-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JiFsLP3Nj8mboNjf/gzF2VIWu/GMvsNLon/K6C1i0ktIpEmpogeqPdOcu5k+rVcB Xfv1B1KYwoFpg3M+ZapyJQ== 0000929624-99-001526.txt : 19990816 0000929624-99-001526.hdr.sgml : 19990816 ACCESSION NUMBER: 0000929624-99-001526 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ANCHOR PACIFIC UNDERWRITERS INC CENTRAL INDEX KEY: 0000317781 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER STORAGE DEVICES [3572] IRS NUMBER: 941687187 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10058 FILM NUMBER: 99686499 BUSINESS ADDRESS: STREET 1: 1800 SUTTER ST STREET 2: STE 400 CITY: CONCORD STATE: CA ZIP: 94520 BUSINESS PHONE: 5106827707 MAIL ADDRESS: STREET 1: 1800 SUTTER ST STE 400 CITY: CONCORD STATE: CA ZIP: 94520 FORMER COMPANY: FORMER CONFORMED NAME: SYSTEM INDUSTRIES INC DATE OF NAME CHANGE: 19920703 10-Q 1 FORM 10-Q ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ________________ FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended June 30, 1999 Commission File Number: 0-9628 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from [ ] to [ ] ANCHOR PACIFIC UNDERWRITERS, INC. (Exact name of registrant as specified in its charter) Delaware 94-1687187 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1800 Sutter Street, Suite 400 94520 Concord, California (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: (925) 682-7707 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common stock, $.02 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No As of June 30, 1999, the Registrant had 4,710,056 shares of common stock outstanding. This document is comprised of 19 pages ================================================================================ ANCHOR PACIFIC UNDERWRITERS, INC. INDEX Part I. FINANCIAL INFORMATION Item 1. Financial Statements: Consolidated Balance Sheets, June 30, 1999 (unaudited) and December 31, 1998.............................................. 1 Consolidated Statements of Operations (unaudited) for the six months and quarters ended June 30, 1999 and 1998........... 3 Consolidated Statements of Shareholders' Equity (Deficit) for the six months ended June 30, 1999 (unaudited) and year ended December 31, 1998........................................ 4 Consolidated Statements of Cash Flows (unaudited ) for the six months ended June 30, 1999 and 1998........................ 5 Notes to Consolidated Financial Statements..................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................ 9 Part II. OTHER INFORMATION Item 1. Legal Proceedings.............................................. 16 Item 2. Changes in Securities.......................................... 16 Item 3. Defaults Upon Senior Securities................................ 16 Item 4. Submission of Matters to a Vote of Security Holders............ 16 Item 5. Other Information.............................................. 16 Item 6. Exhibits and Reports on Form 8-K............................... 16
PART I - FINANCIAL INFORMATION Anchor Pacific Underwriters, Inc. and Subsidiaries Consolidated Balance Sheets
June 30, December 31, 1999 1998 ------------ ----------- (unaudited) Assets Current Assets: Cash and cash equivalents - corporate funds $ 76,184 $ 138,139 Cash and cash equivalents - third-party administration fiduciary funds 3,717,461 3,517,772 Realizable value of net assets sold - 2,054,995 Accounts receivable (less allowance for doubtful accounts of $41,952 in 1999 and 1998, respectively) 414,690 527,827 Prepaid expenses and other current assets 304,351 191,749 ----------- ----------- Total current assets 4,512,686 6,430,482 ----------- ----------- Property and equipment 2,790,353 2,561,111 Accumulated depreciation and amortization (2,128,916) (2,010,633) ----------- ----------- 661,437 550,478 Other assets: Intangible assets, net 560,873 593,933 Other 68,223 80,431 ----------- ----------- 629,096 674,364 ----------- ----------- Total assets $ 5,803,219 $ 7,655,324 ----------- -----------
1 Anchor Pacific Underwriters, Inc. and Subsidiaries Consolidated Balance Sheets (continued)
June 30, December 31, 1999 1998 ----------- ----------- (unaudited) Liabilities and Shareholders' Equity (Deficit) Current Liabilities: Cash and cash equivalents - third-party administration fiduciary funds $ 3,717,461 $ 3,517,772 Accounts payable 488,431 619,798 Accrued expenses 587,085 613,256 Short-term debt 175,000 200,000 Current portion of long-term debt 536,523 1,242,950 Current portion of long-term liabilities 298,055 451,068 ----------- ----------- Total current liabilities 5,802,555 6,644,844 ----------- ----------- Long-term liabilities 435,320 453,226 ----------- ----------- Long-term debt, including $315,000 and $480,000 in 1999 and 1998, respectively, owed to related parties 781,841 858,342 ----------- ----------- Shareholders' equity (deficit): Preferred stock - $.02 par value; 2,000,000 shares authorized; none issued and outstanding Common stock - $.02 par value; 16,000,000 shares authorized; 4,710,056 shares issued as of 6/30/99 and 4,710,057 as of 12/31/98 94,201 94,201 Additional paid-in capital 4,232,265 4,232,265 Accumulated deficit (5,542,963) (4,627,554) ----------- ----------- Total shareholders' equity (deficit) (1,216,497) (301,088) ----------- ----------- Total liabilities and shareholders' equity (deficit) $ 5,803,219 $ 7,655,324 ----------- -----------
See accompanying notes. 2 Anchor Pacific Underwriters, Inc. and Subsidiaries Consolidated Statements of Operations (Unaudited)
Six Months Quarters Ended June 30, Ended June 30, ------------------------------- --------------------------------- 1999 1998 1999 1998 Revenues: Administrative fees and other income $5,024,437 $6,526,613 $2,556,792 $3,139,960 Interest Income 8,956 6,048 2,719 2,282 ---------- ---------- ---------- ---------- Total revenue 5,033,393 6,532,661 2,559,511 3,142,242 Operating expenses: Salaries, commissions and employee benefits 3,727,473 4,080,421 1,812,253 1,974,881 Selling, general and administrative expenses 2,109,283 2,272,427 1,011,335 1,052,314 ---------- ---------- ---------- ---------- Total operating expenses 5,836,756 6,352,848 2,823,588 3,027,195 ---------- ---------- ---------- ---------- (803,363) 179,813 (264,077) 115,047 Other income (expense): Amortization of goodwill & intangible assets (33,060) (22,534) (16,530) (11,267) Interest (75,467) (115,384) (40,648) (49,738) Other 1,351 13,180 (38,571) 8,416 ---------- ---------- ---------- ---------- Total other income (expense) (107,176) (124,738) (95,749) (52,589) ---------- ---------- ---------- ---------- Income (loss) before income taxes (910,539) 55,075 (359,826) 62,458 Benefit (provision) for income taxes 4,870 6,220 - - ---------- ---------- ---------- ---------- Income (loss)from continuing operations $ (915,409) $ 48,855 $ (359,826) $ 62,458 ---------- ---------- ---------- ---------- Discontinued operations: Income from discontinued operations, net of income taxes - 79,655 - 13,658 ---------- ---------- ---------- ---------- Income from discontinued operations - 79,655 - 13,658 ---------- ---------- ---------- ---------- Net income (loss) $ (915,409) $ 128,510 $ (359,826) $ 76,116 ---------- ---------- ---------- ---------- Net income (loss) per share: Income (Loss) from continuing operations $ (0.19) $ 0.01 $ (0.19) $ 0.01 Income from discontinued operations - 0.02 - 0.01 ---------- ---------- ---------- ---------- Basic and diluted income (loss) per common share $ (0.19) $ 0.03 $ (0.19) $ 0.02 ---------- ---------- ---------- ---------- Weighted average number of common shares outstanding 4,710,056 4,710,057 4,710,056 4,710,057 ---------- ---------- ---------- ----------
See accompanying notes 3 Anchor Pacific Underwriters, Inc. Consolidated Statements of Shareholders' Equity (Deficit)
Additional Common Stock Paid-In Accumulated Shares Amount Capital (Deficit) Total ---------------------------------------------------------------------------------- Balance at December 31, 1997 4,690,839 $93,817 $4,215,649 $(3,852,224) $ 457,242 Stock issued for services rendered 18,888 378 16,622 - 17,000 Canceled stock - Fractional shares 330 6 (6) - - Net loss - - - (775,330) (775,330) ---------------------------------------------------------------------------------- Balance at December 31, 1998 4,710,057 $94,201 $4,232,265 $(4,627,554) $ (301,088) Canceled stock - Fractional shares (1) - - - - Net Loss - - - (915,409) (915,409) ---------------------------------------------------------------------------------- Balance at June 30, 1999 (Unaudited) 4,710,056 $94,201 $4,232,265 $(5,542,963) $(1,216,497) ----------------------------------------------------------------------------------
See accompanying notes 4 Anchor Pacific Underwriters, Inc. and Subsidiaries Consolidated Statements of Cash Flows (unaudited)
Six Months Ended June 30, ------------------------------------- 1999 1998 Continuing operations activities: Net income (loss) $ (915,409) $ 128,510 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 118,090 139,532 Amortization of goodwill, other intangibles and organization expenses 33,060 23,695 Changes in operating assets and liabilities, net of effect of purchases of subsidiaries: Accounts receivable 113,137 45,422 Prepaid expenses and other current assets (112,602) 128,962 Other assets 12,208 80,376 Accounts payable and accrued expenses (267,547) (103,729) ----------- --------- Net cash provided by (used in) operating activities (1,019,063) 442,768 ----------- --------- Investment activities: Purchases of property and equipment (229,049) (226,565) Net proceeds from sale of assets 2,165,004 - ----------- --------- Net cash provided by (used in) investing activities 1,935,955 (226,565) ----------- --------- Financing activities: Borrowings on long-term debt 344,000 261,379 Repayment on long-term debt and liabilities (1,322,847) (286,668) ----------- --------- Net cash (used in) financing activities (978,847) (25,289) ----------- --------- Net increase (decrease) in cash (61,955) 190,914 Cash and cash equivalents-corporate funds at beginning of period 138,139 44,384 ----------- --------- Cash and cash equivalents-corporate funds at end of period 76,184 235,298 ----------- --------- Supplemental cash flow information: Cash paid during the period for: Interest 75,467 115,384 ----------- --------- Income taxes 4,870 6,220 ----------- ---------
See accompanying notes 5 ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) June 30, 1999 NOTE 1 - BASIS OF PRESENTATION - ------------------------------ The accompanying unaudited consolidated financial statements of Anchor Pacific Underwriters, Inc. and its subsidiaries ("Anchor") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the six month period ended June 30, 1999, are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. For further information, refer to the consolidated financial statements and footnotes thereto included in Anchor's Annual Report on Form 10-K for the year ended December 31, 1998. Reclassifications - ----------------- Prior years' balances have been reclassified to conform with the current year presentation of discontinued operations. Recapitalization and Restatement - -------------------------------- On January 6, 1995, Anchor merged with System Industries, Inc. ("System"), previously a dormant, publicly traded shell corporation. As a result of the merger, Anchor became a public company. For accounting purposes, the merger has been treated as a recapitalization of Anchor with Anchor as the acquirer. Upon consummation of this merger, shareholders and certain creditors of System each received one share of Anchor common stock and a one year warrant to purchase one share of Anchor common stock at a price of $3.00 for every 42.3291 shares of issued and outstanding System common stock. NOTE 2 - DISCONTINUED OPERATIONS - -------------------------------- Since its inception, Anchor has expanded its insurance and third-party administration service capabilities through internal growth as well as a series of acquisitions. From 1986 through 1990, Anchor, through a wholly- owned subsidiary, Harden & Company Insurance Services, Inc. ("Harden"), primarily focused on providing administration services for group insurance benefit plans. In 1990, Anchor began to diversify its business by providing property, casualty and workers' compensation insurance products and services, as well as offering market studies and program analysis for certain non-profit associations who had endorsed Anchor's products. During the period from 1990 through 1996, Anchor further expanded its property and casualty business by acquiring certain assets, including insurance brokerage accounts. In 1994 Anchor acquired a property and casualty insurance brokerage company, Putnam, Knudsen & Wieking, Inc. ("PKW"). Shortly thereafter it consolidated all of its property and casualty insurance brokerage business under PKW. After evaluating trends in the insurance industry, in mid-1998 the Board of Directors of Anchor decided to sell its property and casualty business and to focus on its third-party administration business. Anchor then engaged an independent investment banker to solicit possible purchasers. After reviewing seven acquisition proposals, Anchor sold substantially all the assets of PKW to an unrelated third party for approximately $2,250,000 in cash, effective December 31, 1998. The proceeds derived from the asset sale were largely used to reduce debt and to make additional financial resources available for working capital needs and third-party administration opportunities. NOTE 3 - CONTINGENCIES - ---------------------- Anchor is subject to certain legal proceedings and claims arising in the ordinary course of its business. It is management's opinion that the resolution of these claims will not have a material effect on Anchor's consolidated financial position. 6 NOTE 4 - 10% CONVERTIBLE SUBORDINATED DEBENTURES - ------------------------------------------------ In 1995, Anchor issued $370,000 of 10% Convertible Subordinated Debentures (the "Debentures"). Subsequently, investors holding $270,000 of the Debentures, including seven members of the Board of Directors, converted their debentures into 200,000 shares of Anchor's common stock at $1.35 per share. These conversions reduced Anchor's outstanding indebtedness by $270,000 and, in turn, increased shareholders' equity by $270,000. As of June 30, 1999, $40,000 of the Debentures had been repaid in full, and $60,000 remained outstanding. NOTE 5 - SUBORDINATED BRIDGE NOTES AND WARRANT - ---------------------------------------------- During 1996, Anchor raised $225,000 from five members of the Board of Directors and other qualified investors through the issuance of 10% Subordinated Bridge Notes with a Warrant to Purchase Shares of Anchor Common Stock ("Bridge Notes"). The basic terms of the Bridge Notes were: (a) 10% interest per annum, paid in arrears; (b) one year term; (c) for every $10,000 of principal invested, the purchaser received a five year warrant to purchase 1,000 shares of Anchor common stock at a purchase price of $1.75 per share; (d) "piggyback" registration rights for three years; and (e) subordination provisions that subordinate the Bridge Notes to Anchor's "Senior Debt" (as defined in the Bridge Notes). In February 1997, Anchor offered the purchasers of said Bridge Notes an opportunity to either change the terms of the warrants underlying the Bridge Notes or to participate in the 1997 Offering (discussed below), by exchanging the Bridge Notes. The basic terms of the two alternatives were: (a) in lieu of receiving a five year warrant to purchase 1,000 shares of Anchor common stock at a purchase price of $1.75 per share, for every $10,000 in principal invested, the purchaser would receive a five year warrant to purchase 2,000 shares of Anchor common stock at a purchase price of $1.35 per share; or (b) be allowed to participate in the 1997 Offering by exchanging the Bridge Notes and receiving in return (i) interest at the rate of 10% per annum up to the date of conversion; (ii) Anchor common stock in place of the Bridge Notes at a conversion price equal to $0.90 per share; and (iii) a five year warrant, equal to the number of shares issued in place of the Bridge Notes, with the right to purchase Anchor's common stock at a purchase price of $0.90 per share. Purchasers representing $180,000 of said Bridge Notes chose alternative (a) above, and the remaining $45,000 chose alternative (b) above. Subsequently, certain purchasers agreed to extend the term of the Bridge Notes and as of June 30, 1999, $80,000 of the Bridge Notes remained outstanding. NOTE 6 - 1997 OFFERING - ---------------------- During 1997, Anchor raised $305,000 from seven members of the Board of Directors and other qualified investors through a private offering of Anchor common stock along with warrants to acquire shares of Anchor common stock (the "1997 Offering"). Anchor utilized a substantial portion of the proceeds from the 1997 Offering to support current and future working capital needs of Anchor. The basic terms of the 1997 Offering were: (a) up to 555,000 shares of Anchor common stock available at a purchase price of $0.90 per share; (b) five year warrants to acquire one share of Anchor common stock for each share of Anchor common stock purchased at an exercise price of $0.90 per share; (c) "piggyback" registration rights for three years; and (d) anti-dilution protection for stock splits, stock dividends, recapitalizations and reorganizations. NOTE 7 - 10% CONVERTIBLE SUBORDINATED DEBENTURES, SERIES B - ---------------------------------------------------------- At the end of the third quarter 1998, Anchor commenced raising additional funds from members of the Board of Directors and other qualified investors by offering 10% Convertible Subordinated Debentures, Series B (the "Series B Debentures"). At the close of the Series B Debentures offering on January 25, 1999, Anchor had raised $495,000, with $200,000 provided by its primary bank lender and the remaining $295,000 from five members of the Board of Directors and other qualified investors. Anchor has utilized a substantial portion of the proceeds from the Series B Debentures to support current working capital needs. The basic terms of the Series B Debentures were: (a) 10% interest, payable semi-annually in arrears; (b) two year maturity; (c) conversion price of $0.50 per share; (d) "Piggyback" registration rights for three years; (e) for each $5,000 of Series B Debentures acquired, an investor received a five year warrant to acquire 2,000 shares of Anchor common stock at an exercise price of $0.50 per share; and (f) subordination provisions that subordinate the Series B Debentures to Anchor's "Senior Debt" (as defined in the Series B Debentures). The Series B Debentures contained a provision that allowed Anchor to redeem all or a portion of their Series B Debentures, at par, plus any outstanding interest, in the event Anchor sold PKW for an amount in excess of $2 million. Anchor sold PKW for $2,250,000 cash, effective December 31, 1998. As of June 30, 1999, 7 Anchor has repurchased $230,000 of the Series B Debentures including $200,000 repurchased from its primary lender. NOTE 8 - 10% CONVERTIBLE SUBORDINATED DEBENTURES, SERIES C - ---------------------------------------------------------- At the end of the first quarter 1999, Anchor commenced raising additional funds from members of the Board of Directors and other qualified investors by offering 10% Convertible Subordinated Debentures, Series C (the "Series C Debentures"). As of July 30, 1999, Anchor had raised $144,000 and had oral commitments from investors to purchase an additional $50,000 of Series C Debentures. Anchor intends to utilize a substantial portion of the proceeds from the Series C Debentures to support current and future working capital needs of Anchor. The basic terms of the Series C Debentures are: (a) 10% interest, payable semi-annually in arrears; (b) two year maturity; (c) conversion price of $0.60 per share; (d) "Piggyback" registration rights for three years; (e) for each $5,000 of Series C Debentures acquired, an investor receives a five year warrant to acquire 2,000 shares of Anchor common stock at an exercise price of $0.60 per share; and (f) subordination provisions that subordinate the Series C Debentures to Anchor's "Senior Debt" (as defined in the Series C Debentures). NOTE 9 - COMMITMENTS - -------------------- On September 30, 1997, Anchor obtained a $1,600,000 bank loan. The basic terms and conditions of this loan were: (a) monthly interest payments equal to the bank's prime rate, plus 2.5%; (b) five year term; (c) monthly principal payments in installments of $26,666 (notwithstanding the foregoing payment provisions, 75% of Anchor's monthly EBITDA were to be applied to principal payments to the extent such percentage of monthly EBITDA was required to make the scheduled payment of principal. To the extent that 75% of monthly EBITDA fell short of the required principal payment, the difference was to be added to the final payment); and (d) a five year warrant to acquire 95,000 shares of Anchor common stock at a purchase price of $1.75 per share. The proceeds of the loan were used to retire outstanding credit facilities with another bank. On December 22, 1997, the bank that provided Anchor with the $1,600,000 term loan also provided Anchor with a $250,000 loan to support current working capital needs of Anchor in connection with Harden's expansion in Portland, Oregon. On March 9, 1998, a term loan in the amount of $1,821,890 was entered into between Anchor and the bank combining both the $1,600,000 term loan and the $250,000 loan. The basic terms of this term loan were: (a) monthly interest payments equal to bank's prime rate, plus 2.5%; (b) maturity date of October 5, 2002; and (c) monthly principal payments in installments of $33,125 beginning April 5, 1998. All other terms and conditions contained in the term loan dated September 30, 1997, including all amendments thereto and replacements therefor, remained in place. On June 2, 1998, a new term loan in the amount of $1,741,841 was entered into between Anchor and the bank which replaced the $1,821,890 term loan. The basic terms of this new term loan are: (a) monthly interest payments equal to bank's prime rate, plus 2.5%; (b) a maturity date of October 5, 2002; and (c) monthly principal payments in installments of $16,500 beginning on June 5, 1998. The provision which required 75% of Anchor's monthly EBITDA to be applied to principal payments was deleted. All other terms and conditions of the term loan dated September 30, 1997, including all amendments thereto and replacements therefor, remain operative. As of June 30, 1999, $734,364 of the bank term loan remained outstanding. Effective December 31, 1998, based on a strategic decision to focus on its third-party administration business, a purchase agreement was entered into between PKW, Anchor and Talbot Agency of California, Inc. ("Talbot") whereby Talbot acquired certain of PKW assets, including insurance brokerage accounts. Consideration for said purchase was $2,250,000 cash which was paid at the time of the closing on January 15, 1999, based on a purchase price of 4.5 times EBITA. The proceeds of the sale have been used by Anchor to reduce debt and to direct additional resources to third-party administration opportunities. On April 29, 1999, Anchor obtained a new $250,000 bank loan from its primary lender. The basic terms and conditions of this loan were: (a) monthly interest payments equal to the bank's prime rate, plus 2.5%; (b) five month term; (c) principal plus all accrued unpaid interest due at maturity, September 30, 1999; and (d) a five year warrant to acquire 100,000 shares of Anchor common stock at a purchase price of $0.60 per share. The proceeds of 8 the loan were used to support current working capital needs of Anchor. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Background Anchor was organized in 1986 as a California general partnership for the specific purpose of acquiring Harden & Company Insurance Services, Inc., a third-party employee benefits administrator ("Harden"), from Alex Brown Financial Group. Anchor was reorganized as a private California corporation in March 1987, and reincorporated in January 1995, as a Delaware corporation in connection with a merger with System Industries, Inc. ("System"). As a result of the merger, Anchor became a public company. Since its inception, Anchor has expanded its insurance and third-party administration service capabilities through internal growth as well as a series of acquisitions. As part of its expansion strategy in 1994, Anchor acquired Benefit Resources, Inc. ("BRI") a third-party employee benefits administration business located in Scottsdale, Arizona. In 1998, Anchor caused BRI to change its name to Harden & Company of Arizona, ('Harden-AZ"). In 1995, certain third- party administration accounts were acquired by Harden-CA from Dutcher Insurance Agency, Inc. ("Dutcher"), located in Stockton, California. In July 1997, Harden- CA took over a third-party administration business, located in Los Angeles, California, that was previously serviced by an unrelated third party. As a result of declining revenues on the Los Angeles business due to carrier rate increases, the Los Angeles office was closed at the end of February 1999, with the remaining business now being serviced from the Concord, California office. In connection with the closure of the Los Angles office, approximately 15 employees who worked in that office were laid-off. Effective January 1, 1998, Anchor and Harden-CA entered into an agreement to acquire the third-party administration business of Pacific Heritage Administrators ("PHA"), a firm based in Portland, Oregon. This contract allowed Harden Group to expand its marketing and servicing territory in Oregon, Washington, Idaho and Nevada and substantially enhanced the Harden Group's revenues in 1998. In conjunction with a new marketing strategy, in June 1998 Anchor reorganized the company's third-party administration services division. In the new organizational structure, "Harden Group" was established as the consolidated name for the management and marketing of third-party administration services. Harden Group includes: Harden & Company Insurance Services, Inc. ("Harden-CA"); Harden & Company of Arizona ("Harden-AZ"); Pacific Heritage Administrators ("PHA") a division of Harden-CA; and Pacific Heritage Administrators of Nevada, Inc. ("PHA-NV"). Under Harden Group identity, the current third-party administration operations of Anchor continue to function as before in their respective territories. Currently, Harden Group includes four third-party administration operations providing services to clients throughout the Western States from six offices located in Concord and Fresno, California; Scottsdale, Arizona; Portland, Oregon; and Las Vegas and Reno, Nevada. Anchor continues to look for opportunities to expand its third-party administration services in the Western United States. General Continuing Operations Third-Party Claims Administration and Employee Benefits Consulting The employee benefits business of Anchor is conducted through Harden Group and primarily involves third-party health benefits administration activities. This business group engages in designing, implementing and administering health benefit plans for small to medium sized employer groups. Administration services provided by Harden Group include receiving and managing employer plan contributions and/or premium payments, monitoring employee and dependent eligibility, preparing required government and tax reports, handling day-to-day administration, reviewing and analyzing claims data for coverage, and managing the claims settlement process. Anchor, through Harden Group, also helps develop insurance products and services tailored to the specific needs of the client, provides risk analysis and conducts loss control and cost studies for insurance companies and self-insured employers. As compensation for its claims administration services, Harden Group generally receives fees based either on a percentage of premiums collected or on a per capita basis. 9 During 1999, Anchor has reorganized its Harden Group senior management structure to be more responsive to the demands of an evolving marketplace. Product development and new product sales continue to be a high priority, as does geographical diversification into other marketing territories in the western states. Discontinued Operations Insurance Brokerage Anchor first entered the insurance brokerage business in 1990 through an acquisition. Thereafter it grew its insurance brokerage business primarily through acquisitions, the largest being PKW. Following the 1994 acquisition of PKW, Anchor consolidated all of its property and casualty insurance brokerage business into PKW. This segment of Anchor's business focused on property and casualty (both commercial and personal lines), health, life and disability, as well as workers' compensation. PKW acted as an agent on behalf of insurers and other intermediaries in soliciting, negotiating and effecting contracts of insurance, and as a broker in procuring insurance contracts on behalf of insureds. As an insurance agent and broker, PKW derived its income from the sale of insurance products and services and the receipt of commissions generated therefrom. Effective as of December 31, 1998, Anchor sold certain assets, including all of the insurance brokerage accounts of PKW, for approximately $2,250,000 in cash. The proceeds derived from the PKW asset sale were largely used to reduce debt and to make additional financial resources available for working capital needs and third-party administration opportunities. Results of Continuing Operations -- Six Months Ended June 30, 1999 and 1998 Reclassifications The prior years' balances detailed below have been reclassified to conform with the current year presentation of discontinued operations. Revenues Total Revenues. Total revenues for the six months ended June 30, 1999, were $5,033,393, a decrease of $1,499,268 or 23.0%, as compared to $6,532,661 in revenues for the same period in 1998. The decrease in revenue in this six month period was primarily due to the declining revenues in Harden Group's Los Angeles office as a result of carrier rate increases. Anchor's revenues vary from quarter to quarter as a result of the timing of policy renewals and net new/lost business production, whereas expenses are fairly uniform throughout the year. Fees. Fees from Harden Group (including underwriting and risk analysis) services for the first six months of 1999, were $5,024,437, a decrease of $1,502,176 or 23.0%, as compared to $6,526,613 in fees for the same period in 1998. This decrease in fee income is the direct result of declining revenue generated from Harden Group's Los Angeles office. Fee revenues generated by Anchor in the first six months of 1999 from third-party administration services consist of revenues generated by Harden Group. The third-party administration revenues are primarily derived from: (a) an insurance product underwritten by one insurance carrier, which is A- (Excellent); and (b) the administration of insurance programs underwritten by various insurance carriers for a number of self-insured employers. Self- insurance is an alternative to fully insured programs in which a client assumes a manageable portion of its insurance risks, usually (although not always) placing the less predictable and larger loss exposure with an excess insurance carrier. Interest Income. Interest income consists of interest earned on funds held in fiduciary accounts and interest earned on investments. Interest income was $8,956 and $6,048 for the six months ended June 30, 1999 and 1998, respectively. 10 Expenses Total Expenses. Total operating expenses for the first six months of 1999, were $5,836,756, a decrease of $516,092 or 8.1% as compared to operating expenses of $6,352,848 for the same period in 1998. As discussed below, the decrease in total expenses resulted primarily from a decrease in selling, general and administration expenses and employee compensation and benefits resulting from the closure of Harden Group's Los Angeles office as well as the reduction of staff at the Concord, Portland and Scottsdale offices in response to the reduction in revenues. Employee Compensation and Benefits. Employee compensation and benefits for the first six months of 1999, were $3,727,473, a decrease of $352,948 or 8.7% as compared to $4,080,421 for the same period in 1998. The decrease related primarily to the closure of Harden Group's Los Angeles office and the reduction of staff at the Concord, Portland and Scottsdale offices in response to the reduction in revenue. Selling, General and Administrative Expenses. Selling, general and administrative expenses were $2,109,283 and $2,272,427 for the six months ended June 30, 1999 and 1998, respectively. The $163,144 or 7.2% decrease in 1999, as compared to 1998, resulted primarily from the closure of Harden Group's Los Angeles office. General and administrative expenses include rent, travel, insurance, postage, telephone, supplies and other miscellaneous expenses. Interest Expense. Interest expense was $75,467 and $115,384, for the first six months of 1999 and 1998, respectively. The decrease in interest expense of $39,917 in the first six months of 1999, as compared to the same period in 1998, was due to the decrease in borrowings under the bank term loan. Amortization of Goodwill and Other Intangibles. Goodwill represents the excess of the cost of acquisitions over the fair value of net assets acquired. Other intangibles include covenants not to compete, customer lists and other contractual rights. Amortization of goodwill and other intangibles was $33,060 and $22,534, for the first six months of 1999 and 1998, respectively. Income Taxes Anchor's expense for income taxes was $4,870 for the first six months of 1999 as compared to $6,220 for the first six months of 1998. Results of Continuing Operations -- Quarters Ended June 30, 1999 and 1998 Reclassifications The prior years' balances detailed below have been reclassified to conform with the current year presentation of discontinued operations. Revenues Total Revenues. Total revenues for the second quarter of 1999, were $2,559,511, an decrease of $582,731 or 18.6%, as compared to 1998 second quarter revenues of $3,142,242. The decrease in revenue in this three month period was primarily due to the declining revenues in Harden Group's Los Angeles office as a result of carrier rate increases. Anchor's revenues vary from quarter to quarter as a result of the timing of policy renewals and net new/lost business production, whereas expenses are fairly uniform throughout the year. Fees. Fees from Harden Group (including underwriting and risk analysis) services for the second quarter of 1999, were $2,556,792, a decrease of $583,168 or 18.6%, as compared to $3,139,960 in fees for the same period in 1998. This decrease in fee income is the direct result of declining revenue generated from Harden Group's Los Angeles office. Fee revenues generated by Anchor in the second quarter of 1999 from third- party administration services consist of revenues generated by Harden Group. The third-party administration revenues are primarily derived from: (a) an insurance product underwritten by one insurance carrier, which is A-(Excellent); and (b) the 11 administration of insurance programs underwritten by various insurance carriers for a number of self-insured employers. Self-insurance is an alternative to fully insured programs in which a client assumes a manageable portion of its insurance risks, usually (although not always) placing the less predictable and larger loss exposure with an excess insurance carrier. Interest Income. Interest income consists of interest earned on funds held in fiduciary accounts and interest earned on investments. Interest income was $2,719 and $2,282 for the quarters ended June 30, 1999 and 1998, respectively. Expenses Total Expenses. Total operating expenses for the second quarter of 1999, were $2,823,588, a decrease of $203,607 or 6.7% as compared to operating expenses of $3,027,195 for the same period in 1998. As discussed below, the decrease in total expenses resulted primarily from a decrease in selling, general and administration expenses and employee compensation and benefits resulting from the closure of Harden Group's Los Angeles office as well as the reduction of staff at the Concord, Portland and Scottsdale offices in response to the reduction in revenues. Employee Compensation and Benefits. Employee compensation and benefits for the second quarter of 1999, were $1,812,253, a decrease of $162,628 or 8.2% as compared to $1,974,881 for the same period in 1998. The decrease related primarily to the closure of Harden Group's Los Angeles office as well as the reduction of staff at the Concord, Portland and Scottsdale offices in response to the reduction in revenues. Selling, General and Administrative Expenses. Selling, general and administrative expenses were $1,011,335 and $1,052,314 for the quarters ended June 30, 1999 and 1998, respectively. The $40,979 or 3.9% decrease in 1999, as compared to 1998, resulted primarily from the closure of Harden Group's Los Angeles office. General and administrative expenses include rent, travel, insurance, postage, telephone, supplies and other miscellaneous expenses. Interest Expense. Interest expense was $40,648 and $49,738, for the second quarter of 1999 and 1998, respectively. The decrease in interest expense of $9,090 in the second quarter of 1999, as compared to the same period in 1998, was due to the decrease in borrowings under the bank term loan. Amortization of Goodwill and Other Intangibles. Goodwill represents the excess of the cost of acquisitions over the fair value of net assets acquired. Other intangibles include covenants not to compete, customer lists and other contractual rights. Amortization of goodwill and other intangibles was $16,530 and $11,267, for the second quarter of 1999 and 1998, respectively. The increase in amortization and other intangibles is a result of increased intangibles at Harden-AZ. Income Taxes Anchor's minimum annual required tax payment due was reported during the first quarter 1999 and 1998. Therefore, there was no income tax expense reported for the quarters ended June 30, 1999 and 1998, respectively. An analysis of Anchor's provision for income taxes is presented in Note 9 of the Notes to Consolidated Financial Statements in Anchor's Form 10-K for the year ending December 31, 1998. Liquidity and Capital Resources Anchor reported net cash flows (used in) by operations of $(1,019,063) for the six months ended June 30, 1999, compared to net cash flows provided by operations of $442,768 for the same period in 1998. During 1999, Anchor repaid $800,000 of the existing line of credit and met its operating and capital needs from various sources, including the use of proceeds received from the sale of PKW and the use of proceeds received from the sale of Series C Debentures. Capital and certain acquisition related expenditures were $229,049 and $226,565 for the six months ended June 30, 1999 and 1998, respectively. The 1999 expenditures primarily involved expenditures related to software development and implementation to update the eligibility and claims processing system. 12 Short-term borrowings, current portion of long-term debt and current portion of long-term liabilities at June 30, 1999, totaling in the aggregate $1,009,578 (as compared to $1,894,018 at December 31, 1998), consisted of: (a) $571,523 representing the current portion of the term bank loans further described in footnote 9 to the Financial Statements, above; (b) approximately $60,435 of future fixed payments under a consulting agreement entered into with a company affiliated with the former shareholders of Harden-AZ; (c) $43,082 representing the current portion of obligations with regard to certain real property leased by PKW prior its acquisition by Anchor and relocation to Anchor's executive offices; (d) $60,000 of the Debentures; (e) $80,000 of the Bridge Notes; (f) approximately $47,400 representing obligations relating to the purchase of furniture, fixtures and computer equipment at the PHA location; and (g) approximately $147,138 for certain other current liabilities. At June 30, 1999, long-term liabilities and long-term debt, less the current portion discussed above, totaled $1,217,161 (as compared to $1,311,568 at December 31, 1998), and primarily consisted of: (a) $412,841 representing the long-term portion outstanding under a term bank loan further described in footnote 9 to the Financial Statements, above; (b) approximately $338,231 representing deferred rent with regard to certain real property currently leased by Anchor; (c) $250,000 of Series B Debentures; (d) $119,000 of Series C Debentures; and (e) approximately $97,089 for certain other long-term liabilities. In May 1995, PKW entered into a sublease with respect to 82% of the office space previously occupied by PKW. The terms of the sublease required PKW to provide a rent subsidy. The sublease expired on September 30, 1997, and was extended by the subtenant through November 30, 1999, the date on which the term of the master lease expires. In December 1995, PKW entered into a sublease with respect to an additional 10% of the office space previously occupied by PKW. The sublease expires on November 30, 1999, and required PKW to provide a rent subsidy. In October 1997, PKW entered into a sublease with the respect to the remaining 8% of the office space previously occupied by PKW. The sublease expires on November 30, 1999, and required PKW to provide a rent subsidy. Following the sale of PKW, Anchor has assumed these remaining lease obligations all of which expire on November 30, 1999. Reference is made to footnotes 4 through 9 to the Financial Statements included in this Form 10-Q for further information on Anchor's fund raising activities and borrowings from its primary bank lender. Anchor has not paid cash dividends in the past and does not expect to pay cash dividends in the foreseeable future. Year 2000 Update Impact of Year 2000. Anchor is currently in the process of addressing a -------------------- problem that is facing all users of automated information systems. The "Year 2000 Issue" is the result of computer programs being written using two digits rather than four to define the applicable year. Computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This situation could result in a system failure or miscalculations causing disruptions to operations, including, among other things, a temporary inability to process transactions, send payments, or engage in similar normal business activities. State of Readiness. Anchor's plan to achieve Year 2000 compliance in its ------------------- electronic information systems is proceeding on schedule. A team has been created to coordinate the identification and implementation of the necessary changes required for computer systems and applications. Anchor has hired an outside computer consultant, OASYS Networks, Inc. ("OASYS"), to assist in the management of the Year 2000 project. OASYS will be providing a Limited-Scope Assessment which is expected to provide an analysis of all networked "objects" and compliance information on all installed applications that are not specific to the insurance industry, and will be limited to the PC, PC Network, and associated peripherals environment. During the course of this assessment, which is expected to be completed by end of the third quarter 1999. OASYS will: 1. Develop an assessment project plan and a schedule to be approved by Anchor. 2. Prepare a comprehensive inventory of network environment (Hardware). In connection with preparing such inventory, OASYS will identify and asset tag all equipment, record serial numbers, identify installed devices and identify BIOS manufacture and version information. 3. Integrate Anchor's existing Year 2000 data into the OASYS reports and procedures, where applicable. 4. Conduct a comprehensive inventory of network environment (Software/Firmware). 13 5. Test all functional computer hardware for Year 2000 and leap year compliance, where applicable. 6. Collect compliance statements from vendors for non-testable hardware equipment (modems, routers, etc.). Cross-reference compliance data with Anchor's existing data, where applicable. 7. Research and report compliance data on all COTS (Common Off The Shelf) applications. 8. Build a project binder to track compliance statements and document all testing of hardware objects. 9. Interview key personnel to identify various dependencies and interface risks that are not immediately apparent through the physical inventory process. 10. Confer with Anchor's team to prioritize issues and create a Mission Critical listing of all hardware, software, dependencies and interfaces. 11. Provide a database to Anchor which will be used to identify and track all new hardware objects introduced into the environment. 12. Prepare a closing Risk Analysis report. In addition, the OASYS team began providing Year 2000 Inbound and Outbound Compliance Communications on April 1, 1999. Inbound Year 2000 Compliance Communications involve requests from outside parties (such as venders, suppliers, etc.) for information and status on Anchor's Year 2000 compliance. Once received, OASYS is expected to respond, document, track and service such requests with periodic summaries being reported to Anchor's team. Outbound Year 2000 Compliance Communications are requests initiated by Anchor seeking the status of another entities' Year 2000 compliance. These requests are being initiated, documented and tracked by OASYS. Anchor's team is also focused on obtaining mainframe Year 2000 compliance at its three principal offices located in Concord, California, Scottsdale, Arizona and Portland, Oregon. The status of the effort for each office is described below. Harden-CA (Concord, CA): ------------------------ Hardware: Current operating system is under review; scheduled compliance by the end of third quarter 1999. Software: Both the billing and claims systems are being upgraded; scheduled compliance by the end of third quarter 1999. Conversion: Converting the entire system to the Resource Information Management System, version 2.7 ("RIMS"), which is Year 2000 compliant. Conversion scheduled for completion by mid-year 2000. Harden-AZ (Scottsdale, AZ): --------------------------- Hardware: Current operating system is Year 2000 compliant. Software: Currently on RIMS, 2.7 which is Year 2000 compliant. Upgrades: Recently upgraded software and hardware. Harden-PHA (Portland, OR): --------------------------- Hardware: Current operating system is under review; scheduled compliance by the end of third quarter 1999. Software: Claims and billing systems are currently Year 2000 compliant. Conversion: Converting entire system to RIMS, which is Year 2000 compliant. Conversion scheduled for completion by year-end 2000. Costs to Address the Year 2000 Issue. Anchor's team is working to complete ------------------------------------ programming efforts for the Year 2000 related projects by September 30, 1999, with final certification testing occurring during the remainder of the 1999 year. Anchor's focus is not only on its internal systems, but also upon the compliance of its key business partners, vendors and other suppliers. Management believes that the redeployment of Anchor's resources will not adversely impact new product or software development. The total cost of Year 2000 compliance is not expected to be material to the company's financial position. The estimated total cost of the Year 2000 Project is expected to not exceed $250,000. 14 Risks Presented by the Year 2000 Issue. The failure to correct a material --------------------------------------- Year 2000 problem could result in an interruption in, or a failure of, certain normal business activities or operations. Such failures could materially and adversely affect Anchor's results of operations, liquidity and financial condition. Due to the general uncertainty inherent in the Year 2000 problem, resulting in part from the uncertainty of the Year 2000 readiness of its key business partners, vendors and other suppliers, Anchor is unable to determine at this time whether the consequences of Year 2000 failures will have a material impact on Anchor's results of operations, liquidity or financial condition. Anchor believes that, with the completion of the Project as currently scheduled, the possibility of significant interruptions of normal operations should be reduced. Readers are cautioned that forward-looking statements contained in the Year 2000 Update should be read in conjunction with Anchor's disclosures below under the head "Forward-Looking Information". Forward-Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of that term under the Private Securities Litigation Reform Act of 1995. Additional written or oral forward-looking statements may be made by Anchor from time to time, in filings with the Securities and Exchange Commission or otherwise. Statements contained herein that are not historical facts are forward-looking statements made pursuant to the safe harbor provisions referenced above. For example, discussions concerning Anchor's ability to create new products and services, and expansion of Anchor through internal growth of existing and new products and services, may involve forward-looking statements. In addition, when used in this discussion, the words, "anticipates," "expects," "intends," "plans" and variations thereof and similar expressions are intended to identify forward-looking statements. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified based on current expectations. Consequently, future events and actual results could differ materially from those set forth in, contemplated by, or underlying the forward- looking statements contained in this filing. Statements in this Quarterly Report, particularly in the Notes to Financial Statements, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations and Year 2000 Update, describe certain factors, among others, that could contribute to or cause such differences. Such forward-looking statements involve risks and uncertainties, and actual results could differ from those described herein. While the statements represent management's current judgment as to the near-term future prospects of its business, such risks and uncertainties could cause actual results to differ from the above statements. Factors which could cause actual results to differ include the following: Harden Group's relationship with new insurance carriers and marketing partners and their ability to effectively provide third-party administration services; controlling operating costs; the impact of competitive products, pricing and services; the availability of capital to finance current operations and future expansion; the cyclical nature of the health insurance markets; and unanticipated regulatory changes. Other risk factors are detailed in Anchor's filings with the Securities and Exchange Commission. Anchor assumes no obligation to update forward-looking statements. Strategy Until recently, Anchor's business has consisted of two basic operations: (i) third-party administration services (Harden Group); and (ii) property and casualty insurance brokerage (PKW). During the last several years, Anchor's third-party administration services experienced steady expansion. Revenues derived from the operations of Harden Group, as a percentage of Anchor's overall revenues, grew from 57% at December 31, 1996 to 80% at December 31, 1998. Conversely, Anchor's property and casualty insurance business was subjected to considerable competitive pressures through much of the 1990's. During this period the insurance industry has generally experienced over capacity which, in turn, has negatively impacted both insurance premiums and brokerage commissions. The financial results of PKW during mid-1998 reflected these developments. In light of these external and internal trends, the Board of Directors made a strategic decision during mid-1998 to sell PKW, the property and casualty insurance brokerage operation. This transaction was completed, effective December 31, 1998. 15 Anchor's current strategy is to focus on expanding Harden Group, its third- party administration services division by: (a) continuing to develop, through its marketing partners, specialized affiliated business units that target selected insurance industry market segments defined by industry type, geographic location and consumer demographics; (b) creating new products and services; and (c) strengthening management, sales and marketing staff. In conjunction with this strategy, Anchor intends to seek to manage its affairs to achieve expansion through internal growth of its existing and new product lines. Anchor also intends to consider new acquisition and merger opportunities in the third-party administration services business. As part of its strategy to focus on the third-party administration services business, Anchor has re-organized its Harden Group senior management structure to be more responsive to the demands of an evolving marketplace. To that end, effective May 1, 1999, senior management of Harden Group was consolidated into four positions from the previous structure of nine officers in three geographic operations (Concord, CA, Portland, OR and Scottsdale, AZ). PART II - OTHER INFORMATION Item 1. Legal Proceedings Anchor and its subsidiaries are parties from time to time to various lawsuits that arise in the normal course of business. Management is not aware of any lawsuits to which Anchor or its subsidiaries is currently a party or to which any property of Anchor or any of its subsidiaries is subject, which might materially adversely affect the financial condition or results of operations of Anchor. Item 2. Changes in Securities None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K A. Exhibits 10.35 Business Loan Agreement dated April 29, 1999, between Anchor and Imperial Bank, and related documents. 27.0 Financial Data Schedule B. Reports on Form 8-K None 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, Anchor has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ANCHOR PACIFIC UNDERWRITERS, INC. Date: August 6, 1999 /s/ James R. Dunathan ------------------ ------------------------------------------------- James R. Dunathan President and Chief Executive Officer Date: August 6, 1999 /s/ Earl Wiklund ------------------ ------------------------------------------------- Earl Wiklund Senior Vice President and Chief Financial Officer 17 EX-10.35 2 BUSINESS LOAN AGREEMENT DATED APRIL 29, 1999 [LOGO OF IMPERIAL BANK APPEARS HERE] PROMISSORY NOTE
Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials $250,000.00 04-28-1999 09-30-1999 613521 900 - ------------------------------------------------------------------------------------------------------------------------------------ References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. - ------------------------------------------------------------------------------------------------------------------------------------ Borrower: ANCHOR PACIFIC UNDERWRITERS, INC. Lender: Imperial Bank 1800 Sutter St., #400 East Bay Regional Office Concord, CA 94520 1331 N. California Blvd., Suite 400 Walnut Creek, CA 94596-9504 ==================================================================================================================================== Principal Amount: $250,000.00 Initial Rate: 10.250% Date of Note: April 29, 1999
PROMISE TO PAY. ANCHOR PACIFIC UNDERWRITERS, INC. ("Borrower") promises to pay to Imperial Bank ("Lender"), or order, in lawful money of the United States of America, the principal amount of Two Hundred Fifty Thousand & 00/100 Dollars ($250,000.00) or so much as may be outstanding, together with Interest on the unpaid outstanding principal balance of each advance. Interest shall be calculated from the date of each advance until repayment of each advance. PAYMENT. Borrower will pay this loan in one payment of all outstanding principal plus all accrued unpaid interest on September 30, 1999. In addition, Borrower will pay regular monthly payments of accrued unpaid interest beginning May 30, 1999, and all subsequent interest payments are due on the same day of each month after that. The annual interest rate for this Note is computed on a 365/360 basis; that is, by applying the ratio of the annual interest rate over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding. Borrower will pay Lender at Lender's address shown above or at such other place as Lender may designate in writing. Unless otherwise agreed or required by applicable law, payments will be applied first to any unpaid collection costs and any late charges, then to any unpaid interest, and any remaining amount to principal. VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from time to time based on changes in an index which is the Imperial Bank Prime Rate (the "Index"). The Prime Rate is the rate announced by Lender as its Prime Rate of interest from time to time. Lender will tell Borrower the current Index rate upon Borrower's request. Borrower understands that Lender may make loans based on other rates as well. The interest rate change will not occur more often than each day. The Index currently is 7.750%. The Interest rate to be applied to the unpaid principal balance of this Note will be at a rate of 2,500 percentage points over the Index, resulting in an Initial Rate: 10.250%0.250%. NOTICE: Under no circumstances will the interest rate on this Note be more than the maximum rate allowed by applicable law. PREPAYMENT; MINIMUM INTEREST CHARGE. In any event, even upon full prepayment of this Note, Borrower understands that Lender is entitled to a minimum interest charge of $250.00. Other than Borrower's obligation to pay any minimum interest charge, Borrower may pay without penalty all or a portion of the amount owed earlier than it is due. Early payments will not, unless agreed to by Lender in writing, relieve Borrower of Borrower's obligation to continue to make payments of accrued unpaid interest. Rather, they will reduce the principal balance due. LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged 5.000% of the unpaid portion of the regularly scheduled payment. DEFAULT. Borrower will be in default if any of the following happens: (a) Borrower fails to make any payment when due. (b) Borrower breaks any promise Borrower has made to Lender, or Borrower fails to comply with or to perform when due any other term, obligation, covenant, or condition contained in this Note or any agreement related to this Note, or in any other agreement or loan Borrower has with Lender. (c) Any representation or statement made or furnished to Lender by Borrower or on Borrower's behalf is false or misleading in any material respect either now or at the time made or furnished. (d) Borrower becomes insolvent, a receiver is appointed for any part of Borrower's property, Borrower makes an assignment for the benefit of creditors, or any proceeding is commenced either by Borrower or against Borrower under any bankruptcy or insolvency laws. (e) Any creditor tries to take any of Borrower's property on or in which Lender has a lien or security interest. This includes a garnishment of any of Borrower's accounts with Lender. (f) Any guarantor dies or any of the other events described in this default section occurs with respect to any guarantor of this Note. (g) A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of the Indebtedness is impaired. (h) Lender in good faith deems itself insecure. If any default, other than a default in payment, is curable and if Borrower has not been given a notice of a breach of the same provision of this Note within the preceding twelve (12) months, it may be cured (and no event of default will have occurred) if Borrower, after receiving written notice from Lender demanding cure of such default: (a) cures the default within ten (10) days; or (b) if the cure requires more than ten (10) days. Immediately initiates steps which Lender deems in Lender's sole discretion to be sufficient to cure the default and thereafter continues and completes all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical. LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal balance on this Note and all accrued unpaid interest immediately due, without notice, and then Borrower will pay that amount. Upon Borrower's failure to pay all amounts declared due pursuant to this section, including failure to pay upon final maturity, Lender, at its option, may also, if permitted under applicable law, do one or both of the following: (a) increase the variable interest rate on this Note to 7,500 percentage points over the Index, and (b) add any unpaid accrued interest to principal and such sum will bear interest therefrom until paid at the rate provided in this Note (including any increased rate). Lender may hire or pay someone else to help collect this Note if Borrower does not pay. Borrower also will pay Lender that amount. This includes, subject to any limits under applicable law, Lender's attorneys' fees and Lender's legal expenses whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Borrower also will pay any court costs, in addition to all other sums provided by law. This Note has been delivered to Lender and accepted by Lender in the State of California. If there is a lawsuit, Borrower agrees upon Lender's request to submit to the jurisdiction of the courts of Los Angeles County, the State of California. Lender and Borrower hereby waive the right to jury trial in any action, proceeding, or counterclaim brought by either Lender or Borrower against the other. (Initial Here [illegible]) This Note shall be governed by and ----------- construed in accordance with the laws of the State of California. DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $25.00 if Borrower makes a payment on Borrower's loan and the check or preauthorized charge with which Borrower pays is later dishonored. RIGHT OF SETOFF. Borrower grants to Lender a contractual security interest in, and hereby assigns, conveys, delivers, pledges, and transfers to Lender all Borrower's right, title and interest in and to, Borrower's accounts with Lender (whether checking, savings, or some other account), including without limitation all accounts held jointly with someone else and all accounts Borrower may open in the future, excluding however all IRA and Keogh accounts, and all trust accounts for which the grant of a security interest would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on this Note against any and all such accounts. LINE OF CREDIT. This Note evidences a straight line of credit. Once the total amount of principal has been advanced, Borrower is not entitled to further loan advances. Advances under this Note may be requested orally by Borrower or by an authorized person. All oral requests shall be confirmed in writing on the day of the request. All communications, instructions, or directions by telephone or otherwise to Lender are to be directed to Lender's office shown above. The following party or parties are authorized to request advances under the line of credit until Lender receives from Borrower at Lender's address shown above written notice of revocation of their authority: James R. Dunathan, President/CEO; and Earl Wiklund, Senior VP/CFO/Secretary. Borrower agrees to be liable for all sums either: (a) advanced in accordance with the instructions of an authorized person or (b) credited to any of Borrower's accounts with Lender. The unpaid principal balance owing on this Note at any time may be evidenced by endorsements on this Note or by Lender's internal records, including daily computer print-outs. Lender will have no obligation to advance funds under this Note if: (a) Borrower or any guarantor is in default under the terms of this Note or any agreement that Borrower or any guarantor has with Lender, including any agreement made in connection with the signing of this Note; (b) Borrower or any guarantor ceases doing business or is insolvent; (c) any guarantor seeks, claims or otherwise attempts to limit, modify or revoke such guarantor's guarantee of this Note or any other loan with Lender; (d) Borrower has applied funds provided pursuant to this Note for purposes other than those authorized by Lender; or (e) Lender in good faith deems itself insecure under this Note or any other agreement between Lender and Borrower. CREDIT TERMS AND CONDITIONS AGREEMENT. This Note is subject to the provisions of the Credit Terms and Conditions Agreement dated September 30, 1997 and all amendments thereto and replacements therefor. 04-29-1999 PROMISSORY NOTE Page 2 (Continued) ================================================================================ GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or remedies under this Note without losing them. Borrower and any other person who signs, guarantees or endorses this Note, to the extent allowed by law, waive any applicable statute of limitations, presentment, demand for payment, protest and notice of dishonor. Upon any change in the terms of this Note, and unless otherwise expressly stated in writing, no party who signs this Note, whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time) this loan, or release any party or guarantor or collateral; or impair, fail to realize upon or perfect Lender's security interest in the collateral; and take any other action deemed necessary by Lender without the consent of or notice to anyone. All such parties also agree that Lender may modify this loan without the consent of or notice to anyone other than the party with whom the modification is made. PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE. BORROWER: ANCHOR PACIFIC UNDERWRITERS, INC. X /s/ J. R. Dunathan ------------------------------------- Authorized Officer AMENDED AND RESTATED ADDENDUM TO CREDIT TERMS AND CONDITIONS DATED SEPTEMBER 30, 1997 This Amended and Restated Addendum ("Restatement") amends and restates that certain Addendum to Credit Terms and Conditions dated September 30, 1997, by and between Imperial Bank ("Bank") and Anchor Pacific Underwriters, Inc. ("Borrower") as previously amended (the "Addendum") (collectively herein the Credit Terms and Conditions and the Addendum are referred to as the "Agreement") as follows: 1. Paragraph B.4. of Credit Terms and Conditions is hereby deleted. 2. Bank to receive a warrant for 95,000 shares of Anchor Pacific Underwriters, Inc. Common Stock exercisable at $1.75 per share with an Issue Date of October 1, 1997 and an Expiration Date of September 30, 2002. Bank to receive an additional warrant for 80,000 shares of Anchor Pacific Underwriters, Inc. Common Stock exercisable at $0.50 per share with an Issue Date of November 25, 1998 and Expiration Date of November 25, 2003. Bank to receive an additional warrant for 100,000 shares of Anchor Pacific Underwriters, Inc. Common Stock exercisable at $0.60 per share with an Issue Date of April 30, 1999 and Expiration Date of May 1, 2004. 3. All corporate balances of Borrower and those under its control to be maintained with Bank. 4. Bank to receive a perfected first priority security interest in and UCC-1 filings on all Borrower and subsidiary assets, and direct assignment of 100% of the capital stock of all of Borrower's subsidiaries. 5. Loan to be guaranteed by each of Borrower's subsidiaries. 6. Year 2000 Compliance. a. Borrower affirmatively covenants that it will perform all acts reasonably necessary to ensure that (i) Borrower and any business in which Borrower holds a substantial interest, and (ii) all customers, suppliers and vendors that are material to Borrower's business, become Year 2000 Compliant in a timely manner. Such acts shall include, without limitation, performing a comprehensive review and assessment of all Borrower's systems and adopting a detailed plan, with itemized budget, for the remediation, monitoring and testing of such systems. As used in this paragraph, "Year 2000 Compliant" shall mean, in regard to any entity, that all software, hardware, firmware, equipment, goods or systems utilized by or material to the business operations or financial condition of such entity, will properly perform date sensitive functions before, during and after Anchor Pacific Underwriters, Inc. Amended and Restated Addendum To Credit Terms and Conditions, Dated September 30, 1997 April 30, 1999 the year 2000. Borrower shall, immediately upon request, provide to Bank such certifications or other evidence of Borrower's compliance with the terms of this paragraph as Bank may from time to time require. b. Borrower and its subsidiaries, as applicable, represent and warrant that they have reviewed the areas within their operations and business which could be adversely affected by, and have developed or are developing a program to address on a timely basis, the Year 2000 Problem and have made related appropriate inquiry of material suppliers and vendors, and based on such review and program, the Year 2000 Problem will not have a material adverse effect upon their financial condition, operations or business as now conducted. "Year 2000 Problem" means the possibility that any computer applications or equipment used by Borrower may be unable to recognize and properly perform date sensitive functions involving certain dates prior to and any dates on or after December 31, 1999." 7. Reference Provision. (a) Other than (i) nonjudicial foreclosure and all matters in connection therewith regarding security interests in real or personal property; or (ii) the appointment of a receiver, or the exercise of other provisional remedies (any and all of which may be initiated pursuant to applicable law), each controversy, dispute or claim between the parties arising out of or relating to this Credit Agreement, any security agreement executed by Borrower in favor of Bank or any note executed by Borrower in favor of Bank or any other agreement or instrument issued in favor of Bank by Borrower (collectively in this Section, the "Agreement") which controversy, dispute or claim is not settled in writing within thirty (30) days after the "Claim Date" (defined as the date on which a ---------- party subject to this Agreement gives written notice to all other parties that a controversy, dispute or claim exists), will be settled by a reference proceeding in California in accordance with the provisions of Section 638 et seq. of the -- --- California Code of Civil Procedure, or their successor section ("CCP"), which --- shall constitute the exclusive remedy for the settlement of any controversy, dispute or claim concerning this Agreement, including whether such controversy, dispute or claim is subject to the reference proceeding and except as set forth above, the parties waive their rights to initiate any legal proceedings against each other in any court or jurisdiction other than the Superior Court in the County where the Real Property, if any, is located or Los Angeles County if none (the "Court"). The referee shall be a retired Judge of the Court selected by ----- mutual agreement of the parties, and if they cannot so agree within forty-five (45) days after the Claim Date, the referee shall be promptly selected by the Presiding Judge of the Court (or his representative). The referee shall be appointed to sit as a temporary judge, with all of the powers for a temporary judge, as authorized by law, and upon selection should take and subscribe to the oath of office as provided for in Rule 244 of the California Rules of Court (or any subsequently enacted Rule). Each party shall have one peremptory challenge pursuant to CCP (S)170.6. The referee shall (a) be requested to set the matter for hearing within sixty (60) days after the date of selection of the referee and (b) try any and all issues of law or fact and report a statement of decision upon them, if possible, within ninety (90) days of the Claim Date. Any decision rendered by the referee will be final, binding and conclusive and judgment 2 Anchor Pacific Underwriters, Inc. Amended and Restated Addendum To Credit Terms and Conditions, Dated September 30, 1997 April 30, 1999 shall be entered pursuant to CCP (S)644 in any court in the state of California having jurisdiction. Any party may apply for a reference proceeding at any time after thirty (30) days following notice to any other party of the nature of the controversy, dispute or claim, by filing a petition for a hearing and/or trial. All discovery permitted by this Agreement shall be completed no later than fifteen (15) days before the first hearing date established by the referee. The referee may extend such period in the event of a party's refusal to provide requested discovery for any reason whatsoever, including, without limitation, legal objections raised to such discovery or unavailability of a witness due to absence or illness. No party shall be entitled to "priority" in conducting discovery. Depositions may be taken by either party upon seven (7) days written notice, and request for production or inspection of documents shall be responded to within ten (10) days after service. All disputes relating to discovery which cannot be resolved by the parties shall be submitted to the referee whose decision shall be final and binding upon the parties. Pending appointment of the referee as provided herein, the Superior Court is empowered to issue temporary and/or provisional remedies, as appropriate. (b) Except as expressly set forth in this Agreement, the referee shall determine the manner in which the reference proceeding is conducted including the time and place of all hearings, the order of presentation of evidence, and all other questions that arise with respect to the course of the reference proceeding. All proceedings and hearings conducted before the referee, except for trial, shall be conducted without a court reporter except that when any party so requests, a court reporter will be used at any hearing conducted before the referee. The party making such a request shall have the obligation to arrange for and pay for the court reporter. The costs of the court reporter at the trial shall be borne equally by the parties. (c) The referee shall be required to determine all issues in accordance with existing case law and the statutory laws of the state of California. The rules of evidence applicable to proceedings at law in the state of California will be applicable to the reference proceeding. The referee shall be empowered to enter equitable as well as legal relief, to provide all temporary and/or provisional remedies and to enter equitable orders that will be binding upon the parties. The referee shall issue a single judgment at the close of the reference proceeding which shall dispose of all of the claims of the parties that are the subject of the reference. The parties hereto expressly reserve the right to contest or appeal from the final judgment or any appealable order or appealable judgment entered by the referee. The parties hereto expressly reserve the right to findings of fact, conclusions of laws, a written statement of decision, and the right to move for a new trial or a different judgment, which new trial, if granted, is also to be a reference proceeding under this provision. (d) In the event that the enabling legislation which provides for appointment of a referee is repealed (and no successor statute is enacted), any dispute between the parties that would otherwise be determined by the reference procedure herein described will be resolved and determined by arbitration. The arbitration will be conducted by a retired judge of the Court, in accordance with the California Arbitration Act, (S)1280 through (S)1294.2 of the CCP as amended from time to time. The limitations with respect to discovery as set forth hereinabove shall apply to any such arbitration proceeding. 3 Anchor Pacific Underwriters, Inc. Amended and Restated Addendum To Credit Terms and Conditions, Dated September 30, 1997 April 30, 1999 8. Except as provided above, the Agreement remains unchanged. 9. This Restatement shall be effective as of April 30, 1999 and the parties hereby confirm that the Agreement as amended is in full force and effect. Anchor Pacific Underwriters, Inc. Imperial Bank "Borrower" "Bank" By: /s/ James R. Dunathan By: /s/ Joseph J. McCarthy James R. Dunathan President and CEO Its: Vice President By: /s/ Earl Wiklund Earl Wiklund Senior Vice President & Secretary 4 THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED. WARRANT TO PURCHASE STOCK Corporation: Anchor Pacific Underwriters, Inc, a Delaware corporation Number of Shares: 100,000 Class of Stock: Common Stock Initial Exercise Price: $0.60 per share Issue Date: April 30, 1999 Expiration Date: May 1, 2004 (Subject to Article 4.1) THIS WARRANT CERTIFIES THAT, in consideration of the payment of $1.00 and for other good and valuable consideration, IMPERIAL BANCORP or registered assignee ("Holder") is entitled to purchase the number of fully paid and nonassessable shares of the class of securities (the "Shares") of the corporation (the "Company") at the initial exercise price per Share (the "Warrant Price") all as set forth above and as adjusted pursuant to Article 2 of this Warrant, subject to the provisions and upon the terms and conditions set forth of this Warrant. ARTICLE 1. EXERCISE -------- 1.1 Method of Exercise. Holder may exercise this Warrant by delivering ------------------ this Warrant and a duly executed Notice of Exercise in substantially the form attached as Appendix 1 to the principal office of the Company. Unless Holder is exercising the conversion right set forth in Section 1.2, Holder shall also deliver to the Company a check for the aggregate Warrant Price for the Shares being purchased. 1.2 Conversion Right. In lieu of exercising this Warrant as specified in ---------------- Section 1.1, Holder may from time to time convert this Warrant, in whole or in part, into a number of Shares determined by dividing (a) the aggregate fair market value of the Shares or other securities otherwise issuable upon exercise of this Warrant minus the aggregate Warrant Price of such Shares by (b) the fair market value of one Share. The fair market value of the Shares shall be determined pursuant to Section 1.5. 1.3 Omitted ------- 1.4 Omitted ------- 1.5 Fair Market Value. For Purposes of determining conversion rights ----------------- under Section 1.2, if the Shares are traded regularly in a public market, the fair market value of the Shares shall be the closing price of the Shares (or the closing price of the Company's stock into which the Shares are convertible) reported for the business day immediately before Holder delivers its Notice of Exercise to the Company. If the Shares are not regularly traded in a public market, the Board of Directors of the Company shall determine fair market value in its reasonable good faith judgment. The foregoing notwithstanding, if Holder advises the Board of Directors in writing that Holder disagrees with such determination, then the Company and Holder shall promptly agree upon a reputable investment banking firm to undertake such valuation. If the valuation of such investment banking firm is greater than that determined by the Board of Directors, then all fees and expenses of such investment banking firm shall be paid by the Company. In all other circumstances, such fees and expenses shall be paid by Holder. 1.6 Delivery of Certificate and New Warrant. Promptly after Holder --------------------------------------- exercises or converts this Warrant, the Company shall deliver to Holder certificates for the Shares acquired and, if this Warrant has not been fully exercised or converted and has not expired, a new Warrant representing the Shares not so acquired. 1.7 Replacement of Warrants. On receipt of evidence reasonably ----------------------- satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of loss, theft or destruction, on delivery of an indemnity agreement reasonably satisfactory in form and amount to the Company or, in the case of mutilation, or surrender and cancellation of this Warrant, the Company at its expense shall execute and deliver, in lieu of this Warrant, a new warrant of like tenor. 1.8 Repurchase on Sale, Merger, or Consolidation of the Company. ----------------------------------------------------------- 1.8.1. "Acquisition". For the purpose of this Warrant, "Acquisition" ----------- means any sale, license, or other disposition of all or substantially all of the assets (including intellectual property) of the Company, or any reorganization, consolidation, or merger of the Company where the holders of the Company's securities before the transaction beneficially own less than 50% of the outstanding voting securities of the surviving entity after the transaction. 1.8.2. Assumption of Warrant. If upon the closing of any Acquisition --------------------- the successor entity assumes the obligations of this Warrant, then this Warrant shall be exercisable for the same securities, cash, and property as would be payable for the Shares issuable upon exercise of the unexercised portion of this Warrant as if such Shares were outstanding on the record date for the Acquisition and subsequent closing. The Warrant Price shall be adjusted accordingly. The Company shall use reasonable efforts to cause the surviving corporation to assume the obligations of this Warrant. 1.8.3. Nonassumption. If upon the closing of any Acquisition the ------------- successor entity does not assume the obligations of this Warrant and Holder has not otherwise exercised this Warrant in full, then the unexercised portion of this Warrant shall be deemed to have been automatically converted pursuant to Section 1.2 and thereafter Holder shall participate in the Acquisition on the same terms as other holders of the same class of securities of the Company. 1.8.4. Purchase Right. Notwithstanding the foregoing, at the election -------------- of Holder, the Company shall purchase the unexercised portion of this Warrant for cash upon the closing of any Acquisition for an amount equal to (a) the fair market value of any consideration that would have been received by Holder in consideration of the Shares had Holder exercised the unexercised portion of this Warrant immediately before the record date for determining the shareholders entitled to participate in the proceeds of the Acquisition, less (b) the aggregate Warrant Price of the Shares, but in no event less than zero. ARTICLE 2. ADJUSTMENTS TO THE SHARES. ------------------------- 2.1 Stock Dividends, Splits, Etc. If the Company declares or pays a ---------------------------- dividend on its common stock payable in common stock, or other securities, subdivides the outstanding common stock into a greater amount of common stock, then upon exercise of this Warrant, for each Share acquired, Holder shall receive, without cost to Holder, the total number and kind of securities to which Holder would have been entitled had Holder owned the Shares of record as of the date the dividend or subdivision occurred. 2.2 Reclassification, Exchange or Substitution. Upon any reclassification, ------------------------------------------ exchange, substitution, or other event that results in a change of the number and/or class of the securities issuable upon exercise or conversion of this Warrant, Holder shall be entitled to receive, upon exercise or conversion of this Warrant, the number and kind of securities and property that Holder would have received for the Shares if this Warrant had been exercised immediately before such reclassification, exchange, substitution, or other event. Such an event shall include any automatic conversion of the outstanding or issuable securities of the Company of the same class or series as the Shares to common stock pursuant to the terms of the Company's Articles of Incorporation upon the closing of a registered public offering of the Company's common stock. The Company or its successor shall promptly issue to Holder a new Warrant for such new securities or other property. The new Warrant shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article 2 including, without limitation, adjustments to the Warrant Price and to the number of securities or property issuable upon exercise of the new Warrant. The provisions of this Section 2.2 shall similarly apply to successive reclassifications, exchanges, substitutions, or other events. 2.3 Adjustments for Combinations, Etc. If the outstanding Shares are --------------------------------- combined or consolidated, by reclassification or otherwise, into a lesser number of shares, the Warrant Price shall be proportionately increased. 2.4 Adjustments for Diluting Issuances. The Warrant Price and the number ---------------------------------- of Shares issuable upon exercise of this Warrant shall be subject to adjustment, from time to time, in the manner set forth on Exhibit B, if attached, in the event of Diluting Issuances (as defined on Exhibit B). 2.5 No Impairment. The Company shall not, by amendment of its Articles of ------------- Incorporation or through a reorganization, transfer of assets, consolidation, merger, dissolution, issue, or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed under this Warrant by the Company, but shall at all times in good faith assist in carrying out all the provisions of this Article 2 and in taking all such action as may be necessary or appropriate to protect Holder's rights under this Article against impairment. If the Company takes any action affecting the Shares or its common stock other than as described above that adversely affects Holder's rights under this Warrant, the Warrant Price shall be adjusted downward and the number of Shares issuable upon exercise of this Warrant shall be adjusted upward in such a manner that the aggregate Warrant Price of this Warrant is unchanged. 2.6 Certificate as to Adjustments. Upon each adjustment of the Warrant ----------------------------- Price, the Company at its expense shall promptly compute such adjustment, and furnish Holder with a certificate of its Chief Financial Officer setting forth such adjustment and the facts upon which such adjustment is based. The Company shall, upon written request, furnish Holder a certificate setting forth the Warrant Price in effect upon the date thereof and the series of adjustments leading to such Warrant Price. ARTICLE 3. REPRESENTATIONS AND COVENANTS OF THE COMPANY. -------------------------------------------- 3.1 Representations and Warranties. The Company hereby represents and ------------------------------ warrants to the Holder that all Shares which may be issued upon the exercise of the purchase right represented by this Warrant, and all securities, if any, issuable upon conversion of the Shares, shall, upon issuance, be duly authorized, validly issued, fully paid and nonassessable, and free of any liens and encumbrances except for restrictions on transfer provided for herein or under applicable federal and state securities laws. 3.2 Notice of Certain Events. If the Company proposes at any time (a) to ------------------------ declare any dividend or distribution upon its common stock, whether in cash, property, stock, or other securities and whether or not a regular cash dividend; (b) to offer for subscription pro rata to the holders of any class or series of its stock any additional shares of stock of any class or series or other rights; (c) to effect any reclassification or recapitalization of common stock; (d) to merge or consolidate with or into any other corporation, or sell, lease, license, or convey all or substantially all of its assets, or to liquidate, dissolve or wind up; or (e) offer holders of registration rights the opportunity to participate in an underwritten public offering of the company's securities for cash, then, in connection with each such event, the Company shall give Holder (1) at least 20 days prior written notice of the date on which a record will be taken for such dividend, distribution, or subscription rights (and specifying the date on which the holders of common stock will be entitled thereto) or for determining rights to vote, if any, in respect of the matters referred to in (c) and (d) above; (2) in the case of the matters referred to in (c) and (d) above at least 20 days prior written notice of the date when the same will take place (and specifying the date on which the holders of common stock will be entitled to exchange their common stock for securities or other property deliverable upon the occurrence of such event); and (3) in the case of the matter referred to in (e) above, the same notice as is given to the holders of such registration rights. 3.3 Information Rights. So long as the Holder holds this Warrant and/or ------------------ any of the Shares, the Company shall deliver to the Holder (a) promptly after mailing, copies of all communiques to the shareholders of the Company, (b) within ninety (90) days after the end of each fiscal year of the Company, the annual audited financial statements of the Company certified by independent public accountants of recognized standing and (c) within forty-five (45) days after the end of each of the first three quarters of each fiscal year, the Company's quarterly, unaudited financial statements. 3.4 Registration Under Securities Act of 1933 as amended. The Company ---------------------------------------------------- agrees that the Shares shall be subject to the registration rights set forth on Exhibit C. ARTICLE 4. MISCELLANEOUS. ------------- 4.1 Term; Notice of Expiration. This Warrant is exercisable, in whole or -------------------------- in part, at any time and from time to time on or before the Expiration Date set forth above. 4.2 Legends. This Warrant and the Shares (and the securities issuable, ------- directly or indirectly, upon conversion of the Shares, if any) shall be imprinted with a legend in substantially the following form: THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED. 4.3 Compliance with Securities Laws on Transfer. This Warrant and the ------------------------------------------- Shares issuable upon exercise of this Warrant (and the securities issuable, directly or indirectly, upon conversion of the Shares, if any) may not be transferred or assigned in whole or in part without compliance with applicable federal and state securities laws by the transferor and the transferee (including, without limitation, the delivery of investment representation letters and legal opinions reasonably satisfactory to the Company). The Company shall not require Holder to provide an opinion of counsel if the transfer is to an affiliate of Holder or if there is no material question as to the availability of current information as referenced in Rule 144(c), Holder represents that it has complied with Rule 144(d) and (e) in reasonable detail, the selling broker represents that it has complied with Rule 144(f), and the Company is provided with a copy of Holder's notice of proposed sale. 4.4 Transfer Procedure. Subject to the provisions of Section 4.2, Holder ------------------ may transfer all or part of this Warrant or the Shares issuable upon exercise of this Warrant (or the securities issuable, directly or indirectly, upon conversion of the Shares, if any) by giving the Company notice of the portion of the Warrant being transferred setting forth the name, address and taxpayer identification number of the transferee and surrendering this Warrant to the Company for reissuance to the transferee(s) (and Holder, if applicable). Unless the Company is filing financial information with the SEC pursuant to the Securities Exchange Act of 1934, the Company shall have the right to refuse to transfer any portion of this Warrant to any person who directly competes with the Company. 4.5 Notices. All notices and other communications from the Company to the ------- Holder, or vice versa, shall be deemed delivered and effective when given personally or mailed by first-class registered or certified mail, postage prepaid, at such address as may have been furnished to the Company or the Holder, as the case may be, in writing by the Company or such Holder from time to time. 4.6 Waiver. This Warrant and any term hereof may be changed, waived, ------ discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. 4.7 Attorneys' Fees. In the event of any dispute between the parties --------------- concerning the terms and provisions of this Warrant, the party prevailing in such dispute shall be entitled to collect from the other party all costs incurred in such dispute, including reasonable attorneys' fees. 4.8 Governing Law. This Warrant shall be governed by and construed in ------------- accordance with the laws of the State of California, without giving effect to its principles regarding conflicts of law. Anchor Pacific Underwriters, Inc. By:/s/ James R. Dunathan By:/s/ Earl Wiklund --------------------- ---------------- Name: James R. Dunathan Name: Earl Wiklund Title: President/CEO Title: Chief Financial Officer APPENDIX 1 NOTICE OF EXERCISE ------------------ 1. The undersigned hereby elects to purchase _______ shares of the Common Stock of Anchor Pacific Underwriters, Inc. pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price of such shares in full. 1. The undersigned hereby elects to convert the attached Warrant into Shares/cash [strike one] in the manner specified in the Warrant. This conversion is exercised with respect to ________ of the Shares covered by the Warrant. 2. Please issue a certificate or certificates representing said shares in the name of the undersigned or in such other name as is specified below: Chief Financial Officer Controllers Department Imperial Bancorp P.O. Box 92991 Los Angeles, CA 90009 or registered assignee 3. The undersigned represents it is acquiring the shares solely for its own account and not as a nominee for any other party and not with a view toward the resale or distribution thereof except in compliance with applicable securities laws. IMPERIAL BANCORP or registered assignee ____________________________________________ (Signature) _________________ (Date) APPENDIX 2 NOTICE THAT WARRANT IS ABOUT TO EXPIRE -------------------------------------- _______________, _______ Chief Financial Officer Controllers Department Imperial Bancorp P.O. Box 92991 Los Angeles, CA 90009 or registered assignee Dear : This is to advise you that the Warrant issued to you described below will expire on May 1, 2004. Issuer: Anchor Pacific Underwriters, Inc. Issue Date: April 30, 1999 Class of Security Issuable: Common Exercise Price Per Share: $ 0.60 Number of Shares Issuable: 100,000 Procedure for Exercise: Please contact Earl Wiklund at (925)-682-7707 with any questions you may have concerning exercise of the Warrant. This is your only notice of pending expiration. Anchor Pacific Underwriters, Inc. By: ___________________________ Its: __________________________ EXHIBIT A --------- Not Applicable -------------- EXHIBIT B --------- IMPERIAL BANCORP ANTIDILUTION AGREEMENT ---------------------- This Antidilution Agreement is entered into as of April 30, 1999, by and between Imperial Bancorp ("Purchaser") and Anchor Pacific Underwriters, Inc. ("the Company"). RECITALS -------- A. Concurrently with the execution of this Antidilution Agreement, the Purchaser is purchasing from the Company a Warrant to Purchase Stock (the "Warrant") pursuant to which Purchaser has the right to acquire from the Company the Shares (as defined in the Warrant). B. By this Antidilution Agreement, the Purchaser and the Company desire to set forth the adjustment in the number of Shares issuable upon exercise of the Warrant as a result of a Diluting Issuance (as defined in Exhibit A to the Warrant). C. Capitalized terms used herein shall have the same meaning as set forth in the Warrant. NOW, THEREFORE, in consideration of the mutual promises, covenants and conditions hereinafter set forth, the parties hereto mutually agree as follows: 1. Definitions. As used in this Antidilution Agreement, the following terms have the following respective meanings: (a) "Option" means any right, option or warrant to subscribe for, purchase or otherwise acquire common stock or Convertible Securities. (b) "Convertible Securities" means any evidences of indebtedness, shares of stock or other securities directly or indirectly convertible into or exchangeable for common stock. (c) "Issue" means to grant, issue, sell, assume or fix a record date for determining persons entitled to receive any security (including Options), whichever of the foregoing is the first to occur. (d) "Additional Common Shares" means all common stock (including reissued shares) Issued (or deemed to be issued pursuant to Section 2) after the date of the Warrant. Additional Common Shares does not include, however, any common stock Issued in a transaction described in Sections 2.1 and 2.2 of the Warrant; any common stock Issued upon conversion of preferred stock outstanding on the date of the Warrant; the Shares; or common stock Issued as incentive or in a nonfinancing transaction to employees, officers, directors or consultants to the Company. (e) The shares of common stock ultimately Issuable upon exercise of an Option (including the shares of common stock ultimately Issuable upon conversion or exercise of a Convertible Security Issuable pursuant to an Option) are deemed to be Issued when the Option is Issued. The shares of common stock ultimately Issuable upon conversion or exercise of a Convertible Security (other than a Convertible Security Issued pursuant to an Option) shall be deemed Issued upon Issuance of the Convertible Security. 2. Deemed Issuance of Additional Common Shares. The shares of common ------------------------------------------- stock ultimately Issuable upon exercise of an Option (including the shares of common stock ultimately Issuable upon conversion or exercise of a Convertible Security Issuable pursuant to an Option) are deemed to be Issued when the Option is Issued. The shares of common stock ultimately Issuable upon conversion or exercise of a Convertible Security (other than a Convertible Security Issued pursuant to an Option) shall be deemed Issued upon Issuance of the Convertible Security. The maximum amount of common stock Issuable is determined without regard to any future adjustments permitted under the instrument creating the Options or Convertible Securities. 3. Adjustment of Warrant Price for Diluting Issuances. -------------------------------------------------- 3.1 Ratchet Adjustment. If the Company issues Additional Common ------------------ Shares after the date of the Warrant and the consideration per Additional Common Share (determined pursuant to Section 9) is less than the Warrant Price in effect immediately before such Issue, the Warrant Price shall be reduced to the lesser of: (a) the amount of such consideration per Additional Common Share; or (b) if the Company's common stock is traded on a national securities exchange or the National Association of Securities Dealers Automated Quotation System, the last reported bid or sale price of the Company's common stock on the first trading day following a public announcement of the Issuance. 3.2 Adjustment of Number of Shares. Upon each adjustment of the ------------------------------ Warrant Price, the number of Shares Issuable upon exercise of the Warrant shall be increased to equal the quotient obtained by dividing (a) the product resulting from multiplying (i) the number of Shares Issuable upon exercise of the Warrant and (ii) the Warrant Price, in each case as in effect immediately before such adjustment, by (b) the adjusted Warrant Price. 3.3 Securities Deemed Outstanding. For the purpose of this Section 3, ----------------------------- all securities Issuable upon exercise of any outstanding Convertible Securities or Options, Warrants, or other rights to acquire securities of the Company shall be deemed to be outstanding. 4. No Adjustment for Issuances Following Deemed Issuances. No ------------------------------------------------------ adjustment to the Warrant Price shall be made upon the exercise of Options or conversion of Convertible Securities. 5. Adjustment Following Changes in Terms of Options or Convertible --------------------------------------------------------------- Securities. If the consideration payable to, or the amount of common stock - ---------- Issuable by, the Company increases or decreases, respectively, pursuant to the terms of any outstanding Options or Convertible Securities, the Warrant Price shall be recomputed to reflect such increase or decrease. The recomputation shall be made as of the time of the Issuance of the Options or Convertible Securities. Any changes in the Warrant Price that occurred after such Issuance because other Additional Common Shares were Issued or deemed Issued shall also be recomputed. 6. Recomputation Upon Expiration of Options or Convertible Securities. The ------------------------------------------------------------------ Warrant Price computed upon the original Issue of any Options or Convertible Securities, and any subsequent adjustments based thereon, shall be recomputed when any Options or rights of conversion under Convertible Securities expire without having been exercised. In the case of Convertible Securities or Options for common stock, the Warrant Price shall be recomputed as if the only Additional Common Shares Issued were the shares of common stock actually Issued upon the exercise of such securities, if any, and as if the only consideration received therefor was the consideration actually received upon the Issue, exercise or conversion of the Options or Convertible Securities. In the case of Options for Convertible Securities, the Warrant Price shall be recomputed as if the only Convertible Securities Issued were the Convertible Securities actually Issued upon the exercise thereof, if any, and as if the only consideration received therefor was the consideration actually received by the Company (determined pursuant to Section 9), if any, upon the Issue of the Options for the Convertible Securities. 7. Limit on Readjustments. No readjustment of the Warrant Price pursuant ---------------------- to Sections 5 or 6 shall increase the Warrant Price more than the amount of any decrease made in respect of the Issue of any Options or Convertible Securities. 8. 30 Day Options. In the case of any Options that expire by their -------------- terms not more than 30 days after the date of Issue thereof, no adjustment of the Warrant Price shall be made until the expiration or exercise of all such Options. 9. Computation of Consideration. The consideration received by the ---------------------------- Company for the Issue of any Additional Common Shares shall be computed as follows: (a) Cash shall be valued at the amount of cash received by the ---- Corporation, excluding amounts paid or payable for accrued interest or accrued dividends. (b) Property. Property, other than cash, shall be computed at the fair -------- market value thereof at the time of the Issue as determined in good faith by the Board of Directors of the Company. (c) Mixed Consideration. The consideration for Additional Common ------------------- Shares Issued together with other property of the Company for consideration that covers both shall be determined in good faith by the Board of Directors. (d) Options and Convertible Securities. The consideration per ---------------------------------- Additional Common Share for Options and Convertible Securities shall be determined by dividing: (i) the total amount, if any, received or receivable by the Company for the Issue of the Options or Convertible Securities, plus the minimum amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Company upon exercise of the Options or conversion of the Convertible Securities, by (ii) the maximum mount of common stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) ultimately Issuable upon the exercise of such Options or the conversion of such Convertible Securities. 10. General. ------- 10.1 Governing Law. This Antidilution Agreement shall be ------------- governed in all respects by the laws of the State of California as such laws are applied to agreements between California residents entered into and to be performed entirely within California. 10.2 Successors and Assigns. Except as otherwise expressly ---------------------- provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto. 10.3 Entire Agreement. Except as set forth below, this ---------------- Antidilution Agreement and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof. 10.4 Notices, etc. All notices and other communications required or ------------ permitted hereunder shall be in writing and shall be mailed by first class mail, postage prepaid, certified or registered mail, return receipt requested, addressed (a) if to Purchaser at Purchaser's address as set forth below, or at such other address as Purchaser shall have furnished to the Company in writing, or (b) if to the Company, at the Company's address set forth below, or at such other address as the Company shall have finished to the Purchaser in writing. 10.5 Severability. In case any provision of this Antidilution ------------ Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions of this Antidilution Agreement shall not in any way be affected or impaired thereby. 10.6 Titles and Subtitles. The titles of the sections and subsections -------------------- of this Agreement are for convenience of reference only and are not to be considered in construing this Antidilution Agreement. 10.7 Counterparts. This Antidilution Agreement may be executed in any ------------ number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. PURCHASER ISSUER IMPERIAL BANCORP Anchor Pacific Underwriters, Inc. By:__________________________ By: /s/ James R. Dunathan -------------------------------- Name: Name: James R. Dunathan Title: Title: President/CEO Address: Address: EXHIBIT C --------- Registration Rights ------------------- The Shares shall be deemed "registrable securities" or otherwise entitled to "piggy back" registration rights in accordance with the terms of the following agreement (the "Agreement") between the Company and its investor(s): None_____________________________________________________________ [Identify Agreement by date, title and parties. If no Agreement exists, indicate by "none."] The Company agrees that no amendments will be made to the Agreement which would have an adverse impact on Holder's registration thereunder without the consent of Holder. By acceptance of the Warrant to which this Exhibit C is attached, Holder shall not be deemed to be a party to the Agreement, but solely entitled to the registration rights created thereby. If no Agreement exists, then the Company and the Holder shall enter into Holder's standard form of Registration Rights Agreement as in effect on the Issue Date of the Warrant. EX-27 3 FINANCIAL DATA SCHEDULE
5 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 3,793,645 0 414,690 0 0 4,512,686 2,790,353 2,128,916 5,803,219 5,802,555 0 94,201 0 0 (1,310,698) 5,803,219 0 5,033,393 0 5,836,756 0 0 75,467 (910,539) 4,870 (915,409) 0 0 0 (915,409) (0.19) (0.19)
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