EXHIBIT 2.2
IN THE UNITED STATES BANKRUPTCY COURT
DISTRICT OF KANSAS
AT TOPEKA
IN RE: )
)
AFI MORTGAGE CORP. ) Case No. 97-43122-11-JAP
) Chapter 11
Debtors )
)
)
IN RE )
)
ADVANCED FINANCIAL, INC. ) Case No. 98-41228-11-JAP
) Chapter 11
Debtors. )
)
FIRST AMENDED
JOINT DISCLOSURE STATEMENT
OF
AFI MORTGAGE, CORP.
AND
ADVANCED FINANCIAL, INC.
DATED JULY 29, 1998
Thomas M. Mullinix, KS #7309
Joanne B. Stutz, KS #12365; MO #30820
EVANS & MULLINIX, P.A.
15301 West 87th Street Parkway, Ste. 220
Lenexa, KS 66219-1428
(913) 541-1200; (913) 541-1010 (FAX)
ATTORNEYS FOR AFI MORTGAGE, CORP. and
ADVANCED FINANCIAL, INC.
TABLE OF CONTENTS
ARTICLE I
INTRODUCTION.................................................................1
A. The Disclosure Statement...............................................1
B. Brief Explanation of Chapter 11........................................2
C. Voting on the Plan.....................................................2
1. Creditors and Shareholders Entitled to Vote........................3
2. General Voting Instructions........................................3
D. The Confirmation Hearing...............................................4
E. Confirmation...........................................................4
ARTICLE II..
GENERAL BACKGROUND INFORMATION...............................................5
A Description of Advanced's Business.....................................5
B. Description of AFIM's Business.........................................5
1. Investment Policies................................................6
a. Investments in Real Estate Mortgages...........................6
b. Description of Real Estate.....................................6
2. Loan Servicing.....................................................6
a. Servicing Capability...........................................7
3. Loan Originations..................................................7
4. Loan Processing....................................................8
5. Types of Loans.....................................................9
6. Markets and Competition............................................9
7. Regulation.........................................................9
C. Events Leading to The Proceedings.....................................10
D. Operations During the Proceedings.....................................11
1. AFIM..............................................................11
2. Advanced..........................................................13
E. Assets and Sources for Repayment of Claims............................14
1. Cash and Cash Equivalents.........................................14
2. Office Building...................................................15
3. Receivables.......................................................15
F. Liquidation Analysis..................................................15
1. The Liquidation Analysis..........................................16
G. Plan Confirmation Analysis............................................17
H. Scheduled Claims......................................................17
1. AFIM..............................................................17
a. Priority Claims...............................................17
b. Secured Claims................................................18
c. General Unsecured Claims......................................18
d. Executory Contracts and Leases................................18
2. Advanced..........................................................18
a. Priority Claims...............................................18
b. Secured Claims................................................18
c. General Unsecured Claims......................................18
d. Executory Contracts and Leases................................18
I. Real and Personal Property............................................18
1. AFIM..............................................................18
2. Advanced..........................................................19
J. Books and Records.....................................................19
K. Tax Aspects of the Plan...............................................19
1. Tax Consequences to the Debtors...................................20
a. General.......................................................20
b. Net Operating Losses..........................................20
c. Cancellation of Debt..........................................21
d. Debt Restructuring............................................21
e. Attribute Reduction...........................................21
f. Change of Ownership - I.R.C. - 382............................22
2. Tax Consequences to the Creditors.................................22
L. Litigation............................................................22
M. Management of the Debtors.............................................23
N. Information Obtained by Plan Proponents...............................23
ARTICLE III.
SUMMARY OF THE JOINT PLAN OF REORGANIZATION.................................24
A. General Description of the Joint Plan of Reorganization...............24
1. Assumptions.......................................................24
2. The FMIC Transaction..............................................24
B. Designation of Classes of Claims and Interests........................26
1. AFIM..............................................................26
2. Advanced..........................................................27
Treatment of Stock Options............................................27
Cancellation of Interests.............................................27
C. Details of the Plan...................................................28
1. Unclassified Claims...............................................28
a. Administrative Claims.........................................28
b. Priority Claims...............................................28
2. Classified Claims of AFIM.........................................29
a. Allowed Secured Claims........................................29
b. Allowed Unsecured Claims Without Priority.....................30
c. Allowed Interests of AFIM.....................................31
3. Classified Claims of Advanced.....................................32
a. Allowed Secured Claims........................................32
b. Allowed Unsecured Claims Without Priority.....................33
c. Allowed Interests of Advanced.................................34
D. Means of Execution of the Plan........................................35
E. Modification of the Plan..............................................36
F. Amendment of Claims After Bar Date....................................36
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EXHIBITS
Exhibit A: Summary of AFI Mortgage, Corp. Income Statements From 11/7/97 to
6/30/98
Exhibit B: Liquidation Analysis
Exhibit C: Proposed Acquisition Agreement and Stock Option Agreement with
FMIC
Exhibit D: Claims Analysis
iii
Article I
INTRODUCTION
A. The Disclosure Statement
The Debtors, AFI Mortgage, Corp. and Advanced Financial, Inc., pursuant to
Section 1125 of the Bankruptcy Code, submit this Disclosure Statement to all
known Creditors and holders of Claims and interests against the Debtors for the
purpose of disclosing that information which the Bankruptcy Court has determined
to be material and important for Claimants to make an informed decision in
exercising their right to vote on the Plan. Reorganization pursuant to Chapter
11 of the Bankruptcy Code depends upon the receipt of a sufficient number of
votes in favor of reorganization. Your vote, therefore, is important.
This Disclosure Statement describes various transactions contemplated
under the Plan. A copy of the Plan accompanies this Disclosure Statement.
Defined terms are capitalized in both the Plan and the Disclosure Statement. See
Definition of Terms, Article 1.
THIS DISCLOSURE STATEMENT HAS BEEN APPROVED BY THE BANKRUPTCY COURT AS
CONTAINING ADEQUATE INFORMATION TO ENABLE CREDITORS TO MAKE AN INFORMED JUDGMENT
ABOUT THE PLAN. SUCH APPROVAL DOES NOT CONSTITUTE A RECOMMENDATION OR
ENDORSEMENT OF THE PLAN BY THE BANKRUPTCY COURT. NO REPRESENTATIONS CONCERNING
THE DEBTORS' ASSETS AND LIABILITIES (INCLUDING THOSE RELATING TO THE FUTURE
BUSINESS OPERATIONS OR THE VALUE OF ANY ASSETS, PROPERTY, CREDITORS' CLAIMS OR
SECURITIES TO BE ISSUED UNDER THE PLAN) INCONSISTENT WITH ANYTHING CONTAINED
HEREIN HAVE BEEN AUTHORIZED. ANY REPRESENTATIONS OR INDUCEMENTS MADE TO SECURE
YOUR VOTE IN FAVOR OF ACCEPTANCE OR REJECTION OF THE PLAN OTHER THAN THAT
CONTAINED IN THIS DISCLOSURE STATEMENT SHOULD NOT BE RELIED UPON BY YOU IN
ARRIVING AT YOUR DECISION
This Disclosure Statement has not been approved or disapproved by the
Securities and Exchange Commission: nor has the Securities and Exchange
Commission passed upon the accuracy or adequacy of the statements contained
herein. There has been no independent audit of the financial information
contained in this Disclosure Statement except as expressly indicated in this
Disclosure Statement.
You are urged to study the Plan in full and to consult with your counsel
about the Plan and its effect, including possible tax consequences, upon your
legal rights. Please read this Disclosure Statement carefully before voting on
the Plan.
Not all of the financial information contained herein is covered by a
certified audit of independent public accountants. For this reason, and because
of the complexity of the Debtors' financial affairs, the
Debtors are unable to represent that the information contained in this
Disclosure Statement is without inaccuracy, although reasonable efforts have
been made to present the information fairly and accurately. Additional financial
information can be found in the Debtors' Statements of Financial Affairs,
Schedules of Assets and Liabilities on file with the Bankruptcy Court, and
Monthly Financial Reports filed with the Bankruptcy Court. Except as otherwise
expressly indicated herein, the portions of this Disclosure Statement describing
the Debtors, their business and the Plan have been prepared from information
furnished by Debtors' management.
THE DEBTORS BELIEVE CONFIRMATION OF THE PLAN IS IN THE BEST INTERESTS OF
THE DEBTORS' CREDITORS AND SHAREHOLDERS. CONSEQUENTLY, THE DEBTORS RECOMMEND
THAT ALL CREDITORS AND EQUITY SHAREHOLDERS VOTE TO ACCEPT THE PLAN.
B. Brief Explanation of Chapter 11
Chapter 11 is the principal reorganization chapter of the Bankruptcy Code.
Pursuant to Chapter 11, the Debtors are authorized to reorganize their business
for their benefit and for the benefit of Creditors and Interest Holders. Upon
the filing of a petition under Chapter 11, actions by Creditors and other
Claimants attempting to collect on pre-petition Claims or to foreclose upon any
of the Debtors' property are automatically stayed during the pendency of the
Chapter 11 case.
In these cases the Debtors have continued in possession of their property
as Debtors-in-Possession. Thus, pursuant to Section 1107(a) of the Bankruptcy
Code, the Debtors are vested with substantially the same powers as a trustee
under the Bankruptcy Code.
C. Voting on the Plan
Formulation of a plan of reorganization is the principal purpose of a
Chapter 11 reorganization proceeding. The Plan is the vehicle for satisfying
Claims of the Debtors' Creditors. Each Creditor entitled to vote on the Plan may
cast its vote for or against the Plan by completing, dating, and signing the
Ballot Form accompanying this Disclosure Statement. The Bankruptcy Court has
ordered that Ballots and Objections to Confirmation of the Plan, must be
received no later than 5:00 p.m. on the 24th day of August, 1998, at the offices
of Debtors' Counsel, EVANS & MULLINIX, P.A., 15301 W. 87th Street Parkway, Suite
220, Lenexa, Kansas 66219-1428.
This Disclosure Statement is intended to assist Creditors in evaluating the
Plan and in determining whether to accept the Plan. UNDER THE BANKRUPTCY CODE,
YOUR VOTE FOR ACCEPTANCE OR REJECTION MAY NOT BE SOLICITED UNLESS YOU RECEIVE A
COPY OF
2
THIS DISCLOSURE STATEMENT PRIOR TO, OR CONCURRENTLY WITH, SUCH SOLICITATION. THE
SOLICITATION OF VOTES ON THE PLAN IS GOVERNED BY THE PROVISIONS OF SECTION
1125(b) OF THE BANKRUPTCY CODE, THE VIOLATION OF WHICH MAY RESULT IN SANCTIONS
BY THE COURT, INCLUDING DISALLOWANCE OF THE SOLICITED VOTE AND LOSS OF THE "SAFE
HARBOR" PROVISIONS OF SECTION 1125(e) OF THE BANKRUPTCY CODE.
1. Creditors and Shareholders Entitled to Vote
Only the votes of Creditors in the Classes that are impaired by the Plan
will be counted to determine if the Plan is accepted by Creditors. In this case
Classes 1 through 13 are impaired by the Plan and, therefore, will have their
votes counted. Votes on the Plan will only be counted for those Claims that are
not listed as disputed, contingent or unliquidated, and only for those Claims
for which a proof of Claim was filed before the Bar Date, providing such Claim
has not been disallowed or suspended prior to computation of the vote, or which
have been estimated for voting purposes pursuant to an Order of the Court. The
Ballot provided for voting on the Plan does not constitute a proof of Claim.
2. General Voting Instructions
A ballot is enclosed with the Disclosure Statement, which has been mailed
to each Creditor and equity security holder on the Court's mailing matrix. This
includes Creditors listed in the Debtors' Schedules, Creditors who have filed a
Proof of Claim and the known transfer agents for the publicly traded securities
of Advanced. Creditors and equity security holders must complete and sign the
ballot and return it to Debtors' Counsel as instructed on the ballot, in the
Order accompanying this Disclosure Statement and the Plan or in the letter which
may accompany this Disclosure Statement and Plan. Ballots should be returned to:
Joanne B. Stutz
Evans & Mullinix, P.A.
15301 W. 87th Street, Ste 220
Lenexa, KS 66219
Ballots which are not signed, which do not indicate an acceptance or
rejection of the Plan or which indicate both an acceptance and rejection of the
Plan will not be counted. Any Creditor or equity security holder holding two or
more Claims against either AFIM or Advanced must complete a separate ballot for
each Claim. The ballot which accompanies the Disclosure Statement and Plan may
be duplicated for this purpose.
PLEASE DO NOT RETURN THE STOCK OR STOCK CERTIFICATES REPRESENTING YOUR
SECURITIES WITH YOUR BALLOT.
3
D. The Confirmation Hearing
The Bankruptcy Court has scheduled a hearing on Confirmation of the Plan to
determine if the Plan has been accepted by the requisite number of Creditors and
whether the other requirements necessary to Confirmation have been satisfied.
The Confirmation Hearing is scheduled for August 26, 1998, at 1:30 p.m. Each
Claimant will receive, either with this Disclosure Statement or separately, the
Bankruptcy Court's Notice of Hearing on Confirmation of the Plan.
E. Confirmation
At the Confirmation Hearing, the Bankruptcy Court will determine, among
other things, whether the Plan has been accepted by each impaired Class of
Creditors. Under Section 1126 of the Bankruptcy Code, an impaired Class is
deemed to have accepted the Plan if at least two-thirds in amount and more than
one-half in number of Allowed Claims in such Class voting to accept or reject
the Plan have voted in favor of acceptance.
There are two methods by which the Plan can be confirmed: (i) the
"acceptance" method, in which all impaired Classes have voted to accept the Plan
as described above; and (ii) the "non-acceptance" method, in which the Plan is
not accepted by one or more of the impaired Classes, provided the Bankruptcy
Court finds that the Plan does not discriminate unfairly and is fair and
equitable to such Class or Classes. For a Plan to be confirmed under the
"non-acceptance" method, it must be accepted by at least one Class of claims or
Interests which is impaired by the Plan. The Debtors may choose to rely upon the
"non-acceptance" method to seek Confirmation of the Plan if it is not accepted
by all impaired Classes of Creditors.
Section 1129(b) of the Bankruptcy Code provides that the Bankruptcy Court
may confirm the Plan notwithstanding its rejection by one or more impaired
Classes if the Bankruptcy Court finds that the Plan is fair and equitable with
respect to each impaired Class which does not accept the Plan. With respect to
Classes of secured Creditors, the fair and equitable test requires that a
secured Creditor (i) retain its lien(s) and receive cash payments having a
present value equal to its Allowed Secured Claim, (ii) receive the proceeds from
the sale of its collateral, or (iii) realize the indubitable equivalent of its
Claim. With respect to a Class of unsecured Claims, the fair and equitable test
requires that if each Claimant in such Class does not receive property having a
present value equal to the amount of such Claimant's Allowed Claim, no Class
junior can receive any property on account of such junior Claim or Interest.
4
Thus, Classes 6, 12 and 13 may not be entitled to participate in the
distributions under the Plan if Classes 1 through 5 and 7 through 10 do not vote
to accept the Plan. Likewise, class 13 may not be entitled to participate in the
distributions under the Plan if Class 12 does not vote to accept the Plan.
If the Bankruptcy Court orders Confirmation of the Plan, then pursuant to
Section 1141(d) of the Bankruptcy Code, the Debtors are discharged from all
pre-Confirmation debts except as provided in the Plan. Confirmation makes the
Plan binding upon the Debtors, all Creditors, Interest Holders, and other
parties-in-interest, regardless of whether they voted to accept the Plan.
Article II
GENERAL BACKGROUND INFORMATION
The following is a general discussion of the business of AFI Mortgage, Corp.
(AFIM) and it's parent, Advanced Financial, Inc. (Advanced), (collectively "the
Debtors"), the events leading to the Proceedings, and the Debtors' operations
during the Proceedings.
A. Description of Advanced's Business
Advanced is a publicly traded company, incorporated under the laws of
Delaware in September, 1986. Originally named Weincor Financial Corporation,
Advanced was a shell corporation which did not conduct any business. In June,
1988, Weincor changed its name to Advanced Medical Dynamics, Inc. (AMDI) and
entered into the business of selling medical equipment. At approximately the
same time Advanced also began publicly trading its stock.
In July, 1990, Advanced's principals perceived a business opportunity for
expansion into the mortgage servicing industry due to the collapse of the
savings and loan industry. In furtherance of this decision, on March 29, 1991,
Advanced acquired Creative Financing, Inc. (CFI), a Nebraska corporation founded
in February, 1982, which operated as a mortgage banker, originating and
servicing one to four (1-4) family mortgages. CFI became the wholly owned
subsidiary of Advanced and Advanced ceased operating as an active business,
transforming itself into a holding company. In 1992, CFI's name was changed to
Continental Mortgage, Inc. The name was again changed to AFI Mortgage, Corp. in
November, 1994. In 1997 AFIM discontinued all of its mortgage operations and
neither Advanced nor AFIM have any active business at this time.
B. Description of AFIM's Business
AFIM is the wholly owned subsidiary of Advanced. The following is a
description of the key components of AFIM's previous business affairs.
5
1. Investment Policies
a. Investments in Real Estate Mortgages
AFIM, as an essential part of its core business, invested in real estate
mortgages by acting as a loan originator. Primarily all mortgage originations
were first mortgages on single family dwellings. A general description of each
type of mortgage activity in which AFIM engaged, such as origination, servicing
and warehousing, and the portfolio turnover rate is contained in the following
sections.
b. Description of Real Estate
The only real estate owned by or in which AFIM has an investment interest
is AFIM's headquarters building, which was built to house AFIM's administrative
arm and which has been occupied since June, 1993. AFIM currently leases its
office building to FMIC, which has expressed an interest in purchasing the
building from AFIM, and subleases back a small portion for its own office.
AFIM owns the building and land in fee simple subject to a first and second
mortgage. The first mortgage has a principal balance of approximately
$725,000.00, which accrues interest at a fixed rate of 11.75% percent, payable
monthly, with the entire balance due and payable October 1, 1998. The balance
may be prepaid at any time without penalty. In the fourth quarter of fiscal
1996, AFIM incurred a $350,000.00 second mortgage that is also due on October 1,
1998. From the sale of its mortgage servicing operations, AFIM repaid
$200,000.00 of the second mortgage.
2. Loan Servicing
Starting in 1991, AFIM, using capital raised through Advanced, purchased
mortgage servicing rights primarily from the Resolution Trust Corporation.
Between 1991 and 1994 AFIM bought and sold several servicing portfolios. At its
peak AFIM serviced approximately $750 million in mortgage servicing rights with
borrowers in all fifty (50) States.
Prior to fiscal 1997 AFIM serviced substantially all the mortgage loans
that it originated or purchased from failed institutions. During fiscal 1997
AFIM sold substantially all of its originated mortgage loans servicing
operations. Loan servicing included collecting and remitting loan payments,
making advances when required, accounting for principal and interest, holding
escrow (impound) funds for payment of taxes and insurance, making inspections of
the mortgage premises, contacting delinquent mortgagors, supervising
foreclosures and property dispositions in the event of unremedied defaults and
generally administering the loans. AFIM received fees for servicing mortgage
loans owned by investors. These fees were calculated on the outstanding
principal balances of the loans serviced and were recorded as income when
earned. Other fee income consisted of ancillary income (late charges, fax fees,
insurance commissions, etc.) associated with loan servicing and was recorded as
income when collected.
AFIM's servicing portfolio was subject to reduction by normal amortization
and prepayment or foreclosure of loans. In addition AFIM sold portions of its
loan servicing rights portfolio. In general the decision to buy or sell
servicing rights was based upon management's assessment of AFIM's cash
6
requirements, AFIM's debt to equity ratio and other significant financial
ratios, the market value of servicing rights and AFIM's current and future
earnings objectives. Due to AFIM's continued losses management made the decision
to sell the entire servicing portfolio to satisfy as much related indebtedness
as possible, enabling AFIM to significantly reduce its cash flow needs
immediately.
a. Servicing Capability
A nonaffiliated third party provided electronic data processing through
AFIM's IBM AS/400. This relationship and service has been terminated and AFIM no
longer has the ability to service mortgage servicing rights.
3. Loan Originations
In January, 1992, AFIM expanded its mortgage banking operations to include
the ability to refinance mortgage loans. This was intended to enhance AFIM's
servicing portfolio in several respects. First, it allowed AFIM to retain a
portion of its payoffs as new loans. Previously, the refinanced loans enhanced
the value of AFIM's portfolio because the new loan had a lower note rate and a
longer servicing life. During fiscal 1997, originated and refinanced mortgage
loans, as well as the service rights for those loans, were sold, which increased
cash flow and revenues. Second, the revenues and earnings provided by the loan
originations also allowed AFIM to diversify its potential revenue producing
business away from loan servicing.
AFIM had developed an important expertise which allowed it to close new
loans in several states by using closing agents and title companies without the
necessity to invest in branch office overhead. This expertise was critical to
the ability to place desktop installations in real estate offices nationwide.
AFIM believes it was at the forefront of the industry to implement an electronic
national network of convenient origination locations with transaction costs well
below the traditional branch office approach. All processing and underwriting
was centralized at AFIM headquarters. Eighteen desktop terminals were in
operation during the fourth quarter of fiscal 1997. The system included core
software capabilities which ran on a desktop or personal computer. AFIM had
in-house computer oriented employees trained on the software to perform
necessary software modifications as well as its installation.
AFIM anticipated completed installations (terminals installed and
operational, including the staffing of a loan officer on AFIM's payroll) of
seventy (70) locations by the end of fiscal 1997. Unfortunately AFIM did not
reach its goal, although it did have forty-five (45) locations at its peak. For
various reasons several of these locations did not meet AFIM's profitability
projections and were subsequently closed. Eighteen (18) locations were in place
when AFIM sold its production platform on February 3, 1997. AFIM estimated the
initial set-up cost of an office for the first ninety (90) days, including the
monthly cost of licenses and equipment, office supplies, etc., to be
approximately $7,000.00 per location.
The system was initially targeted for placement in real estate brokerage
companies with high residential growth. It was designed to be operated on-site
by an AFIM loan representative with "expert
7
systems" feedback to the borrower, providing an evaluation of loan balances and
repayment options. Information was electronically transmitted by modem to AFIM's
administrative offices, where the actual processing and underwriting was
performed. The system offered the convenience of one-stop shopping for the home
buyer in addition to productivity advantages for the agents. The "Step 1
Pre-Approval Process" provided the potential home buyer with a formal written
pre-approval for a monthly mortgage payment based on the application in
approximately forty-eight (48) hours. This allowed the home buyer and real
estate agent the advantage of knowing financing opportunities prior to the
negotiation of a potential contract.
As another method of increasing mortgage loan originations, in July 1994,
AFIM began mortgage production operations in the State of Washington, hiring
some of the staff of a Seattle area mortgage broker. AFIM's desktop terminals
were installed in two offices as a means of enhancing operating efficiencies.
The predecessor organization developed an active business in non-conforming loan
originations which did not meet industry standard credit, loan to value or other
criteria. However, due to the high cost of the operation - $576,000.00 for the
eight months in operation in fiscal 1994, - AFIM decided to sell the operation
in October, 1995.
4. Loan Processing
In connection with the origination of each loan, AFIM processed the loan
application, prepared mortgage documentation, conducted credit checks, had the
property valued by appraisers and funded the loan. Loan applications were
approved by AFIM's underwriting department for compliance with underwriting
criteria, including the loan-to-value ratio, the borrower's income qualification
and necessary insurance. After approval AFIM's policy was to obtain pre-closing
commitments from investors to purchase substantially every loan to be originated
or purchased by AFIM. In the case of loans to be sold to private investors, AFIM
submitted the loan file to a prospective investor for its approval.
FNMA and FHLMC did not review individual loan files prior to issuance of
commitments to purchase loans. Upon receipt of a commitment from an investor to
purchase a loan or loans from AFIM once closed, AFIM issued a commitment to the
prospective borrower specifying the amount of the loan, the prevailing interest
rate, the fees to be paid to AFIM and the date on which AFIM's commitment
expired. The actual interest rate of the loan was established prior to loan
closing based upon the then prevailing interest rate, unless the borrower had
purchased a "rate lock," which guaranteed a specified rate for a designated
period. The normal interval of time between AFIM's issuing its commitment and
the closing of a loan was one to three weeks.
8
5. Types of Loans
Approximately half of the loans serviced by AFIM were conventional loans.
AFIM emphasized the origination of "conforming" loans, which are conventional
loans having principal amounts within the maximum amounts eligible for sale to
FNMA and FHLMC (currently $203,150.00 for a one-family property) and which
otherwise comply with FNMA and FHLMC requirements. AFIM also originated "jumbo"
loans (conventional loans that exceed the maximum amounts qualifying for sale to
FNMA or FHLMC but that otherwise generally comply with FNMA or FHLMC
requirements and other loans that do not comply with FNMA or FHLMC requirements)
but that complied with requirements for sale to private investors. It was AFIM's
policy to obtain a title insurance policy on every mortgage loan. In addition
substantially all of AFIM's originated loans were first mortgage loans. During
the fourth quarter of fiscal 1995, AFIM did introduce a second mortgage loan
program for which the originated loans were sold to private investors.
6. Markets and Competition
The loan origination market share is somewhat diversified with a few large
players and many small players. As a whole, the industry is incorporating
technology and pursuing point of sale strategies to generate mortgage loan
originations. AFIM believes that it was more technologically advanced than most
of its peers with the exception of a few of the largest industry players. AFIM
also believes that its strategies for implementing its technology and point of
sale originations was unique and should have allowed it to compete even with its
largest competitors. Unfortunately, due to the shortage and availability of
experienced loan officers, caused by the industry's increased production
volumes, AFIM was unable to attract and hire experienced loan originators to
operate its desktop locations. This meant that AFIM had to hire and train less
experienced personnel, creating a much longer than anticipated time frame for
loan origination volumes to meet projected goals. In many cases AFIM's shortage
of capital prevented AFIM from keeping the locations open in anticipation of
future loan production.
7. Regulation
AFIM's mortgage banking business was subject to the rules and regulations
of FHA, VA, FNMA, FHLMC and GNMA with respect to originating, processing,
selling and servicing mortgage loans. Those rules and regulations, among other
things, prohibit discrimination, provide for inspections and appraisals, require
credit reports on prospective borrowers, fix maximum loan amounts and, with
respect to VA loans, fix maximum interest rates. Moreover, FHA lenders such as
AFIM were required annually to submit to the Federal Housing Commissioner
audited financial statements. FNMA, FHLMC and GNMA required the maintenance of
specified minimum net worth levels (which vary depending on the amount of the
portfolio serviced). AFIM was subject to examination by the Federal Housing
Commissioner at all times to assure compliance with FHA regulations, policies
and procedures. Mortgage origination activities were subject to the Equal Credit
Opportunity Act, Federal Truth-in Lending Act and the Real Estate Settlement
Procedures
9
Act and the regulations promulgated thereunder, which prohibit discrimination
and require the disclosure of certain basic information to mortgagors concerning
credit and settlement costs.]
Additionally, there were various state laws and regulations affecting
AFIM's mortgage banking operations. AFIM was licensed as a mortgage banker or
retail installment lender in those states requiring such a license and in which
AFIM conducted business. Conventional mortgage operations may also be subject to
state usury statutes. FHA and the VA are exempt from the effect of such
statutes.
C. Events Leading to The Proceedings
AFIM was a full service residential mortgage company and had all approvals
necessary to service mortgages for the Federal National Mortgage Association
(FNMA), Federal Home Loan Mortgage Corporation (FHLMC) and Government National
Mortgage Association (GNMA). Due to the collapse of the savings and loan
industry, a significant amount of servicing was being offered by the Resolution
Trust Corporation (RTC). This created an opportunity for AFIM to purchase
servicing portfolios at historically low prices. Between fiscal 1992 and fiscal
1995 AFIM invested it's capital mainly in the purchase of mortgage servicing
portfolios from the RTC and during that period it's servicing portfolio reached
a principal balance of approximately $750 million.
The servicing portfolio was AFIM's primary source of revenue and cash
flows. However, in March of 1994 AFIM's management determined that it needed to
enter the retail origination market to increase its servicing portfolio through
the origination of new loans rather than bulk purchases, which would require
raising additional capital. Management also determined that it needed to find an
origination concept and strategy that would not require the capital necessary to
implement a traditional branch office operation. Management wanted to take
advantage of the many new technologies which had recently became available to
the mortgage industry. It was at this time that AFIM initiated its concept of
putting a loan officer directly in an established real estate office.
During March and April, 1994, AFIM proceeded to invest a significant amount
of its capital into both systems and personnel in an effort to implement this
new origination strategy. AFIM had anticipated marketing this new concept in
May, 1994. Unfortunately, technical problems encountered in meshing the
technologies for its Desk Top Origination units delayed marketing until January,
1995. During 1995, AFIM was very successful in establishing its strategy in
several real estate offices around the country.
Although, AFIM was successful in locating real estate offices in which to
implement its Desk Top Origination System, it was not nearly as successful in
hiring experienced and qualified loan officers to operate the locations. The
inability to hire experienced loan originators caused AFIM to fall significantly
short of its loan production goals and projections. Therefore, AFIM was unable
to generate from its loan production operations the revenue and cash flow
necessary to support the infrastructure
10
which was in place to handle much higher, anticipated volumes. This led to
significant losses during fiscal 1996 and fiscal 1997.
In an effort to generate the capital necessary to support the loan
production operations, AFIM sold its servicing portfolio, anticipating that loan
production would increase sufficiently to offset the lost revenue and cash flow
previously realized from the servicing operations. Unfortunately, loan
production did not increase as anticipated and AFIM had to close several of its
nonproductive locations. Ultimately AFIM found itself in a situation where
revenues and cash flow were insufficient to continue to support current
operations and in January, 1997, AFIM decided to discontinue its operations and
liquidate its remaining assets to satisfy creditors.
On February 3, 1997, AFIM entered into an Agreement to sell its remaining
loan production operations to First Mortgage Investment, Co. (FMIC). This
allowed AFIM to eliminate the costs related to those operations. At that time
AFIM still had approximately $150,000,000.00 of GNMA mortgage servicing rights,
from which it derived some revenue.
Unfortunately, due to the nature of the servicing portfolio and AFIM's lack
of capital, AFIM was unable to service the portfolio properly within GNMA's
guidelines. Thus, in April, 1997, AFIM advised GNMA of its deteriorating
financial condition and requested approval for the sale of the remaining GNMA
servicing rights to a third party. AFIM also advised GNMA that if the
transaction was consummated under the proposed terms, AFIM anticipated having a
shortage of approximately $350,000.00 to $400,000.00 in AFIM's mortgage
custodial accounts. However, GNMA chose to seize the servicing portfolio instead
of approving the sale. As a result, AFIM was left with no ongoing operations.
D. Operations During the Proceedings
1. AFIM
As a result of its problems, on November 7, 1997, AFIM filed for relief
under Chapter 11 of Title 11. On December 8, 1997, AFIM filed an Application
seeking to employ the firm of Evans and Mullinix, P.A. as bankruptcy counsel
(Debtor's Counsel). The Application also sought Court approval of an arrangement
for payment to Debtor's Counsel providing for the full payment of the monthly
billing statements with the proviso that a sum equal to 25% of the fees be held
in the firm's trust account, pending further Orders of the Court. The Order
approving the Application and the fee arrangement was entered January 16, 1998.
Applications to employ other professionals were also filed. AFIM sought
employment of (i) Allen Reeves, as special counsel, with expertise as a
securities attorney; (ii) Grant Thornton, to prepare the Fiscal Year 1997
consolidated tax returns for Advanced and AFIM; and (iii) Thomas Carew, a tax
specialist, whose services have been instrumental in formulating the Plan. The
Court has not yet ruled on
11
the Applications to employ Grant Thornton and Allen Reeves due to issues
regarding the necessity for their employment until a Plan is confirmed and AFI
no longer desires to employ the services of Mr. Reeves. On April 14, 1998,
AFIM's application to employ Thomas Carew was approved, as was his fee
arrangement, which is similar to that approved for Debtor's Counsel.
On December 2, 1997, the United States Trustee conducted a Section 341
Meeting. At that time the Trustee determined that there was insufficient
interest for an unsecured creditors' committee to be formed. Therefore, the AFIM
Proceedings progressed without that additional expense until shortly after May,
1998, at which time a committee was formed by Commercial Federal Bank, Argo
Federal Savings and Blackwell Sanders.
Shortly after the filing of the AFIM Proceedings, on December 10, 1997,
AFIM filed a motion requesting that the Court set a final date for the filing of
proofs of Claim. The Court, by Order dated December 12, 1997, set that final
date as January 26, 1998 (the Bar Date).
On January 29, 1998, a Motion to Extend the Exclusive Periods for Filing
Disclosure Statement and Plan was filed. While the United States Trustee and
Commercial Federal Bank initially objected, they subsequently approved an Agreed
First Order Increasing AFIM's Exclusive Periods. This Order was entered by the
Court on April 14, 1998, extending the exclusive period for filing the
Disclosure Statement to April 27, 1998, and extending the exclusive period for
obtaining Confirmation to June 27, 1998. A Disclosure Statement was filed in
accordance with that Order. This Joint Disclosure Statement is now filed in
conjunction with the Advanced Proceedings.
During the course of the AFIM Proceedings, various additional pleadings
have been filed, seeking relief intended to enable AFIM to maintain the status
quo with minimal disruptions. These motions sought and obtained the following
relief:
1. AFIM was authorized to compromise a contingent receivable owed by Ben
Barrett in Lincoln, Nebraska, under a Net Branch Agreement. Pursuant to the
compromise, Mr. Barrett's debt was reduced from $14,840.86 to $9,008.53.
2. Matrix Financial was ordered to pay to AFIM's Estate the amount of
$53,906.48, owed as Holdback Funds due under a contract for the sale of certain
of AFIM's loan servicing rights to Matrix. These funds may be subject to the
secured Claims of Argo and CFB.
3. AFIM was authorized to borrow $15,000.00 from FMIC to fund the prepa-
ration of the 1098 returns for 1997. Had this not been approved, the penalties
assessed for failure to file the returns, which numbered in excess of 9,000,
would have been prohibitive.
4. FMIC and AFIM requested approval of an agreement whereby FMIC tendered a
final payment due under its Asset Purchase Agreement for the purchase of
Mortgage Pipeline Loans from AFIM. The $15,000.00 loan was to be repaid as an
offset against this final payment, resulting in a net payment to AFIM's Estate
of $27,206.00. Objections to this request were raised by CFB and the US Trustee;
12
however, those objections were resolved and the Order approving the final
payment was entered on May 20, 1998.
5. AFIM sold its Florida mortgage lender's license for $15,000.00 to
the Ark Group, Inc.
6. AFIM filed a complaint against US Mortgage, to recover $25,343.00
due from its purchase of servicing rights from AFIM in June, 1997. US Mortgage
paid the sums owing and the complaint has been dismissed.
AFIM subleases an office from FMIC, the lessee of its building, and has
only one employee, William Morris, who receives a monthly salary of $5,416.67.
Although there are no actual operations Mr. Morris continues to work daily on
issues related to AFIM's past mortgage banking operations. These issues include
the signing of mortgage releases, assignments, forwarding documentation to
investors who purchased loans from AFIM and generally addressing former
borrowers' problems which occurred while their loans were serviced with AFIM. In
addition Mr. Morris has been instrumental in negotiating the terms of the FMIC
Transaction, which forms the basis of the Debtors' Plan, and has been
responsible for maintaining compliance with the requirements of the AFIM
Proceedings. The cost to operate is approximately $7,000.00 per month, which
includes Mr. Morris' salary.
During the AFIM Proceedings, AFIM has explored various possibilities for
reorganizing its business. The Plan represents the best option and the one which
will provide Creditors with the optimum recover on their claims. For a
description of the Plan see the Section of this Disclosure Statement entitled
"Summary of the Joint Plan of Reorganization".
Attached hereto as "Exhibit "A" is a copy of the relevant portions of
AFIM's monthly financial reports for the periods November 7, 1997, through June
30, 1998.
2. Advanced
On May 8, 1998, Advanced filed for relief under Chapter 11 of Title 11. On
that same date, Advanced filed an Application seeking to employ the firm of
Evans and Mullinix, P.A. as bankruptcy counsel (Debtor's Counsel). The
Application also sought Court approval of an arrangement for payment to Debtor's
Counsel providing for the full payment of the monthly billing statements with
the proviso that a sum equal to 25% of the fees be held in the firm's trust
account, pending further Orders of the Court. The US Trustee objected to the fee
arrangement as Advanced lacks resources with which to pay these expenses.
Debtor's Counsel agreed that no payment would be expected until payment of
administrative expenses pursuant to a confirmed Plan. The Order approving the
Application was entered by the Court on July 2, 1998.
Applications to employ other professionals were also filed. Advanced sought
employment of (i) James Swenson, as special counsel, whose expertise as a
securities attorney is required for consummation of the Plan. The time for
objecting to Mr. Swenson's employment expired without objection and the Order
authorizing his employment was entered on July 1, 1998; and (ii) Thomas Carew, a
tax specialist, whose
13
services have been instrumental in formulating the Plan. The Order approving Mr.
Carew's employment has been submitted to the Court.
On June 9, 1998, the United States Trustee conducted a Section 341 Meeting.
At that time the Trustee advised that although an unsecured creditors' committee
was initially formed, the members of the committee had agreed to disband.
Therefore, the Advanced Proceedings have progressed without that additional
expense.
Shortly after the filing of the Advanced Proceedings, on June 9, 1998,
Advanced filed a motion requesting that the Court set a final date for the
filing of proofs of Claim. The Court, by Order dated June 12, 1998, set that
final date as July 24, 1998 (the Bar Date).
During the course of the Advanced Proceedings, various additional pleadings
have been filed, seeking relief intended to enable Advanced to maintain the
status quo with minimal disruptions. These motions sought and obtained the
following relief:
1. On May 8, 1998, a motion requesting the administrative consolidation
of the AFIM Proceedings and the Advanced Proceedings was filed in both cases. An
objection filed by R.F. Bearden Associates, Inc., was overruled and the Order
authorizing the consolidation was entered on July 2, 1998.
2. On June 1, 1998, Advanced filed a Notice of Election to be Treated as
Small Business and Request for an Order that Committees of Creditors not be
Appointed. The Notice of Election is effective upon its filing and no further
action of the Court is required.
E. Assets and Sources for Repayment of Claims
The Debtors intend to finance the Plan payments from the cash on hand,
additional cash infusions contemplated by the Plan, liquidation of non-liquid
assets and issuance of stock in Advanced. The Debtors' projections for the Plan
are included in the Liquidation Analysis, attached hereto as Exhibit "B". These
projections are not as accurate as the Debtors would like as the Debtors must
employ professionals to assist it in consummating the FMIC Transaction. The
Court has denied the Debtors' request to hire these professionals out of concern
for the unsecured Creditors as the anticipated expenses may exceed $100,000.00.
The Court believes the Creditors should be afforded the opportunity to vote on
the Plan before the professionals' costs are incurred.
1. Cash and Cash Equivalents
As of June 30, 1998, AFIM had approximately $131,892.00 in its Debtor in
Possession checking account. This includes the proceeds from a $100,000.00 CD,
which was held in an escrow account with Bank One, Texas, which CD was
collateral for Bank One's agreement to indemnify Matrix Financial for any losses
it may incur pursuant to the agreement under which Matrix purchased servicing
rights from the
14
Debtors. Both the indemnification and the escrow expired on May 1, 1998, at
which time the CD was released to AFIM, there being no claims made against it.
2. Office Building
AFIM owns a 20,000 square foot office building located at 5425 Martindale,
Shawnee, Kansas. FMIC has offered to purchase the building for $1,030,000.00,
the net proceeds of which would satisfy the first mortgage. FMIC also holds the
second mortgage against the building. This mortgage will be released and
converted to equity in accordance with the Joint Plan of Reorganization.
3. Receivables
AFIM is owed approximately $6,000.00-$10,000.00 from Matrix Financial as
recovery of costs, pursuant to Matrix's purchase of certain of AFIM's loan
servicing rights. AFIM also alleges that FNMA owes $29,454.00 for funds advanced
by AFIM for the benefit of FNMA, which advances are subject to recovery from
FNMA. Finally, AFIM is due approximately $165,000.00 from Advanced through an
inter-company receivable. The Advanced receivable will be deemed collected when
Advanced issues stock to AFIM'S Creditors. Otherwise, AFIM does not believe this
debt is collectible.
F. Liquidation Analysis
The Debtors believe that the Plan provides its Creditors with the greatest
possible value that can be realized on their respective Claims. If the Plan is
not confirmed or consummated, the theoretical alternatives include, in addition
to dismissal of the proceedings, (a) liquidation of the Debtors under Chapter 7
of the Bankruptcy Code, (b) liquidation of the Debtors under Chapter 11 of the
Bankruptcy Code, or (c) an alternative plan of reorganization. After studying
these alternatives the Debtors believe that this Plan is the best alternative
and will maximize recoveries by holders of Claims.
If no Plan is confirmed, the Debtors' Chapter 11 proceedings may be
converted to cases under Chapter 7 of the Bankruptcy Code. Trustees would then
be appointed to liquidate the assets of the Debtors for distribution to their
separate Creditors in accordance with the priorities established by the
Bankruptcy Code. The Debtors believe that liquidation under Chapter 7 would
result in smaller distributions to Creditors because of various factors,
including: (a) additional administrative expenses in both cases resulting from
the appointment of two trustees, attorneys and other professionals to assist the
trustees; (b) additional federal and state income taxes, which would be entitled
to priority payment, to the extent that property sold or distributed by the
trustees has a value in excess of the tax basis in such property; (c) additional
expenses and claims generated during the liquidation and from the rejection of
leases and other executory contracts in connection with the cessation of the
Debtors' operations; and (d) failure to realize the greater going-concern value
of the Debtors' assets, including the loss of the approximate $7 million NOL.
15
If the Plan is not confirmed, the Debtors or, subject to the provisions of
the Bankruptcy Code, any other party in interest, could attempt to formulate and
propose a different plan or plans of reorganization. It is unlikely that the
Debtors could propose a substantially different plan that would receive any
greater support from or provide greater value to Creditors. Even if it would be
possible to formulate a consensus regarding a substantially different plan, the
Debtors believe that it would take a long time to do so and that the prospects
for a larger distribution to Creditors are remote.
The Debtors have proposed this Plan as the most practical means of
providing a reasonable and expeditious distribution to the Creditors. As
described herein, the aggregate distributions to impaired Classes receiving
distributions under the Plan will be far greater than distributions which
Creditors might receive under a liquidation of the Debtors. Confirmation and
consummation of the Plan is preferable to the alternatives described above.
1. The Liquidation Analysis
Upon liquidation of the Debtors, the following would occur:
l. All assets of the Debtors, not otherwise exempt by applicable State
and Federal law, would be converted into cash by either selling or surrendering
tangible property to the respective properly secured Creditors and by collecting
any accounts receivable.
2. Creditors with valid, non-avoidable liens, would be paid from the net
sale proceeds or the value of the surrendered assets, in the amounts of their
respective claims, not to exceed in any instance, the amount of the creditor's
interest in the property in which they have a security interest.
3. Debts incurred, if any, during the Chapter 11 Proceedings, would be
paid.
4. Costs of administration would be paid.
5. Priority Creditors would be paid all available funds on a Pro Rata
basis up to the amounts of their respective Claims.
6. The balance, if any, would be paid to unsecured Creditors.
It is the Debtors' position that the approximate net value of the Estates
upon liquidation will be minimal for unsecured Creditors.
THE DEBTORS BELIEVE THAT LIQUIDATION OF THE DEBTORS WOULD NOT BE IN THE
BEST INTERESTS OF THE DEBTORS, THE ESTATE OR THE CREDITORS AS LIQUIDATION WILL
NOT ALLOW THE CREDITORS TO MAXIMIZE THEIR RECOVERIES.
A copy of the Debtors' liquidation analysis, a comparison of the potential
recovery under the Plan to that of Chapter 7 liquidation, is attached hereto as
Exhibit "B".
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G. Plan Confirmation Analysis
Upon confirmation of the Plan payments will be paid to secured Creditors,
administrative expense Claimants and priority Creditors as outlined herein in
the Section entitled Summary of Joint Plan of Reorganization.
The Delaware Corporation Law Annotated ss. 303., entitled "Reorganization
Under a Statute of the United States, Effectuation," provides that a plan of
reorganization, confirmed by the order of a court of competent jurisdiction, may
be put into effect without further action by the corporation's directors or
stockholders. The corporation may therefore, in reliance on the Confirmation
Order, take the following actions, which list is not intended to be
all-encompassing:
1. Alter, amend or repeal by-laws;
2. Constitute or reconstitute and classify or reclassify the board of
directors;
3. Amend the certificate of incorporation;
4. Change the capital or capital stock;
5. Make any other amendment, change or alteration authorized by the
Delaware corporation statutes.
Thus, Confirmation shall be deemed authorization of the shareholders for
the purpose of compliance with the Delaware statutes. As soon as practicable
after Confirmation, Advanced shall filed with the Secretary of State of Delaware
the appropriate Certificate of Amendment, evidencing its recapitalization and
reorganization.
H. Scheduled Claims
(ANY STATEMENTS REGARDING PROJECTED AMOUNTS OF CLAIMS ARE ESTIMATES OF THE
DEBTORS BASED ON CURRENTLY AVAILABLE INFORMATION AND ARE NOT A REPRESENTATION
THAT SUCH AMOUNTS WILL ULTIMATELY PROVE CORRECT).
1. AFIM
The Schedules, filed on November 7, 1997, as amended on December 10, 1997,
and January 5, 1998, reflect the assets and liabilities of AFIM as of the filing
date, November 7, 1997. The following sections summarize the information
contained in the Schedules. Creditors should refer to the Schedules for more
complete information.
a. Priority Claims. AFIM scheduled one unsecured priority Claim
totaling $20,700.00, owing to the IRS for 1098/1099 penalties. The IRS has
determined that full abatement of this Claim is appropriate.
17
b. Secured Claims. AIFM scheduled four (4) secured Creditors, with
claims totaling $1,423,347.37. These Creditors are identified as Argo
Federal Savings, Citizens National Bank, Commercial Federal Bank and First
Mortgage Investment Co.
c. General Unsecured Claims. Claims of the unsecured Creditors are
scheduled in the approximate amount of $1,168,654.80 and are comprised
primarily of trade debts related to AFIM's business.
d. Executory Contracts and Leases. AFIM listed three (3) leases and
service contracts as of the AFIM Petition Date. However, the property
subject to these leases had been repossessed or returned to the lessors
prior to the AFIM Petition Date.
2. Advanced
The Schedules, filed on May 8, 1998, reflect the assets and liabilities of
Advanced as of the filing date, May 8, 1998. The following sections summarize
the information contained in the Schedules. Creditors should refer to the
Schedules for more complete information.
a. Priority Claims. Advanced scheduled no priority Claims.
b. Secured Claims. Advanced scheduled three (3) secured Creditors,
with claims totaling $917,223.78. These Creditors are identified as Bank
Midwest, Citizens National Bank (CNB) and First Mortgage Investment Co.
(FMIC); however, only Bank Midwest is secured by assets of Advanced. The
debts due CNB and FMIC are guarantees of indebtedness of AFIM and are
secured by assets of AFIM.
c. General Unsecured Claims. Claims of the unsecured Creditors are
scheduled in the approximate amount of $997,814.75 and are comprised
primarily of trade debts related to the Advanced's business.
d. Executory Contracts and Leases. Advanced listed no leases or
service contracts.
I. Real and Personal Property
1. AFIM
As of the date of the filing of the Chapter 11 Bankruptcy Petition, AFIM
listed four (4) tracts of real property with an aggregate value of
$1,042,500.00. AFIM's interest in three (3) of the tracts was as lienholder. The
fourth tract is AFIM's office building in Shawnee, Kansas.
The following personal property was scheduled in the approximate aggregate
amounts:
1. Deposits of money with banking institutions: $107,676.00
2. Stock Interests: $4,542.00.
3. Accounts Receivable: $351,503.00.
4. Contingent Claims: $65,847.00.
18
Further detail regarding the scheduled Claims and any administrative Claims
incurred during the AFIM Proceedings may be found in AFIM's court files which
are available for inspection at the Bankruptcy Court or at the offices of
Debtor's Counsel. Those secured Creditors whose security has a value less than
the amount of their Claim may be able to assert a Claim as an unsecured Creditor
in addition to their secured Claim.
2. Advanced
As of the date of the filing of the Chapter 11 Bankruptcy Petition,
Advanced had no interest in any real property. The only personal property was
$22.00 on deposit in a checking account at CNB.
Further detail regarding the scheduled Claims and any administrative Claims
incurred during the Advanced Proceedings may be found in Advanced's court files
which are available for inspection at the Bankruptcy Court or at the offices of
Debtor's Counsel. Those secured Creditors whose security has a value less than
the amount of their Claim may be able to assert a Claim as an unsecured Creditor
in addition to their secured Claim.
J. Books and Records
During the two years immediately preceding the filing of the petition, none
of the Debtors' books and records relating to the affairs of the business have
been destroyed, lost or disposed of, to the best knowledge of Debtors'
management. The Debtors have employed the accrual method of accounting since the
filing of the petition. The Debtors file consolidated tax returns for a fiscal
year end of March 31.
The Debtors have been responsible for the preparation of monthly financial
reports filed in the AFIM Proceedings and the Advanced Proceedings. The Debtors
have also filed complete federal and state income tax returns for all years in
which such returns are required, with the exception of 1996 and 1997, which will
be prepared once the Court approves the expenditure of funds for this purpose.
K. Tax Aspects of the Plan
The following is a general summary of certain material tax issues that may
affect the Debtors. These issues include potential changes of corporate
ownership and the resulting limitation of net operating losses cancellation of
debt ("COD"), modification of debt deemed to be COD, accrual of interest or
original issue discount ("OID") on such debt, excludability of COD income and
the corresponding required reduction (mainly net operating loss and basis).
Bankruptcy is by its nature very dynamic and subject to change. Bankruptcy
taxation is likewise dynamic and projected results may change significantly,
depending upon actions by creditors, shareholders and other factors, all of
which may be outside the control of the Debtors. The Debtors' strategy is to
maximize tax benefits and minimize tax costs coming out of bankruptcy.
Necessarily, the Debtors must alter their strategy to react
19
to the actions of others throughout the bankruptcy. Accordingly, this discussion
will attempt to describe the areas set forth above.
It is impractical to comment on all aspects of federal, state and local tax
laws which may affect the Debtors, Creditors or interest holders. The following
discussion is merely a summary of some of the general income tax principles
applicable to the Debtors and does not purport to be a complete analysis or
listing of all potential tax issues or risks. It is based, in part, on predicted
future events which may not occur as predicted. There are a number of tax issues
to which there are no definite answers under existing law, or which are actually
based on certain facts. Moreover, other tax risks or issues may arise in the
future which are unforeseen at the present time because of changes and factual
circumstances affecting the Debtors and changes in legislation or statutory
interpretation. IN VIEW OF THE COMPLEXITIES AND TAX LAWS, INTERESTS HOLDERS AND
CREDITORS ARE ENCOURAGED TO CONSULT THEIR OWN ADVISORS WITH RESPECT TO TAX
ISSUES AFFECTING THEM AND THE DEBTORS. THIS SUMMARY DISCUSSION IS NOT INTENDED
AS A SUBSTITUTE FOR CAREFUL TAX ANALYSIS OF EACH INTEREST HOLDER OR CREDITOR.
THE TAX CONSEQUENCES TO INDIVIDUAL CREDITORS AND INTEREST HOLDERS MAY VARY.
1. Tax Consequences to the Debtors
a. General
The corporation in bankruptcy is treated as a continuation of the
pre-bankruptcy entity. There is generally little or no differentiation between
pre and post bankruptcy earnings and loss. The Debtors will continue to operate
in essentially the same manner as they did prior to bankruptcy for tax purposes.
The Debtors will continue to file all tax returns during the pendency of the
bankruptcy. Post petition income taxes are generally administrative expenses.
The bankruptcy filing will cause no direct impact on the shareholders of
the Debtors as the Debtors are "C" corporations. No taxable event will occur
until stock is disposed of or becomes worthless. At such time, the difference
between the stockholders' basis in the stock and any proceeds received would
create taxable gain or loss. The effect of the proposed Plan on Creditors is
less certain and depends upon the specific modification proposed regarding each
Creditor's debt and manner in which the Creditors have previously accounted for
such debt. Accordingly, each Creditor must individually analyze the impact of
the proposed Plan on its debt.
b. Net Operating Losses
The Debtors are a fiscal year taxpayer with a March 31 year end. If the
Debtors have incurred significant tax losses for prior tax years, the net
operating losses may be carried back three (3) years and carried forward fifteen
(15) years.
The amount of the tax loss that could be carried back or carried forward is
currently being analyzed by the Debtors. The Debtors anticipate the net
operating loss to approximate $7 million. The
20
future utilization of these losses may be limited due to current and potential
"changes of ownership" of the Debtors, although the Debtors believe the proposed
Plan significantly reduces this possibility. More importantly, losses will be
eliminated due to attribute reduction resulting from COD income exclusion. To
the extent possible, the Debtors will attempt to maximize the future benefit of
any future net operating losses.
c. Cancellation of Debt
COD income is generally defined as the excess of the "adjusted" issue
price of the outstanding debt over the amount paid to repurchase such debt. The
Internal Revenue Code ("I.R.C.") Section 108 sets forth the rules involving COD
income. Under I.R.C. 108 COD income is excluded from gross income to the extent
that a taxpayer is insolvent before and after the COD, or it is excluded in full
without regard to insolvency if the taxpayer/debtor is in Chapter 11. Under the
Plan, all of AFIM's unsecured Creditors will share Pro Rata in any funds
remaining after payment to the priority, Secured and other senior Classes of
Creditors. Any amount that is not received by both AFIM's and Advanced's
unsecured Creditors or that may be received by them if stock is issued,
constitutes COD income which may be excluded from taxation under I.R.C. 108.
d. Debt Restructuring
A restructuring of debt, even if the face amount of the debt is unchanged,
may also create COD income, depending on the nature and extent of modifications.
If the modifications of debt are sufficiently material in the aggregate under
IRS promulgations and case law, then the old debt instruments will be deemed to
be exchanged for new instruments, creating a taxable event.
e. Attribute Reduction
The "price" for exclusion of COD income is the reduction of tax
attributes. Under I.R.C. Section 108(b) tax attributes, to the extent of
excluding COD income, are reduced in the following order:
(a) Net operating losses for the current taxable year and the Debtors'
NOL carryovers on a dollar for dollar basis.
(b) Business tax credits (multiplied by three to create a loss
equivalency);
(c) Minimum tax credits;
(d) Capital loss carryovers;
(e) Basis reduction for real and personal property;
(f) Passive activity loss and credit carryovers; and
(g) Foreign tax carryovers;
The net operating losses projected may be reduced by projected COD income,
but the exact amount of this attribute reduction cannot be determined until the
tax returns are completed and the amount of cancellation of debt income becomes
more crystallized.
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f. Change of Ownership - I.R.C. - 382
I.R.C. Section 382 was created to avoid "trafficking in losses". This
Section provides that if there is a change of ownership involving a 5%
shareholder, and a change of more than 50 percentage points within a three year
moving period, then the annual utilization of net operating losses will be
limited to the product of the value of the stock of the company and the "long
term tax exempt rate". Once the change occurs, income or loss for the year of
the change is pro rated on a daily basis to determine the pre and post change
loss utilization. There may be a change of ownership contingent upon attracting
an acquisition partner, so that there could be an issue under I.R.C. Section 382
concerning the use of the net operating losses or their elimination. However,
the Debtors believe the restructuring of both AFIM and Advanced in Chapter 11
Proceedings will avoid the ramifications of IRC ss. 382.
There are numerous potential combinations of stock issuance that may, or
may not, cause a change of ownership, and it is not currently possible to
predict with certainty at this time how this potential change of ownership may,
in fact, impair the ability of the Debtors to use net operating loss carry
forwards.
2. Tax Consequences to the Creditors
Both secured and unsecured Creditors may be either required to recognize
income or allowed a deduction as a result of the implementation of the Plan. The
exact tax treatment depends on each Creditor's method of accounting, the nature
of each Creditor's Claim, the property being received and exchanged for such
Claim, if any, and upon whether and to what extent such Creditor has taken a bad
debt deduction in prior taxable years with respect to a particular debt owed to
it by the Debtors. EACH HOLDER OF A SECURED CLAIM AND AN UNSECURED CLAIM IS
URGED TO CONSULT WITH ITS TAX ADVISORS REGARDING THE PARTICULAR TAX CONSEQUENCES
OF THE TREATMENT OF ITS CLAIM UNDER THIS PLAN.
L. Litigation
At the time the Debtors filed their Chapter 11 Proceedings, they were
engaged in litigation over loan defaults and disputes over contracts and leases.
Upon confirmation of the Plan all suits against the Debtors shall be dismissed
with prejudice by the plaintiffs in those actions.
M. Management of the Debtors
At the time of the filing of these Proceedings William B. Morris was AFIM's
only employee and officer. Mr. Morris holds the office of Sr. Vice President and
Secretary. AFIM also has three directors, Daniel Starczewski, William B. Morris
and Richard Schoenfeld; however, only Mr. Morris and Mr. Starczewski have
remained active board members, continuing to serve in this capacity without
compensation. The Debtors contemplate that Mr. Morris will continue his
employment with the Reorganized Debtors.
22
Mr. Morris was instrumental in negotiating the terms of the FMIC
Transaction. In consideration for these extra ordinary services Mr. Morris shall
be granted an option to purchase 149,999 shares of common stock in the
Reorganized Advanced at an exercise price of $.25 per share upon the following
terms, which shall commence two (2) years after Confirmation and continue for a
period of ten (10) years thereafter:
1. Once the stock has attained and maintained a bid price of $1.00 for
twenty (20) consecutive trading days, Mr. Morris shall have the option
to purchase 37,499.75 shares of common stock;
2. Once the stock has attained and maintained a bid price of $2.00 for
twenty (20) consecutive trading days, Mr. Morris shall have the option
to purchase an additional 37,499.75 shares of common stock;
3. Once the stock has attained and maintained a bid price of $3.00 for
twenty (20) consecutive trading days, Mr. Morris shall have the option
to purchase an additional 37,499.75 shares of common stock;
4. Once the stock has attained and maintained a bid price of $4.00 for
twenty (20) consecutive trading days, Mr. Morris shall have the option
to purchase the remaining 37,499.75 shares of common stock.
In exchange for this option Mr. Morris shall relinquish his right to
participate in the distributions to the Class 13 Creditors under the Plan.
Upon Confirmation an interim Board of Directors, consisting of Philip
Holtgraves, Charles Holtgraves and William Morris will conduct the business of
the Reorganized Debtors until a new Board of Directors is. The Reorganized
Advanced's Board will be elected by its shareholders, a portion of which will
include AFIM's unsecured Creditors. The new Board will be responsible for
selecting a management team.
The Reorganized Debtors' business will be conducted for the benefit of
their Creditors, thereby creating the possibility that the unsecured Creditors
will receive more than they would receive upon liquidation.
N. Information Obtained by Plan Proponents
The Plan Proponents compiled this Disclosure Statement after reviewing the
court files, the monthly financial reports, the audited and unaudited financial
reports, the appraisals of the assets, if any, and other related documents
available to all Creditors and parties in interest.
23
Article III
SUMMARY OF THE JOINT PLAN OF REORGANIZATION
A. General Description of the Joint Plan of Reorganization
1. Assumptions
It is presumed for the purposes of the Plan that AFIM's debt to FMIC is
"qualified indebtedness" meaning that the debt was held by FMIC for at least 18
months prior to the filing of the bankruptcy or the debt arose in the ordinary
course of business and was at all times held by FMIC. If neither of these facts
is accurate then the proposed Plan cannot be accomplished; however, based on the
information available to the Debtors and their advisors, the Debtors believe
FMIC satisfies the test.
AFIM's reorganization will consist of a simple liquidation of its assets in
combination with its Creditors' exchange of debt for common stock in Advanced.
If the Plan is not accepted by the Creditors, the Creditors will realize only
their Pro Rata portions of the value of AFIM's liquid assets, currently
estimated to be approximately $100,000.00, net of FMIC's secured mortgage debt
and Chapter 11 and 7 administrative expenses. FMIC, as a secured creditor of
AFIM, holds a superior and preferential position relative to all of AFIM's other
unsecured Creditors.
2. The FMIC Transaction
FMIC is, like AFIM, in the Mortgage Lending and Servicing business and
intends to continue AFIM's core operating business. FMIC has also expressed
interest in gaining access to the public capital markets; however, the cost of
taking a company public is expensive. Should FMIC choose to go public on its own
a significant portion of its cash flow would be constrained during the public
offering process. Thus, FMIC's willingness to enter into the FMIC Transaction is
contingent, in part, on the retention of Advanced's shareholder base, a
contingency which can be met only through the issuance of stock in the
Reorganized Advanced to the existing shareholders.
Assuming that FMIC is successful in this endeavor, FMIC anticipates that
Advanced will be able to obtain additional expansion capital from the public
capital markets. Significant savings for FMIC can be achieved by the Plan which
preserves Advanced as a public company and grants FMIC a quick and inexpensive
vehicle to the public capital markets. These savings will be beneficial to the
unsecured Creditors who will receive stock in a strong going concern.
Advanced and AFIM also believe that the preservation of AFIM's Net
Operating Loss Carry-Forward (NOL) is necessary to attain the maximum benefits
for the Creditors of both Debtors. To accomplish this goal Advanced filed the
Advanced Proceedings. Because both Advanced and AFIM are now in bankruptcy, it
will be possible to preserve AFIM's NOL in accordance with the Bankruptcy
Exception to the change of Ownership Rules under Internal Revenue Code Section
382(b).
24
The Plan contemplates that FMIC will purchase AFIM's office building (the
Property) and relinquish its secured Claim against the Property for the benefit
of AFIM's Creditors, thereby increasing the value of AFIM's liquid assets by
approximately $150,000.00. AFIM's unsecured Creditors will receive a Pro Rata
distribution of AFIM's net liquid assets and both AFIM's and Advanced's
unsecured Creditors will receive a Pro Rata distribution of a portion of
Advanced's common stock in final satisfaction of their outstanding Claims. FMIC,
which has held mortgage debt from AFIM for more than eighteen (18) months prior
to the bankruptcy, will exchange this "qualified indebtedness" for a majority of
Advanced's stock. The Debtors anticipate that FMIC will receive at least 60% of
Advanced's stock in exchange for its release of its secured mortgage Claim
against AFIM.
Advanced will then be owned by FMIC, AFIM's and Advanced's unsecured
Creditors and Advanced's previous shareholders. Because FMIC and the Creditors
of AFIM and Advanced are "qualified creditors" who would own at least 50% of the
new Advanced following the bankruptcy reorganization, the proposed Plan appears
to meet the "bankruptcy exception" to the NOL limitation rules of IRC ss.
382(b).
To encourage FMIC's performance and further investment under the Plan,
Advanced has allowed FMIC to enter into a Stock Option Agreement pursuant to
which FMIC will be granted an option to acquire additional shares of Advanced's
common stock, thereby increasing FMIC's ownership interest from sixty percent
(60%) to a maximum of eighty percent (80%) if the terms and conditions for the
exercise of the option are met. Payment for said option, if exercised, shall
consist of the transfer to Advanced of one or more operating business units
and/or cash having an aggregate fair market value of approximately
$1,500,000.00. The Debtors anticipate that this will, in turn, increase the
value of the stock distributed pursuant to the Plan. FMIC will also not object
to the disbursement of all cash in AFIM's Estate for payment of administrative
expenses and distributions to Creditors.
The transfer of the Property to FMIC on the Closing Date, as that term is
defined in the Acquisition Agreement, shall, to the full extent allowed by the
Bankruptcy Code and the authority and jurisdiction of the Court, and with the
exception of the Lien of CNB, be free and clear of any and all liens, claims,
liabilities, encumbrances and interests thereof and thereagainst of whatever
type or description, including, without limitation, "claims", as defined in 11
U.S.C. ss. 101(5), restrictions on or conditions to transfer or assignment,
mortgages, security interests, pledges, equities and other claims or interests
(Claim/Interest), having arisen, existed or accrued prior to and through the
Closing Date, whether direct or indirect, absolute or contingent, matured or
unmatured, liquidated or unliquidated, of, by or against AFIM or the Property.
No Claim/Interest shall attach to the proceeds of the sale of the Property to
FMIC. Said Claim/Interest shall include, without limitation the following:
a. Claims/Interests arising through the Closing Date, if any, of any
governmental unit for taxes, excepting real property taxes accruing for
calendar year 1998, and subsequent years;
25
b. Claims/Interests arising through the Closing Date relating to any
executory contract or lease affecting or in any way relating to the
Property, including, without limitation, Claims/Interests of AFIM Creditors
arising from AFIM's failure to perform its obligations to said parties
whether such failure occurred prior to or on the Closing Date;
c. Claims/Interests arising through the Closing Date which relate to
work performed by any contractor or materialman and which may give rise to
a mechanic's lien or similar Claim/Interest against the Property, excepting
any such Claims/Interests arising from work performed at the request of
FMIC.
The FMIC Transaction shall not be construed as or constitute the assumption
by FMIC of the Debtors' operations as a successor in any respect of the Debtors'
businesses within the meaning of any laws, rules or regulations relating to any
revenue, pension ERISA, tax, environmental, labor or products liability matters.
Furthermore, FMIC shall, to the full extent allowed by the Bankruptcy Code and
the authority and jurisdiction of the Court, have no liability under any
federal, state or local environmental laws by virtue of FMIC's purchase of the
Property; provided, however, the Acquisition Agreement shall not change FMIC's
liability under such statutes as an owner of the Property or operator of the
Property for such periods as FMIC has operated, occupied or continues to operate
or occupy the Property.
The terms and conditions of the FMIC Transaction are fully set forth in the
proposed Acquisition Agreement and Stock Option Agreement, which are
incorporated fully herein and attached hereto as Exhibit "C".
B. Designation of Classes of Claims and Interests
All Claims and interests against the Debtors of whatever nature, whether or
not scheduled, liquidated or unliquidated, absolute or contingent, including all
Claims arising from transactions of the Debtors or rejection of executory
contracts and/or unexpired leases and all interests arising from the ownership
of the Debtors, whether resulting in an Allowed Claim or not, shall be bound by
the provisions of the Plan.
1. AFIM
Classification of Claims against and interests in AFIM, with the exception
of Administrative Claims and priority tax Claims which are unclassified pursuant
to 11 U.S.C. ss. 1123(a)(1), shall be classified as follows:
Class l: Allowed Secured Claim of Argo Federal Savings.
Class 2: Allowed Secured Claim of Citizen's National Bank.
Class 3: Allowed Secured Claim of Commercial Federal Bank
Class 4: Allowed Secured Claim of First Mortgage Investment Co.
26
Class 5: Allowed Unsecured Prepetition Claims without Priority and
Allowed Undersecured Claims.
Class 6: The Allowed Interests of AFIM.
2. Advanced
Classification of Claims against and interests in Advanced, with the
exception of Administrative Claims and priority tax Claims which are
unclassified pursuant to 11 U.S.C. ss. 1123(a)(1), shall be classified as
follows:
Class 7: Allowed Secured Claim of Bank Midwest.
Class 8: Allowed Secured Claim of Citizen's National Bank.
Class 9: Allowed Secured Claim of First Mortgage Investment Co.
Class 10: Allowed Unsecured Guaranty Claims.
Class 11: Allowed Unsecured Prepetition Claims without Priority and
Allowed Undersecured Claims.
Class 12: The Allowed Interests of the Holders of Preferred Stock in
Advanced.
Class 13: The Allowed Interests of the Holders of Common Stock in
Advanced.
Impaired Classes: Classes 1 through 13 are impaired by this Plan.
Treatment of Stock Options. Any stock option outstanding and unexercised,
relating to stock in Advanced or AFIM, shall be deemed to have rejected as of
the Petition Dates and shall have no further force or effect.
Cancellation of Interests. On the Effective Date all stock interests in
Advanced or AFIM shall be deemed cancelled and of no further force or effect
except as evidence of such holder's entitlement to a distribution, if any, under
the Plan. On the Effective Date any holder of a stock interest asserting an
entitlement to a distribution must deliver to Debtors' Counsel proof of such
entitlement in the form of the original stock certificate. Stock interests held
in a street name shall be issued through the appropriate broker or transfer
agent.
C. Details of the Plan
For further detail concerning the treatment of the Classes identified
herein and the means of execution of the Plan, Creditors are urged to review the
Joint Plan of Reorganization, filed simultaneously herewith, in its entirety.
1. Unclassified Claims
In accordance with 11 U.S.C. ss. 1123(a)(1) Administrative Claims and
Allowed Priority Tax Claims of the kinds specified in Sections 507(a)(1),
507(a)(7) and 507(b) of the Bankruptcy Code, respectively, have not been
classified in the Plan and are excluded from the Classes discussed in the
Disclosure Statement. Such unclassified Claims will be treated as described
below.
27
a. Administrative Claims. Subject to the Bar Date and certain other
provisions contained in this Plan, as described in this subsection, each
holder of an Allowed Claim for administrative costs and expenses of the
kind specified in Sections 507(a)(1) or 507(b) of the Bankruptcy Code,
shall receive, on account of and in full satisfaction of such Allowed
Claim, cash equal to the amount of such Allowed Claim, unless the holder
agrees to a less favorable treatment of such Claim. Without limiting the
foregoing, all fees payable under 28 U.S.C. ss. 1930 that have not
theretofore been paid shall be paid on the Effective Date. All Allowed
Claims for administrative costs and expenses shall be paid by the
Reorganized Debtors.
There are two possible types of Administrative Claims in the
Proceedings. The first consists of Administrative Claims incurred by the
Debtors in the ordinary course of their affairs since the Petition Dates,
including taxes and ordinary business expenses. Payment on these
Administrative Claims will not be made until such payment otherwise would
have become due in the ordinary course of the Debtors' business or under
the terms governing the Claim in the absence of the Proceedings.
The second type of Administrative Claim consists of fees and expenses
as allowed by Order of the Bankruptcy Court (i) for the services of
professionals employed by the Debtors and (ii) for expenses incurred by
other parties in interest making a "substantial contribution" in the
Proceedings. The Debtors are not presently aware of the extent, if any, to
which any party in interest will seek reimbursement for expenses in making
a "substantial contribution" in the Proceedings. Neither do the Debtors
believe any such request will be made.
Under this Plan, all applications for final compensation of
Professionals for services rendered and for reimbursement of expenses
incurred on or before the Effective Date (including, without limitation,
any compensation requested by any Professional or any other entity for
making a substantial contribution in the Proceedings) and all other
requests for payment of administrative costs and expenses incurred before
the Effective Date under ss.ss. 507(a)(1) or 507(b) of the Bankruptcy Code
(except for Claims for trade debt incurred in the ordinary course of
business and Claims under 28 U.S.C. ss. 1930) shall be filed no later than
thirty days after the Effective Date, unless such date is extended by the
Bankruptcy Court and on notice to the Reorganized Debtors. Any such Claim
that is not filed within this deadline shall be forever barred and any
holders of Administrative Claims who are required to file a request for
payment of such Claims and who do not file such request by the applicable
deadline shall be forever barred from asserting such Claims against the
Debtors, the Reorganized Debtors or any of their property.
The Debtors anticipate that Administrative Claims will not exceed
$100,000.00.
b. Priority Claims. The Allowed Priority Tax Claims consist of the tax
Claims of the Johnson County treasurer in the amount of $4,529.62, for
personal property taxes. The priority
28
portion of these Claims will be paid in full and to the extent that they
are nondischargeable from the sale of AFIM's office building. The
dischargeable portion of these Claims shall be treated as a Class 5 Claim.
2. Classified Claims of AFIM
a. Allowed Secured Claims.
The Plan classifies AFIM's Allowed Secured Claims into the following four
(4) Classes:
Class 1: (The Allowed Secured Claim of Argo Federal Savings). Class 1
consists of the prepetition Secured Claim of Argo in the amount of
approximately $80,000.00 as of the AFIM Petition Date. The Class 1 Claim is
secured by one-half of the Holdback Funds, having an approximate value of
$53,906.48.
AFIM is currently reviewing Argo's loan documentation to determine the
validity of Argo's Lien. The Class 1 Claim shall be paid in full on or
before the Effective Date, or as soon as practicable thereafter, unless
AFIM has previously contested the secured nature of this Claim. To the
extent this Class 1 Creditor's Claim is undersecured, the Allowed
Undersecured Claim shall be paid in accordance with the treatment provided
for the Class 5 Creditors.
Class 1 is impaired under this Plan.
Class 2: (The Allowed Secured Claim of Citizen's National Bank). Class
2 consists of the prepetition Secured Claim of CNB in the amount of
approximately $731,176.66 as of the AFIM Petition Date. The Class 2 Claim
is secured by a first mortgage on AFIM's office building in Shawnee,
Kansas, having an approximate value of $1,030,000.00. During the course of
these Proceedings the Class 2 Creditor has continued to receive its regular
monthly mortgage payments. AFIM believes the Class 2 Allowed Secured Claim
is fully secured by the collateral.
This Class 2 Claim shall be paid in full from the sale of the office
building to FMIC, which shall assume the first mortgage indebtedness. Upon
FMIC's assumption of the debt owed the Class 2 Creditor, the Class 2
Creditor shall release AFIM from any further obligation to the Class 2
Creditor. The Class 2 Claimant will retain its security interest in the
collateral pending that sale.
Class 2 is impaired under this Plan.
Class 3: (The Allowed Secured Claim of Commercial Federal Bank). Class
3 consists of the Secured Claim of CFB in the amount of approximately
$460,000.00 as of the AFIM Petition Date.. The Class 3 Claim is secured by
one-half of the Holdback Funds, having an approximate value of $53,906.48.
AFIM is currently reviewing CFB's loan documentation to determine the
validity of CFB's Lien. The Class 3 Claim shall be paid in full on or
before the Effective Date, or as soon as
29
practicable thereafter, unless AFIM has previously contested the secured
nature of this Claim. To the extent this Class 3 Creditor's Claim is
undersecured, the Allowed Undersecured Claim shall be paid in accordance
with the treatment provided for the Class 5 Creditors.
Class 3 is impaired under this Plan
Class 4: (Allowed Secured Claim of First Mortgage Investment Co.).
Class 4 consists of the Secured Claim of FMIC in the amount of
approximately $152,170.71 as of the AFIM Petition Date. The Class 4
Creditor is secured by a second mortgage in AFIM's office building, located
in Shawnee, Kansas, having a value of $1,030,000.00.
The Class 4 Creditor shall release its mortgage interest and convert
its debt to equity in Advanced.
Class 4 is impaired under the Plan.
b. Allowed Unsecured Claims Without Priority.
Class 5: (Allowed Prepetition Unsecured Claims without Priority and
Allowed Undersecured Claims). Class 5 consists of the Allowed Prepetition
Unsecured Claims without Priority and Allowed Undersecured Claims, with
Claims aggregating approximately $3,000,000.00. Each Class 5 Creditor shall
receive its Pro Rata share of a cash dividend, which may approximate eleven
percent (11%) of its Claim, on the Effective Date or as soon as is
practicable thereafter. Said dividend shall be paid from Available Cash. If
assets remain to be liquidated or collected, the cash generated by that
liquidation will be distributed after receipt but no more often than on a
calendar quarterly basis.
The Class 5 Creditors shall also share with the Class 11 Creditors in
a Pro Rata distribution of 900,000 shares of common stock in the
Reorganized Advanced, resulting in an approximate aggregate 30% ownership
interest in Advanced. No fractional shares will be issued and the new
shares of stock issued shall be rounded to the nearest whole share. As the
value of fractional shares will be less than $0.10 (ten cents), no cash
payments will be made for fractional shares. Any shareholder who would
receive less than one half share of stock in the Reorganized Advanced will
receive nothing in this exchange AFIM anticipates that with appreciation in
value of the stock, the Class 5 Creditors may potentially receive more than
payment in full of their Claims.
Each Class 5 Creditor shall also be entitled to receive one Warrant
for each share of stock in the Reorganized Advanced distributed to such
Creditor. The Warrant shall be a detachable Class A Warrant, with a fixed
termination date of March 31, 2002, and may be separately transferred. Each
Class A Warrant will entitle the holder to purchase one share of common
stock in the Reorganized Advanced at a price of $1.25 at any time on or
before March 31, 2002. The
30
Board of Directors of the Reorganized Advanced shall have the right, at any
time after the bid price of the common stock is at least 120% of the
exercise price and remains at such price for a period of twenty (20)
consecutive trading days, to call any or all of such Warrants for
redemption at a par value price of $.001 per warrant upon thirty (30) days'
written notice to the warrantholders, provided that the bid price is at
least 120% of the exercise price on the call date. Any Warrants which are
called will expire and be of no further value of not exercised by the
holders on or before the call date. The Warrants shall not be redeemable
until and unless a current registration statement is in effect. The
Reorganized Advanced may, in its sole discretion, extend the expiration
date of the Warrants and/or reduce the exercise price of the Warrants.
Each Warrant shall bear a restrictive legend prohibiting its transfer
or exercise in the event such transfer would diminish the number of shares
FMIC would otherwise receive pursuant to the Stock Option Agreement.
Pursuant to the Option, FMIC is entitled to receive 3,000,000 shares of
stock in Advanced, provided that the number of shares which FMIC may
receive is limited to no more than or one (1) share less than the number of
shares which, when taken together with all other transactions relevant to a
"change of control" under Section 382(g) of the IRC would trigger such a
"change in control". The legend in the Warrant is intended to prohibit a
transfer which would otherwise trigger such limitation.
Class 5 is impaired under this Plan.
c. Allowed Interests of AFIM.
Class 6: (The Allowed Interests of AFIM). Advanced is the sole
shareholder of AFIM. As a condition to the FMIC Transaction, FMIC has
insisted that the existing shareholders receive a portion of the stock in
the Reorganized Advanced under this Plan. Therefore, as this Plan
contemplates the infusion of capital in the form of stock from Advanced,
thereby altering its ownership, Advanced shall be deemed to have made a
substantial contribution to this Plan and shall be entitled to retain its
ownership interest in the Reorganized AFIM.
Class 6 is impaired under this Plan..
3. Classified Claims of Advanced
a. Allowed Secured Claims.
The Plan classifies Advanced's secured Claims into the following three (3)
Classes:
Class 7: (The Allowed Secured Claim of Bank Midwest). Class 7 consists
of the prepetition Secured Claim of Bank Midwest in the amount of
approximately $38,352.69 as of the Advanced Petition Date. The Class 7
Claim is secured by common stock in both Advanced and AFIM, having an
approximate value of $900.00.
31
The Class 7 Creditor shall receive a payment of $900.00 on the
Effective Date, or as soon thereafter as is practicable, in full
satisfaction of this Class 7 Claim. To the extent this Class 7 Creditor's
Claim is undersecured, the Allowed Undersecured Claim shall be paid in
accordance with the treatment provided for the Class 11 Creditors.
Class 7 is impaired under this Plan.
Class 8: (The Allowed Secured Claim of Citizen's National Bank). Class
8 consists of the prepetition Secured Claim of CNB in the amount of
approximately $727,691.49 as of the Advanced Petition Date. The Class 8
Claim is secured by a first mortgage on AFIM's office building in Shawnee,
Kansas, having an approximate value of $1,030,000.00. During the course of
AFIM's Proceedings the Class 8 Creditor has continued to receive its
regular monthly mortgage payments. Advanced believes the Class 8 Allowed
Secured Claim is fully secured by the collateral.
This Class 8 Claim shall be paid in full from the sale of the office
building to FMIC, which shall assume the first mortgage indebtedness. Upon
FMIC's assumption of the debt owed the Class 8 Creditor, the Class 8
Creditor shall release AFIM from any further obligation to the Class 8
Creditor. The Class 8 Claimant will retain its security interest in the
collateral pending that sale.
Class 8 is impaired under this Plan.
Class 9: (The Allowed Secured Claim of First Mortgage Investment Co.).
Class 9 consists of the Secured Claim of FMIC in the amount of
approximately $151,179.60 as of the Advanced Petition Date. The Class 9
Creditor is secured by a second mortgage in AFIM's office building, located
in Shawnee, Kansas, having a value of $1,030,000.00.
The Class 9 Creditor shall release its mortgage interest and convert
its debt to equity in Advanced.
Class 9 is impaired under the Plan.
b. Allowed Unsecured Claims Without Priority.
Class 10: (Allowed Prepetition Unsecured Guaranty Claims). Class 10
consists of the Allowed Prepetition Unsecured Guaranty Claims, with Claims
aggregating approximately $546,789.12. Each Class 10 Creditor is a member
of Class 5 and shall be treated in accordance with the treatment accorded
the Class 5 Claimants.
Class 10 is impaired under this Plan.
Class 11: (Allowed Prepetition Unsecured Claims without Priority and
Allowed Undersecured Claims). Class 11 consists of the Allowed Prepetition
Unsecured Claims without Priority and Allowed Undersecured Claims, with
Claims aggregating approximately $488,478.32,
32
of which $167,666.10 consists of an intercompany trade payable owed to
AFIM. Each Class 11 Creditor shall share with Classes 5 and 10 in a Pro
Rata distribution of 900,000 shares of common stock in the Reorganized
Advanced, resulting in an initial approximate aggregate 30% ownership
interest in Advanced. No fractional shares will be issued and the new
shares of stock issued shall be rounded to the nearest whole share. As the
value of fractional shares will be less than $0.10 (ten cents), no cash
payments will be made for fractional shares. Any shareholder who would
receive less than one half share of stock in the Reorganized Advanced will
receive nothing in this exchange.
Each Class 11 Creditor shall also be entitled to receive one Warrant
for each share of stock in the Reorganized Advanced distributed to such
Creditor. The Warrant shall be a detachable Class A Warrant, with a fixed
termination date of March 31, 2002, and may be separately transferred. Each
Class A Warrant will entitle the holder to purchase one share of common
stock in the Reorganized Advanced at a price of $1.25 at any time on or
before March 31, 2002. The Board of Directors of the Reorganized Advanced
shall have the right, at any time after the bid price of the common stock
is at least 120% of the exercise price and remains at such price for a
period of twenty (20) consecutive trading days, to call any or all of such
Warrants for redemption at a par value price of $.001 per warrant upon
thirty (30) days' written notice to the warrantholders, provided that the
bid price is at least 120% of the exercise price on the call date. Any
Warrants which are called will expire and be of no further value of not
exercised by the holders on or before the call date. The Warrants shall not
be redeemable until and unless a current registration statement is in
effect. The Reorganized Advanced may, in its sole discretion, extend the
expiration date of the Warrants and/or reduce the exercise price of the
Warrants.
Each Warrant shall bear a restrictive legend prohibiting its transfer
or exercise in the event such transfer would diminish the number of shares
FMIC would otherwise receive pursuant to the Stock Option Agreement.
Pursuant to the Option, FMIC is entitled to receive 3,000,000 shares of
stock in Advanced, provided that the number of shares which FMIC may
receive is limited to no more than or one (1) share less than the number of
shares which, when taken together with all other transactions relevant to a
"change of control" under Section 382(g) of the IRC would trigger such a
"change in control". The legend in the Warrant is intended to prohibit a
transfer which would otherwise trigger such limitation.
The number of shares each Class 11 Creditor may receive will be
determined once all Disputed Claims have been resolved and all cash
distributions to the Class 5 Creditors have been made. Advanced anticipates
that with appreciation in value of the stock, the Class 11 Creditors may
potentially receive more than payment in full of their Claims.
Class 11 is impaired under this Plan.
33
c. Allowed Interests of Advanced.
Class 12: (The Allowed Interests of Holders of Preferred Stock in
Advanced.). Class 12 consists of the Allowed Interests of the Holders of
the Preferred Stock in Advanced. There are currently approximately 363,000
shares of Series B Preferred Stock outstanding, held by approximately 19
shareholders. As a condition to the FMIC Transaction, FMIC has insisted
that the existing shareholders receive a portion of the stock in the
Reorganized Advanced under this Plan. Therefore, the Class 12 Creditors
shall be deemed to have converted their preferred stock interests in
Advanced to a like number of shares of common stock interests in Advanced.
Each Class 12 Creditor shall receive a Pro Rata distribution with Class 13
in the form of common stock in the Reorganized Advanced, resulting in an
approximate aggregate 10% ownership interest in Advanced.
Class 12 is impaired under this Plan..
Class 13: (The Allowed Interests of Holders of Common Stock in
Advanced.). Class 13 consists of the Allowed Interests of the Holders of
the Preferred and Common Stock in Advanced. There are currently
approximately 5,836,476 shares of Common Stock outstanding, held by
approximately 187 shareholders. As a condition to the FMIC Transaction,
FMIC has insisted that the existing shareholders receive a portion of the
stock in the Reorganized Advanced under this Plan. Therefore, with the
exception of the common stock interest held by William B. Morris, the Class
13 Creditors shall, with the Class 12 Creditors, receive its Pro Rata share
of 300,000 shares of common stock in the Reorganized Advanced, resulting in
an approximate aggregate 10% ownership interest in Advanced. William B.
Morris shall relinquish and release any and all stock interests, excepting
any shares held by or in retirement plans, in consideration for the options
described in section I.M.., supra.
The Debtors anticipate that there will be 5,693,913 shares of common
stock outstanding after conversion of the preferred stock held by the Class
12 Creditors and the release of the stock held by William Morris. This
will, in turn, convert to approximately 0.05269 shares of common stock in
the Reorganized Advanced. No fractional shares will be issued and the new
shares of stock issued shall be rounded to the nearest whole share. As the
value of fractional shares will be less than $0.10 (ten cents), no cash
payments will be made for fractional shares. Any shareholder who would
receive less than one half share of stock in the Reorganized Advanced will
receive nothing in this exchange.
Class 13 is impaired under this Plan.
Attached hereto as Exhibit "D" is a Claims Analysis, setting forth the
Claims of Creditors by Class and in the amounts on which payments pursuant to
the Plan have been calculated.
34
D. Means of Execution of the Plan
Consummation of the Plan will require approximately three steps:
Step One: AFIM must complete its audits and bring its SEC filings
current before FMIC will complete the FMIC Transaction. The
completion of the audits are also necessary to determine the
final amount of the NOL. Therefore, AFIM shall retain the
following professionals whose services are necessary to
consummate the FMIC Transaction:
1. A securities attorney to assist with the necessary
filings required by the Securities and Exchange Commission
(SEC). The retention of this counsel has already been
approved by the Court.
2. The accounting firm of Grant Thornton to complete the
March 31, 1997, and March 31, 1998, audited financial
statements and tax returns. Retention of Grant Thornton
shall occur following confirmation of the Plan.
Step Two: Upon approval of the Plan FMIC will purchase the office
building from AFIM and convert its second mortgage into
stock of Advanced. This will provide an additional
$150,000.00 of cash, which will be distributed to the
administrative Claimants and Creditors of AFIM.
Step Three: Upon approval of the Plan FMIC, AFIM and Advanced will
proceed toward consummation of the FMIC Transaction and
issuance of the common stock in Advanced to FMIC and the
unsecured Creditors.
The particulars of the foregoing are set forth in the Plan.
E. Modification of the Plan
The Debtors may propose amendments or modifications to the Plan at any time
prior to the Confirmation Date with leave of the Bankruptcy Court. After the
Confirmation Date, parties-in-interest, including the Debtors, may, with
Bankruptcy Court approval and so long as it does not materially or adversely
affect the interest of Creditors, remedy any defect or omission or reconcile any
inconsistencies in the Plan or in the Confirmation Order, in such manner as may
be necessary to carry out the purposes and intent of the Plan.
F. Amendment of Claims After Bar Date
Claimants shall not be permitted to amend or otherwise modify any Claim
after the Bar Date without leave of the Bankruptcy Court, unless the Claimant
has specifically reserved a right to amend its Claim.
This First Amended Joint Disclosure Statement, dated the 29th day of July,
1998, is hereby approved by the undersigned.
35
AFI MORTGAGE, CORP. ADVANCED FINANCIAL, INC.
/s/ William B, Morris /s/ William B, Morris
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BY: William B. Morris, Vice President BY: William B. Morris, Vice President
Case No. 97-43122-11-JAP Case No. 97-41228-11-JAP
SUBMITTED BY:
EVANS & MULLINIX, P.A.
/s/ Joanne B. Stutz
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Thomas M. Mullinix KS #7309
Joanne B. Stutz KS #12365; MO #30810
Evans and Mullinix, P.A.
15301 W. 87th Street Pkwy., Ste. 220
Lenexa, KS 66219-1428
913-541-1200; 913-541-1010 (Fax)
ATTORNEYS FOR AFI MORTGAGE, CORP. and
ADVANCED FINANCIAL, INC.
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EXHIBITS
Exhibit A: Summary of AFI Mortgage, Corp. Income Statements From 11/7/97 to
6/30/98*
Exhibit B: Liquidation Analysis*
Exhibit C: Proposed Acquisition Agreement and Stock Option Agreement with
FMIC**
Exhibit D: Claims Analysis*
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*Pursuant to Item 601(b)(2) of Regulation S-K under the Securities Act of 1933,
as amended, these exhibits have been omitted from this filing. The registrant
agrees to furnish supplementally a copy of such omitted exhibits to the
Commission upon request.
**This exhibit is being filed as Exhibit 2.3 to the Form 8-K.