<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended: March 31, 1995
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
incorporation or organization) Identification No.)
1800 Sutter Street, Suite 400 (510) 682-7707
Concord, California 94520 (Registrant's telephone number,
(Address of principal executive offices) including area code)
(Zip Code)
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 for 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.
Yes X No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding as of March 31, 1995
Common Stock, par value $.02 per share 3,923,258 shares
This document is comprised of 41 pages.
<PAGE>
ANCHOR PACIFIC UNDERWRITERS, INC.
INDEX
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets,
March 31, 1995 (unaudited) and
December 31, 1994. . . . . . . . . . . . . . . . . . 1
Consolidated Statements of Operations for the three
months ended March 31, 1995 and 1994 (unaudited) . . 3
Consolidated Statements of Shareholders' Equity for
the three months ended March 31, 1995 (unaudited)
and year ended December 31, 1994 . . . . . . . . . . 4
Consolidated Statements of Cash Flows for the three
months ended March 31, 1995 and 1994 (unaudited) . . 5
Notes to Consolidated Financial Statements . . . . . 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . 9
Part II. Other Information
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . 17
Item 2. Changes in Securities. . . . . . . . . . . . . . . . . 17
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . 17
Item 4. Submission of Matters to a Vote of Security Holders. . 17
Item 5. Other Information. . . . . . . . . . . . . . . . . . . 17
Item 6. Exhibits and Reports on Form 8K. . . . . . . . . . . . 17
<PAGE>
ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31 December 31
1995 1994
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents-corporate funds $ 365,351 $ 384,102
Cash and cash equivalents-brokerage
fiduciary funds 1,314,341 1,323,372
Cash and cash equivalents-third party
administration fiduciary funds 3,568,707 4,349,629
Accounts receivable (less allowances for
doubtful accounts of $33,700 as of
March 31, 1995 and December 31, 1994) 1,432,145 1,306,627
Prepaid expenses and other current assets 853,864 949,710
Current portion of deferred tax asset 48,402 48,402
------------ ------------
Total current assets 7,582,810 8,361,842
Property and equipment 2,562,606 2,498,171
Less accumulated depreciation and amortization (1,591,138) (1,540,120)
------------ ------------
971,468 958,051
Other assets:
Goodwill, net 2,498,761 2,525,591
Intangible assets, net 1,270,186 1,144,091
Other 151,929 144,808
------------ ------------
3,920,876 3,814,490
------------ ------------
Total assets $ 12,475,154 $ 13,134,383
------------ ------------
------------ ------------
</TABLE>
- 1 -
<PAGE>
ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31 December 31
1995 1994
------------ ------------
(unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Cash and cash equivalents-third party
administration fiduciary funds $ 3,568,707 $ 4,349,629
Net premiums payable-insurance companies 2,266,383 2,256,313
Accounts payable and accrued expenses 348,758 365,089
Capital lease obligations 46,610 46,610
Short-term debt 1,125,000 850,000
Other liabilities 979,298 894,832
------------ ------------
Total current liabilities 8,334,756 8,762,473
Long-term liabilities, less current portion 1,568,190 1,471,723
Deferred tax liability 159,724 159,724
Shareholders' equity:
Common stock-$.02 par value;
8,000,000 authorized;
3,923,258 shares issued as of
March 31, 1995 and December 31,
1994, respectively 78,465 78,465
Additional paid-in capital 3,294,702 3,294,702
Accumulated deficit (960,683) (632,704)
------------ ------------
Total shareholders' equity 2,412,484 2,740,463
------------ ------------
Total liabilities and shareholders' equity $ 12,475,154 $ 13,134,383
------------ ------------
------------ ------------
</TABLE>
See accompanying notes
- 2 -
<PAGE>
ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months
Ended March 31
---------------------------
1995 1994
(unaudited) (unaudited)
<S> <C> <C>
Revenues:
Commissions, fees and other income $ 2,241,931 $ 1,192,345
Interest income 23,472 21,968
------------ ------------
Total revenue 2,265,403 1,214,313
Operating expenses:
Salaries, commissions and employee
benefits 1,542,701 783,229
Selling, general and administrative
expenses 748,221 403,999
------------ ------------
Total operating expenses 2,290,922 1,187,228
------------ ------------
(25,519) 27,085
Other income (expense):
Amortization of goodwill and
intangible assets (104,499) (37,614)
Interest (28,114) (2,267)
Other 39,162 849
Nonrecurring merger expenses (204,209) -
------------ ------------
Total other income (expense) (297,660) (39,032)
------------ ------------
Loss before income taxes (323,179) (11,947)
Income tax expense 4,800 3,825
------------ ------------
Net loss $ (327,979) $ (15,772)
------------ ------------
------------ ------------
Net earnings per common and common
equivalent share $ (.08) $ (.01)
------------ ------------
------------ ------------
Weighted average number of common and
common equivalent shares outstanding 4,314,836 3,360,208
------------ ------------
------------ ------------
</TABLE>
See accompanying notes
- 3 -
<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>
Balance at
12/31/93
(restated) 2,722,488 $ 54,450 $ 1,817,752 $ 17,785 $ 1,889,987
Stock issued for
acquisitions 1,200,770 24,015 1,476,950 - 1,500,965
Net loss - - - (650,489) (650,489)
-------------------------------------------------------------
Balance at
12/31/94 3,923,258 78,465 3,294,702 (632,704) 2,740,463
Net loss - - - (327,979) (327,979)
-------------------------------------------------------------
Balance at
3/31/95
(unaudited) 3,923,258 $ 78,465 $ 3,294,702 $ (960,683) $ 2,412,484
-------------------------------------------------------------
-------------------------------------------------------------
</TABLE>
- 4 -
<PAGE>
ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months
Ended March 31
--------------------------
1995 1994
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (327,979) $ (15,772)
Adjustments to reconcile net loss to cash
provided by (used in) operating activities:
Depreciation and amortization 51,018 41,222
Amortization of goodwill, other intangibles
and organization expenses 104,499 37,614
Deferred tax asset - 27,344
Deferred tax liability - (27,344)
Changes in operating assets and liabilities,
net of effect of purchases of subsidiaries:
Cash and cash equivalents-brokerage
fiduciary funds 9,031 138,515
Accounts receivable (125,518) 180,270
Prepaid expenses and other current assets 95,846 35,670
Other assets (7,121) (1,019)
Net premiums payable-insurance companies 10,070 (187,389)
Accounts payable and accrued expenses (16,331) (101,098)
Other liabilities (6,965) 85,000
----------- -----------
Net cash (used in) provided by operating activities (213,450) 213,013
INVESTING ACTIVITIES
Notes receivable, net - (34,050)
Purchases of property and equipment (64,435) (50,174)
Purchases of customer list (203,765) -
----------- -----------
Net cash (used in) investing activities (268,200) (84,224)
</TABLE>
- 5 -
<PAGE>
ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
<TABLE>
<CAPTION>
Three Months
Ended March 31
--------------------------
1995 1994
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
FINANCING ACTIVITIES
Debt:
Borrowings 621,467 -
Repayment (145,604) (69,504)
Net payments on amounts due on acquisitions (12,964) 15,484
----------- -----------
Net cash provided by(used in)financing activities 462,899 (54,020)
----------- -----------
Net (decrease) increase in cash (18,751) 74,769
Cash and cash equivalents-corporate funds
at beginning of period 384,102 943,130
----------- -----------
Cash and cash equivalents-corporate funds
at end of period $ 365,351 $ 1,017,899
----------- -----------
----------- -----------
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 28,144 $ 2,267
----------- -----------
----------- -----------
</TABLE>
- 6 -
<PAGE>
ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1995
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Anchor Pacific
Underwriters, Inc. and its subsidiaries ("Anchor") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments, consisting of normal recurring
accruals, considered necessary for a fair presentation have been included.
Operating results for the three-month period ended March 31, 1995 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1995. For further information, refer to the consolidated financial
statements and footnotes thereto included in Anchor's Annual Report on Form 10-K
for the year ended December 31, 1994.
RECLASSIFICATION
Certain prior year balances have been reclassified to conform with the current
year presentation.
NOTE 2 - ACQUISITIONS
On January 6, 1995, Anchor merged with System Industries, Inc. ("System"). For
accounting purposes, the merger has been treated as a recapitalization of Anchor
with Anchor as the acquirer (reverse acquisition). The historical financial
statements prior to January 6, 1995 are those of Anchor. These historical
financial statements have been restated to give effect to this recapitalization.
Upon consummation of this merger, shareholders of System received 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 System Common Stock. As a
result of the merger, Anchor became a public company. In February 1995, Anchor
acquired certain third party administration accounts from a company located in
Stockton, California at a preliminary purchase price of approximately $204,000
(which reflects a $50,000 cash payment and a discounted future income stream)
with an additional $55,000 of stock consideration to be determined during the
second quarter.
- 7 -
<PAGE>
The results of operations from these accounts are included in Anchor's
consolidated financial statements from the date of purchase.
Although Anchor is engaged in discussions with third parties regarding potential
acquisitions, as of May 10, 1995, it did not have any binding agreements with
respect to acquisitions. No assurances can be given with respect to the
likelihood, or financial or business effect, of any possible future acquisition.
NOTE 3 - 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, except as follows. Putnam, Knudsen & Wieking, Insurance Brokers,
("PKW"), a property and casualty insurance brokerage company that was acquired
by Anchor on October 1, 1994, 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.
- 8 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BACKGROUND
Anchor was organized in 1986 as a California general partnership for the
specific purpose of acquiring Harden, a third party employee benefits
administrator. Anchor was reorganized as a private California corporation in
March 1987, and became a public reporting Delaware corporation on January 6,
1995 when it merged with System Industries, Inc. ("System").
Since its inception, Anchor has expanded its insurance and financial
service capabilities through internal growth and a series of acquisitions. In
August 1994, Anchor acquired Benefit Resources, Inc. ("BRI"), a third party
administrator located in Scottsdale, Arizona. In October 1994, Anchor acquired
Putnam, Knudsen & Wieking, Insurance Brokers, ("PKW"), a property and casualty
insurance brokerage company located in Concord, California. The acquisitions of
these entities were accounted for under the purchase method of accounting.
Anchor expects to continue to expand its insurance brokerage and administration
product lines and to explore other complementary expansion opportunities.
Historically, Anchor derived a majority of its revenues from third party
administration services. In light of its acquisition of PKW, Anchor expects to
significantly increase the percentage of its revenues that are derived from
insurance brokerage activities.
RESULTS OF OPERATIONS -- QUARTERS ENDED MARCH 31, 1995 AND 1994
GENERAL
Anchor derives a substantial portion of its revenues from commissions,
which generally are based on a percentage of premiums produced by Anchor,
contingent commissions, which generally are based on underwriting profits
derived over a given period of time by the insurance carrier, and fees for
claims administration (including underwriting and risk analysis) services, which
generally are based on a percentage of premiums collected, or on a per capita
basis. Anchor does not assume any underwriting risk in connection with its
business.
Fluctuations in premiums charged by insurance companies materially affect
commission revenues. During the last five years, the property and casualty
insurance industry has experienced a "soft market" where the underwriting
capacity of insurance companies expanded, stimulating an increase in competition
and a decrease in premium rates, thereby reducing related commissions and fees.
Although some forecasts predict premium increases, the prospect of overall rate
increases in 1995 remains uncertain. In addition to the soft market, recent
workers' compensation reform in California has had the effect of reducing
workers' compensation insurance premiums and, consequently, reducing commissions
generated by the sale of related insurance products. Anchor believes that
revenues generated from anticipated future
- 9 -
<PAGE>
growth and continued diversification of its business will substantially offset
any loss of revenues that results from workers' compensation reform.
Historically, inflation has also affected commission revenues by, among
other things, increasing property replacement costs and workers' compensation
and liability claims, thereby causing some clients to seek higher levels of
insurance coverage and pay higher premiums. During the past several years, the
United States has experienced very low rates of inflation along with business
downsizing, reduced sales and lower payrolls; these events have resulted in
lower levels of exposure to insure. Although the United States has recently
experienced limited inflationary pressures, prices have not yet increased
significantly.
Other factors, such as client uncertainty about the effects of health care
reform, could also affect Anchor's business. Anchor believes, however, that its
expertise in two major elements of recent health care reform proposals (managed
care and managed competition), combined with its strategy of serving middle
market clients, makes it well positioned to operate effectively in a managed
care and managed competition environment. Anchor also believes that in light of
the recent political changes in the United States Congress, the United States
will experience incremental, rather than comprehensive, changes in health care
regulations. It is not possible at this time to predict the effect that any
health care legislation will have on Anchor's business condition or operations.
Anchor is unaware of any current regulatory proposals, except for health
care reform, that could have a material effect on its liquidity, capital
resources or operations.
REVENUES
TOTAL REVENUES. Total revenues for the three months ended March 31, 1995
were $2,265,403, an increase of $1,051,090, or 86.6%, over 1994 first quarter
revenues. The increase resulted primarily from the inclusion of the operations
of PKW and BRI for the three month period ended March 31, 1995. Anchor's
revenues vary from quarter to quarter as a result of the timing of policy
renewals and net new/lost business production, whereas expenses are fairly
uniform throughout the year.
Commissions and fees make up substantially all of Anchor's revenues. The
following table sets forth the percentages of Anchor's revenues attributable to
insurance brokerage services (for which commissions are generated), and third
party administration and underwriting and risk analysis services (for which fees
are generated), for the three months ended March 31, 1995 and 1994. Also
included is the percentage of revenues generated from premium finance
activities.
------------------------------------------------------------------
------------------------------------------------------------------
Quarter Ending March 31, 1995 1994
------------------------------------------------------------------
Insurance Brokerage 41% 20%
------------------------------------------------------------------
Third Party Administration 58 79
------------------------------------------------------------------
Premium Financing 1 1
------------------------------------------------------------------
Total 100% 100%
------------------------------------------------------------------
------------------------------------------------------------------
- 10 -
<PAGE>
COMMISSIONS. Commissions are reported net of sub- broker commissions and
generally are recognized as of the effective date of the insurance policy except
for commissions on installment premiums which are recognized periodically as
billed. Commissions for the first quarter of 1995 were $917,967, an increase of
$670,674, or 271.2%, over $247,293 of commissions for the first quarter of 1994.
The acquisition of PKW accounted for approximately $641,595 of the increase.
The additional increase in 1995 over 1994 was primarily attributable to a net
increase in business.
FEES. Fees from Anchor's third party administration (including
underwriting and risk analysis) services for the three months ended March 31,
1995, were $1,319,637, an increase of $380,336, or 40.5%, over $939,301 in fees
for the same period in 1994. The acquisition of BRI accounted for all of the
increase.
Fee revenues generated by Anchor in the first quarter of 1995 from third
party administration services included revenues generated by Harden & Company
Insurance Services ("Harden") and BRI. A significant portion of BRI's fee
revenues related to an insurance product underwritten by one insurance carrier,
which currently is an A++ (superior) rated insurance carrier.
Harden's third party administration revenues substantially relate to: (a)
an insurance product underwritten by an insurance carrier, which currently is an
A (excellent) rated insurance carrier; and (b) the administration of insurance
programs underwritten by various insurance carriers for a number of self-insured
employers. The insurance product referred to in subparagraph (a) above
accounted for approximately 64.3% of Harden's revenues (or approximately 25.6%
of Anchor's total revenues) in the three months ended March 31, 1995, and
revenues related to the administration of self-insured programs accounted for
34.3% of Harden's revenues in such period. Self-insurance is a program in which
a client assumes a manageable portion of its insurance risks, usually (although
not always) placing the less predictable and larger loss exposure with an excess
insurance carrier.
The insurance company which offered the product that accounted for 64.3% of
Harden's third party administration revenues in the first quarter of 1995
recently informed Harden that as a result of changes in its business strategy,
it will discontinue offering such an insurance product by the end of 1995.
Harden, through an intermediary, has had preliminary discussions with several
insurance companies who have expressed an interest in offering a similar
product; however, Harden does not at this time have any binding commitments from
such companies. While Harden believes that it will be able to contract with a
replacement insurance company to offer the product, no assurances can be given
as to when or whether Harden will locate such a company, or whether the
insurance company that is discontinuing the product will extend the time during
which it offers the product. If a new insurance company is not located, the
employers who purchase the product will need to procure an alternative insurance
product.
- 11 -
<PAGE>
While Anchor expects that it would be able to assist many of such employers to
procure new insurance, the discontinuation of the product could have a material
adverse effect on Anchor's financial condition and results of operations.
INTEREST INCOME. Interest income consists of interest earned on insurance
premiums and other funds held in fiduciary accounts and interest earned on
investments. Interest income was $23,472 and $21,968 for the three months ended
March 31, 1995 and 1994, respectively. The increase in interest income in the
first quarter of 1995, as compared to 1994, resulted primarily from higher
interest rates and a larger amount of insurance premiums and other funds held in
fiduciary accounts.
EXPENSES
TOTAL EXPENSES. Total operating expenses for the three months ended March
31, 1995 were $2,290,922, an increase of $1,103,694, or 93.0%, over the
operating expenses for the same period in 1994. The increase resulted primarily
from the inclusion of the first quarter operating expenses of PKW, totaling
approximately $696,342, and BRI, totaling $410,946, in Anchor's consolidated
financial statements.
EMPLOYEE COMPENSATION AND BENEFITS. Employee compensation and benefits for
the three months ended March 31, 1995 were $1,542,701, an increase of $759,472,
or 97.0%, over the same period in 1994. The acquisitions of PKW and BRI had the
effect of increasing employee compensation and benefits by approximately
$751,788. The remaining increase related primarily to expansion of existing
operations.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $748,221 and $403,999 for the three months ended
March 31, 1995 and 1994, respectively. The $344,222, or 85.2%, increase in the
first quarter 1995, as compared to the same period in 1994, resulted primarily
from the acquisitions of PKW and BRI. Other operating expenses include rent,
travel, insurance, postage, telephone, supplies and other miscellaneous
expenses.
INTEREST EXPENSE. Interest expense was $28,114 and $2,267 for the three
months ended March 31, 1995 and 1994, respectively. The increase in interest
expense in 1995, as compared to 1994, resulted primarily from the assumption of
existing debt in connection with the acquisition of PKW and an increase in
outstanding borrowings on Anchor's existing line of credit. Anchor expects that
its interest expense will increase in 1995, as compared to 1994, due to its
increased borrowings in late 1994 and early 1995.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Goodwill represents the
excess of the cost of acquisitions over the fair value of net assets acquired.
Other intangibles include covenants not to compete, customer lists and other
contractual rights. Amortization of
- 12 -
<PAGE>
goodwill and other intangibles was $104,499 and $37,614, for the three months
ended March 31, 1995 and 1994, respectively. As a result of Anchor's
acquisitions of PKW and BRI, amortization of goodwill and other intangibles will
increase significantly in 1995 over 1994.
NONRECURRING EXPENSES
During the first quarter of 1995, Anchor incurred nonrecurring expenses of
$204,209 for costs related to professional services associated with merger and
acquisition activities. The transaction with System did not generate any new
proceeds from which the professional fees could be deducted.
INCOME TAXES
Anchor's expense for income taxes was $4,800 and $3,825 for the three
months ended March 31, 1995 and 1994, respectively. This $4,800 expense
represents the minimum annual required tax payment due.
LIQUIDITY AND CAPITAL RESOURCES
Anchor's business is not capital intensive and Anchor historically has had
sufficient capital to meet its operating needs. In 1994 and early 1995, Anchor
completed several acquisition and merger transactions which resulted in larger
than normal cash expenditures. Such expenditures, which are discussed in
greater detail below, resulted in Anchor reporting net cash flows used in
operations of $213,450 for the first quarter of 1995. In comparison, net cash
flows provided by operations totaled $213,013 for the quarter ended March 31,
1994. Anchor anticipates that cash flow from operations and borrowing under its
existing credit agreements will be sufficient to fund its current operating and
capital expenditure requirements.
Anchor, however, is seeking to raise up to $750,000 in short-term financing
to supplement its working capital by selling 10% Convertible Subordinated
Debentures (the "Debentures") to members of its Board of Directors and a
limited number of other sophisticated investors. The basic terms of the
Debentures are: (a) 10% interest per annum; (b) two year maturity; (c)
conversion price of $1.35 for first year and $1.65 in the second year; (d)
"piggyback" registration rights for three years; (e) subordination provisions
that subordinate the Debentures to Anchor's "Senior Debt" (as defined in the
Debenture); and (f) provisions that permit Anchor to redeem the Debentures at
par at any time. As of May 10, 1995, Anchor has raised $90,000 from the sale
of Debentures to five members of the Board of Directors of Anchor, and has
received commitments for the purchase of an additional $60,000 principal amount
of Debentures from two members of the Board of Directors.
Anchor is also seeking to raise additional capital of approximately $5
million for debt consolidation and working capital and to fund future
acquisitions. Anchor has had preliminary discussions with various parties, but
has not yet obtained any commitments with respect to such
- 13 -
<PAGE>
financing. There can be no assurance as to when or whether Anchor will raise
additional capital or what the terms and conditions would be for such capital.
Capital and certain acquisition related expenditures (not including
expenditures related to the acquisition of BRI and PKW, or the System Merger)
were $268,200 and $50,174 for the quarters ended March 31, 1995 and 1994,
respectively. The increase in such expenditures in the first quarter of 1995,
as compared to 1994, related primarily to the acquisition of certain third party
administration accounts from a company located in Stockton, California. In
addition to such expenditures, Anchor made several significant expenditures in
the first quarter of 1995 related primarily to professional services associated
with the System Merger and the PKW and BRI acquisitions.
Short-term debt and other liabilities at March 31, 1995, totaling in the
aggregate $2,104,298 (as compared to $1,744,832 at December 31, 1994) consisted
of: (a) approximately $800,000 outstanding under a $1,000,000 revolving line
of credit maintained by Anchor with a regional Bay Area bank; (b) $200,000
outstanding under a $200,000 line of credit maintained by PKW with a regional
Bay Area bank; (c) approximately $300,000 of future fixed payments under a
consulting agreement entered into with a company affiliated with the former
shareholders of BRI; (d) $299,712 representing the current portion of
obligations with regard to certain real property leased by PKW prior to its
acquisition by Anchor and relocation to Anchor's executive offices; and (e)
$504,586 for certain other current liabilities.
The $1,000,000 line of credit, which expires on October 25, 1995, requires
Anchor to maintain shareholders' equity of a least $800,000. Anchor's
shareholders' equity at March 31, 1995 was $2,413,284. The $200,000 line of
credit, which is secured by the net commission portion of PKW's accounts
receivable and equipment and general intangibles, which was to have expired on
May 5, 1995, has been extended until November 5, 1995 pending completion of
appropriate loan documentation. The interest rate on the $1,000,000 line of
credit is equal to the lending bank's prime rate, and on the $200,000 line of
credit is equal to the lending bank's prime rate plus 1%.
In early 1995, the bank that provided Anchor with the $1,000,000 line of
credit provided Anchor with $125,000 of equipment financing. The proceeds from
such equipment financing were used to reduce the outstanding balance on such
line. Also, in early 1995, Anchor borrowed an additional $450,000 on its
$1,000,000 line of credit, such that the outstanding balance on that line at May
1, 1995 was $925,000. Anchor's borrowings in 1994 and early 1995 under its
$1,000,000 line of credit related primarily to payment of: (a) the purchase
price for BRI; (b) a portion of the nonrecurring expenditure with respect to the
System Merger; and (c) a portion of Anchor's contribution of approximately
$895,000 to PKW and BRI as working capital.
Long-term liabilities, less the current portion discussed above, totaling
$1,568,190 at March 31, 1995 (as compared to $1,471,723 at December 31, 1994),
primarily consisted of:
- 14 -
<PAGE>
(a) approximately $504,000 of future fixed payments under the consulting
agreement mentioned above with a company affiliated with the former shareholders
of BRI; (b) approximately $410,038 representing the long-term portion of
obligations with regard to certain real property leased by PKW prior to its
acquisition by Anchor and relocation to Anchor's executive offices; and
(c) approximately $654,152 for certain other long-term liabilities. The amount
classified as a short-term and long-term liability with respect to the lease of
PKW's prior executive offices (i.e., approximately $709,750), is based on the
assumptions that Anchor will sublease such offices prior to September 30, 1995
(the lease expires on November 30, 1999), and will likely need to offer a
multi-year rent subsidy with respect to such sublease. Anchor is currently
attempting to sublease such offices.
Anchor has not paid cash dividends in the past and does not expect to pay
cash dividends in the foreseeable future.
POSSIBLE ADJUSTMENT OF PKW PURCHASE PRICE
In October 1994, Anchor acquired PKW. In connection with that acquisition,
Anchor issued 120,077 shares of its common stock at a value determined to be
$12.50 per share (which were converted into 1,200,770 shares, having a value of
$1.25 per share, upon consummation of the System Merger) to the former
shareholders of PKW. Two of the former shareholders of PKW are members of the
Board of Directors of Anchor. Certain matters have recently been discovered
regarding PKW's operations that have caused the Board of Directors of Anchor to
reevaluate whether the Company paid too high a price for PKW. The Board of
Directors is presently analyzing this matter and discussing with the former
shareholders of PKW the possibility that such shareholders will return to the
Company a portion of the purchase price. If such shareholders return a portion
of the purchase price, they will return a certain number of shares of Anchor's
common stock that were issued in connection with the PKW acquisition. The
return of shares would result in a reduction of : (a) shareholders' equity; (b)
the number of outstanding shares of Anchor's stock; and (c) future amortization
expenses related to the PKW acquisition. Anchor expects that if any shares are
returned to Anchor, no more than 25,000 shares (which were converted into
250,000 shares upon consummation of the System merger) will be so returned.
There can be no assurance, however, as to when or whether a portion of the
purchase price will be returned to Anchor.
STRATEGY
Anchor's strategy is to strengthen its core health insurance and property
and casualty (including workers' compensation) insurance businesses by: (a)
continuing to target selected insurance industry markets defined by industry
type, geographic location and consumer demographics; (b) establishing new
products and services; and (c) seeking to acquire and integrate compatible
insurance brokerage and administration businesses in the Western United States.
In connection with this strategy, Anchor regularly considers acquisition
opportunities.
- 15 -
<PAGE>
To date, acquisitions by Anchor have ranged from relatively small acquisitions
of insurance brokerage and administration accounts to larger acquisitions of
insurance brokerage companies, such as PKW, and third party administrators, such
as BRI. Anchor expects to continue to pursue appropriate acquisition
opportunities, and believes that its recent merger with System greatly enhances
its ability to make acquisitions and continue its expansion strategy. Although
Anchor is engaged in discussions with third parties regarding potential
acquisitions, as of May 1, 1995, it did not have any binding agreements with
respect to acquisitions. No assurances can be given with respect to the
likelihood, or financial or business effect, of any possible future acquisition.
- 16 -
<PAGE>
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Anchor and its subsidiaries are parties from time to time to various lawsuits
that have arisen in the normal course of business. Management is not aware of
any lawsuits to which Anchor or its subsidiaries is currently a party or to
which any property of Anchor or any of its subsidiaries is subject, which might
materially adversely affect the financial condition or results of operations of
Anchor, except as follows.
PKW, together with several other entities, has been named as a defendant in a
lawsuit filed in 1993 entitled Care Convalescent Ambulance, Inc., a California
corporation v. Putnam, Knudsen & Wieking, Inc., a California corporation, et al.
Reference is made to Anchor's Annual Report on Form 10-K for the year ended
December 31, 1994 for additional information regarding such lawsuit.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
4.1 Form of 10% Convertible Subordinated Debenture
27 Financial Data Schedule
- 17 -
<PAGE>
B. Reports on Form 8-K
Anchor filed a Form 8-K dated January 6, 1995 in which it reported pursuant to
Items 2, 4, 7 and 8 thereof the merger of Anchor with and into System, a change
in its independent accountant, and a change in its fiscal year. Anchor also
filed an amendment to such Form 8-K dated March 22, 1995, in which it attached
the following financial statements as exhibits:
(a) Audited balance sheets for PKW, as of September 30, 1994 and
December 31, 1993, and audited statements of operations, shareholders'
deficiency and cash flows for the nine month period ended September 30, 1994 and
the two years ended December 31, 1993 and 1992, and the Report of Independent
Accountants with respect thereto.
(b) Audited balance sheets for BRI, as of July 31, 1994 and September
30, 1993, and audited statements of operations and retained earnings, and cash
flows, for the period ended July 31, 1994 and for the years ended September 30,
1993 and 1992, and the Report of Independent Accountants with respect thereto.
(c) Audited consolidated balance sheets for Anchor as of December 31,
1994, 1993 and 1992, and audited consolidated statements of operations,
shareholders' equity and cash flows for the three years then ended, and the
Reports of Independent accountants with respect thereto.
(d) Unaudited condensed consolidated pro forma balance sheet of Anchor
as of September 30, 1994, and unaudited condensed consolidated pro forma
statement of operations for the period then ended, which reflect the acquisition
of PKW (which became effective August 1, 1994), as if such acquisitions occurred
on January 1, 1994.
- 18 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Anchor has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
ANCHOR PACIFIC UNDERWRITERS, INC.
Date: /s/ James R. Dunathan
----------------------------- -----------------------------
James R. Dunathan,
President and Chief Executive Officer
Date: /s/ Earl Wiklund
----------------------------- -----------------------------
Earl Wiklund,
Senior Vice President and
Chief Financial Officer
- 19 -
<PAGE>
EXHIBIT 4.1
Note No. _________
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR
QUALIFIED UNDER ANY APPLICABLE STATE SECURITIES LAWS. IT MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT OR
QUALIFICATION UNDER SUCH SECURITIES LAWS OR AN OPINION OF COUNSEL, SATISFACTORY
TO THE COMPANY, THAT THE SALE OR TRANSFER IS PURSUANT TO AN EXEMPTION FROM THE
REGISTRATION OR QUALIFICATION REQUIREMENTS OF SUCH SECURITIES LAWS.
ANCHOR PACIFIC UNDERWRITERS, INC.
10% Convertible Subordinated Debenture
(convertible into shares of common stock)
$___________ Concord, California
_________, 1995
ANCHOR PACIFIC UNDERWRITERS, INC., a Delaware corporation (the "Company"),
for value received, hereby promises to pay to _________________________________
or such other person in whose name this Debenture is registered on the Debenture
Register (as that term is defined below) (the "Holder"), the principal amount of
______________ Dollars ($_______), with simple interest on the unpaid balance of
such principal amount at the rate of ten percent (10%) per annum from the date
of this Debenture. Interest on the outstanding principal balance shall be
computed on the basis of a 365 day year and shall be paid to the Holder on April
__, 1996, October __, 1996 and April ___, 1997 (each, an "Interest Payment
Date"). Each Debenture delivered upon registration of transfer or in exchange
for or in lieu of this Debenture shall carry the rights to interest accrued and
unpaid, and to accrue, which were carried by this Debenture.
The full principal amount of this Debenture, plus interest, will be due and
payable on April __, 1997 (the "Maturity Date"). Payment of interest and
principal shall be made in lawful money of the United States of America at the
address of the Holder appearing on the Debenture Register.
This Debenture is one of a duly authorized issue of Debentures of the
Company, limited to the aggregate principal amount of $750,000.
1. REPRESENTATIONS, WARRANTIES AND COVENANTS.
1.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has
<PAGE>
all requisite corporate power and authority to carry on its business as now
conducted and as proposed to be conducted. The Company is duly qualified to
transact business and is in good standing in each jurisdiction in which the
failure to so qualify would have a material adverse effect on its business or
properties.
1.2 VALID ISSUANCE OF DEBENTURES AND SHARES. The Debenture, when
issued, sold and delivered in accordance with the terms hereof for the
consideration expressed herein, will be a valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms, and based
in part upon the representations of the Holder contained in the Subscription
Agreement pursuant to which this Debenture is being issued, will be issued in
compliance with all applicable federal and state securities laws. The shares of
the Company's Common Stock, $.02 par value per share, issuable upon conversion
of the Debentures (the "Shares") have been duly and validly reserved for
issuance and, upon issuance in accordance with the terms of this Debenture,
shall be duly and validly issued, fully paid and nonassessable.
1.3 COMPLIANCE WITH OTHER INSTRUMENTS. The Company is not in
violation of or default under any provisions of its Certificate of Incorporation
or Bylaws as amended and in effect on and as of the date of this Debenture or of
any material provision of any instrument or contract to which it is a party or
by which it is bound or, to its knowledge, of any material provision of any
federal or state judgment, writ, decree, order, statute, rule or governmental
regulation applicable to the Company. The execution, delivery and issuance of
this Debenture will not result in any such violation or be in conflict with or
constitute, with or without the passage of time and giving of notice, a default
under any such provision, instrument or contract or an event which results in
the creation of any lien, charge or encumbrance upon any assets of the Company.
2. SUBORDINATION.
2.1 SUBORDINATION. The indebtedness evidenced by this Debenture is
subordinate and junior in right of payment to all Senior Debt (as such term is
defined below) to the extent provided herein, and the Holder, by such Holder's
acceptance hereof, agrees to the subordination herein provided and shall be
bound by the provisions hereof. Senior Debt shall continue to be Senior Debt
and entitled to the benefits of these subordination provisions irrespective of
any amendment, modification or waiver of any term of the Senior Debt or
extension or renewal of the Senior Debt.
2.2 SENIOR DEBT DEFINED. As used herein, the term "Senior Debt"
shall mean the following whether now outstanding or subsequently incurred,
assumed or created: (a) all indebtedness (whether or not secured) of the Company
or its subsidiaries to
-2-
<PAGE>
banks, insurance companies or other financial institutions regularly engaged in
the business of lending money; (b) such other indebtedness of the Company or its
subsidiaries to the extent that the instrument creating or evidencing such
indebtedness provides that it shall constitute Senior Debt; (c) any indebtedness
issued in exchange for such Senior Debt, or any indebtedness arising from the
satisfaction of such Senior Debt by a guarantor; and (d) any deferrals,
renewals, or extensions of any such Senior Debt.
2.3 DEFAULT ON SENIOR DEBT. If the Company shall default in the
payment of any principal of or interest on any Senior Debt when the same shall
become due and payable, whether at maturity or at a date fixed for prepayment or
by declaration of acceleration or otherwise, then, upon written notice of such
default to the Company by the holders of Senior Debt or any trustee therefor,
unless and until such default shall have been cured or waived or shall have
ceased to exist, no direct or indirect payment (in cash, property, securities,
by set-off or otherwise) shall be made or agreed to be made on account of the
principal of or interest on this Debenture, or in respect of any redemption,
repayment, retirement, purchase or other acquisition of this Debenture.
2.4 PRIOR PAYMENT OF SENIOR DEBT.
(a) In the event of: (i) any insolvency, bankruptcy,
receivership, liquidation, reorganization, readjustment, composition or
other similar proceeding relating to the Company; (ii) any proceeding for
the liquidation, dissolution or other winding up of the Company, voluntary
or involuntary, whether or not involving insolvency or bankruptcy
proceedings; (iii) any assignment by the Company for the benefit of
creditors; or (iv) any other marshalling of the assets of the Company, all
Senior Debt (including any interest thereon accruing after the commencement
of any such proceedings) shall first be paid in full before any payment or
distribution, whether in cash, securities or other property, shall be made
to any Holder on account of the principal or interest on this Debenture.
Any payment or distribution, whether in cash, securities or other property
(other than securities of the Company or any other corporation provided for
by a plan of reorganization or readjustment the payment of which is
subordinate, at least to the extent provided in these subordination
provisions with respect to the indebtedness evidenced by this Debenture, to
the payment of all Senior Debt at the time outstanding and to any
securities issued in respect thereof under any such plan of reorganization
or readjustment), which would otherwise (but for these subordination
provisions) be payable or deliverable in respect of this Debenture shall be
paid or delivered directly to the holders of Senior Debt in accordance with
the priorities then existing among such holders until all
-3-
<PAGE>
Senior Debt (including any interest thereon accruing after the commencement
of any such proceedings) shall have been paid in full. In the event of any
such proceeding, after payment in full of all sums owing with respect to
Senior Debt, the Holder of this Debenture, together with the holders of any
obligations of the Company ranking on a parity with this Debenture, shall
be entitled to be paid from the remaining assets of the Company the amounts
at the time due and owing on account of unpaid principal of and interest on
this Debenture and such other obligations before any payment or other
distribution, whether in cash, property or otherwise, shall be made on
account of any capital stock or any obligations of the Company ranking
junior to this Debenture and such other obligations.
(b) In the event that, notwithstanding the foregoing, any
payment or distribution of any character, whether in cash, securities or
other property (other than securities of the Company or any other
corporation provided for by a plan of reorganization or readjustment the
payment of which is subordinate, at least to the extent provided in these
subordination provisions with respect to the indebtedness evidenced by this
Debenture, to the payment of all Senior Debt at the time outstanding and to
any securities issued in respect thereof under any such plan of
reorganization or readjustment), shall be received by any Holder in
contravention of any of the terms hereof, such payment or distribution or
security shall be received in trust for the benefit of, and shall be paid
over or delivered and transferred to, the holders of the Senior Debt at the
time outstanding in accordance with the priorities then existing among such
holders for application to the payment of all Senior Debt remaining unpaid,
to the extent necessary to pay all such Senior Debt in full. In the event
of the failure of any such Holder to endorse or assign any such payment,
distribution or security, each holder of Senior Debt is hereby irrevocably
authorized to endorse or assign the same.
2.5 NO IMPAIRMENT OF RIGHTS. Nothing contained herein shall impair,
as between the Company and the Holder, the obligation of the Company to pay such
Holder the principal of and interest on this Debenture or prevent such Holder
from exercising all rights, powers and remedies otherwise permitted by
applicable law or hereunder upon an Event of Default (as defined below)
hereunder, all subject to the rights of the holders of the Senior Debt to
receive cash, securities or other property otherwise payable or deliverable to
the Holder of this Debenture.
2.6 SUBROGATION. Upon the payment in full of all Senior Debt, the
Holders of the Debentures, together with all other subordinated debt of the
Company ranking on a parity therewith, shall be subrogated to all rights of any
holders of Senior Debt to receive any further payments or distributions
-4-
<PAGE>
applicable to the Senior Debt until the indebtedness evidenced by the Debentures
shall have been paid in full, and such payments or distributions received by the
Holders thereof, by reason of such subrogation, of cash, securities or other
property which otherwise would be paid or distributed to the holders of Senior
Debt, shall, as between the Company and its creditors other than the holders of
Senior Debt, on the one hand, and such Holders on the other hand, be deemed to
be a payment by the Company on account of Senior Debt and not on account of the
Debentures.
2.7 NO IMPAIRMENT OF SECURITY INTEREST. The provisions of this
Debenture shall not impair any rights, remedies or powers of any secured
creditor of the Company in respect of any security interest. The securing of
any obligations of the Company otherwise ranking on a parity with the Debentures
or ranking junior to such Debentures shall not be deemed to prevent such
obligations from constituting, respectively, obligations ranking on a parity
with such Debentures or ranking junior to such Debentures.
2.8 AMENDMENT OF SUBORDINATION PROVISIONS. No modification or
amendment of the subordination provisions contained in Section 2 hereof in a
manner adverse to the holders of Senior Debt may be made without the consent of
all Holders of Senior Debt.
2.9 UNDERTAKING. By its acceptance of this Debenture, the Holder
agrees to execute and deliver such documents as may be reasonably requested from
time to time by the Company or the lender of any Senior Debt in order to
implement the foregoing provisions of Section 2 hereof.
3. NO RESTRICTIONS ON ISSUANCE OF ADDITIONAL DEBT. Nothing contained in
this Debenture shall restrict the Company from creating, assuming or incurring
any additional indebtedness, whether ranking junior to, on par with, or senior
to, this Debenture, or require the Company to obtain the consent of the Holder
with respect thereto.
4. DEFAULT.
4.1 EVENT OF DEFAULT. Each of the following events shall be an Event
of Default hereunder:
(a) Default in the payment of any interest on this Debenture
when due, continued for ten (10) business days.
(b) Default in the payment of the principal on the Maturity
Date.
(c) Material default in the performance of any of the covenants
or agreements of the Company contained in this Debenture continued for
thirty (30) days after notice
-5-
<PAGE>
thereof (provided, however, that if the default cannot reasonably be
corrected within such period, there shall be no event of default if
corrective action is instituted promptly and is pursued diligently until
the default is corrected).
(d) If a petition in involuntary bankruptcy is filed against the
Company under any bankruptcy, reorganization, arrangement, insolvency,
readjustment of debt, dissolution or liquidation under the law of any
jurisdiction, whether now or hereafter in effect, and is not stayed or
dismissed within thirty (30) days after such filing, or if the Company
shall make an assignment for the benefit of creditors, or shall file a
voluntary petition in bankruptcy, or shall be adjudicated a bankrupt or
insolvent, or shall file any petition or answer seeking for itself any
reorganization, arrangement, composition, readjustment, liquidation,
dissolution or similar relief under any present or future statute, law or
regulation, or shall seek or consent to or acquiesce in the appointment of
any trustee, receiver or liquidator of the Company or of all or any
substantial part of the properties of the Company, or commence voluntary or
involuntary dissolution proceedings.
(e) Default under Senior Debt that gives the holder thereof the
right to accelerate such Senior Debt, and such Senior Debt is in fact
accelerated by such holder.
4.2 REMEDIES ON DEFAULT, ETC.
(a) If an Event of Default occurs and is continuing after the
expiration of any applicable grace period, the Holder may declare the
Debenture immediately due and payable.
(b) In case of a default in the payment of any principal or
interest due on this Debenture, the Company shall pay to the Holder thereof
the amount owing together with: (i) simple interest on the amount owing at
the rate per annum equal to the lower of (x) twelve percent (12%) or
(y) the maximum rate permitted under applicable law on the amounts past
due; and (ii) such additional amount as shall be sufficient to cover the
cost and expenses of collection, including, without limitation, reasonable
attorneys' fees, expenses and disbursements.
(c) No right, power or remedy conferred by this Debenture upon
any Holder shall be exclusive of any other right, power or remedy referred
to herein or now or hereafter available at law, in equity, by statute or
otherwise.
-6-
<PAGE>
5. CONVERSION.
5.1 CONVERSION RIGHTS. The Holder may at any time, and from time to
time, prior to the first to occur of the Maturity Date or the date fixed by the
Company for redemption of this Debenture (the "Redemption Date"), convert this
Debenture or any portion of the principal amount hereof which is $1,000 or an
integral multiple of $1,000, into Shares, at the following conversion price (the
"Conversion Price"), subject to adjustment in certain events described below:
(i) During the first year that this Debenture is outstanding:$1.35 per
Share; and
(ii) Thereafter: $1.65 per Share.
The number of Shares that the Holder shall receive upon any such
conversion shall be determined by dividing the principal amount of this
Debenture to be so converted by the Conversion Price in effect at the time of
such conversion. In the event that this Debenture is called for redemption, the
right to convert the Debenture shall terminate at the close of business on the
Redemption Date and will be lost if not exercised prior to that time unless the
Company defaults in making the payment due upon redemption. In the event of a
partial conversion of this Debenture, the Company shall execute and deliver to
the Holder a new Debenture in the aggregate principal amount equal to and in
exchange for the unconverted portion of the principal amount of the Debenture so
surrendered for conversion.
5.2 EFFECT OF CONVERSION; ISSUANCE OF SHARES ON CONVERSION.
Conversion of this Debenture shall be deemed to have been made at the close of
business on the date that the Debenture shall have been surrendered for
conversion, accompanied by written notice of election to convert in the form of
Exhibit "A" attached hereto (or such other form reasonably acceptable to the
Company), and thereupon the Holder shall have no further rights hereunder,
except with respect to the receipt of accrued interest due hereunder and the
Shares issuable upon conversion of this Debenture. As soon as practicable after
full or partial conversion of this Debenture, the Company shall pay to the
Holder all interest accrued hereunder with respect to the portion of the
Debenture so converted to the date of conversion. In addition, as soon as
practicable after full or partial conversion of this Debenture, the Company
shall, at its expense, cause to be issued in the name of, and delivered to, the
Holder a certificate or certificates for the number of Shares to which the
Holder shall be entitled on such conversion, together with any other securities
and property to which the Holder is entitled on such conversion under the terms
of this Debenture. No fractional shares will be issued on conversion of this
Debenture. If on any conversion of this Debenture a fraction of a share
results, the
-7-
<PAGE>
Company will pay the cash value of that fractional share, calculated on the
basis of the then effective Conversion Price.
5.3 ADJUSTMENTS TO CONVERSION PRICE.
(a) If the Company shall at any time while this Debenture is
outstanding subdivide the outstanding shares of its Common Stock, the
Conversion Price then in effect immediately before that subdivision shall
be proportionately decreased, and if the Company shall at any time while
this Debenture is outstanding combine the outstanding shares of Common
Stock, the Conversion Price then in effect immediately before that
combination shall be proportionately increased. Except as otherwise
provided below, any adjustment under this Section 5.3 shall become
effective at the close of business on the date the subdivision or
combination becomes effective. A dividend on any security of the Company
payable in Common Stock, or a split of the Company's Common Stock, shall be
considered a subdivision of Common Stock for purposes of this Section 5.3
at the close of business on the record date with respect to such dividend
or stock split. A reverse split of the Company's Common Stock shall be
considered a combination of Common Stock for purposes of this Section 5.3
at the close of business on the record date with respect to such reverse
stock split.
(b) In the event the Company, at any time or from time to time
while this Debenture is outstanding, shall make or issue, or fix a record
date for the determination of holders of Common Stock entitled to receive,
a dividend or other distribution with respect to the Company's Common Stock
payable in securities of the Company other than shares of Common Stock,
then and in each such event, provisions shall be made so that the Holder
shall receive upon conversion hereof, in addition to the number of shares
of Common Stock receivable thereupon, the amount of securities of the
Company which he would have received had this Debenture been converted into
Common Stock on the date of such event and had the Holder thereafter,
during the period from the date of such event to and including the
conversion date, retained such securities receivable by him.
(c) If while this Debenture is outstanding, the Shares issuable
upon conversion of this Debenture shall be changed into the same or a
different number of shares of any other class or classes of stock of the
Company, whether by recapitalization, reclassification or other exchange
(other than a subdivision or combination of shares, or a capital
reorganization, merger or sale of assets, provided for elsewhere in Section
5.3 hereof), the Holder shall, upon the conversion of this Debenture, be
entitled to receive, in lieu of the Shares which the Holder would have
become entitled to receive but for such change, a number of shares of such
other class or classes of stock that would have been
-8-
<PAGE>
subject to receipt by the Holder if he had exercised his right of
conversion of this Debenture immediately before that change.
(d) If while this Debenture is outstanding, there shall be a
merger or consolidation of the Company with or into another corporation
(other than a merger which does not result in any reclassification,
conversion, exchange or cancellation of outstanding shares of Common Stock
of the Company), or the sale of all or substantially all of the Company's
properties and assets to any other person, then, as a part of such merger,
consolidation or sale, lawful provision shall be made so that the Holder
shall thereafter be entitled to receive upon conversion of this Debenture,
during the period specified in this Debenture, the number of shares of
stock or other securities or property of the Company, or of the successor
corporation resulting from such merger, consolidation or sale, to which a
holder of the Shares deliverable upon conversion of this Debenture would
have been entitled on such merger, consolidation or sale if this Debenture
had been converted immediately before such merger, consolidation or sale.
In any such case, appropriate adjustment shall be made in the application
of the provisions of this Section 5.3 with respect to the rights of the
Holder after such merger, consolidation or sale to the end that the
provisions of this Section 5.3 (including adjustments of the Conversion
Price then in effect and number of shares purchasable upon conversion of
this Debenture) shall continue to be applicable after that event and shall
be as nearly equivalent to the provisions hereof as may be practicable.
(e) The Company shall promptly and in any case not later than
thirty (30) days after the date of any adjustment of the Conversion Price
give written notice of such adjustment and the number of Shares or other
securities issuable upon conversion of this Debenture, by first-class mail,
postage prepaid, to the registered Holder at the Holder's address as shown
on the Debenture Register. The certificate shall state such adjustment and
show in reasonable detail the facts on which such adjustment is based.
(f) The form of this Debenture need not be changed because of
any adjustment in the Conversion Price or in the number of Shares issuable
upon its conversion. A Debenture issued after any adjustment on any
partial conversion or upon replacement may continue to express the same
Conversion Price and the same number of Shares (appropriately reduced in
the case of partial conversion) as are stated on this Debenture as
initially issued, and that Conversion Price and that number of Shares shall
be considered to have been so changed as of the close of business on the
date of the adjustment.
-9-
<PAGE>
6. OPTIONAL REDEMPTION.
6.1 RIGHT OF REDEMPTION. This Debenture may be redeemed at the
election of the Company, as a whole or from time to time in part, at any time,
at 100% of the principal amount of this Debenture, together with accrued
interest to the Redemption Date. If less than all of the Company's outstanding
Debentures are to be redeemed, the particular Debentures to be redeemed shall be
selected by the Company by lot and the Company may select for redemption
portions (equal to $1,000 or any integral multiple thereof) of the principal
amount of Debentures of a denomination larger than $1,000.
6.2 REDEMPTION PROCEDURES.
(a) Notice of redemption shall be given by first-class mail,
postage prepaid, mailed not less than 30 nor more than 60 days prior to the
Redemption Date, to each Holder of Debentures to be redeemed, at his
address appearing in the Debenture Register.
(b) All notices of redemption shall state: (a) the Redemption
Date; (b) if less than all the outstanding Debentures are to be redeemed,
the identification (and, in the case of partial redemption of any
Debentures, the principal amounts) of the particular Debentures to be
redeemed; (c) that on the Redemption Date the redemption price will become
due and payable upon each such Debenture to be redeemed and that interest
thereon will cease to accrue on and after said date; and (d) the place or
places where such Debentures are to be surrendered for payment of the
redemption price. Any notice that is mailed in the manner herein provided
shall be conclusively presumed to have been given whether or not the Holder
receives said notice.
(c) Notice of redemption having been given as aforesaid, the
Debentures so to be redeemed shall, on the Redemption Date, become due and
payable at the redemption price therein specified, and from and after such
date (unless the Company shall default in the payment of the redemption
price and accrued interest) such Debentures shall cease to bear interest.
Upon surrender of any such Debentures for redemption in accordance with
said notice, such Debentures shall be paid by the Company at the redemption
price, together with accrued interest to the Redemption Date.
(d) If any Debenture called for redemption shall not be so paid
upon surrender thereof for redemption, the principal shall, until paid,
bear interest from the Redemption Date at the rate borne by the Debenture.
-10-
<PAGE>
(e) Any Debenture which is to be redeemed only in part shall be
surrendered at the principal office of the Company (with, if the Company so
requires, due endorsement by, or a written instrument of transfer in form
satisfactory to the Company duly executed by, the Holder thereof or his
attorney duly authorized in writing), and the Company shall execute and
deliver to the Holder of such Debenture without service charge, a new
Debenture or Debentures, of any authorized denomination as requested by
such Holder, in the aggregate principal amount equal to and in exchange for
the unredeemed portion of the principal of the Debenture so surrendered.
7. REGISTRATION OF TRANSFER AND EXCHANGE.
7.1 DEBENTURE REGISTER. The Company shall cause to be kept at the
principal office of the Company a register (the "Debenture Register") in which,
subject to such reasonable regulations as it may prescribe, the Company shall
provide for the registration of Debentures and of transfers of Debentures
subject to the provisions regarding transferability contained in this Debenture.
Upon surrender for registration of transfer of any Debenture at the principal
office of the Company, the Company shall execute and deliver, in the name of the
designated transferee or transferees, one or more new Debentures in minimum
denominations of $1,000 and integral multiples of $1,000.
7.2 EXCHANGE OF DEBENTURES. At the option of the Holder, Debentures
may be exchanged for other Debentures of any authorized denominations and of a
like aggregate principal amount, upon surrender of the Debentures to be
exchanged. Whenever any Debentures are so surrendered for exchange, the Company
shall execute and deliver the Debentures which the Holder making the exchange is
entitled to receive.
7.3 TRANSFER OF DEBENTURES. Every Debenture presented or surrendered
for registration of transfer or exchange shall (if so required by the Company)
be duly endorsed, or be accompanied by a written instrument of transfer in form
satisfactory to the Company, duly executed by the Holder thereof or his attorney
duly authorized in writing. No service charge shall be made for any
registration of transfer or exchange of Debentures, but the Company may require
payment of a sum sufficient to cover any tax or other governmental charge that
may be imposed in connection with any registration of transfer or exchange of
Debentures.
7.4 REPLACEMENT DEBENTURE.
(a) If any mutilated Debenture is surrendered to the Company,
the Company shall execute and deliver in exchange therefor a new Debenture
of like tenor and principal amount and bearing a number not
contemporaneously outstanding. If there shall be delivered to the Company:
(i) evidence to its satisfaction of the destruction, loss or
-11-
<PAGE>
theft of any Debenture; and (ii) such security or indemnity as may be
required by it to save the Company and any agent harmless, then, in the
absence of notice to the Company that such Debenture has been acquired by a
bona fide purchaser, the Company shall execute and deliver, in lieu of any
such destroyed, lost or stolen Debenture, a new Debenture of like tenor and
principal amount and bearing a number not contemporaneously outstanding.
In case any such mutilated, destroyed, lost or stolen Debenture has become
or is about to become due and payable, the Company in its discretion may,
instead of issuing a new Debenture, retire such Debenture.
(b) Upon the issuance of any new Debenture under this Section
7.4, the Company may require the payment of a sum sufficient to cover any
tax or other governmental charge that may be imposed in relation thereto
and any other expenses connected therewith.
(c) Every new Debenture issued pursuant to this Section 7.4 in
lieu of any destroyed, lost or stolen Debenture shall constitute an
original additional contractual obligation of the Company, whether or not
the destroyed, lost or stolen Debenture shall be at any time enforceable by
anyone.
(d) The provisions of this Section 7.4 are exclusive and shall
preclude (to the extent lawful) all other rights and remedies with respect
to the replacement or payment of mutilated, destroyed, lost or stolen
Debentures.
8. LIMITATIONS ON DISPOSITION. The Holder understands that this
Debenture, the Shares issuable upon conversion of this Debenture and any other
securities issued under this Debenture are "restricted securities" under the
federal securities laws inasmuch as they are being acquired from the Company in
a transaction not involving a public offering and that under such laws and
applicable restrictions such securities may be resold without registration under
the Securities Act of 1933, as amended (the "Act") only in certain limited
circumstances. In this connection, the Holder represents that it is familiar
with Rule 144 under the Act and the limitations imposed thereby and by the Act.
The Holder further agrees not to make any disposition of all or any portion
of this Debenture, the Shares or any other securities issued hereunder unless
and until: (a) there is then in effect a Registration Statement under the Act
covering such proposed disposition and such disposition is made in accordance
with such Registration Statement; or (b) (i) the Holder shall have notified the
Company of the proposed disposition and shall have furnished the Company with a
reasonably detailed statement of the circumstances surrounding the proposed
disposition; and (ii) the Holder shall have furnished the Company with an
opinion
-12-
<PAGE>
of counsel, satisfactory to the Company, that such disposition will not require
registration of the securities under the Act.
The Holder understands that this Debenture, the Shares and any other
securities issued hereunder may bear the following legend, together with any
other legend required by law:
"The securities represented hereby have not been registered under the
Securities Act of 1933, or any state securities laws. These securities may
not be sold or transferred in the absence of an effective registration
statement or qualification under such securities laws or an opinion of
counsel, satisfactory to the Company, that the sale or transfer is pursuant
to an exemption from the registration or qualification requirements of any
applicable securities laws."
9. LIMITATIONS ON DIVIDENDS AND DISTRIBUTIONS. So long as this Debenture
is outstanding, the Company shall not declare, pay, make or set apart any sum
for a dividend or other distribution (whether in cash or other property) with
respect to any class of capital stock of the Company (other than dividends or
distributions payable in its capital stock), or for the redemption, retirement,
purchase or other acquisition for value of any share of any class of capital
stock of the Company or any warrants or rights to purchase any class of capital
stock of the Company.
10. REGISTRATION RIGHTS.
10.1 DEFINITIONS. For purposes of Section 10 hereof, terms not
otherwise defined herein shall have the following meanings:
(a) The terms "register," "registered" and "registration" refer
to the preparation and filing of a registration statement in compliance
with the Act and the rules promulgated thereunder, and the declaration of
the effectiveness of such registration statement, or the taking of similar
action under a successor statute or regulation.
(b) The term "Registrable Securities" means the Shares issuable
upon conversion of the Debentures, and any securities issued or issuable
with respect to such Shares by way of a stock dividend or stock split or in
connection with a combination or shares, recapitalization, merger,
consolidation or other reorganization.
(c) The term "Rights Holder" or "Rights Holders" means any
registered holder or holders of Registrable Securities.
(d) The term "Prospectus" means a prospectus that complies with
applicable provisions of the Act.
-13-
<PAGE>
10.2 PIGGYBACK REGISTRATION.
(a) If, at any time, through and including the third anniversary
of the date of this Debenture, the Company proposes to register any of its
securities under the Act (other than in connection with a merger, otherwise
pursuant to a Form S-4 Registration Statement or pursuant to a Form S-8
Registration Statement), it will give written notice by registered mail, at
least thirty (30) days prior to the filing of each such registration
statement, to all Rights Holders of its intention to do so. If any of the
Rights Holders notify the Company within twenty (20) days after receipt of
any such notice of its or their desire to include any Registrable
Securities in such proposed registration statement, the Company shall
afford such Rights Holders the opportunity to have any of their Registrable
Securities registered under such registration statement and included in any
underwriting involved with respect thereto.
(b) Notwithstanding the provisions of Section 10 hereof: (i) the
Company shall have the right at any time after it shall have given written
notice pursuant to said Section 10 (irrespective of whether a written
request for inclusion of any Registrable Securities shall have been made)
to elect not to file any such proposed registration statement, or to
withdraw the same after the filing but prior to the effective date thereof;
and (ii) in the event a registration under Section 10 hereof relates to an
underwritten public offering which does not include any securities being
offered and sold on behalf of selling shareholders, the inclusion of any
Registrable Securities may, at the election of the Company, be conditioned
upon the Rights Holders agreement that the public offering of such
Registrable Securities shall not commence until ninety (90) days after the
effective date of such registration.
(c) The right of any Rights Holder pursuant to Section 10 hereof
shall be conditioned upon such Rights Holder's participation in the
underwriting with respect thereto and the inclusion of such Rights Holder's
Registrable Securities in such underwriting (unless otherwise mutually
agreed by the Company, the managing underwriter or, if none, a majority of
the underwriters, and such Rights Holder) to the extent provided herein.
(d) Notwithstanding any other provision of this Debenture, if
the managing underwriter or, if none, a majority of the underwriters,
determines that marketing factors require a limitation of the number of
shares to be underwritten or a complete exclusion of such shares, such
underwriter or underwriters may limit the number of Registrable Securities
that may be included in the registration and underwriting or exclude all of
the Registrable Securities, as appropriate. In the case of an
-14-
<PAGE>
underwritten registration in which the number of Registrable Securities
that may be included is limited, the Company shall advise all Rights
Holders of the limited number of Registrable Securities that may be
included in the registration, and the number of Registrable Securities that
may be included in the registration and underwriting shall be allocated
among all Rights Holders thereof in proportion, as nearly as practicable,
to the respective amounts of Registrable Securities entitled to inclusion
in such registration held by such Rights Holders at the time of filing the
registration statement.
(e) The Company shall (together with all Rights Holders
proposing to distribute their securities through an underwriting) enter
into an underwriting agreement in customary form with the underwriter or
underwriters selected for the underwriting.
10.3 EXPENSES. All expenses incurred in connection with any
registration pursuant to this Debenture, including without limitation, all
registration, filing and qualification fees, printing expenses, fees and
disbursements of counsel for the Company, and expenses of any special audits
incidental to or required by such registration, shall be borne by the Company;
provided however the Company shall not be required to pay:
(a) fees of legal counsel of any Rights Holder, or underwriters'
fees, discounts, commissions or expenses relating to Registrable
Securities; and
(b) for expenses that the Company is prohibited from paying
under Blue Sky laws or by Blue Sky administrators.
10.4 COMPANY RESPONSIBILITIES. In the case of a registration effected
by the Company pursuant to this Debenture, the Company shall use its best
efforts to keep each Rights Holder participating therein advised in writing as
to the initiation, effectiveness and completion of such registration. At its
expense the Company shall:
(a) prepare and file a registration statement (and such
amendments and supplements thereto) with respect to such Registrable
Securities and use its best efforts to cause such registration
statement to become and remain effective for a period of one hundred
eighty (180) days or until the Rights Holder or Rights Holders have
completed the distribution described in the registration statement
relating thereto, whichever first occurs;
(b) furnish such number of copies of a Prospectus in conformity
with the requirements of applicable law,
-15-
<PAGE>
and such other documents incident thereto as a Rights Holder from time
to time may reasonably request; and
(c) use every reasonable effort to register or qualify the
Registrable Securities covered by such registration statement under
the state Blue Sky laws of such jurisdictions as the Company's Board
of Directors may reasonably determine, and do any and all other acts
and things which may be necessary under said Blue Sky laws to enable
the sellers of the Registrable Securities to consummate the public
sale or other disposition of the Registrable Securities owned by them
in such jurisdictions, except that the Company shall not for any
purpose be required to qualify to do business as a foreign corporation
in any jurisdiction wherein the Registrable Securities are so
qualified.
10.5 INDEMNIFICATION.
(a) The Company shall indemnify each Rights Holder, each of the
Rights Holder's officers and directors, and each person controlling such
Rights Holder, with respect to such registration effected pursuant to
Section 10.2 hereof, and each underwriter, if any, and each person who
controls any underwriter of the Registrable Securities, against all claims,
losses, damages and liabilities (or actions in respect thereto) arising out
of or based on any untrue statement (or alleged untrue statement) of a
material fact contained in any registration statement or related
Prospectus, or based on any omission (or alleged omission) to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading, or any violation by the Company of any
rule or regulation promulgated under any securities law applicable to the
Company and relating to action or inaction required of the Company in
connection with any such registration, and shall reimburse each such Rights
Holder, each of the Rights Holder's officers and directors, and each person
controlling such Rights Holder, each such underwriter and each person who
controls any such underwriter, for any legal and any other expenses
reasonably incurred in connection with investigating or defending any such
claim, loss, damage, liability or action, provided that the Company shall
not be liable in any such case to the extent that any such claim, loss,
damage or liability arises out of or is based on any untrue statement or
omission based upon written information furnished to the Company in an
instrument duly executed by such Rights Holder or underwriter specifically
for use therein.
(b) Each Rights Holder shall, if Registrable Securities held by
or issuable to such Rights Holder are included in the securities as to
which such registration is being effected, indemnify the Company, each of
its directors
-16-
<PAGE>
and officers who sign such registration statement, each underwriter, if
any, of the Company's securities covered by such a registration statement,
each person who controls the Company within the meaning of the Act, and
each other Rights Holder, each of such Rights Holder's officers and
directors and each person controlling such Rights Holder, against all
claims, losses, damages and liabilities (or actions in respect thereof)
arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any such registration statement
or related Prospectus, or any omission (or alleged omission) to state
therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, and shall reimburse the Company,
such Rights Holders, such directors, officers, persons, or underwriters for
any legal or any other expenses reasonably incurred in connection with
investigating or defending any such claim, loss, damage, liability, or
action, in each case to the extent, but only to the extent, that such
untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement or related Prospectus in
reliance upon and in conformity with written information furnished to the
Company in an instrument duly executed by such Rights Holder specifically
for use therein.
(c) Each party entitled to indemnification under this Section
10.5 (the "Indemnified Party") shall give notice to the party required to
provide indemnification (the "Indemnifying Party") promptly after such
Indemnified Party has actual knowledge of any claim as to which indemnity
may be sought, and shall permit the Indemnifying Party to assume the
defense of any such claim or any litigation resulting therefrom, provided
that counsel for the Indemnifying Party, who shall conduct the defense of
such claim or litigation, shall be approved by the Indemnified Party (whose
approval shall not be unreasonably withheld), and the Indemnified Party may
participate in such defense at such party's expense; and provided further
that the failure of any Indemnified Party to give notice as provided herein
shall not relieve the Indemnifying Party of its obligations under this
Section 10.5. No Indemnifying Party, in the defense of any such claim or
litigation, shall, except with the consent of each Indemnified Party,
consent to entry of any judgment or enter into any settlement, which does
not include as an unconditional term thereof, the giving by the claimant or
plaintiff to such Indemnified Party of a release from all liability in
respect to such claim or litigation.
10.6 RIGHTS HOLDER'S OBLIGATIONS. Each Rights Holder whose
Registrable Securities are included in any registration shall furnish to the
Company such written information regarding such Rights Holder and the
distribution proposed by such Rights Holder as the Company may reasonably
request in writing and as
-17-
<PAGE>
shall be required in connection with any registration referred to in this
Debenture.
10.7 ASSIGNMENT. The rights granted to the Rights Holders pursuant to
this Debenture may be assigned to a transferee or assignee of the Debenture or
any of the Registrable Securities, provided that the Company is given written
notice at the time of or within 10 days after said transfer, stating the name
and address of said transferee or assignee and identifying the Registrable
Securities with respect to which such registration rights are being assigned.
11. MISCELLANEOUS.
11.1 AMENDMENT. The provisions of this Debenture may be amended or
modified only with the written consent of the Company and the Holder.
11.2 ENTIRE AGREEMENT. This Debenture constitute the entire agreement
among the parties with regard to the subject matter hereof, and supersedes and
replaces any and all prior to contemporaneous agreements, written or oral. The
terms and conditions of this Debenture shall inure to the benefit of, and be
binding upon, the respective successors and assigns of the parties. Nothing in
this Debenture is intended to confer on any third party any rights, liabilities
or obligations, except as specifically provided.
11.3 HEADINGS. The titles and subtitles used in this Debenture are
for convenience only and are not to be used in construing or interpreting this
Debenture.
11.4 GOVERNING LAW. This Debenture shall be governed by the internal
laws of the State of California as applicable to transactions performed in
California between California residents.
11.5 ATTORNEYS' FEES. The prevailing party in any action or
proceeding between the parties arising out of or related to this Debenture shall
be entitled to recover all reasonable expenses, including without limitation
attorneys' fees and costs, incurred in connection with any such action or
proceeding.
IN WITNESS WHEREOF, the undersigned have executed this Debenture on the
date first above written.
ANCHOR PACIFIC UNDERWRITERS, INC.
By:_____________________________________
James R. Dunathan
President
-18-
<PAGE>
Exhibit "A"
Form of Conversion Notice
To Anchor Pacific Underwriters, Inc.:
The undersigned Holder hereby irrevocably exercises the option to convert this
Debenture, or portion hereof (which is in the amount of not less than $1,000 and
in increments of not less than $1,000 thereafter) below designated, into shares
of the Company's Common Stock, $.02 par value per share, in accordance with the
terms of the Debenture, and directs that the shares issuable and deliverable
upon such conversion, together with any check in payment for fractional shares
and any Debentures representing any unconverted principal amount hereof, be
issued and delivered to the undersigned unless a different name has been
indicated below. If shares or Debentures are to be issued in the name of a
person other than the undersigned, the undersigned will pay all transfer taxes
payable with respect thereto. Any amount required to be paid by the undersigned
on account of interest accompanies this Debenture.
Dated: ____________ __________________________________
Signature
__________________________________
Social Security Number or Other
Taxpayer Identification Number
Principal Amount to be Converted: $_________________
If shares or Debentures are to be registered in the name of a person other than
the Holder, please print such person's name and address below:
Name: _________________________________
Address: _________________________________
_________________________________
-19-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<CASH> 5,248,399
<SECURITIES> 0
<RECEIVABLES> 1,432,145
<ALLOWANCES> 33,700
<INVENTORY> 0
<CURRENT-ASSETS> 7,582,810
<PP&E> 2,562,606
<DEPRECIATION> 1,591,138
<TOTAL-ASSETS> 12,475,154
<CURRENT-LIABILITIES> 8,334,756
<BONDS> 0
<COMMON> 78,465
0
0
<OTHER-SE> 2,334,019
<TOTAL-LIABILITY-AND-EQUITY> 12,475,154
<SALES> 0
<TOTAL-REVENUES> 2,304,565
<CGS> 0
<TOTAL-COSTS> 2,290,922
<OTHER-EXPENSES> 204,209
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 132,613
<INCOME-PRETAX> (323,179)
<INCOME-TAX> 4,800
<INCOME-CONTINUING> (327,979)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (327,979)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
</TABLE>
