The following table sets forth certain historical information for Anchor which is based on continued operations, and should be read in conjunction with Anchor's audited financial statements that are included in this report. The selected consolidated financial data for each of the five years in the period ended December 31, 2000 have been derived from audited consolidated financial statements of Anchor.
Management's Discussion And Analysis Of Financial Condition And Results Of Operations
Anchor had negative net worth of $4,140,327 and negative working capital of $4,405,947 as of December 31, 2000. The company's financial condition continued to deteriorate during 2001. Harden-AZ discontinued operations in 2001 and WBAIS will complete the termination and wind down of its business by the end of January 2002. The Company's outside auditors accordingly have noted that these factors among others, raise substantial doubt about the Company's ability to continue as a going concern.
If the above agreements are not re-negotiated in a manner favorable to the Company, its assets, including its ownership interest in Spectrum CA, will remain subject to the Bank's foreclosure under the Secured Bank Loan and Legion's foreclosure remedies as a secured creditor under the Legion Loan. Should either of these, or other possible contingencies occur, the Company and Spectrum CA could be deprived of substantially all of their assets and businesses.
If successfully implemented, the refinancing plan will enable Anchor to remain in business and pursue its strategy to grow Spectrum CA's managed care business. It may also position Anchor to obtain new equity capital. If successful, management would consider additional strategic alternatives including, but not limited to, acquisitions of other managed care companies.
Total Expenses. Total operating expenses for 2000 were $12,197,138, a decrease of $137,058, or 1%, as compared to 1999 operating expenses of $12,334,196. The change in operating expenses is the net of a $1,926,000 decrease in employee related costs, a $982,000 increase in costs related to the write down of internal use software and other assets, an impairment loss on intangible assets of $462,000 and a $155,000 increase in legal costs. The decrease in employee compensation and benefits related to reduction in staff in all locations due to cost control measures, and a decrease in employee severance costs. The total operating expenses for 1999 decreased $487,183, or 4%, as compared to 1998 operating expenses of $12,821,379. The decrease in total expenses resulted primarily from a reduction in selling, general and administration expenses and employee compensation and benefits resulting from the closure of WBAIS's Los Angeles office, as well as the reduction of staff by the WBA companies at the Concord, Portland and Scottsdale offices in response to declining revenues.
Selling, General and Administrative Expenses. Selling, general and administrative expenses were $4,691,689, $4,346,808 and $4,702,873 in 2000, 1999 and 1998, respectively. Selling, general and administrative expenses increased in 2000 compared to 1999 due primarily to an increase in legal costs of $155,000. The $356,065, or 8%, decrease in 1999, as compared to 1998, resulted primarily from the closure of WBAIS's Los Angeles office. General and administrative expenses include rent, travel, insurance, postage, telephone, supplies and other miscellaneous expenses.
intangibles at Harden-AZ. In 2000, an impairment loss of $461,751 was recorded for the net value of the customer lists at December 31, 2000. The value of the customer lists was assessed as impaired because of the discontinuation of Harden-AZ's business in September 2001 and WBAIS's decision to exit the business in late 2001.
Income Taxes. Anchor's provision for income taxes was $7,710, $5,908 and $9,956 in 2000, 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.
No revenues were generated from insurance brokerage business in 2000 and 1999. The total revenues from Anchor's discontinued insurance brokerage business in 1998 were $3,069,459. Revenues were primarily related to commissions for property and casualty insurance brokerage services (net of sub-broker commissions) and generally were recognized as of the effective date of the insurance policy, except for commissions on installment premiums, which were recognized periodically as billed. Commissions for 1998 were $3,017,939. Interest income, which consisted of interest earned on insurance premiums and other funds held in fiduciary accounts and interest earned on investments was $51,520.
There were no expenses generated from insurance brokerage business in 2000 and 1999. The expenses relating to Anchor's discontinued insurance brokerage business in 1998 were $2,875,350. These expenses were attributed to employee compensation and benefits of $2,019,044, selling, general and administrative expenses of $628,980 and amortization of goodwill and other intangibles of $170,134. In addition, interest expense for 1998 was $57,192.
Anchor has a significant negative net worth and negative working capital, and is in default of the terms of substantially all of its debt. The Company will require funds in excess of those presently available to satisfy its projected working capital and debt service needs in the normal course of business over the next
twelve months. The Company received periodic demand loan advances from WNAH during 2000 to support its operations. WNAH ceased its advances to Anchor in February 2001 although negotiations with WNAH for additional financial support are presently ongoing. There can be no assurance that Anchor will be able to obtain additional working capital from WNAH or any other source on acceptable terms, if at all. The Company is also seeking to restructure the terms of its secured debt with its commercial bank and Legion. There can be no assurance that such debt will be restructured to provide terms sought by the Company. In the event Anchor is unable to raise additional working capital and successfully restructure its debt obligations, the Company's assets and the assets of its subsidiaries will remain subject to possible foreclosure by one or more secured creditors. If such were to occur, the Company and its subsidiaries could be forced to discontinue all operations and/or seek bankruptcy protection.
Anchor reported net cash flows used in operations of $1,456,551 for the twelve months ended December 31, 2000, compared to net cash flows used in operations of $1,410,788 for the twelve months ended December 31, 1999 and net cash flows provided by operations of $83,960 for the twelve months ended December 31, 1998. During 2000, Anchor repaid $200,000 on its short term bank loan and met its operating and capital needs from several sources, including the use of proceeds received from the sale Series A Preferred Stock, the use of proceeds from the sale of Series E Debentures and the loan facility and advances from WNAH (as further discussed below).
The primary use of net cash from investing activities for the twelve months ended December 31, 2000 was $821,628 for the purchase of property and equipment, net of capital leases related primarily to the development and conversion to by the WBA companies to a new benefits plan administration system.
At the end of the third quarter 1998, Anchor commenced raising additional funds from members of the Board of Directors and other qualified investors by offering 10% Convertible Subordinated Debentures, Series B (the "Series B Debentures"). At the close of said offering on January 25, 1999, Anchor had raised $495,000, $200,000 from its primary bank lender and the remaining $295,000 from five members of the Board of Directors and other qualified investors. Anchor used a substantial portion of the proceeds from the Series B Debentures to support current working capital needs. The basic terms of the Series B Debentures were (a) 10% interest, payable semi-annually in arrears (b) two year maturity (c) conversion price of $0.50 per share (d) "Piggyback" registration rights for three years (e) for each $5,000 of Series B Debentures acquired, an investor received a five year warrant to acquire 2,000 shares of Anchor common stock at an exercise price of $0.50 per share and (f) subordination provisions that subordinate the Series B Debentures to Anchor's "Senior Debt" (as defined in the Series B Debentures). The Series B Debentures contained a provision that permitted Anchor to redeem all or a portion of the Series B Debentures, at par, plus any outstanding interest, in the event Anchor sold Putnam, Knudsen & Wieking, Inc. ("PKW") for an amount in excess of $2,000,000. As a result of the December 31, 1998 sale of PKW at a purchase price of $2,054,995 Anchor repurchased $230,000 of the Series B Debentures including $200,000 repurchased from its primary lender. On March 15, 2000, Anchor retired $145,000 of the outstanding Series B Debentures with the proceeds from the Series A Preferred shares purchased by WNAH. As of December 31, 2000 and December 31, 2001 $75,000 of the Series B Debentures remained outstanding.
During the first nine months of 1999, Anchor raised $179,000 from one member of the Board of Directors and other qualified investors by offering 10% convertible Subordinated Debentures, Series C (the "Series C Debentures"). Anchor utilized a substantial portion of the proceeds from the Series C Debentures to support current working capital needs. The basic terms of the Series C Debentures were (a) 10% interest, payable semi-annually in arrears (b) two year maturity (c) conversion price of $0.60 per share (d) "Piggyback" registration rights for three years (e) for each $5,000 of Series C Debentures acquired, an investor received a five year warrant to acquire 2,000 shares of Anchor common stock at an exercise price of $0.60 per share and (f) subordination provisions that subordinated the Series C Debentures to Anchor's "Senior Debt" (as defined in the Series C Debentures).
On September 30, 1999, the Company entered into a term loan of $931,485 with is commercial bank, combining the balances owing under an existing term loan with an additional loan amount of $250,000. The basic terms of this loan were: (a) monthly interest payments equal to bank's prime rate, plus 2.5%; (b) a maturity date of October 7, 2002; and (c) monthly principal payments of $16,500 beginning on November 7, 1999. The term loan is secured by a blanket security interest encumbering receivables, property and equipment, and other assets of Anchor. The loan agreement with the bank contains certain restrictive covenants that, among other things, require Anchor to maintain certain levels of net worth and cash flow (as defined), and prohibits the payment of dividends. Anchor was not in compliance with these covenants at December 31, 2000 and remains in default as of December 31, 2001. All amounts have been reclassified as current liabilities in both years.
Effective March 9, 2000, Anchor and WNAH entered into a Securities Purchase Agreement ("Agreement") which superseded and replaced in its entirety the binding Letter Agreement dated February 18, 2000 and letter of intent dated November 29, 1999. The basic terms of the Agreement provide that WNAH would purchase from Anchor a package of debt and equity securities and that it would make available a $1,000,000 loan facility. The specific securities and loan facility are described below:
(a) Series E Convertible Debentures (the "Series E Debentures") in the principal amount of $500,000; two year maturity with a provision that provides for repayment on July 1, 2000, if requested by WNAH; conversion price of $0.50 per share; "Piggyback" registration rights for three years; for each $5,000 of Series E Debentures acquired, WNAH received a five year warrant to acquire 3,000 shares of Anchor common stock at an exercise price of $0.50 per share; and subordination provisions that subordinates the Series E Debentures to Anchor's "Senior Debt" (as defined in the Series E Debentures). The Series E
(b) a $200,000 bridge loan facility to Anchor evidenced by a promissory note ("Bridge Loan"); bearing interest at the rate of 10% per annum with a maturity date of July 1, 2000. The principal amount and all accrued interest under the Bridge Loan were, at the election of WNAH, applied toward the purchase of Series A Convertible Preferred stock, described below;
(c) 1,853,300 shares of Series A Convertible Preferred stock ("Series A Preferred") at a purchase price of $2,000,000, which if converted would constitute 79.7% of Anchor's current outstanding common stock; and
(d) a $1,000,000 convertible loan facility (the "Convertible Loan") which was made available immediately following the closing of the purchase of the Series A Preferred. The Convertible Loan shall be convertible, at WNAH's option, into shares of Series A Preferred stock which are further convertible into a number of shares of common stock, which, when added to the shares of common stock issued or issuable pursuant to the Series E Debentures (not including the warrants accompanying the Series E Debentures) and other shares of Series A Preferred issued to WNAH, would constitute 73.5% of Anchor's common stock on a fully-diluted basis following such conversion, assuming the maximum amount of $1,000,000 was borrowed by Anchor pursuant to the Convertible Loan.
To finance the Purchase, Anchor entered into a convertible loan with Legion Insurance Company ("Legion") for $2,000,000 (the "Legion Loan"). The Legion Loan was convertible into the securities of Anchor
in the event Anchor completed an offering of its securities with gross proceeds of at least $3,000,000 by June 30, 2001. Further, Anchor and WNAH entered into an assignment and assumption agreement dated January 12, 2001 in which, if WNAH purchased the Legion Note as described below, then WNAH shall cancel the Legion Note in exchange for ownership of the Novaeon assets purchased by Anchor.
At December 31, 2000, long-term liabilities, less the current portion discussed above, totaled $232,453 (as compared to $1,747,612 at December 31, 1999), consisting entirely of non-current capital lease obligations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the accounting and reporting provision of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual, and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business (as previously defined in that opinion). SFAS No. 144 will be adopted January 1, 2002. We have not yet determined the impact of its adoption on our consolidated results of operations, financial position, or cash flows.
Our consolidated financial statements and footnotes and the reports of independent auditors thereon are included in this report on pages through.