February 18, 2000
Xx. Xxxxx X. Xxxxxxxx
President & CEO
Anchor Pacific Underwriters, Inc.
0000 Xxxxxx Xxxxxx
Xxxxxxx, XX 00000
Private & Confidential
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Dear Xx. Xxxxxxxx:
This letter agreement ("Agreement") sets forth the terms under which Xxxx
North America Holding, Inc. ("Xxxx") shall make an investment in Anchor Pacific
Underwriters, Inc. (the "Company"). For purposes of this Agreement the
transactions referenced herein shall be collectively referred to as the
"Transaction."
This Agreement supersedes and replaces in its entirety that certain Letter
of Intent by and between Xxxx and the Company dated November 29, 1999.
The terms shall be as follows:
1. Securities and Loan Facilities. Xxxx will purchase from the Company the
following securities and make available the following loan facility:
(a) Series E Convertible Debentures. Series E Convertible Debentures (the
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"Debentures") in the principal amount of $500,000, bearing interest at the
rate of 10% per annum, convertible into shares of Common Stock at a
conversion price of $.50 per share. These debentures would be senior to the
other series of debentures issued by the Company. The Company and Xxxx
acknowledge that as of the date hereof, Xxxx has purchased $465,000 of the
Debentures. Xxxx shall purchase the additional $35,000 of the Debentures
upon approval of this Agreement by the Board of Directors of the Company
(the "Board") and Xxxx'x receipt of the opinion of counsel referenced in
paragraph 12 herein. Xxxx has also received separate warrants, with a 5
year term, to purchase shares of the Company's Common Stock at a purchase
price of $.50 a share (the "Warrants"). For each $5,000 worth of Debentures
purchased by Xxxx, the Company granted a Warrant to acquire 3,000 shares of
Common Stock.
(b) Amendment of Due Date of the Debentures. The payment terms of the
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Debentures (including all previously issued Debentures held by Xxxx) shall
be amended to provide for repayment on July 1, 2000. The Debentures shall
continue to be
convertible at all times prior to repayment by the Company and, following
the closing of the purchase of the Series A Preferred Stock, the repayment
date of the Debentures may be extended at the election of Xxxx to a date no
later than December 31, 2002.
(c) Convertible Bridge Loan. Upon approval of this Agreement by the
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Board and receipt of the opinion of counsel referenced in paragraph 12,
Xxxx shall make a bridge loan to the Company in the principal amount of
$200,000 evidenced by a promissory note ("Bridge Loan"). The principal
amount of the Bridge Loan shall bear interest at the rate of 10% per annum
and shall be due and payable on July 1, 2000. The principal amount and all
accrued interest under the Bridge Loan may, at the election of Xxxx, be
applied toward the purchase of Series A Preferred Stock, or, in the event
of the failure of a Specified Condition described in paragraph 1(g) below,
may, at the election of Xxxx, be applied toward the purchase of Common
Stock in accordance with the terms of such paragraph 1(g).
(d) Preferred Stock. Xxxx will purchase at the closing approximately
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1,853,300 shares of Series A Convertible Preferred Stock ("Series A
Preferred"), convertible into shares of Common Stock constituting 62.6% of
the Company's Common Stock on a fully-diluted basis (assuming the exercise
of all stock options or warrants issued by the Company or conversion of all
outstanding debentures, including the Series E Debentures and the
accompanying Warrants) following such conversion. Assuming the conversion
of all the Debentures (but not the exercise of the accompanying Warrants
held by Xxxx) and the conversion of all Series A Preferred shares, Xxxx
would own 66% of the Company's Common Stock on a fully-diluted basis
immediately following such conversion and exercise. Each share of Series A
Preferred shall be convertible into 10 shares of Common Stock. The Series A
Preferred shall be entitled to vote on an as converted to Common Stock
basis on all matters presented to the Company's shareholders. The purchase
price for the 1,853,000 shares of the Series A Preferred would be
$2,000,000. The Series A Preferred would carry a cumulative 8% dividend, a
liquidation preference equal to the purchase price plus accumulated
dividends, the right to elect a majority of the Board of Directors, and
approval rights over significant corporate transactions, including all
future issuances of securities.
(e) Convertible Loan Facility. Xxxx will make available to the
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Company a convertible loan facility of $1,000,000 (the "Convertible Loan")
following the closing of the purchase of the Series A Preferred Stock. Any
principal amount borrowed by the Company pursuant to the Convertible Loan
shall bear interest at the rate of 10% per annum. The Company may borrow
all or any portion of the Convertible Loan any time following the closing
of the purchase of the Series A Preferred Stock. Notwithstanding the
Company's right to access the proceeds of the Convertible Loan, Xxxx shall
have the right to cause the Company to borrow all or any portion of the
Convertible Loan at any time following such closing. The Convertible Loan
shall be convertible, at Xxxx'x option, into shares of Series A Preferred
Stock which are further convertible into a
number of shares of Common Stock which, when added to the shares of Common
Stock issued or issuable pursuant to the Debentures (not including the
Warrants accompanying the Debentures) and the other shares of Series A
Preferred issued to Xxxx, would constitute 73.5% of the Company's Common
Stock on a fully-diluted basis following such conversion, assuming the
maximum amount of $1,000,000 was borrowed by the Company pursuant to the
Convertible Loan. Xxxx shall have the right to convert all or any portion
of the Convertible Loan.
(f) Standstill Period, Tender Offer and Warrant. During the 36 month
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period following the closing of the Transaction, neither Xxxx nor its
affiliates will make any further acquisitions of the Company's securities
(including, but not limited to, debt securities such as debentures, bonds
or notes and equity securities such as common or preferred stock) whether
directly from the Company or indirectly from debt or security holders
unless Xxxx has first made a tender offer to purchase all outstanding
shares of Common Stock at a purchase price equal to the greater of: (i) a
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price per share determined by assuming the value of the Company to be equal
to the Company's earnings before income taxes ("EBIT") for the 12 full
calendar months preceding the month in which the offer is made, multiplied
by six (6), or $0.80 per share (the "Tender Offer"). At the closing the
Company will issue Xxxx a warrant with a three (3) year term to purchase a
number of shares of the Company's Common Stock which, when added to the
shares of Common Stock issued or issuable pursuant to the Debentures (not
including the Warrants accompanying the Debentures), the Series A Preferred
Stock and the Convertible Loan, would constitute 90% of the Company's stock
on a fully-diluted basis following the exercise of such warrant. The
exercise of such warrant would be conditioned upon Xxxx having first made a
Tender Offer to buy all of the shares of the Company's stock not then owned
by Xxxx or its affiliates. The Warrant shall enable Xxxx to purchase a
share of Common Stock at a purchase price equal to the greater of (i) a
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price per share determined by assuming the value of the Company to be equal
to the Company's EBIT for the 12 full calendar months preceding the month
in which the offer is made, multiplied by six (6), or (ii) $0.80 per share.
(g) Conditional Option to Purchase Common Stock. Upon the approval of
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this Agreement by the Board and receipt of the opinion of counsel
referenced in paragraph 12 below, Xxxx shall purchase an option to purchase
common shares of the Company subject to the terms and conditions set forth
in this paragraph 1(g) ("Conditional Option"). The purchase price for the
Conditional Option shall be $1,000. The Conditional Option shall be
exercisable by Xxxx only upon the failure of the Company to satisfy certain
material conditions precedent to the consummation of the Transaction by
March 15, 2000 including, but not limited to the following: (a) approval of
this Agreement, the Definitive Agreements (described in paragraph 5 below)
and the Transaction by the Board, (b) the good faith negotiation and timely
execution of the Definitive Agreements by the officers and representatives
of the Company, (c) the
Company's compliance with the material terms of this Agreement and the
Definitive Agreements prior to the closing of the Transaction, (d) receipt by
the Company of all material consents and approvals necessary for the
consummation of the Transaction, and (e) the timely performance by the Company
and its directors and shareholders of all acts necessary for the consummation of
the Transaction, including the adoption and filing of a Certificate of
Determination for the Series A Preferred Stock and the authorization by the
Company and its shareholders of additional shares of Common Stock in an amount
sufficient to fully consummate the Transaction; provided, however, any waiting
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period required by the Securities and Exchange Commission's Information
Statement requirements set forth in Schedule 14C of the Securities Exchange Act
of 1934 shall not be deemed a failure by the Company to satisfy a material
condition precedent. The foregoing conditions shall collectively be referred to
as "Specified Conditions." The parties acknowledge this Conditional Option is
intended to protect Xxxx'x interests in the event the Transaction is not
consummated in accordance with its terms by reason of a failure of a Specified
Condition described above and not as a result of Xxxx'x election not to proceed
for any other reason such as the failure of other conditions precedent for the
benefit of Xxxx or matters or conditions subsequently discovered in its final
due diligence prior to the closing of the Transaction.
Upon the failure of a Specified Condition, Xxxx shall have the option to
purchase 7,200,000 shares of Common Stock which immediately following such
purchase, when combined with the 1,000,000 shares of Common Stock issued or
issuable to Xxxx under the Debentures (not including the Warrants accompanying
the Debentures) shall constitute not less than 51% of the Company's authorized
Common Stock (currently 16,000,000 shares). The purchase price for such shares
shall be $1,000,000 payable at the election of Xxxx by the application of the
principal and accrued interest under the Bridge Loan (approximately $200,000)
and the balance in cash in the approximate amount of $800,000.
In the event the Transaction is consummated in accordance with the terms
hereof, the principal and accrued interest under the Bridge Loan may, at the
election of Xxxx, be applied toward the purchase price of the Series A Preferred
Stock.
2. Employment Agreements. As a condition precedent to the Closing, all
producers and key employees (excluding Xxxxx X. Xxxxxxxx) of the Company (as
determined by Xxxx) will be required to enter into employment agreements with
Xxxx. Such employment agreements shall be in form and substance, and shall
contain certain non-piracy restrictive covenants, acceptable to Xxxx.
3. Conditions. The obligation of Xxxx to consummate the Transaction will be
subject to (a) satisfactory completion of its final due diligence investigation
of the Company, including financial and legal due diligence and verification,
(b) execution of Definitive Agreements by Xxxx, (c) approval of the Transaction
by the Board of
Directors of Xxxx, (d) receipt of all material consents and approvals necessary
for the consummation of the Transaction, (e) the timely performance by the
Company of all acts necessary for the consummation of the Transaction, including
the adoption and filing of a Certificate of Designation for the Series A
Preferred and the authorization of additional shares of Common Stock sufficient
to consummate the Transaction, (f) the absence of any material adverse change in
the Company or its financial condition, and (g) Fiduciary Cash equal to or
greater than Fiduciary Obligations calculated in accordance with California
Department of Insurance regulations.
4. Due Diligence Access. The Company will continue to (and cause its
officers, directors, producers, employees, agents and representatives to)
provide Xxxx and its representatives with full and complete access to all books,
records, contracts, facilities and personnel of the Company. Such information
shall be made available on a confidential basis.
5. Definitive Agreements and Closing. Xxxx will prepare, and the parties
will negotiate in good faith, Definitive Agreements reflecting the terms of the
Transaction as set forth herein, and containing representations, warranties,
covenants, indemnities and agreements customary for transactions of the type
contemplated hereby. The Company will be required under the Definitive
Agreements (i) to make customary representations and warranties to Xxxx,
including, among other things, that all liabilities and obligations of the
Company have been disclosed therein, and that the Company owns each and every
account and that no employee or agent producer has any ownership in any account
or business of the Company, and (ii) to indemnify Xxxx for any claims or
liabilities incurred by Xxxx due to any material breaches of any
representations, warranties or covenants of the Company thereunder or any
material undisclosed liabilities, whether known or unknown; provided, however,
that Xxxx will provide reasonable documentation to support any such claim and
will cooperate with any related inquiry. The parties shall exert their best
efforts to negotiate and execute Definitive Agreements on or before February 29,
2000 and the purchase and sale of the Series A Preferred shall be closed as soon
as possible thereafter. In no event, however, shall the execution and closing
occur later than March 15, 2000.
6. Publicity. Except as may be required by applicable law, neither Xxxx nor
the Company shall engage in, encourage or support any publicity, announcement or
disclosure of any kind or form in connection with this Agreement or the
Transaction unless the parties shall consult in advance on, and attempt in good
faith to obtain the prior consent of the other party as to the form, timing and
content of any publicity, announcement, or disclosure, whether to the financial
community, governmental agencies, public generally or otherwise.
7. Exclusivity. The Company acknowledges that Xxxx has and will continue to
devote substantial resources and incur significant legal, accounting and other
out-of-pocket expenses in conducting due diligence regarding the Company and in
negotiating and documenting the transactions contemplated by this Agreement. To
continue to induce Xxxx to devote such resources and incur such expenses, the
Company agrees that, unless this Agreement is terminated by Xxxx in accordance
herewith, the Company will not, and will not permit any of its officers,
directors, employees, agents or representatives, directly or indirectly, to
supply any information concerning the Company or its insurance business to any
third party in connection with any acquisition of any interest in the Company or
any of its assets or liabilities, or solicit or negotiate, directly or
indirectly, with any third party to acquire any equity interest in, or assets or
liabilities of, the Company. The Company shall, and shall cause its officers,
directors, employees, agents or representatives to, immediately cease any
discussions with any other party regarding any such transaction. In the event
that this exclusivity provision is violated by the Company, Company shall pay
Xxxx a Break Up Fee of $250,000 within thirty (30) days following such election.
This exclusivity provision shall expire on February 29, 2000 unless the Company
and Xxxx have executed all of the Definitive Agreements. Xxxx may extend the
exclusivity period until March 15, 2000 by agreeing to increase the total
purchase price by purchasing an additional $200,000 of the Company's Series E
Debentures or Series A Preferred Shares, or a combination thereof.
8. Interim Conduct. Until and following the execution of the Definitive
Agreements, the Company agrees to conduct its business only in the ordinary
course and consistent with prior practice.
9. Expenses. Each of the parties will bear its own expenses incident to the
contemplated Transaction including, but not limited to, all fees of attorneys
and financial advisors.
10. Binding Effect. This Agreement is intended to create binding
obligations on both parties which, in the absence of the execution of the
Definitive Agreements contemplated herein, shall be fully enforceable in
accordance with their terms.
11. Governing Law. This Agreement shall be governed by the laws of the
State of California, without giving effect to principles of conflicts of laws.
12. Opinion of Counsel. Prior to making the Bridge Loan and purchasing the
remaining Debentures and the Conditional Option as described herein, Xxxx shall
receive from Sheppard, Mullin, Xxxxxxx & Xxxxxxx LLP, counsel to the Company, an
opinion letter addressed to Xxxx, dated the date of the execution of the
Agreement by the Company, that the Company has taken all corporate action
necessary to authorize the execution and delivery of this Agreement by the
Company and that this Agreement has
been duly authorized, executed and delivered on behalf of the Company. The form
and content of such letter shall be subject to the reasonable approval of Xxxx'x
legal counsel.
13. Attorneys' Fees. In the event that any party to this Agreement
institutes any legal proceeding to enforce any of the provisions of this
Agreement, then the prevailing party in such proceeding shall be entitled to
collect and receive its reasonable attorneys' fees and costs, through and
including all appeals, and the other party shall pay for same.
14. Arbitration; Venue and Jurisdiction. The parties hereto agree that any
dispute arising out of or relating to this Agreement or the breach, termination
or the validity hereof, shall be settled by binding arbitration in accordance
with the rules of the American Arbitration Association ("AAA") by a neutral
arbitrator who shall be a former superior court or appellate court judge or
justice with experience in resolving business disputes. The arbitration shall be
governed by the California Code of Civil Procedure Section 1280 et seq. and the
parties intend this procedure to be specifically enforceable in accordance with
such provisions. Judgment upon the award rendered by the arbitrator may be
entered by any court having jurisdiction thereof. The parties agree that the
venue for the arbitration shall be in the County of Contra Costa, California.
The arbitrator shall be required to follow the applicable law as set forth in
the governing law section of this Agreement. The arbitrator shall award
reasonable attorneys' fees and costs of arbitration to the prevailing party in
such arbitration. The parties hereto consent to the personal jurisdiction of any
court in the County of Contra Costa, California for the enforcement of this
agreement to arbitrate and any award granted pursuant to said arbitration or
settlement of any dispute related hereto.
15. Successors and Assigns. Except as otherwise expressly provided herein,
the provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors, and administrators of the parties hereto.
16. Separability. In case any provision of this Agreement shall be invalid,
illegal, or unenforceable, it shall, to the extent practicable, be modified so
as to make it valid, legal and enforceable and to retain as nearly as
practicable the intent of the parties, and the validity, legality, and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
17. Notices, etc. All notices and other communications required or
permitted hereunder shall be in writing and shall be deemed effectively given
upon personal delivery or on the third day following mailing by registered or
certified mail, return receipt requested, postage prepaid, addressed: (a) if to
Xxxx, at 000 Xxxx Xxx Xxxxxx, Xxxxx 0000, Xxx Xxxxx, Xxxxxxxxxx 00000, or at
such other address as Xxxx shall have
furnished to the Company in writing in each case with a copy to Xxxxx Xxxxxxxx,
Xxxxxxxxx Xxxxx Xxxxxxx & Xxxxx, 000 Xxxxxxx Xxxxxx Xxxxx, Xxxxx 0000, Xxxxxxx
Xxxxx, Xxxxxxxxxx 00000, or (b) if to the Company, at 0000 Xxxxxx Xxxxxx, Xxxxx
000, Xxxxxxx, Xxxxxxxxxx 00000, or at such other address as the Company shall
have furnished to Xxxx in writing, in each case with a copy to A. Xxxx Xxxxxx,
Sheppard, Mullin, Xxxxxxx & Xxxxxxx LLP, Xxxx Xxxxxxxxxxx Xxxxxx, Xxxxx 0000,
Xxx Xxxxxxxxx, Xxxxxxxxxx 00000.
Sincerely,
XXXX NORTH AMERICA HOLDING, INC.
By : /s/ Xxxxx X. Xxxxxx Date : 2/18/00
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Xxxxx X. Xxxxxx
Executive Vice President
ANCHOR PACIFIC UNDERWRITERS, INC.
By : /s/ Xxxxx X. Xxxxxxxx Date : 2/22/00
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Xxxxx X. Xxxxxxxx
President & CEO
