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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 25, 1998
PHOENIX INFORMATION SYSTEMS CORP.
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(Exact Name Of Registrant As Specified In Its Charter)
Delaware 0-26532 13-3337797
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(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
100 Second Avenue South, Suite 1100, St. Petersburg, Florida 33701
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(Address Of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (813) 894-8021
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Former Name or Former Address, if Changed Since Last Report
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ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On February 25, 1998, after the granting of an order by the United
States Bankruptcy Court for the District of Delaware (enclosed herewith as
Exhibit 10.46 to Phoenix's Current Report on Form 8-K), Phoenix Information
Systems Corp. ("Phoenix") completed the transaction with S-C Phoenix Partners
whereby Phoenix and its wholly-owned subsidiaries sold substantially all of
their assets free and clear of liens, claims, and encumbrances for $20 million.
Phoenix is a publicly traded holding company incorporated in Delaware.
Phoenix owns a 70% interest in a joint venture with China Southern Airlines,
named Hainan Phoenix Information Systems Ltd. Phoenix had not generated any
significant revenues, earnings or history of operations from inception through
November 30, 1997. Consequently, Phoenix's continued existence depended
primarily upon its ability to raise capital. On December 3, 1997, Phoenix
announced that after an extensive and unsuccessful search for additional
financing it and two of its subsidiaries, Phoenix Systems Group, Inc. ("PSG")
and Phoenix Systems Ltd. ("PSL") had determined to seek protection under Chapter
11 of the Bankruptcy Code. (ref: Phoenix's Current Report on Form 8-K, date of
earliest event reported December 3, 1997). Phoenix also announced that, subject
to court approval, it had arranged for debtor-in-possession financing and a sale
of substantially all its assets to S-C Phoenix Partners, a major shareholder.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
Not applicable
(c) Exhibits
10.46 Memorandum Opinion and Order Authorizing The Sale Of Substantially All
Of The Debtors' Assets Free And Clear Of Liens, Claims and
Encumbrances, The Assumption And Assignment Of Certain Executory
Contracts And Leases, And The Assumption Of Certain Liabilities, dated
February 5, 1998.
10.47 Press Release Issued by Phoenix Information Systems Corp. on February
27, 1998.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Phoenix has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Phoenix Information Systems Corp.
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(Registrant)
Date March 11, 1998 By /s/ Peter J. Ford
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(Signature)
Peter J. Ford, Vice President & CFO
----------------------------------------
(Print the name and title of the signing
officer)
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EXHIBITS TO FORM 8-K
DATE OF EARLIEST EVENT REPORTED: FEBRUARY 25, 1998
FOR
PHOENIX INFORMATION SYSTEMS CORP.
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INDEX OF EXHIBITS
10.46 Memorandum Opinion and Order Authorizing The Sale Of Substantially All
Of The Debtors' Assets Free And Clear Of Liens, Claims and
Encumbrances, The Assumption And Assignment Of Certain Executory
Contracts And Leases, And The Assumption Of Certain Liabilities, dated
February 5, 1998.
10.47 Press Release Issued by Phoenix Information Systems Corp. on February
27, 1998.
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Exhibit 10.46
Memorandum Opinion and Order Authorizing The Sale Of Substantially All Of The
Debtors' Assets Free And Clear Of Liens, Claims and Encumbrances, The Assumption
And Assignment Of Certain Executory Contracts And Leases, And The Assumption Of
Certain Liabilities, dated February 5, 1998.
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EXHIBIT 10.46
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
IN RE: )
)
PHOENIX INFORMATION SYSTEMS ) Case No. 97-2498 (RRM)
CORP., PHOENIX SYSTEMS LTD., and )
PHOENIX SYSTEMS GROUP, INC., )
)
Debtors. )
______________________
MEMORANDUM OPINION
______________________
James L. Patton, Jr., Esquire, Robert S. Brady, Esquire, Brendan L. Shannon,
Esquire, and Victoria W. Counihan, Esquire, Young, Conaway, Stargatt & Taylor,
Wilmington, Delaware; Peter A. Ivanick, Esquire, Angela J. Somers, Esquire,
Carolyn H. Dicker, Esquire, and Timothy W. Walsh, Esquire, LeBoeuf, Lamb, Green
& MacRae, New York, New York; counsel for Debtors.
Laurie S. Silverstein, Esquire, Potter, Anderson & Corroon, Wilmington,
Delaware; Robert D. Drain, Esquire, and Andrew Logan, Esquire, Paul, Weiss,
Rifkind, Wharton & Garrison, New York, New York; counsel for the Secured
Creditors of Phoenix Partners.
John D. Demmy, Esquire and Eric D. Schwartz, Esquire, Morris, James, Hitchens &
Williams, Wilmington, Delaware; Gary M. Schildhorn, Esquire and Steven D.
Usdin, Esquire, Adelman Lavine Gold & Levin, Philadelphia, Pennsylvania;
counsel for the Official Committee of Equity Security Holders.
Jeffrey Schlerf, Esquire, The Bayard Firm, Wilmington, Delaware; Thomas E.
Lauria, Esquire, White & Case, Miami, Florida; counsel for Infinity Investors,
Ltd.
John D. McLaughlin, Jr., Esquire, United States Trustee's Office, Philadelphia,
Pennsylvania; counsel for United States Trustee.
____________________
Dated: February 5, 1998
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McKELVIE, District Judge
This is a bankruptcy case. Phoenix Information Systems Corporation
and its subsidiaries Phoenix Systems Ltd. and Phoenix Systems Group, Inc. have
filed petitions for relief under Chapter 11 of the United States Bankruptcy
Code. With their petitions they have moved for an order approving an
agreement by which they sell substantially all of their assets. the Official
Committee of Equity Security Holders opposes the sale. This is the court's
decision on the motion.
I. FACTUAL AND PROCEDURAL BACKGROUND
The court draws the following facts from testimony and documents
offered into evidence at hearings on December 4, 8, 9 and 19, 1997, and January
15, 21 and 26, 1998.
Phoenix Information Systems ("Phoenix") is a publicly traded Delaware
corporation with its principal place of business in St. Petersburg, Florida.
Phoenix is in the business of developing automated information systems for the
travel and tourism industry. For the past few years the company has directed
its efforts to developing software for the airline reservation industry in the
People's Republic of China.
The parent corporation is a holding company. Its subsidiary Phoenix
Systems Group is a U.S. based corporation that focuses on software
development. Phoenix Systems Ltd. is a Bermuda corporation and a partner in a
joint venture with China Southern Airlines named Hainan-Phoenix Information
Systems Ltd.
Phoenix has not generated any significant revenues since its
inception. It has
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sustained net losses of $4,841,824 in its fiscal year ending March 31, 1995,
$9,704,318 in 1996, and $11,031,821 in 1997. the company's current operating
expenses are approximately $700,000 to $800,000 a month. Those expenses
include approximately $120,000 every two weeks for payroll, $27,000 a month for
rent, $75,000 to $100,000 a month for telecommunications expenses, and $150,000
a month for development related expenses done through outside consultants. On
the day of filing, Phoenix had $39,000 in cash, $65,000 in accounts receivable
and $725,000 in accounts payable.
Phoenix has survived to date by raising cash, including through a
public offering of stock and subsequently through the issuance of convertible
notes and then the sale of preferred stock.
Phoenix's principal asset had been its 70% ownership interest in a
joint venture it entered into in 1993 with a regional airlines in China, Hainan
Airlines. The joint venture, Hainan-Phoenix Information Systems Ltd., is a
company organized under the laws of the People's Republic of China. The joint
venture's principal business is working towards the development and installation
of an airline reservation system in China.
In the fall of 1995, Phoenix was offered the opportunity to purchase a
twenty-five percent interest in Hainan Airlines. Phoenix lacked the resources
to purchase the stock. Because its Board of directors was interested in seeing
that the stock was placed in friendly hands, Phoenix introduced Hainan to one
of Phoenix's investors, S-C Phoenix, an entity owned or controlled by George
Soros and Dr. Purnendu Chatterjee. S-C
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Phoenix purchased the Hainan Airlines stock through American Aviation, Ltd., a
Mauritius corporation. As a part of that transaction, S-C Phoenix granted to
Phoenix an option to purchase within one year up to fifty percent of American
Aviation at a premium of approximately twenty percent over the per share price
S-C Phoenix had paid.
Phoenix continued to raise funds to cover current operating expenses. In
the spring of 1996, it raised $9,000,000 through the sale of Series A and B
preferred stock to Infinity Group, an entity owned or controlled by the Hunt
family. By the fall, Phoenix's Board and management were projecting that their
joint venture would have the computer software up and running by mid-1997 and
that they would need an additional $7,500,000 to get them to that point. At the
same time, their option to purchase American Aviation stock was expiring at the
end of December.
In early December of 1966 Phoenix entered into an agreement by which it
issued Series C preferred stock to S-C Phoenix for $15,000,000. Phoenix then
exercised its option and for $7,500,000 purchased twenty-five percent of
American Aviation. (At that time and now, American Aviation's interest in
Hainan had been reduced from twenty-five percent to twenty-one percent.)
Phoenix's right to transfer that stock was restricted by American Aviation's
Articles of Association, which provide that Phoenix must obtain S-C Phoenix's
consent before it can transfer the stock.
In November of 1996, Hainan Airlines sold its thirty percent interest in
the joint venture to China Southern Airlines. China Southern agreed to invest
$4,800,000 in the
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joint venture in exchange for an additional fifteen percent stake.
In early 1997, the Phoenix Board replaced the company's management. The
new management prepared a revised business plan that pushed back the date when
the joint venture's software would be up and running an additional nine months
or a year, to March or June of 1988. The company then went back to raise cash.
During the period from May of 1993 through December of 1996, the company had
raised (and spent) approximately $39,000,000.
The Board hired an investment banking firm, Benedetto Gartland, to assist
them in raising funds. Benedetto Gartland management and Board members made
extensive efforts to locate new sources of funds. They sought to have the
company's stock listed on the American Stock Exchange or NASDAQ, but were
unsuccessful. They approached China Southern, potential partners such as EDS,
Kemp Gemini, IBE, and Siemens, institutional investors such as AIG, Deutsche
Bank, Hambrecht & Quist, Schroeder Capital Partners, Peregrine Direct
Investments, Walden Group, Barton Capital, Furman Selz, and wealthy families
in the U.S., Europe and Asia, all without success.
Phoenix entered into negotiations to sell its American Aviation share to
an entity called Sino-American for $8,000,000, but S-C Partners informed
Phoenix it would not consent to the sale. In June, Phoenix sought to enter into
an agreement selling the American Aviation stock back to S-C Phoenix for
$7,500,000. Negotiations dragged on through the summer. One complication for
Phoenix was that its investment advisor,
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Benedetto Gartland, was not prepared to give it an opinion that $7,500,000 was
a fair value for the stock. Negotiations broke down in the fall of 1997.
Phoenix was running out of cash and in January of 1998 would have to pay
an additional $1,800,000 into the joint venture. Once more the Board attempted
to raise cash from institutional investors. This time a special committee
established by the Board contacted over thirty firms, without success.
In November, S-C Phoenix proposed that Phoenix be put in Chapter 11 and
that S-C Phoenix would purchase substantially all of its assets for
$20,000,000. The purchase price would provide sufficient funds to pay the costs
of bankruptcy and any unsecured creditors. Approximately $16,000,000 would be
applied towards amounts due the holders of preferred stock. The Board of
Phoenix eventually agreed to this proposal, apparently having concluded that
the only alternative would be to liquidate the business.
Phoenix filed the petitions on December 3, 1997. On the date of the
filing of the petition, Phoenix had 51,842,176 shares of common stock
outstanding. S-C Phoenix held 15,985,000 shares. With its Series C preferred
stock it held the right to an additional 15,000,000 shares. The agreement with
S-C Phoenix provided for S-C Phoenix to make funds available on an interim
basis with a closing on the sale to take place before December 31, 1997.
Following initial hearings on Phoenix's motions, including its motion for
approval of the agreement of sale, the court entered an order directing Phoenix
to provide notice of
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the proposed sale to, among others, prospective purchasers, creditors,
preferred equity holders, common stockholders, and to cooperate in soliciting
competing bids. Phoenix subsequently published notice of the sale in the Wall
Street Journal and The New York Times, and sent the sale agreement to over
thirty potential buyers and to those specified in the court's order. The court
set January 17, 1998 as the date for the hearing on the sale. To date no other
entity or individual has submitted another offer to buy all or any portion of
the debtors assets.
The court held hearings on the sale on January 21, and January 26, 1998.
The Equity Committee objects to the sale on numerous different grounds. First,
the Equity Committee argues that the proposed sale is not in good faith for
several different reasons. The Equity Committee asserts that S-C Phoenix refused
to permit Phoenix to transfer the American Aviation stock. Then S-C Phoenix
negotiated with Phoenix until Phoenix had almost no cash left, at which time S-C
Phoenix suddenly ceased negotiations. The Equity Committee also asserts that the
$1,000,000 buy out fee demanded in exchange for the interim debtor-in-possession
financing impeded others from making offers, and that S-C Phoenix would benefit
from the proposed sale to the detriment of the common stockholders.
Second, the Equity Committee argues that there is not a valid business
reason supporting the approval of the sale. The Equity Committee asserts that
Phoenix is acting hastily and that Phoenix has another alternative, selling the
American Aviation shares,
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which it has not considered. Third, the Equity Committee argues that the sale
price is not fair and reasonable, and that an appraisal of the assets should
occur prior to the sale. Fourth, the Equity Committee argues that the notice
provided was not adequate, that it did not discuss the fact that there was a
"new business plan," and that Phoenix should have "marketed a new company."
Fifth, the Equity Committee argues that the proposed sale would "'sub rosa'
establish the terms of a reorganization plan and thereby short circuit the
requirements of Chapter 11 for confirmation of plans."
The Equity Committee also argues that a provision included in the sale
agreement would "unfairly channel all claims on behalf of the common
stockholders against the Debtors, [S-C Phoenix] or any of the Soros entities...
to a fund comprised of no money." At the January 21, 1998, hearing, counsel
discussed the issue with the court, and it appears that counsel for S-C Phoenix
and counsel for the Equity Committee resolved this issue by agreeing to correct
the language in the sale agreement and to clarify whether the sale is free and
clear of liens.
II. DISCUSSION
Section 363 of the Bankruptcy Code provides that after notice and a
hearing, the debtor "may use, sell, or lease, other than in the ordinary course
of business, property of the estate," subject to the approval of the court. See
11 U.S.C. SS. 363(b)(1) (1995 & Supp. 1997). The sale of assets may not occur
unless "each entity that has an interest in such
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[assets] consents" or "the court, after notice and a hearing, authorizes such
use, sale, or lease." Id. SS. 363(c)(2).
The Equity Committee and various stockholders object to Phoenix's proposed
sale of its assets. Thus, because the parties have not agreed to the sale of
assets, the court must determine whether to authorize the transaction. The
court will not grant the motion to sell if necessary to "provide adequate
protection" to an objecting party's interest. See id. SS. 363(e). The party
seeking to sell the assets bears the burden of proof on the issue of adequate
protection. See id. SS. 363(o).
Before the 1978 amendments to the Bankruptcy Code, a court could only
approve a sale of assets "for cause shown." In re Titusville Country Club, 128
B.R. 396, 399 (Bankr. W.D. Pa. 1991)(citing In re Solar Mfg. Corp., 176 F.2d 493
(3d Cir. 1949)). Cause could be shown in an emergency situation. See id.
After the promulgation of the current SS. 363, several circuits adopted a less
stringent standard, the "sound business purpose" test, for approving a sale of
assets. See id. The sound business purpose test includes four factors:
1) Is the price fair and reasonable?
2) Have the debtors provided adequate and reasonable notice?
3) Was there good faith in the negotiations?
4) Is there a sound business purpose?
See id.
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In In re Delaware & Hudson Ry. Co., 124 B.R. 169, 176 (D. Del. 1991), this
court followed the sound business purpose test. See id. (stating that [o]nce a
court is satisfied that there is a sound business reason or an emergency
justifying the pre-confirmation sale, the court must also determine that the
trustee has provided the interested parties with adequate and reasonable
notice, that the sale price is fair and reasonable and that the purchaser is
proceeding in good faith"). Furthermore, in In re Abbotts Dairies of
Pennsylvania, Inc., 788 F.2d 143, 147 (3d Cir. 1986), the Third Circuit ruled
that before approving a sale of assets a court must make a finding of good
faith by the purchaser. Relying on the Abbotts decision, at least one court
has held that Abbotts "effectively overrules" the Third Circuit's earlier
requirement that cause must be shown before approving a sale of assets. See In
re Industrial Valley Refrigeration and Air Conditioning Supplies, Inc., 77 B.R.
15, 15 (Bankr. E.D. Pa. 1987).
This court will follow the sound business purpose test in evaluating
whether to grant Phoenix's motion to sell substantially all of its assets.
A. Did The Debtors Provide Adequate and Reasonable Notice?
The first factor that the court must analyze before deciding whether to
grant a motion to sell is whether there has been adequate an reasonable notice.
See Delaware & Hudson, 124 B.R. at 176. The court will evaluate whether
Phoenix provided adequate and reasonable notice to both potential objectors to
the sale and to potential buyers.
In Delaware & Hudson, id, at 180, this court recognized that the notice
provided
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should "place all parties on notice that the Debtor is liquidating his
business; disclose accurately the full terms of the sale; explain the effect of
the sale as terminating the debtor's ability to continue in business; and
explain why the proposed price is reasonable and why the sale is in the best
interest of the estate." However, this court also stated that "[t]here is no
precedent which dictates that the Bankruptcy Court must require that this
information be included in the notice of the sale." Id. See also Titusville,
128 B.R. at 399 (finding that the debtors "properly noticed and advertised the
sale" after mailing notice of the hearing and proposed sale to all creditors
and parties in interest, and publishing the notice in papers).
On December 9, 1997, the court issued an order requiring that Phoenix
provide notice of the proposed sale to all persons known to assert liens or
other interests in the assets to be sold, to all creditors and preferred equity
holders, to all parties to executory contracts and unexpired leases that the
debtors proposed to assume and assign pursuant to the sale, to all entities
that had filed an appearance in the case, and to the United States Trustee and
the Securities Exchange Commission. The court also ordered Phoenix to provide
notice of the proposed sale to common stockholders in the Wall Street Journal
and The New York Times.
Phoenix sent notice of the proposed sale to all creditors, preferred
security holders, and others specified in the court's order. Additionally,
Phoenix placed notices in the national editions of both the Wall Street Journal
and The New York Times, thereby
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notifying the common stockholders and any other members of the general public
that might object to the proposed sale. Phoenix filed certifications of
publication for both papers. Furthermore, Phoenix sent out bot pre- and
post-petition notices of the proposed sale to over thirty different potential
purchasers who had expressed a possible interest in Phoenix before Phoenix
filed for bankruptcy. The notice Phoenix explained that, subject to court
approval, Phoenix would sell substantially all of its assets to S-C Phoenix for
$20 million. It also explained that, among other things, financial information
regarding the assets was available and that Phoenix would consider any
competitive bids. Phoenix provided both private and public notice of the
proposed sale to those that might object to the sale, and to those that might
potentially place a competing bid for the assets. Accordingly, considering
Phoenix's financial crisis at the beginning of December 1997, and its need to
move promptly, Phoenix has provided adequate and reasonable notice of the
proposed sale to both potential objectors and potential buyers.
B. Is The Price Fair And Reasonable?
The second factor that the court must analyze before deciding whether to
grant a motion to sell is whether the price is fair and reasonable. See
Delaware & Hudson, 124 B.R. at 176.
Phoenix has actively sought interested investors for the past year, and
Phoenix provided notice at it was open to receiving other bids. The only offer
Phoenix received was for $20,000,000 from S-C Phoenix, which would provide
sufficient funds to pay the
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costs of bankruptcy and any unsecured creditors, and approximately $16,000,000
would be applied towards amounts due the holders of preferred stock.
The Equity Committee argues that the offer price is not fair and
reasonable. The Equity Committee asserts that because S-C Phoenix included a
$1,000,000 fee in the debtor-in-possession financing if Phoenix accepts another
bid, and because of the restrictions on the American Aviation shares, other
interested investors have been discouraged from making offers. However, the
Equity Committee has not presented any evidence, such as evidence of other
offers, showing that $20,000,000 does not accurately reflect the value the
market places on the assets. On the contrary, the facts demonstrate that
Phoenix unsuccessfully sought interested investors prior to filing for
bankruptcy, and in the two months since Phoenix filed for bankruptcy no offers
other than S-C Phoenix's $20,000,000 offer have been made. Apparently,
therefore, S-C Phoenix, as the only interested investor, adequately represents
the value the market places on these assets, and there is no basis for saying
that the offer made is too low.
Accordingly, the court concludes that $20,000,000 is a fair and reasonable
price. See Industrial Valley, 77 B.R. at 22 (finding that the "the
availability of the Debtor's business has been well-known in the industry for
some time and no other offers have surfaced or are likely to surface," and
therefore, concluding that "if the Debtor were to receive a figure
approximating the previous [offer], we could not perceive any just basis for
finding such an offer less than 'fair and reasonable'").
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C. Were the Negotiations Done in Good Faith?
The third factor that the court must analyze before deciding whether to
grant a motion to sell is whether the negotiations were done in good faith.
See Delaware & Hudson, 124 B.R. at 176. The court will evaluate whether S-C
Phoenix, as both a purchaser under bankruptcy law, and an insider under
Delaware corporate law, acted in good faith.
The Third Circuit held in Abbotts, 788 F.2d at 147, that, when approving a
sale of assets pursuant to SS.363(b), a court must make a finding that the
purchaser acted in good faith. Neither the Bankruptcy Code nor the Bankruptcy
Rules provide a definition of "good faith." Accordingly, when evaluating a
proposed transaction for "good faith" the Third Circuit applies "traditional
equitable principles." Abbotts, 788 F.2d at 147. In Abbotts, the Third
Circuit stated that the "requirement that a purchaser act in good faith...
speaks to the integrity of his conduct in the course of the sale proceedings."
Id. The Abbotts court further stated that "(t)ypically, the misconduct that
would destroy a purchaser's good faith status at a [SS.363(b)] sale involves
fraud, collusion between the purchaser and other bidders or the trustee, or an
attempt to take grossly unfair advantage of other bidders." Id. See also
Voest-Alpine Trading USA Corp. v. Vantage Steel Corp., 919 F.2d 206,214 (3d
Cir. 1990) (finding that the transfer of assets from one corporation controlled
by defendants to another corporation established and controlled by defendants
"could not have taken place in good faith because it was in fact designed to
hinder,
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defraud, or delay" the first corporation's creditors)(quotations omitted).
Basically, "lack of good faith is generally determined by fraudulent conduct
during the sale proceedings." In re Exennim, Inc., 715 F.2d 1401, 1404-05 (9th
Cir. 1983). The "good faith requirement is key to the finality of the [court's]
order approving such a sale." In re Tempo Tech. Corp., 202 B.R. 363, 372
(D. Del. 1996).
In re Paolo Gucci, 126 F.3d 380,390 (2d Cir. 1997), the Second Circuit
stated that "the good-faith analysis is focused on the purchaser's conduct in
the course of the bankruptcy proceedings. This includes the purchaser's actions
in preparation for and during the sale itself. That is, the good-faith
requirement prohibits fraudulent, collusive actions specifically intended to
affect the sale price or control the outcome of the sale." The Gucci court
interpreted the Third Circuit's decision in Abbotts as stating that, even when
the conduct in question begins prior to the bankruptcy proceedings, the
"relevant inquiry [remains] whether th(e) conduct was intended to control the
sale price or take unfair advantage of prospective bidders." See id. at 391.
The Equity Committee argues that S-C Phoenix, as the purchaser, has not
acted in good faith. The Equity Committee argues that S-C Phoenix refused to
permit Phoenix to sell the American Aviation stock to Sino-American, and then
it led Phoenix to believe that S-C Phoenix was interested in the American
Aviation shares by negotiating it for several months. Then, when Phoenix had
almost no cash left, S-C Phoenix suddenly ceased negotiations, apparently
forcing Phoenix to file for bankruptcy and accept the
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proposed sale agreement. The Equity Committee also asserts that S-C Phoenix
would benefit from the proposed sale to the detriment of the common
stockholders, and that approval of the sale would give S-C Phoenix control of a
company that has the potential to generate over $100,000,000 a year within the
next six to eight months. Additionally, the Equity Committee asserts that the
$1,000,000 buy out fee demanded in exchange for the interim debtor-in-possession
financing impeded others from making offers.
The fact that S-C Phoenix prevented Phoenix from selling the American
Aviation shares does not demonstrate fraud, collusion, or unfair advantage. On
the contrary, pursuant to the American Aviation Articles of Association, it was
S-C Phoenix's prerogative to veto any proposed transfer. Furthermore, when
Phoenix purchased the American Aviation, the Phoenix Board understood that
the Articles of Association contained a restriction on transferability.
Although S-C Phoenix negotiated with Phoenix during the summer and
fall of 1997, nothing prevented Phoenix from pursuing other sources of
funding. In fact, the evidence demonstrates that Phoenix actively continued to
seek interested investors, even as the negotiations continued, but to no
avail. Furthermore, although at the beginning of December 1997, Phoenix found
itself in a financial crisis and under extreme time constraints, there is no
indication that this had a negative impact on potential purchasers. On the
contrary, in the year before Phoenix filed for bankruptcy, while Phoenix
actively sought out financing alternatives, and in the two months since that
time, no other
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interested investors have come forward with an offer. Accordingly, there is no
evidence that S-C Phoenix used fraudulent or collusive tactics to hold Phoenix
at the negotiating table until Phoenix found itself faced with either
liquidation or the sale of its assets to S-C Phoenix.
While it may be true that the sale of assets to S-C Phoenix may
benefit S-C Phoenix to the detriment of the common stockholders, under the
current circumstances there may not be any equity left in Phoenix. By selling
its assets to S-C Phoenix, Phoenix will potentially be able to sustain its
operations and obtain further funding from S-C Phoenix. Furthermore, there is
no evidence that the alternative, liquidation, will protect the common
stockholders' interest, either. Therefore, the fact that S-C Phoenix may
benefit to the detriment of the common stockholders does not demonstrate a lack
of good faith.
Additionally, as noted above, there is no evidence that the buy out
fee connected to the interim financing provisions prevented other interested
investors from making offers. In fact, there is no basis for concluding that
the buy out fee even influenced other potential purchasers. After a year of
extensive efforts to obtain financing, and in the two months since Phoenix
filed for bankruptcy, S-C Phoenix's offer is still the only offer Phoenix has
received.
The Equity Committee's final argument is that S-C Phoenix did not act
in good faith because it is an insider. The fact that S-C Phoenix is a
controlling stockholder does
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not alter the good faith analysis, as the same evidence showing that S-C
Phoenix, as a purchaser, acted in good faith, demonstrates that S-C Phoenix, as
a controlling stockholder, acted in good faith. Accordingly, the court
concludes that S-C Phoenix, as both a purchaser and an insider, acted in good
faith.
D. Is There a Sound Business Reason For Phoenix to Sell
its Assets to S-C Phoenix?
The fourth factor that the court must analyze before deciding whether
to grant a motion to sell is whether a sound business exists for the sale. See
Delaware & Hudson, 124 B.R. at 176.
The Second Circuit, in In re Lionel Corp., 722 F.2d 1063, 1071 (2d
Cir. 1983), adopted a rule similar to the sound business purpose test,
requiring "that a judge determining a SS. 363(b) application expressly find from
the evidence presented before him at the hearing a good business reason to
grant such an application." When determining whether a good business reason
exists, a court "should consider all salient factors pertaining to the
proceeding," Id. The Lionel court listed several relevant factors, including
the proportionate value of the asset to the estate as a
whole, the amount of elapsed time since the filing, the
likelihood that a plan of reorganization will be
proposed and confirmed in the near future, the effect
of the proposed disposition on future plans of
reorganization, the proceeds to be obtained from the
disposition vis-a-vis any appraisals of the property,
which of the alternatives of use, sale or lease the
proposal envisions, and most importantly perhaps,
whether the asset is increasing
17
<PAGE> 20
or decreasing in value.
Id. Thus, when analyzing whether a sound business reason exists, this court
should consider, among other relevant factors, the amount of time between
filing for bankruptcy and filing the motion to sell, the effect of the proposed
disposition on future plans of reorganization, and whether the asset is
increasing or decreasing in value. See id. See also Delaware & Hudson, 124 B.R.
at 176 (same).
In In re Tempo Tech. Corp., 202 B.R. at 368, this court held that
"[w]without a sizable pool of potential buyers, with only one buyer willing to
negotiate terms of a purchase, and the Debtor's severe cash flow predicament,"
the Bankruptcy Court did not err when it approved a sale of assets pursuant to
SS. 363(b)(1). In making this determination, the court noted that the debtor
had unsuccessfully sought out other potential investment sources.
Similarly, for nearly an entire year prior to filing for bankruptcy
Phoenix sought financing alternatives to no avail. One month prior to filing
for bankruptcy, Phoenix had only one investor, S-C Phoenix, that had expressed
an interest in possibly investing in its company. However, in November 1997,
S-C Phoenix informed Phoenix that it was no longer interested. By December 3,
1997, when Phoenix filed for bankruptcy, it had no viable alternatives for
raising money, and it had enough funds to last only a few days. On December 4,
1997, Phoenix filed the motion to sell. If Phoenix had not filed for
bankruptcy, and had not obtained interim debtor-in-possession financing pending
18
<PAGE> 21
approval of the motion to sell, it would have been forced to liquidate. See In
re Apex Oil Company, 92 B.R. 847, 869 (Bankr.E.D. Mo. 1988)(stating that the
debtor "articulated an array of compelling business reasons for the sale,"
noting that the debtor "will not fully liquidate under the Purchase Agreement").
The Equity Committee asserts that Phoenix acted hastily and that
Phoenix has another alternative, selling the American Aviation shares. However,
the facts illustrate that by the beginning of December 1997, Phoenix had almost
no cash, and after a year of vigorous efforts to obtain financing, S-C Phoenix
made the only offer. Additionally, even if Phoenix could sell the American
Aviation shares, this would not solve Phoenix's problem, as it would merely
provide temporary funding and would not obviate the issue of finding enough
money to sustain Phoenix's operations until cutover.
Furthermore, S-C Phoenix is in a unique position to maximize the value
of Phoenix's assets. S-C Phoenix is owned by investors that are known globally
and have some experience in the Asian markets. S-C Phoenix would be accepted
by the Joint Venture as a partner because of its reputation and its prior
involvement with the Joint Venture. Therefore, approval of the sale of
Phoenix's assets to S-C Phoenix will provide Phoenix with an opportunity to
continue its operations, and will avoid the alternative option of liquidation.
Accordingly, the court finds that there is a sound business purpose
for granting the motion to sell substantially all of Phoenix's assets.
The court will enter an order in accordance with this memorandum
opinion.
19
<PAGE> 22
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
IN RE: )
)
PHOENIX INFORMATION SYSTEMS )
CORP., PHOENIX SYSTEMS LTD., AND ) Case No. 97-2498 (RRM)
PHOENIX SYSTEMS GROUP, INC., )
)
Debtors )
ORDER PURSUANT TO 11 U.S.C. ss. 105(a), 363(b), (f), AND (m), AND 365
APPROVING ASSET PURCHASE AGREEMENT WITH S-C PHOENIX
PARTNERS, AUTHORIZING THE SALE OF SUBSTANTIALLY ALL OF
DEBTORS' ASSETS FREE AND CLEAR OF LIENS, CLAIMS AND
ENCUMBRANCES, THE ASSUMPTION AND ASSIGNMENT OF CERTAIN
EXECUTORY CONTRACTS AND LEASES, AND THE ASSUMPTION OF
CERTAIN LIABILITIES
For the reasons set out in the court's February 5, 1998, opinion,
IT IS HEREBY ORDERED that:
1) The Debtors' motion for an order pursuant to 11 U.S.C. ss.
105(a), 363(b), (f), and (m), and 365 approving Asset Purchase Agreement with
S-C Phoenix is granted.
2) The Debtors' motion for an order pursuant to 11 U.S.C. ss.
105(a), 363(b), (f), and (m), and 365 authorizing the sale of substantially all
of debtors' assets free and clear of liens, claims, and encumbrances, the
assumption and assignment of certain executory contracts and leases, and the
assumption of certain liabilities, pursuant to and as described in the Asset
Purchase Agreement, is granted.
/s/ Roderick R. McKelvie
----------------------------------------
UNITED STATES DISTRICT JUDGE
Dated: February 5, 1998
<PAGE> 1
EXHIBIT 10.47
Press Release issued by Phoenix Information Systems Corp. on February 27, 1998.
<PAGE> 2
EXHIBIT 10.47
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Phoenix Information Systems Corp.
FOR IMMEDIATE RELEASE
PHOENIX COMPLETES SALE OF ASSETS TO MAJOR SHAREHOLDER
UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
St. Petersburg, Florida, USA ... February 27, 1998 ... Phoenix Information
Systems Corp. ("Phoenix") (PHXS - OTC Bulletin Board) announced that pursuant to
Section 363 of title 11 of the United States Code (the "Bankruptcy Code"),
Phoenix has completed the sale of substantially all assets of Phoenix and its
subsidiaries, free and clear of all liens, claims and encumbrances, for $20
million to affiliates of S-C Phoenix Partners, a major shareholder. On February
6, 1998, Phoenix announced the approval of the asset sale by the United States
District Court for the District of Delaware.
Phoenix had announced on December 3, 1997 that, after an extensive and
unsuccessful search for permanent financing, it had determined to seek
protection under Chapter 11 of the Bankruptcy Code and that, subject to court
approval, it had arranged for debtor in possession financing and the asset
sale to S-C Phoenix Partners or its affiliates.
CONTACT: For further information, please call 800/664-7472 or 813/894-8021.
Paul Henry, Director
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February 27, 1998 Phoenix Information Systems Corp. - Press Release
