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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 13D
Under the Securities Exchange Act of 1934
ANCHOR PACIFIC UNDERWRITERS, INC.
---------------------------------
(Name of Issuer)
Common Shares
-------------
(Title of Class of Securities)
033 066 101
-------------
(CUSIP Number)
WARD NORTH AMERICA HOLDING, INC.
610 W. Ash Street, Suite 1500
San Diego, CA 92101
Attn: Jeffrey S. Ward
Chief Executive Officer
(Name, Address and Telephone Number of Person
Authorized to Receive Notices and Communications)
February 24, 2000
------------------
(Date of Event which Requires Filing of this Statement)
If the filing person has previously filed a statement on Schedule 13G to report
the acquisition which is the subject of this Schedule 13D, and is filing this
schedule because of Rule 13d-1(b)(3) or (4), check the following box [_].
Note: Schedules filed in paper format shall include a signed original and five
copies of the schedule, including all exhibits. See Rule 13d-7(b) for other
parties to whom copies are to be sent.
*The remainder of this cover page shall be filled out for a reporting person's
initial filing on this form with respect to the subject class of securities, and
for any subsequent amendment containing information which would alter the
disclosures provided in a prior cover page.
The information required on the remainder of this cover page shall not be deemed
to be "filed" for the purpose of Section 18 of the Securities Exchange Act of
1934 ("Act") or otherwise subject to the liabilities of that section of the Act
but shall be subject to all other provisions of the Act (however, see the
Notes).
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SCHEDULE 13D
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CUSIP No. 033 066 101 Page 2 of 4 Pages
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1 NAME OF REPORTING PERSON Ward North America Holding, Inc.
S.S. or I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
33-0687653
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2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (a) [_]
(b) [X]
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3 SEC USE ONLY
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4 SOURCE OF FUNDS*
WC
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5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT
TO ITEMS 2(d) or 2(d) [_]
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6 CITIZENSHIP OR PLACE OF ORGANIZATION
Purchaser is a California corporation
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7 SOLE VOTING POWER 29,253,002 Common Shares
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NUMBER OF 8 SHARED VOTING POWER
SHARES None
BENEFICIALLY
OWNED BY
EACH REPORTING
PERSON WITH
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9 SOLE DISPOSITIVE POWER 29,253,002 Common Shares
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10 SHARED DISPOSITIVE POWER
None
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11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
29,253,002 Common Shares
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12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES
CERTAIN SHARES* [_]
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13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
86.1% of Common Shares
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14 TYPE OF REPORTING PERSON*
CO
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*SEE INSTRUCTION BEFORE FILLING OUT!
INCLUDE BOTH SIDES OF THE COVER PAGE, RESPONSES TO ITEMS 1-7
(INCLUDING EXHIBITS) OF THE SCHEDULE, AND THE SIGNATURE ATTESTATION.
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2
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SCHEDULE 13D
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Item 1. Security and Issuer.
- ----------------------------
Security: Common Shares
Issuer: Anchor Pacific Underwriters, Inc.
1800 Sutter Street, Suite 400
Concord, CA 94520
Audie J. Dudum - Chairman
James R. Dunathan - President and Chief Executive Officer
Earl Wiklund, Sr. - Vice President, Chief Financial Officer,
Secretary
Item 2. Identity and Background.
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(a) Ward North America Holding, Inc. (Reporting Person)
a California corporation
(b) 610 West Ash Street, Suite 1500
San Diego, CA 92101
(c) Insurance claims adjustment, claims administration and risk
management services.
(d) None.
(e) None.
(f) N/A
Item 3. Source and Amount of Funds or Other Consideration.
- ----------------------------------------------------------
Funds of the Reporting Person. Amount of funds required to purchase
securities held plus the exercise of all warrants or other rights to
purchase now held is $4,650,000, assuming the Issuer, in accordance with
certain restrictions in its Certificate of Designation, issues no further
shares of its Common Stock or other securities convertible into its Common
Stock to third parties hereafter.
Item 4. Purpose of Transaction.
- -------------------------------
The purpose of the acquisition of securities of the Issuer is to commence
a process through which the Reporting Person will acquire majority voting
and pecuniary control of the Issuer and obtain the right for further
control of the Issuer. The Reporting Person and Issuer have negotiated an
investment in Issuer which will permit Reporting Person to elect a
majority of the Issuer's Board of Directors. Additionally, pursuant to the
Securities Purchase Agreement (Exhibit D), Issuer will secure the written
---------
consent of shareholders to increase the capitalization from 16,000,000
Common Shares to 50,000,000 Common Shares. In connection therewith, the
Issuer will prepare, file and circulate an Information Statement in
conformity with Section 14(C) of the Securities Exchange Act of 1934.
Approximately 21 days after circulating the Information Statement, Issuer
will file
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an amendment to its Certificate of Incorporation with the Delaware
Secretary of State which will increase the authorized shares from
16,000,000 to 50,000,000 Common Shares.
Item 5. Interest in Securities of the Issuer.
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(a) Reporting Person has entered into several agreements to purchase
securities convertible into or exercisable for an aggregate of
29,253,002 Common Shares (86.1% of the Issuer's Common Stock) after
an Amendment to the Certificate of Incorporation increases the
authorized shares from 16,000,000 to 50,000,000. The investment
enables Reporting Person to elect a majority of Issuer's board of
directors.
Pursuant to that certain Letter Agreement that appears as Exhibit C
---------
below, Reporting Person has purchased convertible debentures for
$500,000 that are convertible into 1,000,000 Common Shares. In
connection with this investment, Issuer has granted five-year term
warrants for the purchase of 300,000 shares of Common Stock at an
exercise price of $.50 per share. Reporting Person has also purchased
a conditional option for $1,000 to purchase 7,200,000 Common Shares
for $1,000,000.
In a second investment transaction more fully described in Exhibit D,
---------
Reporting Person has purchased from Issuer 1,853,300 shares of Series
A Convertible Preferred Stock for the purchase price of $1.079156 per
share. Fully converted, the Series A Preferred Shares represent
18,533,000 shares of Issuer's Common Stock. In connection with this
second transaction, Reporting Person has granted Issuer a $1,000,000
Secured Convertible Loan Facility at an interest rate of 10% per
annum. Reporting Person has the power to require Issuer to accept an
advance for the full $1,000,000 (or any available balance up to
$1,000,000) at any time prior to March 10, 2002. This Loan Facility
is convertible into 222,000 shares of the Issuer's Series A Preferred
Stock at a price of $4.5045 per share. Fully converted, this Loan
Facility represents 2,220,002 shares of Issuer's Common Stock.
(b) Reporting Person has the sole power to vote all shares directly
owned by such person as described in paragraph (a).
(c) Within the last 60 days, Issuer and Reporting Person have entered
into the agreements described in Item 5(a) above. The Letter
Agreement dated February 18, 2000, effected February 24, 2000
that appears as Exhibit C more fully describes the purchase of
---------
convertible debentures, the five-year term warrants and the
conditional option. The Securities Purchase Agreement dated
March 9, 2000, effected March 10, 2000 that appears as Exhibit D
---------
more fully describes the purchase of Series A Convertible
Preferred Stock and the Secured Convertible Loan Facility. The
price per share and units are indicated above in response to Item
5(a). Exhibits C and D indicate where and how the transactions
by and between Reporting Person and Issuer were effected.
(d) None.
(e) Not applicable.
4
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Item 6. Contracts, Arrangements, Understandings or Relationships With Respect
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to Securities of the Issuer.
---------------------------
As reported under Item 5(a) above, Reporting Person has entered into
several contracts with Issuer to acquire majority voting and pecuniary
control of Issuer. In connection with these transactions, Reporting
Person has acquired voting power over 29,253,002 Common Shares on a
fully converted basis, representing 86.1% of Issuer's authorized and
outstanding Common Stock after amendment of Issuer's Certificate of
Incorporation. As a result of these transactions, Reporting Person has
purchased the right to elect a majority of Issuer's board of directors.
Item 7. Material to be Filed as Exhibits.
- -----------------------------------------
A. Form of Convertible Debentures in the principal amount of $500,000 in
the aggregate, convertible into 1,000,000 shares of the Common Stock
of the Issuer.
B. Form of Warrants for the purchase of 300,000 shares of the Common
Stock of the Issuer at an exercise price of $.50 per share.
C. Letter Agreement dated February 18, 2000, effected February 24, 2000,
providing Reporting Person the conditional right to acquire 7,200,000
shares of the Common Stock of the Issuer for an aggregate purchase
price of $1,000,000.
D. Securities Purchase Agreement dated March 9, 2000 for 1,853,300
shares of Series A Preferred Stock and the $1,000,000 Secured
Convertible Loan Facility.
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Signature
- ---------
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the Information set forth in this statement is true, complete
and correct.
Date: 03/20/00 WARD NORTH AMERICA HOLDING, INC
By: /s/ Kevin P. Jasper
------------------------
Kevin P. Jasper,
Executive Vice President
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Debenture No. E-3
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR
QUALIFIED UNDER ANY APPLICABLE STATE SECURITIES LAWS. IT MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT OR
QUALIFICATION UNDER SUCH SECURITIES LAWS OR AN OPINION OF COUNSEL, SATISFACTORY
TO THE COMPANY, THAT THE SALE OR TRANSFER IS PURSUANT TO AN EXEMPTION FROM THE
REGISTRATION OR QUALIFICATION REQUIREMENTS OF SUCH SECURITIES LAWS.
ANCHOR PACIFIC UNDERWRITERS, INC.
10% Convertible Senior Subordinated Debenture, Series E
(convertible into shares of common stock)
____________$ Concord, California
___________, 2000
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 ___________ Thousand 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 June 1, 2000,
December 1, 2000 and June 1, 2001 (each, an "Interest Payment Date"). Each
Debenture delivered upon registration of transfer or in exchange for or in lieu
of this Debenture shall carry the rights to interest accrued and unpaid, and to
accrue, which were carried by this Debenture. This Debenture, together with the
other Series E Debentures issued to the Holder, 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 December 1, 2001 (the "Maturity Date"). Payment of interest
and principal shall be made in lawful money of the United States of America by
wire transfer to an account designated by the Holder appearing on the Debenture
Register.
This Debenture is a duly authorized Debenture of the Company, Series
E, limited to the aggregate principal amount of $500,000.00.
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
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conducted and as proposed to be conducted. The Company is duly qualified to
transact business and is in good standing in each jurisdiction in which the
failure to so qualify would have a material adverse effect on its business or
properties.
1.2 Valid Issuance of Debentures and Shares. The Debenture, when
---------------------------------------
issued, sold and delivered in accordance with the terms hereof for the
consideration expressed herein, will be a valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms, and based
in part upon the representations of the Holder contained in the Subscription
Agreement pursuant to which this Debenture is being issued, will be issued in
compliance with all applicable federal and state securities laws. The shares of
the Company's Common Stock, $.02 par value per share, issuable upon conversion
of the Debentures (the "Shares") have been duly and validly reserved for
issuance and, upon issuance in accordance with the terms of this Debenture,
shall be duly and validly issued, fully paid and nonassessable.
1.3 Compliance with Other Instruments. The Company is not in
---------------------------------
violation of or default under any provisions of its Certificate of Incorporation
or Bylaws as amended and in effect on and as of the date of this Debenture or of
any material provision of any instrument or contract to which it is a party or
by which it is bound or, to its knowledge, of any material provision of any
federal or state judgment, writ, decree, order, statute, rule or governmental
regulation applicable to the Company. 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
2
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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.
2.2 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
3
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on account of unpaid principal of and interest on this Debenture and such other
obligations before any payment or other distribution, whether in cash, property
or otherwise, shall be made on account of any capital stock or any obligations
of the Company ranking junior to this Debenture and such other obligations.
(b) In the event that, notwithstanding the foregoing, any payment
or distribution of any character, whether in cash, securities or other property
(other than securities of the Company or any other corporation provided for by a
plan of reorganization or readjustment the payment of which is subordinate, at
least to the extent provided in these subordination provisions with respect to
the indebtedness evidenced by this Debenture, to the payment of all Senior Debt
at the time outstanding and to any securities issued in respect thereof under
any such plan of reorganization or readjustment), shall be received by any
Holder in contravention of any of the terms hereof, such payment or distribution
or security shall be received in trust for the benefit of, and shall be paid
over or delivered and transferred to, the holders of the Senior Debt at the time
outstanding in accordance with the priorities then existing among such holders
for application to the payment of all Senior Debt remaining unpaid, to the
extent necessary to pay all such Senior Debt in full. In the event of the
failure of any such Holder to endorse or assign any such payment, distribution
or security, each holder of Senior Debt is hereby irrevocably authorized to
endorse or assign the same.
2.5 No Impairment of Rights. Nothing contained herein shall impair,
-----------------------
as between the Company and the Holder, the obligation of the Company to pay such
Holder the principal of and interest on this Debenture or prevent such Holder
from exercising all rights, powers and remedies otherwise permitted by
applicable law or hereunder upon an Event of Default (as defined below)
hereunder, all subject to the rights of the holders of the Senior Debt to
receive cash, securities or other property otherwise payable or deliverable to
the Holder of this Debenture.
2.6 Subrogation. Upon the payment in full of all Senior Debt, the
-----------
Holders of the Debentures, together with all other subordinated debt of the
Company ranking on a parity therewith, shall be subrogated to all rights of any
holders of Senior Debt to receive any further payments or distributions
applicable to the Senior Debt 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.
4
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2.9 Undertaking. By its acceptance of this Debenture, the Holder
-----------
agrees to execute and deliver such documents as may be reasonably requested from
time to time by the Company or the lender of any Senior Debt in order to
implement the foregoing provisions of Section 2 hereof.
3. 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)
5
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simple interest on the amount owing at the rate per annum equal to the lower of
(x) twelve percent (12%) or (y) the maximum rate permitted under applicable law
on the amounts past due; and (ii) such additional amount as shall be sufficient
to cover the cost and expenses of collection, including, without limitation,
reasonable attorneys' fees, expenses and disbursements.
(c) No right, power or remedy conferred by this Debenture upon
any Holder shall be exclusive of any other right, power or remedy referred to
herein or now or hereafter available at law, in equity, by statute or otherwise.
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
6
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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 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
7
<PAGE>
(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.
(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.
8
<PAGE>
6.3 Replacement Debenture.
---------------------
(a) If the Debenture is mutilated and is surrendered to the Company,
the Company shall execute and deliver in exchange therefor a new Debenture of
like tenor and principal amount and bearing a number not contemporaneously
outstanding. If there shall be delivered to the Company: (i) evidence to its
satisfaction of the destruction, loss or theft of the Debenture; and (ii) such
security or indemnity as may be required by it to save the Company and any agent
harmless. Then, in the absence of notice to the Company that the Debenture has
been acquired by a bona fide purchaser, the Company shall execute and deliver,
in lieu of any such destroyed, lost or stolen Debenture, a new Debenture of like
tenor and principal amount and bearing a number not contemporaneously
outstanding. In the event such mutilated, destroyed, lost or stolen Debenture
has become or is about to become due and payable, the Company in its discretion
may, instead of issuing a new Debenture, retire such Debenture.
(b) Upon the issuance of any new Debenture under this Section 6.3, the
Company may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and any other
expenses connected therewith.
(c) Any new Debenture issued pursuant to this Section 6.3 in lieu of
any destroyed, lost or stolen Debenture shall constitute an original additional
contractual obligation of the Company, whether or not the destroyed, lost or
stolen Debenture shall be at any time enforceable by anyone.
(d) The provisions of this Section 6.3 are exclusive and shall
preclude (to the extent lawful) all other rights and remedies with respect to
the replacement or payment of mutilated, destroyed, lost or stolen Debentures.
7. Limitations on Disposition. The Holder understands that this
--------------------------
Debenture, the Shares issuable upon conversion of this Debenture and any other
securities issued 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:
9
<PAGE>
"The securities represented hereby have not been registered under the
Securities Act of 1933, or any state securities laws. These
securities may not be sold or transferred in the absence of an
effective registration statement or qualification under such
securities laws or an opinion of counsel, satisfactory to the Company,
that the sale or transfer is pursuant to an exemption from the
registration or qualification requirements of any applicable
securities laws."
8. Limitations on Dividends and Distributions. So long as this Debenture
------------------------------------------
is outstanding, the Company shall not declare, pay, make or set apart any sum
for a dividend or other distribution (whether in cash or other property) with
respect to any class of capital stock of the Company (other than dividends or
distributions payable in its capital stock), or for the redemption, retirement,
purchase or other acquisition for value of any share of any class of capital
stock of the Company or any warrants or rights to purchase any class of capital
stock of the Company.
9. Registration Rights.
-------------------
9.1 Definitions. For purposes of Section 9 hereof, terms not
-----------
otherwise defined herein shall have the following meanings:
(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
10
<PAGE>
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 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
11
<PAGE>
(b) for expenses that the Company is prohibited from paying under
Blue Sky laws or by Blue Sky administrators.
9.4 Company Responsibilities. In the case of a registration effected by
------------------------
the Company pursuant to this Debenture, the Company shall use its best efforts
to keep the Rights Holder advised in writing as to the initiation, effectiveness
and completion of such registration. At its expense the Company shall:
(a) prepare and file a registration statement (and such amendments
and supplements thereto) with respect to such Registrable Securities and use its
best efforts to cause such registration statement to become and remain effective
for a period of one hundred eighty (180) days or until the Rights Holder or
Rights Holders have completed the distribution described in the registration
statement relating thereto, whichever first occurs;
(b) furnish such number of copies of a Prospectus in conformity with
the requirements of applicable law, and such other documents incident thereto as
a Rights Holder from time to time may reasonably request; and
(c) use every reasonable effort to register or qualify the
Registrable Securities covered by such registration statement under the state
Blue Sky laws of such jurisdictions as the Company's Board of Directors may
reasonably determine, and do any and all other acts and things which may be
necessary under said Blue Sky laws to enable the sellers of the Registrable
Securities to consummate the public sale or other disposition of the Registrable
Securities owned by them in such jurisdictions, except that the Company shall
not for any purpose be required to qualify to do business as a foreign
corporation in any jurisdiction wherein the Registrable Securities are so
qualified.
9.5 Indemnification.
---------------
(a) The Company shall indemnify the Rights Holder, each of the Rights
Holder's officers and directors, and each person controlling such 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
12
<PAGE>
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.
(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.
13
<PAGE>
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.
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.
14
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Debenture on
the date first above written.
ANCHOR PACIFIC UNDERWRITERS, INC.
By:
-------------------------------
James R. Dunathan
President/CEO
15
<PAGE>
Exhibit "A"
Form of Conversion Notice
To Anchor Pacific Underwriters, Inc.:
The undersigned Holder hereby irrevocably exercises the option to convert this
Debenture, or portion hereof (which is in the amount of not less than $5,000 and
in increments of not less than $5,000 thereafter) below designated, into shares
of the Company's Common Stock, $.02 par value per share, in accordance with the
terms of the Debenture, and directs that the shares issuable and deliverable
upon such conversion, together with any check in payment for fractional shares
and any Debentures representing any unconverted principal amount hereof, be
issued and delivered to the undersigned unless a different name has been
indicated below. If shares or Debentures are to be issued in the name of a
person other than the undersigned, the undersigned will pay all transfer taxes
payable with respect thereto. Any amount required to be paid by the undersigned
on account of interest accompanies this Debenture.
Dated:
--------------- -----------------------------
Signature
----------------------------
Taxpayer Identification Number
Principal Amount to be Converted: $
---------------
If shares or Debentures are to be registered in the name of a person other than
the Holder, please print such person's name and address below:
Name:
----------------------
Address:
----------------------
----------------------
A-1
<PAGE>
WARRANT
TO PURCHASE SHARES OF COMMON STOCK OF
ANCHOR PACIFIC UNDERWRITERS, INC.
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED UNLESS (A) COVERED
BY AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT, (B) IN COMPLIANCE WITH
RULE 144 UNDER SUCH ACT, OR (C) THE COMPANY HAS BEEN FURNISHED WITH AN OPINION
OF COUNSEL REASONABLY ACCEPTABLE TO THE COMPANY THAT NO REGISTRATION IS REQUIRED
FOR SUCH TRANSFER.
_______ Shares of Common Stock
1. General Terms.
--------------
1.1 Right to Acquire Securities.
---------------------------
(a) This Warrant certifies that for value received WARD NORTH
AMERICA, INC., a California corporation, (the "Holder"), or registered assigns,
are entitled at any time before 5:00 p.m., San Francisco, California time, on
the Expiration Date (as such term is defined herein) to purchase from ANCHOR
PACIFIC UNDERWRITERS, INC., a Delaware corporation (the "Company"), 21,000
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.
1.2 Exercise of Warrant.
-------------------
(a) The Holder or any person or entity to whom the Holder has
assigned its right under this Warrant (collectively referred to as the
"Warrantholder") may exercise the Warrant, in whole or in part, at any time or
from time to time, prior to its expiration, on any business day, by delivering a
written notice in the form attached hereto (the "Exercise Notice") to the
Company at the offices of the Company designated in Section 5.4 hereof,
exercising the Warrant and
-1-
<PAGE>
specifying (i) the total number of shares of Common Stock the Warrantholder will
purchase pursuant to such exercise and (ii) a place and date not less than one
nor more than 20 business days from the date of the Exercise Notice for the
closing of such purchase.
(b) At any closing under Section 1.2(a) hereof, (i) the Warrantholder
will surrender the Warrant and make payment to the Company of the aggregate
Exercise Price for the shares of Common Stock so purchased by bank, cashier's or
certified check and (ii) the Company will deliver to the Warrantholder a
certificate or certificates for the number of shares of Common Stock issuable
upon such exercise, together with cash, in lieu of any fraction of a share, as
provided in Section 1.1(a) above. Upon any partial exercise, a new warrant or
warrants of the same tenor and expiration date for the purchase of the number of
such shares not purchased upon such exercise shall be issued by the Company to
the registered holder thereof.
1.3 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 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.
1.4 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.
1.5 Payment of Taxes. The Company shall pay all taxes and other
----------------
governmental
-2-
<PAGE>
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.
1.6 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 by the Company and all other persons dealing
with the Warrant as the absolute owner of such Warrant for any purpose and as
the person entitled to exercise the rights represented thereby, or to the
transfer on the books of the Company, any notice to the contrary
notwithstanding; but until such transfer on such books, the Company may treat
the registered holder of the Warrant as the owner for all purposes. The term
"Warrant" as used herein shall include the Warrant and, any warrants delivered
in substitution or exchange therefor as provided herein.
(b) The Warrant is exchangeable for a warrant or warrants for the
same aggregate number of Warrant Shares, each new Warrant to represent the right
to purchase such number of shares as the holder shall designate at the time of
such exchange.
2. Transfer of Securities.
-----------------------
2.1 Restrictions of Transfer. Neither the Warrant nor the Warrant
------------------------
Shares shall be transferable except upon the conditions specified in this
Section 2.1, which conditions are intended to insure compliance with the
provisions of the Securities Act of 1933 (the "1933 Act") in respect to the
transfer of the Warrant and the Warrant Shares.
(a) Unless and until otherwise permitted by this Section 2.1, the
Warrant and each certificate or other document evidencing any of the Warrant
Shares shall be endorsed with a legend substantially in the following form:
"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
-3-
<PAGE>
ACCEPTABLE TO THE COMPANY TO THE EFFECT THAT NO REGISTRATION IS REQUIRED
FOR SUCH TRANSFER"
(b) Neither the Warrant nor the Warrant Shares shall be transferred,
and the Company shall not be required to register any such transfer, unless and
until one of the following events shall have occurred:
(i) the Company shall have received an opinion of counsel, in
form and substance reasonably acceptable to the Company and its counsel, stating
that the contemplated transfer is exempt from registration under the 1933 Act as
then in effect, and the Rules and Regulations of the Securities and Exchange
Commission (the "Commission") thereunder. Within five business days after
delivery to the Company and its counsel of such an opinion, the Company either
shall deliver to the proposed transferor a statement to the effect that such
opinion is not satisfactory in the reasonable opinion of its counsel (and shall
specify in detail the legal analysis supporting any such conclusion) or shall
authorize the Company's transfer agent to make the requested transfer;
(ii) the Company shall have been furnished with a letter from the
Commission in response to a written request in form and substance acceptable to
counsel for the Company setting forth all of the facts and circumstances
surrounding the contemplated transfer, stating that the Commission will take no
action with regard to the contemplated transfer;
(iii) the Warrant or the Warrant Shares are transferred pursuant
to a registration statement which has been filed with the Commission and has
become effective; or
(iv) the Warrant or the Warrant Shares are transferred in
accordance with the provisions of Rule 144 promulgated by the Commission under
the 1933 Act.
(c) The restrictions on transfer imposed by this Section 2.1 shall
cease and terminate as to the Warrant and the Warrant Shares when (i) such
securities shall have been effectively registered under the 1933 Act and sold by
the holder thereof in accordance with such registration, (ii) an acceptable
opinion as described in Section 2.l(b)(i) or a "no action" letter described in
Section 2.l(b)(ii) states that future transfers of such securities by the
transferor or the contemplated transferee would be exempt from registration
under the 1933 Act, or (iii) such securities may be sold in accordance with the
provisions of Rule 144 promulgated under the 1933 Act. When the restrictions on
transfer contained in this Section 2.1 have terminated as provided above, the
holder of the securities as to which such restrictions shall have terminated or
the transferee of such holder shall be entitled to receive promptly from the
Company, without expense to him, new certificates not bearing the legend set
forth in Section 2.1(a) hereof.
2.2 Cooperation. The Company shall cooperate in supplying such
-----------
information as may be reasonably requested by the Warrantholder to complete and
file any information reporting forms presently or subsequently required by the
Commission as a condition to the availability of an exemption, presently
existing or subsequently adopted, from the 1933 Act for the sale of the Warrant
or the Warrant Shares.
3. Registration Rights
-------------------
-4-
<PAGE>
3.1 Rights of Warrantholders. Holders of the Common Stock issued or
------------------------
issuable upon exercise of this Warrant (collectively, the "Registrable
Securities") shall have "piggyback" registration rights as set forth below:
(a) If, at any time 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.
(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.
-5-
<PAGE>
3.2 Expenses.
---------
All expenses incurred in connection with any registration pursuant to
this Warrant or Warrant Shares, including without limitation, all registration,
filing and qualification fees, printing expenses, fees and disbursements of
counsel for the Company, and expenses of any special audits incidental to or
required by such registration, shall be borne by the Company; provided however
the Company shall not be required to pay:
(a) fees of legal counsel of any Holder, or underwriters' fees,
discounts, commissions or expenses relating to Registrable Securities; and
(b) for expenses that the Company is prohibited from paying under Blue
Sky laws or by Blue Sky administrators.
3.3 Company.
-------
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.
3.4 Indemnification.
---------------
(a) The Company shall indemnify the Holder, with respect to such
registration effected pursuant to Section 3 hereof, against all claims, losses,
damages and liabilities (or actions in respect thereto) arising out of or based
on any untrue statement (or alleged untrue statement) of a material fact
contained in any registration statement or related Prospectus, or based on any
omission (or alleged omission) to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, or
any violation by the Company of any
-6-
<PAGE>
rule or regulation promulgated under any securities law applicable to the
Company and relating to action or inaction required of the Company in connection
with any such registration, and shall reimburse the Holder and each person who
controls any such underwriter, for any legal and any other expenses reasonably
incurred in connection with investigating or defending any such claim, loss,
damage, liability or action, provided that the Company shall not be liable in
any such case to the extent that any such claim, loss, damage or liability
arises out of or is based on any untrue statement or omission based upon written
information furnished to the Company in an instrument duly executed by such
Holder specifically for use therein.
(b) The Holder shall, if Registrable Securities held by or issuable to
the Holder are included in the securities as to which such registration is being
effected, indemnify the Company, each of its directors and officers who sign
such registration statement, each underwriter, if any, of the Company's
securities covered by such a registration statement, each person who controls
the Company within the meaning of the Act, and each other Holder, against all
claims, losses, damages and liabilities (or actions in respect thereof) arising
out of or based on any untrue statement (or alleged untrue statement) of a
material fact contained in any such registration statement or related
Prospectus, or any omission (or alleged omission) to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, and shall reimburse the Company and such Holders for any legal
or any other expenses reasonably incurred in connection with investigating or
defending any such claim, loss, damage, liability, or action, in each case to
the extent, but only to the extent, that such untrue statement (or alleged
untrue statement) or omission (or alleged omission) is made in such registration
statement or related Prospectus in reliance upon and in conformity with written
information furnished to the Company in an instrument duly executed by such
Holder specifically for use therein.
(c) Each party entitled to indemnification under this Section 3.4 (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not be unreasonably
withheld), and the Indemnified Party may participate in such defense at such
party's expense; and provided further that the failure of any Indemnified Party
to give notice as provided herein shall not relieve the Indemnifying Party of
its obligations under this Section 3.4. No Indemnifying Party, in the defense of
any such claim or litigation, shall, except with the consent of each Indemnified
Party, consent to entry of any judgment or enter into any settlement, which does
not include as an unconditional term thereof, the giving by the claimant or
plaintiff to such Indemnified Party of a release from all liability in respect
to such claim or litigation.
3.5 Holder's Obligations. The Holder shall furnish to the Company such
--------------------
written information regarding such Holder and the distribution proposed by such
Holder as the Company may reasonably request in writing and as shall be required
in connection with any registration referred to in this Warrant.
3.6 Assignment. The rights granted to the Holder pursuant to this Warrant
----------
may
-7-
<PAGE>
be assigned to a transferee or assignee of the Warrant or any of the Registrable
Securities, provided that the transferee or assignee is an affiliated entity of
the Holder and the Company is given written notice at the time of or within 10
days after said transfer, stating the name and address of said transferee or
assignee and identifying the Registrable Securities with respect to which such
registration rights are being assigned.
4. Adjustments to Exercise Price and Warrant Shares. The Exercise Price in
------------------------------------------------
effect from time to time and the number of Warrant Shares shall be subject to
adjustment in certain cases as set forth in this Section 4.
4.1 Subdivision or Combination. In the event the outstanding Common
--------------------------
Stock shall be subdivided into a greater number of shares of Common Stock, the
Exercise Price for the Warrant Shares shall, simultaneously with the
effectiveness of such subdivision, be proportionately reduced and the number of
Warrant Shares proportionately increased, and conversely, in case the
outstanding Common Stock shall be combined into a smaller number of shares of
Common Stock, the Exercise Price shall, simultaneously with the effectiveness of
such combination, be proportionately increased and the number of Warrant Shares
proportionately reduced.
4.2 Adjustment for Reorganization, Consolidation, Merger.
-----------------------------------------------------
(a) In case of any reorganization of the Company (or any other
corporation the stock or other securities of which are receivable on the
exercise of the Warrant) after the date on which this Warrant is first issued
(the "Issuance Date"), or in case, after such date, the Company (or any such
other corporation) shall consolidate with or merge into another corporation or
convey all or substantially all of its assets to another corporation, then and
in each such case the Warrantholder, upon exercise of the Warrant as provided in
Section 1.2 hereof at any time after the consummation of such reorganization,
consolidation, merger or conveyance, shall be entitled to receive, in lieu of
the stock or other securities and property receivable upon the exercise of the
Warrant prior to such consummation, the stock or other securities or property to
which the Warrantholder would have been entitled upon such consummation if the
Warrantholder had exercised or converted the Warrant immediately prior thereto;
in each such case, the terms of this Warrant, including the exercise provisions
of Section 1.2, shall be applicable to the shares of stock or other securities
or property receivable upon the exercise or conversion of the Warrant after such
consummation.
(b) The Company shall not effect any consolidation, merger or
conveyance of all or substantially all of its assets unless prior to the
consummation thereof the successor corporation (if other than the Company)
resulting from such consolidation or merger or the corporation into or for the
securities of which the previously outstanding stock of the Company shall be
changed in connection with such consolidation or merger, or the corporation
purchasing such assets, as the case may be, shall assume by written instrument,
in form and substance satisfactory to the Warrantholder, executed and delivered
in accordance with Section 5.4 hereof, the obligation to deliver to the
Warrantholder such shares of stock, securities or assets as, in accordance with
the foregoing provisions, the Warrantholder is entitled to purchase.
(c) If a purchase, tender or exchange offer is made to and
accepted by the
-8-
<PAGE>
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 indirectly controlling, controlled by or under direct or indirect
common control with, such other Person. A Person shall be deemed to control a
corporation if such Person possesses, directly or indirectly, the power to
direct or cause the direction of the management and policies of such
corporation, whether through the ownership of voting securities, by contract or
otherwise.
4.3 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 $10,500 by such adjusted
Exercise Price.
4.4 Miscellaneous Exercise Matters. The Company shall at all times
------------------------------
reserve and keep available out of its authorized but unissued Common Stock the
full number of Warrant Shares deliverable upon exercise of the Warrant Shares,
as such number may change from time to time. Also, the Company shall, at its
own expense, take all such actions and obtain all such permits and orders as
may be necessary to enable the Company lawfully to issue the Warrant Shares upon
the exercise of the Warrant.
4.5 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.
4.6 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.
-9-
<PAGE>
4.7 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.
5. Miscellaneous.
-------------
5.1 Entire Agreement. This Warrant constitutes the full and entire
----------------
understanding and agreements between the parties hereto with respect to the
subjects hereof and thereof.
5.2 Successors and Assigns. The terms and conditions of this
----------------------
Warrant shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties hereto, except as expressly provided
otherwise herein.
5.3 Governing Law. This Warrant shall be governed by and construed
-------------
under the laws of the State of California.
5.4 Notices, Etc. All notices and other communications required or
--------------
permitted hereunder shall be in writing and shall be deemed effectively given
upon personal delivery or upon the seventh day following mailing by registered
air mail, postage prepaid, addressed (a) if to the Warrantholder, at 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.
5.5 Delays or Omissions. No delay or omission to exercise any
-------------------
right, power or remedy accruing to any holder of any securities issued or sold
or to be issued or sold hereunder, upon any breach or default of the Company
under this Agreement, shall impair any such right, power or remedy of such
holder nor shall it be construed to be a waiver of any such breach or default,
or an acquiescence therein, or in any similar breach or default thereafter
occurring, nor shall any waiver of any single breach or default be deemed a
waiver of any other breach or default theretofore or thereafter occurring. Any
waiver, permit, consent or approval of any kind or character on the part of any
holder of any breach or default under this Agreement, or any waiver on the part
of any holder of any provisions or conditions of this Agreement, must be in
writing and shall be effective only to the extent specifically set forth in such
writing. All remedies, either under this Agreement or by law or otherwise
afforded to any holder, shall be cumulative and not alternative.
5.6 Survival. The representations, warranties, covenants and
--------
agreements made herein and or made pursuant to this Agreement shall survive the
execution and delivery of this Agreement, except as expressly provided otherwise
herein.
-10-
<PAGE>
5.7 Waivers and Amendments. With the written consent of the record
----------------------
or beneficial holders of more than 50% of the Warrant Shares (treated as if
converted), the obligations of the Company and the rights of the holders of the
Warrant and the Warrant Shares may be waived (either generally or in a
particular instance, either retroactively or prospectively and either for a
specified period of time or indefinitely), and with the same consent the
Company, when authorized by resolution of its Board of Directors, may enter into
a supplemental agreement for the purpose of adding any provisions to or changing
in any manner or eliminating any of the provisions of this Warrant; provided,
however, that no such waiver or supplemental agreement shall reduce the
aforesaid percentage of the Warrant Shares, the holders of which are required to
consent to any waiver or supplemental agreement, without the consent of the
record or beneficial holders of all of the Warrant Shares (treated as if
converted). Upon the effectuation of each such waiver, consent, agreement of
amendment or modification, the Company promptly shall give written notice
thereof to the record holders of the Warrant and the Warrant Shares. This
held to be invalid, illegal or unenforceable under applicable law, such
Warrant or any provision hereof may not be changed, waived, discharged or
terminated orally, but only by a statement in writing signed by the party
against which enforcement of the change, waiver, discharge or termination is
sought, except to the extent provided in this Section 5.7.
5.8 Severability. If one or more provisions of this Warrant are
------------
provision shall be modified in such manner as to be valid, legal and
enforceable, but so as to most nearly retain the intent of the parties, and if
such modification is not possible, such provision shall be severed from this
Agreement as if such provision were not included, in either case, and the
balance of this Warrant shall not in any way be affected or impaired thereby and
shall be enforceable in accordance with its terms.
5.9 Registered Holder. The Company may deem and treat the
-----------------
registered Holder(s) hereof as the absolute owner(s) of this Warrant
(notwithstanding any notation of ownership or other writing hereon made by
anyone), for the purpose of any exercise or conversion hereof, of any
distribution to the Holder(s) hereof, and for all other purposes, and the
Company shall not be affected by any notice to the contrary. Other than as set
forth herein, this Warrant does not entitle any Holder hereof to any rights of a
stockholder of the Company.
5.10 Titles and Subtitles. The titles of the sections and
--------------------
subsections of this Warrant are for convenience and are not to be considered in
construing this Warrant.
-11-
<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: February , 2000
--
ANCHOR PACIFIC UNDERWRITERS, INC.
By:
--------------------------------
James R. Dunathan
Its: President/CEO
-12-
<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
-13-
<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
-14-
<PAGE>
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 the 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
<PAGE>
convertible 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 be 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
<PAGE>
number of 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 nor 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 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 $0.80 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 1(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
<PAGE>
Company's compliance with the material terms of this Agreement and the
Definitive Agreements prior to the closing 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 of
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 R. 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
<PAGE>
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 necessary for the consummation of 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 by 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>
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 execution and delivery of this Agreement by the
Company and that this Agreement has
<PAGE>
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
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>
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 as 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 : 2/18/00
---------------------------- -------
Kevin P. Jasper
Executive Vice President
ANCHOR PACIFIC UNDERWRITERS, INC.
By : /s/ James R. Dunathan Date : 2/22/00
---------------------------- -------
James R. Dunathan
President & CEO
<PAGE>
================================================================================
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
7
<PAGE>
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
10
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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
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EXHIBIT A
---------
FORM OF DEBENTURE
17
<PAGE>
EXHIBIT B
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CERTIFICATE OF DESIGNATION
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
<PAGE>
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 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
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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 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
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<PAGE>
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"):
(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.
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<PAGE>
(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 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
-5-
<PAGE>
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 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
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<PAGE>
(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 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.
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<PAGE>
(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 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
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<PAGE>
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 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. (a) 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
-9-
<PAGE>
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;
(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
-10-
<PAGE>
(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 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.
-11-
<PAGE>
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.
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:
-----------------------------------
James R. Dunathan, President
By:
-----------------------------------
Earl Wiklund, Secretary
-12-
<PAGE>
EXHIBIT C
---------
FORM OF LOAN FACILITY
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: ____________________________________
James R. Dunathan, President & CEO
AGREED (as to Section 2):
WARD NORTH AMERICA HOLDING, INC.
By: __________________________________
Jeffrey S. Ward, President and CEO
10
<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 Maturity Strike Outstanding
Date 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 Maturity Strike Outstanding
Date Date Price Warrants
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Subscription Agreements/Warrants
- -----------------------------------------------------------------------------------
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 Maturity Strike Outstanding
Date Date Price Warrants
- ------------------------------------------------------------------------------------
System Industries/Warrants
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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 Options Option Price Vested 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 Options Option Price Vested 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 Options Option Price Vested 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 Options Option Price Vested 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, 5th 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 E
---------
FORM OF LEGAL OPINION OF COMPANY COUNSEL
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");
<PAGE>
E. The Certificate of Designations of Series A Convertible
Preferred Stock of Anchor Pacific Underwriters, Inc. dated
March 9, 2000 (the "Certificate of Designations");
F.
G. The Certificate of Amendment to the Certificate of
Incorporation of the Company (the "Certificate of Amendment");
H. 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;
I. A copy of the Bylaws of the Company, certified by an officer of
the Company;
J. A copy of the resolutions of the shareholders of the Company
approving the Certificate of Amendment certified by an officer
of the Company; and
K. 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.
<PAGE>
Ward North America Holding, Inc.
March 10, 2000
Page 3
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
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 terms,
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,
<PAGE>
Ward North America Holding, Inc.
March 10, 2000
Page 4
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 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 1968, 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,
<PAGE>
Ward North America Holding, Inc.
March 10, 2000
Page 5
authorizations, designations, declarations or filings as have been mode or
obtained on or before the date hereof or which are not required to be made or
obtained until after the date hereof.
1. 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 date 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 laws 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
<PAGE>
Ward North America Holding, Inc.
March 10, 2000
Page 6
quoted from or referred to, or copies delivered to any other person, without our
prior written consent.
Very truly yours,
<PAGE>
EXHIBIT F
---------
FORM OF 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 morethan one (1) time in any twelve (12)
month period. Upon
1
<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
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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.
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"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
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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.
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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:
----------------------------------------
Jeffrey S. Ward, President and Chief
Executive Officer
ANCHOR PACIFIC UNDERWRITERS, INC.
By:
---------------------------------------
James R. Dunathan, President and Chief
Executive Officer
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