<PAGE>
================================================================================
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 September 30, 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 September 30, 1998, the Registrant had 4,710,058 shares of common
stock outstanding.
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<PAGE>
ANCHOR PACIFIC UNDERWRITERS, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
<S> <C> <C> <C>
ITEM 1. Financial Statements:
Consolidated Balance Sheets, September 30, 1998 (unaudited) and
December 31, 1997................................................. 1
Consolidated Statements of Operations for the nine months and
quarters ended September 30, 1998 and 1997 (unaudited)............ 3
Consolidated Statements of Shareholders' Equity for the nine
months ended September 30, 1998 (unaudited) and year ended
December 31, 1997................................................. 4
Consolidated Statements of Cash Flows for the nine months
ended September 30, 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................................................. 16
ITEM 2. Changes in Securities............................................. 16
ITEM 3. Defaults Upon Senior Securities................................... 16
ITEM 4. Submission of Matters to a Vote of Security Holders............... 16
ITEM 5. Other Information................................................. 16
ITEM 6. Exhibits and Reports on Form 8-K.................................. 16
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------------- --------------------
(unaudited)
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents - corporate funds $ 29,770 $ 44,384
Cash and cash equivalents - brokerage
fiduciary funds 1,164,823 1,203,594
Cash and cash equivalents - third-party
administration fiduciary funds 2,793,723 3,058,059
Accounts receivable (less allowance for
doubtful accounts of $46,308 and $45,543
in 1998 and 1997, respectively) 1,250,508 1,351,047
Prepaid expenses and other current assets 215,919 375,475
Total current assets 5,454,743 6,032,559
------------------- --------------------
Property and equipment, less accumulated
depreciation and amortization 618,651 620,511
------------------- --------------------
Other assets:
Goodwill, net 1,730,129 1,803,713
Intangible assets, net 935,858 1,021,715
Other 82,560 59,667
2,748,547 2,885,095
------------------- --------------------
Total assets $8,821,941 $9,538,165
=================== ====================
</TABLE>
1
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ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------------- --------------------
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
<S> <C> <C>
Cash and cash equivalents - third-party
administration fiduciary funds $ 2,793,723 $ 3,058,059
Net premiums payable - insurance companies 1,988,355 2,035,032
Accounts payable and accrued expenses 903,514 948,484
Current portion of long-term debt 460,485 629,133
Current portion of long-term liabilities 443,915 574,083
------------------- --------------------
Total current liabilities 6,589,992 7,244,791
------------------- --------------------
Long-term liabilities, net of current portion 411,136 506,944
------------------- --------------------
Long-term debt, including $210,000 in 1998 and
$240,000 in 1997, owed to related parties, net
of current portion 1,460,167 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; 4,710,058 and 4,690,839
shares issued as of 9/30/98 and 12/31/97, respectively 94,201 93,817
Additional paid-in capital 4,232,265 4,215,649
Accumulated deficit (3,965,820) (3,852,224)
------------------- --------------------
Total shareholders' equity 360,646 457,242
------------------- --------------------
Total liabilities and shareholders' equity $ 8,821,941 $ 9,538,165
=================== ====================
</TABLE>
See accompanying notes.
2
<PAGE>
ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Quarters
Ended September 30, Ended September 30,
----------------------------------------- ----------------------------------------
1998 1997 1998 1997
Revenues:
<S> <C> <C> <C> <C>
Commissions, fees and other income $11,724,987 $6,944,887 $3,609,670 $2,922,912
Interest Income 48,043 60,591 13,269 18,456
------------------ ----------------- ------------------ ----------------
Total revenue 11,773,030 7,005,478 3,622,939 2,941,368
Operating expenses:
Salaries, commissions and employee
benefits 7,533,787 4,678,236 2,436,664 1,881,939
Selling, general and administrative
expenses 4,029,111 2,639,766 1,320,169 1,070,007
------------------ ----------------- ------------------ ----------------
Total operating expenses 11,562,898 7,318,002 3,756,833 2,951,946
------------------ ----------------- ------------------ ----------------
210,132 (312,524) (133,894) (10,578)
Other income (expense):
Amortization of goodwill &
intangible assets (161,419) (172,725) (53,783) (53,429)
Interest (203,736) (152,152) (62,691) (52,823)
Other 47,647 39,330 8,211 24,028
------------------ ----------------- ------------------ ----------------
Total other income (expense) (317,508) (285,547) (108,263) (82,224)
------------------ ----------------- ------------------ ----------------
Income (loss) before income taxes (107,376) (598,071) (242,157) (92,802)
Income tax expense 6,220 4,470 - -
------------------ ----------------- ------------------ ----------------
Net income (loss) $ (113,596) $ (602,541) $ (242,157) $ (92,802)
================== ================= ================== ================
Basic and diluted income (loss)
per common share $(0.02) $(0.13) $(0.05) $(0.02)
================== ================= ================== ================
Weighted average number of
common shares outstanding 4,708,137 4,568,525 4,710,058 4,644,277
================== ================= ================== ================
</TABLE>
See accompanying notes
3
<PAGE>
ANCHOR PACIFIC UNDERWRITERS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional
Common Stock Paid-In Accumulated
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 334 6 (6) - -
Canceled stock:
Fractional shares (3) - - - -
Net loss - - - (113,596) (113,596)
---------------------------------------------------------------------------------------
Balance at September 30,
1998 (Unaudited) 4,710,058 $94,201 $4,232,265 $(3,965,820) $ 360,646
======================================================================================
</TABLE>
See accompanying notes
4
<PAGE>
ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
-----------------------------------------------------
1998 1997
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(113,596) $(602,541)
Items not requiring current use of cash:
Depreciation and amortization 244,600 228,947
Amortization of goodwill and other intangibles 159,439 172,724
Changes in items affecting operations:
Cash and cash equivalents - brokerage
fiduciary funds 38,771 (444,056)
Accounts receivable 100,539 385,219
Prepaid expenses and other current assets 158,862 (19,372)
Other assets (22,893) (23,377)
Deferred compensation - 51,000
Net premiums payable - insurance companies (46,677) 45,030
Accounts payable and accrued expenses (44,970) 146,232
--------------------- -----------------------
Cash provided by (used in) operating activities 474,075 (60,194)
--------------------- -----------------------
INVESTING ACTIVITIES
Notes receivable, net 694 (12,008)
Purchases of property and equipment (242,739) (56,516)
--------------------- -----------------------
Cash used in investing activities (242,045) (68,524)
--------------------- -----------------------
FINANCING ACTIVITIES
Issuance of Common stock 17,000 296,702
Borrowings on long-term debt 175,000 185,000
Repayment on long-term debt and liabilities (438,644) (366,064)
--------------------- -----------------------
Cash provided by (used in) financing activities (246,644) 115,638
--------------------- -----------------------
Net loss in cash (14,614) (13,080)
Cash and cash equivalents - corporate funds at
beginning of period 44,384 151,765
--------------------- -----------------------
Cash and cash equivalents - corporate funds at
end of period $ 29,770 $ 138,685
===================== =======================
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 203,736 $ 152,152
===================== =======================
Income taxes $ 6,220 $ 4,470
===================== =======================
</TABLE>
See accompanying notes
5
<PAGE>
ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 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 nine month period ended September 30, 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 of System received 5%
of Anchor's then outstanding stock (195,789 shares). The System shareholders
received for every 42.3291 shares of issued and outstanding System common stock
one share of Anchor common stock along with a warrant to purchase one share of
Anchor common stock at a price of $3.00. A total of 903 warrants were exercised
and the remaining 194,886 warrants expired on January 6, 1997. In addition,
certain creditors of System were to be issued 5% of Anchor's common stock
(195,789 shares) and one warrant to purchase a similar number of shares of
common stock. The 195,789 shares were issued on August 27, 1998 to the
Disbursing Agent of the System Industries Creditor Estate. A total of 195,789
warrants remain reserved for issuance to certain creditors of System pending a
final determination by the System Bankruptcy Creditor Committee. These unissued
warrants will expire one year after their issuance.
NOTE 2 - ACQUISITIONS
- ---------------------
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, Harden & Company of Arizona ("Harden-AZ"), formerly 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 conducts its third-party administration business through its
wholly-owned subsidiary, Harden & Company Insurance Services, Inc. ("Harden-CA")
and through Harden-CA's wholly-owned subsidiary, Harden-AZ. On January 1, 1998,
Harden-CA assumed a significant volume of third-party administration business,
Pacific Heritage Administrators ("PHA"), from an insurance carrier in Portland,
Oregon. Effective March 20, 1998, Harden-CA acquired all of the outstanding
stock of Pacific Heritage Administrators of Nevada, Inc. ("PHA-NV") to further
its business of administering third-party health insurance contracts. Anchor
expects to continue to expand its third-party administration business.
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) be allowed to
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 September 30, 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 the
owner of the $600,000 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 September 30, 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 - 10% CONVERTIBLE SUBORDINATED DEBENTURES, SERIES B
- ----------------------------------------------------------
At the end of the third quarter 1998, Anchor commenced raising
additional funds from members of the Board of Directors and other qualified
investors by offering 10% Convertible Subordinated Debentures, Series B (the
"Series B Debentures"). As of November 6, 1998, Anchor had raised $60,000 and
had oral commitments from investors to purchase an additional $115,000 of the
Series B Debentures. Anchor intends to utilize a substantial portion of the
proceeds from the Series B Debentures to support current and future working
capital needs of Anchor. The basic terms of the Series B Debentures are: (a)
10% interest, payable semi-annually in arrears; (b) two year maturity; (c)
conversion price of $0.50 per share; (d) "piggyback" registration rights for
three years; (e) for each $5,000 of Series B Debentures acquired, an investor
receives a five year warrant to acquire 2,000 shares of Anchor common stock at
an exercise price of $0.50 per share; (f) subordination provisions that
subordinate the Series B Debentures to Anchor's "Senior Debt" (as defined in the
Series B Debentures);
7
<PAGE>
(g) provisions that permit Anchor to redeem the Series B Debentures at par at
any time; and (h) provisions that give each purchaser a one-time right to cause
Anchor to redeem all or a portion of their Series B Debentures, at par, plus any
outstanding interest, in the event Anchor sells Putnam, Knudsen & Wieking, Inc.
("PKW") for an amount in excess of $2 million. Purchasers of the Series B
Debentures as of November 6, 1998, consisted of four members of the Board of
Directors.
NOTE 8 - 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.
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 the
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 were: (a)
monthly interest payments equal to bank's prime rate, plus 2.5%; (b) a maturity
date of October 5, 2002; and (c) monthly principal payments in installments of
$33,125.28 beginning on April 5, 1998. All other terms and conditions contained
in the term loan dated September 30, 1997, including all amendments thereto and
replacements therefor, remained in place.
On June 2, 1998, a new term loan in the amount of $1,741,841.30 was
entered into between Anchor and the bank which replaced the $1,821,890.33 term
loan. The basic terms of this new term loan are: (a) monthly interest payments
equal to bank's prime rate, plus 2.5%; (b) a maturity date of October 5, 2002;
(c) monthly principal payments in installments of $16,500.00 beginning on June
5, 1998; and (d) deletion of the provision which required 75% of Anchor's
monthly EBITDA to be applied to principal to the extent such percentage of
monthly EBITDA was required to make the scheduled payment of principal. All
other terms and conditions contained in the term loan dated September 30, 1997,
including all amendments thereto and replacements therefor, remain operative.
As of September 30, 1998, $1,658,167 remained outstanding under the bank term
loan.
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.
8
<PAGE>
In conjunction with a new marketing strategy, in June 1998 Anchor
reorganized the company's third-party administration services division. In the
new organizational structure, "Harden Group" was established as the consolidated
name for the management and marketing of third-party administration services.
Under Harden Group identify, the current third-party administration operations
of Anchor continue to function as before in their respective territories.
Currently, Harden Group includes four third-party administration operations
providing services to clients through the Western States from seven offices
located in Concord, Los Angeles and Fresno, CA; Scottsdale, AZ; Portland, OR;
and Las Vegas and Reno, NV.
Harden Group includes, Harden & Company Insurance Services, Inc.
("Harden-CA"); Harden
& Company of Arizona ("Harden-AZ"); Pacific Heritage Administrators ("PHA"); and
Pacific Heritage Administrators, Inc. of Nevada ("PHA-NV").
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
GENERAL
Anchor derives its revenues from commissions and fees for claims
administration (including underwriting and risk analysis) services. Commissions
generally are based on a percentage of gross premiums and contingent
commissions, which, in turn, generally are based on underwriting profits derived
over a given period of time by the insurance carrier. Claims administration
fees 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.
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
Group 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 Group has been successful in securing an alternative
insurance carrier to strengthen and broaden its 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
Group which management believes will enhance sales opportunities in California
and Arizona. Furthermore, Harden Group has entered into significant new
contracts to provide third-party administration services through its marketing
partners. These new contracts
9
<PAGE>
have increased the percentage of revenues Anchor derives from third-party
administration services. The new third-party administration services operation,
PHA, in Oregon has also substantially added to the increase in revenues and is
expected to 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 nine months ended September 30,
1998, were $11,773,030, an increase of $4,767,552 or 68%, as compared to
$7,005,478 in revenues for the same period in 1997. The increase in revenue in
this nine month period was primarily due to the increase in fee income derived
from third-party administration services at Harden-CA, which includes $3,993,936
from PHA, 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 nine months ended September 30, 1998, 1997 and
1996.
<TABLE>
<CAPTION>
====================================================================================================
NINE MONTHS ENDED SEPTEMBER 30, 1998 1997 1996
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
Insurance Brokerage Commissions 20% 34% 44%
- ---------------------------------------------------------------------------------------------------
Third-Party Administration Fees 80% 66% 56%
- ---------------------------------------------------------------------------------------------------
Total 100% 100% 100%
====================================================================================================
</TABLE>
As of January 1, l998, Harden Group entered into new administration
contracts through its marketing partners to provide third-party administration
services in Portland, Oregon. As a result of these contracts, the percentage of
its revenues that are derived from third-party administration services have
substantially increased.
COMMISSIONS. Commissions for property and casualty insurance brokerage
services from PKW 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 nine months of 1998 were $2,254,704, a decrease of
$92,007 or 4%, compared to $2,346,711 of commissions for the same period of
1997.
FEES. Fees from Harden Group, Anchor's third-party administration
services division (including underwriting and risk analysis), for the first nine
months of 1998 were $9,470,283 an increase of $4,872,197 or 106%, as compared to
$4,598,086 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 a new insurance carrier and new administrative contracts, as discussed
above, and administrative fees generated from the release of new products.
Fee revenues reported by Anchor in the first nine months of 1998 from
third-party administration services consist of revenues generated by Harden
Group. 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 12.6% of
the third-party administration revenues (or approximately 8.5% of Anchor's total
revenues) in the first nine months 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 nine months
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
loss insurance carrier.
10
<PAGE>
As of January 1, 1998, respectively, Harden Group has entered into
contracts through its marketing partners to provide third-party administration
services in Portland, Oregon. Management expects that these 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 Group to expand its marketing and servicing territory
to 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 $48,043 and $60,591 for the nine
months ended September 30, 1998 and 1997, respectively.
EXPENSES
TOTAL EXPENSES. Total operating expenses for the first nine months of
1998, were $11,562,898, an increase of $4,244,896 or 58% as compared to
operating expenses of $7,318,002 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 Group.
EMPLOYEE COMPENSATION AND BENEFITS. Employee compensation and benefits
for the first nine months of 1998, were $7,533,787, an increase of $2,855,551 or
61% as compared to $4,678,236 for the same period in 1997. The increase related
primarily to staffing needs required to service new third-party administration
projects at Harden-CA. Included in this increase are the expenses related to
PHA, the new third-party administration operation in Portland, Oregon.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $4,029,111 and $2,639,766 for the nine months ended
September 30, 1998 and 1997, respectively. The $1,389,345 or 53% increase in
1998, as compared to 1997, resulted primarily from expenses associated with the
increased third-party administration services business at Harden-CA, including
PHA in Portland, Oregon. General and administrative expenses include rent,
travel, insurance, postage, telephone, supplies and other miscellaneous
expenses.
INTEREST EXPENSE. Interest expense was $203,736 and $152,152, for the
first nine months of 1998 and 1997, respectively. The increase in interest
expense of $51,584 in the first nine months of 1998, as compared to the same
period in 1997, was due to increased borrowings under the bank loan.
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
$161,419 and $172,725, for the first nine months of 1998 and 1997, respectively.
The decrease in amortization and other intangibles is a result of intangibles at
PKW becoming fully amortized.
INCOME TAXES
Anchor's expense for income taxes was $6,220 and $4,470 for the first
nine months 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.
RESULTS OF OPERATIONS -- QUARTERS ENDED SEPTEMBER 30, 1998 AND 1997
REVENUES
TOTAL REVENUES. Total revenues for the third quarter of 1998 were
$3,622,939, an increase of $681,571 or 23%, as compared to 1997 third quarter
revenues of $2,941,368. 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-CA, including the revenue increase from PHA,
the new third-party administration operation in Portland, Oregon.
11
<PAGE>
COMMISSIONS. Commissions from PKW for the third quarter of 1998 were
$666,003, a decrease of $53,153 or 7.4%, compared to $719,156 of commissions for
the same period of 1997.
FEES. Fees from Harden Group, Anchor's third-party administration
services division (including underwriting and risk analysis), for the third
quarter of 1998, were $2,943,667, an increase of $739,911 or 34%, as compared to
$2,203,756 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 a new insurance carrier and new administrative contracts, as discussed
above, administrative fees generated from the release of new products; and,
revenue from the new PHA operation in Portland, Oregon.
INTEREST INCOME. Interest income was $13,269 and $18,456 for the
quarters ended September 30, 1998 and 1997, respectively.
EXPENSES
TOTAL EXPENSES. Total operating expenses for the third quarter of
1998, were $3,756,833, an increase of $804,887 or 27% as compared to operating
expenses of $2,951,946 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 Group.
EMPLOYEE COMPENSATION AND BENEFITS. Employee compensation and benefits
for the third quarter of 1998, were $2,436,664, an increase of $554,725 or 29%
as compared to $1,881,939 for the same period in 1997. The increase related
primarily to greater staffing needs required to service new third-party
administration projects at Harden-CA, including the new employee costs related
to the PHA operation in Portland, Oregon.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $1,320,169 and $1,070,007 for the quarters ended
September 30, 1998 and 1997, respectively. The $250,162 or 23% 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-CA, including the new PHA operation in Portland, Oregon.
INTEREST EXPENSE. Interest expense was $62,691 and $52,823, for the
third quarter of 1998 and 1997, respectively. The increase in interest expense
of $9,868 in the third quarter of 1998, as compared to the same period in 1997,
was due to the increase in borrowings under the bank term loan.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Amortization of
goodwill and other intangibles was $53,783 and $53,429, for the third quarter of
1998 and 1997, respectively.
INCOME TAXES
Anchor's minimum annual required tax payment due was reported during
the first quarter of 1998 and 1997. Therefore, there was no income tax expense
reported for the quarters ended September 30, 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 $474,075 for
the nine months ended September 30, 1998, compared to net cash flows (used in)
operations of $(60,194) 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.
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 the
owner of the $600,000
12
<PAGE>
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
September 30, 1998, $40,000 of the Debentures had been repaid in full, and
$60,000 remained outstanding.
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 September 30, 1998, $140,000 of the Bridge Notes remained outstanding (for
further information, refer to Note 4 above).
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.
At the end of the third quarter 1998, Anchor commenced raising
additional funds from members of the Board of Directors and other qualified
investors by offering 10% Convertible Subordinated Debentures, Series B (the
"Series B Debentures"). As of November 6, 1998, Anchor had raised $60,000 and
had oral commitments from investors to purchase an additional $115,000 of the
Series B Debentures. Anchor intends to utilize a substantial portion of the
proceeds from the Series B Debentures to support current and future working
capital needs of Anchor. The basic terms of the Series B Debentures are: (a)
10% interest, payable semi-annually in arrears; (b) two year maturity; (c)
conversion price of $0.50 per share; (d) "piggyback" registration rights for
three years; (e) for each $5,000 of Series B Debentures acquired, an investor
receives a five year warrant to acquire 2,000 shares of Anchor common stock at
an exercise price of $0.50 per share; (f) subordination provisions that
subordinate the Series B Debentures to Anchor's "Senior Debt" (as defined in the
Series B Debentures); (g) provisions that permit Anchor to redeem the Series B
Debentures at par at any time; and (h) provisions that give each purchaser a
one-time right to cause Anchor to redeem all or a portion of their Series B
Debentures, at par, plus any outstanding interest, in the event Anchor sells
Putnam, Knudsen & Wieking, Inc. ("PKW") for an amount in excess of $2 million.
Purchasers of the Series B Debentures as of November 6, 1998, consisted of four
members of the Board of Directors.
Capital and certain acquisition related expenditures were $242,739 and
$56,516 for the nine months ended September 30, 1998 and 1997, respectively.
The larger 1998 expenditures primarily involved the acquisition of furniture,
fixtures and computer equipment at the new PHA, Portland, Oregon location.
During the first nine months of 1997, the R.L. Ferguson Insurance Agency ("RLF")
located in Walnut Creek, California and certain property and casualty accounts
maintained by Norman I. Robins ("Robins") and John R. McPherson ("McPherson")
were merged into Anchor's insurance brokerage subsidiary, PKW, located in
Concord, California.
Short-term debt, current portion of long-term debt and current portion
of long-term liabilities at September 30, 1998, totaling in the aggregate
$904,400 (as compared to $1,203,216 at December 31, 1997) consisted of: (a)
$198,000 representing the current portion of a $1,741,841.30 term bank loan; (b)
approximately $78,000 of future fixed payments under a consulting agreement
entered into with a company affiliated with the former shareholders of Harden-
AZ; (c) $143,852 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; (d) $60,000 of Debentures; (e)
$140,000 of the Bridge Notes; (f) approximately $118,500 representing
obligations relating to the purchase of furniture, fixtures and computer
equipment at the PHA location; and (g) approximately $166,048 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
13
<PAGE>
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.
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 the
current working capital needs of Anchor in connection with Harden Group's
expansion in Portland, Oregon.
On March 9, 1998, a 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 term loan were: (a) monthly
interest payments equal to bank's prime rate, plus 2.5%; (b) a maturity date of
October 5, 2002; and (c) monthly principal payments in installments of
$33,125.28 beginning on April 5, 1998. All other terms and conditions contained
in the term loan dated September 30, 1997, including all amendments thereto and
replacements therefor, remained in place.
On June 2, 1998, a new term loan in the amount of $1,741,841.30 was
entered into between Anchor and the bank which replaced the $1,821,890.33 term
loan. The basic terms of this new term loan are: (a) monthly interest payments
equal to bank's prime rate, plus 2.5%; (b) a maturity date of October 5, 2002;
(c) monthly principal payments in installments of $16,500.00 beginning on June
5, 1998; and (d) deletion of the provision which required 75% of Anchor's
monthly EBITDA to be applied to principal to the extent such percentage of
monthly EBITDA was required to make the scheduled payment of principal. All
other terms and conditions of the term loan dated September 30, 1997, including
all amendments thereto and replacements therefor, remain operative.
At September 30, 1998, long-term liabilities and long-term debt, less
the current portion discussed above, totaled $1,871,303 (as compared to
$1,836,132 at December 31, 1997), and primarily consisted of: (a) $1,460,167
representing the long-term portion outstanding under a $1,741,841.30 term bank
loan maintained and further described above; (b) approximately $322,577
representing deferred rent with regard to certain real property currently leased
by Anchor; and (c) approximately $88,559 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 UPDATE
Anchor's plan to achieve Year 2000 compliance in its electronic
information systems is proceeding on schedule. The corporate team that has been
created to coordinate the identification and implementation of the necessary
changes required to computer systems and applications is well underway. The
initial impact assessment is being completed and the Year 2000 Project began in
October 1998.
Anchor's team is working to complete the implementation of a Year 2000
compliant computer system together with other programming efforts by September
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 not expected to be material to the company's financial
position. The total cost of the Year 2000 Project is presently not expected to
exceed $250,000.
Due to the general uncertainty inherent in the Year 2000 problem,
resulting in part from the uncertainty of the Year 2000 readiness of its key
business partners, vendors and other suppliers, Anchor is unable to determine at
this time whether the consequences of Year 2000 failures will have a material
impact on Anchor's
14
<PAGE>
results of operations, liquidity or financial condition. Anchor believes that,
with the completion of its current Year 2000 Project, as scheduled, the
possibility of significant interruptions of normal operations should be
minimized.
Readers are cautioned that forward-looking statements contained in the
above should be read in conjunction with Anchor's disclosures below under the
heading "Forward-Looking Information".
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.
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, Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations and Year 2000 Update, 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 Group'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
At the present time Anchor's business consists of two basic
operations: (i) third-party administration services (Harden Group); and (ii)
property and casualty insurance brokerage (PKW).
During the last several years, Anchor's third-party administration
services have experienced steady expansion. Revenues derived from the operations
of Harden Group, as a percentage of Anchor's overall revenues, have grown from
56% at September 30, 1996 to 80% at September 30, 1998. Conversely, Anchor's
property and casualty insurance business has been subjected to considerable
competition pressures through much of the 1990's. During this period the
insurance industry has generally experienced over capacity which, in turn, has
negatively impacted both insurance premiums and brokerage commissions. The
financial results of PKW have reflected theses developments.
In light of these external and internal trends, the Board of Directors
engaged an outside consultant to conduct a comprehensive review of Anchor's
operations with a particular focus on the status of PKW. In June 1998, the
consultant reported the results of its review. After considering the report,
the Board of Directors directed the consultant to solicit possible qualified
purchasers of PKW. As of November 6, 1998, Anchor has received several
preliminary proposals to acquire PKW. These proposals have only recently been
received and are subject to numerous contingencies. Anchor is carefully
reviewing the proposals and expects to proceed with a process which will result
in the sale of PKW or substantially all of its assets.
15
<PAGE>
Anchor's current strategy is to focus on expanding Harden Group, its
third-party administration services division 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 intends to seek to manage its affairs to
achieve expansion through internal growth of its existing and new product lines.
Anchor also intends to consider acquisition and merger opportunities in the
third-party administration services business.
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
4.8 Form of 10% Convertible Subordinated Debenture, Series B.
4.8a Form of Warrant to Purchase Shares of Common Stock of Anchor Pacific
Underwriters, Inc.
27.0 Financial Data Schedule
B. Reports on Form 8-K
None
16
<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: November 6, 1998 /s/ James R. Dunathan
-------------------- --------------------------------------
James R. Dunathan
President and Chief Executive Officer
Date: November 6, 1998 /s/ Earl Wiklund
-------------------- --------------------------------------
Earl Wiklund
Senior Vice President
and Chief Financial Officer
17
<PAGE>
EXHIBIT 4.8
Debenture 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, Series B
(convertible into shares of common stock)
$ Concord, California
_______________,1998
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
______________ Thousand 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 360 day year of twelve 30-day months
and shall be paid to the Holder on _______________, 1999, _______________, 1999
and _______________, 2000 (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 _______________, 2000 (the "Maturity Date"). Payment of
interest and principal shall be made in lawful money of the United States of
America by wire transfer to an account designated by the Holder appearing on the
Debenture Register.
This Debenture is a duly authorized Debenture of the Company, Series
B, limited to the aggregate principal amount of $_______________.
<PAGE>
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 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: (a) 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 (b) 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
<PAGE>
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 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
3
<PAGE>
directly to the holders of Senior Debt in accordance with the priorities
then existing among such holders until all 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
applicable to the Senior Debt
4
<PAGE>
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 two (2) business days.
(b) Default in the payment of the principal on the Maturity Date.
5
<PAGE>
(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 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 $5,000 or an
integral multiple of $5,000, into Shares, at a conversion price of $0.50 per
Share (the "Conversion Price"), subject to adjustment in certain events
described below.
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 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
7
<PAGE>
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 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
8
<PAGE>
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 ten
(10) 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.
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. The Holder shall have a one-time right to
require the Company to redeem his or her Debenture, in the event the Company
shall sell Putnam, Knudsen & Wieking for $2 million or more.
9
<PAGE>
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 the Holder, at the address appearing in the Debenture
Register and to the Company at its principal place of business.
(b) The notice of redemption shall state: (a) the Redemption
Date; (b) that on the Redemption Date the redemption price will become due
and payable on the Debenture and that interest thereon will cease to accrue
on and after said date; and (c) the place where the Debenture is 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
Debenture 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) the Debenture shall cease to bear interest. Upon
surrender of the Debenture for redemption in accordance with said notice,
the Debenture shall be paid by the Company at the redemption price,
together with accrued interest to the Redemption Date.
(d) If the Debenture 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.
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 and the transfer of the Debenture 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 $5,000 and integral multiples of $5,000.
7.2 Transfer of Debentures. At the time the Debenture is presented
----------------------
or surrendered for registration of transfer it 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
10
<PAGE>
writing. No service charge shall be made for any registration of transfer, 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 of the Debentures.
7.3 Replacement Debenture.
---------------------
(a) If the Debenture is mutilated and 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 theft of the
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 the 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 the event 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
7.3, 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) Any new Debenture issued pursuant to this Section 7.3 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 7.3 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
11
<PAGE>
"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) the Holder shall have (i)
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) furnished the Company with an opinion 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
12
<PAGE>
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 Debenture, 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.
10.2 Piggyback Registration.
----------------------
(a) If, at any time, through and including the third anniversary
date of the issuance of this Debenture, the Company proposes to register
any of its securities under the Act (other than in connection with a merger
pursuant to a Form S-4 Registration Statement or an employee stock
compensation plan 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 the Rights Holder of its
intention to do so. If the Rights Holder notifies the Company within
twenty (20) days after receipt of any such notice of its desire to include
any Registrable Securities in such proposed registration statement, the
Company shall afford such Rights Holder the opportunity to have any of the
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 Holder agreement that the public
13
<PAGE>
offering of such Registrable Securities shall not commence until ninety
(90) days after the effective date of such registration.
(c) The rights of the 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 underwritten
registration in which the number of Registrable Securities that may be
included is limited, the Company shall advise the Rights Holder 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.
(f) If, after the third anniversary date of the issuance of this
Debenture, the Registrable Securities owned by the Holder continue to be
subject to a legend or other transfer restriction which treats the Holder
as having affiliate status as that term is used in Rule 144 of the Act,
then the Holder shall continue to have a one-time right to include any
Registrable Securities in a proposed registration statement subject to the
procedures described in Section 10.2 hereof. This registration right shall
expire on the earlier of: (i) the conclusion of the Holder's affiliate
status; or (ii) the sixth anniversary date of the issuance of this
Debenture.
10.3 Expenses. All expenses incurred in connection with any
--------
registration pursuant to this Debenture, including without limitation, all
registration,
14
<PAGE>
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 the Rights Holder 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, 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 the Rights Holder, each of the
Rights Holder's officers and directors, and each person controlling such
15
<PAGE>
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 the 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) The Rights Holder shall, if Registrable Securities held by or
issuable to the Rights Holder are included in the securities as to which
such registration is being effected, indemnify the Company, each of its
directors 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.
16
<PAGE>
(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 he 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. The Rights Holder 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 shall be required in connection with any registration
referred to in this Debenture.
10.7 Assignment. The rights granted to the Rights Holder pursuant to
----------
this Debenture may be assigned to a transferee or assignee of the Debenture or
any of the Registrable Securities, provided that the transferee or assignee is
an affiliated entity of the Rights Holder and 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.
-------------
10.8 Amendment. The provisions of this Debenture may be amended or
---------
modified only with the written consent of the Company and the Holder.
10.9 Entire Agreement. This Debenture constitutes 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.
17
<PAGE>
10.10 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.
10.11 SEC Filings. During the term of this Debenture the Company
-----------
shall promptly forward to the Holder annual and periodic reports and proxy
statements required to be filed by the Company with the Securities and Exchange
Commission pursuant to the Securities Exchange Act of 1934.
10.12 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.
10.13 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 $5,000 and
in increments of not less than $5,000 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
__________________________________________
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:____________________
____________________
A-1
<PAGE>
EXHIBIT 4.8a
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
WARRANT
TO PURCHASE
SHARES OF
COMMON STOCK
OF
ANCHOR PACIFIC UNDERWRITERS, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
----
1. General Terms....................................................... 1
1.1 Right to Acquire Securities.................................... 1
1.2 Exercise of Warrant............................................ 2
1.3 Record Holder.................................................. 2
1.4 Payment of Taxes............................................... 2
1.5 Transfer and Exchange.......................................... 3
2. Transfer of Securities.............................................. 3
2.1 Restrictions of Transfer....................................... 3
2.2 Cooperation.................................................... 5
3. Registration Rights................................................. 5
3.1 Rights of Warrantholders....................................... 5
3.2 Expenses....................................................... 6
3.3 Company Responsibilities....................................... 7
3.4 Indemnification................................................ 7
3.5 Holder's Obligations........................................... 9
3.6 Assignment..................................................... 9
4. Adjustments to Exercise Price and Warrant Shares.................... 9
4.1 Subdivision or Combination..................................... 9
4.2 Adjustment for Reorganization, Consolidation, Merger........... 9
4.3 Miscellaneous Exercise Matters................................. 11
4.4 No Dilution or Impairment...................................... 11
4.5 Notice of Adjustment........................................... 11
4.6 Duty to Make Fair Adjustments in Certain Cases................. 11
5. Miscellaneous....................................................... 12
5.1 Entire Agreement.............................................. 12
5.2 Successors and Assigns........................................ 12
5.3 Governing Law................................................. 12
5.4 Notices, Etc.................................................. 12
5.5 Delays or Omissions........................................... 12
5.6 Survival...................................................... 13
5.7 Waivers and Amendments........................................ 13
5.8 Severability.................................................. 13
5.9 Registered Holder............................................. 13
5.10 Titles and Subtitles.......................................... 14
-i-
<PAGE>
EXERCISE NOTICE.......................................................... 15
FORM OF ASSIGNMENT....................................................... 16
-ii-
<PAGE>
WARRANT
TO PURCHASE SHARES OF COMMON STOCK OF
ANCHOR PACIFIC UNDERWRITERS, INC.
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED UNLESS (A) COVERED
BY AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT, (B) IN COMPLIANCE WITH
RULE 144 UNDER SUCH ACT, OR (C) THE COMPANY HAS BEEN FURNISHED WITH AN OPINION
OF COUNSEL REASONABLY ACCEPTABLE TO THE COMPANY THAT NO REGISTRATION IS REQUIRED
FOR SUCH TRANSFER.
__________ Shares of Common Stock
1. General Terms.
-------------
1.1 Right to Acquire Securities.
---------------------------
(a) This Warrant certifies that for value received ______________
_______________________________________________________ (the "Holder"), or
registered assigns, are entitled at any time before 5:00 p.m., San
Francisco, California time, on the Expiration Date (as such term is defined
herein) to purchase from ANCHOR PACIFIC UNDERWRITERS, INC., a Delaware
corporation (the "Company"), ________ shares (the "Warrant Shares") of the
fully paid and non-assessable Common Stock of the Company ("Common Stock")
as constituted on the date hereof (the "Issuance Date"), at a price of
$0.50 per share (the "Exercise Price"), such number of shares and price per
share subject to adjustment as provided herein and all subject to the
conditions set forth herein. This Warrant may be exercised at any time on
or before five years from the date hereof (the "Expiration Date").
Upon any partial exercise hereof, there shall be issued to the Holder
a new Warrant or Warrants with respect to the shares of Common Stock not so
exercised. No fractions of a share of Common Stock will be issued upon the
exercise of this Warrant, but if a fractional share would be issuable upon
exercise the Company will pay in cash the fair market value thereof as
determined by the Board of Directors of the Company in good faith.
-1-
<PAGE>
(b) The Warrant may be subdivided, at the Warrantholder's option, into
several warrants to purchase the Warrant Shares (collectively, also
referred to as the "Warrant"). Such subdivision may be accomplished in
accordance with the provisions of Section 1.5 hereof.
1.2 Exercise of Warrant.
-------------------
(a) The Holder or any person or entity to whom the Holder has assigned
its right under this Warrant (collectively referred to as the
"Warrantholder") may exercise the Warrant, in whole or in part, at any time
or from time to time, prior to its expiration, on any business day, by
delivering a written notice in the form attached hereto (the "Exercise
Notice") to the Company at the offices of the Company designated in Section
5.4 hereof, exercising the Warrant and specifying (i) the total number of
shares of Common Stock the Warrantholder will purchase pursuant to such
exercise and (ii) a place and date not less than one nor more than 20
business days from the date of the Exercise Notice for the closing of such
purchase.
(b) At any closing under Section 1.2(a) hereof, (i) the Warrantholder
will surrender the Warrant and make payment to the Company of the aggregate
Exercise Price for the shares of Common Stock so purchased by bank,
cashier's or certified check and (ii) the Company will deliver to the
Warrantholder a certificate or certificates for the number of shares of
Common Stock issuable upon such exercise, together with cash, in lieu of
any fraction of a share, as provided in Section 1.1(a) above. Upon any
partial exercise, a new warrant or warrants of the same tenor and
expiration date for the purchase of the number of such shares not purchased
upon such exercise shall be issued by the Company to the registered holder
thereof.
1.3 Record Holder. A Warrant shall be deemed to have been
-------------
exercised immediately prior to the close of business on the date of its
surrender for exercise as provided in Section 1.2(b) above, and the person
entitled to receive the shares of Common Stock issuable upon such exercise shall
be treated for all purposes as the holder of such shares of record as of the
close of business on such date.
1.4 Payment of Taxes. The Company shall pay all taxes and other
----------------
governmental charges that may be imposed in respect of the issue or delivery
of the Warrant Shares or any portion thereof. The Company shall not be
required, however, to pay any tax or other charge imposed in connection with
any transfer involved in the issue of any certificate for the Warrant Shares
or any portion thereof in any name other than that of the registered holder of
the Warrant surrendered in connection with the purchase of such shares, and in
such case the Company shall not be required to issue
-2-
<PAGE>
or deliver any certificate until such tax or other charge has been paid or it
has been established to the Company's satisfaction that no tax or other charge
is due.
1.5 Transfer and Exchange.
---------------------
(a) Subject to the terms hereof, including, without limitation,
Section 2.1, the Warrant and all rights thereunder are transferable, in
whole or in part, on the books of the Company maintained for such purpose
at its office designated in Section 5.4 hereof by the registered holder
hereof in person or by duly authorized attorney, upon surrender of the
Warrant properly endorsed and upon payment of any necessary transfer tax or
other governmental charge imposed upon such transfer. Upon any partial
transfer, the Company will issue and deliver to such holder a new warrant
or warrants with respect to the Warrant Shares not so transferred. Each
taker and holder of the Warrant, by taking or holding the same, consents
and agrees that the Warrant when endorsed in blank shall be deemed
negotiable, and that when the Warrant shall have been so endorsed, the
holder may be treated by the Company and all other persons dealing with the
Warrant as the absolute owner of such Warrant for any purpose and as the
person entitled to exercise the rights represented thereby, or to the
transfer on the books of the Company, any notice to the contrary
notwithstanding; but until such transfer on such books, the Company may
treat the registered holder of the Warrant as the owner for all purposes.
The term "Warrant" as used herein shall include the Warrant and, any
warrants delivered in substitution or exchange therefor as provided herein.
(b) The Warrant is exchangeable for a warrant or warrants for the same
aggregate number of Warrant Shares, each new Warrant to represent the right
to purchase such number of shares as the holder shall designate at the time
of such exchange.
2. Transfer of Securities.
----------------------
2.1 Restrictions of Transfer. Neither the Warrant nor the Warrant
------------------------
Shares shall be transferable except upon the conditions specified in this
Section 2.1, which conditions are intended to insure compliance with the
provisions of the Securities Act of 1933 (the "1933 Act") in respect to the
transfer of the Warrant and the Warrant Shares.
(a) Unless and until otherwise permitted by this Section 2.1, the
Warrant and each certificate or other document evidencing any of the
Warrant Shares shall be endorsed with a legend substantially in the
following form:
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<PAGE>
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED
UNLESS (A) COVERED BY AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT,
(B) IN COMPLIANCE WITH RULE 144 UNDER SUCH ACT, OR (C) THE COMPANY HAS BEEN
FURNISHED WITH AN OPINION OF COUNSEL REASONABLY ACCEPTABLE TO THE COMPANY
TO THE EFFECT THAT NO REGISTRATION IS REQUIRED FOR SUCH TRANSFER"
(b) Neither the Warrant nor the Warrant Shares shall be transferred,
and the Company shall not be required to register any such transfer, unless
and until one of the following events shall have occurred:
(i) the Company shall have received an opinion of counsel, in
form and substance reasonably acceptable to the Company and its
counsel, stating that the contemplated transfer is exempt from
registration under the 1933 Act as then in effect, and the Rules and
Regulations of the Securities and Exchange Commission (the
"Commission") thereunder. Within five business days after delivery to
the Company and its counsel of such an opinion, the Company either
shall deliver to the proposed transferor a statement to the effect
that such opinion is not satisfactory in the reasonable opinion of its
counsel (and shall specify in detail the legal analysis supporting any
such conclusion) or shall authorize the Company's transfer agent to
make the requested transfer;
(ii) the Company shall have been furnished with a letter from
the Commission in response to a written request in form and substance
acceptable to counsel for the Company setting forth all of the facts
and circumstances surrounding the contemplated transfer, stating that
the Commission will take no action with regard to the contemplated
transfer;
(iii) the Warrant or the Warrant Shares are transferred pursuant
to a registration statement which has been filed with the Commission
and has become effective; or
(iv) the Warrant or the Warrant Shares are transferred in
accordance with the provisions of Rule 144 promulgated by the
Commission under the 1933 Act.
-4-
<PAGE>
(c) The restrictions on transfer imposed by this Section 2.1 shall
cease and terminate as to the Warrant and the Warrant Shares when (i) such
securities shall have been effectively registered under the 1933 Act and
sold by the holder thereof in accordance with such registration, (ii) an
acceptable opinion as described in Section 2.l(b)(i) or a "no action"
letter described in Section 2.l(b)(ii) states that future transfers of such
securities by the transferor or the contemplated transferee would be exempt
from registration under the 1933 Act, or (iii) such securities may be sold
in accordance with the provisions of Rule 144 promulgated under the 1933
Act. When the restrictions on transfer contained in this Section 2.1 have
terminated as provided above, the holder of the securities as to which such
restrictions shall have terminated or the transferee of such holder shall
be entitled to receive promptly from the Company, without expense to him,
new certificates not bearing the legend set forth in Section 2.1(a) hereof.
2.2 Cooperation. The Company shall cooperate in supplying such
-----------
information as may be reasonably requested by the Warrantholder to complete and
file any information reporting forms presently or subsequently required by the
Commission as a condition to the availability of an exemption, presently
existing or subsequently adopted, from the 1933 Act for the sale of the Warrant
or the Warrant Shares.
3. Registration Rights.
-------------------
3.1 Rights of Warrantholders. Holders of the Common Stock issued
------------------------
or issuable upon exercise of this Warrant (collectively, the "Registrable
Securities") shall have "piggyback" registration rights as set forth below:
(a) If, at any time, through and including the third anniversary of
the date of this Warrant, the Company proposes to register any of its
securities under the Act (other than in connection with a merger,
acquisition, reorganization or similar transaction pursuant to a Form S-4
Registration Statement or an employee stock compensation plan pursuant to a
Form S-8 Registration Statement), it will give written notice by
registered mail, at least (30) days prior to the filing of each such
registration statement, to the Holder of its intention to do so. If the
Holder notifies the Company within 20 days after receipt of any such
notice of its desire to include any Registrable Securities in such
proposed registration statement, the Company shall afford such Holder the
opportunity to have any of the Registrable Securities registered under
such registration statement and included in any underwriting involved
with respect thereto.
-5-
<PAGE>
(b) Notwithstanding the provisions of Section 3 hereof: (i) the
Company shall have the right at any time after it shall have given written
notice pursuant to this Section 3 (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 3 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 Holder agreeing that the public offering of such Registrable
Securities shall not commence until 90 days after the effective date of
such registration.
(c) The rights of the Holder pursuant to Section 3 hereof shall be
conditioned upon such Holder's participation in the underwriting with
respect thereto and the inclusion of such 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
Holder) to the extent provided herein.
(d) Notwithstanding any other provision of this Warrant, 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 underwritten
registration in which the number of Registrable Securities that may be
included is limited, the Company shall advise the Holder 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 Holders thereof
in proportion, as nearly as practicable, to the respective amounts of
Registrable Securities entitled to inclusion in such registration held by
such Holders at the time of filing the registration statement.
(e) The Company shall (together with all 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.
-6-
<PAGE>
3.2 Expenses.
--------
All expenses incurred in connection with any registration pursuant to
this Warrant or Warrant Shares, 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 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.
3.3 Company Responsibilities.
------------------------
In the case of a piggyback registration of Warrant Shares, the Company
shall use its best efforts to keep the Holder 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 180 days or until the Holder or 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, and such other documents incident
thereto as a 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.
-7-
<PAGE>
3.4 Indemnification.
---------------
(a) The Company shall indemnify the Holder, with respect to such
registration effected pursuant to Section 3 hereof, 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 the Holder 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 Holder specifically for use
therein.
(b) The Holder shall, if Registrable Securities held by or issuable to
the Holder are included in the securities as to which such registration is
being effected, indemnify the Company, each of its directors 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
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 and such Holders 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 m reliance upon and in conformity with
written information furnished to the Company in an instrument duly executed
by such Holder specifically for use therein.
(c) Each party entitled to indemnification under this Section 3.4 (the
"Indemnified Party") shall give notice to the party required to provide
-8-
<PAGE>
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 3.4. 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.
3.5 Holder's Obligations. The Holder shall furnish to the Company
--------------------
such written information regarding such Holder and the distribution proposed by
such Holder as the Company may reasonably request in writing and as shall be
required in connection with any registration referred to in this Warrant.
3.6 Assignment. The rights granted to the Holder pursuant to this
----------
Warrant may be assigned to a transferee or assignee of the Warrant or any of the
Registrable Securities, provided that the transferee or assignee is an
affiliated entity of the Holder and 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.
4. Adjustments to Exercise Price and Warrant Shares. The Exercise
------------------------------------------------
Price in effect from time to time and the number of Warrant Shares shall be
subject to adjustment in certain cases as set forth in this Section 4.
4.1 Subdivision or Combination. In the event the outstanding
--------------------------
Common Stock shall be subdivided into a greater number of shares of Common
Stock, the Exercise Price for the Warrant Shares shall, simultaneously with
the effectiveness of such subdivision, be proportionately reduced and the
number of Warrant Shares proportionately increased, and conversely, in case
the outstanding Common Stock shall be combined into a smaller number of shares
of Common Stock, the Exercise Price shall, simultaneously with the
effectiveness of such combination, be proportionately increased and the number
of Warrant Shares proportionately reduced.
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<PAGE>
4.2 Adjustment for Reorganization, Consolidation, Merger.
----------------------------------------------------
(a) In case of any reorganization of the Company (or any other
corporation the stock or other securities of which are receivable on the
exercise of the Warrant) after the date on which this Warrant is first
issued (the "Issuance Date"), or in case, after such date, the Company (or
any such other corporation) shall consolidate with or merge into another
corporation or convey all or substantially all of its assets to another
corporation, then and in each such case the Warrantholder, upon exercise of
the Warrant as provided in Section 1.2 hereof at any time after the
consummation of such reorganization, consolidation, merger or conveyance,
shall be entitled to receive, in lieu of the stock or other securities and
property receivable upon the exercise of the Warrant prior to such
consummation, the stock or other securities or property to which the
Warrantholder would have been entitled upon such consummation if the
Warrantholder had exercised or converted the Warrant immediately prior
thereto; in each such case, the terms of this Warrant, including the
exercise provisions of Section 1.2, shall be applicable to the shares of
stock or other securities or property receivable upon the exercise or
conversion of the Warrant after such consummation.
(b) The Company shall not effect any consolidation, merger or
conveyance of all or substantially all of its assets unless prior to the
consummation thereof the successor corporation (if other than the Company)
resulting from such consolidation or merger or the corporation into or for
the securities of which the previously outstanding stock of the Company
shall be changed in connection with such consolidation or merger, or the
corporation purchasing such assets, as the case may be, shall assume by
written instrument, in form and substance satisfactory to the
Warrantholder, executed and delivered in accordance with Section 5.4
hereof, the obligation to deliver to the Warrantholder such shares of
stock, securities or assets as, in accordance with the foregoing
provisions, the Warrantholder is entitled to purchase.
(c) If a purchase, tender or exchange offer is made to and accepted by
the holders of more than 50% of the outstanding shares of Common Stock of
the Company, the Company shall not effect any consolidation, merger or sale
with the Person having made such offer or with any Affiliate of such
Person, unless prior to consummation of such consolidation, merger or sale
the Warrantholder shall have been given a reasonable opportunity to then
elect to receive either the stock, securities or assets then issuable upon
the exercise or conversion of the Warrant or, if different, the stock,
securities or assets, or the equivalent, issued to previous holders of the
Common Stock in accordance with such offer, computed as though the
Warrantholder hereof had been, at the time
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<PAGE>
of such offer, a holder of the stock, securities or assets then
purchasable upon the exercise or conversion of the Warrant. As used in
this paragraph (c), the term "Person" shall mean and include an
individual, a partnership, a corporation, a trust, a joint venture, an
unincorporated organization and a government or any department or agency
thereof, and an "Affiliate" of any Person shall mean any Person directly
or indirectly controlling, controlled by or under direct or indirect
common control with, such other Person. A Person shall be deemed to
control a corporation if such Person possesses, directly or indirectly,
the power to direct or cause the direction of the management and policies
of such corporation, whether through the ownership of voting securities,
by contract or otherwise.
4.3 Miscellaneous Exercise Matters. The Company shall at all
------------------------------
times reserve and keep available out of its authorized but unissued Common Stock
the full number of Warrant Shares deliverable upon exercise of the Warrant
Shares, as such number may change from time to time. Also, the Company shall,
at its own expense, take all such actions and obtain all such permits and orders
as may be necessary to enable the Company lawfully to issue the Warrant Shares
upon the exercise of the Warrant.
4.4 No Dilution or Impairment. The Company will not, by amendment
-------------------------
of its certificate of incorporation or through reorganization, consolidation,
merger, dissolution, issue or sale of securities, sale of assets or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms of the Warrant, but will at all times in good faith assist in the
carrying out of all such terms and in the taking of all such actions as may be
necessary or appropriate in order to protect the rights of the Warrantholder
against dilution or other impairment. Without limiting the generality of the
foregoing, the Company will take all such action as may be necessary or
appropriate in order that the Company may validly and legally issue fully paid
and non-assessable shares upon the exercise or conversion of the Warrant.
4.5 Notice of Adjustment. When any adjustment is required to be
--------------------
made in either the Exercise Price or the number of shares issuable upon
exercise of the Warrant, the Company shall promptly notify the Warrantholder
of such event, of the calculation by which such adjustment is to be made and
of the resulting Exercise Price or conversion rate, as the case may be.
4.6 Duty to Make Fair Adjustments in Certain Cases. If any event
----------------------------------------------
occurs as to which in the opinion of the Board of Directors the other provisions
of this Section 4 are not strictly applicable or if strictly applicable would
not fairly protect the purchase and exercise rights of the Warrant in accordance
with the essential intent and principles of such provisions, then the Board of
Directors shall make an adjustment in
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<PAGE>
the application of such provisions, in accordance with such essential intent
and principles, so as to protect such purchase rights as aforesaid.
5. Miscellaneous.
-------------
5.1 Entire Agreement. This Warrant constitutes the full and
----------------
entire understanding and agreements between the parties hereto with respect to
the subjects hereof and thereof.
5.2 Successors and Assigns. The terms and conditions of this
----------------------
Warrant shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties hereto, except as expressly provided
otherwise herein.
5.3 Governing Law. This Warrant shall be governed by and
-------------
construed under the laws of the State of California.
5.4 Notices, Etc. All notices and other communications required
------------
or permitted hereunder shall be in writing and shall be deemed effectively given
upon personal delivery or upon the seventh day following mailing by registered
air mail, postage prepaid, addressed (a) if to the Warrantholder, at
______________________, or at such other address as it shall have furnished to
the Company in writing, (b) if to the Company, a copy should be sent to 1800
Sutter Street, Suite 400, Concord, California 94520 and addressed to the
attention of the corporate secretary, or at such other address as the Company
shall have furnished in writing to the Warrantholder, or (c) if to any other
holder of any Warrant or of Warrant Shares issued upon conversion of the
Warrant, at such address as such holder shall have furnished to the Company in
writing, or, until such holder so furnishes an address to the Company, then to
and at the address of the last holder of such Warrant or Warrant Shares who so
furnished an address to the Company.
5.5 Delays or Omissions. No delay or omission to exercise any
-------------------
right, power or remedy accruing to any holder of any securities issued or sold
or to be issued or sold hereunder, upon any breach or default of the Company
under this Agreement, shall impair any such right, power or remedy of such
holder nor shall it be construed to be a waiver of any such breach or default,
or an acquiescence therein, or in any similar breach or default thereafter
occurring, nor shall any waiver of any single breach or default be deemed a
waiver of any other breach or default theretofore or thereafter occurring. Any
waiver, permit, consent or approval of any kind or character on the part of any
holder of any breach or default under this Agreement, or any waiver on the part
of any holder of any provisions or conditions of this Agreement, must be in
writing and shall be effective only to the extent specifically set forth in such
writing.
-12-
<PAGE>
All remedies, either under this Agreement or by law or otherwise afforded to
any holder, shall be cumulative and not alternative.
5.6 Survival. The representations, warranties, covenants and
--------
agreements made herein and or made pursuant to this Agreement shall survive the
execution and delivery of this Agreement, except as expressly provided otherwise
herein.
5.7 Waivers and Amendments. With the written consent of the
----------------------
record or beneficial holders of more than 50% of the Warrant Shares (treated as
if converted), the obligations of the Company and the rights of the holders of
the Warrant and the Warrant Shares may be waived (either generally or in a
particular instance, either retroactively or prospectively and either for a
specified period of time or indefinitely), and with the same consent the
Company, when authorized by resolution of its Board of Directors, may enter into
a supplemental agreement for the purpose of adding any provisions to or changing
in any manner or eliminating any of the provisions of this Warrant; provided,
however, that no such waiver or supplemental agreement shall reduce the
aforesaid percentage of the Warrant Shares, the holders of which are required to
consent to any waiver or supplemental agreement, without the consent of the
record or beneficial holders of all of the Warrant Shares (treated as if
converted). Upon the effectuation of each such waiver, consent, agreement of
amendment or modification, the Company promptly shall give written notice
thereof to the record holders of the Warrant and the Warrant Shares. This
Warrant or any provision hereof may not be changed, waived, discharged or
terminated orally, but only by a statement in writing signed by the party
against which enforcement of the change, waiver, discharge or termination is
sought, except to the extent provided in this Section 5.7.
5.8 Severability. If one or more provisions of this Warrant are
------------
held to be invalid, illegal or unenforceable under applicable law, such
provision shall be modified in such manner as to be valid, legal and
enforceable, but so as to most nearly retain the intent of the parties, and if
such modification is not possible, such provision shall be severed from this
Agreement as if such provision were not included, in either case, and the
balance of this Warrant shall not in any way be affected or impaired thereby and
shall be enforceable in accordance with its terms.
5.9 Registered Holder. The Company may deem and treat the
-----------------
registered Holder(s) hereof as the absolute owner(s) of this Warrant
(notwithstanding any notation of ownership or other writing hereon made by
anyone), for the purpose of any exercise or conversion hereof, of any
distribution to the Holder(s) hereof, and for all other purposes, and the
Company shall not be affected by any notice to the contrary. Other than as set
forth herein, this Warrant does not entitle any Holder hereof to any rights of a
stockholder of the Company.
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<PAGE>
5.10 Titles and Subtitles. The titles of the sections and
--------------------
subsections of this Warrant are for convenience and are not to be considered in
construing this Warrant.
IN WITNESS WHEREOF, Company has caused this Warrant to be signed by
its duly authorized officer and issued as of the date set forth below.
Dated: _________________
ANCHOR PACIFIC UNDERWRITERS, INC.
By:______________________________
Its:_____________________________
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<PAGE>
EXERCISE NOTICE
(To be executed only upon exercise of Warrant)
The undersigned registered owner of a Warrant of ANCHOR PACIFIC
UNDERWRITERS, INC. (the "Company"), originally issued to _________________
irrevocably exercises such Warrant for the purchase of shares of Common Stock of
the Company, purchasable with the Warrant, and hereby sets the place and date
for the closing of such purchase as follows, all on the terms and conditions
specified in the Warrant.
Place of Closing:_____________
Date of Closing:______________
The undersigned requests that a certificate for such shares be
registered in the name of ________, whose address is ____________________. If
said number of shares is less than all of the shares of Common Stock purchasable
under the Warrant, the undersigned requests that a new Warrant representing the
remaining balance of such shares be registered in the name of __________, whose
address is ____________________.
Dated:_____________________
__________________________________
Signature of Registered Owner
__________________________________
Street Address
__________________________________
City State Zip
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<PAGE>
FORM OF ASSIGNMENT
FOR VALUED RECEIVED, the undersigned registered owner of this Warrant
issued by ANCHOR PACIFIC UNDERWRITERS, INC. hereby sells, assigns and transfers
unto the Assignee named below all of the rights of the undersigned under the
within Warrant, with respect to the number of Shares of Common Stock set forth
below:
Name of Assignee Address No. of Shares
- ---------------- ------- -------------
and does hereby irrevocably constitute and appoint _________ attorney to make
such transfer on the books of ____________ maintained for such purpose, with
full power of substitution in the premises.
Dated:______________________
__________________________________
Signature of Registered Owner
__________________________________
Witness
-16-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000317781
<NAME> ANCHOR PACIFIC UNDERWRITERS, INC.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 3,988,316
<SECURITIES> 0
<RECEIVABLES> 1,296,816
<ALLOWANCES> 46,308
<INVENTORY> 0
<CURRENT-ASSETS> 5,454,743
<PP&E> 3,327,600
<DEPRECIATION> 2,708,949
<TOTAL-ASSETS> 8,821,941
<CURRENT-LIABILITIES> 6,589,992
<BONDS> 0
0
0
<COMMON> 94,201
<OTHER-SE> 266,445
<TOTAL-LIABILITY-AND-EQUITY> 8,821,941
<SALES> 0
<TOTAL-REVENUES> 11,773,030
<CGS> 0
<TOTAL-COSTS> 11,562,898
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 203,736
<INCOME-PRETAX> (107,376)
<INCOME-TAX> 6,220
<INCOME-CONTINUING> (113,596)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (113,596)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
