, Suite 900
Baton Rouge, LA 70821 San Antonio, TX 78212
Fax 504-922-5120 Fax 210-735-6889
Matthew A. Rosenstein
Attorney for ERLY Industries, Inc.
711 N. Carancahua,
Suite 420
Corpus Christi, TX 78475
Fax 512-883-5577
William Finkelstein/Howard Spector
Hughes & Luce
Attorneys for ERLY Creditors
Committee
1717 Main Street, Suite 2800
Dallas, Texas 75201
Fax 214-939-6100
<CAPTION>
- ---------------------------------------------------------------------------------------
<S> <C> <C>
If to Tenzer Kingwood Lakes South, L.P., Scott M. Clearman, Esq.
Group or any Tenzer Company, Inc. and McClanahan & Clearman, LLP
member Michael L. Tenzer 4100 NationsBank Center
thereof: 11400 West Olympic Blvd., 700 Louisiana Street
Suite 1040 Houston, TX 77002
Los Angeles, CA 90064 Fax 713-223-3664
Fax 310-442-3643
Anthony M. Frank Michael L. Tuchin/Isaac Pachulski
101 California Street, Stutman, Treister & Glatt
Suite 2050 3699 Wilshire Blvd, Suite 900
San Francisco, CA 94111 Los Angeles, CA 90010
Fax 415-434-9918 Fax 213-251-5288
</TABLE>
Controlling Law. The parties agree that where applicable Title 11 of the
----------------
United States Code and Texas law will control any dispute arising from the
interpretation or
- --------------------------------------------------------------------------------
COMPROMISE AND SETTLEMENT AGREEMENT, PAGE 9 of 14.
<PAGE>
implementation of the Agreement. Further, the parties agree to submit to the
jurisdiction and venue of the United States Bankruptcy Court for the Southern
District of Texas, Corpus Christi Division, concerning any such dispute that may
arise from this Agreement.
Payments to Tenzer Plaintiffs. All payments of cash to the Tenzer
------------------------------
Plaintiffs under this Agreement (or any document delivered hereunder or in
connection herewith) shall be made by wire transfer directed to the following
account: Frost Bank, 9821 Katy Freeway, Suite 100, Houston, Texas 77024, ABA
#114000093, McClanahan & Clearman, L.L.P. IOLTA Account, Account #50 1224034,
with notice of the wire transfer to Scott M. Clearman, McClanahan & Clearman,
L.L.P., 4100 NationsBank Center, 700 Louisiana Street, Houston, Texas 77002,
telephone: (713) 223-2005, fax: (713) 223-3664.
Representatives. "Representatives" of a person or entity shall mean and
----------------
include all of that person's or entity's past or present principals, agents,
servants, employees, attorneys, consultants, experts, partners (both general
and/or limited), equity participants, officers, directors, shareholders, parent
companies, subsidiaries, affiliates, predecessors, successors, assigns, estates,
beneficiaries, heirs, devisees, legatees, trustees, and personal
representatives.
Successors and Assigns. This Agreement shall enure to the benefit of and be
-----------------------
binding upon each respective party's heirs, if any, and successors and assigns.
Without in any manner limiting the scope of the foregoing, this Agreement shall
be binding on any trustee(s) appointed in the chapter 11 case of ERLY or Watch-
Edge and on any trustee(s) appointed upon a conversion of the chapter 11 case of
ERLY and or Watch-Edge to a case under chapter 7 of the Bankruptcy Code.
Counterparts. This Agreement may be executed in multiple counterparts, each
-------------
of which when taken together with the other executed counterparts shall be
deemed to constitute an original.
No admission of liability. Neither this Agreement, nor any of the terms
-------------------------
hereof, nor any negotiations or proceedings in connection herewith, shall
constitute or be construed as or be deemed to be evidence of an admission on the
part of any party of any liability or wrongdoing whatsoever, or the truth or
untruth, or merit or lack of merit, of any claim or defense of any Party.
Further, this Agreement is in the nature of Compromise and Settlement pursuant
to Rule 408, Federal Rules of Evidence and any comparable State Rule.
Accordingly, neither this Agreement nor any of the terms hereof, nor any
negotiations or proceedings in connection herewith, nor any performance or
forbearance hereunder hall be offered or received in evidence or used in any
proceeding against any party, or used in any proceeding, or otherwise, for any
purpose whatsoever except with respect to the effectuation and enforcement of
this Agreement and obtaining the approval thereof by the Bankruptcy Court.
- --------------------------------------------------------------------------------
COMPROMISE AND SETTLEMENT AGREEMENT, PAGE 10 of 14.
<PAGE>
Additional Documents. The parties hereto agree to execute such additional
---------------------
documents as may be reasonably required by respective counsel to give full
effect to the purposes and intent of this Agreement.
Invalidity. If any one or more of the provisions of this Settlement
----------
Agreement, or the application of any such provision to any person, entity, or
set of circumstances, shall be determined to be invalid, unlawful, or
unenforceable to any extent at any time, the remainder of this Settlement
Agreement, and the application of such provision to persons, entities, or
circumstances other than those as to which it is determined to be invalid,
unlawful, or unenforceable, shall not be affected, and shall continue to be
enforceable to the fullest extent permitted by law. Any invalid, unlawful, or
unenforceable provision hereof shall be reformed to the extent necessary to
render it valid, lawful, and enforceable in a manner consistent with the
intentions of the parties hereto regarding such provision. In no event shall
this provision be construed to permit this Agreement to be interpreted, applied
or enforced in such a manner as would permit any party to receive the
consideration which such party is to receive under this Agreement without
providing all of the consideration which it is to provide under this Agreement
to the party or parties to which it is required to provide such consideration.
Entire Agreement of the Parties. This Agreement constitutes the entire
--------------------------------
agreement and understanding of all parties hereto and/or representatives, with
respect to the transactions contemplated hereby, and supersedes all prior
agreements, arrangements, and understandings related to the subject matter
hereof. No representations, warranties, recitals, covenants, or statements of
intention have been made by, or on behalf of, any party hereto which is not
embodied in this Agreement or in connection with the transactions contemplated
hereby, and no party hereto shall be bound by, or liable for, any alleged
representation, warranty, recital, covenant, or statement of intention not so
set forth. All the terms, provisions, conditions, covenants, warranties,
recitals, and statements of intention in this Agreement shall be binding upon,
inure to the benefit of, and be enforceable by each party hereto or each of
their respective representatives.
Waiver. No supplement, modification, or amendment of this Agreement shall
-------
be binding unless executed in writing by all parties affected thereby. No waiver
of any of the provisions of this Agreement shall be deemed or constituted a
waiver of any other provision, whether or not similar, nor shall any waiver
constitute a continuing waiver. No waiver shall be binding unless executed in
writing by the party making the waiver.
Limitation on Third-Party Beneficiaries. Nothing contained in this
----------------------------------------
Agreement is intended to confer any rights or remedies under or by reason of
this Agreement on any person or entity other than the parties hereto, nor is
anything in this Agreement intended to relieve or discharge the obligation or
liability of any third-party to any party to this
- --------------------------------------------------------------------------------
COMPROMISE AND SETTLEMENT AGREEMENT, PAGE 11 of 14.
<PAGE>
Agreement, nor shall any provision give any third-party any right of subrogation
or action over or against any party to this Agreement.
All Provisions Contractual. All provisions of this Agreement and are
---------------------------
contractual in nature, and not mere recitals only.
Attorney's fees. Each party agrees to be solely responsible for the
----------------
payment of their respective attorney's fees, court costs, expert witness fees,
court reporter's fees, and all other expenses incurred on said party's behalf as
a result of or in connection with this Agreement.
Time of the Essence. The parties hereto expressly acknowledge and agree
--------------------
that time is of the essence and that all deadlines and time periods provided for
under this Agreement are ABSOLUTE AND FINAL.
- --------------------------------------------------------------------------------
COMPROMISE AND SETTLEMENT AGREEMENT, PAGE 12 of 14.
<PAGE>
FULL UNDERSTANDING AND AGREEMENT. EACH PERSON, ENTITY, OR PARTY WARRANTS THAT
---------------------------------
SUCH PARTY HAS READ THIS FULL AND FINAL AGREEMENT (INCLUDING EXHIBITS) AND FULLY
UNDERSTANDS IT. EACH PARTY WARRANTS THAT SUCH PARTY IS OF LEGAL COMPETENCE OR
LEGAL CAPACITY, AND IS FREE, WITHOUT DURESS, TO EXECUTE THIS SETTLEMENT
AGREEMENT AND DELIVER THE RELEASES REQURED HEREBY, AND THAT SUCH PARTY HAS DONE
SO OR WILL DO SO OF FREE WILL AND ACCORD, WITHOUT RELIANCE ON ANY REPRESENTATION
OF ANY KIND OR CHARACTER NOT EXPRESSLY SET FORTH HEREIN.
Dated as of March 26, 1999.
WATCH-EDGE INTERNATIONAL, INC. ERLY INDUSTRIES, INC.
By: /s/ NANETTE N. KELLEY By: /s/ NANETTE N. KELLEY
----------------------------- ------------------------------
Nanette N. Kelley, Chairman & Nanette N. Kelley, Chairman &
Duly Authorized Duly Authorized
KINGWOOD LAKES SOUTH, L. P. TENZER COMPANY, INC.
By: /s/ MICHAEL L. TENZER By: /s/ MICHAEL L. TENZER
----------------------------- ------------------------------
Michael L. Tenzer, President Michael L. Tenzer, President &
of Tenzer Company, Inc. as Duly Authorized
General Partner of Kingwood
Lake South, L.P. and duly
Authorized
MICHAEL L. TENZER ANTHONY M. FRANK
By: /s/ MICHAEL L. TENZER By: /s/ ANTHONY M. FRANK
----------------------------- -----------------------------
Michael L. Tenzer Anthony M. Frank
- --------------------------------------------------------------------------------
COMPROMISE AND SETTLEMENT AGREEMENT, PAGE 13 of 14.
<PAGE>
APPROVED AS TO FORM:
Law Offices of Matthew A. Rosenstein Jeffers & Banack
By: /s/ MATTHEW A. ROSENSTEIN By: /s/ R. GLEN AYERS
---------------------------------- ------------------------------
Matthew A. Rosenstein R. Glen Ayers
Attorney for ERLY Industries, Inc. Attorneys for Watch-Edge
711 N. Carancahua, Suite 420 International, Inc.
Corpus Christi, TX 78475 745 East Mulberry, Suite 900
512-883-5577 Phone San Antonio, TX 78212
512-883-5590 Fax 210-736-6600
210-735-6889 Fax
Stutman, Treister & Glatt McClanahan & Clearman, LLP
Professional Corporation
By: /s/ MICHAEL L. TUCHIN By: /s/ SCOTT M. CLEARMAN
--------------------------------- ------------------------------
Michael L. Tuchin Scott M. Clearman, Esq.
Attorneys for the Tenzer Group 4100 NationsBank Center
3699 Wilshire Blvd, Suite 900 700 Louisiana Street
Los Angeles, CA 90010 Houston, TX 77002
213-251-5145 Phone 713-223-2005 Phone
213-251-5288 Fax 713-223-3664 Fax
Attorneys for the Tenzer Group
- --------------------------------------------------------------------------------
COMPROMISE AND SETTLEMENT AGREEMENT, PAGE 14 of 14.
<PAGE>
RELEASE
-------
(OF ERLY GROUP)
1. As used in this Release, the following terms have the following
meanings:
a. "ERLY" means ERLY Industries, Inc., the debtor in chapter 11 case
number 98-21515 pending in the United States Bankruptcy court, Southern
District of Texas, Corpus Christi Division.
b. "ERLY Group" means ERLY and Watch-Edge. The term "ERLY Group
Member" refers individually to such entities.
c. "ERLY Group Released Parties" means and includes (i) the ERLY
Group, each ERLY Group Member, and the successors, predecessors and assigns
of each ERLY Group member, and any and all of them; (ii) the Participating
ERLY/Watch-Edge Directors; and (iii) in the case of any individuals falling
within the scope of (i) or (ii), their respective heirs. In no event shall
the ERLY Group Released Parties include Gerald D. Murphy, Douglas A.
Murphy, or any present or former officer, director, or employee of ERLY or
Watch-Edge who is not specifically named as a Participating ERLY/Watch-Edge
Director.
d. "Participating ERLY/Watch-Edge Directors" means only those of the
following current directors of ERLY or Watch-Edge who execute this Release
in their personal capacities: Nanette Kelley; Beryl Anthony; Billy Blake;
Eugene Califero; Robert A. Seele, Jr.; and Thurston F. Teele, and also
includes those of the following former directors of ERLY or Watch-Edge who
execute this Release in their personal capacities: Ashraf Rizk and Kurt
Grey. "Participating ERLY/Watch-Edge Director"
1
<PAGE>
refers individually to such persons. The failure of any of the named
individuals to execute this Release shall in no way affect the
effectiveness of this Release as to the ERLY Group or any Participating
ERLY/Watch-Edge Director.
e. "Settlement Agreement" means the "Joint Compromise and Settlement
Agreement" by and among the ERLY Group and the Tenzer Group.
f. "Tenzer Group" means the Tenzer Plaintiffs, Michael L. Tenzer, and
Kingwood Lakes South, L.P. The term "Tenzer Group Member" refers
individually to such entities.
g. "Tenzer Plaintiffs" means Tenzer Co. and Anthony M. Frank.
h. "Tenzer Settlement" means that certain "Agreement" by and among
the Tenzer Group, the ERLY Group, Early California Food Acquisition
Corporation, Gerald D. Murphy, and Douglas A. Murphy, dated as of August
20, 1998.
i. "Watch-Edge" means Watch-Edge International, Inc. f/k/a Chemonics
Industries, Inc., the debtor in chapter 11 case number 98-21895, pending in
the United States Bankruptcy Court, Southern District of Texas, Corpus
Chirsti Division.
j. "Watch-Edge Note" means that certain Promissory Note in the
principal amount of $3,800,000.00 dated August 20, 1998, executed by Watch-
Edge in favor of the Tenzer Plaintiffs.
2. For good and valuable consideration, including the benefits of the
Settlement Agreement, and in order to settle all claims asserted or that could
have been asserted by or on behalf of the Tenzer Group or any Tenzer Group
Member arising from or relating to the Tenzer Settlement or the Watch-Edge Note,
the Tenzer Group, and each Tenzer Group Member, hereby forever releases and
discharges the ERLY Group Released Parties from, and waives and
2
<PAGE>
relinquishes, any and all claims, demands, debts, liabilities, obligations,
actions, causes of action, suits, sums of money, accounts, reckonings,
covenants, contracts, controversies, agreements, promises, and rights
whatsoever, whenever arising, known or unknown, suspected or unsuspected,
contingent or fixed, liquidated or unliquidated, matured or unmatured, in law,
equity, bankruptcy, or otherwise, which the Tenzer Group, any Tenzer Group
Member, or any person or entity claiming from, through, or under any of them,
ever had, now has, or hereafter can, shall, or may have against any of the ERLY
Group Released Parties by reason of, arising from, relating to, or in connection
with the Tenzer Settlement, the Watch-Edge Note, or any other document executed
pursuant to the Tenzer Settlement; provided, however, that nothing contained in
this Release shall release any claims against, or obligations of, any ERLY Group
Released Party under the Settlement Agreement.
3. Each party hereto expressly understands that section 1542 of the Civil
Code of the State of California provides as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES
NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE
RELEASE WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS
SETTLEMENT WITH THE DEBTOR.
4. Each party to this Release hereby agrees that the provisions of section
1542 of the Civil Code of the State of California and all similar federal or
state laws, rights, rules, or legal principles, legal or equitable, which may be
applicable hereto, to the extent that they may apply to any of the matters
released herein, are hereby knowingly and voluntarily waived and relinquished by
each party to this Release, in each and every capacity, to the full extent that
such rights and benefits pertaining to the matters released herein may be
waived, and each party to this
3
<PAGE>
Release hereby agrees and acknowledges that this waiver and relinquishment is an
essential term of this Release, without which the consideration provided to it
would not have been given.
5. In connection with such waiver and relinquishment each party to this
Release acknowledges that it is aware that it may hereafter discover claims
presently unknown or unsuspected, or facts in addition to or different from
those which it now knows or believes to be true, with respect to the matters
released herein. Nevertheless, it is the intent of each party in executing this
Release fully, finally, and forever to settle and release all such matters, and
all claims relative thereto, which exist, may exist or might have existed
(whether or not previously or currently asserted in any action) which are the
subject of the releases granted under paragraph 2.
6. This Release is being delivered in accordance with and in consideration
of the agreements set forth in the Settlement Agreement and the occurrence of
the Closing (as defined therein).
7. This Release may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
8. This Release shall be governed in all respects, including validity,
interpretation, and effect, by, and construed and enforced under the law of the
State of California, without giving effect to the principles of conflict of laws
thereof.
9. This Release shall inure to the benefit of and be binding upon each
respective party's heirs, if any, and successors and assigns, including, without
limitation, any trustee(s) appointed in the chapter 11 case of ERLY or Watch-
Edge and/or any trustee(s) appointed upon a conversion of the chapter 11 case of
ERLY and/or Watch-Edge to a case under chapter 7 of the Bankruptcy Code.
4
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Release to
be executed by a duly-authorized officer or representative on
__________________, 1999.
<TABLE>
<S> <C>
DATED: , 1999 TENZER COMPANY, INC.
------------------
By
----------------------------------
Michael L. Tenzer, President
Notary
- ---------------------------
DATED: , 1999
------------------ ------------------------------------
ANTHONY M. FRANK
Notary
- ---------------------------
DATED: , 1999 KINGWOOD LAKES SOUTH, L.P.
------------------
By
----------------------------------
Michael L. Tenzer, President of Tenzer
Company, Inc., as General Partner of
Kingwood Lakes South, L.P.
Notary
- ---------------------------
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
DATED: , 1999
------------------ -------------------------------------------------
MICHAEL L. TENZER
Notary
- ---------------------------
DATED: , 1999
------------------ -------------------------------------------------
NANETTE KELLEY
Notary
- ---------------------------
DATED: , 1999
------------------ -------------------------------------------------
BERYL ANTHONY
Notary
- ---------------------------
DATED: , 1999
------------------ -------------------------------------------------
BILLY BLAKE
Notary
- ---------------------------
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
DATED: , 1999
------------------ -------------------------------------------------
EUGENE CALIFERO
Notary
- ---------------------------
DATED: , 1999
------------------ -------------------------------------------------
ROBERT A. SEALE, JR.
Notary
- ---------------------------
DATED: , 1999
------------------ -------------------------------------------------
THURSTON F. TEELE
Notary
- ---------------------------
DATED: , 1999
------------------ -------------------------------------------------
ASHRAF RIZK
Notary
- ---------------------------
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
DATED: , 1999
------------------ -------------------------------------------------
KURT GREY
Notary
- ---------------------------
</TABLE>
8
<PAGE>
RELEASE
-------
(OF TENZER GROUP)
1. As used in this Release, the following terms have the following
meanings:
a. "ERLY" means ERLY Industries, Inc., the debtor in chapter 11 case
number 98-21515 pending in the United States Bankruptcy Court, Southern
District of Texas, Corpus Christi Division.
b. "ERLY Group" means ERLY and Watch-Edge. The term "ERLY Group
Member" refers individually to such entities.
c. "Settlement Agreement" means the "Joint Compromise and Settlement
Agreement" by and among the ERLY Group and Tenzer Group.
d. "Tenzer Directors" means the directors of Tenzer Co., consisting,
in addition to Michael L. Tenzer, of Gary Tenzer and Melanie May. "Tenzer
Director" refers individually to such persons.
e. "Tenzer Group" means the Tenzer Plaintiffs, Michael L. Tenzer, and
Kingwood Lakes South, L.P. The term "Tenzer Group Member" refers
individually to such entities.
f. "Tenzer Group Released Parties" means and includes (i) the Tenzer
Group, each Tenzer Group Member, and the successors, predecessors, assigns
and transferees of each Tenzer Group member, and any and all of them; (ii)
the Tenzer Directors; and (iii) in the case of any individuals falling
within the scope of (i) or (ii), their respective heirs.
g. "Tenzer Plaintiffs" means Tenzer Co. and Anthony M. Frank.
1
<PAGE>
h. "Tenzer Settlement" means that certain "Agreement" by and among
the Tenzer Group, the ERLY Group, Early California Food Acquisition
Corporation, Gerald D. Murphy, and Douglas A. Murphy, dated as of August
20, 1998.
i. "Watch-Edge" means Watch-Edge International, Inc. f/k/a Chemonics
Industries, Inc., the debtor in chapter 11 case number 98-21895, pending in
the United States Bankruptcy Court, Southern District of Texas, Corpus
Chirsti Division.
j. "Watch-Edge Note" means that certain Promissory Note in the
principal amount of $3,800,000.00 dated August 20, 1998, executed by Watch-
Edge in favor of the Tenzer Plaintiffs.
2. For good and valuable consideration, including the benefits of the
Settlement Agreement, and in order to settle all claims asserted or that could
have been asserted by or on behalf of the ERLY Group or any ERLY Group Member
arising from or relating to the Tenzer Settlement, the Watch-Edge Note, or any
claim to set aside or avoid any transfer or obligation to any Tenzer Group
Member, whether based on any provision of the Bankruptcy Code or applicable
nonbankruptcy law, the ERLY Group, and each ERLY Group Member, hereby forever
releases and discharges the Tenzer Group Released Parties from, and waives and
relinquishes, any and all claims, demands, debts, liabilities, obligations,
actions, causes of action, suits, sums of money, accounts, reckonings,
covenants, contracts, controversies, agreements, promises, and rights
whatsoever, whenever arising, known or unknown, suspected or unsuspected,
contingent or fixed, liquidated or unliquidated, matured or unmatured, in law,
equity, bankruptcy, or otherwise, which the ERLY Group, any ERLY Group Member,
or any person or entity claiming from, through, or under any of them (including,
without limitation, any chapter 7 or chapter 11 trustee), ever had, now has, or
hereafter can, shall, or may have against any of the Tenzer Group
2
<PAGE>
Released parties by reason of, arising from, relating to, or in connection with
the Tenzer Settlement, the Watch-Edge Note, or any other document executed
pursuant to the Tenzer Settlement, or based on or arising under 11 U.S.C. (S)(S)
510, 544-553, inclusive, or any similar provisions of nonbankruptcy law, whether
under a theory of preference, fraudulent conveyance, or otherwise; provided,
however, that nothing contained in this Release shall release any claims
against, or obligations of, any Tenzer Group Released Party under the Settlement
Agreement.
3. Each party hereto expressly understands that section 1542 of the Civil
Code of the State of California provides as follows:
A GENERAL RELEASE DOES NOT EXTEND TO
CLAIMS WHICH THE CREDITOR DOES NOT KNOW
OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME
OF EXECUTING THE RELEASE WHICH IF KNOWN
BY HIM MUST HAVE MATERIALLY AFFECTED HIS
SETTLEMENT WITH THE DEBTOR.
4. Each party to this Release hereby agrees that the provisions of section
1542 of the Civil Code of the State of California and all similar federal or
state laws, rights, rules, or legal principles, legal or equitable, which may be
applicable hereto, to the extent that they may apply to any of the matters
released herein, are hereby knowingly and voluntarily waived and relinquished by
each party to this Release, in each and every capacity, to the full extent that
such rights and benefits pertaining to the matters released herein may be
waived, and each party to this Release hereby agrees and acknowledges that this
waiver and relinquishment is an essential term of this Release, without which
the consideration provided to it would not have been given.
5. In connection with such waiver and relinquishment each party to this
Release acknowledges that it is aware that it may hereafter discover claims
presently unknown or unsuspected, or facts in addition to or different from
those which it now knows or believes to be
3
<PAGE>
true, with respect to the matters released herein. Nevertheless, it is the
intent of each party in executing this Release fully, finally, and forever to
settle and release all such matters, and all claims relative thereto, which
exist, may exist or might have existed (whether or not previously or currently
asserted in any action) which are the subject of the releases granted under
paragraph 2.
6. This Release is being delivered in accordance with and in consideration
of the agreements set forth in the Settlement Agreement and the occurrence of
the Closing (as defined therein).
7. This Release may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
8. This Release shall be governed in all respects, including validity,
interpretation, and effect, by, and construed and enforced under the law of the
State of California, without giving effect to the principles of conflict of laws
thereof.
9. This Release shall inure to the benefit of and be binding upon each
respective party's heirs, if any, and successors and assigns. Without in any
manner limiting the scope of the foregoing, this Release shall be binding on any
trustee(s) appointed in the chapter 11 case of ERLY or Watch-Edge and on any
trustee(s) appointed upon a conversion of the chapter 11 case of ERLY and/or
Watch-Edge to a case under chapter 7 of the Bankruptcy Code.
4
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Release to
be executed by a duly-authorized officer or representative on
__________________, 1999.
<TABLE>
<S> <C>
DATED: , 1999 ERLY INDUSTRIES, INC.
----------------
By
-----------------------------------------------
Its
-----------------------------------------------
Notary
- ------------------------------------
DATED: , 1999 WATCH-EDGE INTERNATIONAL, f/k/a CHEMONICS
---------------- INDUSTRIES, INC.
By
-----------------------------------------------
Its
-----------------------------------------------
Notary
- ------------------------------------
</TABLE>
5
<PAGE>
EXHIBIT 99.2
William B. Finkelstein
State Bar No. 07016300
HUGHES & LUCE, L.L.P.
1717 Main Street, Suite 2800
Dallas, Texas 75201
(214) 939-5500
Telecopy (214) 939-6100
COUNSEL FOR THE OFFICIAL
COMMITTEE OF UNSECURED
CREDITORS OF ERLY INDUSTRIES, INC.
UNITED STATES BANKRUPTCY COURT
FOR THE SOUTH DISTRICT OF TEXAS
CORPUS CHRISTI DIVISION
In re: (S)
(S)
ERLY Industries, Inc., (S) Case No. 98-21515-C-11
(S)
Debtor (S) (Chapter 11)
EXPEDITED MOTION OF THE OFFICIAL COMMITTEE OF UNSECURED
CREDITORS FOR CONVERSION OF THE CASE TO ONE UNDER CHAPTER 7
AND POINTS AND AUTHORITIES IN SUPPORT THEREOF
---------------------------------------------
IF YOU WANT A HEARING, YOU MUST REQUEST ONE IN WRITING, AND YOU MUST RESPOND
SPECIFICALLY TO EACH PARAGRAPH OF THIS PLEADING. YOU MUST FILE YOUR RESPONSE
WITH THE CLERK OF THE BANKRUPTCY COURT WITHIN TWENTY DAYS FROM THE DATE YOU WERE
SERVED AND GIVE A COPY TO THE PERSON WHO SENT YOU THE NOTICE; OTHERWISE, THE
COURT MAY TREAT THE PLEADING AS UNOPPOSED AND GRANT THE RELIEF.
IF A PARTY REQUESTS EMERGENCY CONSIDERATION, THE COURT MAY ACT EXPEDITIOUSLY ON
THE MATTER. IF THE COURT ALLOWS A SHORTER RESPONSE TIME THAN TWENTY DAYS, YOU
MUST RESPOND WITHIN THAT TIME. IF THE COURT SETS AN EMERGENCY HEARING BEFORE
THE RESPONSE TIME WILL EXPIRE, ONLY ATTENDANCE AT THE HEARING IS NECESSARY TO
PRESERVE YOUR RIGHTS. IF AN EMERGENCY HEARING IS NOT SET, YOU MUST RESPOND
BEFORE THE RESPONSE TIME EXPIRES.
TO THE UNITED STATES BANKRUPTCY JUDGE:
<PAGE>
The Official Committee of Unsecured Creditors (the "Committee") of
---------
ERLY Industries, Inc. ("ERLY" or the "Debtor"), for its Expedited Motion for
Conversion of the Case to One Under Chapter 7 (this "Motion to Convert") states
-----------------
as follows:
I. JURISDICTION
------------
1. This is a proceeding for conversion of the case to one under
chapter 7 of the Bankruptcy Code, filed pursuant to 11 U.S.C. (S) 1112 and
Federal Rules of Bankruptcy Procedure 1017 and 9014. This Court has jurisdiction
of this contested matter pursuant to 28 U.S.C. (S) 1334. This is a core matter
pursuant to 28 U.S.C. (S) 157(b)(2)(A) and (O).
II. PRELIMINARY STATEMENT
---------------------
2. This is not a typical chapter 11 case. ERLY has no ongoing
business to reorganize, no operational assets, and no current income. ERLY's
creditors - as well as this Court - should be spared any further expenses in
connection with a non-reorganizational Chapter 11 case. This case should be
converted to chapter 7, and a trustee should be appointed to liquidate the
remainder of ERLY's bankruptcy estate.
III. BACKGROUND
----------
3. On September 28, 1998 (the "Petition Date"), ERLY filed its
-------------
voluntary petition under chapter 11 of the Bankruptcy Code. Since that date,
the Debtor has retained possession of its properties and has been operating its
affairs pursuant to 11 U.S.C. (S)(S) 1107 and 1108.
4. The U. S. Trustee has appointed five creditors to act as the
Committee in this case.
2
<PAGE>
5. ERLY is a holding company with two operating subsidiaries: Watch-
Edge International, Inc., f/k/a Chemonics Industries, Inc. ("WEI") and American
Rice, Inc. ("ARI")./1/ Both WEI and ARI are debtors-in-possession in separate
cases pending before the Court. WEI, in turn, owns 100% of the common stock of
Chemonics International, Inc. ("Chemonics"), a nondebtor. ERLY and WEI have no
employees, other than those professionals retained in connection with their
bankruptcy cases and those necessary to administer the minimal affairs of two
holding companies. Neither company has a function outside of that of a holding
company, nor do they have any substantial assets other than cash (currently at
the WEI level) and potential litigation recoveries against ARI, insurers,
officers, directors, and other third parties.
6. To date, the Debtor and the Committee have focused much of their
efforts on preserving the value of WEI and Chemonics because these two
subsidiaries represented the most likely source of immediate payment for ERLY's
creditors. At the time of the filing of ERLY's bankruptcy, Chemonics and WEI's
loan/2/ with NationsBank was due and in default, efforts to refinance the
company had been unsuccessful, and were complicated by a lawsuit brought by a
former Ed Marzac, former counsel to ERLY and an unsuccessful purchaser of
Chemonics. WEI and Chemonics' financial condition were further impaired because
FIA purchased the NationsBank loan and was keeping Chemonics on a budget which
was insufficient to meet Chemonics' ongoing financial needs. The Debtor,
together with the Committee and WEI,
- ------------------
/1/ Upon information and belief, ERLY owns 81% of the common stock of ARI and
100% of the stock of WEI.
/2/ ERLY is also purportedly a guarantor of the Chemonics/WEI facility.
3
<PAGE>
succeeded in staving off FIA's forced acquisition of Chemonics long enough to
allow Chemonics' assets to be sold for $8.25 million through a court-approved
sale that involved competitive bidding. Now that the sale of the assets
Chemonics has concluded, ERLY, WEI and Chemonics have no operating assets.
7. As stated above, ERLY's other subsidiary, ARI, is a debtor-in-
possession in a separate case pending before this Court. ARI has significant
ongoing operations. However, upon information and belief, ERLY's stock in ARI is
fully encumbered by liens and security interests granted to holders of certain
indebtedness owed by ARI. ERLY' s ownership interest in ARI is likely to be
greatly diminished, or possibly eliminated, in the process of ARI's
reorganization.
8. In short, the Debtor has completed the task of liquidating its
tangible assets. Current management's liquidation of the Debtor's remaining
assets and prosecution of litigation recoveries against officers, directors,
former professionals and third-parties, however, is not in the interest of the
estate because of the costs and conflicts of interests associated with such
efforts.
9. The Debtor apparently disagrees, since it has continued to move
forward on its request for an extension of the plan exclusivity period and has
stated that it intends to file a Disclosure Statement and Plan which provide
that the Debtor, through existing management, shall continue in its role as
management and shall reinvest substantially all of the proceeds of the Chemonics
sale and litigation recoveries in a new business venture.
IV. ARGUMENT
--------
10. Congress did not intend for cases to remain in chapter 11 if there
is no realistic chance for reorganization. For this reason, bankruptcy courts
have "wide discretion" to convert
4
<PAGE>
cases to Chapter 7 provided sufficient cause exists under 11 U.S.C. (S) 1112(b).
See In re RCM Global Long Term Capital Appreciation Fund, 200 B.R. 514, 519
(Bankr. S.D.N.Y. 1996); 7 COLLIER ON BANKRUPTCY (P) 1112.04[2] (Lawrence P. King
ed., 15th ed. 1998) (stating "section 1112(b) was designed to provide the court
with a powerful tool to weed out inappropriate chapter 11 cases at the earliest
possible stage"); see also United States Sav. Ass'n of Texas v. Timbers of
Inwood Forest Assocs Ltd., 484 U.S. 365, 376 (1988) (stating there "must be a
reasonable possibility of a successful reorganization within a reasonable time")
(citations omitted).
Creditors need not wait until a debtor proposes a plan or until the
debtor's exclusive right to file a plan has expired... Creditors,
likewise, need not incur the added time and expense of a confirmation
hearing on a plan they believe cannot be effectuated.... The very
purpose of (S) 1112(b) is to cut short this plan and confirmation
process where it is pointless.
In re Woodbrook Assocs., 19 F.3d 312, 317 (7th Cir. 1994).
11. Section 1112(b) contains a non-exhaustive list of factors that
constitute "cause" for converting a case from chapter 11 to chapter 7. E.g. In
re RCM Global Long Term Capital Appreciation Fund, 200 B.R. at 519; In re
Lizeric Realty Corp., 188 B.R. 499, 502 (Bankr. S.D.N.Y. 1995); In re Gucci, 174
B.R. 401, 409 (Bankr. S.D.N.Y. 1994). Two of these factors are directly
applicable here: (S) 1112(b)(2) - inability to effectuate a plan, and (S)
1112(b)(1) - continuing loss to or diminution of the estate and absence of a
reasonable likelihood of rehabilitation. Both of these factors weigh heavily in
favor of converting this case to chapter 7.
A. (S) 1112(b)(2): ERLY Lacks the Ability to Effectuate a Plan
------------------------------------------------------------
12. Section 1112(b)(2) provides that cause for conversion includes the
"inability to effectuate a plan." 11 U.S.C. (S) 1112(b)(2). The test under this
section is whether it is reasonable
5
<PAGE>
to expect that a plan can be confirmed within a reasonable amount of time. E.g.
In re Woodbrook Assocs, 19 F.3d 312, 316 (7th Cir. 1994); see also A. Illum
Hansen, Inc. v. Tiana Queen Motel, Inc. (In re Tiana Queen Motel, Inc.), 749
F.2d 146, 151 (2d Cir. 1984) (upholding conversion where, after 15 months in
chapter 11, debtor's prospects for rehabilitation were based solely upon
"boundless confidence"). ERLY cannot satisfy this test because it cannot propose
a plan that meets the confirmation criteria set out in (S) 1129(a).
(1) (S) 1129(a) (11): ERLY Cannot Propose a Feasible Plan
13. Section 1129(a)(11) contains a feasibility test that prevents
confirmation of "visionary schemes which promise creditors and equity security
holders more under a proposed plan than the debtor can possibly attain after
confirmation." 5 COLLIER ON BANKRUPTCY, (P) l129.02[11] at 1129-59 (15th ed.
1993); In re Pizza of Hawaii, 761 F.2d 1374, 1382 (9th Cir. 1985); United
Properties, Inc. v. Emporium Department Stores, Inc., 379 F.2d 55, 64 (8th Cir.
1967).
14. ERLY cannot propose a plan that satisfies this feasibility
standard because it has no historical experience in any currently-ongoing
business. Thus, any proposed plan is, by definition, visionary for ERLY and
would force creditors of ERLY to invest their already-diminished return in a
speculative venture run by existing ERLY management simply because management
insists on this course of action rather than acceding to the wishes of
creditors. See 312 West 91st Street Co., Inc., 35 B.R. 346, 347 (Bankr. S.D.N.Y.
1983) (holding that "[w]ithout a feasibly operating business there is no logic
in continuing a Chapter 11.").
(2) (S) 1129(a)(10): ERLY Cannot Obtain the Requisite Acceptance of
a Plan
15. Similarly, the Bankruptcy Code requires, as a prerequisite to
confirmation, that at
6
<PAGE>
least one class of impaired claims accept the plan. 11 U.S.C. (S) 1129(a)(10).
Based on the schedules and proofs of claims flied in this case, ERLY has four
types of creditors: (i) professionals employed under (S) 327, such as its
attorneys; (ii) priority tax creditors; (iii) secured creditors who hold ARI or
ERLY stock as collateral; and (iv) general unsecured creditors. The first two
types, professionals employed under (S) 327 and priority tax creditors, cannot
be placed into classes under a plan. 11 U.S.C. (S) 1123(a)(l) (providing that a
plan shall designate classes of claims except claims under (S) 507(a)( 1) and
(S) 5 07(a)(8)). Similarly, the collateral held by secured creditors would most
assuredly be forfeited by the Debtor as worthless pursuant to In re Sandy Ridge
Development, Corp, 881 F.2d 1346 (5th Cir. 1989). This leaves ERLY with only one
class of impaired creditors: those holding unsecured claims.
16. Of the non-insider unsecured claims scheduled by ERLY, the
Committee represents approximately 50% of the amount of such claims. The
Committee's members have determined that they will not vote to accept a plan
which forces creditors to reinvest their distribution in a completely new
business venture run by existing ERLY management. ERLY can thus not obtain the
requisite "two-thirds in amount" approval required by 11 U.S.C. (S) 1126. See In
re Rundlett, 136 B.R. 376, 381 (Bankr. S.D.N.Y. 1992) (converting case to
chapter 7 where debtor could not obtain the necessary approvals under (S) 1126).
(3) (S) 1129(a)(3): ERLY Cannot Propose a Plan in Good Faith
17. The Bankruptcy Code prohibits confirmation of a plan unless it is
proposed in "good faith." 11 U.S.C. (S) 1129(a)(3). In this context, good faith
means there is a "reasonable likelihood that the plan will achieve a result
consistent with the objectives and purposes of the Bankruptcy Code." In re
Madison Hotel Assocs., 749 F.2d 410, 425 (7th Cir. 1984); accord In
7
<PAGE>
re Toy & Sports Warehouse, Inc., 37 B.R. 141, 149 (Bankr. S.D.N.Y. 1984). One
litmus test of good faith adopted by courts tests whether debtor seeks to use
the bankruptcy provisions "to create and organize a new business, not to
reorganize or rehabilitate an existing enterprise or to preserve going concern
values of a viable or existing business." In re Natural Land Corp., 825 F.2d 296
(11th Cir. 1987). No description could more accurately and succinctly describe
ERLY's future plans. As stated above, ERLY has no existing business, and can
only propose a plan which would coerce creditors to provide funding necessary to
allow ERLY to acquire a new line of business in which neither the creditor body
nor ERLY management has any base of experience. This is not a permissible use of
the Bankruptcy Code protections, and thus immediate conversion of the case is
warranted.
B. (S) 1112(B)(l): ERLY's Estate is Suffering Continuing Losses and There
----------------------------------------------------------------------
is No Likelihood of Rehabilitation
----------------------------------
19. In addition to the inability to effectuate a plan, section
1112(b)(l) provides that "continuing loss to or diminution of the estate and
absence of a reasonable likelihood of rehabilitation" constitutes cause for
converting a chapter 11 case to chapter 7. 11 U.S.C. (S) 1112(b)(l). This
necessarily entails a two-step inquiry. E.g. In re Denrose Diamond, 49 B.R. 754,
756 (Bankr. S.D.N.Y. 1985). Has ERLY's estate suffered continuing losses and
diminution in value? And if so, is there a reasonable likelihood of
rehabilitation? The answers to both of these questions strongly suggest that
ERLYs case should be converted.
(1) Continuing Loss to or Diminution of the Estate
20. Under the first prong of 11 U.S.C. (S) 1112(b)(1), the bankruptcy
court must determine whether the debtor's estate has suffered continuing losses
or whether estate assets have diminished in value. If the debtor is operating
post-petition with sustained negative cash flow,
8
<PAGE>
this fact is sufficient to support a finding of "continuing loss to . . . the
estate." In re Schriock Const., lnc., 167 B.R 569, 575 (Bankr. D.N.D. 1994).
21. ERLY has operated throughout the last five months at a cost well
in excess of $300,000 when one considers the fees being paid to administrative
employees, management and directors (which alone exceeded to $150,000 through
January 1999) and professional fees of the Debtor's four attorneys and the
Committee. There is no sign that, absent conversion of this case, these expenses
will decrease. A chapter 7 trustee is a much more appropriate party to prosecute
the causes of action remaining in the estate and would be compensated at the far
lower commission specified in 11 U.S.C. (S) 326, thus maximizing the eventual
return to unsecured creditors.
(2) Likelihood of Rehabilitation
23. The second prong of (S) 1112(b)(l) requires the bankruptcy court
to determine whether there is a reasonable likelihood of rehabilitation. See,
e.g. In re Schriock Const., Inc., 167 B.R. at 575 (holding that movant on
conversion motion must show both continuing loss or diminution in value and no
reasonable likelihood of rehabilitation) ERLY's financial performance since the
petition date demonstrates that "rehabilitation" is not a possible goal in this
case since there is no ongoing business in ERLY or any of its subsidiaries.
Since there is no reasonable likelihood of rehabilitation in this case, it
should be converted to chapter 7.
C. Current Management has an Inherent Conflict of Interest Prosecuting
-------------------------------------------------------------------
the Estate's Most Valuable Litigation Claims
--------------------------------------------
24. As ERLY is a publicly-held corporation which was severely
insolvent as of the Petition Date, the estate has significant causes of action
against professionals, officers and directors who were charged with managing the
company's affairs pre-petition. Certain of those
9
<PAGE>
directors, specifically Ms. Nanette Kelly and Mr. Eugene Cafiero still hold
positions as directors of ERLY. In Ms. Kelly's case, she is also the president
of ERLY. Clearly, neither Ms. Kelly nor Mr Cafiero are in an appropriate
position to objectively investigate and evaluate the merits of causes of action
held by ERLY against themselves or their fellow former directors. Nor are they
able to be entrusted with prosecuting officer-director litigation to recover the
proceeds of insurance policies which may provide coverage for the errors,
omissions or malfeasance of ERLY's officers and directors. The Committee
believes that recoveries from these particular causes of action may form the
basis of a large portion of the ERLY estate, and as such, the case should be
converted to a Chapter 7 proceeding so that an independent trustee can
objectively assess the value of ERLY's potential litigation.
V. REQUEST FOR EXPEDITED HEARING
-----------------------------
24. By separate pleading, the Committee has requested an expedited
hearing on this Motion. Several reasons underlie the Committee's request:
. The Committee wishes to effectuate a dividend to creditors
quickly;
. The Committee wishes to conserve the costs associated with
preparation and solicitation of a facially unconfirmable plan;
. The estate faces other deadlines, especially July and October
deadlines associated with the discounted buy-out of an allowed $5
million claim pursuant to a settlement agreement approved by the
Court last month. In order to allow the estate's representatives
to make an economically-informed decision on this buy-out out
option, the estate must quickly move to a liquidating mode so that
the very large claims of ARI and Sandberg Financial Corporation
can be resolved; and
. The estate should assess its causes of action before they become
stale.
Accordingly, the Committee requests that the status of this case be addressed on
an expedited basis.
VI. CONCLUSION
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10
<PAGE>
25. For the reasons set out above, the Committee respectfully requests
that ERLY's chapter 11 bankruptcy case be converted to chapter 7, that upon
conversion a trustee be appointed to liquidate ERLY's bankruptcy estate, and
that the Court grant the Committee any further and additional relief to which it
may be entitled.
Dated: March 1, 1999.
Respectfully submitted,
HUGHES & LUCE, L.L.P.
By: /s/ WILLIAM B. FINKELSTEIN
---------------------------
William B. Finkelstein
State Bar No. 07016300
S.D. Tex. No. 13910
HUGHES & LUCE, L.L.P.
1717 Main Street, Suite 2800
Dallas, Texas 75201
(214) 939-5500
(214) 939-6100 Telecopy
ATTORNEYS FOR THE OFFICIAL
COMMITTEE OF UNSECURED CREDITORS
CERTIFICATE OF SERVICE
----------------------
This is to certify that on this the 1st day of March, 1999, a true and
correct copy of the foregoing was served via first class mail, postage prepaid
on all parties on the attached Master Service List and on Matthew Rosenstein,
counsel for ERLY, via hand-delivery.
/s/ WILLIAM B. FINKELSTEIN
--------------------------
William B. Finkelstein
11
