<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 1999 COMMISSION FILE NUMBER: 0-9628
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM [ ] TO [ ]
ANCHOR PACIFIC UNDERWRITERS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-1687187
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1800 SUTTER STREET, SUITE 400 94520
CONCORD, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (925) 682-7707
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common stock, $.02 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X]Yes [_]No
As of March 31, 1999, the Registrant had 4,710,057 shares of common stock
outstanding.
This document is comprised of 18 pages
================================================================================
<PAGE>
ANCHOR PACIFIC UNDERWRITERS, INC.
INDEX
<TABLE>
<CAPTION>
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements:
Consolidated Balance Sheets, March 31, 1999 (unaudited) and
December 31, 1998........................................... 1
Consolidated Statements of Operations (unaudited) for the
three 3
months ended March 31, 1999 and 1998........................
Consolidated Statements of Shareholders' Equity (Deficit)
for the three months ended March 31, 1999 (unaudited) and
year ended December 31, 1998................................ 4
Consolidated Statements of Cash Flows (unaudited ) for the
three 5
months ended March 31, 1999 and 1998........................
Notes to Consolidated Financial Statements.................. 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 9
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings........................................... 15
ITEM 2. Changes in Securities....................................... 15
ITEM 3. Defaults Upon Senior Securities............................. 15
ITEM 4. Submission of Matters to a Vote of Security Holders......... 15
ITEM 5. Other Information........................................... 15
ITEM 6. Exhibits and Reports on Form 8-K............................ 15
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------------- -------------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents - corporate funds $ 224,778 $ 138,139
Cash and cash equivalents - third-party
administration fiduciary funds 3,717,461 3,517,772
Realizable value of net assets sold - 2,054,995
Accounts receivable (less allowance for
doubtful accounts of $41,952 in
1999 and 1998, respectively) 434,099 527,827
Prepaid expenses and other current assets 205,802 191,749
------------------- -------------------
Total current assets 4,582,140 6,430,482
------------------- -------------------
Property and equipment 2,688,118 2,561,111
Accumulated depreciation and amortization (2,067,918) (2,010,633)
------------------- -------------------
620,200 550,478
Other assets:
Intangible assets, net 577,403 593,933
Other 83,192 80,431
------------------- -------------------
660,595 674,364
------------------- -------------------
Total assets $ 5,862,935 $ 7,655,324
=================== ===================
</TABLE>
1
<PAGE>
ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------------- --------------------
(unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Cash and cash equivalents - third-party
administration fiduciary funds $ 3,717,461 $ 3,517,772
Accounts payable 563,561 619,798
Accrued expenses 334,016 613,256
Short-term debt - 200,000
Current portion of long-term debt 426,193 1,242,950
Current portion of long-term liabilities 399,175 451,068
------------------- --------------------
Total current liabilities 5,440,406 6,644,844
------------------- --------------------
Long-term liabilities 417,859 453,226
------------------- --------------------
Long-term debt, including $315,000 and $480,000 in
1999 and 1998, respectively, owed to related
parties 861,341 858,342
------------------- --------------------
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 shares issued as
of 3/31/99 and 12/31/98 94,201 94,201
Additional paid-in capital 4,232,265 4,232,265
Accumulated deficit (5,183,137) (4,627,554)
------------------- --------------------
Total shareholders' equity (deficit) (856,671) (301,088)
------------------- --------------------
Total liabilities and shareholders' equity (deficit) $ 5,862,935 $ 7,655,324
==================== =====================
</TABLE>
See accompanying notes.
2
<PAGE>
ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
---------------------------------------------------------
1999 1998
<S> <C> <C>
Revenues:
Administrative fees and other income $ 2,467,645 $ 3,386,653
Interest income 6,237 3,766
------------------------- ------------------------
Total revenue 2,473,882 3,390,419
------------------------- ------------------------
Operating expenses:
Salaries, commissions and employee benefits 1,915,220 2,105,540
Selling, general and administrative expenses 1,097,948 1,220,113
------------------------- ------------------------
Total operating expenses 3,013,168 3,325,653
------------------------- ------------------------
(539,286) 64,766
------------------------- ------------------------
Other income (expense):
Amortization of goodwill and intangible assets (16,530) (11,267)
Interest (34,819) (65,646)
Other 39,922 4,764
------------------------- ------------------------
Total other income (expense) (11,427) (72,149)
------------------------- ------------------------
Loss before income taxes (550,713) (7,383)
Benefit (provision) for income taxes (4,870) 20,180
------------------------- ------------------------
Income (loss) from continuing operations (555,583) 12,797
------------------------- ------------------------
Discontinued operations:
Income from discontinued operations, net of
Income taxes - 39,601
------------------------- ------------------------
Income from discontinued operations - 39,601
------------------------- ------------------------
Net income (loss) $ (555,583) $ 52,398
========================= ========================
Net income (loss) per share:
Loss from continuing operations $ (0.12) $ -
Income from discontinued operations - 0.01
------------------------- ------------------------
Basic and diluted income (loss) per common share $ (0.12) $ 0.01
------------------------- ------------------------
Weighted average number of common shares
outstanding 4,710,057 4,710,060
------------------------- ------------------------
</TABLE>
See accompanying notes
3
<PAGE>
ANCHOR PACIFIC UNDERWRITERS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Additional
Common Stock Paid-In Accumulated
Shares Amount Capital (Deficit) Total
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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)
Net Loss - - - (555,583) (555,583)
---------------------------------------------------------------------------------------
Balance at March 31, 1999
(Unaudited) 4,710,057 $ 94,201 $ 4,232,265 $ (5,183,137) $ (856,671)
=======================================================================================
</TABLE>
See accompanying notes
4
<PAGE>
ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
--------------------------------------------------
1999 1998
<S> <C> <C>
CONTINUING OPERATIONS ACTIVITIES:
Net income (loss) $ (555,583) $ 52,398
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 57,283 69,317
Amortization of goodwill, other intangibles
and organization expenses 16,530 11,267
Stock issued for services - 17,000
Changes in operating assets and liabilities, net
of effect of purchases of subsidiaries:
Accounts receivable 93,728 (28,988)
Prepaid expenses and other current assets (14,056) 71,192
Other assets (2,759) (24,232)
Accounts payable and accrued expenses (445,484) 5,056
----------------------- -----------------------
Net cash provided by (used in) operating activities (850,341) 173,010
----------------------- -----------------------
INVESTMENT ACTIVITIES:
Purchases of property and equipment (127,005) (19,291)
Net proceeds from sale of assets 2,165,003 -
----------------------- -----------------------
Net cash provided by (used in) investing activities 2,037,998 (19,291)
----------------------- -----------------------
FINANCING ACTIVITIES:
Borrowings on long-term debt 86,639 200,000
Repayment on long-term debt and liabilities (1,186,018) (227,975)
----------------------- -----------------------
Net cash (used in) financing activities (1,101,018) (27,975)
----------------------- -----------------------
Net increase in cash 85,000 125,744
Cash and cash equivalents-corporate funds at
beginning of period 138,139 44,384
----------------------- -----------------------
Cash and cash equivalents-corporate funds at
end of period $ 224,778 $ 170,128
----------------------- -----------------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 34,819 $ 64,646
----------------------- -----------------------
Income taxes $ 4,870 $ 6,220
----------------------- -----------------------
</TABLE>
See accompanying notes
5
<PAGE>
ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1999
NOTE 1 - BASIS OF PRESENTATION
- ------------------------------
The accompanying unaudited consolidated financial statements of Anchor
Pacific Underwriters, Inc. and its subsidiaries ("Anchor") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments, consisting of normal recurring
accruals, considered necessary for a fair presentation have been included.
Operating results for the three month period ended March 31, 1999, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999. For further information, refer to the consolidated financial
statements and footnotes thereto included in Anchor's Annual Report on Form 10-K
for the year ended December 31, 1998.
Reclassifications
- -----------------
Prior years' balances have been reclassified to conform with the
current year presentation of discontinued operations.
Recapitalization and Restatement
- --------------------------------
On January 6, 1995, Anchor merged with System Industries, Inc.
("System"), previously a dormant, publicly traded shell corporation. As a result
of the merger, Anchor became a public company. For accounting purposes, the
merger has been treated as a recapitalization of Anchor with Anchor as the
acquirer. Upon consummation of this merger, shareholders and certain creditors
of System each received one share of Anchor common stock and one year warrant to
purchase one share of Anchor common stock at a price of $3.00 for every 42.3291
shares of issued and outstanding System common stock.
NOTE 2 - DISCONTINUED OPERATIONS
- --------------------------------
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 a wholly- owned
subsidiary, Harden & Company Insurance Services, Inc. ("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. In 1994 Anchor acquired a property and casualty insurance
brokerage company, Putnam, Knudsen & Wieking, Inc. ("PKW"). Shortly thereafter
it consolidated all of its property and casualty insurance brokerage business
under 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.
NOTE 3 - CONTINGENCIES
- ----------------------
Anchor is subject to certain legal proceedings and claims arising in
the ordinary course of its business. It is management's opinion that the
resolution of these claims will not have a material effect on Anchor's
consolidated financial position.
6
<PAGE>
NOTE 4 - 10% CONVERTIBLE SUBORDINATED DEBENTURES
- ------------------------------------------------
In 1995, Anchor issued $370,000 of 10% Convertible Subordinated
Debentures (the "Debentures"). Subsequently, 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 31, 1999, $40,000
of the Debentures had been repaid in full, and $60,000 remained outstanding.
NOTE 5 - SUBORDINATED BRIDGE NOTES AND WARRANT
- ----------------------------------------------
During 1996, Anchor raised $225,000 from five members of the Board of
Directors and other qualified investors through the issuance of 10% Subordinated
Bridge Notes with a Warrant to Purchase Shares of Anchor Common Stock ("Bridge
Notes"). The basic terms of the Bridge Notes were: (a) 10% interest per annum,
paid in arrears; (b) one year term; (c) for every $10,000 of principal invested,
the purchaser received a five year warrant to 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 31, 1999, $80,000 of the Bridge Notes
remained outstanding.
NOTE 6 - 1997 OFFERING
- ----------------------
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.
NOTE 7 - 10% CONVERTIBLE SUBORDINATED DEBENTURES, SERIES B
- ----------------------------------------------------------
At the end of the third quarter 1998, Anchor commenced raising
additional funds from members of the Board of Directors and other qualified
investors by offering 10% Convertible Subordinated Debentures, Series B (the
"Series B Debentures"). 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 PKW for an amount in excess of $2 million. Anchor sold PKW for $2,250,000
cash, effective December 31, 1998. As of March 31, 1999, Anchor has repurchased
$230,000 of
7
<PAGE>
the Series B Debentures including $200,000 repurchased from its primary lender.
NOTE 8 - 10% CONVERTIBLE SUBORDINATED DEBENTURES, SERIES C
- ----------------------------------------------------------
At the end of the first quarter 1999, Anchor commenced raising
additional funds from members of the Board of Directors and other qualified
investors by offering 10% Convertible Subordinated Debentures, Series C (the
"Series C Debentures"). As of March 31, 1998, Anchor had raised $50,000 and had
oral commitments from investors to purchase an additional $100,000 of Series C
Debentures. Anchor intends to utilize a substantial portion of the proceeds from
the Series C Debentures to support current and future working capital needs of
Anchor. The basic terms of the Series C Debentures are: (a) 10% interest,
payable semi-annually in arrears; (b) two year maturity; (c) conversion price of
$0.60 per share; (d) "Piggyback" registration rights for three years; (e) for
each $5,000 of Series C Debentures acquired, an investor receives a five year
warrant to acquire 2,000 shares of Anchor common stock at an exercise price of
$0.60 per share; and (f) subordination provisions that subordinate the Series C
Debentures to Anchor's "Senior Debt" (as defined in the Series C Debentures).
NOTE 9 - COMMITMENTS
- --------------------
On September 30, 1997, Anchor obtained a $1,600,000 bank loan. The
basic terms and conditions of this loan were: (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 (notwithstanding the foregoing
payment provisions, 75% of Anchor's monthly EBITDA were to be applied to
principal payments to the extent such percentage of monthly EBITDA was required
to make the scheduled payment of principal. To the extent that 75% of monthly
EBITDA fell short of the required principal payment, the difference was to 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'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 the term loan dated
September 30, 1997, including all amendments thereto and replacements therefor,
remained in place.
On June 2, 1998, a new term loan in the amount of $1,741,841 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;
and (c) monthly principal payments in installments of $16,500 beginning on June
5, 1998. The provision which required 75% of Anchor's monthly EBITDA to be
applied to principal payments was deleted. 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 $2,250,000 cash which was paid at the time
of the closing on January 15, 1999, based on a purchase price of 4.5 times
EBITA. The proceeds of the sale have been used by Anchor to reduce debt and to
direct additional resources to third-party administration opportunities.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BACKGROUND
Anchor was organized in 1986 as a California general partnership for
the specific purpose of acquiring Harden & 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.
Since its inception, Anchor has expanded its insurance and third-party
administration service capabilities through internal growth as well as a series
of acquisitions. 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.
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.
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").
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. Anchor continues to look for
opportunities to expand its third-party administration services in the Western
United States.
GENERAL
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 companies and self-insured employers. As compensation for its claims
administration services, Harden Group generally receives fees based either on a
percentage of premiums collected or on a per capita basis.
9
<PAGE>
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. 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.
RESULTS OF CONTINUING OPERATIONS -- QUARTERS ENDED MARCH 31, 1999 AND 1998
RECLASSIFICATIONS
The prior years' balances detailed below have been reclassified to
conform with the current year presentation of discontinued operations.
REVENUES
TOTAL REVENUES. Total revenues for the first quarter of 1999, were
$2,473,882, a decrease of $916,537 or (27.0)%, as compared to 1998 first quarter
revenues of $3,390,419. The decrease in revenue in this three month period was
primarily due to the declining revenues in Harden Group's Los Angeles office as
a result of carrier rate increases. 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 the first quarter of 1999, were $2,467,645, a decrease of
$919,008 or (27.1)%, as compared to $3,386,653 in fees for the same period in
1998. This decrease in fee income is the direct result of declining revenue
generated from Harden Group's Los Angeles office.
Fee revenues generated by Anchor in the first quarter of 1999 from
third-party administration services consist of revenues generated by Harden
Group. The third-party administration revenues are primarily derived from: (a)
an insurance product underwritten by one insurance carrier, which is A-
(Excellent); and (b) the administration of insurance programs underwritten by
various insurance carriers for a number of self-insured employers. Self-
insurance is an alternative to fully insured programs in which a client assumes
a manageable portion of its insurance risks, usually (although not always)
placing the less predictable and larger loss exposure with an excess insurance
carrier.
INTEREST INCOME. Interest income consists of interest earned on funds
held in fiduciary accounts and interest earned on investments. Interest income
was $6,237 and $3,766 for the three months ended March 31, 1999 and 1998,
respectively.
10
<PAGE>
EXPENSES
TOTAL EXPENSES. Total operating expenses for the first quarter of
1999, were $3,013,168, a decrease of $312,485 or (9.4)% as compared to operating
expenses of $3,325,653 for the same period in 1998. As discussed below, the
decrease in total expenses resulted primarily from a decrease in selling,
general and administration expenses and employee compensation and benefits
resulting from the decrease of third-party administration services business at
Harden Group's Los Angeles office.
EMPLOYEE COMPENSATION AND BENEFITS. Employee compensation and
benefits for the first quarter of 1999, were $1,915,220, a decrease of $190,320
or (9.0)% as compared to $2,105,540 for the same period in 1998. The decrease
related primarily to the closure of Harden Group's Los Angeles office.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $1,097,948 and $1,220,113 for the quarters ended
March 31, 1999 and 1998, respectively. The $122,165 or (10.0)% decrease in 1999,
as compared to 1998, resulted primarily from a closure of Harden Group's Los
Angeles office. General and administrative expenses include rent, travel,
insurance, postage, telephone, supplies and other miscellaneous expenses.
INTEREST EXPENSE. Interest expense was $34,819 and $65,646, for the
first quarter of 1999 and 1998, respectively. The decrease in interest expense
of $30,827 in the first quarter of 1999, as compared to the same period in 1998,
was due to the decrease in borrowings under the bank term 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
$16,530 and $11,267, for the first quarter of 1999 and 1998, respectively. The
increase in amortization and other intangibles is a result of increased
intangibles at Harden-AZ.
INCOME TAXES
Anchor's expense for income taxes was $4,870 for the first quarter of
1999 as compared to a benefit for income taxes of $20,180 for the first quarter
of 1998.
LIQUIDITY AND CAPITAL RESOURCES
Anchor reported net cash flows (used in) by operations of $(850,341)
for the first quarter ended March 31, 1999, compared to net cash flows provided
by operations of $173,010 for the same period in 1998. During 1999, Anchor
repaid $800,000 of the existing line of credit and met its operating and capital
needs from various sources, including the use of proceeds received from the sale
of PKW and the use of proceeds received from the sale of Series C Debentures.
Capital and certain acquisition related expenditures were $127,005 and
$19,291 for the three months ended March 1999 and 1998, respectively. The 1999
expenditures primarily involved expenditures related to software development and
implementation to update the eligibility and claims processing system.
Short-term borrowings, current portion of long-term debt and current
portion of long-term liabilities at March 31, 1999, totaling in the aggregate
$825,368 (as compared to $1,894,018 at December 31, 1998), consisted of: (a)
$198,000 representing the current portion of a term bank loan further described
in footnote 9 to the Financial Statements, above; (b) approximately $104,484 of
future fixed payments under a consulting agreement entered into with a company
affiliated with the former shareholders of Harden-AZ; (c) $66,983 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) $80,000 of the Bridge Notes; (f)
approximately $71,100 representing obligations relating to the purchase of
furniture, fixtures and computer equipment at the PHA location; and (g)
approximately $244,801 for certain other current liabilities.
11
<PAGE>
At March 31, 1999, long-term liabilities and long-term debt, less the
current portion discussed above, totaled $1,279,200 (as compared to $1,311,568
at December 31, 1998), and primarily consisted of: (a) $546,341 representing the
long-term portion outstanding under a term bank loan further described in
footnote 9 to the Financial Statements, above; (b) approximately $333,013
representing deferred rent with regard to certain real property currently leased
by Anchor; (c) $265,000 of Series B Debentures; (d) $50,000 of Series C
Debentures; and (e) approximately $84,846 for certain other long-term
liabilities. In May 1995, PKW entered into a sublease with respect to 82% of
PKW's prior office space. The sublease expired on September 30, 1997, and was
extended by the subtenant through November 30, 1999, the date on which the term
of the master lease expires and requires PKW to provide a multi-year rent
subsidy. In December 1995, PKW entered into a sublease with respect to an
additional 10% of PKW's prior office space. The sublease expires on November 30,
1999, and ;requires PKW to provide a multi-year rent subsidy. In October 1997,
PKW entered into a sublease with 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. Following the sale of PKW, Anchor has assumed
these remaining obligations which expire on November 30, 1999.
Reference is made to footnotes 4 through 9 to the Financial Statements
included in this Form 10-Q for further information on Anchor's fund raising
activities and borrowings from its primary bank lender.
Anchor has not paid cash dividends in the past and does not expect to
pay cash dividends in the foreseeable future.
YEAR 2000 UPDATE
Anchor's plan to achieve Year 2000 compliance in its electronic
information systems is proceeding on schedule. A team has been created to
coordinate the identification and implementation of the necessary changes
required for computer systems and applications. Anchor has 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:
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 began 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 is expected to respond, document, track and
service such requests with periodic summaries being reported to Anchor's team.
Outbound Year 2000 Compliance Communications are requests
12
<PAGE>
initiated by Anchor seeking the status of another entities' Year 2000
compliance. These requests are being 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.
HARDEN-CA (CONCORD, CA):
------------------------
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.
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.
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 expected 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".
13
<PAGE>
FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of that term under the Private Securities Litigation Reform
Act of 1995 (Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934). Additional written or oral forward-looking
statements may be made by Anchor from time to time, in filings with the
Securities and Exchange Commission or otherwise. Statements contained herein
that are not historical facts are forward-looking statements made pursuant to
the safe harbor provisions referenced above. For example, discussions concerning
Anchor's ability to create new products and services, and expansion of Anchor
through internal growth of existing and new products and services, may involve
forward-looking statements. In addition, when used in this discussion, the
words, "anticipates," "expects," "intends," "plans" and variations thereof and
similar expressions are intended to identify forward-looking statements.
Forward-looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified based on current
expectations. Consequently, future events and actual results could differ
materially from those set forth in, contemplated by, or underlying the forward-
looking statements contained in this Annual Report. Statements in this Quarterly
Report, particularly in the Notes to Financial Statements, Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations and
Year 2000 Update, describe certain factors, among others, that could contribute
to or cause such differences. Such forward-looking statements involve risks and
uncertainties, and actual results could differ from those described herein.
While the statements represent management's current judgment as to the near-term
future prospects of its business, such risks and uncertainties could cause
actual results to differ from the above statements. Factors which could cause
actual results to differ include the following: Harden Group's relationship with
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.
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
competitive 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.
14
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Anchor and its subsidiaries are parties from time to time to various
lawsuits that arise in the normal course of business. Management is not aware of
any lawsuits to which Anchor or its subsidiaries is currently a party or to
which any property of Anchor or any of its subsidiaries is subject, which might
materially adversely affect the financial condition or results of operations of
Anchor.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
4.9 Form of 10% Convertible Subordinated Debenture, Series C.
4.9a Form of Warrant to Purchase Shares of Common Stock of Anchor Pacific
Underwriters, Inc.
10.2a Sublease dated as of January 1, 1999, between Anchor and Talbot Agency
of California, Inc. (regarding 1800 Sutter Street, Suite 500, Concord,
California).
10.34 Office Lease dated January 29, 1999 between Harden and Columbia
Square, L.L.C. (regarding 111 SW Columbia, Suite 600, Portland,
Oregon).
27.0 Financial Data Schedule
B. Reports on Form 8-K
None
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Anchor has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ANCHOR PACIFIC UNDERWRITERS, INC.
Date: May 10, 1999 /s/ James R. Dunathan
---------------- --------------------------------------------------
James R. Dunathan
President and Chief Executive Officer
Date: May 10, 1999 /s/ Earl Wiklund
---------------- --------------------------------------------------
Earl Wiklund
Senior Vice President and Chief Financial Officer
16
<PAGE>
EXHIBIT 4.9
Debenture No.
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR
QUALIFIED UNDER ANY APPLICABLE STATE SECURITIES LAWS. IT MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT OR
QUALIFICATION UNDER SUCH SECURITIES LAWS OR AN OPINION OF COUNSEL, SATISFACTORY
TO THE COMPANY, THAT THE SALE OR TRANSFER IS PURSUANT TO AN EXEMPTION FROM THE
REGISTRATION OR QUALIFICATION REQUIREMENTS OF SUCH SECURITIES LAWS.
ANCHOR PACIFIC UNDERWRITERS, INC.
10% Convertible Subordinated Debenture, Series C
(convertible into shares of common stock)
$_________ Concord, California
______________
ANCHOR PACIFIC UNDERWRITERS, INC., a Delaware corporation (the
"Company"), for value received, hereby promises to pay to _____________ or such
other person in whose name this Debenture is registered on the Debenture
Register (as that term is defined below) (the "Holder"), the principal amount of
______________ Dollars ($_________), with simple interest on the unpaid balance
of such principal amount at the rate of ten percent (10%) per annum from the
date of this Debenture. Interest on the outstanding principal balance shall be
computed on the basis of a 360 day year of twelve 30-day months and shall be
paid to the Holder on ____________, 1999, ________, 2000 and ____________, 2000
(each, an "Interest Payment Date"). Each Debenture delivered upon registration
of transfer or in exchange for or in lieu of this Debenture shall carry the
rights to interest accrued and unpaid, and to accrue, which were carried by this
Debenture.
The full principal amount of this Debenture, plus interest, will be
due and payable on ________, 2001 (the "Maturity Date"). Payment of interest
and principal shall be made in lawful money of the United States of America by
wire transfer to an account designated by the Holder appearing on the Debenture
Register.
This Debenture is a duly authorized Debenture of the Company, Series
C, limited to the aggregate principal amount of $_________.
<PAGE>
1. Representations, Warranties and Covenants.
-----------------------------------------
1.1 Organization, Good Standing and Qualification. The Company is a
---------------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has all requisite corporate power and authority to
carry on its business as now conducted and as proposed to be conducted. The
Company is duly qualified to transact business and is in good standing in each
jurisdiction in which the failure to so qualify would have a material adverse
effect on its business or properties.
1.2 Valid Issuance of Debentures and Shares. The Debenture, when
---------------------------------------
issued, sold and delivered in accordance with the terms hereof for the
consideration expressed herein, will be a valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms, and based
in part upon the representations of the Holder contained in the Subscription
Agreement pursuant to which this Debenture is being issued, will be issued in
compliance with all applicable federal and state securities laws. The shares of
the Company's Common Stock, $.02 par value per share, issuable upon conversion
of the Debentures (the "Shares") have been duly and validly reserved for
issuance and, upon issuance in accordance with the terms of this Debenture,
shall be duly and validly issued, fully paid and nonassessable.
1.3 Compliance with Other Instruments. The Company is not in
---------------------------------
violation of or default under any provisions of its Certificate of Incorporation
or Bylaws as amended and in effect on and as of the date of this Debenture or of
any material provision of any instrument or contract to which it is a party or
by which it is bound or, to its knowledge, of any material provision of any
federal or state judgment, writ, decree, order, statute, rule or governmental
regulation applicable to the Company. The execution, delivery and issuance of
this Debenture will not result in: (a) any such violation or be in conflict
with or constitute, with or without the passage of time and giving of notice, a
default under any such provision, instrument or contract; or (b) an event which
results in the creation of any lien, charge or encumbrance upon any assets of
the Company.
2. Subordination.
-------------
2.1 Subordination. The indebtedness evidenced by this Debenture is
-------------
subordinate and junior in right of payment to all Senior Debt (as such term is
defined below) to the extent provided herein, and the Holder, by such Holder's
acceptance hereof, agrees to the subordination herein provided and shall be
bound by the provisions hereof. Senior Debt shall continue to be Senior Debt
and entitled to the benefits of these subordination provisions irrespective of
any amendment, modification or waiver of any term of the Senior Debt or
extension or renewal of the Senior Debt.
2
<PAGE>
2.2 Senior Debt Defined. As used herein, the term "Senior Debt"
-------------------
shall mean the following whether now outstanding or subsequently incurred,
assumed or created: (a) all indebtedness (whether or not secured) of the
Company or its subsidiaries to banks, insurance companies or other financial
institutions regularly engaged in the business of lending money; (b) such other
indebtedness of the Company or its subsidiaries to the extent that the
instrument creating or evidencing such indebtedness provides that it shall
constitute Senior Debt; (c) any indebtedness issued in exchange for such Senior
Debt, or any indebtedness arising from the satisfaction of such Senior Debt by a
guarantor; and (d) any deferrals, renewals, or extensions of any such Senior
Debt.
2.3 Default on Senior Debt. If the Company shall default in the
----------------------
payment of any principal of or interest on any Senior Debt when the same shall
become due and payable, whether at maturity or at a date fixed for prepayment or
by declaration of acceleration or otherwise, then, upon written notice of such
default to the Company by the holders of Senior Debt or any trustee therefor,
unless and until such default shall have been cured or waived or shall have
ceased to exist, no direct or indirect payment (in cash, property, securities,
by set-off or otherwise) shall be made or agreed to be made on account of the
principal of or interest on this Debenture, or in respect of any redemption,
repayment, retirement, purchase or other acquisition of this Debenture.
2.4 Prior Payment of Senior Debt.
----------------------------
(a) In the event of: (i) any insolvency, bankruptcy,
receivership, liquidation, reorganization, readjustment, composition or
other similar proceeding relating to the Company; (ii) any proceeding for
the liquidation, dissolution or other winding up of the Company, voluntary
or involuntary, whether or not involving insolvency or bankruptcy
proceedings; (iii) any assignment by the Company for the benefit of
creditors; or (iv) any other marshalling of the assets of the Company, all
Senior Debt (including any interest thereon accruing after the commencement
of any such proceedings) shall first be paid in full before any payment or
distribution, whether in cash, securities or other property, shall be made
to any Holder on account of the principal or interest on this Debenture.
Any payment or distribution, whether in cash, securities or other property
(other than securities of the Company or any other corporation provided for
by a plan of reorganization or readjustment the payment of which is
subordinate, at least to the extent provided in these subordination
provisions with respect to the indebtedness evidenced by this Debenture, to
the payment of all Senior Debt at the time outstanding and to any
securities issued in respect thereof under any such plan of reorganization
or readjustment), which would otherwise (but for these subordination
provisions) be payable or deliverable in respect of this Debenture shall be
paid or delivered
3
<PAGE>
directly to the holders of Senior Debt in accordance with the priorities
then existing among such holders until all Senior Debt (including any
interest thereon accruing after the commencement of any such proceedings)
shall have been paid in full. In the event of any such proceeding, after
payment in full of all sums owing with respect to Senior Debt, the Holder
of this Debenture, together with the holders of any obligations of the
Company ranking on a parity with this Debenture, shall be entitled to be
paid from the remaining assets of the Company the amounts at the time due
and owing on account of unpaid principal of and interest on this Debenture
and such other obligations before any payment or other distribution,
whether in cash, property or otherwise, shall be made on account of any
capital stock or any obligations of the Company ranking junior to this
Debenture and such other obligations.
(b) In the event that, notwithstanding the foregoing, any
payment or distribution of any character, whether in cash, securities or
other property (other than securities of the Company or any other
corporation provided for by a plan of reorganization or readjustment the
payment of which is subordinate, at least to the extent provided in these
subordination provisions with respect to the indebtedness evidenced by this
Debenture, to the payment of all Senior Debt at the time outstanding and to
any securities issued in respect thereof under any such plan of
reorganization or readjustment), shall be received by any Holder in
contravention of any of the terms hereof, such payment or distribution or
security shall be received in trust for the benefit of, and shall be paid
over or delivered and transferred to, the holders of the Senior Debt at the
time outstanding in accordance with the priorities then existing among such
holders for application to the payment of all Senior Debt remaining unpaid,
to the extent necessary to pay all such Senior Debt in full. In the event
of the failure of any such Holder to endorse or assign any such payment,
distribution or security, each holder of Senior Debt is hereby irrevocably
authorized to endorse or assign the same.
2.5 No Impairment of Rights. Nothing contained herein shall impair,
-----------------------
as between the Company and the Holder, the obligation of the Company to pay such
Holder the principal of and interest on this Debenture or prevent such Holder
from exercising all rights, powers and remedies otherwise permitted by
applicable law or hereunder upon an Event of Default (as defined below)
hereunder, all subject to the rights of the holders of the Senior Debt to
receive cash, securities or other property otherwise payable or deliverable to
the Holder of this Debenture.
2.6 Subrogation. Upon the payment in full of all Senior Debt, the
-----------
Holders of the Debentures, together with all other subordinated debt of the
Company ranking on a parity therewith, shall be subrogated to all rights of any
holders of Senior Debt to receive any further payments or distributions
applicable to the Senior Debt
4
<PAGE>
until the indebtedness evidenced by the Debentures shall have been paid in full,
and such payments or distributions received by the Holders thereof, by reason of
such subrogation, of cash, securities or other property which otherwise would be
paid or distributed to the holders of Senior Debt, shall, as between the Company
and its creditors other than the holders of Senior Debt, on the one hand, and
such Holders on the other hand, be deemed to be a payment by the Company on
account of Senior Debt and not on account of the Debentures.
2.7 No Impairment of Security Interest. The provisions of this
----------------------------------
Debenture shall not impair any rights, remedies or powers of any secured
creditor of the Company in respect of any security interest. The securing of
any obligations of the Company otherwise ranking on a parity with the Debentures
or ranking junior to such Debentures shall not be deemed to prevent such
obligations from constituting, respectively, obligations ranking on a parity
with such Debentures or ranking junior to such Debentures.
2.8 Amendment of Subordination Provisions. No modification or
-------------------------------------
amendment of the subordination provisions contained in Section 2 hereof in a
manner adverse to the holders of Senior Debt may be made without the consent of
all holders of Senior Debt.
2.9 Undertaking. By its acceptance of this Debenture, the Holder
-----------
agrees to execute and deliver such documents as may be reasonably requested from
time to time by the Company or the lender of any Senior Debt in order to
implement the foregoing provisions of Section 2 hereof.
3. No Restrictions on Issuance of Additional Debt. Nothing contained in
----------------------------------------------
this Debenture shall restrict the Company from creating, assuming or incurring
any additional indebtedness, whether ranking junior to, on par with, or senior
to, this Debenture, or require the Company to obtain the consent of the Holder
with respect thereto.
4. Default.
-------
4.1 Event of Default. Each of the following events shall be an Event
----------------
of Default hereunder:
(a) Default in the payment of any interest on this Debenture
when due, continued for two (2) business days.
(b) Default in the payment of the principal on the Maturity
Date.
5
<PAGE>
(c) Material default in the performance of any of the covenants
or agreements of the Company contained in this Debenture continued for
thirty (30) days after notice thereof (provided, however, that if the
default cannot reasonably be corrected within such period, there shall be
no event of default if corrective action is instituted promptly and is
pursued diligently until the default is corrected).
(d) If a petition in involuntary bankruptcy is filed against the
Company under any bankruptcy, reorganization, arrangement, insolvency,
readjustment of debt, dissolution or liquidation under the law of any
jurisdiction, whether now or hereafter in effect, and is not stayed or
dismissed within thirty (30) days after such filing, or if the Company
shall make an assignment for the benefit of creditors, or shall file a
voluntary petition in bankruptcy, or shall be adjudicated a bankrupt or
insolvent, or shall file any petition or answer seeking for itself any
reorganization, arrangement, composition, readjustment, liquidation,
dissolution or similar relief under any present or future statute, law or
regulation, or shall seek or consent to or acquiesce in the appointment of
any trustee, receiver or liquidator of the Company or of all or any
substantial part of the properties of the Company, or commence voluntary or
involuntary dissolution proceedings.
(e) Default under Senior Debt that gives the holder thereof the
right to accelerate such Senior Debt, and such Senior Debt is in fact
accelerated by such holder.
4.2 Remedies on Default, etc.
------------------------
(a) If an Event of Default occurs and is continuing after the
expiration of any applicable grace period, the Holder may declare the
Debenture immediately due and payable.
(b) In case of a default in the payment of any principal or
interest due on this Debenture, the Company shall pay to the Holder thereof
the amount owing together with: (i) simple interest on the amount owing at
the rate per annum equal to the lower of (x) twelve percent (12%) or (y)
the maximum rate permitted under applicable law on the amounts past due;
and (ii) such additional amount as shall be sufficient to cover the cost
and expenses of collection, including, without limitation, reasonable
attorneys' fees, expenses and disbursements.
(c) No right, power or remedy conferred by this Debenture upon
any Holder shall be exclusive of any other right, power or remedy referred
to herein or now or hereafter available at law, in equity, by statute or
otherwise.
6
<PAGE>
5. Conversion.
----------
5.1 Conversion Rights. The Holder may at any time, and from time to
-----------------
time, prior to the first to occur of the Maturity Date or the date fixed by the
Company for redemption of this Debenture (the "Redemption Date"), convert this
Debenture or any portion of the principal amount hereof which is $5,000 or an
integral multiple of $5,000, into Shares, at a conversion price of $0.60 per
Share (the "Conversion Price"), subject to adjustment in certain events
described below.
The number of Shares that the Holder shall receive upon any such
conversion shall be determined by dividing the principal amount of this
Debenture to be so converted by the Conversion Price in effect at the time of
such conversion. In the event that this Debenture is called for redemption, the
right to convert the Debenture shall terminate at the close of business on the
Redemption Date and will be lost if not exercised prior to that time unless the
Company defaults in making the payment due upon redemption. In the event of a
partial conversion of this Debenture, the Company shall execute and deliver to
the Holder a new Debenture in the aggregate principal amount equal to and in
exchange for the unconverted portion of the principal amount of the Debenture so
surrendered for conversion.
5.2 Effect of Conversion; Issuance of Shares on Conversion.
------------------------------------------------------
Conversion of this Debenture shall be deemed to have been made at the close of
business on the date that the Debenture shall have been surrendered for
conversion, accompanied by written notice of election to convert in the form of
Exhibit "A" attached hereto (or such other form reasonably acceptable to the
Company), and thereupon the Holder shall have no further rights hereunder,
except with respect to the receipt of accrued interest due hereunder and the
Shares issuable upon conversion of this Debenture. As soon as practicable after
full or partial conversion of this Debenture, the Company shall pay to the
Holder all interest accrued hereunder with respect to the portion of the
Debenture so converted to the date of conversion. In addition, as soon as
practicable after full or partial conversion of this Debenture, the Company
shall, at its expense, cause to be issued in the name of, and delivered to, the
Holder a certificate or certificates for the number of Shares to which the
Holder shall be entitled on such conversion, together with any other securities
and property to which the Holder is entitled on such conversion under the terms
of this Debenture. No fractional shares will be issued on conversion of this
Debenture. If on any conversion of this Debenture a fraction of a share
results, the Company will pay the cash value of that fractional share,
calculated on the basis of the then effective Conversion Price.
5.3 Adjustments to Conversion Price.
-------------------------------
(a) If the Company shall at any time while this Debenture is
outstanding subdivide the outstanding shares of its Common Stock, the
7
<PAGE>
Conversion Price then in effect immediately before that subdivision shall
be proportionately decreased, and if the Company shall at any time while
this Debenture is outstanding combine the outstanding shares of Common
Stock, the Conversion Price then in effect immediately before that
combination shall be proportionately increased. Except as otherwise
provided below, any adjustment under this Section 5.3 shall become
effective at the close of business on the date the subdivision or
combination becomes effective. A dividend on any security of the Company
payable in Common Stock, or a split of the Company's Common Stock, shall be
considered a subdivision of Common Stock for purposes of this Section 5.3
at the close of business on the record date with respect to such dividend
or stock split. A reverse split of the Company's Common Stock shall be
considered a combination of Common Stock for purposes of this Section 5.3
at the close of business on the record date with respect to such reverse
stock split.
(b) In the event the Company, at any time or from time to time
while this Debenture is outstanding, shall make or issue, or fix a record
date for the determination of holders of Common Stock entitled to receive,
a dividend or other distribution with respect to the Company's Common stock
payable in securities of the Company other than shares of Common Stock,
then and in each such event, provisions shall be made so that the Holder
shall receive upon conversion hereof, in addition to the number of shares
of Common Stock receivable thereupon, the amount of securities of the
Company which he would have received had this Debenture been converted into
Common Stock on the date of such event and had the Holder thereafter,
during the period from the date of such event to and including the
conversion date, retained such securities receivable by him.
(c) If while this Debenture is outstanding, the Shares issuable
upon conversion of this Debenture shall be changed into the same or a
different number of shares of any other class or classes of stock of the
Company, whether by recapitalization, reclassification or other exchange
(other than a subdivision or combination of shares, or a capital
reorganization, merger or sale of assets, provided for elsewhere in Section
5.3 hereof), the Holder shall, upon the conversion of this Debenture, be
entitled to receive, in lieu of the Shares which the Holder would have
become entitled to receive but for such change, a number of shares of such
other class or classes of stock that would have been subject to receipt by
the Holder if he had exercised his right of conversion of this Debenture
immediately before that change.
(d) If while this Debenture is outstanding, there shall be a
merger or consolidation of the Company with or into another corporation
(other
8
<PAGE>
than a merger which does not result in any reclassification, conversion,
exchange or cancellation of outstanding shares of Common Stock of the
Company), or the sale of all or substantially all of the Company's
properties and assets to any other person, then, as a part of such merger,
consolidation or sale, lawful provision shall be made so that the Holder
shall thereafter be entitled to receive upon conversion of this Debenture,
during the period specified in this Debenture, the number of shares of
stock or other securities or property of the Company, or of the successor
corporation resulting from such merger, consolidation or sale, to which a
holder of the Shares deliverable upon conversion of this Debenture would
have been entitled on such merger, consolidation or sale if this Debenture
had been converted immediately before such merger, consolidation or sale.
In any such case, appropriate adjustment shall be made in the application
of the provisions of this Section 5.3 with respect to the rights of the
Holder after such merger, consolidation or sale to the end that the
provisions of this Section 5.3 (including adjustments of the Conversion
Price then in effect and number of shares purchasable upon conversion of
this Debenture) shall continue to be applicable after that event and shall
be as nearly equivalent to the provisions hereof as may be practicable.
(e) The Company shall promptly and in any case not later than
ten (10) days after the date of any adjustment of the Conversion Price give
written notice of such adjustment and the number of Shares or other
securities issuable upon conversion of this Debenture, by first-class mail,
postage prepaid, to the registered Holder at the Holder's address as shown
on the Debenture Register. The certificate shall state such adjustment and
show in reasonable detail the facts on which such adjustment is based.
(f) The form of this Debenture need not be changed because of
any adjustment in the Conversion Price or in the number of Shares issuable
upon its conversion. A Debenture issued after any adjustment on any partial
conversion or upon replacement may continue to express the same Conversion
Price and the same number of Shares (appropriately reduced in the case of
partial conversion) as are stated on this Debenture as initially issued,
and that Conversion Price and that number of Shares shall be considered to
have been so changed as of the close of business on the date of the
adjustment.
6. Registration of Transfer and Exchange.
-------------------------------------
6.1 Debenture Register. The Company shall cause to be kept at the
------------------
principal office of the Company a register (the "Debenture Register") in which,
subject to such reasonable regulations as it may prescribe, the Company shall
provide for the registration and the transfer of the Debenture subject to the
provisions regarding transferability contained in this Debenture. Upon
surrender for registration of transfer of any Debenture at the principal office
of the Company, the Company shall execute
9
<PAGE>
and deliver, in the name of the designated transferee or transferees, one or
more new Debentures in minimum denominations of $5,000 and integral multiples of
$5,000.
6.2 Transfer of Debentures. At the time the Debenture is presented
----------------------
or surrendered for registration of transfer it shall (if so required by the
Company) be duly endorsed, or be accompanied by a written instrument of transfer
in form satisfactory to the Company, duly executed by the Holder thereof or his
attorney duly authorized in writing. No service charge shall be made for any
registration of transfer, but the Company may require payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed in
connection with any registration of transfer of the Debentures.
6.3 Replacement Debenture.
---------------------
(a) If the Debenture is mutilated and is surrendered to the
Company, the Company shall execute and deliver in exchange therefor a new
Debenture of like tenor and principal amount and bearing a number not
contemporaneously outstanding. If there shall be delivered to the Company:
(i) evidence to its satisfaction of the destruction, loss or theft of the
Debenture; and (ii) such security or indemnity as may be required by it to
save the Company and any agent harmless. Then, in the absence of notice to
the Company that the Debenture has been acquired by a bona fide purchaser,
the Company shall execute and deliver, in lieu of any such destroyed, lost
or stolen Debenture, a new Debenture of like tenor and principal amount and
bearing a number not contemporaneously outstanding. In the event such
mutilated, destroyed, lost or stolen Debenture has become or is about to
become due and payable, the Company in its discretion may, instead of
issuing a new Debenture, retire such Debenture.
(b) Upon the issuance of any new Debenture under this Section
6.3, the Company may require the payment of a sum sufficient to cover any
tax or other governmental charge that may be imposed in relation thereto
and any other expenses connected therewith.
(c) Any new Debenture issued pursuant to this Section 6.3 in
lieu of any destroyed, lost or stolen Debenture shall constitute an
original additional contractual obligation of the Company, whether or not
the destroyed, lost or stolen Debenture shall be at any time enforceable by
anyone.
(d) The provisions of this Section 6.3 are exclusive and shall
preclude (to the extent lawful) all other rights and remedies with respect
to the replacement or payment of mutilated, destroyed, lost or stolen
Debentures.
7. Limitations on Disposition. The Holder understands that this
--------------------------
Debenture, the Shares issuable upon conversion of this Debenture and any other
securities issued
10
<PAGE>
under this Debenture are "restricted securities" under the federal securities
laws inasmuch as they are being acquired from the Company in a transaction not
involving a public offering and that under such laws and applicable restrictions
such securities may be resold without registration under the Securities Act of
1933, as amended (the "Act") only in certain limited circumstances. In this
connection, the Holder represents that it is familiar with Rule 144 under the
Act and the limitations imposed thereby and by the Act.
The Holder further agrees not to make any disposition of all or any
portion of this Debenture, the Shares or any other securities issued hereunder
unless and until: (a) there is then in effect a Registration Statement under
the Act covering such proposed disposition and such disposition is made in
accordance with such Registration Statement; or (b) the Holder shall have (i)
notified the Company of the proposed disposition and shall have furnished the
Company with a reasonably detailed statement of the circumstances surrounding
the proposed disposition; and (ii) furnished the Company with an opinion of
counsel, satisfactory to the Company, that such disposition will not require
registration of the securities under the Act.
The Holder understands that this Debenture, the Shares and any other
securities issued hereunder may bear the following legend, together with any
other legend required by law:
"The securities represented hereby have not been registered
under the Securities Act of 1933, or any state securities
laws. These securities may not be sold or transferred in the
absence of an effective registration statement or
qualification under such securities laws or an opinion of
counsel, satisfactory to the Company, that the sale or
transfer is pursuant to an exemption from the registration
or qualification requirements of any applicable securities
laws."
8. Limitations on Dividends and Distributions. So long as this Debenture
------------------------------------------
is outstanding, the Company shall not declare, pay, make or set apart any sum
for a dividend or other distribution (whether in cash or other property) with
respect to any class of capital stock of the Company (other than dividends or
distributions payable in its capital stock), or for the redemption, retirement,
purchase or other acquisition for value of any share of any class of capital
stock of the Company or any warrants or rights to purchase any class of capital
stock of the Company.
9. Registration Rights.
-------------------
9.1 Definitions. For purposes of Section 9 hereof, terms not
-----------
otherwise defined herein shall have the following meanings:
11
<PAGE>
(a) The terms "register," "registered" and "registration" refer
to the preparation and filing of a registration statement in compliance
with the Act and the rules promulgated thereunder, and the declaration of
the effectiveness of such registration statement, or the taking of similar
action under a successor statute or regulation.
(b) The term "Registrable Securities" means the Shares issuable
upon conversion of the Debenture, and any securities issued or issuable
with respect to such Shares by way of a stock dividend or stock split or in
connection with a combination or shares, recapitalization, merger,
consolidation or other reorganization.
(c) The term "Rights Holder" or "Rights Holders" means any
registered holder or holders of Registrable Securities.
(d) The term "Prospectus" means a prospectus that complies with
applicable provisions of the Act.
9.2 Piggyback Registration.
----------------------
(a) If, at any time, through and including the third anniversary
date of the issuance of this Debenture, the Company proposes to register
any of its securities under the Act (other than in connection with a merger
pursuant to a Form S-4 Registration Statement or an employee stock
compensation plan pursuant to a Form S-8 Registration Statement), it will
give written notice by registered mail, at least thirty (30) days prior to
the filing of each such registration statement, to the Rights Holder of its
intention to do so. If the Rights Holder notifies the Company within
twenty (20) days after receipt of any such notice of its desire to include
any Registrable Securities in such proposed registration statement, the
Company shall afford such Rights Holder the opportunity to have any of the
Registrable Securities registered under such registration statement and
included in any underwriting involved with respect thereto.
(b) Notwithstanding the provisions of Section 9 hereof: (i) the
Company shall have the right at any time after it shall have given written
notice pursuant to said Section 9 (irrespective of whether a written
request for inclusion of any Registrable Securities shall have been made)
to elect not to file any such proposed registration statement, or to
withdraw the same after the filing but prior to the effective date thereof;
and (ii) in the event a registration under Section 9 hereof relates to an
underwritten public offering which does not include any securities being
offered and sold on behalf of selling shareholders, the inclusion of any
Registrable Securities may, at the election of the Company, be conditioned
upon the Rights Holder agreement that the public
12
<PAGE>
offering of such Registrable Securities shall not commence until ninety
(90) days after the effective date of such registration.
(c) The rights of the Rights Holder pursuant to Section 9 hereof
shall be conditioned upon such Rights Holder's participation in the
underwriting with respect thereto and the inclusion of such Rights Holder's
Registrable Securities in such underwriting (unless otherwise mutually
agreed by the Company, the managing underwriter or, if none, a majority of
the underwriters, and such Rights Holder) to the extent provided herein.
(d) Notwithstanding any other provision of this Debenture, if
the managing underwriter or, if none, a majority of the underwriters,
determines that marketing factors require a limitation of the number of
shares to be underwritten or a complete exclusion of such shares, such
underwriter or underwriters may limit the number of Registrable Securities
that may be included in the registration and underwriting or exclude all of
the Registrable Securities, as appropriate. In the case of an underwritten
registration in which the number of Registrable Securities that may be
included is limited, the Company shall advise the Rights Holder of the
limited number of Registrable Securities that may be included in the
registration, and the number of Registrable Securities that may be included
in the registration and underwriting shall be allocated among all Rights
Holders thereof in proportion, as nearly as practicable, to the respective
amounts of Registrable Securities entitled to inclusion in such
registration held by such Rights Holders at the time of filing the
registration statement.
(e) The Company shall (together with all Rights Holders
proposing to distribute their securities through an underwriting) enter
into an underwriting agreement in customary form with the underwriter or
underwriters selected for the underwriting.
(f) If, after the third anniversary date of the issuance of this
Debenture, the Registrable Securities owned by the Holder continue to be
subject to a legend or other transfer restriction which treats the Holder
as having affiliate status as that term is used in Rule 144 of the Act,
then the Holder shall continue to have a one-time right to include any
Registrable Securities in a proposed registration statement subject to the
procedures described in Section 9.2 hereof. This registration right shall
expire on the earlier of: (i) the conclusion of the Holder's affiliate
status; or (ii) the sixth anniversary date of the issuance of this
Debenture.
9.3 Expenses. All expenses incurred in connection with any
--------
registration pursuant to this Debenture, including without limitation, all
registration,
13
<PAGE>
filing and qualification fees, printing expenses, fees and disbursements of
counsel for the Company, and expenses of any special audits incidental to or
required by such registration, shall be borne by the Company; provided however
the Company shall not be required to pay:
(a) fees of legal counsel of any Rights Holder, or underwriters'
fees, discounts, commissions or expenses relating to Registrable
Securities; and
(b) for expenses that the Company is prohibited from paying
under Blue Sky laws or by Blue Sky administrators.
9.4 Company Responsibilities. In the case of a registration effected
------------------------
by the Company pursuant to this Debenture, the Company shall use its best
efforts to keep the Rights Holder advised in writing as to the initiation,
effectiveness and completion of such registration. At its expense the Company
shall:
(a) prepare and file a registration statement (and such
amendments and supplements thereto) with respect to such Registrable
Securities and use its best efforts to cause such registration statement to
become and remain effective for a period of one hundred eighty (180) days
or until the Rights Holder or Rights Holders have completed the
distribution described in the registration statement relating thereto,
whichever first occurs;
(b) furnish such number of copies of a Prospectus in conformity
with the requirements of applicable law, and such other documents incident
thereto as a Rights Holder from time to time may reasonably request; and
(c) use every reasonable effort to register or qualify the
Registrable Securities covered by such registration statement under the
state Blue Sky laws of such jurisdictions as the Company's Board of
Directors may reasonably determine, and do any and all other acts and
things which may be necessary under said Blue Sky laws to enable the
sellers of the Registrable Securities to consummate the public sale or
other disposition of the Registrable Securities owned by them in such
jurisdictions, except that the Company shall not for any purpose be
required to qualify to do business as a foreign corporation in any
jurisdiction wherein the Registrable Securities are so qualified.
9.5 Indemnification.
---------------
(a) The Company shall indemnify the Rights Holder, each of the
Rights Holder's officers and directors, and each person controlling such
14
<PAGE>
Rights Holder, with respect to such registration effected pursuant to
Section 9.2 hereof, and each underwriter, if any, and each person who
controls any underwriter of the Registrable Securities, against all claims,
losses, damages and liabilities (or actions in respect thereto) arising out
of or based on any untrue statement (or alleged untrue statement) of a
material fact contained in any registration statement or related
Prospectus, or based on any omission (or alleged omission) to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading, or any violation by the Company of any
rule or regulation promulgated under any securities law applicable to the
Company and relating to action or inaction required of the Company in
connection with any such registration, and shall reimburse the Rights
Holder, each of the Rights Holder's officers and directors, and each person
controlling such Rights Holder, each such underwriter and each person who
controls any such underwriter, for any legal and any other expenses
reasonably incurred in connection with investigating or defending any such
claim, loss, damage, liability or action, provided that the Company shall
not be liable in any such case to the extent that any such claim, loss,
damage or liability arises out of or is based on any untrue statement or
omission based upon written information furnished to the Company in an
instrument duly executed by such Rights Holder or underwriter specifically
for use therein.
(b) The Rights Holder shall, if Registrable Securities held by
or issuable to the Rights Holder are included in the securities as to which
such registration is being effected, indemnify the Company, each of its
directors and officers who sign such registration statement, each
underwriter, if any, of the Company's securities covered by such a
registration statement, each person who controls the Company within the
meaning of the Act, and each other Rights Holder, each of such Rights
Holder's officers and directors and each person controlling such Rights
Holder, against all claims, losses, damages and liabilities (or actions in
respect thereof) arising out of or based on any untrue statement (or
alleged untrue statement) of a material fact contained in any such
registration statement or related Prospectus, or any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and shall
reimburse the Company, such Rights Holders, such directors, officers,
persons, or underwriters for any legal or any other expenses reasonably
incurred in connection with investigating or defending any such claim,
loss, damage, liability, or action, in each case to the extent, but only to
the extent, that such untrue statement (or alleged untrue statement) or
omission (or alleged omission) is made in such registration statement or
related Prospectus in reliance upon and in conformity with written
information furnished to the Company in an instrument duly executed by such
Rights Holder specifically for use therein.
15
<PAGE>
(c) Each party entitled to indemnification under this Section
9.5 (the "Indemnified Party") shall give notice to the party required to
provide indemnification (the "Indemnifying Party") promptly after such
Indemnified Party has actual knowledge of any claim as to which indemnity
may he sought, and shall permit the Indemnifying Party to assume the
defense of any such claim or any litigation resulting therefrom, provided
that counsel for the Indemnifying Party, who shall conduct the defense of
such claim or litigation, shall be approved by the Indemnified Party (whose
approval shall not be unreasonably withheld), and the Indemnified Party may
participate in such defense at such party's expense; and provided further
that the failure of any Indemnified Party to give notice as provided herein
shall not relieve the Indemnifying Party of its obligations under this
Section 9.5. No Indemnifying Party, in the defense of any such claim or
litigation, shall, except with the consent of each Indemnified Party,
consent to entry of any judgment or enter into any settlement, which does
not include as an unconditional term thereof, the giving by the claimant or
plaintiff to such Indemnified Party of a release from all liability in
respect to such claim or litigation.
9.6 Rights Holder's obligations. The Rights Holder shall furnish to
---------------------------
the Company such written information regarding such Rights Holder and the
distribution proposed by such Rights Holder as the Company may reasonably
request in writing and as shall be required in connection with any registration
referred to in this Debenture.
9.7 Assignment. The rights granted to the Rights Holder pursuant to
----------
this Debenture may be assigned to a transferee or assignee of the Debenture or
any of the Registrable Securities, provided that the transferee or assignee is
an affiliated entity of the Rights Holder and the Company is given written
notice at the time of or within 10 days after said transfer, stating the name
and address of said transferee or assignee and identifying the Registrable
Securities with respect to which such registration rights are being assigned.
10. Miscellaneous.
-------------
10.1 Amendment. The provisions of this Debenture may be amended or
---------
modified only with the written consent of the Company and the Holder.
10.2 Entire Agreement. This Debenture constitutes the entire
----------------
agreement among the parties with regard to the subject matter hereof, and
supersedes and replaces any and all prior to contemporaneous agreements, written
or oral. The terms and conditions of this Debenture shall inure to the benefit
of, and be binding upon, the respective successors and assigns of the parties.
Nothing in this Debenture is intended to confer on any third party any rights,
liabilities or obligations, except as specifically provided.
16
<PAGE>
10.3 Headings. The titles and subtitles used in this Debenture are
--------
for convenience only and are not to be used in construing or interpreting this
Debenture.
10.4 SEC Filings. During the term of this Debenture the Company
-----------
shall promptly forward to the Holder annual and periodic reports and proxy
statements required to be filed by the Company with the Securities and Exchange
Commission pursuant to the Securities Exchange Act of 1934.
5.5 Governing Law. This Debenture shall be governed by the internal
-------------
laws of the State of California as applicable to transactions performed in
California between California residents.
5.6 Attorneys' Fees. The prevailing party in any action or
---------------
proceeding between the parties arising out of or related to this Debenture shall
be entitled to recover all reasonable expenses, including without limitation
attorneys, fees and costs, incurred in connection with any such action or
proceeding.
IN WITNESS WHEREOF, the undersigned have executed this Debenture on
the date first above written.
ANCHOR PACIFIC UNDERWRITERS, INC.
By: ______________________________
James R. Dunathan
President/CEO
17
<PAGE>
EXHIBIT "A"
Form of Conversion Notice
To Anchor Pacific Underwriters, Inc.:
The undersigned Holder hereby irrevocably exercises the option to convert this
Debenture, or portion hereof (which is in the amount of not less than $5,000 and
in increments of not less than $5,000 thereafter) below designated, into shares
of the Company's Common Stock, $.02 par value per share, in accordance with the
terms of the Debenture, and directs that the shares issuable and deliverable
upon such conversion, together with any check in payment for fractional shares
and any Debentures representing any unconverted principal amount hereof, be
issued and delivered to the undersigned unless a different name has been
indicated below. If shares or Debentures are to be issued in the name of a
person other than the undersigned, the undersigned will pay all transfer taxes
payable with respect thereto. Any amount required to be paid by the undersigned
on account of interest accompanies this Debenture.
Dated:______________________ _________________________________
Signature
_________________________________
Taxpayer Identification Number
Principal Amount to be Converted: $_______________
If shares or Debentures are to be registered in the name of a person other than
the Holder, please print such person's name and address below:
Name: ______________________________
Address: ______________________________
______________________________
A-1
<PAGE>
EXHIBIT 4.9A
================================================================================
WARRANT
TO PURCHASE
SHARES OF
COMMON STOCK
OF
ANCHOR PACIFIC UNDERWRITERS, INC.
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. General Terms..................................................................................... 1
1.1 Right to Acquire Securities.............................................................. 1
1.2 Exercise of Warrant...................................................................... 2
1.3 Record Holder............................................................................ 2
1.4 Payment of Taxes......................................................................... 2
1.5 Transfer and Exchange.................................................................... 3
2. Transfer of Securities............................................................................ 3
2.1 Restrictions of Transfer................................................................. 3
2.2 Cooperation.............................................................................. 5
3. Registration Rights............................................................................... 5
3.1 Rights of Warrantholders................................................................. 5
3.2 Expenses................................................................................. 6
3.3 Company Responsibilities................................................................. 7
3.4 Indemnification.......................................................................... 7
3.5 Holder's Obligations..................................................................... 9
3.6 Assignment............................................................................... 9
4. Adjustments to Exercise Price and Warrant Shares.................................................. 9
4.1 Subdivision or Combination............................................................... 9
4.2 Adjustment for Reorganization, Consolidation, Merger..................................... 9
4.3 Miscellaneous Exercise Matters........................................................... 11
4.4 No Dilution or Impairment................................................................ 11
4.5 Notice of Adjustment..................................................................... 11
4.6 Duty to Make Fair Adjustments in Certain Cases........................................... 11
5. Miscellaneous..................................................................................... 12
5.1 Entire Agreement......................................................................... 12
5.2 Successors and Assigns................................................................... 12
5.3 Governing Law............................................................................ 12
5.4 Notices, Etc............................................................................. 12
5.5 Delays or Omissions...................................................................... 12
5.6 Survival................................................................................. 13
5.7 Waivers and Amendments................................................................... 13
5.8 Severability............................................................................. 13
5.9 Registered Holder........................................................................ 13
5.10 Titles and Subtitles..................................................................... 14
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C>
EXERCISE NOTICE............................................................................................ 15
FORM OF ASSIGNMENT......................................................................................... 16
</TABLE>
-ii-
<PAGE>
WARRANT
TO PURCHASE SHARES OF COMMON STOCK OF
ANCHOR PACIFIC UNDERWRITERS, INC.
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED UNLESS (A) COVERED
BY AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT, (B) IN COMPLIANCE WITH
RULE 144 UNDER SUCH ACT, OR (C) THE COMPANY HAS BEEN FURNISHED WITH AN OPINION
OF COUNSEL REASONABLY ACCEPTABLE TO THE COMPANY THAT NO REGISTRATION IS REQUIRED
FOR SUCH TRANSFER.
_________ Shares of Common Stock
1. General Terms.
-------------
1.1 Right to Acquire Securities.
---------------------------
(a) This Warrant certifies that for value received _________________
_______________ (the "Holder"), or registered assigns, are entitled at any
time before 5:00 p.m., San Francisco, California time, on the Expiration
Date (as such term is defined herein) to purchase from ANCHOR PACIFIC
UNDERWRITERS, INC., a Delaware corporation (the "Company"), __________
shares (the "Warrant Shares") of the fully paid and non-assessable Common
Stock of the Company ("Common Stock") as constituted on the date hereof
(the "Issuance Date"), at a price of $0.60 per share (the "Exercise
Price"), such number of shares and price per share subject to adjustment as
provided herein and all subject to the conditions set forth herein. This
Warrant may be exercised at any time on or before five years from the date
hereof (the "Expiration Date").
Upon any partial exercise hereof, there shall be issued to the Holder
a new Warrant or Warrants with respect to the shares of Common Stock not so
exercised. No fractions of a share of Common Stock will be issued upon the
exercise of this Warrant, but if a fractional share would be issuable upon
exercise the Company will pay in cash the fair market value thereof as
determined by the Board of Directors of the Company in good faith.
-1-
<PAGE>
(b) The Warrant may be subdivided, at the Warrantholder's option,
into several warrants to purchase the Warrant Shares (collectively, also
referred to as the "Warrant"). Such subdivision may be accomplished in
accordance with the provisions of Section 1.5 hereof.
1.2 Exercise of Warrant.
-------------------
(a) The Holder or any person or entity to whom the Holder has
assigned its right under this Warrant (collectively referred to as the
"Warrantholder") may exercise the Warrant, in whole or in part, at any time
or from time to time, prior to its expiration, on any business day, by
delivering a written notice in the form attached hereto (the "Exercise
Notice") to the Company at the offices of the Company designated in Section
5.4 hereof, exercising the Warrant and specifying (i) the total number of
shares of Common Stock the Warrantholder will purchase pursuant to such
exercise and (ii) a place and date not less than one nor more than 20
business days from the date of the Exercise Notice for the closing of such
purchase.
(b) At any closing under Section 1.2(a) hereof, (i) the Warrantholder
will surrender the Warrant and make payment to the Company of the aggregate
Exercise Price for the shares of Common Stock so purchased by bank,
cashier's or certified check and (ii) the Company will deliver to the
Warrantholder a certificate or certificates for the number of shares of
Common Stock issuable upon such exercise, together with cash, in lieu of
any fraction of a share, as provided in Section 1.1(a) above. Upon any
partial exercise, a new warrant or warrants of the same tenor and
expiration date for the purchase of the number of such shares not purchased
upon such exercise shall be issued by the Company to the registered holder
thereof.
1.3 Record Holder. A Warrant shall be deemed to have been
-------------
exercised immediately prior to the close of business on the date of its
surrender for exercise as provided in Section 1.2(b) above, and the person
entitled to receive the shares of Common Stock issuable upon such exercise shall
be treated for all purposes as the holder of such shares of record as of the
close of business on such date.
1.4 Payment of Taxes. The Company shall pay all taxes and
----------------
other governmental charges that may be imposed in respect of the issue or
delivery of the Warrant Shares or any portion thereof. The Company shall not be
required, however, to pay any tax or other charge imposed in connection with any
transfer involved in the issue of any certificate for the Warrant Shares or any
portion thereof in any name other than that of the registered holder of the
Warrant surrendered in connection with the purchase of such shares, and in such
case the Company shall not be required to issue
-2-
<PAGE>
or deliver any certificate until such tax or other charge has been paid or it
has been established to the Company's satisfaction that no tax or other charge
is due.
1.5 Transfer and Exchange.
---------------------
(a) Subject to the terms hereof, including, without limitation,
Section 2.1, the Warrant and all rights thereunder are transferable, in
whole or in part, on the books of the Company maintained for such purpose
at its office designated in Section 5.4 hereof by the registered holder
hereof in person or by duly authorized attorney, upon surrender of the
Warrant properly endorsed and upon payment of any necessary transfer tax or
other governmental charge imposed upon such transfer. Upon any partial
transfer, the Company will issue and deliver to such holder a new warrant
or warrants with respect to the Warrant Shares not so transferred. Each
taker and holder of the Warrant, by taking or holding the same, consents
and agrees that the Warrant when endorsed in blank shall be deemed
negotiable, and that when the Warrant shall have been so endorsed, the
holder may be treated by the Company and all other persons dealing with the
Warrant as the absolute owner of such Warrant for any purpose and as the
person entitled to exercise the rights represented thereby, or to the
transfer on the books of the Company, any notice to the contrary
notwithstanding; but until such transfer on such books, the Company may
treat the registered holder of the Warrant as the owner for all purposes.
The term "Warrant" as used herein shall include the Warrant and, any
warrants delivered in substitution or exchange therefor as provided herein.
(b) The Warrant is exchangeable for a warrant or warrants for the
same aggregate number of Warrant Shares, each new Warrant to represent the
right to purchase such number of shares as the holder shall designate at
the time of such exchange.
2. Transfer of Securities.
----------------------
2.1 Restrictions of Transfer. Neither the Warrant nor the
------------------------
Warrant Shares shall be transferable except upon the conditions specified in
this Section 2.1, which conditions are intended to insure compliance with the
provisions of the Securities Act of 1933 (the "1933 Act") in respect to the
transfer of the Warrant and the Warrant Shares.
(a) Unless and until otherwise permitted by this Section 2.1, the
Warrant and each certificate or other document evidencing any of the
Warrant Shares shall be endorsed with a legend substantially in the
following form:
-3-
<PAGE>
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED
UNLESS (A) COVERED BY AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT,
(B) IN COMPLIANCE WITH RULE 144 UNDER SUCH ACT, OR (C) THE COMPANY HAS BEEN
FURNISHED WITH AN OPINION OF COUNSEL REASONABLY ACCEPTABLE TO THE COMPANY
TO THE EFFECT THAT NO REGISTRATION IS REQUIRED FOR SUCH TRANSFER"
(b) Neither the Warrant nor the Warrant Shares shall be transferred,
and the Company shall not be required to register any such transfer, unless
and until one of the following events shall have occurred:
(i) the Company shall have received an opinion of counsel, in
form and substance reasonably acceptable to the Company and its
counsel, stating that the contemplated transfer is exempt from
registration under the 1933 Act as then in effect, and the Rules and
Regulations of the Securities and Exchange Commission (the
"Commission") thereunder. Within five business days after delivery to
the Company and its counsel of such an opinion, the Company either
shall deliver to the proposed transferor a statement to the effect
that such opinion is not satisfactory in the reasonable opinion of its
counsel (and shall specify in detail the legal analysis supporting any
such conclusion) or shall authorize the Company's transfer agent to
make the requested transfer;
(ii) the Company shall have been furnished with a letter from
the Commission in response to a written request in form and substance
acceptable to counsel for the Company setting forth all of the facts
and circumstances surrounding the contemplated transfer, stating that
the Commission will take no action with regard to the contemplated
transfer;
(iii) the Warrant or the Warrant Shares are transferred pursuant
to a registration statement which has been filed with the Commission
and has become effective; or
(iv) the Warrant or the Warrant Shares are transferred in
accordance with the provisions of Rule 144 promulgated by the
Commission under the 1933 Act.
-4-
<PAGE>
(c) The restrictions on transfer imposed by this Section 2.1 shall
cease and terminate as to the Warrant and the Warrant Shares when (i) such
securities shall have been effectively registered under the 1933 Act and
sold by the holder thereof in accordance with such registration, (ii) an
acceptable opinion as described in Section 2.l(b)(i) or a "no action"
letter described in Section 2.l(b)(ii) states that future transfers of such
securities by the transferor or the contemplated transferee would be exempt
from registration under the 1933 Act, or (iii) such securities may be sold
in accordance with the provisions of Rule 144 promulgated under the 1933
Act. When the restrictions on transfer contained in this Section 2.1 have
terminated as provided above, the holder of the securities as to which such
restrictions shall have terminated or the transferee of such holder shall
be entitled to receive promptly from the Company, without expense to him,
new certificates not bearing the legend set forth in Section 2.1(a) hereof.
2.2 Cooperation. The Company shall cooperate in supplying such
-----------
information as may be reasonably requested by the Warrantholder to complete and
file any information reporting forms presently or subsequently required by the
Commission as a condition to the availability of an exemption, presently
existing or subsequently adopted, from the 1933 Act for the sale of the Warrant
or the Warrant Shares.
3. Registration Rights.
-------------------
3.1 Rights of Warrantholders. Holders of the Common Stock
------------------------
issued or issuable upon exercise of this Warrant (collectively, the "Registrable
Securities") shall have "piggyback" registration rights as set forth below:
(a) If, at any time, through and including the third anniversary of
the date of this Warrant, the Company proposes to register any of its
securities under the Act (other than in connection with a merger,
acquisition, reorganization or similar transaction pursuant to a Form S-4
Registration Statement or an employee stock compensation plan pursuant to a
Form S-8 Registration Statement), it will give written notice by registered
mail, at least (30) days prior to the filing of each such registration
statement, to the Holder of its intention to do so. If the Holder notifies
the Company within 20 days after receipt of any such notice of its desire
to include any Registrable Securities in such proposed registration
statement, the Company shall afford such Holder the opportunity to have any
of the Registrable Securities registered under such registration statement
and included in any underwriting involved with respect thereto.
-5-
<PAGE>
(b) Notwithstanding the provisions of Section 3 hereof: (i) the
Company shall have the right at any time after it shall have given written
notice pursuant to this Section 3 (irrespective of whether a written
request for inclusion of any Registrable Securities shall have been made)
to elect not to file any such proposed registration statement, or to
withdraw the same after the filing but prior to the effective date thereof;
and (ii) in the event a registration under Section 3 hereof relates to an
underwritten public offering which does not include any securities being
offered and sold on behalf of selling shareholders, the inclusion of any
Registrable Securities may, at the election of the Company, be conditioned
upon the Holder agreeing that the public offering of such Registrable
Securities shall not commence until 90 days after the effective date of
such registration.
(c) The rights of the Holder pursuant to Section 3 hereof shall be
conditioned upon such Holder's participation in the underwriting with
respect thereto and the inclusion of such Holder's Registrable Securities
in such underwriting (unless otherwise mutually agreed by the Company, the
managing underwriter or, if none, a majority of the underwriters, and such
Holder) to the extent provided herein.
(d) Notwithstanding any other provision of this Warrant, if the
managing underwriter or, if none, a majority of the underwriters,
determines that marketing factors require a limitation of the number of
shares to be underwritten or a complete exclusion of such shares, such
underwriter or underwriters may limit the number of Registrable Securities
that may be included in the registration and underwriting or exclude all of
the Registrable Securities, as appropriate. In the case of an underwritten
registration in which the number of Registrable Securities that may be
included is limited, the Company shall advise the Holder of the limited
number of Registrable Securities that may be included in the registration,
and the number of Registrable Securities that may be included in the
registration and underwriting shall be allocated among all Holders thereof
in proportion, as nearly as practicable, to the respective amounts of
Registrable Securities entitled to inclusion in such registration held by
such Holders at the time of filing the registration statement.
(e) The Company shall (together with all Holders proposing to
distribute their securities through an underwriting) enter into an
underwriting agreement in customary form with the underwriter or
underwriters selected for the underwriting.
-6-
<PAGE>
3.2 Expenses.
--------
All expenses incurred in connection with any registration
pursuant to this Warrant or Warrant Shares, including without limitation, all
registration, filing and qualification fees, printing expenses, fees and
disbursements of counsel for the Company, and expenses of any special audits
incidental to or required by such registration, shall be borne by the Company;
provided however the Company shall not be required to pay:
(a) fees of legal counsel of any Holder, or underwriters' fees,
discounts, commissions or expenses relating to Registrable Securities; and
(b) for expenses that the Company is prohibited from paying under
Blue Sky laws or by Blue Sky administrators.
3.3 Company Responsibilities.
------------------------
In the case of a piggyback registration of Warrant Shares, the
Company shall use its best efforts to keep the Holder advised in writing as to
the initiation, effectiveness and completion of such registration. At its
expense the Company shall:
(a) prepare and file a registration statement (and such amendments
and supplements thereto) with respect to such Registrable Securities and
use its best efforts to cause such registration statement to become and
remain effective for a period of 180 days or until the Holder or Holders
have completed the distribution described in the registration statement
relating thereto, whichever first occurs;
(b) furnish such number of copies of a Prospectus in conformity with
the requirements of applicable law, and such other documents incident
thereto as a Holder from time to time may reasonably request; and
(c) use every reasonable effort to register or qualify the
Registrable Securities covered by such registration statement under the
state Blue Sky laws of such jurisdictions as the Company's Board of
Directors may reasonably determine, and do any and all other acts and
things which may be necessary under said Blue Sky laws to enable the
sellers of the Registrable Securities to consummate the public sale or
other disposition of the Registrable Securities owned by them in such
jurisdictions, except that the Company shall not for any purpose be
required to qualify to do business as a foreign corporation in any
jurisdiction wherein the Registrable Securities are so qualified.
-7-
<PAGE>
3.4 Indemnification.
---------------
(a) The Company shall indemnify the Holder, with respect to such
registration effected pursuant to Section 3 hereof, against all claims,
losses, damages and liabilities (or actions in respect thereto) arising out
of or based on any untrue statement (or alleged untrue statement) of a
material fact contained in any registration statement or related
Prospectus, or based on any omission (or alleged omission) to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading, or any violation by the Company of any
rule or regulation promulgated under any securities law applicable to the
Company and relating to action or inaction required of the Company in
connection with any such registration, and shall reimburse the Holder and
each person who controls any such underwriter, for any legal and any other
expenses reasonably incurred in connection with investigating or defending
any such claim, loss, damage, liability or action, provided that the
Company shall not be liable in any such case to the extent that any such
claim, loss, damage or liability arises out of or is based on any untrue
statement or omission based upon written information furnished to the
Company in an instrument duly executed by such Holder specifically for use
therein.
(b) The Holder shall, if Registrable Securities held by or issuable
to the Holder are included in the securities as to which such registration
is being effected, indemnify the Company, each of its directors and
officers who sign such registration statement, each underwriter, if any, of
the Company's securities covered by such a registration statement, each
person who controls the Company within the meaning of the Act, and each
other Holder, against all claims, losses, damages and liabilities (or
actions in respect thereof) arising out of or based on any untrue statement
(or alleged untrue statement) of a material fact contained in any such
registration statement or related Prospectus, or any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and shall
reimburse the Company and such Holders for any legal or any other expenses
reasonably incurred in connection with investigating or defending any such
claim, loss, damage, liability, or action, in each case to the extent, but
only to the extent, that such untrue statement (or alleged untrue
statement) or omission (or alleged omission) is made in such registration
statement or related Prospectus m reliance upon and in conformity with
written information furnished to the Company in an instrument duly executed
by such Holder specifically for use therein.
(c) Each party entitled to indemnification under this Section 3.4
(the "Indemnified Party") shall give notice to the party required to
provide
-8-
<PAGE>
indemnification (the "Indemnifying Party") promptly after such Indemnified
Party has actual knowledge of any claim as to which indemnity may be
sought, and shall permit the Indemnifying Party to assume the defense of
any such claim or any litigation resulting therefrom, provided that counsel
for the Indemnifying Party, who shall conduct the defense of such claim or
litigation, shall be approved by the Indemnified Party (whose approval
shall not be unreasonably withheld), and the Indemnified Party may
participate in such defense at such party's expense; and provided further
that the failure of any Indemnified Party to give notice as provided herein
shall not relieve the Indemnifying Party of its obligations under this
Section 3.4. No Indemnifying Party, in the defense of any such claim or
litigation, shall, except with the consent of each Indemnified Party,
consent to entry of any judgment or enter into any settlement, which does
not include as an unconditional term thereof, the giving by the claimant or
plaintiff to such Indemnified Party of a release from all liability in
respect to such claim or litigation.
3.5 Holder's Obligations. The Holder shall furnish to the
--------------------
Company such written information regarding such Holder and the distribution
proposed by such Holder as the Company may reasonably request in writing and as
shall be required in connection with any registration referred to in this
Warrant.
3.6 Assignment. The rights granted to the Holder pursuant to
----------
this Warrant may be assigned to a transferee or assignee of the Warrant or any
of the Registrable Securities, provided that the transferee or assignee is an
affiliated entity of the Holder and the Company is given written notice at the
time of or within 10 days after said transfer, stating the name and address of
said transferee or assignee and identifying the Registrable Securities with
respect to which such registration rights are being assigned.
4. Adjustments to Exercise Price and Warrant Shares. The Exercise
------------------------------------------------
Price in effect from time to time and the number of Warrant Shares shall be
subject to adjustment in certain cases as set forth in this Section 4.
4.1 Subdivision or Combination. In the event the outstanding
--------------------------
Common Stock shall be subdivided into a greater number of shares of Common
Stock, the Exercise Price for the Warrant Shares shall, simultaneously with the
effectiveness of such subdivision, be proportionately reduced and the number of
Warrant Shares proportionately increased, and conversely, in case the
outstanding Common Stock shall be combined into a smaller number of shares of
Common Stock, the Exercise Price shall, simultaneously with the effectiveness of
such combination, be proportionately increased and the number of Warrant Shares
proportionately reduced.
-9-
<PAGE>
4.2 Adjustment for Reorganization, Consolidation, Merger.
----------------------------------------------------
(a) In case of any reorganization of the Company (or any other
corporation the stock or other securities of which are receivable on the
exercise of the Warrant) after the date on which this Warrant is first
issued (the "Issuance Date"), or in case, after such date, the Company (or
any such other corporation) shall consolidate with or merge into another
corporation or convey all or substantially all of its assets to another
corporation, then and in each such case the Warrantholder, upon exercise of
the Warrant as provided in Section 1.2 hereof at any time after the
consummation of such reorganization, consolidation, merger or conveyance,
shall be entitled to receive, in lieu of the stock or other securities and
property receivable upon the exercise of the Warrant prior to such
consummation, the stock or other securities or property to which the
Warrantholder would have been entitled upon such consummation if the
Warrantholder had exercised or converted the Warrant immediately prior
thereto; in each such case, the terms of this Warrant, including the
exercise provisions of Section 1.2, shall be applicable to the shares of
stock or other securities or property receivable upon the exercise or
conversion of the Warrant after such consummation.
(b) The Company shall not effect any consolidation, merger or
conveyance of all or substantially all of its assets unless prior to the
consummation thereof the successor corporation (if other than the Company)
resulting from such consolidation or merger or the corporation into or for
the securities of which the previously outstanding stock of the Company
shall be changed in connection with such consolidation or merger, or the
corporation purchasing such assets, as the case may be, shall assume by
written instrument, in form and substance satisfactory to the
Warrantholder, executed and delivered in accordance with Section 5.4
hereof, the obligation to deliver to the Warrantholder such shares of
stock, securities or assets as, in accordance with the foregoing
provisions, the Warrantholder is entitled to purchase.
(c) If a purchase, tender or exchange offer is made to and accepted
by the holders of more than 50% of the outstanding shares of Common Stock
of the Company, the Company shall not effect any consolidation, merger or
sale with the Person having made such offer or with any Affiliate of such
Person, unless prior to consummation of such consolidation, merger or sale
the Warrantholder shall have been given a reasonable opportunity to then
elect to receive either the stock, securities or assets then issuable upon
the exercise or conversion of the Warrant or, if different, the stock,
securities or assets, or the equivalent, issued to previous holders of the
Common Stock in accordance with such offer, computed as though the
Warrantholder hereof had been, at the time
-10-
<PAGE>
of such offer, a holder of the stock, securities or assets then purchasable
upon the exercise or conversion of the Warrant. As used in this paragraph
(c), the term "Person" shall mean and include an individual, a partnership,
a corporation, a trust, a joint venture, an unincorporated organization and
a government or any department or agency thereof, and an "Affiliate" of any
Person shall mean any Person directly or indirectly controlling, controlled
by or under direct or indirect common control with, such other Person. A
Person shall be deemed to control a corporation if such Person possesses,
directly or indirectly, the power to direct or cause the direction of the
management and policies of such corporation, whether through the ownership
of voting securities, by contract or otherwise.
4.3 Miscellaneous Exercise Matters. The Company shall at all
------------------------------
times reserve and keep available out of its authorized but unissued Common Stock
the full number of Warrant Shares deliverable upon exercise of the Warrant
Shares, as such number may change from time to time. Also, the Company shall, at
its own expense, take all such actions and obtain all such permits and orders as
may be necessary to enable the Company lawfully to issue the Warrant Shares upon
the exercise of the Warrant.
4.4 No Dilution or Impairment. The Company will not, by
-------------------------
amendment of its certificate of incorporation or through reorganization,
consolidation, merger, dissolution, issue or sale of securities, sale of assets
or any other voluntary action, avoid or seek to avoid the observance or
performance of any of the terms of the Warrant, but will at all times in good
faith assist in the carrying out of all such terms and in the taking of all such
actions as may be necessary or appropriate in order to protect the rights of the
Warrantholder against dilution or other impairment. Without limiting the
generality of the foregoing, the Company will take all such action as may be
necessary or appropriate in order that the Company may validly and legally issue
fully paid and non-assessable shares upon the exercise or conversion of the
Warrant.
4.5 Notice of Adjustment. When any adjustment is required to
--------------------
be made in either the Exercise Price or the number of shares issuable upon
exercise of the Warrant, the Company shall promptly notify the Warrantholder of
such event, of the calculation by which such adjustment is to be made and of the
resulting Exercise Price or conversion rate, as the case may be.
4.6 Duty to Make Fair Adjustments in Certain Cases. If any
----------------------------------------------
event occurs as to which in the opinion of the Board of Directors the other
provisions of this Section 4 are not strictly applicable or if strictly
applicable would not fairly protect the purchase and exercise rights of the
Warrant in accordance with the essential intent and principles of such
provisions, then the Board of Directors shall make an adjustment in
-11-
<PAGE>
the application of such provisions, in accordance with such essential intent and
principles, so as to protect such purchase rights as aforesaid.
5. Miscellaneous.
-------------
5.1 Entire Agreement. This Warrant constitutes the full and
----------------
entire understanding and agreements between the parties hereto with respect to
the subjects hereof and thereof.
5.2 Successors and Assigns. The terms and conditions of this
----------------------
Warrant shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties hereto, except as expressly provided
otherwise herein.
5.3 Governing Law. This Warrant shall be governed by and
-------------
construed under the laws of the State of California.
5.4 Notices, Etc.. All notices and other communications
-------------
required or permitted hereunder shall be in writing and shall be deemed
effectively given upon personal delivery or upon the seventh day following
mailing by registered air mail, postage prepaid, addressed (a) if to the
Warrantholder, at _____________________ or at such other address as it shall
have furnished to the Company in writing, (b) if to the Company, a copy should
be sent to 1800 Sutter Street, Suite 400, Concord, California 94520 and
addressed to the attention of the corporate secretary, or at such other address
as the Company shall have furnished in writing to the Warrantholder, or (c) if
to any other holder of any Warrant or of Warrant Shares issued upon conversion
of the Warrant, at such address as such holder shall have furnished to the
Company in writing, or, until such holder so furnishes an address to the
Company, then to and at the address of the last holder of such Warrant or
Warrant Shares who so furnished an address to the Company.
5.5 Delays or Omissions. No delay or omission to exercise any
-------------------
right, power or remedy accruing to any holder of any securities issued or sold
or to be issued or sold hereunder, upon any breach or default of the Company
under this Agreement, shall impair any such right, power or remedy of such
holder nor shall it be construed to be a waiver of any such breach or default,
or an acquiescence therein, or in any similar breach or default thereafter
occurring, nor shall any waiver of any single breach or default be deemed a
waiver of any other breach or default theretofore or thereafter occurring. Any
waiver, permit, consent or approval of any kind or character on the part of any
holder of any breach or default under this Agreement, or any waiver on the part
of any holder of any provisions or conditions of this Agreement, must be in
writing and shall be effective only to the extent specifically set forth in such
writing.
-12-
<PAGE>
All remedies, either under this Agreement or by law or otherwise afforded to any
holder, shall be cumulative and not alternative.
5.6 Survival. The representations, warranties, covenants and
--------
agreements made herein and or made pursuant to this Agreement shall survive the
execution and delivery of this Agreement, except as expressly provided otherwise
herein.
5.7 Waivers and Amendments. With the written consent of the
----------------------
record or beneficial holders of more than 50% of the Warrant Shares (treated as
if converted), the obligations of the Company and the rights of the holders of
the Warrant and the Warrant Shares may be waived (either generally or in a
particular instance, either retroactively or prospectively and either for a
specified period of time or indefinitely), and with the same consent the
Company, when authorized by resolution of its Board of Directors, may enter into
a supplemental agreement for the purpose of adding any provisions to or changing
in any manner or eliminating any of the provisions of this Warrant; provided,
however, that no such waiver or supplemental agreement shall reduce the
aforesaid percentage of the Warrant Shares, the holders of which are required to
consent to any waiver or supplemental agreement, without the consent of the
record or beneficial holders of all of the Warrant Shares (treated as if
converted). Upon the effectuation of each such waiver, consent, agreement of
amendment or modification, the Company promptly shall give written notice
thereof to the record holders of the Warrant and the Warrant Shares. This
Warrant or any provision hereof may not be changed, waived, discharged or
terminated orally, but only by a statement in writing signed by the party
against which enforcement of the change, waiver, discharge or termination is
sought, except to the extent provided in this Section 5.7.
5.8 Severability. If one or more provisions of this Warrant
------------
are held to be invalid, illegal or unenforceable under applicable law, such
provision shall be modified in such manner as to be valid, legal and
enforceable, but so as to most nearly retain the intent of the parties, and if
such modification is not possible, such provision shall be severed from this
Agreement as if such provision were not included, in either case, and the
balance of this Warrant shall not in any way be affected or impaired thereby and
shall be enforceable in accordance with its terms.
5.9 Registered Holder. The Company may deem and treat the
-----------------
registered Holder(s) hereof as the absolute owner(s) of this Warrant
(notwithstanding any notation of ownership or other writing hereon made by
anyone), for the purpose of any exercise or conversion hereof, of any
distribution to the Holder(s) hereof, and for all other purposes, and the
Company shall not be affected by any notice to the contrary. Other than as set
forth herein, this Warrant does not entitle any Holder hereof to any rights of a
stockholder of the Company.
-13-
<PAGE>
5.10 Titles and Subtitles. The titles of the sections and
--------------------
subsections of this Warrant are for convenience and are not to be considered in
construing this Warrant.
IN WITNESS WHEREOF, Company has caused this Warrant to be signed by
its duly authorized officer and issued as of the date set forth below.
Dated: ______________
ANCHOR PACIFIC UNDERWRITERS, INC.
By: __________________________________
Its: President/CEO
-14-
<PAGE>
EXERCISE NOTICE
(To be executed only upon exercise of Warrant)
The undersigned registered owner of a Warrant of ANCHOR PACIFIC
UNDERWRITERS, INC. (the "Company"), originally issued to _________________
irrevocably exercises such Warrant for the purchase of shares of Common Stock of
the Company, purchasable with the Warrant, and hereby sets the place and date
for the closing of such purchase as follows, all on the terms and conditions
specified in the Warrant.
Place of Closing:______________
Date of Closing:_______________
The undersigned requests that a certificate for such shares be
registered in the name of _________________, whose address is ________________
____________. If said number of shares is less than all of the shares of Common
Stock purchasable under the Warrant, the undersigned requests that a new Warrant
representing the remaining balance of such shares be registered in the name of
____________, whose address is _____________________________________.
Dated:________________
___________________________________
Signature of Registered Owner
___________________________________
Street Address
___________________________________
City State Zip
-15-
<PAGE>
FORM OF ASSIGNMENT
FOR VALUED RECEIVED, the undersigned registered owner of this Warrant
issued by ANCHOR PACIFIC UNDERWRITERS, INC. hereby sells, assigns and transfers
unto the Assignee named below all of the rights of the undersigned under the
within Warrant, with respect to the number of Shares of Common Stock set forth
below:
Name of Assignee Address No. of Shares
- ---------------- ------- -------------
and does hereby irrevocably constitute and appoint ___________________ attorney
to make such transfer on the books of _______________________ maintained for
such purpose, with full power of substitution in the premises.
Dated:_________________
_____________________________________
Signature of Registered Owner
_____________________________________
Witness
-16-
<PAGE>
EXHIBIT 10.2A
SUBLEASE
--------
1. PARTIES.
This Sublease, dated as of January 1, 1999, is made between Anchor Pacific
Underwriters, Inc. ("Sublessor"), and Talbot Agency of California, Inc.
("Sublessee").
2. MASTER LEASE.
Sublessor is the lessee under a written lease dated October 29, 1990,
wherein Sutter Square ("Lessor") leased to Sublessor the real property
located in the City of Concord, County of Contra Costa, State of
California, described as certain portions of the fifth (5th) floor in the 9
story office building located on the corner of a city block with Sutter
Street and Clayton Road ("Master Premises"). Said lease has been amended by
the following amendments: First Amendment to Lease dated June 10, 1991,
providing additional rentable square footage approximately 2,592 on the
fourth (4th) floor; Second Amendment to Lease dated April 16, 1994,
providing rentable square footage of approximately 8,027 on the fifth (5th)
floor; and Third Amendment to Lease dated September 9, 1994, providing
additional rentable square footage of approximately 2,665 on the fifth
(5th) floor; said lease and amendments are herein collectively referred to
as the "Master Lease" and are attached hereto as Exhibit "A".
3. PREMISES.
Sublessor hereby subleases to Sublessee on the terms and conditions set
forth in the Sublease the following portion of the Master Premises
("Premises"): An approximate ten thousand six hundred ninety two (10,692)
rentable square foot portion as "hatch" marked on Exhibit "B" attached
hereto.
4. WARRANTY BY SUBLESSOR.
Sublessor warrants and represents to Sublessee that the Master Lease has
not been amended or modified except as expressly set forth herein, that
Sublessor is not now, and as of the commencement of the Term hereof will
not be, in default or breach of any of the provisions of the Master Lease,
and the Sublessor has no knowledge of any claim by lessor that Sublessor is
in default or breach of any of the provisions of the Master Lease.
5. TERM.
The Term of this Sublease shall commence on January 1, 1999 ("Commencement
Date"), or when Lessor consents to the Sublease (if such consent is
required under the Master Lease), which ever shall last occur, and end on
October 31, 2004 ("Termination Date"), unless otherwise sooner terminated
in accordance with the provisions of this Sublease. Sublessee may terminate
this Sublease at any time by giving Sublessor six (6) months written
notice. In the event the Term commences on a date other than the
Commencement Date, Sublessor and Sublessee shall execute a memorandum
setting forth the actual date of commencement of the Term. Possession
1
<PAGE>
of the Premises ("Possession") shall be delivered to Sublease on the
commencement of the Term. If for any reason Sublessor does not deliver
Possession to Sublessee on the commencement of the Term, Sublessor shall
not be subject to any liability for such failure, the Termination Date
shall not be extended by the delay, and validity of this Sublease shall not
be impaired, but rent shall abate until delivery of Possession.
Notwithstanding the foregoing, if Sublessor has not delivered Possession to
sublessee within thirty (30) days after the Commencement Date, then at any
time thereafter and before delivery of Possession, Sublessee may give
written notice to Sublessor of Sublesses's intention to cancel this
sublease. Said notice shall set forth an effective date for such
cancellation which shall be at least ten (10) days after delivery of said
notice to sublessor. If Sublessor delivers Possession to Sublessee on or
before such effective date, this Sublease shall remain in full force and
effect. If Sublessor fails to deliver possession to sublessee on or before
such effective date, this Sublease shall be cancelled, in which case all
consideration previously paid by Sublessee to Sublessor on account of this
Sublease shall be returned to Sublessee, this Sublease shall thereafter be
of no further force or effect, and Sublessor shall have no further
liability to Sublessee on account of such delay or cancellation. If
Sublessor permits Sublessee to take Possession prior to the commencement of
the Term, such early Possession shall not advance the Termination Date and
shall be subject to the provisions of this Sublease, including without
limitation the payment of rent.
6. RENT.
Minimum Rent. Sublessee shall pay Sublessor as minimum rent, without
deduction, setoff, notice, or demand, at 1800 Sutter Street, #400, Concord,
CA 94520 or at such other place as Sublessor shall designate from time to
time by notice to Sublessee, as follows:
1/1/99 - 10/31/99 $1.40 per rentable square foot per month
11/1/99 - 10/31/04 $1.75 per rentable square foot per month
Sublessor will, in addition, pay the amount of any rental adjustments as
and when hereinafter provided in the Master Lease.
Notwithstanding, any other provisions of this Lease, any installment of
Minimum Rent or additional charges not paid to Landlord when due hereunder,
shall bear interest from the date due until the same have been fully paid,
at a rate (the "Default Rate") that is equal to the lessor of (i) two
percent (2%) above the rate on interest established by Bank of America
N.T.&S.A. at its San Francisco headquarters for 90-day unsecured loans to
corporate borrowers with the highest credit standing, adjusted monthly on
the first day of each month, such adjustment to be effective for the
following month, and (ii) the highest rate permitted by law. The payment of
such interest shall not constitute a waiver of any default by Sublessee
hereunder.
7. SECURITY DEPOSIT.
Sublessee shall deposit with Sublessor upon execution of the Sublease the
sum of
2
<PAGE>
fourteen thousand nine hundred sixty eight dollars and eighty cents
($14,968.80) as security for Sublessee's faithful performance of
Sublessee's obligations hereunder ("Security Deposit"). If Sublessee fails
to pay rent or other charges when due under this Sublease, or fails to
perform any of its other obligations hereunder, Sublessor may use or apply
all or any portion of the Security Deposit for the payment of any rent or
other amount due hereunder and unpaid, for the payment of any other sum for
which Sublessor may become obligated by reason of Sublessee's default or
breach, or for any loss of damage sustained by Sublessor as a result of
Sublessee's default or breach. If Sublessor so uses any portion of the
Security Deposit, Sublessee shall, within ten (10) days after written
demand by Sublessor, restore the Security Deposit to the full amount
originally deposited, and Sublessee's failure to do so shall constitute a
default under this Sublease. Sublessor shall not be required to keep the
Security Deposit separate from its general accounts, and shall have no
obligation or liability for payment of interest on the Security Deposit. In
the event Sublessor assigns its interest in this Sublease, Sublessor shall
deliver to its assignee so much of the Security Deposit as is then held by
Sublessor. Within ten (10) days after the Term has expired, or Sublessee
has vacated the Premises, and provided Sublessee is not then in default of
any of its obligations hereunder, the Security Deposit, or so much thereof
as had not theretofore been applied by Sublessor, shall be returned to
Sublessee or to the last assignee, if any, of Sublessee's interest
hereunder.
8. USE OF PREMISES.
The Premises shall be used and occupied only for office purposes, and for
no other use or purpose.
9. ASSIGNMENT AND SUBLETTING.
Sublessee shall not assign this Sublease or further sublet all or any part
of the Premises without the prior written consent of Sublessor (and the
consent of Lessor, if such is required under the terms of the Master
Lease).
10. OTHER PROVISION OF SUBLEASE.
All applicable terms and conditions of the Master Lease are incorporated
into and made a part of this Sublease as if Sublessor were the lessor
thereunder, Sublessee the lessee thereunder, and the Premises the Master
Premises, except for the following:
___________________________________________________________________
___________________________________________________________________
__________________________________________________________________.
Sublessee assumes and agrees to perform the lessee's obligations under the
Master Lease during the Term to the extent that such obligations are
applicable to the Premises, except that the obligation to pay rent to
Lessor under the Master Lease shall be considered performed by Sublessee to
the extent and in the amount rent is paid to Sublessor in accordance with
Section 6 of this Sublease. Sublessee shall not commit or suffer any act or
omission that will violate any of the provisions of the Master Lease.
Sublessor shall exercise due diligence in attempting to cause Lessor to
perform its obligations under the Master Lease for the benefit of
Sublessee. If the
3
<PAGE>
Master Lease terminates, the Sublease shall terminate and the parties shall
be relieved of any further liability or obligation under the Sublease,
provided however, that if the Master Lease terminates as a result of a
default or breach by Sublessor or Sublessee under this Sublease and/or the
Master Lease, then the defaulting party shall be liable to the
nondefaulting party for the damage suffered as a result of such
termination. Notwithstanding the foregoing, if the Master Lease gives
Sublessor any right to terminate the Master Lease in the event of the
partial or total damage, destruction, or condemnation of the Master
Premises or the building or project of which the Master Premises are a
part, the exercise of such right by Sublessor shall not constitute a
default or breach hereunder.
11. ATTORNEYS' FEES.
If Sublessee or Sublessor shall commence an action against the other
arising out or in connection with this Sublease, the prevailing party shall
be entitled to recover its costs of suit and reasonable attorney's fees.
12. RESERVED PARKING SPACES.
Sublessor grants Sublessee seven (7) reserved parking spaces. Said reserved
parking spaces are currently billed in the amount of $30.00 per space.
Sublessee to reimburse Sublessor monthly in the amount of $210.00. If for
any reason the cost to Sublessor for said reserved parking spaces is
increased, Sublessee's cost will be adjusted accordingly.
13. INSURANCE.
Sublessee shall name both Sutter Square Assoc., LLC and Sublessor as
"additional insureds" on a standard business liability policy of limits not
less that two million dollars ($2,000,000.00) per occurrence and aggregate.
14. NOTICES.
All notices and demands which may or are to be required or permitted to be
given by either party on the other hereunder shall be in writing. All
notices and demands by the Sublessor to Sublessee shall be sent by United
States Mail, postage prepaid, addressed to the Sublessee at the Premises,
and to the address hereinbelow, or to such other place as Sublessee may
from time to time designate in a notice to the Sublessor. All notices and
demands by the Sublessee to Sublessor shall be sent by United States Mail,
postage prepaid, addressed to the Sublessor at the address set forth
herein, and to such other person or place as the Sublessor may from time to
time designate in a notice to the Sublessee.
To Sublessor: 1800 Sutter Street, Suite 400, Concord, Ca 94520
To Sublessee: "The Leased Premises"
15. CONSENT BY LESSOR.
THIS SUBLEASE SHALL BE OF NO FORCE OR EFFECT UNLESS
4
<PAGE>
CONSENTED TO BY LESSOR WITHIN 10 DAYS AFTER EXECUTION HEREOF, IF SUCH
CONSENT IS REQUIRED UNDER THE TERMS OF MASTER LEASE.
16. COMPLIANCE.
The parties hereto agree to comply with all applicable federal, state, and
local laws, regulations, codes, ordinances and administrative orders having
jurisdiction over the parties, property or the subject matter of this
Agreement, including, but not limited to, the 1964 Civil Rights Act and all
amendments thereto, the Foreign Investment In Real Property Tax Act, the
Comprehensive Environmental Response Compensation and Liability Act, and
the Americans With Disability Act.
Sublessor: Anchor Pacific Underwriters, Sublessee: Talbot Agency of
Inc. California, Inc.
By: /s/ J.R. Dunathan By: /s/ Kirk Christ
-------------------------------- -----------------------------
Title: President/C.E.O. Title: President
----------------------------- --------------------------
By: N/A By: N/A
-------------------------------- -----------------------------
Title: Title:
Date: 3/23/99 Date: 3/15/99
------------------------------ ---------------------------
5
<PAGE>
[THE CRANBROOK GROUP LETTERHEAD APPEARS HERE]
LANDLORD'S CONSENT TO SUBLEASE (LANDLORD'S CONSENT)
March 31, 1999
Mrs. Martha Scrivens
ANCHOR PACIFIC UNDERWRITERS, INC.
1800 Sutter Street, Suite 400
Concord, CA 94520
RE: LANDLORD'S CONSENT TO SUBLEASE ("LANDLORD'S CONSENT")
Dear Martha:
We are in receipt of your sublease dated January 1, 1999 ("Sublease") by
and between Anchor Pacific Underwriters, Inc., as sublessor ("Sublessor") and
Talbot Agency of California, Inc., as sublessee ("Sublessee") for the premises
commonly known as Sutter Square, 1800 Sutter Street, Suite 500, Concord,
California, measuring approximately 8,027 square feet ("Premises"). Sublessor
leases the Premises from Sutter Square Associates, LLC ("Landlord") pursuant to
that certain lease dated October 29, 1990, as amended by the First Amendment To
Office Lease dated June 10, 1991, and amended by Second Amendment To Office
Lease dated April 16, 1994, and amended by Third Amendment To Lease dated
September 9, 1994, made by and between Landlord and or Landlord's successors-in-
interest to Sutter Square--California LTD, a California Limited Partnership,
successors-in-interest to Societe Generale, a California Corporation
(collectively the "Lease").
Landlord hereby consents to the Sublease of the Lease by Sublessor to
Sublessee as set forth in the Sublease, subject to the following agreements
between Landlord, Sublessor, and Sublessee.
1. Character of Consent: This Landlord's Consent is not and should not
be deemed or construed as, a consent to any other Sublease or subletting. This
Landlord's Consent shall not be deemed or construed to modify, waive, or alter
any of the terms, provisions, convenants, or conditions of the Lease, waive any
breach thereof or any of the rights of Landlord thereunder, or enlarge or
increase Landlord's obligation under the Lease.
<PAGE>
2. Scope of Conditions of Consent: In granting this Landlord's
Consent, it is understood and agreed that: (1) Landlord does not consent to nor
approve any term, provision, covenant or condition contained in the Sublease and
Landlord shall not be bound thereby; (2) no rights shall be granted to Sublessee
under the Sublease which are greater than those granted to Sublessor under the
Lease; and (3) the Sublease shall be subordinate to the Lease and this
Landlord's Consent and in the event of any conflict between the terms and
provisions of the Lease or the Landlord's Consent and the terms and provisions
of the Sublease, the terms and provisions of the Lease or the Landlord's
Consent, as applicable, shall prevail.
3. Assumption of Lease Obligations: Sublessee hereby expressly assumes
and agrees to perform and comply with, for the benefit of Landlord, each and
every obligation of Sublessor under the Lease. Neither the foregoing assumptions
by Sublessee, the Sublease, nor the Landlord's Consent, shall release or
discharge Sublessor from any liability under the Lease including, without
limitation, the payment of rent and other amounts when and as due under the
Lease, and Sublessor shall remain liable and responsible for the full
performance and observance of all of the terms, provisions, covenants, and
conditions set forth in the Lease to be performed by the tenant thereunder. Any
breach or violation of any provision or obligation of the tenant under the Lease
shall be deemed an event of default by Sublessor and Sublessee under the Lease,
and Landlord, at its election, may proceed directly against Sublessee without
first exhausting Landlord's remedies against Sublessor.**
4. Bonus Value: Sublessor and Sublessee, by signing below, acknowledge
and agree, pursuant to paragraph 5.08 of the Lease, that Landlord is entitled to
ninety percent (90%) of any rent or other consideration in excess of Rent
payable under the Lease, that is realized under the Sublease.
5. No Obligations of Landlord: In no event shall Landlord be liable
for any cost or obligation of any kind or nature whatsoever arising from or in
connection with the Sublease including, without limitation, brokerage
commissions, or improvements to the Premises. Sublessor and Sublessee hereby
agree to indemnify, defend and hold Landlord harmless from and against any and
all claims, losses, liabilities, costs and expenses (including attorney's fees)
which Landlord may incur as a result of any claim to pay any person or entity
any commission, finder's fee or other charge in connection with the Sublease.
** The Sublessee's responsibility and liability in relation to the breach or
violation is limited to the extent of their subleased portion of the building.
<PAGE>
Please acknowledge your agreement with the terms and conditions set
forth in this Landlord's Consent by executing the acknowledgment and consent set
forth below.
Very truly yours,
Cranbrook Realty Investment Fund
By: Cranbrook Equity Investment Fund, General Partner
/s/ Kevin M. FitzPatrick
- -------------------------------
Kevin M. FitzPatrick
Vice President, Operations
THE UNDERSIGNED HEREBY AGREE AND CONSENT TO THE TERMS AND CONDITIONS IN
THE FOREGOING LANDLORD'S CONSENT.
ANCHOR PACIFIC UNDERWRITERS, INC.:
By: /s/ J.R. Dunathan
---------------------------
J.R. Dunathan
Its: President/C.E.O.
--------------------------
President/C.E.O.
TALBOT AGENCY OF CALIFORNIA, INC.:
By: /s/ Kirk Christ
---------------------------
Kirk Christ
Its: President
--------------------------
President
<PAGE>
EXHIBIT 10.35
COLUMBIA SQUARE 01
OFFICE LEASE
DATED: January 29, 1999
BETWEEN: COLUMBIA SQUARE, L.L.C., an Oregon Limited LANDLORD;
Liability Company
AND: HARDEN AND COMPANY INSURANCE SERVICES, INC., a California TENANT.
corporation DBA PACIFIC HERITAGE ADMINISTRATORS
Tenant wishes to lease from Landlord the following described property,
hereafter referred to as "the Premises":
Suite 600, an area of approximately 17,987 rentable square feet on the sixth
floor, as outlined on the attached Exhibit A. A 13% load factor is used on
Columbia Square.
located in the Columbia Square Office Building, Portland, Oregon, hereafter
referred to as "the Building.'"
NOW, THEREFORE, Landlord and Tenant agree that the terms of this lease are as
follows:
1. TERM.
- --------
The lease shall be for a term of 36 calendar months plus the partial
--
month, if any, in which the lease commences. The term shall commence on 1/1/00
------
and continue through 12/31/02.
--------
2. DELIVERY OF POSSESSION.
- --------------------------
Delivery of possession shall occur when Tenant actually occupies the Premises
or when the Premises are available for occupancy by Tenant with all work to be
performed by Landlord substantially completed. Landlord shall have no liability
for delays in delivery of possession caused by labor disputes, shortages of
materials, acts of God, or other cause beyond Landlord's reasonable control.
<PAGE>
COLUMBIA SQUARE 02
3. RENT.
- --------
3.1 Tenant shall pay as base rent for the Premises the sum of $ see Section 33
---------------
___________________________ (U.S.) per month on the first day of each month.
Rent for any partial month during the lease term shall be prorated to reflect
the number of days during the lease that Tenant occupied the Premises.
3.2 in addition to base rental Tenant shall pay as additional rent escalation
payments computed according to Section 20 hereof.
3.3 Upon execution of this lease Tenant has paid the base rent for the first
full month of the lease term and in addition has paid the sum of $-0- as a
---
security deposit. The deposit shall be held by Landlord to secure all payments
and performances due from Tenant under this lease. Landlord may commingle the
deposit with its funds and shall owe no interest on the deposit. Landlord may
apply the deposit to the cost of performing any obligation which Tenant fails to
perform within the time required by this lease, but such application by Landlord
shall not be the exclusive remedy for Tenant's default. If the deposit is
applied by Landlord, Tenant shall on demand pay the sum necessary to replenish
the deposit to its original amount. To the extent not applied by Landlord, the
deposit shall be refunded to Tenant within 30 days after expiration of the lease
term, or at Landlord's option, applied against the base rent for the last month
of the term.
4. USE OF THE PREMISES.
- -----------------------
4.1 Tenant shall use the Premises as business offices for the following
business and for no other purpose:
- General Business Offices -
4.2 In connection with its use, Tenant shall comply with all applicable laws,
ordinances, and regulations of any public authority and shall not annoy,
obstruct, or interfere with the rights of other tenants of the Building. Tenant
shall create no nuisance nor allow any objectionable liquid or noise to be
emitted from the Premises. Tenant shall store no materials nor conduct any
activities that will increase Landlord's fire insurance rates for the Premises.
4.3 Tenant shall install in the Premises only such machinery as is customary
for general office use and shall not overload the floors or electrical circuits
of the Premises. Landlord shall have the right to approve in advance the
installation of any power-driven machinery such as electronic data processing
equipment or other machinery not customary for normal office use. Landlord may
select a qualified electrician whose opinion will control regarding electrical
circuits and a qualified engineer or architect whose opinion will control
regarding floor loads. If machinery installed by Tenant generates heat, any
additional air conditioning desired by Tenant shall be at Tenant's expense.
<PAGE>
COLUMBIA SQUARE 03
4.4 No signs, awnings, antennas, or other apparatus shall be painted on or
attached to the Building or on any glass or woodwork of the Premises without
Landlord's written approval as to design, size, location, and color. All signs
installed by Tenant shall be removed upon termination of this lease with the
sign location restored to its former state.
5. UTILITIES AND SERVICES.
- --------------------------
5.1 Landlord will, at its expense, furnish Tenant with the following services
and utilities of quality and quantity customary in first-class office buildings
in the City of Portland:
(a) Elevator service during normal business hours of the Building and the
service of at least one elevator during all other hours.
(b) Heating and air-conditioning to maintain a temperature condition which in
Landlord's judgment provides for comfortable occupancy of the Premises under
normal business operations daily, except for Saturdays, Sundays and holidays,
provided Tenant complies with Landlord's instructions regarding use of drapes
and thermostats and Tenant does not utilize heat generating machines or
equipment which affect the temperature otherwise maintained by the air-
conditioning system. If requested by Tenant, Landlord will furnish heat,
ventilation or air-conditioning during other than normal business hours of the
Building during the week, Saturdays, Sundays and holidays. The cost of such
service shall be borne by Tenant at rates established by Landlord, which rates
will be known at the time of Tenant's request.
(c) Water for drinking, lavatory and toilet purposes.
(d) Electrical current for lighting and operation of low power usage office
machines.
(e) Janitorial service and window washing. This service includes vacuum
cleaning of carpets but no other services with respect to carpets or other floor
coverings which are not standard for the building.
5.2 Tenant shall comply with all government laws or regulations regarding the
use or reduction of use of utilities on the Premises. If Tenant's future use of
Premises results in a material increase in the amount of electricity required
over the amount required at the commencement of the lease term, or beyond the
required for typical office use from 7 a.m. through 6 p.m. five days per week,
then Tenant shall pay a reasonable charge for such increase in electricity
requirements when requested to do so by Landlord.
5.3 Landlord does not warrant that any of the services and utilities referred
to above will be free from interruption. Interruption of services and utilities
shall not be deemed an eviction or disturbance of Tenant's use and possession of
the Premises or render Landlord liable to Tenant for damages, or relieve Tenant
from performance of Tenant's obligations under this lease, but Landlord shall
take all reasonable steps to correct any interruptions in service.
<PAGE>
COLUMBIA SQUARE 04
6. MAINTENANCE BY LANDLORD.
- ---------------------------
6.1 Landlord shall repair and maintain the Building structure, foundation,
roof, gutters, exterior walls, halls, stairways and entryway, elevators and
common passageways in sound, clean, and serviceable condition. Landlord shall
also repair and maintain the draperies, windows, floors, ceilings, walls,
plumbing, plumbing fixtures, light fixtures and electrical distribution system
in good condition and repair except that such services will not be provided for
any of the foregoing items which are nonstandard for the Building. Landlord
shall replace light bulbs and fluorescent tubes in light fixtures which are
standard for the Building. Repair of damage caused by Tenant's negligent or
intentional acts or acts in breach of this lease shall be at Tenant's expense.
6.2 Landlord shall have the right to erect scaffolding and other apparatus
necessary for the purpose of making required repairs. Landlord shall have no
liability for failure to perform required maintenance and repair unless notice
of the needed maintenance or repair is given by Tenant and Landlord fails to
remedy the problem within a reasonable time. Landlord shall have no liability
for interference with Tenant's use by needed repairs and installations provided
these are performed in a manner so as to cause a reasonable minimum of
interference to Tenant.
7. MAINTENANCE AND ALTERATIONS BY TENANT.
- -----------------------------------------
7.1 Tenant shall maintain the interior of the Premises in neat, clean, and
good condition at all times and shall repair all damage to the Premises caused
by Tenant's use, but Tenant shall not be required to repair normal wear
resulting from the ordinary use for which the Premises were leased.
7.2 Tenant shall not make any alterations, additions, or improvements to the
Premises, change the color of the interior, or install any wall or floor
covering without Landlord's written consent. Any such additions, alterations, or
improvements, except for unattached movable trade fixtures, shall at once become
part of the realty and belong to Landlord unless the terms of the applicable
consent provide otherwise. Landlord shall not unreasonably withhold consent
under the paragraph provided any proposed alterations are consistent with the
overall quality of the improvements in the premises.
8. TENANTS INDEMNIFICATION; LIABILITY INSURANCE.
- ------------------------------------------------
8.1 Tenant shall not allow any liens to attach to the Premises as a result of
its activities. Tenant shall indemnify and defend Landlord from any claim,
liability, damage, or loss arising out of any activity on the Premises by
Tenant, its agents, or invitees or resulting from Tenant's failure to comply
with any term of this lease.
8.2 Tenant shall carry public liability and property damage insurance with
limits of not less than $1,000,000 per occurrence. Such insurance shall be in a
form satisfactory to Landlord and shall be evidenced by a certificate delivered
to Landlord stating that the coverage will not be canceled or materially altered
without 10 days' advance
<PAGE>
COLUMBIA SQUARE 05
written notice to Landlord. Landlord shall be named as an additional insured on
such policy.
9. CASUALTY DAMAGE; SUBROGATION WAIVER.
- ---------------------------------------
9.1 If fire or other casualty causes damage to the Building in an amount
exceeding 30 percent of the full construction-replacement cost of the Building
(exclusive of foundations), Landlord may elect to terminate this lease by notice
in writing to Tenant within 30 days after such date. In the event of said
termination, Tenant shall receive its proportionate share of the replacement
cost award for the applicable Tenant Improvements. Otherwise, Landlord shall
promptly restore the Premises to their former condition as soon as practicable.
Rent shall be reduced during the period and to the extent the Premises are not
reasonably usable for the use permitted by this lease because of the casualty
damage and required repairs.
9.2 Landlord shall be responsible for insuring the Building and Tenant for
insuring its personal property and trade fixtures located on the Premises.
Neither party shall be liable to the other for any loss or damage caused by
water damage, sprinkler leakage, or any of the risks covered by a standard fire
insurance policy with an extended coverage endorsement, and there shall be no
subrogated claim by one party's insurance carrier against the other party
arising out of any such loss.
10. CONDEMNATION.
- -----------------
If a condemning authority takes the entire Building or a substantial portion
of the Premises sufficient to render the Premises unsuitable for Tenant's use,
then either party may elect to terminate this lease effective on the date that
possession is taken by the condemning authority. Otherwise, Landlord shall
proceed as soon as practicable following the taking to restore the remainder of
the Building. Rent shall be reduced during the period of restoration to the
extent the Premises are not reasonably usable by Tenant. Rent shall be reduced
for the remainder of the term in an amount proportionate to the reduction in
area of the Premises caused by the taking. All condemnation proceeds shall
belong to Landlord, except for any sums specifically awarded to Tenant for
relocation expenses.
11. ASSIGNMENT AND SUBLETTING.
- ------------------------------
11.1 Tenant shall not assign its interest under this lease or sublet the
Premises without first obtaining Landlord's consent in writing. No consent in
one instance shall prevent this provision from applying to each subsequent
instance. This provision shall apply to all transfers by operation of law
including but not limited to mergers and changes in control of Tenant. No
assignment shall relieve Tenant of its obligation to pay rent or perform other
obligations required by this lease.
11.2 Subject to the above limitations on transfer of Tenant's interest, this
lease shall bind and inure to the benefit of the parties, their respective
heirs, successors, and assigns.
<PAGE>
COLUMBIA SQUARE 06
12. DEFAULT.
- ------------
12.1 Any of the following shall constitute a default by Tenant under this
lease:
(a) Tenant's failure to pay rent or any other charge under this lease within
ten (10) days following written notice that it is due, or failure to comply with
any other term or condition within 20 days following written notice from
Landlord specifying the noncompliance. If such noncompliance cannot be cured
within 20-day period, this provision shall be satisfied if Tenant commences
correction within such period and thereafter proceeds in good faith and with
reasonable diligence to effect compliance as soon as possible. Time is of the
essence of this lease.
(b) Tenant's insolvency or business failure; assignment for the benefit of
its creditors; Tenant's commencement of proceedings under any provision of any
bankruptcy or insolvency law or failure to obtain dismissal of any petition
filed against it under such laws within the time required to answer; or the
appointment of a receiver for Tenant's properties.
12.2 Landlord's failure to give notice as to any failure of compliance by
Tenant shall not be a continuing waiver by Landlord as to the default.
13. REMEDIES FOR DEFAULT.
---------------------
In case of default as described in paragraph 12.1 Landlord shall have the
right to the following remedies which are intended to be cumulative and in
addition to any other remedies provided under applicable law:
13.1 Landlord may terminate the lease and retake possession of the Premises.
Following such retaking of possession efforts by Landlord to relet the Premises
shall be sufficient if Landlord follows its usual procedures for finding tenants
for the space. If Landlord has other vacant space in the Building, prospective
tenants may be placed in such other space without prejudice to Landlord's claim
to damages or loss of rentals from Tenant.
13.2 Landlord may recover all damages caused by Tenant's default which shall
include an amount equal to rentals lost because of the default and the
unamortized cost of any tenant improvement installed by the Landlord to meet
Tenant's special requirements. Landlord may sue periodically to recover damages
as they occur throughout the lease term, and no action for accrued damages shall
bar a later action for damages subsequently accruing. Landlord may elect in any
one action to recover accrued damages plus damages attributable to the remaining
term of the lease equal to the difference between the rent under this lease and
the reasonable rental value of the Premises for the remainder of the term,
discounted to the time of judgment at the rate of 6 percent per annum.
13.3 Landlord may make any payment or perform any obligation which Tenant
has failed to perform, in which case Landlord shall be entitled to recover from
Tenant upon
<PAGE>
COLUMBIA SQUARE 07
demand all amounts so expended, plus interest from the date of the expenditure
at the rate of 10 percent per annum. Any such payment or performance by Landlord
shall not waive Tenant's default.
14. SURRENDER ON TERMINATION.
- -----------------------------
14.1 On expiration or early termination of this lease Tenant shall deliver
all keys to Landlord and surrender the Premises broom clean and in the same
condition as at the commencement of the term subject only to depreciation and
wear from ordinary use. Tenant shall remove all of its furnishings and trade
fixtures that remain its property and restore all damage resulting from such
removal. Failure to remove shall be an abandonment of the property, and Landlord
may dispose of it in any manner without liability. Landlord shall not be
unreasonable in determining the extent of said damage.
14.2 If Tenant fails to vacate the Premises when required, including
failure to remove all its personal property, Landlord may elect either: (i) to
treat Tenant as a Tenant from month to month, subject to all provisions of this
lease except the provision for term and at the market rate then in effect for
comparable office space in downtown Portland; or (ii) to eject Tenant from the
Premises and recover damages caused by wrongful holdover.
15. REGULATIONS.
- ----------------
Landlord shall have the right to make and enforce regulations consistent
with this lease for the purpose of promoting safety, order, cleanliness, and
good service to all tenants of the Building. Copies of all such regulations
shall be furnished to Tenant and shall be complied with as if part of this
lease, and shall be uniformly applied by Landlord.
16. ACCESS.
- -----------
16.1 During times other than usual business hours Tenant's officers and
employees or those having business with Tenant may be required to identify
themselves or show passes in order to gain access to the Building. Landlord
shall have no liability for refusing to permit access by anyone.
16.2 Landlord shall have the right to enter upon the Premises at any time
by passkey or otherwise to determine Tenant's compliance with this lease, to
perform necessary maintenance and repairs to the Building or the Premises, or to
show the Premises to any prospective tenant or purchasers. Such entry shall be
at such times and in such manner as not to interfere with the reasonable
business use of the Premises by Tenant.
16.3 Tenant shall move bulky articles in and out of the Building only at
times approved by Landlord following at least 24 hours' written notice to
Landlord of the intended move. Landlord will not unreasonably withhold its
consent under this paragraph.
<PAGE>
COLUMBIA SQUARE 08
17. NOTICES.
- ------------
Notices between the parties relating to this lease shall be in writing,
effective when delivered, or if mailed, effective on the second day following
mailing, postage prepaid, to the address for the party stated in this lease or
to such other address as either party may specify by notice to the other. Rent
shall be payable to Landlord at the same address and in the same manner, but
shall be considered paid only when received.
18. MORTGAGE OR SALE BY LANDLORD; ESTOPPEL CERTIFICATES.
- --------------------------------------------------------
18.1 This lease is and shall be prior to any mortgage or deed of trust
("Encumbrance") recorded after the date of this lease and affecting the Building
and the land upon which the Building is located. However, if any lender holding
an Encumbrance secured by the Building and the land underlying the Building
requires that this lease be subordinate to the Encumbrance, then Tenant agrees
that the lease shall be subordinate to the Encumbrance if the holder thereof
agrees in writing with Tenant that so long as Tenant performs its obligations
under this lease no foreclosure, deed given in lieu of the foreclosure, or sale
pursuant to the terms of the Encumbrance, or other steps or procedures taken
under the Encumbrance shall affect Tenant's rights under this lease. If the
foregoing condition is met, Tenant shall execute the written agreement and any
other documents required by the holder of the Encumbrance to accomplish the
purposes of this paragraph.
18.2 If the Building is sold as a result of foreclosure of any Encumbrance
thereon or otherwise transferred by Landlord or any successor, Tenant shall
attorn to the purchaser or transferee.
18.3 Either party will within 20 days after notice from the other execute
and deliver to the other party a certificate stating whether or not this lease
has been modified and is in full force and effect and specifying any
modifications or alleged breaches by the other party. The certificate shall also
state the amount of monthly base rent, the dates to which rent has been paid in
advance, and the amount of any security deposit or prepaid rent.
19. PREPARATION FOR OCCUPANCY.
--------------------------
Any work to be performed by landlord prior to Tenant's occupancy shall be
set forth in a separate workletter signed by Landlord and Tenant, a copy of
which shall be attached to this lease.
<PAGE>
COLUMBIA SQUARE 09
20. ANNUAL RENT ESCALATION.
- ---------------------------
20.1 As used in this Section 20, the following terms are defined as follows:
(a) "Base Year" shall mean the calendar year 2000.
(b) "Tenant's Proportionate Share" shall mean a fraction, the numerator of
which is the number of square feet of rentable office space covered by this
lease and the denominator of which is the total number of rentable square feet
of office space in the Building, whether or not such space is actually rented,
and shall be 7%.
(c) "Operating Expenses" means all direct costs of operation and
maintenance of the Building as determined by standard accounting practices,
which may be reviewed by Tenant from time to time at Tenant's expense, and shall
include but shall not be limited to the following costs: real property taxes and
assessments or any fees or charges wholly or partially in substitution
therefore; rent taxes, gross receipt taxes, business license taxes, fees for
permits relating to the Building or any other fee or charge imposed on Landlord
as a direct consequence of owning or leasing the Building; water and sewer
charges, insurance premiums, utilities, janitorial services, labor of Building
attendants, Building management fees, maintenance of elevators and mechanical
systems, supplies, materials, equipment, and tools used in Building maintenance;
upkeep of any landscaping and common areas; and the annual amortized cost
(amortized over such a period as Landlord may select but not shorter than the
period allowed under the Internal Revenue Code and at a current market interest
rate) of capital improvements to the Building for any capital improvements
required by any governmental authority or those which have a reasonable
probability of improving the operating efficiency of the Building; the annual
amortized capital improvement cost. **see below
20.2 If the Operating Expenses for any calendar year after the Base Year
exceed those paid or incurred for the Base Year, then Tenant shall pay its
Proportionate Share of the increase, prorated with respect to years in which
this lease is in effect for less than the entire calendar year. Commencing
January 1 of the first year following the Base Year and for each year
thereafter, Landlord shall estimate in a reasonable manner the amount by which
Operating Expenses are anticipated to increase for that year over the Base Year.
Landlord shall compute Tenant's Proportionate Share of such estimated increase,
and one-twelfth of Tenant's Proportionate Share shall be paid by Tenant as
additional rent in connection with each monthly rent payment. At the conclusion
of each calendar year after the Base Year Landlord shall compute the actual
Operating Expense increases. If the estimated payments collected from Tenant are
insufficient to cover Tenant's Proportionate Share of the actual Operating
expense increases, Tenant shall within 20 days after receipt of a billing from
Landlord pay the difference. If Landlord's estimates exceeded the amount of
actual Operating Expense increases, Landlord shall at its option either refund
the excess to Tenant or apply the excess towards reducing Tenant's Proportionate
Share of Operating Expense increases for the next calendar year in which the
lease is in effect.
20.3 Landlord shall attempt to complete its computation of actual Operating
Expense increases by March of the year following the year for which the
computation
**If any portion of the Building is occupied by a tax-exempt tenant so that
the Building has a partial tax exemption under ORS 307.112 or a similar statute,
then real property taxes shall mean taxes computed as if such partial exemption
did not
<PAGE>
COLUMBIA SQUARE 010
is to be made. Tenant shall pay any additional amounts or be entitled to refund
of any excess payments even if the lease term has expired and Tenant has vacated
the Premises at the time that Landlord's computation of actual Operating
Expenses is made.
20.4 If this lease commences in a year which does not qualify as a Base
Year as defined in paragraph 20.1 above, then on each January 1 until
establishment of a Base Year and commencement of collection of estimated
Operating Expense increases under paragraph 20.2 above, the base rent shall be
increased by an amount equal to 5 percent of the original base rent. Such
increases shall be cumulative until a Base Year has been established and
Landlord is authorized under paragraph 20.2 to commence collection of estimated
Operating Expense increases. Following establishment of a Base Year, the base
rent shall thereafter be the original base rent plus all increases computed
according to this paragraph.
20.5 If on January 1 of any calendar year this lease has not been in effect
for 12 months, then the escalation amounts which would otherwise be payable by
Tenant commencing on such January 1 shall be prorated by reducing the escalation
amount in proportion to the part of the year that this lease was not in effect.
21. ATTORNEYS' FEES.
- --------------------
In any litigation arising out of this lease, the prevailing party shall be
entitled to recover attorneys' fees of trial and on any appeal. Any such
litigation shall be tried to a judge without a jury.
22. INTEREST AND LATE CHARGES.
- ------------------------------
Rent not paid when due shall bear interest at the rate of 10 percent per
annum until paid. Landlord may at its option impose a late charge of $.05 for
each $1 of rent for rent payments made more than 10 days late in addition to
interest and other remedies available for default.
23. NON-SMOKING BUILDING.
- -------------------------
Columbia Square is a non-smoking building. Tenant, its agents, employees
and invitees are prohibited from smoking within the Building or the Premises.
Tenant shall at all times keep and maintain its Premises as a "nonsmoking" area
and shall require its employees, agents, and invitees to do the same. Landlord
shall have the right, in its sole discretion, to terminate the Lease at any time
after Tenant's third failure to observe the no smoking rules. Whether or not
Landlord exercises such option, Tenant shall be solely liable for all costs and
expenses associated with cleaning or maintenance required because of smoke
damage of any kind.
24. CONSENT
- -----------
Whenever Landlord's consent or approval is required under any clauses of
this Lease, Landlord shall have the right to grant or withhold its consent or
approval in its sole discretion and shall not be held to any standard of
reasonableness.
25. ADDITIONAL TERMS.
- ---------------------
This Lease incorporates the provisions of the following additional
documents which are attached hereto: Building Rules and Regulations
Rider to Lease
<PAGE>
COLUMBIA SQUARE 011
IN WITNESS WHEREOF, the duly authorized representatives of the parties have
executed this lease as of the day and year first written above.
LANDLORD: COLUMBIA SQUARE, L.L.C, an Oregon By /s/ [SIGNATURE ILLEGIBLE]
------------------------------
Limited Liability Company
Address for notices: 111 SW Columbia, Name: Melvin Mark, Jr.
--------------- ---------------------------
Suite 1380, Portland OR 97201 Title: Managing Member
- ------------------------------------ --------------------------
HARDEN AND COMPANY INSURANCE SERVICES, INC. a California corporation
TENANT: dba PACIFIC HERITAGE ADMINISTRATORS By /s/ [SIGNATURE ILLEGIBLE]
------------------------------
Address for notices: 111 SW Columbia, By: James R. Dunathan
--------------- -----------------------------
Suite 600, Portland OR 97201 By Chairman
- ------------------------------------ ------------------------------
Unless a different address is
indicated above, notices to
Tenant should be addressed to
the leased Premises.
STATE OF OREGON
SS.
County of
On this ______ day of ______________, 19 ____, personally appeared before me,
___________________________________ who, being sworn stated that he is the
_________________of, ______________________, a _____________corporation,
and that this lease was voluntarily signed in behalf of such corporation by
authority of its Board of Directors.
_______________________________
Notary Public for
My commission expires:
<PAGE>
Rider to Lease between Columbia Square, L.L.C. and Harden and Company Insurance
- -------------------------------------------------------------------------------
Services, Inc., a California corporation dba Pacific Heritage Administrators
- ----------------------------------------------------------------------------
Section 26. PARKING. Tenant shall be entitled to use during the whole of each
business day during the lease term a maximum of 18 unassigned parking
spaces in the Columbia Square parking garage provided that Tenant shall pay
therefore the prevailing monthly parking rate in Columbia Square, which
rate shall be uniformly applied to all users. Tenant shall give Landlord
sixty days' written notice of intent to add or delete parking spaces within
the maximum number of spaces allocated under this lease. However, if at any
time Tenant shall reduce the number of spaces rented, the number of spaces
given up shall be deducted from the maximum allocation which Tenant shall
be permitted under this lease.
Section 27. ASSIGNMENT AND SUBLETTING. Landlord will consent to the assignment
or subletting by Tenant to a party which is financially responsible and
meets Landlord's criteria for leasing a space in the building. The request
for permission to assign or sublet shall be submitted to Landlord in
writing, shall give the name and financial information respecting the
proposed assignee or subtenant, and shall specify all terms of the proposed
assignment or subletting. Thereafter, Landlord shall have seven days in
which to give notice to Tenant electing to take the space back from Tenant
on the same terms and conditions for the same period as proposed in the
request for consent and thereafter return the space to Tenant at Tenant's
option. If financial or other information submitted by Tenant in connection
with the request under this paragraph, is in the Landlord's reasonable
judgment inadequate for Landlord to make judgment about the proposal,
Landlord shall promptly advise Tenant of this fact and the seven day period
shall run from the date upon which Tenant supplies necessary additional
information. If Landlord denies the request for consent to sublease it
shall submit a statement in writing as to its reasons for so doing.
Section 28. MAINTENANCE AND REPAIRS. If Landlord enters into any lease which
provides for the furnishing of services, maintenance or repair to an extent
greater than that specified in this lease Landlord will amend this lease so
as to provide comparable service, maintenance or repair to Tenant under
this lease. Landlord shall notify Tenant immediately upon entering into
such lease, and this lease shall be so amended within 30 days thereafter.
Section 29. OPERATING EXPENSE ADJUSTMENT. In making the annual rental
escalation computations called for by Section 20 of this lease, Landlord
shall make an adjustment with respect to the base year so that the adjusted
operating expenses shall represent a good faith and reasonable estimate of
the expenses including real property taxes which would have been incurred
in such year had the building been fully assessed as a completed structure
and 95% occupied for the entire year. Tenant's share of operating expense
increases computed under Section 20 shall be computed using such estimate.
Rider Landlord /s/ SIGNATURE ILLEGIBLE
-------------------------
Page 1 of 3
Tenant /s/ SIGNATURE ILLEGIBLE
-------------------------
<PAGE>
Section 30. MANAGEMENT FEES. If Melvin Mark Properties is the manager of the
Building, the management fee used in computing the operating expense
escalation under Section 20 of the lease shall be a reasonable management
fee commensurate with that paid other building managers for comparable
services in the Portland Metropolitan Area at the time.
Section 31. Tenant represents that some of the equipment fixtures and furniture
(collectively designated herein as "Trade Equipment"), now or hereafter to
be installed by Tenant in and used by Tenant in the Leased Premises, is or
will be directly financed by an Institutional Lender (bank, insurance
company, pension fund, and the like) or owned by an equipment rental
company (hereinafter designated as "Equipment Lessor") and rented to Tenant
either directly from the Equipment Lessor or by way of Equipment Sublease
or assignment of Equipment Lease from an Equipment Sublessor, and Landlord
hereby agrees to recognize the rights therein of any such Institutional
Lender or Equipment Lessor or Sublessor (or assignee). Landlord agrees that
all such items of financed or leased Trade Equipment installed or to be
installed on the real property constituting the Leased Premises shall be
and remain personal property and not real property notwithstanding the fact
that the same may be nailed or screwed or otherwise attached or affixed to
such real property and further agrees to recognize the rights therein of
any such Institutional Lender or Equipment Lessor or Sublessor (or
assignee). Tenant shall have the right at any time to remove or replace any
and all such financed or leased Trade Equipment regardless of whether
annexed or attached to the Leased Premises, and to the extent of their
respective interests therein, Institutional Lender or Equipment Lessor or
Sublessor (or assignee) shall also have such a right, provided, however,
that any damage to the Leased Premises caused by such a removal shall be
repaired by and at the expense of the Tenant and provided that removal of
the same shall not negatively affect Tenant's mode or operation. Landlord
expressly waives any claim arising by reason of any Landlord's lien or
otherwise with respect to the financed or leased Trade Equipment or to
Trade Equipment on which Tenant has granted a security interest to a bona
fide Institutional Lender, and agrees that any such Institutional Lender or
Equipment Lessor or Sublessor (or assignee) may remove and dispose of the
same without reference to and free and clear of any claim or other demand
of Landlord. With respect to any Trade Equipment which is not leased, or
subject to a security interest, Landlord agrees that Tenant shall have the
absolute right to remove or replace the same irrespective of whether
annexed or attached to the Leased Premises, provided, however, that any
damage to the Premises caused thereby shall be promptly and effectively
repaired by and at the expense of Tenant.
Section 32. The term of "taxes" shall not include any late charges, delinquent
charges, or interest on late payments. Landlord covenants that Landlord
shall pay all sums collected as and for "taxes" to the appropriate taxing
authorities.
Rider Landlord /s/ SIGNATURE ILLEGIBLE
-------------------------
Page 2 of 3
Tenant /s/ SIGNATURE ILLEGIBLE
-------------------------
<PAGE>
Section 33. BASE RENT. Base rent shall be as follows:
January 1, 2000 to December 31, 2000 $26,231 per month
January 1, 2001 to December 31, 2001 $27,730 per month
January 1, 2002 to December 31, 2002 $29,229 per month
Section 34. IMPROVEMENTS. Landlord shall provide an allowance for improvement
to the premises in the amount of $8,993.50. All costs in excess of the
allowance for improvements and/or alterations shall be Tenant's sole
responsibility.
Rider Landlord /s/ SIGNATURE ILLEGIBLE
-------------------------
Page 3 of 3
Tenant /s/ SIGNATURE ILLEGIBLE
-------------------------
<PAGE>
RULES AND REGULATIONS
EXHIBIT B.
1. The halls, passages, exits, entrances, elevators and stairways are not for
the use of the general public and Landlord shall in all cases retain the
right to control and prevent access thereto by all persons whose presence,
in the judgment of Landlord, shall be prejudicial to the safety, character,
reputation and interests of the Building and its Tenants, provided that
nothing herein contained shall be construed to prevent such access to
persons with whom any Tenant normally deals in the ordinary course of such
Tenant's business unless such persons are engaged in illegal activities. No
Tenant, and no employees or invitees of any Tenant, shall go upon the roof
of the Building, except as authorized by Landlord
2. No sign, placard, picture, name, advertisement or notice, visible from the
exterior of leased premises shall be inscribed, painted, affixed, installed
or otherwise displayed by any Tenant either on its premises or any part of
the Building without the prior written consent of Landlord, and Landlord
shall have the right to remove any such sign, placard, picture, name,
advertisement, or notice without notice to and at the expense of the
Tenant.
All approved signs or lettering on doors and walls shall be printed,
painted, affixed or inscribed at the expense of the Tenant by a person
approved by Landlord.
3. No curtains, draperies, blinds, shutters, shades, screens or other
coverings, awnings, hangings or decorations shall be attached to, hung or
placed in, or used in connection with, any window or door on any premises
without the prior written consent of Landlord. In any event with the prior
written consent of Landlord, all such items shall be installed inboard of
Landlord's standard window covering and shall in no way be visible from the
exterior of the Building. No articles shall be placed or kept on the
windowsills so as to be visible from the exterior of the Building. No
articles shall be placed against glass partitions or doors which might
appear unsightly from outside Tenant's Premises.
4. No Tenant shall employ any person or persons other than the janitor of
Landlord for the purpose of cleaning premises unless otherwise agreed to by
Landlord in writing. Except with the written consent of Landlord no person
or persons other than those approved by landlord shall be permitted to
enter the Building for the purpose of cleaning the same. No Tenant shall
cause any unnecessary labor by reason of such Tenant's carelessness or
indifference in the preservation of good order and cleanliness of the
premises. Landlord shall in no way be responsible to any Tenant for any
loss of property on the premises, however occurring, or for any damage done
to the effects of any Tenant by the janitor or any other employee or any
other person.
5. Each Tenant shall see that all doors of its premises are closed and
securely locked and must observe strict care and caution that all water
faucets or water apparatus are entirely shut off before the Tenant or Its
employees leave such premises, and that all utilities shall likewise be
carefully shut off, so as to prevent waste or damage, and for any default
or carelessness the Tenant shall make good all injuries sustained by other
Tenants or occupants of the Building or Landlord. Tenants shall keep the
door or doors to the Building corridors closed at all times except for
ingress and egress.
6. No Tenant shall alter any lock or access device or install a new or
additional lock or access device or any bolt on any of its premises without
the prior written consent of Landlord. If Landlord shall give its consent,
the Tenant shall in each case furnish Landlord with a key for any such
lock. in the event of the loss of any keys or access devices furnished by
Landlord, Tenant shall pay Landlord therefor.
7. No Tenant shall use any method of heating or air-conditioning other than
that supplied by Landlord.
8. No Tenant shall use, keep or permit to be used or kept in its premises any
foul or noxious gas or substance or permit or suffer such premises to be
occupied or used in a manner offensive or objectionable to Landlord or
other occupants of the Building by reason of noise, odors and/or vibrations
or interfere in any way with other Tenants or those having business
therein, nor shall any animals or birds be brought or kept in or about any
premises of the Building.
/s/ Landlord [SIGNATURE ILLEGIBLE]
/s/ Tenant [SIGNATURE ILLEGIBLE]
PAGE 1 - Exhibit B
<PAGE>
9. No cooking shall be done or permitted by any Tenant on its premises (except
that use by the Tenant of Underwriters' Laboratory approved equipment for
the preparation of coffee, tea, hot chocolate and similar beverages for
Tenants and their employees shall be permitted, provided that such
equipment and use is in accordance with all applicable federal, state and
city laws, codes, ordinances, rules and regulations), nor shall premises be
used for lodging. Microwave use is permitted.
10. Except with the prior written consent of Landlord, no Tenant shall sell, or
permit the sale, at retail, of newspapers, magazines, periodicals, theatre
tickets or any other goods or merchandise in or on any premises, nor shall
Tenant carry on, or permit or allow any employee or other person to carry
on, the business of stenography, typewriting or any similar business in or
from any premises for the service or accommodation of occupants of any
other portion of the Building, nor shall the premises of any Tenant be used
for the storage of merchandise or for manufacturing of any kind, or the
business of a public barber shop, beauty shop, beauty parlor, nor shall the
premises of any Tenant be used for any improper, immoral or objectionable
purpose, or any business or activity other than that specifically provided
for in such Tenant's lease.
11. No Tenant shall install any radio or television antenna, loudspeaker or any
other device on the exterior walls or the roof of the Building. Tenant
shall not interfere with radio or television broadcasting or reception from
or in the Building or elsewhere.
12. No Tenant shall lay linoleum, tile, carpet or any other floor covering so
that the same shall be affixed to the floor of its premises in any manner
except as approved in writing by Landlord. The expense of repairing any
damage resulting from a violation of this rule or the removal of any floor
covering shall be borne by the Tenant by whom, or by whose contractors,
employees or invitees, the damage shall have been cause.
13. a) No furniture, freight, equipment, materials, supplies, packages,
merchandise or other property will be received in the Building or carried
up or down the elevators except between such hours and in such elevators as
shall be designated by Landlord. All move-ins and move-outs shall be done
in accordance with the move-in/move-out procedures which may be obtained
from the building manager
b) Landlord shall have the right to prescribe the weight, size and position
of all safes, furniture or other heavy equipment brought into the Building.
Safes or other heavy objects shall, if considered necessary by Landlord,
stand on wood strips of such thickness as determined by Landlord to be
necessary to property distribute the weight thereof. Landlord will not be
responsible for loss of or damage to any safe, equipment or property from
any cause, and all damage done to the Building by moving or maintaining any
such safe, equipment or other property shall be repaired at the expense of
Tenant.
c) Business machines and mechanical equipment belonging to Tenant which
cause noise or vibration that may be transmitted to the structure of the
Building or to any space therein to such a degree as to be objectionable to
Landlord or to any tenants in the Building shall be placed and maintained
by Tenant, at Tenant's expense, on vibration eliminators or other devices
sufficient to eliminate noise or vibration. The persons employed to move
such equipment in or out of the Building must be acceptable to Landlord.
14. No Tenant shall place a load upon any floor of the premises which exceeds
the load per square foot which such floor was designed to carry and which
is allowed by law. No Tenant shall mark, or drive nails, screw or drill
into, the partitions, woodwork or plaster or in any way deface such
premises or any part thereof.
15. Each Tenant shall store all its trash and garbage within the interior of
its premises. No material shall be placed in the trash boxes or receptacles
if such material is of such nature that it may not be disposed of in the
ordinary and customary manner of removing and disposing of trash and
garbage in the city without violation of any law or ordinance governing
such disposal. All trash, garbage and refuse disposal shall be made only
through entryways and elevators for such purposes and at such times as
Landlord shall designate.
/s/ Landlord [SIGNATURE ILLEGIBLE]
/s/ Tenant [SIGNATURE ILLEGIBLE]
PAGE 2 - Exhibit B
<PAGE>
16. Canvassing, soliciting, distribution of handbills or any other written
material, and peddling in the Building are prohibited and each Tenant shall
cooperate to prevent the same. No Tenant shall make room-to-room
solicitation of business from other tenants in the Building.
17. Landlord shall have the right, exercisable without notice and without
liability to any Tenant, to change the name and address of the Building.
18. Landlord reserves the right to exclude or expel from the Building any
person who, in Landlord's judgment, is intoxicated or under the influence
of liquor or drugs or who is in violation of any of the rules and
regulations of the Building.
19. Without the prior written consent of Landlord, Tenant shall not use the
name of the Building in connection with or in promoting or advertising the
business of Tenant except as Tenant's address.
20. Tenant shall comply with all safety, fire protection and evacuation
procedures and regulations established by Landlord or any governmental
agency. Tenant shall not bring any explosives, fireworks or firearms into
the building or allow the same to be kept in the Premises, regardless of
whether or not any laws are being violated.
21. Tenant assumes any and all responsibility for protecting its Premises from
theft, robbery and pilferage, which includes keeping doors locked and other
means of entry to the Premises closed.
22. Tenant shall use carpet protector under all desk chairs.
23. This is a "smoke free" Building. Smoking of any kind is NOT allowed in any
area of the Building including all lobbies, common areas, restrooms,
stairways and all tenant spaces.
24. Landlord may waive any one or more of these Rules and Regulations for the
benefit of any particular Tenant or Tenants, but no such waiver by Landlord
shall be construed as a waiver of such Rules and Regulations in favor of
any other Tenant or Tenants, nor prevent Landlord from thereafter enforcing
any such Rules and Regulations against any or all Tenants in the Building.
25. Landlord reserves the right to make such other and reasonable rules and
regulations as in its judgment from time to time be needed for safety and
security, for care and cleanliness of the Building and for the preservation
of good order therein. Tenant agrees to abide by all such Rules and
Regulations herein above stated and any additional rules and regulations
which are adopted.
26. Tenant shall be responsible for the observance of all of the foregoing
Rules and Regulations by Tenant's employees, agents, clients, customers,
invitees and guests.
27. These Rules and Regulations are in addition to, and shall not be construed
to in any way modify, alter or amend, in whole or in part, the terms,
covenants, agreements and conditions of any Lease of Premises in the
Building.
/s/ Landlord [SIGNATURE ILLEGIBLE]
/s/ Tenant [SIGNATURE ILLEGIBLE]
PAGE 3 - Exhibit B
<PAGE>
EXHIBIT A TO LEASE DATED 1/29/99 BY AND BETWEEN COLUMBIA SQUARE, L.L.C. AN
OREGON LIMITED LIABILITY COMPANY, LANDLORD, AND HARDEN AND COMPANY INSURANCE
SERVICES, INC.; A CALIFORNIA CORPORATION DBA PACIFIC HERITAGE ADMINISTRATORS
LANDLORD /s/ SIGNATURE ILLEGIBLE TENANT /s/ SIGNATURE ILLEGIBLE
6TH FLOOR PLAN
COLUMBIA SQUARE BUILDING
[DIAGRAM APPEARS HERE]
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 3,942,239
<SECURITIES> 0
<RECEIVABLES> 434,099
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,582,140
<PP&E> 2,688,118
<DEPRECIATION> 2,067,918
<TOTAL-ASSETS> 5,862,935
<CURRENT-LIABILITIES> 5,440,406
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 94,201
<TOTAL-LIABILITY-AND-EQUITY> 5,862,935
<SALES> 0
<TOTAL-REVENUES> 2,473,882
<CGS> 0
<TOTAL-COSTS> 3,013,168
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 34,819
<INCOME-PRETAX> (550,713)
<INCOME-TAX> 4,870
<INCOME-CONTINUING> (555,583)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (555,583)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
