IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICTOF KANSAS
TOPEKA DIVISION
IN RE )
)
ADVANCED FINANCIAL, INC. ) Case No. 98-41228-11-JAP
) Chapter 11
Debtors. )
_______________________________)
_______________________________)
)
IN RE: )
)
AFI MORTGAGE CORP. ) Case No. 97-43122-11-JAP
) Chapter 11
Debtors. )
_______________________________)
ORDER APPROVING AMENDED MOTION FOR
AUTHORIZATION TO ENTER INTO AGREEMENT OF REORGANIZATION
ON this ___ day of February, 1999, comes on for consideration the Debtors'
Amended Motion requesting authorization for Advanced Financial, Inc.
("Advanced") to enter into an Agreement of Reorganization with Cannon Financial
Corporation ("Cannon"). The issues having been duly considered by the Court and
a decision having been reached without trial or hearing, the Court finds as
follows:
1. On the 22nd day of January, 1999, the Debtors filed a Motion for
Authorization to Enter into Agreement of Reorganization, wherein the Debtors
requested this Court's approval of Advanced's decision to enter into an
Agreement of Reorganization with Cannon Financial Company ("Cannon") and its
shareholders. An Amended Motion was filed on the 9th day of February, 1999, also
requesting this Court's approval of Advanced's decision to enter into an
Agreement of Reorganization with Cannon Financial Company ("Cannon") and its
shareholders upon terms which were slightly different from those set forth in
the original Motion.
2. As stated in the Amended Motion, Cannon is a Kansas
corporation formed in August, 1998, to purchase a collection
business from Berman, DeLeve, Kuchan and Chapman, L.C. Cannon
now collects accounts receivable for business clients and
recently started to purchase and collect, for its own account,
receivables consisting primarily of credit card debt. Cannon
intends to focus its future efforts in this latter area.
3. The basic terms of the Agreement of Reorganization Among
Cannon Financial Company, Advanced Financial, Inc. and Sequoia
Company, Piper Jaffrey, Inc. (as custodian for the benefit of
Terrence P. Dunn), JMO Group, Mark P. Offill (trustee of the Jean
Offill Grandchildren's Irrevocable Trust), David W. Offill, Larry
Davis and Constance Davis (collectively, "Shareholders"),
Terrence P. Dunn (Dunn) and Mark P Offill (Offill) ("The Cannon
Agreement"), are as follows.
a. Advanced shall acquire from the Shareholders, all issued and
outstanding stock of Cannon pursuant to what is proposed to be a
non-taxable reorganization under ss. 368(a)(1)(B) of the Internal Revenue
Code of 1986, as amended.
b. The Shareholders shall transfer to Advanced one hundred
percent (100%) of the outstanding shares of stock in Cannon
in exchange for Advanced's transfer to them of up to 1.5
million shares of authorized but unissued stock, valued for
the purposes of this transaction at $823,000.00, based on
the fairness opinion discussed in paragraph 5, below.
However, the shares of Advanced's stock shall be placed into
an escrow account until Cannon has provided an audited
balance sheet as of the closing date. Said balance sheet is
to be provided within sixty (60) days of closing and the net
book value shown on that audited balance sheet shall be
determinative of the ultimate number of shares to be
transferred by Advanced to the Shareholders. If Cannon's
net book value is greater than or equal to $500,000.00 but
less than or equal to $600,000.00, the Shareholders shall
return to Advanced two (2) shares of Advanced stock for each
$1.00 of equity less than $600,000.00. If the net book
value is less than $500,000.00, the Shareholders must,
within ten (10) business days, contribute sufficient assets
to increase the net book value to $500,000.00. If the
Shareholders fail to contribute such assets, they shall be
required to return three (3) shares for each fifty cents
($.50) of net book value less than $500,000.00. In addition
the indemnity clause contained in the Cannon Agreement and
incorporated by reference into the Escrow Agreement provides
for the potential disgorgement of shares issued to the
Shareholders.
c. The Shareholders have acknowledged that the Advanced stock shall be
used for investment purposes and not for future distribution or resale.
Such shares of stock
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shall contain restrictions on transfer and, for three (3) years subsequent
to the closing date, the Shareholders, Dunn and Offill are prohibited from
acquiring additional stock in Advanced if such acquisition would cause a
change of control under the IRS regulations.
d. The Shareholders, Dunn and Offill shall also provide to Advanced a
covenant not to compete for a three-year period during which the
Shareholders shall not solicit either customers or employees of Cannon's
business. The Shareholders shall also be prohibited from engaging in
similar business within a 150 mile radius of the greater Kansas City
metropolitan area.
e. The parties have utilized Kenneth H. Koger as consultant, broker
or finder. As compensation for his services, Mr. Koger shall receive,
pursuant to a Stock Option Agreement, an option to purchase 50,000 shares
of stock in Advanced at fifty cents ($.50) per share. The option, which is
immediately exercisable, shall expire in ten (10) years.
f. Sequoia Company, a current shareholder in Cannon, shall
enter into a Consulting Agreement for a term of five (5)
years to provide advice and consultation as required by the
company. Sequoia has designated Lee H. Greif as its sole
employee to perform these services. Sequoia shall provide a
covenant not to compete for a two (2) year period
encompassing a fifty (50) mile radius of the greater Kansas
City metropolitan area. In exchange for these services
Sequoia shall receive compensation of $11,500.00 per month,
beginning March 1, 1999, plus monthly bonuses, commencing in
the year 2001, calculated on the previous year's net income
after depreciation, interest and taxes. In the event Mr.
Greif is unable or unwilling to perform the services
required pursuant to the Consulting Agreement, the
Consulting Agreement will terminate.
g. The Cannon Agreement is also subject to additional contingencies.
Any party desiring further information regarding these contingencies are
urged to review the Cannon Agreement and related documents.
Copies of the Cannon Agreement, Escrow Agreement, Stock Option Agreement,
Consulting Agreement and Designated Employee Agreement, in substantially the
forms to be executed prior to the closing date, are attached to the Court's copy
of this Amended Motion as Exhibits A through E.
4. The agreement between Advanced and FMIC, defined as the FMIC Transaction
in the Debtors' Joint Plan,shall be amended as follows:
a. FMIC shall enter into a loan agreement with Advanced, whereby
Advanced shall be provided a $875,000.00 line of credit for a five
year term. Interest shall accrue on the outstanding draws at the fixed
rate of 7% per annum and Advanced shall be required to pay interest only
on a quarterly basis. The principal balance shall be due and payable at
the expiration of the five (5) year term. Advanced shall be required to
draw
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against the line of credit on the following schedule: $250,000.00 shall be
drawn upon execution of the Note; beginning one (1) month after execution
of the Note and continuing no more often than monthly thereafter, Advanced
shall be required to draw an additional $100,000.00 per month until the
entire line has been extended.
5. The parties to the Cannon Agreement have obtained an opinion letter from
David L. Cochran, of Cochran, Head and Company, P.C., determining the value of
Cannon for purposes of this transaction to be $823,000.00.
6. The Debtors believe the Cannon Agreement shall create value in Advanced
for the benefit of Advanced's shareholders and the creditors of AFI, who shall
receive shares of stock in Advanced pursuant to the Debtors' Joint Plan of
Reorganization.
7. On the 5th day of February, 1999, due and proper Notice of Objection
Deadline was provided to all necessary parties, providing that objections, if
any, to the Amended Motion were due by February 12, 1999. No objections have
been filed as of February 16, 1999, and therefore, entry of this Order without a
hearing is proper.
IT IS THEREFORE ORDERED, ADJUDGED AND DECREED that the Debtors are
authorized to enter into the Agreement of Reorganization with Cannon Financial
Corporation, upon the terms set forth herein. It is further
ORDERED that the Debtors are authorized to amend the FMIC Transaction upon
the terms set forth herein.
It is so Ordered.
____________________________________
Hon. James A. Pusateri
United States Bankruptcy Judge
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Submitted by:
Evans & Mullinix, P.A.
- ----------------------------------
Joanne B. Stutz, Ks #12365; Mo #30810
15301 W. 87th Street Parkway, Suite 220
Lenexa, Ks 66219-1428
(913) 541-1200; (913) 541-1010 (FAX)
ATTORNEYS FOR DEBTORS