Anchor and its subsidiaries occupy portions of WNAH's executive offices in San Diego, California pursuant to the resource sharing agreement between WNAH's subsidiary, Ward North America, Inc., ("WNA") and Anchor. Harden-AZ remains obligated for approximately 6,992 rentable square feet of office space in Scottsdale, Arizona and WBAIS remains subject to a lease for approximately 17,987 rentable square feet of office space in Portland, Oregon and additional office space in Wheaton, Illinois.
The Company's plan is to devote all available resources to Spectrum CA's managed care operations and attempt to grow its 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.
Negotiations involving Anchor, Comerica Bank, Legion, Spectrum CA, and WNAH are ongoing regarding a number of matters critical to the continued financial viability of Spectrum CA and the Company. These matters include, among others: (a) Comerica Bank's forebearance of the Company's current covenant defaults under the Secured Bank Loan and the extension of its due date beyond October 5, 2002 requested by the Company; and (b) the guaranty by WNAH of the Company's obligations under the Secured Bank Loan sought by the Bank; and (c) the further extension of the Legion Loan beyond December 31, 2001; and (d) the re-negotiation of the Legion Note Purchase Agreement and the Assignment & Assumption Agreement by Legion and WNAH to address the contingency that Anchor may fail to raise sufficient additional capital to cause Legion to convert the Legion Loan balance to Anchor stock or otherwise satisfy the balance of the Legion Loan (See Recent Developments - Purchase of Managed Care Assets and Business).
If the refinancing plan is unsuccessful, Anchor will likely be unable to continue operations and its assets will be subject to claims of its creditors.
Results of Continuing Operations--Years Ended December 31, 2000, 1999 and 1998
Employee Compensation and Benefits. Employee compensation and benefits for 2000 were $5,995,236, a decrease of $1,382,032, or 19%, as compared to 1999 employee compensation of $7,377,268. The decrease related primarily to the downsizing of management and operations staff in response to the reduction in revenues, consolidation of corporate support functions, and closure of the Concord office in November 2000. The total employee compensation and benefits expenses for 1999 decreased $690,533, or 9%, over employee compensation and benefits for 1998 of $8,067,801. The decrease related primarily to the closure of WBAIS's Los Angeles office and the reduction of staff at WBAIS's Concord and Portland offices and Harden-AZ's Scottsdale office in response to declining revenue.
Employee Severance and Other Costs. Costs for employee severance reserves and other costs were $544,000 for 1999. These costs primarily consist of severance accruals pertaining to the resignations of certain members of management effective March 31, 2000, which were accrued in 1999. These severance costs were a result of management's plan to eliminate management positions and centralize corporate administrative functions. There were no additional costs incurred in 2000.
Amortization of Intangible Assets. Amortization of intangible assets was $66,062, $66,120 and $50,705 in 2000, 1999 and 1998, respectively. Amortization of intangible assets in 2000 as compared to 1999 was consistent. The increase in amortization of intangible assets from 1998 to 1999 was a result of increased
Write Down of Internal Use Software and Other Assets. The Company performed a cash flow analysis of its business and determined that due to its cash flow difficulties certain software and associated hardware at WBAIS was impaired. During 2000, the Company recorded an impairment charge of $982,000 related to these assets in accordance with SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of".
Interest Expense. Interest expense was $294,550, $186,441 and $221,871 in 2000, 1999 and 1998, respectively. The increase in interest expense in 2000, as compared to 1999 is the result of a $537,000 increase in the outstanding debt balance at December 31, 2000. Long term debt, including the current portion, was $2,519,000 and $1,983,000 at December 31, 2000 and 1999, respectively. All long term debt was classified as current at December 31, 2000. The decrease in interest expense in 1999, as compared to 1998, was due to decreased borrowings under the Company's bank term loan which decreased from $1,626,342 to $898,486 at December 31, 1998 and 1999, respectively.
Interest Income. Interest income consisted of interest earned on funds held in fiduciary accounts and interest earned on investments. Interest income was $13,639, $17,969, and $11,491 in 2000, 1999 and 1998, respectively. Income earned on funds held in fiduciary accounts fluctuates with the decrease or increase in interest rates.
The primary use of net cash from operating activities for the twelve months ended December 31, 2000 was the net loss from continuing operations of $3,324,856, reduced by non-cash items, including depreciation and amortization of $506,174, an impairment loss of $461,751, and a write down of internal use software and other equipment of $982,400.
Net cash provided by financing activities for the twelve months ended December 31, 2000 was $2,278,179 primarily from the issuance of $2,000,000 of Series A Convertible Preferred stock to a related party, $1,100,000 in long term borrowings from a related party, $409,000 in short term borrowings from a related party, reduced by $398,000 of repayments of the Company's short term bank loan and term loan, repayments of various long term liabilities of $514,119, repayments of $185,000 of other debt, and repayments of $175,000 of Series B Convertible Debentures.
In September 1999, Anchor offered the investors of said Series C Debentures the opportunity to either remain as investors in the Series C Debentures or to convert their Series C Debentures into the Series D Debentures (discussed below). The basic terms of the two alternatives were (a) remain as an investor of the Series C Debentures or (b) exchange the Series C Debentures and Warrants and receive in return (i) Series D Debentures at a conversion price of $0.50 per share and (ii) for each $5,000 of debentures originally purchased a Warrant to acquire 3,000 shares of Anchor's common stock at a purchase price of $0.50 per share. All of the Series C Debentures investors chose alternative (b) above.
During the last three months of 1999, Anchor raised $244,000 from one member of the Board of Directors and other qualified investors by offering 10% Convertible Subordinated Debentures, Series D (the "Series D Debentures). Anchor utilized a substantial portion of the proceeds from the Series D Debentures to support working capital needs. The basic terms of the Series D 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 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). As of December 31, 2000 $244,000 of the Series D Debentures remained outstanding and $235,000 remained outstanding at December 31, 2001.
Debentures are superior to all other debentures of the Company, including without limitation those Series A, B, C and D debentures (detailed above), and shall constitute "Senior Debt" for purposes of those debentures. As of December 31, 2000, WNAH had invested $500,000 in the Series E Debentures;
Under the terms of the Agreement, WNAH agreed that during the 36 month period following the closing of the transaction neither WNAH or its affiliates would make any further acquisitions of Anchor's securities unless WNAH first made a tender offer (the "Tender Offer") to buy all of the shares of Anchor's common stock not then owned by WNAH or its affiliates at a purchase price equal to the greater of: (i) $0.80 per share (as adjusted for stock 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.
In March 2000, Anchor paid in full the balances of several of its debt securities with proceeds from the Series A Preferred shares purchased by WNAH. Anchor paid the $60,000 balance due under the 10% Convertible Subordinated Debentures (the "Debentures"). In addition, Anchor paid the remaining $80,000 due under the 10% Subordinated Bridge Notes with a Warrant to Purchase Shares of Anchor Common Stock ("Bridge Notes").
As further consideration for Legion to make the $2,000,000 loan to Anchor, WNAH amended the repayment terms of an existing debt between WNAH and Legion. Additionally, WNAH and Legion have entered into an agreement wherein if Anchor failed to complete an offering of its securities with gross proceeds of at least $3,000,000 by June 30, 2001 WNAH, at Legion's election, was obligated to purchase the Legion Note from Legion in exchange for the issuance of a fixed number of shares of the Common Stock of WNAH. Legion agreed to extend the due date of the Legion Loan to December 31, 2001 following the Company's default at June 30, 2001. Although management is currently negotiating with Legion for a further extension beyond December 31, 2001, no such extension has been granted to date. There can be no assurance that an extension will be obtained on terms acceptable to the Company, if at all.
Capital and certain acquisition related expenditures were $821,628, $323,607 and $94,909 for the twelve months ended December 2000, 1999, and 1998 respectively. The 2000 expenditures primarily related to software development, implementation and related hardware costs to update the eligibility and claims processing system.
Short-term borrowings, the current portion of long-term debt and the current portion of long-term liabilities in the aggregate totaled $3,121,178 at December 31, 2000 (as compared to $982,589 at December 31, 1999). As of December 31, 2000, short-term borrowings, the current portion of long-term debt and the current portion of long-term liabilities in the aggregate consisted of: (a) $700,486 representing the balance of a term bank loan; (b) $85,275 of current portion of other long term liabilities; (c) $819,000 of the Debentures; (d) $409,000 of short term borrowing from WNAH; (e) $107,417 in current capital lease obligations; and (f) $1,000,000 of promissory note payable to WNAH.
The Financial Accounting Standards Board ("FASB") has issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments. SFAS No. 133, which is effective for the Company beginning January 1, 2001, requires that entities recognize all derivatives as either assets or liabilities on the balance sheet, and measure those instruments at fair value. The Company does not presently engage in any hedging activities to compensate for the effect of exchange rate fluctuations on the net assets or operating results of its foreign subsidiary. As a result, management has determined that the adoption of SFAS No. 133 will not have a material impact on the Company's consolidated results of operations, financial position or cash flows.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and No. 142, "Goodwill and Other Intangible Assets." These Statements change the accounting for business combinations and goodwill. SFAS No.141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 141 will not have a material impact on the Company's consolidated results of operations, financial position, or cash flows. SFAS No. 142 changes the accounting for goodwill and certain intangible assets from an amortization method to an impairment-only approach. The adoption of SFAS No.