<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 1999
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from [ ] to [ ]
Commission File Number: 0-9628
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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
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. [X] Yes [_] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K ((S)229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 24, 2000 was $2,992,088.
As of March 24, 2000, the Registrant had 4,710,055 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Exhibit Index is on page 22.
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ANCHOR PACIFIC UNDERWRITERS, INC.
TABLE OF CONTENTS
<TABLE>
<C> <S> <C>
PART I.
Item 1. Business....................................................... 3
Item 2. Properties..................................................... 8
Item 3. Legal Proceedings.............................................. 9
Item 4. Submission of Matters to a Vote of Security Holders............ 9
PART II.
Item 5. Market for Registrant's Common Equity and Related Shareholder
Matters........................................................ 10
Item 6. Selected Financial Data........................................ 10
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 11
Item 8. Financial Statements and Supplementary Data.................... 20
Changes in Disagreements With Accountants on Accounting and
Item 9. Financial Disclosure........................................... 20
PART III.
Item 10. Directors and Executive Officers of Registrant................. 21
Item 11. Executive Compensation......................................... 21
Item 12. Security Ownership of Certain Beneficial Owners and
Management..................................................... 21
Item 13. Certain Relationships and Related Transactions................. 21
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-
K.............................................................. 22
</TABLE>
<PAGE>
PART I
Item 1. Business
Summary
Anchor Pacific Underwriters, Inc. is a holding company that is primarily
engaged in insurance administration services through its three direct and
indirect wholly-owned subsidiaries. Anchor Pacific Underwriters, Inc. and the
subsidiaries listed in the chart below are collectively referred to as
"Anchor" and/or the "Company" unless the context otherwise requires.
ANCHOR PACIFIC UNDERWRITERS, INC.
(a Delaware corporation)
Holding Company
Harden & Company Insurance Services, Inc.
(a California corporation)
Employee Benefits Administrator
Group Health Insurance
---------------------------------
Harden & Company of Arizona Pacific Heritage Administrators of
formerly known as Nevada, Inc.
Benefit Resources, Inc. (a Nevada corporation)
(an Arizona corporation) Employee Benefits Administrator
Employee Benefits Administrator Group Health Insurance
Group Health Insurance
Anchor provides third-party claims administration, employee benefits
consulting, underwriting and risk analysis primarily to private sector small
and middle market companies, groups, trusts, associations, government agencies
and individual consumers. Anchor offers its customers, as broker or
administrator, a range of products and services tailored to the specific needs
of such customers.
Anchor markets the products and services of more than 15 commercial
insurance companies and over a dozen managed care and preferred provider
organizations. The marketing of products and services is carried out through
five direct sales representatives, nine general agents and over 700
independent insurance brokers. Anchor's customer base is in the Western United
States, primarily in California, Arizona and Oregon
As further described below in "Recent Developments, Change in Control" on
March 9, 2000 Anchor entered into a Securities Purchase Agreement which
completed a process pursuant to which Ward North America Holding, Inc.
purchased certain debt and equity interests in Anchor and made funds available
to Anchor pursuant to a line of credit. In connection with this process, Ward
obtained a controlling ownership interest in Anchor and certain members of
management have resigned effective March 31, 2000. Additionally, the Board of
Directors has been substantially recomposed with nine of the ten previous
directors resigning with one nominee of Anchor and four nominees of Ward
joining the Board. As of March 24, 2000 representatives of Ward held four of
the six Board of Director positions in the Company.
The principal executive offices of Anchor are located approximately 30 miles
east of San Francisco, California, at 1800 Sutter Street, Suite 400, Concord,
California 94520.
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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"). 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. From 1986 through 1990, Anchor, through Harden,
primarily focused on providing administration services for group insurance
benefit plans. In 1990, Anchor began to diversify its business by providing
property, casualty and workers' compensation insurance products and services,
as well as offering market studies and program analysis for certain non-profit
associations who had endorsed Anchor's products.
During the period from 1990 through 1996, Anchor further expanded its
property and casualty business by acquiring certain assets, including
insurance brokerage accounts. In 1994, Anchor acquired the property and
casualty insurance brokerage company, Putnam, Knudsen & Wieking, Inc. ("PKW")
and consolidated all of its property and casualty insurance brokerage business
into 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. In January
1999, Anchor sold substantially all the assets of PKW to an unrelated third
party. In 1999, Anchor caused PKW to change its name to Shelby Insurance
Services, Inc., ("Shelby"). On March 9, 2000, Anchor sold all of the capital
stock of Shelby to James R. Dunathan, a member of the Board of Directors.
As part of its expansion strategy in 1994, Anchor acquired Benefit
Resources, Inc. ("BRI") a third-party employee benefits administration
business located in Scottsdale, Arizona. In 1998, Anchor caused BRI to change
its name to Harden & Company of Arizona, ("Harden-AZ"). In 1995, certain
third-party administration accounts were acquired by Harden-CA from Dutcher
Insurance Agency, Inc. ("Dutcher"), located in Stockton, California. In July
1997, Harden-CA took over a third-party administration business, located in
Los Angeles, California, that was previously serviced by an unrelated third
party. As a result of declining revenues on the Los Angeles business due to
carrier rate increases, the Los Angeles office was closed at the end of
February 1999, with the remaining business now being serviced from the
Concord, California office.
Effective January 1, 1998, Anchor and Harden-CA entered into an agreement to
acquire the third-party administration business of Pacific Heritage
Administrators ("PHA"), a firm based in Portland, Oregon. This contract
allowed Harden Group to expand its marketing and servicing territory in
Oregon, Washington, Idaho and Nevada and substantially enhanced the Harden
Group's revenues in 1998. Anchor expects to continue to look for opportunities
to expand its third-party administration services in the Western United
States.
In June 1998, Anchor reorganized the company's third-party administration
services division. The organizational structure, "Harden Group" was
established as the consolidated name for the management and marketing of
third-party administration services. Currently, Harden Group includes four
third-party administration operations providing services to clients throughout
the Western States from four offices located in Concord and Fresno,
California; Scottsdale, Arizona; and Portland, Oregon.
Harden Group includes: Harden & Company Insurance Services, Inc. ("Harden-
CA"); Harden & Company of Arizona ("Harden-AZ"); Pacific Heritage
Administrators ("PHA") a division of Harden-CA; and Pacific Heritage
Administrators of Nevada, Inc. ("PHA-NV").
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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 on a percentage of premiums collected, or on a per capita basis.
During the past year, Anchor has sought to take steps to strengthen Harden
Group's management and sales and marketing staff by hiring seasoned
executives. Product development and new product sales continue to be a high
priority, as does geographical diversification into other marketing
territories in the western states.
Discontinued Operations
Insurance Brokerage
Anchor first entered the insurance brokerage business in 1990 through an
acquisition. Thereafter it grew its insurance brokerage business primarily
through acquisitions, the largest being PKW which was acquired in 1994.
Following the 1994 acquisition of PKW, Anchor consolidated all of its property
and casualty insurance brokerage business into PKW. This segment of Anchor's
business focused on property and casualty (both commercial and personal
lines), health, life and disability, as well as workers' compensation. PKW
acted as an agent on behalf of insurers and other intermediaries in
soliciting, negotiating and effecting contracts of insurance, and as a broker
in procuring insurance contracts on behalf of insureds.
As an insurance agent and broker, PKW derived its income from the sale of
insurance products and services and the receipt of commissions generated
therefrom. Effective as of December 31, 1998, Anchor sold certain assets,
including all of the insurance brokerage accounts of PKW for approximately
$2,250,000 in cash. The proceeds derived from the PKW asset sale were largely
used to reduce debt and to make additional financial resources available for
working capital needs and third-party administration opportunities.
In 1999, Anchor caused PKW to change its name to Shelby Insurance Services,
Inc., ("Shelby"). Effective March 9, 2000, Anchor sold all of the capital
stock of Shelby to James R. Dunathan, a member of the Board of Directors.
Recent Developments, Change in Control
On November 29, 1999 Anchor entered into a letter of intent with Ward North
America Holding, Inc. ("Ward") whereby Ward would acquire a controlling
interest in Anchor. During the next several months Ward acquired $500,000 of
10% Convertible Subordinated Debentures, Series E (the "Series E Debentures")
along with warrants to purchase 300,000 shares of Anchor common stock at $0.50
per share. The Series E Debentures had an initial two year term, paid 10%
interest and were convertible into shares of Anchor's common stock at $0.50 a
share. On March 9, 2000, Anchor and Ward signed a Securities Purchase
Agreement (the "Agreement") pursuant to which Ward acquired a controlling
interest in Anchor for $2,000,000 through the purchase of 1,853,300 shares of
Series A Convertible Preferred stock ("Series A Preferred"). The Series A
Preferred shares are senior to the Company's common stock and vote on an as
converted basis of ten shares for each share of Series A Preferred. The terms
of the Agreement also provided that Ward would make available a $1,000,000
line of credit. In connection with its investment, all of Anchor's directors
resigned except for James R. Dunathan. As the sole remaining director, Mr.
Dunathan appointed one representative of Anchor and four representatives of
Ward to the board of directors of Anchor.
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Ward is a San Diego, California based company that provides claims
administration and risk management for general insurance, workers'
compensation, automobile, professional liability and employment practices
liability. The investment in Anchor represents the first time Ward has been
involved in employee benefits administration. Anchor's management and board of
directors believe that Ward will be able to provide needed capital to the
Company. In turn, this will enable Anchor to accelerate the systems
consolidation process and to seek new business expansion opportunities.
Employees
As of March 24, 2000, Anchor and its subsidiaries employed approximately 160
full-time employees. None of Anchor's employees are presently represented by a
union or covered by a collective bargaining agreement. Anchor believes its
employee relations are good.
Executive Officers of the Registrant
The following information is provided regarding certain executive officers
of Anchor and/or its subsidiaries.
<TABLE>
<CAPTION>
Name Age Position Held Since
---- --- -------- ----------
<C> <C> <S> <C>
James R. Dunathan.............. 63 President, Chief Executive Officer and 1987
Director of Anchor
Earl Wiklund................... 52 Senior Vice President, Chief Financial 1987
Officer of Anchor and Harden Group
Carol J. Haynosch.............. 46 Senior Vice President, Human 1994
Resources, Corporate Affairs and
Assistant Secretary of Anchor and
Harden Group
Terry D. Hale.................. 54 President and Chief Operating Officer 2000
of Harden Group
Thomas O. Hedford.............. 59 President, Sales & Marketing of Harden 1999
Group
Raymond P. Petersen............ 62 Vice President, Special Risks of 1996
Harden Group
Stuart Rosendahl............... 46 Vice President, Sales & Marketing of 1999
Harden Group
</TABLE>
James R. Dunathan. Mr. Dunathan has over 40 years of experience in the
insurance industry and his family has been involved in the insurance industry
since 1880. He joined Harden in 1985 and initiated the formation of Anchor in
late 1986. Mr. Dunathan served as a member of the Board of Directors of the
Professional Insurance Agents Association for 11 years and as President of
such Association from 1975 to 1976. Currently Mr. Dunathan serves on the
Business Leaders Alliance for Contra Costa County, an appointment made by the
County Board of Supervisors. He also serves as a Director of the Barbara
Milliff Children's Center in Concord, California, a non-profit school for
children with developmental disabilities. Mr. Dunathan completed his
undergraduate studies at Ohio State University; and served actively in the
U.S. Navy as a naval aviator while he continued graduate work at the U.S.
Armed Forces Institute in Japan.
Earl Wiklund. In addition to his duties at Anchor, Mr. Wiklund also serves as
the Senior Vice President and Chief Financial Officer of Anchor's third-party
administration division, Harden Group. He has over 30 years of experience in
various operational, administrative and financial management positions. Mr.
Wiklund joined Harden in 1984 as Vice President, Finance. Mr. Wiklund
graduated from California State University, Sacramento, with a B.S. degree and
received his M.B.A. from St. Mary's College. He also serves as Chairman of
Anchor's Audit, Budget & Finance Committee. Mr. Wiklund resigned from Anchor's
Board of Directors on March 14, 2000 and has resigned all of his executive
capacities effective March 31, 2000.
Carol J. Haynosch. Ms. Haynosch joined Anchor in 1994 with more than 25 years
experience in legal, banking and insurance. Prior to joining Anchor, Ms.
Haynosch was the Vice President of an insurance and diversified financial
services company, and a Vice President of a national bank. In addition to her
responsibility
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to being the Company's senior executive for human resource matters, Ms.
Haynosch's responsibilities include corporate compliance, due diligence and
SEC reporting. She also serves as an ex-officio member of Anchor's
Compensation and Personnel Committee.
Terry D. Hale. Mr. Hale joined Harden Group on March 14, 2000 as President and
Chief Operating Officer. Mr. Hale has over 29 years of experience and
leadership in the employee benefits and insurance field. His experience
includes the development and implementation of employee benefit programs,
underwriting, managing a Federal Employee Health Benefit (FEHB) plan primarily
for Department of Treasury employees. Prior to joining Harden Group, he served
as Executive Director from 1989 to 2000 of the Texas Municipal League Group
Benefits Risk Pool. As Executive Director, Mr. Hale was responsible for the
daily operational functions as well as the development of business
opportunities. Prior to entering the insurance field Mr. Hale taught high
school biology, chemistry and physics in Columbia, Illinois. Mr. Hale received
a Bachelor of Science degree from Southeast Missouri State University.
Thomas O. Hedford. Mr. Hedford originally joined PHA in 1968 when it was
formerly owned by Beneficial Life Insurance Company. PHA was acquired by
Harden Group in 1998 and is now operated as a division of Harden-CA. As
President, Sales & Marketing, his responsibilities at Harden Group primarily
focus on the production of self-insured and large case fully insured accounts.
Mr. Hedford is also responsible for the daily operational functions of PHA. He
has been active in actuarial organizations and served on insurance industry
boards. From 1995-1998 he served as Chairman of the Oregon Medical Insurance
Pool Board and from 1996-1998 he was the Treasurer of the Oregon Life and
Health Guaranty Association. Mr. Hedford graduated from the University of
Washington with a degree in Mathematics.
Raymond P. Petersen. Mr. Petersen joined Harden-CA in 1987 following several
years with Marsh-McLennan Associates in San Francisco. His 30 plus years in
the insurance industry include sales management and marketing positions for
both property and casualty and group health benefits companies. At Harden
Group he is responsible for the development of sales from sponsored programs
for state associations and trade groups. Mr. Petersen has resigned all of his
executive capacities effective March 31, 2000.
Stuart Rosendahl. Mr. Rosendahl originally joined PHA in 1995, when it was
formerly owned by Beneficial Life Insurance Company, after serving ten years
with Blue Cross Blue Shield of Oregon. PHA was acquired by Harden Group in
1998 and is now operated as a division of Harden-CA. At Harden Group, Mr.
Rosendahl is responsible for new business development, consulting, client
management and retention. Mr. Rosendahl is active in the Oregon State
Association of Health Underwriters and is a member of the Self Insured
Institute of America as well as various other insurance industry related
organizations. He holds a Bachelor of Science degree from Oregon State
University and has earned the professional designation of Certified Health
Consultant (CHC).
Regulation
Anchor's insurance related third-party administration activities are subject
to licensing and regulation by the jurisdictions in which such activities are
conducted. In addition to regulatory requirements applicable to Anchor, most
jurisdictions require that individuals engaged in insurance brokerage
activities be personally licensed. As a result, a number of Anchor's employees
are so licensed. Anchor's operations depend on the continued validity and good
standing under the licenses and approvals pursuant to which it currently
operates. Licensing laws and regulations vary from jurisdiction to
jurisdiction. In all jurisdictions, the applicable licensing laws and
regulations are subject to amendment or interpretation by regulatory
authorities. Such authorities generally are vested with broad discretion as to
the granting, renewing and revoking of licenses and approvals.
Other factors, such as client uncertainty about the potential effect of
health care reform proposals, could also affect Anchor's business. Anchor
believes that its expertise in two areas frequently identified in health care
reform proposals (managed care and managed competition), combined with its
strategy of serving middle market clients, leave it well positioned to operate
effectively in a managed care and managed competition environment. Anchor also
believes that in the current political environment, the United States will
experience incremental, rather than sudden comprehensive changes in health
care regulations. It is not possible at this time, however, to
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predict the effect that any future health care reform legislation will have on
Anchor's business condition or operations. Anchor is unaware of any current
regulatory proposals that could have any material effect on its liquidity,
capital resources or operations.
Inflation
In response to general inflation trends and increased operating costs, the
health insurance industry continuously seeks to achieve greater savings from
medical service providers. The health insurance industry, in general, and the
insurance claims administration and service industry, in particular, continues
to undergo significant consolidation. The primary driver of this process is
the major investment in infrastructure required to maintain a competitive
position. The focus on systems which improve productivity and accommodate
electronic data interchange increasingly requires service providers to achieve
a certain critical mass in order to be cost effective.
At the same time, significant opportunities are emerging from the
consolidation process, as employers seek quality service and stability for
their group benefit plans. Third-party administrators who apply state-of-the-
art systems, are cost-effective and seek to be flexible in delivering their
services have an opportunity to substantially expand their client base.
Competition
The insurance claims administration and service business is highly
competitive and there are many claims administration and service organizations
who actively compete with Anchor in every area of its business. Anchor
competes directly with national insurance administrators, insurance companies
and health maintenance organizations that market their own products, through
independent agencies, brokers and third-party administrators, as well as with
entities which self insure or sponsor other insurance programs. Many of these
competitors are larger than Anchor and have greater resources. Anchor seeks to
compete by specializing in specific market segments, developing specialty
products for those markets, and maintaining relationships with consumers by
providing personal service normally associated with small local businesses,
together with the expertise, flexibility and diversity of products that can
only be provided by a larger firm.
Item 2. Properties
Anchor leases approximately 32,099 rentable square feet of office space at
its executive offices at 1800 Sutter Street, Suite 400, Concord, California
94520. From November 1, 1994 through October 31, 1999, Anchor paid rent of
$1.40 per rentable square foot per month (approximately $44,939 per month).
Effective from November 1, 1999 and through October 31, 2004, Anchor's must
pay rent of $1.75 per rentable square foot per month (approximately $56,173
per month). As of January 1, 2000, Anchor subleased to an unrelated third
party 10,692 rentable square feet of this office space (approximately $14,969
per month from January 1, 1999 through October 31, 1999 and approximately
$18,711 from November 1, 1999 through October 31, 2004).
In addition to the leased space it currently occupies in Concord, Harden-AZ
leases approximately 6,992 rentable square feet of office space in Scottsdale,
Arizona, and PHA leases approximately 17,987 rentable square feet of office
space in Portland, Oregon. The Harden-AZ lease for 6,992 rentable square feet,
which expires May 31, 2002, requires a rent payment of between $0.84 and $0.90
per rentable square foot per month. Harden-AZ also rented 2,033 square feet at
$1.25 per rentable square foot per month under a lease which expired March 1,
2000. PHA paid rent in Portland, Oregon under its lease for 17,987 rentable
square feet of $1.40 per rentable square foot per month through December 31,
1999, and from January 1, 2000 through December 31, 2002 must pay rent of
between $1.46 and $1.63 per rentable square foot per month. In addition, PHA
paid rent of $1.50 per rentable square foot per month for 500 square feet in
Las Vegas, Nevada, which expired on June 1, 1999.
PKW was obligated to pay rent of between $1.75 and $2.00 per rentable square
foot per month under a prior lease in Oakland, California, which expired on
November 30, 1999. In December 1994, Anchor relocated
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PKW's executive office to Anchor's office space in Concord, California and
subleased approximately 13,128 rentable square feet of PKW's offices in
Oakland. In May 1995, December 1995, and October 1997, it entered into
subleases with respect to 82%, 10% and 8%, respectively, of PKW's office space
in Oakland. The amounts classified as short and long-term liabilities with
respect to the leases, reflect the shortfall between sublease income received
and lease expense paid. Anchor assumed this remaining obligation which expired
on November 30, 1999. On March 15, 2000, Anchor retired this lease obligation
with the proceeds from the sale of Series A Preferred shares purchased by
Ward.
Item 3. Legal Proceedings
Anchor and its subsidiaries are parties from time to time to various
lawsuits that arise in the normal course of business. Management is not aware
of any lawsuits to which Anchor or its subsidiaries is currently a party or to
which any property of Anchor or any of its subsidiaries is subject, which
might materially adversely affect the financial condition or results of
operations of Anchor.
Item 4. Submission of Matters to a Vote of Security Holders
None.
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PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
Prior to the consummation of the merger with System in January 1995, Anchor
was a privately held California corporation with approximately 63
shareholders. Consequently, there was no established trading market for
Anchor's common stock. As of March 24, 2000, there were approximately
4,710,055 shares of Anchor's common stock outstanding, held by approximately
2,000 shareholders of record. As of March 24, 2000, there were outstanding
warrants to purchase 1,588,129 shares of common stock at exercise prices of
$0.50 to $3.00 per share, and outstanding options to purchase 592,450 shares
of common stock at exercise prices of $0.37 to $2.19 per share of Anchor,
outstanding debentures representing Series B, D and E in the amount of
$864,000 convertible into 1,728,000 shares of Anchor common stock and Series A
Preferred stock convertible into 18,533,000 shares of Anchor common stock
(representing 62.6% of Anchor's outstanding shares on a fully diluted basis).
The following table sets forth historical trade information for Anchor common
stock.
<TABLE>
<CAPTION>
Quarterly Quarterly Quarterly
Common Stock Quarterly Trade History Volume High/Ask Low/Bid
- ------------------------------------ --------- --------- ---------
<S> <C> <C> <C>
March 31, 1998.................................... 87,300 0.94 0.67
June 30, 1998..................................... 90,900 0.71 0.60
September 30, 1998................................ 160,300 0.49 0.32
December 31, 1998................................. 23,100 0.46 0.23
March 31, 1999.................................... 175,200 0.65 0.62
June 30, 1999..................................... 166,500 0.39 0.39
September 30, 1999................................ 124,740 0.33 0.32
December 31, 1999................................. 60,300 0.44 0.43
</TABLE>
Since the January 1995 merger with System, Anchor's shares of common stock
have publicly traded on the OTC Bulletin Board (Symbol: APUX). At such time it
meets certain minimum market capitalization requirements, Anchor intends to
seek to list its shares on The Nasdaq Small-Cap Market; however, there can be
no assurance as to when or whether such shares will be so listed.
Holders of Anchor common stock are entitled to such dividends as may be
declared from time to time by the Board of Directors out of legally available
funds. Anchor has not paid any cash or stock dividends to date. Anchor does
not expect to pay dividends in the foreseeable future.
Item 6. Selected Financial Data
The following table sets forth certain historical information for Anchor
which is based on continued operations, and should be read in conjunction
with, Anchor's audited financial statements that are being filed as part of
this report.
<TABLE>
<CAPTION>
Anchor Pacific Underwriters, Inc.
Selected Financial Data
--------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues 1/............. $10,072,565 $12,284,558 $6,977,330 $ 4,574,132 $ 5,269,554
Income (Loss) before
Other expenses,
net 1/................. $(2,195,511) $ (486,116) $ (733,726) $ (921,935) $ (54,894)
Loss.................... $(2,477,971) $ (775,330) $ (946,691) $(1,405,800) $ (536,640)
Loss Per Share 2/....... $ (0.53) $ (0.16) $ (0.21) $ (0.37) $ (0.14)
Weighted Average Shares
Outstanding 2/......... 4,710,056 4,710,057 4,612,153 3,766,176 3,819,605
Cash Flow From
Operations (Deficit)... $(1,410,788) $ 83,960 $ (406,752) $(1,127,789) $ 475,158
Total Assets............ $ 6,520,035 $ 7,655,324 $7,452,310 $ 8,423,690 $10,173,428
Total Long-Term
Liabilities............ $ 1,747,612 $ 1,311,568 $1,785,309 $ 872,950 $ 1,753,849
Shareholders' Equity
(Deficit).............. $(2,779,059) $ (301,088) $ 457,242 $ 1,107,231 $ 1,563,032
</TABLE>
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- --------
1/ Consistent with Anchor's audited financial statements set forth elsewhere
in this Annual Report, both Revenues and Income (Loss) before other
expenses, net, include interest income.
2/ Earnings (Loss) Per Share and Weighted Average Shares Outstanding have
been retroactively restated to reflect the effects of the 10 for 1 stock
split effected January 6, 1995.
Item 7. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
General
Historically, Anchor derived a majority of its revenues from third-party
administration services. As a result of acquisitions made during 1994 and
1996, Anchor significantly increased the percentage of its revenues derived
from property and casualty insurance brokerage activities. Based on a
strategic decision in 1998 to focus on its third-party administration
business, Anchor sold its insurance brokerage business at year-end 1998. This
sale allowed Anchor to reduce debt and to make additional financial resources
available for working capital needs and third-party administration
opportunities. In July 1997 and January 1998, Harden entered into new
contracts through its marketing partners to provide third-party administration
services in Los Angeles, California and Portland, Oregon. As a result of
declining revenue on the Los Angeles business due to carrier rate increases,
the Los Angeles, California office was closed at the end of February 1999,
with the remaining business now being serviced from the Concord, California
office.
Product development and new product sales continue to be a top priority, as
does geographical diversification into other states and marketing territories.
Marketing for new business began in 1996 and coincided with the release of new
products by Harden Group. Recently, Harden Group has entered into significant
new contracts to provide third-party administration services through its
marketing partners. Management anticipates that these new contracts will
increase the revenues Anchor derives from third-party administration services
and expects to accelerate its marketing activities in California, Arizona,
Nevada, Oregon, Washington, Idaho and Utah.
Results of Continuing Operations--Years Ended December 31, 1999, 1998 and 1997
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 1999 were $10,072,565, a decrease of
$2,211,993, or 18%, from 1998 revenues. The decrease in revenue was primarily
due to declining revenues as resulting from carrier rate increases and lost
business in Harden Group's former Los Angeles office as well as its PHA office
in Oregon. In February 1999, Harden Group closed the Los Angeles office. The
total revenues for 1998 were $12,284,558, an increase of $5,307,228, or 76%,
over 1997 revenues of $6,977,330. The increase in revenue was primarily due to
the increase in fee income derived from Harden Group and the acquisition of
its PHA office in Oregon. Anchor's revenues vary from quarter to quarter as a
result of the timing of policy renewals and net new/lost business production,
whereas expenses are fairly uniform throughout the year.
Fees. Fees from Harden Group, (including underwriting and risk analysis)
services for 1999 were $10,054,596, a decrease of $2,218,471, or 18%, as
compared to $12,273,067 in fees for 1998. This decrease in fee income is
largely the direct result of declining revenue due to carrier rate increases
and lost business generated from Harden Group's former Los Angles office as
well as its PHA office. Fee revenues for 1997 were $6,952,655. The increase in
fee income for 1998, as compared to 1997 was largely the result of new
business generated from projects associated with new administrative contracts
and administrative fees generated from new products.
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Revenues generated by Anchor in 1999 from third-party administration
services consist of fee revenues generated by Harden Group. The third-party
administration revenues are primarily derived from: (a) an insurance product
underwritten by one insurance carrier, which is A- (Excellent) rated; (b) the
administration of insurance programs underwritten by various reinsurance
carriers for a number of self-insured employers; and (c) dental insurance
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 loss reinsurance carrier.
Interest Income. Interest income consists of interest earned on funds held
in fiduciary accounts and interest earned on investments. Interest income was
$17,969, $11,491 and $24,675 in 1999, 1998 and 1997, respectively. Income
earned on funds held in fiduciary accounts fluctuates with the decrease or
increase in interest rates.
Expenses
Total Expenses. Total operating expenses for 1999 were $12,268,076, a
decrease of $502,598, or 4%, as compared to 1998 operating expenses of
$12,770.674. 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. Total operating expenses for 1998
increased $5,059,618, or 66%, as compared to 1997 operating expenses of
$7,711,056. The increase resulted primarily from an increase in selling,
general and administration expenses and employee compensation and benefits
resulting from the expansion of third-party administration services business
at Harden Group.
Employee Compensation and Benefits. Employee compensation and benefits for
1999 were $7,377,268, a decrease of $690,533, or 9%, as compared to 1998
employee compensation of $8,067,801. 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. The total employee compensation and benefits expenses for 1998
increased $3,423,612, or 74%, over employee compensation and benefits for 1997
of $4,644,189. The increase related primarily to staffing needs required to
service new third-party administration projects at Harden Group.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $4,346,808, $4,702,873 and $3,066,867 in 1999,
1998 and 1997, respectively. The $356,065, or 8%, decrease in 1999, as
compared to 1998, resulted primarily from the closure of Harden Group's Los
Angeles office. The $1,636,006, or 53% increase in 1998, compared to 1997,
resulted primarily from expenses associated with the increased third-party
administration services business at Harden Group. General and administrative
expenses include rent, travel, insurance, postage, telephone, supplies and
other miscellaneous expenses.
Employee Severance and Other Costs. Costs for employee severance reserves
and other costs were $544,000 for 1999. These costs primarily consist of
severance accruals pertaining to the resignations of certain members of
management effective March 31, 2000.
Interest Expense. Interest expense was $186,411, $221,871 and $240,488 in
1999, 1998 and 1997, respectively. The decrease in interest expense in 1999,
as compared to 1998 and 1997, was due to continued decreased borrowings under
the Company's 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
$66,120, $50,705 and $45,067 in 1999, 1998 and 1997, respectively. The
increase in amortization of goodwill and other intangibles is a result of
increased intangibles at Harden-AZ.
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Income Taxes
Anchor's expense for income taxes was $5,908, $9,956, and $(4,030) in 1999,
1998 and 1997, respectively. An analysis of Anchor's provision for income
taxes is presented in Note 8 of the Notes to Consolidated Financial
Statements.
Results of Discontinued Operations--Year Ended December 31, 1998
Revenues
No revenues were generated from insurance brokerage business in 1999. The
total revenues from Anchor's discontinued insurance brokerage business in 1998
were $3,069,459. Revenues were primarily related to commissions for property
and casualty insurance brokerage services (net of sub-broker commissions) and
generally were recognized as of the effective date of the insurance policy,
except for commissions on installment premiums, which were recognized
periodically as billed. Commissions for 1998 were $3,017,939. Interest income,
which consisted of interest earned on insurance premiums and other funds held
in fiduciary accounts and interest earned on investments was $51,520.
Expenses
There were no expenses generated from insurance brokerage business in 1999.
The expenses relating to Anchor's discontinued insurance brokerage business in
1998 were $2,875,350. These expenses were attributed to employee compensation
and benefits of $2,019,044, selling, general and administrative expenses of
$628,980 and amortization of goodwill and other intangibles of $170,134. In
addition, interest expense for 1998 was $57,192.
Liquidity and Capital Resources
Anchor reported net cash flows used by operations of $(1,410,788) for the
twelve months ended December 31, 1999, compared to net cash flows used by
operations of $83,960 for the twelve months ended December 31, 1998. During
1999, Anchor repaid $800,000 on its existing line of credit and met its
operating and capital needs from several sources, including the use of
proceeds received from the sale of PKW and the use of proceeds from the sale
of Series C, D and E Debentures (as further discussed below).
In 1995, Anchor issued $370,000 of 10% Convertible Subordinated Debentures
(the "Debentures"). Investors holding $270,000 of the Debentures, including
seven members of the Board of Directors, converted their debentures into
200,000 shares of Anchor's common stock at $1.35 per share. These conversions
reduced Anchor's outstanding indebtedness by $270,000 and, in turn, increased
shareholders' equity by $270,000. On March 15, 2000, Anchor paid off the
remaining outstanding Debentures ($60,000) with the proceeds from the Series A
Preferred shares purchased by Ward.
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
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common stock at a purchase price of $1.35 per share; or (b) be allowed to
participate in the 1997 Offering by exchanging the Bridge Notes and receiving
in return (i) interest at the rate of 10% per annum up to the date of
conversion; (ii) Anchor common stock in place of the Bridge Notes at a
conversion price equal to $0.90 per share; and (iii) a five year warrant,
equal to the number of shares issued in place of the Bridge Notes, with the
right to purchase Anchor's common stock at a purchase price of $0.90 per
share. Purchasers representing $180,000 of said Bridge Notes chose alternative
(a) above, and the remaining $45,000 chose alternative (b) above. Certain
purchasers agreed to extend the term of the Bridge Notes. On March 15, 2000,
Anchor paid off the remaining outstanding Bridge Notes ($80,000) with the
proceeds from the Series A Preferred shares purchased by Ward.
During 1997, Anchor raised $305,000 from seven members of the Board of
Directors and other qualified investors through a private offering of Anchor
common stock along with warrants to acquire shares of Anchor common stock (the
"1997 Offering"). Anchor utilized a substantial portion of the proceeds from
the 1997 Offering to support current and future working capital needs of
Anchor. The basic terms of the 1997 Offering were: (a) up to 555,000 shares of
Anchor common stock available at a purchase price of $0.90 per share; (b) five
year warrants to acquire one share of Anchor common stock for each share of
Anchor common stock purchased at an exercise price of $0.90 per share; (c)
"piggyback" registration rights for three years; and (d) anti-dilution
protection for stock splits, stock dividends, recapitalizations and
reorganizations.
At the end of the third quarter 1998, Anchor commenced raising additional
funds from members of the Board of Directors and other qualified investors by
offering 10% Convertible Subordinated Debentures, Series B (the "Series B
Debentures"). At the close of said offering on January 25, 1999, Anchor had
raised $495,000, $200,000 from its primary bank lender and the remaining
$295,000 from five members of the Board of Directors and other qualified
investors. Anchor used a substantial portion of the proceeds from the Series B
Debentures to support current working capital needs. The basic terms of the
Series B Debentures were: (a) 10% interest, payable semi-annually in arrears;
(b) two year maturity; (c) conversion price of $0.50 per share; (d)
"Piggyback" registration rights for three years; (e) for each $5,000 of Series
B Debentures acquired, an investor received a five year warrant to acquire
2,000 shares of Anchor common stock at an exercise price of $0.50 per share;
and (f) subordination provisions that subordinate the Series B Debentures to
Anchor's "Senior Debt" (as defined in the Series B Debentures). The Series B
Debentures contained a provision that permitted Anchor to redeem all or a
portion of the Series B Debentures, at par, plus any outstanding interest, in
the event Anchor sold Putnam, Knudsen & Wieking, Inc. ("PKW") for an amount in
excess of $2,000,000. As a result of the December 31, 1998 sale of PKW at a
purchase price in excess of $2,000,000, Anchor repurchased $230,000 of the
Series B Debentures including $200,000 repurchased from its primary lender. On
March 15, 2000, Anchor paid off $145,000 of the outstanding Series B
Debentures with the proceeds from the Series A Preferred shares purchased by
Ward. As of March 24, 2000, $120,000 of the Series B Debentures remained
outstanding.
During the first nine months of 1999, Anchor raised $179,000 from one member
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.
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During the last three months of 1999, Anchor raised $244,000 from one member
of the Board of Directors and other qualified investors by offering 10%
Convertible Subordinated Debentures, Series D (the "Series D Debentures).
Anchor utilized 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 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
D Debentures acquired, an investor received 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 subordinated the Series D Debentures to
Anchor's "Senior Debt" (as defined in the Series D Debentures). As of March
24, 2000, all of the Series D Debentures remained outstanding.
On November 29, 1999, Anchor and Ward North America Holding, Inc. ("Ward")
executed a letter of intent whereby Ward would acquire a controlling ownership
interest in Anchor and nominees of Ward would assume a majority of the seats
on Anchor's Board of Directors. The November 29, 1999 letter of intent was
further modified by the parties pursuant to a February 18, 2000 binding Letter
Agreement that specifically bound the parties to certain funding and
structural commitments.
Effective March 9, 2000, Anchor and Ward entered into a Securities Purchase
Agreement ("Agreement") which superseded and replaced in its entirety the
binding Letter Agreement dated February 18, 2000 and letter of intent dated
November 29, 1999. The basic terms of the Agreement provide that Ward would
purchase from Anchor a package of debt and equity securities and that it would
make available a $1,000,000 loan facility. The specific securities and loan
facility are described below:
(a) Series E Convertible Debentures (the "Series E Debentures") in the
principal amount of $500,000; two year maturity with a provision that
provides for repayment on July 1, 2000, if requested by Ward; conversion
price of $0.50 per share; "Piggyback" registration rights for three years;
for each $5,000 of Series E Debentures acquired, Ward received a five year
warrant to acquire 3,000 shares of Anchor common stock at an exercise price
of $0.50 per share; and subordination provisions that subordinates the
Series E Debentures to Anchor's "Senior Debt" (as defined in the Series E
Debentures). The Series E Debentures are superior to all other debentures
of the Company, including without limitation those Series A, B, C and D
debentures (detailed above), and shall constitute "Senior Debt" for
purposes of those debentures. As of March 24, 2000, Ward has invested
$500,000 in the Series E Debentures;
(b) a $200,000 bridge loan facility to Anchor evidenced by a promissory
note ("Bridge Loan"); bearing interest at the rate of 10% per annum with a
maturity date of July 1, 2000. The principal amount and all accrued
interest under the Bridge Loan were, at the election of Ward, applied
toward the purchase of Series A Convertible Preferred stock, described
below;
(c) 1,853,300 shares of Series A Convertible Preferred stock ("Series A
Preferred") at a purchase price of $2,000,000, which would constitute 62.6%
of Anchor's common stock on a fully diluted basis; and
(d) a $1,000,000 convertible loan facility (the "Convertible Loan") which
was made available immediately following the closing of the purchase of the
Series A Preferred. The Convertible Loan shall be convertible, at Ward's
option, into shares of Series A Preferred stock which are further
convertible into a number of shares of common stock, which, when added to
the shares of common stock issued or issuable pursuant to the Series E
Debentures (not including the warrants accompanying the Series E
Debentures) and other shares of Series A Preferred issued to Ward, would
constitute 73.5% of Anchor's common stock on a fully-diluted basis
following such conversion, assuming the maximum amount of $1,000,000 was
borrowed by Anchor pursuant to the Convertible Loan.
Under the terms of the Agreement, Ward agreed that during the 36 month
period following the closing of the transaction neither Ward or its affiliates
would make any further acquisitions of Anchor's securities unless Ward first
made a tender offer (the "Tender Offer") to buy all of the shares of Anchor's
common stock not then owned by Ward or its affiliates at a purchase price
equal to the greater of: (i) $0.80 per share (as adjusted for stock splits,
combinations or dividends with respect to such shares) or (ii) the price per
share determined by
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assuming the value of Anchor to the be equal to Anchor's earnings before
income taxes ("EBIT") for the 12 full calendar months preceding the month in
which the offer is made, multiplied by six (6) and divided by the number of
shares outstanding of the Company on a fully diluted basis.
Capital and certain acquisition related expenditures were $323,607 and
$284,509 for the twelve months ended December 1999 and 1998, respectively. The
1999 expenditures primarily related to software development and implementation
to update the eligibility and claims processing system.
Short-term borrowings, which consist of the current portion of long-term
debt and the current portion of long-term liabilities in the aggregate totaled
$982,589 at December 31, 1999 (as compared to $1,894,018 at December 31,
1998). As of December 31, 1999, short-term borrowings consisted of: (a)
$198,000 representing the current portion of a term bank loan further
described below; (b) approximately $73,750 of future fixed payments under a
consulting agreement entered into with a company affiliated with the former
shareholders of Harden-AZ; (c) $260,000 of the Debentures; (d) $80,000 of the
Bridge Notes; (e) $200,000 of short term borrowing (f) $69,038 representing
deferred rent with regard to certain real property currently leased by Anchor;
and (g) approximately $101,801 for certain other current liabilities. On March
15, 2000, Anchor used the proceeds derived from the sale of Series A Preferred
shares purchased Ward to retire the amounts described in (d); (e) and (g) and
$145,000 of (c).
On September 30, 1997, Anchor obtained a $1,600,000 bank loan. The basic
terms and conditions of this loan are: (a) monthly interest payments equal to
the bank's prime rate, plus 2.5%; (b) five year term; (c) monthly principal
payments in installments of $26,666 (Not withstanding the foregoing, 75% of
Anchor's monthly EBITDA shall be applied to principal to the extent such
percentage of monthly EBITDA is required to make the scheduled payment of
principal. To the extent that 75% of monthly EBITDA falls short of the
required principal payment, the difference shall be added to the final
payment); and (d) a five year warrant to acquire 95,000 shares of Anchor
common stock at a purchase price of $1.75 per share. The proceeds of the loan
were used to retire outstanding credit facilities with another bank.
On December 22, 1997, the bank that provided Anchor with the $1,600,000 term
loan also provided Anchor with a $250,000 loan to support current working
capital needs of Anchor in connection with Harden Group's expansion in
Portland, Oregon.
On March 9, 1998, a term loan in the amount of $1,821,890 was entered into
between Anchor and the bank combining both the $1,600,000 term loan and the
$250,000 loan. The basic terms of this term loan were: (a) monthly interest
payments equal to bank's prime rate, plus 2.5%; (b) maturity date of October
5, 2002; and (c) monthly principal payments in installments of $33,125
beginning on April 5, 1998. All other terms and conditions contained in term
loan dated September 30, 1997, including all amendments thereto and
replacements therefor, remained in place.
On June 2, 1998, a new term loan in the amount of $1,741,841 was entered
into between Anchor and the bank which replaced the $1,821,890 term loan. The
basic terms of this new term loan are: (a) monthly interest payments equal to
bank's prime rate, plus 2.5%; (b) a maturity date of October 5, 2002; 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.
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 terms; (c)
principal plus all accrued unpaid interest due at maturity on 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 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
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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 which began 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.
At December 31, 1999, long-term liabilities and long-term debt, less the
current portion discussed above, totaled $1,747,612 (as compared to $1,311,568
at December 31, 1998), and primarily consisted of: (a) $700,485 representing
the long-term portion outstanding under a term bank loan further described
above; (b) approximately $264,644 representing deferred rent with regard to
certain real property currently leased by Anchor; (c) $50,000 of Series B
Debentures, (d) $244,000 of Series D Debentures; (e) $ 400,000 of Series E
Debentures; and (f) approximately $88,483 for certain other long-term
liabilities. On March 15, 2000, Anchor used the proceeds derived from the sale
of Series A Preferred shares purchased by Ward to retire the amount described
in (c) above. In addition, at the time Anchor acquired PKW in 1994 it assumed
a lease obligation on PKW's old office space. At the conclusion of the lease
the landlord was owed $147,094. On March 15, 2000, Anchor retired this lease
obligation with the proceeds from the sale of the Series A Preferred shares
purchased by Ward.
Anchor has not paid cash dividends in the past and does not expect to pay
cash dividends in the foreseeable future.
Strategy
Until January 1999, Anchor's business 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 experienced considerable competition pressures
through much of the 1990's. During this period the insurance industry
generally experienced over capacity which, in turn, negatively impacted both
insurance premiums and brokerage commissions.
In light of these external and internal trends, the Board of Directors made
a strategic decision in 1998 to sell PKW, the property and casualty insurance
brokerage operation. This transaction was completed, effective December 31,
1998. In 1999, Anchor caused PKW to change its name to Shelby Insurance
Services, Inc., ("Shelby"). Effective March 9, 2000, Anchor sold all of the
capital stock of Shelby to James R. Dunathan, a member of the Board of
Directors.
On November 29, 1999 Anchor entered into a letter of intent with Ward North
America Holding, Inc. ("Ward") whereby Ward would acquire a controlling
interest in Anchor. On March 9, 2000, Anchor and Ward signed an Agreement
pursuant to which Ward acquired a controlling interest in Anchor through the
purchase of Series A Convertible Preferred shares ("Series A Preferred"). The
Series A Preferred shares are senior to the Company's common stock and vote on
an as converted basis of ten for each share of Series A Preferred. In
connection with its investment, all of Anchor's directors resigned except for
James R. Dunathan. As the sole remaining director, Mr. Dunathan appointed one
representative of Anchor and four representatives of Ward to the board of
directors of Anchor.
Ward is a San Diego, California based company that provides claims
administration and risk management for general insurance, workers'
compensation, automobile, professional liability, employment practices
liability, etc. The investment in Anchor represents the first time Ward has
been involved in employee benefits administration. Anchor's management and
board of directors believe that Ward will be able to provide needed capital to
the Company. In turn, this will enable Anchor to accelerate the systems
consolidation process and to pursue further expansion opportunities.
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Anchor's current strategy is to focus on expanding Harden Group, its third-
party administration services division by: (a) continuing to develop, through
its marketing partners, specialized affiliated business units that target
selected insurance industry market segments defined by industry type,
geographic location and consumer demographics; (b) creating new products and
services; and (c) strengthening management, sales and marketing staff. In
conjunction with this strategy, Anchor intends to seek to manage its affairs
to achieve expansion through internal growth of its existing and new product
lines. Anchor also intends to consider additional acquisition and merger
opportunities in the third-party administration services business.
Recently Issued Accounting Statements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting
for Derivative Instruments and Hedging Activities." SFAS 133 establishes new
standards of accounting and reporting for derivative instruments and hedging
activities. SFAS 133 requires that all derivatives be recognized at fair value
on the balance sheet, and that the corresponding gains or losses be reported
either in the statement of operations or as a component of comprehensive
income, depending on the type of hedging relationship that exists. SFAS 133
has been amended by Statement 137, "Accounting for Derivative Instruments and
Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133,"
and is effective for years beginning after June 15, 2000. The Company plans to
adopt this statement in fiscal 2001, Management does not believe adoption of
this statement will materially impact the Company's financial position or
results of operations.
On March 4, 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants ("AICPA") issued Statement
of Position No. 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 requires that
computer software costs that are related to internal software and incurred in
the preliminary project stage be expensed as incurred. Once the capitalization
criteria of SOP 98-1 have been met, external direct costs of materials and
services consumed in developing or obtaining internal-use computer software;
payroll and payroll-related costs for employees who are directly associated
with and who devote time to the internal-use computer software project (to the
extent of the time spent directly on the project); and interest costs incurred
when developing computer software for internal use should be capitalized. SOP
98-1 is effective for financial statements for fiscal years beginning after
December 15, 1998. Accordingly, Anchor has adopted SOP 98-1 in its
consolidated financial statements for the year ending December 31, 1999. The
adoption of SOP 98-1 is not expected to have a materiel impact on the
consolidated financial statements of Anchor.
Year 2000 Update
Impact of Year 2000. The "Year 2000 Issue" was the result of computer
programs which had been written using two digits rather than four to define
the applicable year. The concern was computer programs that had time-sensitive
software might recognize a date using "00" as the year 1900 rather than the
year 2000. This situation could have resulted 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.
Current Status. Anchor's plan to achieve Year 2000 compliance in its
electronic information systems was successfully completed. A corporate team
was created to coordinate the identification and implementation of the
necessary changes required for computer systems and applications. Anchor also
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 provided a detailed analysis of all networked "objects"
and compliance information on all installed applications that were not
specific to the insurance industry. The OASYS assessment was completed during
the third quarter of 1999.
In addition, OASYS provided Year 2000 Inbound and Outbound Compliance
Communications beginning on April 1, 1999. Inbound Year 2000 Compliance
Communications involved requests from outside parties
18
<PAGE>
(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 and provided Anchor with periodic summaries.
Anchor's team was successful in obtaining mainframe Year 2000 compliance at
its three principal offices located in Concord, California, Scottsdale,
Arizona and Portland, Oregon. The detail of these efforts for each office is
described below:
<TABLE>
<CAPTION>
Harden-CA (Concord, CA):
------------------------
<C> <S>
Current operating system has been reviewed and updated and is Year
Hardware: 2000 compliant.
Both the billing and claims systems have been upgraded and are
Software: Year 2000 compliant.
Conversion: Converting the entire system to the Resource Information
Management System, version 2.7 ("RIMS"), which is Year 2000
compliant. Conversion scheduled for completion during third
quarter 2000.
<CAPTION>
Harden-AZ (Scottsdale, AZ):
---------------------------
<C> <S>
Hardware: Current operating system is Year 2000 compliant.
Software: Currently on RIMS, 2.7 which is Year 2000 compliant.
Upgrades: Recently upgraded software and hardware.
<CAPTION>
Harden-PHA (Portland, OR):
--------------------------
<C> <S>
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.
</TABLE>
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 occurred during the remainder of the 1999 year.
Anchor's focus had 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 did not
adversely impact new product or software development. The total cost of the
Year 2000 Project was approximately $200,000.
Readers are cautioned that forward-looking statements contained in the Year
2000 Update should be read in conjunction with Anchor's disclosures below
under the head "Forward-Looking Information".
Forward-Looking Information
This Annual Report on Form 10-K contains forward-looking statements within
the meaning of that term under the Private Securities Litigation Reform Act of
1995. Additional written or oral forward-looking statements may be made by
Anchor from time to time, in filings with the Securities and Exchange
Commission or otherwise. Statements contained herein that are not historical
facts are forward-looking statements made pursuant to the safe harbor
provisions referenced above. For example, discussions concerning Anchor's
ability to create new products and services, and expansion of Anchor through
internal growth of existing and new products and services, may involve
forward-looking statements. In addition, when used in this discussion, the
words, "anticipates," "expects," "intends," "plans" and variations thereof and
similar expressions are intended to identify forward-looking statements.
Forward-looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified based on
current expectations. Consequently, future events and actual results could
differ materially from those set forth in, contemplated by, or underlying the
forward-looking statements contained in this Annual Report. Statements in this
Annual Report, particularly in the Notes to Financial Statements, "Part II,
Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations", and "Year
19
<PAGE>
2000 Update", describe certain factors, among others, that could contribute to
or cause such differences. Such forward-looking statements involve risks and
uncertainties, and actual results could differ from those described herein.
While the statements represent management's current judgment as to the near-
term future prospects of its business, such risks and uncertainties could
cause actual results to differ from the above statements. Factors which could
cause actual results to differ include the following: Harden Group's
relationship with new insurance carriers and marketing partners and their
ability to effectively provide third-party administration services;
controlling operating costs; the impact of competitive products, pricing and
services; the availability of capital to finance operations and future
expansion; the cyclical nature of the health insurance markets; and
unanticipated regulatory changes. Additionally, on March 9, 2000 Anchor
entered into a Agreement with Ward pursuant to which there was a change in
both the ownership structure and the composition of the Board of Directors.
Other risk factors are detailed in Anchor's filings with the Securities and
Exchange Commission. Anchor assumes no obligation to update forward-looking
statements.
Item 8. Financial Statements and Supplementary Data
The following financial statements for Anchor appear on pages F-1 through F-
21 of this report:
<TABLE>
<S> <C>
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Operations for the years ended December
31, 1999, 1998 and 1997
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended December
31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
</TABLE>
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
20
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The information under the headings "Election of Directors" and "Compliance
with Section 16(a) of the Securities Exchange Act of 1934" from the
Registrant's Proxy Statement to be mailed in connection with the Registrant's
2000 Annual Meeting of Shareholders as hereby incorporated by reference.
Item 11. Executive Compensation
The information under the headings "Executive Compensation" and "Employment
Agreements with James R. Dunathan and Thomas O. Hedford" from the Registrant's
Proxy Statement to be mailed in connection with the Registrant's 2000 Annual
Meeting of Shareholders are hereby incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information under the headings "Principal Shareholders" and "Stock
Ownership Table" from the Registrant's Proxy Statement to be mailed in
connection with the Registrant's 2000 Annual Meeting of Shareholders as hereby
incorporated by reference.
Item 13. Certain Relationships and Related Transactions
The information under the heading "Certain Relationships and Related
Transactions" from the Registrant's Proxy Statement to be mailed in connection
with the Registrant's 2000 Annual Meeting of Shareholders as hereby
incorporated by reference.
21
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial Statements.
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Operations for the years ended December 31,
1999, 1998 and 1997
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended December 31, 1999
1998and 1997
Notes to Consolidated Financial Statements
(a) (2) Financial Statement Schedules.
Other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
(a) (3) Exhibit Index.
<TABLE>
<C> <S>
2.1 Amended and Restated Agreement and Plan of Merger dated as of October 24,
1994, by and between System and Old Anchor, as amended by that certain
Amendment to the Amended and Restated Agreement and Plan of Merger dated
as of December 29, 1994, and Agreement of Merger attached as an exhibit
to the Reorganization Agreement and certified by the Delaware Secretary
of State on January 6, 1995. Incorporated by reference to Exhibit 2.1 of
Anchor's Annual Report on Form 10-K for the year ended December 31, 1994.
3.1 Restated Certificate of Incorporation. Incorporated by reference to
Exhibit 3.1 of Anchor's Annual Report on Form 10-K for the year ended
December 31, 1994.
3.2 Bylaws. Incorporated by reference to Exhibit 3.2 of Anchor's Annual
Report on Form 10-K for the year ended December 31, 1994.
4.1 Specimen Common Stock Certificate. Incorporated by reference to Exhibit
4.1 of Anchor's Annual Report on Form 10-K for the year ended December
31, 1994.
4.2 Specimen Warrant Certificate. Incorporated by reference to Exhibit 4.2 of
Anchor's Annual Report on Form 10-K for the year ended December 31, 1994.
4.3 Warrant Agreement dated as of January 7, 1995, between Anchor and U.S.
Stock Transfer Corporation. Incorporated by reference to Exhibit 4.3 of
Anchor's Annual Report on Form 10-K for the year ended December 31, 1994.
4.3a Letter dated December 29, 1995, to all stockholders from James R.
Dunathan extending warrants expiration date to January 6, 1997.
Incorporated by reference to Exhibit 4.3a of Anchor's Annual Report on
Form 10-K for the year ended December 31, 1995.
4.4 Form of 10% Convertible Subordinated Debenture. Incorporated by reference
to Exhibit 4.1 of Anchor's Form 10-Q for the quarter ending March 31,
1995.
4.5 Form of 10% Convertible Subordinated Debenture, Series A. Incorporated by
reference to Exhibit 4.5 of Anchor's Annual Report on Form 10-K for the
year ended December 31, 1995.
4.6 Form of 10% Subordinated Bridge Note. Incorporated by reference to
Exhibit 4.6 of Anchor's Form 10-Q for the quarter ending September 30,
1996.
</TABLE>
22
<PAGE>
<TABLE>
<C> <S>
4.6a Form of Warrant to Purchase Shares of Common Stock of Anchor Pacific
Underwriters, Inc. Incorporated by reference to Exhibit 4.6a of
Anchor's Form 10-Q for the quarter ending September 30, 1996.
4.6b Form of Offering to change the terms of the Form of Warrant to Purchase
Shares of Common Stock of Anchor Pacific Underwriters, Inc., which is
incorporated by reference to Exhibit 4.6a, above. Incorporated by
reference to Exhibit 4.6b of Anchor's Annual Report on Form 10-K for
the year ended December 31, 1996.
4.7 Form of Subscription Agreement for the Offer and Sale of Shares of
Common Stock of Anchor Pacific Underwriters, Inc. Incorporated by
reference to Exhibit 4.7 of Anchor's Annual Report on Form 10-K for the
year ended December 31, 1996.
4.7a Form of Warrant to Purchase Shares of Common Stock of Anchor Pacific
Underwriters, Inc. Incorporated by reference to Exhibit 4.7a of
Anchor's Annual Report on Form 10-K for the year ended December 31,
1996.
4.8 Form of 10% Convertible Subordinated Debenture, Series B. Incorporated
by reference to Exhibit 4.8 of Anchor's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998.
4.8a Form of Warrant to Purchase Shares of Common Stock of Anchor Pacific
Underwriters, Inc. Incorporated by reference to Exhibit 4.8a of
Anchor's Quarterly Report on Form 10-Q for the quarter ended September
30, 1998.
4.9 Form of 10% Convertible Subordinated Debenture, Series C. Incorporated
by reference to Exhibit 4.9 of Anchor's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999.
4.9a Form of Warrant to Purchase Shares of Common Stock of Anchor Pacific
Underwriters, Inc. Incorporated by reference to Exhibit 4.9a of
Anchor's Quarterly Report on Form 10-Q for the quarter ended March 31,
1999.
4.10 Form of 10% Convertible Subordinated Debenture, Series D. Incorporated
by reference to Exhibit 4.10 of Anchor's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1999.
4.10a Form of Warrant to Purchase Shares of Common Stock of Anchor Pacific
Underwriters, Inc. Incorporated by reference to Exhibit 4.10a of
Anchor's Quarterly Report on Form 10-Q for the quarter ended September
30, 1999.
10.1 1994 Stock Option Plan. Incorporated by reference to Exhibit 10.1 of
Anchor's Annual Report on Form 10-K for the year ended December 31,
1994.*
10.2 Lease dated October 29, 1990, as amended on June 10, 1991, April 16,
1994 and September 9, 1994, between Anchor and Societe Generale
(regarding 1800 Sutter Street, Concord, California). Incorporated by
reference to Exhibit 10.2 of Anchor's Annual Report on Form 10-K for
the year ended December 31, 1994.
10.2a Sublease dated as of January 1, 1999, between Anchor and Talbot Agency
of California, Inc. (regarding 1800 Sutter Street, Suite 500, Concord,
California). Incorporated by reference to Exhibit 10.2a of Anchor's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1999.
10.3 Lease dated May 29, 1990, as amended on December 1, 1992, between PKW
and Kaiser Center, Inc. (regarding 300 Lakeside Drive, Oakland,
California). Incorporated by reference to Exhibit 10.3 of Anchor's
Annual Report on Form 10-K for the year ended December 31, 1994.
10.3a Sublease dated May 26, 1995, between PKW and Martin, Ryan & Andrada,
Inc. (regarding 82% of 300 Lakeside Drive, Oakland, California).
Incorporated by reference to Exhibit 10.2 of Anchor's Form 10-Q for the
quarter ending June 30, 1995.
10.3b Sublease dated December 1, 1995, between PKW and Logiciel, Inc.
(regarding 10% of 300 Lakeside Drive, Oakland, California).
Incorporated by reference to Exhibit 10.3b of Anchor's Annual Report on
Form 10-K for the year ended December 31, 1995.
</TABLE>
23
<PAGE>
<TABLE>
<C> <S>
10.4 Lease dated July 3, 1989, as amended on February 10, 1994, between BRI
and Connecticut General Life Insurance Company (regarding 10301 N. 92nd
Street, Scottsdale, Arizona). Incorporated by reference to Exhibit 10.4
of Anchor's Annual Report on Form 10-K for year ended December 31,
1994.
10.5 Employment Agreement dated August 16, 1994, between Anchor and James R.
Dunathan. Incorporated by reference to Exhibit 10.5 of Anchor's Annual
Report on Form 10-K for the year ended December 31, 1994.*
10.6 Amendment No. 1 to Employment Agreement dated December 19, 1994,
between Anchor and James R. Dunathan. Incorporated by reference to
Exhibit 10.6 of Anchor's Annual Report on Form 10-K for the year ended
December 31, 1994.*
10.6a Employment Agreement dated August 16, 1997, between Anchor and James R.
Dunathan. Incorporated by reference to Exhibit 10.6a of Anchor's
Quarterly Report on Form 10Q for the quarter ended September 30, 1997.*
10.6b Amendment No. 1 to Employment Agreement dated May 1, 1999, between
Anchor and James R. Dunathan.
10.7 Business Loan Agreement dated as of September 27, 1994, between Anchor
and Concord Commercial Bank, and related documents. Incorporated by
reference to Exhibit 10.7 of Anchor's Annual Report on Form 10-K for
the year ended December 31, 1994.
10.8 Business Loan Agreement dated as of September 7, 1994, between PKW and
CivicBank of Commerce, and related documents. Incorporated by reference
to Exhibit 10.8 of Anchor's Annual Report on Form 10-K for the year
ended December 31, 1994.
10.9 Business Loan Agreement dated as of June 17, 1992, between Harden and
Concord Commercial Bank, and related documents. Incorporated by
reference to Exhibit 10.9 of Anchor's Annual Report on Form 10-K for
the year ended December 31, 1994.
10.10 Lease of Personal Property dated April 6, 1994, between BRI and
Winthrop Financial Group, Inc. (regarding computer equipment).
Incorporated by reference to Exhibit 10.10 of Anchor's Annual Report on
Form 10-K for the year ended December 31, 1994.
10.12 Information Management Agreement dated as of May 11, 1993, between
Harden and CMSI, Inc. Incorporated by reference to Exhibit 10.12 of
Anchor's Annual Report on Form 10-K for the year ended December 31,
1994.
10.12a Mutual Release and Settlement Agreement, Promissory Note and UCC-1
Financing Statement dated as of March 25, 1996, between Harden and BRC
(formerly CMSI) of the Information Management Agreement dated as of May
11, 1993, between Harden and CMSI, which is incorporated by reference
to Exhibit 10.12, above. Incorporated by reference to Exhibit 10.12a of
Anchor's Form 10-Q for the quarter ending March 31, 1996.
10.12b Account Transition Agreement, Promissory Note and UCC-1 Financing
Statement dated as of March 29, 1996, between Harden and BRC (formerly
CMSI) of the Management Agreement dated as of May 11, 1993, between
Harden and CMSI, which is incorporated by reference to Exhibit 10.12,
above. Incorporated by reference to Exhibit 10.12b of Anchor's Form 10-
Q for the quarter ending March 31, 1996.
10.13 Consulting Agreement dated as of August 1, 1994, between BRI and
Hightrust, Ltd. Incorporated by reference to Exhibit 10.13 of Anchor's
Annual Report on Form 10-K for the year ended December 31, 1994.
10.14 Agreement for Purchase and Sale of Assets dated as of January 18, 1995,
between Harden and Dutcher. Incorporated by reference to Exhibit 10.14
of Anchor's Annual Report on Form 10-K for the year ended December 31,
1994.
10.15 Amendment to Agreement for Purchase and Sale of Assets dated February
1, 1995, between Harden and Dutcher. Incorporated by reference to
Exhibit 10.15 of Anchor's Annual Report on Form 10-K for the year ended
December 31, 1994.
</TABLE>
24
<PAGE>
<TABLE>
<C> <S>
10.15a Amendment to Agreement for Purchase and Sale of Assets dated June 10,
1996, between Harden and Dutcher, which is incorporated by reference to
Exhibit 10.15, above. Incorporated by reference to Exhibit 10.15a of
Anchor's Form 10-Q for the quarter ending June 30, 1996.
10.16 Asset Purchase Agreement dated May 17, 1995 between Putnam, Knudsen &
Wieking Inc. Insurance Brokers and Crestview Leasing. Incorporated by
reference to Exhibit 10.1 of Anchor's Form 10-Q for the quarter ending
June 30, 1995.
10.17 Settlement Agreement and Mutual Release dated August 22, 1995 between
Anchor and Donald B. Putnam, James P. Wieking, Ronald J. Marengo, Gary
N. Lewis, Edward Wieking and Robert Moser. Incorporated by reference to
Exhibit 10.1 of Anchor's Form 10-Q for the quarter ending September 30,
1995.*
10.18 Purchase and Sale Agreement dated as of March 1, 1996 between Anchor
and Roland L. Ferguson, doing business as R.L. Ferguson Insurance
Agency. Incorporated by reference to Exhibit 10.18 of Anchor's Form 10-
Q for the quarter ending March 31, 1996.
10.19 Purchase and Sale Agreement dated as of April 1, 1996 between Anchor
and Norman I. Robins. Incorporated by reference to Exhibit 10.19 of
Anchor's Form 10-Q for the quarter ending June 30, 1996.
10.20 Purchase and Sale Agreement dated as of May 1, 1996 between Anchor and
PKW and John R. McPherson. Incorporated by reference to Exhibit 10.20
of Anchor's Form 10-Q for the quarter ending June 30, 1996.
10.21 Engagement Letter dated June 27, 1996 between Anchor and Gerbsman
Partners. Incorporated by reference to Exhibit 10.21 of Anchor's Form
10-Q for the quarter ending June 30, 1996.
10.22 Industrial Real Estate Lease (Multi-Tenant Facility) dated September
12, 1996 between Palo Cristi Airport II, L.L.C., and BRI (regarding
15721 North Greenway Hayden Loop, Suite 205, Scottsdale, Arizona).
Incorporated by reference to Exhibit 10.22 of Anchor's Form 10-Q for
the quarter ending September 30, 1996.
10.23 Financial Advisory Agreement dated December 17, 1996 between The
Private Financing Group and Anchor Pacific Underwriters, Inc.
Incorporated by reference to Exhibit 10.23 of Anchor's Annual Report on
Form 10-K for the year ended December 31, 1996.
10.24 Business Loan Agreement dated as of July 3, 1997, between Anchor and
Imperial Bank, and related documents. Incorporated by reference to
Exhibit 10.24 of Anchor's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997.
10.25 Central Plaza Office Lease dated July 14, 1997, between Harden and Zufu
Properties, Co., Ltd. (regarding 3460 Wilshire Boulevard Tower, Suite
407, Los Angeles, California). Incorporated by reference to Exhibit
10.25 of Anchor's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997.
10.25a Addendum dated July 14, 1997, to Central Plaza Office Lease dated July
14, 1997, between Harden and Zufu Properties, Co., Ltd. (regarding 3460
Wilshire Boulevard Tower, Suite 407, Los Angeles, California).
Incorporated by reference to Exhibit 10.25a of Anchor's Quarterly
Report on Form 10-
10.26 Office Building Lease dated July 30, 1997, between BRI and T.W.
Patterson Investors II/The T.W. Patterson Building (regarding 2014
Tulare Street, Suite 818, Fresno, California). Incorporated by
reference to Exhibit 10.26 of Anchor's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997.
10.27 Business Loan Agreement dated of September 30, 1997, between Anchor and
Imperial Bank, and related documents. Incorporated by reference to
Exhibit 10.27 of Anchor's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1997.
10.28 Business Loan Agreement dated December 22, 1997, between Anchor and
Imperial Bank, and related documents. Incorporated by reference to
Exhibit 10.28 of Anchor's Annual Report on Form 10-K for the year ended
December 31, 1998.
</TABLE>
25
<PAGE>
<TABLE>
<C> <S>
10.29 Central Plaza Office Lease dated January 6, 1998, between Harden and
Zufu Properties, Co., Ltd. (regarding 3450 Wilshire Boulevard Tower,
Suite 210, Los Angeles, California). Incorporated by reference to
Exhibit 10.29 of Anchor's Annual Report on Form 10-K for the year ended
December 31, 1998.
10.30 Business Loan Agreement dated March 9, 1998, between Anchor and
Imperial Bank, and related documents. Incorporated by reference to
Exhibit 10.30 of Anchor's Annual Report on Form 10-K for the year ended
December 31, 1998.
10.31 Stock Purchase Agreement effective March 20, 1998, between Anchor and
Harden and Pacific Assurance Company (regarding Pacific Heritage
Administrators of Nevada, Inc.). Incorporated by reference to Exhibit
10.31 of Anchor's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998.
10.32 Agreement dated February 26, 1998, between Russell Miller, Inc. and
Anchor. Incorporated by reference to Exhibit 10.32 of Anchor's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.
10.33 Business Loan Agreement dated June 1, 1998, between Anchor and Imperial
Bank, and related documents. Incorporated by reference to Exhibit 10.33
of Anchor's Quarterly Report on Form 10-Q for the quarter ended June
30, 1998.
10.34 Purchase Agreement dated January 15, 1999, between Talbot Agency of
California, Inc., PKW and Anchor. Incorporated by reference to Exhibit
10.34 of Anchor's Annual Report on Form 10-K for the year ended
December 31, 1999.
10.35 Office Lease dated January 29, 1999 between Harden and Columbia Square,
L.L.C. (regarding 111 SW Columbia, Suite 600, Portland, Oregon).
Incorporated by reference to Exhibit 10.34 of Anchor's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1999.
10.36 Business Loan Agreement dated April 29, 1999, between Anchor and
Imperial Bank, and related documents. Incorporated by reference to
10.35 of Anchor's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1999.
10.37 Business Loan Agreement dated September 30, 1999, between Anchor and
Imperial Bank, and related documents. Incorporated by reference to
10.36 of Anchor's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999.
10.38 Letter Agreement dated February 18, 2000, between Anchor and Ward North
America Holding, Inc. ("Ward").
10.39 Stock Purchase Agreement dated March 9, 2000 between Anchor and James
R. Dunathan for the purchase of all the outstanding stock of Shelby
Insurance Services, Inc. formerly known as Putnam, Knudsen & Wieking,
Inc.
10.40 Securities Purchase Agreement dated March 9, 2000 between Anchor and
Ward North America Holding, Inc. ("Ward").
10.40a Exhibit A, Form of Debenture to the Securities Purchase Agreement dated
March 9, 2000 between Anchor and Ward.
10.40b Exhibit B, Certificate of Designations to the Securities Purchase
Agreement dated March 9, 2000 between Anchor and Ward.
10.40c Exhibit C, Form of Loan Facility to the Securities Purchase Agreement
dated March 9, 2000 between Anchor and Ward.
10.40d Exhibit D, Schedule of Exceptions to the Securities Purchase Agreement
dated March 9, 2000 between Anchor and Ward.
10.40e Exhibit E, Form of Legal Opinion of Company Counsel to the Securities
Purchase Agreement dated March 9, 2000 between Anchor and Ward.
</TABLE>
26
<PAGE>
<TABLE>
<C> <S>
10.40f Exhibit F, Form of Investor Rights Agreement to the Securities Purchase
Agreement dated March 9, 2000, between Anchor and Ward.
10.41 Employment Agreement dated September 1, 1998, between Harden and Thomas
O. Hedford.
10.41a Amendment No. 1 to Employment Agreement dated May 1, 1999, between
Harden and Thomas O. Hedford.
10.42 Employment Agreement dated May 1, 1999, between Harden and Earl
Wiklund.
11.1 Statement Regarding Computation of Per Share Earnings.
21.1 Subsidiaries of Anchor. Incorporated by reference to Exhibit 21.1 of
Anchor's Annual Report on Form 10-K for the year ended December 31,
1994.
27.0 Financial Data Schedule.
</TABLE>
- --------
All other exhibits are omitted because they are inapplicable.
*Denotes management contract or compensatory plan or arrangement.
(b) Reports of Form 8-K.
None.
27
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
Anchor Pacific Underwriters, INC.
(Registrant)
Date: March 27, 2000 /s/ James R. Dunathan
By: _________________________________
James R. Dunathan
President and Chief Executive
Officer
(Principal Executive Officer)
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ James R. Dunathan President, Chief Executive March 27, 2000
______________________________________ Officer and Director
James R. Dunathan
(Principal Executive Officer)
/s/ Earl Wiklund Senior Vice President, March 27, 2000
______________________________________ Chief Financial Officer
Earl Wiklund and Secretary
(Principal Financial Officer)
/s/ Jeffrey S. Ward Chairman and Director March 27, 2000
______________________________________
Jeffrey S. Ward
/s/ Kevin P. Jasper Director March 27, 2000
______________________________________
Kevin P. Jasper
/s/ Russ A. Whitmarsh Director March 27, 2000
______________________________________
Russ A. Whitmarsh
/s/ Gerard A.C. Bakker Director March 27, 2000
______________________________________
Gerard A.C. Bakker
Director March 27, 2000
______________________________________
William R. Beasley
</TABLE>
28
<PAGE>
ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
<TABLE>
<S> <C>
Report of Independent Auditors.............................................. F-2
Audited Consolidated Financial Statements
Consolidated Balance Sheet.................................................. F-3
Consolidated Statement of Operations........................................ F-4
Consolidated Statement of Shareholders' Equity (Deficit).................... F-5
Consolidated Statement of Cash Flows........................................ F-6
Notes to Consolidated Financial Statements.................................. F-7
</TABLE>
F-1
<PAGE>
March 17, 2000
To the Board of Directors
and Shareholders of
Anchor Pacific Underwriters, Inc.
REPORT OF INDEPENDENT AUDITORS
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, shareholders' equity (deficit) and cash
flows present fairly, in all material respects, the financial position of
Anchor Pacific Underwriters, Inc. and its subsidiaries at December 31, 1999
and 1998, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
F-2
<PAGE>
ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31
------------------------
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents--corporate funds.......... $ 138,139
Cash and cash equivalents--third party
administration fiduciary funds..................... $ 4,686,823 3,517,772
Realizable value of net assets sold................. -- 2,054,995
Accounts receivable (less allowance for doubtful
accounts of $7,500 and $41,952 in 1999 and 1998,
respectively)...................................... 465,337 527,827
Prepaid expenses and other current assets........... 148,774 191,749
----------- -----------
Total current assets............................... 5,300,934 6,430,482
----------- -----------
Property and equipment, less accumulated depreciation
and amortization.................................... 630,811 550,478
----------- -----------
Other assets:
Intangible assets, net.............................. 527,813 593,933
Other............................................... 60,477 80,431
----------- -----------
588,290 674,364
----------- -----------
$ 6,520,035 $ 7,655,324
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Cash and cash equivalents--third party
administration fiduciary funds..................... $ 4,686,823 $ 3,517,772
Cash overdraft...................................... 55,926 --
Accounts payable.................................... 1,161,334 619,798
Accrued expenses.................................... 664,810 613,256
Short-term borrowings............................... 200,000 200,000
Current portion of long-term debt................... 588,060 1,242,950
Current portion of long-term liabilities............ 194,529 451,068
----------- -----------
Total current liabilities.......................... 7,551,482 6,644,844
----------- -----------
Long-term liabilities, net of current portion........ 353,127 453,226
----------- -----------
Long-term debt, including $234,000 and $480,000 in
1999 and 1998, respectively, owed to related
parties, net of current portion..................... 1,394,485 858,342
Shareholders' equity (deficit):
Preferred stock--$.02 par value; 2,000,000 shares
authorized; none issued and outstanding............
Common stock--$.02 par value; 16,000,000 shares
authorized; 4,170,055 and 4,710,057 shares issued
and outstanding at December 31, 1999 and 1998,
respectively....................................... 94,201 94,201
Additional paid-in capital.......................... 4,232,265 4,232,265
Accumulated deficit................................. (7,105,525) (4,627,554)
----------- -----------
(2,779,059) (301,088)
----------- -----------
Commitments and contingencies (Notes 1, 6, 7, 11, and
12).................................................
----------- -----------
$ 6,520,035 $ 7,655,324
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------
1999 1998 1997
----------- ----------- ----------
<S> <C> <C> <C>
Revenues:
Administrative fees and other income... $10,054,596 $12,273,067 $6,952,655
Interest income........................ 17,969 11,491 24,675
----------- ----------- ----------
10,072,565 12,284,558 6,977,330
----------- ----------- ----------
Operating expenses:
Salaries, commissions and employee
benefits.............................. 7,377,268 8,067,801 4,644,189
Selling, general and administrative
expenses.............................. 4,346,808 4,702,873 3,066,867
Employee severance and other costs..... 544,000 -- --
----------- ----------- ----------
12,268,076 12,770,674 7,711,056
----------- ----------- ----------
(2,195,511) (486,116) (733,726)
----------- ----------- ----------
Other income (expense):
Amortization of goodwill and intangible
assets................................ (66,120) (50,705) (45,067)
Interest............................... (186,441) (221,871) (240,488)
Other.................................. (23,991) -- 49,810
----------- ----------- ----------
(276,552) (272,576) (235,745)
----------- ----------- ----------
Loss before income taxes................ (2,472,063) (758,692) (969,471)
Provision (benefit) for income taxes.... 5,908 9,956 (4,030)
----------- ----------- ----------
Loss from continuing operations......... (2,477,971) (768,648) (965,441)
----------- ----------- ----------
Discontinued operations:
Income (loss) from operations, net of
income taxes.......................... -- 116,509 18,750
Loss on disposal, net of income tax
benefit............................... -- (123,191) --
----------- ----------- ----------
Income (loss) from discontinued
operations............................. -- (6,682) 18,750
----------- ----------- ----------
Net loss................................ $(2,477,971) $ (775,330) $ (946,691)
=========== =========== ==========
Net loss per share:
Loss from continuing operations........ $ (0.53) $ (0.16) $ (0.21)
Income (loss) from discontinued
operations............................ -- -- --
----------- ----------- ----------
Basic and diluted loss per common
share.................................. $ (0.53) $ (0.16) $ (0.21)
=========== =========== ==========
Weighted average number of common shares
outstanding............................ 4,710,056 4,710,057 4,612,153
=========== =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Common Stock Additional
------------------ Paid-In Accumulated
Shares Amount Capital Deficit Total
--------- ------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1996................... 4,362,837 $87,256 $3,925,508 $(2,905,533) $ 1,107,231
Stock issued for
warrants exercised.... 567 11 1,691 -- 1,702
Bridge notes exchanged
for stock............. 50,000 1,000 44,000 -- 45,000
Issuance of stock for
cash.................. 277,778 5,557 244,443 -- 250,000
Canceled stock--
Fractional shares..... (343) (7) 7 -- --
Net loss............... -- -- -- (946,691) (946,691)
--------- ------- ---------- ----------- -----------
Balance at December 31,
1997................... 4,690,839 93,817 4,215,649 (3,852,224) 457,242
Stock issued for
services rendered..... 18,888 378 16,622 -- 17,000
Canceled stock--
Fractional shares..... 330 6 (6) -- --
Net loss............... -- -- -- (775,330) (775,330)
--------- ------- ---------- ----------- -----------
Balance at December 31,
1998................... 4,710,057 94,201 4,232,265 (4,627,554) (301,088)
Canceled stock--
Fractional shares..... (2) -- -- -- --
Net loss............... -- -- -- (2,477,971) (2,477,971)
--------- ------- ---------- ----------- -----------
Balance at December 31,
1999................... 4,710,055 $94,201 $4,232,265 $(7,105,525) $(2,779,059)
========= ======= ========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------
1999 1998 1997
----------- --------- ---------
<S> <C> <C> <C>
Continuing operations:
Net loss from continuing operations........ $(2,477,971) $(768,648) $(965,441)
Items not requiring the current use of
cash:
Depreciation and amortization............. 276,667 283,724 243,310
Amortization of goodwill and intangible
assets................................... 66,120 50,705 45,067
Changes in items affecting operations:
Accounts receivable...................... 62,490 (30,178) (467,736)
Prepaid expenses and other current
assets.................................. 42,975 153,670 (122,892)
Other assets............................. 19,954 (20,764) 94,700
Deferred compensation.................... -- -- 257,784
Accounts payable and accrued expenses.... 593,090 394,579 510,276
Other liabilities........................ 5,887 20,872 (1,820)
----------- --------- ---------
Cash provided by (used for) operating
activities.............................. (1,410,788) 83,960 (406,752)
----------- --------- ---------
Investments:
Net proceeds from sale of PKW.............. 2,054,995 -- --
Purchases of property and equipment........ (323,607) (94,909) (108,364)
----------- --------- ---------
Cash provided by (used for) in investing
activities.............................. 1,731,388 (94,909) (108,364)
----------- --------- ---------
Financing:
Short-term borrowings...................... 200,000 200,000 --
Repayments on short-term borrowings........ (200,000) -- (970,000)
Borrowings on long-term debt............... 1,199,000 405,000 1,260,000
Repayment of long-term debt................ (1,317,746) (262,029) (148,207)
Payments on long-term liabilities.......... (395,919) (570,594) (388,732)
Cash overdraft............................. 55,926 -- --
Issuance of stock.......................... -- 17,000 250,000
Common stock--warrants exercised........... -- -- 1,702
----------- --------- ---------
Cash provided by (used for) financing
activities.............................. (458,739) (210,623) 4,763
----------- --------- ---------
Discontinued operations:
Income (loss) from discontinued operations,
net of income taxes....................... -- (6,682) 18,750
Changes in operating activities............ -- 340,432 398,573
----------- --------- ---------
Operating activities....................... -- 333,750 417,323
Investing activities....................... -- -- --
Financing activities....................... -- (18,423) (14,351)
----------- --------- ---------
Cash provided by discontinued
operations.............................. -- 315,327 402,972
----------- --------- ---------
Increase (decrease) in cash and cash
equivalents................................ (138,139) 93,755 (107,381)
Cash and cash equivalents--corporate funds:
Beginning of period........................ 138,139 44,384 151,765
----------- --------- ---------
End of period.............................. $ -- $ 138,139 $ 44,384
=========== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--Nature of Business
Organization
Anchor Pacific Underwriters, Inc. and its subsidiaries ("Anchor") provide
insurance administration. As of December 31, 1998, Anchor sold its property
and casualty brokerage services and reported the sale as a discontinued
operation (See Note 14). Administration services are provided to employer
groups of varying sizes, primarily located in California, Oregon and Arizona.
The consolidated financial statements include the accounts of Anchor and its
wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Basis of Presentation
The financial statements have been prepared on the going concern basis.
Anchor has reported a net loss during the past five years. Anchor has a
negative current working capital of approximately $2.1 million.
In early 2000, Anchor raised $2.1 million and obtained a $1 million
convertible loan facility from a Securities Purchase Agreement ("Agreement")
they entered into with Ward North America Holding, Inc. ("Ward") (See Note
16). Anchor's management and board of directors believe that Ward will be able
to provide needed capital to the Company. In turn, this will enable Anchor to
accelerate its systems consolidation process and contribute overall to improve
its financial performance.
Management's plan to achieve profitability includes a strategy to expand its
third-party administration services business by: (a) continuing to develop
specialized affiliated business units that target selected insurance industry
market segments defined by industry type, geographic location and consumer
demographics; (b) creating new products, services, and marketing partner
relationships; and (c) strengthening management, sales and marketing staff. In
conjunction with this strategy, Anchor seeks to manage its affairs to achieve
expansion through internal growth of its existing and new product lines.
Anchor also regularly considers acquisition and merger opportunities and other
business expansion alternatives.
NOTE 2--Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Revenue Recognition
Continuing operations
The majority of revenue from third-party administration services consists of
fees charged for the administration of fully insured and self-insured group
health plans. Fee income is recognized at the time employers remit monthly
premiums and when services are rendered.
Discontinued operations
Insurance brokerage revenue consists principally of insurance commissions
(net of split or shared commissions), fees in lieu of commissions for
insurance placement services and interest income on fiduciary and corporate
funds. Insurance commissions and fees in lieu of commissions for insurance
placement services are
F-7
<PAGE>
ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
recognized when coverage becomes effective, the premium due under the policy
is known or can be reasonably estimated, and substantially all required
services related to placing the insurance have been provided.
Broker commission adjustments and commissions on premiums billed directly by
underwriters are recognized principally when such amounts can be reasonably
estimated.
In addition, Anchor received annual contingency commissions from various
property and casualty insurance carriers. The commissions were based upon the
carrier's loss experience as well as the number of policies placed. Revenue
from contingency commissions were recognized when received. Fee income for
services other than placement of insurance coverages was recognized as those
services were provided.
Cash and Cash Equivalents
Anchor considers all highly liquid investments with a maturity of three
months or less at the date of acquisition to be cash equivalents.
Fiduciary Funds and Liabilities
Funds held for self-funded employers and fully insured programs are held in
a fiduciary capacity.
Interest earned on certain fiduciary funds is included in Anchor's earnings.
Interest income on fiduciary funds from continuing operations amounted to
$17,969, $11,491, and $24,675, in 1999, 1998, and 1997, respectively.
Concentration of Credit Risk
Cash and cash equivalents are on deposit in approximately 200 separate
accounts with certain accounts exceeding $100,000. The FDIC insures accounts
up to $100,000 each. If several accounts are maintained for the same entity at
the same bank, the FDIC applies the $100,000 limit to the combined group. The
accounts are maintained in well-established regional and national commercial
banks. These banks have satisfied the FDIC's more stringent capitalization
requirements, qualifying them to accept broker deposits. The banks have
received high ratings from bank rating services. As a result, credit risk is
deemed to be minimal.
Accounts Receivable
Anchor provides for future estimated credit losses based on an evaluation of
a current aging of the accounts, current economic conditions and other factors
necessary to provide for losses that can be reasonably anticipated.
Fair Value of Financial Instruments
The carrying values of financial instruments such as cash and cash
equivalents, fiduciary funds, and debt obligations approximate their fair
market value.
The following methods and assumptions were used by Anchor in estimating its
fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance
sheet for cash and short-term instruments approximate those assets' fair
values.
Short-term borrowings: The carrying amounts on the lines of credits and
other short-term borrowings approximate their fair values.
F-8
<PAGE>
ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Long-term borrowings: The fair values of Anchor's long-term borrowings are
estimated using discounted cash flow analyses, based on the current
incremental borrowing rates for similar types of borrowing arrangements.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
computed using the straight-line method over the estimated useful lives of the
assets, which range from three to ten years.
Internal-use software is capitalized in accordance with AICPA Statement of
Position 98-1 and is being amortized over a three-year period.
Intangible Assets
Intangible assets represent customer lists acquired in acquisitions.
Customer lists are amortized on the straight-line basis over 12 years.
Impairment of intangible assets is measured on the basis of anticipated
undiscounted cash flows for each asset. Based upon Anchor's analysis, no
impairment of such assets was indicated for the years ended December 31, 1999,
1998, or 1997.
Income Taxes
Anchor and its subsidiaries file a consolidated federal income tax return
and combined returns for state tax purposes.
Loss Per Share
Loss per common share is computed using the weighted average number of
common shares outstanding during each period. Diluted loss per share excludes
the effect of convertible debt, stock options, and warrants (See Notes 7, 10
and 12), because their effect would have been antidilutive.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting
for Derivative Instruments and Hedging Activities." SFAS 133 establishes new
standards of accounting and reporting for derivative instruments and hedging
activities. SFAS 133 requires that all derivatives be recognized at fair value
in the balance sheet, and that the corresponding gains or losses be reported
either in the statement of operations or as a component of comprehensive
income, depending on the type of hedging relationship that exists. Statement
133 was amended by Statement 137, "Accounting for Derivative Instruments and
Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133,"
and is effective for years beginning after June 15, 2000. The Company plans to
adopt this statement in fiscal 2001. Management does not believe adoption of
this statement will materially impact the Company's financial position or
results of operations.
On March 4, 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants ("AICPA") issued Statement
of Position No. 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 requires that
computer software costs that are related to internal software and incurred in
the preliminary project stage be expensed as incurred. Once the capitalization
criteria of SOP 98-1 have been met, external direct costs of materials and
services consumed
F-9
<PAGE>
ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
in developing or obtaining internal-use computer software; payroll and
payroll-related costs for employees who are directly associated with and who
devote time to the internal-use computer software project (to the extent of
the time spent directly on the project); and interest costs incurred when
developing computer software for internal use should be capitalized. SOP 98-1
is effective for financial statements for fiscal years beginning after
December 15, 1998. Accordingly, Anchor has adopted SOP 98-1 in its
consolidated financial statements for the year ending December 31, 1999. The
adoption of SOP 98-1 is not expected to have a material impact on the
consolidated financial statements of Anchor.
Reclassifications
Certain reclassifications have been made to the prior year financial
statements to conform with the current year financial statement presentation.
Such reclassifications have had no effect on net income as previously
reported.
NOTE 3--Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------------
1999 1998
---------- ----------
<S> <C> <C>
Leasehold improvements................................ $ 57,933 $ 53,039
Furniture and equipment............................... 402,046 401,436
Office equipment...................................... 563,775 557,313
Computer equipment.................................... 628,460 628,460
Computer software..................................... 1,265,896 920,863
---------- ----------
2,918,110 2,561,111
Less--accumulated depreciation and amortization....... 2,287,299 2,010,633
---------- ----------
$ 630,811 $ 550,478
========== ==========
</TABLE>
The foregoing assets are pledged as security for certain indebtedness (See
Note 7).
NOTE 4--Intangible Assets
Intangible assets consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------- Amortization
1999 1998 Period
-------- -------- ------------
<S> <C> <C> <C>
Customer lists................................ $788,972 $790,538 12 years
Less--accumulated amortization................ 261,159 196,605
-------- --------
$527,813 $593,933
======== ========
</TABLE>
The foregoing assets are pledged as security for certain indebtedness (See
Note 7).
NOTE 5--Short-Term Borrowings
In 1999, Anchor obtained a $200,000 short-term bank loan expiring on March
15, 2000. Borrowings under the loan amounted to $200,000 at December 31, 1999
with annual interest at the bank's prime rate plus 2.5%
F-10
<PAGE>
ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(11.25% at December 31, 1999). In connection with obtaining the loan, Anchor
issued warrants to the lender to purchase 80,000 shares of Anchor common stock
at an exercise price of $0.50 per share. In March 2000, this loan was paid in
full (See Note 16).
NOTE 6--Other Long-Term Liabilities
Other long-term liabilities primarily consist of future contingent payments
relating to contractual agreements negotiated with the previous owners of
businesses acquired, deferred rent and other liabilities. The future
contingent payments are generally based upon the amount of net commission
income generated from the books of business acquired.
At December 31, 1999, future payments of these liabilities are as follows:
<TABLE>
<CAPTION>
Year
----
<S> <C>
2000................................................................ $194,529
2001................................................................ 157,521
2002................................................................ 69,038
2003................................................................ 69,038
2004................................................................ 57,530
--------
547,656
Less--current portion............................................... 194,529
--------
$353,127
========
</TABLE>
NOTE 7--Long-Term Debt
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
December 31,
---------------------
1999 1998
---------- ----------
<S> <C> <C>
Term bank loan--with interest at prime rate plus 2.25%
(11.25% and 10.25% at December 31, 1999 and 1998).... $ 898,486 $1,626,342
10% subordinated bridge notes, matured in 1999........ 80,000 140,000
10% notes payable to officers, matured in 1999........ 45,000 25,000
10% convertible subordinated debentures, matured in
1999................................................. 60,000 60,000
10% convertible subordinated debentures, Series B,
maturing in 2000 and 2001............................ 250,000 215,000
10% convertible subordinated debentures, Series D,
maturing in 2001..................................... 244,000 --
10% convertible subordinated debentures, Series E,
maturing in 2001..................................... 400,000 --
Equipment loans--with annual interest at 8.25%,
maturing in 2000..................................... 5,060 34,950
---------- ----------
1,982,546 2,101,292
Less--current portion................................. 588,060 1,242,950
---------- ----------
$1,394,486 $ 858,342
========== ==========
</TABLE>
During 1998, Anchor combined all of its outstanding loans with the bank and
entered into a new term loan. The term loan agreement provides for: (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. In January 1999, upon
completion of the sale of PKW, Anchor made a loan payment of $800,000 on this
term loan.
F-11
<PAGE>
ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 terms; (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.
On September 30, 1999, a new term loan in the amount of $931,485 was entered
into between Anchor and the bank combining the balances owing on the 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 which began on November 7, 1999.
The term loan is secured by certain receivables, property and equipment, and
other assets. The loan agreement with the bank contains certain restrictive
covenants that, among other things, require Anchor to maintain certain levels
of net worth and cash flow (as defined), and prohibits the payment of
dividends. Anchor was not in compliance with these covenants at December 31,
1999 but has obtained a waiver from the bank.
At the end of the third quarter of 1998, Anchor commenced raising additional
funds from members of the Board of Directors and other qualified investors by
offering 10% Convertible Subordinated Debentures Series B (the "Series B
Debentures"). At December 31, 1998, Anchor had raised $215,000 from five
members of the Board of Directors and other qualified investors. The basic
terms of the Series B Debentures were: (a) 10% interest, payable semi-annually
in arrears; (b) two year maturity; (c) conversion price of $0.50 per share;
(d) "Piggyback" registration rights for three years; (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; (f) subordination provisions that subordinate the Series B Debentures
to Anchor's "Senior Debt" (as defined in the Series B Debentures). In early
1999, Anchor raised an additional $50,000 and paid off one debenture for
$15,000.
During 1999, Anchor raised $244,000 from other qualified investors by
offering 10% Convertible Subordinated Debentures, Series D (the "Series D
Debentures). The basic terms of the Series D 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 D Debentures acquired, an investor
received 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 late 1999, Anchor raised $400,000 from Ward North America Holding, Inc.
("Ward") by offering 10% Convertible Subordinated Debentures, Series E (the
"Series E Debentures). The basic terms of the Series E Debentures were: (a)
10% interest, payable semi-annually in arrears; (b) two year maturity with a
provision that provides for repayment on July 1, 2000, if requested by Ward;
(c) conversion price of $0.50 per share; (d) "Piggyback" registration rights
for three years; (e) for each $5,000 of Series E Debentures acquired, Ward
received 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 E Debentures to Anchor's "Senior Debt" (as defined).
The Series E Debentures are superior to all other debentures of the Company,
including without limitation those Series B and D debentures, and shall
constitute "Senior Debt" for purposes of those debentures.
In March 2000, upon completion of the Agreement with Ward (See Note 16),
Anchor made the following loan repayments: 1) $80,000 on its subordinated
bridge notes; 2) $190,000 on its various Convertible Subordinated Debentures;
and 3) $45,000 on notes payable to officers.
F-12
<PAGE>
ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Scheduled principal payments due on long-term debt after December 31, 1999,
including payments made on long-term debt in early 2000, are as follows:
<TABLE>
<CAPTION>
Year
----
<S> <C>
2000.............................................................. $ 588,060
2001.............................................................. 892,000
2002.............................................................. 198,000
2003.............................................................. 198,000
2004.............................................................. 106,486
----------
$1,982,546
==========
</TABLE>
NOTE 8--Income Taxes
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
Year ended December
31,
--------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Current tax expense--state............................. $5,908 $9,956 $8,470
====== ====== ======
</TABLE>
The income tax expense included in the consolidated financial statements is
as follows:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------
1999 1998 1997
------ -------- -------
<S> <C> <C> <C>
Income tax provision (benefit) from continuing
operations..................................... $5,908 $ 9,956 $(4,030)
Income tax expense from discontinued
operations..................................... -- 77,600 12,500
Income tax (benefit) on disposal................ -- (77,600) --
------ -------- -------
$5,908 $ 9,956 $ 8,470
====== ======== =======
</TABLE>
Deferred income taxes are provided for the temporary differences between the
financial reporting and tax bases of Anchor's assets and liabilities.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized.
Deferred tax assets are comprised of the following:
<TABLE>
<CAPTION>
December 31,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Deferred tax assets:
Depreciation and amortization..................... $ 18,000 $ 4,300
Vacation pay...................................... 125,200 106,500
Disposal of PKW................................... -- 371,100
Bad debt and legal reserves....................... 69,000 42,800
Other accruals.................................... 172,800 31,500
Net operating loss carryforward................... 2,037,000 997,700
----------- -----------
2,442,000 1,553,900
Valuation allowance for deferred tax assets........ (2,442,000) (1,553,900)
----------- -----------
Net deferred tax asset............................. -- --
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
F-13
<PAGE>
ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 1999 and 1998, current deferred tax assets are $366,000 and
$552,000, respectively, and noncurrent deferred tax assets are $2,076,000 and
$1,001,900, respectively.
The change in the valuation allowance is comprised of the following items:
<TABLE>
<CAPTION>
Year ended December
31,
--------------------
1999 1998
---------- ---------
<S> <C> <C>
Increase due to net operating losses.................... $1,059,700 $ 107,726
Change in net operating loss due to IRS audit........... -- (360,766)
Increase due to disposal of PKW......................... -- 371,100
Change in estimate of temporary differences for fixed
and intangible assets, deferred rent, vacation pay and
other accruals......................................... 171,600 49,086
---------- ---------
Net increase............................................ $ 888,100 $ 167,146
========== =========
</TABLE>
A reconciliation of income tax computed at the federal statutory corporate
tax rate to the provision for income taxes follows:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------------------
1999 1998 1997
------------------- ------------------ ------------------
Amount Percent Amount Percent Amount Percent
---------- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Income taxes at federal
statutory rate......... $ (835,710) (34.0)% $(263,612) (34.0)% $(475,649) (34.0)%
Increase (decrease) in
income taxes resulting
from:
State and local income
taxes, net of federal
tax benefit........... (147,478) (6.0) (46,520) (6.0) (83,938) (6.0)
Permanent differences.. 23,045 0.9 142,790 18.4 79,949 5.7
Other.................. (99,557) (4.0) 59,616 7.7 9,717 0.7
State minimum tax...... 5,908 0.3 9,956 1.3 6,830 0.5
Net operating loss..... 1,059,700 43.1 107,726 13.9 469,921 33.6
---------- ----- --------- ----- --------- -----
$ 5,908 0.3 % $ 9,956 1.3 % $ 6,830 0.5 %
========== ===== ========= ===== ========= =====
</TABLE>
At December 31, 1999, Anchor had estimated federal and state net operating
loss carryforwards of approximately $5,468,000 and $3,304,102, respectively.
The federal and state net operating losses will begin to expire in the years
ending December 31, 2003 and 2000, respectively.
Anchor has entered into a securities purchase agreement with Ward, resulting
in shares of Preferred stock being issued. Federal and state tax laws impose
limitations on the use of the net operating losses and tax credits following
certain changes in ownership. If such an ownership change has occurred, the
limitation would reduce the amount of the benefit of the net operating losses
and general business credits that would be available to offset future taxable
income starting in the year of the ownership change.
NOTE 9--Retirement and Employee Benefit Plans
Anchor has a 401(k) profit sharing plan to which eligible employees may
contribute up to 15% of their salaries, or a maximum of $10,000 as deferred
compensation. The plan also provides for voluntary employer contributions
whereby Anchor may match 50% of the employee contribution up to a maximum of
3% of the employee's gross salary. Anchor made no contributions to the plan
during the years ended December 31, 1999, 1998, and 1997.
F-14
<PAGE>
ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In addition, Anchor offers active eligible employees certain life, health,
vision and dental benefits. There are several plans, which differ in amounts
of coverage and deductibles. Anchor does not extend such benefits to retirees.
NOTE 10--Stock Option Plan
On December 5, 1994, the Board of Directors of Anchor adopted the Anchor
Pacific Underwriters, Inc. 1994 Stock Option Plan (the "1994 Plan"). The
aggregate number of shares that are available for issuance pursuant to the
exercise of options granted under the 1994 Plan may not exceed 1,000,000
shares of common stock. Options granted to members of the Board of Directors
in 1995 vested immediately upon grant. Other options granted in 1995 generally
vested after one year. Options granted in 1997, 1998 and 1999 generally vest
over a four-year period, with 25% vesting each year, with the exception of
50,000 options granted to a member of the Board of Directors in 1997 and
16,000 granted in 1998, which vested immediately upon grant. Generally, the
options are priced at fair market value of the stock at the date of grant,
except for shareholders of more than 10% of Anchor, in which case the options
are priced at 110% of the market price at the date of grant. Options generally
have a ten-year life.
During 1997, the Company adopted Financial Accounting Standards Board
Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") and,
pursuant to its provisions, elected to continue using the intrinsic-value
method of accounting for stock-based awards granted to employees in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" ("APB 25"). Accordingly, the Company has not recognized
compensation expense for its stock-based awards to employees for the years
ended December 31, 1999, 1998 and 1997. The following table reflects pro forma
net income and earnings per share had the Company elected to adopt the fair
value approach of SFAS 123:
<TABLE>
<CAPTION>
1999 1998 1997
---------- -------- ----------
<S> <C> <C> <C>
Net loss:
As reported................................. $2,477,971 $775,330 $ 946,691
Pro forma................................... $2,490,881 796,010 $1,405,800
Basic and diluted loss per share:
As reported................................. $ .53 $ .16 $ .21
Pro forma................................... $ .53 $ .17 $ .31
</TABLE>
These pro forma amounts may not be representative of future disclosures
since the estimated fair value of stock options is amortized to expense over
the vesting period, and additional options may be granted in future years.
The estimated fair value of each option granted is calculated using the
Black-Scholes option-pricing model. The weighted average assumptions used in
the model were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rate.................................... 5.0% 5.6% 6.5%
Expected years until exercise.............................. 5.0 5.7 6.3
Expected stock volatility.................................. 56.0% 45.0% 25.0%
Dividend................................................... -- -- --
</TABLE>
F-15
<PAGE>
ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of the status of Anchor's stock option plan as of December 31,
1999, 1998, and 1997 and changes during the years then ended is presented
below:
<TABLE>
<CAPTION>
1999 1998 1997
------------------ ------------------ ------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 620,975 $1.36 631,350 $1.41 557,350 $1.52
Granted................. 21,400 $1.00 74,400 $ .82 112,400 $ .91
Canceled or expired..... (101,775) $1.40 (84,775) $1.28 (38,400) $1.58
-------- ----- -------- ----- -------- -----
Outstanding at end of
year................... 540,600 $1.34 620,975 $1.36 631,350 $1.41
======== ===== ======== ===== ======== =====
Options exercisable at
year end............... 466,750 527,625 541,450
Weighted average grant-
date fair value of
options granted during
the year whose exercise
price equaled market
price on date of
grant.................. $.53 $.39 $.34
Weighted average grant-
date fair value of
options granted during
the year whose exercise
price exceeded market
price on date of
grant.................. $ -- $ .23 $ .32
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ---------------------------------------------------------- ----------------------------
Weighted Average
Range of Remaining
Exercise Number Contractual Weighted Average Number Weighted Average
Prices Outstanding Life Exercise Price Exercisable Exercise Price
- -------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ .50 6,000 9.0 years $ .50 6,000 $ .50
$ .81-$ .89 42,250 8.2 years $ .85 10,600 $ .85
$ .90-$1.00 114,000 7.9 years $ .93 78,300 $ .91
$1.45-$1.65 377,350 5.5 years $1.52 370,850 $1.52
$2.19 1,000 5.6 years $2.19 1,000 $2.19
- ----------- ------- --------- ----- ------- -----
$ .50-$2.19 540,600 6.3 years $1.33 466,750 $1.39
=========== ======= ========= ===== ======= =====
</TABLE>
NOTE 11--Leases:
Anchor rents its office facilities in Concord, California under an operating
lease, which expires in 2004. The terms of the lease include a 12-month rent
deferral and fixed rental escalation. The total rent for the lease term, which
reflects the 12-month deferral, and the escalation is being amortized on the
straight-line basis over the full term of the lease, resulting in deferred
rent liability of approximately $333,682 and $327,795 at December 31, 1999 and
1998, respectively. The deferred rent liability is included in long-term
liabilities in the accompanying balance sheet.
Anchor also leases office facilities in Oregon and Arizona. Such leases
expire in December 2002 and May 2002.
F-16
<PAGE>
ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The consolidated statement of operations includes rent expense of
$1,373,830, $1,152,588, and $757,666 reflected in selling, general and
administrative expenses for the years ended December 31, 1999, 1998, and 1997,
respectively.
Future minimum annual lease payments under office and equipment operating
leases as of December 31, 1999, are as follows:
<TABLE>
<CAPTION>
Gross
Lease Sublease Net
Year Payment Payment Payment
---- ---------- ---------- ----------
<S> <C> <C> <C>
2000........................................ $1,237,346 $ 224,532 $1,012,814
2001........................................ 1,199,257 224,532 974,725
2002........................................ 1,102,073 224,532 877,541
2003........................................ 693,655 224,532 469,123
2004........................................ 563,021 187,110 375,911
---------- ---------- ----------
$4,795,352 $1,085,238 $3,710,114
========== ========== ==========
</TABLE>
NOTE 12--Commitments and Contingencies
Anchor is subject to certain legal proceedings and claims arising in
connection with the normal course of its business. It is management's opinion
that the resolution of these claims will not have a material effect on
Anchor's consolidated financial position.
Anchor has estimated they will spend approximately $1.7 million over the
next two years to upgrade their computer hardware and software system.
Anchor had the following warrants outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Number Exercise Maturity
Outstanding Price Dates
----------- -------- --------
<S> <C> <C>
195,789 $3.00 Various
36,000 $1.35 2001
404,440 $0.90 2002
95,000 $1.75 2002
100,000 $0.60 2004
197,500 $0.50 2003
499,400 $0.50 2004
---------
1,528,129
=========
</TABLE>
NOTE 13--Related Party Transactions
At December 31, 1999, 1998, and 1997, $254,000, $480,000, and $240,000,
respectively, in 10% convertible debentures and bridge notes to various
members of its Board of Directors. Total interest incurred on this debt was
approximately $21,600, $21,400, and $24,849, respectively. Anchor repaid
$215,000 of principle plus interest on the related party debt in early 2000.
NOTE 14--Discontinued Operations:
On January 15, 1999, Anchor sold substantially all of the net assets of its
insurance brokerage business, primarily including cash held in fiduciary
accounts, accounts receivable, property and equipment, intangible
F-17
<PAGE>
ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
assets and premiums payable to insurance companies. This operation has been
accounted for as a discontinued operation and, accordingly, the foregoing
assets and liabilities and the insurance brokerage business's results of
operations are segregated in the accompanying consolidated balance sheets and
statements of operations and of cash flows. The loss on the sale of such net
assets has been reflected in the results of operations for the year ended
December 31, 1998.
Net revenues, operating costs and expenses, other income and expense, and
income taxes for all periods presented have been reclassified for amounts
associated with the discontinued operation.
Revenues, income (losses) from operations, loss on disposal, and income tax
provision (benefit) associated with the discontinued operation are as follows:
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Total revenues..................................... $3,069,459 $3,115,202
========== ==========
Income (loss) from operations before income tax
provision......................................... $ 194,109 $ 31,250
Income tax provision............................... (77,600) (12,500)
---------- ----------
Income (loss) from operations...................... 116,509 18,750
---------- ----------
Loss on disposal................................... (200,791) --
Income tax benefit on disposal..................... 77,600 --
---------- ----------
(123,191) --
---------- ----------
Income (loss) from discontinued operations......... $ (6,682) $ 18,750
========== ==========
</TABLE>
Income from discontinued operations for the years ended December 31, 1998,
and 1997 exclude general and administrative charges from Anchor of $213,900
and $298,000.
Assets and liabilities for all periods have been reclassified for amounts
associated with the discontinued operations. Anchor has reported such net
assets at their net realizable values under the caption, "Realizable value of
net assets sold." Summarized balance sheet data for the discontinued
operations are as follows at December 31, 1998:
<TABLE>
<S> <C>
Cash and cash equivalents--brokerage fiduciary funds............ $ 970,916
Accounts receivable, net........................................ 924,230
Prepaid expenses and other current assets....................... 15,197
Property and equipment, net..................................... 26,248
Intangibles, net................................................ 2,263,655
Net premiums payable--insurance companies....................... (1,893,637)
Acquisition payables............................................ (50,823)
-----------
2,255,786
Less--loss on disposition....................................... (200,791)
-----------
Net realizable value of assets sold............................. $ 2,054,995
===========
</TABLE>
On January 15, 1999, Anchor received $2,250,000 in cash and a receivable of
$27,500 for the sale of these net assets. Anchor also paid commissions of
$112,500 and incurred approximately $110,000 in additional expenses associated
with the sale. Anchor used $1,075,000 of these proceeds to pay off long-term
debt.
F-18
<PAGE>
ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 15--Cash Flow Disclosures:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Supplemental cash flow information:
Cash paid during the period for:
Interest......................................... $169,375 $254,505 $285,049
======== ======== ========
Income taxes..................................... $ 5,908 $ 9,956 $ 8,526
======== ======== ========
Supplemental schedule of noncash investing and
financing activities:
Increase in fixed assets and long-term liabilities
related to the purchase of office furniture and
equipment......................................... $ 33,393 $189,600 $ --
Bridge notes exchanged for common stock............ $ -- $ -- $ 45,000
======== ======== ========
Increase in intangible assets and long-term
liabilities related to purchase of customer lists.. $ -- $252,635 $ --
======== ======== ========
</TABLE>
NOTE 16--Subsequent Event:
Effective March 9, 2000, Anchor and Ward entered into a securities purchase
agreement ("Agreement"). Under the terms of the Agreement, Ward will purchase
from Anchor the following securities and make available the following loan
facility:
(a) $500,000 in Series E Convertible Debentures, maturing on July 1, 2000
or, at the holder's election, on a date not later than December 31,
2002, convertible into Anchor's common stock at $.50 per share (as of
December 31, 1999 and March 17, 2000, Ward had purchased $400,000 and
$500,000, respectively, of Series E Convertible Debentures). Further
these Debentures provided for the issuance of five-year term warrants
to purchase 3,000 shares of Anchor's common stock at $.50 per share for
each $5,000 of Debentures purchased, or a total of 300,000 shares;
(b) $200,000 bridge loan facility on February 23, 2000, interest at 10% per
annum, maturing on July 1, 2000. Ward applied the loan to the purchase
price of the Series A Convertible Preferred stock;
(c) 1,853,300 shares of Series A Convertible Preferred stock at a purchase
price of $2 million, convertible into Anchor's common stock at 10 to 1
shares of preferred stock, subject to adjustment upon certain events;
and
(d) $1 million Secured Convertible Loan Facility, interest at 10% per
annum, maturing on March 10, 2002, convertible into Anchor's Series A
Convertible Preferred stock at $4.5045 per share, subject to adjustment
upon certain events.
The Series A Convertible Preferred stock provides for, among other things,
an 8% cumulative dividend, voting rights equal to the number of shares of
common stock into which it may be converted, a liquidation preference equal to
the purchase price plus accumulated dividends, the right to elect a majority
of the board of directors, and requires the consent of the preferred
stockholders to pay any dividends or to redeem any equity securities.
F-19
<PAGE>
Exhibit 10.6B
AMENDEMNT NO. 1
---------------
TO
--
EMPLOYMENT AGREEMENT
--------------------
This Amendment No. 1 to Employment Agreement (the "Amendment") is made
effective on May 1, 1999, between ANCHOR PACIFIC UNDERWRITERS, INC.
("Employer"), and JAMES R. DUNATHAN ("Executive").
RECITALS
--------
A. Executive and Employer entered into that certain Employment Agreement
dated August 16, 1997 (the "Agreement"), pursuant to which Employer agreed to
employee Executive on the terms set forth therein.
B. Employer restructured its third party administration divisions' Harden
& Company Insurance Services, Inc., aka Harden Group, and all subsidiaries,
management team effective May 1, 1999.
C. In light of said restructuring, Employer and Executive desire to amend
certain terms of the Agreement.
NOW, THEREFORE, in consideration of the above recitals and of the mutual
promises and conditions in this Amendment, it is agreed as follows:
TERMS AND CONDITIONS
--------------------
1. The first sentence of Section 4. of the Agreement is hereby deleted in
its entirety and replaced with the following sentence:
"Subject to earlier termination as provided in this Agreement,
Executive shall be employed beginning May 1, 1999, and ending April 30, 2004."
2. Section 6(a) of the Agreement is hereby deleted in its entirety and
replaced with the following Section 6(a):
"(b) Incentive Compensation. In addition to the basic salary provided
----------------------
for in Section 6(a) above, Employer shall pay to Executive as incentive
compensation a bonus based on Employer's third party administration ("Harden
Group") divisions' financial performance. The bonus shall be equal to 5% of
Harden Group's operating results, and shall be calculated quarterly for the
periods ended March 31, June 30, September 30, and December 31, respectively.
Harden Group's operating results shall be based on an EBITDA (earnings before
interest, taxes, depreciation, and amortization)
1
<PAGE>
basis. The bonus shall be paid to Executive within 30 days of the end of each
quarterly period. To the extent Harden Group's operating results for a
particular quarterly period are later adjusted, any over-payment or under-
payment of Executive's bonus will be adjusted in the next quarterly period (or,
if necessary, such additional quarterly periods until the discrepancy is
resolved)."
3. Except as modified above, the terms and conditions contained in the
Agreement shall remain in full force and effect.
Executed by the parties as of the day and year first above written.
"Employer"
ANCHOR PACIFIC UNDERWRITERS,
INC.
By:/s/ Audie J. Dudum
------------------
Audie J. Dudum, Chairman
"Executive"
By:/s/ James R. Dunathan
---------------------
James R. Dunathan
2
<PAGE>
[WARD logo appears here]
Exhibit 10.38
February 18, 2000
Mr. James R. Dunathan
President & CEO
Anchor Pacific Underwriters, Inc.
1800 Sutter Street
Concord, CA 94520
Private & Confidential
----------------------
Dear Mr. Dunathan:
This letter agreement ("Agreement") sets forth the terms under which Ward
North America Holding, Inc. ("Ward"') shall make an investment in Anchor Pacific
Underwriters, Inc. (the "Company"). For purposes of this Agreement the
transactions referenced herein shall be collectively referred to as the
"Transaction."
This Agreement supersedes and replaces in its entirety that certain Letter
of Intent by and between Ward and the Company dated November 29, 1999.
The terms shall be as follows:
1. Securities and Loan Facilities. Ward will purchase from the Company the
following securities and make available the following loan facility:
(a) Series E Convertible Debentures. Series E Convertible Debentures (the
-------------------------------
"Debentures") in the principal amount of $500,000, bearing interest at the rate
of 10% per annum convertible into shares of Common Stock at a conversion price
of $.50 per share. These debentures would be senior to the other series of
debentures issued by the Company. The Company and Ward acknowledge that as of
the date hereof, Ward has purchased $465,000 of the Debentures. Ward shall
purchase an additional $35,000 of the Debentures upon approval of this Agreement
by the Board of Directors of the Company ("the Board") and Ward's receipt of the
opinion of counsel referenced in paragraph 12 herein. Ward has also received
separate warrants, with a 5 year term, to purchase shares of the Company's
Common Stock at a purchase price of $.50 a share (the "Warrants"). For each
$5,000 worth of Debentures purchased by Ward, the Company granted a Warrant to
acquire 3,000 shares of Common Stock.
(b) Amendment of Due Date of the Debentures. The payment terms of the
---------------------------------------
Debentures (including all previously issued Debentures held by Ward) shall be
amended to provide for repayment on July 1, 2000. The Debentures shall continue
to be convertible
<PAGE>
at all times prior to repayment by the Company and, following the closing of the
purchase of the Series A Preferred Stock, the repayment date of the Debentures
may be extended at the election of Ward to a date no later than December 31,
2002.
(c) Convertible Bridge Loan. Upon approval of this Agreement by the Board
-----------------------
and receipt of the opinion of counsel referenced in paragraph 12, Ward shall
make a bridge loan to the Company in the principal amount of $200,000 evidenced
by a promissory note ("Bridge Loan"). The principal amount of the Bridge Loan
shall bear interest at the rate of 10% per annum and shall be due and payable on
July 1, 2000. The principal amount and all accrued interest under the Bridge
Loan may, at the election of Ward, be applied toward the purchase of Series A
Preferred stock, or, in the event of the failure of a Specified Condition
described in paragraph 1(g) below, may, at the election of Ward, be applied
toward the purchase of Common Stock in accordance with the terms of such
paragraph 1(g).
(d) Preferred Stock. Ward will purchase at the closing approximately
---------------
1,853,300 shares of Series A Convertible Preferred Stock. ("Series A Preferred")
convertible into shares of Common Stock constituting 62.6% of the Company's
Common stock on a fully-diluted basis (assuming the exercise of all stock
options or warrants issued by the Company or conversion of all outstanding
debentures, including the Series E Debentures and the accompanying Warrants)
following such conversion. Assuming the conversion of all the Debentures (but
not the exercise of the accompanying Warrants held by Ward) and the conversion
of all Series A Preferred shares, Ward would own 66% of the Company's Common
Stock on a fully-diluted basis immediately following such conversion and
exercise. Each share of Series A Preferred shall be convertible into 10 shares
of Common Stock. The Series A Preferred shall he entitled to vote on an as
converted to Common Stock basis on all matters presented to the Company's
shareholders. The purchase price for the 1,853,000 shares of the Series A
Preferred would be $2,000,000 The Series A Preferred would carry a cumulative 8%
dividend, a liquidation preference equal to the purchase price plus accumulated
dividends, the right to elect a majority of the Board of Directors, and approval
rights over significant corporate transactions, including all future issuances
of securities.
(e) Convertible Loan Facility. Ward will make available to the Company a
-------------------------
convertible loan facility of $1,000,000 (the "Convertible Loan") following the
closing of the purchase of the Series A Preferred stock. Any principal amount
borrowed by the Company pursuant to the Convertible Loan shall bear interest at
the rate of 10% per annum. The Company may borrow all or any portion of the
Convertible Loan any time following the closing of the purchase of the Series A
Preferred stock. Notwithstanding the Company's right to access the proceeds of
the Convertible Loan. Ward shall have the right to cause the Company to borrow
all or any portion of the Convertible Loan at any time following such closing.
The Convertible Loan shall be convertible at Ward's option, into shares of
Series A Preferred stock which are further convertible into a number of
<PAGE>
[WARD logo appears here]
shares of Common Stock which, when added to the shares of Common Stock issued or
issuable pursuant to the Debentures (not including the Warrants accompanying the
Debentures) and the other shares of Series A Preferred issued to Ward, would
constitute 73.5% of the Company's Common Stock on a fully-diluted basis
following such conversion assuming the maximum amount of $1,000,000 was borrowed
by the Company pursuant to the Convertible Loan. Ward shall have the right to
convert all or any portion of the Convertible Loan.
(f) Standstill Period Tender Offer and Warrant. During the 36 month period
------------------------------------------
following the closing of the Transaction, neither Ward or its affiliates will
make any further acquisitions of the Company's securities (including, but not
limited to, debt securities such as debentures, bonds or notes and equity
securities such as common or preferred stock) whether directly from the Company
or indirectly from debt or security holders unless Ward has first made a tender
offer to purchase all outstanding shares of Common Stock at a purchase price
equal to the greater of: (i) a price per share of determined by assuming the
-------
value of the Company to be equal to the Company's earnings before income taxes
("EBIT") for the 12 full calendar months preceding the month in which the offer
is made, multiplied by six (6), or $.80 per share (the "Tender Offer"). At the
closing the Company will issue Ward a warrant with a three (3) year term to
purchase a number of shares of the Company's Common Stock which, when added to
the shares of Common Stock issued or issuable pursuant to the Debentures (not
including the Warrants accompanying the Debentures), the Series A Preferred
stock and the Convertible Loan, would constitute 90% of the Company's stock on a
fully-diluted basis following the exercise of such warrant. The exercise of such
warrant would be conditioned upon Ward having first made a Tender Offer to buy
all of the shares of the Company's stock not then owned by Ward or its
affiliates. The Warrant shall enable Ward to purchase a share of Common Stock at
a purchase price equal to the greater of (i) a price per share determined by
-------
assuming the value of the Company to be equal to the Company's EBIT for the 12
full calendar months preceding the month in which the offer is made, multiplied
by six (6), or (ii) $0.80 per share.
(g) Conditional Option to Purchase Common Stock. Upon the approval of this
-------------------------------------------
Agreement by the Board and receipt of the opinion of counsel referenced in
paragraph 12 below, Ward shall purchase an option to purchase common shares of
the Company subject to the terms and conditions set forth in this paragraph I(g)
("Conditional Option"). The purchase price for the Conditional Option shall be
$1,000. The Conditional Option shall be exercisable by Ward only upon the
failure of the Company to satisfy certain material conditions precedent to the
consummation of the Transaction by March 15, 2000 including, but not limited to
the following: (a) approval of this Agreement, the Definitive Agreements
(described in paragraph 5 below) and the Transaction by the Board, (b) the good
faith negotiation and timely execution of the Definitive Agreements by the
officers and representatives of the Company, (c) the Company's compliance with
the material terms of this Agreement and the Definitive Agreements prior to the
closing
<PAGE>
[WARD logo appears here]
of the Transaction, (d) receipt by the Company of all material consents and
approvals necessary for the consummation of the Transaction, and (e) the timely
performance by the Company and its directors and shareholders of all acts
necessary for the consummation the Transaction, including the adoption and
filing of a Certificate of Determination for the Series A Preferred Stock and
the authorization by the Company and its shareholders of additional shares of
Common Stock in an amount sufficient to fully consummate the Transaction;
provided, however, any waiting period required by the Securities and Exchange
- -------- -------
Commission's Information Statement requirements set forth in Schedule 14C of the
Securities Exchange Act of 1934 shall not be deemed a failure by the Company to
satisfy a material condition precedent. The foregoing conditions shall
collectively be referred to as "Specified Conditions". The parties acknowledge
this Conditional Option is intended to protect Ward's interests in the event the
Transaction is not consummated in accordance with its terms by reason of a
failure of a Specified Condition described above and not as a result of Ward's
election not to proceed for any other reason such as the failure of other
conditions precedent for the benefit of Ward or matters or conditions
subsequently discovered in its final due diligence prior to the closing of the
Transaction.
Upon the failure of a Specified Condition, Ward shall have the option to
purchase 7,200,000 shares of Common Stock which immediately following such
purchase, when combined with the 1,000,000 shares of Common Stock issued or
issuable to Ward under the Debentures (not including the Warrants accompanying
the Debentures) shall constitute not less than 51% of the Company's authorized
Common Stock (currently 16,000,000 shares). The purchase price for such shares
shall be $1,000,000 payable at the election of Ward by the application of the
principal and accrued interest under the Bridge Loan (approximately $200,000)
and the balance in cash in the approximate amount of $800,000.
In the event the Transaction is consummated in accordance with the terms hereof,
the principal and accrued interest under the Bridge Loan may, at the election of
Ward, be applied toward the purchase price of the Series A Preferred stock.
2. Employment Agreements. As a condition precedent to the Closing, all
producers and key employees (excluding James P. Dunathan) of the Company (as
determined by Ward) will be required to enter into employment agreements with
Ward. Such employment agreements shall be in form and substance, and shall
contain certain non-piracy restrictive covenants, acceptable to Ward.
3. Conditions. The obligation of Ward to consummate the Transaction will
be subject to (a) satisfactory completion of its final due diligence
investigation of the Company, including financial and legal due diligence and
verification, (b) execution of Definitive Agreements by Ward, (c) approval of
the Transaction by the Board of Directors of Ward, (d) receipt of all material
consents and approvals necessary for the consummation of the Transaction, (e)
the timely performance by the Company of all acts
<PAGE>
[WARD logo appears here]
necessary for the consummation the Transaction, including the adoption and
filing of a Certificate of Designation for the Series A Preferred and the
authorization of additional shares of Common Stock sufficient to consummate the
Transaction, (f) the absence of any material adverse change in the Company or
its financial condition, and (g) Fiduciary Cash equal to or greater than
Fiduciary Obligations calculated in accordance with California Department of
Insurance regulations.
4. Due Diligence Access. The Company will continue to (and cause its
officers, directors, producers, employees, agents and representatives to)
provide Ward and its representatives with full and complete access to all books,
records, contracts, facilities and personnel of the Company. Such information
shall be made available on a confidential basis.
5. Definitive Agreements and Closing. Ward will prepare, and the parties
will negotiate in good faith, Definitive Agreements reflecting the terms of the
Transaction as set forth herein, and containing representations, warranties,
covenants, indemnities and agreements customary for transactions of the type
contemplated hereby. The Company will be required under the Definitive
Agreements (i) to make customary representations and warranties to Ward,
including, among other things, that all liabilities and obligations of the
Company have been disclosed therein, and that the Company owns each and every
account and that no employee or agent producer has any ownership in any account
or business of the Company, and (ii) to indemnify Ward for any claims or
liabilities incurred by Ward due to any material breaches of any
representations, warranties or covenants of the Company thereunder or any
material undisclosed liabilities, whether known or unknown; provided, however,
that Ward will provide reasonable documentation to support any such claim and
will cooperate with any related inquiry. The parties shall exert their best
efforts to negotiate and execute Definitive Agreements on or before February 29,
2000 and the purchase and sale of the Series A Preferred shall be closed as soon
as possible thereafter. In no event however shall the execution and closing
occur later than March 15, 2000.
6. Publicity. Except as may be required applicable law, neither Ward nor
the Company shall engage in, encourage or support any publicity, announcement or
disclosure of any kind or form in connection with this Agreement or the
Transaction unless the parties shall consult in advance on, and attempt in good
faith to obtain the prior consent of the other party as to the form, timing and
content of any publicity, announcement, or disclosure, whether to the financial
community, governmental agencies, public generally or otherwise.
<PAGE>
[WARD logo appears here]
7. Exclusivity. The Company acknowledges that Ward has and will continue to
devote substantial resources and incur significant legal, accounting and other
out-of-pocket expenses in conducting due diligence regarding the Company and in
negotiating and documenting the transactions contemplated by this Agreement. To
continue to induce Ward to devote such resources and incur such expenses, the
Company agrees that, unless this Agreement is terminated by Ward in accordance
herewith, the Company will not, and will not permit any of its officers,
directors, employees, agents or representatives, directly or indirectly, to
supply any information concerning the Company or its insurance business to any
third party in connection with any acquisition of any interest in the Company or
any of its assets or liabilities, or solicit or negotiate, directly or
indirectly, with any third party to acquire any equity interest in, or assets or
liabilities of, the Company. The Company shall, and shall cause its officers,
directors, employees, agents or representatives to, immediately cease any
discussions with any other party regarding any such transaction. In the event
that this exclusivity provision is violated by the Company. Company shall pay
Ward a Break Up Fee of $250,000 within thirty (30) days, following such
election. This exclusivity provision shall expire on February 29, 2000 unless
the Company and Ward have executed all of the Definitive Agreements. Ward may
extend the exclusivity period until March 15, 2000 by agreeing to increase the
total purchase price by purchasing an additional $200,000 of the Company's
Series E Debentures or Series A Preferred Shares, or a combination thereof.
8. Interim Conduct. Until and following the execution of the Definitive
Agreements, the Company agrees to conduct its business only in the ordinary
course and consistent with prior practice.
9. Expenses. Each of the parties will bear its own expenses incident to
the contemplated Transaction including, but not limited to, all fees of
attorneys and financial advisors.
10. Binding Effect. This Agreement is intended to create binding
obligations on both parties which, in the absence of the execution of the
Definitive Agreements contemplated herein, shall be fully enforceable in
accordance with their terms.
11. Governing Law. This Agreement shall be governed by the laws of the
State of California, without giving effect to principles of conflicts of laws.
12. Opinion of Counsel. Prior to making the Bridge Loan and purchasing
the remaining Debentures and the Conditional Option as described herein, Ward
shall receive from Sheppard, Mullin, Richter & Hampton LLP, counsel to the
Company, an opinion letter addressed to Ward dated the date of the execution of
the Agreement by the Company, that the Company has taken all corporate action
necessary to authorize the
<PAGE>
execution and delivery of this Agreement by the Company and that this Agreement
has been duly authorized, executed and delivered on behalf of the Company. The
form and content of such letter shall be subject to the reasonable approval of
Ward's legal counsel.
13. Attorneys' Fees. In the event that any party to this Agreement
institutes any legal proceeding to enforce any of the provisions of this
Agreement, then the prevailing party in such proceeding shall be entitled to
collect and receive its reasonable attorneys' fees and costs, through and
including all appeals, and the other party shall pay for same.
14. Arbitration; Venue and Jurisdiction. The parties hereto agree that any
dispute arising out of or relating to this Agreement or the breach, termination
or the validity hereof shall be settled by binding arbitration in accordance
with the rules of the American Arbitration Association "AAA") by a neutral
arbitrator who shall be a former superior court or appellate court judge or
justice with experience in resolving business disputes. The arbitration shall be
governed by the California Code of Civil Procedure Section 1280 et seq. and the
parties intend this procedure to be specifically enforceable in accordance with
such provisions. Judgment upon the award rendered by the arbitrator may be
entered by any court having jurisdiction thereof. The parties agree that the
judgment or decision of the arbitrator shall be final and binding. The parties
agree that the venue for the arbitration shall be in the County of Contra Costa,
California. The arbitrator shall be required to follow the applicable law as set
forth in the governing law section of this Agreement. The arbitrator shall award
reasonable attorneys' fees and costs of arbitration to the prevailing party in
such arbitration. The parties hereto consent to the personal jurisdiction of any
court in the County of Contra Costa, California for the enforcement of this
agreement to arbitrate and any award granted pursuant to said arbitration or
settlement of any dispute related hereto.
15. Successors and Assigns. Except as otherwise expressly provided herein,
the provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors, and administrators of the parties hereto.
16. Separability. In case any provision of this Agreement shall be
invalid, illegal or unenforceable, it shall, to the extent practicable be
modified so as to make it valid, legal and enforceable and to retain as nearly
as practicable the intent of the parties, and the validity, legality, and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
17. 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 on the third day following mailing by registered or
certified mail, return receipt requested, postage prepaid, addressed: (a) if to
Ward, at 610 West Ash Street, Suite 1500, San Diego, California 92101, or at
such other address as Ward shall have
<PAGE>
[WARD logo appears here]
furnished to the Company in writing in each case with a copy to Bruce Feuchter,
Stradling Yocca Carlson & Rauth, 660 Newport Center Drive, Suite 1600, Newport
Beach, California 92660, or (b) if to the Company, at 1800 Sutter Street, Suite
400, Concord, California 94520, or at such other address the Company shall have
furnished to Ward in writing, in each case with a copy to A. John Murphy,
Sheppard, Mullin, Richter & Hampton LLP, Four Embarcadero Center, Suite 1700,
San Francisco, California 94111.
Sincerely,
WARD NORTH AMERICA HOLDING, INC.
By: /s/ Kevin P. Jasper Date: February 18, 2000
------------------- -----------------
Kevin P. Jasper
Executive Vice President
ANCHOR PACIFIC UNDERWRITERS, INC.
By: /s/ James R. Dunathan Date: February 22, 2000
--------------------- -----------------
James R. Dunathan
President & CEO
<PAGE>
Exhibit 10.39
STOCK PURCHASE AGREEMENT
This Agreement is entered into by and between Anchor Pacific Underwriters, Inc.
("Anchor"), a Delaware corporation and James R. Dunathan ("JRD"), an individual
to be effective as of March 9, 2000.
RECITALS
A. JRD desires to purchase from Anchor all the outstanding stock of Shelby
Insurance Services, Inc., formerly known as Putnam, Knudsen & Wieking,
Inc., ("Shelby") to further his business of property and casualty insurance
contacts.
NOW THEREFORE, in consideration of the mutual covenants and promises contained
herein, the parties, intending to be legally bound, agree as follows:
1. Purchase of Stock of Shelby by JRD. JRD will purchase from Anchor all of
-----------------------------------
the outstanding stock of Shelby for the sum of $1,000.00. This amount shall
be paid in cash upon delivery by Anchor to JRD of Anchor's shares of stock
in Shelby, properly endorsed for transfer.
2. Warranties and Representations of Anchor. Anchor warrants that it is
-----------------------------------------
transferring all its outstanding shares of stock of Shelby to JRD. Anchor
warrants that it has the requisite legal authority and approval of its
board of directors to sell its shares of stock of Shelby to JRD. Anchor
represents that it is not aware of any liabilities on the part of Shelby,
but except as contained in this Section 2, Anchor makes no warranties or
representations of any nature with respect to Shelby.
3. Warranties and Representations of JRD. JRD warrants that he has the
--------------------------------------
requisite legal authority to purchase Anchor's shares of stock of Shelby.
4. Mutual Release of Liabilities. The parties agree that after the transfer
------------------------------
of stock of Shelby to JRD, Anchor or any of its other subsidiaries shall
not have any liability of any nature with respect to Shelby relating to
matters arising after the transfer of the stock of Shelby to JRD. And the
parties further agree that after the transfer of stock of Shelby to JRD,
JRD shall not have any liability of any nature with respect to Shelby
relating to matters arising prior to the transfer of the stock of Shelby to
JRD.
5. Transfer of Books and Records. Anchor agrees that it will deliver to JRD
------------------------------
along with the delivery of the Shelby shares of stock, stock certificate
book, photocopies of the minutes of the meetings of the board of directors
meetings, some of which were held as combined meetings with Anchor and its
other subsidiaries.
<PAGE>
6. Required approval for Anchor. This Agreement is subject to the approval of
-----------------------------
the board of directors of Anchor.
7. Entire Agreement. This Agreement, including any amendments and addenda,
-----------------
forms the entire agreement between the parties, and there are no
understandings between the parties other than as expressed in the
Agreement.
8. Modification and Termination. Except as otherwise provided herein, this
-----------------------------
Agreement may be amended or canceled and terminated only by mutual written
consent of the parties. Any change or modification to the Agreement will
be null and void unless made by amendment to this Agreement and signed by
both parties.
9. Successors and Assigns. This Agreement is binding upon and inures to the
-----------------------
benefit of the parties thereto and their respective successors and assigns.
10. Notice. Notice or notification with respect to this Agreement shall be
-------
mailed or delivered to Anchor, at 1800 Sutter Street, Suite 400, Concord,
CA 94520 and/or to JRD at 42 Clement Ct., Napa, CA 94558.
IN WITNESS WHEREOF, this Agreement is executed in duplicate on the dates
indicated below, each signer warranting that he/she has the requisite authority
to execute this Agreement.
ANCHOR PACIFIC UNDERWRITERS, INC.
By: /s/ Audie J. Dudum
-----------------------------------
Audie J. Dudum,
Chairman
Date: March 10, 2000
-----------------------------------
JAMES R. DUNATHAN
By: /s/ James R. Dunathan
-----------------------------------
James R. Dunathan
Date: 3/10/00
-----------------------------------
-2-
<PAGE>
EXHIBIT 10.40
================================================================================
SECURITIES PURCHASE AGREEMENT
BY AND BETWEEN
ANCHOR PACIFIC UNDERWRITERS, INC.,
a Delaware corporation
AND
WARD NORTH AMERICA HOLDING, INC.,
a California corporation
Dated as of March 9, 2000
================================================================================
<PAGE>
SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT is made and entered into as of March 9,
2000 (the "Effective Date") by and between Anchor Pacific Underwriters, Inc., a
Delaware corporation (the "Company"), and Ward North America Holding, Inc., a
California corporation ("Purchaser"). The parties hereby agree as follows:
1. PURCHASE AND SALE OF SECURITIES.
1.1 Sale and Issuance of Senior Convertible Debentures.
(a) Purchaser has purchased and the Company has issued and sold
to Purchaser (i) Series E Convertible Debentures (the "Debentures"), in the form
attached hereto as Exhibit A, in the principal amount of $500,000 (the
---------
"Debentures Purchase Price") and (ii) five year term Warrants attached thereto
for the purchase of 300,000 shares of the Common Stock of the Company
exercisable at $.50 per share (the "Debenture Warrants").
(b) The Company acknowledges that Purchaser has already
delivered $500,000 in cash to the Company as payment for the Debentures
(including the Debenture Warrants), and Purchaser acknowledges that the Company
has already delivered to Purchaser $500,000 of the Debentures (including the
Debenture Warrants), pursuant to the terms and conditions of that certain Letter
Agreement by and between the Company and Purchaser dated November 29, 1999 (the
"Letter Agreement") and the subsequent letter agreement between the Company and
Purchaser dated February 18, 2000 (the "later Letter Agreement").
(c) The payment provision of the Debentures shall be amended to
provide for repayment on July 1, 2000. The Debentures shall be convertible at
all times prior to repayment by the Company and following the Closing (as
defined in Section 1.5 below) the payment date may be extended at Purchaser's
election to a date no later than December 31, 2002.
1.2 Sale and Issuance of Preferred Stock.
(a) The Company shall, on or before the Closing, adopt and file
a Certificate of Designation (the "Certificate of Designation") in the form
attached hereto as Exhibit B with the Delaware Secretary of State, creating a
---------
Series A Convertible Preferred Stock, $.02 par value per share ("Series A
Preferred Stock"), which series shall initially consist of 1,853,300 shares.
(b) Subject to the terms and conditions of this Agreement,
Purchaser agrees to purchase at the Closing, and the Company agrees to sell and
issue to Purchaser at the Closing, 1,853,300 shares of the Company's Series A
Preferred Stock (the "Shares") for the purchase price of One Dollar and
079156/100 ($1.079156) per share, for a total purchase price for the Shares of
$2,000,000. Purchaser has previously made a convertible bridge loan (the "Bridge
Loan") in the amount of $200,000 to the Company and Purchaser may apply the
principal amount of the Bridge Loan and any accrued interest thereon toward the
purchase price of the Shares and the remainder of the purchase price shall be
paid in cash.
1.3 Execution and Delivery of Secured Convertible Loan Facility.
Subject to the terms and conditions of this Agreement, Purchaser
agrees to execute and deliver at the Closing, and the Company agrees to execute
and deliver to Purchaser at Closing, a Secured Convertible Loan Facility (the
"Loan Facility"), in the form attached hereto as
<PAGE>
Exhibit C, which shall permit the Company to borrow from Purchaser the principal
- ---------
amount of up to $1,000,000 at an interest rate of 10% per annum. The Loan
Facility shall initially be convertible into that number of shares of the
Company that when added to all other convertible securities held by Purchaser of
the Company, shall allow Purchaser to acquire on a fully diluted basis 74.5% of
the Company's Common Stock assuming the full $1,000,000 was borrowed.
1.4 Standstill.
During the 36 month period commencing on the date of the Closing,
Purchaser shall not acquire any securities of the Company except pursuant to the
conversion or exercise of the Shares, the Debentures, the Loan Facility or the
Debenture Warrants, until Purchaser has either (i) made a tender offer (the
"Tender Offer") pursuant to Regulation 14D as promulgated under the Exchange
Act, as defined below, for the purchase of all the shares of Common Stock of the
Company outstanding and not owned by Purchaser or its affiliates, or (ii)
Purchaser has made an offer to acquire all remaining securities of the Company
outstanding by way of a cash merger (the "Merger"). The price per share offered
in the Tender Offer or in the Merger shall be the greater of (i) $.80 per share
(as adjusted for stock splits, combinations or dividends with respect to such
shares) or (ii) a price per share determined by assuming the value of the
Company to be equal to the Company's earnings before interest and taxes for the
last twelve months most recently ended immediately prior to such Tender Offer or
Merger, multiplied by six and divided by the number of shares outstanding of the
Company on a fully diluted basis.
1.5 The Closing.
(a) The purchase and sale of the Shares and the execution and
delivery of the Loan Facility shall take place at the offices of Stradling Yocca
Carlson & Rauth, 660 Newport Center Drive, Suite 1600, Newport Beach, California
92660, on March 10, 2000, or at such other time and place as the Company and
Purchaser mutually agree upon orally or in writing (which time and place are
designated as the "Closing").
(b) At the Closing, the Company shall deliver to the Purchaser a
stock certificate registered in Purchaser's name evidencing the Shares against
delivery to the Company by Purchaser of $2,000,000 (the "Stock Purchase Price"
and collectively with the Debentures Purchase Price and the Stock Purchase
Price, the "Total Purchase Price").
(c) Except as provided in Section 1.2(b) above, the Total
Purchase Price (less the $500,000 previously paid by the Purchaser for the
Debentures and the $200,000 previously advanced by the Purchaser in the form of
a Bridge Loan) shall be paid by a wire transfer of funds to an account
designated by the Company, which account shall be designated no later than three
(3) days prior to the Closing.
1.6 Reservation of Common Stock. Any shares of Common Stock of the
Company issuable upon conversion of the Series A Preferred Stock when issued,
issuable upon conversion of the Loan Facility or the Debentures when issued or
issuable upon exercise of the Debenture Warrants are herein referred to as the
"Underlying Common Stock." The Debentures, the Debenture Warrants, the Shares,
the Loan Facility and the Underlying Common Stock are sometimes herein referred
to collectively as the "Securities." The Board of Directors of the Company will,
prior to the Closing, vote to authorize an increase in the number of shares of
Common Stock the Company is authorized to issue and shall reserve and authorize
the continued reservation of, free of preemptive rights and other preferential
rights, (a) a sufficient number of its authorized but unissued shares of Series
A Preferred Stock to satisfy the purchase hereunder, and (b) a sufficient number
of its
2
<PAGE>
authorized but unissued shares of Common Stock to satisfy the rights of
conversion of all the Debentures, the Shares, the Loan Facility, and the
exercise of the Debenture Warrants.
1.7 Further Stockholder Action. Prior to the Closing, the Company
will (a) secure the written consent of the holders of a sufficient number of
shares of its Common Stock to authorize an increase in the number of shares of
Common Stock the Company is authorized to issue to at least 50,000,000; and (b)
prepare and file a Certificate of Designation to reflect the specific terms and
conditions of the Series A Preferred Stock. Subsequent to the Closing, the
Company will also take the necessary steps to promptly prepare, file and
circulate an Information Statement (the "Information Statement") in conformity
with the requirements of Section 14(c) of the Securities Exchange Act of 1934,
as amended, and the regulations promulgated thereunder (the "Exchange Act").
Approximately, twenty-one (21) days after the circulation of the Information
Statement, the Company will take the necessary steps to amend its Certificate of
Incorporation by filing an amendment with the Delaware Secretary of State to
increase the number of shares of Common Stock the Company is authorized to issue
to 50,000,000.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
Except as otherwise set forth on the Schedule of Exceptions attached
hereto as Exhibit D specifically identifying the relevant subparagraph hereof,
---------
which exceptions shall be deemed to be representations and warranties hereunder,
the Company hereby represents and warrants to Purchaser as follows:
2.1 Organization and Standing; Qualification. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware, has all requisite corporate or similar power and
authority to own and operate its properties and assets and to carry on its
business as now conducted and as presently proposed to be conducted. The Company
is duly qualified and is authorized to transact business and is in good standing
as a foreign corporation in each jurisdiction in which the failure so to qualify
would have a material adverse effect on the business, financial condition,
properties, operations or results of operations of the Company.
2.2 Authority. The Company has taken all corporate action necessary
in order, to execute, deliver and perform its obligations under this Agreement,
the Investor Rights Agreement and any other agreement to which the Company is a
party the execution and delivery of which is contemplated hereby (the "Ancillary
Agreements"), to issue and sell the Debentures, the Debenture Warrants, the
Shares and the Loan Facility and to carry out the provisions of this Agreement
and the Investor Rights Agreement or any Ancillary Agreement. This Agreement,
the Investor Rights Agreement and each Ancillary Agreement is a legal, valid and
binding obligation of the Company, enforceable in accordance with their terms,
subject to bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws of general applicability relating to or affecting
creditors' rights and to general equity principles.
2.3 Capitalization. The authorized capital stock of the Company,
immediately prior to the Closing, will consist of 16,000,000 shares of Common
Stock, $0.02 par value, of which 4,710,055 shares are issued and outstanding as
of the Closing; 2,000,000 shares of Preferred Stock, $0.02 par value, 1,853,300
of which have been designated as Series A Preferred Stock, none of which are
currently issued and outstanding. All issued and outstanding shares of the
Company's capital stock have been duly authorized and validly issued, are fully
paid and nonassessable, and are free and clear of any lien, mortgage, pledge,
security interest, claim or other encumbrances (collectively, "Encumbrances").
Except as set forth in the Schedule of Exceptions, there are no outstanding
rights of first refusal, preemptive rights or other rights, options, warrants,
conversion
3
<PAGE>
rights, or other agreements either directly or indirectly for the purchase or
acquisition from the Company of any shares of its capital stock. All of the
outstanding shares of Common Stock, Preferred Stock, options and warrants have
been duly and validly issued in compliance with all applicable federal and state
securities laws.
2.4 Validity. The sale of the Debentures, the Debenture Warrants and
the Shares, and the subsequent conversions and/or exercise, as applicable, of
the Debentures, the Debenture Warrants, the Shares and the Loan Facility are not
and will not be subject to any preemptive rights or rights of first refusal that
have not been waived and, when issued, sold and delivered in compliance with the
provisions of this Agreement and the Company's Certificate of Incorporation, the
Securities will be validly issued, fully paid and nonassessable, and will be
free of any Encumbrances; provided, however, the parties recognize and
understand that further action is required following the Closing with respect to
the preparation, filing and circulation of the Information Statement by the
Company as required under the Exchange Act.
2.5 SEC Filings. The Company has filed with the Securities and
Exchange Commission (the "SEC") all reports, schedules, forms, statements and
other documents required pursuant to the Exchange Act, since January 1, 1997
(collectively, and in each case including all exhibits and schedules thereto and
documents incorporated by reference therein, the "SEC Documents"). As of their
respective dates, the SEC Documents complied in all material respects with the
requirements of the Exchange Act, as the case may be, and the rules and
regulations of the SEC promulgated thereunder applicable to such SEC Documents.
As of their respective dates, none of the SEC Documents (including any and all
financial statements included therein) filed pursuant to the Exchange Act or any
rule or regulation thereunder contained any untrue statement of a material fact
or omitted to state a material fact required to be stated therein or necessary
in order to make the statements therein, in the light of the circumstances under
which they were made, not misleading. Except to the extent that information
contained in any SEC Document has been revised or superseded by a later filed
SEC Document, none of the SEC Documents (including any and all financial
statements included therein) contains any untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading. The consolidated financial statements of
the Company included in all SEC Documents filed since January 1, 1997 (the "SEC
Financial Statements") comply in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, and have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto). The SEC Financial Statements
fairly present the consolidated financial position of the Company as of the
dates thereof and the consolidated results of its operations and cash flows for
the periods then ended (subject, in the case of unaudited quarterly statements,
to normal recurring audit adjustments). Except as set forth on the Schedule of
Exceptions, the Company does not have any material liabilities or obligations of
any nature (whether accrued, absolute, contingent or otherwise) required by
generally accepted accounting principles to be recognized or disclosed on a
consolidated balance sheet of the Company or in the notes thereto, except (i)
liabilities reflected in the consolidated audited balance sheet of the Company
as of December 31, 1998 or the notes thereto, (ii) liabilities reflected in the
consolidated unaudited balance sheet of the Company as of September 30, 1999, or
any notes thereto, and (iii) liabilities disclosed in any SEC Documents filed by
the Company prior to the date of this Agreement with respect to any period
ending, or date occurring, after September 30, 1999.
2.6 Absence of Changes or Events. Except as set forth on the Schedule
of Exceptions, since September 30, 1999, the Company has conducted its business
only in the ordinary
4
<PAGE>
course consistent with past practice, and there is not and has not been: (i)
since September 30, 1999, any condition, event or occurrence which has had a
material adverse effect on the business, properties, financial condition or
results of operations of the Company (a "Material Adverse Effect"); (ii) since
September 30, 1999, any condition, event or occurrence which as of the date of
this Agreement, individually or in the aggregate, could reasonably be expected
to have a Material Adverse Effect with respect to the Company; or (iii) since
September 30, 1999, any condition, event or occurrence which, individually or in
the aggregate, could reasonably be expected to prevent or materially delay the
ability of the Company to consummate the transactions contemplated by this
Agreement or perform its obligations hereunder.
2.7 Material Contracts and Agreements.
(a) The Schedule of Exceptions lists the following accounts,
agreements, leases, contracts, notes, mortgages, indentures, arrangements or
other obligations (individually, a "Contract," collectively, the "Contracts") to
which the Company is a party on the date hereof:
(i) any Contract the performance of which is expected to
involve consideration payable either to or by the Company in excess of $25,000
per annum;
(ii) any Contract which restricts or contains limitations
on the ability of the Company to freely conduct business in any area within the
United States;
(iii) any collective bargaining agreement to which the
Company is a party;
(iv) any employment agreement to which the Company is a
party; and
(v) any Contract which relates to indebtedness owed by the
Company having a principal amount of $25,000 or more, or the guarantee thereof.
(b) The Company has made available to Purchaser a correct and
complete copy of each Contract listed in the Schedule of Exceptions, together
with any and all amendments or modifications thereto. Each such Contract is
valid, binding, enforceable, and in full force and effect, and the Company is
not in breach or default under any such Contract and no event has occurred
which, with notice or lapse of time or both, would constitute a breach or
default, or permit termination, modification, or acceleration, under such
Contract.
(c) The Company owns each and every Contract to which it is a
party and no employee or agent producer has any ownership in any Contract,
account or business of the Company.
2.8 Accounts Receivable. All accounts receivable of the Company have
and will have arisen from the provision of services by the Company in the
ordinary course of business. The Company has not received any notice of, nor
does the Company know of any counterclaim or set-off with respect to any
accounts receivable or any facts or circumstances that would be the basis for,
any such counterclaim or set-off which is not reflected or taken into account in
the contractual allowance or bad debt reserves set forth in the SEC Financial
Statements.
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2.9 Fixed Assets. The fixed assets of the Company used in its
operations, including, but not limited to, all vehicles, materials, equipment,
and computers are in good working order and condition in all material respects.
2.10 Title to Properties and Assets; Liens; etc. The Company has good
and marketable title to its properties and assets, and good title to all its
leasehold estates, in each case free of all Encumbrances other than (a) liens
resulting from taxes which have not yet become delinquent, (b) minor liens,
encumbrances, or defects of title which do not, individually or in the
aggregate, materially detract from the value of the property subject thereto or
materially impair the Company's ownership or use of such property or assets, or
(c) as set forth on the Schedule of Exceptions. With respect to property it
leases, the Company is in compliance with such leases in all material respects.
2.11 Compliance with Other Instruments. Other than as set forth on the
Schedule of Exceptions, the Company is not in violation or default of any term
or provision of its Certificate of Incorporation or Bylaws, any Contract,
judgment, decree or order to which it is a party or by which it is bound or, to
the best of its knowledge, any statute, rule or regulation applicable to the
Company. Other than as set forth on the Schedule of Exceptions, the execution,
delivery and performance of this Agreement, the Investor Rights Agreement or any
Ancillary Agreement by the Company do not, and the consummation by the Company
of the transactions contemplated hereby and thereby will not, constitute or
result in (A) a breach or violation of, or a default under, the Certificate of
Incorporation or By-laws of the Company, (B) a breach or violation of, or a
default under, the acceleration of any obligations or the creation of a lien,
pledge, security interest or other encumbrance on the assets of the Company
(with or without notice, lapse of time or both) pursuant to any Contracts
binding upon the Company, (C) a violation of any law, rule, regulation,
judgment, injunction, order, decree or other restriction of any court or
governmental entity ("Law") or any governmental or non-governmental permit or
license to which the Company is subject or (D) any change in the rights or
obligations of any party under any Contract binding upon the Company.
2.12 Litigation, etc. Other than as set forth on the Schedule of
Exceptions, there are no actions, suits, proceedings, or investigations before
any court, or administrative agency pending or, to the best of the Company's
knowledge, currently threatened by, against or with respect to the Company. The
Company is not a party or subject to, and none of its assets are bound by, the
provisions of any order, writ, injunction, judgment, or decree of any court or
governmental agency or instrumentality. There is no action, suit, proceeding, or
investigation by the Company currently pending or that the Company intends to
initiate.
2.13 Tax Returns, Payments and Elections. The Company has filed all
tax returns and reports as required by law. These returns and reports are true
and correct in all material respects. The Company has paid all taxes and other
assessments due, except those contested by it in good faith that are listed in
the Schedule of Exceptions. The provision for taxes of the Company as shown in
the SEC Financial Statements is adequate for taxes due or accrued as of the date
thereof. The Company has not elected to be treated as a collapsible corporation
pursuant to Section 1362(a) or Section 341(f) of the Code, nor has it made any
other elections pursuant to the Code (other than elections that relate solely to
methods of accounting, depreciation or amortization) that would have a material
effect on the Company, its financial condition, its business as presently
conducted or proposed to be conducted or any of its properties or material
assets. The Company has never had any tax deficiency proposed or assessed
against it and has not executed any waiver of any statute of limitations on the
assessment or collection of any tax or governmental charge. None of the
Company's federal income tax returns and none of its state income or franchise
tax or sales or use tax returns has ever been audited by governmental
authorities. Since the date of the SEC Financial
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Statements, the Company has made adequate provisions on its books of account for
all taxes, assessments and governmental charges with respect to its business,
properties and operations for such period. The Company has withheld or collected
from each payment made to each of its employees, the amount of all taxes
(including, but not limited to, federal income taxes, Federal Insurance
Contribution Act taxes and Federal Unemployment Tax Act taxes) required to be
withheld or collected therefrom, and has paid the same to the proper tax
receiving officers or authorized depositaries.
2.14 Employees. No employee of the Company is obligated under any
contract (including licenses, covenants, or commitments of any nature) or other
agreement, or subject to any judgment, decree or order of any Court or
administrative agency that would conflict with such employee's obligation to use
his or her best efforts to promote the interests of the Company or that would
conflict with the Company's business as conducted or as proposed to be
conducted. To the Company's knowledge, no employee of the Company is in
violation of any term of any employment contract, proprietary information and
inventions agreement, non-competition agreement, or any other contract or
agreement relating to the relationship of any such employee with the Company or
any previous employer. The Company has no collective bargaining agreements with
any of its employees and to the best of the Company's knowledge there is no
labor union organizing activity pending or threatened with respect to the
Company. Except as set forth on the Schedule of Exceptions, there is no pension,
health, profit sharing, bonus, stock purchase, stock option, hospitalization,
insurance, severance, or any other employee benefit or welfare benefit plan with
respect to any officer or employee of the Company. Other than as set forth on
the Schedule of Exceptions, the employment of each officer and employee of the
Company is terminable at the will of the Company. To the Company's knowledge,
the Company has complied in all material respects with all applicable state and
federal equal employment opportunity and other laws related to employment.
2.15 Insurance. The Company has adequate insurance, with financially
sound and reputable insurers, with respect to its properties that are of a
character customarily insured by entities engaged in the same or a similar
business similarly situated, against loss or damage of the kinds customarily
insured against by such entities, which insurance is of such types (including
public liability and errors and omissions insurance) as are customarily carried
under similar circumstances by such other entities. No policy of insurance held
by the Company has been cancelled nor has any requested coverage been refused by
the Company's insurance carrier.
2.16 Registration Rights. Except as required by the Investor Rights
Agreement (as described herein) or as set forth in the Schedule of Exceptions,
the Company is not under any obligation to register (as defined in the Investor
Rights Agreement) any of its presently outstanding securities or any of its
securities which may hereafter be issued.
2.17 Governmental Consents. All consents, approvals, orders, or
authorizations of, or registrations, qualifications, designations, declarations,
or filings with, any governmental authority, required on the part of the Company
in connection with the valid execution and delivery of this Agreement and the
offer, sale or issuance of the Securities, or the consummation of any other
transaction contemplated hereby have been obtained, or will be effective at the
Closing, except for notices required or permitted to be filed with certain state
and federal securities commissions after the Closing, which notices will be
filed on a timely basis.
2.18 Offering. Assuming the accuracy of the representations and
warranties of the Purchaser contained in Section 3.3 hereof, the offer, issue,
and sale of the Securities are and will be exempt from the registration and
prospectus delivery requirements of the Securities Act of 1933, as
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amended (the "1933 Act"), and have been registered or qualified (or are exempt
from registration and qualification) under the registration, permit, or
qualification requirements of all applicable state securities laws.
2.19 Operating Rights. To the knowledge of the Company, the Company
has all operating authority, licenses, franchises, permits, certificates,
consents, rights and privileges (collectively "Licenses") as are necessary or
appropriate to the operation of its business as now conducted and, except as set
forth in the Schedule of Exceptions, as proposed to be conducted. To the
knowledge of the Company, such Licenses are in full force and effect, no
violations have been or are expected to have been recorded in respect of any
such Licenses, and no proceeding is pending or threatened that could result in
the revocation or limitation of any of such Licenses. The Company has conducted
its business so as to comply in all material respects with all such Licenses.
2.20 Protection of Proprietary Information.
(a) The Company has taken all reasonable security measures to
protect the secrecy, confidentiality, and value of all trade secrets, know-how,
inventions, designs, processes, and technical data required to conduct its
business.
(b) Each officer, employee, or consultant of the Company has
signed a proprietary information agreement substantially in the Company's
standard form of such agreement, each of which agreements remains in full force
and effect as of the date hereof. To the best of the Company's knowledge, none
of the Company's current or former officers, employees, or consultants is or
will be in violation thereof, and the Company will use its best efforts to
prevent any such violation.
2.21 Rights in Proprietary Information. To the knowledge of the
Company, the Company has sufficient right, title and interest in and to all
proprietary rights necessary for its business as now conducted, without any
known conflict or infringement of the rights of others. The Company has not
received any communications alleging that the Company has violated or, by
conducting its business as proposed, would violate any of the patents,
trademarks, service marks, trade names, or other proprietary rights of any other
person or entity, nor does the Company have reason to believe that it has
violated or, by conducting its business as proposed, would violate any of the
patents, trademarks, service marks, trade names, or other proprietary rights of
any person or entity.
2.22 Minute Books. The minute books of the Company made available to
the Purchaser's counsel for review contain a complete summary of all meetings of
and actions by directors and stockholders of the Company, from the time of
incorporation to the date hereof, and reflect all transactions referred to in
such minutes accurately in all material respects.
2.23 Voting Agreements. There exists no voting agreements or voting
trusts involving shares of the Company's stock or any stockholder of the
Company, other than those included in the Investor Rights Agreement.
2.24 Full Disclosure. Neither this Agreement, the representations and
warranties by the Company contained herein, the Exhibits hereto, the Investor
Rights Agreement or any Ancillary Agreement, nor any other written statement or
certificate delivered or to be furnished to the Purchaser in connection herewith
or therewith, when read together, contains any untrue statement of a material
fact or omits to state a material fact necessary in order to make the statements
contained herein or therein not misleading. There is no fact known to the
Company which has not been
8
<PAGE>
disclosed to Purchaser that would materially adversely affect the Company's
business or financial condition or its ability to perform its obligations under
this Agreement.
3. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER.
Purchaser hereby represents and warrants to the Company as follows:
3.1 Legal Power. It has the requisite legal power to enter into this
Agreement, the Investor Rights Agreement, the Loan Facility and any Ancillary
Agreement, to purchase the Debentures, the Debenture Warrant and the Shares and
to carry out and perform its obligations under the terms of this Agreement, the
Investor Rights Agreement, the Loan Facility and any Ancillary Agreement.
3.2 Due Execution. This Agreement has been duly authorized, executed
and delivered by it, and, upon due execution and delivery by the Company, this
Agreement, the Investor Rights Agreement and any Ancillary Agreement, will be
valid and binding agreements of it enforceable in accordance with their
respective terms, subject to laws of general application relating to bankruptcy,
insolvency and the relief of debtors and subject to the availability of
equitable remedies.
3.3 Representations.
(a) It is acquiring the Securities for its own account, not as
nominee or agent, for investment and not with a view to, or for resale in
connection with, any distribution or public offering thereof within the meaning
of the 1933 Act.
(b) It understands that (i) the Securities have not been
registered under the 1933 Act by reason of a specific exemption therefrom, that
they must be held by it indefinitely, and that it must, therefore, bear the
economic risk of such investment indefinitely, unless a subsequent disposition
thereof is registered under the 1933 Act or is exempt from such registration;
(ii) the Debentures, the Shares, the Loan Facility, the Debenture Warrants, and
each certificate representing the Underlying Common Stock will be endorsed with
the following legend:
"THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED,
ASSIGNED OR HYPOTHECATED UNLESS PURSUANT TO SEC RULE 144 OR RULE 144A
OR THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER THE 1933 ACT
COVERING SUCH SECURITIES OR THE COMPANY RECEIVES AN OPINION OF
COUNSEL FOR THE HOLDER OF THESE SECURITIES REASONABLY SATISFACTORY TO
THE COMPANY, STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR
HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY
REQUIREMENTS OF THE 1933 ACT."
and (iii) the Company will instruct any transfer agent not to register the
transfer of any of the Shares, the Loan Facility, the Debentures, the Debenture
Warrants or the Underlying Common Stock unless the conditions specified in the
foregoing legend are satisfied; provided, however, that no such opinion of
counsel shall be necessary if the sale, transfer or assignment is made pursuant
to SEC Rule 144 or Rule 144A and Purchaser provides the Company with evidence
reasonably satisfactory to the Company and its counsel that the proposed
transaction satisfies the requirements of Rule 144 or Rule 144A. The Company
agrees to remove the foregoing legend from any securities if the
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<PAGE>
requirements of SEC Rule 144(k) (or any successor rule or regulation) apply with
respect to such securities and the Company and its counsel are provided with
reasonably satisfactory evidence that the requirements of Rule 144(k) apply.
(c) It has not been offered the Securities by any form of
advertisement, articles, notice or other communication published in any
newspaper, magazine or similar media or broadcast over television or radio.
(d) It is an "accredited investor" within the meaning of Rule
501 of Regulation D of the 1933 Act.
(e) It was not formed for the specific purpose of acquiring the
Securities offered hereunder.
4. CERTAIN COVENANTS.
4.1 Access and Information. The Company shall permit Purchaser and
its representatives to have access, upon reasonable advance notice, to the real
property owned or leased by the Company and to the offices of the Company, and
shall furnish, or cause to be furnished, to Purchaser any financial and
operating data and other information that is available with respect to the
business and properties of the Company, including, but not limited to, all
books, records and contracts, as Purchaser shall from time to time request.
4.2 Confidentiality. Each party acknowledges that it may have access
to various items of proprietary and confidential information of the other in the
course of investigations and negotiations prior to Closing. Each party agrees
that any such information received from the other party shall be kept
confidential and shall not be used for any purpose other than to facilitate the
consummation of the transactions contemplated herein. Confidential and
proprietary information shall include any business or other information which is
delivered by one party to the other, unless such information (i) is already
public knowledge, (ii) becomes public knowledge through no fault, action or
inaction of the receiving party or (iii) was known by the receiving party, or
any of its directors, officers, employees, representatives, agents or advisors,
as applicable, prior to the disclosure of such information by the disclosing
party to the receiving party. No party hereto, nor its respective officers,
directors, employees, accountants, attorneys, or agents, as applicable, shall
intentionally disclose the existence or nature of, or any of the terms and
conditions relating to, the transactions referred to herein, to any third person
without the written consent of all other parties.
4.3 Public Disclosure. Except as may be required to comply with the
requirements of applicable law or the rules and regulations of a stock exchange
upon which the securities of a party may be listed, no press release or similar
public announcement or communication will be made or caused to be made
concerning the execution or performance of this Agreement unless specifically
approved in advance by all parties hereto; provided, however, that to the extent
that either party to this Agreement is required by law or the rules and
regulations of any stock exchange upon which the securities of one of the
parties is listed to make such a public disclosure, such public disclosure shall
only be made after prior consultation with the other party to this Agreement.
5. CONDITIONS TO CLOSING.
5.1 Conditions to Obligations of Purchaser at the Closing.
Purchaser's obligation to purchase the Shares and enter into the Loan Facility
at the Closing is subject to the
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fulfillment to the Purchaser's satisfaction, at or prior to the Closing, of the
following conditions, any of which may be waived by Purchaser:
(a) Approval by Board of Directors of Purchaser. The Board of
-------------------------------------------
Directors of Purchaser shall have approved the execution and performance of this
Agreement and all documents related thereto;
(b) Approval by Stockholders of the Company. The Company shall
---------------------------------------
seek a written consent from a majority of the Stockholders of the Company
approving an amendment of the Company's Certificate of Incorporation to increase
the authorized capital from 16,000,000 shares of Common Stock authorized to
50,000,000 shares of Common Stock authorized;
(c) Delivery of the Debentures, the Debenture Warrants, the
-------------------------------------------------------
Shares and the Loan Facility. The Company shall have delivered to Purchaser the
- ----------------------------
Debentures, the Debenture Warrants, the Shares and the Loan Facility;
(d) Certificate of Secretary. The Company shall have delivered
------------------------
to Purchaser a certificate of the Secretary of the Company, dated as of the
Closing Date, certifying a copy of the resolutions of the board of directors of
the Company authorizing the execution and performance of this Agreement and all
documents related thereto, and that such resolutions were duly adopted and are
in full force and effect;
(e) Certificate of Officers. Each of the representations and
-----------------------
warranties of the Company contained in this Agreement shall be true in all
material respects when made and as of the Closing Date, in each case with the
same effect as though such representations and warranties had been made on and
as of the Closing Date (except that representations and warranties that are made
as of a specific date need be true in all material respects only as of such
date); each of the covenants, conditions and agreements of the Company to be
performed on or prior to the Closing Date shall have been duly performed in all
material respects; and Purchaser shall have received at the Closing a
certificate to the foregoing effect, dated as of the Closing Date and executed
on behalf of the Company by its President and its Chief Financial Officer;
(f) Due Diligence; Financial Verification. Purchaser shall have
-------------------------------------
completed to its satisfaction its due diligence investigation of the Company,
including financial and legal due diligence;
(g) Fiduciary Cash. The Company shall have, as of the date of
--------------
the Closing, Fiduciary Cash equal to or greater than Fiduciary Obligations, as
calculated in accordance with California Department of Insurance Regulations;
(h) Opinion of Counsel. Purchaser shall have received from
------------------
Sheppard, Mullin, Richter & Hampton LLP, counsel to the Company, an opinion
letter substantially in the form attached hereto as Exhibit E, addressed to
---------
Purchaser, dated the date of the Closing;
(i) Certificate of Designation. The Certificate of Designation,
--------------------------
in the form set forth as Exhibit B hereto, shall have been filed with the
---------
Secretary of State of the State of Delaware;
(j) Investor Rights Agreement. The Company and Purchaser shall
-------------------------
have entered into the Investor Rights Agreement in the form of Exhibit F
---------
attached hereto;
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(k) Other Documents; Consents. Purchaser shall have received
-------------------------
such other documents and instruments as Purchaser or Purchaser's counsel
reasonably may request to better evidence or effectuate the transactions
contemplated hereby, including but not limited to, all consents required on the
part of the Company in connection with the valid execution and delivery of this
Agreement and the offer, sale or issuance of the Securities, or the consummation
of any other transaction contemplated hereby; and
(l) No Material Adverse Change. Since December 31, 1999, there
--------------------------
shall not have been (i) any condition, event or occurrence which individually or
in the aggregate, has had a Material Adverse Effect on the Company; (ii) any
condition, event or occurrence which, individually or in the aggregate, could
reasonably be expected to have a Material Adverse Effect with respect to the
Company; or (iii) any condition, event or occurrence which, individually or in
the aggregate, could reasonably be expected to prevent or materially delay the
ability of the Company to consummate the transactions contemplated by this
Agreement or perform its obligations hereunder.
5.2 Conditions to Obligations of the Company at the Closing. The
Company's obligation to issue and sell the Shares and enter into the Loan
Facility under this Agreement is subject to the fulfillment to the Company's
satisfaction, at or prior to the Closing, of the following conditions, any of
which may be waived by the Company:
(a) Total Purchase Price. Purchaser shall have delivered the
--------------------
Total Purchase Price to the Company in the manner set forth in Section 1.5
above;
(b) Certificate of Secretary. Purchaser shall have delivered to
------------------------
the Company a certificate of the Secretary of the Purchaser, dated as of the
Closing Date, certifying a copy of the resolutions of the board of directors of
the Purchaser authorizing the execution and performance of this Agreement and
all documents related thereto, and that such resolutions were duly adopted and
are in full force and effect;
(c) Certificate of Officers. Each of the representations and
-----------------------
warranties of Purchaser contained in this Agreement shall be true in all
material respects when made and as of the Closing Date, in each case with the
same effect as though such representations and warranties had been made on and
as of the Closing Date (except that representations and warranties that are made
as of a specific date need be true in all material respects only as of such
date); each of the covenants, conditions and agreements of Purchaser to be
performed on or prior to the Closing Date shall have been duly performed in all
material respects; and the Company shall have received at the Closing a
certificate to the foregoing effect, dated as of the Closing Date and executed
on behalf of Purchaser by its President or any of its Vice Presidents and its
Secretary or any of its Assistant Secretaries; and
(d) Other Documents; Consents. The Company shall have received
-------------------------
such other documents and instruments as the Company or Company's counsel
reasonably may request to better evidence or effectuate the transactions
contemplated hereby, including but not limited to, all consents required on the
part of the Purchaser in connection with the valid execution and delivery of
this Agreement and the consummation of any other transaction contemplated
hereby.
6. TERMINATION.
6.1 Termination. This Agreement may be terminated at any time prior
to the Closing:
(a) by the mutual agreement of the Company and Purchaser;
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(b) by either the Company or Purchaser, by giving written notice
of such termination to the other party, if such other party shall breach any of
its material obligations or agreements under this Agreement and such breach
shall be incapable of cure or has not been cured within thirty (30) days
following the giving of written notice of such breach to the breaching party;
(c) by either the Company or Purchaser, by giving written notice
of such termination to the other party, if there shall be in effect any law or
regulation that prohibits the consummation of the Closing or if consummation of
the Closing would violate any non-appealable final order, decree or judgment of
any court or governmental body having competent jurisdiction; or
(d) by either the Company or Purchaser, by giving written notice
of such termination to the other party, if the Closing shall not have occurred
on or prior to March 15, 2000.
6.2 Effect of Termination. In the event of the termination of this
Agreement in accordance with Section 6.1 hereof, this Agreement shall thereafter
become void and have no effect, and no party hereto shall have any liability to
the other party hereto or their respective Affiliates, directors, officers or
employees, except for the obligations of the parties hereto contained in this
Section 6.2 and Sections 4.2 and 4.3 hereof, and except that nothing herein will
relieve any party from liability for any breach of this Agreement prior to such
termination.
7. INDEMNIFICATION.
7.1 Survival. Unless otherwise set forth in this Agreement, the
warranties, representations and agreements of the Company and Purchaser
contained herein shall survive the execution and delivery of this Agreement and
the Closing and shall in no way be affected by any investigation of the subject
matter thereof made by or on behalf of the Company or Purchaser.
7.2 Indemnification by the Company. The Company shall indemnify and
hold harmless Purchaser against any and all losses, liabilities, claims and
expenses, including reasonable attorneys' fees ("Losses"), sustained by
Purchaser resulting from, arising out of, or connected with any inaccuracy in,
breach of, or nonfulfillment of any representation, warranty, covenant or other
obligation of the Company contained in this Agreement. Notwithstanding the
foregoing, the Company shall not be liable for any of Purchaser's lost profits
or any incidental or consequential damages.
7.3 Indemnification by Purchaser. Purchaser shall indemnify and hold
harmless the Company against any and all Losses sustained by the Company
resulting from, arising out of, or connected with any inaccuracy in, breach of,
or nonfulfillment of any representation, warranty, covenant or agreement made by
or other obligation of Purchaser contained in this Agreement. Notwithstanding
the foregoing, Purchaser shall not be liable for any of the Company's lost
profits or any incidental or consequential damages.
8. MISCELLANEOUS.
8.1 Governing Law. This Agreement shall be governed by and construed
under the laws of the State of California as applied to agreements among
California residents, made and to be performed entirely within the State of
California.
8.2 Attorneys' Fees. In the event that any party to this Agreement
institutes any legal proceeding to enforce any of the provisions of this
Agreement, then the prevailing party in such
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proceeding shall be entitled to collect and receive its reasonable attorneys'
fees and costs, through and including all appeals, and the other party shall pay
for same.
8.3 Arbitration; Venue and Jurisdiction. The parties hereto agree
that any dispute arising out of or relating to this Agreement or the breach,
termination or the validity hereof, shall be settled by binding arbitration in
accordance with the rules of the American Arbitration Association ("AAA") by a
neutral arbitrator who shall be a former superior court or appellate court judge
or justice with experience in resolving business disputes. The arbitration shall
be governed by the California Code of Civil Procedure Section 1280 et seq. and
the parties intend this procedure to be specifically enforceable in accordance
with such provisions. Judgment upon the award rendered by the arbitrator may be
entered by any court having jurisdiction thereof. The parties agree that the
judgment or decision of the arbitrator shall be final and binding. The parties
agree that the venue for the arbitration shall be in the County of San Diego,
California. The arbitrator shall be required to follow the applicable law as set
forth in the governing law section of this Agreement. The arbitrator shall award
reasonable attorneys' fees and costs of arbitration to the prevailing party in
such arbitration. The parties hereto consent to the personal jurisdiction of any
court in the County of San Diego, California for the enforcement of this
agreement to arbitrate and any award granted pursuant to said arbitration or
settlement of any dispute related hereto.
8.4 Successors and Assigns. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors, and administrators of the
parties hereto.
8.5 Entire Agreement. This Agreement, the Exhibits hereto, and the
other documents delivered pursuant hereto constitute the full and entire
understanding and agreement among the parties with regard to the subjects hereof
and supersedes all prior agreements and understandings, oral or written, with
respect to such matters, including, but not limited to, the Letter Agreement;
provided, however, that Paragraph 1(g) of the Letter Agreement shall remain in
effect in accordance with its terms. Nothing in this Agreement, express or
implied, is intended to confer upon any party, other than the parties hereto and
their respective successors and assigns, any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
herein.
8.6 Separability. In case any provision of this Agreement shall be
invalid, illegal, or unenforceable, it shall, to the extent practicable, be
modified so as to make it valid, legal and enforceable and to retain as nearly
as practicable the intent of the parties, and the validity, legality, and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
8.7 Amendment and Waiver. Any term of this Agreement may be amended
and the observance of any term of this Agreement may be waived (either generally
or in a particular instance, either retroactively or prospectively, and either
for a specified period of time or indefinitely), only with the written consent
of the Company and Purchaser.
8.8 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 on the third day following mailing by registered or
certified mail, return receipt requested, postage prepaid, addressed: (a) if to
Purchaser, at its address set forth at the end or this Agreement, or at such
other address as Purchaser shall have furnished to the Company in writing in
each case with a copy to Bruce Feuchter, Stradling Yocca Carlson & Rauth, 660
Newport Center Drive, Suite 1600, Newport Beach, California 92660, or (b) if to
the Company, at its address as set forth at the end of this
14
<PAGE>
Agreement, or at such other address as the Company shall have furnished to the
Purchasers in writing, in each case with a copy to A. John Murphy, Sheppard,
Mullin, Richter & Hampton LLP, Four Embarcadero Center, Suite 1700, San
Francisco, California 94111.
8.9 Finders' Fees.
(a) The Company (i) represents and warrants that it has retained
no finder or broker in connection with the transactions contemplated by this
Agreement, and (ii) hereby agrees to indemnify and to hold Purchaser harmless of
and from any liability for any commission or compensation in the nature of a
finder's fee to any broker or other person or firm (and the costs and expenses,
including reasonable attorneys' fees, of defending against such liability or
asserted liability) for which the Company or any of its employees or
representatives is responsible.
(b) Purchaser (i) represents and warrants that it has retained
no finder or broker in connection with the transactions contemplated by this
Agreement, other than Hales & Company, who shall be paid by Purchaser, and (ii)
hereby agrees to indemnify and to hold the Company harmless of and from any
liability for any commission or compensation in the nature of a finder's fee to
any broker or other person or firm (and the costs and expenses, including
reasonable attorneys' fees, of defending against such liability or asserted
liability) for which such Purchaser or any of its employees or representatives
are responsible.
8.10 Fees and Expenses. Except as otherwise expressly provided in this
Agreement, whether or not the transactions contemplated by this Agreement are
consummated, the parties shall bear their own respective expenses (including,
but not limited to, all compensation and expenses of counsel, financial
advisors, consultants, actuaries and independent accountants) incurred in
connection with this Agreement and the transactions contemplated hereby.
8.11 Titles and Subtitles. The titles of the paragraphs and
subparagraphs of this Agreement are for convenience of reference only and are
not to be considered in construing this Agreement.
8.12 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one instrument.
15
<PAGE>
The foregoing Securities Purchase Agreement is hereby executed as of the
date first above written.
610 West Ash Street, Suite 1500 WARD NORTH AMERICA HOLDING, INC.
San Diego, California 92101
By: /s/ Jeffrey S. Ward
-----------------------------------
Jeffrey S. Ward,
President and Chief Executive Officer
1800 Sutter Street, Suite 400 ANCHOR PACIFIC UNDERWRITERS, INC.
Concord, California 94520
By: /s/ James R. Dunathan
-----------------------------------
James R. Dunathan,
President and Chief Executive Officer
16
<PAGE>
EXHIBIT 10.40a
EXHIBIT A
---------
FORM OF DEBENTURE
<PAGE>
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 Senior Subordinated Debenture, Series E
(convertible into shares of common stock)
$_________ Concord, California
____________, ______
ANCHOR PACIFIC UNDERWRITERS, INC., a Delaware corporation (the
"Company"), for value received, hereby promises to pay to Ward North America
Holding, Inc. a California corporation, or such other person in whose name this
Debenture is registered on the Debenture Register (as that term is defined
below) (the "Holder"), the principal amount of _________ _______________ Dollars
($___________), with simple interest on the unpaid balance of such principal
amount at the rate of ten percent (10%) per annum (or the maximum rate permitted
by law, whichever is less) 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 ___________, ____,
___________, ____ and ________, ____ (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. This Debenture shall be superior
to all other debentures of the Company, including without limitation those
Series A, B, C and D debentures in the aggregate principal amount of $554,000,
and shall constitute "Senior Debt" for purposes of such debentures.
The full principal amount of this Debenture, plus interest, will be
due and payable on ____________, _____ (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
E, limited to the aggregate principal amount of $__________.
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
<PAGE>
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. Neither the execution, delivery and
issuance of this Debenture, nor the issuance of the Shares upon conversion
thereof, will 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.
1.4 SEC Filings. The Company's Annual Report on Form 10-K for the
-----------
fiscal year ended December 31, 1998 filed with the Securities and Exchange
commission (the "SEC") on March 3, 1999, and the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1999, June 30, 1999 and September 30,
1999, including all exhibits to such filings (collectively, the "SEC Filings")
as of the respective dates of filing, were accurate and complete in all material
respects and complied in all material respects with the rules, regulations and
interpretations of the SEC.
1.5 Full Disclosure. The Company has provided Holder with all the
---------------
information that Holder has requested for deciding whether to purchase the
Shares. Neither this Agreement nor the representations and warranties contained
herein, nor any other written statements or certificates made or delivered in
connection herewith, when read together, contains any untrue statement of a
material facts or omits to state a material fact necessary to make the
statements herein or therein not misleading.
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 issued prior to the date of this
Debenture, 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. Senior Debt shall not include
any of the Company's debentures, whether Series A, B, C, D or otherwise.
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
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.
3
<PAGE>
(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 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.
4
<PAGE>
3. Restrictions on Issuance of Additional Debt. Except for amendments to
-------------------------------------------
and refinancings of Senior Debt existing as of the date hereof, the Company
shall not create, assume or incur any additional indebtedness ranking on par
with, or senior to, this Debenture without the prior written 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.
(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.
5
<PAGE>
(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.
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 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
6
<PAGE>
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
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) In the event that, following the date of this Debenture, the
Company shall issue shares of Common Stock (or other securities directly or
indirectly convertible into Common Stock) without consideration or for
consideration less than the Conversion Price then in effect, the Conversion
Price shall concurrently be reduced to equal such consideration per share.
7
<PAGE>
(f) 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.
(g) 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 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.
8
<PAGE>
(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 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
<PAGE>
9. Registration Rights.
-------------------
9.1 Definitions. For purposes of Section 9 hereof, terms not
-----------
otherwise defined herein shall have the following meanings:
(a) The terms "register," "registered" and "registration" refer
to the preparation and filing of a registration statement in compliance with the
Act 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 following the 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 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
10
<PAGE>
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.
9.3 Expenses. All expenses incurred in connection with any
--------
registration pursuant to this Debenture, 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 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
11
<PAGE>
(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 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.
12
<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.
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.
13
<PAGE>
10.5 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.
10.6 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, Chief Executive Officer
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
14
<PAGE>
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: ___________________________
___________________________
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
11. General Terms.
--------------
11.1 Right to Acquire Securities.
---------------------------
(a) This Warrant certifies that for value received WARD NORTH
AMERICA, INC., a California corporation, (the "Holder"), or registered assigns,
are entitled at any
-15-
<PAGE>
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.
(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.
11.2 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.
11.3 Net Issue Exercise. Notwithstanding any provisions herein to
------------------
the contrary, if the fair market value of one share of the Company's Common
Stock (as defined below) is greater than the Exercise Price (as adjusted to the
last trading day prior to the exercise date), in lieu of exercising this Warrant
for cash, the Warrantholder may elect to receive full shares equal to the value
(as determined below) of this Warrant (or the portion thereof being cancelled)
by surrender of this Warrant at the principal office of the Company together
with a written notice of such election in which event the Company shall issue to
the Holder a number of shares of Common Stock computed using the following
-16-
<PAGE>
formula:
X = Y (A-B)
-------
A
Where: X = the number of shares of Common Stock to be issued to
the Holder
Y = the number of shares of Common Stock purchasable
under the Warrant or, if only a portion of the
Warrant is being exercised, the portion of the
Warrant being cancelled
A = the fair market value of one share of the Company's
Common Stock (as defined below)
B = Warrant Price (as adjusted to the last trading day
prior to the exercise date)
For purposes of the above calculation, fair market value of one share of Common
Stock shall be the last trade price of the Common Stock on the last trading day
prior to the exercise date as reported in the Wall Street Journal, or, if the
Wall Street Journal ceases publication, then a publication mutually acceptable
to the parties hereto.
11.4 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.
11.5 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 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.
11.6 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
-17-
<PAGE>
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.
12. Transfer of Securities.
-----------------------
12.1 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:
"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
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<PAGE>
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.
(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.
12.2 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.
13. Registration Rights
-------------------
13.1 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 following 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.
-19-
<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.
13.2 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.
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<PAGE>
13.3 Company.
-------
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.
13.4 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
-21-
<PAGE>
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
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.
13.5 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.
13.6 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.
14. 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.
14.1 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
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<PAGE>
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.
14.2 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 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
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<PAGE>
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.
14.3 Adjustment for Certain Issuances. In the event that, following
--------------------------------
the date of this Warrant, the Company shall issue shares of Common Stock (or
securities convertible into, directly or indirectly, Common Stock) without
consideration or for consideration per share less than the Exercise Price then
in effect, then (a) the Exercise Price shall concurrently be reduced to such
lower price per share, and (b) this Warrant shall concurrently become
exercisable for a number of shares obtained by dividing $45,000 by such adjusted
Exercise Price.
14.4 Miscellaneous Exercise Matters. The Company shall at all 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.
14.5 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.
14.6 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.
14.7 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 the application of such provisions, in
accordance with such essential intent and principles, so as to protect such
purchase rights as aforesaid.
15. Miscellaneous.
-------------
15.1 Entire Agreement. This Warrant constitutes the full and entire
----------------
understanding and agreements between the parties hereto with respect to the
subjects hereof and thereof.
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<PAGE>
15.2 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.
15.3 Governing Law. This Warrant shall be governed by and construed
-------------
under the laws of the State of California.
15.4 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 610 West
Ash Street, Suite 1500, San Diego, California 92101 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.
15.5 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. All
remedies, either under this Agreement or by law or otherwise afforded to any
holder, shall be cumulative and not alternative.
15.6 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.
15.7 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,
-25-
<PAGE>
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.
15.8 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.
15.9 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.
15.10 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.
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<PAGE>
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
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<PAGE>
EXERCISE NOTICE
(To be executed only upon exercise of Warrant)
The undersigned registered owner of a Warrant of ANCHOR PACIFIC
UNDERWRITERS, INC. (the "Company"), originally issued to _________________
irrevocably exercises such Warrant for the purchase of shares of Common Stock of
the Company, purchasable with the Warrant, and hereby sets the place and date
for the closing of such purchase as follows, all on the terms and conditions
specified in the Warrant.
Place of Closing:__________________
Date of Closing:___________________
The undersigned requests that a certificate for such shares be
registered in the name of ________________, whose address is____________________
______________________. If said number of shares is less than all of the shares
of Common Stock purchasable under the Warrant, the undersigned requests that a
new Warrant representing the remaining balance of such shares be registered in
the name of ____________________, whose address is_____________________________.
Dated:___________
__________________________________
Signature of Registered Owner
__________________________________
Street Address
__________________________________
City State Zip
-28-
<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
A-1
<PAGE>
EXHIBIT 10.40B
EXHIBIT B
---------
CERTIFICATE OF DESIGNATION
<PAGE>
CERTIFICATE OF DESIGNATIONS OF
SERIES A CONVERTIBLE PREFERRED STOCK
OF
ANCHOR PACIFIC UNDERWRITERS, INC.,
A DELAWARE CORPORATION
(Pursuant to Section 151(g) of the
Delaware General Corporation Law)
The undersigned, James R. Dunathan and Earl Wiklund hereby certify that:
I. They are the duly elected and acting President and Secretary,
respectively, of Anchor Pacific Underwriters, Inc., a Delaware corporation (the
"Corporation").
II. The Certificate of Incorporation of the Company authorizes 2,000,000
shares of preferred stock, par value $0.02 per share ("Preferred Stock"), of
which none are outstanding.
III. The following is a true and correct copy of resolutions duly adopted
by the Board of Directors at a meeting duly held on March 9, 2000, which
constituted all requisite action on the part of the Corporation for adoption of
such resolutions.
RESOLUTIONS
WHEREAS, the Board of Directors of the Corporation (the "Board of
Directors") is authorized to provide for the issuance of shares of Preferred
Stock in series, and by filing a certificate pursuant to the applicable law of
the State of Delaware, to establish from time to time the number of shares to be
included in each such series, and to fix the designations, powers, preferences
and rights of the shares of each such series and the qualifications, limitations
or restrictions thereof; and
WHEREAS, the Board of Directors desires, pursuant to its authority as
aforesaid, to designate a new series of Preferred Stock, set the number of
shares constituting such series and fix the rights, preferences, privileges and
restrictions of such series;
NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors hereby
designates a new series of Preferred Stock and the number of shares constituting
such series and fixes the rights, preferences, privileges and restrictions
relating to such series as follows:
1. Designation, Amount, Par Value, and Dividends. The series of Preferred
Stock shall be designated as the Series A Convertible Preferred Stock (the
"Series A Preferred Stock"), and the number of shares so designated shall be
1,853,300. The par value of each share of Series A Preferred Stock shall be
$0.02. The holders of shares of Series A Preferred Stock, in preference to the
holders of shares of Common Stock and any other Junior Stock, shall be entitled
to receive, when, as and if declared by the Board of Directors, out of the
Available Assets, cumulative cash dividends at an annual rate per share equal to
8%, compounded annually, of the Series A Liquidation Value from and after the
Series A Issue Date, as adjusted for any stock splits, combinations or dividends
with respect to such share of Series A Preferred Stock, and provided that no
dividends shall be paid on or declared and set apart on the Common Stock or
Junior Stock until all accumulated and unpaid dividends with respect to the
shares of Series A Preferred Stock shall have been paid or declared and set
aside. Dividends payable pursuant to this Section shall begin to accrue and be
<PAGE>
cumulative from the Series A Issue Date, whether or not earned or declared. The
amount of dividends so payable shall be determined on the basis of twelve 30-day
months and a 360-day year. Dividends paid on the shares of Series A Preferred
Stock in an amount less than the total amount of such dividends at the time
accrued on such shares shall be allocated pro rata on a share-by-share basis
among all such shares at the time outstanding.
2. Liquidation Preference.
(a) In the event of any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, or in the event of its
insolvency, the holders of the Series A Preferred Stock shall be entitled to be
paid out of the Available Assets, prior and in preference to any distribution to
the holders of Common Stock or any other Junior Stock, and subject to the
liquidation rights and preferences of any class or series of preferred stock
designated in the future to be senior to, or on a parity with, the Series A
Preferred Stock with respect to liquidation preferences, an amount equal to the
greater of (i) the Series A Liquidation Value for each outstanding share of
Series A Preferred Stock, or (ii) an amount per share equal to the amount such
holders would have received had the Series A Preferred Stock been converted to
Common Stock immediately prior to such liquidation, dissolution or winding up.
If, upon liquidation, dissolution or winding up of the Corporation, the
Available Assets shall be insufficient to pay the holders of Series A Preferred
Stock the full amount to which they otherwise would be entitled to receive, the
holders of Series A Preferred Stock shall share ratably in any distribution of
Available Assets pro rata in proportion to the respective liquidation preference
amounts to which they would otherwise be entitled to receive upon liquidation if
all liquidation preference dollar amounts owing to the holders of Series A
Preferred Stock were paid in full.
(b) After payment to the holders of the Series A Preferred Stock of
the amount set forth in subsection 2(a), the then remaining assets and funds of
the Corporation legally available for distribution, if any, shall be distributed
to the holders of the Common Stock.
(c) The amounts set forth above and throughout this Section shall be
subject to equitable adjustment whenever there shall occur a stock dividend,
stock split, reverse stock split, combination, reorganization, recapitalization,
reclassification or other similar event involving a change in the capital
structure of the Series A Preferred Stock.
(d) For purposes of this Section, a liquidation, dissolution or
winding up of the Corporation shall be deemed to be occasioned by, or to include
(i) the acquisition of the Corporation by another entity by means of any
transaction or series of related transactions (including, without limitation,
any reorganization, merger or consolidation but, excluding any merger effected
exclusively for the purpose of changing the domicile of the Corporation), or
(ii) a sale of all or substantially all of the assets of the Corporation; or
(iii) a sale of authorized and unissued shares of the Corporation, unless in any
of the cases described in clauses (i), (ii) or (iii), the Corporation's
shareholders of record as constituted immediately prior to such acquisition or
sale will, immediately after such acquisition or sale (by virtue of securities
issued as consideration for the Corporation's acquisition or sale or otherwise)
hold at least 50% of the voting power of the surviving or acquiring entity.
Each holder of Series A Preferred Stock, upon the occurrence of an event
described in the immediately preceding sentence, shall have the option of
electing treatment of his shares of Series A Preferred Stock under either this
Section 2 or under Section 5(g) hereof by giving the Corporation written notice
of such election at least ten days prior to the close of such transaction,
unless such holders received notice of the transaction less than 20 days prior
to the close of such transaction, and
-2-
<PAGE>
then the notice of election shall be given within 10 days after such notice of
the transaction. In any of such events, if the consideration received by the
Corporation is other than cash, its value will be deemed to be such
consideration's fair market value, as determined reasonably by the Board of
Directors.
3. Redemption. The Series A Preferred Stock shall not be redeemable.
4. Voting Rights; Directors.
(a) Except as expressly provided herein, including Section 7, or by
the Certificate of Incorporation, by the bylaws of the Corporation or as
required by law, the holder of each share of the Series A Preferred Stock shall
be entitled to the number of votes equal to the number of full shares of Common
Stock into which such shares of Series A Preferred Stock could be converted and
(except as expressly provided herein or required by law, voting together with
the Common Stock as a single class) shall have voting rights and powers equal to
the voting rights and powers of the Common Stock and shall be entitled to notice
of any shareholders' meeting, which shall be given in accordance with the bylaws
of the Corporation. Fractional votes shall not, however, be permitted and any
fractional voting rights available on an as-converted basis (after aggregating
all shares into which shares of Series A Preferred Stock held by each holder
could be converted) shall be rounded to the nearest whole number (with one-half
being rounded downward).
(b) In addition to those persons entitled to call a special meeting of
the Corporation's shareholders pursuant to the Delaware Corporation Laws,
special meetings of the Corporation's shareholders may be called by vote of not
less than a majority of the outstanding shares of Series A Preferred Stock.
(c) The Board of Directors of the Corporation shall consist of between
seven (7) and thirteen (13) members, with the exact number to be fixed from time
to time by the affirmative vote of a majority of the Board of Directors. At
each meeting or pursuant to each consent of the Corporation's shareholders for
the election of directors, the holders of the Series A Preferred Stock, voting
together as a separate class, shall be entitled to elect five (5) directors to
the Board of Directors. In the case of any vacancy (other than a vacancy caused
by removal) in the office of a director occurring among the directors elected by
the holders of the Series A Preferred Stock pursuant to this Section, the
remaining directors so elected by the Series A Preferred Stock may by
affirmative vote of a majority thereof (or the remaining director so elected if
there be but one, or if there are no such directors remaining, by the
affirmative vote of the Series A Preferred Stock), elect a successor or
successors to hold office for the unexpired term of the director or directors
whose place or places shall be vacant. Any director who shall have been elected
by the holders of the Series A Preferred Stock or any directors so elected as
provided in the immediately preceding sentence hereof may be removed during the
aforesaid term of office, either with or without cause, by, and only by, the
affirmative vote of the holders of the Series A Preferred Stock, given either at
a special meeting of such shareholders duly called for that purpose or pursuant
to a written consent of shareholders, and any vacancy thereby created may be
filled by the holders of the Series A Preferred Stock represented at the meeting
or pursuant to unanimous written consent.
5. Conversion. The holders of the Series A Preferred Stock shall have
conversion rights as follows (the "Conversion Rights"):
-3-
<PAGE>
(a) Right to Convert. Each share of Series A Preferred Stock shall be
----------------
convertible, at the option of the holder thereof, at any time after the Series A
Issue Date, at the office of the Corporation or any transfer agent for such
stock, into such number of fully paid and nonassessable shares of Common Stock
as is determined by dividing the Series A Stated Value by the then applicable
Conversion Price, determined as hereinafter provided, in effect on the date the
certificate is surrendered for conversion (hereinafter sometimes the "Conversion
Rate"). The initial Conversion Price per share for Series A Preferred Stock (as
from time to time in effect, the "Conversion Price") shall be $.1079156. Such
initial Conversion Price shall be adjusted as hereinafter provided.
(b) Automatic Conversion. Each share of Series A Preferred Stock
--------------------
shall automatically be converted into shares of Common Stock at the then
effective Conversion Price as provided in Section 5(a) above, after adjustment
as provided elsewhere in this Section 5,
(i) immediately prior to the closing of an underwritten public
offering of the Corporation's Common Stock (A) immediately following which
offering the Corporation's Common Stock trades on the New York Stock Exchange or
the Nasdaq National Market or any national securities exchange with recognition
by regulatory authorities not materially different from, and listing standards
not less stringent than those imposed by, the Nasdaq National Market and (B) at
a price per share of Common Stock (adjusted for any stock splits, stock
dividends and recapitalizations of or on the Common Stock) not less than Five
Dollars ($5.00) for each share of Common Stock into which the Series A Preferred
Stock would then convert, and which results in gross proceeds to the Corporation
of at least Ten Million Dollars ($10,000,000); or
(ii) at the election of the holders of at least a majority of the
Series A Preferred Stock, voting as a separate class, to automatically convert
all of the outstanding shares of Series A Preferred Stock.
(c) Mechanics of Conversion. Before any holder of Series A Preferred
-----------------------
Stock shall be entitled to convert the same into shares of Common Stock, such
holder shall surrender the certificate or certificates therefor, duly endorsed,
at the office of the Corporation or of any transfer agent for such stock, and
shall give written notice to the Corporation at such office that it elects to
convert the same and shall state therein the name or names in which it wishes
the certificate or certificates for shares of Common Stock to be issued. The
Corporation shall, as soon as practicable thereafter, issue and deliver at such
office to such holder a certificate or certificates for the number of shares of
Common Stock to which it shall be entitled as aforesaid. Such conversion shall
be deemed to have been made immediately prior to the close of business on the
date of surrender of the shares of Series A Preferred Stock to be converted, and
the person or persons entitled to receive the shares of Common Stock issuable
upon such conversion shall be treated for all purposes as the record holder or
holders of such shares of Common Stock on such date.
(d) Conversion Price Adjustments of Preferred Stock for Certain
Dilutive Issuances, Splits and Combinations.
(i) The Conversion Price of Series A Preferred Stock shall be
subject to adjustment from time to time as follows:
(A) Upon each issuance by this Corporation of any
Additional Stock (as defined below) after the date the first share of Series A
Preferred Stock was originally
-4-
<PAGE>
issued, without consideration or for a consideration per share less than the
Conversion Price for such series in effect immediately prior to the issuance of
such Additional Stock, the Conversion Price for such series in effect
immediately prior to each issuance shall forthwith (except as otherwise provided
in this clause (i)) be adjusted to a price determined by multiplying such
Conversion Price by a fraction, the numerator of which shall be the number of
shares of Common Stock outstanding immediately prior to such issuance plus the
number of shares of Common Stock that the aggregate consideration received by
the Corporation for such issuance would purchase at such Conversion Price; and
the denominator of which shall be the number of shares of Common Stock
outstanding immediately prior to such issuance plus the number of shares of such
Additional Stock.
(B) No adjustment of the Conversion Price for Series A
Preferred Stock shall be made in an amount less than one cent ($.01) per share,
provided that any adjustments that are not required to be made by reason of this
sentence shall be carried forward and shall be either taken into account in any
subsequent adjustment made prior to three (3) years from the date of the event
giving rise to the adjustment being carried forward, or shall be made at the end
of three (3) years from the date of the event giving rise to the adjustment
being carried forward, and upon such adjustment the Conversion Price for such
Preferred Stock shall be rounded up or down to the nearest cent. Except to the
limited extent provided for in subsections 5(d)(i) (E)(3), or (E)(4) or
5(d)(iv), no adjustment of such Conversion Price pursuant to this subsection
5(d)(i) shall have the effect of increasing the Conversion Price above the
Conversion Price in effect immediately prior to such adjustment.
(C) In the case of the issuance of Common Stock for cash,
the consideration shall be deemed to be the amount of cash paid therefor before
deducting any reasonable discounts, commissions or other expenses allowed, paid
or incurred by this Corporation for any underwriting or otherwise in connection
with the issuance and sale thereof.
(D) In the case of the issuance of the Common Stock for a
consideration in whole or in part other than cash, the consideration other than
cash shall be deemed to be the fair value thereof as determined in good faith by
the Board of Directors irrespective of any accounting treatment.
(E) In the case of the issuance of options to purchase or
rights to subscribe for Common Stock, securities by their terms convertible into
or exchangeable for Common Stock or options to purchase or rights to subscribe
for such convertible or exchangeable securities, the following provisions shall
apply for all purposes of this subsection 5(d)(i) and subsection 5(d)(ii):
(1) The aggregate maximum number of shares of Common
Stock deliverable upon exercise (whether or not then exercisable) of such
options to purchase or rights to subscribe for Common Stock shall be deemed to
have been issued at the time such options or rights were issued and for a
consideration equal to the sum of the consideration (determined in the manner
provided in subsections 5(d)(i)(C) and (d)(i)(D)), if any, received by the
Corporation upon the issuance of such options or rights, and the exercise price
provided for in such options or rights for the Common Stock covered thereby.
(2) The aggregate maximum number of shares of Common
Stock deliverable upon conversion of or in exchange (whether or not then
convertible or exchangeable) for any such convertible or exchangeable securities
or upon the exercise of options to purchase or rights to subscribe for such
convertible or exchangeable securities and subsequent
-5-
<PAGE>
conversion or exchange thereof shall be deemed to have been issued at the time
such securities were issued or such options or rights were issued and for a
consideration equal to the sum of the consideration, if any, received by the
Corporation for any such securities and related options or rights (excluding any
cash received on account of accrued interest or accrued dividends), and the
additional consideration, if any, to be received by the Corporation upon the
conversion or exchange of such securities (other than the principal amount of
convertible securities to the extent the Corporation has received such
consideration as of the issuance thereof) or the exercise of any related options
or rights.
(3) In the event of any change in the number of shares
of Common Stock deliverable upon exercise of such options or rights or upon
conversion of or in exchange for such convertible or exchangeable securities,
including, but not limited to, a change resulting from the antidilution
provisions thereof, the Conversion Price of the Series A Preferred Stock, to the
extent in any way affected by or computed using such options, rights or
securities, shall be recomputed to reflect such change.
(4) Upon the expiration of any such options or rights,
the termination of any such rights to convert or exchange or the expiration of
any options or rights related to such convertible or exchangeable securities,
the Conversion Price of the Series A Preferred Stock, to the extent in any way
affected by or computed using such options, rights or securities, shall be
recomputed to reflect the issuance of only the number of shares of Common Stock
(and convertible or exchangeable securities that remain in effect) actually
issued upon the exercise of such options or rights, upon the conversion or
exchange of such securities or upon the exercise of the options or rights
related to such securities.
(ii) "Additional Stock" shall mean any shares of Common Stock
issued (or deemed to have been issued pursuant to subsection 5(d)(i)(E)) by this
Corporation after the date the first share of Series A Preferred Stock was
originally issued other than:
(A) Common Stock issued pursuant to a transaction described
in subsection 5(d)(iii) hereof;
(B) Common Stock issuable or issued to employees or service
providers of this Corporation directly or pursuant to a stock option plan or
restricted stock plan at the then current fair market value, as approved and
determined by the Board of Directors of this Corporation; or
(C) Common Stock issued upon conversion of shares of Series
A Preferred Stock.
(iii) In the event the Corporation should at any time or from
time to time after the date the first share of Series A Preferred Stock was
originally issued fix a record date for the effectuation of a split or
subdivision of the outstanding shares of Common Stock or the determination of
holders of Common Stock entitled to receive a dividend or other distribution
payable in additional shares of Common Stock or other securities or rights
convertible into, or entitling the holder thereof to receive directly or
indirectly, additional shares of Common Stock (hereinafter referred to as
"Common Stock Equivalents") without payment of any consideration by such holder
for the additional shares of Common Stock or the Common Stock Equivalents
(including the additional shares of Common Stock issuable upon conversion or
exercise thereof), then, as of such record date (or the date of such dividend
distribution, split or subdivision if no record date is fixed), the
-6-
<PAGE>
Conversion Price of the Series A Preferred Stock shall be appropriately
decreased so that the number of shares of Common Stock issuable on conversion of
each share of such series shall be increased in proportion to such increase of
the aggregate of shares of Common Stock outstanding and those issuable with
respect to such Common Stock Equivalents.
(iv) If the number of shares of Common Stock outstanding at any
time after the date the first share of Series A Preferred Stock was originally
issued is decreased by a reverse-split or combination of the outstanding shares
of Common Stock, then, following the record date of such combination, the
Conversion Price for the Series A Preferred Stock shall be appropriately
increased so that the number of shares of Common Stock issuable on conversion of
each share of such series shall be decreased in proportion to such decrease in
outstanding shares.
(e) Other Distributions. In the event this Corporation shall declare
-------------------
a distribution payable in securities of other entities, evidences of
indebtedness issued by this Corporation or other entities, assets (excluding
cash dividends) or options or rights not referred to in subsection 5(d)(iii),
then, in each such case for other purposes of this subsection 5(e), the holders
of Series A Preferred Stock shall be entitled to a proportionate share of any
such distribution as though they were the holders of the number of shares of
Common Stock of the Corporation into which their shares of Series A Preferred
Stock are convertible as of the record date fixed for the determination of the
holders of Common Stock of the Corporation entitled to receive such
distribution.
(f) Recapitalizations. If at any time or from time to time there
-----------------
shall be a recapitalization of the Common Stock (other than a subdivision,
combination or merger or sale of assets transaction provided for elsewhere in
this Section 5 or Section 2), provision shall be made so that the holders of
Series A Preferred Stock shall thereafter be entitled to receive upon conversion
of such Preferred Stock the number of shares of stock or other securities or
property of the Corporation or otherwise, to which a holder of such number of
shares of Common Stock deliverable upon conversion immediately prior to that
recapitalization would have been entitled on such recapitalization. In any such
case, appropriate adjustment shall be made in the application of the provisions
of this Section 5 with respect to the rights of the holders of Series A
Preferred Stock after the recapitalization to the end that the provisions of
this Section 5 (including adjustment of the Conversion Price then in effect and
the number of shares purchasable upon conversion of Series A Preferred Stock)
shall be applicable after that event as nearly equivalent as may be practicable.
(g) Capital Reorganization, Merger or Sale of Assets. If at any time
------------------------------------------------
or from time to time there shall be a capital reorganization of the Common Stock
(other than a subdivision, combination, reclassification or exchange of shares
provided for elsewhere in this Section 5) or a merger or consolidation of the
Corporation with or into another corporation, or the sale of all or
substantially all of the Corporation's properties and assets to any other
person, then, as a part of such reorganization, merger, consolidation or sale,
provision shall be made so that the holders of the Series A Preferred Stock
shall thereafter be entitled to receive upon conversion of the Series A
Preferred Stock, the number of shares of stock or other securities or property
of the Corporation, or of the successor corporation resulting from such merger,
consolidation or sale, to which a holder of Common Stock issuable upon
conversion would have been entitled on such capital reorganization, merger,
consolidation, or sale or an amount of cash receivable as if the Series A
Preferred Stock had converted into shares of Common Stock. In any such case,
appropriate adjustment shall be made in the application of the provisions of
this Section 5 with respect to the rights of the holders of the Series A
Preferred Stock after the reorganization, merger, consolidation or sale to the
end that the provisions of this Section 5 shall be applicable after that event
in as nearly equivalent a manner as
-7-
<PAGE>
may be practicable. Each holder of Series A Preferred Stock upon the occurrence
of an event set forth in this Section 5(g), shall, subject to automatic
conversion pursuant to subsection 5(b), have the option of electing treatment of
his shares of Series A Preferred Stock under either this Section 5(g) or Section
2 hereof, if applicable, by giving the Corporation written notice of such
election at least ten days prior to the close of such transaction unless such
holders received notice of the transaction less than 20 days prior to the close
of such transaction, then the notice of election shall be given within 10 days
after such notice.
(h) Certificates as to Adjustments. Upon the occurrence of each
------------------------------
adjustment or readjustment of the Conversion Price pursuant to this Section 5,
the Corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and cause independent public
accountants selected by the Corporation to verify such computation and prepare
and furnish to each holder of Series A Preferred Stock a certificate setting
forth such adjustment or readjustment and showing in detail the facts upon which
such adjustment or readjustment is based. The Corporation shall, upon the
written request at any time of any holder of Series A Preferred Stock furnish or
cause to be furnished to such holder a like certificate setting forth (i) such
adjustments and readjustments, (ii) the Conversion Price at the time in effect,
and (iii) the number of shares of Common Stock and the amount, if any, of other
property which at the time would be received upon the conversion of Series A
Preferred Stock.
(i) Issue Taxes. The Corporation shall pay any and all issue and
-----------
other taxes that may be payable in respect of any issue or delivery of shares of
Common Stock on conversion of shares of Series A Preferred Stock pursuant
hereto; provided, however, that the Corporation shall not be obligated to pay
any transfer taxes resulting from any transfer requested by any holder in
connection with any such conversion.
(j) Reservation of Stock Issuable Upon Conversion. The Corporation
---------------------------------------------
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
the shares of the Series A Preferred Stock, such number of its shares of Common
Stock as shall from time to time be sufficient to effect the conversion of all
outstanding shares of the Series A Preferred Stock and if at any time the number
of authorized but unissued shares of Common Stock shall not be sufficient to
effect the conversion of all then outstanding shares of the Series A Preferred
Stock, the Corporation will take such corporate action as may, in the opinion of
its counsel, be necessary to increase its authorized but unissued shares of
Common Stock to such number of shares as shall be sufficient for such purpose,
including, without limitation, engaging in best efforts to obtain the requisite
stockholder approval of any necessary amendment to its Certificate of
Incorporation. For the purpose of increasing the number of shares of Common
Stock authorized to provide enough Common Stock to fully convert the Series A
Preferred Stock, the Series A Preferred Stock shall vote in favor of such
amendment to the Certificate of Incorporation.
(k) No Fractional Shares. No fractional share shall be issued upon
--------------------
the conversion of any share or shares of Series A Preferred Stock. All shares
of Common Stock (including fractions thereof) issuable upon conversion of more
than one share of Series A Preferred Stock by a holder thereof shall be
aggregated for purposes of determining whether the conversion would result in
the issuance of any fractional share. If, after the aforementioned aggregation,
the conversion would result in the issuance of a fraction of a share of Common
Stock, the Corporation shall, in lieu of issuing any fractional share, pay the
holder otherwise entitled to such fraction a sum in cash equal to
-8-
<PAGE>
the fair market value of such fraction on the date of conversion (as determined
in good faith by the Board of Directors of the Corporation).
6. Amendment. Any term relating to the Series A Preferred Stock may be
amended and the observance of any term relating to the Series A Preferred Stock
may be waived (either generally or in a particular instance) only with the vote
or written consent of holders of a majority of the outstanding shares of the
Series A Preferred Stock. Any amendment so effected shall be binding upon the
Corporation and any holder of the Series A Preferred Stock.
7. Protective Provisions. 1) So long as any shares of Series A
Preferred Stock remain outstanding, the Corporation shall not, without the vote
or written consent by the holders of a majority of the outstanding shares of
Series A Preferred Stock, voting as a separate class, authorize:
(i) the declaration, setting aside or payment of any dividend
or distribution with respect to any shares of equity securities of the
Corporation;
(ii) any increase in the authorized number of shares of any
class or series of capital stock of the Corporation;
(iii) the redemption or repurchase of any shares of equity
securities, except for the repurchase of shares at cost or without cost pursuant
to rights granted to the Corporation under employee stock option or stock
repurchase agreements;
(iv) any amendment to, or waiver of, any provision of the
Certificate of Incorporation or bylaws of the Corporation or any corporate
action that would change any of the rights, preferences, privileges of the
Series A Preferred Stock or limitations provided for herein for the benefit of
the Series A Preferred Stock or which would materially adversely affect the
rights of the holders of the Series A Preferred Stock;
(v) the creation or issuance of, or the obligation to create
or issue, any shares of any class or series of capital stock of the Corporation,
or any other securities convertible into capital stock of the Corporation, other
than (i) capital stock issuable or issued to employees or service providers of
this Corporation directly or pursuant to a stock option or restricted stock plan
approved by the Board of Directors of this Corporation or (ii) capital stock
issuable upon the conversion or exchange of any convertible or exchangeable
securities outstanding as of the date hereof or the issuance of which was
approved pursuant to this subsection;
(vi) the sale, lease, exchange or transfer, in one transaction
or a series of related transactions, of assets of the Corporation having a fair
market value in excess of $100,000, unless the Corporation's stockholders
immediately prior to such sale, lease, exchange or transfer will, as a result of
such transaction hold (by virtue of securities issued as consideration in such
transaction) at least 50% of the voting power of the purchasing entity);
(vii) any liquidation, dissolution or winding up of the
Corporation;
(viii) any reorganization, merger or consolidation in which the
Corporation is not the surviving entity, or which will result in the
Corporation's stockholders immediately prior to such transaction not holding at
least 50% of the voting power of the surviving or continuing entity;
-9-
<PAGE>
(ix) any change in the primary business of the Corporation and
its subsidiaries from the business of providing insurance claims management,
administration and related services to third parties;
(x) any transaction which would result in the Corporation, or
any Subsidiary of the Corporation, incurring, assuming or suffering to exist,
any new bank indebtedness that exceeds existing bank indebtedness of the
Corporation on the Series A Issue Date by an amount in excess of one hundred
thousand dollars ($100,000);
(xi) the acquisition (including by merger or consolidation with
the Corporation or any of its Subsidiaries) by the Corporation or any of its
Subsidiaries of shares of capital stock of or any other ownership interest in,
or the acquisition (including by purchase, lease or exchange) of all or any
substantial portion of the assets of, any entity (other than the formation of
any new Subsidiary or joint venture in the ordinary course of the Corporation's
business which has been approved by a majority of the Board of Directors);
(xii) the creation or issuance of any stock options, warrants or
other Common Stock Equivalents, other than options issued to employees or
service providers of this Corporation directly or pursuant to a stock option
plan approved by the Board of Directors of this Corporation granted at the then
fair market value of such Common Stock as determined by the Board of Directors;
or
(xiii) any transaction substantially similar to any of those
enumerated in this Section.:
(b) In addition to any other rights provided by law or otherwise
provided herein, so long as shares of the Series A Preferred Stock remain
outstanding.
(i) the Board of Directors of the Corporation shall not exceed
nine members; and
(ii) the holders of the Series A Preferred shall elect a
majority of the Corporation's Board of Directors voting separately as a single
class.
8. No Reissuances of Series A Preferred Stock. No share or shares of
Series A Preferred Stock acquired by the Corporation by reason of redemption,
purchase, conversion or otherwise shall be reissued, and all such shares shall
be returned to the status of undesignated shares of Preferred Stock.
9. Certain Covenants. Any registered holder of Series A Preferred Stock
may proceed to protect and enforce its rights and the rights of such holders by
any available remedy by proceeding at law or in equity to protect and enforce
any such rights, whether for the specific enforcement of any provision contained
herein or in aid of the exercise of any power granted herein, or to enforce any
other proper remedy.
10. No Dilution or Impairment. The Corporation will not, by amendment of
its Certificate of Incorporation or through any reorganization, transfer of
capital stock or assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms of the Series A Preferred Stock set
-10-
<PAGE>
forth herein, but will at all times in good faith assist in the carrying out of
all such terms and in the taking of all such action as may be necessary or
appropriate in order to protect the rights of the holders of such Preferred
Stock against dilution or other impairment.
11. Notices. In the event of:
(a) Any taking by the Corporation of a record of the holders of any
class of securities for the purpose of determining the holders thereof who are
entitled to receive any dividend or other distribution, or any right to
subscribe for, purchase or otherwise acquire any shares of capital stock of any
class or any other securities or property, or to receive any other right, or
(b) Any capital reorganization of the Corporation, any
reclassification or recapitalization of the capital stock of the Corporation,
any merger or consolidation of the Corporation, or any transfer of all or
substantially all of the assets of the Corporation to any other Corporation, or
any other entity or person, or
(c) Any voluntary or involuntary dissolution, liquidation or winding
up of the Corporation,
then and in each such event the Corporation shall mail or cause to be
mailed to each holder of Series A Preferred Stock a notice specifying (i) the
date on which any such record is to be taken for the purpose of such dividend,
distribution or right and a description of such dividend, distribution or right
and (ii) the date on which any such reorganization, reclassification,
recapitalization, transfer, consolidation, merger, dissolution, liquidation or
winding up is expected to become effective. Such notice shall be mailed by
first class mail, postage prepaid, at least 20 days prior to the date specified
in such notice on which such action is to be taken.
12. Certain Definitions.
"Available Assets" shall mean, upon the liquidation, dissolution or winding
up of the Corporation, all assets of the Corporation available for distribution
to holders of all classes of the Corporation's capital stock, whether such
assets are capital, surplus or earnings.
"Junior Stock" shall mean any capital stock of the Corporation ranking
junior (either as to dividends or upon liquidation, dissolution or winding up)
to the Series A Preferred Stock.
"Series A Issue Date" shall mean, as to any share of Series A Preferred
Stock, the date of original issuance of such share of Series A Preferred Stock.
"Series A Liquidation Value" as of any date shall mean an amount per share
equal to the Series A Stated Value, plus all accrued and unpaid dividends
thereon.
"Series A Stated Value" shall mean $1.079156.
"Subsidiary" of any Person means any corporation or other entity of which a
majority of the voting power of the voting equity securities or equity interest
is owned, directly or indirectly, by such Person.
-11-
<PAGE>
RESOLVED FURTHER, that the President and Secretary of the Corporation be,
and they hereby are, authorized and directed to prepare, execute, verify, and
file in Delaware, a Certificate of Designation in accordance with these
resolutions and as required by law.
IN WITNESS WHEREOF, the undersigned declare under penalty of perjury that
they have read the foregoing Certificate of Designations and know the contents
thereof, and that the statements therein are true and correct of their own
knowledge.
Executed at Concord, California, on March 9, 2000.
By:/s/ James R. Dunathan
-------------------------------
James R. Dunathan, President
By:/s/ Earl Wiklund
-------------------------------
Earl Wiklund, Secretary
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<PAGE>
EXHIBIT 10.40C
EXHIBIT C
---------
FORM OF LOAN FACILITY
<PAGE>
THIS CONVERTIBLE PROMISSORY NOTE AND LOAN AGREEMENT (THE "NOTE") AND THE
SECURITIES ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY APPLICABLE
STATE SECURITIES LAWS, AND MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS.
ANCHOR PACIFIC UNDERWRITERS, INC.
CONVERTIBLE PROMISSORY NOTE AND LOAN AGREEMENT
$1,000,000 March 10, 2000
FOR VALUE RECEIVED, ANCHOR PACIFIC UNDERWRITERS, INC., a Delaware
corporation (the "Company"), hereby promises to pay to WARD NORTH AMERICA
HOLDING, INC., a California corporation ( "Holder"), or registered assigns, on
March 10, 2002, subject to earlier conversion as described below, the principal
sum of One Million Dollars ($1,000,000), or such lesser amount as shall equal
the unpaid principal amount of the advances made by Holder to the Company
pursuant to Section 2 below, and to pay interest from the date of each advance
on the whole amount of such advance remaining unpaid at a rate per annum equal
to the lesser of (a) ten percent (10.0%) per annum, or (b) the maximum rate
permitted by law.
Interest on each advance shall accrue from the date of such advance, and
shall be due and payable quarterly on the first day of each calendar quarter
during the term hereof, with all remaining accrued and unpaid interest due and
payable at such time as the outstanding principal amount is due or has been
converted. All accrued and unpaid interest shall be paid in cash upon the
payment in cash of the principal outstanding hereunder or the conversion of this
Note as provided herein. Nothing contained in this Note shall require the
Company at any time to pay interest at a rate exceeding the maximum rate
allowable under California law. Principal and interest shall be payable at the
principal office of Holder, located at 610 West Ash Street, Suite 1500, San
Diego, California 92101, or at such other place as Holder may designate from
time to time in writing to the Company. Interest shall be computed on the basis
of the actual number of days elapsed over a 360-day year.
1. Other Agreements and Documents.
------------------------------
(a) Purchase Agreement and Related Documents. This Note is issued
----------------------------------------
pursuant to and is entitled to the benefits and subject to the conditions of
that certain Securities Purchase Agreement of even date herewith, among the
Company and Holder, as the same may be amended from time to time (the "Purchase
Agreement").
In connection with the Purchase Agreement (i) the Company and Holder
entered into that certain Investor Rights Agreement of even date herewith, as
the same may be amended from time to time (the "Investor Rights Agreement"),
(ii) Holder purchased from the Company certain convertible debentures (the
"Debentures"), as described in the Purchase Agreement, (iii) the Company issued
to Holder certain warrants to purchase shares of common stock of the Company
(the "Debenture Warrants"), as defined in the Purchase
<PAGE>
Agreement, and (iv) the Company filed with the Delaware Secretary of State that
certain Certificate of Designations of Series A Convertible Preferred Stock (the
"Certificate").
(b) This Note, the Purchase Agreement, the Investor Rights Agreement,
the Debentures, the Debenture Warrants, and the Certificate are sometimes
collectively referred to herein as the "Transaction Documents".
2. Line of Credit Amount and Terms
-------------------------------
(a) Facility Amount.
---------------
(i) During the availability period described below in Section
2(b), Holder will provide a line of credit (the "Facility") to The Company.
The amount of the Facility (the "Commitment") is $1,000,000.
(ii) All or a portion of the Facility shall be made available as
needed. Each advance shall be made available to the Company within three
(3) Business Days following the Company's request therefor in accordance
with Section 2(c).
(b) Availability Period. The Facility is available commencing on the
-------------------
date this Convertible Promissory Note and Loan Agreement is signed by the
parties hereto and ending on March 10, 2002 (the "Expiration Date"), so long as
no Event of Default (as defined below), or event or condition with the giving of
notice or passage of time or both would constitute an Event of Default shall
have occurred and is continuing.
(c) Requests for Advances. Each request for an advance must be in
---------------------
writing and received by Holder at least three (3) Business Days prior to the
Business Day of the requested advance.
(d) Business Days. Unless otherwise provided in this Agreement, a
-------------
Business Day is a day other than a Saturday or a Sunday on which commercial
banks are open for business in California. All payments and disbursements which
would be due on a day which is not a Business Day will be due on the next
Business Day. All payments received on a day which is not a Business Day will
be applied to the credit of the Company on the next Business Day.
(e) Taxes. Payments made by the Company to Holder will be made
-----
without deduction of withholding or similar taxes. If the Company is required
to pay such taxes, the Company will pay such taxes in addition to the amounts
due to Holder under this Agreement. If the Company fails to make such tax
payments when due, the Company indemnifies Holder against any liability for such
taxes, as well as for any related interest, expenses, additions to tax, or
penalties asserted against or suffered by Holder with respect to such taxes.
(f) Condition to Each Advance. Before each advance under the
-------------------------
Facility, including the first:
(i) the Company must furnish Holder with a request for an
advance as contemplated by Section 2(c);
(ii) each representation and warranty set forth in the Purchase
Agreement shall be true and correct in all material respects as if made on the
date of such advance;
2
<PAGE>
(iii) no material adverse change in the operations, business or
condition (financial or otherwise) of the Company and its subsidiaries shall
have occurred from that existing as of March 1, 2000; and
(iv) no Event of Default, or event or condition with the giving
of notice or passage of time or both would constitute an Event of Default shall
have occurred and be continuing on the date of such advance.
Each request for an advance shall be deemed a representation and warranty
by the Company that the conditions referred to in clauses (ii), (iii) and (iv)
above have been met.
(g) Required Advance. Notwithstanding the foregoing, the Holder
----------------
shall have the right, at any time, to require the Company to accept an advance
equal to the remaining unadvanced amount of the Facility.
(h) Application of Payments. Payments by the Company hereunder shall
-----------------------
be applied as follows: first, to the payment of expenses due hereunder; second,
----- ------
to the payment of interest accrued on this Note; and third, to the payment of
-----
the outstanding principal balance of advances made hereunder, in the order such
advances were borrowed.
3. Default. If any of the following events (hereafter called "Events of
-------
Default") shall occur:
(a) If the Company shall default in the payment of any principal or
interest due under this Note when the same shall become due and payable, whether
at maturity or by acceleration or otherwise; or
(b) If the Company shall make a general assignment for the benefit of
creditors; or
(c) If the Company shall file a voluntary petition in bankruptcy, or
shall be adjudicated a bankrupt or insolvent, or shall file any petition or
answer seeking any reorganization, arrangement, composition, readjustment,
liquidation, dissolution or similar relief under the present or any future
federal bankruptcy act or other applicable federal, state or other statute, law
or regulation, or shall file any answer admitting the material allegation of a
petition filed against the Company in such proceeding, or shall seek or consent
to or acquiesce in the appointment of any trustee, receiver or liquidator of the
Company of all or any substantial part of the properties of the Company, or the
Company shall commence the winding up or the dissolution or liquidation of the
Company; or
(d) If, within sixty (60) days after a court of competent
jurisdiction shall have entered an order, judgment or decree approving any
complaint or petition against the Company seeking reorganization, dissolution or
similar relief under the present or any future federal bankruptcy act or other
applicable federal, state or other statute, law or regulation, such order,
judgment or decree shall not have been dismissed or stayed pending appeal, or
if, within sixty (60) days after the appointment, without the consent or
acquiescence of the Company, of any trustee, receiver or liquidator of the
Company or of all or any substantial part of the properties of the Company, such
appointment shall not have been vacated or
3
<PAGE>
stayed pending appeal, or if, within sixty (60) days after the expiration of any
such stay, shall not have been vacated; or
(e) If the Company should breach any of the covenants,
representations, warranties, terms or conditions contained in this Note (other
than as provided in paragraphs (a), (b), (c), (d), (f), (g), (h) or (i) of this
Section), any of the other Transaction Documents, or in any statement or
certificate at any time given or made to Holder pursuant thereto or in
connection therewith, and, if such breach is of a type that is curable, such
breach is not cured within fifteen (15) days after the Company becomes aware of
such breach; or
(f) If the Company should fail to pay when due any amount due under
any of the Transaction Documents; or
(g) If the Company shall fail to pay when due (whether upon
acceleration or otherwise) and after passage of any applicable notice and cure
periods, any payment due with respect to indebtedness for borrowed money having
an aggregate principal amount of more than $50,000 when due; or
(h) If the Company shall fail to comply with (i) any agreement
pursuant to which the Company shall be liable for an amount in excess of $50,000
upon any default thereof, or (ii) any indenture, mortgage, deed of trust, or
other agreement binding on it or affecting its properties, and in any such case
such failure continues after the applicable grace or notice period, if any,
specified in such agreement on the date of such failure; or
(i) If any judgment, writ, warrant or attachment or execution or
similar process which calls for payment or presents liability in excess of
$50,000 shall be rendered, issued or levied against the Company or its property
and such process shall not be waived, stayed, vacated or fully bonded within
thirty (30) days after its issuance or levy, unless such judgment is covered by
insurance and the insurer has acknowledged coverage in writing with respect
thereto;
then, and in each and every such case, Holder may by notice in writing to the
Company declare all amounts under this Note to be forthwith due and payable
(except that, in the case of an Event of Default under either Section 3(c) or
Section 3(d), this Note shall become immediately due and payable without notice)
and thereupon the balance shall become so due and payable, without presentation,
protest or further demand or notice of any kind, all of which are hereby
expressly waived.
4. Conversion. Subject to and upon compliance with the provisions of
----------
this Section 4, at the option of Holder, at any time or from time to time, this
Note may be converted, in whole or in part, into shares of Series A Preferred
Stock of the Company by the surrender of this Note in the manner specified in
Section 4(a) below. The number of shares of Series A Preferred Stock into which
this Note shall be convertible shall equal the principal amount of the Note
being converted divided by the "Conversion Price" (as hereinafter defined). The
Conversion Price shall initially be $4.5045 per share, and shall be subject to
adjustment pursuant to Section 4(b) below.
(a) Mechanics of Conversion. Before Holder shall be entitled to
-----------------------
convert this Note, Holder shall surrender this Note, duly endorsed, at the
Company's principal
4
<PAGE>
corporate office, together with written notice of Holder's election to convert
the same, and shall state therein the name or names in which the certificate or
certificates for shares of Series A Preferred Stock are to be issued. The
Company shall, as soon as practicable thereafter, issue and deliver to Holder,
or to the nominee or nominees of Holder, a certificate or certificates for the
number of shares of Series A Preferred Stock to which Holder shall be entitled
as aforesaid. Such conversion shall be deemed to have been made immediately
prior to the close of business on the date of such surrender of the Note to be
converted, and the person or persons entitled to receive the shares of Series A
Preferred Stock issuable upon such conversion shall be treated for all purposes
as the record holder or holders of such shares of Series A Preferred Stock as of
such date. If this Note is converted in part, this Note must be converted for a
number of whole shares of Series A Preferred Stock and Holder shall be entitled
to receive a new Note covering the remaining principal amount in respect of
which this Note has not been converted. Upon such surrender of this Note, the
Company will issue a certificate or certificates in the name of Holder for the
largest number of whole shares of Series A Preferred Stock to which Holder shall
be entitled and, if this Note is converted in whole, in lieu of any fractional
share of Series A Preferred Stock to which Holder shall be entitled, cash equal
to the remaining amount due hereunder. If the conversion is in connection with
an underwritten offering of securities registered pursuant to the Securities Act
of 1933, the conversion may, at the option of Holder, be conditioned upon the
closing with the underwriters of the sale of securities pursuant to such
offering, in which event the person or persons entitled to receive the shares of
Series A Preferred Stock or Common Stock, as applicable, issuable upon
conversion of this Note shall not be deemed to have converted this Note until
immediately prior to the closing of such sale of securities.
(b) Conversion Price Adjustments for Certain Dilutive Issuances,
------------------------------------------------------------
Splits and Combinations. The Conversion Price shall be subject to adjustment
- -----------------------
from time to time as follows:
(i) In the event the Company should at any time or from time
to time after the date of execution of this Convertible Promissory Note and Loan
Agreement (the "Effective Date") fix a record date for the effectuation of a
split or subdivision of the outstanding shares of Series A Preferred Stock or
the determination of holders of Series A Preferred Stock entitled to receive a
dividend or other distribution payable in additional shares of Series A
Preferred Stock, Common Stock or other securities or rights convertible into, or
entitling the holder thereof to receive directly or indirectly, additional
shares of Series A Preferred Stock or Common Stock (hereinafter referred to as
"Common Stock Equivalents") without payment of any consideration by such holder
for the additional shares of Series A Preferred Stock, Common Stock or the
Common Stock Equivalents (including the additional shares of Common Stock
issuable upon conversion or exercise thereof), then, as of such record date (or
the date of such dividend distribution, split or subdivision if no record date
is fixed), the Conversion Price shall be appropriately decreased so that the
number of shares of Series A Preferred Stock issuable on conversion of this Note
shall be increased in proportion to such increase of the aggregate of shares of
Series A Preferred Stock and Common Stock outstanding and those issuable with
respect to such Common Stock Equivalents.
(ii) If the number of shares of Series A Preferred Stock
outstanding at any time after the Effective Date is decreased by a combination
of the outstanding shares of Series A Preferred Stock, then, following the
record date of such
5
<PAGE>
combination, the Conversion Price shall be appropriately increased so that the
number of shares of Series A Preferred Stock issuable on conversion of this Note
shall be decreased in proportion to such decrease in outstanding shares of
Series A Preferred Stock.
(c) Other Distributions. In the event the Company shall declare a
-------------------
distribution payable in securities of other persons, evidences of indebtedness
issued by the Company or other persons, assets (excluding cash dividends) or
options or rights not referred to in Section 4(b)(i), then, in each such case
for other purposes of this Section 4(c), Holder shall be entitled to a
proportionate share of any such distribution as though they were the holder of
the number of shares of Series A Preferred Stock of the Company into which this
Note is convertible as of the record date fixed for the determination of the
holders of Series A Preferred Stock of the Company entitled to receive such
distribution in respect of shares of Series A Preferred Stock.
(d) Recapitalizations. If at any time or from time to time there
-----------------
shall be a recapitalization of the Series A Preferred Stock (other than a
subdivision, combination or merger or sale of assets transaction or like
transaction provided for elsewhere in this Section 4), provision shall be made
so that Holder shall thereafter be entitled to receive upon conversion of the
Note the number of shares of stock or other securities or property of the
Company, or otherwise, to which a holder of Series A Preferred Stock would have
been entitled on such recapitalization. In any such case, appropriate
adjustment shall be made in the application of the provisions of this Section 4
with respect to the rights of Holder after the recapitalization to the end that
the provisions of this Section 4 (including adjustment of the Conversion Price
then in effect and the number of shares purchasable upon conversion of the
Notes) shall be applicable after that event as they were before as nearly
equivalent as may be practicable.
(e) No Impairment. The Company will not, by amendment of its
-------------
Certificate of Incorporation or through any reorganization, recapitalization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by the
Company but will at all times in good faith assist in the carrying out of all
the provisions of this Section 4 and in the taking of all such action as may be
necessary or appropriate in order to protect the conversion rights of Holder
against impairment.
(f) Certificate as to Adjustment. Upon the occurrence of each
----------------------------
adjustment or readjustment of the Conversion Price pursuant to this Section 4,
the Company, at its expense, shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and cause its chief financial
officer to verify such computation and prepare and furnish to Holder a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is based. The Company
shall, upon the written request at any time of Holder, furnish or cause to be
furnished to Holder a like certificate setting forth (A) such adjustment and
readjustment, (B) the Conversion Price at the time in effect, and (C) the number
of shares of Series A Preferred Stock and the amount, if any, of other
securities and/or property which at the time would be receivable upon the
conversion of the Note. Such certificate shall set forth in reasonable detail
such facts as may be necessary to show the reason for and manner of computing
such adjustment. If demanded by Holder, the Company shall provide Holder a
verification or confirmation of
6
<PAGE>
the calculation of such adjustment signed by an independent certified public
accountant, which may be the firm of independent certified public accountants
servicing the Company.
(g) Notices of Record Date. In the event of any taking by the
----------------------
Company of a record of the holders of any class of securities for the purpose of
determining if Holder is entitled to receive any dividend or other distribution,
any right to subscribe for, purchase or otherwise acquire any shares of stock of
any class or any other securities or property, or to receive any other right,
the Company shall mail to Holder, at least 20 days prior to the date specified
therein, a notice specifying the date on which any such record is to be taken
for the purpose of such dividend, distribution or right, and the amount and
character of such dividend, distribution or right.
(h) Taxes on Conversion. The issue of share certificates on
-------------------
conversion of this Note shall be made without charge to Holder for any tax in
respect of the issue thereof. The Company shall not, however, be required to
pay any tax which may be payable in respect of any transfer involved in the
issue and delivery of shares in any name other than that of Holder, and the
Company shall not be required to issue or deliver any certificate in respect of
such shares unless and until the person or persons requesting the issuance
thereof shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been paid.
(i) Reservation of Conversion Securities. The Company agrees that it
------------------------------------
will use its best efforts to have its stockholders authorize, and once so
authorized it will at all times have authorized and reserved, and will keep
available, solely for issuance or delivery upon the conversion of this Note, the
shares of Series A Preferred Stock and other securities and properties as from
time to time shall be receivable upon the conversion of this Note, and the
shares of Common Stock issuable upon conversion of the Series A Preferred Stock.
(j) No Rights as Stockholders. Prior to the conversion of this Note,
-------------------------
Holder shall not be entitled to any rights of a stockholder of the Company,
including, without limitation, the right to vote, to receive dividends or other
distributions or to exercise any pre-emptive rights, and shall not be entitled
to receive any notice of any proceedings of the Company, except as provided
herein or in the Purchase Agreement or as otherwise agreed.
5. Merger, Consolidation.
---------------------
(a) Acceleration on Merger, Consolidation. In the event of (i) any
-------------------------------------
consolidation or merger of the Company with or into any other corporation or
other entity or person, or any other corporate reorganization in which the
Company shall not be the continuing or surviving entity, or any transaction or
series of related transactions by the Company in which in excess of 50% of the
Company's voting power is issued for the purpose of combining with or
acquisition by one or more corporations or other entities or persons; or (ii) a
sale, conveyance or disposition of all or substantially all of the assets of the
Company, then, at the election of Holder made by written notice given to the
Company, the principal and accrued interest on this Note shall be due and
payable at the closing of any such transaction.
(b) Notices. The Company shall give Holder written notice of such
-------
impending transaction not later than twenty (20) days prior to the stockholders'
meeting
7
<PAGE>
called to approve such transaction, or twenty (20) days prior to the closing of
such transaction, whichever is earlier. The first of such notices shall describe
the material terms and conditions of the impending transaction and the
provisions of this Section 5 and the Company shall thereafter give Holder prompt
notice of any material changes. The transaction shall in no event take place
sooner than twenty (20) days after the Company has given the first notice
provided for herein or sooner than ten (10) days after the Company has given the
notice provided for herein of any material changes.
6. Transfer. Subject to the restrictions and limitations set forth in
--------
the Purchase Agreement, upon surrender of this Note for transfer or exchange, a
new Note or new Notes of the same tenor, dated the date to which interest has
been paid on the surrendered Note and in an aggregate principal amount equal to
the unpaid principal amount of the Note so surrendered, will be issued to and
registered in the name of the transferee or transferees. The Company may treat
the person in whose name this Note is registered as the owner hereof for the
purpose of receiving payments and for all other purposes.
7. Prepayment of Note. This Note may not be pre-paid by the Company
------------------
without the express written consent of Holder.
8. Notices. Any notices and other communications required or permitted
-------
in this Agreement shall be effective if in writing and delivered personally or
sent by telecopier, Federal Express, or registered or certified air mail,
postage prepaid, addressed as follows:
If to the Company, addressed to:
Anchor Pacific Underwriters, Inc.
1800 Sutter Street, Suite 400
Concord, California 94520
Attention: James R. Dunathan, President & Chief Executive Officer
If to Holder, addressed to:
Ward North America Holding
610 West Ash Street, Suite 1500
San Diego, California 92101
Attention: Jeffrey S. Ward, President & Chief Executive Officer
Unless otherwise specified herein, such notices or other communications
shall be deemed effective (a) on the date delivered, if delivered personally,
(b) two (2) business day after being sent by Federal Express, if sent by Federal
Express, (c) one (1) business day after being delivered, if delivered by
telecopier, and (d) three (3) business days after being sent, if sent by
registered or certified air mail. Each of the parties hereto shall be entitled
to specify a different address by giving notice as aforesaid to each of the
other parties hereto.
9. Amendment, Waiver Etc. The terms of this Note may be amended or
----------------------
waived only upon the written consent of the Company and Holder.
10. Waivers. The Company hereby waives diligence, presentment for
-------
payment, demand, protest, notice of non-payment, notice of dishonor, notice of
protest, and any and all other notices
8
<PAGE>
and demands whatsoever. The Company agrees to remain bound until all principal
and interest payable hereunder are paid in full, notwithstanding any extensions
or renewals granted with respect to this Note or the release of any party liable
hereunder. The Company, and any and all endorsers hereof, also waive the right
to plead any and all statutes of limitations as a defense to any demand on this
Note or any and all obligations or liabilities arising out of or in connection
with this Note, to the fullest extent permitted by law.
11. No Waiver by Holder. Any delay or omission on the part of Holder to
-------------------
exercise any of its rights or remedies hereunder, including, without limitation,
the right to accelerate amounts owing under this Note, shall not be deemed a
continuing waiver of that right or remedy or any other right or remedy of Holder
in respect thereof. The acceptance by Holder of any payment pursuant to the
terms of this Note which is less than payment in full of all amounts due and
payable at the time of such payment shall not constitute a waiver of the right
to exercise any of Holder's rights or remedies under this Note at that time or
at any subsequent time or nullify any prior exercise of any such rights or
remedies without the express written consent of Holder, except as and to the
extent otherwise provided by law.
12. Costs of Enforcement. If the Company fails to pay any amounts due
--------------------
hereunder when due, or if an Event of Default occurs under this Note, then the
Company shall pay all costs of enforcement and collection, including, without
limitation, reasonable attorneys' fees and costs, whether or not enforcement and
collection includes the filing of a lawsuit, and whether or not that lawsuit is
prosecuted to judgment.
13. Binding Nature. The provisions of this Note shall be binding upon and
--------------
inure to the benefit of the respective successors and assigns of the Company and
Holder.
14. Usury Savings. The Company and Holder intend to contract in
-------------
compliance with all state and federal usury laws governing the loan evidenced by
this Note. Both parties agree that none of the terms of this Note or any other
agreement between the Company and Holder shall be construed as a contract for or
a requirement to pay interest under this Note at a rate in excess of the maximum
interest rate, or in an amount that exceeds the maximum amount of interest,
allowed by any applicable state or federal usury laws. If Holder receives sums
which constitute interest that would increase the effective interest rate or the
amount of interest received on this Note to a rate or an amount in excess of
that permitted by any applicable law, then all such sums constituting interest
in excess of that permitted to be paid under applicable law shall at Holder's
option either be credited to the payment of principal or returned to the
Company. The provisions of this Paragraph control the other provisions of this
Note and any other agreement between the Company and Holder.
15. Assignment. This Note is not assignable or transferable by the
----------
Company.
16. Governing Law. This Note shall be governed by and construed under the
-------------
laws of the State of California as applied to agreements among California
residents, made and to be performed entirely within the State of California.
17. Jurisdiction; Venue. Each party hereto agrees that all actions or
-------------------
disputes arising directly or indirectly as a result or in consequence of this
Agreement, shall be instituted and litigated only in courts having situs in San
Diego County and the United States District Court for the Southern District of
California, and the Company and Holder each hereby consent to the exclusive
jurisdiction and venue of any state or federal court located and having its
situs in San Diego County.
9
<PAGE>
18. WAIVER OF RIGHT TO TRIAL BY JURY. EACH PARTY HERETO KNOWINGLY AND
--------------------------------
WILLINGLY WAIVES ITS RIGHT TO A TRIAL BY JURY IN ANY ACTION OR DISPUTE ARISING
DIRECTLY OR INDIRECTLY AS A RESULT OR IN CONSEQUENCE OF THIS NOTE, AND AGREES
THAT ANY SUCH ACTION OR DISPUTE SHALL BE HEARD BEFORE A JUDGE ONLY.
19. Severability. All provisions hereof are severable. If any provision
------------
hereof is declared invalid for any reason, that invalidity shall not affect any
other provision of this Note, all of which shall remain in full force and
effect.
IN WITNESS WHEREOF, the Company has caused this Note to be duly executed by
its duly authorized officer as of the day and year first above written.
ANCHOR PACIFIC UNDERWRITERS, INC.
By: /s/ James R. Dunathan
----------------------------------
James R. Dunathan, President & CEO
AGREED (as to Section 2):
WARD NORTH AMERICA HOLDING, INC.
By: /s/ Jeffrey S. Ward
----------------------------------
Jeffrey S. Ward, President and CEO
10
<PAGE>
EXHIBIT 10.40D
EXHIBIT D
---------
SCHEDULE OF EXCEPTIONS
<PAGE>
EXHIBIT D
SCHEDULE OF EXCEPTIONS
----------------------
2.1 Organization and Standing; Qualification.
None.
2.2 Authority.
The Company must authorize additional shares of Common Stock.
2.3 Capitalization.
(a) Warrants.
Warrants to purchase shares of Common Stock were granted as follows:
The Imperial Bank Note/Warrants, specifically set forth below, include a
net exercise feature, a repurchase on sale provision, and an anti-dilution
feature for adjusting the price and number of issuable common shares, as are
more fully set forth in the specific warrant agreements provided to Purchaser.
Exception 2.16 is incorporated herein.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Anchor Pacific Underwriters
Warrant Log
- -----------------------------------------------------------------------------------------------------------
Participant Warrant Date Maturity Strike Outstanding
Date Price Warrants
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Subordinated Notes/Warrants
- -----------------------------------------------------------------------------------------------------------
Steve Gonsalves Aug-96 Aug-01 $1.35 10,000
- -----------------------------------------------------------------------------------------------------------
Gonsalves and Santucci, Inc. Aug-96 Aug-01 $1.35 10,000
- -----------------------------------------------------------------------------------------------------------
Christine Behrens - APU 401-K Sep-96 Sep-01 $1.35 2,000
- -----------------------------------------------------------------------------------------------------------
James Dunathan - APU 401-K Sep-96 Sep-01 $1.35 2,000
- -----------------------------------------------------------------------------------------------------------
Earl Wiklund-APU 401-K Sep-96 Sep-01 $1.35 2,000
- -----------------------------------------------------------------------------------------------------------
James Wieking - APU 401-K Sep-96 Sep-01 $1.35 4,000
- -----------------------------------------------------------------------------------------------------------
Donald Putnam - APU 401-K Sep-96 Sep-01 $1.35 4,000
- -----------------------------------------------------------------------------------------------------------
Susan Sula Sep-96 Sep-01 $1.35 2,000
- -----------------------------------------------------------------------------------------------------------
TOTAL: 36,000
- -----------------------------------------------------------------------------------------------------------
</TABLE>
-1-
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Participant Warrant Date Maturity Strike Outstanding
Date Price Warrants
- ------------------------------------------------------------------------------------------------------------
Subscription Agreements/Warrants
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Earl Wiklund Jan-97 Jan-02 $0.90 11,111
- ------------------------------------------------------------------------------------------------------------
Steve Gonsalves Jan-97 Jan-02 $0.90 55,555
- ------------------------------------------------------------------------------------------------------------
Donald Putnam Jan-97 Jan-02 $0.90 33,333
- ------------------------------------------------------------------------------------------------------------
Earl Wiklund Feb-97 Feb-02 $0.90 5,555
- ------------------------------------------------------------------------------------------------------------
James Wieking Feb-97 Feb-02 $0.90 27,777
- ------------------------------------------------------------------------------------------------------------
Audie Dudum Mar-97 Mar-02 $0.90 22,222
- ------------------------------------------------------------------------------------------------------------
Terrance O'Dwyer Mar-97 Mar-02 $0.90 17,000
- ------------------------------------------------------------------------------------------------------------
John Carroll Apr-97 Apr-02 $0.90 11,111
- ------------------------------------------------------------------------------------------------------------
Jeff Kaufman Apr-97 Apr-02 $0.90 22,222
- ------------------------------------------------------------------------------------------------------------
Garrett Cecchini Apr-97 Apr-02 $0.90 22,222
- ------------------------------------------------------------------------------------------------------------
Peter Logan Apr-97 Apr-02 $0.90 22,222
- ------------------------------------------------------------------------------------------------------------
John Warner Apr-97 Apr-02 $0.90 11,111
- ------------------------------------------------------------------------------------------------------------
Robert Baratta Apr-97 Apr-02 $0.90 10,000
- ------------------------------------------------------------------------------------------------------------
Nino Pedrini Apr-97 Apr-02 $0.90 10,000
- ------------------------------------------------------------------------------------------------------------
Terrance O'Dwyer Jul-97 Jul-02 $0.90 13,000
- ------------------------------------------------------------------------------------------------------------
Lawrence Hayes Aug-97 Aug-02 $0.90 11,111
- ------------------------------------------------------------------------------------------------------------
Thomas Pomeroy Aug-97 Aug-02 $0.90 11,111
- ------------------------------------------------------------------------------------------------------------
Donald Cameron Sep-97 Sep-02 $0.90 27,777
- ------------------------------------------------------------------------------------------------------------
TOTAL: 344,440
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
10% Note/Warrants
- ------------------------------------------------------------------------------------------------------------
Steve Gonsalves Sep-97 Sep-02 $0.90 30,000
- ------------------------------------------------------------------------------------------------------------
Earl Wiklund Sep-99 Sep-04 $0.50 12,000
- ------------------------------------------------------------------------------------------------------------
TOTAL: 42,000
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Engagement Letter/Warrants
- ------------------------------------------------------------------------------------------------------------
Steve Gerbsman Aug-97 Aug-02 $0.90 30,000
- ------------------------------------------------------------------------------------------------------------
TOTAL: 30,000
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Imperial Bank Note/Warrants
- ------------------------------------------------------------------------------------------------------------
Imperial Bank* (see note above) Oct-97 Oct-02 $1.75* 95,000*
- ------------------------------------------------------------------------------------------------------------
Nov-98 Nov-03 $0.50* 80,000*
- ------------------------------------------------------------------------------------------------------------
Apr-99 May-04 $0.60* 100,000*
- ------------------------------------------------------------------------------------------------------------
Dec-99 Dec-04 $0.50* 80,000*
- ------------------------------------------------------------------------------------------------------------
TOTAL: 355,000*
- ------------------------------------------------------------------------------------------------------------
</TABLE>
-2-
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Participant Warrant Date Maturity Strike Outstanding
Date Price Warrants
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
System Industries/Warrants
- -----------------------------------------------------------------------------------------------------------
Unsecured Creditors unknown unknown $3.00 195,789
- -----------------------------------------------------------------------------------------------------------
TOTAL: 195,789
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Series B Warrants
- -----------------------------------------------------------------------------------------------------------
Gordon Silverstein Oct-98 Oct-03 $0.50 6,000
- -----------------------------------------------------------------------------------------------------------
Earl Wiklund Oct-98 Oct-03 $0.50 6,000
- -----------------------------------------------------------------------------------------------------------
Donald Putnam Oct-98 Oct-03 $0.50 6,000
- -----------------------------------------------------------------------------------------------------------
Thomas Hedford Nov-98 Nov-03 $0.50 6,000
- -----------------------------------------------------------------------------------------------------------
Robert Rath Nov-98 Nov-03 $0.50 10,000
- -----------------------------------------------------------------------------------------------------------
Jim Wieking Nov-98 Nov-03 $0.50 6,000
- -----------------------------------------------------------------------------------------------------------
Stuart Rosendahl Dec-98 Dec-03 $0.50 6,000
- -----------------------------------------------------------------------------------------------------------
Gordon Silverstein Dec-98 Dec-03 $0.50 6,000
- -----------------------------------------------------------------------------------------------------------
Robert Baratta Dec-98 Dec-03 $0.50 22,750
- -----------------------------------------------------------------------------------------------------------
Nino Pedrini Trust Dec-98 Dec-03 $0.50 22,750
- -----------------------------------------------------------------------------------------------------------
Donald Cameron Jan-99 Jan-04 $0.50 20,000
- -----------------------------------------------------------------------------------------------------------
TOTAL: 117,500
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Series D Warrants
- -----------------------------------------------------------------------------------------------------------
Richard Frank Mar-99 Mar-04 $0.50 30,000
- -----------------------------------------------------------------------------------------------------------
Guarantee Life May-99 May-04 $0.50 36,000
- -----------------------------------------------------------------------------------------------------------
James Dunathan - APU 401-K Jun-99 Jun-04 $0.50 5,400
- -----------------------------------------------------------------------------------------------------------
Charles Klinedinst Jul-99 Jul-04 $0.50 15,000
- -----------------------------------------------------------------------------------------------------------
James Dunathan Sep-99 Sep-04 $0.50 21,000
- -----------------------------------------------------------------------------------------------------------
Donald Cameron Oct-99 Oct-04 $0.50 60,000
- -----------------------------------------------------------------------------------------------------------
TOTAL: 167,400
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Series E Warrants
- -----------------------------------------------------------------------------------------------------------
Ward N.A. Nov-99 Nov-04 $0.50 90,000
- -----------------------------------------------------------------------------------------------------------
Ward N.A. Dec-99 Dec-04 $0.50 90,000
- -----------------------------------------------------------------------------------------------------------
Ward N.A. Dec-99 Dec-04 $0.50 60,000
- -----------------------------------------------------------------------------------------------------------
Ward N.A. Jan-00 Jan-05 $0.50 39,000
- -----------------------------------------------------------------------------------------------------------
Ward N.A. Feb-00 Feb-05 $0.50 21,000
- -----------------------------------------------------------------------------------------------------------
TOTAL: 300,000
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
TOTAL WARRANTS: 1,588,129
- -----------------------------------------------------------------------------------------------------------
</TABLE>
-3-
<PAGE>
(b) Options.
In accordance with the approval of the shareholders at the Company's
annual shareholder meeting held on May 12, 1998, the Company's 1994
Stock Option Plan ("Plan") must be amended to reflect the authorized
Common Stock to be 16,000,000, authorized Preferred Stock to be
2,000,000, with 1,000,000 shares of Common Stock reserved for the
Plan.
The following is a list of the outstanding options of the Company:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Anchor Pacific Underwriters
Option Log
- -----------------------------------------------------------------------------------------
Optionee Grant Date Number of Option Price Vested
Options Options
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Dunathan, James 6/20/95 54,350 $1.50 54,350
- -----------------------------------------------------------------------------------------
6/24/96 1,000 $1.60 750
- -----------------------------------------------------------------------------------------
5/13/97 1,000 $0.90 500
- -----------------------------------------------------------------------------------------
8/16/97 50,000 $0.90 50,000
- -----------------------------------------------------------------------------------------
5/12/98 1,000 $0.81 250
- -----------------------------------------------------------------------------------------
12/21/98 10,000 $0.90 10,000
- -----------------------------------------------------------------------------------------
12/21/98 6,000 $0.50 6,000
- -----------------------------------------------------------------------------------------
Wiklund, Earl 6/20/95 45,000 $1.50 45,000
- -----------------------------------------------------------------------------------------
6/24/96 1,000 $1.45 750
- -----------------------------------------------------------------------------------------
5/13/97 1,000 $0.90 500
- -----------------------------------------------------------------------------------------
5/12/98 1,000 $0.81 250
- -----------------------------------------------------------------------------------------
Gonsalves, Steve 6/20/95 15,000 $1.50 15,000
- -----------------------------------------------------------------------------------------
5/14/96 1,000 $1.63 750
- -----------------------------------------------------------------------------------------
5/13/97 1,000 $0.90 500
- -----------------------------------------------------------------------------------------
5/12/96 1,000 $0.81 250
- -----------------------------------------------------------------------------------------
Sanford, Michael 6/20/95 35,000 $1.50 35,000
- -----------------------------------------------------------------------------------------
5/14/96 1,000 $1.63 750
- -----------------------------------------------------------------------------------------
5/13/97 1,000 $0.90 500
- -----------------------------------------------------------------------------------------
5/12/98 1,000 $0.81 250
- -----------------------------------------------------------------------------------------
MacCullough, R. 6/20/95 35,000 $1.50 35,000
- -----------------------------------------------------------------------------------------
5/14/96 1,000 $1.63 750
- -----------------------------------------------------------------------------------------
5/13/97 1,000 $0.90 500
- -----------------------------------------------------------------------------------------
5/12/98 1,000 $0.81 250
- -----------------------------------------------------------------------------------------
Silverstein, Gordon 3/10/97 15,000 $1.00 7,500
- -----------------------------------------------------------------------------------------
5/13/97 1,000 $0.90 500
- -----------------------------------------------------------------------------------------
5/12/98 1,000 $0.81 250
- -----------------------------------------------------------------------------------------
</TABLE>
-4-
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Anchor Pacific Underwriters
Option Log
- -----------------------------------------------------------------------------------------
Optionee Grant Date Number of Option Price Vested
Options Options
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Dudum, Audie J. 6/20/95 35,000 $1.50 35,000
- -----------------------------------------------------------------------------------------
5/14/96 1,000 $1.63 750
- -----------------------------------------------------------------------------------------
5/13/97 1,000 $0.90 500
- -----------------------------------------------------------------------------------------
5/12/98 1,000 $0.81 250
- -----------------------------------------------------------------------------------------
Putnam, Donald B. 6/20/95 25,000 $1.65 25,000
- -----------------------------------------------------------------------------------------
6/24/96 1,000 $1.60 750
- -----------------------------------------------------------------------------------------
5/13/97 1,000 $1.00 500
- -----------------------------------------------------------------------------------------
5/12/98 1,000 $0.89 250
- -----------------------------------------------------------------------------------------
Wieking, James P. 6/20/95 25,000 $1.65 25,000
- -----------------------------------------------------------------------------------------
6/24/96 1,000 $1.60 750
- -----------------------------------------------------------------------------------------
5/13/97 1,000 $1.00 500
- -----------------------------------------------------------------------------------------
5/12/96 1,000 $0.89 250
- -----------------------------------------------------------------------------------------
Hayes, Lawrence 10/28/96 15,000 $1.45 11,250
- -----------------------------------------------------------------------------------------
5/13/97 1,000 $0.90 500
- -----------------------------------------------------------------------------------------
5/12/96 1,000 $0.81 250
- -----------------------------------------------------------------------------------------
Van Laanen, E.J. 6/20/95 35,000 $1.50 35,000
- -----------------------------------------------------------------------------------------
Dutcher, Robert 6/20/95 1,500 $1.50 1,500
- -----------------------------------------------------------------------------------------
Haynosch, Carol J. 6/20/95 10,000 $1.50 10,000
- -----------------------------------------------------------------------------------------
Scrivens, Martha 6/20/95 1,000 $1.50 1,000
- -----------------------------------------------------------------------------------------
5/12/98 1,500 $0.81 375
- -----------------------------------------------------------------------------------------
Penning, Cora 6/20/95 5,000 $1.50 5,000
- -----------------------------------------------------------------------------------------
O'Connell, Paulette 6/20/95 2,000 $1.50 2,000
- -----------------------------------------------------------------------------------------
Petersen, Raymond 6/20/95 10,000 $1.50 10,000
- ----------------------------------------------------------------------------------------
Klemmensen, Bea 6/20/95 1,000 $1.50 1,000
- ----------------------------------------------------------------------------------------
Meyer, Linda 6/20/95 1,000 $1.50 1,000
- ----------------------------------------------------------------------------------------
Monroe, Nancy 6/20/95 1,000 $1.50 1,000
- ----------------------------------------------------------------------------------------
Rodriguez, Kim 6/20/95 1,000 $1.50 1,000
- ----------------------------------------------------------------------------------------
Scoff, Theresa 8/19/95 1,000 $2.19 1,000
- ----------------------------------------------------------------------------------------
Jones, Daryl 6/20/95 500 $1.50 500
- ----------------------------------------------------------------------------------------
McCuish, Tracy 6/20/95 500 $1.50 500
- ----------------------------------------------------------------------------------------
Nelson, Karen 6/20/95 500 $1.50 500
- ----------------------------------------------------------------------------------------
Packard, Karen 6/20/95 500 $1.50 500
- ----------------------------------------------------------------------------------------
Robinson, Norma 6/20/95 500 $1.50 500
- ----------------------------------------------------------------------------------------
Barajas, Monica 6/20/95 100 $1.50 100
- ----------------------------------------------------------------------------------------
Ebert, Susan 6/20/95 100 $1.50 100
- ----------------------------------------------------------------------------------------
Pheine, Marion 6/20/95 100 $1.50 100
- ----------------------------------------------------------------------------------------
</TABLE>
-5-
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Anchor Pacific Underwriters
Option Log
- ------------------------------------------------------------------------------------------------------------
Optionee Grant Date Number of Option Price Vested
Options Options
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Schumann, Joann 6/20/95 100 $1.50 100
- ------------------------------------------------------------------------------------------------------------
Sorbello, Donna 6/20/95 100 $1.50 100
- ------------------------------------------------------------------------------------------------------------
Stewart, Donald 6/24/96 100 $1.45 1,875
- ------------------------------------------------------------------------------------------------------------
Santos, Rosemarie 6/24/96 100 $1.45 75
- ------------------------------------------------------------------------------------------------------------
Stepp, Marilyn 6/24/96 100 $1.45 75
- ------------------------------------------------------------------------------------------------------------
Winningham, Tiffany 6/24/96 100 $1.45 75
- ------------------------------------------------------------------------------------------------------------
Stief, Vicki 6/26/97 1,000 $0.90 500
- ------------------------------------------------------------------------------------------------------------
Johnson, Carolyn 6/26/97 500 $0.90 250
- ------------------------------------------------------------------------------------------------------------
Boyd, Lynn A. 6/20/95 10,000 $1.50 10,000
- ------------------------------------------------------------------------------------------------------------
Almarez, Renee 5/12/98 100 $0.81 25
- ------------------------------------------------------------------------------------------------------------
Dominguez, Kathie 5/12/98 100 $0.81 25
- ------------------------------------------------------------------------------------------------------------
Grim, Aaron 5/12/98 100 $0.81 25
- ------------------------------------------------------------------------------------------------------------
Hubbert, Corrine 5/12/98 100 $0.81 25
- ------------------------------------------------------------------------------------------------------------
Tomajan, Penne 5/12/98 100 $0.81 25
- ------------------------------------------------------------------------------------------------------------
Wirth, Dora 5/12/98 25 $0.81 25
- ------------------------------------------------------------------------------------------------------------
Fish, Carole L. 6/20/95 500 $1.50 500
- ------------------------------------------------------------------------------------------------------------
Kallen, Renee 6/24/96 100 $1.45 75
- ------------------------------------------------------------------------------------------------------------
Strodel, Marilyn 6/24/96 100 $1.45 75
- ------------------------------------------------------------------------------------------------------------
Jordan, Catherine 6/26/97 100 $0.90 50
- ------------------------------------------------------------------------------------------------------------
Rath, Robert 6/26/97 10,000 $0.90 5,000
- ------------------------------------------------------------------------------------------------------------
Turney, Jerry 5/12/96 5,000 $0.81 1,250
- ------------------------------------------------------------------------------------------------------------
Sotherlund, Connie 5/12/98 2,500 $0.81 625
- ------------------------------------------------------------------------------------------------------------
Alvarez, Margaret 5/12/98 100 $0.81 25
- ------------------------------------------------------------------------------------------------------------
Comer, Kristin 5/12/98 100 $0.81 25
- ------------------------------------------------------------------------------------------------------------
Kent, Don 1/29/99 2,500 $1.00 625
- ------------------------------------------------------------------------------------------------------------
Thomas Hedford 1/19/98 12,500 $0.88 6,250
- ------------------------------------------------------------------------------------------------------------
Deborah Koler 1/19/98 2,500 $0.88 1,250
- ------------------------------------------------------------------------------------------------------------
Stuart Rosendahl 1/19/98 7,500 $0.88 3,750
- ------------------------------------------------------------------------------------------------------------
Bell, Suzanne 1/29/99 2,500 $1.00 625
- ------------------------------------------------------------------------------------------------------------
Meyer, Rod 1/29/99 2,500 $1.00 625
- ------------------------------------------------------------------------------------------------------------
Sharer, Andrea 1/29/99 2,500 $1.00 625
- ------------------------------------------------------------------------------------------------------------
Kruger, Susan 1/29/99 1,500 $1.00 375
- ------------------------------------------------------------------------------------------------------------
May, Terese 1/29/99 1,500 $1.00 375
- ------------------------------------------------------------------------------------------------------------
Johnson, Regenia 1/29/99 1,000 $1.00 250
- ------------------------------------------------------------------------------------------------------------
Carlson, Sandra 1/29/99 500 $1.00 125
- ------------------------------------------------------------------------------------------------------------
Appleman, Scott 1/29/99 100 $1.00 25
- ------------------------------------------------------------------------------------------------------------
</TABLE>
-6-
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Anchor Pacific Underwriters
Option Log
- ------------------------------------------------------------------------------------------------------------
Optionee Grant Date Number of Option Price Vested
Options Options
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Baker, Keith 1/29/99 100 $1.00 25
- ------------------------------------------------------------------------------------------------------------
Bedlion, Amy 1/29/99 100 $1.00 25
- ------------------------------------------------------------------------------------------------------------
Bristol, Lisa 1/29/99 100 $1.00 25
- ------------------------------------------------------------------------------------------------------------
Canton, James 1/29/99 100 $1.00 25
- ------------------------------------------------------------------------------------------------------------
Clark, Jody 1/29/99 100 $1.00 25
- ------------------------------------------------------------------------------------------------------------
Crase, Colleen 1/29/99 100 $1.00 25
- ------------------------------------------------------------------------------------------------------------
DeLong, Charlene 1/29/99 100 $1.00 25
- ------------------------------------------------------------------------------------------------------------
Festner, Roberta 1/29/99 100 $1.00 25
- ------------------------------------------------------------------------------------------------------------
Fisher, Lisa 1/29/99 100 $1.00 25
- ------------------------------------------------------------------------------------------------------------
Fraly, Denise 1/29/99 100 $1.00 25
- ------------------------------------------------------------------------------------------------------------
Graff, Adam 1/29/99 100 $1.00 25
- ------------------------------------------------------------------------------------------------------------
Graff, Jason 1/29/99 100 $1.00 25
- ------------------------------------------------------------------------------------------------------------
Haughland, Cynthia 1/29/99 100 $1.00 25
- ------------------------------------------------------------------------------------------------------------
Hren, Terry 1/29/99 100 $1.00 25
- ------------------------------------------------------------------------------------------------------------
Humphrey, Christie 1/29/99 100 $1.00 25
- ------------------------------------------------------------------------------------------------------------
Kaaihue, Herbert 1/29/99 100 $1.00 25
- ------------------------------------------------------------------------------------------------------------
Laney, Jan 1/29/99 100 $1.00 25
- ------------------------------------------------------------------------------------------------------------
Menefee, Michelle 1/29/99 100 $1.00 25
- ------------------------------------------------------------------------------------------------------------
Meyer, Mathew 1/29/99 100 $1.00 25
- ------------------------------------------------------------------------------------------------------------
Norris, Denise 1/29/99 100 $1.00 25
- ------------------------------------------------------------------------------------------------------------
O'Berle, Jeffrey 1/29/99 25 $1.00 25
- ------------------------------------------------------------------------------------------------------------
Owings, Sally 1/29/99 100 $1.00 25
- ------------------------------------------------------------------------------------------------------------
Walker, Marci 1/29/99 100 $1.00 25
- ------------------------------------------------------------------------------------------------------------
Winter, Shirley 1/29/99 100 $1.00 25
- ------------------------------------------------------------------------------------------------------------
Yarbrough, Nancy 1/29/99 100 $1.00 25
- ------------------------------------------------------------------------------------------------------------
Zhu, Xia 1/29/99 100 $1.00 25
- ------------------------------------------------------------------------------------------------------------
</TABLE>
2.4 Validity.
None.
2.5 SEC Filings.
The Company did not file a 1999 Proxy Statement with the SEC,
however, the information was otherwise contained in the Company's subsequent 10-
K filing with the SEC.
-7-
<PAGE>
2.6 Absence of Changes or Events.
None.
2.7 Material Contracts and Agreements.
(i) Office Lease for property located at 1800 Sutter Street,
Suite 400, Concord, California.
Sublease dated January 1, 1999 by and between the Company and
Talbot Agency of California, Inc. for space located at 1800
Sutter Street, 5/th/ Floor, Concord, California.
Payment and Security Agreement dated October 6, 1999 by and
between Kaiser Center, Inc. as agent for Kaiser Aluminum
Chemical Corporation and Company.
Schedule 2.8 is incorporated herein.
(ii) A two (2) year non-compete provision is included in the
Purchase Agreement dated January 15, 1999, effective December
21, 1998, by and between the Company and Talbot Agency of
California, Inc. relating to the sale of the assets of Putnam
Knudsen & Wieking, Inc. (the "PKW Agreement"). The PKW
Agreement was provided to Purchaser.
(iv) The Company has employment agreements with all of its
employees. Copies of those employment agreements have been
provided to the Purchaser.
(v) The Company has provided to the Purchaser the Contracts
relating to the following aggregate debt obligations, of
which the Company is currently a party:
1. Imperial Bank Notes: $881,985.75
$200,000.00
2. Subordinated Notes: $ 80,000.00
3. Debentures: Series A $ 60,000.00
Series B $250,000.00
Series D $244,000.00
Series E $500,000.00
-8-
<PAGE>
4. 10% Notes:JR Dunathan $ 25,000.00
Earl Wicklund $ 20,000.00
2.8 Accounts Receivable.
Under the terms of the PKW Agreement, the Company is claiming a
right to receive certain 1998 Direct Bill Receivables from Talbot
Agency of California. The Company is currently negotiating with
Talbot to resolve this claim.
2.9 Fixed Assets.
None.
2.10 Title to Properties and Assets; Liens; etc.
None.
2.11 Compliance with Other Instruments.
The Company must amend its Certificate of Incorporation to
authorize additional shares of Common Stock to comply with the
terms and conditions of the Purchase Agreement. Further, the
Bylaws of the Company must be amended to reduce the number of
members on the Board of Directors.
2.12 Litigation, etc.
The Company entered into a Payment and Security Agreement dated
October 6, 1999 by and between Kaiser Center, Inc. as agent for
Kaiser Aluminum Chemical Corporation and Company relating to
certain claims arising out of certain lease obligations of the
Company.
Schedule 2.8 is incorporated herein by reference.
2.13 Tax Returns, Payments and Elections.
None.
2.14 Employees.
None.
2.15 Insurance.
None.
-9-
<PAGE>
2.16 Registration Rights.
The Warrant Agreements with Imperial Bank are subject to a
requirement that the Company enter into a Registration Rights
Agreement with Imperial Bank.
2.17 Governmental Consents.
None.
2.18 Offering.
None.
2.19 Operating Rights.
None.
2.20 Protection of Proprietary Information.
None.
2.21 Rights in Proprietary Information.
None.
2.22 Minute Books.
None.
2.23 Voting Agreements.
None.
2.24 Full Disclosure.
None.
-10-
<PAGE>
Exhibit 10.40e
EXHIBIT E
---------
FORM OF LEGAL OPINION OF COMPANY COUNSEL
<PAGE>
SHEPPARD, MULLIN, RICHTER & HAMPTON LLP
A LIMITED LIABILITY PARTNERSHIP INCLUDING PROFESSIONAL CORPORATIONS
ATTORNEYS AT LAW
SEVENTEENTH FLOOR
FOUR EMBARCADERO CENTER
SAN FRANCISCO, CALIFORNIA 94111-4106
WRITER'S DIRECT LINE TELEPHONE (415) 434-9100 OUR FILE NUMBER
(415) 434-9100 ---------- SYI-61968
FACSIMILE (415) 434-3947
March 10, 2000
Ward North America Holding, Inc.
610 West Ash Street, Suite 1500
San Diego, CA 92101
Re: Securities Purchase Agreement
-----------------------------
Ladies and Gentlemen:
We have acted as counsel to Anchor Pacific Underwriters, Inc., a
Delaware corporation (the "Company"), in connection with that certain Securities
Purchase Agreement (the "Agreement") dated March 9, 2000, between the Company
and Ward North America Holding, Inc. ("Ward"). This letter is delivered pursuant
to Section 5.1(h) of the Agreement.
In the preparation of this opinion, we have examined originals or
copies of such documents and instruments as we have deemed appropriate,
including the following:
A. The Agreement;
B. The Registration Rights Agreement dated March 9, 2000, between the
Company and Ward (the "Registration Rights Agreement");
C. The Investor Rights Agreement dated March 9, 2000, between the
Company and Ward (the "Investor Rights Agreement");
D. The Convertible Promissory Note and Loan Agreement dated March
9,2000, between the Company and Ward (the "Note");
E. The Certificate of Designations of Series A Convertible Preferred
Stock of Anchor Pacific Underwriters, Inc. dated March 9, 2000 (the
"Certificate of Designations");
LOS ANGELES * ORANGE COUNTY * SAN DIEGO * SAN FRANCISCO
<PAGE>
SHEPPARD, MULLIN, RICHTER & HAMPTON LLP
Ward North America Holding, Inc.
March 10, 2000
Page 2
F. The Certificate of Amendment to the Certificate of
Incorporation of the Company (the "Certificate of Amendment");
G. A copy of the Amended and Restated Certificate of
Incorporation of the Company, as filed with the Secretary of
State of the State of Delaware;
H. A copy of the Bylaws of the Company, certified by an officer
of the Company;
I. A copy of the resolutions of the shareholders of the Company
approving the Certificate of Amendment certified by an officer
of the Company; and
J. A copy of the resolutions of the directors of the Company,
certified by an officer of the Company.
The Agreement, the Registration Rights Agreement, the Investor
Rights Agreement, and the Note are hereinafter collectively referred to as
the "Transaction Documents."
In rendering the opinions set forth below, we have assumed:
a. The genuineness of all signatures (other than those signed by
or on behalf of the Company), the authenticity of all documents submitted
to us as originals, the conformity to the originals of all documents
submitted to us as copies, and the authenticity of all such originals.
b. The due authorization, execution and delivery of the
Transaction Documents by and on behalf of Ward.
c. That the Transaction Documents are the legal, valid and
binding obligation of Ward, and that Ward has all requisite power and
authority and has taken any and all action necessary to be taken by Ward to
execute and deliver the Transaction Documents.
Based upon the foregoing, and subject to the assumptions,
exceptions, qualifications and limitations set forth herein, we are of the
opinion that:
1. The Company is a corporation duly organized, validly existing
<PAGE>
SHEPPARD, MULLIN, RICHTER & HAMPTON LLP
Ward North America Holding, Inc.
March 10, 2000
Page 3
and in good standing under the laws of the State of Delaware. The
Company has the corporate power and authority to own its properties
and assets, to carry on its business as presently conducted, and to
enter into the Transaction Documents and perform its obligations
thereunder, including without limitation the sale and issuance of the
shares of Series A Preferred Stock being purchased by the Ward.
2. Except as disclosed in the schedules to the Agreement, the
Company is duly qualified to do business as a foreign corporation and
is in good standing in each other state in which the nature of its
activities or of its properties owned or leased makes such
qualification necessary, except to the extent that failure to so
qualify would not have a material adverse effect on the Company.
3. Each of the Transaction Documents has been duly authorized by
all necessary corporate action on the part of the Company and has been
duly executed and delivered by the Company.
4. Each of the Transaction Documents is a legal, valid and
binding obligation of the Company enforceable against it in accordance
with its term except as the enforceability thereof may be subject to
or limited by (a) bankruptcy, insolvency, reorganization, arrangement,
moratorium, or other similar laws relating to or affecting rights of
creditors and (b) general equitable principles, regardless of whether
the issue of enforceability is considered in a proceeding in equity or
at law.
5. The authorized capital stock of the Company consists of (a)
16,000,000 shares of Common Stock (the "Common Stock") of which
4,710,055 shares are issued and outstanding, and (b) 2,000,000 shares
of Preferred Stock (the "Preferred Stock"), none of which are
outstanding. All presently outstanding shares of the Company's capital
stock have been duly authorized and validly issued, and are fully paid
and nonassessable. Except as disclosed in or contemplated by the
Agreement or the exhibits and schedules delivered in connection
therewith, there are, to our current actual knowledge, (x) no
outstanding subscriptions, warrants, options, calls, claims,
commitments, convertible securities or other agreements or
arrangements under which the Company is or may be obligated to issue
shares of its capital stock, and (y) no preemptive or similar rights
to subscribe for or to purchase capital stock of the
<PAGE>
SHEPPARD, MULLIN, RICHTER & HAMPTON LLP
Ward North America Holding, Inc.
March 10, 2000
Page 4
Company.
6. Subject to the Delaware Secretary of State accepting for
filing the Certificate of Designations, the shares of Series A
Preferred Stock to be issued to Ward pursuant to the Agreement have
been duly authorized and, when issued and paid for in accordance with
the terms of the Agreement will be validly issued, fully paid and
nonassessable.
7. Based in part upon the representations of Ward contained in
the Agreement the offer, sale, issuance and delivery of the shares of
Series A Preferred Stock to Ward under the circumstances contemplated
by the Agreement are exempt from the registration requirements of the
Securities Act of 1933, as amended (the "Securities Act"), and the
qualification requirements of the California Corporate Securities Law
of 1969, as amended.
8. The execution and delivery of the Transaction Documents and
the performance by the Company of their respective terms (a) will not
breach or result in a violation of the Company's Amended and Restated
Certificate of Incorporation or Bylaws, or any Judgment, order or
decree of any court or arbitrator, known to us, to which the Company
is a party or is subject (b) is neither prohibited by, nor subjects
the Company to, a fine, penalty or similar sanction under, nor will
result in the creation of any lien, charge or encumbrance upon any of
the assets of the Company pursuant to, any statute or regulation of
the type which are typically applicable to transactions similar to
those transactions contemplated by the Agreement, (c) will not
constitute a material breach of the terms, conditions or provisions
of, or constitute a default under, or result in the creation of any
lien, charge or encumbrance upon any of the assets of the Company
pursuant to, any contract, undertaking, indenture or other agreement
or instrument identified in Schedule 2.7 to the Agreement.
9. No consent approval or authorization of, or designation,
declaration or filing with, any governmental authority is required in
connection with the valid execution, delivery and performance by the
Company of the Transaction Documents, other than such consents,
approvals, designations, declarations or filings as have been made or
obtained on or before the date hereof or which are not required to be
made or obtained until after the date hereof.
<PAGE>
SHEPPARD, MULLIN, RICHTER & HAMPTON LLP
Ward North America Holding, Inc.
March 10, 2000
Page 5
10. Except as disclosed in the Agreement or the exhibits and
schedules delivered in connection therewith, there is, to our current
actual knowledge, no action, suit or proceeding pending against the
Company or its properties in any court or before any governmental
authority or agency, or arbitration board or tribunal (a) which seeks
to restrain, enjoin, prevent the consummation of, or otherwise
challenge the Agreement or any of the transactions contemplated
thereby, or (b) which, if adversely determined, could have a material
adverse effect on the Company or its business or properties.
Our opinion set forth above is subject to the qualification that
certain further corporate actions must be taken by the Company to enable it
to perform fully all of its obligations under the Transaction Documents. As
noted above, the Certificate of Designations must be filed with the
Secretary of State of Delaware. The Certificate of Amendment must also be
filed with the Secretary of State of Delaware, which may not be done until
at least 20 days after the Company has distributed an information statement
to its shareholders. Finally, before additional shares of Series A
Preferred Stock can be issued upon the conversion of the Note, the
directors of the Company must adopt resolutions designating additional
shares of such stock, and an appropriate document must be filed with the
Secretary of State of Delaware.
Our opinion set forth above speaks only as of the due hereof and
is based solely upon the existing laws of the State of California, the
General Corporation Law of the State of Delaware (the "DGCL") and the
federal laws of the United States, and we express no opinion, and none
should be inferred, as to any other laws. We are not passing upon the
applicability of the law of any states to the Agreement, and our opinions
above are limited to the substantive state laws of the State of California,
the DGCL and the federal laws of the United States. We disclaim any
obligation to update this opinion letter for events occurring after the
date of this opinion letter.
This opinion letter is provided at your request and solely to you
for use in connection with the transactions provided for in the Agreement.
This opinion letter may not be relied upon by any other person or for any
other purpose, nor may it be quoted from or referred to, or copies
delivered to any other person, without our prior written consent
Very truly yours,
/s/ Sheppard, Mullin, Richter & Hampton LLP
<PAGE>
Exhibit 10.40f
EXHIBIT F
---------
FORM OF INVESTOR RIGHTS AGREEMENT
<PAGE>
INVESTOR RIGHTS AGREEMENT
THIS INVESTOR RIGHTS AGREEMENT ("Agreement") is entered into as of March
10, 2000, by and among Anchor Pacific Underwriters, Inc., a Delaware corporation
(the "Company") and Ward North America Holding, Inc. ("Holder").
WHEREAS, the Company and Holder are parties to that certain Securities
Purchase Agreement dated as of March 9, 2000 (the "Purchase Agreement"),
pursuant to which Holder purchased from the Company convertible debentures (the
"Debentures") and Series A Convertible Preferred Stock (the "Series A Preferred
Stock") and entered into a Convertible Facility Loan (the "Facility Loan").
WHEREAS, in connection with the Company's issuance of the Series A
Preferred Stock and entering into the Facility Loan with Holder pursuant to the
Purchase Agreement, the Company has agreed to enter into this Investor Rights
Agreement as a condition to the Closing thereunder.
NOW THEREFORE, in consideration of the mutual agreements, covenants and
conditions and releases contained herein, the Company and Holder hereby agree as
follows:
1. REGISTRATION RIGHTS
Holder shall have the right to cause the Company to register its
Registrable Securities in accordance with the following provisions:
1.1 Demand Registration.
-------------------
(a) Upon the written request of Holder, the Company will use its best
efforts to cause the prompt Registration under the Securities Act, subject to
the provisions of this Section 1, of all Registrable Securities Holder has
requested the Company to register, and in connection therewith, prepare and file
on such appropriate form as the Company, in its reasonable discretion, shall
determine, a Registration Statement under the Securities Act to effect such
Registration; provided, however, that the Company shall not be required to
-------- -------
effect such Registration unless the market value of the Registrable Securities
to be sold in such Registration shall be estimated to be at least $1,000,000 at
the time of filing such Registration Statement.
With respect to any Registration Statement filed, or to be filed,
pursuant to this Section 1.1(a), if the Company shall furnish to Holder a
certified resolution of its Board of Directors stating that in the Board of
Directors' good faith judgment it would (because of the existence of, or in
anticipation of, any acquisition or financing, merger, sale or assets,
recapitalization or other similar corporate activity, or the unavailability for
reasons beyond the Company's control of any required audited financial
statements, or any other event or condition of similar significance to the
Company) be materially disadvantageous (a "Disadvantageous Condition") to the
Company or its stockholders for such a Registration Statement to be declared
Effective, or to be filed and become Effective, and setting forth the general
reasons for such judgment, the Company shall be entitled to cause such
Registration Statement to be withdrawn and the effectiveness of such
Registration Statement terminated, or, in the event no Registration Statement
has yet been filed, shall be entitled not to file any such Registration
Statement, until such Disadvantageous Condition no longer exists (notice of
which the Company shall promptly deliver to Holder); provided, however, that the
-------- -------
Company may not exercise such right more than one (1) time in any twelve (12)
month period. Upon
<PAGE>
receipt of any such notice of a Disadvantageous Condition, Holder will forthwith
discontinue use of the disclosure document contained in such Registration
Statement and, if so directed by the Company, Holder shall deliver to the
Company all copies, other than permanent file copies then in Holder's
possession, of the disclosure document then covering such Registrable Securities
current at the time of receipt of such notice, and, in the event no Registration
Statement has yet been filed, all drafts of the disclosure document covering
such Registrable Securities. In the event that the Company shall give any notice
of a Disadvantageous Condition, the Company shall at such time as it in good
faith deems appropriate and in any event within 180 days of such notice file a
new Registration Statement covering the Registrable Securities that were covered
by such withdrawn Registration Statement, and such Registration Statement shall
be maintained Effective for such time as may be necessary so that the period of
effectiveness of such new Registration Statement, when aggregated with the
period during which such initial Registration Statement was Effective, shall be
such time as may be otherwise required by Section 1.1(c).
Holder may, at any time prior to the Effective Date of the
Registration Statement relating to such Registration, revoke such request by
providing a written notice to the Company revoking such request; provided,
--------
however, that the Company shall not be obligated to pay the Registration
- -------
Expenses relating to such withdrawn Registration unless Holder agrees to have
such withdrawn Registration deemed to be one of the Registrations with respect
to which the Company bears Registration Expenses.
(b) Number of Registrations; Expenses. The Company shall not be
---------------------------------
obligated to effect more than one (1) Effective Registration of Registrable
Securities pursuant to a request from Holder under this Section 1.1 during the
term of this Agreement. The Company shall pay all Registration Expenses in
connection with such Registration which Holder is entitled to request pursuant
to this Section 1.1. However, Holder shall pay all underwriting discounts and
commissions and transfer taxes, if any, relating to the sale or disposition of
Holder's Registrable Securities pursuant to this Section 1.1. Notwithstanding
any other provisions contained in this Section 1.1, the Company shall not be
required to register any Registrable Securities in connection with a request for
such Registration made in accordance with this Section 1.1 within 180 days
following the effective date of any registration statement (other than a
registration statement on Form S-8) filed by the Company.
(c) Effective Registration Statement. A Registration required
--------------------------------
pursuant to this Section 1.1 shall not be deemed to have been effected unless
the Registration Statement relating thereto (i) has become Effective under the
Securities Act, and (ii) has remained Effective for a period of at least 90 days
(or such shorter period in which all Registrable Securities included in such
Registration have actually been sold thereunder); provided, however, that if an
-------- -------
Effective Registration Statement requested pursuant to this Section 1.1 is
discontinued in connection with a Disadvantageous Condition, such Registration
Statement shall not be included as the Registration which may be requested
pursuant to Section 1.1(b); provided further, that if after a Registration
-------- -------
Statement requested pursuant to this Section 1.1 becomes Effective such
Registration Statement is subject to any stop order, injunction or other order
or requirement of the Commission or other governmental agency or court solely
due to the actions or omissions to act of the Company, such Registration shall
not be the Registration which Holder is entitled to request pursuant to Section
1.1(b).
(d) Selection of Underwriters. If the requested Registration pursuant
-------------------------
to this Section 1.1 is in the form of an underwritten offering, the Company
shall have the right to select the
2
<PAGE>
investment banker and manager or co-managers that will administer the offering,
subject to the reasonable approval of Holder.
(e) Priority in Requested Registrations. If the requested
-----------------------------------
Registration pursuant to this Section 1.1 involves an underwritten offering and
the managing underwriter shall advise the Company that, in its view, the number
of equity securities requested to be included in such Registration exceeds the
largest number of securities which can be sold without having an adverse effect
on such offering, including the price at which such securities can be sold, the
Company will include in such Registration (i) first, Registrable Securities
-----
proposed to be registered by Holder and (ii) second, securities that the Company
------
proposes to issue and sell for its own account and all other securities proposed
to be registered by the holders thereof, pro rata based on the number of
securities proposed to be registered by each such Person; provided, however,
-------- -------
that if in any such underwritten offering the Company includes in such
Registration Statement less than 80% of the Registrable Securities requested to
be included therein by Holder, then such Registration Statement shall not be
treated as the Registration which Holder is entitled to request pursuant to
Section 1.1(b).
1.2 Incidental Registration.
-----------------------
(a) If the Company at any time proposes to register any of its equity
securities under the Securities Act (other than a registration (i) relating to
shares of Common Stock issuable upon exercise of employee stock options or in
connection with any employee benefit or similar plan of the Company, (ii) in
connection with an acquisition by the Company of another company, or (iii)
pursuant to Section 1.1), it shall each such time, subject to the provisions of
Section 1.2(b), give prompt written notice to Holder of its intention to do so
and of Holder's rights under this Section 1.2, at least 30 days prior to the
anticipated filing date of the Registration Statement relating to such
Registration. Such notice shall offer Holder the opportunity to include in such
Registration Statement such number of Registrable Securities as Holder may
request, subject to the provisions of this Section 1.2. Upon the written
request of Holder made within 20 days after the receipt of the Company's notice
(which request shall specify the number of Registrable Securities intended to be
disposed of by Holder and the intended method of disposition thereof), the
Company will use its reasonable efforts to effect the Registration under the
Securities Act of all Registrable Securities which the Company has been so
requested to register by Holder; provided, that (x) if such Registration
--------
involves an underwritten offering, Holder must sell its Registrable Securities
to the underwriter(s) selected by the Company on the same terms and conditions
as apply to the Company; and (y) if, at any time after giving written notice of
its intention to register any securities pursuant to this Section 1.2(a) and
prior to the Effective Date of the Registration Statement filed in connection
with such Registration, the Company shall determine for any reason not to
register such securities for its own account or the account of others, the
Company shall give written notice to Holder and shall thereupon be relieved of
its obligation to register any Registrable Securities in connection with such
Registration without prejudice, however, to rights of Holder under Section 1.1.
If a Registration pursuant to this Section 1.2(a) involves an underwritten
public offering, Holder may elect, in writing prior to the Effective Date of the
Registration Statement filed in connection with such Registration, not to
register such Registrable Securities in connection with such Registration. No
Registration effected under this Section 1.2 shall relieve the Company of its
obligations to effect Registrations upon request under Section 1.3. The Company
shall pay all Registration Expenses in connection with each Registration of
Registrable Securities requested pursuant to this Section 1.2. However, Holder
shall pay all underwriting discounts and commissions and transfer taxes, if any,
relating to the sale or disposition of Holder's Registrable Securities pursuant
to a Registration Statement effected pursuant to this Section 1.2.
3
<PAGE>
(b) Priority in Incidental Registrations. If a Registration pursuant
------------------------------------
to this Section 1.2 involves an underwritten offering and the managing
underwriter advises the Company that, in its good faith view, the number of
equity securities (including all Registrable Securities) which the Company,
Holder and any other persons intend to include in such Registration exceeds the
largest number of securities which can be sold without having an adverse effect
on such offering, including the price at which such Registrable Securities can
be sold, the Company will include in such Registration (i) first, securities
-----
that the Company proposes to issue and sell for its own account, (ii) second,
------
Registrable Securities proposed to be registered by Holder, and (iii) third, any
-----
other securities proposed to be registered by other stockholders of the Company.
1.3 Registrations on Form S-3. In addition to the rights provided Holder
-------------------------
in Sections 1.1 and 1.2, if the Registration of Registrable Securities under the
Securities Act can be effected on Form S-3 (or any similar form promulgated by
the Commission), then upon the written request of Holder, the Company will as
expeditiously as possible, use its best efforts to effect qualification and
registration under the Securities Act on Form S-3 of all or such portion of the
Registrable Securities as Holder shall specify; provided, however, the Company
shall not be required to effect a registration pursuant to this Section 1.3
unless the market value of the Registrable Securities to be sold in any such
Registration shall be estimated to be at least $1,000,000 at the time of filing
such Registration Statement; and provided further that the Company shall not be
required to effect more than one Registration during any twelve (12) month
period. The Company shall pay all Registration Expenses in connection with each
Registration of Registrable Securities requested pursuant to this Section 1.3.
However, Holder shall pay all underwriting discounts and commissions and
transfer taxes, if any, relating to the sale or disposition of Holder's
Registrable Securities pursuant to a Registration Statement effected pursuant to
this Section 1.3.
1.4 Transfer of Registration Rights. The rights of Holder contained in
-------------------------------
Section 1 may be transferred to a transferee (other than a competitor of the
Company); provided that (a) such transferee acquires at least fifty percent
(50%) of Holder's Securities; provided, however, if Holder intends to transfer
such rights to a partner or Affiliate, the restrictions regarding the amount of
shares necessary to effectively transfer such rights will not apply; and (b) the
Company is given written notice by such Holder at the time of or within a
reasonable time after said transfer stating the name and address of said
transferee or assignee and identifying the securities with respect to which such
registration rights are being assigned.
1.5 Holdback Agreements.
-------------------
(a) If any Registration of Registrable Securities shall be in
connection with an underwritten public offering, Holder agrees not to effect any
sale or distribution, including any private placement or any sale pursuant to
Rule 144 or any successor provision, under the Securities Act, of any
Registrable Securities, and not to effect any such sale or distribution of any
other equity security of the Company or of any security convertible into or
exchangeable or exercisable for any equity security of the Company (in each
case, other than as part of such underwritten public offering) during the seven
days prior to, and during the 180 day period which begins on the Effective Date
of such Registration Statement (except as part of such Registration) provided
that Holder has received written notice of such Registration at least two
Business Days prior to the anticipated beginning of the seven day period
referred to above. Notwithstanding the foregoing, the holdback period provided
for by this Section 1.5 shall be applicable for no more than 180 days out of any
365 day period.
4
<PAGE>
(b) If any Registration of Registrable Securities shall be in
connection with an underwritten public offering, (i) the Company and Holder
agree not to effect any sale or distribution of any equity securities of the
Company or of any security convertible into or exchangeable or exercisable for
any equity security of the Company (other than any such sale or distribution of
such securities by the Company in connection with any merger or consolidation by
the Company or any Affiliate or the acquisition by the Company or an Affiliate
of the Company of the capital stock or substantially all the assets of any other
Person or in connection with an employee stock ownership or other benefit plan)
during the seven days prior to, and during the 180 day period which begins on,
the Effective Date of such Registration Statement (except as part of such
Registration) and (ii) the Company agrees that any agreement entered into after
the date hereof pursuant to which the Company issues or agrees to issue any
privately placed equity securities shall contain a provision under which the
holders of such securities agree not to effect any sale or distribution of any
such securities during the period referred to in the foregoing clause (i),
including any sale pursuant to Rule 144 under the Securities Act (except as part
of such Registration, if permitted).
1.6 Registration Procedures. In connection with any offering of
-----------------------
Registrable Securities registered pursuant to this Section 1, the Company shall:
(a) Prepare and file with the Commission as soon as reasonably
practicable following receipt of a request for Registration, a Registration
Statement on any form for which the Company then qualifies or which counsel for
the Company shall deem appropriate, and which form shall be available for the
sale of the Registrable Securities in accordance with the intended methods of
distribution thereof, and use its best efforts to cause such Registration
Statement to become and remain Effective as provided herein, provided that
--------
before filing with the Commission a Registration Statement or disclosure
document constituting part of a Registration Statement or any amendments or
supplements thereto, the Company will (x) furnish to counsel selected by Holder
copies of all such documents proposed to be filed for said counsel's review and
comment and (y) notify Holder of any stop order issued or threatened by the
Commission and take all reasonable actions required to prevent the entry of such
stop order or to remove it if entered.
(b) Prepare and file with the Commission such amendments and
supplements to such Registration Statement and any disclosure document
constituting part of such Registration Statement used in connection therewith as
may be necessary to keep Effective such Registration Statement for a period of
not less than 180 days or such shorter period which will terminate when all
Registrable Securities covered by such Registration Statement have been sold
(but not before the expiration of the 90 day period, if applicable, referred to
in Section 4(3) of the Securities Act and Rule 174, or any successor thereto, if
applicable), and comply with the provisions of the Securities Act with respect
to the disposition of all securities covered by such Registration Statement
during such period in accordance with the intended methods of disposition by the
sellers thereof set forth in such Registration Statement.
(c) Furnish to Holder and each underwriter, if any, of Registrable
Securities covered by such Registration Statement such number of copies of such
Registration Statement, each amendment and supplement thereto (in each case
including all exhibits thereto), and the disclosure document included in such
Registration Statement (including each preliminary disclosure document), in
conformity with the requirements of the Securities Act, and such other documents
as Holder may reasonably request in order to facilitate the disposition of the
Registrable Securities owned by Holder.
5
<PAGE>
(d) Use its best efforts to register or qualify such Registrable
Securities under such other state securities or "blue sky" laws of such
jurisdictions as Holder, and each underwriter, if any, of Registrable Securities
covered by such Registration Statement reasonably requests and do any and all
other acts and things which may be reasonably necessary or advisable to enable
Holder and each underwriter, if any, to consummate the disposition in such
jurisdictions of the Registrable Securities owned by Holder; provided that the
--------
Company will not be required to (x) qualify generally to do business in any
jurisdiction where it would not otherwise be required to qualify but for this
Section 1.6(d), (y) subject itself to taxation in any such jurisdiction where it
would not otherwise be subject to but for this Section 1.6(d) or (z) consent to
general service of process in any such jurisdiction.
(e) Use its best efforts to cause the Registrable Securities covered
by such Registration Statement to be registered with or approved by such other
governmental agencies or authorities as may be necessary by virtue of the
business and operations of the Company to enable Holder to consummate the
disposition of such Registrable Securities.
(f) Immediately notify Holder, at any time when a disclosure document
relating thereto is required to be delivered under the Securities Act, of the
happening of any event which comes to the Company's attention if as a result of
such event the disclosure document included in such Registration Statement
contains any untrue statement of a material fact or omits to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading, and promptly prepare and furnish to Holder a supplement or
amendment to such disclosure document so that, as thereafter delivered to
Holder, such disclosure document will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading.
(g) Use its best efforts to cause all such Registrable Securities to
be listed on a national securities exchange (including Nasdaq National Market)
or, if not available, or such other securities exchange on which similar
securities issued by the Company may then be listed, and enter into such
customary agreements including a listing application and indemnification
agreement in customary form, and to provide a transfer agent and registrar for
such Registrable Securities covered by such Registration Statement no later than
the Effective Date of such Registration Statement.
(h) Enter into such customary agreements (including an underwriting
agreement in customary form) and take all such other actions as Holder or the
underwriters retained by Holder, if any, reasonably request in order to expedite
or facilitate the disposition of such Registrable Securities, including
customary representations, warranties, indemnities and agreements.
(i) Make available for inspection by Holder, any underwriter
participating in any disposition pursuant to such Registration Statement, and
any attorney, accountant or other agent retained by Holder or underwriter
(collectively, the "Inspectors"), all financial and other records, pertinent
corporate documents and properties of the Company (collectively, "Records"), if
any, as shall be reasonably necessary to enable them to exercise their due
diligence responsibility, and cause the Company's and its Affiliates' officers,
directors and employees to supply all information and respond to all inquiries
reasonably requested by any such Inspector in connection with such Registration
Statement.
6
<PAGE>
(j) Use its best efforts to obtain a "cold comfort" letter from the
Company's independent public accountants in customary form and covering such
matters of the type customarily covered by such "cold comfort" letters as Holder
reasonably requests.
(k) Furnish, at the request of Holder, on the date that Registrable
Securities are delivered to the underwriters for sale in connection with a
Registration, if such securities are being sold through underwriters, or on the
Effective Date of the Registration Statement, (i) an opinion, dated such date,
of the counsel representing the Company, in form and substance as is customarily
given to underwriters in an underwritten public offering, addressed to the
underwriters, if any, and to Holder, and (ii) to the extent permitted under the
rules of the AICPA, a letter, dated such date, from the independent accountants
of the Company, in form and substance as is customarily given by independent
accountants to underwriters in an underwritten public offering, addressed to the
underwriters, if any, and to Holder.
(l) Otherwise use its best efforts to comply with all applicable
rules and regulations of the Commission, and make available to Holder, as soon
as reasonably practicable, an earnings statement covering a period of at least
twelve months, beginning with the first month after the Effective Date of the
Registration Statement, which earnings statement shall satisfy the provisions of
Section 11(a) of the Securities Act and Rule 158 thereunder.
It shall be a condition precedent to the obligation of the Company to
take any action with respect to Securities of Holder that Holder shall furnish
to the Company such information regarding the Securities held by Holder and the
intended method of disposition thereof as the Company shall reasonably request
and as shall be required in connection with the action taken by the Company.
Holder agrees that, upon receipt of any notice from the Company of the
happening of any event of the kind described in Section 1.6(f), Holder will
forthwith discontinue disposition of Registrable Securities until Holder's
receipt of the copies of the supplemented or amended disclosure document
contemplated by Section 1.6(f), and, if so directed by the Company, Holder will
deliver to the Company (at the Company's expense) all copies (including, without
limitation, any and all drafts), other than permanent file copies, then in
Holder's possession, of the disclosure document covering such Registrable
Securities. In the event the Company shall give any such notice, the period
mentioned in Section 1.6(b) shall be extended by the number of days during the
period from and including the date of the giving of such notice pursuant to
Section 1.6(f) to and including the date when Holder shall have received the
copies of the supplemented or amended disclosure document contemplated by
Section 1.6(f).
1.7 Indemnification.
---------------
(a) Indemnification by the Company. In the event of any Registration
------------------------------
of any Securities of the Company under the Securities Act pursuant to this
Agreement, the Company will indemnify and hold harmless, to the full extent
permitted by law, Holder, its respective directors and officers, general
partners, limited partners and managing directors, each other person who
participates as an underwriter in the offering or sale of such Securities and
each other person, if any, who controls, is controlled by or is under common
control with Holder or any such underwriter within the meaning of the Securities
Act (and directors, officers, controlling persons, partners and managing
directors of any of the foregoing), against any and all losses, claims, damages
or liabilities, joint or several, and expenses (including any amounts paid in
any settlement effected with the
7
<PAGE>
Company's consent, which consent will not be unreasonably withheld) to which
Holder, any such director or officer or general or limited partner or managing
director or any such underwriter or controlling person may become subject under
the Securities Act, state securities or "blue sky" laws, common law or
otherwise, insofar as such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) or expenses arise out of or are based upon (i)
any untrue statement or alleged untrue statement of any material fact contained,
on the Effective Date thereof, in any Registration Statement under which such
Securities were registered under the Securities Act, any preliminary, final or
summary disclosure document contained therein, or any amendment or supplement
thereto, (ii) 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 (iii) any violation or alleged violation by the Company of any
federal, state or common law rule or regulation applicable to the Company and
relating to any action or inaction by the Company in connection with any such
Registration. The Company shall reimburse Holder and each such director,
officer, general partner, limited partner, managing director or underwriter and
controlling person for any legal or any other expenses reasonably incurred by
them in connection with investigating or defending such loss, claim, liability,
action or proceeding. The Company shall not be liable under this Section 1.7 in
any case to the extent that any loss, claim, damage, liability (or action or
proceeding in respect thereof) or expense arises out of or is based upon any
untrue statement or alleged untrue statement or omission or alleged omission
made in such Registration Statement or amendment or supplement thereto or in any
such preliminary, final or summary disclosure document in reliance upon and in
conformity with written information furnished to the Company through an
instrument duly executed by Holder in its capacity as a holder of Registrable
Securities in the Company or any such director, officer, general or limited
partner, managing director or underwriter specifically stating that it is for
use in the preparation thereof; and that the Company shall not be liable to any
person who participates as an underwriter in the offering or sale of Registrable
Securities, if any, or any other person, if any, who controls such underwriter
within the meaning of the Securities Act, pursuant to this Section with respect
to any preliminary disclosure document or the final disclosure document or the
final disclosure document as amended or supplemented as the case may be, to the
extent that any such loss, claim, damage or liability of such underwriter or
controlling person results from the fact that such underwriter sold Registrable
Securities to a person to whom there was not sent or given, at or prior to the
written confirmation of such sale, a copy of the final disclosure document or of
the final disclosure document as then amended or supplemented, whichever is most
recent, if the Company has previously furnished copies thereof to such
underwriter and such final disclosure document, as then amended or supplemented,
had corrected any such misstatement or omission. The indemnity provided for
herein shall remain in full force and effect regardless of any investigation
made by or on behalf of Holder or any such director, officer, general partner,
limited partner, managing director, underwriter or controlling person and shall
survive the transfer of such securities by such holder.
(b) Indemnification by Holder. The Company may require, as a
-------------------------
condition to including any Registrable Securities in any Registration Statement
filed in accordance with the provisions hereof, that the Company shall have
received an undertaking reasonably satisfactory to it from Holder, to indemnify
and hold harmless (in the same manner and to the same extent as set forth in
paragraph (a) above) the Company and its directors, officers, controlling
persons and all other prospective sellers and their respective directors,
officers, general and limited partners, managing directors, and their respective
controlling persons with respect to any untrue statement or alleged untrue
statement in or omission or alleged omission from such Registration Statement,
any preliminary, final or summary disclosure document contained therein, or any
amendment or supplement, if such untrue statement or alleged untrue statement or
omission or alleged omission was made in reliance upon and in conformity with
written information furnished to the Company or its
8
<PAGE>
representatives through an instrument duly executed by or on behalf of Holder
specifically stating that it is for use in the preparation of such Registration
Statement, preliminary, final or summary disclosure document or amendment or
supplement, or a document incorporated by reference into any of the foregoing.
Such indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of the Company or Holder, underwriters or any
of their respective directors, officers, general or limited partners, managing
directors or controlling persons and shall survive the transfer of such
Securities by Holder, provided, however, that Holder shall not be liable in the
-------- -------
aggregate for any amounts exceeding the product derived from multiplying the
sale price per Registrable Security times the number of Registrable Securities
sold pursuant to such Registration Statement or disclosure document by such
holder.
(c) Notices of Claims, etc. Promptly after receipt by an indemnified
----------------------
party hereunder of written notice of the commencement of any action or
proceeding with respect to which a claim for indemnification may be made
pursuant to this Section 1.7, such indemnified party will, if a claim in respect
thereof is to be made against an indemnifying party, promptly give written
notice to the indemnifying party of the commencement of such action, provided
--------
that the failure of any indemnified party to give notice as provided herein
shall not relieve the indemnifying party of its obligations under the preceding
subsections of this Section, except to the extent that the indemnifying party is
actually materially prejudiced by such failure to give notice. In case any such
action is brought against an indemnified party, unless in such indemnified
party's reasonable judgment a conflict of interest between such indemnified and
indemnifying parties may exist in respect of such claim, the indemnifying party
will be entitled to participate in and, jointly with any other indemnifying
party similarly notified, to assume the defense thereof, to the extent that it
may wish, with counsel reasonably satisfactory to such indemnified party, and
after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party will not be
liable to such indemnified party for any legal or other expenses subsequently
incurred by the latter in connection with the defense thereof, unless in such
indemnified party's reasonable judgment a conflict of interest between such
indemnified and indemnifying parties arises in respect of such claim after the
assumption of the defense thereof, and the indemnifying party will not be
subject to any liability for any settlement made without its consent (which
consent shall not be unreasonably withheld). No indemnifying party will 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. An indemnifying party who is not entitled to, or elects not to,
assume the defense of a claim will not be obligated to pay the fees and expenses
of more than one counsel in any single jurisdiction for all parties indemnified
by such indemnifying party with respect to such claim, unless in the reasonable
judgment of any indemnified party a conflict of interest may exist between such
indemnified party and any other of such indemnified parties with respect to such
claim, in which event the indemnifying party shall be obligated to pay the fees
and expenses of such additional counsel or counsels as may be reasonably
necessary. Notwithstanding anything to the contrary set forth herein, and
without limiting any of the rights set forth above, in any event each party will
have the right to retain, at its own expense, counsel with respect to the
defense of a claim.
(d) Other Indemnification. Indemnification similar to that specified
---------------------
in the preceding subsections of this Section 1.7 (with appropriate
modifications) shall be given by the Company and Holder with respect to any
required Registration or other qualification of securities under any federal or
state law or regulation or governmental authority other than the Securities Act.
9
<PAGE>
(e) Contribution. In order to provide for just and equitable
------------
contribution in circumstances in which the indemnity agreement provided for in
this Section is for any reason held to be unenforceable although applicable in
accordance with its terms, the Company, Holder and the underwriters shall
contribute to the aggregate losses, liabilities, claims, damages and expenses of
the nature contemplated by such indemnity agreement incurred by the Company,
Holder and the underwriters, in such proportions that the underwriters are
responsible for that portion represented by the percentage that the underwriting
discount appearing in the disclosure document bears to the offering price
appearing therein and the Company and Holder are responsible for the balance;
provided, however, that no person guilty of fraudulent misrepresentation (within
- -------- -------
the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. As between the Company and Holder, such parties shall
contribute to the aggregate losses, liabilities, claims, damages and expenses of
the nature contemplated by such indemnity agreement in such proportion as shall
be appropriate to reflect (x) the relative benefits received by the Company, on
the one hand, and Holder, on the other hand, from the offering of the
Registrable Securities and any other securities included in such offering, and
(y) the relative fault of the Company, on the one hand, and Holder, on the other
hand, with respect to the statements or omissions which resulted in such loss,
liability, claim, damage or expense, or action in respect thereof, as well as
any other relevant equitable considerations. The relative benefits received by
the Company, on the one hand, and Holder, on the other hand, with respect to
such offering shall be deemed to be in the same proportion as the sum of the
total purchase price paid to the Company in respect of the Registrable
Securities plus the total net proceeds received by the Company from the offering
of any securities included in such offering (before deducting expenses) bears to
the amount by which the total net proceeds from the offering of Registrable
Securities (before deducting expenses) received by Holder with respect to such
offering exceeds the purchase price paid by Holder to the Company in respect of
the Registrable Securities, and in each case the net proceeds received from such
offering shall be determined as set forth in the disclosure document. The
relative fault shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or omission or alleged
omission to state a material fact relates to information supplied by the Company
or Holder, the intent of the parties and their relative knowledge, access to
information and opportunity to correct or prevent such untrue statement or
omission. The Company and Holder agree that it would not be just and equitable
if contribution pursuant to this Section were to be determined by pro rata
allocation or by any other method of allocation which does not take into account
the equitable considerations referred to herein. Notwithstanding anything to
the contrary contained herein, the Company and Holder agree that any
contribution required to be made by Holder pursuant to this Section 1.7(e) shall
not exceed the net proceeds from the offering of Registrable Securities (before
deducting expenses) received by Holder with respect to such offering. For
purposes of this Section, each Person, if any, who controls a holder of
Registrable Securities or an underwriter within the meaning of Section 15 of the
Securities Act shall have the same rights to contribution as Holder or
underwriter, and each director of the Company, each officer of the Company who
signed the Registration Statement, and each person, if any, who controls the
Company within the meaning of Section 15 of the Securities Act shall have the
same rights to contribution as the Company.
1.8 Rule 144. At all times hereafter, the Company agrees that it will
--------
file in a timely manner all reports required to be filed by it pursuant to the
Exchange Act, and, if at any time the Company is not required to file such
reports, it will make available to the public, to the extent required to permit
the sale of shares by any holder of Registrable Securities pursuant to Rule 144
under the Securities Act, as such Rule may be amended from time to time, current
information about itself and its activities as contemplated by Rule 144.
Notwithstanding the foregoing, the Company
10
<PAGE>
may deregister any class of its equity securities under Section 12 of the
Exchange Act or suspend its duty to file reports with respect to any class of
its securities pursuant to Section 15(d) of the Exchange Act if it is then
permitted to do so pursuant to the Exchange Act and the rules and regulations
thereunder.
2. RIGHT OF FIRST REFUSAL
2.1 Right of First Refusal. If at any time the Company or any Subsidiary
----------------------
desires to issue, sell or exchange, agree or obligate itself to issue, sell or
exchange, or reserve or set aside for issuance, sale or exchange, any debt
securities, shares of preferred stock or shares of Common Stock or any Common
Stock Equivalents or capital stock of any Subsidiary in a privately-negotiated
transaction pursuant to a bona fide offer from a third party or through its
agent (the "Proposed Buyer"), the Company shall first submit a written offer
(the "Offer") to sell such securities (the "Offered Securities") to Holder on
terms and conditions, including price, not less favorable to Holder than those
on which the Company proposes to sell such Offered Securities to the Proposed
Buyer. Holder shall have the absolute right to purchase that number of the
Offered Securities (its "Pro Rata Fraction") as shall be equal to the number of
Offered Securities multiplied by a fraction, the numerator of which shall be the
number of shares of Fully Diluted Outstanding Common Stock then owned by Holder
and the denominator of which shall be the aggregate number of shares of Fully
Diluted Outstanding Common Stock.
2.2 The Offer. The Offer shall disclose the identity of the Proposed
---------
Buyer, the number and class of Offered Securities proposed to be sold, the terms
and conditions, including price, of the proposed sale, and any other material
facts relating to the proposed sale. The Offer shall further state that Holder
may acquire, in accordance with the provisions of this Section 2, its Pro Rata
Fraction of the Offered Securities for the price indicated in the Offer and upon
the other terms and conditions, including deferred or installment payment (if
applicable), set forth therein.
2.3 Notice of Acceptance. If Holder desires to purchase its Pro Rata
--------------------
Fraction of the Offered Securities, Holder shall deliver a written notice of its
election to purchase such shares to the Company, which notice shall state the
number of Offered Securities Holder desires to purchase and shall be delivered
in person or mailed to the Company within 30 days of the date of receipt by
Holder of the Offer. Such notice shall, when taken in conjunction with the
Offer, be deemed to constitute a valid, legally binding and enforceable
agreement for the sale to and purchase by Holder of that number of Offered
Securities as determined by its Pro Rata Fraction, on the terms of the Offer.
2.4 Closing. The closing of the sale of Offered Securities to Holder
-------
pursuant to this Section 2 shall be made at the offices of the Company on such
date as may be agreed by Holder and the Company, but no later than the 60th day
following the date the Offer is received by Holder. Such sale shall be effected
by the Company's delivery to Holder of a certificate(s) issued in the name of
Holder evidencing the Offered Securities to be purchased by Holder, duly
endorsed for transfer, against payment to the Company of the purchase price by
Holder. The exercise or nonexercise by Holder of its first refusal rights
pursuant to this Section 2 shall be without prejudice to its first refusal
rights under this Section 2 with respect to any future sale of securities.
2.5 Sales to Proposed Transferee. The Offered Securities not so purchased
----------------------------
may be sold at any time within 120 days after the date the Offer was made. Any
such sale shall be to the Proposed Buyer, at not less than the price and upon
other terms and conditions, if any, not more favorable to the transferee than
those specified in the Offer. Any Offered Securities not sold within
11
<PAGE>
the permitted time period shall continue to be subject to the requirements of a
prior Offer pursuant to this Section 2.
2.6 Exception. The first refusal rights of Holder under this Section 2
---------
shall not apply to the issuance of the following securities ("Excluded
Securities"): (a) shares of Common Stock, or options exercisable therefor,
granted to directors, officers or employees of or consultants to the Company or
any Subsidiary pursuant to any qualified or non-qualified stock option plan or
agreement, employee stock ownership plan, stock purchase agreement, stock plan,
stock restriction agreement, or consulting agreement or such other options,
arrangements, agreements or plans approved by the compensation committee of the
Board of Directors of the Company; (b) securities issued solely in consideration
for the acquisition (whether by merger or otherwise) by the Company of all or
substantially all of the capital stock or assets of any other entity; (c) shares
of Common Stock issuable upon the exercise of the warrants or options
outstanding as of the date hereof; (d) shares of Common Stock issuable upon
conversion of shares of preferred stock, convertible debentures, convertible
notes or any other convertible securities issued by the Company ("Convertible
Securities") provided that such Convertible Securities were outstanding as of
the date hereof, or were issued in compliance with the provision of this Section
2; and (e) securities issued in connection with the provision of senior debt or
lease financing to the Company by any bank or other financial institution.
3. AFFIRMATIVE COVENANTS OF THE COMPANY
3.1 Inspection Rights. The Company shall permit during normal business
-----------------
hours, upon reasonable request and reasonable notice, Holder or any employees,
agents or representatives thereof, to examine and make copies of and extracts
from the records and books of account of, and visit and inspect the properties,
assets, operations and business of the Company and any Subsidiary, and to
discuss the affairs, finances and accounts of the Company and any Subsidiary
with any of its officers, consultants, directors, attorneys or independent
accountants.
3.2 Budget Approval. At least 30 days prior to the commencement of each
---------------
fiscal year, the Company shall prepare and submit to, and obtain in respect
thereof the approval of the majority of the members of, the Board of Directors
of the Company (the "Board"), a business plan and monthly operating budget in
detail for each fiscal year, monthly operating expenses and profit and loss
projections and cash flow projections and a capital expenditure budget for the
fiscal year for the Company and its Subsidiaries.
3.3 Financings. The Company shall promptly, fully and in detail, inform
----------
all of the members of the Board of any discussions, offers or contracts relating
to possible financings of any material nature for the Company or any Subsidiary,
whether initiated by the Company, any Subsidiary or any other Person.
3.4 Meetings of Directors. The Company shall hold meetings of the Board
---------------------
on not less than a quarterly basis.
3.5 Bylaws; Meetings; Insurance and Indemnification.
-----------------------------------------------
(a) The Company shall use its best efforts to at all times cause its
Bylaws to provide that (i) any two directors shall have the right to call a
meeting of the Board and, (ii) any
12
<PAGE>
holder or holders of at least 50% of the outstanding shares of Series A
Preferred Stock shall have the right to call a meeting of stockholders.
(b) The Company shall obtain and cause to be maintained in effect,
with financially sound insurers, a policy of directors' and officers' liability
insurance covering all Directors whom are members of the Board (and their
respective successors) in an amount of at least $5,000,000 or such other amount
the Board of Directors shall specify, unless the Board determines that such
coverage is not warranted or is not obtainable at a reasonable cost.
(c) The Company shall cause the Certificate of Incorporation, By-laws
and other organizational documents of the Company and each of its Subsidiaries
at all times, to the fullest extent permitted by law, to provide for
indemnification of, advancement of expenses to, and limitation of the personal
liability of its Board against all losses and damages other than such losses and
damages which arise directly or indirectly out of gross negligence or willful
misconduct, to the fullest extent permitted by law.
(d) Each of the directors of the Company is an intended third party
beneficiary of the obligations of the Company pursuant to this Section 3.5, and
the obligations of the Company pursuant to this Section 3.5 shall be enforceable
by the directors.
3.6 Corporate Existence. The Company shall maintain, and cause each of
-------------------
the Subsidiaries to maintain, their respective corporate existence, intellectual
property rights, other rights, licenses, permits, and franchises in full force
and effect to the extent appropriate in accordance with good business practice.
3.7 Properties; Business; Insurance. The Company shall maintain, and
-------------------------------
cause each of the Subsidiaries, to maintain as to their respective properties
and business, with financially sound and reputable insurers, insurance against
such casualties and contingencies and of such types and in such amounts as is
customary for companies of a similar size and financial condition similarly
situated within the same industry.
3.8 Expenses of Directors. The Company shall promptly reimburse in full
---------------------
each director or Representative of the Company (as defined below) who is not an
officer or employee of the Company for all of his or her reasonable out-of-
pocket expenses incurred in attending each meeting of the Board or any committee
thereof.
3.9 Compliance with Laws. The Company shall comply, and cause each
--------------------
Subsidiary to comply, with all applicable laws, rules, regulations and orders,
noncompliance with which could have a material adverse effect on its business,
assets, operations, prospects or condition, financial or otherwise.
3.10 Keeping of Records and Books of Account. The Company shall keep, and
---------------------------------------
cause each Subsidiary to keep, adequate records and books of account, in which
complete entries will be made in accordance with GAAP consistently applied,
reflecting all financial transactions of the Company and each Subsidiary, and in
which, for each fiscal year, all proper reserves for depreciation, depletion,
obsolescence, amortization taxes, bad debts and other purposes in connection
with its business shall be made.
13
<PAGE>
3.11 Size of Board; Holders of Series A Preferred Stock Right to Elect
-----------------------------------------------------------------
Directors. The Company shall take all appropriate actions to (i) fix and
- ---------
maintain the Board at seven (7) persons within its existing range of seven (7)
and thirteen (13) persons; (ii) adopt and approve a Certificate of Designations
of the Series A Convertible Preferred Stock which shall provide that the Series
A Preferred Stock shall be entitled to elect five (5) directors to the Board of
Directors and, so long as shares of Series A Preferred Stock remain outstanding
the holders of the Series A Preferred shall elect a majority of the Company's
Board of Directors voting separately as a single class.
In lieu of selecting any one, or all, of the members of the Board to which
Holder is entitled pursuant to this Section, Holder may appoint a representative
(a "Representative") to attend all meetings of the Board. Holder acknowledges
and agrees that the Company's management will have the right to exclude any such
Representative from all or portions of meetings of the Board, or omit to provide
such Representative with certain information, if the Company's management
believes it is necessary in order to preserve the attorney-client privilege, or
fulfill the Company's obligations with respect to confidential or proprietary
information of third parties, or if such meeting or information involves matters
where a director would customarily not participate in a meeting or be provided
such information. In addition, Holder acknowledges and agrees that any such
Representative will maintain the confidentiality of all information obtained
through such Representative's position, except to the extent that (i) such
information is already in such Representative's possession, (ii) such
information becomes public knowledge other than as a result of such
Representative's actions or inactions, (iii) such Representative rightfully
obtains such information subsequently from a third party, (iv) such
Representative develops such information independently and without use of the
information provided by the Company or (v) such information is approved in
writing for release by the Company.
3.12 Reporting Requirements. The Company shall furnish the following to
----------------------
Holder:
(a) SEC Reports. So long as the Company is subject to the reporting
------------
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), it will furnish to Holder, at the same time the Company files any
document with the Commission, copies of all such documents, including, but not
limited to, its reports on Form 10-K, Form 10-Q, Form 8-K or any successor form
or forms;
(b) Monthly Reports. As soon as available and in any event within 20
---------------
days after the end of each month, consolidated balance sheets of the Company and
the Subsidiaries as of the end of such month and consolidated statements of
income and statements of cash flows and changes in stockholders' equity of the
Company and the Subsidiaries for such month and for the period commencing at the
end of the previous fiscal year and ending with the end of such month, setting
forth in each case in comparative form the corresponding figures for the
corresponding period of the preceding fiscal year, and including comparisons to
the budget or business plan and an analysis of the variances from the budget or
plan, prepared in accordance with GAAP consistently applied (other than notes
and year end adjustments);
(c) Quarterly Reports: As soon as available and in any event within
-----------------
45 days after the end of each calendar quarter, consolidated balance sheets of
the Company and the Subsidiaries as of the end of the period and consolidated
statements of income and statements of cash flows and changes in stockholders'
equity of the Company and the Subsidiaries for such quarterly period and for the
period commencing at the end of the previous fiscal year and ending with the end
of such quarterly period, setting forth in each case in comparative form the
corresponding figures for the
14
<PAGE>
corresponding period of the preceding fiscal year, and including comparisons to
the budget or business plan and an analysis of the variances from the budget or
plan, prepared in accordance with GAAP consistently applied;
(d) Annual Reports: As soon as available and in any event within 90
--------------
days after the end of each fiscal year of the Company, a copy of the annual
audit report for such year for the Company and the Subsidiaries, including
therein consolidated balance sheets of the Company and the Subsidiaries as of
the end of such fiscal year and consolidated statements of income and statements
of cash flows and changes in stockholders' equity of the Company and the
Subsidiaries for such fiscal year, setting forth in each case in comparative
form the corresponding figures for the preceding fiscal year, all such
consolidated statements to be duly certified by an officer of the Company and an
independent public accountant of recognized national standing approved by the
Board or a committee of the Board;
(e) Accountant's Letters: Within 10 days after receipt, copies of
--------------------
all accountant's letters, reviews and reports to management; and
(f) Budgets and Operating Plan: As soon as available and in any
--------------------------
event at least 30 days before the beginning of each fiscal year of the Company,
a business plan and monthly operating budgets for the forthcoming fiscal year.
3.13 Termination of Obligations. The Company's obligations under Article
--------------------------
3 shall terminate at such time as the Holder holds less than 50% of the Fully
Diluted Outstanding Common Stock.
4. DEFINITIONS AND ACCOUNTING TERMS
4.1 Certain Defined Terms. As used in this Agreement, the following terms
---------------------
shall have the following meanings:
"Affiliate" shall mean, with respect to any Person, any other Person that
directly or indirectly through one or more intermediaries controls or is
controlled by or is under common control with such Person. For the purposes of
this definition, "control," when used with respect to any particular Person,
means the power to direct the management and policies of such Person, directly
or indirectly, whether through the ownership of voting securities, by contract
or otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing. For purposes of this Agreement, Holder shall not
be deemed an Affiliate of the Company or any Subsidiary.
"Agreement" shall mean this Investor Rights Agreement, including all
amendments, modifications or supplements hereto.
"Business Day" shall mean any day except a Saturday, Sunday or other day on
which commercial banks in the State of California are authorized by law or
executive order to close
"Commission" shall mean the Securities and Exchange Commission or any other
federal agency then administering the Securities Act or Exchange Act.
"Common Stock" shall mean (a) the Company's Common Stock, $.02 par value,
as authorized on the date of this Agreement, (b) any other capital stock of any
class or classes (however designated) of the Company, authorized on or after the
date hereof, the holders of which shall have
15
<PAGE>
the right, without limitation as to amount, either to all or to a share of the
balance of current dividends and liquidating dividends after the payment of
dividends and distributions on any shares entitled to preference, and the
holders of which shall ordinarily, in the absence of contingencies or in the
absence of any provision to the contrary in the Articles of Incorporation of the
Company (or amendment thereto), be entitled to vote for the election of a
majority of directors of the Company (even though the right so to vote has been
suspended by the happening of such a contingency or provision), and (c) any
other securities into which or for which any of the securities described in (a)
or (b) may be converted or exchanged pursuant to a plan of recapitalization,
reorganization, merger, sale of assets or otherwise.
"Common Stock Equivalents" shall mean all rights, options, warrants or
convertible or exchangeable securities entitling the holders thereof to
subscribe for or purchase or otherwise acquire shares of Common Stock,
including, but not limited to, shares of the Series A Preferred Stock.
"Effective" shall mean that all Registration requirements under the
Securities Act with respect to a Registration Statement have been satisfied and
that the Commission has officially approved the public distribution or
circulation of the Registration Statement in connection with a public offering
of Registrable Securities.
"Effective Date" shall mean the date on which a Registration Statement is
declared to be Effective by the Commission.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated pursuant thereto.
"Fully Diluted Outstanding Common Stock" shall mean, at the time of the
determination, the number of issued shares of Common Stock actually outstanding
(excluding any shares of the Company held by the Company as "treasury stock") at
such time together with the number of shares of Common Stock which could be
acquired at such time pursuant to all Common Stock Equivalents as if such Common
Stock Equivalents have been fully exercised or converted and the full amount of
all Common Stock obtained in connection therewith has been obtained.
"Inspectors" shall have the meaning given such term in Section 1.6(i).
"NASD" shall mean the National Association of Securities Dealers, Inc.
"Nasdaq" shall mean the National Association of Securities Dealers
Automated Quotations System.
"Offer" shall have the meaning assigned to such term in Section 2.1.
"Offered Securities" shall have the meaning assigned to that term in
Section 2.1.
"Person" shall mean an individual, corporation, partnership, joint venture,
trust, university, or unincorporated organization, or a government or any agency
or political subdivision thereof.
"Pro Rata Fraction" shall have the meaning assigned to that term in Section
2.1.
"Proposed Buyer" shall have the meaning assigned to that term in Section
2.1.
16
<PAGE>
"Records" shall have the meaning assigned to that term in Section 1.6(i).
"Registrable Securities" shall mean (a) shares of Common Stock of the
Company issued or issuable upon conversion of the shares of Series A Preferred
Stock held by Holder as of the date hereof; (b) shares of Common Stock of the
Company issued or issuable upon conversion of the Debentures held by Holder as
of the date hereof; (c) shares of Common Stock of the Company issued or issuable
upon conversion of the Facility Loan held by Holder as of the date hereof; (d)
shares of Common Stock of the Company issued or issuable upon exercise of the
Debenture Warrant held by Holder as of the date hereof; and (e) any other shares
of Common Stock of the Company issued or issuable as (or issuable upon the
conversion or exercise of any warrant, right, or other security that is issued
as) a dividend or other distribution with respect to, or in exchange or in
replacement of, such Registrable Securities; provided, however, that such
-------- -------
securities shall cease to be Registrable Securities if and when (x) a
Registration Statement with respect to the disposition of such securities shall
have become Effective under the Securities Act and such securities shall have
been disposed of pursuant to such Effective Registration Statement, (y) such
securities shall have been otherwise transferred, if new certificates or other
evidences of ownership for such securities not bearing a legend restricting
further transfer and not subject to any stop transfer order or other
restrictions on transfer shall have been delivered by the Company, and
subsequent disposition of such securities shall not require Registration or
qualification of such securities under the Securities Act, or (z) such
securities may be resold by Holder in any three-month period pursuant to Rule
144 under the Securities Act.
"Registration" shall mean the satisfaction by the Company of all applicable
requirements under the Securities Act as evidenced by the official approval of
the Commission in connection with a public offering by the Company of
Registrable Securities.
"Registration Expenses" shall mean all expenses incident to the Company's
performance of or compliance with its obligations under Section 1 of this
Agreement, including, without limitation, all Commission and stock exchange or
NASD registration and filing fees and expenses, fees and expenses of compliance
with applicable state securities or "blue sky" laws (including, without
limitation, reasonable fees and disbursements of counsel for the underwriters in
connection with "blue sky" qualifications of the Registrable Securities),
printing expenses, messenger and delivery expenses, the fees and expenses
incurred in connection with the listing of the securities to be registered in a
public offering on each securities exchange or national market system on which
such securities are to be so listed and, following any such registered offering,
the fees and expenses incurred in connection with the listing of such securities
to be registered on each securities exchange or national market system on which
such securities are listed, fees and disbursements of counsel for the Company
and all independent certified public accountants (including the expenses of any
annual audit and "cold comfort" letters required by or incident to such
performance and compliance), the fees and disbursements of underwriters
customarily paid by issuers or sellers of securities (including the fees and
expenses of any "qualified independent underwriter" required by the NASD), the
reasonable fees of one counsel retained in connection with each such
registration under Section 1 by the holders of a majority of the securities
being registered, the reasonable fees and expenses of any special experts
retained by the Company in connection with such registration, and fees and
expenses of other persons retained by the Company (but not including any
underwriting discounts or commissions or transfer taxes, if any, attributable to
the sale of Registrable Securities by holders of such Registrable Securities).
"Registration Statement" shall mean any disclosure document that the
Company is required to file under the Securities Act in connection with a public
offering of Registrable Securities.
17
<PAGE>
"Related Party" shall mean, other than Holder or any of its Affiliates, any
officer, director or beneficial holder of shares of capital stock of the
Company, the Company or any Subsidiary, any spouse, former spouse, child,
Company, Company of a spouse, sibling or grandchild of any such officer,
director or beneficial holder of the Company, the Company or any Subsidiary, and
any Affiliate or Associate of any of the foregoing persons.
"Securities" shall mean collectively the shares of Series A Preferred
Stock, the Debentures, the Facility Loan and the Warrant held by Holder and the
shares of Series A Preferred Stock and Common Stock issuable in respect thereof.
"Securities Act" shall mean the Securities Act of 1933, as amended from
time to time or any other federal act, rule or regulation requiring Registration
with any federal agency in connection with a public offering of Registrable
Securities.
"Sell" as to any Stock, shall mean to sell, or in any other way directly or
indirectly transfer (including by operation of law, by merger or consolidation,
or sale of securities of a holding company), assign, distribute or otherwise
dispose of, such Stock in a bona fide transaction for value; and the terms
"Sale" and "Sold" shall have meanings correlative to the foregoing.
"Stock" means (i) any shares of Common Stock and (ii) any Common Stock
Equivalents (including, without limitation, the Common Stock issuable upon
conversion, exercise or exchange thereof), in each case, whether owned on the
date hereof or acquired hereafter.
"Stockholder" means Holder.
"Subsidiary" shall mean any corporation or other entity of which at least a
majority of the securities or other ownership interest having ordinary voting
power (absolutely or contingently) for the election of directors or other
persons performing similar functions are at the time owned directly or
indirectly by the Company and/or any of its other Subsidiaries.
5. MISCELLANEOUS
5.1 No Waiver; Cumulative Remedies. No failure or delay on the part of
------------------------------
any party to this Agreement in exercising any right, power or remedy hereunder
shall operate as a waiver thereof; nor shall any single or partial exercise of
any such right, power or remedy preclude any other or further exercise thereof
or the exercise of any other right, power or remedy hereunder. The remedies
herein provided are cumulative and not exclusive of any remedies provided by
law.
5.2 Amendments, Waivers and Consents. Any provision in this Agreement to
--------------------------------
the contrary notwithstanding, and except as hereinafter provided, changes in,
termination or amendments of or additions to this Agreement may be made, and
compliance with any covenant or provision set forth herein may be omitted or
waived, only with the written consent of the Company and Holder. Any waiver or
consent may be given subject to satisfaction of conditions stated therein and
any waiver or consent shall be effective only in the specific instance and for
the specific purpose for which given.
5.3 Addresses for Notices. Any notice, demand, request, waiver or other
---------------------
communication under this Agreement shall be in writing and shall be deemed to
have been duly given on the date of service if personally served or on the third
day after mailing if mailed to the party to whom notice is
18
<PAGE>
to be given, by first class mail, registered, return receipt requested, postage
prepaid and addressed as follows:
To Holder: Ward North America Holding, Inc.
610 West Ash Street, Suite 1500
San Diego, California 92101
Attention: Jeffrey S. Ward, President
With a copy to: Stradling Yocca Carlson & Rauth
660 Newport Center Drive, Suite 1600
Newport Beach, California 92660-6441
Attention: Bruce Feuchter, Esq.
To the Company: Anchor Pacific Underwriters, Inc.
1800 Sutter Street, Suite 400
Concord, California 94520
Attention: James R. Dunathan, President and Chief Executive
Officer
With a copy to: Sheppard, Mullin, Richter & Hampton
Four Embarcadero Center, Suite 1700
San Francisco, California 94111
Attention: A. John Murphy, Esq.
5.4 Binding Effect; Assignment. This Agreement shall be binding upon and
--------------------------
inure to the benefit of each of the Company and Holder and their respective
successors and assigns, except that the Company shall not have the right to
delegate its obligations hereunder or to assign its rights hereunder or any
interest herein.
5.5 Severability. The provisions of this Agreement are severable and, in
------------
the event that any court of competent jurisdiction shall determine that any one
or more of the provisions or part of a provision contained in this Agreement,
shall, for any reason, be held to be invalid, illegal or unenforceable in any
respect, such invalidity, illegality or unenforceability shall not affect any
other provision or part of a provision of this Agreement; but this Agreement
shall be reformed and construed as if such invalid or illegal or unenforceable
provision, or part of a provision, had never been contained herein, and such
provisions or part reformed so that it would be valid, legal and enforceable to
the maximum extent possible.
5.6 Confidentiality. Holder agrees that it will keep confidential and
---------------
will not disclose or divulge any confidential, proprietary or secret information
which Holder may obtain from the Company ("Confidential Information"); provided,
however, that Holder may disclose such Confidential Information (a) on a
confidential basis to its attorneys, accountants, consultants and other
professionals to the extent necessary to obtain their services in connection
with its investment in the Company, (b) to any prospective holder of any
Securities from Holder as long as such prospective holder agrees in writing to
be bound by the provisions of this Section, (c) to any entity controlling,
controlled by or under common control with such Holder so long as such person
agrees in writing to be bound by the provisions of this Section, or (d) as
required by applicable law.
For purposes of this Section, Confidential Information shall not include
(i) information already in Holder's possession, (ii) information which becomes
public knowledge other than as a
19
<PAGE>
result of Holder's actions or inactions, (iii) information which is subsequently
rightfully obtained by Holder from a third party, (iv) information Holder
develops independently and without use of the information provided by the
Company or (v) information which is approved in writing for release by the
Company.
5.7 Governing Law. This Agreement shall be governed by and construed
-------------
under the laws of the State of California as applied to agreements among
California residents, made and to be performed entirely within the State of
California.
5.8 Attorneys' Fees. In the event that any party to this Agreement
---------------
institutes any legal proceeding to enforce any of the provisions of this
Agreement, then the prevailing party in such proceeding shall be entitled to
collect and receive its reasonable attorneys' fees and costs, through and
including all appeals, and the other party shall pay for same.
5.9 Arbitration; Venue and Jurisdiction. The parties hereto agree that
-----------------------------------
any dispute arising out of or relating to this Agreement or the breach,
termination or the validity hereof, shall be settled by binding arbitration in
accordance with the rules of the American Arbitration Association ("AAA") by a
neutral arbitrator who shall be a former superior court or appellate court judge
or justice with experience in resolving business disputes. The arbitration
shall be governed by the California Code of Civil Procedure Section 1280 et seq.
and the parties intend this procedure to be specifically enforceable in
accordance with such provisions. Judgment upon the award rendered by the
arbitrator may be entered by any court having jurisdiction thereof. The parties
agree that the judgment or decision of the arbitrator shall be final and
binding. The parties agree that the venue for the arbitration shall be in the
County of San Diego, California. The arbitrator shall be required to follow the
applicable law as set forth in the governing law section of this Agreement. The
arbitrator shall award reasonable attorneys' fees and costs of arbitration to
the prevailing party in such arbitration. The parties hereto consent to the
personal jurisdiction of any court in the County of San Diego, California for
the enforcement of this agreement to arbitrate and any award granted pursuant to
said arbitration or settlement of any dispute related hereto.
5.10 Headings. Section and subsection headings in this Agreement are
--------
included herein for convenience of reference only and shall not constitute a
part of this Agreement for any other purpose.
5.11 Counterparts. This Agreement may be executed in any number of
------------
counterparts, all of which taken together shall constitute one and the same
instrument, and any of the parties hereto may execute this Agreement by signing
any such counterpart.
5.12 Further Assurances. From and after the date of this Agreement, upon
------------------
the request of Holder or the Company, each of the Company and Holder shall
execute and deliver such instruments, documents and other writings as may be
reasonably necessary or desirable to confirm and carry out and to effectuate
fully the intent and purposes of this Agreement.
5.13 Specific Enforcement. The parties hereto acknowledge and agree that
--------------------
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with their specific terms or were
otherwise breached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent breaches of the provisions of this
Agreement and to enforce specifically the terms and provisions hereof in any
court of the United States or any state thereof having jurisdiction, this being
in addition to any other remedy to which they may be entitled at law or equity.
20
<PAGE>
5.14 Entire Agreement. This Agreement constitutes the full and complete
----------------
agreement and understanding among the parties hereto regarding the subject
matter hereof, and shall supersede all prior communications, representations,
understandings or agreements, if any, whether oral or written, concerning the
subject matter hereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first set forth above.
WARD NORTH AMERICA HOLDING, INC.
By: /s/ Jeffrey S. Ward
----------------------------------------
Jeffrey S. Ward, President and Chief
Executive Officer
ANCHOR PACIFIC UNDERWRITERS, INC.
By: /s/ James R. Dunathan
----------------------------------------
James R. Dunathan, President and Chief
Executive Officer
21
<PAGE>
Exhibit 10.41
EMPLOYMENT AGREEMENT
--------------------
This Employment Agreement is made on September 1, 1998, between HARDEN &
COMPANY INSURANCE SERVICES INC. d.b.a. PACIFIC HERITAGE ADMINISTRATORS
("Employer"), and THOMAS O. HEDFORD ("Executive").
RECITALS
--------
A. Executive is and has been employed by Employer or its predecessor
company for more than five (5) years as President of Pacific Heritage
Administrators. Through such experience, he has acquired outstanding and
special skills and abilities and an extensive background in and knowledge of
Employer's business and the industry in which it is engaged.
D. Employer desires assurance of the continued association and services
of Executive in order to retain his experience, skill, abilities, background and
knowledge, and is therefore willing to engage his services on the terms and
conditions set forth below.
E. Executive desires to continue in the employ of Employer and is willing
to do so on those terms and conditions.
NOW, THEREFORE, in consideration of the above recitals and of the mutual
promises and conditions in this Agreement, it is agreed as follows:
TERMS AND CONDITIONS
--------------------
1. Duties and Authority. Employer shall employ Executive as President of
--------------------
Employer. Executive's position as President is to remain in effect until
changes are deemed necessary and approved by action of the Employer's Board of
Directors.
2. Outside Business Activities. During his employment, Executive shall
---------------------------
devote his full energies, interest, abilities and productive time to the
performance of this Agreement and shall not, without Employer's prior written
consent, render to others services of any kind for compensation, or engage in
any other business activity that would materially interfere with the performance
of his duties under this Agreement. His compensation, unless otherwise
specifically set by the Board of Directors of Employer, shall be paid solely by
Employer.
3. Covenant Not to Compete During Employment Term. During the employment
----------------------------------------------
term, Executive shall not, directly or indirectly, whether as a partner,
<PAGE>
employee, creditor, shareholder or otherwise, promote, participate in or engage
in any activity or other business competitive with Employer's business.
4. Term of Employment. Subject to earlier termination as provided in
------------------
this Agreement, Executive shall be employed beginning January 1, 1998, and
ending December 31, 2001. Executive's compensation and benefits described under
Section 6, below, shall begin on January 1, 1998 and shall be prorated as
necessary.
5. Place of Employment. Unless the parties agree otherwise in writing
-------------------
during the employment term, Executive shall perform the services he is required
to perform under this Agreement at Employer's offices, located at 111 S.W.
Columbia, Suite 600, Portland, Oregon, provided, however, that Employer may from
time to time require Executive to travel temporarily to other locations on
Employer's business.
6. Executive's Compensation and Benefits.
-------------------------------------
(a) Basic Salary. Employer shall pay a basic salary to Executive at
------------
a rate of $110,000 per year, payable on a semi-monthly basis, effective January
1, 1998. The basic salary payable to Executive under this Section 6(a) shall be
subject to increases based upon the personal performance of Executive and the
business performance of Employer as determined by periodic reviews and
evaluations to be conducted at least annually.
(b) Incentive Compensation. In addition to the basic salary provided
----------------------
for in Section 6(a) above, Employer shall pay to Executive as incentive
compensation a bonus based on Employer's financial performance. The bonus shall
be negotiated annually, but shall not be less than 50% of 3% of Employer's
operating results, and shall be calculated quarterly for the periods ended March
31, June 30, September 30, and December 31, respectively. The Employer's
operating results shall be based on an EBITDA (earnings before interest, taxes,
depreciation, and amortization) basis. The bonus shall be paid to Executive
within 30 days of the end of each quarterly period. To the extent Employer's
operating results for a particular quarterly period are later adjusted, any
over-payment or under-payment of Executive's bonus will be adjusted in the next
quarterly period (or, if necessary, such additional quarterly periods until the
discrepancy is resolved).
(c) Additional Benefits. During the employment term, Executive shall
-------------------
be entitled to receive all other benefits of employment generally available to
Employer's other executive and managerial employees when and as he becomes
eligible for them, including group health benefits, dental insurance, life
insurance (at three (3) times salary), and five (5) weeks of annual paid
vacation. Vacation allowance to increase by one (1) week every four (4) years,
beginning with the effective date of this Agreement. Executive's vacation
benefits shall be subject to Employer's policies on limitations on accruing
vacation time.
- 2 -
<PAGE>
(d) Expenses. During the employment term, Employer shall reimburse
--------
Executive for reasonable out-of-pocket expenses incurred in relation to
Employer's business, including all travel expenses, food and lodging while away
from home, subject to documentation to be submitted monthly and such other
policies as Employer may from time to time reasonably establish for its
employees.
(e) Automobile Allowance. During the employment term, Employer shall
--------------------
furnish to Executive an automobile allowance of $700 per month as an alternative
to any other automobile travel expense otherwise payable under company policy.
7. Employer's Ownership of Intangibles. All processes, inventions,
-----------------------------------
patents, copyrights, trademarks and other intangible rights that may be
conceived or developed by Executive, either alone or with others, during the
term of Executive's employment, whether or not conceived or developed during
Executive's working hours, and with respect to which the equipment, supplies,
facilities or trade secret information of Employer was used, or that relate to
the business of Employer or to Employer's actual or demonstrably anticipated
research and development, or that result from any work performed by Executive
for Employer, shall be the sole property of Employer. Executive shall disclose
to Employer all inventions conceived during the term of employment, whether or
not the property of Employer under the terms of the preceding sentence, provided
that such disclosure shall be received by Employer in confidence. Executive
shall execute all documents, including patent applications and assignments,
required by Employer to establish Employer's rights under this Section.
8. Indemnification by Employer. Employer shall, to the maximum extent
---------------------------
permitted by law, indemnify and hold Executive harmless against expenses,
including reasonable attorneys' fees, judgments, fines, settlements and other
amounts actually and reasonably incurred in connection with a proceeding arising
by reason of Executive's employment by Employer or any of its direct or indirect
subsidiaries. Employer shall advance to Executive any expenses incurred in
defending such proceeding to the maximum extent permitted by law.
9. Termination of Agreement.
------------------------
(a) Termination for Cause. Employer may terminate this Agreement at
---------------------
any time without notice if Executive commits any material act of dishonesty,
discloses confidential information, is guilty of gross carelessness or
misconduct, or unjustifiably neglects his duties under this Agreement. In the
event Executive is terminated for cause under this Section 9(a), he shall be
paid his basic salary due under Section 6(a) through the date of his
termination, all rights under Section 6(b) shall be lost.
- 3 -
<PAGE>
(b) Termination on Resignation. Executive may terminate this
--------------------------
Agreement by giving Employer three (3) months' prior written notice of his
resignation. In the event Executive resigns under this Section 9(b), he shall be
entitled to receive three (3) months' basic salary due under Section 6(a), and
any bonus due under Section 6(b) will be prorated through the date of his
resignation.
(c) Termination on Death. If Executive dies during the initial term
--------------------
or during any renewal terms of this Agreement, this Agreement shall be
terminated on the last day of the calendar month of his death. In the event
Executive dies, he or his estate shall be entitled to the basic salary due under
Section 6(a) through the end of the month in which his death occurs, and any
bonus due under Section 6(b) shall be prorated through the end of the month in
which is death occurs.
10. Effect of Combination or Dissolution. This Agreement shall not be
------------------------------------
terminated by Employer's voluntary or involuntary dissolution or by any merger
in which Employer is not the surviving or resulting corporation, or on any
transfer of all or substantially all of Employer's assets. In the event of any
such merger or transfer of assets, the provisions of this Agreement shall be
binding on and inure to the benefit of the surviving business entity or the
business entity to which such assets shall be transferred.
11. Disclosure of Confidential Information and Trade Secrets Prohibited.
-------------------------------------------------------------------
In the course of his employment, Executive may have access to confidential
information and trade secrets relating to Employer's business. Except as
required in the course of his employment by Employer, Executive will not,
without Employer's prior consent, either during his employment by Employer or
for three (3) years after termination of this employment, directly or
indirectly, disclose to any third person any such confidential information or
trade secrets.
12. Disclosure of Customer Information and Solicitation of Other Employees
----------------------------------------------------------------------
Prohibited. In the course of his employment, Executive will have access to
- ----------
confidential records and data pertaining to Employer's customers and to the
relationship between these customers and Employer's employees. Such information
is considered secret and is disclosed to Executive in confidence. During his
employment by Employer and for three (3) years after termination of that
employment, Executive shall not directly or indirectly, disclose or use any such
information, except as required in the course of his employment by Employer. In
addition, for three (3) years after termination of his employment, Executive
shall not induce or attempt to induce any employee of Employer to discontinue
employment with Employer for the purpose of employment with any competitor of
Employer.
- 4 -
<PAGE>
13. Payment Upon Termination or Permanent Disability. Notwithstanding any
------------------------------------------------
provision of this Agreement, if Employer terminates this Employment Agreement
for any reason other than cause or Executive becomes permanently disabled or
unable to perform his duties as President, Employer shall pay Executive (i) an
amount equal to six (6) months' basic salary due under Section 6(a), at
Executive's then current rate of compensation; (ii) any accrued, but unpaid,
bonus due under Section 6(b); and (iii) for a period of six (6) months, all
benefits, including the automobile allowance described in Section 6(f), to which
Executive would otherwise be entitled had the Agreement not been so terminated.
If Executive is permanently disabled, any obligations under this Section 13
shall be reduced, on a dollar-for-dollar basis, by any disability insurance
payments made to Executive during the six (6) month period.
14. Miscellaneous Provisions.
------------------------
(a) Integration. This Agreement contains the entire agreement
-----------
between the parties and supersedes all prior oral and written agreements,
understandings, commitments and practices between the parties, including all
prior employment agreements, whether or not fully performed by Executive before
the date of this Agreement. No amendments to this Agreement may be made except
by mutual consent and in writing signed by both parties.
(b) Choice of Law. The formation, construction, and performance of
-------------
this Agreement shall be construed in accordance with the laws of the State of
California.
(c) Notices. Any notice to Employer required or permitted under this
-------
Agreement shall be given in writing by Executive, either by personal service or
by registered or certified mail, postage prepaid, addressed to Employer at its
then principal place of business. Any such notice to Executive shall be given
in a like manner and, if mailed, shall be addressed to Executive at his home
address then known in Employer's files. For the purpose of determining
compliance with any time limit in this Agreement, a notice shall be deemed to
have been duly given (i) on the date of service, if served personally on the
party to whom notice is to be given, or (ii) on the fifth business day after
mailing, if mailed to the party to whom the notice is to be given in the manner
provided in this Section.
(d) Remedies. If either party obtains a judgment against the other
--------
by reason of breach of this Agreement, a reasonable attorneys' fee as fixed by
the court shall be included in such judgment.
(e) Severability. If any provision of this Agreement is held invalid
------------
or unenforceable, the remainder of this Agreement shall nevertheless remain in
full force and effect. If any provision is held invalid or unenforceable with
respect to particular circumstances, it shall nevertheless remain in full force
and effect in all other circumstances.
- 5 -
<PAGE>
Executed by the parties as of the day and year first above written.
"Employer"
HARDEN & COMPANY INSURANCE
SERVICES, INC., d.b.a. PACIFIC
HERITAGE ADMINISTRATORS
By:/s/ James R. Dunathan
---------------------------------
James R. Dunathan, Chairman
By:/s/ Earl Wiklund
---------------------------------
Earl Wiklund, Chief Executive Officer
"Executive"
By:/s/ Thomas O. Hedford
---------------------------------
Thomas O. Hedford
- 6 -
<PAGE>
Exhibit 10.41a
AMENDMENT NO. 1
---------------
TO
--
EMPLOYMENT AGREEMENT
--------------------
This Amendment No. 1 to Employment Agreement (the "Amendment") is made
effective on May 1, 1999, between HARDEN & COMPANY INSURANCE SERVICES, INC., AKA
HARDEN GROUP, and all subsidiaries ("Employer"), and THOMAS O. HEDFORD
("Executive").
RECITALS
--------
A. Executive and Employer entered into that certain Employment Agreement
dated September 1, 1998 (the "Agreement"), pursuant to which Employer agreed to
employee Executive on the terms set forth therein.
B. Employer restructured its management team effective May 1, 1999.
C. In light of said restructuring, Employer and Executive desire to amend
certain terms of the Agreement.
NOW, THEREFORE, in consideration of the above recitals and of the mutual
promises and conditions in this Amendment, it is agreed as follows:
TERMS AND CONDITIONS
--------------------
1. The term "Employer" in the Agreement is hereby amended from Harden &
Company Insurance Services Inc. d.b.a. Pacific Heritage Administrators and
replaced with Harden & Company Insurance Services, Inc. AKA Harden Group and
all subsidiaries.
2. Section 1. of the Agreement is deleted in its entirety and replaced
with the following Section 1:
"1. Duties and Authority. Employer shall employ Executive as
--------------------
Executive Vice President of Employer. Executive's position as Executive Vice
President is to remain in effect until changes are deemed necessary and approved
by action of the Employer's Board of Directors."
3. The first sentence of Section 4. of the Agreement is hereby deleted in
its entirety and replaced with the following sentence:
"Subject to earlier termination as provided in this Agreement,
Executive shall be employed beginning May 1, 1999, and ending April 30, 2004."
1
<PAGE>
4. The second sentence of Section 6(b) of the Agreement is hereby deleted
in its entirety and replaced with the following sentence:
"The bonus shall be equal to 4% of Employer's operating results, and
shall be calculated quarterly for the periods ended March 31, June 30, September
30, and December 31, respectively."
5. Section 9(b) of the Agreement is hereby deleted in its entirety and
replaced with the following Section 9(b):
"(b) Termination on Resignation. Executive may terminate this
--------------------------
Agreement by giving Employer four (4) months' prior written notice of his
resignation. In the event Executive resigns under this Section 9(b), he shall be
entitled to receive four (4) months' basic salary due under Section 6(a), and
any bonus due under Section 6(b) will be prorated through the date of his
resignation."
6. Section 13 of the Agreement is hereby deleted in its entirety and
replaced with the following Section 13:
"13. Payment Upon Termination or Permanent Disability.
------------------------------------------------
Notwithstanding any provision of this Agreement, if Employer terminates this
Employment Agreement for any reason other than cause or Executive becomes
permanently disabled or unable to perform his duties as Executive Vice
President, Employer shall pay Executive (i) an amount equal to nine (9) months'
basic salary due under Section 6(a), at Executive's then current rate of
compensation; (ii) any accrued, but unpaid, bonus due under Section 6(b); and
(iii) for a period of nine (9) months, all benefits, including the automobile
allowance described in Section 6(e), to which Executive would otherwise be
entitled had the Agreement not been so terminated. If Executive is permanently
disabled, any obligations under this Section 13 shall be reduced, on a dollar-
for-dollar basis, by any disability insurance payments made to Executive during
the nine (9) month period.
6. Except as modified above, the terms and conditions contained in the
Agreement shall remain in full force and effect.
2
<PAGE>
Executed by the parties as of the day and year first above written.
"Employer"
HARDEN & COMPANY INSURANCE
SERVICES, INC. AKA HARDEN GROUP
and all subsidiaries
By:/s/ James R. Dunathan
---------------------------------------
J.R. Dunathan, Chairman
President and Chief Executive Officer
"Executive"
By:/s/ Thomas O. Hedford
---------------------------------------
Thomas O. Hedford
3
<PAGE>
Exhibit 10.42
EMPLOYMENT AGREEMENT
--------------------
This Employment Agreement is effective as of May 1, 1999 between HARDEN &
COMPANY INSURANCE SERVICES INC., AKA Harden Group, and all subsidiaries
("Employer"), and EARL WIKLUND ("Executive").
RECITALS
--------
A. Executive is and has been employed by Employer for more than five (5)
years and currently holds the position of Chief Operating Officer and Chief
Financial Officer. Through such experience, he has acquired outstanding and
special skills and abilities and an extensive background in and knowledge of
Employer's business and the industry in which it is engaged.
D. Employer desires assurance of the continued association and services of
Executive in order to retain his experience, skill, abilities, background and
knowledge, and is therefore willing to engage his services on the terms and
conditions set forth below.
E. Executive desires to continue in the employ of Employer and is willing
to do so on those terms and conditions.
NOW, THEREFORE, in consideration of the above recitals and of the mutual
promises and conditions in this Agreement, it is agreed as follows:
TERMS AND CONDITIONS
--------------------
1. Duties and Authority. Employer shall employ Executive as Chief
--------------------
Operating Officer and Chief Financial Officer of Employer. Executive's position
as Chief Operating Officer and Chief Financial Officer is to remain in effect
until changes are deemed necessary and approved by action of the Employer's
Board of Directors.
2. Outside Business Activities. During his employment, Executive shall
---------------------------
devote his full energies, interest, abilities and productive time to the
performance of this Agreement and shall not, without Employer's prior written
consent, render to others services of any kind for compensation, or engage in
any other business activity that would materially interfere with the performance
of his duties under this Agreement; provided, however, that Executive may
continue to serve, without additional compensation, as an officer and director
of Anchor Pacific Underwriters, Inc., or any of its subsidiaries or affiliates.
His compensation, unless otherwise specifically set by the Board of Directors of
Employer, shall be paid solely by Employer.
1
<PAGE>
3. Covenant Not to Compete During Employment Term. During the employment
----------------------------------------------
term, Executive shall not, directly or indirectly, whether as a partner,
employee, creditor, shareholder or otherwise, promote, participate in or engage
in any activity or other business competitive with Employer's business.
4. Term of Employment. Subject to earlier termination as provided in this
------------------
Agreement, Executive shall be employed beginning May 1, 1999, and ending April
30, 2004. Executive's compensation and benefits described under Section 6,
below, shall begin on May 1, 1999 and shall be prorated as necessary.
5. Place of Employment. Unless the parties agree otherwise in writing
-------------------
during the employment term, Executive shall perform the services he is required
to perform under this Agreement at Employer's offices, located at 1800 Sutter
Street, Suite 400, Concord, California, provided, however, that Employer may
from time to time require Executive to travel temporarily to other locations on
Employer's business.
6. Executive's Compensation and Benefits.
-------------------------------------
(a) Basic Salary. Employer shall pay a basic salary to Executive at a
------------
rate of $113,050 per year, payable on a semi-monthly basis, effective May 1,
1999. The basic salary payable to Executive under this Section 6(a) shall be
subject to increases based upon the personal performance of Executive and the
business performance of Employer as determined by periodic reviews and
evaluations to be conducted at least annually.
(b) Incentive Compensation. In addition to the basic salary provided
----------------------
for in Section 6(a) above, Employer shall pay to Executive as incentive
compensation a bonus based on Employer's financial performance. The bonus shall
be equal to 4% of Employer's operating results, and shall be calculated
quarterly for the periods ended March 31, June 30, September 30, and December
31, respectively. The Employer's operating results shall be based on an EBITDA
(earnings before interest, taxes, depreciation, and amortization) basis. The
bonus shall be paid to Executive within 30 days of the end of each quarterly
period. To the extent Employer's operating results for a particular quarterly
period are later adjusted, any over-payment or under-payment of Executive's
bonus will be adjusted in the next quarterly period (or, if necessary, such
additional quarterly periods until the discrepancy is resolved).
(c) Additional Benefits. During the employment term, Executive shall
-------------------
be entitled to receive all other benefits of employment generally available to
Employer's other executive and managerial employees when and as he becomes
eligible for them, including group health benefits, dental insurance, life
insurance (at three (3) times salary), and five (5) weeks of annual paid
vacation. Vacation allowance to increase by one (1) week every four (4) years,
beginning with the effective date of this Agreement. Executive's vacation
benefits shall be subject to Employer's policies on limitations on accruing
vacation time.
2
<PAGE>
(d) Expenses. During the employment term, Employer shall reimburse
--------
Executive for reasonable out-of-pocket expenses incurred in relation to
Employer's business, including all travel expenses, food and lodging while away
from home, subject to documentation to be submitted monthly and such other
policies as Employer may from time to time reasonably establish for its
employees.
(e) Automobile Allowance. During the employment term, Employer shall
--------------------
furnish to Executive an automobile allowance of $1,000 per month as an
alternative to any other automobile travel expense otherwise payable under
company policy.
7. Employer's Ownership of Intangibles. All processes, inventions,
-----------------------------------
patents, copyrights, trademarks and other intangible rights that may be
conceived or developed by Executive, either alone or with others, during the
term of Executive's employment, whether or not conceived or developed during
Executive's working hours, and with respect to which the equipment, supplies,
facilities or trade secret information of Employer was used, or that relate to
the business of Employer or to Employer's actual or demonstrably anticipated
research and development, or that result from any work performed by Executive
for Employer, shall be the sole property of Employer. Executive shall disclose
to Employer all inventions conceived during the term of employment, whether or
not the property of Employer under the terms of the preceding sentence, provided
that such disclosure shall be received by Employer in confidence. Executive
shall execute all documents, including patent applications and assignments,
required by Employer to establish Employer's rights under this Section.
8. Indemnification by Employer. Employer shall, to the maximum extent
---------------------------
permitted by law, indemnify and hold Executive harmless against expenses,
including reasonable attorneys' fees, judgments, fines, settlements and other
amounts actually and reasonably incurred in connection with a proceeding arising
by reason of Executive's employment by Employer or any of its direct or indirect
subsidiaries. Employer shall advance to Executive any expenses incurred in
defending such proceeding to the maximum extent permitted by law.
9. Termination of Agreement.
------------------------
(a) Termination for Cause. Employer may terminate this Agreement at
---------------------
any time without notice if Executive commits any material act of dishonesty,
discloses confidential information, is guilty of gross carelessness or
misconduct, or unjustifiably neglects his duties under this Agreement. In the
event Executive is terminated for cause under this Section 9(a), he shall be
paid his basic salary due under Section 6(a) through the date of his
termination, all rights under Section 6(b) shall be lost.
(b) Termination on Resignation. Executive may terminate this Agreement
--------------------------
by giving Employer four (4) months' prior written notice of his resignation. In
the event Executive resigns under this Section 9(b), he shall be entitled to
receive four (4)
3
<PAGE>
months' basic salary due under Section 6(a), and any bonus due under Section
6(b) will be prorated through the date of his resignation.
(c) Termination on Death. If Executive dies during the initial term or
--------------------
during any renewal terms of this Agreement, this Agreement shall be terminated
on the last day of the calendar month of his death. In the event Executive dies,
he or his estate shall be entitled to the basic salary due under Section 6(a)
through the end of the month in which his death occurs, and any bonus due under
Section 6(b) shall be prorated through the end of the month in which his death
occurs.
10. Effect of Combination or Dissolution. This Agreement shall not be
------------------------------------
terminated by Employer's voluntary or involuntary dissolution or by any merger
in which Employer is not the surviving or resulting corporation, or on any
transfer of all or substantially all of Employer's assets. In the event of any
such merger or transfer of assets, the provisions of this Agreement shall be
binding on and inure to the benefit of the surviving business entity or the
business entity to which such assets shall be transferred.
11. Disclosure of Confidential Information and Trade Secrets Prohibited.
-------------------------------------------------------------------
In the course of his employment, Executive may have access to confidential
information and trade secrets relating to Employer's business. Except as
required in the course of his employment by Employer, Executive will not,
without Employer's prior consent, either during his employment by Employer or
for three (3) years after termination of this employment, directly or
indirectly, disclose to any third person any such confidential information or
trade secrets.
12. Disclosure of Customer Information and Solicitation of Other Employees
----------------------------------------------------------------------
Prohibited. In the course of his employment, Executive will have access to
- ----------
confidential records and data pertaining to Employer's customers and to the
relationship between these customers and Employer's employees. Such information
is considered secret and is disclosed to Executive in confidence. During his
employment by Employer and for three (3) years after termination of that
employment, Executive shall not directly or indirectly, disclose or use any such
information, except as required in the course of his employment by Employer. In
addition, for three (3) years after termination of his employment, Executive
shall not induce or attempt to induce any employee of Employer to discontinue
employment with Employer for the purpose of employment with any competitor of
Employer.
13. Payment Upon Termination or Permanent Disability. Notwithstanding any
------------------------------------------------
provision of this Agreement, if Employer terminates this Employment Agreement
for any reason other than cause or Executive becomes permanently disabled or
unable to perform his duties as Chief Operating Officer and Chief Financial
Officer, Employer shall pay Executive (i) an amount equal to nine (9) months'
basic salary due under Section 6(a), at Executive's then current rate of
compensation; (ii) any accrued, but unpaid, bonus due under Section 6(b); and
(iii) for a period of nine (9) months, all benefits, including the automobile
allowance described in Section 6(e), to which Executive would otherwise be
4
<PAGE>
entitled had the Agreement not been so terminated. If Executive is permanently
disabled, any obligations under this Section 13 shall be reduced, on a dollar-
for-dollar basis, by any disability insurance payments made to Executive during
the nine (9) month period.
14. Miscellaneous Provisions.
------------------------
(a) Integration. This Agreement contains the entire agreement between
-----------
the parties and supersedes all prior oral and written agreements,
understandings, commitments and practices between the parties, including all
prior employment agreements, whether or not fully performed by Executive before
the date of this Agreement. No amendments to this Agreement may be made except
by mutual consent and in writing signed by both parties.
(b) Choice of Law. The formation, construction, and performance of
-------------
this Agreement shall be construed in accordance with the laws of the State of
California.
(c) Notices. Any notice to Employer required or permitted under this
-------
Agreement shall be given in writing by Executive, either by personal service or
by registered or certified mail, postage prepaid, addressed to Employer at its
then principal place of business. Any such notice to Executive shall be given
in a like manner and, if mailed, shall be addressed to Executive at his home
address then known in Employer's files. For the purpose of determining
compliance with any time limit in this Agreement, a notice shall be deemed to
have been duly given (i) on the date of service, if served personally on the
party to whom notice is to be given, or (ii) on the fifth business day after
mailing, if mailed to the party to whom the notice is to be given in the manner
provided in this Section.
(d) Remedies. If either party obtains a judgment against the other by
--------
reason of breach of this Agreement, a reasonable attorneys' fee as fixed by the
court shall be included in such judgment.
(e) Severability. If any provision of this Agreement is held invalid
or unenforceable, the remainder of this Agreement shall nevertheless remain in
full force and effect. If any provision is held invalid or unenforceable with
respect to particular circumstances, it shall nevertheless remain in full force
and effect in all other circumstances.
5
<PAGE>
Executed by the parties as of the day and year first above written.
"Employer"
HARDEN & COMPANY INSURANCE
SERVICES, INC., AKA HARDEN GROUP
and all subsidiaries
By: /s/ James R. Dunathan
--------------------------------
James R. Dunathan, Chairman
President and Chief Executive Officer
"Executive"
By: /s/ Earl Wiklund
-------------------------------
Earl Wiklund
6
<PAGE>
Exhibit 11
ANCHOR PACIFIC UNDERWRITERS, INC.
COMPUTATION OF EARNINGS PER COMMON
AND COMMON SHARE EQUIVALENT
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Basic:
Weighted average number of common shares
outstanding............................. 4,710,056 4,708,580 4,612,153
=========== ========== ==========
Net loss................................. $(2,477,971) $ (775,330) $ (946,691)
=========== ========== ==========
Per share amount......................... $ (0.53) $ (0.16) $ (0.21)
=========== ========== ==========
Diluted:
Weighted average number of common shares
outstanding............................. 4,710,056 4,708,580 4,612,153
Net effect of stock options and
warrants................................ -- -- --
Net effect of convertible debentures
outstanding end of period............... 779,750 444,444 444,444
----------- ---------- ----------
Total.................................. 5,489,806 5,153,024 5,056,597
=========== ========== ==========
Net loss.................................. $(2,477,971) $ (775,330) $ (946,691)
Interest on convertible debt.............. 44,970 7,666 6,000
----------- ---------- ----------
Net Income, after deducting interest on
debentures............................... $(2,433,001) $ (767,664) $ (940,691)
=========== ========== ==========
Per share amount......................... $ (0.44) $ (0.15) $ (0.19)
=========== ========== ==========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 472,837
<ALLOWANCES> 7,500
<INVENTORY> 0
<CURRENT-ASSETS> 5,460,934
<PP&E> 2,918,110
<DEPRECIATION> 2,287,299
<TOTAL-ASSETS> 6,520,035
<CURRENT-LIABILITIES> 7,551,482
<BONDS> 1,982,546
0
0
<COMMON> 94,201
<OTHER-SE> (2,684,858)
<TOTAL-LIABILITY-AND-EQUITY> 6,520,035
<SALES> 10,054,596
<TOTAL-REVENUES> 10,072,565
<CGS> 0
<TOTAL-COSTS> 12,268,076
<OTHER-EXPENSES> 276,552
<LOSS-PROVISION> 7,500
<INTEREST-EXPENSE> 186,441
<INCOME-PRETAX> (2,472,063)
<INCOME-TAX> 5,908
<INCOME-CONTINUING> (2,477,971)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,477,971)
<EPS-BASIC> (0.53)
<EPS-DILUTED> (0.53)
</TABLE>
