<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A-1
Amendment No. 1
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: DECEMBER 31, 1994
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission file number: 0-9628
ANCHOR PACIFIC UNDERWRITERS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-1687187
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
1800 Sutter Street, Suite 400, Concord, California 94520
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (510) 682-7707
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.02 par value
1
<PAGE>
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K ( 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
See Item 5 of this report regarding the aggregate market value of the
voting stock held by non-affiliates of the registrant.
As of March 15, 1995, the Registrant had 3,923,258 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
2
<PAGE>
ANCHOR PACIFIC UNDERWRITERS, INC.
Amendment No. 1 to Form 10-K
For the Fiscal Year Ended December 31, 1994
This Amendment No.1 is being filed by the registrant to amend the figures
for loss per share and weighted average shares outstanding for the periods ended
December 31, 1994, 1993 and 1992 contained in the Selected Financial Data table
in Item 6 of the registrant's Form 10-K for the fiscal year ended December 31,
1994 (the "Form 10-K"), and to make corresponding amendments to the registrant's
consolidated statements of operations included as part of the Form 10-K. The
figures for weighted average shares outstanding contained in the Form 10-K
inadvertently included shares underlying unexercised stock options as common
share equivalents, resulting in an overstatement of weighted average shares
outstanding and an understatement of loss per share for the periods indicated.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain historical information for Anchor
which is based on, and should be read in conjunction with, Anchor's audited
financial statements.
ANCHOR PACIFIC UNDERWRITERS, INC.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues(1) $6,091,165 $4,767,820 $4,436,728 $4,009,583 $3,659,025
Operating Income(1) $63,349 $232,674 $174,567 $54,734 $421,687
Net Income (Loss) ($650,489) ($1,662) ($92,585) $111,061 $168,555
Earnings (Loss) Per Share ($2.47) ($0.01) ($0.40) $0.54 $0.94
Weighted Average 263,108 232,434 229,901 204,877 178,840
Shares Outstanding
Cash Flow (Deficit)
From Operations ($537,714) $345,909 $289,780 $314,464 $238,939
Total Assets $13,134,383 $7,689,637 $8,177,374 $6,524,617 $5,698,190
Long-Term Liabilities $1,631,447 $514,651 $720,302 $275,506 $70,045
Shareholders'
Equity $2,740,463 $1,889,987 $1,870,023 $1,917,592 $1,159,597
---------------------------
<FN>
(1) Consistent with Anchor's audited financial statements, revenues and
operating income include interest income.
</TABLE>
3
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements for the registrant appear on pages F-1
through F-25 of this report. Such financial statements reflect the amendments
to the figures for loss per share and weighted average shares outstanding
mentioned above.
Reports of Independent Auditors
Consolidated Balance Sheets as of December 31, 1994 and 1993
Consolidated Statements of Operations for the years ended December 31,
1994, 1993 and 1992
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1994, 1993 and 1992
Consolidated Statements of Cash Flows for the years ended December 31,
1994, 1993 and 1992
Notes to Consolidated Financial Statements
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The financial statements referenced above appear on pages F-1 through F-25
of this report.
4
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
ANCHOR PACIFIC UNDERWRITERS, INC.
(Registrant)
Date: August 25, 1995 /s/ Earl Wiklund
----------------------------------
Earl Wiklund
Chief Financial Officer
5
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
ANCHOR PACIFIC UNDERWRITERS, INC.
AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1994 , 1993 and 1992
<PAGE>
Anchor Pacific Underwriters, Inc. and Subsidiaries
Consolidated Financial Statements
Years ended December 31, 1994, 1993 and 1992
CONTENTS
Report of Independent Auditors. . . . . . . . . . . . . . . . . . . . . . . F-1
Audited Consolidated Financial Statements
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . F-6
Consolidated Statements of Shareholders' Equity . . . . . . . . . . . . . . F-7
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . F-8
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . F-10
F-1
<PAGE>
[ERNST & YOUNG LLP LETTERHEAD]
Report of Independent Auditors
Board of Directors and Shareholders
Anchor Pacific Underwriters, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Anchor Pacific
Underwriters, Inc. and subsidiaries as of December 31, 1994, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. The consolidated financial statements
of Anchor Pacific Underwriters, Inc. and subsidiaries for the years ended
December 31, 1993 and 1992, were audited by other auditors whose report dated
April 1, 1994 expressed an unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Anchor
Pacific Underwriters, Inc. and subsidiaries at December 31, 1994, and the
consolidated results of their operations and their cash flows for the year then
ended in conformity with generally accepted accounting principles.
As more fully described in Note 14, a lawsuit has been filed, alledging that the
Company and several other unaffiliated entities placed insurance coverage with
an insurance company which subsequently became insolvent and failed to pay the
plaintiffs insurance claim. The ultimate amount of liability cannot be
determined at this time.
/s/ Ernst & Young LLP
March 3, 1995
F-2
<PAGE>
Board of Directors and Stockholders
Anchor Pacific Underwriters, Inc.
and Subsidiaries
Concord, California
INDEPENDENT AUDITOR'S REPORT
We have audited the accompanying consolidated balance sheets of Anchor
Pacific Underwriters, Inc. and subsidiaries, as of December 31, 1993 and 1992,
and the related consolidated statements of operations, stockholders' equity and
cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Company's management. Out responsibilitity is to
express an opinion on these consolidated financial statements based on our
audits. We did not audit the financial statements of Anchor Pacific Premium
Finance Co. Inc., a wholly-owned subsidiary, which statemetns reflect total
assets of $160,235 and $87,946 as of December 31, 1993 and 1992 and total
revenues of $20,079 for the year ended December 31, 1993 and $154 for the peiod
December 15, 1992 to December 31, 1992 (see note 1). Those statements were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for Anchor Pacific
Premium Finance Company is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits and
the report of other auditors provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of Anchor
Pacific Underwriters, Inc. and subsidiaries as of December 31, 1993 and 1992,
and the results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
As discussed in Note 2 to the financial statements, effective January
1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes."
HIROSE, OTO & BAILEY ACCOUNTANTS INC.
By: /s/ Mary E. Bailey
------------------------------
Mary E. Bailey, CPA
Oakland, California
April 1, 1994
F-3
<PAGE>
Anchor Pacific Underwriters, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31
1994 1993
-------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents - corporate funds $ 384,102 $ 943,130
Cash and cash equivalents - brokerage fiduciary
funds 1,323,372 420,642
Cash and cash equivalents - third party
administration fiduciary funds 4,349,629 4,163,579
Accounts receivable (less allowances for doubtful
accounts 1994, $33,700; 1993; $-0-) 1,306,627 715,026
Prepaid expenses and other current assets 949,710 114,514
Current portion of deferred tax asset 48,402 27,344
------------------------------
Total current assets 8,361,842 6,384,235
Property and equipment 2,498,171 1,488,231
Less accumulated depreciation and amortization (1,540,120) (867,303)
------------------------------
958,051 620,928
Other assets:
Goodwill, net 2,525,591 335,647
Intangible assets, net 1,144,091 241,097
Other 144,808 107,730
------------------------------
3,814,490 684,474
------------------------------
Total assets $13,134,383 $7,689,637
------------------------------
------------------------------
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31
1994 1993
------------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS EQUITY
Current liabilities:
Cash and cash equivalents - third party
administration fiduciary funds $ 4,349,629 $ 4,163,579
Net premiums payable - insurance companies 2,256,313 778,463
Accounts payable and accrued expenses 365,089 173,237
Capital lease obligations 46,610 --
Short-term debt 850,000 --
Other liabilities 894,832 169,720
-------------------------------------
Total current liabilities 8,762,473 5,284,999
Long-term liabilities, less current portion 1,471,723 487,307
Deferred tax liability 159,724 27,344
Shareholders equity:
Common stock - no par value; 1,000,000
shares authorized; 353,168 and 233,091
shares issued and outstanding for 1994
and 1993, respectively 3,335,037 1,834,072
Additional paid-in capital 38,130 38,130
Retained earnings (deficit) (632,704) 17,785
-------------------------------------
Total shareholders equity 2,740,463 1,889,987
-------------------------------------
Total liabilities and shareholders equity $ 13,134,383 $ 7,689,637
-------------------------------------
-------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
Anchor Pacific Underwriters, Inc. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1994 1993 1992
----------------------------------------------------
<S> <C> <C> <C>
Revenues:
Commissions, fees and other income $ 5,978,754 $ 4,681,785 $ 4,315,725
Interest income 112,411 86,035 121,003
----------------------------------------------------
Total revenues 6,091,165 4,767,820 4,436,728
Operating expenses:
Salaries, commissions and employee
benefits 3,921,242 2,847,922 2,659,229
Selling, general and administrative
expenses 2,106,574 1,687,224 1,602,932
----------------------------------------------------
Total operating expenses 6,027,816 4,535,146 4,262,161
----------------------------------------------------
63,349 232,674 174,567
Other income (expense):
Amortization of goodwill and
intangible assets (256,149) (203,345) (209,770)
Interest (35,925) (30,492) (20,646)
Other 45,637 (20,248) (32,374)
Nonrecurring merger expenses (462,601) -- --
----------------------------------------------------
(709,038) (254,085) (262,790)
----------------------------------------------------
Loss before income taxes (645,689) (21,411) (88,223)
Income tax expense (credit) 4,800 (19,749) 4,362
----------------------------------------------------
Net loss $ (650,489) $ (1,662) $ (92,585)
----------------------------------------------------
----------------------------------------------------
Net loss per common share $ (2.47) $ (.01) $ (.40)
----------------------------------------------------
----------------------------------------------------
Weighted average number of common
shares outstanding 263,108 232,434 229,901
----------------------------------------------------
----------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
Anchor Pacific Underwriters, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
ADDITIONAL RETAINED
COMMON STOCK PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1992 228,025 $1,768,446 $ 37,114 $ 112,032 $1,917,592
Stock options exercised 2,500 25,000 -- -- 25,000
Discount on redemption of
preferred stock -- -- 1,016 -- 1,016
Stock issued for acquisitions 1,251 19,000 -- -- 19,000
Net loss -- -- -- (92,585) (92,585)
----------------------------------------------------------------------------------
Balances at December 31, 1992 231,776 1,812,446 38,130 19,447 1,870,023
Stock options exercised 1,315 21,626 -- -- 21,626
Net loss -- -- -- (1,662) (1,662)
----------------------------------------------------------------------------------
Balances at December 31, 1993 233,091 1,834,072 38,130 17,785 1,889,987
Stock issued for acquisitions 120,077 1,500,965 -- -- 1,500,965
Net loss -- -- -- (650,489) (650,489)
----------------------------------------------------------------------------------
Balances at December 31, 1994 353,168 $3,335,037 $ 38,130 $ (632,704) $2,740,463
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-7
<PAGE>
Anchor Pacific Underwriters, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1994 1993 1992
---------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (650,489) $ (1,662) $ (92,585)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 208,751 205,966 172,677
Amortization of goodwill, other intangibles and
organization expenses 257,309 213,476 233,875
Changes in operating assets and liabilities, net of
effect of purchases of subsidiaries:
Cash and cash equivalents - brokerage fiduciary funds 322,950 65,957 (185,128)
Accounts receivable (133,818) (172,213) (252,161)
Prepaid expenses and other current assets 9,678 37,121 (25,683)
Other assets (66,928) (40) 56
Net premiums payable - insurance companies (254,236) (37,394) 341,624
Accounts payable and accrued expenses (78,931) (735) 33,982
Other liabilities (152,000) 35,433 63,123
---------------------------------------------------
Net cash provided by (used in) operating activities (537,714) 345,909 289,780
INVESTING ACTIVITIES
Notes receivable, net 3,350 11,324 (56,743)
Purchase of property and equipment (394,916) (229,551) (146,485)
Purchases of subsidiaries, net of cash acquired (28,534) (25,462) (15,800)
Insurance proceeds -- -- 106,230
---------------------------------------------------
Net cash used in investing activities (420,100) (243,689) (112,798)
</TABLE>
F-8
<PAGE>
Anchor Pacific Underwriters, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1994 1993 1992
--------------------------------------------------
<S> <C> <C> <C>
FINANCING ACTIVITIES
Common stock - stock options exercised $ -- $ 21,626 $ 25,000
Preferred stock:
Redemption -- -- (76,584)
Dividends paid -- -- (4,656)
Debt:
Borrowings 600,000 24,375 51,639
Repayment (125,784) (58,407) (98,367)
Capital lease payments (10,969) -- --
Payments on amounts due on acquisitions (64,461) (35,720) (50,248)
--------------------------------------------------
Net cash provided by (used in) financing activities 398,786 (48,126) (153,216)
--------------------------------------------------
Net increase (decrease) in cash (559,028) 54,094 23,766
Cash and cash equivalents - corporate
funds at beginning of year 943,130 889,036 865,270
--------------------------------------------------
Cash and cash equivalents - corporate funds at
end of year $ 384,102 $ 943,130 $ 889,036
--------------------------------------------------
--------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 37,097 $ 29,320 $ 20,646
--------------------------------------------------
--------------------------------------------------
Income taxes $ 93,042 $ 6,000 $ 6,500
--------------------------------------------------
--------------------------------------------------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Insurance agency acquired in 1992 on
contingency purchase price revalued based
on loss of customer base:
Customer list $ 20,000 $ 36,000 $ 156,000
Covenant not to compete 20,000 36,000 156,000
Goodwill 10,000 18,000 78,000
--------------------------------------------------
50,000 90,000 390,000
Less cash payment -- -- (10,000)
Less shares issued -- -- (19,000)
--------------------------------------------------
$ 50,000 $ 90,000 $ 361,000
--------------------------------------------------
--------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-9
<PAGE>
Anchor Pacific Underwriters, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1994
1. NATURE OF BUSINESS
Anchor Pacific Underwriters, Inc. (Anchor) is a holding company that provides
insurance administration and property and casualty brokerage services through
its five direct and indirect subsidiaries. Administration services are provided
to employer groups of varying size, most of which are located in California and
Arizona. Anchor also operates property and casualty insurance agencies which
service customers located primarily in the greater San Francisco Bay Area.
The consolidated financial statements include the results of all the
subsidiaries for the period owned by Anchor. Acquired subsidiaries have been
accounted by the purchase method of accounting and fully consolidated. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
The majority of revenue from third party administration services consists of
fees charged for the administration of fully insured and self-insured group
health plans. Fee income is recognized at the time employers remit monthly
premiums and when services are rendered.
Insurance brokerage revenue consists principally of insurance commissions (net
of split or shared commissions), fees in lieu of commissions for insurance
placement services and interest income on fiduciary and corporate funds.
Insurance commissions and fees in lieu of commissions for insurance placement
services are recognized when protection is afforded under the insurance policy
(that is, when coverage is effective), the premium due under the policy is known
or can be reasonably estimated, and substantially all required services related
to placing the insurance have been provided.
Broker commission adjustments and commissions on premiums billed directly by
underwriters are recognized principally when such amounts can be reasonably
estimated.
F-10
<PAGE>
Anchor Pacific Underwriters, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION (CONTINUED)
In addition, Anchor receives annual contingency commissions from various
property and casualty insurance carriers. The commissions are based upon the
carrier's loss experience as well as the number of policies placed. Revenue
from contingency commissions is recognized when received. Fee income for
services other than placement of insurance coverages is recognized as those
services are provided.
EXPENSE RECOGNITION
All costs are expensed as incurred.
CASH AND CASH EQUIVALENTS
Anchor considers all highly liquid investments with a maturity of three months
or less at the date of acquisition to be cash equivalents.
FIDUCIARY FUNDS AND LIABILITIES
Anchor, in its fiduciary capacity as a third party administrator of claims, has
certain fiduciary funds, segregated in specific bank accounts. Those funds held
for self-funded employers and fully insured programs are classified as "Third
Party Administration Fiduciary Funds."
In its capacity as a property and casualty insurance broker, Anchor collects
premiums from insureds and, after deducting its commissions, remits the premiums
to the respective insurance underwriters. Unremitted insurance premiums are
held in a fiduciary capacity.
In accordance with industry practice, interest earned on certain fiduciary funds
is included in Anchor's earnings. Interest income on fiduciary funds amounted
to $64,139 in 1994, $55,907 in 1993 and $80,318 in 1992.
F-11
<PAGE>
Anchor Pacific Underwriters, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTS RECEIVABLE
Anchor provides for future estimated credit losses based on an evaluation of a
current aging of the accounts, current economic conditions and other factors
necessary to provide for losses that can be reasonably anticipated.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of financial instruments such as cash and cash equivalents,
fiduciary funds, accounts receivable, net premiums payable, accounts payable,
and debt obligations approximate their fair market value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization are
computed using the straight-line method over the estimated useful lives of the
assets, which range from three to ten years.
Software costs relating to the upgrading and enhancing of existing programs are
capitalized and amortized over a period of five years.
GOODWILL AND INTANGIBLE ASSETS
Goodwill represents the excess of the cost of acquisitions over the fair value
of net assets acquired. Intangible assets relate to covenants not to compete,
customer lists and other contractual rights acquired in acquisitions. Goodwill
is amortized on the straight-line basis over 10 to 25 years. Covenants not to
compete and customer lists are amortized on the straight-line basis over 5 to 12
years. Accumulated amortization of goodwill and other intangibles at December
31, 1994 and 1993 are $1,626,882 and $929,610, respectively.
F-12
<PAGE>
Anchor Pacific Underwriters, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Anchor and its subsidiaries file consolidated federal income tax returns and
combined returns for state franchise tax purposes.
Effective January 1, 1993, Anchor adopted the Financial Accounting Standards
Board Statement of Financial Accounting Standards ("FASB") No. 109, "Accounting
for Income Taxes." FASB No. 109 requires the use of an asset and liability
approach for measuring deferred taxes based on temporary differences between
financial statement and tax bases of assets and liabilities existing at each
balance sheet date using enacted tax rates for years in which the related taxes
are expected to be paid or recovered.
The adoption of FASB 109 did not have a material effect on Anchor's accounting
for income taxes or net income.
EARNINGS PER SHARE
Earnings per share is based on the weighted average number of common shares
outstanding during the period.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform with the current
year presentation.
F-13
<PAGE>
Anchor Pacific Underwriters, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. PROPERTY AND EQUIPMENT
Property and equipment are detailed below:
<TABLE>
<CAPTION>
1994 1993
---------------------------
<S> <C> <C>
Leasehold improvements $ 52,042 $ 47,375
Furniture and equipment 794,207 336,762
Office equipment 353,745 256,086
Computer equipment 834,020 488,855
Computer software 464,157 359,153
----------------------------
2,498,171 1,488,231
Less accumulated depreciation and amortization (1,540,120) (867,303)
----------------------------
$ 958,051 $ 620,928
----------------------------
----------------------------
</TABLE>
4. GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31 1994 1993 1992 AMORTIZATION
PERIOD
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Goodwill $ 3,293,992 $ 983,135 $ 1,001,135 10 - 25 years
Less accumulated amortization (768,401) (647,488) (548,367)
------------------------------------
$ 2,525,591 $ 335,647 $ 452,768
------------------------------------
------------------------------------
Covenants not to compete $ 240,700 $ 260,700 $ 296,700 5 - 12 years
Customer lists 1,761,872 262,519 298,519 5 - 12 years
------------------------------------
2,002,572 523,219 595,219
Less accumulated amortization (858,481) (282,122) (177,898)
------------------------------------
$ 1,144,091 $ 241,097 $ 417,321
------------------------------------
------------------------------------
</TABLE>
F-14
<PAGE>
Anchor Pacific Underwriters, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. GOODWILL AND INTANGIBLE ASSETS (CONTINUED)
The carrying values of intangibles are reviewed on an ongoing basis for
impairment. If such review indicates that the intangibles will not be
recoverable, as determined based upon the discounted cash flows of the entity
acquired over the remaining amortization period, Anchor's carrying value of the
intangibles will be reduced by the estimated shortfall of cash flows.
In May 1992, Anchor purchased certain business of a property and casualty
broker. During 1994, management determined it was necessary to reduce the
carrying value of the intangibles related to that purchase by $50,000. The
remaining purchase price is being paid monthly as the business renews over the
remaining life of the contract.
5. SHORT-TERM DEBT
Anchor entered into a credit agreement (expiring October 25, 1995) with its
principal bank which provides for a revolving line of credit of $1,000,000.
Interest is paid monthly, at the bank's prime rate, as adjusted. Anchor must
maintain a net worth greater than $800,000. There was $600,000 and $-0-
outstanding borrowings at December 31, 1994 and 1993, respectively.
In addition, in conjunction with an acquisition, Anchor assumed a line of
credit, expiring May 5, 1995, which provides for maximum borrowings of $250,000.
Amounts advanced against the line bear interest at the bank's prime rate plus 1%
and are collateralized by the subsidiary's net commission portion of accounts
receivable along with its equipment and general intangibles. The outstanding
borrowings against the line at December 31, 1994 are $250,000.
F-15
<PAGE>
Anchor Pacific Underwriters, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. OTHER LONG-TERM LIABILITIES
Other long-term liabilities primarily consist of future contingent payments
relating to contractual agreements negotiated with the previous owners of
acquired businesses, deferred lease incentives and other liabilities not due
within one year. The future contingent payments are generally based upon the
amount of net commission income generated from the books of business acquired.
At December 31, 1994, the scheduled future payments of these liabilities were as
follows: 1995, $271,698; 1996, $309,198; 1997, $302,921; 1998, $200,445.
The amount due within one year is included in current liabilities.
7. ACQUISITIONS
On August 1, 1994, Anchor's subsidiary, Harden & Company, acquired all of the
issued and outstanding common stock of Benefit Resources Inc. ("BRI"), a third-
party administrator located in Scottsdale, Arizona. The purchase price
consisted of $300,000 cash and certain other acquisition expenses. In addition,
Harden entered into a consulting contract pursuant to which it agreed to pay
$940,000 over a fifty-month period to an entity affiliated with the former
shareholders of BRI. At the end of the fifty-month term, a final bonus payment
will be calculated, if any, that would be paid out from the fifty-first through
the ninety-eighth month. The preliminary purchase price has been allocated to
assets and liabilities of BRI based upon their estimated respective fair values.
The preliminary purchase price exceeded the fair value of BRI's net assets by
approximately $212,000, which has been allocated to other intangible assets.
On October 1, 1994, Anchor acquired Putnam, Knudsen & Wieking, Inc. (PKW), a
property and casualty insurance brokerage firm. The purchase price consisted of
the issuance of 120,077 shares of newly issued Anchor stock at a value
determined to be $12.50 per share for all 35,677 shares issued and outstanding
of PKW. The purchase price also consisted of certain other acquisition
expenses. In conjunction with this acquisition, Anchor also assumed
approximately $710,000 in relocation liabilities relating to PKW's former office
facilities. The preliminary purchase price exceeded the fair value of PKW's net
assets by approximately $2,895,000, of which $2,210,000 has been allocated to
goodwill and $685,000 allocated to other intangible assets.
F-16
<PAGE>
Anchor Pacific Underwriters, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. ACQUISITIONS (CONTINUED)
The following summary, unaudited pro forma results of operations for the years
ended December 31, 1994 and 1993, assume the acquisitions of PKW and BRI
occurred as of the beginning of the respective periods:
<TABLE>
<CAPTION>
1994 1993
--------------------------------------
<S> <C> <C>
Revenues $10,037,190 $ 9,931,307
Net loss (1,183,484) (422,343)
Net loss per common share (4.50) (1.82)
</TABLE>
The unaudited pro forma results do not assume any economies of scale from
combining the operations of PKW and BRI with those of Anchor. The pro forma net
loss includes nonrecurring merger expenses incurred in 1994 and expenses accrued
on certain legal matters.
8. INCOME TAXES
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1994 1993 1992
--------------------------------------------
<S> <C> <C> <C>
Current tax expense:
Federal $ 28,386 $ 816 $ -
State and local 9,809 9,543 4,362
--------------------------------------------
Total current 38,195 10,359 4,362
Deferred tax (credit) expense:
Federal (28,386) (30,108) -
State and local (5,009) - -
--------------------------------------------
Total deferred (33,395) (30,108) -
--------------------------------------------
Income tax expense (credit) $ 4,800 $(19,749) $ 4,362
--------------------------------------------
--------------------------------------------
</TABLE>
F-17
<PAGE>
Anchor Pacific Underwriters, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. INCOME TAXES (CONTINUED)
Deferred income taxes are provided for the temporary differences between the
financial reporting basis and the tax basis of the Company's assets and
liabilities.
Deferred tax liabilities and assets are comprised of the following at December
31:
<TABLE>
<CAPTION>
1994 1993
-----------------------------
<S> <C> <C>
Deferred tax liabilities:
Depreciation and amortization $280,871 $ 35,884
Rent 26,853 26,853
-----------------------------
Total deferred tax liabilities 307,724 62,737
Deferred tax assets:
Vacation pay 38,968 23,422
Bad debt allowance - 973
Tax credits 42,977 34,655
Other, net 9,234 3,339
Net operating loss carryforward 186,726 112,672
-----------------------------
Total deferred tax assets 277,905 175,061
Valuation allowance for deferred tax assets 81,503 112,324
-----------------------------
Net deferred tax asset 196,402 62,737
-----------------------------
Net deferred tax liabilities $111,322 $ -
-----------------------------
-----------------------------
</TABLE>
For December 31, 1994 and 1993, deferred tax liabilities are noncurrent. For
December 31, 1994 and 1993, deferred tax assets are comprised of $48,402 and
$27,344 which are current and $148,000 and $35,393 which are noncurrent,
respectively.
F-18
<PAGE>
Anchor Pacific Underwriters, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. INCOME TAXES (CONTINUED)
The change in the valuation allowance is comprised of the following items:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1994 1993
----------------------------
<S> <C> <C>
Increase (decrease) due to net operating losses $ 33,396 $(48,598)
Decrease due to purchase of businesses (64,217) -
----------------------------
Net decrease $(30,821) $(49,598)
----------------------------
----------------------------
</TABLE>
At December 31, 1994, $64,670 of the valuation allowance related to the purchase
of BRI. When realized, the tax benefit will be accounted for as a reduction of
goodwill.
F-19
<PAGE>
Anchor Pacific Underwriters, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. INCOME TAXES (CONTINUED)
A reconciliation of income tax computed at the federal statutory corporate tax
rate to income tax expense is:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1994 1993 1992
---------------------------- --------------------------- ---------------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income taxes at federal statutory rate $(219,534) (34.0)% $ (7,279) 34.0% $(29,995) (34.0)%
Increase (decrease) in income taxes
resulting from:
State and local income taxes,
net of federal tax benefit (38,741) (6.0) (1,285) 6.0 (5,293) (6.0)
Amortization of goodwill and
other intangibles 21,594 3.3 29,404 (137.3) 42,481 48.0
Employee benefits 10,358 1.6 8,009 (37.4) 5,258 6.0
Alternative minimum tax - - - - 2,530 3.0
Nonrecurring merger expenses 192,927 30.0 - - - -
State minimum tax 4,800 0.7 - - - -
Change in valuation allowance 33,396 5.1 (48,598) 227.0 - -
Net operating loss - - - - (10,619) (12.1)
----------------------------------------------------------------------------------------
$ 4,800 0.7% $(19,749) 92.3% $ 4,362 4.9%
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
</TABLE>
At December 31, 1994, the Company had federal and state net operating loss
carryforwards of approximately $523,000 and $95,000, respectively. The net
operating losses will begin to expire in the year ending December 31, 2000.
At December 31, 1994, the Company had federal general business credits of
approximately $26,000. The general business credits will begin to expire in the
year ending December 31, 1996. At December 31, 1994, the Company had state tax
credits of approximately $16,000. The state tax credits may be carried forward
indefinitely.
As indicated in Note 7, the Company issued approximately one-third of its
outstanding shares in 1994. Federal and state tax law impose limitations on the
use of the net operating losses and tax credits following certain changes in
ownership. If such an ownership change has occurred, the limitation could
reduce the amount of the benefit of the net operating losses and general
business credits that would be available to offset future taxable income
starting in the year of the ownership change.
F-20
<PAGE>
Anchor Pacific Underwriters, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. CONCENTRATION OF CREDIT RISK
Cash and cash equivalents are on deposit in approximately 140 separate accounts
with certain accounts exceeding $100,000. The FDIC insures accounts up to
$100,000 each. If several accounts are maintained for the same entity at the
same bank, the FDIC applies the $100,000 limit to the combined group. The
accounts are maintained in well-established local commercial banks. These banks
have satisfied the FDIC's more stringent capitalization requirements, qualifying
them to accept broker deposits. The banks have received high ratings from bank
rating services. As a result, credit risk is deemed to be minimal.
10. RETIREMENT AND EMPLOYEE BENEFIT PLANS
Anchor has a 401(k) profit sharing plan to which eligible employees may
contribute up to 20% (which amount was decreased to 15% as of January 1, 1995)
of their salaries, or a maximum of $9,240, as deferred compensation. The plan
also provides for voluntary employer contributions whereby Anchor may match 50%
of the employee contribution up to a maximum of 3% of employees' gross salary.
Anchor made no contributions to the plan for 1994 and 1993.
In addition, Anchor offers active eligible employees certain life, health,
vision and dental benefits. There are several plans which differ in amounts of
coverage and deductibles. Anchor does not extend such benefits to retirees.
F-21
<PAGE>
Anchor Pacific Underwriters, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. STOCK OPTION PLAN
In 1987, Anchor adopted an employee stock option plan and reserved 135,000
shares of stock for issuance pursuant to options granted thereunder. The option
price was computed at the greater of the stock's fair market value at the time
of grant or $10. Options were exercisable over a five-year period beginning a
year after the date of grant at a rate of 20% per year. Information regarding
the plan is summarized below:
<TABLE>
<CAPTION>
OPTION PRICE
RANGE SHARES
----------------------------------
<S> <C> <C>
Options outstanding, December 31, 1992 $15.30-$17.50 60,650
Granted 17.50 18,350
Exercised 15.30-17.50 (1,315)
Canceled/expired 15.30-17.42 (15,425)
----------------------------------
Options outstanding, December 31, 1993 15.30-17.50 62,260
Canceled/expired 15.30-17.50 (22,500)
----------------------------------
Options outstanding, December 31, 1994 $15.30-$17.50 39,760
----------------------------------
----------------------------------
</TABLE>
Exercisable options totaled 21,772 and 32,320 at December 31, 1994 and 1993,
respectively.
Anchor had also reserved 100,000 shares for options available for grant under a
Board of Directors stock option plan. These options when granted vested at 20%
per year over a five-year period at an option price of $20 per share. As of
December 31, 1994, 52,500 options had been granted. Exercisable options for the
Board of Directors totaled 42,000 at December 31, 1994.
All options that were outstanding under the employee stock option plan and
director stock option plan terminated as of January 5, 1995 (SEE NOTE 16).
F-22
<PAGE>
Anchor Pacific Underwriters, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. LEASES
Anchor rents its Concord, California facilities under an operating lease which
originally was to expire in 1996. During 1994, management negotiated and
amended the lease to include additional space and to extend the expiration date
to 2004. The terms of the original lease include a 12-month rent deferral. The
total rent for the lease term which reflects the 12-month deferral is being
amortized on the straight-line basis over the full term of the lease. Deferred
rent of approximately $233,000 at December 31, 1994 and $310,000 at December 31,
1993 are included in long-term liability.
A subsidiary located in Scottsdale, Arizona leases offices under an operating
lease which expires in 1997. In addition, Anchor assumed the lease obligation
of certain Oakland facilities upon the acquisition of PKW.
The consolidated statements of operations reflect rent expense of $424,597,
$306,703 and $269,228 for 1994, 1993, and 1992, respectively.
Future minimum annual lease payments under operating leases are as follows:
<TABLE>
<S> <C>
1995 $ 918,943
1996 943,435
1997 869,335
1998 854,335
1999 850,549
2000 and thereafter 3,258,034
----------
$7,694,631
----------
----------
</TABLE>
F-23
<PAGE>
Anchor Pacific Underwriters, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. COMMITMENTS
In 1993, Anchor entered into an agreement with a third party to provide
information management services. Such services include managing and operating
certain automated information systems as well as providing programming support
and the development of certain software applications.
The agreement provides for an initial term of three years (expiring March 28,
1996) with two (2) two-year automatic renewals unless a 90-day notice of
nonrenewal is given by either party. Net costs for the initial term approximate
$416,000 per year. Other terms and conditions include a penalty provision
should Anchor not continue the agreement through the automatic renewal periods.
14. CONTINGENCIES
Anchor is subject to certain legal proceedings and claims arising in connection
with its business. It is management's opinion that the resolution of these
claims will not have a material effect on Anchor's consolidated financial
position.
However, PKW and several other entities not affiliated with Anchor or PKW were
named as defendants in a lawsuit in 1993 that alleges damages in the amount of
$1.5 million plus expenses relating to insurance placed with an Arizona-
domiciled carrier that has since become insolvent. The ultimate outcome and the
individual responsibilities of the defendants of this suit cannot presently be
determined; however, a settlement of the lawsuit for the full amount of the
claim could have a material impact on Anchor's financial position. Management
intends to continue to contest the claim vigorously.
15. RELATED PARTY TRANSACTIONS
Anchor is contingently liable on certain bank loans made to three of its
shareholders. The amounts outstanding on these loans total approximately
$127,642 and $171,000 at December 31, 1994 and 1993, respectively.
F-24
<PAGE>
Anchor Pacific Underwriters, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
16. SUBSEQUENT EVENTS
On January 6, 1995, Anchor and Systems Industries (SI) consummated the merger of
the two companies. Upon such consummation, shareholders of SI became entitled
to receive one share of Anchor common stock and one warrant to purchase one
share of Anchor common stock for every 42.3291 shares of issued and outstanding
SI common stock. As a result of the merger, Anchor became a publicly traded
company.
Professional expenses incurred in conjunction with the merger, which approximate
$462,600, have been classified as a nonrecurring item on the consolidated
statement of operations.
In conjunction with the SI merger and subsequent to year end, Anchor's employee
and director stock option plans were terminated. On December 5, 1994, the board
of directors approved a new stock option plan. As of December 31, 1994, no
options had been granted under this new plan.
F-25
