The Company's plan in 2002 and beyond is to devote all available resources to grow Spectrum CA's managed care business internally and, provided the Company is successful in raising additional working capital, through acquisitions. There can be no assurance, however, that additional working capital will become available to the Company in 2002, or ever.
Spectrum CA currently performs telephonic case management and utilization review services at nine locations
Anchor and Spectrum CA, presently lack sufficient working capital to meet their respective delinquent and maturing debt obligations. The Company's outside auditors accordingly have noted that this fact, among others, raises substantial doubt about the Company's ability to continue as a going concern.
Negotiations involving Comerica Bank, Legion, and the Pennsylvania Insurance Commissioner as Rehabilitator of Legion, among others, are ongoing regarding a number of matters critical to the continued financial viability of Spectrum CA and Anchor. These matters include: (a) Comerica Bank's extension of the Forbearance Agreement relating to Anchor's covenant defaults under the Secured Bank Loan beyond January 31, 2002 and the extension of the Loan's maturity date beyond October 5, 2002; and (b) the extension of the Legion Loan's maturity date beyond December 31, 2001. Recently, Comerica Bank sought and obtained WNAH's guarantee of Anchor's obligations under the Secured Bank Loan. Despite the guarantee provided by WNAH, there can be no assurance that Comerica Bank will extend the term of the Forbearance Agreement beyond January 31, 2002 or agree to amend the Secured Bank Loan's maturity date as sought by Anchor. In the event these debt agreements are not successfully re-negotiated, Anchor's assets, including its ownership interest in Spectrum CA, and Spectrum CA's ownership of its assets and business, would likely be subject to the Bank's foreclosure rights under the Secured Bank Loan and Legion's foreclosure remedies as a secured creditor under the Legion Loan. Should any of the above or other possible contingencies occur, Anchor and Spectrum CA could be deprived of substantially all of their assets and businesses.
The Company is considering a number of refinancing alternatives to address its debt and enable Anchor to remain in business and grow Spectrum CA's managed care business. Critical components of any resulting plan will likely require the restructuring of debt and the conversion of all, or significant portions, of debt held by affiliated and unaffiliated creditors to Anchor or Spectrum CA equity securities. Management anticipates any such plan will also require Anchor and/or Spectrum CA to raise substantial additional working capital. 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. There can be no assurance that Anchor and Spectrum CA will be able to accomplish these objectives and remain in business.
Total Revenues. Total revenues from continuing operations for the year ended December 31, 2001 were $4,673,678. The revenues were primarily generated from telephonic case management and utilization services. During 2001, Spectrum lost approximately 5 customer accounts representing 40% of the business obtained in the Novaeon Asset acquisition. For the year ended December 31, 2001, two customers represented 69%, or $3,227,623, of Spectrum CA's revenue in 2001. One of those customers was from the Novaeon business and one was a new customer that Spectrum CA gained as a result of its affiliation with WNAH.
Selling, general and administrative expenses. Selling, general and administrative expenses for the year ended December 31, 2001 were $1,496,679. These expenses consist mainly of rent expense of $472,415, corporate overhead charge from WNAH of $464,973 and telecommunication costs of $179,534. Spectrum CA has approximately 9 locations in the United States. Spectrum CA is charged approximately 10% of its revenue by WNAH for corporate services such as accounting, legal, human resources and IT provided by WNAH. Anchor and Spectrum CA incurred $237,333 in professional fees for accounting and legal services, but these expenses were offset by a $234,000 expense credit for the release of a legal accrual from 2000 for litigation with two of Anchor's former executive officers (Item 3. Legal Proceedings).
Depreciation and amortization. Depreciation and amortization was $96,161 for the year ended December 31, 2001. The expense relates directly to the $320,000 of equipment acquired in the Novaeon Asset purchase that is used by Spectrum CA.
Amortization of goodwill. Total amortization of goodwill was $54,748 for the year ended December 31, 2001. At December 31, 2001, goodwill is comprised solely of the goodwill recorded as a result of the Novaeon Asset purchase, and is being amortized over 10 years. Goodwill represents the excess of the cost of the acquisition over the fair value of net assets acquired.
The discontinued operations of WBA primarily consisted of third-party health benefits administration activities. The WBA companies engaged in designing, implementing and administering health benefit plans for small to medium sized employer groups. Administration services provided by WBA 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. Due to continuing revenue losses from terminating and non-renewing accounts, management determined the WBA companies could not remain in business and service its customers beyond the first quarter of 2002 and discontinued the business in January 2002.
Total Revenues. Total revenues from discontinued operations decreased $3,955,971 or 44%, to $5,043,166 for the year ended December 31, 2001 from $8,999,137 for the year ended December 31, 2000. The decrease was due to the continuous loss of customers during 2001. Significant customer accounts of Harden - AZ and WBAIS terminated in the second quarter of 2001. WBA's
customers were dissatisfied with WBA's limited information systems capabilities and service levels had reached the point that it appeared likely that most, if not all, of WBA's customers would terminate their service agreements by the end of the first quarter of 2002. Total revenues decreased $1,055,459 or 10%, to $8,999,137 for the year ended December 31, 2000 from $10,054,596 for the year ended December 31, 1999. The revenue consisted exclusively of fee, commission and miscellaneous revenue of the WBA companies. The decrease in revenue was primarily due to the non-renewal and cancellation of customer accounts in WBAIS's Concord, California office and Harden-AZ's Arizona office.
Loss from discontinued operations decreased $1,149,603 or 38%, to $1,908,968 for the year ended December 31, 2001 from $3,058,571 for the year ended December 31, 2000. The decrease in the loss from discontinued operations in 2001 consisted of a $3,955,971 decrease in revenue netted with a $5,728,390 decrease in operating expenses and $459,887 loss on disposal of WBA. Total operating expenses related to the discontinued operations were $6,468,748, a decrease of $5,728,390, or 47%, as compared to $12,197,138 for the year ended December 31, 2000. In September 2001, Harden-AZ closed its Scottsdale, Arizona and San Antonio, Texas offices. WBAIS's accident and health plan administration business was consolidated into its Portland, Oregon and Wheaton, Illinois offices, which were closed in January 2002. Employee related costs decreased $3,083,016 to $2,912,220 in 2001. The WBA Companies had 98 employees at December 31, 2000 and 17 at December 31, 2001. WBA wrote down $399,948 of internal use software and other equipment that was abandoned during 2001. General and administrative costs decreased $1,535,109, or 33%, to $3,156,580 from $4,691,689 for the year ended December 31, 2000 as a direct result of the wind down of the business.
Loss from discontinued operations increased $772,949 or 34%, to $3,058,571 for the year ended December 31, 2000 from $2,285,622 for the year ended December 31, 1999. The increase in the loss is the result of a decrease in revenue of $1,055,459 combined with a decrease in expenses of $137,058. Total operating expenses related to discontinued operations 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.
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 is seeking to restructure the terms of its secured and unsecured debt but there can be no assurance that such debt will be restructured to provide acceptable terms. 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 provided by operations of $753,758 for the twelve months ended December 31, 2001, compared to net cash flows used in operations of $1,758,176 for the twelve months ended December 31, 2000 and net cash flows used in operations of $1,354,862 for the twelve months ended December 31, 1999. During 2001, Anchor repaid $198,000 on its Secured Bank Loan and met its operating and capital needs from several sources, including, among others, the use of proceeds of the Novaeon Note, the Convertible Loan, the Legion Loan, and cash advances from WNA all as described below.
Net cash provided by financing activities for the twelve months ended December 31, 2001 was $1,886,033 consisting of: proceeds from the $2,000,000 Legion Loan, operating charges and advances from the subsidiaries of WNAH of $502,316, $90,000 from the Convertible Loan, and $130,653 from increases in other debt; reduced by repayments of: $198,000 on the Secured Bank Loan, $409,000 on short-term advances from WNAH, $91,000 on the Convertible Loan, $67,331 on other debt and $71,605 on capital lease obligations.
Short-term borrowings, the current portion of long-term debt and the current portion of capital lease obligations in the aggregate totaled $5,817,503 at December 31, 2001 (as compared to $3,505,572 at December 31, 2000). As of December 31, 2001, short-term borrowings, the current portion of long-term debt and the current portion of capital lease obligations consisted of: (a) $502,486 due under the Secured Bank Loan (described below); (b) other debt of $157,598; (c) aggregate current Series B, D and E Debenture debt in the amount of $810,000 (described below); (d) $2,000,000 due under the Legion Loan (described below); (e) $500,000 due under the Novaeon Note (described below); (f) $79,529 in current capital lease obligations; and (g) $999,000 due to WNA under the Convertible Loan (described below).
Description of Delinquent Debt Obligations: The following is an overview of the major delinquent debt obligations of Anchor and its remaining operating subsidiary, Spectrum CA.
Series B Debentures: At December 31, 2001 the outstanding principal immediately due and payable to the holders of Anchor's 10% Convertible Subordinated Debentures, Series B ("Series B Debentures") was $75,000. The holders of the Series B Debentures are unaffiliated third parties. The basic terms of the Series B Debentures are: (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 to include the Secured Bank Loan described herein).
Series D Debentures: At December 31, 2001, $235,000 of Anchor's 10% Convertible Subordinated Debentures, Series D (the "Series D Debentures") remained outstanding and immediately due and payable. The holders of the Series D Debentures are unaffiliated third parties. The basic terms of the Series D Debentures are: (a) 10% interest, payable semi-annually in arrears; (b) two year maturity; (c) conversion price of $0.50 per share; (d) "Piggyback" registration rights for three years; (e) for each $5,000 of Series D Debentures acquired, an investor received a five year warrant to acquire 3,000 shares of Anchor common stock at an exercise price of $0.50 per share; and (f) subordination provisions that subordinated the Series D Debentures to Anchor's "Senior Debt" (as defined in the Series D Debentures to include the Secured Bank Loan described herein).
Series E Debentures: At December 31, 2001, the principal sum of $500,000 plus unpaid interest of $101,667 was immediately due and payable to WNAH under the Company's 10% Convertible Subordinated Debentures,
Secured Bank Loan: On September 30, 1999, Anchor entered into a term loan of $931,485 with is commercial bank, Imperial Bank, now Comerica Bank following a 2001 merger, (the "Bank") combining the balances owing under an existing term loan with an additional loan amount of $250,000 (the "Secured Bank Loan"). The basic terms of the 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 Secured Bank Loan is secured by a blanket security interest encumbering receivables, property and equipment, and other assets of Anchor and its subsidiaries. The loan agreement 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 as of December 31, 2001. The unpaid principal balance under the Secured Bank Loan at December 31, 2001 of $502,486 has been reclassified as a current liability.
The unpaid balance of the Secured Bank Loan was subsequently reduced to $377,986 at March 31, 2002 through additional principal payments required by Comerica Bank under a Forbearance Agreement and Amendment to Promissory Note and Conditional Consent to Subsidiary Transactions between the parties dated January 2, 2002 (the "Forbearance Agreement"). The Forbearance Agreement amended the repayment terms of the Secured Bank Loan making it payable in monthly principal installments of $20,000, plus accrued interest, with a balloon payment of $257,986 due on October 5, 2002. The Forbearance Agreement also evidenced the Bank's forbearance of Anchor's Secured Bank Loan covenant defaults until January 31, 2002 and its consent to the cessation of WBAIS's business. As a condition of its forbearance, the Bank sought and obtained the execution and delivery of an Unconditional Guaranty of the Secured Bank Loan by WNAH, Anchor's majority shareholder. Anchor remains in default under the Secured Bank Loan covenants and, following the expiration of the Forbearance Agreement on January 31, 2002, the Bank is no longer restricted from seeking the immediate repayment of the Secured Bank Loan or pursuing other remedies arising from the default. The Company is engaged in ongoing negotiations with the Bank concerning further extension of the Forbearance Agreement. There can be no assurance, however, that the Bank will agree to such an extension or that an extension on terms acceptable to the Company will be negotiated.
Convertible Loan: In conjunction with its purchase of the Series A Preferred shares in March 2000, WNAH also agreed to provide Anchor with a $1,000,000 Convertible Loan. The Convertible Loan was made available immediately following the closing of the Series A Preferred stock purchase transaction. Principal advances under the Convertible Loan bear interest at the rate of ten percent (10%) per annum and interest is payable quarterly. The outstanding balance of principal and interest under the Convertible Loan was due and payable on March 10, 2002. The Convertible Loan is convertible, at WNAH's option, into shares of Series A Preferred stock which are further convertible into a number of shares of common stock at a rate of 10 to 1, 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 82.2% of Anchor's common stock on a fully-diluted basis following such conversion. At December 31, 2001 the outstanding balance of principal and interest due under the Convertible Loan was $1,154,475. Anchor failed to make quarterly interest payments in 2000 and 2001 and, as a result of the default, the outstanding balances due at December 31, 2000 and 2001 have been classified as current.
The Convertible Loan remains in default. Anchor is engaged in ongoing negotiations with WNAH concerning an extension of the maturity date and further forbearance of its interest payment defaults. There can be no assurance that the terms of the Convertible Loan will be amended in a manner acceptable to the Company or that the Company will be able to comply with any such amended terms.
Affiliate Demand Loans and Overhead Support Charges: Since September 2000, WNA has provided administrative and overhead support services to Anchor and its subsidiaries under an inter-company resource sharing arrangement. WNA's overhead support includes the services of its senior executive personnel as well as the performance of human resources, accounting, insurance, legal, facilities management, information technology, and administrative functions and the use of WNA's nationwide data network, hardware and software infrastructure, web-site hosting capabilities and other communications resources. Anchor and its subsidiaries initially agreed to pay the sum of $12,500 per month for WNA's overhead support services. The monthly support fee was increased to 8% of monthly net revenue of WBA and 10% of monthly net revenue of Spectrum CA in January 2001 to more closely reflect the fair market value of the services and the amount of the expense savings realized by Anchor and its subsidiaries under the arrangement. WNA and other WNAH subsidiaries, WTX and SMC, has also made various demand loans to Anchor and its subsidiaries in the form of cash advances or payments made on their behalf subject to a reimbursement obligation. As of December 31, 2001, the aggregate demand loan balance due to WNA, WTX and SMC was $768,890 and the balance of unpaid overhead support charges was $457,533.
Novaeon Note: The consideration for the Novaeon Assets under the Asset Purchase Agreement was a cash payment of $1,500,000 and delivery of Anchor's contingent promissory note for $3,500,000. The principal amount of the Novaeon Note has been retroactively reduced to $500,000 as of January 12, 2001 under the Note's contingent adjustment provision based on revenues received in 2001 from the operation of the purchased assets. All principal and accrued interest under the Novaeon Note was due and payable on April 30, 2002. In May 2002, the Company obtained an amendment of the repayment terms of the Novaeon Note to provide for monthly-amortized payments over a period of 12 months beginning on July 1, 2002. The Company paid $97,926 in principal and interest payments in May 2002, the remaining principal and interest of $457,353 plus 8% interest will be paid in 12 monthly installments of $39,784 until June 1, 2003.
Anchor failed to complete a $3,000,000 equity offering or satisfy the Legion Loan by June 30, 2001. On November 21, 2001, Legion and Anchor executed a First Amendment to Promissory Note extending the due date of the Legion Loan and Legion's right to cause Anchor to purchase the Legion Note under the Note Purchase Agreement to December 31, 2001. Anchor was engaged in discussions with Legion regarding the further extension of the Legion Note's maturity when a Pennsylvania court appointed the Pennsylvania Insurance Commissioner as Legion's Rehabilitator. The court ordered the Commissioner to assume possession and control of all Legion's assets and business for the protection of policyholders as of that date. All further negotiations concerning the
Legion Note will be conducted with the Pennsylvania Insurance Commissioner. There can be no assurance that an amendment of the Legion Note's repayment terms acceptable to the Company will be obtained or that the Rehabilitator will not commence legal action to collect the debt.
splits, combinations or dividends with respect to such shares) or (ii) the price per share determined by assuming the value of Anchor to the be equal to Anchor's earnings before income taxes ("EBIT") for the 12 full calendar months preceding the month in which the offer is made, multiplied by six (6) and divided by the number of shares outstanding of the Company on a fully diluted basis. This contractual restriction expires in March 2003. Any equity refinancing proposal involving funds to be provided by WNAH would likely be contingent upon WNAH successfully completing its own private equity offering which commenced in April 2002 and the approval of Anchor's disinterested common shareholders. There can be no assurance that a commitment from WNAH to provide additional funds to Anchor will be obtained or, if such an agreement is reached, that WNAH will be successful in its own efforts to raise additional working capital or that such a plan would be acceptable to Anchor's common shareholders.
Anchor's Board of Directors is also assessing a variety of other re-financing alternatives involving, among other things, the conversion of debt held by affiliated (including WNAH and Legion) and unaffiliated creditors to Anchor stock. The Company also intends to seek an extension of the maturity of the Secured Bank Loan beyond October 2002. While the Board will continue to pursue re-financing alternatives, there can be no assurance that the Company will be successful, as any plan will necessarily involve multiple parties and contingencies.