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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from [ ] to [ ]
Commission File Number: 0-9628
ANCHOR PACIFIC UNDERWRITERS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-1687187
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1800 Sutter Street, Suite 400 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 for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X]Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 12, 1999 was $2,523,651.
As of March 12, 1999, the Registrant had 4,710,057 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Exhibit Index is on page 28
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ANCHOR PACIFIC UNDERWRITERS, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Part I.
<C> <S> <C>
Item 1. Business..................................................... 3
Item 2. Properties................................................... 6
Item 3. Legal Proceedings............................................ 7
Item 4. Submission of Matters to a Vote of Security Holders.......... 7
Part II.
Item 5. Market for Registrant's Common Equity and Related Shareholder
Matters.................................................... 7
Item 6. Selected Financial Data...................................... 8
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 9
Item 8. Financial Statements and Supplementary Data.................. 15
Item 9. Changes in Disagreements With Accountants on Accounting and
Financial Disclosure....................................... 16
Part III.
Item 10. Directors and Executive Officers of Registrant............... 16
Item 11. Executive Compensation....................................... 20
Item 12. Security Ownership of Certain Beneficial Owners
and Management............................................. 24
Item 13. Certain Relationships and Related Transactions............... 27
Part IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K.................................................. 28
</TABLE>
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PART I
Item 1. Business
Summary
Anchor Pacific Underwriters, Inc. is a holding company that is primarily
engaged in insurance administration services through its three direct and
indirect wholly-owned subsidiaries. Anchor Pacific Underwriters, Inc. and the
subsidiaries listed in the chart below are collectively referred to as "Anchor"
unless the context otherwise requires.
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<CAPTION>
<S> <C>
ANCHOR PACIFIC UNDERWRITERS, INC.
(a Delaware corporation)
Holding Company
|
|
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Harden & Company Insurance Services, Inc.
(a California corporation)
Employee Benefits Administrator
Group Health Insurance
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_________________________________________
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Harden & Company of Arizona Pacific Heritage Administrators of Nevada, Inc.
formerly known as (a Nevada corporation)
Benefit Resources, Inc. Employee Benefits Administrator
(an Arizona corporation) Group Health Insurance
Employee Benefits Administrator
Group Health Insurance
</TABLE>
Anchor provides third-party claims administration, employee benefits
consulting, underwriting and risk analysis primarily to private sector small and
middle market companies, groups, trusts, associations, government agencies and
individual consumers. Anchor offers its customers, as broker or administrator,
a range of products and services tailored to the specific needs of such
customers.
Anchor markets the products and services of more than 20 commercial
insurance companies and over 20 managed care and preferred provider
organizations. The marketing of products and services is carried out through 10
direct sales representatives and over 500 independent insurance brokers.
Anchor's customer base is in the Western United States, primarily in California,
Arizona and Oregon. For the fiscal year ended December 31, 1998, Anchor
generated in excess of $12 million in revenues from its continuing operations.
The principal executive offices of Anchor are located approximately 30
miles east of San Francisco, California, at 1800 Sutter Street, Suite 400,
Concord, California 94520.
Background
Anchor was organized in 1986 as a California general partnership for the
specific purpose of acquiring Harden & Company Insurance Services, Inc., a
third-party employee benefits administrator ("Harden"), from Alex Brown
Financial Group. Anchor was reorganized as a private California corporation in
March 1987, and reincorporated in January 1995, as a Delaware corporation in
connection with a merger with System Industries, Inc. ("System"). As a result
of the merger, Anchor became a public company.
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Since its inception, Anchor has expanded its insurance and third-party
administration service capabilities through internal growth as well as a series
of acquisitions. From 1986 through 1990, Anchor, through Harden, primarily
focused on providing administration services for group insurance benefit plans.
In 1990, Anchor began to diversify its business by providing property, casualty
and workers' compensation insurance products and services, as well as offering
market studies and program analysis for certain non-profit associations who had
endorsed Anchor's products.
During the period from 1990 through 1996, Anchor further expanded its
property and casualty business by acquiring certain assets, including insurance
brokerage accounts. When Anchor made the acquisition of a property and
casualty insurance brokerage company, Putnam, Knudsen & Wieking, Inc. ("PKW"),
located in Oakland, California in October 1994, it consolidated all of its
property and casualty insurance brokerage business into one entity, PKW. After
evaluating trends in the insurance industry in mid-1998, the Board of Directors
of Anchor decided to sell its property and casualty business and to focus on
its third-party administration business. Anchor then engaged an independent
investment banker to solicit possible purchasers. After reviewing seven
acquisition proposals, Anchor sold substantially all the assets of PKW to an
unrelated third party for approximately $2,250,000 in cash, effective December
31, 1998. The proceeds derived from the asset sale were largely used to reduce
debt and to make additional financial resources available for working capital
needs and third-party administration opportunities.
As part of its expansion strategy in 1994, Anchor acquired Benefit
Resources, Inc. ("BRI") a third-party employee benefits administration business
located in Scottsdale, Arizona. In 1998, Anchor caused BRI to change its name to
Harden & Company of Arizona, ("Harden-AZ"). In 1995, certain third-party
administration accounts were acquired by Harden-CA from Dutcher Insurance
Agency, Inc. ("Dutcher"), located in Stockton, California. In July 1997, Harden-
CA took over a third-party administration business, located in Los Angeles,
California, that was previously serviced by an unrelated third party. As a
result of declining revenues on the Los Angeles business due to carrier rate
increases, the Los Angeles office was closed at the end of February 1999, with
the remaining business now being serviced from the Concord, California office.
Effective January 1, 1998, Anchor and Harden-CA entered into an agreement
to acquire the third-party administration business of Pacific Heritage
Administrators ("PHA"), a firm based in Portland, Oregon. This contract allowed
Harden Group to expand its marketing and servicing territory in Oregon,
Washington, Idaho and Nevada and substantially enhanced the Harden Group's
revenues in 1998. Anchor will continue to look for opportunities to expand its
third-party administration services in the Western United States.
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 identity, 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 throughout the Western States from six offices
located in Concord and Fresno, California; Scottsdale, Arizona; Portland,
Oregon; and Las Vegas and Reno, Nevada.
Harden Group includes: Harden & Company Insurance Services, Inc. ("Harden-
CA"); Harden & Company of Arizona ("Harden-AZ"); Pacific Heritage Administrators
("PHA") a division of Harden-CA; and Pacific Heritage Administrators of
Nevada, Inc. ("PHA-NV").
Continuing Operations
Third-Party Claims Administration and Employee Benefits Consulting
The employee benefits business of Anchor is conducted through Harden Group
and primarily involves third-party health benefits administration activities.
This business group engages in designing, implementing and administering health
benefit plans for small to medium sized employer groups. Administration
services provided by Harden Group include receiving and managing employer plan
contributions and/or premium payments, monitoring employee and dependent
eligibility, preparing required government and tax reports, handling day-to-day
administration, reviewing and analyzing claims data for coverage, and managing
the claims settlement process. Anchor, through Harden Group, also helps develop
insurance products and services tailored to the specific needs of the client,
provides risk analysis and conducts loss control and cost studies for insurance
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companies and self-insured employers. As compensation for its claims
administration services, Harden Group generally receives fees based on a
percentage of premiums collected, or on a per capita basis.
During the past year, Anchor has sought to take steps to strengthen Harden
Group's management and sales and marketing staff by hiring additional seasoned
executives. Product development and new product sales continue to be a high
priority, as does geographical diversification into other marketing territories
in the western states.
Discontinued Operations
Insurance Brokerage
Anchor first entered the insurance brokerage business in 1990 through an
acquisition. Thereafter it grew its insurance brokerage business primarily
through acquisitions, the largest being PKW which was acquired in 1994.
Following the 1994 acquisition of PKW, Anchor consolidated all of its property
and casualty insurance brokerage business into PKW. This segment of Anchor's
business focused on property and casualty (both commercial and personal lines),
health, life and disability, as well as workers' compensation. PKW acted as an
agent on behalf of insurers and other intermediaries in soliciting, negotiating
and effecting contracts of insurance, and as a broker in procuring insurance
contracts on behalf of insureds.
As an insurance agent and broker, PKW derived its income from the sale of
insurance products and services and the receipt of commissions generated
therefrom. Effective as of December 31, 1998, Anchor sold certain assets,
including all of the insurance brokerage accounts of PKW for approximately
$2,250,000 in cash. The proceeds derived from the PKW asset sale were largely
used to reduce debt and to make additional financial resources available for
working capital needs and third-party administration opportunities.
Recent Developments/Business Strategy
Anchor's strategy is to expand its third-party administration services by:
(a) continuing to develop through its marketing partners specialized affiliated
business units that target selected insurance industry market segments defined
by industry type, geographic location and consumer demographics; (b) creating
new products and services; and (c) strengthening management, sales and marketing
staff. In conjunction with this strategy, effective December 31, 1998, Anchor
sold certain assets and all of the insurance brokerage accounts of PKW to an
unrelated third party purchaser. Proceeds derived from this sale have been
largely used to reduce debt and to make additional financial resources available
for working capital needs and third-party administration opportunities. In
addition, Anchor manages its affairs by achieving expansion through internal
growth of its existing and new product lines. Anchor also regularly considers
acquisition and merger opportunities and other business expansion alternatives.
Employees
As of March 12, 1999, Anchor and its subsidiaries employed approximately
175 full-time employees. In connection with the PKW asset sale, approximately
36 employees who worked at PKW were terminated and were rehired by the
purchaser, effective December 31, 1998. None of Anchor's employees are
presently represented by a union or covered by a collective bargaining
agreement. Anchor believes its employee relations are good.
Regulation
The activities of Anchor that involve insurance related third-party
administration are subject to licensing and regulation by the jurisdictions in
which such activities are conducted. In addition to regulatory requirements
applicable to Anchor, most jurisdictions require that individuals engaged in
insurance brokerage activities be personally licensed. As a result, a number of
Anchor's employees are so licensed. Anchor's operations depend on the validity
of and its continued good standing under the licenses and approvals pursuant to
which it operates. Licensing laws and regulations vary from jurisdiction to
jurisdiction. In all jurisdictions, the applicable licensing laws and
regulations are subject to amendment or interpretation by regulatory
authorities. Such authorities generally are vested with broad discretion as to
the granting, renewing and revoking of licenses and approvals.
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Other factors, such as 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 serving
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 any material effect on its liquidity, capital resources or
operations.
Inflation
Partially in response to general inflation and increased costs, the health
insurance industry continuously seeks to achieve greater savings from the
medical services industry. The health insurance industry, in general, and the
insurance claims administration and service industry, in particular, continues
to undergo significant consolidation. The primary driver of this process is the
major investment in infrastructure required to maintain a competitive position.
The focus on systems which improve productivity and accommodate electronic data
interchange increasingly requires service providers to achieve a certain
critical mass to be cost effective.
At the same time, significant opportunities are emerging from the
consolidation process, as employers seek quality service and stability for their
group benefit plans. Third-party administrators who apply state-of-the-art
systems, are cost-effective and seek to be flexible in delivering their services
have an opportunity to substantially expand their client base.
Competition
The insurance claims administration and service business is highly
competitive and there are many claims administration and service organizations
who actively compete with Anchor in every area of its business. Anchor competes
directly with national insurance administrators, insurance companies and health
maintenance organizations that market their own products, through independent
agencies, brokers and third-party administrators, as well as with entities which
self insure or sponsor other insurance programs. Many of these competitors are
larger than Anchor and have greater resources. Anchor seeks to compete by
specializing in specific market segments, developing specialty products for
those markets, and maintaining relationships with consumers by providing
personal service normally associated with small local businesses, together with
the expertise, flexibility and diversity of products that can only be provided
by a larger firm.
Anchor believes it has several competitive advantages, including: (a) a
growing market share within its current operating territory as one of the top
administration firms in the western states; (b) proven ability to identify and
close acquisitions; (c) a public equity currency; and (d) an experienced
management team whose operating philosophy is committed to preserving and
enhancing acquired companies' value.
Item 2. Properties
Anchor leases approximately 32,099 rentable square feet of office space at
its executive offices at 1800 Sutter Street, Suite 400, Concord, California
94520. From November 1, 1994 through October 31, 1999, Anchor must pay rent of
$1.40 per rentable square foot per month (approximately $44,939 per month), and
from November 1, 1999 through October 31, 2004, Anchor must pay rent of $1.75
per rentable square foot per month (approximately $56,173 per month). Following
the December 31, 1998 sale of PKW, Anchor subleased 10,692 rentable square feet
of this office space to the purchaser of PKW (approximately $14,969 per month
from January 1, 1999 through October 31, 1999, and approximately $18,711 from
November 1, 1999 through October 31, 2004). Anchor also has an option to lease
additional office space at its executive offices in Concord.
In addition to the leased space it currently occupies in Concord, Anchor
has a lease obligation on approximately 13,128 rentable square feet of office
space in Oakland, California; Harden-AZ leases approximately 9,025 rentable
square feet of office space in Scottsdale, Arizona; PHA leases approximately
17,510 rentable square feet of office space in Portland, Oregon and
approximately 500 rentable square feet of office space in Las Vegas, Nevada.
Anchor must now pay rent of between $1.75 and $2.00 per rentable square foot per
month under PKW's prior lease in Oakland, California, which expires on November
30, 1999. Harden-AZ must pay rent under its lease
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for 6,992 rentable square feet, which expires May 31, 2002, of between $0.84 and
$0.90 per rentable square foot per month, and for 2,033 rentable square feet,
which expires November 30, 1999, $1.25 per rentable square foot per month. PHA
must pay rent in Portland, Oregon of $1.40 per rentable square foot per month,
which expires on December 31, 1999 and $1.50 per rentable square foot per month
for 500 rentable square feet in Las Vegas, Nevada, which expires on June 1,
1999.
Anchor had relocated PKW's office in December 1994 to Anchor's office space
in Concord, California and subleased PKW's offices in Oakland. In May 1995,
December 1995, and October 1997, PKW entered into subleases with respect to
82%, 10% and 8%, respectively, of PKW's prior office space in Oakland. The
amounts, classified as short and long-term liabilities with respect to the PKW
leases, reflect the shortfall between sublease income to be received and PKW's
lease expense to be paid. Following the sale of PKW, Anchor has assumed this
remaining obligation which expires on November 30, 1999.
Item 3. 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 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
Prior to the consummation of the merger with System in January 1995, Anchor
was a privately held California corporation with approximately 63 shareholders.
Consequently, there was no established trading market for Anchor's common stock.
As of March 12, 1999, there were approximately 4,710,057 shares of Anchor's
common stock outstanding, held by approximately 2,000 shareholders of record.
As of March 12, 1999, there also were warrants to purchase 912,042 shares of
common stock and options to purchase 538,000 shares of common stock of Anchor
outstanding. The following table sets forth historical trade information for
Anchor common stock.
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<CAPTION>
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Common Stock Quarterly Trade History Quarterly Volume Quarterly High/Ask Quarterly Low/Bid
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<S> <C> <C> <C>
March 31, 1997 104,600 1.25 0.75
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June 30, 1997 51,000 1.04 0.61
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September 30, 1997 46,400 0.96 0.63
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December 31, 1997 23,100 0.95 0.72
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March 31, 1998 87,300 0.94 0.67
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June 30, 1998 90,900 0.71 0.60
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September 30, 1998 160,300 0.49 0.32
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December 31, 1998 23,100 0.46 0.23
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</TABLE>
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Since the January 1995 merger with System, Anchor's shares of common stock
have publicly traded on the OTC Bulletin Board (Symbol: APUX). At such time it
meets certain minimum market capitalization requirements, Anchor intends to seek
to list its shares on The Nasdaq Small-Cap Market; however, there can be no
assurance as to when or whether such shares will be so listed.
Holders of Anchor common stock are entitled to such dividends as may be
declared from time to time by the Board of Directors out of legally available
funds. Anchor has not paid any cash or stock dividends to date. Anchor does
not expect to pay dividends in the foreseeable future.
Item 6. Selected Financial Data
The following table sets forth certain historical information for Anchor
which is based on continued operations, and should be read in conjunction with,
Anchor's audited financial statements that are being filed as part of this
report.
<TABLE>
<CAPTION>
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Anchor Pacific Underwriters, Inc.
Selected Financial Data
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1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues/1/ $12,284,558 $6,977,330 $ 4,574,132 $ 5,269,554 $ 4,430,765
Income (Loss) before
other expenses, net/1/ $ (486,116) $ (733,726) $ (921,935) $ (54,894) $ 249,988
Loss $ (775,330) $ (946,691) $(1,405,800) $ (536,640) $ (471,180)
Loss Per Share/2/ $(0.16) $(0.21) $(0.37) $(0.14) $(0.16)
Weighted Average
Shares Outstanding/2/ 4,710,057 4,612,153 3,766,176 3,819,605 3,022,658
Cash Flow From
Operations (Deficit) $ 83,960 $ (406,752) $(1,127,789) $ 475,158 $ (534,364)
Total Assets $ 7,655,324 $7,452,310 $ 8,423,690 $10,173,428 $10,707,204
Total Long-Term Liabilities $ 1,311,568 $1,785,309 $ 872,950 $ 1,753,849 $ 1,408,747
Shareholders' Equity (Deficit) $ (301,088) $ 457,242 $ 1,107,231 $ 1,563,032 $ 2,740,463
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</TABLE>
/1/ Consistent with Anchor's audited financial statements set forth elsewhere in
this Annual Report, both Revenues and Income (Loss) before other expenses, net,
include interest income.
/2/ Earnings (Loss) Per Share and Weighted Average Shares Outstanding have been
retroactively restated to reflect the effects of the 10 for 1 stock split
effected January 6, 1995.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
Historically, Anchor derived a majority of its revenues from third-party
administration services. As a result of its acquisitions made during 1994 and
1996, Anchor significantly increased the percentage of its revenues derived from
property and casualty insurance brokerage activities. Based on a strategic
decision in 1998 to focus on its third-party administration business, Anchor
sold its insurance brokerage business at year-end 1998. This sale will allow
Anchor to reduce debt and to make additional financial resources available for
working capital needs and third-party administration opportunities. In July
1997 and January 1998, Harden entered into new contracts through its marketing
partners to provide third-party administration services in Los Angeles,
California and Portland, Oregon. As a result of declining revenue on the Los
Angeles business due to carrier rate increases, the Los Angeles, California
office was closed at the end of February 1999, with the remaining business now
being serviced from the Concord, California office. Management expects that the
revenues derived from third-party administration services provided out of the
Portland, Oregon office will continue to increase.
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. Marketing for new business began in 1996 and coincided
with the release of new products by Harden Group. Market reaction to these
changes has been encouraging. Harden Group has been successful in securing an
alternative insurance carrier to strengthen and broaden their product offerings
in the small group market, as well as facilitate geographic diversification.
This new insurance carrier has negotiated a multi-year, exclusive contract with
Harden Group. Furthermore, Harden Group has entered into significant new
contracts to provide third-party administration services through its marketing
partners. Management anticipates that these new contracts will increase the
revenues Anchor derives from third-party administration services. As a result
of the new administration services operation, PHA in Portland, Oregon, the
revenues derived from third-party administration services have substantially
increased and has provided a platform for marketing expansion in the northern
tier of the western states (Oregon, Washington, Idaho and Nevada).
Results of Continuing Operations -- Years Ended December 31, 1998, 1997 and 1996
Revenues
Total Revenues. Total revenues for 1998 were $12,284,558, an increase of
$5,307,228, or 76%, over 1997 revenues of $6,977,330. The increase in revenue
was primarily due to the increase in fee income derived from third-party
administration services at Harden Group. 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.
Fees. Fees from Harden Group, (including underwriting and risk analysis)
services for 1998 were $12,273,067, an increase of $5,320,412, or 76%, as
compared to $6,952,655 in fees for 1997. This increase in fee income is largely
the direct result of new business generated from projects associated with the
new administrative contracts, as discussed above, and administrative fees
generated from the release of new products.
Fee revenues generated by Anchor in 1998 from third-party administration
services consist of revenues generated by Harden Group. The third-party
administration revenues are substantially derived from: (a) an insurance
product underwritten by one insurance carrier, which is A- (Excellent) rated;
and (b) the administration of insurance programs underwritten by various
insurance carriers for a number of self-insured employers. 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.
Interest Income. Interest income consists of interest earned on funds held
in fiduciary accounts and interest earned on investments. Interest income was
$11,491, $24,675 and $61,710 in 1998, 1997 and 1996, respectively. As interest
rates have fallen in recent years, the income earned on funds held in fiduciary
accounts has been reduced.
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Expenses
Total Expenses. Total operating expenses for 1998 were $12,770,674, an
increase of $5,059,618, or 66%, as compared to 1997 operating expenses of
$7,711,056. As discussed below, the increase in total expenses resulted
primarily from an increase in selling, general and administration expenses and
employee compensation and benefits resulting from the expansion of third-party
administration services business at Harden Group.
Employee Compensation and Benefits. Employee compensation and benefits for
1998 were $8,067,801, an increase of $3,423,612, or 74%, as compared to 1997
employee compensation of $4,644,189. The increase related primarily to staffing
needs required to service new third-party administration projects at Harden
Group.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $4,702,873, $3,066,867 and $2,394,961 in 1998, 1997
and 1996, respectively. The $1,636,006, or 53%, increase in 1998, as compared
to 1997, resulted primarily from expenses associated with the increased third-
party administration services business at Harden Group. General and
administrative expenses include rent, travel, insurance, postage, telephone,
supplies and other miscellaneous expenses.
Interest Expense. Interest expense was $221,871, $240,488 and $337,263 in
1998, 1997 and 1996, respectively. The decrease in interest expense in 1998, as
compared to 1997, was due to decreased 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 $50,705,
$45,067 and $140,058 in 1998, 1997 and 1996, respectively. The increase in
amortization of goodwill and other intangibles is a result of increased
intangibles at Harden-AZ.
Income Taxes
Anchor's expense for income taxes was $9,956, $(4,030), and $6,830 in 1998,
1997 and 1996, respectively. An analysis of Anchor's provision for income taxes
is presented in Note 8 of the Notes to Consolidated Financial Statements.
Results of Discontinued Operations - Year Ended December 31, 1998
Revenues
The total revenues from Anchor's discontinued insurance brokerage business
in 1998 were $3,069,459. Revenues were primarily related to commissions for
property and casualty insurance brokerage services (net of sub-broker
commissions) and generally were recognized as of the effective date of the
insurance policy, except for commissions on installment premiums, which were
recognized periodically as billed. Commissions for 1998 were $3,017,939.
Interest income, which consisted of interest earned on insurance premiums and
other funds held in fiduciary accounts and interest earned on investments was
$51,520.
Expenses
The expenses relating to Anchor's discontinued insurance brokerage business
in 1998 were $2,875,350. These expenses were attributed to employee compensation
and benefits of $2,019,044, selling, general and administrative expenses of
$628,980 and amortization of goodwill and other intangibles of $170,134. In
addition, interest expense for 1998 was $57,192.
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Liquidity and Capital Resources
Anchor reported net cash flows provided by operations of $83,960 for the
twelve months ended December 31, 1998, compared to net cash flows used by
operations of $(406,752) for the twelve months ended December 31, 1997. During
1998, Anchor met its operating and capital needs from several sources, including
borrowing under its existing credit agreements and the proceeds from the sale of
Series B Debentures (as discussed below).
In 1995, Anchor issued $370,000 of 10% Convertible Subordinated Debentures
(the "Debentures"). Investors holding $270,000 of the Debentures, including
seven members of the Board of Directors, converted their debentures into 200,000
shares of Anchor's common stock at $1.35 per share. These conversions reduced
Anchor's outstanding indebtedness by $270,000 and, in turn, increased
shareholders' equity by $270,000. As of March 12, 1999, $40,000 of the
Debentures had been repaid in full, and $60,000 remained outstanding under the
terms of the Debentures.
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 purchase 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 (discussed below), by exchanging
the Bridge Notes. The basic terms of the 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 March 12, 1999, $80,000 of the Bridge Notes
remained outstanding.
During 1997, Anchor raised $305,000 from seven members of the Board of
Directors and other qualified investors through a private offering 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"). At the close of said offering on January 25, 1999, Anchor had
raised $495,000, $200,000 from its primary bank lender and the remaining
$295,000 from five members of the Board of Directors and other qualified
investors. Anchor has utilized a substantial portion of the proceeds from the
Series B Debentures to support current working capital needs. The basic terms
of the Series B Debentures were: (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 received a five year warrant to acquire 2,000
shares of Anchor common stock at an exercise price of $0.50 per share; and (f)
subordination provisions that subordinate the Series B Debentures to Anchor's
"Senior Debt" (as defined in the Series B Debentures). The Series B Debentures
contained a provision that permit Anchor to redeem all or a portion of their
Series B Debentures, at par, plus any outstanding interest, in the event Anchor
sold Putnam, Knudsen & Wieking, Inc. ("PKW") for an amount in excess of $2
million. As a result of the December
11
<PAGE>
31, 1998 sale of PKW at a purchase price in excess of $2 million, Anchor has as
of March 12, 1999, repurchased $230,000 of the Series B Debentures, with
$265,000 still outstanding.
Capital and certain acquisition related expenditures were $284,509 and
$108,364 for the twelve months ended December 1998 and 1997, respectively. The
largest 1998 expenditures primarily involved the acquisition of furniture,
fixtures and computer equipment at the new PHA, Portland, Oregon location.
Short-term borrowings, current portion of long-term debt and current
portion of long-term liabilities at December 31, 1998, totaling in the aggregate
$1,894,018 (as compared to $1,203,216 at December 31, 1997), consisted of: (a)
$998,000 representing the current portion of a term bank loan further described
below; (b) approximately $104,480 of future fixed payments under a consulting
agreement entered into with a company affiliated with the former shareholders of
Harden-AZ; (c) $113,650 representing the current portion of obligations with
regard to certain real property leased by PKW prior its acquisition by Anchor
and relocation to Anchor's executive offices; (d) $60,000 of the Debentures;
(e) $140,000 of the Bridge Notes; (f) $200,000 of the Series B Debentures; (g)
approximately $94,800 representing obligations relating to the purchase of
furniture, fixtures and computer equipment at the PHA location; and (h)
approximately $183,088 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 (Not withstanding the foregoing, 75% of
Anchor's monthly EBITDA shall be applied to principal to the extent such
percentage of monthly EBITDA is required to make the scheduled payment of
principal. To the extent that 75% of monthly EBITDA falls short of the required
principal payment, the difference shall be added to the final payment); and (d)
a five year warrant to acquire 95,000 shares of Anchor common stock at a
purchase price of $1.75 per share. The proceeds of the loan were used to retire
outstanding credit facilities with another bank.
On December 22, 1997, the bank that provided Anchor with the $1,600,000
term loan also provided Anchor with a $250,000 loan to support current working
capital needs of Anchor in connection with Harden Group's expansion in Portland,
Oregon.
On March 9, 1998, a term loan in the amount of $1,821,890 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) maturity date of October 5,
2002; and (c) monthly principal payments in installments of $33,125 beginning
April 5, 1998. All other terms and conditions contained in 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 was entered
into between Anchor and the bank which replaced the $1,821,890 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 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 schedule 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.
Effective December 31, 1998, based on a strategic decision to focus on its
third-party administration business, a purchase agreement was entered into
between PKW, Anchor and Talbot Agency of California, Inc. ("Talbot") whereby
Talbot acquired certain of PKW assets, including insurance brokerage accounts.
Consideration for said purchase was cash which was delivered at closing, January
15, 1999, based on a purchase price of 4.5 times EBITA, which was $2,250,000.
The proceeds of the sale have been used by Anchor to reduce debt and to direct
additional resources to third-party administration opportunities.
At December 31, 1998, long-term liabilities and long-term debt, less the
current portion discussed above, totaled $1,311,568 (as compared to $1,785,309
at December 31, 1997), and primarily consisted of: (a) $628,342 representing
the long-term portion outstanding under a term bank loan further described
above; (b) approximately $327,795 representing deferred rent with regard to
certain real property currently leased by Anchor; (c) $230,000 of Series B
Debentures, and (d) approximately $125,431 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,
12
<PAGE>
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 the 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.
Strategy
Until recently, Anchor's business has consisted 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 57%
at December 31, 1996 to 80% at December 31, 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 these developments.
In light of these external and internal trends, the Board of Directors made
a strategic decision to sell PKW, the property and casualty insurance brokerage
operation. This transaction was completed, effective December 31, 1998.
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 additional acquisition and merger opportunities in the
third-party administration services business.
Recently Issued Accounting Statements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting
for Derivative Instruments and Hedging Activities." SFAS 133 establishes new
standards of accounting and reporting for derivative instruments and hedging
activities. SFAS 133 requires that all derivatives be recognized at fair value
in the balance sheet, and that the corresponding gains or losses be reported
either in the statement of operations or as a component of comprehensive income,
depending on the type of hedging relationship that exists. SFAS 133 will be
effective for fiscal years beginning after June 15, 1999. The Company does not
currently hold derivative instruments or engage in hedging activities.
Year 2000 Update
Anchor's plan to achieve Year 2000 compliance in its electronic information
systems is proceeding on schedule. A corporate team has been created to
coordinate the identification and implementation of the necessary changes
required for computer systems and applications. Anchor has also recently hired
an outside computer consultant, OASYS Networks, Inc. ("OASYS"), to assist in
the management of the Year 2000 project. OASYS will be providing a Limited-
Scope Assessment which is expected to provide a detailed analysis of all
networked "objects" and compliance information on all installed applications
that are not specific to the insurance industry, and will be limited to the PC,
PC Network, and associated peripherals environment. During the course of this
assessment, which is expected to be completed by end of the third quarter 1999.
OASYS will:
13
<PAGE>
1. Develop an assessment project plan and a schedule to be approved by
Anchor.
2. Prepare a comprehensive inventory of network environment (Hardware).
In connection with preparing such inventory, OASYS will identify and
asset tag all equipment, record serial numbers, identify installed
devices and identify BIOS manufacture and version information.
3. Integrate Anchor's existing Year 2000 data into the OASYS reports and
procedures, where applicable.
4. Conduct a comprehensive inventory of network environment
(Software/Firmware).
5. Test all functional computer hardware for Year 2000 and leap year
compliance, where applicable.
6. Collect compliance statements from vendors for non-testable hardware
equipment (modems, routers, etc.). Cross-reference compliance data with
Anchor's existing data, where applicable.
7. Research and report compliance data on all COTS (Common Off The Shelf)
applications.
8. Build a project binder to track compliance statements and document all
testing of hardware objects.
9. Interview key personnel to identify various dependencies and interface
risks that are not immediately apparent through the physical inventory
process.
10. Confer with Anchor's team to prioritize issues and create a Mission
Critical listing of all hardware, software, dependencies and
interfaces.
11. Provide a database to Anchor which will be used to identify and track
all new hardware objects introduced into the environment.
12. Prepare a closing Risk Analysis report.
In addition, the OASYS team will begin providing Year 2000 Inbound and
Outbound Compliance Communications on April 1, 1999. Inbound Year 2000
Compliance Communications involve requests from outside parties (such as
venders, suppliers, etc.) for information and status on Anchor's Year 2000
compliance. Once received, OASYS will respond, document, track and service such
requests with periodic summaries being reported to Anchor's team. Outbound Year
2000 Compliance Communications are requests initiated by Anchor seeking the
status of another entities' Year 2000 compliance. These requests will be
initiated, documented and tracked by OASYS.
Anchor's team is also focused on obtaining mainframe Year 2000 compliance
at its three principal offices located in Concord, California, Scottsdale,
Arizona and Portland, Oregon. The status of the effort for each office is
described below.
<TABLE>
<CAPTION>
Harden-CA (Concord, CA):
---------------------------
<S> <C>
Hardware: Current operating system is under review; scheduled
compliance by the end of third quarter 1999.
Software: Both the billing and claims systems are being
upgraded; scheduled compliance by the end of third
quarter 1999.
Conversion: Converting the entire system to the Resource
Information Management System, version 2.7
("RIMS"), which is Year 2000 compliant. Conversion
scheduled for completion by mid-year 2000.
</TABLE>
Harden-AZ (Scottsdale, AZ):
---------------------------
Hardware: Current operating system is Year 2000 compliant.
Software: Currently on RIMS, 2.7 which is Year 2000 compliant.
Upgrades: Recently upgraded software and hardware.
Harden-PHA (Portland, OR):
--------------------------
Hardware: Current operating system is under review; scheduled
compliance by the end of third quarter 1999.
Software: Claims system is currently Year 2000 compliant.
Billing system is being upgraded, scheduled
compliance by the end of second quarter 1999.
Conversion: Converting entire system to RIMS, which is Year 2000
compliant. Conversion scheduled for completion by
year-end 2000.
14
<PAGE>
Anchor's team is working to complete programming efforts for the Year
2000 related projects by September 30, 1999, with final certification testing
occurring during 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 estimated total cost of the
Year 2000 Project is estimated to not exceed $250,000.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect Anchor's
results of operations, liquidity and financial condition. 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
results of operations, liquidity or financial condition. Anchor believes that,
with the completion of the Project as currently scheduled, the possibility of
significant interruptions of normal operations should be reduced.
Readers are cautioned that forward-looking statements contained in the
Year 2000 Update should be read in conjunction with Anchor's disclosures below
under the head "Forward-Looking Information".
Forward-Looking Information
This Annual Report on Form 10-K 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 Annual Report. Statements in this Annual
Report, particularly in the Notes to Financial Statements, "Part II, Item 7,
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 new insurance carriers 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 health insurance markets; and
unanticipated regulatory changes.
Item 8. Financial Statements and Supplementary Data
The following financial statements for Anchor appear on pages F-1
through F-21 of this report:
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Operations for the years ended December 31,
1998, 1997 and 1996
15
<PAGE>
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996
Notes to Consolidated Financial Statements
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The experience and background of each of the directors and nominees are
set forth below.
<TABLE>
<CAPTION>
============================================================================================================================
Year First
Became a
Name Age Director Positions with Anchor
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
James R. Dunathan 62 1987 President and Chief Executive Officer since 1987
and a Director
Earl Wiklund 51 1987 Senior Vice President, Chief Financial Officer
and Secretary since 1987 and a Director
Audie J. Dudum 66 1987 Chairman of the Board since November 30, 1994 and
a Director
Steven A. Gonsalves 44 1993 Director
Lawrence A. Hayes 44 1996 Director
R. William MacCullough 57 1987 Director
Gary H. Rittenhouse 52 -- Nominee
Donald B. Putnam 66 1994 Director
Michael R. Sanford 58 1987 Director
Gordon M. Silverstein 53 1997 Director
James P. Wieking 67 1994 Director
============================================================================================================================
</TABLE>
James R. Dunathan. Mr. Dunathan has over 40 years of experience in the
insurance industry and his family has been involved in the insurance industry
since 1880. He joined Harden in 1985 and initiated the formation of Anchor in
late 1986. Mr. Dunathan served as a member of the Board of Directors of the
Professional Insurance Agents Association for 11 years and as President of such
Association from 1975 to 1976. Currently Mr. Dunathan serves on the Business
Leaders Alliance for Contra Costa County, an appointment made by the County
Board of Supervisors. He also serves as a Director of the Barbara Milliff
Children's Center in Concord, California, a non-profit school for children with
developmental disabilities. Mr. Dunathan completed his undergraduate studies at
Ohio State University; and served actively in the U.S. Navy as a naval aviator
while he continued graduate work at the U.S. Armed Forces Institute in Japan.
Earl Wiklund. In addition to his duties at Anchor, Mr. Wiklund also serves
as the Chief Executive Officer of Anchor's third-party administration division,
Harden Group. He has over 30 years of experience in various operational,
administrative and financial management positions. Mr. Wiklund joined Harden in
1984 as Vice President, Finance. From 1993-1996, Mr. Wiklund served on the
Board of Director's of the Health Care Administrators Association ("HCAA"),
formerly known as the Independent Administrators Association, a trade
organization which provides a forum for the exchange of ideas and information
among health care administrators.
16
<PAGE>
During this same period he also served as both a member of the Legislative
Committee and as Treasurer. Mr. Wiklund graduated from California State
University, Sacramento, with a B.S. degree and received his M.B.A. from St.
Mary's College. He also serves as Chairman of Anchor's Audit, Budget & Finance
Committee.
Audie J. Dudum. Since 1969, Mr. Dudum has served as President of Ramallah,
Inc., a manufacturer and distributor of linens and domestics with customers
throughout the Western United States and Hawaii. Mr. Dudum has also been
actively involved in the Ramallah Federation, a national organization founded as
a coalition of immigrants from the Middle East to offer financial, educational
and political assistance to such immigrants. For nearly 20 years he has served,
both nationally and regionally, as a board member of the Ramallah Federation and
was its President in 1983. Mr. Dudum attended City College of San Francisco.
Steven A. Gonsalves. Mr. Gonsalves has been the President of Gonsalves &
Santucci, Inc. since 1986. Gonsalves & Santucci, Inc. is involved in commercial
and residential concrete construction, steel reinforcing and concrete pumping in
the greater San Francisco Bay Region. In addition, he has been President and
Chief Executive Officer of Reliable Trucking, Inc. since 1989. Mr. Gonsalves
attended Utah State University.
Lawrence A. Hayes. Mr. Hayes is a Senior Advisor with Hoefer & Arnett,
Incorporated, an investment banking firm headquartered in San Francisco. Prior
to joining Hoefer & Arnett in 1996 he was a Senior Advisor at Bentley Associates
L.P. from 1995-96, Director in the Financial Services Industry Group of
Prudential Securities from 1987-95, and Senior Vice President overseeing the
Insurance Ratings Group of Standard and Poor's from 1982-87. Mr. Hayes received
a B.S. degree in Business Administration from Northeastern University and holds
an M.B.A. degree from Babson College. Mr. Hayes is a Chartered Financial
Analyst.
R. William MacCullough. Since 1994, Mr. MacCullough has been a Vice
President with the Bank of Oakland. He has over 30 years of experience in the
financial services industry in the San Francisco Bay Area. His career includes
various positions at Bank of America, Barclay's Bank, Meridian National Bank and
the Firemen's Fund Insurance Company. Prior to his current position, he was
Senior Credit Administrator for Fireman's Fund Insurance Company from 1991 to
1994.
Gary H. Rittenhouse. Mr. Rittenhouse is the Senior Vice President -
Strategic Initiatives and Group Special Markets Division of Guarantee Mutual
Life Company ("Guarantee"). He began his career with Guarantee Life in 1970
following his graduation from the University of Nebraska, Omaha campus. Group
Special Markets' primary responsibility centers around providing specialized
products and services, including Excess Loss, to alternate distribution systems
for marketing and administration. In addition to operation responsibility for
Group Special Markets Division, Mr. Rittenhouse is a key member of the Merger
and Acquisition business unit which is responsible for identifying and acquiring
companies or blocks of business which meet identified parameters.
Donald B. Putnam. Mr. Putnam is Chairman of the Executive Committee of
Putnam, Knudsen & Wieking/Talbot. An insurance professional with over 40 years
of experience, Mr. Putnam has been actively involved as a director or officer of
many California insurance associations and served as Director of the National
Association of Insurance Brokers (NAIB) and Intersure, an international
affiliation of insurance brokers. He has also served as Chairman of the NAIB-
PAC. Mr. Putnam is a Business School graduate from the University of
California, Berkeley.
Michael R. Sanford. Since 1991, Mr. Sanford has been the President and
Chief Executive Officer of the Bank Oakland. He has over 30 years of experience
in the banking industry. His career includes serving as President and Chief
Executive Officer of Meridian National Bank and director of the Alex Brown
Financial Group.
James P. Wieking. Mr. Wieking is the Executive Vice President of Putnam,
Knudsen & Wieking/Talbot. He has been active in the insurance business for 40
years. Mr. Wieking was formerly the owner of Wieking, Connolly & Associates in
Oakland, which merged with PKW in 1983. Mr. Wieking has been involved in
various civic and professional associations and has served as a board member of
the Pacific Network Group and the Independent Insurance Agents Association. He
is a graduate of the University of California, Berkeley.
The only director of Anchor who holds a directorship in any company (other
than Anchor) with a class of securities registered pursuant to Section 12 of the
Securities Exchange Act of 1934, as amended, is Mr. Sanford, who serves on the
board of directors of the Bank of Oakland. No director or executive officer of
Anchor has a family relationship to another director or executive officer of
Anchor.
17
<PAGE>
The following information is provided regarding certain executive officers
of Anchor and/or its subsidiaries.
<TABLE>
<CAPTION>
==============================================================================================================
Name Age Position Held Since
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
James R. Dunathan 62 President, Chief Executive Officer and 1987
Director of Anchor
Earl Wiklund 51 Senior Vice President, Chief Financial 1987
Officer, Secretary and Director of Anchor
Chief Executive Officer of Harden Group
Carol J. Haynosch 45 Senior Vice President, Human Resources, 1994
Corporate Affairs, and Assistant Secretary
of Anchor
Lynn A. Boyd 54 President of Harden-CA 1996
Raymond P. Petersen 61 Executive Vice President of Harden-CA 1996
Thomas O. Hedford 58 President of PHA 1998
Stuart Rosendahl 54 Vice President Marketing of PHA 1998
Robert H. Rath 54 President of Harden-AZ 1997
Jerry Turney 51 Vice President Marketing of Harden-AZ 1998
============================================================================================================
</TABLE>
James R. Dunathan. Mr. Dunathan has over 40 years of experience in the
insurance industry and his family has been involved in the insurance industry
since 1880. He joined Harden in 1985 and initiated the formation of Anchor in
late 1986. Mr. Dunathan served as a member of the Board of Directors of the
Professional Insurance Agents Association for 11 years and as President of such
Association from 1975 to 1976. Currently Mr. Dunathan serves on the Business
Leaders Alliance for Contra Costa County, an appointment made by the County
Board of Supervisors. He also serves as a Director of the Barbara Milliff
Children's Center in Concord, California, a non-profit school for children with
developmental disabilities. Mr. Dunathan completed his undergraduate studies at
Ohio State University; and served actively in the U.S. Navy as a naval aviator
while he continued graduate work at the U.S. Armed Forces Institute in Japan.
Earl Wiklund. In addition to his duties at Anchor, Mr. Wiklund also serves
as the Chief Executive Officer of Anchor's third-party administration division,
Harden Group. He has over 30 years of experience in various operational,
administrative and financial management positions. Mr. Wiklund joined Harden in
1984 as Vice President, Finance. From 1993-1996, Mr. Wiklund served on the
Board of Director's of the Health Care Administrators Association ("HCAA"),
formerly known as the Independent Administrators Association, a trade
organization which provides a forum for the exchange of ideas and information
among health care administrators. During this same period, he also served as a
member of the Legislative Committee and as Treasurer. Mr. Wiklund graduated
from California State University, Sacramento, with a B.S. degree and received
his M.B.A. from St. Mary's College. He also serves as Chairman of Anchor's
Audit, Budget & Finance Committee.
Carol J. Haynosch. Ms. Haynosch joined Anchor in 1994 with more than 25
years experience in legal, banking and insurance. Prior to joining Anchor, Ms.
Haynosch was the Vice President of an insurance and diversified financial
services company, and a Vice President of a national bank. In addition to her
responsibility to oversee human resources, Ms. Haynosch's responsibilities
include corporate compliance, due diligence and SEC reporting. She also serves
as an ex-officio member of Anchor's Compensation and Personnel Committee.
18
<PAGE>
Lynn A. Boyd. Mr. Boyd joined Harden-CA in 1991. He has over 30 years
experience in the group health insurance field including positions with Blue
Cross and large insurance brokerage agencies. In his capacity as President, he
is responsible for the daily operation of Harden-CA as well as focusing on the
production of large self-insured and fully insured accounts. Mr. Boyd also
serves on the Harden-CA Executive Committee. Mr. Boyd is a CLU, ChFC and
currently serves as a member of the Board of Directors of the HCAA. Mr. Boyd
also served as President of the HCAA from 1997-1998. He received his B.S.B.A.
from the University of Denver with a major in Finance and a minor in Accounting.
Raymond P. Petersen. Mr. Petersen joined Harden-CA in 1987 following
several years with Marsh-McLennan Associates in San Francisco. His 30 plus
years in the insurance industry include sales management and marketing positions
for both property and casualty and group health benefits companies. At Harden-
CA he is responsible for the development of sales from sponsored programs for
state associations and trade groups. Another priority for him is directing the
network of contracted General Agents and their dedicated producers. Mr.
Petersen serves on the Harden-CA Executive Committee.
Thomas O. Hedford. Mr. Hedford originally joined PHA in 1968 when it was
formerly owned by Beneficial Life Insurance Company. PHA was acquired by Harden
Group in 1998 and is now operated as a division of Harden-CA. His sales
responsibilities at PHA primarily focus on the production of self-insured and
large case fully insured accounts. Mr. Hedford also is responsible for the
daily operational functions of PHA. He has been active in actuarial
organizations and served on insurance industry boards. From 1995-1998 he served
as Chairman of the Oregon Medical Insurance Pool Board and from 1996-1998 he
was the Treasurer of the Oregon Life and Health Guaranty Association. Mr.
Hedford graduated from the University of Washington with a degree in
Mathematics.
Stuart Rosendahl. Mr. Rosendahl originally joined PHA in 1995 when it was
formerly owned by Beneficial Life Insurance Company after serving ten years with
Blue Cross Blue Shield of Oregon. PHA was acquired by Harden Group in 1998 and
is now operated as a division of Harden-CA. At PHA, Mr. Rosendahl is
responsible for new business development, consulting, client management and
retention. Mr. Rosendahl is active in the Oregon State Association of Health
Underwriters and is a member of the Self Insured Institute of America as well as
various other insurance industry related organizations. He holds a Bachelor of
Science degree from Oregon State University and has earned the professional
designation of Certified Health Consultant (CHC).
Robert H. Rath. Mr. Rath joined Harden-AZ in 1997 with 25 years of
experience in the employee benefits administration field. His career includes
extensive management experience in underwriting, sales and claims as well as
Exclusive Provider Organization (EPO), Preferred Provider Organization (PPO) and
Health Maintenance Organization (HMO) development and implementation. Mr. Rath
is responsible for the daily operational functions of Harden-AZ as well as the
development of business opportunities and the production of administration
services business. For the past 13 years, Mr. Rath's activities have focused
on marketing and sales management of employee benefits plans in the Western
United States. Prior to joining Harden-AZ, Mr. Rath was the President and
Director of L & H Administrators from 1995-1997, and President, Chief Executive
Officer and Director of Western States Administrators from 1972-1995. He has
also served as Director of the Society of Professional Benefit Administrators
and Director and President of the HCAA. Mr. Rath serves on the Harden-AZ
Executive Committee.
Jerry Turney. Mr. Turney joined Harden-AZ in 1998 with over 20 years of
experience in the design and sales of employee benefit programs. Prior to
joining Harden-AZ, Mr. Turney was the Western Regional Manager with American
Trust Administrators from 1996-1998. He previously held sales and marketing
management positions within the Blue Cross/Blue Shield system in the San
Francisco, Los Angles and Phoenix areas. At Harden-AZ, Mr. Turney is
responsible for new business development and client retention. Mr. Turney is a
member of the Board of Directors of the Greater Phoenix Health Underwriters.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires Anchor's directors and executive officers, and any
person who owns more than ten percent of Anchor's common stock, to file with the
SEC initial reports of ownership and reports of changes in ownership of Anchor's
common stock. Directors, executive officers and greater than ten-percent
shareholders are required by SEC regulations to furnish Anchor with copies of
all Section 16(a) forms they file. To Anchor's knowledge, based solely on
review of
19
<PAGE>
the copies of such reports furnished to Anchor and written representations that
no other reports were required, during the fiscal year ended December 31, 1998,
all such persons required to file reports were in compliance with the applicable
Section 16(a) filing requirements.
Item 11. Executive Compensation
The following table shows for the fiscal years ended December 31, 1998,
1997 and 1996, the compensation paid to the executive officers of Anchor, the
executive officers of its subsidiary, Harden-CA's division, PHA and the
executive officers of its former subsidiary, PKW, who performed significant
policy making functions for Anchor, whose aggregate salaries and bonuses
exceeded $100,000.
<TABLE>
<CAPTION>
==================================================================================================================================
Summary Annual Compensation Table
- ----------------------------------------------------------------------------------------------------------------------------------
Name and Principal Position Year Salary ($)/1/ Bonus ($) All Other
Compensation
($)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
James R. Dunathan 1998 $132,999 $38,062/2/ $ 5,807/5/
President and Chief 1997 137,237 - 14,735/5/
Executive Officer 1996 137,237 - 13,871/5/
Earl Wiklund 1998 108,685 21,081/2/ -
Senior Vice President, 1997 112,311 - -
Chief Financial Officer and 1996 112,861 - -
Secretary
Thomas O. Hedford 1998 110,000 16,000/3/ -
President of PHA
Stuart Rosendahl 1998 84,000 1,500/4/ 21,276/6/
Vice President Marketing of PHA
Donald B. Putnam 1998 99,999 - -
Chairman of the Executive 1997 99,999 - -
Committee of PKW 1996 106,105 - -
James P. Wieking 1998 109,999 - -
Executive Vice President 1997 125,679 - -
of PKW 1996 125,387 - -
- --------------------------------------------------------------------------------------------------------------------------------
================================================================================================================================
</TABLE>
/1/ Includes compensation earned and received by the named persons, as well as
amounts earned but deferred at the election of such persons pursuant to Anchor's
401(k) Plan.
/2/ Represents incentive compensation paid to Mr. Dunathan and Mr. Wiklund
based on Anchor's financial performance. Said bonus is equal to 4% of Anchor's
operating results ("EBITDA", earnings before income taxes, depreciation and
amortization) and was calculated semi-annually for the periods ended June 30 and
December 31, respectively.
/3/ Represents incentive compensation paid to Mr. Hedford based on PHA's
financial performance. Said bonus for 1998 is equal 50% of 3% of PHA's operating
results ("EBITDA", earnings before income taxes, depreciation and amortization)
and was calculated quarterly for the periods ended March 31, June 30, September
30, and December 31, respectively.
/4/ Represents incentive compensation paid to Mr. Rosendahl based on PHA's
overall financial performance.
/5/ Represents amount paid to Mr. Dunathan for commissions related to certain
of Mr. Dunathan's insurance brokerage clients.
/6/ Represents amount paid to Mr. Rosendahl for commissions related to certain
of Mr. Rosendahl's third-party administration clients.
20
<PAGE>
<TABLE>
<CAPTION>
===============================================================================================================================
Option/SAR Grants in the Last Fiscal Year
- -------------------------------------------------------------------------------------------------------------------------------
Name Number of Securities % of Total Options/SARs Exercise Price Expiration Date
Underlying Number of Granted to Employees in Fiscal Per Share
Options/SARs Granted /1/ Year
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
James R. Dunathan 10,000 14.64% $0.90 12/21/08
1,000 1.46% 0.81 5/12/08
6,000 8.78% 0.50 12/21/08
Earl Wiklund 1,000 1.46% 0.81 5/12/08
Thomas O. Hedford 12,500 18.30% 0.88 1/19/08
Stuart Rosendahl 7,500 10.98% 0.88 1/19/08
Jerry Turney 5,000 7.82% 0.81 5/12/08
=============================================================================================================================
</TABLE>
/1/ Each option has a ten-year term but is subject to earlier termination
upon the optionee's termination of employment, death or disability as provided
in the 1994 Stock Option Plan and the optionee's option agreement. The exercise
price may be paid in cash or in shares. Withholding taxes due on exercise may be
paid in cash, with previously owned shares, or by having shares withheld. All
options become exercisable in 25% increments in 1999, 2000, 2001 and 2002,
respectively, except for the 10,000 and 6,000 options granted to Mr. Dunathan
which became exercisable immediately.
<TABLE>
<CAPTION>
===============================================================================================================================
Aggregated Option/SAR Exercises in the Last Fiscal Year
and Fiscal Year-End Option/SAR Values /1/
- -------------------------------------------------------------------------------------------------------------------------------
Name Number of Securities Underlying Unexercised Value of Unexercised In-the-Money
Options/SARs at 12/31/98 Options/SARs at 12/31/98
(Exercisable) (Unexercisable) (Exercisable) (Unexercisable)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
James R. Dunathan 121,100 2,250 0 0
Earl Wiklund 45,750 2,250 0 0
Carol J. Haynosch 10,000 0 0 0
Lynn A. Boyd 10,000 0 0 0
Raymond P. Petersen 10,000 0 0 0
Thomas O. Hedford 0 12,500 0 0
Stuart Rosendahl 0 7,500 0 0
Robert H. Rath 2,500 7,500
Jerry Turney 0 5,000 0 0
============================================================================================================================
</TABLE>
/1/ No options were exercised during 1998. Anchor's 1994 Stock Option Plan
does not provide for stock appreciation rights ("SARs"). The dollar value
reported in the table was determined by multiplying the average of the high and
low bid prices on the OTC Bulletin Board of Anchor's common stock on December
31, 1998 by the number of shares subject to the options minus the aggregate
exercise price.
21
<PAGE>
Employment Agreement with James R. Dunathan
Effective August 16, 1997, Anchor entered into a five-year employment
agreement ("Agreement") with James R. Dunathan, President and Chief Executive
Officer of Anchor, which provides for a base salary of $140,000 per year
(subject to increase from time to time based upon personal and Company
performance as determined by the Board of Directors). The Agreement provides
that Mr. Dunathan is entitled to participate in all other employee benefit plans
generally available to Anchor's other executive and managerial employees.
Additionally, he is entitled to receive as incentive compensation an annual
bonus equal to 4% of Anchor's operating results ("EBITDA", earnings before
income taxes, depreciation and amortization). Pursuant to the Agreement, in
1997, Mr. Dunathan was granted options to purchase 50,000 shares of Anchor
common stock at an exercise price of $0.90, at the time of grant. He is also
entitled to an automobile allowance, currently set at $12,000 per year. The
Agreement also provides that: (a) in the event that Mr. Dunathan resigns by
giving Anchor six months' prior notice of resignation, he will be entitled to
receive six months base salary; and (b) if Anchor terminates the Agreement for
any reason other than for cause or if Mr. Dunathan becomes permanently disabled,
Anchor will pay to Mr. Dunathan an amount equal to twelve months salary at Mr.
Dunathan's then current rate of compensation and will continue, for a period of
twelve months from termination, all benefits and allowances (including the
automobile allowance) to which Mr. Dunathan would otherwise be entitled had the
Agreement not been terminated, except that if Mr. Dunathan is permanently
disabled, Anchor's obligations to pay said amounts will be reduced on a dollar-
for-dollar basis by any disability insurance payments made to Mr. Dunathan
during said twelve-month period.
Employment Agreement with Thomas O. Hedford
Effective January 1, 1998, Harden entered into a four-year employment
agreement ("Agreement") with Thomas O. Hedford, President of the Harden division
PHA, which provides for a base salary of $110,000 per year (subject to increase
from time to time based upon personal and PHA's performance as determined by
periodic reviews and evaluations to be conducted at least annually. The
Agreement provides that Mr. Hedford is entitled to participate in all other
employee benefit plans generally available to Harden's other executive and
managerial employees. Additionally, he is entitled to receive as incentive
compensation an annual bonus that shall not be less than 50% of 3% of PHA's
operating results ("EBITDA", earnings before income taxes, depreciation and
amortization). Pursuant to the Agreement he is also entitled to an automobile
allowance, currently set at $8,400 per year. The Agreement also provides that:
(a) in the event that Mr. Hedford resigns by giving Harden three months' prior
notice of resignation, he will be entitled to receive three months base salary;
(b) if Harden terminates the Agreement for any reason other than for cause, or
if he becomes permanently disabled, Harden will pay to Mr. Hedford an amount
equal to six months salary at Mr. Hedford's then current rate of compensation,
and will continue, for a period of six months from termination, all benefits and
allowances (including the automobile allowance) to which Mr. Hedford would
otherwise be entitled had the Agreement not been terminated, except that if Mr.
Hedford is permanently disabled, Harden's obligations to pay said amounts will
be reduced by any disability insurance payments made to Mr. Hedford during said
six-month period.
22
<PAGE>
The 1994 Stock Option Plan (the "1994 Plan")
No options were exercised by the directors or executive officers of Anchor
during Anchor's last fiscal year. As of March 12, 1999 there were options to
purchase 604,725 shares of Anchor common stock outstanding. Except with respect
to options to be granted to non-employee directors, the amount of options that
will be granted in the future is not presently determinable.
The following table sets forth options that were granted under the 1994
Plan during 1998. All such options have an exercise price equal to 100% of the
fair market value of Anchor common stock as of the date of grant (except for
options granted to persons who own stock possessing more than 10% of the voting
power of Anchor's common stock, which have an exercise price equal to 110% of
the fair market value as of the date of grant). Options granted in 1998 are
exercisable in 25% increments in 1999, 2000, 2001 and 2002, respectively, except
for the options to acquire 10,000 and 6,000 shares granted to James R. Dunathan,
which are exercisable immediately. All such options have a term of 10 years.
<TABLE>
<CAPTION>
===================================================================================================================================
1994 Plan
- -----------------------------------------------------------------------------------------------------------------------------------
Name & Position Exercise Price Number of Shares
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Employee Directors:
James R. Dunathan
President and Chief Executive Officer $0.90 10,000
0.81 1,000
0.50 6,000
Earl Wiklund
Senior Vice President, Chief Financial Officer and Secretary $0.81 1,000
Non-Employee Directors: $0.81 6,000 (1,000 each to
6 directors)
$0.89 2,000 (1,000 each to
2 directors)
All Employees (including employees who are also officers): $0.88 22,500
$0.81 25,800
Consultants: N/A -0-
====================================================================================================================================
</TABLE>
23
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table shows the name, address, number of shares held, and
percentage of shares held as of March 12, 1999, by each person or entity known
to Anchor to be the beneficial owner of more than five percent of the Company's
common stock.
<TABLE>
<CAPTION>
==============================================================================================================================
Name and Address Amount and Nature of Percent
Ownership of Class
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
James R. Dunathan 318,897/1/ 6.60%
1800 Sutter Street, Suite 400
Concord, CA 94520
Steven A. Gonsalves 245,979/2/ 5.10%
5151 Port Chicago Highway
Concord, CA 94520
Donald B. Putnam 624,588/3/ 12.92%
1800 Sutter Street, Suite 500
Concord, CA 94520
James P. Wieking 492,078/4/ 10.30%
1800 Sutter Street, Suite 500
Concord, CA 94520
Earl Wiklund 290,796/5/ 5.42%
1800 Sutter Street, Suite 400
Concord, CA 94520
Guarantee Mutual Life Company 672,444/6/ 14.28%
8001 Indian Hills Drive
Omaha, Nebraska 68114
==============================================================================================================================
</TABLE>
/1/ Includes 193,547 shares of common stock, 123,350 shares of common stock
issuable upon the exercise of stock options, and 2,000 shares of common stock
issuable upon exercise of warrants at a purchase price of $1.35 per share. Mr.
Dunathan has sole dispositive power over such shares of common stock.
/2/ Includes 132,424 shares of common stock, 18,000 shares of common stock
issuable upon the exercise of stock options, 10,000 shares of common stock
issuable upon exercise of warrants at a purchase price of $1.35 per share, and
85,555 shares of common stock issuable upon exercise of warrants at a purchase
price of $0.90 per share. Mr. Gonsalves shares voting power over 132,424 shares
of common stock with Debra Gonsalves, his wife. Mr. Gonsalves shares voting
power with Gonsalves & Santucci, Inc., as President and majority shareholder,
over the remaining 21,875 shares of common stock.
/3/ Includes 499,013 shares of common stock, 28,000 shares of common stock
issuable upon the exercise of stock options, 24,242 shares of common stock
issuable upon the conversion of certain debentures at a conversion price of
$1.65 per share, 30,000 shares of common stock issuable upon the conversion of
certain debentures at a conversion price of $0.50 per share, 4,000 shares of
common stock issuable upon the exercise of warrants at a purchase price of $1.35
per share, 33,333 shares of common stock issuable upon exercise of warrants at a
purchase price of $0.90 per share, and 6,000 shares of common stock issuable
upon exercise of warrants at a purchase price of $0.50 per share. Mr. Putnam
shares voting power over such shares of common stock with Alexandra Putnam, his
wife, as co-trustee of a revocable living trust.
/4/ Includes 426,301 shares of common stock, 28,000 shares of common stock
issuable upon exercise of warrants at a purchase price of $1.35 per share,
27,777 shares of common stock issuable upon exercise of warrants at a purchase
of $0.90 per share, and
24
<PAGE>
6,000 shares of common stock issuable upon exercise of warrants at a purchase
price of $0.50 per share. Mr. Wieking has sole dispositive power over such
shares of common stock.
/5/ Includes 158,130 shares of common stock, 48,000 shares of common stock
issuable upon the exercise of stock options, 30,000 shares of common stock
issuable upon the conversion of certain debentures at a conversion price of
$0.50 per share, 2,000 shares of common stock issuable upon exercise of warrants
at a purchase price of $1.35 per share, 16,666 shares of common stock issuable
upon exercise of warrants at a purchase price of $0.90 per share, and 3,000
shares of common stock issuable upon exercise of warrants at a purchase price of
$0.50 per share. Mr. Wiklund has sole dispositive power over such shares of
common stock.
/6/ Guarantee Mutual Life Company has sole dispositive power over such
shares of common stock.
The table below indicates the number of shares of Anchor's common stock
beneficially owned as of March 12, 1999, by (a) incumbent directors and the
nominees nominated by the Board of Directors for election as directors; (b)
executive officers who are not also directors; and (c) by all directors and
executive officers as a group. Except as otherwise indicated, each person has
sole investment and voting powers with respect to the shares shown as
beneficially owned. Ownership information is based upon information furnished
by the respective individuals.
<TABLE>
<CAPTION>
=====================================================================================================================
DIRECTORS, NOMINEES AND NAMED EXECUTIVE OFFICERS
- ---------------------------------------------------------------------------------------------------------------------
Name Common stock Beneficially Owned as of Percent
March 12, 1999 of Class
- ---------------------------------------------------------------------------------------------------------------------
(a) Directors:
<S> <C> <C>
Audie J. Dudum /1/ 127,258 2.67%
James R. Dunathan /2/ 318,897 6.60%
Steven A. Gonsalves /3/ 245,979 5.10%
Lawrence A. Hayes /4/ 113,269 2.39%
R. William MacCullough /5/ 182,100 3.84%
Gary H. Rittenhouse /6/ -- 0%
Donald B. Putnam /7/ 624,588 12.92%
Michael R. Sanford /8/ 98,590 2.08%
Gordon M. Silverstein /9/ 101,121 2.10%
James P. Wieking /10/ 492,078 10.30%
Earl Wiklund /11/ 290,796 5.42%
(b) Executive Officers:
Lynn A. Boyd /12/ 10,000 0.21%
Raymond P. Petersen /13/ 16,250 0.34%
Thomas O. Hedford /14/ 48,500 1.02%
Stuart Rosendahl /15/ 13,500 0.29%
Robert H. Rath /16/ 70,000 1.46%
Jerry Turney /17/ 5,000 0.10%
Carol J. Haynosch /18/ 10,000 0.21%
(c) All directors and executive officers as a group 2,737,926 48.24%
=====================================================================================================================
</TABLE>
/1/ Includes 67,036 shares of common stock, 38,000 shares of common stock
issuable upon the exercise of stock options, and 22,222 shares of common stock
issuable upon exercise of warrants at a purchase price of $0.90 per share.
25
<PAGE>
/2/ Includes 193,547 shares of common stock, 123,350 shares of common stock
issuable upon the exercise of stock options, and 2,000 shares of common stock
issuable upon exercise of warrants at a purchase price of $1.35 per share.
/3/ Includes 132,424 shares of common stock, 18,000 shares of common stock
issuable upon the exercise of stock options, 10,000 shares of common stock
issuable upon exercise of warrants at a purchase price of $1.35 per share, and
85,555 shares of common stock issuable upon exercise of warrants at a purchase
price of $0.90 per share.
/4/ Includes 85,158 shares of common stock, 17,000 shares of common stock
issuable upon the exercise of stock options and 11,111 shares of common stock
issuable upon exercise of warrants at a purchase price of $0.90 per share.
/5/ Includes 144,100 shares of common stock and 38,000 shares of common stock
issuable upon the exercise of stock options.
/6/ Nominee, Gary H. Rittenhouse is Senior Vice President - Strategic
Initiatives and Group Special Markets Division of Guarantee Mutual Life Company
("Guarantee"). Guarantee has sole dispositive power over 672,444 shares of
common stock, which represents 14.28% of Anchor's outstanding shares.
/7/ Includes 499,013 shares of common stock, 28,000 shares of common stock
issuable upon the exercise of stock options, 24,242 shares of common stock
issuable upon the conversion of certain debentures at a conversion price of
$1.65 per share, 30,000 shares of common stock issuable upon the conversion of
certain debentures at a conversion price of $0.50 per share, 4,000 shares of
common stock issuable upon exercise of warrants at a purchase price of $1.35 per
share, 33,333 shares of common stock issuable upon exercise of warrants at a
purchase price of $0.90 per share, and 6,000 shares of common stock issuable
upon exercise of warrants at a purchase price of $0.50 per share.
/8/ Includes 60,590 shares of common stock and 38,000 shares of common stock
issuable upon the exercise of stock options.
/9/ Includes 17,000 shares of common stock issuable upon the exercise of stock
options, 12,121 shares of common stock issuable upon the conversion of certain
debentures at a conversion price of $1.65 per share, 60,000 shares of common
stock issuable upon the conversion of certain debentures at a conversion price
of $0.50 per share, and 12,000 shares of common stock issuable upon exercise of
warrants at a purchase price of $0.50 per share.
/10/ Includes 426,301 shares of common stock, 28,000 shares of common stock
issuable upon the exercise of stock options, 4,000 shares of common stock
issuable upon exercise of warrants at a purchase price of $1.35 per share,
27,777 shares of common stock issuable upon exercise of warrants at a purchase
price of $0.90 per share, and 6,000 shares of common stock issuable upon the
conversion of certain debentures at a conversion price of $0.50 per share.
/11/ Includes 158,130 shares of common stock, 48,000 shares of common stock
issuable upon the exercise of stock options, 30,000 shares of common stock
issuable upon the conversion of certain debentures at a conversion price of
$0.50 per share, 2,000 shares of common stock issuable upon exercise of warrants
at a purchase price of $1.35 per share, 16,666 shares of common stock issuable
upon exercise of warrants at a purchase price of $0.90 per share, and 6,000
shares of common stock issuable upon exercise of warrants at a purchase price of
$0.50 per share.
/12/ Includes 10,000 shares of common stock issuable upon the exercise of
stock options.
/13/ Includes 6,250 shares of common stock and 10,000 shares of common stock
issuable upon the exercise of stock options.
/14/ Includes 12,500 shares of common stock issuable upon the exercise of
stock options, 6,000 shares of common stock issuable upon exercise of warrants
at a purchase price of $0.50 per share, and 30,000 shares of common stock
issuable upon the conversion of certain debentures at a conversion price of
$0.50 per share.
26
<PAGE>
/15/ Includes 7,500 shares of common stock issuable upon the exercise of stock
options, and 6,000 shares of common stock issuable upon exercise of warrants at
a purchase price of $0.50 per share.
/16/ Includes 10,000 shares of common stock issuable upon the exercise of
stock options, 10,000 shares of common stock issuable upon exercise of warrants
at a purchase price of $0.50 per share, and 50,000 shares of common stock
issuable upon the conversion of certain debentures at a conversion price of
$0.50 per share.
/17/ Includes 5,000 shares of common stock issuable upon the exercise of stock
options.
/18/ Includes 10,000 shares of common stock issuable upon the exercise of stock
options.
Item 13. Certain Relationships and Related Transactions
There are no material transactions since January 1, 1998, or any currently
proposed transactions, to which Anchor was or is to be a party, in which the
amount involved exceeds $60,000 and in which any director, executive officer,
five percent or more shareholder, or any associate of any of the foregoing
persons had, or will have, a direct or indirect material interest, except as
follows:
In 1995, Anchor issued $370,000 of 10% Convertible Subordinated Debentures
(the "Debentures"). Subsequent investors holding $270,000 of the Debentures,
including seven members of the Board of Directors (Messrs. Dudum, Dunathan,
Hayes, Putnam, Taylor, Wieking and Wiklund), converted the Debentures into
shares of Anchor's common stock at $1.35 per share. These conversions reduced
Anchor's outstanding indebtedness by $270,000 and, in turn, increased
shareholders' equity by $270,000. As of March 12, 1999, $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 (Messrs. Dunathan, Gonsalves, Putnam, Wieking and Wiklund) 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 purchase 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 (discussed below), by exchanging
the Bridge Notes. The basic terms of the 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 March 12, 1999, $80,000 of the Bridge Notes,
held by three members of the Board of Directors (Messrs. Dunathan, Gonsalves and
Putnam) remained outstanding.
During 1997, Anchor raised $305,000 from seven members of the Board of
Directors (Messrs. Dudum, Dunathan, Gonsalves, Hayes, Putnam, Wieking and
Wiklund) and other qualified investors through a private offering 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.
27
<PAGE>
At the end of the third quarter 1998, Anchor commenced raising additional
funds from qualified investors by offering 10% Convertible Subordinated
Debentures, Series B (the "Series B Debentures"). At the close of said offering,
January 25, 1999, Anchor had raised $495,000 from five members of the Board of
Directors (Messrs. Dunathan, Putnam, Silverstein, Wieking and Wiklund) and other
qualified investors. Anchor has utilized a substantial portion of the proceeds
from the Series B Debentures to support current working capital needs. The basic
terms of the Series B Debentures were: (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 shares years; (e) for each $5,000 of
Series B Debentures acquired, an investor received a five year warrant to
acquire 2,000 shares of Anchor common stock at an exercise price of $0.50 per
share; and (f) subordination provisions that subordinate the Series B Debentures
to Anchor's "Senior Debt" (as defined in the Series B Debentures). The Series B
Debentures contained a provision that permitted Anchor to redeem all or a
portion of the Series B Debentures, at par, plus any outstanding interest, in
the event Anchor sold Putnam, Knudsen & Wieking, Inc. ("PKW") for an amount in
excess of $2 million. As a result of the December 31, 1998 sale of PKW in excess
of $2 million, Anchor has as of March 12, 1999, repurchased $230,000 of the
Series B Debentures. Of the $265,000 Series B Debentures that remain
outstanding, $75,000 are held by four members of the Board of Directors (Messrs.
Dunathan, Putnam, Silverstein and Wiklund).
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Financial Statements.
--------------------
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Operations for the years ended December 31,
1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996
Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules.
-----------------------------
Other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes
thereto.
(a)(3) Exhibit Index.
-------------
2.1 Amended and Restated Agreement and Plan of Merger dated as of
October 24, 1994, by and between System and Old Anchor, as
amended by that certain Amendment to the Amended and Restated
Agreement and Plan of Merger dated as of December 29, 1994, and
Agreement of Merger attached as an exhibit to the
Reorganization Agreement and certified by the Delaware
Secretary of State on January 6, 1995. Incorporated by
reference to Exhibit 2.1 of Anchor's Annual Report on Form 10-K
for the year ended December 31, 1994.
3.1 Restated Certificate of Incorporation. Incorporated by
reference to Exhibit 3.1 of Anchor's Annual Report on Form 10-K
for the year ended December 31, 1994.
3.2 Bylaws. Incorporated by reference to Exhibit 3.2 of Anchor's
Annual Report on Form 10-K for the year ended December 31,
1994.
4.1 Specimen Common Stock Certificate. Incorporated by reference to
Exhibit 4.1 of Anchor's Annual Report on Form 10-K for the year
ended December 31, 1994.
28
<PAGE>
4.2 Specimen Warrant Certificate. Incorporated by reference to
Exhibit 4.2 of Anchor's Annual Report on Form 10-K for the year
ended December 31, 1994.
4.3 Warrant Agreement dated as of January 7, 1995, between Anchor
and U.S. Stock Transfer Corporation. Incorporated by reference
to Exhibit 4.3 of Anchor's Annual Report on Form 10-K for the
year ended December 31, 1994.
4.3a Letter dated December 29, 1995, to all stockholders from James
R. Dunathan extending warrants expiration date to January 6,
1997. Incorporated by reference to Exhibit 4.3a of Anchor's
Annual Report on Form 10-K for the year ended December 31,
1995.
4.4 Form of 10% Convertible Subordinated Debenture. Incorporated by
reference to Exhibit 4.1 of Anchor's Form 10-Q for the quarter
ending March 31, 1995.
4.5 Form of 10% Convertible Subordinated Debenture, Series A.
Incorporated by reference to Exhibit 4.5 of Anchor's Annual
Report on Form 10-K for the year ended December 31, 1995.
4.6 Form of 10% Subordinated Bridge Note. Incorporated by reference
to Exhibit 4.6 of Anchor's Form 10-Q for the quarter ending
September 30, 1996.
4.6a Form of Warrant to Purchase Shares of Common Stock of Anchor
Pacific Underwriters, Inc. Incorporated by reference to Exhibit
4.6a of Anchor's Form 10-Q for the quarter ending September 30,
1996.
4.6b Form of Offering to change the terms of the Form of Warrant to
Purchase Shares of Common Stock of Anchor Pacific Underwriters,
Inc., which is incorporated by reference to Exhibit 4.6a,
above. Incorporated by reference to Exhibit 4.6b of Anchor's
Annual Report on Form 10-K for the year ended December 31,
1996.
4.7 Form of Subscription Agreement for the Offer and Sale of Shares
of Common Stock of Anchor Pacific Underwriters, Inc.
Incorporated by reference to Exhibit 4.7 of Anchor's Annual
Report on Form 10-K for the year ended December 31, 1996.
4.7a Form of Warrant to Purchase Shares of Common Stock of Anchor
Pacific Underwriters, Inc. Incorporated by reference to Exhibit
4.7a of Anchor's Annual Report on Form 10-K for the year ended
December 31, 1996.
4.8 Form of 10% Convertible Subordinated Debenture, Series B.
Incorporated by reference to Exhibit 4.8 of Anchor's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998.
4.8a Form of Warrant to Purchase Shares of Common Stock of Anchor
Pacific Underwriters, Inc. Incorporated by reference to Exhibit
4.8a of Anchor's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998.
10.1 1994 Stock Option Plan. Incorporated by reference to Exhibit
10.1 of Anchor's Annual Report on Form 10-K for the year ended
December 31, 1994.*
10.2 Lease dated October 29, 1990, as amended on June 10, 1991,
April 16, 1994 and September 9, 1994, between Anchor and
Societe Generale (regarding 1800 Sutter Street, Concord,
California). Incorporated by reference to Exhibit 10.2 of
Anchor's Annual Report on Form 10-K for the year ended December
31, 1994.
10.3 Lease dated May 29, 1990, as amended on December 1, 1992,
between PKW and Kaiser Center, Inc. (regarding 300 Lakeside
Drive, Oakland, California). Incorporated by reference to
Exhibit 10.3 of Anchor's Annual Report on Form 10-K for the
year ended December 31, 1994.
29
<PAGE>
10.3a Sublease dated May 26, 1995, between PKW and Martin, Ryan &
Andrada, Inc. (regarding 82% of 300 Lakeside Drive, Oakland,
California). Incorporated by reference to Exhibit 10.2 of
Anchor's Form 10-Q for the quarter ending June 30, 1995.
10.3b Sublease dated December 1, 1995, between PKW and Logiciel, Inc.
(regarding 10% of 300 Lakeside Drive, Oakland, California).
Incorporated by reference to Exhibit 10.3b of Anchor's Annual
Report on Form 10-K for the year ended December 31, 1995.
10.4 Lease dated July 3, 1989, as amended on February 10, 1994,
between BRI and Connecticut General Life Insurance Company
(regarding 10301 N. 92nd Street, Scottsdale, Arizona).
Incorporated by reference to Exhibit 10.4 of Anchor's Annual
Report on Form 10-K for year ended December 31, 1994.
10.5 Employment Agreement dated August 16, 1994, between Anchor and
James R. Dunathan. Incorporated by reference to Exhibit 10.5 of
Anchor's Annual Report on Form 10-K for the year ended December
31, 1994.*
10.6 Amendment No. 1 to Employment Agreement dated December 19,
1994, between Anchor and James R. Dunathan. Incorporated by
reference to Exhibit 10.6 of Anchor's Annual Report on Form 10-
K for the year ended December 31, 1994.*
10.6a Employment Agreement dated August 16, 1997, between Anchor and
James R. Dunathan. Incorporated by reference to Exhibit 10.6a
of Anchor's Quarterly Report on Form 10Q for the quarter ended
September 30, 1997.*
10.7 Business Loan Agreement dated as of September 27, 1994, between
Anchor and Concord Commercial Bank, and related documents.
Incorporated by reference to Exhibit 10.7 of Anchor's Annual
Report on Form 10-K for the year ended December 31, 1994.
10.8 Business Loan Agreement dated as of September 7, 1994, between
PKW and CivicBank of Commerce, and related documents.
Incorporated by reference to Exhibit 10.8 of Anchor's Annual
Report on Form 10-K for the year ended December 31, 1994.
10.9 Business Loan Agreement dated as of June 17, 1992, between
Harden and Concord Commercial Bank, and related documents.
Incorporated by reference to Exhibit 10.9 of Anchor's Annual
Report on Form 10-K for the year ended December 31, 1994.
10.10 Lease of Personal Property dated April 6, 1994, between BRI and
Winthrop Financial Group, Inc. (regarding computer equipment).
Incorporated by reference to Exhibit 10.10 of Anchor's Annual
Report on Form 10-K for the year ended December 31, 1994.
10.12 Information Management Agreement dated as of May 11, 1993,
between Harden and CMSI, Inc. Incorporated by reference to
Exhibit 10.12 of Anchor's Annual Report on Form 10-K for the
year ended December 31, 1994.
10.12a Mutual Release and Settlement Agreement, Promissory Note and
UCC-1 Financing Statement dated as of March 25, 1996, between
Harden and BRC (formerly CMSI) of the Information Management
Agreement dated as of May 11, 1993, between Harden and CMSI,
which is incorporated by reference to Exhibit 10.12, above.
Incorporated by reference to Exhibit 10.12a of Anchor's Form
10-Q for the quarter ending March 31, 1996.
10.12b Account Transition Agreement, Promissory Note and UCC-1
Financing Statement dated as of March 29, 1996, between Harden
and BRC (formerly CMSI) of the Management Agreement dated as of
May 11, 1993, between Harden and CMSI, which is incorporated by
reference to Exhibit 10.12, above. Incorporated by reference to
Exhibit 10.12b of Anchor's Form 10-Q for the quarter ending
March 31, 1996.
30
<PAGE>
10.13 Consulting Agreement dated as of August 1, 1994, between BRI
and Hightrust, Ltd. Incorporated by reference to Exhibit 10.13
of Anchor's Annual Report on Form 10-K for the year ended
December 31, 1994.
10.14 Agreement for Purchase and Sale of Assets dated as of January
18, 1995, between Harden and Dutcher. Incorporated by reference
to Exhibit 10.14 of Anchor's Annual Report on Form 10-K for the
year ended December 31, 1994.
10.15 Amendment to Agreement for Purchase and Sale of Assets dated
February 1, 1995, between Harden and Dutcher. Incorporated by
reference to Exhibit 10.15 of Anchor's Annual Report on Form
10-K for the year ended December 31, 1994.
10.15a Amendment to Agreement for Purchase and Sale of Assets dated
June 10, 1996, between Harden and Dutcher, which is
incorporated by reference to Exhibit 10.15, above. Incorporated
by reference to Exhibit 10.15a of Anchor's Form 10-Q for the
quarter ending June 30, 1996.
10.16 Asset Purchase Agreement dated May 17, 1995 between Putnam,
Knudsen & Wieking Inc. Insurance Brokers and Crestview Leasing.
Incorporated by reference to Exhibit 10.1 of Anchor's Form 10-Q
for the quarter ending June 30, 1995.
10.17 Settlement Agreement and Mutual Release dated August 22, 1995
between Anchor and Donald B. Putnam, James P. Wieking, Ronald
J. Marengo, Gary N. Lewis, Edward Wieking and Robert Moser.
Incorporated by reference to Exhibit 10.1 of Anchor's Form 10-Q
for the quarter ending September 30, 1995.*
10.18 Purchase and Sale Agreement dated as of March 1, 1996 between
Anchor and Roland L. Ferguson, doing business as R.L. Ferguson
Insurance Agency. Incorporated by reference to Exhibit 10.18 of
Anchor's Form 10-Q for the quarter ending March 31, 1996.
10.19 Purchase and Sale Agreement dated as of April 1, 1996 between
Anchor and Norman I. Robins. Incorporated by reference to
Exhibit 10.19 of Anchor's Form 10-Q for the quarter ending June
30, 1996.
10.20 Purchase and Sale Agreement dated as of May 1, 1996 between
Anchor and PKW and John R. McPherson. Incorporated by reference
to Exhibit 10.20 of Anchor's Form 10-Q for the quarter ending
June 30, 1996.
10.21 Engagement Letter dated June 27, 1996 between Anchor and
Gerbsman Partners. Incorporated by reference to Exhibit 10.21
of Anchor's Form 10-Q for the quarter ending June 30, 1996.
10.22 Industrial Real Estate Lease (Multi-Tenant Facility) dated
September 12, 1996 between Palo Cristi Airport II, L.L.C., and
BRI (regarding 15721 North Greenway Hayden Loop, Suite 205,
Scottsdale, Arizona). Incorporated by reference to Exhibit
10.22 of Anchor's Form 10-Q for the quarter ending September
30, 1996.
10.23 Financial Advisory Agreement dated December 17, 1996 between
The Private Financing Group and Anchor Pacific Underwriters,
Inc. Incorporated by reference to Exhibit 10.23 of Anchor's
Annual Report on Form 10-K for the year ended December 31,
1996.
10.24 Business Loan Agreement dated as of July 3, 1997, between
Anchor and Imperial Bank, and related documents. Incorporated
by reference to Exhibit 10.24 of Anchor's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997.
10.25 Central Plaza Office Lease dated July 14, 1997, between Harden
and Zufu Properties, Co., Ltd. (regarding 3460 Wilshire
Boulevard Tower, Suite 407, Los Angeles, California).
Incorporated by reference to Exhibit 10.25 of Anchor's
Quarterly Report on Form 10-Q for the quarter ended September
30, 1997.
31
<PAGE>
10.25a Addendum dated July 14, 1997, to Central Plaza Office Lease
dated July 14, 1997, between Harden and Zufu Properties, Co.,
Ltd. (regarding 3460 Wilshire Boulevard Tower, Suite 407, Los
Angeles, California). Incorporated by reference to Exhibit
10.25a of Anchor's Quarterly Report on Form 10-
10.26 Office Building Lease dated July 30, 1997, between BRI and T.W.
Patterson Investors II/The T.W. Patterson Building (regarding
2014 Tulare Street, Suite 818, Fresno, California).
Incorporated by reference to Exhibit 10.26 of Anchor's
Quarterly Report on Form 10-Q for the quarter ended September
30, 1997.
10.27 Business Loan Agreement dated of September 30, 1997, between
Anchor and Imperial Bank, and related documents. Incorporated
by reference to Exhibit 10.27 of Anchor's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997.
32
<PAGE>
10.28 Business Loan Agreement dated December 22, 1997, between Anchor
and Imperial Bank, and related documents. Incorporated by
reference to Exhibit 10.28 of Anchor's Annual Report on
Form 10-K for the year ended December 31, 1998.
10.29 Central Plaza Office Lease dated January 6, 1998, between
Harden and Zufu Properties, Co., Ltd. (regarding 3450 Wilshire
Boulevard Tower, Suite 210, Los Angeles, California).
Incorporated by reference to Exhibit 10.29 of Anchor's Annual
Report on Form 10-K for the year ended December 31, 1998.
10.30 Business Loan Agreement dated March 9, 1998, between Anchor and
Imperial Bank, and related documents. Incorporated by reference
to Exhibit 10.30 of Anchor's Annual Report on Form 10-K for the
year ended December 31, 1998.
10.31 Stock Purchase Agreement effective March 20, 1998, between
Anchor and Harden and Pacific Assurance Company (regarding
Pacific Heritage Administrators of Nevada, Inc.). Incorporated
by reference to Exhibit 10.31 of Anchor's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1998.
10.32 Agreement dated February 26, 1998, between Russell Miller, Inc.
and Anchor. Incorporated by reference to Exhibit 10.32 of
Anchor's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998.
10.33 Business Loan Agreement dated June 1, 1998, between Anchor and
Imperial Bank, and related documents. Incorporated by reference
to Exhibit 10.33 of Anchor's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998.
10.34 Purchase Agreement dated January 15, 1999, between Talbot
Agency of California, Inc., PKW and Anchor.
11.1 Statement Regarding Computation of Per Share Earnings.
21.1 Subsidiaries of Anchor. Incorporated by reference to Exhibit
21.1 of Anchor's Annual Report on Form 10-K for the year ended
December 31, 1994.
27.0 Financial Data Schedule.
All other exhibits are omitted because they are inapplicable.
*Denotes management contract or compensatory plan or
arrangement.
(b) Reports of Form 8-K.
None.
33
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
ANCHOR PACIFIC UNDERWRITERS, INC.
(Registrant)
Date: March 23, 1999 By: /s/ James R. Dunathan
----------------------------------------------
James R. Dunathan
President and
Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- ------------------------------- -------------------- --------------
<S> <C> <C>
/s/ James R. Dunathan President, March 23, 1999
- ------------------------------- Chief Executive
James R. Dunathan Officer and Director
(Principal Executive Officer)
/s/ Earl Wiklund Chief Financial March 23, 1999
- ------------------------------- Officer, Secretary
Earl Wiklund and Director
(Principal Financial and
Accounting Officer)
/s/ Audie J. Dudum Chairman, March 23, 1999
- ------------------------------- Director
Audie J. Dudum
/s/ Steven A. Gonsalves Director March 23, 1999
- -------------------------------
Steven A. Gonsalves
/s/Lawrence A. Hayes Director March 23, 1999
- -------------------------------
Lawrence A. Hayes
/s/ R. William MacCullough Director March 23, 1999
- -------------------------------
R. William MacCullough
/s/ Donald B. Putnam Director March 23, 1999
- -------------------------------
Donald B. Putnam
/s/ Michael R. Sanford Director March 23, 1999
- -------------------------------
Michael R. Sanford
/s/ Gordon M. Silverstein Director March 23, 1999
- -------------------------------
Gordon M. Silverstein
/s/ James P. Wieking Director March 23, 1999
- -------------------------------
James P. Wieking
</TABLE>
33
<PAGE>
ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
--------------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
AND REPORT OF INDEPENDENT AUDITORS
----------------------------------
* * * * *
DECEMBER 31, 1998, 1997 and 1996
--------------------------------
<PAGE>
ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
---------------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
YEARS ENDED DECEMBER 31, 1998, 1997 and 1996
--------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors............................ 1
Audited Consolidated Financial Statements
Consolidated Balance Sheet................................ 2
Consolidated Statement of Operations...................... 3
Consolidated Statement of Shareholders' Equity (Deficit).. 4
Consolidated Statement of Cash Flows...................... 5
Notes to Consolidated Financial Statements................ 6
</TABLE>
<PAGE>
[LETTERHEAD FOR ODENBERG, ULLAKKO, MURANISHI & CO.]
March 15, 1999
To the Board of Directors
and Shareholders of
Anchor Pacific Underwriters, Inc.
REPORT OF INDEPENDENT AUDITORS
------------------------------
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, shareholders' equity (deficit) and cash
flows present fairly, in all material respects, the financial position of Anchor
Pacific Underwriters, Inc. and its subsidiaries at December 31, 1998 and 1997,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ Odenberg, Ullakko, Muranishi & Co.
<PAGE>
ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
--------------------------------------------------
CONSOLIDATED BALANCE SHEET
--------------------------
<TABLE>
<CAPTION>
December 31
-------------------------------
1 9 9 8 1 9 9 7
------- -------
A S S E T S
-----------
<S> <C> <C>
Current assets:
Cash and cash equivalents - corporate funds $ 138,139 $ 44,384
Cash and cash equivalents - third party administration fiduciary 3,517,772 3,058,059
funds
Realizable value of net assets sold 2,054,995 2,505,436
Accounts receivable (less allowance for doubtful accounts of
$41,952 and $45,543 in 1998 and 1997, respectively) 527,827 497,649
Prepaid expenses and other current assets 191,749 345,419
---------- ----------
Total current assets 6,430,482 6,450,947
---------- ----------
Property and equipment, less accumulated depreciation and
amortization 550,478 550,067
---------- ----------
Other assets:
Intangible assets, net 593,933 391,629
Other 80,431 59,667
---------- ----------
674,364 451,296
---------- ----------
$7,655,324 $7,452,310
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current liabilities:
Cash and cash equivalents - third party administration fiduciary
funds $3,517,772 $3,058,059
Accounts payable 619,798 383,299
Accrued expenses 613,256 565,185
Short-term borrowings 200,000 -
Current portion of long-term debt 1,242,950 629,133
Current portion of long-term liabilities 451,068 574,083
---------- ----------
Total current liabilities 6,644,844 5,209,759
---------- ----------
Long-term liabilities, net of current portion 453,226 456,121
---------- ----------
Long-term debt, including $480,000 and $240,000 in 1998 and 1997,
respectively, owed to related parties, net of current portion 858,342 1,329,188
---------- ----------
Shareholders' equity (deficit):
Preferred stock - $.02 par value; 2,000,000 shares authorized; none
issued and outstanding
Common stock - $.02 par value; 16,000,000 shares authorized;
4,710,057 and 4,690,839 shares issued and outstanding at
December 31, 1998 and 1997, respectively 94,201 93,817
Additional paid-in capital 4,232,265 4,215,649
Accumulated deficit (4,627,554) (3,852,224)
----------- -----------
(301,088) 457,242
----------- -----------
Commitments and contingencies (Notes 1, 6, 7, 11, and 12)
----------- -----------
$ 7,655,324 $ 7,452,310
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
--------------------------------------------------
CONSOLIDATED STATEMENT OF OPERATIONS
------------------------------------
<TABLE>
<CAPTION>
Year ended December 31
----------------------------------------------------------
1 9 9 8 1 9 9 7 1 9 9 6
----------- ---------- -----------
<S> <C> <C> <C>
Revenues:
Administrative fees and other income $12,273,067 $6,952,655 $ 4,512,422
Interest income 11,491 24,675 61,710
----------- ---------- -----------
12,284,558 6,977,330 4,574,132
----------- ---------- -----------
Operating expenses:
Salaries, commissions and employee benefits 8,067,801 4,644,189 3,101,106
Selling, general and administrative expenses 4,702,873 3,066,867 2,394,961
----------- ---------- -----------
12,770,674 7,711,056 5,496,067
----------- ---------- -----------
(486,116) (733,726) (921,935)
----------- ---------- -----------
Other income (expense):
Amortization of goodwill and intangible assets (50,705) (45,067) (140,058)
Interest (221,871) (240,488) (337,263)
Other - 49,810 26,678
----------- ---------- -----------
(272,576) (235,745) (450,643)
----------- ---------- -----------
Loss before income taxes (758,692) (969,471) (1,372,578)
Provision (benefit) for income taxes 9,956 (4,030) 6,830
----------- ---------- -----------
Loss from continuing operations (768,648) (965,441) (1,379,408)
----------- ---------- -----------
Discontinued operations:
Income (loss) from operations, net of
income taxes 116,509 18,750 (26,392)
Loss on disposal, net of income tax benefit (123,191) - -
----------- ---------- -----------
Income (loss) from discontinued operations (6,682) 18,750 (26,392)
----------- ---------- -----------
Net loss $ (775,330) $ (946,691) $(1,405,800)
=========== ========== ===========
Net loss per share:
Loss from continuing operations $(0.16) $(0.21) $(0.37)
Income (loss) from discontinued operations - - -
----------- ---------- -----------
Basic and diluted loss per common share $(0.16) $(0.21) $(0.37)
=========== ========== ===========
Weighted average number of common shares
outstanding 4,710,057 4,612,153 3,766,176
=========== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
--------------------------------------------------
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
--------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Additional
--------------------------------- Paid-In Accumulated
Shares Amount Capital Deficit Total
-------------- ------------- -------------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 3,674,501 $73,490 $2,989,275 $(1,499,733) $ 1,563,032
Shares issued for warrants
exercised 36 1 107 - 108
Convertible debentures
exchanged for stock 644,444 12,889 857,111 - 870,000
Shares issued for acquisitions 43,928 879 79,120 - 79,999
Canceled stock -
Fractional shares (72) (3) (105) - (108)
Net loss - - - (1,405,800) (1,405,800)
--------- ------- ---------- ----------- -----------
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
rendered 18,888 378 16,622 - 17,000
Canceled stock -
Fractional shares 330 6 (6) - -
Net loss - - - (775,330) (775,330)
--------- ------- ---------- ----------- -----------
Balance at December 31, 1998 4,710,057 $94,201 $4,232,265 $(4,627,554) $ (301,088)
========= ======= ========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
--------------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
<TABLE>
<CAPTION>
Year ended December 31
--------------------------------------------
1 9 9 8 1 9 9 7 1 9 9 6
------- ------- -------
<S> <C> <C> <C>
Continuing operations:
Net loss from continuing operations $(768,648) $ (965,441) $(1,379,408)
Items not requiring the current use of cash:
Depreciation and amortization 283,724 243,310 253,189
Amortization of goodwill and intangible assets 50,705 45,067 140,058
Changes in items affecting operations:
Accounts receivable (30,178) (467,736) 39,185
Prepaid expenses and other current assets 153,670 (122,892) 61,184
Other assets (20,764) 94,700 (65,589)
Deferred compensation - 257,784 103,560
Accounts payable and accrued expenses 394,579 510,276 (50,748)
Other liabilities 20,872 (1,820) (229,220)
--------- ---------- -----------
Cash provided by (used in) operating activities 83,960 (406,752) (1,127,789)
--------- ---------- -----------
Investments:
Purchases of property and equipment (94,909) (108,364) (84,035)
--------- ---------- -----------
Cash used in investing activities (94,909) (108,364) (84,035)
--------- ---------- -----------
Financing:
Short-term borrowings (repayments) 200,000 (970,000) 220,000
Borrowings on long-term debt 405,000 1,260,000 225,000
Repayment of long-term debt (262,029) (148,207) (204,127)
Payments on long-term liabilities (570,594) (388,732) (9,481)
Issuance of stock 17,000 250,000 -
Common stock - warrants exercised - 1,702 -
--------- ---------- -----------
Cash provided by (used for) financing activities (210,623) 4,763 231,392
--------- ---------- -----------
Discontinued operations:
Income (loss) from discontinued operations, net of
income taxes (6,682) 18,750 (26,392)
Changes in operating activities 340,432 398,573 367,210
--------- ---------- -----------
Operating activities 333,750 417,323 340,818
Investing activities - - (100,000)
Financing activities (18,423) (14,351) (13,402)
--------- ---------- -----------
Cash provided by discontinued operations 315,327 402,972 227,416
--------- ---------- -----------
Increase (decrease) in cash and cash equivalents 93,755 (107,381) (753,016)
Cash and cash equivalents - corporate funds:
Beginning of period 44,384 151,765 904,781
--------- ---------- -----------
End of period $ 138,139 $ 44,384 $ 151,765
========= ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
--------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 1 - Nature of Business
Organization
Anchor Pacific Underwriters, Inc. ("Anchor") is a holding company that provides
insurance administration and property and casualty brokerage services. As of
December 31, 1998, Anchor sold its property and casualty brokerage services and
reported the sale as a discontinued operation (See Note 14). Administration
services are provided to employer groups of varying sizes, primarily located in
California, Oregon and Arizona. Anchor derived 28% of its revenue from
administration services for clients underwritten by one insurance company.
The consolidated financial statements include the accounts of Anchor and its
wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Basis of Presentation
The financial statements have been prepared on the going concern basis. Anchor
has reported a net loss during the past three years. The decrease in net loss
from 1997 to 1998 relates primarily to an increase in fee income as the result
of new business generated from projects associated with new insurance carriers
and marketing partners within the third-party administration division and
administrative fees generated from the release of new products.
On July 1, 1997, Harden & Company's ("Harden") primary insurance carrier
purchased a significant volume of business from an insurance carrier in Los
Angeles, California. The new insurance carrier then entered into a contract
with Harden to provide third-party administration services to this business. In
January 1998, Harden assumed a significant volume of administration business
from an insurance carrier in Portland, Oregon. As a result of these two
contracts, fees from Anchor's third-party administration services for 1998
increased 77% over the fees for 1997.
Management's plan to achieve profitability includes a strategy to expand its
third-party administration services business by: (a) continuing to develop
specialized affiliated business units that target selected insurance industry
market segments defined by industry type, geographic location and consumer
demographics; (b) creating new products, services, and marketing partner
relationships; and (c) strengthening management, sales and marketing staff. In
conjunction with this strategy, Anchor seeks to manage its affairs to achieve
expansion through internal growth of its existing and new product lines. Anchor
also regularly considers acquisition and merger opportunities and other business
expansion alternatives.
6
<PAGE>
NOTE 2 - Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Revenue Recognition
Continuing operations
- ---------------------
The majority of revenue from third-party administration services consists of
fees charged for the administration of fully insured and self-insured group
health plans. Fee income is recognized at the time employers remit monthly
premiums and when services are rendered.
Discontinued operations
- -----------------------
Insurance brokerage revenue consists principally of insurance commissions (net
of split or shared commissions), fees in lieu of commissions for insurance
placement services and interest income on fiduciary and corporate funds.
Insurance commissions and fees in lieu of commissions for insurance placement
services are recognized when coverage becomes effective, the premium due under
the policy is known or can be reasonably estimated, and substantially all
required services related to placing the insurance have been provided.
Broker commission adjustments and commissions on premiums billed directly by
underwriters are recognized principally when such amounts can be reasonably
estimated.
In addition, Anchor receives annual contingency commissions from various
property and casualty insurance carriers. The commissions are based upon the
carrier's loss experience as well as the number of policies placed. Revenue
from contingency commissions is recognized when received. Fee income for
services other than placement of insurance coverages is recognized as those
services are provided.
Cash and Cash Equivalents
Anchor considers all highly liquid investments with a maturity of three months
or less at the date of acquisition to be cash equivalents.
Fiduciary Funds and Liabilities
Funds held for self-funded employers, fully insured programs and unremitted
insurance premiums are held in a fiduciary capacity.
Interest earned on certain fiduciary funds is included in Anchor's earnings.
Interest income on fiduciary funds from continuing operations amounted to
$11,491, $24,675, and $61,710 in 1998, 1997, and 1996, respectively.
7
<PAGE>
Concentration of Credit Risk
Cash and cash equivalents are on deposit in approximately 170 separate accounts
with certain accounts exceeding $100,000. The FDIC insures accounts up to
$100,000 each. If several accounts are maintained for the same entity at the
same bank, the FDIC applies the $100,000 limit to the combined group. The
accounts are maintained in well-established regional and national commercial
banks. These banks have satisfied the FDIC's more stringent capitalization
requirements, qualifying them to accept broker deposits. The banks have
received high ratings from bank rating services. As a result, credit risk is
deemed to be minimal.
Accounts Receivable
Anchor provides for future estimated credit losses based on an evaluation of a
current aging of the accounts, current economic conditions and other factors
necessary to provide for losses that can be reasonably anticipated.
Fair Value of Financial Instruments
The carrying values of financial instruments such as cash and cash equivalents,
fiduciary funds, and debt obligations approximate their fair market value.
The following methods and assumptions were used by Anchor in estimating its fair
value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance sheet
for cash and short-term instruments approximate those assets' fair values.
Short-term borrowings: The carrying amounts on the lines of credits and other
short-term borrowings approximate their fair values.
Long-term borrowings: The fair values of Anchor's long-term borrowings are
estimated using discounted cash flow analyses, based on the current incremental
borrowing rates for similar types of borrowing arrangements.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
computed using the straight-line method over the estimated useful lives of the
assets, which range from three to ten years.
Software costs relating to the upgrading and enhancing of existing programs are
capitalized and amortized over a period of five years.
Intangible Assets
Intangible assets represent customer lists acquired in acquisitions. Customer
lists are amortized on the straight-line basis over 5 to 13 years.
Impairment of intangible assets is measured on the basis of anticipated
undiscounted cash flows for each asset. Based upon Anchor's analysis, no
impairment of such assets was indicated for the years ended December 31, 1998,
1997, or 1996.
8
<PAGE>
Income Taxes
Anchor and its subsidiaries file a consolidated federal income tax return and
combined returns for state tax purposes.
Loss Per Share
Loss per common share is computed using the weighted average number of common
shares outstanding during each period. Diluted loss per share excludes the
effect of convertible debt, stock options, and warrants (See Notes 7, 10 and
12), because their effect would have been antidilutive.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities." SFAS 133 establishes new
standards of accounting and reporting for derivative instruments and hedging
activities. SFAS 133 requires that all derivatives be recognized at fair value
in the balance sheet, and that the corresponding gains or losses be reported
either in the statement of operations or as a component of comprehensive income,
depending on the type of hedging relationship that exists. SFAS 133 will be
effective for fiscal years beginning after June 15, 1999. Anchor does not
currently hold derivative instruments or engage in hedging activities.
Reclassifications
Prior years' balances have been reclassified to conform with the current year
presentation of discontinued operations.
NOTE 3 - Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31
-------------------------------------
1998 1997
------------------ -----------------
<S> <C> <C>
Leasehold improvements $ 53,039 $ 47,376
Furniture and equipment 401,436 399,582
Office equipment 557,313 703,149
Computer equipment 632,625 250,650
Computer software 916,698 875,849
---------- ----------
2,561,111 2,276,606
Less - accumulated depreciation and amortization 2,010,633 1,726,539
---------- ----------
$ 550,478 $ 550,067
========== ==========
</TABLE>
The foregoing assets are pledged as security for certain indebtedness
(See Note 7).
9
<PAGE>
NOTE 4 - Intangible Assets
Intangible assets consist of the following:
<TABLE>
<CAPTION>
December 31
------------------------------------- Amortization
1998 1997 Period
---------------- ------------------- -----------------
<S> <C> <C> <C>
Customer lists $790,538 $526,432 5 - 13 years
Less - accumulated amortization 196,605 134,803
-------- --------
$593,933 $391,629
======== ========
</TABLE>
The foregoing assets are pledged as security for certain indebtedness
(See Note 7).
NOTE 5 - Short-Term Borrowings
In 1998, Anchor obtained a $200,000 short-term bank loan expiring on March 1,
1999. Borrowings under the loan amounted to $200,000 at December 31, 1998 with
annual interest at the bank's prime rate plus 2.5% (10.25% at December 31,
1998). In connection with obtaining the loan, Anchor issued warrants to the
lender to purchase 80,000 shares of Anchor common stock at an exercise price of
$0.50 per share. In January 1999, following the sale of PKW, this loan was paid
in full (See Note 7).
NOTE 6 - Other Long-Term Liabilities
Other long-term liabilities primarily consist of future contingent payments
relating to contractual agreements negotiated with the previous owners of
businesses acquired, deferred rent and other liabilities. The future contingent
payments are generally based upon the amount of net commission income generated
from the books of business acquired.
At December 31, 1998, future payments of these liabilities are as follows:
<TABLE>
<CAPTION>
Year
- ----
<S> <C>
1999 $451,068
2000 117,117
2001 111,590
2002 103,838
2003 69,038
Thereafter 51,643
--------
904,294
Less - current portion 451,068
--------
$453,226
========
</TABLE>
10
<PAGE>
NOTE 7 - Long-Term Debt
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
December 31
-------------------------------------
1998 1997
------------------- ----------------
<S> <C> <C>
Term bank loan - with interest at prime rate plus 2.25%
(10.25% and 11.0% at December 31, 1998 and 1997)
$1,626,342 $1,573,333
Line of bank credit - with interest at prime rate plus
2.25% (11.0% at December 31, 1997) - 75,000
10% subordinated bridge notes, maturing in 1999 150,000 180,000
10% convertible subordinated debentures, maturing in 1999
60,000 60,000
10% convertible subordinated debentures, Series B,
maturing in 2000 230,000 -
Equipment loans - with annual interest at 8.25%, maturing
in 2000 34,950 69,988
---------- ----------
2,101,292 1,958,321
Less - current portion 1,242,950 629,133
---------- ----------
$ 858,342 $1,329,188
========== ==========
</TABLE>
In October 1997, Anchor obtained a $1.6 million term bank loan. The loan bears
interest at the bank's prime rate plus 2.5% and is payable in monthly principal
installments of $26,667 plus interest over a five-year period. In connection
with obtaining the loan, Anchor issued to the lender a warrant to purchase
95,000 shares of its common stock at $1.75 per share until October 2002. The
proceeds of the loan were used to repay existing borrowings under Anchor's lines
of bank credit.
In December 1997, the term loan lender provided Anchor with a $250,000 line of
credit which expired in February 1998. Borrowings under the line of credit
amounted to $75,000 at December 31, 1997 with interest at the bank's prime rate
plus 2.5%.
In early March 1998, the bank combined the outstanding balances of the term loan
and line of credit into a new $1.82 million term loan. The term loan is secured
by certain receivables, property and equipment, and other assets. The new loan
bears interest at the bank's prime rate plus 2.5% and is payable in monthly
principal installments of $16,500 plus interest through October 2002. The loan
agreements with the bank contain certain restrictive covenants which, among
other things, require Anchor to maintain certain levels of net worth and cash
flow (as defined), and prohibits the payment of dividends.
During 1998, bridge notes totaling $30,000 were repaid and the maturity dates of
the remaining notes were extended to various dates in 1999.
In 1998, the maturity dates of certain debentures were extended to various dates
in 1999. The debentures may be converted into common stock at $1.35 per share.
11
<PAGE>
At the end of the third quarter of 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"). At December 31, 1998, Anchor had raised $230,000 from five
members of the Board of Directors and other qualified investors. The basic
terms of the Series B Debentures were: 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; 3) for each $5,000 of Series B
Debentures acquired, an investor received 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 all or a portion of their Series B Debentures, at par, plus any
outstanding interest, in the event Anchor sold Putnam, Knudsen & Wieking Inc.
("PKW") for an amount in excess of $2 million.
In early 1999, upon completion of the sale of PKW, Anchor made the following
loan repayments: 1) $75,000 on its subordinated bridge notes and debentures; 2)
$200,000 on its short-term bank loan; and 3) $800,000 on its term bank loan.
Scheduled principal payments due on long-term debt after December 31, 1998,
including payments made on long-term debt in early 1999, are as follows:
<TABLE>
<CAPTION>
Year
----
<S> <C>
1999 $1,242,950
2000 428,000
2001 198,000
2002 232,342
----------
$2,101,292
==========
</TABLE>
NOTE 8 - Income Taxes
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
Year ended December 31
-----------------------------------------
1998 1997 1996
------------- ------------ ------------
<S> <C> <C> <C>
Current tax expense - state $9,956 $8,470 $6,830
====== ====== ======
</TABLE>
The income tax expense included in the consolidated financial statements is as
follows:
<TABLE>
<CAPTION>
Year ended December 31
-----------------------------------------
1998 1997 1996
------------- ------------ ------------
<S> <C> <C> <C>
Income tax provision (benefit) from continuing
operations $ 9,956 $(4,030) $6,830
Income tax expense from discontinued operations 77,600 12,500 -
Income tax (benefit) on disposal (77,600) - -
-------- ------- ------
$ 9,956 $ 8,470 $6,830
======== ======= ======
</TABLE>
12
<PAGE>
Deferred income taxes are provided for the temporary differences between the
financial reporting and tax bases of Anchor's assets and liabilities. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized.
Deferred tax liabilities and assets are comprised of the following:
<TABLE>
<CAPTION>
December 31
-------------------------------------
1998 1997
------------------ -----------------
<S> <C> <C>
Deferred tax liabilities:
Depreciation and amortization $ - $ 195,862
----------- -----------
Deferred tax assets:
Depreciation and amortization 4,327 -
Vacation pay 106,461 94,969
Disposal of PKW 371,100 -
Bad debt and E&O reserves 42,781 44,218
Other 31,514 192,672
Net operating loss carryforward 997,720 1,250,760
----------- -----------
1,553,903 1,582,619
Valuation allowance for deferred tax assets (1,553,903) (1,386,757)
----------- -----------
Net deferred tax asset - 195,862
----------- -----------
$ - $ -
=========== ===========
</TABLE>
At December 31, 1997, deferred tax liabilities are noncurrent. At December 31,
1998 and 1997, current deferred tax assets are $551,856 and $255,189,
respectively, and noncurrent deferred tax assets are $1,002,047 and $1,327,430,
respectively.
During 1998, Anchor's federal consolidated tax returns for the years ended
December 31, 1994, 1995 and 1996 were audited by the Internal Revenue Service.
The audit resulted in the loss of $901,916 in federal net operating losses
(NOL's).
The change in the valuation allowance is comprised of the following items:
<TABLE>
<CAPTION>
Year ended December 31
-----------------------------------
1998 1997
----------------- ----------------
<S> <C> <C>
Increase due to net operating losses $ 107,726 $286,123
Change in net operating loss due to IRS audit (360,766) -
Increase due to disposal of PKW 371,100 -
Change in estimate of temporary differences for fixed and
intangible assets, sublease liability, deferred rent,
vacation pay and other 49,086 (8,900)
--------- --------
Net increase $ 167,146 $277,223
========= ========
</TABLE>
13
<PAGE>
A reconciliation of income tax computed at the federal statutory corporate tax
rate to the provision for income taxes follows:
<TABLE>
<CAPTION>
Year ended December 31
------------------------------------------------------------------------
1998 1997 1996
------------------------ ---------------------- --------------------
Amount Percent Amount Percent Amount Percent
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income taxes at federal statutory rate $(263,612) (34.0)% $(318,995) (34.0)% $(475,649) (34.0)%
Increase (decrease) in income taxes
resulting from:
State and local income taxes, net of
federal tax benefit (46,520) (6.0) (56,293) (6.0) (83,938) (6.0)
Permanent differences 142,790 18.4 78,538 8.3 79,949 5.7
Other 59,616 7.7 10,627 1.1 9,717 0.7
State minimum tax 9,956 1.3 8,470 0.9 6,830 0.5
Net operating loss 107,726 13.9 286,123 30.6 469,921 33.6
------------------------------------------------------------------------
$ 9,956 1.3% $ 8,470 0.9% $ 6,830 0.5%
========================================================================
</TABLE>
At December 31, 1998, Anchor had estimated federal and state net operating loss
carryforwards of approximately $2,686,000 and $1,408,000, respectively. The
federal and state net operating losses will begin to expire in the years ending
December 31, 2003 and 1999, respectively.
NOTE 9 - Retirement and Employee Benefit Plans
Anchor has a 401(k) profit sharing plan to which eligible employees may
contribute up to 15% of their salaries, or a maximum of $10,000 as deferred
compensation. The plan also provides for voluntary employer contributions
whereby Anchor may match 50% of the employee contribution up to a maximum of 3%
of the employee's gross salary. Anchor made no contributions to the plan during
the years ended December 31, 1998, 1997, and 1996.
In addition, Anchor offers active eligible employees certain life, health,
vision and dental benefits. There are several plans which differ in amounts of
coverage and deductibles. Anchor does not extend such benefits to retirees.
NOTE 10 - Stock Option Plan
On December 5, 1994, the Board of Directors of Anchor adopted the Anchor Pacific
Underwriters, Inc. 1994 Stock Option Plan (the "1994 Plan"). The aggregate
number of shares that are available for issuance pursuant to the exercise of
options granted under the 1994 Plan may not exceed 1,000,000 shares of common
stock. Options granted to members of the Board of Directors in 1995 vested
immediately upon grant. Other options granted in 1995 generally vested after
one year. Options granted in 1996, 1997 and 1998 generally vest over a four-
year period, with 25% vesting each year, with the exception of 50,000 options
granted to a member of the Board of Directors in 1997 and 16,000 granted in
1998, which vested immediately upon grant. Generally, the options are priced at
fair market value of the stock at the date of grant, except for shareholders of
more than 10% of Anchor, in which case the options are priced at 110% of the
market price at the date of grant. Options generally have a ten-year life.
Anchor applies the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") to its stock option plan.
Accordingly, no compensation cost has been recognized for the plan for the years
ended December 31, 1998, 1997, and 1996.
14
<PAGE>
Had Anchor adopted Financial Accounting Standards Board Statement No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123"), the net loss of
$775,330 as reported for the year ended December 31, 1998 would compare to a pro
forma net loss of $796,010, and the net loss of $946,691 as reported for the
year ended December 31, 1997 would compare to a pro forma loss of $1,405,800.
Basic and diluted loss per share of $.16 as reported for the year ended December
31, 1998 would compare to a loss per share of $.17 on a pro forma basis; and for
the year ended December 31, 1997, the reported basic and diluted loss per share
of $.21 would not change on a pro forma basis.
The effects of applying SFAS No. 123 in the preceding pro forma disclosure are
not indicative of the effect on reported net income for future years. SFAS No.
123 does not apply to awards granted prior to 1995.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1998 and 1997, respectively: expected volatility
of approximately 45% and 25%, risk-free interest rates of 5.6% and 6.5%, and
expected lives of 5.7 and 6.3 years. No dividend yield was used as Anchor has
not paid dividends in the past and does not anticipate paying dividends in the
future.
A summary of the status of Anchor's stock option plan as of December 31, 1998
and 1997, and changes during the years then ended is presented below:
<TABLE>
<CAPTION>
1998 1997
------------------------------- -------------------------------
Weighted Weighted
Average Average
Number Exercise Number Exercise
of Shares Price of Shares Price
--------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 631,350 $1.41 557,350 $1.52
Granted 74,400 $ .82 112,400 $ .91
Canceled or expired (84,775) $1.28 (38,400) $1.58
-------- ----- -------- -----
Outstanding at end of year 620,975 $1.36 631,350 $1.41
======== ===== ======== =====
Options exercisable at year end 527,625 541,450
Weighted average grant-date fair value of
options granted during the year whose
exercise price equaled market price on
date of grant $.39 $.34
Weighted average grant-date fair value of
options granted during the year whose
exercise price exceeded market price on
date of grant $.23 $.32
</TABLE>
15
<PAGE>
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ------------------------------------------------------------------ -----------------------------
Weighted
Range Average Weighted Weighted
of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
- ------------ --------------- ----------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
$ .50 6,000 10.0 years $ .50 6,000 $ .50
$ .81-$ .89 52,600 9.2 years $ .84 - $ -
$ .90-$1.00 98,025 8.5 years $ .92 70,575 $ .91
$ 1.45-$1.65 463,350 5.5 years $1.52 450,300 $1.52
$ 2.19 1,000 6.6 years $2.19 750 $2.19
- ------------ ------- --------- ----- ------- -----
$ .50-$2.19 620,975 6.3 years $1.36 527,625 $1.43
============ ======= ========= ===== ======= =====
</TABLE>
NOTE 11 - Leases:
Anchor rents its office facilities in Concord, California under an operating
lease which expires in 2004. The terms of the lease include a 12-month rent
deferral and fixed rental escalation. The total rent for the lease term which
reflects the 12-month deferral and the escalation is being amortized on the
straight-line basis over the full term of the lease, resulting in deferred rent
liability of approximately $327,795 and $306,923 at December 31, 1998 and 1997,
respectively. The deferred rent liability is included in long-term liabilities
in the accompanying balance sheet.
In connection with a business acquisition in October 1994, Anchor assumed the
lease obligation for certain facilities in Oakland, California. Anchor has
subleased the facilities to two tenants. The subleases will remain in effect
until Anchor's lease obligation expires in 1999.
Anchor also leases office facilities in Oregon and Arizona. Such leases expire
in December 1999 and May 2002.
The consolidated statement of operations includes rent expense of $1,152,588,
$757,666, and $683,591 reflected in selling, general and administrative expenses
for the years ended December 31, 1998, 1997, and 1996, respectively.
Future minimum annual lease payments under operating leases as of December 31,
1998, exclusive of net amounts owed under the Oakland lease which are disclosed
in the schedule of payments under long-term liabilities in Note 6, are as
follows:
<TABLE>
<CAPTION>
Gross Lease Sublease
Payment Payment Net Payment
--------------- -------------- ---------------
Year
----
<S> <C> <C> <C>
1999 $1,227,897 $ 187,112 $1,040,785
2000 775,808 224,532 551,276
2001 769,280 224,532 544,748
2002 714,194 224,532 489,662
2003 674,079 224,532 449,547
Thereafter 561,733 187,110 374,623
---------- ---------- ----------
$4,722,991 $1,272,350 $3,450,641
========== ========== ==========
</TABLE>
16
<PAGE>
NOTE 12 - Commitments and Contingencies
Anchor is subject to certain legal proceedings and claims arising in connection
with the normal 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.
Anchor had warrants outstanding to purchase 928,729 shares of its common stock
at prices ranging from $.50 to $3.00 per share. The warrants expire during the
period from August 2001 to October 2003.
NOTE 13 - Related Party Transactions
During 1998 and 1997, 10% convertible subordinated debentures totaling $80,000
were outstanding to two members of the Board of Directors and three
shareholders. Total interest incurred and accrued for these debentures was
$6,000 and $6,849 for the years ended December 31, 1998 and 1997, respectively.
This liability is classified under the current portion of long-term debt.
In 1998, 10% convertible subordinated debentures Series B totaling $75,000 were
sold to five members of the Board of Directors, and $15,000 was repaid in 1998.
Total interest incurred for these debentures was $900 for the year ended
December 31, 1998.
Subordinated bridge notes totaling $170,000 were sold in 1996 to five members of
the Board of Directors and two shareholders (See Note 7). In 1998, $30,000 of
these notes were repaid. In early 1999, $60,000 of these notes were repaid.
Total interest incurred for these bridge notes was approximately $14,500 and
$18,000 for the years ending December 31, 1998 and 1997, respectively. This
liability is classified under the current portion of long-term debt.
NOTE 14 - Discontinued Operations:
On January 15, 1999, Anchor sold substantially all of the net assets of its
insurance brokerage business, primarily including cash held in fiduciary
accounts, accounts receivable, property and equipment, intangible assets and
premiums payable to insurance companies. This operation has been accounted for
as a discontinued operation and, accordingly, the foregoing assets and
liabilities and the insurance brokerage business's results of operations are
segregated in the accompanying consolidated balance sheets and statements of
operations and of cash flows. The loss on the sale of such net assets has been
reflected in the results of operations for the year ended December 31, 1998.
Net revenues, operating costs and expenses, other income and expense, and income
taxes for all periods presented have been reclassified for amounts associated
with the discontinued operation.
17
<PAGE>
Revenues, income (losses) from operations, loss on disposal, and income tax
provision (benefit) associated with the discontinued operation are as follows:
<TABLE>
<CAPTION>
Years ended December 31
---------------------------------------------------------
1998 1997 1996
------------------ ------------------ -----------------
<S> <C> <C> <C>
Total revenues $3,069,459 $3,115,202 $3,420,352
========== ========== ==========
Income (loss) from operations before
income tax provision $ 194,109 $ 31,250 $ (26,392)
Income tax provision (77,600) (12,500) -
---------- ---------- ----------
Income (loss) from operations 116,509 18,750 (26,392)
---------- ---------- ----------
Loss on disposal (200,791) - -
Income tax benefit on disposal 77,600 - -
---------- ---------- ----------
(123,191) - -
---------- ---------- ----------
Income (loss) from discontinued operations
$ (6,682) $ 18,750 $ (26,392)
========== ========== ==========
</TABLE>
Income from discontinued operations for the years ending December 31, 1998,
1997, and 1996 exclude general and administrative charges from Anchor of
$213,900, $298,000 and $270,000.
Assets and liabilities for all periods have been reclassified for amounts
associated with the discontinued operations. Anchor has reported such net
assets at their net realizable values under the caption, "Realizable value of
net assets sold." Summarized balance sheet data for the discontinued operations
are as follows at December 31:
<TABLE>
<CAPTION>
December 31
-----------------------------------
1998 1997
----------------- ----------------
<S> <C> <C>
Cash and cash equivalents - brokerage fiduciary funds $ 970,916 $ 1,203,594
Accounts receivable, net 924,230 853,398
Prepaid expenses and other current assets 15,197 30,056
Property and equipment, net 26,248 70,444
Intangibles, net 2,263,655 2,433,799
Net premiums payable - insurance companies (1,893,637) (2,035,032)
Acquisition payables (50,823) (50,823)
----------- -----------
2,255,786 2,505,436
Less--loss on disposition (200,791) -
----------- -----------
Net realizable value of assets sold $ 2,054,995 $ 2,505,436
=========== ===========
</TABLE>
On January 15, 1999, Anchor received $2,250,000 in cash and a
receivable of $27,500 for the sale of these net assets. Anchor also paid
commissions of $112,500 and incurred approximately $110,000 in additional
expenses associated with the sale. Anchor used $1,075,000 of these proceeds to
pay off long-term debt (See Note 7).
18
<PAGE>
NOTE 15- Cash Flow Disclosures:
<TABLE>
<CAPTION>
Year ended December 31
-----------------------------------------------------
1998 1997 1996
------------------ --------------- ----------------
<S> <C> <C> <C>
Supplemental cash flow information:
Cash paid during the period for:
Interest $254,505 $285,049 $379,071
======== ======== ========
Income taxes $ 9,956 $ 8,526 $ 6,830
======== ======== ========
Supplemental schedule of noncash investing and financing
activities:
Increase in fixed assets and long-term liabilities
related to the purchase of office furniture and
equipment $189,600 $ - $ -
======== ======== ========
Bridge notes exchanged for common stock $ - $ 45,000 $ -
======== ======== ========
Convertible debentures exchanged for common stock $ - $ - $870,000
======== ======== ========
Increase in intangible assets and common stock related
to purchase of customer lists $252,635 $ - $176,999
======== ======== ========
Decrease in goodwill and intangible assets related to
adjustment in deferred taxes $ - $ - $111,322
======== ======== ========
</TABLE>
19
<PAGE>
EXHIBIT 10.34
PURCHASE AGREEMENT
------------------
THIS AGREEMENT is executed this 15th day of January, 1999, to be
effective as of December 31, 1998, at 12:01 a.m. (the "Effective Date"), by and
between TALBOT AGENCY OF CALIFORNIA, INC., a California corporation ("Talbot"),
as purchaser, and PUTNAM, KNUDSEN & WIEKING, INC., a California corporation
("PKW"), as seller, and ANCHOR PACIFIC UNDERWRITERS, INC., a Delaware
corporation ("APU"), as sole shareholder of PKW and guarantor of PKW's
obligations under this Agreement.
RECITALS
A. PKW operates as an independent insurance agency, under the name Putnam,
Knudsen & Wieking in Concord, California ("Business").
B. PKW wishes to sell and Talbot desires to acquire certain of PKW's assets
described below upon the terms and subject to the conditions set forth
below.
THE PARTIES THEREFORE agree as follows:
AGREEMENTS
1. PURCHASE AND SALE.
-----------------
1.1 Purchase and Sale. On the terms and subject to the conditions of this
-----------------
Agreement, at the Closing (as defined in Section 3), PKW will sell, transfer and
deliver to Talbot all right, title and interest in and to the Assets (as defined
below), free and clear of all liens, security interests, claims, charges and
encumbrances of any nature whatsoever, other than those described in subsection
1.3 below. In reliance on the representations and warranties of PKW and APU
contained in this Agreement, and for the consideration expressed in this
Agreement, Talbot will buy the Assets from PKW at the Closing.
1.2 Assets. All of the following shall be referred to collectively in
------
this Agreement as the "Assets":
(a) All of PKW's rights, title and interest, including the right to
solicit renewals, with respect to the insurance accounts listed on the attached
EXHIBIT 1.2(A) (collectively, the "Insurance Accounts"), and all original
records and files relating to the Insurance Accounts, including but not limited
to all customer lists and all records of expiration data which are or have been
maintained by PKW relating to the Insurance Accounts. The parties expressly
agree that Talbot shall be entitled to all commissions, contingent commissions,
profit-sharing participations and bonuses with respect to the Insurance Accounts
received from carriers on or after the Effective Date, excluding Direct Bill
Receivables as of December 31, 1998, notwithstanding that any insurance business
to which the same relate may have been written prior to the Effective Date.
<PAGE>
Effective from and after the Closing, PKW assigns and transfers to Talbot any
and all rights, claims and causes of action that it now has or may have in the
future against any insurance company, agent or broker, or any other party
concerning the ownership of the Insurance Accounts.
(b) All of PKW's rights, title and interest in and to the office
equipment and other personal property assets listed on the attached EXHIBIT
1.2(B), and all office supplies used in the conduct of PKW's agency business
(collectively, the "Tangible Personal Property").
(c) All of PKW's payments from insureds held in trust, including all
premium trust bank accounts, a listing of which is attached as EXHIBIT 1.2(C),
plus cash and the appropriate bank account(s), in an amount sufficient to cause
the current assets included in the Assets to exceed the current liabilities in
the Liabilities by $1.00.
(d) All of PKW's rights under and leasehold interest in that certain
sub-lease arrangement (the "Sub-Lease") between PKW and APU for 10,692 square
feet of office space located at 1800 Sutter Street, Suite 500, Concord,
California. Subsequent to the Closing, the parties will negotiate in good faith,
a new sublease between APU and Talbot with terms and conditions substantially
similar to the present Sub-Lease, subject to the right of Talbot to terminate
such new Sub-Lease on six months prior written notice.
(e) PKW's name as well as the goodwill value, if any ("Goodwill"), of
PKW's name and address and existing telephone numbers and telephone listings, as
well as all trade names and the goodwill value, if any, of the trade names
"Putnam, Knudsen & Wieking," "Putnam, Knudsen & Wieking Insurance," and all
other names used by PKW.
(f) All of PKW's rights under the asset purchase agreements,
employment agreements and non-competition agreements referenced in paragraph 1.4
below.
(g) All of PKW's accounts receivable ("Receivables") existing at the
Effective Date, excluding any amounts owed to PKW by insurance carriers as of
December 31, 1998 ("Direct Bill Receivables").
1.3 Liabilities. As of the Effective Date, in connection with the purchase
-----------
of the Assets and in reliance on the representations and warranties of PKW and
APU, Talbot will assume the following liabilities of PKW (the "Liabilities"):
(a) The liabilities of PKW set forth on the attached EXHIBIT 1.3(A).
2
<PAGE>
(b) All of PKW's accounts payable ("Payables") existing at the
Effective Date. A complete listing of PKW's Payables and Receivables on the
Effective Date is attached as EXHIBIT 1.3(B) ("AP/AR Schedule").
NO OTHER LIABILITIES OF PKW EXCEPT THOSE SPECIFICALLY REFERENCED IN THIS
SUBSECTION 1.3 SHALL BE ACQUIRED OR ASSUMED BY TALBOT PURSUANT TO THIS
AGREEMENT.
1.4 Assignment and Assumption. As of the Effective Date, PKW and APU
-------------------------
assign certain rights and Talbot assumes certain obligations, as described
below:
(a) PKW and APU assign all of their rights to Talbot, and Talbot
assumes all of their payment obligations, under a Contract for the Sale and
Purchase of Assets made as of March 1, 1996 with Roland Ferguson ("Ferguson"),
an individual, and the related Non-Competition Agreement and Employment
Agreement with Ferguson of even date therewith.
(b) PKW and APU assign all of their rights to Talbot, and Talbot
assumes all of their payment obligations, under a Contract for the Sale and
Purchase of Assets made as of April 1, 1996 with Norman Robins ("Robins"), an
individual, and the related Non-Competition Agreement with Robins of even date
therewith.
(c) PKW and APU assign all of their rights to Talbot, and Talbot
assumes all of their obligations, under a Contract for the Purchase and the Sale
of Assets dated May 1, 1996 by and between PKW and APU and John McPherson
("McPherson"), an individual, and the related Non-Competition Agreement by and
between PKW and McPherson of even date therewith.
(d) PKW and APU assign all of their rights to Talbot, and Talbot
assumes all of their obligations under that Purchase Agreement dated May 31,
1997, between Dealey, Renton & Associates, as buyers, and PKW, as seller.
(e) PKW and APU assign all of their rights to Talbot, and Talbot
assumes all of their obligations under those Producer Agreements between PKW and
the producers listed in EXHIBIT 1.4(E) (the "Producer Agreements").
1.5 Definitions.
-----------
"Net-Working Capital" means the difference between the current assets,
-------------------
included in the Assets, and the current liabilities, included in the
Liabilities, as of Closing. In calculating Net Working Capital such current
assets and current liabilities will be determined in a manner consistent with
generally accepted accounting principles.
"Purchase Price" means the purchase price to be paid for the Assets
--------------
as described in subsection 1.6 below.
3
<PAGE>
"Contingent Commissions" means all commissions on renewal of Insurance
----------------------
Accounts (including any additions to Insurance Accounts existing at Closing).
"Pro Forma Pretax Profits" means earnings before interest, taxes,
------------------------
amortization, and management fees. For purposes of calculating Pro Forma Pretax
Profits, the amount of Contingent Commissions used in the calculation will be
determined by negotiation of the parties in good faith and only those staffing
or employee changes effectuated prior to the Closing Date will be considered in
determining Pro Forma Pretax Profits. The parties agree that the Pro Forma
Pretax Profits as of the close of business on December 31, 1998 are $513,092.00
as reflected on the Pro Forma Financial Statements a copy of which are attached
as EXHIBIT 1.5.
1.6 Purchase Price. The Purchase Price for the Assets and the Covenants
--------------
shall be the lesser of (i) $2,250,000 or (ii) an amount equal to the sum of 4.5
times Pro Forma Pretax Profits plus one dollar of Net Working Capital; provided,
however, in no event shall the Purchase Price be less than $2,000,000.
1.7 Allocation of Purchase Price. The Purchase Price shall be allocated as
----------------------------
follows:
(a) The Tangible Personal Property will be assigned a value equal to
its book value, and
(b) the balance of the Purchase Price will be assigned to the
Insurance Accounts and Goodwill. The amounts allocated to the Insurance Accounts
and Goodwill will be divided between the two items as follows: 80% to the
Insurance Accounts and 20% to Goodwill. The parties further acknowledge the
fairness and reasonableness of such allocations and agree that for federal and
state income tax purposes they will each report the sale and purchase of the
Assets in accordance with such allocations.
1.8 Payments. Subject to the provisions of Section 3.2(j), the Purchase
--------
Price shall be paid by Talbot to PKW in cash at Closing by wire transfer to such
account or accounts as designated by PKW.
1.9 Adjustment for Payables and Receivables. During the month of January
---------------------------------------
2000, a reconciliation of the AP/AR Schedule to actual receipts and payments
will be performed by Talbot. In the event the amount of Receivables collected by
Talbot at December 31, 1999 is less than the amount of Receivables shown on the
AP/AR Schedule and/or the amount of Payables paid by Talbot at December 31, 1999
is more than the amount shown on the AP/AR Schedule, APU shall make a payment to
Talbot in the amount of such uncollected Receivables and/or excess Payables (the
"AP/AR Adjustment") by January 31, 2000. If the amount of Receivables so
collected is greater than the amount on the AP/AR Schedule and/or the amount of
Payables so paid is less
4
<PAGE>
than the amount on the AP/AR Schedule, Talbot shall make a payment to APU in the
amount of such excess Receivables or unpaid Payables by January 31, 2000. if any
payment required by this Section 1.9 is not made by January 31, 2000 or is
extended pursuant to the written consent of the parties owed such payment, the
unpaid amount shall bear interest at a rate of nine percent (9%) per year from
January 31, 2000 to the date actually paid. In the event that APU makes a
payment to Talbot pursuant to this section, Talbot will provide APU with access
to all related documents and will cooperate with any reasonable efforts by APU
to negotiate or collect on such Payables or Receivables (including, if
necessary, assigning receivables to APU).
2. EMPLOYMENT AGREEMENTS AND COVENANTS.
-----------------------------------
2.1 Producer Agreements. PKW has Producer Agreements with each of the
-------------------
producers listed on EXHIBIT 1.4(E). The Effective Date of each of the Producer
Agreements is January 1, 1997. At the Closing, PKW will assign to Talbot the
Producer Agreements.
(a) Material Inducement. PKW and APU acknowledge that Talbot would
-------------------
not consummate the transactions contemplated by this Agreement but for the
agreement of each of the Producers listed on EXHIBIT 1.4(E) to execute and
perform their respective obligations under the Producer Agreements, including
without limitation the non-competition, non-solicitation and confidentiality
restrictions contained in the Producer Agreements.
2.2 Restrictive Covenants. PKW and APU acknowledge and recognize that to
---------------------
protect Talbot's legitimate business interests arising out of Talbot's
acquisition of the assets of PKW, Talbot is entitled to restrict PKW's and APU's
activities in the manner described in this Agreement. PKW and APU acknowledge
that Talbot would not consummate the transactions contemplated by this Agreement
but for the agreement of each of PKW and APU to the limitations of the following
non-solicitation and non-compete restrictions.
(a) No Solicitation. PKW and APU agree that they shall not, for the
---------------
24 months following the Effective Date ("the Covenant Period"), engage in any of
the following activities or conduct:
(1) Solicit or attempt to solicit business from any person or
entity which made any purchase of goods or services from Talbot during the
Covenant Period or from PKW prior to the Closing (a "Customer"), including any
identified prospective customer (a "Prospective Customer").
(2) Request or advise any Customer, Prospective Customer, or
other person or entity having any business dealing with Talbot or PKW to
withdraw, curtail, change or cancel its business dealing with Talbot or
otherwise interfere with Talbot's actual Or prospective relationship with a
Customer or Prospective Customer.
5
<PAGE>
(3) Directly or indirectly solicit the employment of or employ
any person who is now or after the Closing is employed by Talbot.
For the purposes of this Agreement, the term "goods or services" shall mean
insurance policies and insurance-related goods and services, including, without
limitation, workers' compensation, commercial property, casualty, personal lines
and life, health, annuities or similar benefits policies or contracts provided,
administered or sold by any business within a 100 mile radius of the city of
Concord, in the State of California, which is similar to or competes with any
business carried on by Talbot or PKW, but excluding group life and health
policies or contracts, including Internal Revenue Service Section 125 Plans,
claims adjudication and administration of group health plans on behalf of
clients.
(b) Covenant Not to Compete. APU and PKW agree that during the
-----------------------
Covenant Period, they will not directly or indirectly own, manage, operate,
join, control or participate in, or be connected as a shareholder, officer,
employee, partner, creditor, guarantor, adviser or otherwise with any business
within a 100 mile radius of the city of Concord, in the State of California,
which is similar to or competes with any business carried on by Talbot or PKW,
other than in group life and health policies or contracts, including Internal
Revenue Service Section 125 Plans, claims adjudication and administration of
group health plans on behalf of clients, except that APU or PKW may own
securities in any publicly held corporation which competes with Talbot, in which
none of APU or PKW owns of record or beneficially in the aggregate more than one
percent (1%) of the outstanding shares of the corporation.
(c) APU Employees. Talbot will not directly or indirectly solicit the
-------------
employment of or employ any person who is now or after the Closing is employed
by APU.
(d) Remedies.
--------
(1) APU and PKW acknowledge that violation of the foregoing non-
solicitation and non-competition restrictions would cause irreparable injury to
Talbot. They also understand that Talbot's remedy at law for any breach of any
of their obligations under such restrictions would be inadequate, and agree that
temporary and permanent injunctive relief may be granted in any proceedings
which may be brought to enforce the non-solicitation and non-competition
restrictions, without the necessity of proof of actual damage in order to obtain
such injunctive relief.
(2) If either (or both) of PKW or APU violate the provisions of
this subsection 2.2, then, in addition to any other remedy provided in this
Agreement, Talbot shall be entitled to collect from any (or all) of the
breaching parties an amount equal to one times (1x) all gross revenues received
by any (or all) of them from or
6
<PAGE>
arising out of the prohibited activities, for twelve months commencing on the
date any business is transacted in violation of the terms of this Agreement.
(3) The parties acknowledge that the remedies provided herein are
reasonable in that they have purposely been (i) restricted in operation in
respect to both time and place, (ii) are supported by good consideration,
including without limitation, the purchase of Goodwill and (iii) afford
reasonable protections for and do not impose an unreasonable burden upon Talbot,
PKW, APU or the public.
(4) If a court of competent jurisdiction finds that the scope of any
non-competition or non-solicitation restriction contained in this Agreement is
too broad to permit enforcement of the restriction to its full extent, then the
parties agree that the restriction will be enforced to the maximum extent
permitted by law, and the scope of any restriction may be judicially modified
accordingly, in any proceeding brought to enforce the restriction.
3. CLOSING.
-------
3.1 Location and Date. The closing of the sale and purchase of the Assets
-----------------
(the "Closing") shall take place at the offices of PKW in Concord, California at
10:00 a.m. (Pacific Time) on January 15, 1999, or such other time and place as
the parties mutually may agree, but shall be effective for all purposes as of
the Effective Date.
3.2 Deliveries by PKW. At the Closing, PKW shall deliver the following
-----------------
to Talbot:
(a) The records relating to the Insurance Accounts, as described in
paragraph 1.2(a) above, and any assignments or other documents which reasonably
may be required in order to effectuate the transfer of the Insurance Accounts to
Talbot.
(b) A bill of sale with respect to the Personal Property assets, in
such form and content as Talbot reasonably may request.
(c) Such documents as may be necessary to transfer PKW's trust and
operating bank accounts, identified on EXHIBIT 1.2(C), and any other Assets, in
such form and content as Talbot reasonably may request.
(d) Assignments of the Producer Agreement(s), executed on behalf of
the Producers, and agreeing to the assignment to Talbot.
(e) Certificate of good standing for PKW issued by the Secretary of
State of California and dated within five days of the Closing date.
7
<PAGE>
(f) Certified resolution of the board of directors of PKW authorizing
PKW's entry into this Agreement and related transaction documents and the
amendment of its articles to change the corporate name.
(g) Certified resolution of the shareholder of PKW approving the sale
of substantially all of the corporation's assets and the amendment of its
articles to change the corporate name.
(h) Articles of Amendment to PKW's Articles of Incorporation to
change the corporate name, duly executed on behalf of PKW and in form and
substance suitable for filing with the Secretary of State of California.
(i) Proof of errors and omissions tail coverage in the amounts set
forth in Section 11 below.
(j) A letter from Imperial Bank committing to (i) release PKW from
its Continuing Guarantee dated on or about June 2, 1998 of that certain Line of
Credit to APU, and (ii) release its security interest on the assets of PKW,
including, but not limited to, 35,677 shares of PKW stock, and Imperial Bank's
UCC financing statement filed in the Office of the Secretary of State of the
State of California on October 27, 1997 as Document Number 9730360743. PKW shall
also deliver, within twenty days of the Closing, conclusive proof of the
releases set forth above, evidencing clear title to the Assets. Should PKW be
unable to provide a letter of commitment from Imperial Bank for delivery at
Closing, Talbot shall pay the Purchase Price to an Escrow Agent upon whom the
parties have mutually agreed. Once such letter is received by Talbot from
Imperial Bank, Talbot shall instruct the Escrow Agent to wire transfer the
Purchase Price to whichever account or accounts PKW and APU shall designate.
(k) Releases from employment contracts of all employees and producers
who have those signed agreements as of the Closing Date. Such release shall be
in language that is satisfactory to Talbot.
(l) Such other documents and instruments as may be reasonably
necessary to be delivered by PKW at Closing to carry out the intent of this
Agreement, and any other documents or records relating to PKW's business as
Talbot reasonably may request.
3.3 Deliveries by Talbot. At the Closing, Talbot shall deliver the
--------------------
following to PKW:
(a) Subject to the provisions of section 3.2(j), the Purchase Price
by wire transfer to an account or accounts designated by PKW.
(b) Certified resolution of the board of directors of Talbot
authorizing its entry into this Agreement and the related transaction documents.
8
<PAGE>
(c) Such other documents and instruments as may be reasonably
required to be delivered by Talbot at Closing in order to carry out the intent
of this Agreement, and any other documents as PKW reasonably may request.
4. REPRESENTATIONS AND WARRANTIES OF PKW AND APU. PKW and APU represent and
---------------------------------------------
warrant to Talbot that the following statements are true and correct on the date
hereof and were true and correct on the Effective Date as though made on such
date, except where another date is specified:
4.1 Organization; Standing. PKW is a corporation duly organized, validly
----------------------
existing and in good standing under the laws of the State of California, and has
all requisite corporate power and corporate authority and the right to own or to
hold under lease its properties and conduct its business as now conducted.
4.2 PKW's Authority. PKW has all requisite corporate power and authority
---------------
to execute and deliver this Agreement and to perform its obligations hereunder,
and to sell and transfer to Talbot good and marketable title to the Assets free
and clear of all claims, liabilities, liens, pledges, charges, encumbrances and
equities of any kind, other than the Liabilities and Payables to be assumed by
Talbot as set forth in subsection 1.3 above.
4.3 Valid and Binding Obligations. The execution, delivery and
-----------------------------
performance of this Agreement have been duly authorized by all necessary
corporate action of PKW. This Agreement and all other instruments or agreements
executed in connection herewith by PKW or APU or both constitute, or will
constitute when delivered, the valid and binding obligations of PKW or APU,
respectively, enforceable in accordance with their respective terms, except to
the extent enforceability may be limited by bankruptcy, insolvency, moratorium
or other similar laws affecting the enforcement of creditors' rights generally,
and by equitable principles of general application.
4.4 No Violation. The execution and delivery by PKW of this Agreement
------------
and the implementation by it of all transactions contemplated by this Agreement
will not violate or constitute a default under any provision of PKW's articles
of incorporation or bylaws; any contract, instrument or other commitment to
which PKW is a party or otherwise bound or affected; any order, writ, judgment,
injunction, decree, law, rule, or regulation having applicability to PKW; or any
governmental license, permit or other authorization applicable to the business
transacted by PKW.
4.5 License. PKW is duly licensed and authorized to transact business as
-------
presently conducted in the State of California.
4.6 Financial Statements. The financial statements of PKW delivered or
--------------------
made available to Talbot are correct in all material respects and fairly present
the financial condition of PKW, as of their dates.
9
<PAGE>
4.7 Title; Absence of Liens. EXHIBITS 1.2(A) AND 1.2(B) to this
-----------------------
Agreement contain a full and complete listing of the Insurance Accounts and the
Personal Property assets, respectively. PKW has good and marketable title to the
Assets, free and clear of all liens and encumbrances, other than the Liabilities
and Payables expressly to be assumed by Talbot pursuant to subsection 1.3 above.
Except as provided in the preceding sentence, there are no liabilities,
obligations, liens or encumbrances, whether accrued, absolute, contingent or
otherwise, arising out of any transactions entered into or any state of facts
existing prior to Closing and affecting the Assets or any portion thereof, or
which could give rise after Closing to a claim by a creditor of PKW against the
Assets or against Talbot or any of its affiliated companies.
4.8 Receivables and Payables. The AP/AR Schedule set forth in EXHIBIT
------------------------
1.3(B) is true and complete.
4.9 No Finder. Neither PKW or APU has taken any action which would give
---------
to any firm, corporation, agency or other person a right to a consultant's or
finder's fee or any type of brokerage commission in relation to or in connection
with the sale of the Assets to Talbot, except for any obligations to Russell
Miller as broker to PKW and APU in this transaction, for which PKW and APU have
sole liability and will indemnify Talbot for all amounts related thereto.
4.10 Commitments to Transfer or Pledge the Assets. There are no
--------------------------------------------
outstanding commitments, options or other agreements under which PKW or APU has
agreed to transfer or pledge any interest in the Assets, or any portion thereof,
except as otherwise stated in this Agreement or the exhibits hereto.
4.11 Claims; Litigation. There are no legal, administrative, or other
------------------
proceedings pending against or on behalf of PKW, including any claim, action,
suit, investigation or inquiry before any court or governmental body or agency
affecting or threatening the Assets. PKW has not been permanently or temporarily
enjoined or barred by order, judgment or decree of any court or other tribunal
or any governmental or self-regulatory body or agency from engaging in or
continuing any conduct or practice in connection with the business engaged in by
PKW.
4.12 Insurance Accounts. All insurance business written through and owned
------------------
by PKW at the Effective Date is identified on EXHIBIT 1.2(A) to this Agreement.
The insureds' names, policy expiration dates and other data shown on EXHIBIT
1.2(A) or otherwise delivered to Talbot at Closing are accurate as of the date
of Closing. Except as set forth on EXHIBIT 1.2(A), all of such business is a
direct account of PKW and none has been brokered to PKW by any other party. PKW
represents that all commissions and fees which become due with respect to an
insurance policy, endorsement or any other transaction of insurance business for
any Insurance Account are on direct bill.
4.13 Compliance with Bulk Transfer Laws. The transactions contemplated by
----------------------------------
this Agreement do not constitute the sale of merchandise as the term
"merchandise" is
10
<PAGE>
defined or construed under the Bulk Transfer Laws of the State of California,
and may be consummated without liability to Talbot without any filing or
publication of notice under the Bulk Transfer Laws or other statutes of the
State of California. PKW hereby indemnifies and holds harmless Talbot from and
against, and agrees to defend Talbot from, any liability or claimed liability to
any creditor of PKW arising out of the failure of the parties to comply with any
of the provisions of the Bulk Transfer Laws of the State of California in
connection with the transactions contemplated by this Agreement.
4.14 Leaseholds. PKW is not in default of any obligation under the
----------
Sub-Lease (described in paragraph 1.2(d) above). The premises leased under the
Sub-Lease are in good and satisfactory condition and working order. No
condemnation proceeding is pending or threatened which would preclude or impair
the use of any of the real property which is used by PKW in the conduct of its
operations for the purposes for which it is currently used. There are no
restrictions on the rights of PKW to assign the Sub-Lease to Talbot other than
any restrictions which have been waived or otherwise removed.
4.15 Conduct of Business Prior to Closing. Except as otherwise
------------------------------------
disclosed to Talbot in writing, since November 30, 1998, and at all times until
the Closing date, PKW has:
(a) Operated its agency business in the usual, regular and
ordinary manner and refrained from making any material change in the nature or
management of such business.
(b) Used its best efforts, without making any commitment on
Talbot's behalf, to preserve PKW's business organization intact and to preserve
the good will of PKW's customers and others having business relationships with
PKW.
(c) Maintained all properties necessary for the conduct of the
agency business, whether owned or leased, in substantially the same condition as
they were on November 30, 1998 (reasonable wear and tear which are not such as
to adversely affect the operation of such business and damage due to unavoidable
casualty excepted); and has given notice to Talbot of any material damage to
such properties by fire or other casualty.
4.16 No Defaults. PKW has in all material respects performed all
-----------
obligations required to be performed by it under all leases, contracts,
agreements, and other commitments to which it is a party which affect its
insurance business and is not in material default under any of them, and no
event has occurred which, with notice or lapse of time, would cause or
constitute a material default under any of them or the creation of a lien or
encumbrance upon any of the Assets.
4.17 Access to Records. Other than APU and the employees of PKW and
-----------------
APU, no other agent or broker, potential buyer, or its representatives (other
than
11
<PAGE>
Talbot) has had access to PKW's office books and records, including but not
limited to expirations, customer lists, and customer account records within the
last 36 months, excluding, however, financial statements of PKW.
4.18 No Undisclosed Commitments. There are no other agreements,
--------------------------
leases, contracts, or other commitments to which PKW is a party and which relate
in any way whatsoever to the operation of PKW's insurance business which have
not been disclosed to Talbot prior to Closing.
4.19 Disclosure. Neither this Agreement nor any other document,
----------
certificate or statement furnished by or on behalf of PKW or APU in connection
with the transactions contemplated by this Agreement contains any untrue
statement of a material fact or fails to include all material facts necessary to
make this Agreement or such document, certificate or statement not misleading.
4.20 Licenses and Taxes. PKW has all licenses and permits, federal,
------------------
state and local, necessary to conduct its business, and such licenses and
permits are in effect. PKW is in compliance with the insurance premium trust
laws of the State of California and is not "out-of-trust" with respect to any
account. PKW has paid or made adequate provision for the payment of all federal,
state or local taxes payable by PKW, and has filed all federal, state or local
tax returns required to be filed by PKW. The federal, state and local tax
returns of PKW are correct as filed. PKW has not elected Subchapter S status
under the Internal Revenue Code. PKW has complied in all material respects with
all applicable laws, regulations and requirements relating to the business of
PKW. Any employee benefit plans of PKW are adequately funded and are in
compliance with all applicable law and regulations.
4.21 Employees. The names, positions, and salaries of all the
---------
employees of PKW are identified on EXHIBIT 4.21 to this Agreement ("Employees").
The names and other information shown on EXHIBIT 4.21 are accurate as of the
date of Closing.
(a) Termination. On or before Closing, PKW will terminate the
-----------
employment of all its Employees and producer contracts, other than the Producers
listed on EXHIBIT 4.21, relating to the Assets.
(b) Employment by Talbot. Talbot will offer employment to all
--------------------
of the Employees listed on EXHIBIT 4.21. Talbot will provide PKW with a list of
any Employees who were offered employment with Talbot and actually become
employed by Talbot. It is Talbot's desire that the Employees who accept Talbot's
offer of employment continue in the same roles and positions and continue to
have the same responsibilities as they did with PKW. In addition, it is the
intent of Talbot that no change in the role, position or responsibility of any
of the Employees who accept employment with Talbot be made without a discussion
of the issue with the members of PKW's prior management who have also accepted
Talbot's offer of employment.
12
<PAGE>
Notwithstanding the foregoing, except for hiring those employees set forth on
EXHIBIT 4.21, Talbot will have absolute discretion in making all personnel
decisions, including but not limited to hiring, firing and defining of job
duties. Nothing in this Agreement will obligate Talbot to employ any of the
Employees for any period of time.
(c) Benefits. All Employees who accept Talbot's offer of
--------
employment, and who are eligible to participate, will be entitled to Talbot's
full benefit package, including 401(k), once all applicable waiting periods have
been satisfied.
5. REPRESENTATIONS AND WARRANTIES OF TALBOT. Talbot represents and
----------------------------------------
warrants to PKW that the following statements are true and correct on the date
hereof and will be true and correct on the Effective Date as though made on such
date, except where another date is specified:
5.1 Talbot's Corporate Existence: Good Standing. Talbot is a
-------------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of California.
5.2 Talbot's Authority. Talbot has all requisite corporate power and
------------------
authority to execute and deliver this Agreement and to perform its obligations
hereunder.
5.3 Valid and Binding Obligations. The execution, delivery and
-----------------------------
performance of this Agreement have been duly authorized by all necessary
corporate action of Talbot. This Agreement and all other instruments or
agreements executed in connection herewith by Talbot constitute or will
constitute when delivered, the valid and binding obligations of Talbot
enforceable in accordance with their respective terms, except to the extent
enforceability may be limited by bankruptcy, insolvency, moratorium or other
similar laws affecting the enforcement of creditors' rights generally, and by
equitable principles of general application.
5.4 No Violation. Talbot is not a party to or obligated or
------------
restricted by any contract, provision or other commitment which will be violated
by the entry into and performance by it of any of the terms and conditions
hereto.
5.5 No Finder. Talbot has not taken any action which would give to
---------
any firm, corporation, agency or other person a right to a consultant's or
finder's fee or any type of brokerage commission in relation to or in connection
with the sale of the Assets to Talbot.
6. CONDITIONS TO TALBOT'S OBLIGATIONS. Talbot's obligations hereunder
----------------------------------
are subject to the fulfillment, at or prior to the Closing or such other date as
may be specified, of each of the following conditions, any or all of which may
be waived, or extended, in writing by Talbot, in its sole discretion:
13
<PAGE>
6.1 Accuracy of Representations and Warranties. Each of the
------------------------------------------
representations and warranties of PKW and APU contained in this Agreement shall
be true on and as of the Closing with the same force and effect as though made
on and as of the date of the Closing, except as affected by transactions
contemplated hereby.
6.2 Performance of Covenants. PKW and APU shall have performed and
------------------------
complied with all covenants, obligations and agreements to be performed or
complied with by it on or before the Closing pursuant to this Agreement.
6.3 Producer Agreements. The Producer Agreements with the Producers
-------------------
shall have been assigned to Talbot.
6.4 Material Adverse Change. No damage, destruction or loss (whether
-----------------------
or not covered by insurance) or other event materially and adversely affecting
the Assets shall have occurred.
6.5 Due Diligence. Talbot shall have completed all aspects of its
-------------
due diligence investigation, and shall not have discovered any information that
causes it reasonably to conclude that it does not wish to complete the
transaction.
6.6 Delivery of Schedules and Exhibits. PKW shall have delivered to
----------------------------------
Talbot all schedules, exhibits and records required under this Agreement, and
all of the same shall have been approved by Talbot after Talbot has completed
its examination of the same.
6.7 Satisfaction of all Debts and Liens Affecting Assets. PKW shall
----------------------------------------------------
have satisfied and removed any and all debts, liens and encumbrances affecting
the Assets, other than the Liabilities and Payables to be assumed by Talbot
pursuant to subsection 1.3 above.
6.8 Governmental and Other Consents. PKW shall have obtained all
-------------------------------
necessary consents and other authorizations necessary for Talbot to purchase and
take title to the Assets, including without limitation all government or other
regulatory agencies have jurisdiction and the approval of the board of directors
of PKW and APU.
7. TERMINATION. This Agreement may be terminated by either party at any
-----------
time prior to the Closing, by written notice of termination to the other, if any
of the conditions to Closing have not been satisfied or waived by the party to
which they are due.
8. INDEMNIFICATION AND REIMBURSEMENT.
---------------------------------
8.1 Indemnification by PKW and APU. PKW and APU indemnify and hold
------------------------------
harmless, and shall defend Talbot against:
14
<PAGE>
(a) All liabilities of PKW of any kind, whether accrued, absolute,
contingent, or otherwise, as of the Effective Date (except to the extent
disclosed to Talbot prior to Closing and expressly assumed by Talbot pursuant to
this Agreement and identified on attached EXHIBIT 8.1(A)) and arising out of any
action, error or omission of PKW or APU or their officers, directors, employees
or agents, or any occurrence, prior to the Effective Date.
(b) All liabilities of any kind or nature, whether accrued, absolute,
contingent, or otherwise, and whether arising prior to or after the Closing,
which relate to or arise out of the acquisition, formation, ownership or
operation of PKW prior to the Effective Date, except to the extent disclosed to
Talbot prior to Closing and expressly assumed by Talbot pursuant to this
Agreement or other writing.
(c) Any and all claims of any of PKW's employees or former employees
related in any way to any services provided by any of them prior to the
Effective Date or related in any way to the termination of their employment by
PKW. This shall include, by way of example and not limitation, any claims for
wrongful discharge, discrimination or harassment; claims for vacation earned or
accrued prior to the Effective Date; claims related to termination of employment
agreements; and claims related to failure to pay minimum wages, failure to pay
other employee benefits, salaries, wages, commissions, or any employment taxes
related to wages, salaries and/or commissions earned (or alleged to be earned)
or payable prior to the Effective Date.
(d) Any damage or deficiency resulting from any misrepresentation,
omission, breach of warranty, nonfulfillment of any agreement, or guarantee on
the part of PKW under this Agreement, or from any misrepresentation in or
omission from any other instrument furnished or to be furnished to Talbot under
this Agreement.
8.2 Reimbursement by PKW. PKW and APU will reimburse Talbot for the
--------------------
amount of any loss, liability or damage suffered by Talbot in respect of any
liability, obligation, or claim to which the foregoing indemnity by PKW and APU
relates, upon demand made by Talbot. The aggregate amount of damages which are
demanded in a claim by Talbot under this Section 8, and thereafter suffered by
Talbot must exceed $10,000 before PKW and APU will be obligated to Talbot under
this Agreement. Any adjustment required by the AP/AR Adjustment shall not be
subject to this $10,000 cap. If such claim(s) exceeds this sum, then the entire
amount of such claim(s) shall be recoverable, it being the intention of the
parties that the $10,000 referred to in the preceding sentence be simply a
threshold for the making of claims and not a deductible. Notwithstanding the
foregoing, the total aggregate liability of PKW and APU under this Section 8
shall not exceed the following amounts for the following periods: (i) $5,000,000
during the twelve months immediately following the Closing Date, (ii) $3,500,000
during the period beginning thirteen months after the Closing Date and ending
twenty-four months after the Closing Date (less the aggregate amount, if any,
paid hereunder during the preceding 12 months), and (iii) $2,000,000 during the
15
<PAGE>
period beginning twenty-five months after Closing Date and ending thirty-six
months after the Closing Date (less the aggregate amount, if any, paid hereunder
during the preceding 24 months). PKW and APU will have no liability under this
Section 8 for claims made by Talbot after the third anniversary of the Closing
Date, except for claims relating to Section 4.20, which shall survive for the
applicable statute of limitations if longer than three years from the date of
Closing and from criminal matters which shall continue indefinitely. The
obligations of PKW and APU hereunder shall be joint and several. Talbot agrees
that, to the extent reasonably possible, it shall not require any such payments
without providing ten (10) days' prior written notice to PKW and APU and
permitting PKW and APU an additional twenty (20) days thereafter to cure or to
contest such liability, obligation or claim.
8.3 Offset. As security for PKW and APU's' liability under the
------
foregoing indemnity, Talbot may, to the extent not reimbursed by PKW and APU,
reduce the balance of any obligation of Talbot to PKW and APU, by the amount of
any payments Talbot is required to make with regard to any item to which such
indemnity relates. Talbot's right to such offset will be subject to the PKW and
APU right to not less than ten days' prior written notice of Talbot's intention
to make such offset. The PKW and APU will have such ten-day period in which to
cure any claimed default giving rise to the offset. Talbot agrees that in the
event a court of competent jurisdiction determines, or the parties otherwise
agree, that any such offset was made improperly or in bad faith by Talbot, that
portion of such offset which has become due and payable to PKW and APU under the
terms of this Agreement or otherwise shall bear interest at a default rate of
nine percent (9%) per year from the date of the offset (or such date thereafter
as the payment became due and payable to PKW and APU, if later) to the date
paid.
8.4 Indemnification by Talbot. Talbot indemnifies and holds
-------------------------
harmless, and shall defend PKW and APU against:
(a) All liabilities of Talbot of any kind arising out of any action,
error or omission of Talbot, or any occurrence, on or after the Effective Date.
(b) Any claim, loss, damage or deficiency resulting from any
misrepresentation, omission or breach of warranty on the part of Talbot under
this Agreement.
(c) All liabilities assumed by Talbot pursuant to subsection 1.3.
8.5 Reimbursement by Talbot. Talbot will reimburse PKW and APU for
-----------------------
the amount of any loss, liability or damage suffered by PKW or APU in respect of
any liability, obligation, or claim to which the foregoing indemnity by Talbot
relates, upon demand made by PKW or APU. The aggregate amount of damages which
are demanded in a claim by PKW or APU under this Section 8, and thereafter
suffered by PKW or APU must exceed $10,000 before Talbot will be obligated to
PKW or APU under this Agreement. Any adjustment required by the AP/AR Adjustment
shall not be
16
<PAGE>
subject to this $10,000 cap. If such claim(s) exceeds this sum, then the entire
amount of such claim(s) shall be recoverable, it being the intention of the
parties that the $10,000 referred to in the preceding sentence be simply a
threshold for the making of claims and not a deductible. Notwithstanding the
foregoing, the total aggregate liability of Talbot under this Section 8 shall
not exceed the following amounts for the following periods' (i) $5,000,000
during the twelve months immediately following the Closing Date, (ii) $3,500,000
during the period beginning thirteen months after the Closing Date and ending
twenty-four months after the Closing Date (less the aggregate amount, if any,
paid hereunder during the preceding 12 months), and (iii) $2,000,000 during the
period beginning twenty-five months after Closing Date and ending thirty-six
months after the Closing Date (less the aggregate amount, if any, paid hereunder
during the preceding 24 months). Talbot will have no liability under this
Section 8 for claims made by Talbot after the third anniversary of the Closing
Date. PKW and APU agree that, to the extent reasonably possible, they shall not
require any such payments without providing ten (10) days' prior written notice
to Talbot and permitting Talbot an additional twenty (20) days thereafter to
cure or to contest such liability, obligation or claim.
9. EMPLOYEES AND BENEFITS: PKW and APU understand and acknowledge
----------------------
that subsequent to the Effective Date, Talbot may, in its sole and absolute
discretion, hire certain employees previously employed by PKW. PKW and APU
represent, warrant and agree that they shall indemnify and hold Talbot harmless
from any and all claims of any of PKW's employees or former employees related in
any way to any services provided by any of them prior to the Effective Date or
related in any way to the termination of their employment by PKW. The foregoing
indemnity shall include, by way of example and not limitation, any claims for
wrongful discharge, discrimination or harassment; claims for vacation earned or
accrued prior to the Effective Date; claims related to termination of employment
agreements; and claims related to failure to pay minimum wages, failure to pay
other employee benefits, salaries, wages, commissions, or any employment taxes
related to wages, salaries and/or commissions earned (or alleged to be earned)
or payable prior to the Effective Date. PKW agrees that it will give full and
adequate notices with respect to the termination of employment to all employees,
effective the Effective Date. All accrued but unpaid compensation and benefits
with respect to the PKW employees (for example, holiday and vacation pay,
retirement benefits and appropriate government withholding for taxes, and
unemployment and workers' compensation premiums, and FICA payments) will be paid
by PKW for the period through the Effective Date. Talbot will be responsible for
employee wages and benefits after the Effective Date.
10. USE OF PKW NAME. As of the Effective Date, PKW assigns to Talbot
---------------
and shall thereafter permit Talbot to use the name "Putnam, Knudsen & Wieking,
Inc." and "Putnam, Knudsen & Wieking Insurance" and all other names used by PKW
(the "Trade Names"). PKW agrees to cause its articles of incorporation to be
amended to change its corporate name and will cooperate with Talbot in making
filings with the Secretary of State of California, the Department of Insurance
for the State of
17
<PAGE>
California, the Clerks of the counties in which PKW does business, and any other
governmental agency necessary to permit Talbot to use the Trade Names.
11. TAIL COVERAGE. PKW agrees that prior to Closing it will obtain
-------------
errors and omissions "tail" coverage in an amount not less than $1,000,000 per
occurrence, $3,000,000 aggregate, which shall cover claims filed during an
extended reporting period of three years following the Effective Date.
12. SURVIVAL OF WARRANTIES AND REPRESENTATIONS. All statements in
------------------------------------------
this Agreement and its exhibits, and in any document delivered by a party in
connection with the transactions contemplated by this Agreement, will be deemed
representations and warranties hereunder by such party. All such representations
and warranties will survive the Closing.
13. NOTICES. All notices, consents, assignments and other
-------
communications under the provisions of this Agreement shall be deemed to have
been duly given when (a) delivered by hand, (b) sent by facsimile or telecopier
(with receipt confirmed), or (c) three days after delivery to the U.S. Postal
Service or other delivery service (receipt requested), postage prepaid; in each
case to the address of the parties set forth below, or to such other address as
a party may designate as to itself by giving notice of such change of address in
accordance with the provisions of this paragraph:
If to Talbot: Talbot Agency of California, Inc.
4371 Latham Street, Suite 101
Riverside, California 92501
Attention: Kirk Christ
Facsimile: (909) 788-8502
with a copies to: Talbot Agency, Inc.
7770 Jefferson NE, Ste. 200
Albuquerque, New Mexico 87109
Attention: Matthew Chavez
Facsimile: (505)828-9422
and
Sutin, Thayer & Browne
Two Park Square, Suite 1000
6565 Americas Parkway N.E.
Albuquerque, NM 87110
Attention: Gabriel M. Parra
Facsimile:(505)888-6565
18
<PAGE>
If to PKW: Putnam, Knudsen & Wieking, Inc.
c/o Anchor Pacific Underwriters, Inc.
1800 Sutter Street, Suite 500
Concord, California 94520
Attention: James R. Dunathan
Facsimile: (925)677-3210
with copy to: A. John Murphy
Sheppard, Mullen, Richter & Hampton
Four Embarcadero Center, Suite 1700
San Francisco, California 94111
If to APU: James R. Dunathan
Anchor Pacific Underwriters, Inc.
1800 Sutter Street, Suite 400
Concord, California 94520
with copy to: A. John Murphy
Sheppard, Mullen, Richter & Hampton
Four Embarcadero Center, Suite 1700
San Francisco, California 94111
14. MISCELLANEOUS.
-------------
14.1 Expenses. Except as otherwise provided in this Agreement, whether
--------
or not the transactions contemplated by this Agreement are consummated, each
party shall pay its own expenses and the fees and expenses of its counsel and
accountants and other experts, and APU personally guarantees payment of all such
fees and expenses incurred on behalf of PKW.
14.2 No Waiver. The waiver of any breach of any provision of this
---------
Agreement, or failure to enforce any provision hereof shall not operate or be
construed as a waiver of any subsequent breach by any party. Any waiver must be
in writing and signed by the parties.
14.3 Interpretation. Words used herein, regardless of the number and
--------------
gender specifically used, shall be deemed and construed to include any other
number, singular or plural, and any other gender as the context requires.
19
<PAGE>
14.4 Governing Law. This Agreement shall be interpreted and governed in
-------------
accordance with the internal laws of the State of California, without regard to
the conflicts of law principles thereof.
14.5 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be considered an original but all of which
together shall constitute one and the same instrument.
14.6 Entire Agreement. This Agreement sets forth the entire agreement
----------------
among the parties on the matters set forth herein and supersedes all prior
agreements, whether written or oral, among any of the parties hereto relating to
the Assets.
14.7 Severability. If any portion of this Agreement shall be invalid,
------------
void, voidable or unenforceable, such invalidity or unenforceability shall in no
way affect the validity or enforceability of any other portion hereof.
14.8 Binding Agreement. This Agreement shall extend to and be binding
-----------------
upon the parties hereto, their heirs, legal representatives, executors,
successors and assigns. The parties agree for themselves and their heirs,
representatives, executors, successors and assigns, to execute any instruments
and to perform any acts which may be necessary or desirable to carry out the
purposes of this Agreement.
14.9 Attorneys' Fees. In any suit, proceeding or action to enforce any
---------------
term, condition or covenant of this Agreement or to procure an adjudication or
determination of the rights of any party hereto, the most prevailing party shall
be entitled to recover from the other party to the proceeding reasonable sums as
attorneys' fees and costs and expenses in connection with such suit, proceeding
or action, including appeal, which sums may be included in any judgment or
decree entered therein.
14.10 Headings. The Section and other headings in this Agreement are
--------
included solely as a matter of convenience for reference and are not intended to
be a part of this Agreement.
14.11 Further Assurances. PKW, APU and Talbot shall cooperate with one
------------------
another to facilitate the orderly transfer of the Assets to Talbot. If any sum
of money due to either party under the terms of this Agreement is paid to the
other party, the party receiving such payment shall promptly account for and
endorse and transfer such payment to the party entitled thereto. At any time,
either before or after the Closing, Talbot, PKW and APU will execute such
additional instruments and take such actions as may be reasonably requested by
the other in order to confirm, perfect or otherwise carry out the intent and
purposes of this Agreement.
14.12 Negotiated Agreement. The parties hereto have been represented by
--------------------
counsel of their own choosing throughout this transaction who have carefully
negotiated the provisions of this Agreement. Accordingly, the Parties do not
believe
20
<PAGE>
that any presumptions relating to the interpretation of contracts against the
drafter should be applied in this case and therefore waive its effects.
15. ARBITRATION. The parties agree to give written notice of any breach or
-----------
default in the terms of this Agreement, and the breaching party will have twenty
days after delivery of such notice within which to cure the breach or default.
If the party fails to cure any such breach or default within such period, the
non-breaching party may pursue its remedies pursuant to this Agreement. Any
controversy arising out of this Agreement or the breach thereof will be settled
by arbitration in San Francisco, California, or such other location as the
parties may mutually agree, in accordance with the then effective contract
arbitration rules of the American Arbitration Association, except that Talbot
may apply to a court of competent jurisdiction for any temporary or permanent
injunctive relief necessary to halt any breach or threatened breach by either of
APU, Putnam or Wieking of the restrictive covenants contained in either of the
Employment Agreements. Judgment upon the award rendered by the arbitrator may be
entered in any court having jurisdiction.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
above stated.
PKW: PUTNAM, KNUDSEN & WIEKING, INC., a California
corporation
By /s/ J.R. Dunathan
------------------------------------------
Its President /C.E.O.
---------------------------------------
APU: ANCHOR PACIFIC UNDERWRITERS, INC., a Delaware
corporation
By /s/ J.R. Dunathan
------------------------------------------
Its President /C.E.O.
---------------------------------------
21
<PAGE>
TALBOT: TALBOT AGENCY OF CALIFORNIA, INC., a California
Corporation
By /s/ Kirk Christ
--------------------------------------------
Kirk Christ
President
22
<PAGE>
EXHIBIT 11.1
ANCHOR PACIFIC
COMPUTATION OF LOSS PER SHARE
<TABLE>
<CAPTION>
Years Ended December 31
----------------------------------------------------
1998 1997 1996
---------- ---------- -----------
<S> <C> <C> <C>
BASIC
Net loss from continuing operations $ (768,648) $ (965,441) $(1,405,800)
Net income (loss) from discontinued operations (6,682) 18,750 (26,392)
---------- ---------- -----------
Net loss $ (775,330) $ (946,691) $(1,432,192)
========== ========== ===========
Weighted average shares outstanding 4,710,057 4,612,153 3,766,176
========== ========== ===========
Per share amount:
Continuing operations $ (0.16) $ (0.21) $ (0.37)
Discontinued operations $ (0.00) $ (0.00) $ (0.00)
---------- ---------- -----------
$ (0.16) $ (0.21) $ (0.37)
========== ========== ===========
DILUTED
Net loss from continuing operations,
after deducting interest on debentures $ (761,748) $ (959,441) $(1,284,130)
Net income (loss) from discontinued operations (6,682) 18,750 (26,392)
---------- ---------- -----------
Net loss $ (768,430) $ (940,691) $(1,310,522)
========== ========== ===========
Weighted average shares outstanding 4,710,057 4,612,153 3,766,176
Net effect of dilutive stock options
and warrants - based on the treasury
stock method using the average market price -- -- 57,371
Net effect of convertible debentures
outstanding end of period 504,444 44,444 60,606
Effect of shares issued upon conversion of
debentures, assuming the conversion occurred
at the beginning of the period -- -- 580,555
---------- ---------- -----------
Total 5,214,501 4,656,597 4,464,708
========== ========== ===========
Per share amount (A):
Continuing operations $ (0.15) $ (0.21) $ (0.29)
Discontinued operations $ (0.00) $ (0.00) $ (0.01)
---------- ---------- -----------
$ (0.15) $ (0.21) $ (0.30)
========== ========== ===========
</TABLE>
Note (A): For financial reporting purposes, basic and diluted loss per share is
calculated exclusive of the effects of stock options, warrants, and
convertible debentures because they are antidilutive. The above calculation
on the dilutive basis includes the effect of stock options, warrants and
convertible debentures outstanding, for the purposes of complying with
section 229.601 of regulation S-K.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000317781
<NAME> ANCHOR PACIFIC UNDERWRITERS, INC.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,655,911
<SECURITIES> 0
<RECEIVABLES> 2,692,831
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,540,488
<PP&E> 2,561,113
<DEPRECIATION> 2,010,635
<TOTAL-ASSETS> 7,765,332
<CURRENT-LIABILITIES> 6,754,854
<BONDS> 0
0
0
<COMMON> 94,201
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<INCOME-TAX> 22,444
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</TABLE>
