UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): November 1, 2002
HALLMARK FINANCIAL SERVICES, INC.
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(Exact name of registrant as specified in its charter)
Nevada 0-16090 87-0447375
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(State or other (Commission (IRS Employer
jurisdiction File Number) Identification No.)
of incorporation)
14651 Dallas Parkway, Suite 900, Dallas, Texas 75254
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 404-1637
Not Applicable
(Former name or former address, if changed since last report.)
Item 2. Acquisition or Disposition of Assets.
On November 1, 2002, the Registrant purchased all of the right, title
and interest of LaSalle Bank National Association ("LaSalle") in and to a
promissory note (the "Millers Note") payable to LaSalle by Millers American
Group, Inc. ("Millers"), together with all related loan documentation and
collateral, for a cash purchase price of $6.5 million. The purchase price
of the Millers Note was determined by arm's-length negotiations between the
Registrant and LaSalle. There is no material relationship between LaSalle
and the Registrant or any of its affiliates, any director or officer of the
Registrant, or any associate of any such director or officer.
At the time of such acquisition, the Millers Note was in default and
had an outstanding balance of approximately $15.07 million, consisting of a
$14.85 million principal balance and approximately $220,000 in unpaid
interest. The Millers Note is guaranteed by Trilogy Holdings, Inc.
("Trilogy"), a wholly-owned subsidiary of Millers, and is secured by all of
the issued and outstanding capital stock of Millers Insurance Company
("MIC"), a Texas-based property and casualty insurance carrier, and Phoenix
Indemnity Insurance Company ("Phoenix"), an Arizona-based property and
casualty insurance carrier, each of which is a wholly-owned subsidiary of
Trilogy.
Newcastle Partners, L.P. ("Newcastle"), an affiliate of Mark E.
Schwarz, Chairman of the Board of Registrant, provided a $9.0 million
interim financing facility to Registrant for the purchase of the Millers
Note and the consummation of certain proposed transactions being negotiated
with Millers. The Registrant intends to repay the bridge loan with the
proceeds from a rights offering to its shareholders. However, there can be
no assurance that the contemplated rights offering will be completed in a
timely manner or will provide sufficient net proceeds to fully repay the
loan from Newcastle.
Item 5. Other Events and Regulation FD Disclosure
In lieu of immediate foreclosure of the collateral securing the Millers
Note, the Registrant has negotiated with Millers to accept all of the
outstanding capital stock of Phoenix in satisfaction of $7.0 million of the
outstanding balance of the Millers Note. The proposed exchange is
contingent on execution of a mutually acceptable definitive agreement and
regulatory approval of the Registrant's Form A application for change of
control previously filed with the Arizona Department of Insurance. If
consummated, the proposed transaction would result in Phoenix becoming a
wholly-owned subsidiary of the Registrant. However, there can be no
assurance that the proposed transaction will be completed.
The Registrant has also negotiated with Millers to acquire for cash and
the assumption of certain debt all of the issued and outstanding capital
stock of Effective Litigation Management, Inc. ("ELM") and Financial and
Accounting Resources, Inc. ("FAR"), each a wholly-owned subsidiary of
Millers with no prior operations, as well as all of the issued and
outstanding capital stock of Millers General Agency ("MGA"), a wholly-owned
subsidiary of MIC which is a Texas-based managing general agency, and
certain contracts and fixed assets of MIC. Upon consummation of the
proposed acquisitions, the newly acquired subsidiaries of the Registrant
would employ all MIC personnel and provide fee-based claims and financial
administrative services to MIC. Consummation of these proposed transactions
are also contingent on execution of mutually acceptable definitive
agreements and obtaining required regulatory approvals. Therefore, there
can be no assurance that the proposed transactions will be consummated.
The Registrant intends to continue to hold the capital stock of MIC as
collateral for the remaining balance of the Millers Note while the parties
evaluate the recapitalization or reorganization of MIC. There can be no
assurance that MIC will ever be recapitalized or reorganized, that the
Registrant will otherwise foreclose on such collateral or successfully
enforce its guaranty against Trilogy, or that the remaining balance of the
Millers Note will ever be paid.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(c) Exhibits.
2 Loan Purchase and Sale Agreement dated November 1, 2002,
between Hallmark Financial Services, Inc. and LaSalle Bank
National Association
4 Promissory Note dated November 1, 2002, for $9,000,000
payable by Hallmark Financial Services, Inc. to Newcastle
Partners, L.P.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
HALLMARK FINANCIAL SERVICES, INC.
Date: November 8, 2002 By: /s/ Linda H. Sleeper
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Linda H. Sleeper, Its President