<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 1998 COMMISSION FILE NUMBER: 0-9628
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM [ ] TO [ ]
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 94520
CONCORD, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (925) 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
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
As of March 31, 1998, the Registrant had 4,710,060 shares of common stock
outstanding.
This document is comprised of 27 pages
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ANCHOR PACIFIC UNDERWRITERS, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
<S> <C>
ITEM 1. Financial Statements:
Consolidated Balance Sheets, March 31, 1998 (unaudited) and
December 31, 1997.................................................... 1
Consolidated Statements of Operations for the three
months ended March 31, 1998 and 1997 (unaudited)..................... 3
Consolidated Statements of Shareholders' Equity for the three
months ended March 31, 1998 (unaudited) and year ended
December 31, 1997.................................................... 4
Consolidated Statements of Cash Flows for the three
months ended March 31, 1998 and 1997 (unaudited)..................... 5
Notes to Consolidated Financial Statements........................... 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................. 8
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.................................................... 14
ITEM 2. Changes in Securities................................................ 14
ITEM 3. Defaults Upon Senior Securities...................................... 14
ITEM 4. Submission of Matters to a Vote of Security Holders.................. 14
ITEM 5. Other Information.................................................... 14
ITEM 6. Exhibits and Reports on Form 8-K..................................... 14
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------------- -------------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents - corporate funds $ 170,128 $ 44,384
Cash and cash equivalents - brokerage
fiduciary funds 898,675 1,203,594
Cash and cash equivalents - third-party
administration fiduciary funds 2,949,591 3,058,059
Accounts receivable (less allowance for
doubtful accounts of $45,864 and $45,543
in 1998 and 1997, respectively) 1,703,659 1,351,047
Prepaid expenses and other current assets 264,769 375,475
------------------- -------------------
Total current assets 5,986,822 6,032,559
------------------- -------------------
Property and equipment, less accumulated
depreciation and amortization 749,037 620,511
------------------- -------------------
Other assets:
Goodwill, net 1,779,136 1,803,713
Intangible assets, net 992,435 1,021,715
Other 83,899 59,667
------------------- -------------------
2,855,470 2,885,095
------------------- -------------------
Total assets $ 9,591,329 $ 9,538,165
------------------- -------------------
</TABLE>
1
<PAGE>
ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------------- -------------------
(unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Cash and cash equivalents - third-party
administration fiduciary funds $ 2,949,591 $ 3,058,059
Net premiums payable - insurance companies 1,960,585 2,035,032
Accounts payable and accrued expenses 963,534 948,484
Current portion of long-term debt 408,752 629,133
Current portion of long-term liabilities 573,834 574,083
------------------- -------------------
Total current liabilities 6,856,296 7,244,791
------------------- -------------------
Long-term liabilities, net of current portion 467,395 506,944
------------------- -------------------
Long-term debt, including $210,000 in 1998 and
$240,000 in 1997, owed to related parties, net
of current portion 1,741,002 1,329,188
------------------- -------------------
Shareholders' equity:
Preferred stock - $.02 par value; 2,000,000 shares
authorized; none issued and outstanding
Common stock - $.02 par value; 16,000,000
shares authorized; 4,710,060 and 4,690,839
shares issued as of 3/31/98 and 12/31/97,
respectively 94,201 93,817
Additional paid-in capital 4,232,265 4,215,649
Accumulated deficit (3,799,830) (3,852,224)
------------------- -------------------
Total shareholders' equity 526,636 457,242
------------------- -------------------
Total liabilities and shareholders' equity $ 9,591,329 $ 9,538,165
------------------- -------------------
</TABLE>
See accompanying notes.
2
<PAGE>
ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months
Ended March 31,
----------------------------------------------
1998 1997
(unaudited) (unaudited)
<S> <C> <C>
Revenues:
Commissions, fees and other income $ 4,164,999 $ 2,005,254
Interest income 17,126 21,595
------------------- -------------------
Total revenue 4,182,125 2,026,849
------------------- -------------------
Operating expenses:
Salaries, commissions and employee benefits 2,472,074 1,384,807
Selling, general and administrative expenses 1,534,499 755,227
------------------- -------------------
Total operating expenses 4,006,573 2,140,034
------------------- -------------------
175,552 (113,185)
------------------- -------------------
Other income (expense):
Amortization of goodwill and intangible assets (53,856) (62,529)
Interest (78,504) (51,218)
Other 15,422 3,346
------------------- -------------------
Total other income (expense) (116,938) (110,401)
------------------- -------------------
Income (loss) before income taxes 58,614 (223,586)
Income tax expense 6,220 4,470
------------------- -------------------
Net income (loss) $ 52,394 $ (228,056)
------------------- -------------------
Basic and diluted income (loss) per common share $ .01 $ (.05)
------------------- -------------------
Weighted average number of common shares
outstanding 4,710,060 4,456,205
------------------- -------------------
</TABLE>
See accompanying notes
3
<PAGE>
ANCHOR PACIFIC UNDERWRITERS, INC.
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 December 31,
1996 4,362,837 $ 87,256 $ 3,925,508 $ (2,905,533) $ 1,107,231
Stock issued for warrants
exercised 567 11 1,691 - 1,702
Bridge notes exchanged
for stock 50,000 1,000 44,000 - 45,000
Issuance of stock for cash 277,778 5,557 244,443 - 250,000
Canceled stock -
Fractional shares (343) (7) 7 - -
Net loss - - - (946,691) (946,691)
---------------- --------------- ---------------- ---------------- ------------------
Balance at December 31,
1997 4,690,839 $ 93,817 $ 4,215,649 $ (3,852,224) $ 457,242
Stock issued for
services 18,888 378 16,622 - 17,000
Fractional shares
adjustment 333 6 (6) - -
Net Income - - - 52,394 52,394
---------------- --------------- ---------------- ---------------- ------------------
Balance at March 31, 1998
(Unaudited) 4,710,060 $ 94,201 $ 4,232,265 $ (3,799,830) $ 526,636
---------------- --------------- ---------------- ----------------- -----------------
</TABLE>
See accompanying notes
4
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ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months
Ended March 31,
--------------------------------------------
1998 1997
(unaudited) (unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 52,394 $ (228,056)
Items not requiring current use of cash:
Depreciation and amortization 80,366 76,331
Amortization of goodwill and other intangibles 53,856 62,529
Stock issued for services 17,000 -
Changes in items affecting operations:
Cash and cash equivalents - brokerage
fiduciary funds 304,919 (205,157)
Accounts receivable (352,612) 276,087
Prepaid expenses and other current assets 110,012 7,536
Other assets (24,232) 2,194
Deferred compensation - 51,000
Net premiums payable - insurance companies (74,447) (160,663)
Accounts payable and accrued expenses 15,000 (77,083)
----------------- -------------------
Cash provided by (used in) operating activities 182,306 (195,282)
----------------- -------------------
INVESTING ACTIVITIES
Notes receivable, net 694 18,591
Purchases of property and equipment (208,892) (3,464)
----------------- -------------------
Cash provided by (used in) investing activities (208,198) 15,127
----------------- -------------------
FINANCING ACTIVITIES
Issuance of stock:
Common stock - 155,300
Warrants exercised - 1,702
Borrowings on long-term debt 200,000 35,000
Repayment on long-term debt and liabilities (48,364) (105,867)
------------------- -------------------
Cash provided by financing activities 151,636 86,135
------------------- -------------------
Net increase (loss) in cash 125,744 (94,020)
Cash and cash equivalents - corporate funds at
beginning of period 44,384 151,765
------------------- -------------------
Cash and cash equivalents - corporate funds at
end of period $ 170,128 $ 57,745
------------------- -------------------
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 78,504 $ 51,218
------------------- -------------------
Income taxes $ 6,220 $ 4,470
------------------- -------------------
</TABLE>
See accompanying notes
5
<PAGE>
ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1998
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, 1998, are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1998. 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, 1997.
Reclassifications
- -----------------
Certain prior years' balances have been reclassified to
conform with the current year presentation.
Recapitalization and Restatement
- --------------------------------
On January 6, 1995, Anchor merged with System Industries, Inc.
("System"), previously a dormant, publicly traded shell corporation. As a result
of the merger, Anchor became a public company. For accounting purposes, the
merger has been treated as a recapitalization of Anchor with Anchor as the
acquirer. Upon consummation of this merger, shareholders and certain creditors
of System each received one share of Anchor common stock and one year warrant
to purchase one share of Anchor common stock at a price of $3.00 for every
42.3291 shares of issued and outstanding System common stock. Warrants to
purchase 194,886 shares of common stock expired January 6, 1997, and unissued
warrants to purchase 195,789 shares of common stock will expire one year after
their issuance.
NOTE 2 - ACQUISITIONS
- ---------------------
To date, acquisitions by Anchor have involved both relatively
small acquisitions of insurance brokerage and administration accounts, as well
as larger acquisitions, such as the 1995 acquisitions of the insurance brokerage
company, Putnam, Knudsen & Wieking, Inc. ("PKW"), and the third-party
administrators, Benefit Resources, Inc. ("BRI"). The results of operations from
these acquisitions are included in Anchor's consolidated financial statements
from the date of purchase. Anchor expects to continue to expand its third-party
administration business. Anchor conducts its third-party administration business
through its wholly-owned subsidiary, Harden & Company Insurance Services, Inc.
("Harden") and through Harden's wholly-owned subsidiary, BRI. Effective January
1, 1998, Harden, assumed a significant volume of third-party administration
business from an insurance carrier in Portland, Oregon.
Effective March 20, 1998, Harden acquired from the same
company that it had recently assumed the third-party administration business
from in Portland, Oregon, all of the outstanding stock of Pacific Heritage
Administrators of Nevada, Inc., to further its business of administering
third-party health insurance contracts.
NOTE 3 - CONTINGENCIES
- ----------------------
Anchor is subject to certain legal proceedings and claims
arising in the ordinary course of 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.
6
<PAGE>
NOTE 4 - SUBORDINATED BRIDGE NOTES AND WARRANT
- ----------------------------------------------
During 1996, Anchor raised $225,000 from five members of the
Board of Directors and other qualified investors through the issuance of 10%
Subordinated Bridge Notes with a Warrant to Purchase Shares of Anchor Common
Stock ("Bridge Notes"). The basic terms of the Bridge Notes were: (a) 10%
interest per annum, paid in arrears; (b) one year term; (c) for every $10,000 of
principal invested the purchaser received a five year warrant to acquire 1,000
shares of Anchor common stock at a purchase price of $1.75 per share; (d)
"piggyback" registration rights for three years; and (e) subordination
provisions that subordinate the Bridge Notes to Anchor's "Senior Debt" (as
defined in the Bridge Notes).
In February 1997, Anchor offered the purchasers of said Bridge
Notes an opportunity to either change the terms of the warrants underlying the
Bridge Notes or to participate in the 1997 Offering (Note 6 below), by
exchanging the Bridge Notes. The basic terms of these two alternatives were: (a)
in lieu of receiving a five year warrant to purchase 1,000 shares of Anchor
common stock at a purchase price of $1.75 per share, for every $10,000 in
principal invested, the purchaser would receive a five year warrant to purchase
2,000 shares of Anchor common stock at a purchase price of $1.35 per share; or
(b) participate in the 1997 Offering by exchanging the Bridge Notes and
receiving in return (i) interest at the rate of 10% per annum up to the date of
conversion; (ii) Anchor common stock in place of the Bridge Notes at a
conversion price equal to $0.90 per share; and (iii) a five year warrant, equal
to the number of shares issued in place of the Bridge Notes, with the right to
purchase Anchor's common stock at a purchase price of $0.90 per share.
Purchasers representing $180,000 of said Bridge Notes chose alternative (a)
above, and the remaining $45,000 chose alternative (b) above. Certain purchasers
agreed to extend the term of the Bridge Notes. As of March 31, 1998, $140,000 of
the Bridge Notes remained outstanding.
NOTE 5 - 10% CONVERTIBLE SUBORDINATED DEBENTURES
- ------------------------------------------------
In 1995, Anchor issued $370,000 of 10% Convertible
Subordinated Debentures (the "Debentures") and $600,000 of Series A 10%
Convertible Subordinated Debenture (the "Series A Debenture"). Investors holding
$270,000 of the Debentures, including seven members of the Board of Directors,
and $600,000 of the Series A Debenture, converted their debentures into 644,444
shares of Anchor's common stock at $1.35 per share. These conversions reduced
outstanding indebtedness by $870,000 and, in turn, increased shareholders'
equity by $870,000. Certain holders agreed to extend the term of the Debentures.
As of March 31, 1998, $40,000 of the Debentures had been repaid in full, and
$60,000 remained outstanding.
NOTE 6 - 1997 OFFERING
- ----------------------
During 1997, Anchor raised $305,000 from eight members of the
Board of Directors and other qualified investors through a private offering
which consisted of shares of Anchor common stock along with warrants to acquire
shares of Anchor common stock (the "1997 Offering"). Anchor utilized a
substantial portion of the proceeds from the 1997 Offering to support current
and future working capital needs of Anchor. The basic terms of the 1997 Offering
were: (a) up to 555,000 shares of Anchor common stock available at a purchase
price of $0.90 per share: (b) five year warrants to acquire one share of Anchor
common stock for each share of Anchor common stock purchased at an exercise
price of $0.90 per share; (c) "piggyback" registration rights for three years;
and (d) anti-dilution protection for stock splits, stock dividends,
recapitalizations and reorganizations.
NOTE 7 - COMMITMENTS
- --------------------
On September 30, 1997, Anchor obtained a $1,600,000 bank loan. The
basic terms and conditions of this loan are: (a) monthly interest payments equal
to the bank's prime rate plus 2.5%; (b) five year term; (c) monthly principal
payments in installments of $26,666.67 (Not withstanding the foregoing, 75% of
Anchor's monthly earnings before interest, taxes, depreciation and amortization
("EBITDA") shall be applied to principal to the extent such percentage of
monthly EBITDA is required to make the scheduled payment of principal. To the
extent that 75% of monthly EBITDA falls short of the required principal payment,
the difference shall be added to the final payment); and (d) a five year warrant
to acquire 95,000 shares of Anchor common stock at a purchase price of $1.75 per
share. The proceeds of the loan were used to retire outstanding credit
facilities with another bank.
7
<PAGE>
On December 22, 1997, the bank that provided Anchor with the $1,600,000
term loan also provided Anchor with a $250,000 loan to support current working
capital needs of Anchor in connection with Harden's expansion in Portland,
Oregon.
As of March 9, 1998, a new term loan in the amount of $1,821,890.33 was
entered into between Anchor and the bank combining both the $1,600,000 term loan
and the $250,000 loan. The basic terms of this new term loan are: (a) monthly
interest payments equal to bank's prime rate plus 2.5%; (b) maturity date of
October 5, 2002; (c) monthly principal payments in installments of $33,125.28
beginning on April 5, 1998; and (d) all other terms and conditions of the term
loan dated September 30, 1997, including all amendments thereto and replacements
therefor.
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.
Since its inception, Anchor has expanded its insurance brokerage and
administration service capabilities through internal growth and a series of
acquisitions. Anchor expects to continue to expand its third-party
administration services operation and to explore other complementary expansion
opportunities.
Historically, Anchor derived a majority of its revenues from
third-party administration services. As a result of acquisitions made during
1994 and 1996, Anchor significantly increased the percentage of its revenues
derived from property and casualty insurance brokerage activities. In July 1997
and January 1998, Harden entered into significant new contracts through its
marketing partners to provide third-party administration services in Los
Angeles, California and Portland, Oregon. These new contracts have substantially
increased the percentage of revenues derived from third-party administration
services.
RESULTS OF OPERATIONS -- QUARTERS ENDED MARCH 31, 1998 AND 1997
GENERAL
Anchor derives a portion of its revenues from commissions, which
generally are based on a percentage of gross premiums and 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 may materially
affect commission revenues. During the last nine years, the property and
casualty insurance industry has experienced a "soft market" in which the
underwriting capacity of insurance companies expanded, stimulating an increase
in competition and a decrease in premium rates, thereby reducing related
commissions and fees. In addition to the soft market for property and casualty
insurance, workers' compensation reform in California has had the effect of
reducing workers' compensation insurance premiums resulting in reduced
commissions generated by the sale of related insurance products. Although some
sources in the insurance industry have predicted future premium increases, the
likelihood of rate increases in the near future remains uncertain. Anchor
believes that revenues generated from anticipated future growth and continued
diversification of its business will offset weaknesses in the property and
casualty market and any loss of revenues that may result from workers'
compensation reform.
Historically, inflation has impacted 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, in turn, pay higher premiums. During the past several
years, the United States has experienced very low rates of inflation along with
gradual business expansion. Consequently, inflation has had minimal impact on
insurance pricing.
8
<PAGE>
At times, client uncertainty about the potential effect of health care
reform, could also affect Anchor's business. Anchor believes that its expertise
in two areas frequently identified in health care reform proposals (managed care
and managed competition), combined with its strategy of servicing middle market
clients, leave it well positioned to operate effectively in a managed care and
managed competition environment. Anchor also believes that in the current
political environment, the United States will experience incremental, rather
than sudden comprehensive changes in health care regulations. It is not possible
at this time, however, to predict the effect that any future health care reform
legislation will have on Anchor's business condition or operations. Anchor is
unaware of any current regulatory proposals that could have a material effect on
its liquidity, capital resources or operations.
Anchor has taken steps to strengthen the sales management at Harden and
BRI by hiring seasoned sales and marketing executives to take over marketing
responsibilities. Product development and new product sales continue to be a top
priority, as does geographical diversification into other states and marketing
territories. Harden and BRI have been successful in securing an alternative
insurance carrier to strengthen and broaden their product offerings in the small
group market, as well as to facilitate geographic diversification. This new
insurance carrier has negotiated a multi-year, exclusive contract with Harden
and BRI which management believes will enhance sales opportunities in California
and Arizona. Furthermore, Harden has entered into significant new contracts to
provide third-party administration services through its marketing partners.
These new contracts have increased the percentage of revenues Anchor derives
from third-party administration services. The new third-party administration
services operation in Oregon has also substantially increased revenues and will
provide a platform for expanding marketing activities in the northern tier of
the western states (Oregon, Washington, Idaho and Nevada).
REVENUES
TOTAL REVENUES. Total revenues for the first quarter of 1998, were
$4,182,125, an increase of $2,155,276 or 106.3%, as compared to 1997 first
quarter revenues of $2,026,849. The increase in revenue in this three month
period was primarily due to the increase in fee income derived from third-party
administration services at Harden which included $1,342,711 from the new
business in Portland, Oregon.
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, underwriting and risk analysis services (for which
fees are generated), for the three months ended March 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
============================================= ===================== ====================== =====================
QUARTER ENDED MARCH 31, 1998 1997 1996
- --------------------------------------------- --------------------- ---------------------- ---------------------
<S> <C> <C> <C>
Insurance Brokerage Commissions 19% 40% 42%
- --------------------------------------------- --------------------- ---------------------- ---------------------
Third-Party Administration Fees 81% 60% 58%
- --------------------------------------------- --------------------- ---------------------- ---------------------
Total 100% 100% 100%
- --------------------------------------------- --------------------- ---------------------- ---------------------
</TABLE>
Harden has recently entered into new administration contracts through
its marketing partners to provide third-party administration services in Los
Angeles, California and Portland, Oregon. As a result of these new contracts,
the percentage of its revenues that are derived from third-party administration
services has substantially increased in 1998.
COMMISSIONS. Commissions for property and casualty insurance brokerage
services 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 1998 were $778,346, a decrease of $21,685 or 2.7%,
compared to $800,031 of commissions for the same period of 1997. A net loss of
commission revenue at PKW accounted for all of the decrease.
9
<PAGE>
FEES. Fees from Anchor's third-party administration (including
underwriting and risk analysis) services for the first quarter of 1998, were
$3,386,653, an increase of $2,181,563 or 181%, as compared to $1,205,090 in fees
for the same period in 1997. This increase in fee income is largely the direct
result of new business generated from projects associated with the new insurance
carrier and new administrative contracts, as discussed above, and administrative
fees generated from the release of new products.
Fee revenues generated by Anchor in the first quarter of 1998 from
third-party administration services consist of revenues generated by Harden and
BRI. The third-party administration revenues are primarily derived from: (a) an
insurance product underwritten by one insurance carrier, which is A-
(Excellent); and (b) the administration of insurance programs underwritten by
various insurance carriers for a number of self-insured employers. The insurance
product, described in (a) above, accounted for approximately 10% of the
third-party administration revenues (or approximately 8% of Anchor's total
revenues) in the first quarter of 1998, and revenues related to the
administration of self-insured programs, described in (b) above, accounted for
substantially all of the remaining portion of revenues in the first quarter of
1998. Self-insurance is an alternative to fully insured programs 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.
As of July 1, 1997 and January 1, 1998, respectively, Harden has
entered into contracts through its marketing partners to provide third-party
administration services in Los Angeles, California and Portland, Oregon.
Management expects that these recent agreements will continue to increase the
percentage of income derived from third-party administration services in 1998
and future years. In addition, the contract in Oregon will allow Harden to
expand its marketing and servicing territory in Oregon, Washington, Idaho and
Nevada.
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 $17,126 and $21,595 for the three
months ended March 31, 1998 and 1997, respectively.
EXPENSES
TOTAL EXPENSES. Total operating expenses for the first quarter of 1998,
were $4,006,573, an increase of $1,866,539 or 87.2% as compared to operating
expenses of $2,140,034 for the same period in 1997. As discussed below, the
increase in total expenses resulted primarily from an increase in selling,
general and administration expenses and employee compensation and benefits
related to the recent expansion of the third-party administration services
business at Harden.
EMPLOYEE COMPENSATION AND BENEFITS. Employee compensation and benefits
for the first quarter of 1998, were $2,472,074, an increase of $1,087,267 or
78,5% as compared to $1,384,807 for the same period in 1997. The increase
related primarily to greater staffing needs required to service new third-party
administration projects at Harden, including a $697,447 increase which resulted
from the hiring of new employees to staff the Portland, Oregon operation.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $1,534,499 and $755,227 for the quarter ended March
31, 1998 and 1997, respectively. The $779,272 or 103.2% increase in 1998, as
compared to 1997, resulted primarily from an increase in expenses associated
with the increased third-party administration services business at Harden,
including the new Portland, Oregon office which accounted for $265,086 of the
increase. General and administrative expenses include rent, travel, insurance,
postage, telephone, supplies and other miscellaneous expenses.
INTEREST EXPENSE. Interest expense was $78,504 and $51,218, for the
first quarter of 1998 and 1997, respectively. The increase in interest expense
of $27,286 in the first quarter of 1998, as compared to the same period in 1997,
was due to the increase in borrowings on the bank line of credit.
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 goodwill and other intangibles was $53,856
and $62,529, for the first quarter of 1998 and 1997, respectively. The decrease
in amortization and other intangibles is a result of intangibles at PKW becoming
fully amortized.
10
<PAGE>
INCOME TAXES
Anchor's expense for income taxes was $6,220 and $4,470 for
the first quarter of 1998 and 1997, respectively. An analysis of Anchor's
provision for income taxes is presented in Note 9 of the Notes to Consolidated
Financial Statements in Anchor's Annual Report on Form 10-K for the year ending
December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Anchor reported net cash flows provided by operations of
$182,306 for the first quarter ended March 31, 1998, compared to net cash flows
(used in) operations of $(195,282) for the same period in 1997. During 1997,
Anchor met its operating and capital needs from various sources, including
borrowing under its existing credit agreements and the use of proceeds received
from the 1997 Offering. See Note 6, above.
During 1996, Anchor raised $225,000 from five members of the
Board of Directors and other qualified investors through the issuance of Bridge
Notes. As of March 31, 1998, $140,000 of the Bridge Notes remained outstanding
(for further information, refer to Note 4 above).
In 1995, Anchor issued $370,000 of 10% Convertible
Subordinated Debentures (the "Debentures") and $600,000 of Series A 10%
Convertible Subordinated Debentures (the "Series A Debenture"). Investors
holding $270,000 of the Debentures, including seven members of the Board of
Directors, and $600,000 of the Series A Debenture, converted their debentures
into 644,444 shares of Anchor's common stock at $1.35 per share. These
conversions reduced Anchor's outstanding indebtedness by $870,000 and, in turn,
increased shareholders' equity by $870,000. Certain holders agreed to extend the
term of the Debentures. As of March 31, 1998, $40,000 of the Debentures had been
repaid in full, and $60,000 remained outstanding.
During 1997, Anchor raised $305,000 from eight members of the
Board of Directors and other qualified investors through a private offering
which consisted of Anchor common stock along with warrants to acquire shares of
Anchor common stock (the "1997 Offering"). Anchor utilized a substantial portion
of the proceeds from the 1997 Offering to support current and future working
capital needs of Anchor. The basic terms of the 1997 Offering were: (a) up to
555,000 shares of Anchor common stock available at a purchase price of $0.90 per
share: (b) five year warrants to acquire one share of Anchor common stock for
each share of Anchor common stock purchased at an exercise price of $0.90 per
share; (c) "piggyback" registration rights for three years; and (d)
anti-dilution protection for stock splits, stock dividends, recapitalizations
and reorganizations.
Capital and certain acquisition related expenditures were
$208,892 and $3,464 for the first quarter of 1998 and 1997, respectively. The
larger 1998 expenditures primarily involved the acquisition of furniture,
fixtures and computer equipment at the new Portland, Oregon location. During the
first quarter of 1997, the largest expenditure involved computer equipment
purchased by Harden.
Short-term debt, current portion of long-term debt and current
portion of long-term liabilities at March 31, 1998, totaling in the aggregate
$982,586 (as compared to $1,203,216 at December 31, 1997) consisted of: (a)
approximately $180,000 of future fixed payments under a consulting agreement
entered into with a company affiliated with the former shareholders of BRI; (b)
$200,000 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; (c) $60,000 of Debentures; (d) $140,000 of the
Bridge Notes; and (e) approximately $402,586 for certain other current
liabilities.
On September 30, 1997, Anchor obtained a $1,600,000 bank loan.
The basic terms and conditions of this loan are: (a) monthly interest payments
equal to the bank's prime rate plus 2.5%; (b) five year term; (c) monthly
principal payments in installments of $26,666.67 (Not withstanding the
foregoing, 75% of Anchor's monthly EBITDA shall be applied to principal to the
extent such percentage of monthly EBITDA is required to make the scheduled
payment of principal. To the extent that 75% of monthly EBITDA falls short of
the required principal payment, the difference shall be added to the final
payment); and (d) a five year warrant to acquire 95,000 shares of Anchor common
stock at a purchase price of $1.75 per share. The proceeds of the loan were used
to retire outstanding credit facilities with another bank.
11
<PAGE>
On December 22, 1997, the bank that provided Anchor with the
$1,600,000 term loan also provided Anchor with a $250,000 loan to support
current working capital needs of Anchor in connection with Harden's expansion in
Portland, Oregon.
As of March 9, 1998, a new term loan in the amount of
$1,821,890.33 was entered into between Anchor and the bank combining both the
$1,600,000 term loan and the $250,000 loan. The basic terms of this new term
loan are: (a) monthly interest payments equal to bank's prime rate plus 2.5%;
(b) maturity date of October 5, 2002; (c) monthly principal payments in
installments of $33,125.28 beginning on April 5, 1998; and (d) all other terms
and conditions of the term loan dated September 30, 1997 including all
amendments thereto and replacements therefor.
At March 31, 1998, long-term liabilities and long-term debt,
less the current portion discussed above, totaled $2,208,397 (as compared to
$1,836,132 at December 31, 1997), and primarily consisted of: (a) $1,574,397
representing the long-term portion outstanding under a $1,821,890 term bank loan
maintained and further described above; (b) approximately $50,560 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; (c) approximately $328,000 representing deferred rent with regard to
certain real property currently leased by Anchor; (d) approximately $165,900
representing obligations relating to the purchase of furniture, fixtures and
computer equipment at the new Portland, Oregon location; and (e) approximately
$88,839 for certain other long-term liabilities. In May 1995, PKW entered into a
sublease with respect to 82% of PKW's prior office space. The sublease expired
on September 30, 1997, and was extended by the subtenant through November 30,
1999, the date on which the term of the master lease expires and requires PKW to
provide a multi-year rent subsidy. In December 1995, PKW entered into a sublease
with respect to an additional 10% of PKW's prior office space. The sublease
expires on November 30, 1999, and requires PKW to provide a multi-year rent
subsidy. In October, 1997, PKW entered into a sublease with respect to the
remaining 8% of PKW's prior office space. The sublease expires on November 30,
1999, and requires PKW to provide a multi-year rent subsidy.
Anchor has not paid cash dividends in the past and does not
expect to pay cash dividends in the foreseeable future.
YEAR 2000 ISSUES
Anchor has established a plan to achieve Year 2000 compliance
in its electronic information systems. A corporate team has been created to
coordinate the identification and implementation of the necessary changes
required to computer systems and applications. An initial impact assessment is
being completed and renovation efforts are expected to begin in the second
quarter of 1998.
Anchor is working to complete programming efforts for the Year
2000 related projects by June 30, 1999, with final certification testing
occurring in the remainder of the 1999 year. Anchor's focus is not only on its
internal systems, but also upon the compliance of its key business partners,
vendors, and other suppliers. Management believes that the redeployment of
Anchor's resources will not adversely impact new product or software
development. The total cost of Year 2000 compliance is presently estimated to
not exceed $250,000 through 1999.
FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q contains forward-looking
statements within the meaning of that term under the Private Securities
Litigation Reform Act of 1995 (Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934). Additional written or oral
forward-looking statements may be made by Anchor from time to time, in filings
with the Securities and Exchange Commission or otherwise. Statements contained
herein that are not historical facts are forward-looking statements made
pursuant to the safe harbor provisions referenced above. For example,
discussions concerning Anchor's ability to create new products and services, and
expansion of Anchor through internal growth of existing and new products and
services, may involve forward-looking statements. In addition, when used in this
discussion, the words, "anticipates," "expects," "intends," "plans" and
variations thereof and similar expressions are intended to identify forward-
looking statements.
12
<PAGE>
Forward-looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified based on current
expectations. Consequently, future events and actual results could differ
materially from those set forth in, contemplated by, or underlying the forward-
looking statements contained in this Quarterly Report. Statements in this
Quarterly Report, particularly in the Notes to Consolidated Financial Statements
and Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations describe certain factors, among others, that could
contribute to or cause such differences. Such forward-looking statements involve
risks and uncertainties, and actual results could differ from those described
herein. While the statements represent management's current judgment as to the
near-term future prospects of its business, such risks and uncertainties could
cause actual results to differ from the above statements. Factors which could
cause actual results to differ include the following: Harden's and BRI's
relationship with the new insurance carrier and marketing partners and their
ability to effectively provide third-party administration services; controlling
operating costs; the impact of competitive products, pricing and services; the
availability of capital to finance operations and future expansion; the cyclical
nature of the property and casualty and health insurance markets; and
unanticipated regulatory changes.
STRATEGY
Anchor's current plan is to expand its third-party
administration services by: (a) continuing to develop through its marketing
partners specialized affiliated business units that target selected insurance
industry market segments defined by industry type, geographic location and
consumer demographics; (b) creating new products and services; and (c)
strengthening management, sales and marketing staff. In conjunction with this
strategy, Anchor seeks to manage its affairs to achieve expansion through
internal growth of its existing and new product lines. Anchor also regularly
considers acquisitions and merger opportunities and other business expansion
alternatives.
13
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Anchor and its subsidiaries are parties from time to time to various
lawsuits that arise 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.
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
10.31 Stock Purchase Agreement effective March 20, 1998, between Anchor and
Harden and Pacific Assurance Company (regarding Pacific Heritage
Administrators of Nevada, Inc.)
10.32 Agreement dated February 26, 1998, between Russell Miller, Inc. and
Anchor.
27.0 Financial Data Schedule
B. Reports on Form 8-K
None
14
<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.
<TABLE>
<CAPTION>
ANCHOR PACIFIC UNDERWRITERS, INC.
<S> <C>
Date: May 7, 1998 /s/ James R. Dunathan
------------------------------------ -----------------------------------------------------
James R. Dunathan
President and Chief Executive Officer
Date: May 7, 1998 /s/ Earl Wiklund
------------------------------------ -----------------------------------------------------
Earl Wiklund
Senior Vice President and Chief Financial Officer
</TABLE>
15
<PAGE>
Exhibit 10.31
STOCK PURCHASE AGREEMENT
This Agreement is entered into by and between PACIFIC HERITAGE ASSURANCE
COMPANY, an Oregon corporation (referred to as "PHA"), and ANCHOR PACIFIC
UNDERWRITERS, INC., and its wholly-owned subsidiary, HARDEN & COMPANY (referred
to collectively as "APU"), a Delaware corporation, to be effective as of March
20, 1998.
RECITALS
A. PHA and APU have executed an Agreement for Transfer of Assets and for
Administrative Services, effective December 31, 1997, under which agreement
APU purchased assets from PHA, provided for insurance and reinsurance
coverages for policies and contracts issued by PHA, and agreed to provide
administrative services for PHA, all for the purpose of transferring PHA's
group health insurance business to APU.
B. APU now desires to purchase from PHA all the outstanding stock of Pacific
Heritage Administrators of Nevada, Inc. ("PHA Nevada"), in furtherance of
its business of administering health insurance contracts.
NOW THEREFORE, in consideration of the mutual covenants and promises contained
herein, the parties, intending to be legally bound, agree as follows:
1. Purchase of Stock of PHA Nevada by APU. APU will purchase from PHA all of
---------------------------------------
the outstanding stock of PHA Nevada for the sum of $1,000.00. This amount
shall be paid in cash upon delivery by PHA to APU of PHA's shares in stock
in PHA Nevada, properly endorsed for transfer.
2. Warranties and Representations of PHA. PHA warrants that it is transferring
-------------------------------------
all its outstanding shares of stock of PHA Nevada to APU. PHA warrants that
it has the requisite legal authority and approval of its board of directors
to sell its shares of stock of PHA Nevada to APU. PHA represents that it is
not aware of any liabilities on the part of PHA Nevada, but except as
contained in this section 2, PHA makes no warranties or representations of
any nature with respect to PHA Nevada. The parties agree that after the
transfer of the stock of PHA Nevada to APU, neither PHA, Beneficial Life
Insurance Company nor Deseret Management Corporation shall have any
liability of any nature with respect to PHA Nevada, whether relating to
matters arising prior to the transfer of the stock of PHA Nevada to APU or
to matters arising after the transfer of such stock.
<PAGE>
3. Transfer of Books and Records. PHA agrees that it will deliver to APU along
-----------------------------
with the delivery of the PHA Nevada shares of Stock, photocopies of the
minutes of the meetings of the board of directors meetings, all of which
were held as combined meetings with PHA and its other subsidiaries.
4. Warranties and Representations of APU. APU warrants that is has the
--------------------------------------
requisite legal authority and approval of its board of directors to
purchase PHA's shares of stock of PHA Nevada.
5. Required Approval for PHA. This Agreement is subject to the approval of the
-------------------------
board of directors of PHA.
6. Required Approvals of APU. This Agreement is subject to the approval of the
-------------------------
board of directors of Harden & Company.
7. Entire Agreement. This Agreement, including any amendments and addenda,
----------------
forms the entire agreement between the parties, and there are no
understandings between the parties other than as expressed in the
Agreement.
8. Modification and Termination. Except as otherwise provided herein, this
----------------------------
Agreement may be amended or canceled and terminated only by mutual written
consent of the parties. Any change or modification to the Agreement will be
null and void unless made by amendment to this Agreement and signed by both
parties.
9. Successors and Assigns. This Agreement is binding upon and inures to the
----------------------
benefit of the parties hereto and their respective successors and assigns.
10. Notice. Notice or notification with respect to this Agreement shall be
------
mailed or delivered to PHA at its Home Office in Portland, Oregon, with a
copy to the President of Beneficial Life Insurance Company at its Home
Office in Salt Lake City, Utah or to APU at its corporate headquarters in
Concord, California.
11. Multiple Counterparts. This Agreement may be executed simultaneously in any
---------------------
number of counterparts, each of which will be deemed an original, but all
of which will constitute one and the same instrument.
IN WITNESS WHEREOF, this Agreement is executed in duplicate on the dates
indicated below, each signer warranting that he/she has the requisite authority
to execute this Agreement.
[Signatures Follow on Next Page]
<PAGE>
PACIFIC HERITAGE COMPANY
By /s/ Kent H. Cameron By /s/ Ted Lewis
----------------------------- -----------------------------
Kent Cameron Ted Lewis
Title Chairman Title Secretary
-------------------------- --------------------------
Date 3/19/98 Date March 19, 1998
--------------------------- ---------------------------
ANCHOR PACIFIC UNDERWRITES, INC.
By /s/ J.R. Dunathan By /s/ Earl Wiklund
----------------------------- -----------------------------
J.R. Dunathan Earl Wiklund
Title President/C.E.O. Title CFO
-------------------------- --------------------------
Date 3-23-98 Date 3-27-98
--------------------------- ---------------------------
HARDEN & COMPANY
By /s/ J.R. Dunathan By /s/ Earl Wiklund
----------------------------- ----------------------------
J.R. Dunathan Earl Wiklund
Title Chairman Title CEO
-------------------------- --------------------------
Date 3-23-98 Date 3-27-98
--------------------------- ---------------------------
<PAGE>
Exhibit 10.32
[LETTERHEAD OF RUSSELL MILLER, INC.]
February 26, 1998
PRIVATE & CONFIDENTIAL
----------------------
Mr. James R. Dunathan
President & CEO
Anchor Pacific Underwriters, Inc.
P.O. Box 4104
Concord, California 94524
Dear Jim:
The purpose of this letter is to summarize the basis under which Russell
Miller, Inc. ("RMI") would conduct a fair market valuation of Anchor Pacific
Underwriters, Inc.
History and Background
- ----------------------
We understand that Anchor Pacific Underwriters is engaged, through
subsidiaries, in the insurance brokerage, employee benefits administration and
premium financing businesses. Although thinly traded, the company is publicly
held.
Purpose
- -------
In connection with general corporate planning, Anchor Pacific Underwriters has
requested that RMI undertake a valuation of the company and its subsidiary
companies. The valuation study will be completed on a majority basis as of
December 31, 1997.
As the study is being completed for general corporate planning purposes, it
would be inappropriate to rely upon this study for purposes of financing.
Scope of Assignment
- -------------------
Russell Miller, Inc. will perform a business enterprise valuation of Anchor
Pacific Underwriters, Inc. at December 31, 1997 which will establish the
economic value based on the business's historical performance and projected
future income streams. As the valuation is being completed in connection with
corporate planning, you have requested a separate valuation of the company's
insurance brokerage operations if, on a theoretical basis, it were a
freestanding operation (such valuation to include, on a combined basis, all
other subsidiaries of Anchor Pacific Underwriters, Inc.) Concurrently, you
have also requested a valuation of the company's administrative business,
assuming it were also a freestanding entity. A consolidated valuation of
Anchor Pacific Underwriters as it currently is configured is also required.
<PAGE>
Mr. James R. Dunathan
February 26, 1998
Page Two
In formulating our opinion of the present value of this business as an
operating entity at the December 31, 1997 valuation date, we will review
balance sheets, financial statistics, operating results, and forecasts
furnished by you. We will assume that the information properly represents the
business operations and conditions, on an historical basis, up to and
including the valuation date.
RMI will complete a study of market conditions and an analysis of published
information concerning the economy and the insurance industry to evaluate past
performance and to assess the ability and capacity of the business to generate
future investment returns. Many of these topics have been set forth in
Internal Revenue Ruling 59-60 and subsequent related rulings.
The factors examined in our study include, but will not be limited to, the
following:
. The history of the business and the nature of the enterprise from its
inception.
. The economic outlook in general, and the condition and outlook of the
specific industry in particular.
. The book value of the stock and the financial condition of the
business.
. Historical and projected revenues and earnings of the company.
. The dividend-paying capacity.
. The presence of goodwill or other intangible value.
. Sales of the stock and the size of the block or stock to be valued.
. The market price of stocks of corporations engaged in the same or a
similar line of business having their stocks actively traded in a free
and open market, either on an exchange or over the counter.
. Present worth of future monetary benefits of ownership based on
appropriate rates of return, as indicated by alternative investment
opportunities of comparable magnitude, character, and risk.
Definitions
- -----------
FAIR MARKET VALUE is defined as the estimated amount at which the asset would
change hands between a willing buyer and a willing seller, neither being under
any compulsion to buy or sell, each having reasonable knowledge of all
relevant facts.
<PAGE>
Mr. James R. Dunathan
February 26, 1998
Page Three
BUSINESS ENTERPRISE is defined as the combination of all tangible assets
(property, plant, and equipment, and net working capital) and intangible
assets of a continuing business. Alternatively, the business enterprise is
equivalent to the invested capital of the business, that is, the combination
of the value of the stockholders' equity (or partners' capital) and long-term
debt.
To develop a MINORITY INTEREST value in a privately held business, the value
must be converted from open market value to a closely held value. In a closely
held company, minority shareholders would not have a readily available market
for their interests, as do minority shareholders in a publicly traded company.
Additionally, they face the risk of having no control over the financial
performance of a company that, unlike public companies, may not have a goal of
maximizing shareholder values.
To arrive at a MAJORITY INTEREST value indication, a premium for control is
applied to the open market value of the business. The privileges of control
include the right to sell the business, appoint the board of directors, and
establish the strategic direction of the business.
Approaches to Value
- -------------------
In completing the assignment, we will rely on the three traditional
approaches to value: income, market and asset based. Overall, the three
approaches include a study of the economics affecting the company, the
industry, its competitive market position, the economic environment and market
it serves, the nature and extent of the assets employed in the business, the
experience and quality of management and assembled personnel, and any other
pertinent factors. These factors, collectively considered, influence the
future prospect of the firm and, ultimately, its value.
A. Income Approach
---------------
The fair market value of an ongoing business is the present worth of
future benefits to be derived by ownership. To that extent, pro forma
projections of operating revenue and expenses will be forecasted to determine
our conclusions of value predicated upon discounting the future earnings.
Based upon discussions with management, as well as the reviews of
management-prepared forecasts, we will make appropriate adjustments to develop
a pro forma operating forecast. The resulting earnings will be discounted at
an appropriate rate to their present value to determine the value of the
entire business.
B. Market Approach
---------------
In evaluating the degree of investment risk in a particular company,
it is common appraisal practice to compare the operating performance
(expressed as a price to earnings or market value to revenues multiple) of the
company under review with
<PAGE>
Mr. James Dunathan
February 26, 1998
Page Four
that of similar companies in the same or a related line of business
that might provide alternate or similar investment opportunities.
C. Asset Based Approach
--------------------
In valuing a business enterprise, individual values can be determined
for the firm's tangible and intangible assets. In a service-related
business, such as a retail property/casualty insurance agency,
intangible assets typically comprise a significant component of the
total business enterprise value. Service-related businesses
maintaining proprietary customer information, which gives the firm the
knowledge necessary to generate individual streams of renewable
revenues (and earnings) from its customers, as well as the ability to
sell such proprietary information to third party buyers (exclusive of
any other tangible or intangible assets of the firm), have established
what is typically referred to as customer list assets. Because of the
predictability of the earnings generated from such assets, values of
customer list assets can be determined. The aggregate values of the
various tangible and intangible assets that comprise the business
enterprise represent the value of the entire business. This
approach will be considered in valuing Putnam, Knudsen & Weiking, Inc.,
however, it may not be an appropriate method for the administration
business.
Informational Requirements, Work Product and Timing
- ---------------------------------------------------
The first phase in the performance of the valuation is the completion of a
valuation questionnaire for the administrative operations and a separate
questionnaire for the brokerage business for the 12-month period ending with
December 31, 1997. We understand that Anchor Pacific Underwriters will supply
RMI with re-stated financial statements which eliminate allocated expenses and
fairly reflect the operating expenses of the two business units if the two
business units were operating on a separate freestanding basis and therefore
not receiving the benefit of corporate office and related services.
Following our preliminary analysis of the information received in response to
the questionnaires, we will conduct interviews with you and key Anchor Pacific
Underwriters personnel to discuss questions we may have regarding the operation
of the business. The final phase of the valuation is the production of a
formal report documenting the valuation process and our conclusions.
If we receive all requested information on or before March 14, 1998, we will
provide an opinion of value in a brief letter format no later than April 28,
1998. A full narrative report will follow within two weeks.
<PAGE>
Mr. James R. Dunathan
February 26, 1998
Page Five
Cost of Project
- ---------------
Our professional fees are based on the actual hours spent on a project and the
various hourly rates of RMI professionals. These rates range from $75 per hour
for a financial analyst to $225 for a managing director. Based upon our
knowledge of your firm and my knowledge of similar assignments, I estimate that
the total fee for this project, as defined in Scope of Assignment, will be in
the range of $17,000 to $19,000. We would also bill you for our out-of-pocket
expenses. We request a $8,000 retainer prior to the commencement of services.
Services provided after delivery of the report will be billed separately at our
standard hourly rate. The fee could increase if good accounting, operational,
market and personnel information is not available in a readily discernible
format.
You have the right to terminate this engagement at any time, in which case there
will be no further obligation on the part of either party to continue. In such
event, you will be billed only for the actual time and charges accumulated
through the date of cessation. In the event the scope of the assignment is
expanded, RMI will bill you for these services on an hourly basis.
Our services are subject to the attached Limiting Conditions and Assumptions,
which will be incorporated in our final report.
We strive to provide practical advice to our clients based on our unique
knowledge of the industry and your needs. Our work product will be timely,
accurate, and pertinent.
In closing, I would like to reiterate Russell Miller, Inc.'s absolute commitment
to the highest professional standards.
Yours truly,
/s/ John W. Wicher
------------------------
John W. Wicher
Managing Director
Acknowledged & Agreed
/s/ J.R. Dunathan
- -----------------
J.R. Dunathan
4/3/98
Enclosures
<PAGE>
LIMITING CONDITIONS AND ASSUMPTIONS
The services provided by Russell Miller, Inc. ("RMI") are performed in
accordance with professional standards related to such services. Our
compensation is not contingent in any way upon the results of our investigation.
We assume, without independent verification, the accuracy of all data provided
to us. All files, work papers, or documents developed by us during the course of
the engagement will be the property of RMI. We will retain this data for at
least five years.
The opinion rendered is to be used only for the purpose as stated herein; any
use or reliance on our report, by you or third parties, for any other purpose
may invalidate the results. The Client agrees that it will indemnify and hold
harmless RMI, its directors, employees, agents and each person, if any, who
controls RMI from and against any and all losses, claims, damages and
liabilities, joint or several (including all legal or other expenses reasonably
incurred by any indemnified party in connection with the preparation for or
defense of any claim, action, or proceeding, whether or not resulting in any
liabilities), to which such party may become subject under any applicable
federal or state law or otherwise (i) caused by or arising out of any untrue
statement or alleged untrue statement of a material fact contained in
information furnished to RMI by the Client or the omission or the alleged
omission to state therin a material fact necessary in order to make the
statement therein not misleading in light of the circumstances under which they
were made, or (ii) caused by or arising out of any transaction covered by RMI
performing the services contemplated hereunder or rendering the opinion or any
use thereof or reference thereto by the Client; provided, however, that the
Client will not be liable under clause (ii) hereof to the extent that any loss,
claim, damage or liability is found in a final judgement by a court to have
resulted from the gross negligence or willful misfeasance by RMI.
In the event that RMI becomes involved in any capacity in any action, proceeding
or investigation brought by or against any person or entity in connection with
any matter referred to in this agreement, the Client periodically will reimburse
RMI for its legal and other expenses (including the cost of any investigation
and preparation) incurred in connection herewith.
We reserve the right to include your name on our client list, but we will
maintain the confidentiality of all conversations, documents provided to us and
the content of our reports, subject to legal or administrative process or
proceedings. These conditions can only be modified by written documents
executed by both parties.
***
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000317781
<NAME> ANCHOR PACIFIC UNDERWRITERS, INC.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
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0
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