-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, E0H68SAs6AUWfB96TkhpG/sYMT7+d9gp3pb9GdFwBzHw9IkH3BDctCnRvGTwNY6y OXIBjPb2vYBhHE0ghGZXQg== 0001014108-99-000063.txt : 19990305 0001014108-99-000063.hdr.sgml : 19990305 ACCESSION NUMBER: 0001014108-99-000063 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19990217 ITEM INFORMATION: ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19990304 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADVANCED FINANCIAL INC CENTRAL INDEX KEY: 0000823314 STANDARD INDUSTRIAL CLASSIFICATION: FINANCE SERVICES [6199] IRS NUMBER: 841069416 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 001-11838 FILM NUMBER: 99557131 BUSINESS ADDRESS: STREET 1: 5425 MARTINDALE CITY: SHAWNEE STATE: KS ZIP: 66218 BUSINESS PHONE: 9134412466 MAIL ADDRESS: STREET 1: 5425 MARTINDALE CITY: SHAWNEE STATE: KS ZIP: 66218 FORMER COMPANY: FORMER CONFORMED NAME: ADVANCED MEDICAL DYNAMICS INC DATE OF NAME CHANGE: 19910617 FORMER COMPANY: FORMER CONFORMED NAME: WEINCOR FINANCIAL CORP DATE OF NAME CHANGE: 19890406 8-K 1 FORM 8-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of Earliest Event Reported): February 17, 1999 (Cannon Closing and Bankruptcy Order) ADVANCED FINANCIAL, INC. ------------------------ (Exact Name of Registrant as Specified in Its Charter) Delaware 0-19485 84-1069416 -------------- ---------------- --------------- (State of Incorporation) Commission File Number) (IRS Employer Identification Number) 911 Main, Kansas City, MO 64105 ------------------------------------------------------ (Address of Principal Executive Offices) (Zip Code) (816) 842-0700 ---------------------------------------------------- (Registrant's Telephone Number, Including Area Code) 5425 Martindale, Shawnee, KS 66218 ---------------------------------------------------- (Former name or former address, if changed since last report) Item 2. Acquisitions and Dispositions (a) On February 19, 1999 (the "Closing Date"), pursuant to the Agreement of Reorganization dated February 5, 1999 ("Cannon Reorganization Agreement") among Cannon Financial Company ("Cannon"), Advanced Financial, Inc. (the "Registrant"), Terrence P. Dunn ("Dunn") and Mark P Offill ("Offill") and Sequoia Company, Piper Jaffrey, Inc. (as custodian for the benefit of Terrence P. Dunn), JMO Group LLC, Mark P. Offill (trustee of the Jean Offill Grandchildren's Irrevocable Trust), David W. Offill, Larry Davis and Constance Davis (collectively, the "Shareholders") and as amended by the Amendment to Agreement of Reorganization dated February 18, 1999 ("Amendment") among Cannon, the Registrant, Dunn, Offill and the Shareholders, the Registrant acquired Cannon, as a wholly-owned subsidiary, by acquiring from the Shareholders all issued and outstanding stock of Cannon in exchange for up to 1.5 million shares of the Registrant's common stock, $.001 par value ("Common Stock"). Cannon is engaged in the business of collecting non-performing receivables on behalf of third parties and collecting non-performing credit card receivables that it acquires for its own account. In accordance with the Escrow Agreement dated February 18, 1999 (the "Escrow Agreement") by and among Evans & Mullinix, P.A and the Shareholders, the 1.5 million shares of Common Stock have been placed in an escrow account and will be released as set forth below upon the Registrant's receipt of Cannon's audited balance sheet dated as of January 31, 1999 and income statement for the period ended January 31, 1999, due within 60 days after the Closing Date. The shares of Common Stock will be distributed from the escrow as follows: (i) If Cannon's January 31, 1999 audited balance sheet reports a net book value, which is greater than or equal to $500,000.00 but less than $600,000.00, the escrow agent shall return to the Registrant two (2) shares of Common Stock for each $1.00 by which such net book value is less than $600,000.00, and the remaining shares of Common Stock shall be released to the Shareholders. (ii) If Cannon's January 31, 1999 audited balance sheet reports a net book value, which is less than $500,000.00, the Registrant shall receive that number of shares determined under (i) above. In addition, the Shareholders must, within ten (10) business days, contribute sufficient assets to increase the net book value to $500,000.00. If the Shareholders fail to contribute such assets, the escrow agent shall also return to the Registrant three shares (3) for each fifty cents ($.50) by which such net book value is less than $500,000.00. The remaining shares of Common Stock shall be released to the Shareholders. (iii) If Cannon's January 31, 1999 audited balance sheet reports a net book value, which is equal to or greater than $600,000.00, the Shareholders shall be entitled to receive the entire 1.5 million shares of Common Stock released from escrow. The Cannon stock acquired by the Registrant was valued at $823,000.00, based on the fairness opinion issued by David L. Cochran, of Cochran, Head and Company, P.C., and described in the Order Approving Amended Motion for Authorization to Enter into Agreement of Reorganization dated February 17, 1999 (the "Cannon Order") set forth as Exhibit 99.2 of this Form 8-K. The parties intend that the transaction qualify as a non-taxable reorganization under ss. 368(a)(1)(B) of the Internal Revenue Code of 1986, as amended. 2 Pursuant to a Consulting Agreement dated February 18, 1999 ("Consulting Agreement"), the Registrant also entered into a 5 year consulting agreement with Sequoia Company to commence on March 1, 1999 and end on February 28, 2004. The Consulting Agreement requires Sequoia Company to provide advice regarding the broad aspects of profit-making opportunities related to the general credit collection business, including identifying various companies involved in the credit collection business and other opportunities involving or similar to the credit collection business which Registrant may acquire, identifying and evaluating the location of possible acquisition of books or groups of non-performing credit card debt, and finding and negotiating agreements with third parties to provide services to those third parties in connection with the collection of non-performing debt accounts. The Consulting Agreement is attached as Exhibit 10.1 to this Form 8-K. Pursuant to a Designated Employee Agreement dated February 18, 1999 (the "Designated Employee Agreement"), Sequoia Company entered into an employment agreement with Lee Greif, husband of Amy Greif, designating Mr. Greif as the only employee of Sequoia Company to provide consulting services to the Registrant under the Consulting Agreement. As reported on Schedule 13G filed with the Securities and Exchange Commission on March 1, 1999, Amy Greif is the beneficial owner of more than 5% of the Common Stock of the Registrant. Pursuant to the Stock Option Agreement dated February 19, 1999 ("Koger Stock Option Agreement") by and between the Registrant and Kenneth H. Koger ("Koger"), the Registrant granted Koger the right to acquire 50,000 shares of Common Stock at an option price of Fifty Cents ($0.50) per share as compensation for Koger's assistance with completing the Registrant's acquisition of Cannon. Koger's option expires February 19, 2009 and is exercisable at any time after February 19, 1999. The Koger Stock Option Agreement is attached as Exhibit 10.4 to this Form 8-K. The foregoing description of the Cannon Reorganization Agreement, the Amendment, the Escrow Agreement, the Consulting Agreement, the Designated Employee Agreement and the Koger Stock Option Agreement are summaries of certain of the provisions of these agreements and reference is made to copies of these agreements which are attached hereto as Exhibit 2.3, 2.4, 10.1, 10.2, 10.3 and 10.4 and are incorporated herein by reference for all of their terms and conditions. Item 3. Bankruptcy or Receivership (b) Order Confirming Plan of Reorganization (1) - (2) On February 17, 1999, the United States Bankruptcy Court for the District of Kansas ("Bankruptcy Court") entered an Order Approving Amended Motion for Authorization to Enter into Agreement of Reorganization ("Cannon Order"). (3) In summary, the Cannon Order authorized the Registrant to enter into the Cannon Reorganization Agreement, as amended by the Amendment. A summary of the Cannon Reorganization Agreement is contained in paragraph 3 of the Cannon Order filed as Exhibit 99.2 to this Form 8-K. The Cannon Order also amended the Acquisition Agreement (the "Amended Acquisition Agreement") entered into between the Registrant and First Mortgage Investment Co. ("FMIC") pursuant to the First Amended Joint Plan of Reorganization dated July 29, 1998 of the Registrant 3 and its wholly-owned subsidiary, AFI Mortgage, Corp. (the "Plan"). Pursuant to the Amended Acquisition Agreement, FMIC granted a line of credit in the amount of $875,000 to the Registrant and the Registrant agreed to draw upon the line of credit in accordance with the schedule set forth in the Cannon Order. A summary of the terms of the line of credit is contained in paragraph 4(a) of the Cannon Order filed as Exhibit 99.2 to this Form 8-K. (4)-(5) See Item 3(b)(4) and (5) of the Current Report on Form 8-K filed by the Registrant with the Securities and Exchange Commission on November 25, 1998. Certain statements contained in this Current Report on Form 8-K which are not statements of historical fact constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, including, without limitation, any statements specifically identified as forward-looking statements in this Form 8-K. Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, income or loss, earnings or loss per share, capital expenditures, the payment or non-payment of dividends, capital structure and other financial items, (ii) statements of plans and objectives of the Registrant and its subsidiary (collectively the "Company") or its management or Board of Directors, including plans or objectives relating to the products or services of the Company, (iii) statements of future economic performance, and (iv) statements of assumptions underlying the statements described in (i), (ii) and (iii). Forward-looking statements made by or on behalf of the Registrant involve risks and uncertainties which may cause actual results to differ materially from those in such statements. Some important factors that could cause the actual results to differ materially from those discussed in the forward-looking statements include, but are not limited to: the ability of the Company to satisfy all of the conditions necessary to successfully implement the Plan; whether FMIC exercises its option to acquire shares of new Common Stock of the Reorganized Registrant; the ability of the Company to acquire other ongoing businesses on reasonable terms; the ability of the Company to successfully integrate and operate Cannon and any acquired business; and general international and domestic economic conditions. Other factors not identified herein could also have such an effect. Item 7. Financial Statements and Exhibits (a) Financial Statements of Businesses Acquired The financial statements required to be filed pursuant to this Item 7(a) for the acquisition of all of the outstanding stock of Cannon are not included with this Current Report on Form 8-K and will be filed by amendment to this Form 8-K not later than 60 days after March 4, 1999. (b) Pro Forma Financial Statements The pro forma financial statements required to be filed pursuant to this Item 7(b) for the acquisition of all of the outstanding stock of Cannon are not included with this Current Report on Form 8-K and will be filed by amendment to this Form 8-K not later than 60 days after March 4, 1999. 4 (c) Exhibits *2.1 First Amended Joint Plan of Reorganization of AFI Mortgage, Corp. and Advanced Financial, Inc. dated July 29, 1998 (Exhibit 2.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on November 25, 1998). *2.2 First Amended Joint Disclosure Statement of AFI Mortgage, Corp and Advanced Financial, Inc. dated July 29, 1998 (Exhibit 2.2 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on November 25, 1998). 2.3 Agreement of Reorganization dated February 5, 1999 among Cannon Financial Company, Advanced Financial, Inc., Terrence P. Dunn and Mark P Offill and Sequoia Company, Piper Jaffrey, Inc. (as custodian for the benefit of Terrence P. Dunn), JMO Group LLC, Mark P. Offill (trustee of the Jean Offill Grandchildren's Irrevocable Trust), David W. Offill, Larry Davis and Constance Davis. 2.4 Amendment to Agreement of Reorganization dated February 18, 1999 among Cannon Financial Company, Advanced Financial, Inc., Terrence P. Dunn and Mark P Offill and Sequoia Company, Piper Jaffrey, Inc. (as custodian for the benefit of Terrence P. Dunn, JMO Group LLC, Mark P. Offill (trustee of the Jean Offill Grandchildren's Irrevocable Trust), David W. Offill, Larry Davis and Constance Davis. 10.1 Consulting Agreement dated February 18, 1999, by and between Cannon Financial Company, a Kansas corporation, and Sequoia Company, a Kansas corporation. 10.2 Escrow Agreement dated February 18, 1999 by and among Evans & Mullinix, P.A., Sequoia Company, Piper Jaffray, Inc., custodian for the benefit of Terrence P. Dunn, JMO Group LLC, Mark P. Offill, Trustee of the Jean Offill Grandchildren's Irrevocable Trust, David W. Offill, Larry Davis, Constance Davis and Advanced Financial, Inc. 10.3 Designated Employee Agreement dated February 18, 1999 by and between Sequoia Company and Lee Greif. 10.4 Stock Option Agreement dated February 19, 1999 by and between Advanced Financial, Inc. and Kenneth Koger. *99.1 Bankruptcy Court Order dated November 13, 1998 Confirming First Amended Joint Plan of Reorganization Under Chapter 11 of the United States Bankruptcy Code (Exhibit 99.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on November 25, 1998). 99.2 Bankruptcy Court Order dated February 17, 1999 Approving Amended Motion for Authorization to Enter into Agreement of Reorganization. 5 99.3 Press Release of Advanced Financial, Inc. dated February 22, 1999 Regarding Acquisition of Cannon Financial Company. 99.4 Press Release of Advanced Financial, Inc. dated February 22, 1999 Regarding $875,000 Line of Credit. * Incorporated by reference as indicated. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report as amended to be signed on its behalf by the undersigned hereunto duly authorized. ADVANCED FINANCIAL, INC. (registrant) /s/ William B. Morris William B. Morris Chairman of the Board, Senior Vice-President and Secretary Date: March 4, 1999 6 EXHIBIT INDEX Assigned Exhibit Number and Description of Exhibit *2.1 First Amended Joint Plan of Reorganization of AFI Mortgage, Corp. and Advanced Financial, Inc. dated July 29, 1998 (Exhibit 2.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission (the "SEC") on November 25, 1998). *2.2 First Amended Joint Disclosure Statement of AFI Mortgage, Corp and Advanced Financial, Inc. dated July 29, 1998 (Exhibit 2.2 to the Current Report on Form 8-K filed with the SEC on November 25, 1998). 2.3 Agreement of Reorganization dated February 5, 1999 among Cannon Financial Company, Advanced Financial, Inc., Terrence P. Dunn and Mark P Offill and Sequoia Company, Piper Jaffrey, Inc. (as custodian for the benefit of Terrence P. Dunn), JMO Group LLC, Mark P. Offill (trustee of the Jean Offill Grandchildren's Irrevocable Trust), David W. Offill, Larry Davis and Constance Davis. 2.4 Amendment to Agreement of Reorganization dated February 18, 1999 among Cannon Financial Company, Advanced Financial, Inc., Terrence P. Dunn and Mark P Offill and Sequoia Company, Piper Jaffrey, Inc. (as custodian for the benefit of Terrence P. Dunn, JMO Group LLC, Mark P. Offill (trustee of the Jean Offill Grandchildren's Irrevocable Trust), David W. Offill, Larry Davis and Constance Davis. 10.1 Consulting Agreement dated February 18, 1999, by and between Cannon Financial Company and Sequoia Company 10.2 Escrow Agreement dated February 18, 1999 by and among Evans & Mullinix, P.A., Sequoia Company, Piper Jaffray, Inc., custodian for the benefit of Terrence P. Dunn, JMO Group LLC, Mark P. Offill, Trustee of the Jean Offill Grandchildren's Irrevocable Trust, David W. Offill, Larry Davis, Constance Davis and Advanced Financial, Inc. 10.5 Designated Employee Agreement dated February 18, 1999 by and between Sequoia Company and Lee Greif. 10.6 Stock Option Agreement dated February 19, 1999 by and between Advanced Financial, Inc. and Kenneth Koger. *99.1 Bankruptcy Court Order dated November 13, 1998 Confirming First Amended Joint Plan of Reorganization Under Chapter 11 of the United States Bankruptcy Code (Exhibit 99.1 to the Current Report on Form 8-K filed with the SEC on November 25, 1998). 99.2 Bankruptcy Court Order dated February 17, 1999 Approving Amended Motion for Authorization to Enter into Agreement of Reorganization. 7 99.3 Press Release of Advanced Financial, Inc. dated February 22, 1999 Regarding Acquisition of Cannon Financial Company. 99.4 Press Release of Advanced Financial, Inc. dated February 22, 1999 Regarding $875,000 Line of Credit. * Incorporated by reference as indicated. 8 EX-2.3 2 AGREEMENT OF REORGANIZATION AGREEMENT OF REORGANIZATION AMONG CANNON FINANCIAL COMPANY, a Kansas corporation ("Corporation"), ADVANCED FINANCIAL, INC., a Delaware corporation ("AFI"), SEQUOIA COMPANY, PIPER JAFFRAY, 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 and MARK P. OFFILL February 5, 1999 TABLE OF CONTENTS ----------------- Page ---- ARTICLE I. REORGANIZATION.....................................................1 - -------------------------- 1.01 Purchase and Sale of the Shares......................................1 1.02 Purchase Price.......................................................2 1.03 Adjustments to Purchase Price for Shareholders.......................2 ARTICLE II. REPRESENTATIONS AND WARRANTIES OF SHAREHOLDER.....................4 - ---------------------------------------------------------- 2.01 Corporate Organization, etc..........................................4 2.02 Capital Stock; Options...............................................4 2.03 Subsidiaries and Affiliates..........................................4 2.04 Authorization, etc...................................................5 2.05 No Violation.........................................................5 2.06 Governmental Authorities.............................................5 2.07 Financial Statements.................................................5 2.08 No Undisclosed Liabilities, Claims, etc..............................5 2.09 Absence of Certain Changes...........................................6 2.10 Contracts............................................................6 2.11 True and Complete Copies.............................................6 2.12 Title and Related Matters............................................7 (a) Real Property......................................................7 (b) Personal Property.................................................10 (c) Machinery, Equipment, Parts, Furniture, Tools, Vehicles and Other Tangible Assets.........................................10 (d) No Disposition of Assets..........................................10 2.13 Litigation..........................................................10 2.14 Tax Matters.........................................................11 2.15 Government Contracts................................................13 2.16 Compliance with Law.................................................13 2.17 Absence of Certain Business Practices...............................13 2.18 ERISA and Related Employee Benefit Matters..........................14 (a) Welfare Benefit Plans.............................................14 (b) Pension Benefit Plans.............................................14 (c) Compliance with Applicable Law....................................15 (d) Administration of Plans...........................................15 (e) Title IV Plans....................................................15 (f) Other Employee Benefit Plans and Agreements.......................16 (g) Copies of Plans...................................................16 (h) Continuation Coverage Requirements for Health Plans...............16 (i) Valid Obligations.................................................16 (j) COBRA.............................................................16 (k) Health Insurance..................................................17 2.19 Intellectual Property...............................................17 2.20 Customers...........................................................17 2.21 Labor Relations.....................................................18 2.22 Insurance...........................................................18 2.23 Environmental.......................................................18 2.24 Bank Accounts.......................................................20 2.25 Compensation........................................................20 2.26 Commitments.........................................................20 2.27 Other Employee Matters..............................................21 i 2.28 WARN................................................................21 2.29 Overtime, Back Wages, Vacation and Minimum Wages....................21 2.30 ADA.................................................................22 2.31 Permits.............................................................22 2.32 Shareholders'Acquisition of AFI's Stock.............................22 2.33 Disclosure..........................................................23 2.34 Survival............................................................23 2.35 Public Announcements................................................23 2.36 Make-up of Shareholder Group........................................23 ARTICLE III. REPRESENTATIONS AND WARRANTIES OF AFI...........................24 - --------------------------------------------------- 3.01 Corporate Organization, etc.........................................24 3.02 Authorization, etc..................................................24 3.03 No Violation........................................................24 3.04 Governmental Authorities............................................24 3.05 Insurance...........................................................24 3.06 AFI's Plan of Reorganization........................................25 3.07 Unregistered Stock..................................................25 3.08 Capital Stock; Options..............................................25 3.09 Subsidiaries and Affiliates.........................................25 3.10 Financial Statements................................................25 3.11 No Undisclosed Liabilities, Claims, etc.............................25 3.12 Absence of Certain Changes..........................................25 3.13 Litigation..........................................................26 3.14 Tax Matters.........................................................26 3.15 Compliance with Law.................................................28 3.16 Tax Loss Carry Forward..............................................29 3.17 Disclosure..........................................................29 3.18 Survival............................................................29 ARTICLE IV. COVENANTS OF SHAREHOLDER.........................................29 - ------------------------------------- 4.01 Amendments..........................................................29 4.02 Capital Changes.....................................................29 4.03 Dividends; Bonuses..................................................29 4.04 Capital and Other Expenditures......................................29 4.05 Borrowing...........................................................30 4.06 Other Commitments...................................................30 4.07 Full Access and Disclosure..........................................30 4.08 Consents............................................................30 4.09 Breach of Agreement................................................30 4.10 Fulfillment of Conditions...........................................30 4.11 Regular Course of Business..........................................30 4.12 Conversion of Long-term Debt to Equity..............................31 ARTICLE V. COVENANTS OF AFI..................................................31 - ---------------------------- 5.01 Books and Records...................................................31 5.02 Fulfillment of Conditions...........................................31 5.03 Piggyback Registration Rights.......................................31 ARTICLE VI. COVENANT NOT TO COMPETE..........................................32 - ------------------------------------ ARTICLE VII. OTHER AGREEMENTS................................................33 - ------------------------------ ii 7.01 Consultants, Brokers and Finders....................................33 7.02 Consulting Agreement................................................34 7.03 Taxes...............................................................34 7.04 Anti-dilution.......................................................35 7.05 Future Purchase of Shares...........................................35 ARTICLE VIII. CONDITIONS TO THE OBLIGATIONS OF AFI...........................35 - --------------------------------------------------- 8.01 Representations and Warranties; Performance.........................35 8.02 Fairness Opinion....................................................36 8.03 Consents and Approvals..............................................36 8.04 Opinion of Counsel to Corporation and/or Shareholder................36 8.05 No Proceeding or Litigation.........................................36 8.06 Review..............................................................36 8.07 Other Agreements....................................................36 8.08 Board of Director Approvals.........................................36 8.09 Stock...............................................................36 8.10 Adverse Change......................................................37 8.11 Computer Leases.....................................................37 8.12 Execution of Escrow Agreement.......................................37 8.13 Termination of Existing Consulting Agreements.......................37 8.14 Resignation of Existing Officers and Directors......................37 8.15 FMIC Line of Credit.................................................37 8.16 Bankruptcy Court Approval...........................................37 8.17 Koger Agreement.....................................................37 8.18 SEC Filings.........................................................38 8.19 FMIC Transaction....................................................38 8.20 Greif Disclosure....................................................38 ARTICLE IX. CONDITIONS TO THE OBLIGATIONS OF SHAREHOLDER.....................38 - --------------------------------------------------------- 9.01 Representations and Warranties; Performance.........................38 9.02 No Proceeding or Litigation.........................................38 9.03 Payment.............................................................38 9.04 Other Documents.....................................................38 9.05 Other Agreements....................................................38 9.06 Execution of Escrow Agreement.......................................39 9.07 Computer Leases.....................................................39 9.08 Koger Agreement.....................................................39 9.09 SEC Filings.........................................................39 9.10 FMIC Transaction....................................................39 9.11 Greif Disclosure....................................................39 9.12 FMIC Line of Credit.................................................39 ARTICLE X. CLOSING...........................................................39 - ------------------- 10.01 Closing............................................................39 10.02 Deliveries at Closing..............................................39 10.03 Legal Actions......................................................40 10.04 Specific Performance...............................................40 ARTICLE XI. INDEMNIFICATION..................................................41 - ---------------------------- 11.01 Indemnification by Shareholder.....................................41 11.02 Tender of Defense for Damages......................................42 11.03 Survival of Warranties.............................................42 iii ARTICLE XII. MISCELLANEOUS PROVISIONS........................................42 - -------------------------------------- 12.01 Amendment and Modification.........................................42 12.02 Waiver of Compliance; Consents.....................................42 12.03 Expenses...........................................................43 12.04 Notices............................................................43 12.05 Definitions........................................................44 12.06 Assignment.........................................................44 12.07 Governing Law......................................................44 12.08 Counterparts.......................................................44 12.09 Neutral Interpretation.............................................44 12.10 Headings...........................................................44 12.11 Release of All Claims..............................................44 12.12 Confidentiality....................................................45 12.13 Entire Agreement...................................................45 iv AGREEMENT OF REORGANIZATION --------------------------- THIS AGREEMENT ("Agreement"), dated as of the 5th day of February, 1999, is made by and among SEQUOIA COMPANY, PIPER JAFFRAY, INC., 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, and LARRY DAVIS and CONSTANCE DAVIS, husband and wife (collectively and individually the "Shareholders"), CANNON FINANCIAL COMPANY, a Kansas corporation (the "Corporation"), ADVANCED FINANCIAL, INC., a Delaware corporation ("AFI"), TERRENCE P. DUNN, individually ("Dunn"), and MARK P. OFFILL, individually ("Offill"). RECITALS -------- A. Shareholders are the owners of all the issued and outstanding stock of Corporation; and B. AFI desires to acquire all the issued and outstanding stock of Corporation from Shareholders, and Shareholders are willing to sell the same to AFI in a nontaxable reorganization pursuant to Section 368(a)(1)(B) of the Internal Revenue Code of 1986, as amended, pursuant to the terms and provisions hereinafter set forth; and C. On November 13, 1998, the United States Bankruptcy Court for the District of Kansas entered an order confirming the First Amended Joint Plan of Reorganization dated July 29, 1998 of AFI and its wholly-owned subsidiary, AFI Mortgage, Corp. ("Plan of Reorganization"). No appeal was taken by any party and the order confirming the Plan of Reorganization is final and non-appealable. NOW, THEREFORE, in consideration of the premises, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: ARTICLE I REORGANIZATION -------------- 1.01 Purchase and Sale of the Shares. At the Closing Date (as hereinafter defined) and in the manner herein provided, Shareholders shall sell, transfer and deliver all of the shares of capital stock of Corporation (hereinafter collectively called the "Shares") to AFI, and AFI shall purchase the Shares from Shareholders pursuant to a transaction that is intended to qualify as a nontaxable reorganization pursuant to Section 368(a)(1)(B) of the Internal Revenue Code of 1986, as amended. Shareholders acknowledge that AFI has not made and makes no representation or warranty to Shareholders that Shareholders' exchange of shares hereunder will actually qualify for a non-taxable treatment pursuant to Internal Revenue Code of 1986, as amended. Shareholders acknowledge that they are obtaining their own tax advice from their own representatives and will not look to AFI with respect to any of that advice, and hereby releases and agrees to forever hold AFI harmless from any claim, liability, obligation, cost or expense 1 whatsoever as a result of their desire that this transaction qualify for non-taxable treatment pursuant to the Internal Revenue Code. 1.02 Purchase Price. Subject to the terms and conditions of this Agreement and in reliance on the representations and warranties of Shareholders herein contained, and in consideration of the sale, conveyance, transfer and delivery of the Shares provided for in this Agreement, AFI agrees to pay to Shareholders at the Closing an aggregate purchase price (the "Purchase Price") as follows: (a) AFI will transfer to Shareholders the sum of One Million Five Hundred Thousand (1,500,000) shares of AFI's common voting stock having a par value of One One-thousands Cents ($0.001) per share. The Purchase Price shall be allocated among the Shareholders, on a pro rata basis, based upon each Shareholder's percentage ownership interests of the Shares as of the Closing Date, as set forth in Exhibit 2.02. The Purchase Price payable to ------------ Shareholders shall be subject to the terms and provisions contained within this Agreement. The Purchase Price payable to Shareholders and the number of shares to be issued to Shareholders may be adjusted as a result of the terms and provisions contained within Section 1.03 hereafter. 1.03 Adjustments to Purchase Price to Shareholders. (a) Shareholders hereby agree to place the shares received by them from the payment of the Purchase Price pursuant to Section 1.02 above, into escrow, with Evans & Mullinix, P.A. as the independent escrow agent, to be held pending compliance with Sections 1.03(b) and 1.03(c) hereafter and pending the completion of their indemnity obligations in Section 8 hereof. The parties agree that the escrow shall be accomplished pursuant to the escrow agreement attached hereto as Exhibit 1.03 and incorporated herein by this referenced ("Escrow Agreement"), with all expenses of the escrow agent as a result of its service to be split equally between (a) AFI and (b) Shareholders. (b) Shareholders and AFI agree to cause Corporation, at AFI's expense, by no later than sixty (60) days after the Closing Date, to prepare an audited balance sheet and income statement of Corporation as of the Closing Date ("Closing Balance Sheet") to be prepared in accordance with generally accepted accounting principles by the accounting firm of Grant Thornton and in a manner agreeable to AFI and its accountants. To the extent that the net book value on said Closing Balance Sheet ("Closing Owner's Equity") is less than Six Hundred Thousand Dollars ($600,000), but greater than or equal to Five Hundred Thousand Dollars ($500,000), Shareholders agree that for each One Dollar ($1) that Closing Owner's Equity is less than Six Hundred Thousand Dollars ($600,000) they shall disgorge two (2) Shares ("Forfeited Shares"). This adjustment in Purchase Price received as a result of the operation of Section 1.03(b) shall be accomplished by the surrender of the Forfeited Shares by Shareholders within thirty (30) days after completion of the Closing Balance Sheet. In the event that the Closing Owner's Equity does not result in a whole number, the parties agree that to the extent that the fractional portion of the Closing Owner's Equity is less than one-half (*), the Closing 2 Owner's Equity will be rounded down to the next whole number, and if the fraction is one-half (*) or greater, the Closing Owner's Equity shall be rounded up to the next whole number. The rights of the parties, pursuant to the escrow, shall be governed by the Escrow Agreement. Net book value, for purposes of the calculation of Closing Owner's Equity, shall be Corporation's total assets, less total liabilities, as of the Closing Date, with such balance sheet adjusted to reflect the conversion of Corporation's long-term debt amounting to One Hundred Seventy-five Thousand Dollars ($175,000) to equity as described in Section 4.13 herein, and further deducting as liabilities any and all expenses required to be paid by Corporation pursuant to this Agreement (except for the legal fees incurred by Corporation in connection with this transaction). (c) In the event that the Closing Owner's Equity is less than Five Hundred Thousand Dollars ($500,000), Shareholders shall have ten (10) business days from receipt of the notice of same from AFI in order to contribute assets to Corporation sufficient to, in the reasonable opinion of AFI and AFI's accountants, raise the Closing Owner's Equity to at least Five Hundred Thousand Dollars ($500,000). If Shareholders fail to contribute said assets within the ten (10) business days provided for herein, Shareholders hereby agree to disgorge, a number of shares equal to three (3) shares for each Fifty Cents ($.50) in value that the Closing Owner's Equity is less than Five Hundred Thousand Dollars ($500,000). This adjustment in Purchase Price received as a result of the operation of this Section 1.03(c) shall be accomplished by the surrender of such shares by Shareholders within thirty (30) days after the written election by AFI of this option. In the event that the Forfeited Shares result in fractional shares or after division between Shareholders result in individual fractional share amounts for any Shareholders, to the extent the fraction is less than one-half (.5), the fractional shares will be rounded down to the next whole number, and if one-half (.5) or greater, shall be rounded up to the next whole number. The disgorgement of shares as a result of the operation of this subparagraph (c) shall be governed according to the terms of the Escrow Agreement. (d) Notwithstanding anything herein contained to the contrary, if Shareholders disagree with the Closing Owner's Equity determined by the accountants retained by AFI, Shareholders shall give written notice of same to AFI within ten (10) business days of the receipt of such audit. In such event, Shareholders shall retain accountants at their own expense, and the accountants retained by Shareholders shall consult with the accountants retained by AFI. If the two accounting firms can agree on the Closing Owner's Equity, then the agreed upon determination shall control Closing Owner's Equity for purposes of the provisions of this Section 1.03. If such two accounting firms cannot agree of the value of the Closing Owner's Equity, then the two accounting firms shall mutually select a third accounting firm that shall resolve any differences. The decision of such third accounting firm as to the Closing Owner's Equity shall be determinative on the parties hereto. The expense of the third accounting firm shall be shared equally by AFI and Shareholders. (e) In the event that the Closing does not occur by February 19, 1999, without AFI or Shareholders, respectively, exercising the rights they have to cancel the Agreement prior to Closing under Articles VIII and IX of the Agreement, respectively, 3 Shareholders shall be entitled to a penalty for said failure to close equal to two thousand (2,000) shares of AFI stock for each day after February 19, 1999, that Closing fails to occur ("Penalty Shares"). However, in no event shall the payment of the Penalty Shares as discussed herein cause, after all other adjustments provided for in this Section 1.03, the total Shares received by Shareholders to exceed one million five hundred thousand (1,500,000) shares. Any Penalty Shares delivered to Shareholders as a result of this Section 1.03(e) shall be allocated proportionately to Shareholders based upon their share holdings in Corporation prior to Closing. In addition, any Penalty Shares received as a result of the operation of this Section 1.03(e) shall constitute "Shares" subject to the indemnification provisions of this Agreement and subject to the Escrow Agreement. ARTICLE II. REPRESENTATIONS AND WARRANTIES OF SHAREHOLDERS ---------------------------------------------- Shareholders, jointly and severally, and after consultation with Corporation's officers and directors, both on the date of this Agreement and as of Closing, represent and warrant to AFI and Corporation as follows: 2.01 Corporate Organization, etc. Corporate Organization, etc. Corporation is a Subchapter C corporation duly organized, validly existing and in good standing under the laws of the State of Kansas, with all requisite corporate power and authority to carry on its business as it is now being conducted and to own, operate and lease its properties and assets. Corporation is authorized to do business, and is in good standing, in the State of Missouri. The conduct of its business and its ownership or use of property do not require Corporation to be qualified or licensed to do business as a foreign corporation in any state other than the State of Missouri. Exhibit 2.01 contains complete and correct copies of Corporation's (i) articles or certificate of incorporation, as amended to the Closing Date, (ii) bylaws, as amended to the Closing Date, and (iii) minutes, current through the Closing Date. Corporation has all federal, state, local and foreign licenses, permits or other approvals required for the operation of its business as now being conducted. 2.02 Capital Stock; Options. The authorized capital stock of Corporation and the shares of capital stock issued and outstanding, of all classes, and the respective holdings of each Seller are as set forth in Exhibit 2.02 and Corporation has no treasury stock. All issued and outstanding shares of capital stock are validly issued, fully paid and nonassessable and are owned by Shareholders, free and clear of all liens, encumbrances or claims. There are no issued and outstanding options, warrants, rights, securities, contracts, commitments, understandings, profit sharing or retirement plans, or other arrangements by which Corporation is bound to issue any additional shares of its capital stock or options to purchase shares of its capital stock. 2.03 Subsidiaries and Affiliates. Except as set forth in Exhibit 2.03, Corporation has no subsidiaries, Affiliates or investments in any other entity or business operation. The term "Affiliates" means, for the purpose of this Agreement, each shareholder, director, officer and employee of Corporation, the family members of each Shareholder, Trustees of the Shareholders, and any director, officer or employee of Corporation, and any corporation, partnership or other entity in which Corporation, any Shareholder, any family member of a Shareholder or director or 4 officer of Corporation has any financial interest or is a controlling person, as that term is used in connection with the federal securities laws. 2.04 Authorization, etc. Both Corporation and Shareholders have full power and authority to enter into this Agreement and to carry out the transactions contemplated hereby. 2.05 No Violation. Except as set forth in Exhibit 2.05, neither Corporation, nor Shareholders, are subject to or obligated under any article or certificate of incorporation, bylaw, Law (as defined in Section 12.05), or any agreement or instrument, or any license, franchise or permit, which would be breached or violated by the execution, delivery and performance of this Agreement by Shareholders or Corporation. Shareholders and Corporation will comply with all applicable Laws in connection with their or its execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby. The execution, delivery and performance of this Agreement by Shareholders and Corporation does not require the consent of any third party, and neither conflicts with, results in a breach of, or constitutes a default under any applicable law, judgment, order, injunction, decree, rule, regulation, or ruling of any court or government to which either Corporation or Shareholders may be subject, nor does it conflict with, constitute grounds for termination of, result in a breach of, or constitute a default under, any agreement, instrument, license or permit to which either Corporation or Shareholders are now subject. 2.06 Governmental Authorities. Except as set forth on Exhibit 2.06, neither Shareholders nor Corporation are required to submit any notice, report or other filing with, and no consent, approval or authorization is required, by any governmental or regulatory authority in connection with Shareholders' or Corporation's execution, delivery, consummation or performance of this Agreement or the consummation of the transactions contemplated hereby. 2.07 Financial Statements. Exhibit 2.07 contains Corporation's statements of financial position as of December 31, 1998, and statements of income and retained earnings for the period ending December 31, 1998. All such statements of financial position and the notes thereto are complete and accurate, contain a listing of all assets and liabilities of Corporation and fairly present the financial position of Corporation as of the respective dates thereof, and such statements of income and retained earnings and the notes thereto fairly present the results of operations for the periods therein referred to. Other than accrued income taxes not yet due and payable, all such statements include all adjustments (all of which were normal recurring adjustments) necessary to fairly present the financial position, results of operations and changes in financial position at and for such periods. The statement of financial position and statement of income and retained earnings as of December 31, 1998, are referred to collectively as the "Balance Sheet." December 31, 1998, is referred to as the "Financial Statement Date." 2.08 No Undisclosed Liabilities, Claims, etc. Except for (a) liabilities fully reflected or reserved against in the Balance Sheet; (b) liabilities disclosed on Exhibit 2.08; and (c) regular and usual liabilities and obligations incurred in the ordinary course of business consistent with the Corporation's past practices, Corporation has no liabilities, obligations or claims (absolute, accrued, fixed or contingent, matured or unmatured, or otherwise), including liabilities, 5 obligations or claims which may become known or which arise only after the Closing and which result from actions, omissions or occurrences of Corporation prior to the Closing. 2.09 Absence of Certain Changes. Since the Financial Statement Date, except as set forth on Exhibit 2.09, there has not been (a) any damage, destruction or loss to physical property, whether covered by insurance or not, adversely affecting Corporation's properties and business; (b) any declaration, setting aside or payment of any dividend whether in cash, stock or property with respect to Corporation's capital stock, or any redemption or other acquisition of such stock by Corporation; (c) any increase in the compensation payable or to become payable by Corporation to its directors, officers, key employees, Affiliates or Shareholders, except as referenced in Section 4.03 hereafter, or any adoption of or increase in any bonus, insurance, pension or other employee benefit plan, payment or arrangement made to, for or with any such party; (d) any entry into any commitment or transaction involving borrowing or capital expenditure; (e) any termination or waiver of any rights of value to the business of Corporation, except for discounting of credit receivables in the ordinary course of business; (f) any adoption or amendment of any collective bargaining, bonus, profit sharing, compensation, stock option, pension, retirement, deferred compensation, or other plan, agreement, trust, fund or arrangement for the benefit of employees; (g) any agreement or understanding made or entered into to do any of the foregoing; or (h) any other material change in the business, properties or financial condition of the Corporation, other than those changes affecting the collection industry generally and that have occurred in the ordinary course of business. 2.10 Contracts. Exhibit 2.10 contains a schedule of, and copies of, all Contracts to which Corporation is a party. The term "Contracts" shall include, but shall not be limited to, all oral (which shall be summarized in Exhibit 2.10) and written contracts, agreements, agency agreements, loan agreements, mortgages, indentures, deeds of trust, guarantees, commitments, joint venture agreements, purchase and/or sale agreements, collective bargaining, union, consulting and/or employment contracts, leases of real or personal property, easements, advertising or marketing agreements, expense sharing agreements, suite or sign rental agreements, distribution or dealer agreements, service agreements, and license agreements (except there shall not be included agreements entered into in the ordinary course of business which do not exceed, in the case of any one agreement, an obligation of $5,000, and in the case of all agreements, an aggregate obligation of $15,000). Except as set forth on Exhibit 2.10, Corporation is not in default or alleged to be in default under any Contract nor is Corporation aware of any default by any other party to any Contract, and there exists no event, condition or occurrence which, after notice or lapse of time, or both, would constitute a default under any Contract. Except as set forth on Exhibit 2.10, all of the Contracts are in full force and effect and constitute legal, valid and binding obligations of the parties thereto in accordance with their terms, and will not be changed, modified, breached or violated by virtue of the sale of the Shares hereunder. No notice to or consent by any other party is required by virtue of the consummation of the transactions described in this Agreement. 2.11 True and Complete Copies. Copies of all agreements, contracts and documents delivered and to be delivered hereunder by Corporation or Shareholders are and will be true and complete copies of such agreements, contracts and documents. All written summaries of oral agreements will be true and complete. 6 2.12 Title and Related Matters. Except as set forth in Exhibit 2.12, Corporation has good and marketable title to all of the properties and assets, tangible and intangible, reflected in the Balance Sheet or acquired after the date thereof (except properties sold or otherwise disposed of since the date thereof in the ordinary course of business and consistent with the Corporation's past practices) free and clear of all mortgages, security interests, liens, pledges, claims, escrows, options, rights of first refusal, indentures, easements, licenses, security agreements or other agreements, arrangements, contracts, commitments, understandings, obligations, charges or encumbrances of any kind or character, except as reflected on the Balance Sheet. Corporation owns or leases, directly or indirectly, all of the assets and properties reflected in the Balance Sheet, and is a party to all licenses and other agreements, presently used or necessary to carry on the business or operations of Corporation as presently conducted. (a) Real Property (i) Corporation is not a tenant under any lease(s) of real property used by Corporation except as described on Exhibit 2.10 ("Lease(s)"). With respect to the leased real property described on Exhibit 2.10 and except as set forth on Exhibit 2.12: (A) all such Leases are in full force and effect and constitute valid and binding obligations of the respective parties thereto; (B) there have not been and there currently are not any defaults thereunder by any party thereto; (C) no event has occurred which (whether with or without notice, lapse of time or the happening or occurrence of any other event) would constitute a default thereunder entitling the lessor to terminate any such Lease; and (D) the continuation, validity and effectiveness of all such leases under the current rentals and other current terms thereof will in no way be affected by the transactions contemplated by this Agreement or, if any would be affected, Shareholders shall use all necessary means at their disposal to cause an appropriate consent to such transactions to be delivered to AFI prior to the Closing Date at no cost or other adverse consequences to Corporation ((A) through (D) are hereinafter collectively referred to as "Lease Restrictions"). (ii) The real property leased by Corporation is of good quality construction throughout, are in good condition and working order, are adequate for their intended purposes, and have no structural or other substantial deficiencies. 7 (iii) With respect to the leased site leases (as hereinafter defined): a) Corporation is the sole owner of the lessee's interest in the Lease dated August 1, 1998 ("Leased Site Lease") from Berman, DeLeve, Kuchan & Chapman, LC ("Landlord") to Corporation of the property located at 1900 Commerce Tower, 911 Main, Kansas City, Missouri 64105, and the Leased Site Lease is in full force and effect without current default by either Corporation or the Landlord, except as set forth on Exhibit 2.12(a) attached hereto. b) A true and complete copy of the Leased Site Lease, and all amendments and other agreements relating thereto, has been delivered by Corporation to AFI. The Leased Site Lease has not been and will not be modified subsequent to delivery of full copies of the same to AFI pursuant hereto. Corporation does not claim, and knows of no person or entity claiming any right to or interest in all or any part of the Leased Sites, except the lessor thereunder. c) All obligations of the lessor under the Leased Site Lease with respect to the performance of work or the installation of equipment or materials required to have been performed at or prior to the date hereof have been fully observed and performed, and there are no agreements. d) Corporation does not have any purchase option or other interest (other than its leasehold tenancy for a specified term, as stated in the Leased Site Lease) in the Property covered by the Leased Site Lease. e) If required by AFI, Corporation shall cause delivery of a landlord estoppel letter from each of the lessors in substantially the form as attached hereto as Exhibit 2.12(b). In addition, Corporation shall cause delivery of nondisturbance agreements from any ground lessor or mortgagee of the respective leased properties, in form acceptable to AFI. (iv) There is no pending condemnation or similar proceeding affecting the property which is subject to the Leased Site Lease (the "Leased Premises" or "Property"), and Corporation has not received any written notice, and has no knowledge, that any such proceeding is contemplated. (v) Shareholders have no knowledge that the continued ownership, operation, use and occupancy of the Leased Premises violates any zoning, building, health, flood control, fire or other law, ordinance, order or regulation or any restrictive covenant. To Shareholders' knowledge, there are no violations of any federal, state, county or municipal law, ordinance, order, regulation or requirement, affecting any portion of the Leased Premises, and no written notice of any such violation has been issued by any governmental authority. 8 (vi) The Improvements located on the Leased Premises (including without limitation all mechanical, electric, water, air conditioning and heating systems and appliances included therein) (1) have been constructed in a good and workmanlike manner, free from defects in workmanship and material, are in good working order and condition, and do not require any repair or replacement other than minor, routine maintenance and (2) have been constructed and are being occupied, maintained and operated in compliance with all applicable laws, regulations, insurance requirements, contracts, leases, permits, licenses, ordinances, restrictions, building set back lines, zoning regulations, covenants, reservations and easements, and neither Corporation nor its stockholders, directors, officers or employees has received any notice, written or verbal, claiming any violation of any of the same or requesting or requiring the performance of any repairs, alterations or other work in order to so comply; all required certificates of occupancy have been duly issued and remain outstanding and in effect with regard to the Property. (vii) No work has been performed or is in progress at the Leased Premises, and no materials have been furnished to the Leased Premises or any portion thereof, which might give rise to mechanic's, materialman's or other liens against the Leased Premises. (viii)There is sufficient utility service available to the Leased Premises (including without limitation, gas, electricity, water, sewer capacity and telephone service) for the operations presently being conducted thereat. (ix) There are no adverse parties in possession of the Leased Premises and no parties in possession thereof except Corporation, and no party has been granted any license, lease, or other right relating to the use or possession of the Leased Premises except the Corporation. (x) There are no contracts or other obligations outstanding for the sale, exchange or transfer of the Leased Premises or any portion thereof or the business operated thereat. (xi) The condition of the Leased Premises at Closing shall be such that all deferred repairs and maintenance shall be completed and all mechanical systems, appliances, plumbing, electrical systems and heating and air-conditioning systems shall be in good working order. (xii) There are no actions, suits, claims, proceedings or causes of action which are pending or have been threatened or asserted against, or are affecting, Corporation or the Leased Premises or any part thereof in any court or before any arbitrator, board or governmental or administrative agency or other person or entity which might have an adverse effect on the Leased Premises, Improvements, Personalty or any portion thereof or on AFI's ability to operate the Leased Premises as an engineering operation from and after the date hereof. 9 (xiii)The Leased Premises has free, uninterrupted access to and from one or more publicly dedicated streets, highways or roads. (xiv) All ad valorem taxes, occupancy taxes, sales taxes, use taxes, employment, withholding and unemployment taxes and all other taxes, excises and assessment, and all of the bills, costs, expenses and other liabilities whatsoever required to be paid by the Corporation under the Leased Site Lease or to its operation or maintenance (including without limitation, all obligations for salaries, wages, earned vacation pay, inventory and supplies, services, maintenance and repair, signed rental, telephone rental, other equipment rental, if any, utilities, and all other expenses related to the maintenance or operation of the Leased Premises) accrued or assessable through December 31, 1998; and in the case of any such taxes, excises and other assessments, all returns for periods through December 31, 1998, have been properly filed. (b) Personal Property. Corporation has good and marketable title to all the personal property and assets, tangible or intangible, shown on the Balance Sheet and listed on Exhibit 2.12, except to the extent sold or disposed of in transactions entered into in the ordinary course of business consistent with the Corporation's past practices since the Financial Statement Date. None of such assets are subject to any (i) contracts of sale or lease, except contracts for the sale of inventory in the ordinary and regular course of business; or (ii) security interests, encumbrances, liens or charges of any kind or character, except as set forth in Exhibit 2.12. (c) Machinery, Equipment, Parts, Furniture, Tools, Vehicles and Other Tangible Assets. All machinery, equipment, parts, furniture, tools, vehicles and other tangible assets shall be in good operating condition, ordinary wear and tear excepted, on the Closing Date. (d) No Disposition of Assets. There has not been since the Financial Statement Date any sale, lease or any other disposition or distribution by Corporation of any of its assets or properties and any other assets now or hereafter owned by it, except transactions in the ordinary and regular course of business consistent with past practices or as otherwise consented to by AFI. In addition, there will be no sale, lease or other disposition of any of its assets or properties and any other assets now or hereafter owned by it, between the date of this Agreement and Closing, except for transactions in the ordinary course of business. 2.13 Litigation. Except as set forth in Exhibit 2.13, there is no suit, action, investigation or proceeding pending or, to the knowledge of Shareholders, threatened against Shareholders or Corporation which, if adversely determined, would adversely affect the business, prospects, operations, earnings, properties or the condition, financial or otherwise, of Corporation nor is there any judgment, decree, injunction, rule or order of any court, governmental department, commission, agency, instrumentality or arbitrator outstanding against Corporation having, or which, insofar as can be reasonably foreseen, in the future may have, any such effect. 10 2.14 Tax Matters. The term "Taxes" means all net income, capital gains, gross income, gross receipts, sales, use, transfer, ad valorem, franchise, profits, license, capital, withholding, payroll, employment, excise, goods and services, severance, stamp, occupation, premium, property, windfall profits, customs, duties or other taxes, fees or assessments, or other governmental charges of any kind whatsoever, together with any interest, fines and any penalties, additions to tax or additional amounts incurred or accrued under applicable Laws or assessed, charged or imposed by any governmental authority, domestic or foreign, provided that any interest, penalties, additions to tax or additional amounts that relate to Taxes for any taxable period (including any portion of any taxable period ending on or before the Closing Date) shall be deemed to be Taxes for such period, regardless of when such items are incurred, accrued, assessed or imposed. For the purposes of this Section 2.14 and Section 7.04, Corporation shall be deemed to include any predecessor of Corporation or any person or entity from which Corporation incurs a liability for Taxes as a result of any transferee liability, except as stated in Exhibit 2.14.1: (a) Corporation has duly and timely filed (and prior to the Closing Date will duly and timely file) true, correct and complete tax returns, reports or estimates, all prepared in accordance with applicable Laws, for all years and periods (and portions thereof) and for all jurisdictions (whether federal, state, local or foreign) in which any such returns, reports or estimates were due. All Taxes shown as due and payable on such returns, reports and estimates have been paid, and there is no current liability for any Taxes due and payable in connection with any such returns. There are no unpaid assessments for additional Taxes for any period nor is there any basis therefor. Attached hereto as Exhibit 2.14.2 are copies of the 1994, 1995 and 1996 federal, state and foreign tax returns filed by Corporation. (b) Corporation is not, and never has been, a member of any consolidated, combined or unitary group for federal, state, local or foreign tax purposes except as set forth in Exhibit 2.14.1. Corporation is not a party to any joint venture, partnership or other arrangement that could be treated as a partnership for federal income tax purposes. (c) Corporation has (i) withheld all required amounts from its employees, agents, contractors and nonresidents and remitted such amounts to the proper agencies; (ii) paid all employer contributions and premiums and (iii) filed all federal, state, local and foreign returns and reports with respect to employee income tax withholding, and social security and unemployment taxes and premiums, all in compliance with the withholding tax provisions of the Internal Revenue Code of 1986, as amended (the "Code"), as in effect for the applicable year or any prior provision thereof and other applicable Laws. (d) No deficiencies or reassessments for any Taxes have been proposed, asserted or assessed against Corporation by any federal, state, local or foreign taxing authority. Exhibit 2.14.1 describes the status of any federal, state, local or foreign tax audits or other administrative proceedings, discussions or court proceedings that are presently pending with regard to any Taxes or tax returns of Corporation (including a description of all issues raised by the taxing authorities in connection with any such 11 audits or proceedings), and no additional issues are being asserted against Corporation in connection with any existing audits or proceedings. (e) Corporation has not executed or filed any agreement or other document extending the period for assessment, reassessment or collection of any Taxes, and no power of attorney granted by Corporation with respect to any Taxes is currently in force. (f) Corporation has not entered into any closing or other agreement with any taxing authority which affects any taxable year of Corporation ending after the Closing Date. Corporation is not a party to any tax sharing agreement or similar arrangement for the sharing of tax liabilities or benefits. (g) Corporation has not agreed to and is not required to make any adjustment by reason of a change in accounting methods that affects any taxable year ending after the Closing Date. The Internal Revenue Service ("IRS") has not proposed to Corporation any such adjustment or change in accounting methods that affects any taxable year ending after the Closing Date. Corporation has no application pending with any taxing authority requesting permission for any changes in accounting methods that relate to its business or operations and that affects any taxable year ending after the Closing Date. (h) Corporation has not consented to the application of Code Section 341(f). (i) There is no contract, agreement, plan or arrangement covering any employee or former employee of Corporation that, individually or collectively, could give rise to the payment by Corporation of any amount that would not be deductible by reason of Code Section 280G. (j) No asset of Corporation is tax exempt use property under Code Section 168(h). No portion of the cost of any asset of Corporation has been financed directly or indirectly from the proceeds of any tax exempt "State or local government bond" or any other obligation described in Code Section 103(a). (k) None of the assets of Corporation is property that Corporation is required to treat as being owned by any other person pursuant to the safe harbor lease provision of former Code Section 168(f)(8). (l) Corporation does not have and has not had a permanent establishment in any foreign country and does not and has not engaged in a trade or business in any foreign country. Neither Shareholders nor Corporation are foreign persons within the meaning of Code Section 1445. (m) Corporation will not be liable for any federal, state, local, foreign and other sales, use, documentary, recording, stamp, transfer or similar Taxes applicable to, imposed upon or arising out of the transfer of the Shares to AFI and the transactions contemplated by this Agreement. 12 2.15 Government Contracts. Except as set forth in Exhibit 2.15, no Contract or other aspect of the business of Corporation is subject to the Federal Procurement Regulations or other regulations of any governmental agency. Corporation has not bid on or been awarded any "small business set aside contract," any other "set aside contract" or other order or contract requiring small business or other special status at any time. None of Corporation's expected sales or orders will be lost, and Corporation's customer relations will not be damaged, as a result of AFI's continuing the operations of Corporation as an entity that does not qualify as a small business. 2.16 Compliance with Law. (a) Corporation has not previously failed and is not currently failing to comply with any applicable Laws relating to the business of Corporation or the operation of its assets where such failure or failures would individually or in the aggregate have an adverse effect on the financial condition, business, operations or prospects of Corporation. In particular, but without limiting the generality of the foregoing,Corporation is in compliance with all applicable Laws relating to anti-competitive practices, price fixing, health and safety, environmental, employment and discrimination matters. There are no proceedings of record and no proceedings are pending or threatened, nor has Corporation or either Seller received any written notice regarding, or is otherwise aware of, any violation of any Law, including, without limitation, any requirement of OSHA or any pollution or environmental control agency (including air and water). (b) Exhibit 2.16 contains copies of all reports of inspections by representatives of any federal, state or local governmental entity or agency of the business and properties of Corporation through the date hereof under OSHA and under all other applicable health, safety or environmental Laws. The deficiencies, if any, noted on such reports or any deficiencies noted by such inspections through the Closing Date shall be corrected by the Closing Date. Neither Corporation nor Shareholders know or have reason to know of any other safety, health, environmental, anti-competitive or discrimination problems relating to the financial condition, business, assets, operations, prospects, earnings or employment practices of Corporation. 2.17 Absence of Certain Business Practices. Shareholders, nor any person or entity related to or affiliated with Shareholders, any officer, employee or agent of Corporation or Shareholders, nor any other person or entity acting on behalf of or associated with Corporation or Shareholders, nor any other entity directly or indirectly owned or controlled by Corporation or Shareholders, acting alone or together, has: (a) received, directly or indirectly, any rebates, payments, commissions, promotional allowances or any other economic benefit, regardless of its nature or type, from any customer, supplier, trading company, shipping company, governmental employee or other entity or individual with whom Corporation has done business directly or indirectly; or (b) directly or indirectly, given or agreed to give any gift or similar benefit to any customer, supplier, trading company, shipping company, governmental employee or other person or entity who is or may be in a position to help or hinder the business of Corporation (or assist Corporation in connection with any actual or proposed transaction); which might subject 13 Corporation to any damage or penalty in any civil, criminal or governmental litigation or proceeding. 2.18 ERISA and Related Employee Benefit Matters. (a) Welfare Benefit Plans. Exhibit 2.18.1 lists and includes a copy of each "employee welfare benefit plan" (within the meaning of Section 3(1) of the Employee Retirement Income Security Act of 1974 ("ERISA")) maintained by Corporation or to which Corporation contributes or is required to contribute, including any multi-employer plan ("Welfare Benefit Plan") and sets forth as of the most recent valuation date (i) the amount of any liability of Corporation for payments due with respect to any Welfare Benefit Plan, (ii) the amount of any payment made and to be made, stated separately, by Corporation with respect to any Welfare Benefit Plan for the plan year during which the Closing is to occur, and (iii) with respect to any Welfare Benefit Plan to which Section 505 of the Code applies, a statement of assets and liabilities for such Welfare Benefit Plan as of the most recent valuation date. Without limiting the foregoing, Exhibit 2.18.1 discloses any obligations of Corporation to provide retiree health benefits to current or former employees of Corporation. Corporation neither maintains nor participates in any "multiple employer welfare plans" (within the meaning of Section 3(40) of ERISA) which are not a Welfare Benefit Plan. Any Welfare Benefit Plans previously maintained or administered by Corporation have been closed out and terminated in accordance with appropriate federal and state law and no continuing liability exists to Corporation as a result of the maintenance, administration, closeout and termination of said plans. (b) Pension Benefit Plans. Exhibit 2.18.2 lists and includes a copy of each "employee pension benefit plan" (within the meaning of Section 3(2) of ERISA) maintained by Corporation or to which Corporation contributes or is required to contribute, including any multi-employer plan ("Pension Benefit Plan"). All costs of the Pension Benefit Plans have been provided for on the basis of consistent methods and, if applicable, in accordance with sound actuarial assumptions and practices that are acceptable under ERISA. With respect to each Pension Benefit Plan that is subject to Title I, Part 3 of ERISA (concerning "funding"), Exhibit 2.18.2 sets forth as of the valuation date (i) the unfunded liability for all accrued benefits, (ii) the funding method, (iii) the actuarially computed value of vested benefits, (iv) the fair market value of the assets held for funding purposes, (v) the amount and plan year of any "accumulated funding deficiency," as defined in Section 302(a)(2) of ERISA (arising for any reason whatever) that exists with respect to any plan year, and (vi) the amount of any contribution by Corporation paid and to be paid, stated separately, for the plan year during which the Closing is to occur. With respect to each Pension Benefit Plan that is not subject to Title I, Part 3 of ERISA, Exhibit 2.18.2 sets forth as of the valuation date (i) the amount of any liability of Corporation for any contributions due with respect to such Pension Benefit Plan and (ii) the amount of any contribution paid and to be paid, stated separately, by Corporation with respect to such Pension Benefit Plan for the plan year during which the Closing is to occur. Any Pension Benefit Plans previously maintained or administered by Corporation have been closed out and terminated in accordance with 14 appropriate federal and state law and no continuing liability exists to Corporation as a result of the maintenance, administration, closeout and termination of said plans. (c) Compliance with Applicable Law. Each of the Pension Benefit Plans, Welfare Benefit Plans any related trust agreements, annuity contracts, and other funding instruments, comply with the provisions of ERISA and the Code and all other statutes, orders, governmental rules and regulations applicable to such Welfare Benefit Plans and Pension Benefit Plans. Corporation has performed all of its obligations currently required to have been performed under all Welfare Benefit Plans and Pension Benefit Plans. There are no actions, suits or claims (other than routine claims for benefits) pending or threatened against or with respect to any Welfare Benefit Plans, Pension Benefit Plans or the assets of or party in interest with respect to such plans, and no facts exist that could give rise to any actions, suits or claims (other than routine claims for benefits) against such plans or the assets of or party in interest with respect to such plans. Each Pension Benefit Plan is qualified in form and operation under Section 401(a) of the Code, the Internal Revenue Service has issued a favorable determination letter with respect to each Pension Benefit Plan, and no event has occurred that will or could give rise to a disqualification of any Pension Benefit Plan under Code section 401(a). No event has occurred that will or could subject any Welfare Benefit Plan or Pension Benefit Plan to tax under Section 511 of the Code. (d) Administration of Plans. Each Welfare Benefit Plan and each Pension Benefit Plan has been administered to date in compliance with the requirements of ERISA and the Code. No plan fiduciary of any Welfare Benefit Plan or Pension Benefit Plan has engaged in (i) any transaction in violation of Section 406(a) or (b) of ERISA, or (ii) any "prohibited transaction" (within the meaning of Section 408 of ERISA or Section 4975(c)(1) of the Code) for which no exemption exists under Section 408 of ERISA or Section 4975(d) of the Code. (e) Title IV Plans. With respect to each Pension Benefit Plan which is subject to the provisions of Title IV of ERISA in which Corporation (for purposes of this subsection "Seller" shall include each trade or business, whether or not incorporated, which is a member of a group of which Corporation is a member and which is under common control within the meaning of Section 414 of the Code and the regulations thereunder) participates or has participated, (i) Corporation has not withdrawn from such Pension Benefit Plan during a plan year in which it was a "substantial employer" (as defined in Section 4001(a) (2) of ERISA), (ii) Corporation has not completely or partially withdrawn from a Pension Benefit Plan that is a multi-employer plan, and the liability to which Corporation would become subject under ERISA if Corporation were to withdraw completely from all multi-employer plans in which it currently participates is not in excess of Ten Thousand Dollars ($10,000) as of the most recent valuation date applicable thereto, (iii) Corporation has not filed a notice of intent to terminate any such Pension Benefit Plan or adopted any amendment to treat such Pension Benefit Plan as terminated, (iv) the Pension Benefit Guaranty Corporation has not instituted proceedings to terminate any such Pension Benefit Plan, (v) no other event or condition has occurred that might constitute grounds under Section 4042 of ERISA for the termination of, or the 15 appointment of a Trustee to administer, any such Pension Benefit Plan, (vi) all required premium payments to the Pension Benefit Guaranty Corporation have been paid when due, and (vii) no "reportable event" (as described in Section 4043 of ERISA and the regulations thereunder) has occurred with respect to said Pension Benefit Plan. (f) Other Employee Benefit Plans and Agreements. Exhibit 2.18.3 lists and includes a copy of each profit sharing, deferred compensation, bonus, stock option, stock purchase, pension, retainer, consulting, retirement, welfare or other incentive plan or agreement, fringe benefit program or employment agreement not terminable on thirty (30) days or less written notice, and any other employee benefit plan, agreement, arrangement, or commitment not previously listed on the Exhibits to this Section that is maintained by Corporation or to which Corporation contributes or is required to contribute. Exhibit 2.18.3 also contains a complete list of all employees of Corporation and the amount of vacation weeks accrued to each such employee. (g) Copies of Plans. Exhibit 2.18.4 includes, to the extent not included in Exhibits 2.18.1 through 2.18.3, true and complete copies of: each Welfare Benefit Plan; each Pension Benefit Plan, related trust agreements, annuity contracts and other funding instruments; each plan, agreement, arrangement, and commitment referred to in subsection (f) of this Section; favorable determination letters; annual reports (Form 5500 series) required to be filed with any governmental agency for each Welfare Benefit Plan and each Pension Benefit Plan for all plan years, including, without limitation, all schedules thereto and all financial statements with attached opinions of independent accountants; current summary plan descriptions for all Welfare Benefit Plans and Pension Benefit Plans; and actuarial reports as of the last valuation date for each Pension Benefit Plan that is subject to Title IV of ERISA. (h) Continuation Coverage Requirements for Health Plans. All group health plans of Corporation (including any plans of affiliates of Corporation that must be taken into account under Section 4980B of the Code) have been operated in compliance with the group health plan continuation coverage requirements of Section 4980B of the Code and Title I, Part 6 of ERISA to the extent such requirements are applicable. (i) Valid Obligations. All Welfare Benefit Plans, Pension Benefit Plans, related trust agreements, annuity contracts or other funding instruments, and all plans, agreements, arrangements and commitments referred to in subsection (f) of this Section are legal, valid and binding and in full force and effect, and there are no defaults thereunder. Except as specified in Exhibit 2.18.5, none of the rights of Corporation thereunder will be impaired by the consummation of the transactions contemplated by this Agreement, and all of the rights of Corporation thereunder will be enforceable by AFI at and after the Closing without the consent or agreement of any other party other than consents and agreements specifically listed in Exhibit 2.18.5. (j) COBRA. As of the Closing Date, Corporation has no employees who are receiving COBRA continuation coverage or who may yet timely elect such coverage, regardless of whether the COBRA qualifying event accrues prior to, on or after the 16 Closing Date. Corporation has complied in all material respects with The Family and Medical Leave Act of 1993 ("FMLA"). Corporation has no employees who are, or will be, on FMLA leave as of the Closing Date. (k) Health Insurance. Corporation does not provide, and is not obligated to provide, benefits, including, but not limited to, death, health, medical or hospitalization benefits (whether or not insured), with respect to current or former employees, their dependents or beneficiaries beyond their retirement or other termination of employment other than (i) coverage mandated by applicable law, (ii) death benefits or retirement benefits under any "employee pension benefit plan," as that term is defined in Section 3(2) of ERISA, (iii) deferred compensation benefits accrued as liabilities on the books of Corporation, or (iv) benefits the full cost of which is borne by the current or former employee (or his beneficiary). 2.19 Intellectual Property. Corporation has good and marketable title to, and Exhibit 2.19 contains a detailed listing of, each copyright, trademark, trade name, service mark, trade dress, patent, franchise, trade secret, product designation, formula, process, know-how, right of publicity, design and other similar rights (collectively "Intellectual Property Rights") used in, or necessary for, the operation of its business as currently conducted. Except as otherwise set forth on Exhibit 2.19, all of said Intellectual Property Rights are free and clear of all royalty obligations, security interests, liens and encumbrances. Corporation has the exclusive right to use all Intellectual Property Rights used in, or necessary for, the operation of its business as currently conducted. Corporation has taken all action necessary to protect against and defend against, and neither Shareholders have any knowledge of, any conflicting use of any such Intellectual Property Rights. Corporation does not have nor does Corporation utilize any Intellectual Property Rights except those which are set forth in Exhibit 2.19. Except as set forth in Exhibit 2.19, Corporation is not a party in any capacity to any franchise, license, royalty or other agreement respecting or restricting any Intellectual Property Rights, and the Intellectual Property Rights used by Corporation in the conduct of Corporation's business do not conflict with the Intellectual Property Rights of any third party. No product made, sold or distributed by Corporation, or service provided by Corporation, violates any license or infringes any Intellectual Property Rights of any third party, and there are no pending claims or demands by any third party to the contrary. 2.20 Customers. (a) Set forth on Exhibit 2.20(a) hereto ("Customer List") is a list of the names and addresses of any person or entity who purchased services from Corporation to date. (b) Set forth in Exhibit 2.20(b) attached hereto ("Customer Pricing") is a current list of Corporation's actual prices and/or fees, with any applicable discounts, rebates, allowances, or other similar rights. (c) Shareholders have not received actual notice from any of Corporation's customers who represent in excess of five percent (5%) of the sales volume of 17 Corporation that any of such customers will, for any reason, cease to do business with Corporation after the Closing. 2.21 Labor Relations. Except as set forth in Exhibit 2.21, there have been no strikes, work stoppages or any demands for collective bargaining by any union or labor organization; there is no collective bargaining relationship between Corporation and any union; there is no dispute or controversy with any union or other organization of Corporation's employees and there are no arbitration proceedings pending or threatened involving a dispute or controversy. Corporation is in full compliance with all Laws respecting employment and employment practices, terms and conditions of employment and wages and hours including, without limitation, the Fair Labor Standards Act, the Family and Medical Leave Act of 1993, the Americans with Disabilities Act of 1990, the Veterans Reemployment Rights Act, the Equal Employment Opportunities Act as amended by the Civil Rights Act of 1991, the Occupational Safety and Health Act, the Employee Retirement Income Security Act, the Immigration Reform and Control Act of 1986, the Age Discrimination in Employment Act, Title VII of the Civil Rights Act of 1964, the Older Workers Benefit Protective Act, and all other Laws, each as amended to date, relating to employer/employee rights and obligations. To the best of Shareholders' knowledge, Corporation currently has satisfactory relationships with its employees. 2.22 Insurance. Exhibit 2.22 lists and includes copies of all certificates of coverage regarding all of Corporation's existing insurance policies, the premiums therefor and the coverage of each policy. Corporation has maintained and, through the Closing Date, will maintain one or more liability insurance policies, with an aggregate coverage limit of at least One Million Dollars ($1,000,000) ("Liability Insurance"). To the best of their knowledge, the insurance in force is of a sufficient level to adequately compensate Corporation for any liabilities, obligations and claims that Corporation may incur related to errors and omissions by liabilities of Corporation, Shareholders, Corporation's shareholders, officers and employees prior to the Closing Date and up to a policy limit of at least One Million Dollars ($1,000,000). 2.23 Environmental. (a) For purposes of this Section: (i) "Hazardous Materials" means any hazardous, infectious or toxic substance, chemical, pollutant, contaminant, emission or waste which is or becomes regulated by any local, state, federal or foreign authority. Hazardous Materials include, without limitation, anything which is: (i) defined as a "pollutant" pursuant to 33 U.S.C. ss. 1362(6); (ii) defined as a "hazardous waste" pursuant to 42 U.S.C. ss. 6921; (iii) defined as a "regulated substance" pursuant to 42 U.S.C. ss. 6991; (iv) defined as a "hazardous substance" pursuant to 42 U.S.C. ss. 9601(14); (v) defined as a "pollutant or contaminant" pursuant to 42 U.S.C. ss. 9601(33); (vi) petroleum; (vii) asbestos; and (viii) polychlorinated biphenyl. (ii) "Environmental Laws and Regulations" means all limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, 18 schedules and timetables contained in any Laws relating to pollution, nuisance, or the environment including, without limitation, (i) the Federal Clean Air Act, 42 U.S.C. ss.ss. 7401 et seq.; (ii) the Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C. ss.ss. 9601 et seq.; (iii) the Federal Emergency Planning and Community Right-to-Know Act, 42 U.S.C. ss.ss. 1101 et seq.; (iv) the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. ss.ss. 136 et seq.; (v) the Federal Water Pollution Control Act, 33 U.S.C. ss.ss. 1251 et seq.; (vi) the Solid Waste Disposal Act, 42 U.S.C. ss.ss. 6901 et seq.; (vii) the Toxic Substances Control Act, 15 U.S.C. ss.ss. 2601 et seq.; (viii) Laws relating in whole or part to emissions, discharges, releases, or threatened releases of any Hazardous Material; and (ix) Laws relating in whole or part to the manufacture, processing, distribution, use, coverage, disposal, transportation, storage or handling of any Hazardous Material. (b) The operations and activities of Corporation comply, and have in the past complied, in all respects, with all Environmental Laws and Regulations. There are no pending or currently proposed changes to any Environmental Laws and Regulations which, when implemented or effective, may affect the operations of Corporation. (c) Corporation has obtained and is and has been in full compliance with all requirements, permits, licenses and other authorizations which are required with respect to Corporation's operations, as well as the transactions contemplated hereby under all Environmental Laws and Regulations. Exhibit 2.23(a) lists each such permit, license or other authorization. There are no other such permits, licenses or other authorizations which are required by any Environmental Laws and Regulations after the Closing. (d) There is no civil, criminal, administrative or other action, suit, demand, claim, hearing, notice of violation, proceeding, investigation, notice or demand pending, received, or, to the best knowledge of Corporation, threatened against Corporation relating in any way to any Environmental Laws and Regulations. (e) Corporation has not caused or experienced any past or present events, conditions, circumstances, plans or other matters which: (i) are not in compliance with all Environmental Laws and Regulations; (ii) may give rise to any statutory, common law, or other legal liability, or otherwise form the basis of any claim, action, demand, suit, proceeding, hearing, notice of violation or investigation based on or relating to Hazardous Materials including, without limitation, such matters relating to any property owned, leased or utilized by Corporation at any time; (iii) arise from inventory of or waste from Hazardous Materials; or (iv) arise from any off-site disposal, release or threatened release of Hazardous Materials. (f) No asbestos, polychlorinated biphenyls, lead-based paints, or radon are on any real property or in any building now or previously owned, operated, leased or utilized by Corporation. 19 (g) Corporation has not received any notice or indication from any governmental agency or private or public entity advising it that it is or may be responsible for any investigation or response costs with respect to a release, threatened release or cleanup of chemicals or materials produced by or resulting from any business, commercial or industrial activities, operations or processes, including, without limitation, any Hazardous Materials. Corporation is not aware of any facts which might give rise to such notices. (h) No underground tanks, piping or subsurface structures of any type exist or have existed on any real property now or previously owned, operated, leased or utilized by Corporation except as disclosed on Exhibit 2.23(b). (i) Exhibit 2.23(d) contains complete copies of all environmental investigations, assessments, audits, studies, tests and related materials in possession of Corporation, or known to Corporation to exist, which relate to the current or prior operations of Corporation or any real property now or previously owned, operated, leased or utilized by Corporation. 2.24 Bank Accounts. As of the Closing, Exhibit 2.24 will list of all bank accounts, lock boxes, safe deposit boxes and post office boxes maintained in the name of or controlled by Corporation and the names of the persons having access thereto. 2.25 Compensation. Exhibit 2.25 lists the current job title and total remuneration (including, without limitation, salary, commissions and bonuses) for each of the Shareholders and for each officer, director, employee or consultant of Corporation who is expected to receive total remuneration from the Corporation in excess of Ten Thousand Dollars ($10,000) during the current fiscal year. Except as disclosed on Exhibit 2.25, Corporation has not since the Financial Statement Date and will not prior to the Closing Date increase or commit to increase the base compensation, bonus or the rate (or any other component) of total compensation payable or to become payable by Corporation to any employee (including any director or officer), whether such person is listed on Exhibit 2.25 or not, and, except as set forth herein, no extraordinary compensation, commission, or bonus will be paid by Corporation. 2.26 Commitments. ----------- (a) Except as set forth in Exhibit 2.26 hereto or as otherwise set ------------ forth in this Agreement, Shareholders have not entered into, nor are Corporation's Assets or Business bound by, whether or not in writing, any agreement or instrument, or any charter or other restriction, or any judgment, order, writ, injunction, decree, rule or regulation that could or does materially and adversely affect the Corporation's Assets or business ("Commitment"), except as otherwise set forth in this Agreement and on the Balance Sheet. (b) Except as disclosed in the applicable Exhibit hereto, neither Shareholders nor Corporation have received actual notice of any plan or intention of any other party to any Commitment to exercise any right to cancel or terminate any Commitment or 20 agreement, and neither Shareholders nor Corporation know of any fact that would justify the exercise of such right. (c) Except for the Contracts set forth on Exhibit 2.10, there are no ------------ written or oral contractual Commitments, contracts, or agreements to which Corporation is a party, which shall be binding upon Corporation on or after the Closing. 2.27 Other Employee Matters. Set forth in Exhibit 2.27 hereto are the ------------------------ ------------- following: (a) A description of the termination or severance pay policy of Corporation. (b) A complete and accurate list of all holiday and vacation pay and other benefits accrued as of the date hereof, in respect of employees of Corporation. (c) A description of the workers compensation loss experience of Corporation as of the date hereof. Except as set forth on Exhibit 2.27 hereto, no employment manual or written ------------- employment policy and/or procedures have been provided to or for employees, and no written or verbal employment, consultant or independent contractor agreement exists to which Corporation may be bound. Shareholders have delivered to AFI accurate and complete copies of all such employment agreements, consulting agreements, confidentiality agreements and all other agreements, plans and other instruments to which Corporation is a party and under which its employees or consultants are entitled to receive benefits of any nature. To Shareholders' actual knowledge, Corporation is in compliance with all federal and state laws respecting employment and employment practices, terms and conditions of employment and wages and hours and is not engaged in, nor has it committed, any discriminatory employment practice or unfair labor practice as defined in the National Labor Relations Act of 1947, as amended. There is no employment discrimination claim, either pending or threatened, against Corporation, and there is no unfair labor practice claim against Corporation before the National Labor Relations Board. 2.28 WARN. Corporation has never effected any "plant closing" or "mass ---- layoff" within the meaning of the Worker Adjustment and Retraining Notification Act, 29 U.S.C. 2101 et seq. as amended ("WARN"). -- --- 2.29 Overtime, Back Wages, Vacation and Minimum Wages. No present or former ------------------------------------------------ employee of Corporation has, or will as of the Closing Date have, any claim against Corporation (whether under federal, state or local law, any employment agreement, or otherwise) on account of or for (a) overtime pay, other than overtime pay for the then current payroll period, (b) wages or salary for any period other than the current payroll period, (c) vacation, time off or pay in lieu of vacation or time off, other than that earned in respect of the current fiscal year or accrued on Corporation's books and records, or (d) any violation of any statute, ordinance or regulation relating to minimum wages or maximum hours of work. All amounts required to be withheld by Corporation from its employees have been properly withheld and will be timely deposited and all contributions required to be paid by Corporation in respect of its employees have been paid in 21 accordance with the applicable provisions of federal, state and local laws regarding income tax withholding and social security, workers compensation, unemployment compensation or similar taxes or contributions. 2.30 ADA. Corporation has received no notice from any individual, entity or --- federal, state, local governmental agency or official notifying it that Corporation or any property or asset of Corporation is in violation of, or in noncompliance with, the Americans with Disabilities Act (the "ADA"). Corporation has not received any notice of a claim or potential claim under the Civil Rights Act of 1991 for any violation of the ADA. 2.31 Permits. Set forth in Exhibit 2.31 attached hereto is a list of all ------- ------------ permits, licenses and approvals from federal, state, county, local and foreign governmental and regulatory bodies (collectively, "Permits") held, utilized or applied for by Corporation, including, without limitation, all state licenses required to be issued in those states in which Corporation does business, and the Permits are valid and in full force and effect. Except as set forth on Exhibit 2.31, no other or additional licenses, permits or approvals are required - ------------ of or from any governmental authority or agency in connection with the conduct of the Business which, if not obtained, could materially and adversely affect the Corporation's business or the Assets. Corporation and the Corporation's business have complied and are in compliance, in all material respects, with the terms and conditions of the Permits and no violation of any of the Permits or the laws or rules governing the issuance or continued validity thereof has occurred. Neither Shareholders nor Corporation have received any claim or notice, and Shareholders have no actual knowledge indicating, that Corporation or the Corporation's business is not in compliance with the terms of any such Permits and with all requirements, standards and procedures of the federal, state, county, local and foreign governmental regulatory bodies which issued them. Corporation is in compliance with all federal, state, county and local laws, ordinances, codes, regulations, orders, requirements, standards and procedures, including but not limited to any and all laws, regulations and ordinances relating to or regulating human health and the environment, which are applicable to Corporation or the business. 2.32 Shareholders' Acquisition of AFI's Stock. Shareholders separately ----------------------------------------- represent and warrant to AFI the following with respect to AFI's stock to be transferred to them in accordance with this Agreement: (a) The AFI stock to be transferred to them is being acquired by Shareholders for investment purposes and not with a view to distribution or resale. Shareholders shall not sell, transfer, assign, pledge, hypothecate or otherwise dispose of any of the shares of AFI stock or any interest therein unless the AFI stock is registered under the 1933 Act, and any applicable securities laws of any state or jurisdiction or unless the AFI stock is the subject of an opinion of counsel, which opinion and counsel are reasonably acceptable to AFI, that such registration is not required. The stock certificates evidencing the AFI stock will bear legends setting forth the restrictions on transfers stated immediately above, and stop-transfer instructions will be delivered by AFI to AFI's stock transfer agent (Interwest Transfer) reflecting such restrictions. 22 (b) Attached hereto as Exhibit 2.32(b) is an Information Statement --------------- and copy of the AFI Plan of Reorganization and Disclosure Statement dated July 29, 1998, and confirmation order from the Bankruptcy Court relating to said Plan that provides Shareholders with information about AFI and its business. Shareholders have reviewed the Information Statement, Plan of Reorganization and Disclosure Statement, and have had ample opportunity to discuss AFI's business, management and financial affairs with directors, officers and management of AFI, have had an opportunity to review the Plan of Reorganization and Disclosure Statement, and have been given complete access and the opportunity to review AFI's books and records, operations and facilities and are fully aware of the risks associated with receiving AFI's stock. (c) Shareholders have such knowledge and experience in financial and business matters as to permit them to make an informal investment decision concerning the receipt of AFI's stock and any risk incumbent thereto. (d) Shareholders will not, for a period of three (3) years after Closing, acquire any further shares of stock of AFI if the acquisition of those shares will, (i) in the reasonable opinion of competent tax counsel for AFI, cause a "change of control" of AFI as determined under Section 382 of the Internal Revenue Code of 1986, as amended, including the regulations as promulgated thereunder, or under the comparable provision of any future internal revenue law; or (ii) have the effect of reducing the number of shares which FMIC could acquire under its option without such FMIC acquisition causing a "change of control." 2.33 Disclosure. No representation or warranty made by Shareholders in this ---------- Agreement or in any agreement, instrument, document, certificate, statement or letter furnished to AFI, by or on behalf of Shareholders in connection with any of the transactions contemplated by this Agreement contains any untrue statement of fact or omits to state a fact necessary in order to make the statements herein or therein not misleading in light of the circumstances in which they are made. 2.34 Survival. The representations and warranties made by Shareholders -------- under this Agreement are being made for the sole purpose of assuring AFI of the peaceful possession of the stock and operation of Corporation, free of claims made by third-party creditors, taxing authorities and others who may have a claim against Shareholders or Corporation, or of Shareholders' ability to complete this transaction according to terms and conditions set forth herein, other than as set forth on the Balance Sheet. Each of the representations, warranties and covenants made in this Agreement by Shareholders shall survive this Closing Date and shall inure to the benefit of and be enforceable by AFI. 2.35 Public Announcements. Neither Shareholders nor Corporation shall issue -------------------- or cause the publication of any press release or any other announcement with respect to the transactions contemplated by this Agreement without the prior written consent of AFI. 2.36 Make-up of Shareholder Group. The JMO Group represents and warrants ----------------------------- that the Shareholders of the JMO Group involve either individuals who are shareholders of 23 Corporation in their individual capacities or minor children under the age of 18. The Jean Offill Grandchildren's Irrevocable Trust represents and warrants that, except for Angela Offill, the beneficiaries of the Jean Offill Grandchildren's Irrevocable Trust are all minor children under the age of 18. The Jean Offill Grandchildren's Irrevocable Trust and JMO Group acknowledge that AFI is relying upon these representations and warranties in not requiring the other Shareholders of the JMO Group and the beneficiaries of the Jean Offill Grandchildren's Irrevocable Trust to become parties to and bound by the provisions of Article VI regarding noncompetition. The Jean Offill Grandchildren's Irrevocable Trust covenants to Corporation and AFI that none of the beneficiaries of the Jean Offill Grandchildren's Irrevocable Trust will compete, pursuant to the terms and conditions of Article VI hereof, with Corporation or AFI during the noncompetition period set forth in Article VI. The JMO Group covenants to Corporation and AFI that none of the Shareholders of the JMO Group will compete, pursuant to the terms and conditions of Article VI hereof, with Corporation or AFI during the noncompetition period set forth in Article VI. ARTICLE III. REPRESENTATIONS AND WARRANTIES OF AFI ------------------------------------- AFI hereby represents and warrants to Shareholders, as follows: 3.01 Corporate Organization, etc. AFI is a corporation duly organized, ----------------------------- validly existing and in good standing under the laws of the State of Delaware. 3.02 Authorization, etc. Upon Bankruptcy Court approval, AFI has full ------------------- corporate power and authority to enter into this Agreement and to carry out the transactions contemplated hereby. As of the Closing, the Board of Directors of AFI will have duly authorized the execution and delivery of this Agreement and the transactions contemplated hereby, and no other corporate proceedings on its part are necessary to authorize this Agreement and the transactions contemplated hereby. 3.03 No Violation. AFI is not subject to or obligated under any certificate ------------ of incorporation, bylaw, Law, or any agreement or instrument, or any license, franchise or permit, which would be breached or violated by its execution, delivery or performance of this Agreement. AFI will comply with all Laws in connection with its execution, delivery and performance of this Agreement and the transactions contemplated hereby. 3.04 Governmental Authorities. Except as set forth on Exhibit 3.04, and ------------------------- ------------ except for Bankruptcy Court approval, AFI is not required to submit any notice, report or other filing with and no consent, approval or authorization is required by any governmental or regulatory authority in connection with AFI's execution or delivery of this Agreement or the consummation of the transactions contemplated hereby. 3.05 Insurance. AFI will have at Closing insurance policies that will --------- provide general liability insurance coverage for any liabilities, obligations and claims it may incur after Closing up to policy limits of at least One Million Dollars ($1,000,000.00). 24 3.06 AFI's Plan of Reorganization. AFI's Plan of Reorganization has been ----------------------------- confirmed by appropriate Bankruptcy Court order. 3.07 Unregistered Stock. The AFI stock to be issued to Shareholders has not ------------------ been registered under the Securities Act of 1933 or registered or qualified under state laws. Except as set forth in Section 5.03 hereafter, AFI has no obligation to register such stock. 3.08 Capital Stock; Options. All issued and outstanding shares of capital ------------- stock are validly issued, fully paid and nonassessable. Except for the option of First Mortgage Investment Company ("FMIC") to purchase up to three million (3,000,000) shares of stock of AFI at an option price of Fifty Cents ($.50) per share ("FMIC Option"), there are no issued and outstanding options, warrants, rights, securities, contracts, commitments, understandings, profit sharing or retirement plans, or other arrangements by which AFI is bound to issue any additional shares of its capital stock or options to purchase shares of its capital stock, except as set forth on Exhibit 3.08. ------------ 3.09 Subsidiaries and Affiliates. Except as set forth in Exhibit 3.09, AFI --------------------------- ------------ has no subsidiaries, Affiliates or investments in any other entity or business operation. The term "Affiliates" means, for the purpose of this Agreement, each shareholder, director, officer and employee of AFI, and any director, officer or employee of AFI, and any corporation, partnership or other entity in which AFI or officer of AFI has any financial interest or is a controlling person, as that term is used in connection with the federal securities laws. 3.10 Financial Statements. Exhibit 3.10 contains AFI's statements of financial position as of December 31, 1998, and statements of income and retained earnings for the period ending December 31, 1998. All such statements of financial position and the notes thereto are complete and accurate, contain a listing of all assets and liabilities of AFI and fairly present the financial position of AFI as of the respective dates thereof, and such statements of income and retained earnings and the notes thereto fairly present the results of operations for the periods therein referred to. Other than accrued income taxes not yet due and payable, all such statements include all adjustments (all of which were normal recurring adjustments) necessary to fairly present the financial position, results of operations and changes in financial position at and for such periods. The statement of financial position and statement of income and retained earnings as of December 31, 1998, are referred to collectively as the "AFI Balance Sheet." December 31, 1998, is referred to as the "Financial Statement Date." 3.11 No Undisclosed Liabilities, Claims, etc. Except for (a) liabilities fully reflected or reserved against in the AFI Balance Sheet; (b) liabilities disclosed on Exhibit 3.11; and (c) regular and usual liabilities and obligations incurred in the ordinary course of business consistent with the AFI's past practices, AFI has no liabilities, obligations or claims (absolute, accrued, fixed or contingent, matured or unmatured, or otherwise), including liabilities, obligations or claims which may become known or which arise only after the Closing and which result from actions, omissions or occurrences of AFI prior to the Closing. 3.12 Absence of Certain Changes. Since the Financial Statement Date, except as set forth on Exhibit 3.12, there has not been (a) any damage, destruction or loss to physical property, 25 whether covered by insurance or not, adversely affecting AFI's properties and business; (b) any declaration, setting aside or payment of any dividend whether in cash, stock or property with respect to AFI's capital stock, or any redemption or other acquisition of such stock by AFI; (c) any increase in the compensation payable or to become payable by AFI to its directors, officers, key employees, Affiliates, or any adoption of or increase in any bonus, insurance, pension or other employee benefit plan, payment or arrangement made to, for or with any such party; (d) any entry into any commitment or transaction involving borrowing or capital expenditure; (e) any termination or wavier of any rights of value to the business of AFI, except as set forth and accomplished in connection with the Plan of Reorganization; (f) any adoption or amendment of any collective bargaining, bonus, profit sharing, compensation, stock option, pension, retirement, deferred compensation, or other plan, agreement, trust, fund or arrangement for the benefit of employees; (g) any agreement or understanding made or entered into to do any of the foregoing; or (h) any other material change in the business, properties or financial condition of the AFI, other than those changes affecting the industries in which AFI does business generally and that have occurred in the ordinary course of business. 3.13 Litigation. Except as set forth in Exhibit 3.13, there is no suit, action, investigation or proceeding pending or, to the knowledge of AFI which, if adversely determined, would adversely affect the business, prospects, operations, earnings, properties or the condition, financial or otherwise, of AFI nor is there any judgment, decree, injunction, rule or order of any court, governmental department, commission, agency, instrumentality or arbitrator outstanding against AFI having, or which, insofar as can be reasonably foreseen, in the future may have, any such effect. 3.14 Tax Matters. The term "Taxes" means all net income, capital gains, gross income, gross receipts, sales, use, transfer, ad valorem, franchise, profits, license, capital, withholding, payroll, employment, excise, goods and services, severance, stamp, occupation, premium, property, windfall profits, customs, duties or other taxes, fees or assessments, or other governmental charges of any kind whatsoever, together with any interest, fines and any penalties, additions to tax or additional amounts incurred or accrued under applicable Laws or assessed, charged or imposed by any governmental authority, domestic or foreign, provided that any interest, penalties, additions to tax or additional amounts that relate to Taxes for any taxable period (including any portion of any taxable period ending on or before the Closing Date) shall be deemed to be Taxes for such period, regardless of when such items are incurred, accrued, assessed or imposed. For the purposes of this Section 3.14, AFI shall be deemed to include any predecessor of AFI or any person or entity from which AFI incurs a liability for Taxes as a result of any transferee liability, except as stated in Exhibit 3.14.1: (a) Except for fiscal years end 1997 and 1998, AFI has duly and timely filed (and prior to the Closing Date will duly and timely file) true, correct and complete tax returns, reports or estimates, all prepared in accordance with applicable Laws, for all years and periods (and portions thereof) and for all jurisdictions (whether federal, state, local or foreign) in which any such returns, reports or estimates were due. All Taxes shown as due and payable on such returns, reports and estimates have been paid, and there is no current liability for any Taxes due and payable in connection with any such returns. There are no unpaid assessments for additional Taxes for any period nor is there 26 any basis therefor. Attached hereto as Exhibit 3.14.2 are copies of all federal, state and foreign tax returns filed by AFI. (b) AFI is a member of a consolidated, combined or unitary group for federal, state, local or foreign tax purposes. AFI is not a party to any joint venture, partnership or other arrangement that could be treated as a partnership for federal income tax purposes. (c) AFI has (i) withheld all required amounts from its employees, agents, contractors and nonresidents and remitted such amounts to the proper agencies; (ii) paid all employer contributions and premiums and (iii) filed all federal, state, local and foreign returns and reports with respect to employee income tax withholding, and social security and unemployment taxes and premiums, all in compliance with the withholding tax provisions of the Internal Revenue Code of 1986, as amended (the "Code"), as in effect for the applicable year or any prior provision thereof and other applicable Laws. (d) No deficiencies or reassessments for any Taxes have been proposed, asserted or assessed against AFI by any federal, state, local or foreign taxing authority. Exhibit 3.14.1 describes the status of any federal, state, local or foreign tax audits or other administrative proceedings, discussions or court proceedings that are presently pending with regard to any Taxes or tax returns of AFI (including a description of all issues raised by the taxing authorities in connection with any such audits or proceedings), and no additional issues are being asserted against AFI in connection with any existing audits or proceedings. (e) AFI has not executed or filed any agreement or other document extending the period for assessment, reassessment or collection of any Taxes, and no power of attorney granted by AFI with respect to any Taxes is currently in force. (f) AFI has not entered into any closing or other agreement with any taxing authority which affects any taxable year of AFI ending after the Closing Date. AFI is not a party to any tax sharing agreement or similar arrangement for the sharing of tax liabilities or benefits. (g) AFI has not agreed to and is not required to make any adjustment by reason of a change in accounting methods that affects any taxable year ending after the Closing Date. The Internal Revenue Service ("IRS") has not proposed to AFI any such adjustment or change in accounting methods that affects any taxable year ending after the Closing Date. AFI has no application pending with any taxing authority requesting permission for any changes in accounting methods that relate to its business or operations and that affects any taxable year ending after the Closing Date. (h) AFI has not consented to the application of Code Section 341(f). (i) There is no contract, agreement, plan or arrangement covering any employee or former employee of AFI that, individually or collectively, could give rise to 27 the payment by AFI of any amount that would not be deductible by reason of Code Section 280G. (j) No asset of AFI is tax exempt use property under Code Section 168(h). No portion of the cost of any asset of AFI has been financed directly or indirectly from the proceeds of any tax exempt "State or local government bond" or any other obligation described in Code Section 103(a). (k) None of the assets of AFI is property that AFI is required to treat as being owned by any other person pursuant to the safe harbor lease provision of former Code Section 168(f)(8). (l) AFI does not have and has not had a permanent establishment in any foreign country and does not and has not engaged in a trade or business in any foreign country. AFI is not a foreign person within the meaning of Code Section 1445. (m) AFI will not be liable for any federal, state, local, foreign and other sales, use, documentary, recording, stamp, transfer or similar Taxes applicable to, imposed upon or arising out of the transfer of the Shares to AFI and the transactions contemplated by this Agreement. 3.15 Compliance with Law. (a) AFI has not previously failed and is not currently failing to comply with any applicable Laws relating to the business of AFI or the operation of its assets where such failure or failures would individually or in the aggregate have an adverse effect on the financial condition, business, operations or prospects of AFI. In particular, but without limiting the generality of the foregoing, AFI is in compliance with all applicable Laws relating to anti-competitive practices, price fixing, health and safety, environmental, employment and discrimination matters. There are no proceedings of record and no proceedings are pending or threatened, nor has AFI or either Seller received any written notice regarding, or is otherwise aware of, any violation of any Law, including, without limitation, any requirement of OSHA or any pollution or environmental control agency (including air and water). (b) Exhibit 3.16 contains copies of all reports of inspections by representatives of any federal, state or local governmental entity or agency of the business and properties of AFI through the date hereof under OSHA and under all other applicable health, safety or environmental Laws. The deficiencies, if any, noted on such reports or any deficiencies noted by such inspections through the Closing Date shall be corrected by the Closing Date. AFI does not know or have reason to know of any other safety, health, environmental, anti-competitive or discrimination problems relating to the financial condition, business, assets, operations, prospects, earnings or employment practices of AFI. 28 3.16 Tax Loss Carry Forward. AFI believes that it is more likely than not that the presently-existing tax loss carry forward present in AFI will not be adversely impacted by this transaction. 3.17 Disclosure. No representation or warranty made by AFI in this Agreement or in any agreement, instrument, document, certificate, statement or letter furnished in connection with any of the transactions contemplated by this Agreement contains any untrue statement of fact or omits to state a fact necessary in order to make the statements herein or therein not misleading in light of the circumstances in which they are made. 3.18 Survival. The representations and warranties made by AFI under this Agreement are being made for the sole purpose of assuring Shareholders of the peaceful possession of the AFI stock. Each of the representations, warranties and covenants made in this Agreement by AFI shall survive for a period of two (2) years after the Closing Date and shall inure to the benefit of and be enforceable by Shareholders; provided, however, that with respect to the representations, warranties and covenants made in Section 3.14, such representations, warranties and covenants shall survive for a period equal to the applicable statute of limitations period for the particular tax involved. ARTICLE IV COVENANTS OF SHAREHOLDER ------------------------ Except as otherwise consented to or approved by AFI in writing, until the Closing, Shareholders, jointly and severally, covenant and agree (and will cause Corporation to act or refrain from acting where required hereinafter) as follows: 4.01 Amendments. Except as required for the transactions contemplated in this Agreement, no change or amendment shall be made in Corporation's articles or certificate of incorporation or bylaws. Corporation will not merge into or consolidate with any other corporation or person, or change the character of its business. 4.02 Capital Changes. Corporation will not issue or sell any shares of its capital stock of any class or issue or sell any securities convertible into, or options, warrants to purchase or rights to subscribe to, any shares of its capital stock of any class. 4.03 Dividends; Bonuses. Corporation will not declare, pay or set aside for payment any dividend or other distribution in respect of its capital stock, nor shall Corporation, directly or indirectly, redeem, purchase or otherwise acquire any shares of its capital stock. Corporation will not pay, set aside, accrue, agree to or become liable in any manner for any bonus, of any nature or type, (i) to Shareholders or any Affiliates, except for payment to Sequoia of up to Forty-eight Thousand Six Hundred Dollars ($48,600) as Corporation has previously advised AFI, or (ii) to any employee or officer of Corporation except in the ordinary course of business. 4.04 Capital and Other Expenditures. Corporation will not make any capital expenditures, or commitments with respect thereto, except in the ordinary course of business. Corporation will not prepay any debt or obligation in excess of One Hundred Dollars ($100) 29 (except for prepaying trade accounts payable in the normal course of business to take advantage of cash discounts). 4.05 Borrowing. Corporation will not incur, assume or guarantee any indebtedness or capital leases other than in the ordinary course of business. Corporation will not create or permit to become effective any mortgage, pledge, lien, encumbrance or charge of any kind upon its assets other than in the ordinary course of business. 4.06 Other Commitments. Except in the ordinary course of business consistent with the Corporation's past practices, Corporation will not enter into any transaction, make any commitment or incur any obligation. 4.07 Full Access and Disclosure. (a) Corporation shall afford to AFI and its counsel, accountants and other authorized representatives access during business hours to Corporation's offices, plants, properties, books and records in order that AFI may have full opportunity to make such reasonable investigations as it shall desire to make of the affairs of Corporation and Corporation will cause its officers and employees to furnish such additional financial and operating data and other information as AFI shall from time to time reasonably request. (b) From time to time prior to the Closing Date, Corporation will promptly supplement or amend in writing information previously delivered to AFI with respect to any matter hereafter arising which, if existing or occurring at the date of this Agreement, would have been required to be set forth or disclosed. 4.08 Consents. Corporation will use all necessary means at its disposal to obtain on or prior to the Closing Date all consents necessary to the consummation of the transactions contemplated hereby. 4.09 Breach of Agreement. Neither Shareholders nor Corporation will take any action which, if taken prior to the Closing Date, would constitute a breach of this Agreement. 4.10 Fulfillment of Conditions. Corporation and Shareholders will take all commercially reasonable steps necessary or desirable and proceed diligently and in good faith to satisfy each condition to the obligations of AFI contained in this Agreement and will not take or fail to take any action that could reasonably be expected to result in the nonfulfillment of any such condition. 4.11 Regular Course of Business. Corporation will operate its business in the ordinary course, diligently and in good faith, consistent with Corporation's past management practices; will maintain (except for expiration due to lapse of time) all leases and contracts described herein in effect without change except as expressly provided herein; will comply with the provisions of all Laws, applicable to the conduct of its business; will not engage in any significant or unusual transaction; will not sell any assets or acquire any new assets, except in the ordinary and usual course of business; will not cancel, release, waive or compromise any debt, except for discounting of credit receivables in the ordinary course of business, claim or right in 30 its favor having a value in excess of Five Thousand Dollars ($5,000) other than in connection with returns for credit or replacement in the ordinary course of business; will maintain insurance coverage up to the Closing Date in amounts adequate to protect and insure Corporation against perils which good business practice demands be insured against or which are normally insured against by other industry members similarly situated. 4.12 Conversion of Long-term Debt to Equity. Shareholders shall contribute to Corporation prior to Closing, the long-term debt that Shareholders collectively hold from Corporation in the amount of at least One Hundred Seventy-five Thousand Dollars ($175,000). ARTICLE V COVENANTS OF AFI ---------------- AFI hereby covenants and agrees with Shareholders that: 5.01 Books and Records. AFI shall preserve and keep Corporation's books and records delivered hereunder for a period of five (5) years from the date hereof and shall, during such period, make such books and records available to officers and directors of Corporation for any reasonable purpose. 5.02 Fulfillment of Conditions. AFI will take all commercially reasonable steps necessary or desirable and proceed diligently and in good faith to satisfy each condition to the obligations of AFI contained in this Agreement and will not take or fail to take any action that could reasonably be expected to result in the nonfulfillment of any such condition. 5.03 Piggyback Registration Rights. If AFI proposes to file a registration statement under the Securities Act of 1933, other than a registration statement providing for the registration of stock to be issued upon the exercise of warrants issued in connection with the Plan of Reorganization (a "Registration Statement") at any time within two (2) years after the Closing Date with respect to an offering of common stock (other than a Registration Statement on Form S-8 or Form S-4) it will promptly give notice thereof to the Shareholders within twenty (20) days prior to the filing of such Registration Statement and such notice will offer the Shareholders the opportunity to register such number of Shares as the Shareholders may request. AFI will use its best efforts to cause the managing underwriter of such offering to permit the requesting Shareholders to include the Shares in such offering on the same terms and conditions as the other common stock being offered thereby. The number of Shares to be included in such offering may be reduced as the managing underwriter deems appropriate; provided however, that if shares of common stock are included in the offering, any such reduction in the number of Shares of any Shareholder will be reduced pro rata with any reduction in the number shares of common stock sought to be included in the registration by all other holders participating in the offering. The selection of the underwriters for any such offering shall be in the sole discretion of AFI. AFI will pay all reasonable expenses associated with the registration and sale of the Shares, including, without limitation, expenses for accounting, printing, registration and distribution fees and expenses, except that the Shareholders shall pay the expenses of their own legal counsel and all commissions and underwriting discounts payable with respect to the Shares. If any of the Shares are included in any registration pursuant to this section, each Shareholder shall take such action 31 and furnish AFI with such information regarding and relating to the distribution of the Shares as AFI may from time to time reasonably request and as shall be required in connection with any registration, qualification or compliance referred to in this Agreement, including, without limitation, the following: (i) enter into an appropriate underwriting agreement containing terms and provisions then customary in agreements of that nature; (ii) enter into such customary agreements, powers of attorney and related documents at such time and on such terms and conditions as may then be customarily required in connection with such offering; and (iii) distribute the Shares only in accordance with and in the manner of distribution contemplated by the applicable Registration Statement and prospectus. ARTICLE VI COVENANT NOT TO COMPETE In consideration of AFI's agreement to transfer the Purchase Price set forth in Section 1.02 of this Agreement and payment of the consideration set forth therein at Closing, Shareholders, Dunn, and Offill hereby agree that for a period of three (3) years from the date thereof, they will not directly or indirectly, either by themselves or through others, or as individuals, partners, employees, agents, officers, stockholders, directors, trustees, beneficiaries, security holders, creditors, consultants or otherwise; (a) Solicit business from, divert business from, or attempt to convert to other methods of using the same or similar products and services as provided by AFI or Corporation, any client, account or location of AFI or Corporation, of which Shareholders had any contact or as a result of or during their employment by Corporation and/or AFI; (b) Perform services on behalf of any debt collection or similar business, or any business involving debt collection within a 150-mile radius of the greater Kansas City metropolitan area; or (c) Solicit from employment or employ any employee of Corporation and/or AFI. Shareholders have carefully read and considered the provisions of this paragraph, and having done so, agree that the restrictions set forth in this paragraph (including, but not limited to, the time period restriction) are fair and reasonable, and are reasonably required for the protection of the interests of AFI, its officers, directors and other employees. Shareholders represent that their experience, age, capabilities, current health and assets are such that this Agreement does not deprive them from earning a livelihood or profits in the unrestricted business activities which remain open to them or from otherwise adequately and appropriately supporting themselves. In the event that, notwithstanding the foregoing, any of the provisions of this paragraph shall be held to be invalid or unenforceable, the remaining provisions thereof shall nevertheless continue to be valid and enforceable as though the invalid or unenforceable parts had not been included therein. In the event that any provision of the provisions of this paragraph relating to time period and/or areas of restriction shall be declared by a court of competent jurisdiction to exceed the maximum time period or areas such court deems reasonable and enforceable, said time period and/or areas of restriction shall be deemed to become and thereafter be the maximum time period 32 and/or areas which such court deems reasonable and enforceable. Shareholders agree that damages alone will be inadequate protection for AFI in the event of a breach or a threatened breach or violation of any of the provisions of this Agreement, and that AFI shall, in addition thereto, be entitled to an injunction restraining such breach or violation by Shareholders of any provision of this Agreement, and, such injunctive remedy shall not be in limitation of, but in addition to, any other remedies authorized by law for the breach or threatened breach of this Agreement, including the recovery of monetary damages and reasonable attorneys' fees. Shareholders and AFI expressly waive the posting of any bond or surety required prior to the issuance of an injunction hereunder. However, in the event that the court refuses to honor the waiver of the bond hereunder, Shareholders and AFI hereby expressly agree to a bond to be posted in this matter of One Hundred Dollars ($100). Nothing in this Agreement shall be construed to prohibit AFI from also pursuing any other remedy, the parties having agreed that all remedies are cumulative. Shareholders also recognize and covenant and agree that all records, materials and information, including, but not limited to, customer/clients lists, client business cards, pricing lists, bid lists, documents, records, notebooks, tapes, printed materials, notes, computer software, programs, disks, supplies and forms (collectively "Company Records"), relating to the stock purchased by AFI hereunder and Corporation's business and customers, are confidential, trade secrets and shall remain the exclusive property of AFI. Shareholders further agree that they will not at any time remove from Corporation's offices, duplicate or divulge any information regarding the Company Records. At the end of any employment of Shareholders with AFI or Corporation, Shareholders agree to return any Company Records in their possession to AFI or AFI's office. If Shareholder is not an employee of AFI or Corporation, Shareholders agree to return any Company records in their possession at Closing to AFI or AFI's office. Shareholders agree that AFI shall have the right to seek specific performance requiring Shareholders to return any Company Records in their possession at any time after Closing. Dunn and Offill, respectively, hereby acknowledge that the shares of AFI common stock to be distributed to Piper, Jaffray, Inc., as custodian for the benefit of Terrence P. Dunn, and Mark P. Offill, as trustee of the Jean Offill Grandchildren's Irrevocable Trust, respectively, are sufficient consideration to them, respectively, to bind them, individually, to the provisions of this Article VI, and hereby agree that, in addition to the other remedies to which AFI is entitled as a result of a breach by said individuals of Article VI, the damages that occur as a result of said breach by them, respectively, will subject Piper, Jaffray, Inc., as custodian for the benefit of Terrence P. Dunn, and Mark P. Offill, as trustee of the Jean Offill Grandchildren's Irrevocable Trust, respectively, to the indemnity set forth in Article XI of this Agreement and to the Escrow Agreement that secures that indemnity. ARTICLE VII OTHER AGREEMENTS 7.01 Consultants, Brokers and Finders. Shareholders and AFI represent and warrant to one another that, other than Ken Koger, the existence of which will be disclosed in the Bankruptcy Court approval process, they have not retained any consultant, broker or finder in connection with the transactions contemplated by this Agreement. AFI hereby agrees to indemnify, defend and hold Shareholders and their affiliates harmless from and against any and all claims, liabilities or expenses for any brokerage fees, commissions or finders fees due to any consultant, broker or finder retained by AFI. Shareholders shall jointly and severally indemnify, 33 defend and hold AFI and its officers, directors, employees and affiliates, harmless from and against any and all claims, liabilities or expenses for any brokerage fees, commissions or finders fees due to any consultant, broker or finder retained by Shareholders or Corporation. 7.02 Consulting Agreement. Prior to Closing, Company and Sequoia Company will enter into a Consulting Agreement, substantially in the form of Exhibit 7.02, and Sequoia Company and Lee H. Grief will enter into a Designated Employee Agreement substantially in the form of Exhibit 7.03. 7.03 Taxes. (a) Shareholders shall cause Corporation to prepare and file all tax returns and reports of Corporation due on or prior to the Closing Date, which returns and reports shall be prepared and filed timely and on a basis consistent with existing procedures for preparing such returns and reports and in a manner consistent with Corporation's prior practice with respect to the treatment of specific items on the returns or reports; provided, however, that if the treatment of any item on any such return or report has not been provided by prior practice, Shareholders shall cause Corporation to report such items in a manner that would result in the least amount of tax liability to Corporation and AFI for periods ending after the Closing Date. AFI shall cause Corporation to prepare and file all tax returns and reports of Corporation due after the Closing Date, which returns and reports, to the extent they relate to taxable periods beginning prior to, but including the Closing Date, shall be prepared and filed timely and on a basis consistent with existing procedures for preparing such returns and in a manner consistent with Corporation's prior practice with respect to the treatment of specific items on the returns and reports, unless such treatment does not have sufficient legal support to avoid the imposition of penalties. (b) AFI, Corporation and Shareholders shall provide each other with such assistance as may reasonably be requested by the others in connection with the preparation of any return or report of Taxes, any audit or other examination by any taxing authority, or any judicial or administrative proceedings relating to liabilities for Taxes. AFI, Corporation and Shareholders will retain for the full period of any statute of limitations and provide the others with any records or information which may be relevant to such preparation, audit, examination, proceeding or determination. (c) If in connection with any examination, investigation, audit or other proceeding in respect of any tax return covering the operations of Corporation on or before the Closing Date, any governmental body or authority issues to Corporation a written notice of deficiency, a notice of reassessment, a proposed adjustment, an assertion of claim or demand concerning the taxable period covered by such return, AFI or Corporation shall notify Shareholders of its receipt of such communication from the governmental body or authority within thirty (30) business days after receiving such notice of deficiency, reassessment, adjustment or assertion of claim or demand. Except as provided below, Shareholders shall, at Shareholders' expense, have the nonexclusive right to participate in the contest of any such assessment, proposal, claim, reassessment, demand or other proceedings in connection with any tax return covering taxable periods 34 of Corporation ending on or before the Closing Date. AFI and Corporation will not be obligated to settle or resolve any issue related to Taxes for such a period, which, if so settled or resolved, could have an effect on Corporation or AFI for periods after the Closing Date, unless Shareholders agree in writing with AFI and Corporation, in terms reasonably satisfactory to AFI and Corporation, to indemnify AFI and Corporation from any cost, damage, loss or expense relating to such settlement or resolution. Notwithstanding anything in this Agreement to the contrary, if any examination, investigation, audit or other proceeding relates to a tax return for a period that begins before and ends after the Closing Date, AFI and Corporation shall solely participate in, control and resolve such examination, investigation, audit or other proceeding, provided that AFI shall communicate with Shareholders regarding the status of such examination, investigation, audit or proceeding. 7.04 Anti-dilution. AFI agrees, for a period of three (3) years after Closing, that it will not issue any voting common stock of AFI for less than Fifty Cents ($.50) per share in consideration received by AFI, absent the written agreement of Shareholders. Shareholders agree, however, that the Fifty Cents ($.50) per share requirement set forth herein shall be reduced proportionately upon the occurrence of a stock split or stock dividend of AFI common stock. 7.05 Future Purchase of Shares. Shareholders, Dunn and Offill will not, for a period of three (3) years after Closing, acquire any further shares of stock of AFI if the acquisition of those shares will, (i) in the reasonable opinion of competent tax counsel for AFI, cause a "change of control" of AFI as determined under Section 382 of the Internal Revenue Code of 1986, as amended, including the regulations as promulgated thereunder, or under the comparable provision of any future internal revenue law; or (ii) have the effect of reducing the number of shares which FMIC could acquire under its option without such FMIC acquisition causing a "change of control." Shareholders, Dunn, and Offill hereby acknowledge and agree that they shall have personal liability for a violation of this Section 7.05, which liability shall not be limited by any provisions of Article XI of this Agreement or limited to the shares of stock placed in escrow by Shareholders, pursuant to the Escrow Agreement. ARTICLE VIII CONDITIONS TO THE OBLIGATIONS OF AFI Each and every obligation of AFI under this Agreement shall be subject to the satisfaction, on or before the Closing Date, of each of the following conditions unless waived in writing by AFI: 8.01 Representations and Warranties; Performance. The representations and warranties made by Shareholders herein shall be true and correct on the date of this Agreement and on the Closing Date with the same effect as though made on such date; Shareholders shall have performed and complied with all agreements, covenants and conditions required by this Agreement to be performed and complied with by them prior to the Closing Date; and Shareholders shall have delivered to AFI a certificate, dated the Closing Date, in the form designated as Exhibit 8.01 hereto, certifying to such matters and the other conditions contained in this Article VIII. 35 8.02 Fairness Opinion. AFI shall have received a fairness opinion from a party and in form and substance reasonably agreeable to AFI, representing that Corporation has, as of the Closing Date, a fair market value, on an ongoing basis, of at least Seven Hundred Fifty Thousand Dollars ($750,000). 8.03 Consents and Approvals. All consents from and filings with third parties, regulators and governmental agencies required to consummate the transactions contemplated hereby, or which, either individually or in the aggregate, if not obtained, would cause an adverse effect on Corporation's financial condition or business shall have been obtained and delivered to AFI, including but not limited to: (a) consents by Corporation's landlords. (b) consent by Corporation's equipment lessor(s). (c) consents by any of Corporation's lenders. (d) Bankruptcy Court approval, in AFI's sole discretion. 8.04 Opinion of Counsel to Corporation and/or Shareholder. AFI shall have received an opinion of counsel to Corporation and/or Shareholders, dated the Closing Date, in a form satisfactory to AFI and Shareholders' Counsel. 8.05 No Proceeding or Litigation. No action, suit or proceeding before any court or any governmental or regulatory authority shall have been commenced or threatened, and no investigation by any governmental or regulatory authority shall have been commenced or threatened against Corporation, Shareholders or AFI or any of their respective principals, officers or directors seeking to restrain, prevent or change the transactions contemplated hereby or questioning the validity or legality of any of such transactions or seeking damages in connection with any of such transactions. 8.06 Review. A full due diligence review of Corporation's business shall be completed by AFI, its legal counsel, its outside consultants, or others appointed by AFI. AFI shall be satisfied in its sole and absolute discretion with the results of AFI's due diligence review of Corporation and its business operations, prospects and assets. AFI shall bear the costs of this review. 8.07 Other Agreements. The Agreements described in Article VII shall have been entered into and delivered. 8.08 Board of Director Approvals. The Board of Directors of AFI shall have approved this Agreement, the transactions contemplated hereby and the Closing. 8.09 Stock. Shareholders shall have delivered duly executed stock powers and duly issued stock certificates representing the Shares which assign and transfer the Shares to AFI. 36 8.10 Adverse Change. There shall have been no material adverse change to the assets, liabilities, and business of Corporation. 8.11 Computer Leases. AFI shall have entered into a certain indemnity agreement with Amy Greif on the computer leases utilized by Corporation at Closing. 8.12 Execution of Escrow Agreement. Shareholders and AFI shall have entered into the Escrow Agreement. 8.13 Termination of Existing Consulting Agreements. The existing consulting agreements between Corporation and Lee S. Greif and Amy S. Greif shall have been terminated by the parties thereto, with no further obligation of Corporation to either as a result thereof. 8.14 Resignation of Existing Officers and Directors. The existing officers and directors of Corporation shall have resigned effective as of Closing. 8.15 FMIC Line of Credit. AFI and FMIC shall have entered into an agreement in which FMIC agrees to provide to AFI, as of Closing, a Eight Hundred Seventy-five Thousand Dollar ($875,000) line of credit upon which AFI can draw down for any reason whatsoever. The line of credit shall remain in existence for a term of five (5) years and shall accrue interest at the rate of seven percent (7%) per annum fixed during the term of the line of credit, with interest paid quarterly by AFI to FMIC, and any principal borrowed on said line of credit due and payable five (5) years from the date of Closing. Said agreement shall provide that AFI shall draw down at Closing Two Hundred Fifty Thousand Dollars ($250,000) on said line of credit, with an additional One Hundred Thousand Dollars ($100,000) drawn down every thirty (30) days after Closing until the full Eight Hundred Seventy-five Thousand Dollar ($875,000) line of credit has been extended by FMIC to AFI. In addition, said agreement shall contain the covenant of AFI that it shall not, for a period of five (5) years from the Closing Date, repay said line of credit from revenues earned from the normal operations of AFI, nor will it, within two (2) years after the Closing Date, repay the line of credit through the borrowing of funds by AFI. 8.16 Bankruptcy Court Approval. AFI shall have (a) received a limited notice order from the Bankruptcy Court in form and content agreeable to AFI, in its sole discretion, and, pursuant to said order, provided notice of the pending transaction to the creditors described in said order, with copies of the operative documents, including, but not limited to, the Consulting Agreement and Designated Employee Agreement; and (b) either no objection shall have been received to the proposed transaction and the Court has approved the transaction for completion by AFI or, if objections are received, after appropriate hearing with the Bankruptcy Court, an order is obtained from the Bankruptcy Court allowing AFI to complete the transaction. 8.17 Koger Agreement. AFI, Corporation and Shareholders shall have entered into an agreement with Ken Koger, setting forth the compensation to be received by Ken Koger for his participation in this transaction, which said agreement shall be disclosed to the Bankruptcy Court in the approval process. 37 8.18 SEC Filings. All delinquent 10-KSB and 10-QSB filings shall be filed with and accepted by the SEC. 8.19 FMIC Transaction. A closing shall have occurred under the Acquisition Agreement between AFI and FMIC dated November 13, 1998. 8.20 Greif Disclosure. Lee H. Greif will have disclosed, in writing, his participation in this transaction and relationship to Sequoia to the appropriate authorities governing and regulating his conduct, the contents of which shall be approved by AFI and its counsel. In the event that any of these conditions have not occurred prior to Closing, AFI may, at its sole and absolute discretion, terminate this Agreement through notice to the other parties hereto. ARTICLE IX CONDITIONS TO THE OBLIGATIONS OF SHAREHOLDERS Each and every obligation of Shareholders under this Agreement shall be subject to the satisfaction, on or before the Closing Date, of each of the following conditions unless waived in writing by Shareholder: 9.01 Representations and Warranties; Performance. The representations and warranties made by AFI herein shall be true and correct on the date of this Agreement and on the Closing Date with the same effect as though made on such date; AFI shall have performed and complied with all agreements, covenants and conditions required by this Agreement to be performed and complied with by it prior to the Closing Date; AFI shall have delivered to Shareholders a certificate of its Chief Operating Officer, dated the Closing Date, certifying to the fulfillment of the conditions set forth herein, in the form designated as Exhibit 9.01 and the other conditions contained in this Article IX. 9.02 No Proceeding or Litigation. No action, suit or proceeding before any court or any governmental or regulatory authority shall have been commenced, or threatened, and no investigation by any governmental or regulatory authority shall have been commenced, or threatened, against Corporation, Shareholders, AFI or any of their respective principals, officers or directors, seeking to restrain, prevent or change the transactions contemplated hereby or questioning the validity or legality of any of such transactions or seeking damages in connection with any of such transactions. 9.03 Payment. The transfer of AFI's stock to Shareholders, as described in Section 1.02, shall have been made. 9.04 Other Documents. AFI will furnish Shareholders with such other documents and certificates to evidence compliance with the conditions set forth in this Article as may be reasonably requested by Shareholders. 9.05 Other Agreements9.05Other Agreements. The agreements described in Article VII shall have been entered into and delivered. 38 9.06 Execution of Escrow Agreement. Shareholders and AFI shall have entered into the Escrow Agreement. 9.07 Computer Leases. AFI shall have entered into a certain indemnity agreement with Amy Greif on the computer leases utilized by Corporation at Closing. 9.08 Koger Agreement. AFI, Corporation and Shareholders shall have entered into an agreement with Ken Koger, setting forth the compensation to be received by Ken Koger for his participation in this transaction, which said agreement shall be disclosed to the Bankruptcy Court in the approval process. 9.09 SEC Filings. All delinquent 10-KSB and 10-QSB filings shall be filed with and accepted by the SEC. 9.10 FMIC Transaction. A closing shall have occurred under the Acquisition Agreement between AFI and FMIC dated November 13, 1998. 9.11 Greif Disclosure. Lee H. Greif will have disclosed, in writing, his participation in this transaction and relationship to Sequoia to the appropriate authorities governing and regulating his conduct, the contents of which shall be approved by AFI and its counsel. 9.12 FMIC Line of Credit . AFI and FMIC shall have entered into an agreement in which FMIC agrees to provide to AFI, as of Closing, a Eight Hundred Seventy-five Thousand Dollar ($875,000) line of credit upon which AFI can draw down for any reason whatsoever. The line of credit shall remain in existence for a term of five (5) years and shall accrue interest at the rate of seven percent (7%) per annum fixed during the term of the line of credit, with interest paid quarterly by AFI to FMIC, and any principal borrowed on said line of credit due and payable five (5) years from the date of Closing. Said agreement shall provide that AFI shall draw down at Closing Two Hundred Fifty Thousand Dollars ($250,000) on said line of credit, with an additional One Hundred Thousand Dollars ($100,000) drawn down every thirty (30) days after Closing until the full Eight Hundred Seventy-five Thousand Dollar ($875,000) line of credit has been extended by FMIC to AFI. In addition, said agreement shall contain the covenant of AFI that it shall not, for a period of five (5) years from the Closing Date, repay said line of credit from revenues earned from the normal operations of AFI, nor will it, within two (2) years after the Closing Date, repay the line of credit through the borrowing of funds by AFI. In the event that any of these conditions have not occurred prior to Closing, Shareholders may, at their sole and absolute discretion, terminate this Agreement through notice to the other parties hereto. ARTICLE X CLOSING 10.01 Closing. The closing of this transaction (the "Closing") shall be held on or before February 19, 1999, or on such other date (the "Closing Date") mutually agreed upon at such place or places as AFI shall designate. 10.02 Deliveries at Closing. 39 (a) At the Closing, Shareholders shall transfer and assign to AFI all of the Shares by delivering certificates representing each of the Shares, duly endorsed for transfer to AFI, and the other agreements, certifications and other documents required to be executed and delivered hereunder at the Closing shall be duly and validly executed and delivered. (b) From time to time after the Closing, at AFI's request and without further consideration from AFI, Shareholders shall execute and deliver such other instruments of conveyance and transfer and take such other action as AFI reasonably may require to convey, transfer to and vest in AFI and to put AFI in possession of the Shares to be sold, conveyed, transferred and delivered hereunder. 10.03 Legal Actions. If, prior to the Closing Date, any action or proceeding shall have been instituted by any third party before any court or governmental agency to restrain or prohibit this Agreement or the consummation of the transactions contemplated herein, the Closing shall be adjourned at the option of any party hereto for a period of up to one hundred twenty (120) days. If, at the end of such 120-day period, the action or proceeding shall not have been favorably resolved, either party may, by written notice thereof to the other, terminate their respective obligations hereunder. 10.04 Specific Performance. The parties agree that if any party hereto is obligated to, but nevertheless does not, consummate this transaction, then any other party, in addition to all other rights or remedies, shall be entitled to the remedy of specific performance mandating that the other party or parties consummate this transaction. In an action for specific performance by any party against any other party, the other party shall not plead adequacy of damages at law. 40 ARTICLE XI INDEMNIFICATION 11.01 Indemnification by Shareholder. Shareholders, jointly and severally (except for subparagraph (i) below, for which the Jean Offill Grandchildren's Irrevocable Trust shall be solely liable, and subparagraph (j) below, for which the JMO Group shall be solely liable), indemnify AFI and each of its shareholders, officers, directors, subsidiaries, agents, employees and attorneys against any loss, damage, or expense (including, but not limited to, reasonable attorneys' fees) ("Damages"), incurred or sustained by AFI or any of its shareholders, officers, directors, or subsidiaries, agents, employees and attorneys (a) as a result of any breach of any term, provision, covenant or agreement contained in this Agreement by Shareholder and/or Corporation; (b) as a result of any inaccuracy in any of the representations or warranties made by Shareholders and/or Corporation in Article II of this Agreement; (c) as a result of any inaccuracy or misrepresentation in any certificate or other document or instrument delivered by Shareholders and/or Corporation in accordance with any provision of this Agreement; (d) arising out of any violation or claimed violation of any environmental laws and regulations associated with the Leased Premises and occurring (although the claim may be later asserted) prior to Closing; (e) any taxes of Corporation, for taxable periods ending on or before the Closing Date, not included in the Closing Balance Sheet, including, but not limited to, taxes as a result from audits by any taxing authority of Corporation's taxes for taxable periods ending prior to the Closing Date and any expenses incurred by AFI and/or Corporation in connection with said audits; (f) as a result of the existence of any liabilities or obligations of Corporation not included on the Closing Balance Sheet of Corporation attached hereto; (g) as a result of the operation of Corporation prior to Closing; (h) as a result of ownership of Shares prior to Closing. The obligations of Shareholders as set forth in Section 11.01(b) shall be subject to and limited by the following: (i) as a result of the violation by the Jean Offill Grandchildren's Irrevocable Trust of its representations, warranties and covenants contained in Section 2.36 herein; or (j) as a result of the violation by the JMO Group of its representations, warranties and covenants contained in Section 2.36 herein: (i) AFI shall give written notice to Shareholders stating specifically the basis for the claim for Damages, the amount thereof and shall tender defense thereof to Shareholders as provided in Section 11.02; and (ii) The parties hereto agree that Shareholders' indemnity hereunder shall not go into effect until at least Five Thousand Dollars ($5,000) in aggregate damages have occurred during the period of indemnity hereunder. (iii) AFI hereby agrees that, except as set forth in Section 1.03(c) herein and in Section 7.05 herein, Shareholders' indemnity pursuant to this Agreement shall be nonrecourse to Shareholders personally and corporately. Except for Shareholders' obligation under Section 1.03(c) and except for violations of Section 7.05 hereunder, AFI agrees that its only remedy in connection with Shareholders' indemnity hereunder shall be to accept a forfeiture of Shareholders' shares pursuant to the terms and conditions of the Escrow Agreement attached hereto. 41 (iv) The parties agree that the indemnity under Section 11.01, with respect to all items which can cause "damages" to occur thereunder, shall be limited to those items that are discovered and for which AFI provides notice to Shareholders of its claim for damages, which notification occurs within two (2) years of the date of Closing hereunder. However, notwithstanding the foregoing, with respect to the indemnity that arises out of subparagraph 11.01(e), the indemnity shall continue for a period equal to the applicable statute of limitations period for the particular tax involved. 11.02 Tender of Defense for Damages. Promptly upon receipt by AFI of a notice of a claim by a third party which may give rise to a claim for Damages, AFI shall give written notice thereof to Shareholders. No failure or delay of AFI in the performance of the foregoing shall relieve, reduce or otherwise affect Shareholders' obligations and liability to indemnify AFI pursuant to this Agreement, except to the extent that such failure or delay shall have adversely affected Shareholders' ability to defend against such claim for Damages. Shareholders may, at their sole expense, undertake the defense against such claim and may contest or settle such claim on such terms, at such time and in such manner as Shareholders, in their sole discretion, shall elect and AFI shall execute such documents and take such steps as may be reasonably necessary in the opinion of counsel for Shareholders to enable Shareholders to conduct the defense of such claim for Damages. If Shareholders fail or refuse to defend any claim for Damages, Shareholders may nevertheless, at their own expense, participate in the defense of such claim by AFI and in any and all settlement negotiations relating thereto. In any and all events, Shareholders shall have such access to the records and files of AFI relating to any claim for Damages as may be reasonably necessary to effectively defend or participate in the defense thereof. 11.03 Survival of Warranties. The respective representations and warranties of Shareholders and AFI contained herein or in any certificates or other documents delivered prior to or at the Closing are true, accurate and correct and shall not be deemed waived or otherwise affected by any investigation made by any party hereto or the occurrence of the Closing. Each and every such representation and warranty shall survive the Closing Date, and all claims for Damages based on intentional or fraudulent actions, misrepresentations or breaches shall never expire. ARTICLE XII MISCELLANEOUS PROVISIONS 12.01 Amendment and Modification. Subject to applicable law, this Agreement may be amended, modified and supplemented only by written agreement of Shareholders, Corporation and AFI. 12.02 Waiver of Compliance; Consents. Any failure of Shareholders on the one hand, or AFI on the other hand, to comply with any obligation, covenant, agreement or condition herein may be waived in writing by AFI or by Shareholders, but such waiver or failure to insist upon strict compliance with such obligation, covenant, agreement or condition shall not operate as a waiver of, or estoppel with respect to, any subsequent or other failure. Whenever this Agreement requires or permits consent by or on behalf of any party hereto, such consent shall be given in 42 writing in a manner consistent with the requirements for a waiver of compliance as set forth in this Section 12.02. 12.03 Expenses. Each party will pay its own legal, accounting and other expenses incurred by such party or on its behalf in connection with this Agreement and the transactions contemplated herein. If Corporation shall at any time pay any expenses incurred in connection with this Agreement or any part thereof or any of the proceedings and transactions contemplated hereunder including, without limitation, any legal, accounting, printing, filing or other costs. Such costs shall be deducted from and reduce the "Closing Owner's Equity" defined herein and, as such, may affect the Shares to be received and/or retained by Shareholders, pursuant to Section 1.03 hereof. 12.04 Notices. Any notice, request, consent or communication (collectively a "Notice") under this Agreement shall be effective only if it is in writing and (i) personally delivered, (ii) sent by certified or registered mail, return receipt requested, postage prepaid, (iii) sent by a nationally recognized overnight delivery service, with delivery confirmed, or (iv) telexed or telecopied, with receipt confirmed, addressed as follows: If to Shareholders and/or Corporation: Cannon Financial Company Post Office Box 8266 Shawnee Mission, Kansas 66208 With copy to: Thomas K. Jones, Esq. Payne & Jones, Chartered 11000 King, Suite 200 Post Office Box 25625 Overland Park, Kansas 66225 If to AFI to: Advanced Financial, Inc. 1900 Commerce Tower 911 Main Street Kansas City, Missouri 64105 Attn: President With copy to: Edward E. Frizell, Esq. Polsinelli, White, Vardeman & Shalton West 47th Street, Suite 1000 Kansas City, Missouri 64112 or such other persons or addresses as shall be furnished in writing by any party to the other party. A Notice shall be deemed to have been given as of the date when (i) personally delivered, (ii) five (5) days after the date when deposited with the United States mail properly addressed, (iii) when 43 receipt of a Notice sent by an overnight delivery service is confirmed by such overnight delivery service, or (iv) when receipt of the telex or telecopy is confirmed, as the case may be, unless the sending party has actual knowledge that a Notice was not received by the intended recipient. 12.05 Definitions. For the purpose of this Agreement, "Laws" shall include, without limitation, all foreign, federal, state and local laws, statutes, rules, regulations, codes, ordinances, plans, orders, judicial decrees, writs, injunctions, notices, decisions or demand letters issued, entered or promulgated pursuant to any foreign, federal, state or local law. For the purpose of this Agreement, "generally accepted accounting principles" shall mean such principles, applied on a consistent basis, as set forth in Opinions of the Accounting Principles Board of the American Institute of Certified Public Accountants and/or in statements of the Financial Accounting Standards Board which are applicable in the circumstances as of the date in question, and the requirement that such principles be applied on a "consistent basis" means that accounting principles observed in the current period are comparable in all material respects to those applied in the preceding periods, except as change is permitted or required under or pursuant to such accounting principles. 12.06 Assignment. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, successors and permitted assigns, but neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by either party without the prior written consent of the other party. 12.07 Governing Law. This Agreement shall be governed by the laws of the state of Missouri as to all matters including, but not limited to, matters of validity, construction, effect, performance and remedies. 12.08 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 12.09 Neutral Interpretation. This Agreement constitutes the product of the negotiation of the parties hereto and the enforcement hereof shall be interpreted in a neutral manner, and not more strongly for or against any party based upon the source of the draftsmanship hereof. 12.10 Headings. The article and section headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 12.11 Release of All Claims. As additional consideration for the Purchase Price paid to Shareholders by AFI hereunder, the receipt and sufficiency of which is hereby acknowledged, Shareholders hereby release and forever discharge AFI, Corporation, their respective shareholder, partners, directors, officers, employees and agents, and their heirs, executors, administrators, successors and assigns, from any and all obligations, rights, duties, claims, causes of action, damages, liabilities and demands whatsoever under, arising out of, or in any way connected with or related to the respective relationships as a shareholder, director, officer, employee or agent of 44 Corporation. This release shall be binding on Shareholders, their respective heirs, administrators, executors, successors and assigns, and shall survive the Closing under this Agreement. 12.12 Confidentiality. The parties hereto agree that the information on AFI and Corporation presented to one another shall remain confidential and shall not be disclosed by any parties, except to their attorneys, accountants, the Bankruptcy Court, and the appropriate officials of the Securities and Exchange Commission. In the event that a Closing does not occur hereunder, the parties agree to return all confidential information obtained in connection with this transaction to the party from whom it was received, and neither party shall be permitted to use, in its own behalf or on behalf of any third party, any confidential information which it obtained from the other party hereto. 12.13 Entire Agreement. This Agreement, which term as used throughout includes the Exhibits hereto, embodies the entire agreement and understanding of the parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, representations, warranties, covenants or undertakings other than those expressly set forth or referred to herein. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter. IN WITNESS WHEREOF, the parties hereto have entered into this Agreement as of the date first hereinabove set forth. AFI: ADVANCED FINANCIAL, INC., a Delaware corporation By: ---------------------------------------- Printed Name: ------------------------------ Title: ----------------------------------- SHAREHOLDERS: SEQUOIA COMPANY By: ---------------------------------------- Amy S. Greif, President 45 PIPER JAFFRAY, INC., custodian for the benefit of Terrence P. Dunn By: ---------------------------------------- Name: ---------------------------------------- Title: ---------------------------------------- JMO GROUP By: ---------------------------------------- Name: ---------------------------------------- Title: ---------------------------------------- JEAN OFFILL GRANDCHILDREN'S IRREVOCABLE TRUST By: ---------------------------------------- Mark P. Offill, Trustee ------------------------------------------------- David W. Offill ------------------------------------------------- Larry Davis ------------------------------------------------- Constance Davis CORPORATION: CANNON FINANCIAL COMPANY, a Kansas corporation By: --------------------------------------------- Printed Name: ----------------------------------- Title: ----------------------------------- 46 DUNN: -------------------------------------------------- Terrence P. Dunn OFFILL: -------------------------------------------------- Mark P. Offill 47 SCHEDULE OF EXHIBITS TO AGREEMENT FOR REORGANIZATION Exhibits Title - -------- ----- Exhibit 1.03 Escrow Agreement Exhibit 2.01 Certificate or Articles of Incorporation, Bylaws and Minutes of the of Corporation Exhibit 2.02 Schedule of Authorized, Issued and Outstanding Capital Stock of Corporation Exhibit 2.03 Schedule of Subsidiaries and Affiliates Exhibit 2.05 Restrictions on Ability to Perform Exhibit 2.06 Required Governmental Approvals Exhibit 2.07 Financial Statements Exhibit 2.08 Liabilities Exhibit 2.09 Certain Changes Exhibit 2.10 Schedule of Contracts Exhibit 2.12 Title and Related Matters Exhibit 2.12(a) Leased Site Lease Exhibit 2.12(b) Landlord Estoppel Letter Exhibit 2.13 Legal Proceedings and Judgments Exhibit 2.14.1 Certain Tax Matters Exhibit 2.14.2 Tax Returns Exhibit 2.15 Government Contracts Exhibit 2.16 Copies of Reports and Inspections Exhibit 2.18.1 Welfare Benefit Plans; Retiree Health Benefits Exhibit 2.18.2 Pension Benefit Plans Exhibit 2.18.3 Other Benefit Plans Including Vacations Exhibit 2.18.4 Other Plan Documents Exhibit 2.18.5 Consents and Agreements Exhibit 2.19 Schedule of Intellectual Property Rights Exhibit 2.20(a) Customer List Exhibit 2.20(b) Customer Fees Exhibit 2.20(c) Work in Process Exhibit 2.21 Labor Relations Exhibit 2.22 Schedule of Insurance Exhibit 2.23(a) Environmental Matters Exhibit 2.23(b) Underground Tanks, Piping and Subsurface Structures Exhibit 2.23(d) Environmental Investigations Exhibit 2.24 Bank Accounts Exhibit 2.25 Compensation Schedule Exhibit 2.26 Commitments Exhibit 2.27 Other Employee Matters Exhibit 2.31 Permits Exhibit 2.32(b) Information Statement; AFI July 29, 1998 Plan of Reorganization and Disclosure Statement Exhibit 3.04 Required Notice Exhibit 3.08 Capital Stock Options Exhibit 3.09 Subsidiaries and Affiliates 2 Exhibit 3.10 AFI's Financial Statements Exhibit 3.11 AFI's Liabilities Exhibit 3.12 Certain Changes (AFI) Exhibit 3.13 Litigation Exhibit 3.14.1 AFI's Tax Matters Exhibit 3.14.2 AFI's Tax Returns Exhibit 3.16 Copies of Reports and Inspections (AFI) Exhibit 7.02 Consulting Agreement Exhibit 7.03 Designated Employee Agreement Exhibit 8.01 Certificate of Fulfillment of Conditions by Shareholders Exhibit 9.01 Certificate of Fulfillment of Conditions by AFI 3 Exhibit 1.03 Escrow Agreement Exhibit 2.01 Certificate or Articles of Incorporation, Bylaws and Minutes of the Corporation Exhibit 2.02 Schedule of Authorized, Issued and Outstanding Capital Stock of Corporation Certificate Date No. of Shares Holder Exhibit 2.03 Schedule of Subsidiaries and Affiliates Exhibit 2.05 Restrictions on Ability to Perform Exhibit 2.06 Required Governmental Approvals Exhibit 2.07 Financial Statements Exhibit 2.08 Liabilities Exhibit 2.09 Certain Changes Exhibit 2.10 Schedule of Contracts Exhibit 2.12 Title and Related Matters Exhibit 2.12(a) Leased Site Lease Exhibit 2.12(b) Landlord Estoppel Letter Exhibit 2.13 Legal Proceedings and Judgments Exhibit 2.14.1 Certain Tax Matters Exhibit 2.14.2 Tax Returns Exhibit 2.15 Government Contracts Exhibit 2.16 Copies of Reports and Inspections Exhibit 2.18.1 Welfare Benefit Plans; Retiree Health Benefits Exhibit 2.18.2 Pension Benefit Plans Exhibit 2.18.3 Other Benefit Plans Including Vacations Exhibit 2.18.4 Other Plan Documents Exhibit 2.18.5 Consents and Agreements Exhibit 2.19 Schedule of Intellectual Property Rights Exhibit 2.20(a) Customer List Exhibit 2.20(b) Customer Fees Exhibit 2.20(c) Work in Process Exhibit 2.21 Labor Relations Exhibit 2.22 Schedule of Insurance Exhibit 2.23(a) Environmental Matters Exhibit 2.23(b) Underground Tanks, Piping and Subsurface Structures Exhibit 2.23(d) Environmental Investigations Exhibit 2.24 Bank Accounts Exhibit 2.25 Compensation Schedule Exhibit 2.26 Commitments Exhibit 2.27 Other Employee Matters Exhibit 2.31 Permits Exhibit 2.32(b) Information Statement; AFI July 29, 1998 Plan of Reorganization and Disclosure Statement Exhibit 3.04 Required Notice File 8-K of AFI within fourteen (14) days after Closing of transaction. File prior to Closing by AFI, the 1997 10-KSB, June 30, 1997 10-QSB, September 30, 1997 10-QSB, December 31, 1997 10-QSB, March 31, 1998 10-KSB, June 30, 1998 10-QSB, September 30, 1998 10-QSB, December 31, 1998 10-QSB. Exhibit 3.08 Capital Stock Options a) 900,000 warrants to existing creditors of AFI at an execution price of $1.25 per share, pursuant to the Bankruptcy Plan. b) William B. Morris is to receive an option to acquire 149,999 shares of AFI common stock at $.25 per share, pursuant to the Bankruptcy Plan. Exhibit 3.09 Subsidiaries and Affiliates AFI Mortgage Corp., a Nebraska corporation Exhibit 3.10 AFI's Financial Statements Exhibit 3.11 AFI's Liabilities None Exhibit 3.12 Certain Changes (AFI) All transactions discussed within AFI and AFI Mortgage Corp.Bankruptcy Plans. Exhibit 3.13 Litigation Any and all suits filed prior to filing of the bankruptcy of AFI or AFI Mortgage Corp. Exhibit 3.14.1 AFI Tax Matters None Exhibit 3.14.2 AFI Tax Returns Exhibit 3.16 Copies of Reports and Inspections (AFI) None Exhibit 7.02 Consulting Agreement Exhibit 7.03 Designated Employee Agreement Exhibit 8.01 Certificate of Fulfillment of Conditions by Shareholders Exhibit 9.01 Certificate of Fulfillment of Conditions by AFI EX-2.4 3 AMENDMENT TO AGREEMENT OF REORGANIZATION AMENDMENT TO AGREEMENT OF REORGANIZATION This Amendment is made and entered into this 18th day of February, 1999, by and among CANNON FINANCIAL COMPANY, a Kansas corporation ("Corporation"), ADVANCED FINANCIAL, INC., a Delaware corporation ("AFI"), SEQUOIA COMPANY ("Sequoia") and LEE GREIF ("Greif"). W I T N E S S E T H: WHEREAS, the parties hereto, as well as the other shareholders of Corporation, Terrence P. Dunn and Mark P. Offill ("such parties"), did enter into that certain Agreement of Reorganization dated February 5, 1999 ("Agreement of Reorganization"); WHEREAS, Sequoia has represented to Corporation and AFI that it has reviewed the contents of the Agreement of Reorganization with such parties, and has the authorization of such parties to enter into this Amendment on behalf of said parties; WHEREAS, Greif has communicated with representatives of Corporation and such parties as to this Amendment and matters set forth herein; and WHEREAS, Sequoia and Greif, in order to secure this representation and promise to Corporation and AFI, have agreed to indemnify Corporation and AFI from any and all damages that may occur to either or both of them as a result of any of such parties successfully arguing that Greif and Sequoia did not have authority to enter into the Amendment on behalf of such parties. NOW, THEREFORE, in consideration of the mutual covenants and conditions set forth herein, the parties hereto agree as follows: 1. The first sentence of Paragraph 1.03(b) is hereby revised in its entirety to read as follows: Shareholders and AFI agree to cause Corporation, at AFI's expense, by no later than sixty (60) days after the Closing Date, to prepare an audited balance sheet and income statement of Corporation as of the end of business on January 31, 1999 ("Closing Balance Sheet") to be prepared in accordance with generally accepted accounting principles by the accounting firm of Grant Thornton and in a manner agreeable to AFI and its accountants. 2. The parties hereto agree that the following shall be added to Exhibit 2.02 of the Agreement of Reorganization: An option in favor of William B. Morris to purchase 150,000 shares of the common capital stock of AFI for a purchase price of $.25 per share, which option may only be exercised on or after February 19, 2001 (if William B. Morris is employed by AFI on February 19, 2001), and then only pursuant to the following restrictions: (a) Seventy-five thousand (75,000) shares may be purchased when AFI stock has been traded for twenty (20) consecutive days on a public stock exchange at a purchase price of One Dollar ($1.00) or more. (b) The final seventy-five thousand (75,000) shares may be purchased only when AFI common stock has been traded for twenty (20) consecutive days on a publicly traded stock exchange at a purchase price of Two Dollars ($2.00) or more. 3. The parties hereto agree that the following table should be added to Exhibit 2.02 of the Agreement of Reorganization to supplement the listing of shares of capital stock of Corporation as of the Closing Date: Percentage of Shareholder Stock Owned No. of Shares Sequoia Company 48.15% 6,500 Piper Jaffray, Inc., custodian for the benefit 14.81% 2,000 of Terrence P. Dunn Larry and Constance Davis 7.41% 1,000 David Offill 7.41% 1,000 JMO Group 14.81% 2,000 Mark P. Offill, Trustee of the Jean Offill 7.41% 1,000 Grandchildren's Irrevocable Trust ______ ______ TOTAL 100% 13,500 4. In consideration for the agreement of AFI to go forward under the Agreement of Reorganization without requiring that all shareholders of Cannon sign this Amendment, Sequoia and Greif, jointly and severally, hereby agree to indemnify and hold AFI, Corporation and William B. Morris, and each of them, harmless from any and all losses, causes of actions, costs, claims, expenses and damages whatsoever (including reasonable attorneys' fees) ("Damages") incurred by AFI, Corporation or William B. Morris as a result of the allegations of any shareholder of Corporation that they have been damaged as a result of their failure to execute this Amendment. Promptly upon receipt by AFI, Corporation or William B. Morris of a notice of a claim which may give rise to a claim for Damages, AFI, Corporation or William B. Morris shall give written notice thereof to Sequoia and Greif. No failure or delay of AFI, Corporation or William B. Morris, in the performance of the foregoing, shall relieve, reduce or otherwise affect Sequoia and Greif's obligations and liability to indemnify AFI, Corporation or William B. Morris, pursuant to this Amendment. Sequoia and Greif may, at their sole expense, undertake the defense against such claim and may contest or settle such claim on such terms, at such time and in such manner as Sequoia and Greif, in their sole discretion, shall elect and AFI, Corporation or William B. Morris shall execute such documents and take such steps as may be reasonably necessary in the opinion of counsel for Sequoia and Greif to enable Sequoia and Greif to conduct the defense of such claim for Damages. If Sequoia and Greif fail or refuse to defend any claim for Damages, Sequoia and Greif may nevertheless, at their own expense, participate in the defense of such claim by AFI, Corporation or William B. Morris, and in any and all settlement negotiations 2 relating thereto. In any and all events, Sequoia and Greif shall have such access to the records and files of AFI, Corporation or William B. Morris relating to any claim for Damages as may be reasonably necessary to effectively defend or participate in the defense thereof. 5. In all other respects, the aforementioned Agreement of Reorganization shall remain in full force and effect as written. IN WITNESS WHEREOF, the undersigned parties have executed this Amendment on the day and year first above written. AFI: ADVANCED FINANCIAL, INC., a Delaware corporation By: ________________________________ Printed Name:_______________________ Title: _____________________________ CORPORATION: CANNON FINANCIAL COMPANY, a Kansas corporation By: _______________________________ Printed Name: _____________________ Title: ____________________________ SEQUOIA: SEQUOIA COMPANY By: ______________________________ Printed Name: ____________________ Title: ___________________________ GREIF: __________________________________ Lee Greif 3 EX-10.1 4 CONSULTING AGREEMENT CONSULTING AGREEMENT THIS CONSULTING AGREEMENT is made this ____ day of February, 1999, by and between CANNON FINANCIAL COMPANY, a Kansas corporation, hereinafter referred to as "Company," and SEQUOIA COMPANY, a Kansas corporation, hereinafter referred to as "Consultant." WHEREAS, Company is engaged in the Business of collecting, on behalf of clients, accounts receivable related to the client's business ("Business"); and WHEREAS, Consultant will designate during the entire term of this Agreement a designated employee (hereinafter the "designated employee") of Consultant to be the sole individual providing services on behalf of Consultant hereunder; and WHEREAS, Company desires to obtain the services of Consultant to assist it in generating a collection business for Company; and WHEREAS, Consultant desires to be retained by Company in the aforesaid capacity; and WHEREAS, Consultant acknowledges that Company would suffer substantial and irreparable loss and damage in the event Consultant or the designated employee should disclose confidential information to competitors of Company; and WHEREAS, Company and Consultant desire to set forth in writing the terms and conditions of their agreements and understandings. NOW, THEREFORE, in consideration of the foregoing, of the mutual promises and undertakings herein contained, the consideration set forth in paragraph 4 hereafter, and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto intending legally to be bound, hereby agree as follows: 1. Consulting. Company hereby agrees to retain Consultant for a period of five (5) years, commencing upon the date of this Agreement as a consultant to Company with respect to the Business. In such capacity, Consultant shall render such advice and consultation in connection with the Business as Company may require. In particular, Consultant's duties shall consist primarily of advice from time to time respecting broad aspects of profit-making opportunities in the general credit collection business. This shall include, but not be limited to, the determination of various companies in the Business and in areas involving or similar to credit collection which Company could acquire from time to time, the location and acquisition of books or groups of non-performing credit card debt that could be purchased by Company, and the entrance into agreements with third parties to provide services to those third parties, assisting them in the collection of their non-performing debt accounts. Consultant hereby agrees that, at all times during the term of this Agreement, without the prior written consent of Company, the designated employee will be the only party who will, on behalf of Consultant, be providing the services Consultant is required to provide to Company hereunder. In performing these services, Company will develop written guidelines that indicate the criteria that must be present in order for Company to consider these various facets of services to be provided by Consultant. Consultant agrees to use its best efforts to follow the guidelines in connection with the Business that it proposes to Company. In performing these consulting services, Consultant will be an independent contractor. Company understands that it will have no control over the number of hours worked by Consultant and where it works in satisfaction of its services hereunder. Nothing herein will create a partnership or joint venture relationship between Company and Consultant. Consultant will not be responsible for day-to-day operations of Company and will perform services, specifically requested by and reporting to the President of Company or a Vice President designated by the President at times and places reasonably agreeable to both parties. Consultant understands that it shall have no authority whatsoever to bind Company as to any obligation, liability, arrangement, contract or in any manner or way whatsoever and it agrees that, in all dealings with third parties on behalf of Company, that it shall communicate such fact to said third parties. 2. Compliance With All Laws. Consultant certifies that it will comply with all local, state and federal statutes, rules, regulations and laws with respect to all matters pertaining to this Agreement and the services performed on behalf of Company hereunder, and shall indemnify and hold Company harmless from claims, damages, expenses and costs, including reasonable attorneys' fees, for any violation or claimed violation thereof. Consultant understands that if it does not so comply with such laws, such actions shall be deemed unauthorized by Company. 3. Term. The term of this Agreement shall be for a period of five (5) years beginning on March 1, 1999, and terminating February 28, 2004, unless earlier terminated. 4. Compensation and Other Benefits. a. As and for compensation for the services to be rendered for Company by Consultant under this Agreement, Consultant shall be paid the monthly sum of Eleven Thousand Five Hundred Dollars($11,500) during the term of the engagement hereunder beginning March 1, 1999. b. As additional compensation hereunder, Consultant shall be entitled to receive a bonus determined as follows: i In the event that net income for book purposes after depreciation, interest and taxes for calendar year-end 2000 exceeds Five Hundred Thousand Dollars ($500,000), Consultant shall be paid a bonus of Four Thousand Dollars ($4,000) per month in connection with its services rendered during calendar year 2001. ii In the event that net income for book purposes after depreciation, interest and taxes for calendar year-end 2001 exceeds Five Hundred Thousand Dollars ($500,000), Consultant shall be paid a bonus of Four Thousand Dollars ($4,000) per month in connection with its services rendered during calendar year 2002. 2 iii. In the event that net income for book purposes after depreciation, interest and taxes for calendar year-end 2002 exceeds Five Hundred Thousand Dollars ($500,000), Consultant shall be paid a bonus of Four Thousand Dollars ($4,000) per month in connection with its services rendered during calendar year 2003. c. Consultant understands that, other than as specifically set forth herein, it shall be obligated to pay for all of its necessary expenses in connection with performance of its services hereunder. Company will not be obligated to reimburse Consultant for any expenses whatsoever it incurs in connection with the conduct of its services hereunder, other than those expressly allowed by Company policy, without the prior written agreement of Company in each event. However, Company does agree that it will provide to Consultant reasonable office space, monthly office parking for the designated employee only, phone usage and secretarial assistance in connection with the provision of its services to Company hereunder. 5. Disclosure of Information. a. Consultant acknowledges that, in and as a result of its engagement hereunder, it and its designated employee will be making use of, acquiring and/or adding to confidential information of a special and unique nature and value relating to such matters as Company's secrets, systems, procedures, manuals, confidential reports and lists of customers of Company and the Business. As a material inducement to Company to enter into this Agreement, and to pay to Consultant the compensation referred to in Paragraph 4 hereof, Consultant covenants and agrees that neither it, nor its designated employee or any of Consultant's shareholders, officers, directors, partners, members, employees or agents, shall, at any time during or following the term of Consultant's engagement hereunder, directly or indirectly, use, disseminate, divulge, disclose, lecture upon or publish articles with respect to, for any purpose whatsoever, any of such confidential information which has been obtained by or disclosed to them as a result of Consultant's engagement by Company. Such confidential information includes information not generally known in the industry in which Company is or may be engaged and information in any form concerning Company's customers, products, processes, methods, technology, computer programs, development, inventions, manufacturers, purchasing, distribution, accounting, marketing, merchandising and selling. It is understood and agreed, however, that confidential information will not include any information or documentation in the public domain and will likewise not include any information or documentation obtained by Consultant from any third party as long as such third party was not under a similar confidentiality restriction or an employee of Company or AFI. In the event of a breach or threatened breach by Consultant, its designated employee, or Consultant's shareholders, officers, directors, partners, members, employees or agents, of any of the provisions of this Paragraph 5, Company, in addition to and not in limitation of any other rights, remedies or damages available to Company at law or in equity, shall be entitled to a permanent injunction in order to prevent or to restrain any such breach by Consultant, its designated employee or by Consultant's 3 shareholders, directors, officers, partners, agents, representatives, employees, and/or any and all persons directly or indirectly acting for or with it or him. b. Upon termination of its engagement with Company, whether such termination was at the request of Consultant or of Company, all documents, records, notebooks and similar repositories of or documents containing any confidential information as defined in Paragraph 5(a) above, including copies thereof, then in Consultant's or its designated employee's possession or the possession of Consultant's officers, directors, shareholders, partners, members, employees or agents, or obtained by others from Company, whether prepared by them or others, will be the sole property of Company and shall be returned to Company. c. In the event that Consultant becomes legally compelled to disclose any of the information defined as confidential in Paragraph 5(a), Consultant or its designated employee will provide Company prompt notice so that Company may seek a protective order or other appropriate remedy and/or waive compliance with these provisions of this Agreement. In the event that such protective order or other remedy is not obtained, or that Company waives compliance with the provisions of this Agreement, Consultant and its designated employee will furnish only that portion of the information which they are legally required to disclose or with respect to which Company has waived compliance and will exercise their best efforts (which shall not require the payment of money) to cooperate with Company's efforts to obtain a required protective order or other reliable assurance that confidential treatment will be accorded the information. 6. Restrictive Covenant. By its engagement with Company, Consultant, as well as its designated employee, will acquire additional and intimate knowledge about the customers, financial data, price and business negotiations and business techniques of Company, as they may now exist or as they may be developed in the future. Consultant acknowledges and agrees that Company, in its engagement of Consultant, will allow Consultant to perform services for firms, corporations and other associations and business enterprises which Consultant may solicit as clients and customers of Company ("customers"), and in so doing, has and will utilize Company's ideas, techniques and expertise in establishing an even greater rapport with such customers. In order to avoid the inadvertent disclosure of Company's confidential matters, and as consideration for Consultant's engagement hereunder, Consultant hereby covenants and agrees that during Consultant's engagement hereunder and for two (2) years from and after the effective date of the termination of Consultant's engagement with Company, Consultant, its designated employee, and their respective shareholders, directors, officers, partners, members, employees and agents shall not, directly or indirectly, either by themselves or through others, or as a partner, employee, agent, officer, director, member, stockholder or otherwise (1) solicit, divert, take away or attempt to take away the Business of Company's present or past customers, or the customers of any affiliated or related companies of Company, in any business or enterprise competing with Company or any subsidiary companies of Company, (2) solicit, hire, employ or endeavor to employ any of Company's employees or employees of any subsidiary companies of Company, or (3) within a radius of fifty (50) miles from the city limits of any city in which Company is presently working for or soliciting customers or has worked for or solicited customers within the two (2) year period prior to termination of Consultant's engagement with Company, transact any business with, own any interest directly or indirectly in, or 4 be associated with or employed in any capacity by or on behalf of any person, partnership, firm, corporation or other business association engaged or seeking to engage in any business or enterprise competing directly or indirectly with Company or any subsidiary companies of Company. For purposes of this paragraph, the references to "Consultant" shall include any shareholder, officer, director, partner, member or agent of Consultant and any individual employed by Consultant on the date of this Agreement or during the term hereof. 7. Accounting for Profits. Consultant covenants and agrees that if it, its designated employee, or any other restricted parties shall violate any of the covenants or restrictions under the foregoing Paragraphs 5 and 6, Company shall be entitled to an accounting and repayment of all profits, compensation, commissions, remuneration, or other benefits that Consultant or any other restricted parties, directly or indirectly, has realized as a result of any such violation. These remedies shall be in addition to, and not in limitation of, any injunctive relief or other rights and remedies to which Company is or may be entitled at law, in equity, or under this Agreement. 8. Reasonableness of Restrictions. a. Consultant has carefully read and considered the provisions of Paragraphs 5, 6 and 7 and, having done so, agrees that the restrictions set forth in these paragraphs, are fair and reasonable, are reasonably required for the protection of the interests of Company and its officers, directors, shareholders, and other employees, are not injurious to the public in general, is no greater than reasonably necessary to protect the legitimate business interests of Company, and is not unduly harsh and oppressive on Consultant or the other restricted parties. In the event that Company is found by the Arbitrator(s) to have violated this Agreement, Consultant agrees that Company shall have 30 days after said arbitration decision to cure said performance or payment default. b. Consultant represents that its experience, capabilities and assets are such that this Agreement does not deprive it from earning a profit in the unrestricted business activities which remain open to it, nor does it deprive any of the other restricted parties from earning a livelihood in the unrestricted business activities that remain open to them or from otherwise adequately and appropriately supporting themselves. c. In the event that, notwithstanding the foregoing, any of the provisions of Paragraphs 5, 6 and 7 shall be held to be invalid or unenforceable, the remaining provisions thereof shall nevertheless continue to be valid and enforceable as though the invalid and unenforceable parts had not been included therein. In the event that any provision of Paragraphs 5, 6 and 7 shall be declared by a Court of competent jurisdiction to exceed the maximum restriction such Court deems reasonable and enforceable, the restriction deemed reasonable and enforceable by the Court shall become and thereafter be the maximum restriction. 9. Remedies. Consultant agrees that damages alone will be inadequate protection for Company in the event of a breach or threatened breach or violation of any of the provisions of this Agreement and that Company shall, in addition thereto, be entitled to an injunction restraining such breach or violation by Consultant, its designated employee and any other 5 restricted parties of any provision of this Agreement, and, such injunctive remedy shall not be in limitation of but in addition to, any other remedies authorized by law for the breach or threatened breach of this Agreement, including the recover of monetary damages and a reasonable attorney's fee. Consultant acknowledges that the agreement of the designated employee to the restrictions set forth in Paragraphs 5 and 6 herein is a material inducement to Company's payment of the sums set forth in Paragraph 4 hereof. Consultant, Company and the other restricted parties expressly waive the posting of any bond or surety required pursuant to the issuance of an injunction hereunder. However, in the event that the Court refuses to honor the waiver of bond hereunder, Consultant, Company and the other restricted parties hereby expressly agree to a bond to be posted in this matter of One Hundred Dollars ($100). Nothing in this Agreement shall be construed to prohibit Company from also pursuing any other remedy, the parties having agreed that all remedies are cumulative. The obligations of Consultant and the other restricted parties, and the rights of Company, its successors and assigns under Paragraphs 5, 6, 7, 8 and 9 of this Agreement, shall survive the termination of this Agreement. Consultant understands and acknowledges that a breach of Paragraphs 5 and 6 by Consultant's designated employee, the agents of Consultant's designated employee, or by any shareholders, directors, officers, employees, agents, partners or members of Consultant shall constitute a breach of Consultant under this Agreement entitling Company to all of the same remedies under this Agreement available to it as if a breach occurred by Consultant itself. Notwithstanding anything in this Paragraph 9 to the contrary, the parties agree that any dispute, controversy or claim for actual damages arising out of the termination of this Agreement under Paragraph 11 herein shall be submitted to and settled by arbitration in Kansas City, Jackson County, Missouri, pursuant to private arbitration. No other dispute under this Agreement shall be subject to arbitration, absent the separate agreement of the parties, and under no circumstances shall any claim for consequential, punitive or exemplary damages, or any tort claim, be arbitrable under this Agreement.. The parties agree that within ten (10) days after a demand for arbitration is sent in writing by any party to this Agreement, the respective parties shall either jointly agree upon one (1) arbitrator to arbitrate the disputes raised pursuant to the demand for arbitration, or each party will independently pick an arbitrator to serve on the arbitration panel. If the parties elect to pick their own arbitrators to serve on the panel, the two arbitrators picked by the respective parties shall then pick a third arbitrator who will complete the arbitration panel. The parties agree that the actual arbitration between the parties will begin no later than sixty (60) days from the date that the demand for arbitration is served on the other party and that the decision of the arbitration panel will be rendered no later than ninety (90) days from the date that the demand for arbitration is served on the other party. The parties agree that the Federal Rules of Civil Procedure, and discovery, will apply to these arbitration proceedings. Any award rendered shall be in writing and final and conclusive among the parties, and a judgment thereon may be entered in any court of competent jurisdiction. The expenses of the arbitration, and the arbitrator fees, shall be borne equally by the parties to the arbitration, provided that each party shall pay for and bear the cost of its own experts, evidence and counsel fees. Notwithstanding the foregoing it is agreed that the arbitrators may, in their discretion, award the prevailing party reasonable attorney fees as a part of the award if the arbitrator determines that the losing party acted in bad faith or without reasonable cause. In the event that Company is found by said Arbitrator(s) to have violated this Agreement, Consultant agrees that 6 Company shall have 30 days after said arbitration decision to cure said performance or payment default. 10. Delegation of Duties and Assignment of Rights. Consultant and the other restricted parties may not delegate the performance of any of their respective obligations or duties hereunder, or assign any rights hereunder except upon the prior written consent of Company. Company may assign all of its rights and obligations under this Agreement, provided that Company shall remain liable for all of its obligations under this Agreement (including, but not limited to, the obligation to pay compensation to Consultant) despite such assignment. In the event of an assignment by Company or Consultant, each reference in this Agreement to Company or Consultant shall include the assignee from and after the date of such assignment. 11. Termination. a. The engagement of Consultant under this Agreement shall terminate upon the occurrence of any of the following events: i the death of the designated employee; ii if the designated employee is adjudicated as being legally incompetent by any court having jurisdiction to determine such matter; iii the expiration of ten (10) days following notice by Company to Consultant of its intent to terminate its engagement hereunder "with cause" (as defined below), without Consultant curing said cause. However, the parties hereto agree that in the event of a termination with cause by Company for which a demand for arbitration is sent by the terminated party, payments to Consultant under Paragraph 4(a) only shall continue during the conduct of the arbitration proceeding and until a decision is rendered by the arbitrator described in Paragraph 9 herein; iv subsequent to one (1) year from the date of this Agreement, the expiration of twenty (20) days following notice by Company to Consultant of its intent to terminate its engagement hereunder without cause and upon payment by Company to Consultant of an additional amount equal to 50% of the payments then remaining under this Agreement; or v the mutual agreement of the parties hereto. b. For purposes of this Agreement, a termination of Consultant's engagement hereunder shall be considered to be for "cause" if such termination is by reason of Consultant's or the designated employee's dishonesty, theft, conviction of a felony or a misdemeanor involving moral turpitude or dishonesty, malfeasance, willful misconduct, material breach of this Agreement, abandonment of their respective responsibilities hereunder, neglect of material duties Consultant and/or the designated employee are required to perform hereunder, failure of Consultant and/or the designated employee to maintain the confidentiality of any client or information in their possession or to which they have access or knowledge, Company's discovery that any other party other than the 7 designated employee has been providing services on behalf of Consultant hereunder without the consent of Company, or in the event that any individual other than the designated employee becomes the designated employee of Consultant providing services hereunder, without Company's consent. The parties agree that the definition of "cause" shall occur if any of these actions have occurred only during the term hereof, not only by Consultant itself, but by the designated employee. c. Upon termination of Consultant's engagement hereunder for any reason, Company shall be obligated to pay to, or for the benefit of, Consultant only such compensation or other benefits which have accrued through the date of such termination. However, in the event that termination of Consultant's engagement occurs as a result of the operation of Paragraph 11(a)(i) or 11(a)(ii), Company, as its sole and remaining payment obligation hereunder, agrees to continue to pay the sum of Eleven Thousand Five Hundred Dollars ($11,500.00) to Consultant as a termination payment, for a period of twelve (12) months after the month of termination. d. Except as expressly provided herein, the obligation of Consultant, its designated employee and any other restricted parties, respectively, and the rights of Company, its successors and assigns, under this Agreement shall survive the termination of Consultant's engagement under this Agreement. 12. Waiver of Breach. The waiver by Consultant or Company of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach thereof. 13. Severability. The provisions of this Agreement, including particularly, but not solely, the provisions of Paragraphs 5, 6 and 7 shall be deemed severable, and the invalidity or unenforceability of any one or more of the provisions of this Agreement shall not affect the validity and enforceability of the other provisions. 14. Applicable Law. This Agreement shall be construed and performed according to the laws of the State of Missouri, and shall be binding upon the parties thereto, their successors and assigns. The parties hereto agree that, except for the claims arbitrable under Paragraph 9 hereof, appropriate jurisdiction and venue for any and all claims under this Agreement or related in any way to the Agreement or the subject matter thereof shall be in the Circuit Courts of Jackson County, Missouri. The parties hereto waive any right they may have to remove said litigation to any federal court. Consultant hereby agrees, as part of any relief Company may obtain against Consultant, its designated employee or any other restricted parties as a result of their breach of this Consulting Agreement, that Company, in addition to such other relief it shall be granted by the court, shall be entitled to be reimbursed by Consultant for any costs it incurs in connection with the enforcement of this Agreement, including, but not limited to, a reasonable attorneys' fee. The parties hereto agree that appropriate service of process for any of said actions may be obtained on said parties by personal service or by delivery of said process to the parties or a representative of the parties by first class mail, postage prepaid. Consultant agrees that Company may offset against any amounts owed by Company to Consultant hereunder, any amounts owed by Consultant, its designated employee, or any restricted parties, to Company. 8 15. Notice. Any notice required to be given shall be sufficient if it is in writing and sent by certified mail or registered mail, return receipt requested, first class postage prepaid, to Sequoia Company, Post Office Box 8266, Shawnee Mission, Kansas 66208, in the case of Consultant, its designated employee, or any other restricted parties, and to 1900 Commerce Tower, 911 Main Street, Kansas City, Missouri 64105, in the case of Company, which shall be deemed received three (3) days after such deposit in the United States mail. 16. Entire Agreement. This Agreement, and the documents and Agreements referred to herein, contains the entire agreement and understanding by and between Company and Consultant with respect to the engagement herein referred to, and no representations, promises, agreements or understandings, written or oral, not herein contained shall be of any force of effect. No change or modification hereof shall be valid or binding unless the same is in writing and signed by the party intended to be bound. No waiver or any provision of this Agreement shall be valid unless the same is in writing and signed by the party against whom such waiver is sought to be enforced; moreover, no valid waiver of any provision of this Agreement at any time shall be deemed a waiver of any other provision of this Agreement at such time or will be deemed a valid waiver of such provision at any other time. THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE ENFORCED BY THE PARTIES. IN WITNESS WHEREOF, the parties hereto executed this Agreement as of the day and year first above written. CONSULTANT: SEQUOIA COMPANY By:________________________________________ Name:______________________________________ Title:_____________________________________ COMPANY: CANNON FINANCIAL COMPANY By:________________________________________ Name:______________________________________ Title:_____________________________________ 9 EX-10.2 5 ESCROW AGREEMENT ESCROW AGREEMENT THIS AGREEMENT, dated as of this ____ day of February, 1999, by and among EVANS & MULLINIX, P.A. (hereafter called the "Escrow Agent"), SEQUOIA COMPANY, PIPER JAFFRAY, INC., 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, and LARRY DAVIS and CONSTANCE DAVIS, husband and wife (hereinafter collectively and individually referred to as "Shareholders") and ADVANCED FINANCIAL, INC., a Delaware corporation (hereinafter referred to as "AFI"). W I T N E S S E T H: WHEREAS, Shareholders, AFI and Cannon Financial Company ("Corporation") have entered into an Agreement of Reorganization dated February 5, 1999 ("Reorganization Agreement"), whereby Shareholders have agreed to sell and AFI has agreed to buy, all of the issued and outstanding stock of Corporation (the "Shares"); and WHEREAS, pursuant to Section 1.03 of the Reorganization Agreement, Shareholders have placed in escrow the shares received by them from the payment of the Purchase Price with Escrow Agent to secure Shareholders' obligation to disgorge shares in the event that the Closing Owner's Equity is less than Six Hundred Thousand Dollars ($600,000) as set forth in Sections 1.03(b) and (c); and WHEREAS, pursuant to Section 8 of the Reorganization Agreement, Shareholder have also agreed to place in escrow the shares received by them for the payment of the Purchase Price with Escrow Agent to secure Shareholders' indemnity obligations pursuant to Section 8. NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants hereinafter set forth, the parties hereto agree as follows: 1. Definitions. "Authorized Representative" means any person or persons empowered to authorize, approve or direct actions under this Escrow Agreement, on behalf of one (1) of the parties hereto, as established from time to time by resolution of the Board of Directors of the party represented thereby. "Escrow Account" means the escrow account created by Paragraph 2 of this Escrow Agreement. "Escrow Agent" means the agent at the time serving under this Escrow Agreement. "Escrow Agreement" or "Agreement" means this Escrow Agreement. "Escrowed Shares" means all shares deposited with Escrow Agent pursuant to Paragraph 3 of this Escrow Agreement. 2. Creation of the Escrow Account. There is hereby created and established with Escrow Agent the Escrow Account, to be held in the custody of Escrow Agent in accordance with this Escrow Agreement. 3. Deposit to the Escrow Account. Shareholders hereby deposit with Escrow Agent all shares received by them pursuant to the Reorganization Agreement, with properly endorsed stock powers attached thereto, appointing Escrow Agent as the agent to transfer said shares to AFI in the event the shares, or any part thereof, are forfeited pursuant to the terms and conditions of this Escrow Agreement. 4. Ownership of the Escrowed Shares. The Escrowed Shares shall be the property of Shareholders, subject to the terms and conditions of this Agreement. 5. Payment of Escrowed Shares. The Escrowed Shares shall be held in escrow pending compliance with Section 7 of the Agreement. 6. Income on Escrow Assets. All income earned on or stock dividends or stock splits in connection with the Escrowed Shares shall be added to the Escrow Account for use as set forth in connection with Paragraph 5 above. 7. Termination. This Escrow Agreement shall continue until the satisfaction of the following events: (a) In the event that a disgorgement of shares is to occur by Shareholders pursuant to the terms and conditions of Section 1.03(b) of the Reorganization Agreement, the accounting firm or firms that, pursuant to Section 1.03(d), are to make the decision on the number of shares to be disgorged by Shareholders, pursuant to Section 1.03(b), shall calculate the number of shares to be disgorged by Shareholders in total, pursuant to Section 1.03(b), and provide notice of that amount to AFI, Shareholders and Escrow Agent. Upon receipt of that notice, Escrow Agent shall send the shares to be disgorged by Shareholders to AFI. Any shares not disgorged to AFI, pursuant to Section 1.03(b) of the Reorganization Agreement, shall be retained by Escrow Agent to be held in escrow pending satisfaction of subsection (c) hereof. (b) In the event that, pursuant to Section 1.03(c) of the Reorganization Agreement, a disgorgement of shares by Shareholders is applicable, the accounting firm or firms that, pursuant to Section 1.03(d), are to make the decision on the number of shares to be disgorged by Shareholders, pursuant to Section 1.03(c), shall calculate the number of shares to be disgorged by Shareholders in total, pursuant to Section 1.03(c), and provide notice of that amount to AFI, Shareholders and Escrow Agent. Upon receipt of that notice, Escrow Agent shall send the shares to be disgorged by Shareholders to AFI. Any shares not disgorged to AFI, pursuant to Section 1.03(c) of the Reorganization Agreement, shall be retained by Escrow Agent to be held in escrow pending satisfaction of subsection (c) below. (c) The Escrowed Shares shall be held pending any claim for damages being 2 made by AFI against Shareholders pursuant to the terms of the indemnity set forth in Section 8 of the Reorganization Agreement. In the event that AFI has a claim for damages against Shareholders, it shall provide notice to Shareholders pursuant to the terms and conditions of Section 8, with a copy to Escrow Agent. Shareholders shall have thirty (30) days from receipt of the notice in order to notify AFI and Escrow Agent of their objection to the alleged damages. In the event that Shareholders do not object to said damages, Escrow Agent shall turn over to AFI, to compensate AFI for the damages, an amount of Escrowed Shares equal to the total damages claimed by AFI divided by the per share selling price of AFI common stock on its then applicable stock exchange on the date prior to distribution by Escrow Agent to AFI. In the event that Shareholders object to the damages alleged by AFI, Escrow Agent shall continue to hold said shares until a court of competent jurisdiction has made a final, non-appealable decision concerning the damages alleged to have been suffered by AFI and Shareholders' liability therefor. Upon a final, non-appealable decision rendered with respect to said damages, upon notice to Escrow Agent by AFI, accompanied with a copy of the decision, Escrow Agent will turn over to AFI a number of Escrowed Shares equal to the final damage award divided by the per share selling price of AFI common stock on its then applicable stock exchange on the date prior to the distribution by Escrow Agent to AFI. Any Escrowed Shares remaining after said judicial determination shall continue to be retained in the Escrow Account, subject to Paragraph 7(d) below, until the period of time of Shareholders' indemnification responsibilities, as set forth in Section 8 of the Reorganization Agreement, has run and there are no damage claims outstanding by AFI against Shareholders. (d) Subject to compliance with and completion of Paragraphs 7(a), 7(b) and 7(c) above, the parties hereto agree that the Escrowed Shares shall be released by Escrow Agent to Shareholders in the following percentages at the following times: (i) One-third (1/3) of the then-existing Escrowed Shares on the date ten (10) months from the Closing Date under the Reorganization Agreement; (ii) One-half (1/2) of the then-existing Escrowed Shares on the date eighteen (18) months from the Closing Date under the Reorganization Agreement; and (iii)The remaining one-third (1/3) of the Escrowed Shares on the latter to occur of (A) twenty-four (24) months from the Closing Date under the Reorganization Agreement, or (B) if outstanding claims exist under this Escrow Agreement on the date twenty-four (24) months from the Closing Date under the Reorganization Agreement, the date the Escrowed Shares are determined by a non-appealable judgment in an applicable court to be distributable to either AFI or Shareholders hereunder. The parties agree and understand that to the extent claims have been made pursuant to Paragraphs 7(a), 7(b) or 7(c) above, the total of which outstanding claims in existence at the date of a scheduled release of shares under this Paragraph 7(d) exceeds the amount of shares that would have been remaining after the scheduled release, Escrow Agent will 3 only release the number of shares that are in excess of the total amount of shares that would be necessary in order to cover the then existing claims. (e) Upon completion of Escrow Agent's responsibilities under subparagraphs (a), (b), (c) and (d) above, any Escrowed Shares remaining in the Escrow Account shall be returned to Shareholders. Each time that a determination is made pursuant to subparagraphs (a), (b) and (c) above that Escrowed Shares held by Escrow Agent are to be disgorged to AFI, the Escrowed Shares shall be divided among Shareholders and disgorged accordingly based upon the percentage of stock that each of them owned in Corporation as of the date of Closing under the Reorganization Agreement. 8. Fees and Expenses. Any fees and expenses charged by Escrow Agent in connection with carrying out its duties hereunder shall be split equally between AFI and Shareholders. Otherwise, all parties shall pay their own expenses in connection with this Escrow Agreement. 9. Duties of Escrow Agent. (a) Escrow Agent shall be liable as a depository only with its duties being only those specifically provided herein and which are ministerial in nature and not discretionary. Escrow Agent shall not be liable for any mistake of fact or error in judgment, or for any acts or provisions of any kind taken in good faith and believed by it to be authorized or within the rights or powers conferred by this Escrow Agreement, unless there be shown willful misconduct or gross negligence. (b) Escrow Agent shall not be responsible for the sufficiency or accuracy of the form, execution or validity of the documents or items deposited hereunder, nor for any description of property or other matter noted therein. It shall not be liable for default by any party hereto because of such party's failure to perform, and shall have no responsibility to seek performance by any party; nor shall it be liable for the outlawing of any rights under any statutes of limitation in respect to any documents or items deposited. (c) Escrow Agent shall not be liable in any respect on account of the identity, authority or rights of persons executing or delivering, or purporting to execute or deliver, any document or item, and may rely absolutely and be fully protected in acting upon any item, document or other writing believed by it to be authentic in performing its duties hereunder. Escrow Agent may, as a condition to the disbursement of money or property, require from the payee or recipient a receipt therefor, and, upon final payment or distribution, require a release from any liability arising out of its execution or performance of this Escrow Agreement. (d) Escrow Agent may consult with counsel of its own choice and shall be entitled to reasonable compensation and reimbursement for its services and out-of-pocket expenses. Escrow Agent shall have the right to reimburse itself out of any funds in its possession for reasonable costs, expenses, attorney's fees and its compensation, and shall have a lien on all money documents or property held in escrow to cover same. Escrow 4 Agent retains the right to resign upon giving thirty (30) days' written notice to all parties hereto. (e) In accepting any funds, securities or documents delivered hereunder, it is agreed and understood that, in the event of disagreement between the parties to this Escrow Agreement, or persons claiming under them, or any of them, Escrow Agent reserves the right to hold all money, securities and property in its possession, and all papers in connection with or concerning this escrow, until a mutual agreement has been reached between all of said parties, or until delivery is made to court in any interpleader action, or until as otherwise authorized by final judgment or decree. 10. Addresses of Parties. Whether payments, instructions, notices, releases, or any other documents are required to be given by or to the parties hereto, they shall be sent by certified/registered mail to the following addresses, which may be changed from time to time by written notice to all parties: Escrow Agent: Evans & Mullinix, P.A. 15301 West 87th Street, Suite 220 Lenexa, Kansas 66219 Shareholders: Sequoia Company Attn.: Amy S. Greif, President ------------------------------ ------------------------------ Piper Jaffray, Inc., Custodian for the benefit of Terrence P. Dunn ------------------------------ ------------------------------ JMO Group ------------------------------ ------------------------------ Mark P. Offill, Trustee of the Jean Offill Grandchildren's Irrevocable Trust c/o _______________ ------------------------------ ------------------------------ David W. Offill ------------------------------ 5 ------------------------------ Larry and Constance Davis ------------------------------ ------------------------------ AFI: Advanced Financial, Inc. 1900 Commerce Tower 911 Main Street Kansas City, Missouri 64105 11. Successors and Assigns. All of the covenants, promises, and agreements contained in this Escrow Agreement shall be binding upon, and inure to the benefit of, the parties hereto and their respective successors and assigns, whether so expressed or not. 12. Amendment. This Escrow Agreement may be amended or altered at any time by a writing agreed to by all parties hereto in such form and manner as is acceptable to Escrow Agent. 13. Severability. If any one (1) or more of the covenants or agreements provided in this Escrow Agreement should be determined by a court of competent jurisdiction to be contrary to law, such covenant or agreement shall be deemed and construed to be severable from the remaining covenants and agreements herein contained and shall in no way affect the validity of the remaining provisions of this Escrow Agreement. 14. Governing Law. This Escrow Agreement shall be governed by the laws of the State of Missouri. 15. Headings. Any headings preceding the text of the several paragraphs hereof shall be solely for convenience of reference and shall not constitute a part of this Escrow Agreement, nor shall they affect its meaning construction, or effect. 16. Counterparts. This Escrow Agreement may be executed in several counterparts, all or any of which shall be regarded for all purposes as one original and shall constitute and be but one and the same instrument. IN WITNESS WHERE0F, this Escrow Agreement is executed as of and from the date first above written. ESCROW AGENT: EVANS & MULLINIX, P.A. By: ---------------------------------------- 6 Name: ----------------------------------- Title: ----------------------------------- SHAREHOLDERS: SEQUOIA COMPANY By: ---------------------------------------- Amy S. Greif, President PIPER JAFFRAY, INC., custodian for the benefit of Terrence P.Dunn By: ---------------------------------------- Name: ----------------------------------- Title: ----------------------------------- JMO GROUP By: ---------------------------------------- Name: ----------------------------------- Title: ----------------------------------- JEAN OFFILL GRANDCHILDREN'S IRREVOCABLE TRUST By: ---------------------------------------- Mark P. Offill, Trustee -------------------------------------------- David W. Offill -------------------------------------------- Larry Davis -------------------------------------------- Constance Davis AFI: ADVANCED FINANCIAL, INC. 7 By: ---------------------------------------- Name: ----------------------------------- Title: ----------------------------------- 8 EX-10.3 6 DESIGNATED EMPLOYEE AGREEMENT DESIGNATED EMPLOYEE AGREEMENT THIS DESIGNATED EMPLOYEE AGREEMENT is made this _____ day of February, 1999, by and between SEQUOIA COMPANY, a Kansas corporation, hereinafter referred to as "Company," and LEE H. GREIF, hereinafter referred to as "Employee." WHEREAS, Company has entered into a Consulting Agreement with CANNON FINANCIAL COMPANY, a Kansas corporation ("Cannon") under which Consultant has agreed to assist Cannon in the generation of collection business for Cannon; and WHEREAS, in said Consulting Agreement, Company has agreed to designate a single employee to be the only employee of Company providing said consulting services for Cannon, to be designated as the "designated employee" of Company; and WHEREAS, as part of and in consideration for Cannon's agreement to engage Company for said consulting services, Company has agreed to insure that the employee designated as the designated employee thereunder would agree to be bound by the confidentiality and non-competition provisions of the Consulting Agreement; and WHEREAS, Employee, after fully reviewing the Consulting Agreement and with full knowledge of the restrictions that will be placed upon Employee as a result of being enumerated the designated employee under the Consulting Agreement is willing to enter into this Agreement to become the designated employee of Company for the provision of services to Cannon under the Consulting Agreement. NOW, THEREFORE, in consideration of Company's entrance into the Consulting Agreement with Cannon, the sums to be paid to Company by Cannon under the Consulting Agreement, and the sums to be paid to Employee by Company as a result of Employee's employment by Company, the parties hereto agree as follows: 1. Employee hereby agrees to accept the responsibilities and obligations of the "designated employee" under the Consulting Agreement between Company and Cannon. In accepting the designation, Employee understands that Employee will be the only individual performing services for Company in its role as a consultant for Cannon. Employee acknowledges that Employee's death or adjudication of incompetency or Employee's inability to perform the responsibilities of Company pursuant to the Consulting Agreement will result in the termination of the Consulting Agreement by Cannon, subject to certain payment obligations of Cannon. 2. Disclosure of Information. a. Employee acknowledges that, in and as a result of his engagement hereunder, he will be making use of, acquiring and/or adding to confidential information of a special and unique nature and value relating to such matters as Cannon's secrets, systems, procedures, manuals, confidential reports and lists of customers of Cannon and its business. As a material inducement to Company to enter into this Agreement, to enter into the Consulting Agreement, and to pay to Employee his employment compensation, Employee covenants and agrees that neither he, nor any of his agents shall, at any time during or following the term of Company's engagement as Cannon's consultant, directly or indirectly, use, disseminate, divulge, disclose, lecture upon or publish articles with respect to, for any purpose whatsoever, any of such confidential information which has been obtained by or disclosed to them as a result of Company's engagement by Cannon and/or Employee's engagement hereunder. Such confidential information includes information not generally known in the industry in which Cannon is or may be engaged and information in any form concerning Cannon's customers, products, processes, methods, technology, computer programs, development, inventions, manufacturers, purchasing, distribution, accounting, marketing, merchandising and selling, but excluding any information generally known to the public from sources other than Company or Cannon. In the event of a breach or threatened breach by Employee or Employee's agent, of any of the provisions of this Paragraph 2, Cannon, in addition to and not in limitation of any other rights, remedies or damages available to Cannon at law or in equity, shall be entitled to a permanent injunction in order to prevent or to restrain any such breach by Employee or by Employee's agents and/or any and all persons directly or indirectly acting for or with him. b. Upon termination of his employment with Company, whether such termination was at the request of Employee or of Company, all documents, records, notebooks and similar repositories of or documents containing any confidential information as defined in Paragraph 2(a) above, including copies thereof, then in Employee's possession or obtained by others from Employee, whether prepared by them or others, will be the sole property of Company and shall be returned to Company, to be returned by Company to Cannon. c. In the event that Employee becomes legally compelled to disclose any of the information defined as confidential in Paragraph 2(a), Employee will provide Company prompt notice so that Company may seek a protective order or other appropriate remedy and/or waive compliance with these provisions of this Agreement. In the event that such protective order or other remedy is not obtained, or that Company waives compliance with the provisions of this Agreement, Employee will furnish only that portion of the information which he is legally required to disclose or with respect to which Company has waived compliance and will exercise his best efforts (which shall not require the payment of money) to cooperate with Company's efforts to obtain a required protective order or other reliable assurance that confidential treatment will be accorded the information. 3. Restrictive Covenants. a. By his designation as Company's designated employee and Company's consulting engagement with Cannon, Employee will acquire additional and intimate knowledge about the customers, financial data, price and business negotiations and business techniques of Cannon, as they may now exist or as they may be developed in the future. 2 Employee acknowledges and agrees that Company, in its designation of Employee as its designated employee, will allow Employee to perform services for firms, corporations and other associations and business enterprises which Employee may solicit as clients and customers of Cannon ("customers"), and in so doing, has and will utilize Cannon's ideas, techniques and expertise in establishing an even greater rapport with such customers. In order to avoid the inadvertent disclosure of Cannon's confidential matters, and as consideration for Company's engagement by Cannon and Company's designation of Employee as its designated employee hereunder, Employee hereby covenants and agrees that during Employee's employment hereunder, during Company's engagement by Cannon, and for two (2) years from and after the effective date of the termination of Company's engagement with Cannon, Employee and his agents shall not, directly or indirectly, either by themselves or through others, or as a partner, employee, agent, officer, director, member, stockholder or otherwise (1) solicit, divert, take away or attempt to take away the business of Cannon's present or past customers, or the customers of any affiliated or related companies of Cannon, in any business or enterprise competing with Cannon or any subsidiary companies of Cannon, (2) solicit, hire, employ or endeavor to employ any of Cannon's employees or employees of any subsidiary companies of Cannon, or (3) within a radius of fifty (50) miles from the city limits of any city in which Cannon is presently working for or soliciting customers or has worked for or solicited customers within the two (2) year period prior to termination of Company's engagement with Cannon, transact any business with, own any interest directly or indirectly in, or be associated with or employed in any capacity by or on behalf of any person, partnership, firm, corporation or other business association engaged or seeking to engage in any business or enterprise competing directly or indirectly with Cannon. b. Employee will not, for a period of three (3) years after Closing, acquire any further shares of stock of Advanced Financial, Inc. ("AFI") if the acquisition of those shares will, (i) in the reasonable opinion of competent tax counsel for AFI, cause a "change of control" of AFI as determined under Section 382 of the Internal Revenue Code of 1986, as amended, including the regulations as promulgated thereunder, or under the comparable provision of any future internal revenue law; or (ii) have the effect of reducing the number of shares which First Mortgage Investment Company ("FMIC") could acquire under its option without such FMIC acquisition causing a "change of control." 4. Accounting for Profits. Employee covenants and agrees that if he, or any other restricted parties shall violate any of the covenants or restrictions under the foregoing Paragraphs 2 and 3, Company and/or Cannon shall be entitled to an accounting and repayment of all profits, compensation, commissions, remuneration, or other benefits that Employee or any other restricted parties, directly or indirectly, has realized as a result of any such violation. These remedies shall be in addition to, and not in limitation of, any injunctive relief or other rights and remedies to which Company and/or Cannon is or may be entitled at law, in equity, or under this Agreement. 3 5. Reasonableness of Restrictions. a. Employee has carefully read and considered the provisions of Paragraphs 2, 3 and 4 and, having done so, agree that the restrictions set forth in these paragraphs, are fair and reasonable, are reasonably required for the protection of the interests of Company, Cannon, and their respective officers, directors, shareholders, and other employees, are not injurious to the public in general, is no greater than reasonably necessary to protect the legitimate business interests of Company and Cannon, and is not unduly harsh and oppressive on Employee. b. Employee represents that his experience, capabilities and assets are such that this Agreement does not deprive him from earning a livelihood in the unrestricted business activities that remain open to him or from otherwise adequately and appropriately supporting himself. c. In the event that, notwithstanding the foregoing, any of the provisions of Paragraphs 2, 3 and 4 shall be held to be invalid or unenforceable, the remaining provisions thereof shall nevertheless continue to be valid and enforceable as though the invalid and unenforceable parts had not been included therein. In the event that any provision of Paragraphs 2, 3 and 4 shall be declared by a Court of competent jurisdiction to exceed the maximum restriction such Court deems reasonable and enforceable, the restriction deemed reasonable and enforceable by the Court shall become and thereafter be the maximum restriction. d. Employee may not delegate the performance of any of his obligations and duties hereunder or assign any rights hereunder except upon prior written consent of both Company and Cannon. e. Employee acknowledges and agrees that the stock to be received by Company from AFI under the Agreement of Reorganization and the payments to be made by Cannon to Company under the Consulting Agreement are of material benefit to Employee and are sufficient consideration to Employee to be bound by: (i) provisions 5 and 6 of the Consulting Agreement, and (ii) the provisions in Paragraphs 2, 3 and 4 hereof. 6. Remedies. Employee agrees that damages alone will be inadequate protection for Company and/or Cannon in the event of a breach or threatened breach or violation of any of the provisions of this Agreement and that Company and/or Cannon shall, in addition thereto, be entitled to an injunction restraining such breach or violation by Employee and any other restricted parties of any provision of this Agreement, and, such injunctive remedy shall not be in limitation of but in addition to, any other remedies authorized by law for the breach or threatened breach of this Agreement, including the recovery of monetary damages and a reasonable attorney's fee. Employee, Cannon and Company expressly waive the posting of any bond or surety required pursuant to the issuance of an injunction hereunder. However, in the event that the Court refuses to honor the waiver of bond hereunder, Employee, Cannon and Company hereby expressly agree to a bond to be posted in this matter of One Hundred Dollars ($100). 4 Nothing in this Agreement shall be construed to prohibit Company and/or Cannon from also pursuing any other remedy, the parties having agreed that all remedies are cumulative. The obligations of Employee and the rights of Company and Cannon, their successors and assigns under Sections 2, 3, 4, 5 and 6 of this Agreement, shall survive the termination of this Agreement. 7. Applicable Law. This Agreement shall be construed and performed according to the laws of the State of Missouri, and shall be binding upon the parties thereto, their successors and assigns. The parties hereto agree that appropriate jurisdiction and venue for any and all claims under this Agreement or related in any way to the Agreement or the subject matter thereof shall be in the Circuit Courts of Jackson County, Missouri. The parties hereto waive any right they may have to remove said litigation to any federal court. Employee hereby agrees, as part of any relief Company and/or Cannon may obtain against Employee as a result of his breach of this Agreement, that Company and/or Cannon, in addition to such other relief they shall be granted by the court, shall be entitled to be reimbursed by Employee for any costs they incur in connection with the enforcement of this Agreement, including, but not limited to, a reasonable attorneys' fee. The parties hereto agree that appropriate service of process for any of said actions may be obtained on said parties by personal service or by delivery of said process to the parties or a representative of the parties by first class mail, postage prepaid. 8. Termination of Prior Agreement. Employee hereby agrees, as a result of the execution of the Consulting Agreement by Company with Cannon and as a result of the execution of this Agreement between Company and Employee, that the Consulting Agreement between Cannon and Employee dated as of July 22, 1998 is, as of this date, deemed terminated by and between the parties and that Cannon has no further obligations whatsoever to Employee as a result of the operation of that agreement. 9. Compensation. Employee acknowledges and agrees that the compensation payable to Employee by Company (as well as certain other terms of Employee's employment by Company) shall be determined by separate agreement of the parties hereto. 10. Entire Agreement. Except for the Consulting Agreement, this Agreement, and the documents and agreements referred to herein, contains the entire agreement and understanding by and between Company and Employee with respect to the engagement herein referred to, and no representations, promises, agreements or understandings, written or oral, not herein contained shall be of any force of effect. No change or modification hereof shall be valid or binding unless the same is in writing and signed by the party intended to be bound. No waiver or any provision of this Agreement shall be valid unless the same is in writing and signed by the party against whom such waiver is sought to be enforced; moreover, no valid waiver of any provision of this Agreement at any time shall be deemed a waiver of any other provision of this Agreement at such time or will be deemed a valid waiver of such provision at any other time. 5 IN WITNESS WHEREOF, the parties hereto executed this Agreement as of the day and year first above written. SEQUOIA COMPANY By:________________________________________ Name:______________________________________ Title:_____________________________________ ___________________________________________ LEE H. GREIF 6 EX-10.4 7 STOCK OPTION AGREEMENT STOCK OPTION AGREEMENT This STOCK OPTION AGREEMENT ("Agreement") is entered into this 19th day of February, 1999, by and between Advanced Financial, Inc., a Delaware corporation (the "Corporation"), and Kenneth H. Koger (the "Optionee"); WITNESSETH: WHEREAS, the Optionee has provided valuable services to the Corporation in exchange for this stock option and has requested that the Corporation grant the stock option to Optionee; NOW, THEREFORE, in consideration of the premises and the covenants contained herein, and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto agree as follows: 1. Grant of Option. The Corporation hereby grants to Optionee the right and option to purchase, subject to the terms and conditions hereof, an aggregate of 50,000 shares ("Shares") of common stock, $0.001 par value per share ("Common Stock") at an option price of Fifty Cents ($0.50) per Share, subject to adjustment as hereinafter set forth (the "Option"). The Option may be exercised in whole at any time, or in part from time to time, until expiration of the Option as provided herein. 2. Expiration of Option. The term of the Option shall expire on the tenth anniversary of the date hereof. 3. Exercise of Option. Optionee may exercise the Option, in whole or in part, by providing to the Secretary of the Corporation the following: (a) written notice of the exercise of the Option, specifying the number of Shares to be purchased and containing such other information as the Secretary of the Corporation may request, including without limitation the Optionee's social security number; and (b) payment in full of the option price for such Shares in cash (including by cashier's check or money order). 4. Issuance of Shares. (a) No Shares shall be issued or sold pursuant to the exercise of the Option until: (i) such Shares are qualified for sale under such securities laws and regulations as may be deemed by the Board of Directors of the Corporation to be applicable thereto and (ii) Optionee agrees in writing to such restrictions upon the subsequent transfer of such Shares as may reasonably be deemed necessary by the Board of Directors of the Corporation to insure that Optionee will not sell or otherwise dispose of such Shares in transactions which, in the opinion of counsel for the Corporation, may violate the federal securities laws. (b) Optionee shall have none of the rights of a stockholder of the Corporation with respect to Shares purchased upon the exercise of the Option until such Shares have been issued and delivered to the Optionee, and the issuance of Shares shall confer no retroactive right to dividends. 5. Transfer of Option. The Option may not be transferred by the Optionee or the Permitted Transferee other than by will or the laws of descent and distribution, and may be exercised during the lifetime of the holder of the Option only by such holder. Notwithstanding the preceding sentence, Optionee may, upon prior written notice to the Corporation, transfer this Option in whole or in part to Optionee's spouse, Ruthanne C. Koger (the "Permitted Transferee"). Any purported transfer in violation of the provisions of this Section 5 shall be null and void and of no force or effect. 6. Adjustments to Option. (a) Subdivision of Stock, etc. In the event of a stock dividend or other distribution payable in Common Stock, or any stock split or subdivision of Common Stock into a greater number of shares, the number of Shares subject to the Option immediately prior to such event shall be proportionately increased and the exercise price in effect immediately prior to such event shall be proportionately reduced, and in the event that the outstanding shares of Common Stock of the Corporation shall be combined into a smaller number of shares, the number of Shares subject to the Option immediately prior to such combination shall be proportionately reduced and the exercise price in effect immediately prior to such combination shall be proportionately increased. The parties agree that the Option will not be adjusted as a result of the cancellation of outstanding shares of Common Stock and the issuance of new shares of Common Stock pursuant to the plan of reorganization of the Corporation which has been approved by the United States Bankruptcy Court for the District of Kansas, as such plan may be amended from time to time. (b) Reorganization, Consolidation, Merger, etc. In the event that the Corporation shall (i) effect a reorganization or recapitalization pursuant to which all of the outstanding shares of Common Stock are converted into or exchanged for other securities or property (including cash), (ii) consolidate with or merge into any other person, or (iii) transfer all or substantially all of its properties or assets to any other person in such a way that holders of Common Stock shall be entitled to receive securities or property (including cash) with respect to or in exchange for Common Stock; then, in each such case, the Optionee, upon the exercise of the Option at any time after the consummation of such reorganization or recapitalization, consolidation, merger or sale of assets, as the case may be, shall be entitled to receive, in lieu of the Shares subject to the Option prior to such consummation, the stock and other securities and property (including cash) to which the Optionee would have been entitled upon such consummation if the Optionee had so exercised the Option immediately prior thereto. The above provision shall apply to successive reorganizations, recapitalizations, consolidations, mergers or transfers described therein. 7. Assumption of Risk. It is expressly understood and agreed that Optionee assumes all risks incident to any change hereafter in applicable laws or regulations and all risks incident to any change hereafter in the value of the Shares purchased hereunder or subject to the Option. 2 8. Government Restrictions. The obligation of the Corporation to sell or deliver Shares under the Option shall be subject to all applicable laws, rules and regulations, and to such approvals by any government agency as may be required. 9. Non-Qualified Stock Option. The Option is not intended to be and shall not be treated as an Incentive Stock Option under the Internal Revenue Code of 1986, as amended. 10. Binding Agreement. This Agreement shall be binding upon and inure to the benefit of the respective heirs, executors, administrators, distributees and successors of the parties hereto, except as otherwise specifically provided herein. 11. Complete Agreement; Amendment. This Agreement contains the entire understanding and the full and complete agreement of the parties with respect to the subject matter hereof and supercedes any prior understandings, agreements or representations by or between the parties, written or oral, relating to the subject matter hereof. This Agreement may not be modified or amended except by a written agreement signed by the parties. 12. Action by the Corporation. Any action taken by the Corporation pursuant to this Agreement, including but not limited to the waiver of any right granted herein, shall be binding on the Corporation only if such action is expressly approved or authorized by the Board of Directors. 13. Choice of Law. This Agreement shall be construed and its provisions enforced and administered in accordance with the laws of the State of Delaware, except to the extent that such laws may be superseded by any Federal law. IN WITNESS WHEREOF, the parties hereto have executed this Option as of the day and year first above written. ADVANCED FINANCIAL, INC. By:__________________________ Its_______________________ _____________________________ Kenneth H. Koger Optionee 3 ASSIGNMENT AND ASSUMPTION OF OPTION KNOW THAT, KENNETH H. KOGER ("Assignor"), in consideration of TEN and NO/100 ($10.00) DOLLARS and other good and valuable consideration paid by RUTHANNE C. KOGER ("Assignee"), the receipt and sufficiency of which are hereby acknowledged, hereby assigns unto Assignee, all of Assignor's right, title and interest in and to a certain Stock Option Agreement dated on or about February 19, 1999, by and between Assignor and Advanced Financial, Inc. ("Agreement") together with all of Assignor's right, title and interest in and to the option to purchase shares of Common Stock of Advanced Financial, Inc. under the Agreement. TO HAVE AND TO HOLD the same unto Assignee, her heirs and assigns forever, subject to the covenants, conditions and provisions therein contained. ASSIGNEE hereby assumes the performance of all of the terms, covenants, conditions and provisions of the Agreement from and after the date hereof as if Assignee had signed the Agreement as Optionee named therein as of the date hereof. IN WITNESS WHEREOF, the parties hereto have executed this instrument as of the ____ day of February, 1999. _________________________________ Kenneth H. Koger _________________________________ Ruthanne C. Koger 4 EX-99.2 8 ORDER APPROVING AMENDED MOTION FOR AUTHORIZATION 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 $500,000.00. In addition the indemnity clause contained in the Cannon Agreement and incorporated by reference into the Escrow Agreement provides for the potential disgorgement of shares issued to the Shareholders. c. The Shareholders have acknowledged that the Advanced stock shall be used for investment purposes and not for future distribution or resale. Such shares of stock 2 shall contain restrictions on transfer and, for three (3) years subsequent to the closing date, the Shareholders, Dunn and Offill are prohibited from acquiring additional stock in Advanced if such acquisition would cause a change of control under the IRS regulations. d. The Shareholders, Dunn and Offill shall also provide to Advanced a covenant not to compete for a three-year period during which the Shareholders shall not solicit either customers or employees of Cannon's business. The Shareholders shall also be prohibited from engaging in similar business within a 150 mile radius of the greater Kansas City metropolitan area. e. The parties have utilized Kenneth H. Koger as consultant, broker or finder. As compensation for his services, Mr. Koger shall receive, pursuant to a Stock Option Agreement, an option to purchase 50,000 shares of stock in Advanced at fifty cents ($.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 3 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 4 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 EX-99.3 9 ADVANCED FINANCIAL, INC. ACQUIRES CANNON FINANCIAL Contact: Brad Morris News Release (913) 441-2466 OTC: AVFID FOR IMMEDIATE RELEASE ADVANCED FINANCIAL, INC. ACQUIRES CANNON FINANCIAL COMPANY Shawnee, Kansas, February 22, 1999--- Advanced Financial, Inc. ("AVFI" or the "Company") announced today that it had acquired 100% of the outstanding stock of Cannon Financial Company ("CFC"), Kansas City, Missouri, from the shareholders of CFC in exchange for stock of AVFI. On February 19, 1999, AVFI completed the acquisition of CFC by exchanging 1,500,000 shares of AVFI Common Stock for all of the outstanding shares of CFC subject to adjustment as described below. Pursuant to the Agreement between AVFI and the CFC shareholders, all 1,500,000 shares are to be held in escrow until a financial audit of CFC is completed. If the audit shows that CFC's shareholders equity is $600,000 or greater, the 1,500,000 shares shall be considered issued. If CFC's shareholders equity is less than $600,000 but greater than $500,000, two shares shall be returned to AVFI, for every $1 by which CFC's shareholders equity is less than $600,000. In addition, if CFC's shareholder equity is less than $500,000, an additional three shares shall be returned to AVFI for each $0.50 by which CFC's shareholders equity is less than $500,000. The audit is to be completed within the next 60 days. CFC is involved in the management and collection of non-performing receivables. CFC was formed in July 1998, and acquired the collection operations of a Kansas City, Missouri law firm. The collection operations acquired by CFC had been in existence for more than 30 years and only collected receivables on a contingency basis. CFC's business plan upon acquiring the collection operations was to use the existing contingency collection operations as a foundation to acquire charged off credit card debt and collect such debt for its own account. The Company also entered into a Consulting Agreement, and covenant not to compete, with one of CFC's shareholders, Sequoia Company ("Sequoia"). Sequoia was the initial shareholder and founder of CFC. Sequoia will continue to work with the Company and provide advice with respect to profit-making opportunities in the general credit collection business. This shall include pursuing the potential acquisitions of other similar companies, and the analysis and purchase of charge off credit card debt from third parties. The consulting agreement is for a term of 5 years with fees of $11,500, to be paid monthly. AVFI's management believes that the strategy of acquiring credit card debt and collecting it for AVFI's own account has substantial growth opportunity. The credit-card industry has experienced significant growth, and outstanding balances are expected to reach $783 billion by 2000, per industry reports, up from $560 billion in 1997 and $238 billion in 1990. Of the outstanding balances, credit card charge off's, per industry reports, are expected to reach $38.8 billion by 2000, up from $31.3 billion in 1997 and $9.1 billion 1990. These non-performing assets can be purchased at prices ranging from less than 2 cents to 10 cents on the dollar, with potential collections of 15 to 30 cents. To date, CFC has purchased approximately $950,000 of credit card receivables, and is attempting to collect on a contingency basis an additional $13,000,000, for which it receives approximately 30% of the amounts it collects. AVFI, and its now wholly owned subsidiary CFC, plan to grow through the acquisition of additional portfolios of charged off credit card debt to be collected for AVFI's own account. To accomplish this AVFI has entered into a financing agreement for $875,000, with its principal shareholder First Mortgage Investment Co. ("FMIC"), see the Company's February 22, 1999 news release, Advanced Financial, Inc. Receives $875,000 Line of Credit. Some of the matters discussed in this press release constitute forward-looking statements within the meaning of the securities laws. Actual results may differ materially from those projected in such forward-looking statements as a result of a variety of risks and uncertainties. Some important factors that could cause the actual results to differ materially from those discussed in the forward-looking statements include, but are not limited to: the future size of the credit card industry, the ability of the Company to acquire additional portfolios on reasonable terms; the ability of the Company to successfully collect on the charged-off debt that it acquires; competition; and general international and domestic economic conditions. Other factors not identified herein could also have such an effect. Investors are cautioned that all forward-looking statements involve risk and uncertainty. EX-99.4 10 ADVANCED FINANCIAL, INC. OBTAINS $875,000 CREDIT Contact: Brad Morris News Release (913) 441-2466 OTC: AVFID FOR IMMEDIATE RELEASE ADVANCED FINANCIAL, INC. OBTAINS $875,000 LINE OF CREDIT SHAWNEE, KANSAS, February 22, 1999 --- Advanced Financial, Inc. ("AVFI" or the "Company") announced today that it has entered into a Credit Agreement with First Mortgage Investment, Co. (FMIC) to borrow $875,000. Pursuant to the terms of the Credit Agreement, the Company drew down $250,000 on February 19, 1999 and will draw down an additional $100,000 every thirty days until the full $875,000 has been extended by FMIC to the Company. The credit facility is for a term of five years and interest accrues on the principal balance at a rate of 7% per annum fixed during the term. Interest will be paid quarterly with principal due at maturity. The proceeds of this line of credit will be used primarily for the purchase of charge off credit card portfolios by AVFI's wholly owned subsidiary, Cannon Financial Company (CFC). For additional information, see the Company's news release dated February 22, 1999, Advanced Financial, Inc. Acquires Cannon Financial Company. FMIC owns approximately 40% of the outstanding shares of Common Stock of the Company, and holds an option to acquire additional shares. For additional information, see the Company's news release dated February 22, 1999, Advanced Financial, Inc. Completes Recapitalization. Some of the matters discussed in this press release constitute forward-looking statements within the meaning of the securities laws. Actual results may differ materially from those projected in such forward-looking statements as a result of a variety of risks and uncertainties. Investors are cautioned that all forward-looking statements involve risk and uncertainty. -----END PRIVACY-ENHANCED MESSAGE-----