<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarter Ended June 30, 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 June 30, 1999, the Registrant had 4,710,056 shares of common stock
outstanding.
This document is comprised of 19 pages
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ANCHOR PACIFIC UNDERWRITERS, INC.
INDEX
<TABLE>
<S> <C>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets, June 30, 1999 (unaudited) and
December 31, 1998.............................................. 1
Consolidated Statements of Operations (unaudited) for the
six months and quarters ended June 30, 1999 and 1998........... 3
Consolidated Statements of Shareholders' Equity (Deficit)
for the six months ended June 30, 1999 (unaudited) and year
ended December 31, 1998........................................ 4
Consolidated Statements of Cash Flows (unaudited ) for the
six months ended June 30, 1999 and 1998........................ 5
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.............................................. 16
Item 2. Changes in Securities.......................................... 16
Item 3. Defaults Upon Senior Securities................................ 16
Item 4. Submission of Matters to a Vote of Security Holders............ 16
Item 5. Other Information.............................................. 16
Item 6. Exhibits and Reports on Form 8-K............................... 16
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
Anchor Pacific Underwriters, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ -----------
(unaudited)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents - corporate funds $ 76,184 $ 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) 414,690 527,827
Prepaid expenses and other current assets 304,351 191,749
----------- -----------
Total current assets 4,512,686 6,430,482
----------- -----------
Property and equipment 2,790,353 2,561,111
Accumulated depreciation and amortization (2,128,916) (2,010,633)
----------- -----------
661,437 550,478
Other assets:
Intangible assets, net 560,873 593,933
Other 68,223 80,431
----------- -----------
629,096 674,364
----------- -----------
Total assets $ 5,803,219 $ 7,655,324
----------- -----------
</TABLE>
1
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Anchor Pacific Underwriters, Inc. and Subsidiaries
Consolidated Balance Sheets (continued)
<TABLE>
<CAPTION>
June 30, 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 488,431 619,798
Accrued expenses 587,085 613,256
Short-term debt 175,000 200,000
Current portion of long-term debt 536,523 1,242,950
Current portion of long-term liabilities 298,055 451,068
----------- -----------
Total current liabilities 5,802,555 6,644,844
----------- -----------
Long-term liabilities 435,320 453,226
----------- -----------
Long-term debt, including $315,000 and $480,000 in
1999 and 1998, respectively, owed to related parties 781,841 858,342
----------- -----------
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; 4,710,056 shares issued as
of 6/30/99 and 4,710,057 as of 12/31/98 94,201 94,201
Additional paid-in capital 4,232,265 4,232,265
Accumulated deficit (5,542,963) (4,627,554)
----------- -----------
Total shareholders' equity (deficit) (1,216,497) (301,088)
----------- -----------
Total liabilities and shareholders' equity (deficit) $ 5,803,219 $ 7,655,324
----------- -----------
</TABLE>
See accompanying notes.
2
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Anchor Pacific Underwriters, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Six Months Quarters
Ended June 30, Ended June 30,
------------------------------- ---------------------------------
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Revenues:
Administrative fees and other income $5,024,437 $6,526,613 $2,556,792 $3,139,960
Interest Income 8,956 6,048 2,719 2,282
---------- ---------- ---------- ----------
Total revenue 5,033,393 6,532,661 2,559,511 3,142,242
Operating expenses:
Salaries, commissions and employee benefits 3,727,473 4,080,421 1,812,253 1,974,881
Selling, general and administrative expenses 2,109,283 2,272,427 1,011,335 1,052,314
---------- ---------- ---------- ----------
Total operating expenses 5,836,756 6,352,848 2,823,588 3,027,195
---------- ---------- ---------- ----------
(803,363) 179,813 (264,077) 115,047
Other income (expense):
Amortization of goodwill & intangible assets (33,060) (22,534) (16,530) (11,267)
Interest (75,467) (115,384) (40,648) (49,738)
Other 1,351 13,180 (38,571) 8,416
---------- ---------- ---------- ----------
Total other income (expense) (107,176) (124,738) (95,749) (52,589)
---------- ---------- ---------- ----------
Income (loss) before income taxes (910,539) 55,075 (359,826) 62,458
Benefit (provision) for income taxes 4,870 6,220 - -
---------- ---------- ---------- ----------
Income (loss)from continuing operations $ (915,409) $ 48,855 $ (359,826) $ 62,458
---------- ---------- ---------- ----------
Discontinued operations:
Income from discontinued operations,
net of income taxes - 79,655 - 13,658
---------- ---------- ---------- ----------
Income from discontinued operations - 79,655 - 13,658
---------- ---------- ---------- ----------
Net income (loss) $ (915,409) $ 128,510 $ (359,826) $ 76,116
---------- ---------- ---------- ----------
Net income (loss) per share:
Income (Loss) from continuing operations $ (0.19) $ 0.01 $ (0.19) $ 0.01
Income from discontinued operations - 0.02 - 0.01
---------- ---------- ---------- ----------
Basic and diluted income (loss) per
common share $ (0.19) $ 0.03 $ (0.19) $ 0.02
---------- ---------- ---------- ----------
Weighted average number of
common shares outstanding 4,710,056 4,710,057 4,710,056 4,710,057
---------- ---------- ---------- ----------
</TABLE>
See accompanying notes
3
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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)
Canceled stock -
Fractional shares (1) - - - -
Net Loss - - - (915,409) (915,409)
----------------------------------------------------------------------------------
Balance at June 30, 1999
(Unaudited) 4,710,056 $94,201 $4,232,265 $(5,542,963) $(1,216,497)
----------------------------------------------------------------------------------
</TABLE>
See accompanying notes
4
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Anchor Pacific Underwriters, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
-------------------------------------
1999 1998
<S> <C> <C>
Continuing operations activities:
Net income (loss) $ (915,409) $ 128,510
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 118,090 139,532
Amortization of goodwill, other intangibles
and organization expenses 33,060 23,695
Changes in operating assets and liabilities, net
of effect of purchases of subsidiaries:
Accounts receivable 113,137 45,422
Prepaid expenses and other current assets (112,602) 128,962
Other assets 12,208 80,376
Accounts payable and accrued expenses (267,547) (103,729)
----------- ---------
Net cash provided by (used in) operating activities (1,019,063) 442,768
----------- ---------
Investment activities:
Purchases of property and equipment (229,049) (226,565)
Net proceeds from sale of assets 2,165,004 -
----------- ---------
Net cash provided by (used in) investing activities 1,935,955 (226,565)
----------- ---------
Financing activities:
Borrowings on long-term debt 344,000 261,379
Repayment on long-term debt and liabilities (1,322,847) (286,668)
----------- ---------
Net cash (used in) financing activities (978,847) (25,289)
----------- ---------
Net increase (decrease) in cash (61,955) 190,914
Cash and cash equivalents-corporate funds at
beginning of period 138,139 44,384
----------- ---------
Cash and cash equivalents-corporate funds at
end of period 76,184 235,298
----------- ---------
Supplemental cash flow information:
Cash paid during the period for:
Interest 75,467 115,384
----------- ---------
Income taxes 4,870 6,220
----------- ---------
</TABLE>
See accompanying notes
5
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ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 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 six month period ended June 30, 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 a 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
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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 June 30, 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. Subsequently, certain purchasers agreed to
extend the term of the Bridge Notes and as of June 30, 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 the Series B Debentures offering on
January 25, 1999, Anchor had raised $495,000, with $200,000 provided by 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 allowed
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
June 30, 1999,
7
<PAGE>
Anchor has repurchased $230,000 of 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 July 30, 1999, Anchor had raised $144,000 and had
oral commitments from investors to purchase an additional $50,000 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. As of June 30, 1999, $734,364 of the
bank term loan remained outstanding.
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.
On April 29, 1999, Anchor obtained a new $250,000 bank loan from its
primary lender. 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 month
term; (c) principal plus all accrued unpaid interest due at maturity, September
30, 1999; and (d) a five year warrant to acquire 100,000 shares of Anchor common
stock at a purchase price of $0.60 per share. The proceeds of
8
<PAGE>
the loan were used to support current working capital needs of Anchor.
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.
In connection with the closure of the Los Angles office, approximately 15
employees who worked in that office were laid-off.
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 1999, Anchor has reorganized its Harden Group senior management
structure to be more responsive to the demands of an evolving marketplace.
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 -- Six Months Ended June 30, 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 six months ended June 30, 1999, were
$5,033,393, a decrease of $1,499,268 or 23.0%, as compared to $6,532,661 in
revenues for the same period in 1998. The decrease in revenue in this six 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 six months of 1999, were $5,024,437, a decrease of
$1,502,176 or 23.0%, as compared to $6,526,613 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 six months 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
$8,956 and $6,048 for the six months ended June 30, 1999 and 1998, respectively.
10
<PAGE>
Expenses
Total Expenses. Total operating expenses for the first six months of 1999,
were $5,836,756, a decrease of $516,092 or 8.1% as compared to operating
expenses of $6,352,848 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 closure of Harden Group's Los Angeles office as well as the
reduction of staff at the Concord, Portland and Scottsdale offices in response
to the reduction in revenues.
Employee Compensation and Benefits. Employee compensation and benefits for
the first six months of 1999, were $3,727,473, a decrease of $352,948 or 8.7% as
compared to $4,080,421 for the same period in 1998. The decrease related
primarily to the closure of Harden Group's Los Angeles office and the reduction
of staff at the Concord, Portland and Scottsdale offices in response to the
reduction in revenue.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $2,109,283 and $2,272,427 for the six months ended
June 30, 1999 and 1998, respectively. The $163,144 or 7.2% decrease in 1999, as
compared to 1998, resulted primarily from the 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 $75,467 and $115,384, for the first
six months of 1999 and 1998, respectively. The decrease in interest expense of
$39,917 in the first six months 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 $33,060
and $22,534, for the first six months of 1999 and 1998, respectively.
Income Taxes
Anchor's expense for income taxes was $4,870 for the first six months of
1999 as compared to $6,220 for the first six months of 1998.
Results of Continuing Operations -- Quarters Ended June 30, 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 second quarter of 1999, were
$2,559,511, an decrease of $582,731 or 18.6%, as compared to 1998 second quarter
revenues of $3,142,242. 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 second quarter of 1999, were $2,556,792, a decrease of $583,168
or 18.6%, as compared to $3,139,960 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 second 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
11
<PAGE>
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
$2,719 and $2,282 for the quarters ended June 30, 1999 and 1998, respectively.
Expenses
Total Expenses. Total operating expenses for the second quarter of 1999,
were $2,823,588, a decrease of $203,607 or 6.7% as compared to operating
expenses of $3,027,195 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 closure of Harden Group's Los Angeles office as well as the
reduction of staff at the Concord, Portland and Scottsdale offices in response
to the reduction in revenues.
Employee Compensation and Benefits. Employee compensation and benefits for
the second quarter of 1999, were $1,812,253, a decrease of $162,628 or 8.2% as
compared to $1,974,881 for the same period in 1998. The decrease related
primarily to the closure of Harden Group's Los Angeles office as well as the
reduction of staff at the Concord, Portland and Scottsdale offices in response
to the reduction in revenues.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $1,011,335 and $1,052,314 for the quarters ended
June 30, 1999 and 1998, respectively. The $40,979 or 3.9% decrease in 1999, as
compared to 1998, resulted primarily from the 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 $40,648 and $49,738, for the second
quarter of 1999 and 1998, respectively. The decrease in interest expense of
$9,090 in the second 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 second 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 minimum annual required tax payment due was reported during the
first quarter 1999 and 1998. Therefore, there was no income tax expense reported
for the quarters ended June 30, 1999 and 1998, respectively. An analysis of
Anchor's provision for income taxes is presented in Note 9 of the Notes to
Consolidated Financial Statements in Anchor's Form 10-K for the year ending
December 31, 1998.
Liquidity and Capital Resources
Anchor reported net cash flows (used in) by operations of $(1,019,063) for
the six months ended June 30, 1999, compared to net cash flows provided by
operations of $442,768 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 $229,049 and
$226,565 for the six months ended June 30, 1999 and 1998, respectively. The 1999
expenditures primarily involved expenditures related to software development and
implementation to update the eligibility and claims processing system.
12
<PAGE>
Short-term borrowings, current portion of long-term debt and current
portion of long-term liabilities at June 30, 1999, totaling in the aggregate
$1,009,578 (as compared to $1,894,018 at December 31, 1998), consisted of: (a)
$571,523 representing the current portion of the term bank loans further
described in footnote 9 to the Financial Statements, above; (b) approximately
$60,435 of future fixed payments under a consulting agreement entered into with
a company affiliated with the former shareholders of Harden-AZ; (c) $43,082
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 $47,400 representing obligations relating to the
purchase of furniture, fixtures and computer equipment at the PHA location; and
(g) approximately $147,138 for certain other current liabilities.
At June 30, 1999, long-term liabilities and long-term debt, less the
current portion discussed above, totaled $1,217,161 (as compared to $1,311,568
at December 31, 1998), and primarily consisted of: (a) $412,841 representing the
long-term portion outstanding under a term bank loan further described in
footnote 9 to the Financial Statements, above; (b) approximately $338,231
representing deferred rent with regard to certain real property currently leased
by Anchor; (c) $250,000 of Series B Debentures; (d) $119,000 of Series C
Debentures; and (e) approximately $97,089 for certain other long-term
liabilities. In May 1995, PKW entered into a sublease with respect to 82% of the
office space previously occupied by PKW. The terms of the sublease required PKW
to provide a rent subsidy. 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. In December 1995, PKW entered into a sublease with
respect to an additional 10% of the office space previously occupied by PKW. The
sublease expires on November 30, 1999, and required PKW to provide a rent
subsidy. In October 1997, PKW entered into a sublease with the respect to the
remaining 8% of the office space previously occupied by PKW. The sublease
expires on November 30, 1999, and required PKW to provide a rent subsidy.
Following the sale of PKW, Anchor has assumed these remaining lease obligations
all of 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
Impact of Year 2000. Anchor is currently in the process of addressing a
--------------------
problem that is facing all users of automated information systems. The "Year
2000 Issue" is the result of computer programs being written using two digits
rather than four to define the applicable year. Computer programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This situation could result in a system failure or
miscalculations causing disruptions to operations, including, among other
things, a temporary inability to process transactions, send payments, or engage
in similar normal business activities.
State of Readiness. 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 an 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).
13
<PAGE>
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 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 and billing systems are currently Year 2000
compliant.
Conversion: Converting entire system to RIMS, which is Year
2000 compliant. Conversion scheduled for
completion by year-end 2000.
Costs to Address the Year 2000 Issue. 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.
14
<PAGE>
Risks Presented by the Year 2000 Issue. The failure to correct a material
---------------------------------------
Year 2000 problem could result in an interruption in, or a failure of, certain
normal business activities or operations. Such failures could materially and
adversely affect Anchor's results of operations, liquidity and financial
condition. Due to the general uncertainty inherent in the Year 2000 problem,
resulting in part from the uncertainty of the Year 2000 readiness of its key
business partners, vendors and other suppliers, Anchor is unable to determine at
this time whether the consequences of Year 2000 failures will have a material
impact on Anchor's results of operations, liquidity or financial condition.
Anchor believes that, with the completion of the Project as currently scheduled,
the possibility of significant interruptions of normal operations should be
reduced.
Readers are cautioned that forward-looking statements contained in the Year
2000 Update should be read in conjunction with Anchor's disclosures below under
the head "Forward-Looking Information".
Forward-Looking Statements
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. 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 filing. 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 current operations and future expansion; the cyclical nature
of the health insurance markets; and unanticipated regulatory changes. Other
risk factors are detailed in Anchor's filings with the Securities and Exchange
Commission. Anchor assumes no obligation to update forward-looking statements.
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
experienced steady expansion. Revenues derived from the operations of Harden
Group, as a percentage of Anchor's overall revenues, grew from 57% at December
31, 1996 to 80% at December 31, 1998. Conversely, Anchor's property and casualty
insurance business was 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 during mid-1998
reflected these developments. In light of these external and internal trends,
the Board of Directors made a strategic decision during mid-1998 to sell PKW,
the property and casualty insurance brokerage operation. This transaction was
completed, effective December 31, 1998.
15
<PAGE>
Anchor's current strategy is to focus on expanding Harden Group, its third-
party administration services division by: (a) continuing to develop, through
its marketing partners, specialized affiliated business units that target
selected insurance industry market segments defined by industry type, geographic
location and consumer demographics; (b) creating new products and services; and
(c) strengthening management, sales and marketing staff. In conjunction with
this strategy, Anchor intends to seek to manage its affairs to achieve expansion
through internal growth of its existing and new product lines. Anchor also
intends to consider new acquisition and merger opportunities in the third-party
administration services business.
As part of its strategy to focus on the third-party administration services
business, Anchor has re-organized its Harden Group senior management structure
to be more responsive to the demands of an evolving marketplace. To that end,
effective May 1, 1999, senior management of Harden Group was consolidated into
four positions from the previous structure of nine officers in three geographic
operations (Concord, CA, Portland, OR and Scottsdale, AZ).
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Anchor and its subsidiaries are parties from time to time to various
lawsuits that arise in the normal course of business. Management is not aware of
any lawsuits to which Anchor or its subsidiaries is currently a party or to
which any property of Anchor or any of its subsidiaries is subject, which might
materially adversely affect the financial condition or results of operations of
Anchor.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
10.35 Business Loan Agreement dated April 29, 1999, between Anchor and
Imperial Bank, and related documents.
27.0 Financial Data Schedule
B. Reports on Form 8-K
None
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Anchor
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ANCHOR PACIFIC UNDERWRITERS, INC.
Date: August 6, 1999 /s/ James R. Dunathan
------------------ -------------------------------------------------
James R. Dunathan
President and Chief Executive Officer
Date: August 6, 1999 /s/ Earl Wiklund
------------------ -------------------------------------------------
Earl Wiklund
Senior Vice President and Chief Financial Officer
17
<PAGE>
[LOGO OF IMPERIAL BANK APPEARS HERE]
PROMISSORY NOTE
<TABLE>
<CAPTION>
Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$250,000.00 04-28-1999 09-30-1999 613521 900
- ------------------------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular
loan or item.
- ------------------------------------------------------------------------------------------------------------------------------------
Borrower: ANCHOR PACIFIC UNDERWRITERS, INC. Lender: Imperial Bank
1800 Sutter St., #400 East Bay Regional Office
Concord, CA 94520 1331 N. California Blvd., Suite 400
Walnut Creek, CA 94596-9504
====================================================================================================================================
Principal Amount: $250,000.00 Initial Rate: 10.250% Date of Note: April 29, 1999
</TABLE>
PROMISE TO PAY. ANCHOR PACIFIC UNDERWRITERS, INC. ("Borrower") promises to pay
to Imperial Bank ("Lender"), or order, in lawful money of the United States of
America, the principal amount of Two Hundred Fifty Thousand & 00/100 Dollars
($250,000.00) or so much as may be outstanding, together with Interest on the
unpaid outstanding principal balance of each advance. Interest shall be
calculated from the date of each advance until repayment of each advance.
PAYMENT. Borrower will pay this loan in one payment of all outstanding principal
plus all accrued unpaid interest on September 30, 1999. In addition, Borrower
will pay regular monthly payments of accrued unpaid interest beginning May 30,
1999, and all subsequent interest payments are due on the same day of each month
after that. The annual interest rate for this Note is computed on a 365/360
basis; that is, by applying the ratio of the annual interest rate over a year of
360 days, multiplied by the outstanding principal balance, multiplied by the
actual number of days the principal balance is outstanding. Borrower will pay
Lender at Lender's address shown above or at such other place as Lender may
designate in writing. Unless otherwise agreed or required by applicable law,
payments will be applied first to any unpaid collection costs and any late
charges, then to any unpaid interest, and any remaining amount to principal.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from
time to time based on changes in an index which is the Imperial Bank Prime Rate
(the "Index"). The Prime Rate is the rate announced by Lender as its Prime Rate
of interest from time to time. Lender will tell Borrower the current Index rate
upon Borrower's request. Borrower understands that Lender may make loans based
on other rates as well. The interest rate change will not occur more often than
each day. The Index currently is 7.750%. The Interest rate to be applied to the
unpaid principal balance of this Note will be at a rate of 2,500 percentage
points over the Index, resulting in an Initial Rate: 10.250%0.250%. NOTICE:
Under no circumstances will the interest rate on this Note be more than the
maximum rate allowed by applicable law.
PREPAYMENT; MINIMUM INTEREST CHARGE. In any event, even upon full prepayment of
this Note, Borrower understands that Lender is entitled to a minimum interest
charge of $250.00. Other than Borrower's obligation to pay any minimum interest
charge, Borrower may pay without penalty all or a portion of the amount owed
earlier than it is due. Early payments will not, unless agreed to by Lender in
writing, relieve Borrower of Borrower's obligation to continue to make payments
of accrued unpaid interest. Rather, they will reduce the principal balance due.
LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged
5.000% of the unpaid portion of the regularly scheduled payment.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform when
due any other term, obligation, covenant, or condition contained in this Note or
any agreement related to this Note, or in any other agreement or loan Borrower
has with Lender. (c) Any representation or statement made or furnished to Lender
by Borrower or on Borrower's behalf is false or misleading in any material
respect either now or at the time made or furnished. (d) Borrower becomes
insolvent, a receiver is appointed for any part of Borrower's property, Borrower
makes an assignment for the benefit of creditors, or any proceeding is commenced
either by Borrower or against Borrower under any bankruptcy or insolvency laws.
(e) Any creditor tries to take any of Borrower's property on or in which Lender
has a lien or security interest. This includes a garnishment of any of
Borrower's accounts with Lender. (f) Any guarantor dies or any of the other
events described in this default section occurs with respect to any guarantor of
this Note. (g) A material adverse change occurs in Borrower's financial
condition, or Lender believes the prospect of payment or performance of the
Indebtedness is impaired. (h) Lender in good faith deems itself insecure.
If any default, other than a default in payment, is curable and if Borrower has
not been given a notice of a breach of the same provision of this Note within
the preceding twelve (12) months, it may be cured (and no event of default will
have occurred) if Borrower, after receiving written notice from Lender demanding
cure of such default: (a) cures the default within ten (10) days; or (b) if the
cure requires more than ten (10) days. Immediately initiates steps which Lender
deems in Lender's sole discretion to be sufficient to cure the default and
thereafter continues and completes all reasonable and necessary steps sufficient
to produce compliance as soon as reasonably practical.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest immediately due, without
notice, and then Borrower will pay that amount. Upon Borrower's failure to pay
all amounts declared due pursuant to this section, including failure to pay upon
final maturity, Lender, at its option, may also, if permitted under applicable
law, do one or both of the following: (a) increase the variable interest rate on
this Note to 7,500 percentage points over the Index, and (b) add any unpaid
accrued interest to principal and such sum will bear interest therefrom until
paid at the rate provided in this Note (including any increased rate). Lender
may hire or pay someone else to help collect this Note if Borrower does not pay.
Borrower also will pay Lender that amount. This includes, subject to any limits
under applicable law, Lender's attorneys' fees and Lender's legal expenses
whether or not there is a lawsuit, including attorneys' fees and legal expenses
for bankruptcy proceedings (including efforts to modify or vacate any automatic
stay or injunction), appeals, and any anticipated post-judgment collection
services. Borrower also will pay any court costs, in addition to all other sums
provided by law. This Note has been delivered to Lender and accepted by Lender
in the State of California. If there is a lawsuit, Borrower agrees upon Lender's
request to submit to the jurisdiction of the courts of Los Angeles County, the
State of California. Lender and Borrower hereby waive the right to jury trial in
any action, proceeding, or counterclaim brought by either Lender or Borrower
against the other. (Initial Here [illegible]) This Note shall be governed by and
-----------
construed in accordance with the laws of the State of California.
DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $25.00 if Borrower
makes a payment on Borrower's loan and the check or preauthorized charge with
which Borrower pays is later dishonored.
RIGHT OF SETOFF. Borrower grants to Lender a contractual security interest in,
and hereby assigns, conveys, delivers, pledges, and transfers to Lender all
Borrower's right, title and interest in and to, Borrower's accounts with Lender
(whether checking, savings, or some other account), including without limitation
all accounts held jointly with someone else and all accounts Borrower may open
in the future, excluding however all IRA and Keogh accounts, and all trust
accounts for which the grant of a security interest would be prohibited by law.
Borrower authorizes Lender, to the extent permitted by applicable law, to charge
or setoff all sums owing on this Note against any and all such accounts.
LINE OF CREDIT. This Note evidences a straight line of credit. Once the total
amount of principal has been advanced, Borrower is not entitled to further loan
advances. Advances under this Note may be requested orally by Borrower or by an
authorized person. All oral requests shall be confirmed in writing on the day of
the request. All communications, instructions, or directions by telephone or
otherwise to Lender are to be directed to Lender's office shown above. The
following party or parties are authorized to request advances under the line of
credit until Lender receives from Borrower at Lender's address shown above
written notice of revocation of their authority: James R. Dunathan,
President/CEO; and Earl Wiklund, Senior VP/CFO/Secretary. Borrower agrees to be
liable for all sums either: (a) advanced in accordance with the instructions of
an authorized person or (b) credited to any of Borrower's accounts with Lender.
The unpaid principal balance owing on this Note at any time may be evidenced by
endorsements on this Note or by Lender's internal records, including daily
computer print-outs. Lender will have no obligation to advance funds under this
Note if: (a) Borrower or any guarantor is in default under the terms of this
Note or any agreement that Borrower or any guarantor has with Lender, including
any agreement made in connection with the signing of this Note; (b) Borrower or
any guarantor ceases doing business or is insolvent; (c) any guarantor seeks,
claims or otherwise attempts to limit, modify or revoke such guarantor's
guarantee of this Note or any other loan with Lender; (d) Borrower has applied
funds provided pursuant to this Note for purposes other than those authorized by
Lender; or (e) Lender in good faith deems itself insecure under this Note or any
other agreement between Lender and Borrower.
CREDIT TERMS AND CONDITIONS AGREEMENT. This Note is subject to the provisions of
the Credit Terms and Conditions Agreement dated September 30, 1997 and all
amendments thereto and replacements therefor.
<PAGE>
04-29-1999 PROMISSORY NOTE Page 2
(Continued)
================================================================================
GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or
remedies under this Note without losing them. Borrower and any other person who
signs, guarantees or endorses this Note, to the extent allowed by law, waive any
applicable statute of limitations, presentment, demand for payment, protest and
notice of dishonor. Upon any change in the terms of this Note, and unless
otherwise expressly stated in writing, no party who signs this Note, whether as
maker, guarantor, accommodation maker or endorser, shall be released from
liability. All such parties agree that Lender may renew or extend (repeatedly
and for any length of time) this loan, or release any party or guarantor or
collateral; or impair, fail to realize upon or perfect Lender's security
interest in the collateral; and take any other action deemed necessary by Lender
without the consent of or notice to anyone. All such parties also agree that
Lender may modify this loan without the consent of or notice to anyone other
than the party with whom the modification is made.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO
THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE.
BORROWER:
ANCHOR PACIFIC UNDERWRITERS, INC.
X /s/ J. R. Dunathan
-------------------------------------
Authorized Officer
<PAGE>
AMENDED AND RESTATED
ADDENDUM
TO CREDIT TERMS AND CONDITIONS
DATED SEPTEMBER 30, 1997
This Amended and Restated Addendum ("Restatement") amends and restates that
certain Addendum to Credit Terms and Conditions dated September 30, 1997, by and
between Imperial Bank ("Bank") and Anchor Pacific Underwriters, Inc.
("Borrower") as previously amended (the "Addendum") (collectively herein the
Credit Terms and Conditions and the Addendum are referred to as the "Agreement")
as follows:
1. Paragraph B.4. of Credit Terms and Conditions is hereby deleted.
2. Bank to receive a warrant for 95,000 shares of Anchor Pacific Underwriters,
Inc. Common Stock exercisable at $1.75 per share with an Issue Date of October
1, 1997 and an Expiration Date of September 30, 2002. Bank to receive an
additional warrant for 80,000 shares of Anchor Pacific Underwriters, Inc. Common
Stock exercisable at $0.50 per share with an Issue Date of November 25, 1998 and
Expiration Date of November 25, 2003. Bank to receive an additional warrant for
100,000 shares of Anchor Pacific Underwriters, Inc. Common Stock exercisable at
$0.60 per share with an Issue Date of April 30, 1999 and Expiration Date of May
1, 2004.
3. All corporate balances of Borrower and those under its control to be
maintained with Bank.
4. Bank to receive a perfected first priority security interest in and UCC-1
filings on all Borrower and subsidiary assets, and direct assignment of 100% of
the capital stock of all of Borrower's subsidiaries.
5. Loan to be guaranteed by each of Borrower's subsidiaries.
6. Year 2000 Compliance.
a. Borrower affirmatively covenants that it will perform all acts
reasonably necessary to ensure that (i) Borrower and any business in which
Borrower holds a substantial interest, and (ii) all customers, suppliers and
vendors that are material to Borrower's business, become Year 2000 Compliant in
a timely manner. Such acts shall include, without limitation, performing a
comprehensive review and assessment of all Borrower's systems and adopting a
detailed plan, with itemized budget, for the remediation, monitoring and testing
of such systems. As used in this paragraph, "Year 2000 Compliant" shall mean, in
regard to any entity, that all software, hardware, firmware, equipment, goods or
systems utilized by or material to the business operations or financial
condition of such entity, will properly perform date sensitive functions before,
during and after
<PAGE>
Anchor Pacific Underwriters, Inc.
Amended and Restated Addendum To Credit Terms and Conditions, Dated
September 30, 1997
April 30, 1999
the year 2000. Borrower shall, immediately upon request, provide to Bank such
certifications or other evidence of Borrower's compliance with the terms of this
paragraph as Bank may from time to time require.
b. Borrower and its subsidiaries, as applicable, represent and warrant
that they have reviewed the areas within their operations and business which
could be adversely affected by, and have developed or are developing a program
to address on a timely basis, the Year 2000 Problem and have made related
appropriate inquiry of material suppliers and vendors, and based on such review
and program, the Year 2000 Problem will not have a material adverse effect upon
their financial condition, operations or business as now conducted. "Year 2000
Problem" means the possibility that any computer applications or equipment used
by Borrower may be unable to recognize and properly perform date sensitive
functions involving certain dates prior to and any dates on or after December
31, 1999."
7. Reference Provision.
(a) Other than (i) nonjudicial foreclosure and all matters in connection
therewith regarding security interests in real or personal property; or (ii) the
appointment of a receiver, or the exercise of other provisional remedies (any
and all of which may be initiated pursuant to applicable law), each controversy,
dispute or claim between the parties arising out of or relating to this Credit
Agreement, any security agreement executed by Borrower in favor of Bank or any
note executed by Borrower in favor of Bank or any other agreement or instrument
issued in favor of Bank by Borrower (collectively in this Section, the
"Agreement") which controversy, dispute or claim is not settled in writing
within thirty (30) days after the "Claim Date" (defined as the date on which a
----------
party subject to this Agreement gives written notice to all other parties that a
controversy, dispute or claim exists), will be settled by a reference proceeding
in California in accordance with the provisions of Section 638 et seq. of the
-- ---
California Code of Civil Procedure, or their successor section ("CCP"), which
---
shall constitute the exclusive remedy for the settlement of any controversy,
dispute or claim concerning this Agreement, including whether such controversy,
dispute or claim is subject to the reference proceeding and except as set forth
above, the parties waive their rights to initiate any legal proceedings against
each other in any court or jurisdiction other than the Superior Court in the
County where the Real Property, if any, is located or Los Angeles County if none
(the "Court"). The referee shall be a retired Judge of the Court selected by
-----
mutual agreement of the parties, and if they cannot so agree within forty-five
(45) days after the Claim Date, the referee shall be promptly selected by the
Presiding Judge of the Court (or his representative). The referee shall be
appointed to sit as a temporary judge, with all of the powers for a temporary
judge, as authorized by law, and upon selection should take and subscribe to the
oath of office as provided for in Rule 244 of the California Rules of Court (or
any subsequently enacted Rule). Each party shall have one peremptory challenge
pursuant to CCP (S)170.6. The referee shall (a) be requested to set the matter
for hearing within sixty (60) days after the date of selection of the referee
and (b) try any and all issues of law or fact and report a statement of decision
upon them, if possible, within ninety (90) days of the Claim Date. Any decision
rendered by the referee will be final, binding and conclusive and judgment
2
<PAGE>
Anchor Pacific Underwriters, Inc.
Amended and Restated Addendum To Credit Terms and Conditions, Dated
September 30, 1997
April 30, 1999
shall be entered pursuant to CCP (S)644 in any court in the state of California
having jurisdiction. Any party may apply for a reference proceeding at any time
after thirty (30) days following notice to any other party of the nature of the
controversy, dispute or claim, by filing a petition for a hearing and/or trial.
All discovery permitted by this Agreement shall be completed no later than
fifteen (15) days before the first hearing date established by the referee. The
referee may extend such period in the event of a party's refusal to provide
requested discovery for any reason whatsoever, including, without limitation,
legal objections raised to such discovery or unavailability of a witness due to
absence or illness. No party shall be entitled to "priority" in conducting
discovery. Depositions may be taken by either party upon seven (7) days written
notice, and request for production or inspection of documents shall be responded
to within ten (10) days after service. All disputes relating to discovery which
cannot be resolved by the parties shall be submitted to the referee whose
decision shall be final and binding upon the parties. Pending appointment of the
referee as provided herein, the Superior Court is empowered to issue temporary
and/or provisional remedies, as appropriate.
(b) Except as expressly set forth in this Agreement, the referee shall
determine the manner in which the reference proceeding is conducted including
the time and place of all hearings, the order of presentation of evidence, and
all other questions that arise with respect to the course of the reference
proceeding. All proceedings and hearings conducted before the referee, except
for trial, shall be conducted without a court reporter except that when any
party so requests, a court reporter will be used at any hearing conducted before
the referee. The party making such a request shall have the obligation to
arrange for and pay for the court reporter. The costs of the court reporter at
the trial shall be borne equally by the parties.
(c) The referee shall be required to determine all issues in accordance
with existing case law and the statutory laws of the state of California. The
rules of evidence applicable to proceedings at law in the state of California
will be applicable to the reference proceeding. The referee shall be empowered
to enter equitable as well as legal relief, to provide all temporary and/or
provisional remedies and to enter equitable orders that will be binding upon the
parties. The referee shall issue a single judgment at the close of the reference
proceeding which shall dispose of all of the claims of the parties that are the
subject of the reference. The parties hereto expressly reserve the right to
contest or appeal from the final judgment or any appealable order or appealable
judgment entered by the referee. The parties hereto expressly reserve the right
to findings of fact, conclusions of laws, a written statement of decision, and
the right to move for a new trial or a different judgment, which new trial, if
granted, is also to be a reference proceeding under this provision.
(d) In the event that the enabling legislation which provides for
appointment of a referee is repealed (and no successor statute is enacted), any
dispute between the parties that would otherwise be determined by the reference
procedure herein described will be resolved and determined by arbitration. The
arbitration will be conducted by a retired judge of the Court, in accordance
with the California Arbitration Act, (S)1280 through (S)1294.2 of the CCP as
amended from time to time. The limitations with respect to discovery as set
forth hereinabove shall apply to any such arbitration proceeding.
3
<PAGE>
Anchor Pacific Underwriters, Inc.
Amended and Restated Addendum To Credit Terms and Conditions, Dated
September 30, 1997
April 30, 1999
8. Except as provided above, the Agreement remains unchanged.
9. This Restatement shall be effective as of April 30, 1999 and the parties
hereby confirm that the Agreement as amended is in full force and effect.
Anchor Pacific Underwriters, Inc. Imperial Bank
"Borrower" "Bank"
By: /s/ James R. Dunathan By: /s/ Joseph J. McCarthy
James R. Dunathan
President and CEO Its: Vice President
By: /s/ Earl Wiklund
Earl Wiklund
Senior Vice President & Secretary
4
<PAGE>
THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR
OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT
OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE
CORPORATION AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED.
WARRANT TO PURCHASE STOCK
Corporation: Anchor Pacific Underwriters, Inc, a Delaware
corporation
Number of Shares: 100,000
Class of Stock: Common Stock
Initial Exercise Price: $0.60 per share
Issue Date: April 30, 1999
Expiration Date: May 1, 2004 (Subject to Article 4.1)
THIS WARRANT CERTIFIES THAT, in consideration of the payment of $1.00 and
for other good and valuable consideration, IMPERIAL BANCORP or registered
assignee ("Holder") is entitled to purchase the number of fully paid and
nonassessable shares of the class of securities (the "Shares") of the
corporation (the "Company") at the initial exercise price per Share (the
"Warrant Price") all as set forth above and as adjusted pursuant to Article 2 of
this Warrant, subject to the provisions and upon the terms and conditions set
forth of this Warrant.
ARTICLE 1. EXERCISE
--------
1.1 Method of Exercise. Holder may exercise this Warrant by delivering
------------------
this Warrant and a duly executed Notice of Exercise in substantially the form
attached as Appendix 1 to the principal office of the Company. Unless Holder is
exercising the conversion right set forth in Section 1.2, Holder shall also
deliver to the Company a check for the aggregate Warrant Price for the Shares
being purchased.
1.2 Conversion Right. In lieu of exercising this Warrant as specified in
----------------
Section 1.1, Holder may from time to time convert this Warrant, in whole or in
part, into a number of Shares determined by dividing (a) the aggregate fair
market value of the Shares or other securities otherwise issuable upon exercise
of this Warrant minus the aggregate Warrant Price of such Shares by (b) the fair
market value of one Share. The fair market value of the Shares shall be
determined pursuant to Section 1.5.
1.3 Omitted
-------
1.4 Omitted
-------
1.5 Fair Market Value. For Purposes of determining conversion rights
-----------------
under Section 1.2, if the Shares are traded regularly in a public market, the
fair market value of the Shares shall be the closing price of the Shares (or the
closing price of the Company's stock into which the Shares are convertible)
reported for the business day immediately before Holder delivers its Notice of
Exercise to the Company.
<PAGE>
If the Shares are not regularly traded in a public market, the Board of
Directors of the Company shall determine fair market value in its reasonable
good faith judgment. The foregoing notwithstanding, if Holder advises the Board
of Directors in writing that Holder disagrees with such determination, then the
Company and Holder shall promptly agree upon a reputable investment banking firm
to undertake such valuation. If the valuation of such investment banking firm is
greater than that determined by the Board of Directors, then all fees and
expenses of such investment banking firm shall be paid by the Company. In all
other circumstances, such fees and expenses shall be paid by Holder.
1.6 Delivery of Certificate and New Warrant. Promptly after Holder
---------------------------------------
exercises or converts this Warrant, the Company shall deliver to Holder
certificates for the Shares acquired and, if this Warrant has not been fully
exercised or converted and has not expired, a new Warrant representing the
Shares not so acquired.
1.7 Replacement of Warrants. On receipt of evidence reasonably
-----------------------
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of loss, theft or destruction, on delivery of an
indemnity agreement reasonably satisfactory in form and amount to the Company
or, in the case of mutilation, or surrender and cancellation of this Warrant,
the Company at its expense shall execute and deliver, in lieu of this Warrant, a
new warrant of like tenor.
1.8 Repurchase on Sale, Merger, or Consolidation of the Company.
-----------------------------------------------------------
1.8.1. "Acquisition". For the purpose of this Warrant, "Acquisition"
-----------
means any sale, license, or other disposition of all or substantially all of the
assets (including intellectual property) of the Company, or any reorganization,
consolidation, or merger of the Company where the holders of the Company's
securities before the transaction beneficially own less than 50% of the
outstanding voting securities of the surviving entity after the transaction.
1.8.2. Assumption of Warrant. If upon the closing of any Acquisition
---------------------
the successor entity assumes the obligations of this Warrant, then this Warrant
shall be exercisable for the same securities, cash, and property as would be
payable for the Shares issuable upon exercise of the unexercised portion of this
Warrant as if such Shares were outstanding on the record date for the
Acquisition and subsequent closing. The Warrant Price shall be adjusted
accordingly. The Company shall use reasonable efforts to cause the surviving
corporation to assume the obligations of this Warrant.
1.8.3. Nonassumption. If upon the closing of any Acquisition the
-------------
successor entity does not assume the obligations of this Warrant and Holder has
not otherwise exercised this Warrant in full, then the unexercised portion of
this Warrant shall be deemed to have been automatically converted pursuant to
Section 1.2 and thereafter Holder shall participate in the Acquisition on the
same terms as other holders of the same class of securities of the Company.
1.8.4. Purchase Right. Notwithstanding the foregoing, at the election
--------------
of Holder, the Company shall purchase the unexercised portion of this Warrant
for cash upon the closing of any Acquisition for an amount equal to (a) the fair
market value of any consideration that would have been received by Holder in
consideration of the Shares had Holder exercised the unexercised portion of this
Warrant immediately before the record date for determining the shareholders
entitled to participate in the
<PAGE>
proceeds of the Acquisition, less (b) the aggregate Warrant Price of the Shares,
but in no event less than zero.
ARTICLE 2. ADJUSTMENTS TO THE SHARES.
-------------------------
2.1 Stock Dividends, Splits, Etc. If the Company declares or pays a
----------------------------
dividend on its common stock payable in common stock, or other securities,
subdivides the outstanding common stock into a greater amount of common stock,
then upon exercise of this Warrant, for each Share acquired, Holder shall
receive, without cost to Holder, the total number and kind of securities to
which Holder would have been entitled had Holder owned the Shares of record as
of the date the dividend or subdivision occurred.
2.2 Reclassification, Exchange or Substitution. Upon any reclassification,
------------------------------------------
exchange, substitution, or other event that results in a change of the number
and/or class of the securities issuable upon exercise or conversion of this
Warrant, Holder shall be entitled to receive, upon exercise or conversion of
this Warrant, the number and kind of securities and property that Holder would
have received for the Shares if this Warrant had been exercised immediately
before such reclassification, exchange, substitution, or other event. Such an
event shall include any automatic conversion of the outstanding or issuable
securities of the Company of the same class or series as the Shares to common
stock pursuant to the terms of the Company's Articles of Incorporation upon the
closing of a registered public offering of the Company's common stock. The
Company or its successor shall promptly issue to Holder a new Warrant for such
new securities or other property. The new Warrant shall provide for adjustments
which shall be as nearly equivalent as may be practicable to the adjustments
provided for in this Article 2 including, without limitation, adjustments to the
Warrant Price and to the number of securities or property issuable upon exercise
of the new Warrant. The provisions of this Section 2.2 shall similarly apply to
successive reclassifications, exchanges, substitutions, or other events.
2.3 Adjustments for Combinations, Etc. If the outstanding Shares are
---------------------------------
combined or consolidated, by reclassification or otherwise, into a lesser number
of shares, the Warrant Price shall be proportionately increased.
2.4 Adjustments for Diluting Issuances. The Warrant Price and the number
----------------------------------
of Shares issuable upon exercise of this Warrant shall be subject to adjustment,
from time to time, in the manner set forth on Exhibit B, if attached, in the
event of Diluting Issuances (as defined on Exhibit B).
2.5 No Impairment. The Company shall not, by amendment of its Articles of
-------------
Incorporation or through a reorganization, transfer of assets, consolidation,
merger, dissolution, issue, or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed under this Warrant by the Company, but shall at all times
in good faith assist in carrying out all the provisions of this Article 2 and in
taking all such action as may be necessary or appropriate to protect Holder's
rights under this Article against impairment. If the Company takes any action
affecting the Shares or its common stock other than as described above that
adversely affects Holder's rights under this Warrant, the Warrant Price shall be
adjusted downward and the number of Shares issuable upon exercise of this
Warrant shall be adjusted upward in such a manner that the aggregate Warrant
Price of this Warrant is unchanged.
<PAGE>
2.6 Certificate as to Adjustments. Upon each adjustment of the Warrant
-----------------------------
Price, the Company at its expense shall promptly compute such adjustment, and
furnish Holder with a certificate of its Chief Financial Officer setting forth
such adjustment and the facts upon which such adjustment is based. The Company
shall, upon written request, furnish Holder a certificate setting forth the
Warrant Price in effect upon the date thereof and the series of adjustments
leading to such Warrant Price.
ARTICLE 3. REPRESENTATIONS AND COVENANTS OF THE COMPANY.
--------------------------------------------
3.1 Representations and Warranties. The Company hereby represents and
------------------------------
warrants to the Holder that all Shares which may be issued upon the exercise of
the purchase right represented by this Warrant, and all securities, if any,
issuable upon conversion of the Shares, shall, upon issuance, be duly
authorized, validly issued, fully paid and nonassessable, and free of any liens
and encumbrances except for restrictions on transfer provided for herein or
under applicable federal and state securities laws.
3.2 Notice of Certain Events. If the Company proposes at any time (a) to
------------------------
declare any dividend or distribution upon its common stock, whether in cash,
property, stock, or other securities and whether or not a regular cash dividend;
(b) to offer for subscription pro rata to the holders of any class or series of
its stock any additional shares of stock of any class or series or other rights;
(c) to effect any reclassification or recapitalization of common stock; (d) to
merge or consolidate with or into any other corporation, or sell, lease,
license, or convey all or substantially all of its assets, or to liquidate,
dissolve or wind up; or (e) offer holders of registration rights the opportunity
to participate in an underwritten public offering of the company's securities
for cash, then, in connection with each such event, the Company shall give
Holder (1) at least 20 days prior written notice of the date on which a record
will be taken for such dividend, distribution, or subscription rights (and
specifying the date on which the holders of common stock will be entitled
thereto) or for determining rights to vote, if any, in respect of the matters
referred to in (c) and (d) above; (2) in the case of the matters referred to in
(c) and (d) above at least 20 days prior written notice of the date when the
same will take place (and specifying the date on which the holders of common
stock will be entitled to exchange their common stock for securities or other
property deliverable upon the occurrence of such event); and (3) in the case of
the matter referred to in (e) above, the same notice as is given to the holders
of such registration rights.
3.3 Information Rights. So long as the Holder holds this Warrant and/or
------------------
any of the Shares, the Company shall deliver to the Holder (a) promptly after
mailing, copies of all communiques to the shareholders of the Company, (b)
within ninety (90) days after the end of each fiscal year of the Company, the
annual audited financial statements of the Company certified by independent
public accountants of recognized standing and (c) within forty-five (45) days
after the end of each of the first three quarters of each fiscal year, the
Company's quarterly, unaudited financial statements.
3.4 Registration Under Securities Act of 1933 as amended. The Company
----------------------------------------------------
agrees that the Shares shall be subject to the registration rights set forth on
Exhibit C.
ARTICLE 4. MISCELLANEOUS.
-------------
4.1 Term; Notice of Expiration. This Warrant is exercisable, in whole or
--------------------------
in part, at any time and from time to time on or before the Expiration Date set
forth above.
<PAGE>
4.2 Legends. This Warrant and the Shares (and the securities issuable,
-------
directly or indirectly, upon conversion of the Shares, if any) shall be
imprinted with a legend in substantially the following form:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN
EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN
OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS
COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED.
4.3 Compliance with Securities Laws on Transfer. This Warrant and the
-------------------------------------------
Shares issuable upon exercise of this Warrant (and the securities issuable,
directly or indirectly, upon conversion of the Shares, if any) may not be
transferred or assigned in whole or in part without compliance with applicable
federal and state securities laws by the transferor and the transferee
(including, without limitation, the delivery of investment representation
letters and legal opinions reasonably satisfactory to the Company). The Company
shall not require Holder to provide an opinion of counsel if the transfer is to
an affiliate of Holder or if there is no material question as to the
availability of current information as referenced in Rule 144(c), Holder
represents that it has complied with Rule 144(d) and (e) in reasonable detail,
the selling broker represents that it has complied with Rule 144(f), and the
Company is provided with a copy of Holder's notice of proposed sale.
4.4 Transfer Procedure. Subject to the provisions of Section 4.2, Holder
------------------
may transfer all or part of this Warrant or the Shares issuable upon exercise of
this Warrant (or the securities issuable, directly or indirectly, upon
conversion of the Shares, if any) by giving the Company notice of the portion of
the Warrant being transferred setting forth the name, address and taxpayer
identification number of the transferee and surrendering this Warrant to the
Company for reissuance to the transferee(s) (and Holder, if applicable). Unless
the Company is filing financial information with the SEC pursuant to the
Securities Exchange Act of 1934, the Company shall have the right to refuse to
transfer any portion of this Warrant to any person who directly competes with
the Company.
4.5 Notices. All notices and other communications from the Company to the
-------
Holder, or vice versa, shall be deemed delivered and effective when given
personally or mailed by first-class registered or certified mail, postage
prepaid, at such address as may have been furnished to the Company or the
Holder, as the case may be, in writing by the Company or such Holder from time
to time.
4.6 Waiver. This Warrant and any term hereof may be changed, waived,
------
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought.
4.7 Attorneys' Fees. In the event of any dispute between the parties
---------------
concerning the terms and provisions of this Warrant, the party prevailing in
such dispute shall be entitled to collect from the other party all costs
incurred in such dispute, including reasonable attorneys' fees.
<PAGE>
4.8 Governing Law. This Warrant shall be governed by and construed in
-------------
accordance with the laws of the State of California, without giving effect to
its principles regarding conflicts of law.
Anchor Pacific Underwriters, Inc.
By:/s/ James R. Dunathan By:/s/ Earl Wiklund
--------------------- ----------------
Name: James R. Dunathan Name: Earl Wiklund
Title: President/CEO Title: Chief Financial Officer
<PAGE>
APPENDIX 1
NOTICE OF EXERCISE
------------------
1. The undersigned hereby elects to purchase _______ shares of the Common
Stock of Anchor Pacific Underwriters, Inc. pursuant to the terms of the attached
Warrant, and tenders herewith payment of the purchase price of such shares in
full.
1. The undersigned hereby elects to convert the attached Warrant into
Shares/cash [strike one] in the manner specified in the Warrant. This conversion
is exercised with respect to ________ of the Shares covered by the Warrant.
2. Please issue a certificate or certificates representing said shares in
the name of the undersigned or in such other name as is specified below:
Chief Financial Officer
Controllers Department
Imperial Bancorp
P.O. Box 92991
Los Angeles, CA 90009
or registered assignee
3. The undersigned represents it is acquiring the shares solely for its
own account and not as a nominee for any other party and not with a view toward
the resale or distribution thereof except in compliance with applicable
securities laws.
IMPERIAL BANCORP or registered assignee
____________________________________________
(Signature)
_________________
(Date)
<PAGE>
APPENDIX 2
NOTICE THAT WARRANT IS ABOUT TO EXPIRE
--------------------------------------
_______________, _______
Chief Financial Officer
Controllers Department
Imperial Bancorp
P.O. Box 92991
Los Angeles, CA 90009
or registered assignee
Dear :
This is to advise you that the Warrant issued to you described below will
expire on May 1, 2004.
Issuer: Anchor Pacific Underwriters, Inc.
Issue Date: April 30, 1999
Class of Security Issuable: Common
Exercise Price Per Share: $ 0.60
Number of Shares Issuable: 100,000
Procedure for Exercise:
Please contact Earl Wiklund at (925)-682-7707 with any questions you may
have concerning exercise of the Warrant. This is your only notice of pending
expiration.
Anchor Pacific Underwriters, Inc.
By: ___________________________
Its: __________________________
<PAGE>
EXHIBIT A
---------
Not Applicable
--------------
<PAGE>
EXHIBIT B
---------
IMPERIAL BANCORP
ANTIDILUTION AGREEMENT
----------------------
This Antidilution Agreement is entered into as of April 30, 1999, by and between
Imperial Bancorp ("Purchaser") and Anchor Pacific Underwriters, Inc. ("the
Company").
RECITALS
--------
A. Concurrently with the execution of this Antidilution Agreement, the
Purchaser is purchasing from the Company a Warrant to Purchase Stock (the
"Warrant") pursuant to which Purchaser has the right to acquire from the Company
the Shares (as defined in the Warrant).
B. By this Antidilution Agreement, the Purchaser and the Company desire to
set forth the adjustment in the number of Shares issuable upon exercise of the
Warrant as a result of a Diluting Issuance (as defined in Exhibit A to the
Warrant).
C. Capitalized terms used herein shall have the same meaning as set forth
in the Warrant.
NOW, THEREFORE, in consideration of the mutual promises, covenants and
conditions hereinafter set forth, the parties hereto mutually agree as follows:
1. Definitions. As used in this Antidilution Agreement, the following
terms have the following respective meanings:
(a) "Option" means any right, option or warrant to subscribe for, purchase
or otherwise acquire common stock or Convertible Securities.
(b) "Convertible Securities" means any evidences of indebtedness, shares of
stock or other securities directly or indirectly convertible into or
exchangeable for common stock.
(c) "Issue" means to grant, issue, sell, assume or fix a record date for
determining persons entitled to receive any security (including Options),
whichever of the foregoing is the first to occur.
(d) "Additional Common Shares" means all common stock (including reissued
shares) Issued (or deemed to be issued pursuant to Section 2) after the date of
the Warrant. Additional Common Shares does not include, however, any common
stock Issued in a transaction described in Sections 2.1 and 2.2 of the Warrant;
any common stock Issued upon conversion of preferred stock outstanding on the
date of the Warrant; the Shares; or common stock Issued as incentive or in a
nonfinancing transaction to employees, officers, directors or consultants to the
Company.
<PAGE>
(e) The shares of common stock ultimately Issuable upon exercise of an
Option (including the shares of common stock ultimately Issuable upon conversion
or exercise of a Convertible Security Issuable pursuant to an Option) are deemed
to be Issued when the Option is Issued. The shares of common stock ultimately
Issuable upon conversion or exercise of a Convertible Security (other than a
Convertible Security Issued pursuant to an Option) shall be deemed Issued upon
Issuance of the Convertible Security.
2. Deemed Issuance of Additional Common Shares. The shares of common
-------------------------------------------
stock ultimately Issuable upon exercise of an Option (including the shares of
common stock ultimately Issuable upon conversion or exercise of a Convertible
Security Issuable pursuant to an Option) are deemed to be Issued when the Option
is Issued. The shares of common stock ultimately Issuable upon conversion or
exercise of a Convertible Security (other than a Convertible Security Issued
pursuant to an Option) shall be deemed Issued upon Issuance of the Convertible
Security. The maximum amount of common stock Issuable is determined without
regard to any future adjustments permitted under the instrument creating the
Options or Convertible Securities.
3. Adjustment of Warrant Price for Diluting Issuances.
--------------------------------------------------
3.1 Ratchet Adjustment. If the Company issues Additional Common
------------------
Shares after the date of the Warrant and the consideration per Additional Common
Share (determined pursuant to Section 9) is less than the Warrant Price in
effect immediately before such Issue, the Warrant Price shall be reduced to the
lesser of:
(a) the amount of such consideration per Additional Common Share; or
(b) if the Company's common stock is traded on a national securities
exchange or the National Association of Securities Dealers Automated Quotation
System, the last reported bid or sale price of the Company's common stock on the
first trading day following a public announcement of the Issuance.
3.2 Adjustment of Number of Shares. Upon each adjustment of the
------------------------------
Warrant Price, the number of Shares Issuable upon exercise of the Warrant shall
be increased to equal the quotient obtained by dividing (a) the product
resulting from multiplying (i) the number of Shares Issuable upon exercise of
the Warrant and (ii) the Warrant Price, in each case as in effect immediately
before such adjustment, by (b) the adjusted Warrant Price.
3.3 Securities Deemed Outstanding. For the purpose of this Section 3,
-----------------------------
all securities Issuable upon exercise of any outstanding Convertible Securities
or Options, Warrants, or other rights to acquire securities of the Company shall
be deemed to be outstanding.
4. No Adjustment for Issuances Following Deemed Issuances. No
------------------------------------------------------
adjustment to the Warrant Price shall be made upon the exercise of Options or
conversion of Convertible Securities.
<PAGE>
5. Adjustment Following Changes in Terms of Options or Convertible
---------------------------------------------------------------
Securities. If the consideration payable to, or the amount of common stock
- ----------
Issuable by, the Company increases or decreases, respectively, pursuant to the
terms of any outstanding Options or Convertible Securities, the Warrant Price
shall be recomputed to reflect such increase or decrease. The recomputation
shall be made as of the time of the Issuance of the Options or Convertible
Securities. Any changes in the Warrant Price that occurred after such Issuance
because other Additional Common Shares were Issued or deemed Issued shall also
be recomputed.
6. Recomputation Upon Expiration of Options or Convertible Securities. The
------------------------------------------------------------------
Warrant Price computed upon the original Issue of any Options or Convertible
Securities, and any subsequent adjustments based thereon, shall be recomputed
when any Options or rights of conversion under Convertible Securities expire
without having been exercised. In the case of Convertible Securities or Options
for common stock, the Warrant Price shall be recomputed as if the only
Additional Common Shares Issued were the shares of common stock actually Issued
upon the exercise of such securities, if any, and as if the only consideration
received therefor was the consideration actually received upon the Issue,
exercise or conversion of the Options or Convertible Securities. In the case of
Options for Convertible Securities, the Warrant Price shall be recomputed as if
the only Convertible Securities Issued were the Convertible Securities actually
Issued upon the exercise thereof, if any, and as if the only consideration
received therefor was the consideration actually received by the Company
(determined pursuant to Section 9), if any, upon the Issue of the Options for
the Convertible Securities.
7. Limit on Readjustments. No readjustment of the Warrant Price pursuant
----------------------
to Sections 5 or 6 shall increase the Warrant Price more than the amount of any
decrease made in respect of the Issue of any Options or Convertible Securities.
8. 30 Day Options. In the case of any Options that expire by their
--------------
terms not more than 30 days after the date of Issue thereof, no adjustment of
the Warrant Price shall be made until the expiration or exercise of all such
Options.
9. Computation of Consideration. The consideration received by the
----------------------------
Company for the Issue of any Additional Common Shares shall be computed as
follows:
(a) Cash shall be valued at the amount of cash received by the
----
Corporation, excluding amounts paid or payable for accrued interest or accrued
dividends.
(b) Property. Property, other than cash, shall be computed at the fair
--------
market value thereof at the time of the Issue as determined in good faith by the
Board of Directors of the Company.
(c) Mixed Consideration. The consideration for Additional Common
-------------------
Shares Issued together with other property of the Company for consideration that
covers both shall be determined in good faith by the Board of Directors.
(d) Options and Convertible Securities. The consideration per
----------------------------------
Additional Common Share for Options and Convertible Securities shall be
determined by dividing:
<PAGE>
(i) the total amount, if any, received or receivable by the Company
for the Issue of the Options or Convertible Securities, plus the minimum amount
of additional consideration (as set forth in the instruments relating thereto,
without regard to any provision contained therein for a subsequent adjustment of
such consideration) payable to the Company upon exercise of the Options or
conversion of the Convertible Securities, by
(ii) the maximum mount of common stock (as set forth in the
instruments relating thereto, without regard to any provision contained therein
for a subsequent adjustment of such number) ultimately Issuable upon the
exercise of such Options or the conversion of such Convertible Securities.
10. General.
-------
10.1 Governing Law. This Antidilution Agreement shall be
-------------
governed in all respects by the laws of the State of California as such laws are
applied to agreements between California residents entered into and to be
performed entirely within California.
10.2 Successors and Assigns. Except as otherwise expressly
----------------------
provided herein, the provisions hereof shall inure to the benefit of, and be
binding upon, the successors, assigns, heirs, executors and administrators of
the parties hereto.
10.3 Entire Agreement. Except as set forth below, this
----------------
Antidilution Agreement and the other documents delivered pursuant hereto
constitute the full and entire understanding and agreement between the parties
with regard to the subjects hereof and thereof.
10.4 Notices, etc. All notices and other communications required or
------------
permitted hereunder shall be in writing and shall be mailed by first class mail,
postage prepaid, certified or registered mail, return receipt requested,
addressed (a) if to Purchaser at Purchaser's address as set forth below, or at
such other address as Purchaser shall have furnished to the Company in writing,
or (b) if to the Company, at the Company's address set forth below, or at such
other address as the Company shall have finished to the Purchaser in writing.
10.5 Severability. In case any provision of this Antidilution
------------
Agreement shall be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions of this Antidilution Agreement shall
not in any way be affected or impaired thereby.
10.6 Titles and Subtitles. The titles of the sections and subsections
--------------------
of this Agreement are for convenience of reference only and are not to be
considered in construing this Antidilution Agreement.
<PAGE>
10.7 Counterparts. This Antidilution Agreement may be executed in any
------------
number of counterparts, each of which shall be an original, but all of which
together shall constitute one instrument.
PURCHASER ISSUER
IMPERIAL BANCORP Anchor Pacific Underwriters, Inc.
By:__________________________ By: /s/ James R. Dunathan
--------------------------------
Name: Name: James R. Dunathan
Title: Title: President/CEO
Address: Address:
<PAGE>
EXHIBIT C
---------
Registration Rights
-------------------
The Shares shall be deemed "registrable securities" or otherwise entitled
to "piggy back" registration rights in accordance with the terms of the
following agreement (the "Agreement") between the Company and its investor(s):
None_____________________________________________________________
[Identify Agreement by date, title and parties. If no Agreement
exists, indicate by "none."]
The Company agrees that no amendments will be made to the Agreement which
would have an adverse impact on Holder's registration thereunder without the
consent of Holder. By acceptance of the Warrant to which this Exhibit C is
attached, Holder shall not be deemed to be a party to the Agreement, but solely
entitled to the registration rights created thereby.
If no Agreement exists, then the Company and the Holder shall enter into
Holder's standard form of Registration Rights Agreement as in effect on the
Issue Date of the Warrant.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 3,793,645
<SECURITIES> 0
<RECEIVABLES> 414,690
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,512,686
<PP&E> 2,790,353
<DEPRECIATION> 2,128,916
<TOTAL-ASSETS> 5,803,219
<CURRENT-LIABILITIES> 5,802,555
<BONDS> 0
94,201
0
<COMMON> 0
<OTHER-SE> (1,310,698)
<TOTAL-LIABILITY-AND-EQUITY> 5,803,219
<SALES> 0
<TOTAL-REVENUES> 5,033,393
<CGS> 0
<TOTAL-COSTS> 5,836,756
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 75,467
<INCOME-PRETAX> (910,539)
<INCOME-TAX> 4,870
<INCOME-CONTINUING> (915,409)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (915,409)
<EPS-BASIC> (0.19)
<EPS-DILUTED> (0.19)
</TABLE>
