<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 September 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 September 30, 1999, the Registrant had 4,710,055 shares of common
stock outstanding.
This document is comprised of 60 pages
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ANCHOR PACIFIC UNDERWRITERS, INC.
INDEX
<TABLE>
<CAPTION>
<S> <C>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets, September 30, 1999 (unaudited)
and December 31, 1998............................................ 1
Consolidated Statements of Operations (unaudited) for the
nine months and quarters ended September 30, 1999 and 1998....... 3
Consolidated Statements of Shareholders' Equity (Deficit)
for the nine months ended September 30, 1999 (unaudited)
and year ended December 31, 1998................................. 4
Consolidated Statements of Cash Flows (unaudited) for the
nine months ended September 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................................................ 17
Item 2. Changes in Securities............................................ 17
Item 3. Defaults Upon Senior Securities.................................. 17
Item 4. Submission of Matters to a Vote of Security Holders.............. 17
Item 5. Other Information................................................ 17
Item 6. Exhibits and Reports on Form 8-K................................. 17
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
Anchor Pacific Underwriters, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
--------------- --------------
(unaudited)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents - corporate funds $ 140,423 $ 138,139
Cash and cash equivalents - third-party
administration fiduciary funds 3,606,657 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) 530,550 527,827
Prepaid expenses and other current assets 174,664 191,749
--------------- ---------------
Total current assets 4,452,294 6,430,482
--------------- ---------------
Property and equipment 2,865,548 2,561,111
Accumulated depreciation and amortization (2,190,459) (2,010,633)
--------------- ---------------
675,089 550,478
--------------- ---------------
Other assets:
Intangible assets, net 572,517 593,933
Other 44,585 80,431
--------------- ---------------
617,102 674,364
--------------- ---------------
Total assets $ 5,744,485 $ 7,655,324
=============== ===============
</TABLE>
1
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Anchor Pacific Underwriters, Inc. and Subsidiaries
Consolidated Balance Sheets (continued)
<TABLE>
<CAPTION>
September 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 $ 3,606,657 $ 3,517,772
Accounts payable 1,209,748 619,798
Accrued expenses 221,134 613,256
Short-term debt - 200,000
Current portion of long-term debt 338,000 1,242,950
Current portion of long-term liabilities 369,246 451,068
--------------- ---------------
Total current liabilities 5,744,785 6,644,844
--------------- ---------------
Long-term liabilities 414,449 453,226
--------------- ---------------
Long-term debt, including $315,000 and $480,000
in 1999 and 1998, respectively, owed to related
parties 1,127,486 858,342
--------------- ---------------
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; 4,710,055 shares issued
as of 9/30/99 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 (5,868,701) (4,627,554)
--------------- ---------------
Total shareholders' equity (deficit) (1,542,235) (301,088)
--------------- ---------------
Total liabilities and shareholders' equity
(deficit) $ 5,744,485 $ 7,655,324
=============== ===============
</TABLE>
See accompanying notes.
2
<PAGE>
Anchor Pacific Underwriters, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Quarters
Ended September 30, Ended September 30,
---------------------------------------- ---------------------------------------
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Revenues:
Administrative fees and other income $ 7,478,600 $ 9,470,283 $ 2,454,163 $ 2,943,670
Interest Income 13,087 7,788 4,131 1,740
---------------- --------------- ---------------- ----------------
Total revenue 7,491,687 9,478,071 2,458,294 2,945,410
Operating expenses:
Salaries, commissions and employee
benefits 5,460,479 6,021,155 1,733,006 1,940,734
Selling, general and administrative
expenses 3,100,945 3,380,511 991,662 1,108,085
---------------- ---------------- ---------------- ----------------
Total operating expenses 8,561,424 9,401,666 2,724,668 3,048,819
---------------- ---------------- ---------------- ----------------
(1,069,737) 76,405 (266,374) (103,409)
Other income (expense):
Amortization of tangible assets (47,835) (33,801) (14,775) (11,267)
Interest (118,181) (162,843) (42,714) (47,459)
Other (1,024) 15,406 (2,375) 2,227
---------------- ---------------- ---------------- ----------------
Total other income (expense) (167,040) (181,238) (59,864) (56,499)
---------------- ---------------- ---------------- ----------------
Loss before income taxes (1,236,777) (104,833) (326,238) (159,908)
Benefit (provision) for income taxes 4,370 6,220 (500) (51)
---------------- ---------------- ---------------- ----------------
Loss from continuing operations (1,241,147) (111,053) (325,738) (159,857)
---------------- ---------------- ---------------- ----------------
Discontinued operations:
Loss from discontinued operations,
net of income taxes - (2,542) - (82,197)
---------------- ---------------- ---------------- ----------------
Loss from discontinued operations - (2,542) - (82,197)
---------------- ---------------- ---------------- ----------------
Net loss $ (1,241,147) $ (113,595) $ (325,738) $ (242,054)
================ ================ ================ ================
Net loss per share:
Loss from continuing operations $ (0.26) $ (0.02) $ (0.07) $ (0.03)
Loss from discontinued operations - - - (0.02)
================ ================ ================ ================
Basic and diluted loss per common share $ (0.26) $ (0.02) $ (0.07) $ (0.05)
================ ================ ================ ================
Weighted average number of common
shares outstanding 4,710,055 4,708,137 4,710,055 4,710,057
================ ================ ================ ================
</TABLE>
See accompanying notes
3
<PAGE>
Anchor Pacific Underwriters, Inc.
Consolidated Statements of Shareholders' Equity (Deficit)
<TABLE>
<CAPTION>
Additional
Common Stock Paid-In Accumulated
Shares Amount Capital (Deficit) Total
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1997 4,690,839 $ 93,817 $ 4,215,649 $ (3,852,224) $ 457,242
Stock issued for services
rendered 18,888 378 16,622 - 17,000
Canceled stock -
Fractional shares 330 6 (6) - -
Net loss - - - (775,330) (775,330)
---------------------------------------------------------------------------------------
Balance at December 31,
1998 4,710,057 $ 94,201 $ 4,232,265 $ (4,627,554) $ (301,088)
Canceled stock -
Fractional shares (2) - - - -
Net Loss - - - (1,241,147) (1,241,147)
---------------------------------------------------------------------------------------
Balance at September 30,
1999 (Unaudited) 4,710,055 $ 94,201 $ 4,232,265 $ (5,868,701) $ (1,542,235)
=======================================================================================
</TABLE>
See accompanying notes
4
<PAGE>
Anchor Pacific Underwriters, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
---------------------------------------------
1999 1998
<S> <C> <C>
Continuing operations activities:
Net income (loss) $ (1,241,147) $ 187,146
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 179,826 211,453
Amortization of goodwill, other intangibles and
organization expenses 21,416 31,820
Changes in operating assets and liabilities:
Accounts receivable (2,723) 69,512
Prepaid expenses and other current assets 17,082 135,735
Other assets 35,846 (384,560)
Accounts payable and accrued expenses 87,825 (19,858)
----------------- -----------------
Net cash provided by (used in) operating activities (901,875) 231,248
----------------- -----------------
Investment activities:
Notes Receivable, net - 694
Purchases of property and equipment (304,437) (242,739)
Net proceeds from sale of assets 2,165,003 -
----------------- -----------------
Net cash provided by (used in) investing activities 1,860,566 (242,045)
----------------- -----------------
Financing activities:
Common stock issued:
Private offering - 15,297
Warrants - 1,702
Borrowings on long-term debt 225,000 -
Repayment on long-term debt and liabilities (1,181,407) (67,240)
----------------- -----------------
Net cash (used in) financing activities (956,407) (50,241)
----------------- -----------------
Net increase (decrease) in cash 2,284 (61,038)
Cash and cash equivalents - corporate funds at
beginning of period 138,139 73,409
----------------- -----------------
Cash and cash equivalents - corporate funds at
end of period $ 140,423 $ 12,371
================= =================
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 118,181 $ 162,843
================= =================
Income taxes $ 4,370 $ 6,220
================= =================
</TABLE>
See accompanying notes
5
<PAGE>
ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
September 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 nine month period ended September 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
<PAGE>
NOTE 4 - 10% CONVERTIBLE SUBORDINATED DEBENTURES
- ------------------------------------------------
In 1995, Anchor issued $370,000 of 10% Convertible Subordinated
Debentures (the "Debentures"). Subsequently, investors holding $270,000 of the
Debentures, including seven members of the Board of Directors, converted their
debentures into 200,000 shares of Anchor's common stock at $1.35 per share.
These conversions reduced Anchor's outstanding indebtedness by $270,000 and, in
turn, increased shareholders' equity by $270,000. As of September 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 September 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 were 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 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 subordinated 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
7
<PAGE>
September 30, 1999, 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
- ----------------------------------------------------------
During the first nine months of 1999, Anchor raised $179,000 from
members of the Board of Directors and other qualified investors by offering 10%
Convertible Subordinated Debentures, Series C (the "Series C Debentures").
Anchor utilized a substantial portion of the proceeds from the Series C
Debentures to support current working capital needs. The basic terms of the
Series C Debentures were: (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 received 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 subordinated the Series C Debentures to Anchor's
"Senior Debt" (as defined in the Series C Debentures).
In September 1999, Anchor offered the investors of said Series C
Debentures the opportunity to either remain as investors in the Series C
Debentures or to convert their Series C Debentures into the Series D Debentures
(discussed below). The basic terms of the two alternatives were: (a) remain as
an investor of the Series C Debentures; or (b) exchange the Series C Debentures
and Warrants and receive in return (i) Series D Debentures at a conversion price
of $0.50 per share; and (ii) for each $5,000 of debentures originally purchased
a Warrant to acquire 3,000 shares of Anchor's common stock at a purchase price
of $0.50 per share. All of the Series C Debentures investors chose alternative
(b) above.
NOTE 9 - 10% CONVERTIBLE SUBORDINATED DEBENTURES, SERIES D
- ----------------------------------------------------------
In September 1999, Anchor commenced raising additional funds from
members of the Board of Directors and other qualified investors by offering 10%
Convertible Subordinated Debentures, Series D (the "Series D Debentures"). As of
October 7, 1999, Anchor had received $244,000 from said investors and had oral
commitments for an additional $50,000 in the Series D Debentures. Anchor intends
to utilize a substantial portion of the proceeds from the Series D Debentures to
support current working capital needs. The basic terms of the Series D
Debentures are: (a) 10% interest, payable semi-annually in arrears; (b) two year
maturity; (c) conversion price of $0.50 per share; (d) "Piggyback" registration
rights for three years; (e) for each $5,000 of Series D Debentures acquired, an
investor receives a five year warrant to acquire 3,000 shares of Anchor common
stock at an exercise price of $0.50 per share; and (f) subordination provisions
that subordinates the Series D Debentures to Anchor's "Senior Debt" (as defined
in the Series D Debentures).
NOTE 10 - 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.
8
<PAGE>
On June 2, 1998, a new term loan in the amount of $1,741,841 was
entered into between Anchor and the bank which replaced the $1,821,890 term
loan. The basic terms of this new term loan are: (a) monthly interest payments
equal to bank's prime rate, plus 2.5%; (b) a maturity date of October 5, 2002;
and (c) monthly principal payments in installments of $16,500 beginning on June
5, 1998. The provision which required 75% of Anchor's monthly EBITDA to be
applied to principal payments was deleted. All other terms and conditions of the
term loan dated September 30, 1997, including all amendments thereto and
replacements therefor, remain operative.
Effective December 31, 1998, based on a strategic decision to focus on
its third-party administration business, a purchase agreement was entered into
between PKW, Anchor and Talbot Agency of California, Inc. ("Talbot") whereby
Talbot acquired certain of PKW assets, including insurance brokerage accounts.
Consideration for said purchase was $2,250,000 cash, which was paid at the time
of the closing on January 15, 1999, based on a purchase price of 4.5 times
EBITDA. 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 the loan were
used to support the current working capital needs of Anchor.
On September 30, 1999, a new term loan in the amount of $931,485.75
was entered into between Anchor and the bank combining both the balance owing on
the $1,741,841 term loan and the $250,000 bank 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 7, 2002; and (c) monthly principal payments
in installments of $16,500 beginning on November 7, 1999. All other terms and
conditions contained in the term loan dated September 30, 1997, (except for the
provision which required 75% of Anchor's monthly EBITDA to be applied to
principal payments which had been deleted earlier) including all amendments
thereto and replacements therefor, remain operative.
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
Anchor to expand its marketing and servicing territory in Oregon, Washington,
Idaho and Nevada and substantially enhanced Anchor'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
9
<PAGE>
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.
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.
10
<PAGE>
Results of Continuing Operations -- Nine Months Ended September 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 nine months ended September 30,
1999, were $7,491,687, a decrease of $1,986,384 or 21%, as compared to
$9,478,071 in revenues for the same period in 1998. The decrease in revenue in
this nine month period was primarily due to the declining revenues as a result
of carrier rate increases and lost business in Harden Group's former Los Angeles
office as well as its PHA office. In February 1999 Harden Group closed the Los
Angeles office. 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 nine months of 1999, were $7,478,600, a
decrease of $1,991,683 or 21%, as compared to $9,470,283 in fees for the same
period in 1998. This decrease in fee income is the direct result of declining
revenue due to carrier rate increases and lost business generated from Harden
Group's former Los Angeles office as well as its PHA office.
Fee revenues generated by Anchor in the first nine 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 rated A-
(Excellent); (b) the administration of insurance programs underwritten by
various insurance carriers for a number of self-insured employers; and (c)
dental administration. 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 $13,087 and $7,788 for the nine months ended September 30, 1999 and 1998,
respectively.
Expenses
Total Expenses. Total operating expenses for the first nine months of
1999, were $8,561,424, a decrease of $840,242 or 8.9% as compared to operating
expenses of $9,401,666 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 nine months of 1999, were $5,460,479, a decrease of $560,676 or
9.3% as compared to $6,021,155 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 $3,100,945 and $3,380,511 for the nine months ended
September 30, 1999 and 1998, respectively. The $279,566 or 8.3% 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 $118,181 and $162,843, for the
first nine months of 1999 and 1998, respectively. The decrease in interest
expense of $44,662 in the first nine months of 1999, as compared to the same
period in 1998, was due to the decrease in borrowings under the bank term loan.
11
<PAGE>
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
$47,835 and $33,801, for the first nine months of 1999 and 1998, respectively.
The increase in amortization and other intangibles in the first nine months of
1999 is a result of increased intangibles at Harden-AZ.
Income Taxes
Anchor's expense for income taxes was $4,370 for the first nine months
of 1999 as compared to $6,220 for the first nine months of 1998.
Results of Continuing Operations -- Quarters Ended September 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 third quarter of 1999, were
$2,458,294, a decrease of $487,116 or 16.5%, as compared to 1998 third quarter
revenues of $2,945,410. The decrease in revenue in this three month period was
primarily due to the declining revenues as a result of carrier rate increases
and lost business in Harden Group's former Los Angeles office as well as its PHA
office. 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 third quarter of 1999, were $2,454,163, a decrease of
$489,507 or 16.6%, as compared to $2,943,670 in fees for the same period in
1998. This decrease in fee income is the direct result of declining revenue due
to carrier rate increases and lost business generated from Harden Group's former
Los Angeles office as well as its PHA office.
Fee revenues generated by Anchor in the third 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 rated 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 $4,131 and $1,740 for the quarters ended September 30, 1999 and 1998,
respectively.
Expenses
Total Expenses. Total operating expenses for the third quarter of
1999, were $2,724,668, a decrease of $324,151 or 10.6% as compared to operating
expenses of $3,048,819 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 third quarter of 1999, were $1,733,006, a decrease of $207,728 or 10.7%
as compared to $1,940,734 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.
12
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $991,662 and $1,108,085 for the quarters ended
September 30, 1999 and 1998, respectively. The $116,423 or 10.5% 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 $42,714 and $47,459, for the
third quarter of 1999 and 1998, respectively. The decrease in interest expense
of $4,745 in the third 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
$14,775 and $11,267, for the third 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 September 30, 1999 and 1998, respectively as
Anchor received refunds of overpaid taxes in both quarters. 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 operations of $(901,875) for
the nine months ended September 30, 1999, compared to net cash flows provided by
operations of $231,248 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 and D Debentures.
Capital and certain acquisition related expenditures were $304,437 and
$242,739 for the nine months ended September 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.
Short-term borrowings, current portion of long-term debt and current
portion of long-term liabilities at September 30, 1999, totaling in the
aggregate $707,246 (as compared to $1,894,018 at December 31, 1998), consisted
of: (a) $198,000 representing the current portion of the term bank loans further
described in Note 10 to the Financial Statements, above; (b) approximately
$19,387 of future fixed payments under a consulting agreement entered into with
a company affiliated with the former shareholders of Harden-AZ; (c) $44,049
representing the current portion of obligations with regard to certain real
property leased by PKW prior its acquisition by Anchor and its subsequent
relocation to Anchor's executive offices; (d) $60,000 of the Debentures; (e)
$80,000 of the Bridge Notes; (f) approximately $23,700 representing obligations
relating to the purchase of furniture, fixtures and computer equipment at the
PHA location; and (g) approximately $282,110 for certain other current
liabilities.
At September 30, 1999, long-term liabilities and long-term debt, less
the current portion discussed above, totaled $1,541,935 (as compared to
$1,311,568 at December 31, 1998), and primarily consisted of: (a) $733,486
representing the long-term portion outstanding under a term bank loan further
described in Note 10 to the Financial Statements, above; (b) approximately
$343,449 representing deferred rent with regard to certain real property
currently leased by Anchor; (c) $250,000 of Series B Debentures; (d) $144,000 of
Series D Debentures; and (e) approximately $71,000 for certain other long-term
liabilities.
Reference is made to Notes 4 through 10 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.
13
<PAGE>
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. 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 hired an outside
computer consultant, OASYS Networks, Inc. ("OASYS"), to assist in the management
of the Year 2000 project. OASYS provided a Limited-Scope Assessment which
involved an analysis of all networked "objects" and compliance information on
all installed applications that are not specific to the insurance industry.
OASYS analysis was limited to the PC, PC Network and associated peripherals
environment. During the course of this assessment, which was completed during
the third quarter 1999, OASYS:
1. Developed an assessment project plan and a schedule that was
approved by Anchor.
2. Prepared a comprehensive inventory of network environment
(Hardware). In connection with preparing such inventory, OASYS
identified and asset tagged all equipment, recorded serial
numbers, identified installed devices and identified BIOS
manufacture and version information.
3. Integrated Anchor's existing Year 2000 data into the OASYS reports
and procedures, where applicable.
4. Conducted a comprehensive inventory of network environment
(Software/Firmware).
5. Tested all functional computer hardware for Year 2000 and leap
year compliance, where applicable.
6. Collected compliance statements from vendors for non-testable
hardware equipment (modems, routers, etc.). Cross-referenced
compliance data with Anchor's existing data, where applicable.
7. Researched and reported compliance data on all COTS (Common Off
The Shelf) applications.
8. Built a project binder to track compliance statements and document
all testing of hardware objects.
9. Interviewed key personnel to identify various dependencies and
interface risks that were not immediately apparent through the
physical inventory process.
10. Conferred with Anchor's team to prioritize issues and created a
Mission Critical listing of all hardware, software, dependencies
and interfaces.
11. Provided a database to Anchor which is being used to identify and
track all new hardware objects introduced into the environment.
12. Prepared a closing Risk Analysis report.
In addition, OASYS 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 responded, documented, tracked and serviced such requests
with periodic summaries having been reported to Anchor's team. Outbound Year
2000 Compliance Communications were requests initiated by Anchor seeking the
status of another entities' Year 2000 compliance. These requests were initiated,
documented and tracked by OASYS.
14
<PAGE>
Anchor's team has also been 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 has been reviewed and updated
and is Year 2000 compliant.
Software: Both the billing and claims systems are being upgraded.
The project is 90% complete with scheduled compliance
by the end of November 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 has been reviewed and 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 Year 2000 compliant.
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 completed its programming
------------------------------------
efforts for the Year 2000 related projects during the third quarter of 1999.
Final certification testing will continue during the remainder of the 1999 year.
Anchor's focus has not only been 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 has not
adversely impacted 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 not expected to
exceed $250,000.
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 Statements".
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
15
<PAGE>
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, 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.
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).
16
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Anchor and its subsidiaries are parties from time to time to various
lawsuits that arise in the normal course of business. Management is not aware
of any lawsuits to which Anchor or its subsidiaries is currently a party or to
which any property of Anchor or any of its subsidiaries is subject, which might
materially adversely affect the financial condition or results of operations of
Anchor.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
4.10 Form of 10% Convertible Subordinated Debenture, Series D
4.10a Form of Warrant to Purchase Shares of Common Stock of Anchor Pacific
Underwriters, Inc.
10.36 Business Loan Agreement dated September 30, 1999, between Anchor and
Imperial Bank, and related documents.
27.0 Financial Data Schedule
B. Reports on Form 8-K
None
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Anchor has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ANCHOR PACIFIC UNDERWRITERS, INC.
Date: November 5, 1999 /s/ James R. Dunathan
----------------------- -------------------------------------
James R. Dunathan
President and Chief Executive Officer
Date: November 5, 1999 /s/ Earl Wiklund
----------------------- -------------------------------------
Earl Wiklund
Senior Vice President and Chief
Financial Officer
18
<PAGE>
EXHIBIT 4.10
Debenture No. _____
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR
QUALIFIED UNDER ANY APPLICABLE STATE SECURITIES LAWS. IT MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT OR
QUALIFICATION UNDER SUCH SECURITIES LAWS OR AN OPINION OF COUNSEL, SATISFACTORY
TO THE COMPANY, THAT THE SALE OR TRANSFER IS PURSUANT TO AN EXEMPTION FROM THE
REGISTRATION OR QUALIFICATION REQUIREMENTS OF SUCH SECURITIES LAWS.
ANCHOR PACIFIC UNDERWRITERS, INC.
10% Convertible Subordinated Debenture, Series D
(convertible into shares of common stock)
$ Concord, California
_________, 1999
ANCHOR PACIFIC UNDERWRITERS, INC., a Delaware corporation (the
"Company"), for value received, hereby promises to pay to ________________, or
such other person in whose name this Debenture is registered on the Debenture
Register (as that term is defined below) (the "Holder"), the principal amount of
____ ____________ Dollars ($___________), with simple interest on the unpaid
balance of such principal amount at the rate of ten percent (10%) per annum from
the date of this Debenture. Interest on the outstanding principal balance shall
be computed on the basis of a 360 day year of twelve 30-day months and shall be
paid to the Holder on ___________, 2000, ________, 2000 and ________, 2001
(each, an "Interest Payment Date"). Each Debenture delivered upon registration
of transfer or in exchange for or in lieu of this Debenture shall carry the
rights to interest accrued and unpaid, and to accrue, which were carried by this
Debenture.
The full principal amount of this Debenture, plus interest, will be
due and payable on __________, 2001 (the "Maturity Date"). Payment of interest
and principal shall be made in lawful money of the United States of America by
wire transfer to an account designated by the Holder appearing on the Debenture
Register.
This Debenture is a duly authorized Debenture of the Company, Series
D, limited to the aggregate principal amount of $____________.
<PAGE>
1. Representations, Warranties and Covenants.
-----------------------------------------
1.1 Organization, Good Standing and Qualification. The Company is a
---------------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has all requisite corporate power and authority to
carry on its business as now conducted and as proposed to be conducted. The
Company is duly qualified to transact business and is in good standing in each
jurisdiction in which the failure to so qualify would have a material adverse
effect on its business or properties.
1.2 Valid Issuance of Debentures and Shares. The Debenture, when
---------------------------------------
issued, sold and delivered in accordance with the terms hereof for the
consideration expressed herein, will be a valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms, and based
in part upon the representations of the Holder contained in the Subscription
Agreement pursuant to which this Debenture is being issued, will be issued in
compliance with all applicable federal and state securities laws. The shares of
the Company's Common Stock, $.02 par value per share, issuable upon conversion
of the Debentures (the "Shares") have been duly and validly reserved for
issuance and, upon issuance in accordance with the terms of this Debenture,
shall be duly and validly issued, fully paid and nonassessable.
1.3 Compliance with Other Instruments. The Company is not in
---------------------------------
violation of or default under any provisions of its Certificate of Incorporation
or Bylaws as amended and in effect on and as of the date of this Debenture or of
any material provision of any instrument or contract to which it is a party or
by which it is bound or, to its knowledge, of any material provision of any
federal or state judgment, writ, decree, order, statute, rule or governmental
regulation applicable to the Company. The execution, delivery and issuance of
this Debenture will not result in: (a) any such violation or be in conflict
with or constitute, with or without the passage of time and giving of notice, a
default under any such provision, instrument or contract; or (b) an event which
results in the creation of any lien, charge or encumbrance upon any assets of
the Company.
2. Subordination.
-------------
2.1 Subordination. The indebtedness evidenced by this Debenture is
-------------
subordinate and junior in right of payment to all Senior Debt (as such term is
defined below) to the extent provided herein, and the Holder, by such Holder's
acceptance hereof, agrees to the subordination herein provided and shall be
bound by the provisions hereof. Senior Debt shall continue to be Senior Debt
and entitled to the benefits of these subordination provisions irrespective of
any amendment, modification or waiver of any term of the Senior Debt or
extension or renewal of the Senior Debt.
2
<PAGE>
2.2 Senior Debt Defined. As used herein, the term "Senior Debt"
-------------------
shall mean the following whether now outstanding or subsequently incurred,
assumed or created: (a) all indebtedness (whether or not secured) of the
Company or its subsidiaries to banks, insurance companies or other financial
institutions regularly engaged in the business of lending money; (b) such other
indebtedness of the Company or its subsidiaries to the extent that the
instrument creating or evidencing such indebtedness provides that it shall
constitute Senior Debt; (c) any indebtedness issued in exchange for such Senior
Debt, or any indebtedness arising from the satisfaction of such Senior Debt by a
guarantor; and (d) any deferrals, renewals, or extensions of any such Senior
Debt.
2.3 Default on Senior Debt. If the Company shall default in the
----------------------
payment of any principal of or interest on any Senior Debt when the same shall
become due and payable, whether at maturity or at a date fixed for prepayment or
by declaration of acceleration or otherwise, then, upon written notice of such
default to the Company by the holders of Senior Debt or any trustee therefor,
unless and until such default shall have been cured or waived or shall have
ceased to exist, no direct or indirect payment (in cash, property, securities,
by set-off or otherwise) shall be made or agreed to be made on account of the
principal of or interest on this Debenture, or in respect of any redemption,
repayment, retirement, purchase or other acquisition of this Debenture.
2.4 Prior Payment of Senior Debt.
----------------------------
(a) In the event of: (i) any insolvency, bankruptcy,
receivership, liquidation, reorganization, readjustment, composition or
other similar proceeding relating to the Company; (ii) any proceeding for
the liquidation, dissolution or other winding up of the Company, voluntary
or involuntary, whether or not involving insolvency or bankruptcy
proceedings; (iii) any assignment by the Company for the benefit of
creditors; or (iv) any other marshalling of the assets of the Company, all
Senior Debt (including any interest thereon accruing after the commencement
of any such proceedings) shall first be paid in full before any payment or
distribution, whether in cash, securities or other property, shall be made
to any Holder on account of the principal or interest on this Debenture.
Any payment or distribution, whether in cash, securities or other property
(other than securities of the Company or any other corporation provided for
by a plan of reorganization or readjustment the payment of which is
subordinate, at least to the extent provided in these subordination
provisions with respect to the indebtedness evidenced by this Debenture, to
the payment of all Senior Debt at the time outstanding and to any
securities issued in respect thereof under any such plan of reorganization
or readjustment), which would otherwise (but for these subordination
provisions) be payable or deliverable in respect of this Debenture shall be
paid or delivered
3
<PAGE>
directly to the holders of Senior Debt in accordance with the priorities
then existing among such holders until all Senior Debt (including any
interest thereon accruing after the commencement of any such proceedings)
shall have been paid in full. In the event of any such proceeding, after
payment in full of all sums owing with respect to Senior Debt, the Holder
of this Debenture, together with the holders of any obligations of the
Company ranking on a parity with this Debenture, shall be entitled to be
paid from the remaining assets of the Company the amounts at the time due
and owing on account of unpaid principal of and interest on this Debenture
and such other obligations before any payment or other distribution,
whether in cash, property or otherwise, shall be made on account of any
capital stock or any obligations of the Company ranking junior to this
Debenture and such other obligations.
(b) In the event that, notwithstanding the foregoing, any
payment or distribution of any character, whether in cash, securities or
other property (other than securities of the Company or any other
corporation provided for by a plan of reorganization or readjustment the
payment of which is subordinate, at least to the extent provided in these
subordination provisions with respect to the indebtedness evidenced by this
Debenture, to the payment of all Senior Debt at the time outstanding and to
any securities issued in respect thereof under any such plan of
reorganization or readjustment), shall be received by any Holder in
contravention of any of the terms hereof, such payment or distribution or
security shall be received in trust for the benefit of, and shall be paid
over or delivered and transferred to, the holders of the Senior Debt at the
time outstanding in accordance with the priorities then existing among such
holders for application to the payment of all Senior Debt remaining unpaid,
to the extent necessary to pay all such Senior Debt in full. In the event
of the failure of any such Holder to endorse or assign any such payment,
distribution or security, each holder of Senior Debt is hereby irrevocably
authorized to endorse or assign the same.
2.5 No Impairment of Rights. Nothing contained herein shall impair,
-----------------------
as between the Company and the Holder, the obligation of the Company to pay such
Holder the principal of and interest on this Debenture or prevent such Holder
from exercising all rights, powers and remedies otherwise permitted by
applicable law or hereunder upon an Event of Default (as defined below)
hereunder, all subject to the rights of the holders of the Senior Debt to
receive cash, securities or other property otherwise payable or deliverable to
the Holder of this Debenture.
2.6 Subrogation. Upon the payment in full of all Senior Debt, the
-----------
Holders of the Debentures, together with all other subordinated debt of the
Company ranking on a parity therewith, shall be subrogated to all rights of any
holders of Senior Debt to receive any further payments or distributions
applicable to the Senior Debt
4
<PAGE>
until the indebtedness evidenced by the Debentures shall have been paid in full,
and such payments or distributions received by the Holders thereof, by reason of
such subrogation, of cash, securities or other property which otherwise would be
paid or distributed to the holders of Senior Debt, shall, as between the Company
and its creditors other than the holders of Senior Debt, on the one hand, and
such Holders on the other hand, be deemed to be a payment by the Company on
account of Senior Debt and not on account of the Debentures.
2.7 No Impairment of Security Interest. The provisions of this
----------------------------------
Debenture shall not impair any rights, remedies or powers of any secured
creditor of the Company in respect of any security interest. The securing of
any obligations of the Company otherwise ranking on a parity with the Debentures
or ranking junior to such Debentures shall not be deemed to prevent such
obligations from constituting, respectively, obligations ranking on a parity
with such Debentures or ranking junior to such Debentures.
2.8 Amendment of Subordination Provisions. No modification or
-------------------------------------
amendment of the subordination provisions contained in Section 2 hereof in a
manner adverse to the holders of Senior Debt may be made without the consent of
all holders of Senior Debt.
2.9 Undertaking. By its acceptance of this Debenture, the Holder
-----------
agrees to execute and deliver such documents as may be reasonably requested from
time to time by the Company or the lender of any Senior Debt in order to
implement the foregoing provisions of Section 2 hereof.
3. No Restrictions on Issuance of Additional Debt. Nothing contained in
----------------------------------------------
this Debenture shall restrict the Company from creating, assuming or incurring
any additional indebtedness, whether ranking junior to, on par with, or senior
to, this Debenture, or require the Company to obtain the consent of the Holder
with respect thereto.
4. Default.
-------
4.1 Event of Default. Each of the following events shall be an Event
----------------
of Default hereunder:
(a) Default in the payment of any interest on this Debenture
when due, continued for two (2) business days.
(b) Default in the payment of the principal on the Maturity
Date.
5
<PAGE>
(c) Material default in the performance of any of the covenants
or agreements of the Company contained in this Debenture continued for
thirty (30) days after notice thereof (provided, however, that if the
default cannot reasonably be corrected within such period, there shall be
no event of default if corrective action is instituted promptly and is
pursued diligently until the default is corrected).
(d) If a petition in involuntary bankruptcy is filed against the
Company under any bankruptcy, reorganization, arrangement, insolvency,
readjustment of debt, dissolution or liquidation under the law of any
jurisdiction, whether now or hereafter in effect, and is not stayed or
dismissed within thirty (30) days after such filing, or if the Company
shall make an assignment for the benefit of creditors, or shall file a
voluntary petition in bankruptcy, or shall be adjudicated a bankrupt or
insolvent, or shall file any petition or answer seeking for itself any
reorganization, arrangement, composition, readjustment, liquidation,
dissolution or similar relief under any present or future statute, law or
regulation, or shall seek or consent to or acquiesce in the appointment of
any trustee, receiver or liquidator of the Company or of all or any
substantial part of the properties of the Company, or commence voluntary or
involuntary dissolution proceedings.
(e) Default under Senior Debt that gives the holder thereof the
right to accelerate such Senior Debt, and such Senior Debt is in fact
accelerated by such holder.
4.2 Remedies on Default, etc.
------------------------
(a) If an Event of Default occurs and is continuing after the
expiration of any applicable grace period, the Holder may declare the
Debenture immediately due and payable.
(b) In case of a default in the payment of any principal or
interest due on this Debenture, the Company shall pay to the Holder thereof
the amount owing together with: (i) simple interest on the amount owing at
the rate per annum equal to the lower of (x) twelve percent (12%) or (y)
the maximum rate permitted under applicable law on the amounts past due;
and (ii) such additional amount as shall be sufficient to cover the cost
and expenses of collection, including, without limitation, reasonable
attorneys' fees, expenses and disbursements.
(c) No right, power or remedy conferred by this Debenture upon
any Holder shall be exclusive of any other right, power or remedy referred
to herein or now or hereafter available at law, in equity, by statute or
otherwise.
6
<PAGE>
5. Conversion.
----------
5.1 Conversion Rights. The Holder may at any time, and from time to
-----------------
time, prior to the first to occur of the Maturity Date or the date fixed by the
Company for redemption of this Debenture (the "Redemption Date"), convert this
Debenture or any portion of the principal amount hereof which is $5,000 or an
integral multiple of $5,000, into Shares, at a conversion price of $0.50 per
Share (the "Conversion Price"), subject to adjustment in certain events
described below.
The number of Shares that the Holder shall receive upon any such
conversion shall be determined by dividing the principal amount of this
Debenture to be so converted by the Conversion Price in effect at the time of
such conversion. In the event that this Debenture is called for redemption, the
right to convert the Debenture shall terminate at the close of business on the
Redemption Date and will be lost if not exercised prior to that time unless the
Company defaults in making the payment due upon redemption. In the event of a
partial conversion of this Debenture, the Company shall execute and deliver to
the Holder a new Debenture in the aggregate principal amount equal to and in
exchange for the unconverted portion of the principal amount of the Debenture so
surrendered for conversion.
5.2 Effect of Conversion; Issuance of Shares on Conversion.
------------------------------------------------------
Conversion of this Debenture shall be deemed to have been made at the close of
business on the date that the Debenture shall have been surrendered for
conversion, accompanied by written notice of election to convert in the form of
Exhibit "A" attached hereto (or such other form reasonably acceptable to the
Company), and thereupon the Holder shall have no further rights hereunder,
except with respect to the receipt of accrued interest due hereunder and the
Shares issuable upon conversion of this Debenture. As soon as practicable after
full or partial conversion of this Debenture, the Company shall pay to the
Holder all interest accrued hereunder with respect to the portion of the
Debenture so converted to the date of conversion. In addition, as soon as
practicable after full or partial conversion of this Debenture, the Company
shall, at its expense, cause to be issued in the name of, and delivered to, the
Holder a certificate or certificates for the number of Shares to which the
Holder shall be entitled on such conversion, together with any other securities
and property to which the Holder is entitled on such conversion under the terms
of this Debenture. No fractional shares will be issued on conversion of this
Debenture. If on any conversion of this Debenture a fraction of a share
results, the Company will pay the cash value of that fractional share,
calculated on the basis of the then effective Conversion Price.
5.3 Adjustments to Conversion Price.
-------------------------------
(a) If the Company shall at any time while this Debenture is
outstanding subdivide the outstanding shares of its Common Stock, the
7
<PAGE>
Conversion Price then in effect immediately before that subdivision shall
be proportionately decreased, and if the Company shall at any time while
this Debenture is outstanding combine the outstanding shares of Common
Stock, the Conversion Price then in effect immediately before that
combination shall be proportionately increased. Except as otherwise
provided below, any adjustment under this Section 5.3 shall become
effective at the close of business on the date the subdivision or
combination becomes effective. A dividend on any security of the Company
payable in Common Stock, or a split of the Company's Common Stock, shall be
considered a subdivision of Common Stock for purposes of this Section 5.3
at the close of business on the record date with respect to such dividend
or stock split. A reverse split of the Company's Common Stock shall be
considered a combination of Common Stock for purposes of this Section 5.3
at the close of business on the record date with respect to such reverse
stock split.
(b) In the event the Company, at any time or from time to time
while this Debenture is outstanding, shall make or issue, or fix a record
date for the determination of holders of Common Stock entitled to receive,
a dividend or other distribution with respect to the Company's Common stock
payable in securities of the Company other than shares of Common Stock,
then and in each such event, provisions shall be made so that the Holder
shall receive upon conversion hereof, in addition to the number of shares
of Common Stock receivable thereupon, the amount of securities of the
Company which he would have received had this Debenture been converted into
Common Stock on the date of such event and had the Holder thereafter,
during the period from the date of such event to and including the
conversion date, retained such securities receivable by him.
(c) If while this Debenture is outstanding, the Shares issuable
upon conversion of this Debenture shall be changed into the same or a
different number of shares of any other class or classes of stock of the
Company, whether by recapitalization, reclassification or other exchange
(other than a subdivision or combination of shares, or a capital
reorganization, merger or sale of assets, provided for elsewhere in Section
5.3 hereof), the Holder shall, upon the conversion of this Debenture, be
entitled to receive, in lieu of the Shares which the Holder would have
become entitled to receive but for such change, a number of shares of such
other class or classes of stock that would have been subject to receipt by
the Holder if he had exercised his right of conversion of this Debenture
immediately before that change.
(d) If while this Debenture is outstanding, there shall be a
merger or consolidation of the Company with or into another corporation
(other
8
<PAGE>
than a merger which does not result in any reclassification, conversion,
exchange or cancellation of outstanding shares of Common Stock of the
Company), or the sale of all or substantially all of the Company's
properties and assets to any other person, then, as a part of such merger,
consolidation or sale, lawful provision shall be made so that the Holder
shall thereafter be entitled to receive upon conversion of this Debenture,
during the period specified in this Debenture, the number of shares of
stock or other securities or property of the Company, or of the successor
corporation resulting from such merger, consolidation or sale, to which a
holder of the Shares deliverable upon conversion of this Debenture would
have been entitled on such merger, consolidation or sale if this Debenture
had been converted immediately before such merger, consolidation or sale.
In any such case, appropriate adjustment shall be made in the application
of the provisions of this Section 5.3 with respect to the rights of the
Holder after such merger, consolidation or sale to the end that the
provisions of this Section 5.3 (including adjustments of the Conversion
Price then in effect and number of shares purchasable upon conversion of
this Debenture) shall continue to be applicable after that event and shall
be as nearly equivalent to the provisions hereof as may be practicable.
(e) The Company shall promptly and in any case not later than
ten (10) days after the date of any adjustment of the Conversion Price give
written notice of such adjustment and the number of Shares or other
securities issuable upon conversion of this Debenture, by first-class mail,
postage prepaid, to the registered Holder at the Holder's address as shown
on the Debenture Register. The certificate shall state such adjustment and
show in reasonable detail the facts on which such adjustment is based.
(f) The form of this Debenture need not be changed because of
any adjustment in the Conversion Price or in the number of Shares issuable
upon its conversion. A Debenture issued after any adjustment on any partial
conversion or upon replacement may continue to express the same Conversion
Price and the same number of Shares (appropriately reduced in the case of
partial conversion) as are stated on this Debenture as initially issued,
and that Conversion Price and that number of Shares shall be considered to
have been so changed as of the close of business on the date of the
adjustment.
6. Registration of Transfer and Exchange.
-------------------------------------
6.1 Debenture Register. The Company shall cause to be kept at the
------------------
principal office of the Company a register (the "Debenture Register") in which,
subject to such reasonable regulations as it may prescribe, the Company shall
provide for the registration and the transfer of the Debenture subject to the
provisions regarding transferability contained in this Debenture. Upon
surrender for registration of transfer of any Debenture at the principal office
of the Company, the Company shall execute
9
<PAGE>
and deliver, in the name of the designated transferee or transferees, one or
more new Debentures in minimum denominations of $5,000 and integral multiples of
$5,000.
6.2 Transfer of Debentures. At the time the Debenture is presented
----------------------
or surrendered for registration of transfer it shall (if so required by the
Company) be duly endorsed, or be accompanied by a written instrument of transfer
in form satisfactory to the Company, duly executed by the Holder thereof or his
attorney duly authorized in writing. No service charge shall be made for any
registration of transfer, but the Company may require payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed in
connection with any registration of transfer of the Debentures.
6.3 Replacement Debenture.
---------------------
(a) If the Debenture is mutilated and is surrendered to the
Company, the Company shall execute and deliver in exchange therefor a new
Debenture of like tenor and principal amount and bearing a number not
contemporaneously outstanding. If there shall be delivered to the Company:
(i) evidence to its satisfaction of the destruction, loss or theft of the
Debenture; and (ii) such security or indemnity as may be required by it to
save the Company and any agent harmless. Then, in the absence of notice to
the Company that the Debenture has been acquired by a bona fide purchaser,
the Company shall execute and deliver, in lieu of any such destroyed, lost
or stolen Debenture, a new Debenture of like tenor and principal amount and
bearing a number not contemporaneously outstanding. In the event such
mutilated, destroyed, lost or stolen Debenture has become or is about to
become due and payable, the Company in its discretion may, instead of
issuing a new Debenture, retire such Debenture.
(b) Upon the issuance of any new Debenture under this Section
6.3, the Company may require the payment of a sum sufficient to cover any
tax or other governmental charge that may be imposed in relation thereto
and any other expenses connected therewith.
(c) Any new Debenture issued pursuant to this Section 6.3 in
lieu of any destroyed, lost or stolen Debenture shall constitute an
original additional contractual obligation of the Company, whether or not
the destroyed, lost or stolen Debenture shall be at any time enforceable by
anyone.
(d) The provisions of this Section 6.3 are exclusive and shall
preclude (to the extent lawful) all other rights and remedies with respect
to the replacement or payment of mutilated, destroyed, lost or stolen
Debentures.
7. Limitations on Disposition. The Holder understands that this
--------------------------
Debenture, the Shares issuable upon conversion of this Debenture and any other
securities issued
10
<PAGE>
under this Debenture are "restricted securities" under the federal securities
laws inasmuch as they are being acquired from the Company in a transaction not
involving a public offering and that under such laws and applicable restrictions
such securities may be resold without registration under the Securities Act of
1933, as amended (the "Act") only in certain limited circumstances. In this
connection, the Holder represents that it is familiar with Rule 144 under the
Act and the limitations imposed thereby and by the Act.
The Holder further agrees not to make any disposition of all or any
portion of this Debenture, the Shares or any other securities issued hereunder
unless and until: (a) there is then in effect a Registration Statement under the
Act covering such proposed disposition and such disposition is made in
accordance with such Registration Statement; or (b) the Holder shall have (i)
notified the Company of the proposed disposition and shall have furnished the
Company with a reasonably detailed statement of the circumstances surrounding
the proposed disposition; and (ii) furnished the Company with an opinion of
counsel, satisfactory to the Company, that such disposition will not require
registration of the securities under the Act.
The Holder understands that this Debenture, the Shares and any other
securities issued hereunder may bear the following legend, together with any
other legend required by law:
"The securities represented hereby have not been registered
under the Securities Act of 1933, or any state securities
laws. These securities may not be sold or transferred in the
absence of an effective registration statement or
qualification under such securities laws or an opinion of
counsel, satisfactory to the Company, that the sale or
transfer is pursuant to an exemption from the registration
or qualification requirements of any applicable securities
laws."
8. Limitations on Dividends and Distributions. So long as this Debenture
------------------------------------------
is outstanding, the Company shall not declare, pay, make or set apart any sum
for a dividend or other distribution (whether in cash or other property) with
respect to any class of capital stock of the Company (other than dividends or
distributions payable in its capital stock), or for the redemption, retirement,
purchase or other acquisition for value of any share of any class of capital
stock of the Company or any warrants or rights to purchase any class of capital
stock of the Company.
9. Registration Rights.
-------------------
9.1 Definitions. For purposes of Section 9 hereof, terms not
-----------
otherwise defined herein shall have the following meanings:
11
<PAGE>
(a) The terms "register," "registered" and "registration" refer
to the preparation and filing of a registration statement in compliance
with the Act and the rules promulgated thereunder, and the declaration of
the effectiveness of such registration statement, or the taking of similar
action under a successor statute or regulation.
(b) The term "Registrable Securities" means the Shares issuable
upon conversion of the Debenture, and any securities issued or issuable
with respect to such Shares by way of a stock dividend or stock split or in
connection with a combination or shares, recapitalization, merger,
consolidation or other reorganization.
(c) The term "Rights Holder" or "Rights Holders" means any
registered holder or holders of Registrable Securities.
(d) The term "Prospectus" means a prospectus that complies with
applicable provisions of the Act.
9.2 Piggyback Registration.
----------------------
(a) If, at any time, through and including the third anniversary
date of the issuance of this Debenture, the Company proposes to register
any of its securities under the Act (other than in connection with a merger
pursuant to a Form S-4 Registration Statement or an employee stock
compensation plan pursuant to a Form S-8 Registration Statement), it will
give written notice by registered mail, at least thirty (30) days prior to
the filing of each such registration statement, to the Rights Holder of its
intention to do so. If the Rights Holder notifies the Company within twenty
(20) days after receipt of any such notice of its desire to include any
Registrable Securities in such proposed registration statement, the Company
shall afford such Rights Holder the opportunity to have any of the
Registrable Securities registered under such registration statement and
included in any underwriting involved with respect thereto.
(b) Notwithstanding the provisions of Section 9 hereof: (i) the
Company shall have the right at any time after it shall have given written
notice pursuant to said Section 9 (irrespective of whether a written
request for inclusion of any Registrable Securities shall have been made)
to elect not to file any such proposed registration statement, or to
withdraw the same after the filing but prior to the effective date thereof;
and (ii) in the event a registration under Section 9 hereof relates to an
underwritten public offering which does not include any securities being
offered and sold on behalf of selling shareholders, the inclusion of any
Registrable Securities may, at the election of the Company, be conditioned
upon the Rights Holder agreement that the public
12
<PAGE>
offering of such Registrable Securities shall not commence until ninety
(90) days after the effective date of such registration.
(c) The rights of the Rights Holder pursuant to Section 9 hereof
shall be conditioned upon such Rights Holder's participation in the
underwriting with respect thereto and the inclusion of such Rights Holder's
Registrable Securities in such underwriting (unless otherwise mutually
agreed by the Company, the managing underwriter or, if none, a majority of
the underwriters, and such Rights Holder) to the extent provided herein.
(d) Notwithstanding any other provision of this Debenture, if
the managing underwriter or, if none, a majority of the underwriters,
determines that marketing factors require a limitation of the number of
shares to be underwritten or a complete exclusion of such shares, such
underwriter or underwriters may limit the number of Registrable Securities
that may be included in the registration and underwriting or exclude all of
the Registrable Securities, as appropriate. In the case of an underwritten
registration in which the number of Registrable Securities that may be
included is limited, the Company shall advise the Rights Holder of the
limited number of Registrable Securities that may be included in the
registration, and the number of Registrable Securities that may be included
in the registration and underwriting shall be allocated among all Rights
Holders thereof in proportion, as nearly as practicable, to the respective
amounts of Registrable Securities entitled to inclusion in such
registration held by such Rights Holders at the time of filing the
registration statement.
(e) The Company shall (together with all Rights Holders
proposing to distribute their securities through an underwriting) enter
into an underwriting agreement in customary form with the underwriter or
underwriters selected for the underwriting.
(f) If, after the third anniversary date of the issuance of this
Debenture, the Registrable Securities owned by the Holder continue to be
subject to a legend or other transfer restriction which treats the Holder
as having affiliate status as that term is used in Rule 144 of the Act,
then the Holder shall continue to have a one-time right to include any
Registrable Securities in a proposed registration statement subject to the
procedures described in Section 9.2 hereof. This registration right shall
expire on the earlier of: (i) the conclusion of the Holder's affiliate
status; or (ii) the sixth anniversary date of the issuance of this
Debenture.
9.3 Expenses. All expenses incurred in connection with any
--------
registration pursuant to this Debenture, including without limitation, all
registration,
13
<PAGE>
filing and qualification fees, printing expenses, fees and disbursements of
counsel for the Company, and expenses of any special audits incidental to or
required by such registration, shall be borne by the Company; provided however
the Company shall not be required to pay:
(a) fees of legal counsel of any Rights Holder, or underwriters'
fees, discounts, commissions or expenses relating to Registrable
Securities; and
(b) for expenses that the Company is prohibited from paying
under Blue Sky laws or by Blue Sky administrators.
9.4 Company Responsibilities. In the case of a registration effected
------------------------
by the Company pursuant to this Debenture, the Company shall use its best
efforts to keep the Rights Holder advised in writing as to the initiation,
effectiveness and completion of such registration. At its expense the Company
shall:
(a) prepare and file a registration statement (and such
amendments and supplements thereto) with respect to such Registrable
Securities and use its best efforts to cause such registration statement to
become and remain effective for a period of one hundred eighty (180) days
or until the Rights Holder or Rights Holders have completed the
distribution described in the registration statement relating thereto,
whichever first occurs;
(b) furnish such number of copies of a Prospectus in conformity
with the requirements of applicable law, and such other documents incident
thereto as a Rights Holder from time to time may reasonably request; and
(c) use every reasonable effort to register or qualify the
Registrable Securities covered by such registration statement under the
state Blue Sky laws of such jurisdictions as the Company's Board of
Directors may reasonably determine, and do any and all other acts and
things which may be necessary under said Blue Sky laws to enable the
sellers of the Registrable Securities to consummate the public sale or
other disposition of the Registrable Securities owned by them in such
jurisdictions, except that the Company shall not for any purpose be
required to qualify to do business as a foreign corporation in any
jurisdiction wherein the Registrable Securities are so qualified.
9.5 Indemnification.
---------------
(a) The Company shall indemnify the Rights Holder, each of the
Rights Holder's officers and directors, and each person controlling such
14
<PAGE>
Rights Holder, with respect to such registration effected pursuant to
Section 9.2 hereof, and each underwriter, if any, and each person who
controls any underwriter of the Registrable Securities, against all claims,
losses, damages and liabilities (or actions in respect thereto) arising out
of or based on any untrue statement (or alleged untrue statement) of a
material fact contained in any registration statement or related
Prospectus, or based on any omission (or alleged omission) to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading, or any violation by the Company of any
rule or regulation promulgated under any securities law applicable to the
Company and relating to action or inaction required of the Company in
connection with any such registration, and shall reimburse the Rights
Holder, each of the Rights Holder's officers and directors, and each person
controlling such Rights Holder, each such underwriter and each person who
controls any such underwriter, for any legal and any other expenses
reasonably incurred in connection with investigating or defending any such
claim, loss, damage, liability or action, provided that the Company shall
not be liable in any such case to the extent that any such claim, loss,
damage or liability arises out of or is based on any untrue statement or
omission based upon written information furnished to the Company in an
instrument duly executed by such Rights Holder or underwriter specifically
for use therein.
(b) The Rights Holder shall, if Registrable Securities held by
or issuable to the Rights Holder are included in the securities as to which
such registration is being effected, indemnify the Company, each of its
directors and officers who sign such registration statement, each
underwriter, if any, of the Company's securities covered by such a
registration statement, each person who controls the Company within the
meaning of the Act, and each other Rights Holder, each of such Rights
Holder's officers and directors and each person controlling such Rights
Holder, against all claims, losses, damages and liabilities (or actions in
respect thereof) arising out of or based on any untrue statement (or
alleged untrue statement) of a material fact contained in any such
registration statement or related Prospectus, or any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and shall
reimburse the Company, such Rights Holders, such directors, officers,
persons, or underwriters for any legal or any other expenses reasonably
incurred in connection with investigating or defending any such claim,
loss, damage, liability, or action, in each case to the extent, but only to
the extent, that such untrue statement (or alleged untrue statement) or
omission (or alleged omission) is made in such registration statement or
related Prospectus in reliance upon and in conformity with written
information furnished to the Company in an instrument duly executed by such
Rights Holder specifically for use therein.
15
<PAGE>
(c) Each party entitled to indemnification under this Section
9.5 (the "Indemnified Party") shall give notice to the party required to
provide indemnification (the "Indemnifying Party") promptly after such
Indemnified Party has actual knowledge of any claim as to which indemnity
may he sought, and shall permit the Indemnifying Party to assume the
defense of any such claim or any litigation resulting therefrom, provided
that counsel for the Indemnifying Party, who shall conduct the defense of
such claim or litigation, shall be approved by the Indemnified Party (whose
approval shall not be unreasonably withheld), and the Indemnified Party may
participate in such defense at such party's expense; and provided further
that the failure of any Indemnified Party to give notice as provided herein
shall not relieve the Indemnifying Party of its obligations under this
Section 9.5. No Indemnifying Party, in the defense of any such claim or
litigation, shall, except with the consent of each Indemnified Party,
consent to entry of any judgment or enter into any settlement, which does
not include as an unconditional term thereof, the giving by the claimant or
plaintiff to such Indemnified Party of a release from all liability in
respect to such claim or litigation.
9.6 Rights Holder's obligations. The Rights Holder shall furnish to
---------------------------
the Company such written information regarding such Rights Holder and the
distribution proposed by such Rights Holder as the Company may reasonably
request in writing and as shall be required in connection with any registration
referred to in this Debenture.
9.7 Assignment. The rights granted to the Rights Holder pursuant to
----------
this Debenture may be assigned to a transferee or assignee of the Debenture or
any of the Registrable Securities, provided that the transferee or assignee is
an affiliated entity of the Rights Holder and the Company is given written
notice at the time of or within 10 days after said transfer, stating the name
and address of said transferee or assignee and identifying the Registrable
Securities with respect to which such registration rights are being assigned.
10. Miscellaneous.
-------------
10.1 Amendment. The provisions of this Debenture may be amended or
---------
modified only with the written consent of the Company and the Holder.
10.2 Entire Agreement. This Debenture constitutes the entire
----------------
agreement among the parties with regard to the subject matter hereof, and
supersedes and replaces any and all prior to contemporaneous agreements, written
or oral. The terms and conditions of this Debenture shall inure to the benefit
of, and be binding upon, the respective successors and assigns of the parties.
Nothing in this Debenture is intended to confer on any third party any rights,
liabilities or obligations, except as specifically provided.
16
<PAGE>
10.3 Headings. The titles and subtitles used in this Debenture are
--------
for convenience only and are not to be used in construing or interpreting this
Debenture.
10.4 SEC Filings. During the term of this Debenture the Company shall
-----------
promptly forward to the Holder annual and periodic reports and proxy statements
required to be filed by the Company with the Securities and Exchange Commission
pursuant to the Securities Exchange Act of 1934.
5.5 Governing Law. This Debenture shall be governed by the internal
-------------
laws of the State of California as applicable to transactions performed in
California between California residents.
5.6 Attorneys' Fees. The prevailing party in any action or
---------------
proceeding between the parties arising out of or related to this Debenture shall
be entitled to recover all reasonable expenses, including without limitation
attorneys, fees and costs, incurred in connection with any such action or
proceeding.
IN WITNESS WHEREOF, the undersigned have executed this Debenture on
the date first above written.
ANCHOR PACIFIC UNDERWRITERS, INC.
By:______________________________
James R. Dunathan
President/CEO
17
<PAGE>
Exhibit "A"
Form of Conversion Notice
To Anchor Pacific Underwriters, Inc.:
The undersigned Holder hereby irrevocably exercises the option to convert this
Debenture, or portion hereof (which is in the amount of not less than $5,000 and
in increments of not less than $5,000 thereafter) below designated, into shares
of the Company's Common Stock, $.02 par value per share, in accordance with the
terms of the Debenture, and directs that the shares issuable and deliverable
upon such conversion, together with any check in payment for fractional shares
and any Debentures representing any unconverted principal amount hereof, be
issued and delivered to the undersigned unless a different name has been
indicated below. If shares or Debentures are to be issued in the name of a
person other than the undersigned, the undersigned will pay all transfer taxes
payable with respect thereto. Any amount required to be paid by the undersigned
on account of interest accompanies this Debenture.
Dated:________________ __________________________________
Signature
__________________________________
Taxpayer Identification Number
Principal Amount to be Converted: $_______________
If shares or Debentures are to be registered in the name of a person other than
the Holder, please print such person's name and address below:
Name: _____________________________
Address: _____________________________
_____________________________
A-1
<PAGE>
Exhibit 4.10a
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
WARRANT
TO PURCHASE
SHARES OF
COMMON STOCK
OF
ANCHOR PACIFIC UNDERWRITERS, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. General Terms...................................................... 1
1.1 Right to Acquire Securities................................... 1
1.2 Exercise of Warrant........................................... 2
1.3 Record Holder................................................. 2
1.4 Payment of Taxes.............................................. 2
1.5 Transfer and Exchange......................................... 3
2. Transfer of Securities............................................. 3
2.1 Restrictions of Transfer...................................... 3
2.2 Cooperation................................................... 5
3. Registration Rights................................................ 5
3.1 Rights of Warrantholders...................................... 5
3.2 Expenses...................................................... 6
3.3 Company Responsibilities...................................... 7
3.4 Indemnification............................................... 7
3.5 Holder's Obligations.......................................... 9
3.6 Assignment.................................................... 9
4. Adjustments to Exercise Price and Warrant Shares................... 9
4.1 Subdivision or Combination.................................... 9
4.2 Adjustment for Reorganization, Consolidation, Merger.......... 9
4.3 Miscellaneous Exercise Matters................................ 11
4.4 No Dilution or Impairment..................................... 11
4.5 Notice of Adjustment.......................................... 11
4.6 Duty to Make Fair Adjustments in Certain Cases................ 11
5. Miscellaneous...................................................... 12
5.1 Entire Agreement.............................................. 12
5.2 Successors and Assigns........................................ 12
5.3 Governing Law................................................. 12
5.4 Notices, Etc.................................................. 12
5.5 Delays or Omissions........................................... 12
5.6 Survival...................................................... 13
5.7 Waivers and Amendments........................................ 13
5.8 Severability.................................................. 13
5.9 Registered Holder............................................. 13
5.10 Titles and Subtitles.......................................... 14
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C>
EXERCISE NOTICE......................................................... 15
FORM OF ASSIGNMENT...................................................... 16
</TABLE>
-ii-
<PAGE>
WARRANT
TO PURCHASE SHARES OF COMMON STOCK OF
ANCHOR PACIFIC UNDERWRITERS, INC.
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED UNLESS (A) COVERED
BY AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT, (B) IN COMPLIANCE WITH
RULE 144 UNDER SUCH ACT, OR (C) THE COMPANY HAS BEEN FURNISHED WITH AN OPINION
OF COUNSEL REASONABLY ACCEPTABLE TO THE COMPANY THAT NO REGISTRATION IS REQUIRED
FOR SUCH TRANSFER.
_______ Shares of Common Stock
1. General Terms.
-------------
1.1 Right to Acquire Securities.
---------------------------
(a) This Warrant certifies that for value received _________
____________, (the "Holder"), or registered assigns, are entitled at any
time before 5:00 p.m., San Francisco, California time, on the Expiration
Date (as such term is defined herein) to purchase from ANCHOR PACIFIC
UNDERWRITERS, INC., a Delaware corporation (the "Company"), ______ shares
(the "Warrant Shares") of the fully paid and non-assessable Common Stock of
the Company ("Common Stock") as constituted on the date hereof (the
"Issuance Date"), at a price of $0.50 per share (the "Exercise Price"),
such number of shares and price per share subject to adjustment as provided
herein and all subject to the conditions set forth herein. This Warrant may
be exercised at any time on or before five years from the date hereof (the
"Expiration Date").
Upon any partial exercise hereof, there shall be issued to the
Holder a new Warrant or Warrants with respect to the shares of Common Stock
not so exercised. No fractions of a share of Common Stock will be issued
upon the exercise of this Warrant, but if a fractional share would be
issuable upon exercise the Company will pay in cash the fair market value
thereof as determined by the Board of Directors of the Company in good
faith.
-1-
<PAGE>
(b) The Warrant may be subdivided, at the Warrantholder's option,
into several warrants to purchase the Warrant Shares (collectively, also
referred to as the "Warrant"). Such subdivision may be accomplished in
accordance with the provisions of Section 1.5 hereof.
1.2 Exercise of Warrant.
-------------------
(a) The Holder or any person or entity to whom the Holder has
assigned its right under this Warrant (collectively referred to as the
"Warrantholder") may exercise the Warrant, in whole or in part, at any time
or from time to time, prior to its expiration, on any business day, by
delivering a written notice in the form attached hereto (the "Exercise
Notice") to the Company at the offices of the Company designated in Section
5.4 hereof, exercising the Warrant and specifying (i) the total number of
shares of Common Stock the Warrantholder will purchase pursuant to such
exercise and (ii) a place and date not less than one nor more than 20
business days from the date of the Exercise Notice for the closing of such
purchase.
(b) At any closing under Section 1.2(a) hereof, (i) the Warrantholder
will surrender the Warrant and make payment to the Company of the aggregate
Exercise Price for the shares of Common Stock so purchased by bank,
cashier's or certified check and (ii) the Company will deliver to the
Warrantholder a certificate or certificates for the number of shares of
Common Stock issuable upon such exercise, together with cash, in lieu of
any fraction of a share, as provided in Section 1.1(a) above. Upon any
partial exercise, a new warrant or warrants of the same tenor and
expiration date for the purchase of the number of such shares not purchased
upon such exercise shall be issued by the Company to the registered holder
thereof.
1.3 Record Holder. A Warrant shall be deemed to have been exercised
-------------
immediately prior to the close of business on the date of its surrender for
exercise as provided in Section 1.2(b) above, and the person entitled to receive
the shares of Common Stock issuable upon such exercise shall be treated for all
purposes as the holder of such shares of record as of the close of business on
such date.
1.4 Payment of Taxes. The Company shall pay all taxes and other
----------------
governmental charges that may be imposed in respect of the issue or delivery of
the Warrant Shares or any portion thereof. The Company shall not be required,
however, to pay any tax or other charge imposed in connection with any transfer
involved in the issue of any certificate for the Warrant Shares or any portion
thereof in any name other than that of the registered holder of the Warrant
surrendered in connection with the purchase of such shares, and in such case the
Company shall not be required to issue
-2-
<PAGE>
or deliver any certificate until such tax or other charge has been paid or it
has been established to the Company's satisfaction that no tax or other charge
is due.
1.5 Transfer and Exchange.
---------------------
(a) Subject to the terms hereof, including, without limitation,
Section 2.1, the Warrant and all rights thereunder are transferable, in
whole or in part, on the books of the Company maintained for such purpose
at its office designated in Section 5.4 hereof by the registered holder
hereof in person or by duly authorized attorney, upon surrender of the
Warrant properly endorsed and upon payment of any necessary transfer tax or
other governmental charge imposed upon such transfer. Upon any partial
transfer, the Company will issue and deliver to such holder a new warrant
or warrants with respect to the Warrant Shares not so transferred. Each
taker and holder of the Warrant, by taking or holding the same, consents
and agrees that the Warrant when endorsed in blank shall be deemed
negotiable, and that when the Warrant shall have been so endorsed, the
holder may be treated by the Company and all other persons dealing with the
Warrant as the absolute owner of such Warrant for any purpose and as the
person entitled to exercise the rights represented thereby, or to the
transfer on the books of the Company, any notice to the contrary
notwithstanding; but until such transfer on such books, the Company may
treat the registered holder of the Warrant as the owner for all purposes.
The term "Warrant" as used herein shall include the Warrant and, any
warrants delivered in substitution or exchange therefor as provided herein.
(b) The Warrant is exchangeable for a warrant or warrants for the
same aggregate number of Warrant Shares, each new Warrant to represent the
right to purchase such number of shares as the holder shall designate at
the time of such exchange.
2. Transfer of Securities.
----------------------
2.1 Restrictions of Transfer. Neither the Warrant nor the Warrant
------------------------
Shares shall be transferable except upon the conditions specified in this
Section 2.1, which conditions are intended to insure compliance with the
provisions of the Securities Act of 1933 (the "1933 Act") in respect to the
transfer of the Warrant and the Warrant Shares.
(a) Unless and until otherwise permitted by this Section 2.1, the
Warrant and each certificate or other document evidencing any of the
Warrant Shares shall be endorsed with a legend substantially in the
following form:
-3-
<PAGE>
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR
OTHERWISE TRANSFERRED UNLESS (A) COVERED BY AN EFFECTIVE
REGISTRATION STATEMENT UNDER SUCH ACT, (B) IN COMPLIANCE WITH
RULE 144 UNDER SUCH ACT, OR (C) THE COMPANY HAS BEEN FURNISHED
WITH AN OPINION OF COUNSEL REASONABLY ACCEPTABLE TO THE COMPANY
TO THE EFFECT THAT NO REGISTRATION IS REQUIRED FOR SUCH TRANSFER"
(b) Neither the Warrant nor the Warrant Shares shall be transferred,
and the Company shall not be required to register any such transfer, unless
and until one of the following events shall have occurred:
(i) the Company shall have received an opinion of counsel, in
form and substance reasonably acceptable to the Company and its
counsel, stating that the contemplated transfer is exempt from
registration under the 1933 Act as then in effect, and the Rules and
Regulations of the Securities and Exchange Commission (the
"Commission") thereunder. Within five business days after delivery to
the Company and its counsel of such an opinion, the Company either
shall deliver to the proposed transferor a statement to the effect
that such opinion is not satisfactory in the reasonable opinion of its
counsel (and shall specify in detail the legal analysis supporting any
such conclusion) or shall authorize the Company's transfer agent to
make the requested transfer;
(ii) the Company shall have been furnished with a letter from
the Commission in response to a written request in form and substance
acceptable to counsel for the Company setting forth all of the facts
and circumstances surrounding the contemplated transfer, stating that
the Commission will take no action with regard to the contemplated
transfer;
(iii) the Warrant or the Warrant Shares are transferred pursuant
to a registration statement which has been filed with the Commission
and has become effective; or
(iv) the Warrant or the Warrant Shares are transferred in
accordance with the provisions of Rule 144 promulgated by the
Commission under the 1933 Act.
-4-
<PAGE>
(c) The restrictions on transfer imposed by this Section 2.1 shall
cease and terminate as to the Warrant and the Warrant Shares when (i) such
securities shall have been effectively registered under the 1933 Act and
sold by the holder thereof in accordance with such registration, (ii) an
acceptable opinion as described in Section 2.l(b)(i) or a "no action"
letter described in Section 2.l(b)(ii) states that future transfers of such
securities by the transferor or the contemplated transferee would be exempt
from registration under the 1933 Act, or (iii) such securities may be sold
in accordance with the provisions of Rule 144 promulgated under the 1933
Act. When the restrictions on transfer contained in this Section 2.1 have
terminated as provided above, the holder of the securities as to which such
restrictions shall have terminated or the transferee of such holder shall
be entitled to receive promptly from the Company, without expense to him,
new certificates not bearing the legend set forth in Section 2.1(a) hereof.
2.2 Cooperation. The Company shall cooperate in supplying such
-----------
information as may be reasonably requested by the Warrantholder to complete and
file any information reporting forms presently or subsequently required by the
Commission as a condition to the availability of an exemption, presently
existing or subsequently adopted, from the 1933 Act for the sale of the Warrant
or the Warrant Shares.
3. Registration Rights.
-------------------
3.1 Rights of Warrantholders. Holders of the Common Stock issued or
------------------------
issuable upon exercise of this Warrant (collectively, the "Registrable
Securities") shall have "piggyback" registration rights as set forth below:
(a) If, at any time, through and including the third anniversary of
the date of this Warrant, the Company proposes to register any of its
securities under the Act (other than in connection with a merger,
acquisition, reorganization or similar transaction pursuant to a Form S-4
Registration Statement or an employee stock compensation plan pursuant to a
Form S-8 Registration Statement), it will give written notice by registered
mail, at least (30) days prior to the filing of each such registration
statement, to the Holder of its intention to do so. If the Holder notifies
the Company within 20 days after receipt of any such notice of its desire
to include any Registrable Securities in such proposed registration
statement, the Company shall afford such Holder the opportunity to have any
of the Registrable Securities registered under such registration statement
and included in any underwriting involved with respect thereto.
-5-
<PAGE>
(b) Notwithstanding the provisions of Section 3 hereof: (i) the
Company shall have the right at any time after it shall have given written
notice pursuant to this Section 3 (irrespective of whether a written
request for inclusion of any Registrable Securities shall have been made)
to elect not to file any such proposed registration statement, or to
withdraw the same after the filing but prior to the effective date thereof;
and (ii) in the event a registration under Section 3 hereof relates to an
underwritten public offering which does not include any securities being
offered and sold on behalf of selling shareholders, the inclusion of any
Registrable Securities may, at the election of the Company, be conditioned
upon the Holder agreeing that the public offering of such Registrable
Securities shall not commence until 90 days after the effective date of
such registration.
(c) The rights of the Holder pursuant to Section 3 hereof shall be
conditioned upon such Holder's participation in the underwriting with
respect thereto and the inclusion of such Holder's Registrable Securities
in such underwriting (unless otherwise mutually agreed by the Company, the
managing underwriter or, if none, a majority of the underwriters, and such
Holder) to the extent provided herein.
(d) Notwithstanding any other provision of this Warrant, if the
managing underwriter or, if none, a majority of the underwriters,
determines that marketing factors require a limitation of the number of
shares to be underwritten or a complete exclusion of such shares, such
underwriter or underwriters may limit the number of Registrable Securities
that may be included in the registration and underwriting or exclude all of
the Registrable Securities, as appropriate. In the case of an underwritten
registration in which the number of Registrable Securities that may be
included is limited, the Company shall advise the Holder of the limited
number of Registrable Securities that may be included in the registration,
and the number of Registrable Securities that may be included in the
registration and underwriting shall be allocated among all Holders thereof
in proportion, as nearly as practicable, to the respective amounts of
Registrable Securities entitled to inclusion in such registration held by
such Holders at the time of filing the registration statement.
(e) The Company shall (together with all Holders proposing to
distribute their securities through an underwriting) enter into an
underwriting agreement in customary form with the underwriter or
underwriters selected for the underwriting.
-6-
<PAGE>
3.2 Expenses.
--------
All expenses incurred in connection with any registration
pursuant to this Warrant or Warrant Shares, including without limitation, all
registration, filing and qualification fees, printing expenses, fees and
disbursements of counsel for the Company, and expenses of any special audits
incidental to or required by such registration, shall be borne by the Company;
provided however the Company shall not be required to pay:
(a) fees of legal counsel of any Holder, or underwriters' fees,
discounts, commissions or expenses relating to Registrable Securities; and
(b) for expenses that the Company is prohibited from paying under
Blue Sky laws or by Blue Sky administrators.
3.3 Company Responsibilities.
------------------------
In the case of a piggyback registration of Warrant Shares, the
Company shall use its best efforts to keep the Holder advised in writing as to
the initiation, effectiveness and completion of such registration. At its
expense the Company shall:
(a) prepare and file a registration statement (and such amendments
and supplements thereto) with respect to such Registrable Securities and
use its best efforts to cause such registration statement to become and
remain effective for a period of 180 days or until the Holder or Holders
have completed the distribution described in the registration statement
relating thereto, whichever first occurs;
(b) furnish such number of copies of a Prospectus in conformity with
the requirements of applicable law, and such other documents incident
thereto as a Holder from time to time may reasonably request; and
(c) use every reasonable effort to register or qualify the
Registrable Securities covered by such registration statement under the
state Blue Sky laws of such jurisdictions as the Company's Board of
Directors may reasonably determine, and do any and all other acts and
things which may be necessary under said Blue Sky laws to enable the
sellers of the Registrable Securities to consummate the public sale or
other disposition of the Registrable Securities owned by them in such
jurisdictions, except that the Company shall not for any purpose be
required to qualify to do business as a foreign corporation in any
jurisdiction wherein the Registrable Securities are so qualified.
-7-
<PAGE>
3.4 Indemnification.
---------------
(a) The Company shall indemnify the Holder, with respect to such
registration effected pursuant to Section 3 hereof, against all claims,
losses, damages and liabilities (or actions in respect thereto) arising out
of or based on any untrue statement (or alleged untrue statement) of a
material fact contained in any registration statement or related
Prospectus, or based on any omission (or alleged omission) to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading, or any violation by the Company of any
rule or regulation promulgated under any securities law applicable to the
Company and relating to action or inaction required of the Company in
connection with any such registration, and shall reimburse the Holder and
each person who controls any such underwriter, for any legal and any other
expenses reasonably incurred in connection with investigating or defending
any such claim, loss, damage, liability or action, provided that the
Company shall not be liable in any such case to the extent that any such
claim, loss, damage or liability arises out of or is based on any untrue
statement or omission based upon written information furnished to the
Company in an instrument duly executed by such Holder specifically for use
therein.
(b) The Holder shall, if Registrable Securities held by or issuable
to the Holder are included in the securities as to which such registration
is being effected, indemnify the Company, each of its directors and
officers who sign such registration statement, each underwriter, if any, of
the Company's securities covered by such a registration statement, each
person who controls the Company within the meaning of the Act, and each
other Holder, against all claims, losses, damages and liabilities (or
actions in respect thereof) arising out of or based on any untrue statement
(or alleged untrue statement) of a material fact contained in any such
registration statement or related Prospectus, or any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and shall
reimburse the Company and such Holders for any legal or any other expenses
reasonably incurred in connection with investigating or defending any such
claim, loss, damage, liability, or action, in each case to the extent, but
only to the extent, that such untrue statement (or alleged untrue
statement) or omission (or alleged omission) is made in such registration
statement or related Prospectus in reliance upon and in conformity with
written information furnished to the Company in an instrument duly executed
by such Holder specifically for use therein.
(c) Each party entitled to indemnification under this Section 3.4
(the "Indemnified Party") shall give notice to the party required to
provide
-8-
<PAGE>
indemnification (the "Indemnifying Party") promptly after such Indemnified
Party has actual knowledge of any claim as to which indemnity may be
sought, and shall permit the Indemnifying Party to assume the defense of
any such claim or any litigation resulting therefrom, provided that counsel
for the Indemnifying Party, who shall conduct the defense of such claim or
litigation, shall be approved by the Indemnified Party (whose approval
shall not be unreasonably withheld), and the Indemnified Party may
participate in such defense at such party's expense; and provided further
that the failure of any Indemnified Party to give notice as provided herein
shall not relieve the Indemnifying Party of its obligations under this
Section 3.4. No Indemnifying Party, in the defense of any such claim or
litigation, shall, except with the consent of each Indemnified Party,
consent to entry of any judgment or enter into any settlement, which does
not include as an unconditional term thereof, the giving by the claimant or
plaintiff to such Indemnified Party of a release from all liability in
respect to such claim or litigation.
3.5 Holder's Obligations. The Holder shall furnish to the Company
--------------------
such written information regarding such Holder and the distribution proposed by
such Holder as the Company may reasonably request in writing and as shall be
required in connection with any registration referred to in this Warrant.
3.6 Assignment. The rights granted to the Holder pursuant to this
----------
Warrant may be assigned to a transferee or assignee of the Warrant or any of the
Registrable Securities, provided that the transferee or assignee is an
affiliated entity of the Holder and the Company is given written notice at the
time of or within 10 days after said transfer, stating the name and address of
said transferee or assignee and identifying the Registrable Securities with
respect to which such registration rights are being assigned.
4. Adjustments to Exercise Price and Warrant Shares. The Exercise Price
------------------------------------------------
in effect from time to time and the number of Warrant Shares shall be subject to
adjustment in certain cases as set forth in this Section 4.
4.1 Subdivision or Combination. In the event the outstanding Common
--------------------------
Stock shall be subdivided into a greater number of shares of Common Stock, the
Exercise Price for the Warrant Shares shall, simultaneously with the
effectiveness of such subdivision, be proportionately reduced and the number of
Warrant Shares proportionately increased, and conversely, in case the
outstanding Common Stock shall be combined into a smaller number of shares of
Common Stock, the Exercise Price shall, simultaneously with the effectiveness of
such combination, be proportionately increased and the number of Warrant Shares
proportionately reduced.
-9-
<PAGE>
4.2 Adjustment for Reorganization, Consolidation, Merger.
----------------------------------------------------
(a) In case of any reorganization of the Company (or any other
corporation the stock or other securities of which are receivable on the
exercise of the Warrant) after the date on which this Warrant is first
issued (the "Issuance Date"), or in case, after such date, the Company (or
any such other corporation) shall consolidate with or merge into another
corporation or convey all or substantially all of its assets to another
corporation, then and in each such case the Warrantholder, upon exercise of
the Warrant as provided in Section 1.2 hereof at any time after the
consummation of such reorganization, consolidation, merger or conveyance,
shall be entitled to receive, in lieu of the stock or other securities and
property receivable upon the exercise of the Warrant prior to such
consummation, the stock or other securities or property to which the
Warrantholder would have been entitled upon such consummation if the
Warrantholder had exercised or converted the Warrant immediately prior
thereto; in each such case, the terms of this Warrant, including the
exercise provisions of Section 1.2, shall be applicable to the shares of
stock or other securities or property receivable upon the exercise or
conversion of the Warrant after such consummation.
(b) The Company shall not effect any consolidation, merger or
conveyance of all or substantially all of its assets unless prior to the
consummation thereof the successor corporation (if other than the Company)
resulting from such consolidation or merger or the corporation into or for
the securities of which the previously outstanding stock of the Company
shall be changed in connection with such consolidation or merger, or the
corporation purchasing such assets, as the case may be, shall assume by
written instrument, in form and substance satisfactory to the
Warrantholder, executed and delivered in accordance with Section 5.4
hereof, the obligation to deliver to the Warrantholder such shares of
stock, securities or assets as, in accordance with the foregoing
provisions, the Warrantholder is entitled to purchase.
(c) If a purchase, tender or exchange offer is made to and accepted
by the holders of more than 50% of the outstanding shares of Common Stock
of the Company, the Company shall not effect any consolidation, merger or
sale with the Person having made such offer or with any Affiliate of such
Person, unless prior to consummation of such consolidation, merger or sale
the Warrantholder shall have been given a reasonable opportunity to then
elect to receive either the stock, securities or assets then issuable upon
the exercise or conversion of the Warrant or, if different, the stock,
securities or assets, or the equivalent, issued to previous holders of the
Common Stock in accordance with such offer, computed as though the
Warrantholder hereof had been, at the time
-10-
<PAGE>
of such offer, a holder of the stock, securities or assets then purchasable
upon the exercise or conversion of the Warrant. As used in this paragraph
(c), the term "Person" shall mean and include an individual, a partnership,
a corporation, a trust, a joint venture, an unincorporated organization and
a government or any department or agency thereof, and an "Affiliate" of any
Person shall mean any Person directly or indirectly controlling, controlled
by or under direct or indirect common control with, such other Person. A
Person shall be deemed to control a corporation if such Person possesses,
directly or indirectly, the power to direct or cause the direction of the
management and policies of such corporation, whether through the ownership
of voting securities, by contract or otherwise.
4.3 Miscellaneous Exercise Matters. The Company shall at all times
------------------------------
reserve and keep available out of its authorized but unissued Common Stock the
full number of Warrant Shares deliverable upon exercise of the Warrant Shares,
as such number may change from time to time. Also, the Company shall, at its
own expense, take all such actions and obtain all such permits and orders as
may be necessary to enable the Company lawfully to issue the Warrant Shares upon
the exercise of the Warrant.
4.4 No Dilution or Impairment. The Company will not, by amendment
-------------------------
of its certificate of incorporation or through reorganization, consolidation,
merger, dissolution, issue or sale of securities, sale of assets or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms of the Warrant, but will at all times in good faith assist in the
carrying out of all such terms and in the taking of all such actions as may be
necessary or appropriate in order to protect the rights of the Warrantholder
against dilution or other impairment. Without limiting the generality of the
foregoing, the Company will take all such action as may be necessary or
appropriate in order that the Company may validly and legally issue fully paid
and non-assessable shares upon the exercise or conversion of the Warrant.
4.5 Notice of Adjustment. When any adjustment is required to be
--------------------
made in either the Exercise Price or the number of shares issuable upon exercise
of the Warrant, the Company shall promptly notify the Warrantholder of such
event, of the calculation by which such adjustment is to be made and of the
resulting Exercise Price or conversion rate, as the case may be.
4.6 Duty to Make Fair Adjustments in Certain Cases. If any event
----------------------------------------------
occurs as to which in the opinion of the Board of Directors the other provisions
of this Section 4 are not strictly applicable or if strictly applicable would
not fairly protect the purchase and exercise rights of the Warrant in accordance
with the essential intent and principles of such provisions, then the Board of
Directors shall make an adjustment in
-11-
<PAGE>
the application of such provisions, in accordance with such essential intent and
principles, so as to protect such purchase rights as aforesaid.
5. Miscellaneous.
-------------
5.1 Entire Agreement. This Warrant constitutes the full and entire
----------------
understanding and agreements between the parties hereto with respect to the
subjects hereof and thereof.
5.2 Successors and Assigns. The terms and conditions of this
----------------------
Warrant shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties hereto, except as expressly provided
otherwise herein.
5.3 Governing Law. This Warrant shall be governed by and construed
-------------
under the laws of the State of California.
5.4 Notices, Etc.. All notices and other communications required or
-------------
permitted hereunder shall be in writing and shall be deemed effectively given
upon personal delivery or upon the seventh day following mailing by registered
air mail, postage prepaid, addressed (a) if to the Warrantholder, at
______________________ or at such other address as it shall have furnished to
the Company in writing, (b) if to the Company, a copy should be sent to 1800
Sutter Street, Suite 400, Concord, California 94520 and addressed to the
attention of the corporate secretary, or at such other address as the Company
shall have furnished in writing to the Warrantholder, or (c) if to any other
holder of any Warrant or of Warrant Shares issued upon conversion of the
Warrant, at such address as such holder shall have furnished to the Company in
writing, or, until such holder so furnishes an address to the Company, then to
and at the address of the last holder of such Warrant or Warrant Shares who so
furnished an address to the Company.
5.5 Delays or Omissions. No delay or omission to exercise any
-------------------
right, power or remedy accruing to any holder of any securities issued or sold
or to be issued or sold hereunder, upon any breach or default of the Company
under this Agreement, shall impair any such right, power or remedy of such
holder nor shall it be construed to be a waiver of any such breach or default,
or an acquiescence therein, or in any similar breach or default thereafter
occurring, nor shall any waiver of any single breach or default be deemed a
waiver of any other breach or default theretofore or thereafter occurring. Any
waiver, permit, consent or approval of any kind or character on the part of any
holder of any breach or default under this Agreement, or any waiver on the part
of any holder of any provisions or conditions of this Agreement, must be in
writing and shall be effective only to the extent specifically set forth in such
writing.
-12-
<PAGE>
All remedies, either under this Agreement or by law or otherwise afforded to any
holder, shall be cumulative and not alternative.
5.6 Survival. The representations, warranties, covenants and
--------
agreements made herein and or made pursuant to this Agreement shall survive the
execution and delivery of this Agreement, except as expressly provided otherwise
herein.
5.7 Waivers and Amendments. With the written consent of the record
----------------------
or beneficial holders of more than 50% of the Warrant Shares (treated as if
converted), the obligations of the Company and the rights of the holders of the
Warrant and the Warrant Shares may be waived (either generally or in a
particular instance, either retroactively or prospectively and either for a
specified period of time or indefinitely), and with the same consent the
Company, when authorized by resolution of its Board of Directors, may enter into
a supplemental agreement for the purpose of adding any provisions to or changing
in any manner or eliminating any of the provisions of this Warrant; provided,
however, that no such waiver or supplemental agreement shall reduce the
aforesaid percentage of the Warrant Shares, the holders of which are required to
consent to any waiver or supplemental agreement, without the consent of the
record or beneficial holders of all of the Warrant Shares (treated as if
converted). Upon the effectuation of each such waiver, consent, agreement of
amendment or modification, the Company promptly shall give written notice
thereof to the record holders of the Warrant and the Warrant Shares. This
Warrant or any provision hereof may not be changed, waived, discharged or
terminated orally, but only by a statement in writing signed by the party
against which enforcement of the change, waiver, discharge or termination is
sought, except to the extent provided in this Section 5.7.
5.8 Severability. If one or more provisions of this Warrant are
------------
held to be invalid, illegal or unenforceable under applicable law, such
provision shall be modified in such manner as to be valid, legal and
enforceable, but so as to most nearly retain the intent of the parties, and if
such modification is not possible, such provision shall be severed from this
Agreement as if such provision were not included, in either case, and the
balance of this Warrant shall not in any way be affected or impaired thereby and
shall be enforceable in accordance with its terms.
5.9 Registered Holder. The Company may deem and treat the
-----------------
registered Holder(s) hereof as the absolute owner(s) of this Warrant
(notwithstanding any notation of ownership or other writing hereon made by
anyone), for the purpose of any exercise or conversion hereof, of any
distribution to the Holder(s) hereof, and for all other purposes, and the
Company shall not be affected by any notice to the contrary. Other than as set
forth herein, this Warrant does not entitle any Holder hereof to any rights of a
stockholder of the Company.
-13-
<PAGE>
5.10 Titles and Subtitles. The titles of the sections and
--------------------
subsections of this Warrant are for convenience and are not to be considered in
construing this Warrant.
IN WITNESS WHEREOF, Company has caused this Warrant to be signed by
its duly authorized officer and issued as of the date set forth below.
Dated:
ANCHOR PACIFIC UNDERWRITERS, INC.
By:________________________________________
James R. Dunathan
Its: President/CEO
-14-
<PAGE>
EXERCISE NOTICE
(To be executed only upon exercise of Warrant)
The undersigned registered owner of a Warrant of ANCHOR PACIFIC
UNDERWRITERS, INC. (the "Company"), originally issued to _________________
irrevocably exercises such Warrant for the purchase of shares of Common Stock of
the Company, purchasable with the Warrant, and hereby sets the place and date
for the closing of such purchase as follows, all on the terms and conditions
specified in the Warrant.
Place of Closing:_______________________
Date of Closing:________________________
The undersigned requests that a certificate for such shares be
registered in the name of ________, whose address is ____________________. If
said number of shares is less than all of the shares of Common Stock purchasable
under the Warrant, the undersigned requests that a new Warrant representing the
remaining balance of such shares be registered in the name of __________, whose
address is ____________________.
Dated:_______________________
__________________________________
Signature of Registered Owner
__________________________________
Street Address
__________________________________
City State Zip
-15-
<PAGE>
FORM OF ASSIGNMENT
FOR VALUED RECEIVED, the undersigned registered owner of this Warrant
issued by ANCHOR PACIFIC UNDERWRITERS, INC. hereby sells, assigns and transfers
unto the Assignee named below all of the rights of the undersigned under the
within Warrant, with respect to the number of Shares of Common Stock set forth
below:
Name of Assignee Address No. of Shares
- ---------------- ------- -------------
and does hereby irrevocably constitute and appoint _________ attorney to make
such transfer on the books of ____________ maintained for such purpose, with
full power of substitution in the premises.
Dated:_______________________
__________________________________
Signature of Registered Owner
__________________________________
Witness
-16-
<PAGE>
EXHIBIT 10.36
[LOGO OF IMPERIAL BANK]
PROMISSORY NOTE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$931,485.75 09-30-1999 10-07-2002 613521 900 JMC
- ----------------------------------------------------------------------------------------------------------
Reference 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 Sulter St., #400 East Bay Regional Office
Concord, CA 94520 1331 N. California Blvd., Suite 400
Walnut Creek, CA 94596-9504
==========================================================================================================
Principal Amount: $931,485.75 Initial Rate: 10.750% Date of Note: September 30, 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 Nine Hundred Thirty One Thousand Four Hundred
Eighty Five & 75/100 Dollars ($931,485.75), together with interest on the unpaid
principal balance from September 30, 1999, until paid in full.
PAYMENT. Subject to any payment changes resulting from changes in the index,
Borrower will pay this loan in 35 principal payments of $16,500.00 each and one
final principal and interest payment of $357,156.87. Borrower's first principal
payment is due November 7, 1999, and all subsequent principal payments are due
on the same day of each month after that. In addition, Borrower will pay regular
monthly payments of all accrued unpaid interest due as of each payment date.
Borrower's first interest payment is due November 7, 1999, and all subsequent
interest payments are due on the same day of each month after that. Borrower's
final payment due October 7, 2002, will be for all principal and accrued
interest not yet paid. 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 8.250%. 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 of 10.750%. 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. Borrower agrees that all loan fees and
other prepaid finance charges are earned fully as of the date of the loan and
will not be subject to refund upon early payment (whether voluntary or as a
result of default), except as otherwise required by law. 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 under the payment schedule. Rather, they will reduce the
principal balance due and may result in Borrower making fewer payments.
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 any jury
trial in any action, proceeding, or counterclaim brought by either Lender or
Borrower against the other. (Initial Here JRD) 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.
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.
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.
<PAGE>
PROMISSORY NOTE Page 2
(Continued)
================================================================================
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.
/s/ James R. Dunathan
- ----------------------------
Authorized Officer
================================================================================
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000317781
<NAME> ANCHOR PACIFIC UNDERWRITERS, INC.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 3,747,080
<SECURITIES> 0
<RECEIVABLES> 530,550
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,452,294
<PP&E> 2,865,548
<DEPRECIATION> 2,190,459
<TOTAL-ASSETS> 5,744,485
<CURRENT-LIABILITIES> 5,744,485
<BONDS> 0
0
0
<COMMON> 94,201
<OTHER-SE> (1,636,436)
<TOTAL-LIABILITY-AND-EQUITY> 5,744,485
<SALES> 0
<TOTAL-REVENUES> 7,491,687
<CGS> 0
<TOTAL-COSTS> 8,561,424
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 118,181
<INCOME-PRETAX> (1,236,777)
<INCOME-TAX> 4,370
<INCOME-CONTINUING> (1,241,147)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,241,147)
<EPS-BASIC> (0.26)
<EPS-DILUTED> (0.26)
</TABLE>
