As filed with the Securities and Exchange Commission on April 2, 2003
Registration No. 333-________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
-------------------------
HALLMARK FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Nevada 87-0447375
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
14651 Dallas Parkway
Suite 900
Dallas, Texas 75254
(972) 404-1637
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
----------------------------
Mark E. Schwarz
Chairman and CEO
Hallmark Financial Services, Inc.
14651 Dallas Parkway
Suite 900
Dallas, Texas 75254
(972) 404-1637
(Name, address, including zip code, and telephone number,
including area code, of agent for service of process)
Copies to:
Steven Wolosky, Esq.
Olshan Grundman Frome Rosenzweig & Wolosky LLP
505 Park Avenue
New York, New York 10022
(212) 753-7200
------------------------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this registration statement.
-------------------------
If the only securities being registered on this Form are being
offered pursuant to dividend or interest reinvestment plans, please check the
following box. |_|
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, please check the following box. |X|
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box. |_|
CALCULATION OF REGISTRATION FEE
=================================================================================
Proposed Maximum
Aggregate Offering Amount Of
Title of Shares to be Registered(1) Price(2) Registration Fee
- ---------------------------------------------------------------------------------
Nontransferable Common Stock Subscription
Rights.................................... $0(3) $0(3)
- ---------------------------------------------------------------------------------
Common Stock, par value $.03 per share,
issuable upon exercise of nontransferable
rights.................................... $10,000,000(4) $809.00
=================================================================================
(1) This registration statement relates to (a) nontransferable rights to
purchase shares of common stock of Hallmark Financial Services, Inc.,
which rights will be issued to holders of common stock of Hallmark
Financial Services, Inc., and (b) the shares of common stock deliverable
upon exercise of the nontransferable rights pursuant to the rights
offering.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933, as amended.
(3) The nontransferable rights are being issued without consideration.
Pursuant to Rule 457(g) under the Securities Act of 1933, as amended, no
separate registration fee is required because the rights are being
registered in the same registration statement as the common stock
underlying the rights.
(4) Represents the gross proceeds from the assumed exercise of all
nontransferable rights issued.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH
DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE
REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
2
The information in this prospectus is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This prospectus is not
an offer to sell these securities and is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED APRIL 2, 2003
PROSPECTUS
Hallmark Financial Services, Inc.
Subscription Rights
Shares of Common Stock
We are distributing to holders of our common stock, at no charge,
nontransferable subscription rights to purchase up to an aggregate of _______
shares of our common stock. You will receive one subscription right for each
share of common stock you own. If you exercise your rights in full, you may
over-subscribe for the purchase of additional shares that remain unsubscribed at
the expiration of the rights offering, subject to availability and allocation of
shares among persons exercising this over-subscription privilege. You will not
be entitled to receive any rights unless you hold of record shares of our common
stock as of the close of business on ________________, 2003.
The proceeds of this rights offering will be used to pay back
outstanding indebtedness and the remainder, if any, will be used for working
capital purposes.
Each subscription right will entitle you to purchase _______ shares
of our common stock at a subscription price of $______ per right (or $______ per
share). The subscription rights will expire if they are not exercised by 5:00
p.m., New York City time, on ______________, 2003, the expected expiration date
of this rights offering. We may extend the period for exercising the rights in
our sole discretion. Rights that are not exercised by the expiration date of the
rights offering will expire and will have no value. The rights may not be sold
or transferred except under the very limited circumstances described later in
this prospectus. You should carefully consider whether to exercise your rights
before the expiration date. All exercises of subscription rights are
irrevocable. Our board of directors is making no recommendation regarding your
exercise of the subscription rights.
If any shares of common stock offered in the rights offering remain
unsubscribed after the rights offering, Timothy A. Bienek, our President and
Chief Operating Officer, Scott K. Billings, our Chief Financial Officer, and
James C. Epstein, one of the director nominees in our upcoming board of
directors election, have agreed to purchase such shares, up to an aggregate
subscription price of $100,000, $50,000 and $125,000, respectively, pursuant to
standby purchase agreements.
Shares of our common stock are traded on the American Stock Exchange
Emerging Company Marketplace under the symbol "HAF." On April __, 2003, the
closing sales price for our common stock was $______ per share. We expect that
the shares of common stock issued in the rights offering will also be listed on
the American Stock Exchange Emerging Company Marketplace under the same symbol.
AN INVESTMENT IN OUR COMMON STOCK IS VERY RISKY. YOU SHOULD
CAREFULLY CONSIDER THE RISK FACTORS BEGINNING ON PAGE 6 OF THIS PROSPECTUS
BEFORE EXERCISING YOUR SUBSCRIPTION RIGHTS.
Underwriting
Discounts and Proceeds to the
Price to Public Commissions Company(1)
--------------- ------------ ----------
Per share.................. $_______(2) N/A $_______
Total...................... $_______ N/A $_______
(1) Before deducting expenses of the rights offering payable by
us, estimated to be $_______.
(2) This represents the subscription price for purchase of a
share of common stock upon exercise of the subscription
rights.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR
DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
-----------------------
The date of this prospectus is ____________, 2003.
TABLE OF CONTENTS
Page
----
Questions and Answers about the Rights Offering.......................... 1
Risk Factors............................................................. 6
Our Company.............................................................. 11
Use of Proceeds.......................................................... 11
Capitalization........................................................... 11
Price Range of Common Stock.............................................. 12
The Rights Offering...................................................... 12
Certain United States Federal Income Tax Consequences.................... 20
Plan of Distribution..................................................... 21
Legal Matters............................................................ 22
Experts.................................................................. 22
Where You Can Find More Information...................................... 22
Forward-Looking Statements............................................... 23
i
You should rely only on the information in this prospectus and the
additional information described under the heading "Where You Can Find More
Information." We have not authorized any other person to provide you with
different information. If anyone provides you with different or inconsistent
information, you should not rely on it. We are not making an offer to sell these
securities in any jurisdiction where the offer or sale is not permitted. You
should assume that the information in this prospectus and the additional
information described under the heading "Where You Can Find More Information"
were accurate on the date on the front cover of the prospectus only. Our
business, financial condition, results of operations and prospects may have
changed since that date.
QUESTIONS AND ANSWERS ABOUT THE RIGHTS OFFERING
This section highlights information contained elsewhere or
incorporated by reference in this prospectus. This section does not contain all
of the important information that you should consider before exercising your
subscription rights and investing in our common stock. You should read this
entire prospectus carefully.
Q: WHAT IS THE RIGHTS OFFERING?
A: The rights offering is a distribution to holders of our common stock, at no
charge, of nontransferable subscription rights to purchase additional
shares of our common stock. You will receive one subscription right for
each share of common stock you own at the close of business on ________,
2003, the record date. The subscription rights will be evidenced by
nontransferable rights certificates.
Q: WHAT IS A SUBSCRIPTION RIGHT?
A: Each subscription right is a right to purchase ____ shares of our common
stock and carries with it a basic subscription privilege and an
over-subscription privilege.
Q: WHAT IS THE BASIC SUBSCRIPTION PRIVILEGE?
A: The basic subscription privilege of each right entitles you to purchase
_____ shares of our common stock at a subscription price of $_____ per
right (or $_____ per share). You may exercise any number of your
subscription rights, or you may choose not to exercise any subscription
rights. We will not distribute any fractional shares, but will round up the
aggregate number of shares you are entitled to receive to the nearest whole
number.
Q: WHAT IS THE OVER-SUBSCRIPTION PRIVILEGE?
A: We do not expect that all of our stockholders will exercise all of their
basic subscription rights. By extending over-subscription privileges to our
stockholders, we are providing stockholders that exercise all of their
basic subscription privileges with the opportunity to purchase those shares
that are not purchased by other stockholders. The over-subscription
privilege of each right entitles you, if you fully exercise your basic
subscription privilege, to subscribe for additional shares of our common
stock unclaimed by other holders of rights in the rights offering, at the
same subscription price per right. If an insufficient number of shares is
available to fully satisfy all over-subscription privilege requests, the
available shares will be distributed proportionately among rights holders
who exercised their over-subscription privilege based on the number of
shares each rights holder subscribed for under the basic subscription
privilege. The subscription agent will return any excess payments by mail
without interest or deduction promptly after the expiration of the rights
offering.
Q: HOW LONG WILL THE RIGHTS OFFERING LAST?
A: You will be able to exercise your subscription rights only during a limited
period. If you do not exercise your subscription rights before 5:00 p.m.,
New York City time, on _____________, 2003, your subscription rights will
expire. We may, in our sole discretion, decide to extend the rights
offering until some later time, no later than _______________.
1
Q: AM I REQUIRED TO SUBSCRIBE IN THE RIGHTS OFFERING?
A: No.
Q: WHAT HAPPENS IF I CHOOSE NOT TO EXERCISE MY SUBSCRIPTION RIGHTS?
A: You will retain your current number of shares of common stock even if you
do not exercise your subscription rights. If you choose not to exercise
your subscription rights, then the percentage of our common stock that you
own may decrease. The magnitude of the reduction of your percentage
ownership will depend upon the extent to which you and the other
stockholders subscribe in the rights offering.
Q: HOW DO I EXERCISE MY SUBSCRIPTION RIGHTS?
A: You may exercise your subscription rights by properly completing and
signing your subscription certificate, and delivering it with full payment
of the subscription price for the shares you are subscribing (including any
amounts in respect of the over-subscription privilege) to the subscription
agent on or prior to the expiration date. If you use the mail, we recommend
that you use insured, registered mail, return receipt requested. If you
cannot deliver your rights certificate to the subscription agent on time,
you may follow the guaranteed delivery procedures described under "The
Rights Offering - Guaranteed Delivery Procedures" beginning on page 16.
Q: WHAT SHOULD I DO IF I WANT TO PARTICIPATE IN THE RIGHTS OFFERING BUT MY
SHARES ARE HELD IN THE NAME OF MY BROKER, CUSTODIAN BANK OR OTHER NOMINEE?
A: If you hold shares of our common stock through a broker, custodian bank or
other nominee, we will ask your broker, custodian bank or other nominee to
notify you of the rights offering. If you wish to exercise your
subscription rights, you will need to have your broker, custodian bank or
other nominee act for you. To indicate your decision, you should complete
and return to your broker, custodian bank or other nominee the form
entitled "Beneficial Owner Election Form." You should receive this form
from your broker, custodian bank or other nominee with the other rights
offering materials. You should contact your broker, custodian bank or other
nominee if you believe you are entitled to participate in the rights
offering but you have not received this form.
Q: WHAT SHOULD I DO IF I WANT TO PARTICIPATE IN THE RIGHTS OFFERING AND I AM A
STOCKHOLDER IN A FOREIGN COUNTRY OR IN THE ARMED SERVICES?
A: The subscription agent will mail subscription certificates to you if you
are a rights holder whose address is outside the United States or if you
have an Army Post Office or a Fleet Post Office address. To exercise your
rights, you must notify the subscription agent on or prior to 5:00 p.m.,
New York City time, on ____________, 2003, and take all other steps which
are necessary to exercise your rights, on or prior to that time. If you do
not follow these procedures prior to the expiration of the rights offering,
your rights will expire.
Q: WILL I BE CHARGED A SALES COMMISSION OR A FEE BY HALLMARK FINANCIAL
SERVICES IF I EXERCISE MY SUBSCRIPTION RIGHTS?
A: No. We will not charge a brokerage commission or a fee to rights holders
for exercising their subscription rights. However, if you exercise your
subscription rights through a broker or nominee, you will be responsible
for any fees charged by your broker or nominee.
Q: WHAT ARE THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF EXERCISING MY
SUBSCRIPTION RIGHTS AS A HOLDER OF COMMON STOCK?
A: A holder of common stock generally will not recognize income or loss for
federal income tax purposes in connection with the receipt or exercise of
subscription rights in the rights offering. We urge you to consult your own
tax advisor with respect to the particular tax consequences of the rights
offering or the related share issuance to you. See "Certain United States
Federal Income Tax Consequences" on page 20.
Q: HOW MANY SHARES MAY I PURCHASE?
A: You will receive one nontransferable subscription right for each share of
common stock that you owned at the close of business on ____________, 2003,
the record date. Each subscription right contains the basic subscription
2
privilege and the over-subscription privilege. Each basic subscription
privilege entitles you to purchase _____ shares of our common stock for
$___ per share. Fractional shares will be eliminated by rounding up the
aggregate number of shares you are entitled to receive to the nearest whole
number. See "The Rights Offering - Subscription Privileges - Basic
Subscription Privilege." The over-subscription privilege entitles you to
subscribe for additional shares of our common stock at the same
subscription price per share on a pro-rata basis to the number of shares
you purchased under your basic subscription privilege, provided you fully
exercise your basic subscription privilege. "Pro-rata" means in proportion
to the number of shares of our common stock that you and the other rights
holders electing to exercise their over-subscription privileges have
purchased by exercising the basic subscription privileges on their holdings
of common stock. See "The Rights Offering - Subscription Privileges -
Over-Subscription Privilege."
Q: WHEN WILL I RECEIVE CERTIFICATES FOR THE SHARES PURCHASED IN THE RIGHTS
OFFERING?
A: We will issue certificates representing shares purchased in the rights
offering to you or to the Depository Trust Company on your behalf, as the
case may be, as soon as practicable after the expiration of the rights
offering.
Q: IF THE RIGHTS OFFERING IS NOT COMPLETED, WILL MY SUBSCRIPTION PAYMENT BE
REFUNDED TO ME?
A: Yes. The subscription agent will hold all funds it receives in escrow until
completion of the rights offering. If the rights offering is not completed,
the subscription agent will return promptly, without interest, all
subscription payments.
Q: HOW WAS THE SUBSCRIPTION PRICE ESTABLISHED?
A: The subscription price was established by our board of directors based on
the recommendation of a special committee of directors, excluding those
directors affiliated with Newcastle who did not participate (in their
capacity as directors) in the discussion, consideration or voting with
respect to these matters. These factors included the historic and then
current market price of the common stock, our business prospects, our
recent and anticipated operating results, general conditions in the
securities markets, our need for capital, alternatives available to us for
raising capital, the amount of proceeds desired, the pricing of similar
transactions, the liquidity of our common stock, and the level of risk to
our investors.
Q: ARE THERE RISKS IN EXERCISING MY SUBSCRIPTION RIGHTS?
A: Yes. The exercise of your rights involves risks. Exercising your rights
means buying additional shares of our common stock and should be considered
as carefully as you would consider any other equity investment in our
company. Among other things, you should carefully consider the risks
described under the heading "Risk Factors," beginning on page 6.
Q: AFTER I EXERCISE MY SUBSCRIPTION RIGHTS, CAN I CHANGE MY MIND AND CANCEL MY
PURCHASE?
A: No. Once you send in your subscription certificate and payment you cannot
revoke the exercise of your subscription rights, even if you later learn
information about us that you consider to be unfavorable and even if the
market price of our common stock is below the subscription price. You
should not exercise your subscription rights unless you are certain that
you wish to purchase additional shares of our common stock at the
subscription price. See "The Rights Offering - No Revocation."
Q: MAY I TRANSFER MY SUBSCRIPTION RIGHTS IF I DO NOT WANT TO PURCHASE ANY
SHARES?
A: No. Should you choose not to exercise your subscription rights, you may not
sell, give away or otherwise transfer your rights. However, subscription
rights will be transferable to affiliates of the recipient and by operation
of law (for example, upon death of the recipient).
3
Q: WHY IS HALLMARK FINANCIAL SERVICES ENGAGING IN A RIGHTS OFFERING?
A: We are making this rights offering in order to raise $10.0 million in new
capital to be used as follows:
o to repay an $8.6 million loan, and accrued interest, made by
Newcastle Partners, L.P. (referred to as Newcastle) to us during
2002, that is evidenced by promissory notes with an annual
interest rate of 11.75% (referred to as the Newcastle Notes),
and
o as additional working capital for our business.
Our board of directors believes that the rights offering will ultimately
strengthen our financial condition through generating additional cash,
reducing our indebtedness and increasing our stockholders' equity. We want
to give you the opportunity to participate in this fund raising effort and
to purchase additional shares of our common stock.
Q: WHAT IS THE BOARD OF DIRECTORS' RECOMMENDATION REGARDING THE RIGHTS
OFFERING?
A: Our board of directors is not making any recommendation as to whether you
should exercise your subscription rights. You are urged to make your
decision based on your own assessment of the rights offering and our
company.
Q: HOW MANY SHARES OF OUR COMMON STOCK WILL BE OUTSTANDING AFTER THE RIGHTS
OFFERING?
A: As of March 14, 2003, we had 11,050,133 shares of common stock issued and
outstanding. We expect to issue up to ________ shares in the rights
offering. After the rights offering, we anticipate that we will have
________ shares of common stock outstanding. Depending on the number of
subscriptions we receive from stockholders, the rights offering could
result in a change in control of Hallmark Financial Services because of
the over subscription privilege held by Newcastle. See "Risk Factors" on
page 6.
Q: WILL THE NEW SHARES BE INITIALLY LISTED ON THE AMERICAN STOCK EXCHANGE
EMERGING COMPANY MARKETPLACE AND TREATED LIKE OTHER SHARES?
A: Yes. Our common stock is traded on the American Stock Exchange Emerging
Company Marketplace under the symbol "HAF." We expect that the shares of
common stock issued in the rights offering will also be listed on the AMEX
Emerging Company Marketplace under the same symbol. On ________, 2003, the
last trading day prior to our initial filing of this rights offering, the
closing price of our common stock on the AMEX was $_____ per share. On
________, 2003, the last trading day before the date of this prospectus,
the closing price of our common stock on the AMEX was $______ per share.
Q: HOW WILL THE RIGHTS OFFERING AFFECT NEWCASTLE'S OWNERSHIP OF OUR COMMON
STOCK?
A: Newcastle beneficially owns 5,334,001 shares of our common stock
(including currently exercisable options to purchase 50,000 shares of
common stock), representing approximately 48.1% of our outstanding common
stock and of the voting power of our outstanding voting securities.
If no holders of subscription rights other than Newcastle exercise their
rights in the rights offering, Newcastle may, as a result of its
over-subscription privilege, own approximately _____ shares, representing
____% of our outstanding common stock and of the voting power of our
outstanding voting securities. If all rights holders exercise their basic
subscription privileges in full, then Newcastle will continue to
beneficially own approximately 48.1% of our common stock and of the voting
power of our outstanding voting securities.
Q: CAN THE BOARD OF DIRECTORS WITHDRAW THE RIGHTS OFFERING?
A: Yes. Our board of directors may decide to withdraw the rights offering at
any time for any reason. If we withdraw the rights offering, any money
received from subscribing stockholders will be refunded promptly, without
interest. See "The Rights Offering - Withdrawal and Amendment."
4
Q: WHAT SHOULD I DO IF I HAVE OTHER QUESTIONS OR NEED ASSISTANCE?
A: If you have questions or need assistance, please contact ____________, the
information agent for the rights offering, or ____________, the
subscription agent, at the following addresses and telephone numbers:
The Information Agent:
----------------------
----------------------
----------------------
or
The Subscription Agent:
----------------------
----------------------
----------------------
For a more complete description of the rights offering, see "The Rights
Offering" beginning on page 12.
5
RISK FACTORS
THE EXERCISE OF YOUR SUBSCRIPTION RIGHTS FOR SHARES OF OUR COMMON
STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER THE
FOLLOWING FACTORS AND OTHER INFORMATION PRESENTED OR INCORPORATED BY REFERENCE
IN THIS PROSPECTUS BEFORE DECIDING TO INVEST IN OUR COMMON STOCK. THE RISKS AND
UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES WE FACE. ADDITIONAL RISKS
AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US MAY ALSO IMPAIR OUR OPERATIONS AND
BUSINESS. IF WE DO NOT SUCCESSFULLY ADDRESS ANY ONE OR MORE OF THE RISKS
DESCRIBED BELOW, THERE COULD BE A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL
CONDITION, OPERATING RESULTS AND BUSINESS. WE CANNOT ASSURE YOU THAT WE WILL
SUCCESSFULLY ADDRESS THESE RISKS.
RISKS RELATING TO OUR BUSINESS:
OUR RESULTS MAY FLUCTUATE AS A RESULT OF CYCLICAL CHANGES IN THE
PROPERTY-CASUALTY INSURANCE INDUSTRY.
All of our revenue is attributable to property-casualty insurance,
which as an industry is cyclical in nature and has historically been
characterized by soft markets followed by hard markets. A soft market is a
period of relatively high levels of price competition, less restrictive
underwriting standards and generally low premium rates. A hard market is a
period of capital shortages resulting in lack of insurance availability,
relatively low levels of competition, more selective underwriting of risks and
relatively high premium rates. The industry is currently experiencing a hard
market, with premium rates increasing and more selective underwriting of risks
occurring.
OUR INDUSTRY IS VERY COMPETITIVE, WHICH MAY UNFAVORABLY IMPACT OUR RESULTS OF
OPERATIONS.
The property-casualty insurance industry, our primary source of
revenue, is highly competitive and, except for regulatory considerations, there
are very few barriers to entry. We compete with large national insurance
companies, smaller regional companies and managing general agents. Our
competition includes entities which have, or are affiliated with, entities that
have greater financial and other resources than we have.
ESTIMATING RESERVES IS INHERENTLY UNCERTAIN AND IF OUR LOSS RESERVES ARE NOT
ADEQUATE, IT WILL HAVE AN UNFAVORABLE IMPACT ON OUR RESULTS.
We maintain loss reserves to cover estimated liability for unpaid
losses and loss adjustment expenses, including legal and other fees as well as a
portion of general expenses, for reported and unreported claims incurred as of
the end of each accounting period. Reserves represent management's estimates of
what the ultimate settlement and administration of claims will cost. These
estimates, which generally involve actuarial projections, are based on
management's assessment of facts and circumstances then known, as well as
estimates of future trends in claim severity, frequency, judicial theories of
liability, and other factors. These variables are affected by both internal and
external events, such as changes in claim handling procedures, inflation,
judicial trends and legislative changes. Many of these items are not directly
quantifiable in advance. Additionally, there may be a significant reporting lag
between the occurrence of an event and the time it is reported to us. The
inherent uncertainties of estimating reserves are greater for certain types of
liabilities, particularly those in which the various considerations affecting
the type of claim are subject to change and in which long periods of time may
elapse before a definitive determination of liability is made. Reserve estimates
are continually refined in a regular and ongoing process as experience develops
and further claims are reported and settled. Adjustments to reserves are
reflected in the results of the periods in which such estimates are changed.
Because settling reserves is inherently uncertain, there can be no assurance
that the current reserves will prove adequate.
OUR RESULTS MAY BE UNFAVORABLY IMPACTED IF WE ARE UNABLE TO OBTAIN ADEQUATE
REINSURANCE.
If we are unable to obtain adequate reinsurance protection for the
risks we have underwritten, we will either be exposed to greater losses from
these risks or we will reduce the level of business that we underwrite, which
will reduce our revenue. The amount, availability and cost of reinsurance are
subject to prevailing market conditions beyond our control, and they affect our
ability to write additional premiums as well as our profitability.
IF THE COMPANIES THAT PROVIDE OUR REINSURANCE DO NOT PAY ALL OF OUR CLAIMS, WE
COULD INCUR SEVERE LOSSES.
We purchase reinsurance by transferring, or ceding, part of the risk
we have assumed to a reinsurance company in exchange for part of the premium we
receive in connection with the risk. Although reinsurance makes the reinsurer
6
liable to us to the extent the risk is transferred or ceded to the reinsurer, it
does not relieve us, the reinsured, of our liability to our policyholders.
Accordingly, we bear credit risk with respect to our reinsurers. We cannot
assure that our reinsurers will pay all of our reinsurance claims, or that they
will pay our claims on a timely basis.
CATASTROPHIC LOSSES MAY ADVERSELY AFFECT OUR RESULTS OF OPERATIONS, LIQUIDITY
AND FINANCIAL CONDITION.
Property-casualty insurance companies are subject to claims arising
out of catastrophes that may have a significant affect on their results of
operations, liquidity and financial condition. Catastrophes can be caused by
various events, including hurricanes, windstorms, earthquakes, hail storms,
explosions, severe winter weather and fires and may include man-made events,
such as the September 11, 2001 terrorist attacks on the World Trade Center. The
incidence, frequency, and severity of catastrophes are inherently unpredictable.
The extent of losses from a catastrophe is a function of both the total amount
of insured exposure in the area affected by the event and the severity of the
event.
WE ARE SUBJECT TO COMPREHENSIVE REGULATION, AND OUR RESULTS MAY BE UNFAVORABLY
IMPACTED BY THESE REGULATIONS.
We are subject to comprehensive governmental regulation and
supervision. Most insurance regulations are designed to protect the interests of
policyholders rather than of the of the stockholders and other investors of the
insurance companies. These regulations, generally administered by the department
of insurance in each state in which we do business, relate to, among other
things;
o Approval of policy forms and rates,
o Standards of solvency, including risk based capital measurements
(which are a measure developed by the National Association of
Insurance Commissioners and used by the state insurance
regulators to identify insurance companies that potentially are
inadequately capitalized),
o Licensing of insurers and their agents,
o Restrictions on the nature, quality and concentration of
investments,
o Restrictions on the ability of our insurance company
subsidiaries to pay dividends,
o Restrictions on transactions between the insurance company
subsidiaries and their affiliates,
o Requiring certain methods of accounting,
o Periodic examinations of operations and finances,
o Prescribing the form and content of records of financial
condition to be filed, and
o Requiring reserves for unearned premium, losses and other
purposes.
State insurance departments also conduct periodic examinations of
the affairs of insurance companies and require filing of annual and other
reports relating to the financial condition of insurance companies, holding
company issues and other matters. Our business depends on compliance with
applicable laws and regulations and our ability to maintain valid licenses and
approvals for our operations. Regulatory authorities may deny or revoke licenses
for various reasons, including violations of regulations. Changes in the level
of regulation of the insurance industry or changes in laws or regulations
themselves or interpretations by regulatory authorities, could have a material
adverse affect on our operations.
AS A HOLDING COMPANY, WE ARE DEPENDENT ON DIVIDENDS FROM OUR SUBSIDIARIES TO
MEET OUR OBLIGATIONS.
We are a holding company and a legal entity separate and distinct
from our insurance company subsidiaries and our non-insurance company
subsidiaries. As a holding company without significant operations of our own,
our principal sources of funds are dividends and other sources of funds from our
subsidiaries. State insurance laws limit the ability of our insurance company
subsidiaries to pay dividends and require the insurance companies to maintain
specified levels of statutory capital and surplus. These restrictions affect the
ability of the insurance company subsidiaries to pay dividends and use their
capital in other ways. Our rights to participate in any distribution of assets
of the insurance company subsidiaries are subject to prior claims of
policyholders and creditors (except to the extent that our rights, if any, as a
creditor are recognized). Consequently, our ability to pay debts, expenses and
cash dividends to our stockholders may be limited.
7
OUR INSURANCE COMPANY SUBSIDIARIES ARE SUBJECT TO MINIMUM CAPITAL AND SURPLUS
REQUIREMENTS. FAILURE TO MEET THESE REQUIREMENTS COULD SUBJECT US TO REGULATORY
ACTION.
Our insurance company subsidiaries are subject to minimum capital
and surplus requirements imposed under the laws of Texas and Arizona. Any
failure by one of the insurance company subsidiaries to meet minimum capital and
surplus requirements imposed by applicable state law will subject it to
corrective action, including requiring adoption of a comprehensive financial
plan, examination and the issuance of a corrective order by the applicable state
insurance department, revocation of its license to sell insurance products or
placing the subsidiary under state regulatory control. Any new minimum capital
and surplus requirements adopted in the future may require us to increase the
capital and surplus of our insurance company subsidiaries which we may not be
able to do.
THE LOSS OF KEY EXECUTIVES COULD DISRUPT OUR BUSINESS.
Our success will depend in part upon the continued service of our
Chairman and Chief Executive Officer, Mark E. Schwarz and our President and
Chief Operating Officer, Timothy A. Bienek. Messrs. Schwarz and Bienek do not
have employment agreements with us. We do not have key person insurance on the
lives of Messrs. Schwarz and Bienek. Our success will also depend on our ability
to attract and retain additional executives and personnel. The loss of key
personnel could cause disruption in our business.
ADVERSE SECURITIES MARKET CONDITIONS CAN HAVE A SIGNIFICANT AND NEGATIVE IMPACT
ON OUR INVESTMENT PORTFOLIO.
Our results of operations depend in part on the performance of our
invested assets. The majority of our investment portfolio is invested in fixed
maturity securities. Certain risks are inherent in connection with fixed
maturity securities including loss upon default and price volatility in reaction
to changes in interest rates and general market factors. An increase in interest
rates lowers prices on fixed maturity securities, and any sales we make during a
period of increasing interest rates may result in losses. Conversely, investment
income earned from future investments in fixed maturity securities will decrease
if interest rates decrease.
SINCE WE ARE RELIANT ON INDEPENDENT AGENTS TO MARKET OUR PRODUCTS, THEIR FAILURE
TO DO SO WOULD HAVE A MATERIAL ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS.
We principally market our insurance programs through independent
insurance agents. As a result, our business depends in part on the marketing
efforts of these agents and on our ability to offer insurance products and
services that meet the requirements of the agents and customers of these agents.
The agents, however, are not obligated to sell or promote our products and many
sell or promote competitors' insurance products in addition to our products. The
failure or inability of insurance agents to market our insurance products
successfully could have a material adverse impact on our business, financial
condition and results of operations.
NEWCASTLE PARTNERS, L.P. HAS THE ABILITY TO EXERT SIGNIFICANT INFLUENCE OVER OUR
OPERATIONS AND MAY HAVE INTERESTS THAT DIFFER FROM THOSE OF OUR OTHER
STOCKHOLDERS.
Newcastle Partners, L.P. beneficially owns approximately 48.1%
(including outstanding options) of our common stock prior to this offering and
has the ability to exert significant influence over our policies and affairs.
Newcastle has the power to affect significantly the election of our board of
directors and the approval of any action requiring stockholder vote, including
amendments to our Articles of Incorporation or Regulations and approving mergers
or sales of substantially all of our assets. The interests of Newcastle may
differ from the interests of our other stockholders in some respects and
Newcastle may take action adverse to our other stockholders.
RISKS RELATING TO THIS RIGHTS OFFERING:
THE SUBSCRIPTION PRICE PER SHARE IS NOT AN INDICATION OF OUR VALUE AND YOU MAY
NOT BE ABLE TO SELL SHARES PURCHASED UPON THE EXERCISE OF YOUR SUBSCRIPTION
RIGHTS AT A PRICE EQUAL TO OR GREATER THAN THE SUBSCRIPTION PRICE.
The subscription price per share does not necessarily bear any
relationship to the book value of our assets, operations, cash flows, earnings,
financial condition or any other established criteria for value. As a result,
you should not consider the subscription price as an indication of the current
value of our company or our common stock. We cannot assure you that you will be
able to sell shares purchased in this offering at a price equal to or greater
than the subscription price.
8
THE RIGHTS OFFERING MAY CAUSE THE PRICE OF OUR COMMON STOCK TO DECREASE
IMMEDIATELY, AND THIS DECREASE MAY CONTINUE.
The subscription price per share equals __% of the current market
price of our common stock determined by averaging the closing price of our
common stock on the AMEX for the five trading days ending on _______, 2003. This
discount, along with the number of shares we propose to issue and ultimately
will issue if the rights offering is completed, may result in an immediate
decrease in the market value of our common stock. This decrease may continue
after the completion of the rights offering.
AS A HOLDER OF COMMON STOCK, YOU MAY SUFFER SIGNIFICANT DILUTION OF YOUR
PERCENTAGE OWNERSHIP OF OUR COMMON STOCK.
If you do not exercise your subscription rights and shares are
purchased by other stockholders in the rights offering or by Newcastle, your
proportionate voting and ownership interest will be reduced and the percentage
that your original shares represent of our expanded equity after exercise of the
subscription rights will be diluted. For example, if you own 200,000 shares of
our common stock before the rights offering, or approximately 1.8% of our
outstanding common stock, and you exercise none of your subscription rights
while all other subscription rights are exercised by other stockholders, then
your percentage ownership would be reduced to approximately ___%. The magnitude
of the reduction of your percentage ownership will depend upon the extent to
which you subscribe in the rights offering.
IF YOU EXERCISE YOUR SUBSCRIPTION RIGHTS, YOU MAY NOT REVOKE THE EXERCISE OF
YOUR RIGHTS, AND YOU MAY BE UNABLE TO SELL ANY SHARES YOU PURCHASE AT A PROFIT
AND YOUR ABILITY TO SELL MAY BE DELAYED BY THE TIME REQUIRED TO DELIVER THE
STOCK CERTIFICATES.
The public trading market price of our common stock may decline
after you elect to exercise your subscription rights. If that occurs, you may
have committed to buy shares of common stock at a price above the prevailing
market price and you will have an immediate unrealized loss. Moreover, we cannot
assure you that following the exercise of subscription rights you will be able
to sell your shares of common stock at a price equal to or greater than the
subscription price. Until shares are delivered upon expiration of the rights
offering, you may not be able to sell the shares of our common stock that you
purchase in the rights offering. Certificates representing shares of our common
stock purchased will be delivered as soon as practicable after expiration of the
rights offering.
YOU MAY NOT REVOKE THE EXERCISE OF YOUR RIGHTS EVEN IF THERE IS A DECLINE IN OUR
COMMON STOCK PRICE PRIOR TO THE EXPIRATION DATE OF THE SUBSCRIPTION PERIOD.
Even if our common stock price declines below the subscription price
for the common stock, resulting in a loss on your investment upon the exercise
of rights to acquire shares of our common stock, you may not revoke or change
your exercise of rights after you send in your subscription forms and payment.
YOU MAY NOT REVOKE THE EXERCISE OF YOUR RIGHTS EVEN IF WE DECIDE TO EXTEND THE
EXPIRATION DATE OF THE SUBSCRIPTION PERIOD.
We may, in our sole discretion, extend the expiration date of the
subscription period to a date no later than _____________. During any potential
extension of time, our common stock price may decline below the subscription
price and result in a loss on your investment upon the exercise of rights to
acquire shares of our common stock. If the expiration date is extended after you
send in your subscription forms and payment, you still may not revoke or change
your exercise of rights.
YOU WILL NOT RECEIVE INTEREST ON SUBSCRIPTION FUNDS RETURNED TO YOU.
If we cancel the rights offering, neither we nor the subscription
agent will have any obligation with respect to the subscription rights except to
return, without interest, any subscription payments to you.
THE SUBSCRIPTION RIGHTS ARE NOT TRANSFERABLE AND THERE IS NO MARKET FOR THE
SUBSCRIPTION RIGHTS.
You may not sell, give away or otherwise transfer your subscription
rights. The subscription rights are only transferable to your affiliates and by
operation of law. Because the subscription rights are non-transferable, there is
no market or other means for you to directly realize any value associated with
the subscription rights. You must exercise the subscription rights and acquire
additional shares of our common stock to realize any value.
9
THE RIGHTS OFFERING MAY RESULT IN A CHANGE IN CONTROL OF OUR COMPANY.
If no stockholders other than Newcastle exercise their subscription
rights, Newcastle will purchase _________ shares in the offering. In that case,
Newcastle's ownership interest would be approximately __%, and the aggregate
ownership interest of the remaining stockholders would decrease to approximately
__%. Even if some stockholders other than Newcastle exercise their subscription
rights, Newcastle still may be able to purchase enough shares to increase its
ownership interest to over 50%. As a result, Newcastle may, following their
rights offering, have the voting power to control the election of our board of
directors and the approval of other matters presented for consideration by our
stockholders, which could include mergers, acquisitions, amendments to our
charter and various corporate governance actions.
BECAUSE WE MAY TERMINATE THE OFFERING, YOUR PARTICIPATION IN THE OFFERING IS NOT
ASSURED.
Once you exercise your subscription rights, you may not revoke the
exercise for any reason unless we amend the offering. If we decide to terminate
the offering, we will not have any obligation with respect to the subscription
rights except to return any subscription payments, without interest.
YOU NEED TO ACT PROMPTLY AND FOLLOW SUBSCRIPTION INSTRUCTIONS, OTHERWISE YOUR
SUBSCRIPTION MAY BE REJECTED.
Stockholders who desire to purchase shares in this rights offering
must act promptly to ensure that all required forms and payments are actually
received by the subscription agent prior to 5:00 p.m., New York City time, on
______, 2003, the expiration date. If you fail to complete and sign the required
subscription forms, send an incorrect payment amount, or otherwise fail to
follow the subscription procedures that apply to your desired transaction, the
subscription agent may, depending on the circumstances, reject your subscription
or accept it to the extent of the payment received. Neither we nor our
subscription agent undertakes to contact you concerning, or attempt to correct,
an incomplete or incorrect subscription form or payment. We have the sole
discretion to determine whether a subscription exercise properly follows the
subscription procedures.
MOST, IF NOT ALL, OF THE PROCEEDS OF THE RIGHTS OFFERING WILL NOT BE AVAILABLE
FOR WORKING CAPITAL OR OTHER PURPOSES.
The proceeds from the rights offering will be used to repay the $8.6
million bridge loan from Newcastle, plus accrued interest on such loan.
Therefore, most, if not all, of the proceeds of the rights offering will not be
available to us for working capital or other purposes.
RISKS RELATING TO OUR COMMON STOCK:
OUR COMMON STOCK IS VOLATILE AND THE VALUE OF ANY INVESTMENT IN OUR COMMON STOCK
MAY FLUCTUATE.
The market price for our common stock has been, and is likely to
continue to be, highly volatile. The market for our common stock is subject to
fluctuations as a result of a variety of factors, including factors beyond our
control. These include:
o current expectations of our future revenue and earnings growth
rates;
o changes in market valuations of similar companies;
o conditions or trends in the industry;
o general market and economic conditions; and
o other events or factors that are unforeseen.
WE DO NOT INTEND TO PAY DIVIDENDS ON SHARES OF OUR COMMON STOCK IN THE
FORESEEABLE FUTURE.
We currently expect to retain our future earnings, if any, to reduce
debt and for use in the operation of our business. We do not anticipate paying
any cash dividends on shares of our common stock in the foreseeable future.
10
OUR COMPANY
Our company engages in the sale of property and casualty insurance
products. Our business involves (i) marketing, underwriting and premium
financing of non-standard personal automobile insurance primarily in Texas,
Arizona and New Mexico, (ii) commercial insurance in Texas, New Mexico, Idaho,
Oregon and Washington, (iii) third party claims administration and (iv) other
insurance related services. Our principal offices are located at 14651 Dallas
Parkway, Suite 900, Dallas, Texas 75254, and our telephone number is (972)
404-1637.
USE OF PROCEEDS
The maximum net proceeds to us from the sale of our common stock in
this rights offering are estimated to be approximately $____ million after
deducting estimated offering expenses allocable to and payable by us.
We will use the proceeds of the rights offering to fully repay an
$8.6 million loan, plus accrued interest on such loan, made to us by Newcastle
during 2002 that is evidenced by the Newcastle Notes with an annual interest
rate of 11.75%, which notes are due by their terms in September 2003. The
proceeds of the Newcastle Notes were used by us to purchase a note receivable
from a major bank and the Commercial Lines Group from Millers Insurance Company.
We intend to use the remaining net proceeds, if any, as additional
working capital for our business.
CAPITALIZATION
The following table sets forth our summary capitalization as of
December 31, 2002 on an historical basis and should be read in conjunction with
our financial statements and notes thereto incorporated by reference into this
prospectus. The table also includes our capitalization on a pro forma basis
assuming the completion of the rights offering and the use of the net proceeds
for the repayment of the Newcastle Notes, but prior to the use of the remaining
proceeds. See "Use of Proceeds."
Actual Pro Forma
(in thousands) (in thousands)
Cash and cash equivalents .............................. $ 8,453 $_____
Total debt (excluding advances for financed premiums)
Short-term debt ........................................ 8,600 0
Long-term debt ......................................... 1,803 1,803
Total debt ................................. $ 10,403 $ 1,803
Stockholders' equity:
Common stock, $.03 par value, authorized
100,000,000 shares, issued 11,855,610 ............ $ 356 $_____
Capital in excess of par value ................... 10,875 _____
Retained (deficit) earnings ...................... (1,491) (1,491)
Accumulated other comprehensive income
(loss) ........................................... (162) (162)
Treasury stock, 806,477 shares, at cost .......... (1,043) (1,043)
Total stockholders' equity ................. 8,535 _____
Total capitalization ................................... $ 18,938 $_____
11
PRICE RANGE OF COMMON STOCK
Our common stock has traded on the American Stock Exchange Emerging
Company Marketplace under the symbol "HAF" since January 6, 1994. On ____, 2003,
the last trading day prior to our public announcement of the proposed rights
offering, the closing price of our common stock on the AMEX was $____ per share.
On ____, 2003, the record dates for the rights offering, the closing price of
our common stock on the AMEX was $_____ per share. On _______, 2003, the closing
price of common stock on the _______ was $_____ per share. The following table
shows the common stock's high and low sales prices on the AMEX for the periods
indicated.
Period High Sale Low Sale
2001:
First Quarter $ 0.69 $ 0.50
Second Quarter 0.65 0.50
Third Quarter 0.61 0.43
Fourth Quarter 0.60 0.40
2002:
First Quarter $ 0.60 $ 0.40
Second Quarter 0.60 0.40
Third Quarter 0.54 0.35
Fourth Quarter 0.70 0.30
2003:
First Quarter $ 0.75 $ 0.50
Second Quarter (through April __) $ ____ $ ____
On March 14, 2003 there were 157 record holders and approximately
560 beneficial stockholders of our common stock.
We have never paid dividends on our common stock and we intend to
continue this policy for the foreseeable future in order to retain earnings for
development of our business.
THE RIGHTS OFFERING
The Board of Directors has proposed that we attempt to raise equity
capital through a rights offering to all of our stockholders and to use the
proceeds from the equity financing to repay the Newcastle Notes. Any remaining
proceeds would be used for working capital purposes.
REASONS FOR THE RIGHTS OFFERING
In approving the rights offering, our board of directors carefully
considered our need for additional capital and several alternative capital
raising methods. The board of directors also considered the potential change in
control by Newcastle and the potential dilution of the ownership percentage of
our current common stockholders caused by the rights offering. While the
ownership percentage of our current common stockholders may decrease, the board
of directors considered that the magnitude of this dilution would be subject to,
and dependent upon, the decision of each common stockholder whether to subscribe
for additional shares of our common stock in the rights offering.
After weighing the factors discussed above and the effect of the
rights offering of generating $10.0 million (less expenses related to the
offering) in additional capital for us, the board of directors believes that the
rights offering is the best alternative for capital raising and is in the best
interests of our company and our stockholders. As described in "Use of
12
Proceeds," the proceeds of the rights offering are intended to be used to repay
the Newcastle Notes and any remaining amounts will be used for additional
working capital for our business.
Our board of directors believes that the rights offering will
ultimately strengthen our financial condition through generating additional
cash, reducing our indebtedness, and increasing our stockholders' equity. See
"Use of Proceeds" and "Capitalization". However, our board of directors is not
making any recommendation as to whether you should exercise your subscription
rights.
SUBSCRIPTION RIGHTS
BASIC SUBSCRIPTION PRIVILEGE. We are distributing to the holders of
record of our common stock, at the close of business on _______________, 2003,
at no charge, one nontransferable subscription right for each share of our
common stock they own. The subscription rights will be evidenced by rights
certificates. Each subscription right will entitle the holder to purchase
_______ shares of our common stock. You are not required to exercise any or all
of your subscription rights.
If, pursuant to your exercise of your subscription rights, the
number of shares of common stock you are entitled to receive would result in
your receipt of fractional shares, the aggregate number of shares issued to you
will be rounded up to the nearest whole number.
OVER-SUBSCRIPTION PRIVILEGE. Subject to the allocation described
below, each subscription right also grants each subscription rights holder an
over-subscription privilege to purchase additional shares of common stock that
are not purchased by other rights holders pursuant to the other rights holders'
basic subscription privileges. You are entitled to exercise your
over-subscription privilege only if you exercise your basic subscription
privilege in full.
If you wish to exercise your over-subscription privilege, you should
indicate the number of additional shares that you would like to purchase in the
space provided on your subscription certificate. When you send in your
subscription certificate, you must also send the full purchase price for the
number of additional shares that you have requested to purchase (in addition to
the payment due for shares purchased through your basic subscription privilege).
If the number of shares remaining after the exercise of all basic subscription
privileges is not sufficient to satisfy all requests for shares pursuant to
over-subscription privileges, you will be allocated additional shares pro-rata
(subject to elimination of fractional shares), based on the number of shares you
purchased through the basic subscription privilege in proportion to the total
number of shares that you and other over-subscribing stockholders purchased
through the basic subscription privilege. However, if your pro-rata allocation
exceeds the number of shares you requested on your subscription certificate,
then you will receive only the number of shares that you requested, and the
remaining shares from your pro-rata allocation will be divided among other
rights holders exercising their over-subscription privileges.
As soon as practicable after the expiration date,
_______________________, acting as our subscription agent, will determine the
number of shares of common stock that you may purchase pursuant to the
over-subscription privilege. You will receive certificates representing these
shares as soon as practicable after the expiration date. If you request and pay
for more shares than are allocated to you, we will refund that overpayment,
without interest. In connection with the exercise of the over-subscription
privilege, banks, brokers and other nominee holders of subscription rights who
act on behalf of beneficial owners will be required to certify to us and to the
subscription agent as to the aggregate number of subscription rights that have
been exercised, and the number of shares of common stock that are being
requested through the over-subscription privilege, by each beneficial owner on
whose behalf the nominee holder is acting.
STANDBY COMMITMENTS. On ________, 2003, we entered into a standby
purchase agreement with each of Timothy A. Bienek, our President and Chief
Operating Officer, Scott K. Billings, our Chief Financial Officer, and James C.
Epstein, a director nominee in our upcoming elections (referred to collectively
as the standby purchasers). The following description of such agreements does
not purport to be complete. A copy of the standby purchase agreements have been
filed as exhibits to the registration statement of which this prospectus forms a
part.
The standby purchase agreements obligate us to sell, and requires
Messrs. Bienek, Billings and Epstein to subscribe for and purchase from us,
________, _________ and ________ shares of our common stock, respectively, at
the subscription price per share. Such number of shares shall be made available
from the subscription rights not subscribed for by our stockholders. Prior to
entering into the standby purchase agreements, the Standby Purchasers owned no
shares of our common stock.
13
SUBSCRIPTION PRICE
The subscription price for a subscription right is $_____ per right
(or $____ per share). The per share price equals ___% of the current market
price of our common stock determined by averaging the closing price of our
common stock on the AMEX for the five trading days ending on ______, 2003. The
subscription price does not necessarily bear any relationship to our past or
expected future results of operations, cash flows, current financial condition,
or any other established criteria for value. No change will be made to the cash
subscription price by reason of changes in the trading price of our common stock
prior to the closing of the rights offering.
DETERMINATION OF SUBSCRIPTION PRICE
Our board of directors set all of the terms and conditions of the
rights offering, including the subscription price. In establishing the
subscription price, our board of directors considered the following factors:
o strategic alternatives for capital raising,
o the market price of our common stock,
o the pricing of similar transactions,
o the amount of proceeds desired,
o our business prospects, and
o general conditions in the securities markets.
We determined the ___% discount to our current market price after
taking into account the preceding factors. We did not seek or obtain any opinion
of financial advisors or investment bankers in establishing the subscription
price for the offering. You should not consider the subscription price as an
indication of the value of our company or our common stock. We cannot assure you
that you will be able to sell shares purchased during this offering at a price
equal to or greater than the subscription price. On ________, 2003, the closing
sale price of our common stock was $____ per share.
EXPIRATION DATE, EXTENSIONS AND TERMINATION
You may exercise your subscription right at any time before 5:00
p.m., New York City time, on ______, 2003, the expiration date for the rights
offering. However, we may extend the offering period for exercising your
subscription rights from time to time in our sole discretion, with such
extension not to exceed ________ days. If you do not exercise your subscription
rights before the expiration date, your unexercised subscription rights will be
null and void. We will not be obligated to honor your exercise of subscription
rights if the subscription agent receives the documents relating to your
exercise after the rights offering expires, regardless of when you transmitted
the documents, unless you have timely transmitted the documents under the
guaranteed delivery procedures described below.
We have the sole discretion to extend the expiration date from time
to time by giving oral or written notice to the subscription agent on or before
the scheduled expiration date. If we elect to extend the expiration of the
rights offering, we will issue a press release announcing the extension no later
than 9:00 a.m., New York City time, on the next business day after the most
recently announced expiration date.
WITHDRAWAL AND AMENDMENT
We reserve the right to withdraw or terminate this rights offering
at any time for any reason. In the event that this offering is withdrawn or
terminated, all funds received from subscriptions by stockholders will be
returned. Interest will not be payable on any returned funds.
We reserve the right to amend the terms of this rights offering. If
we make an amendment that we consider significant, we will:
o mail notice of the amendment to all stockholders of record as of
the record date;
o extend the expiration date by at least 10 days; and
o offer all subscribers no less than 10 days to revoke any
subscription already submitted.
14
The extension of the expiration date will not, in and of itself, be
treated as a significant amendment for these purposes.
METHOD OF SUBSCRIPTION - EXERCISE OF SUBSCRIPTION RIGHTS
You may exercise your subscription rights by delivering the
following to the subscription agent, at or prior to 5:00 p.m., New York City
time, on ______________, 2003, the date on which the rights expire:
o your properly completed and executed rights certificate with any
required signature guarantees or other supplemental
documentation; and
o your full subscription price payment for each share subscribed
for under your basic subscription privilege and your
over-subscription privilege.
You should read and follow the instructions accompanying the rights
certificate(s) carefully.
SIGNATURE GUARANTEE MAY BE REQUIRED
Your signature on each rights certificate must be guaranteed by an
eligible institution such as a member firm of a registered national securities
exchange or a member of the National Association of Securities Dealers, Inc., or
from a commercial bank or trust company having an office or correspondent in the
United States, subject to standards and procedures adopted by the subscription
agent, unless:
o your rights certificate provides that shares are to be delivered
to you as record holder of those subscription rights; or
o you are an eligible institution.
DELIVERY OF SUBSCRIPTION MATERIALS AND PAYMENT
You should deliver your rights certificate and payment of the
subscription price or, if applicable, notice of guaranteed delivery, to the
subscription agent by one of the methods described below:
If by mail, by hand or by overnight courier to: __________________
The subscription agent's telephone number is _____________________.
You are responsible for the method of delivery of your rights
certificate(s) with your subscription price payment to the subscription agent.
If you send your rights certificate(s) and subscription price payment by mail,
we recommend that you send them by registered mail, properly insured, with
return receipt requested. You should allow a sufficient number of days to ensure
delivery to the subscription agent prior to the time the rights offering
expires.
Do not send your rights certificate(s) and subscription price
payment to us. Your delivery to an address other than the address set forth
above will not constitute valid delivery.
METHOD OF PAYMENT
Your payment of the subscription price must be made in U.S. dollars
for the full number of shares of common stock you are subscribing for by either:
o check or bank draft (cashier's check) drawn upon a U.S. bank or
money order payable to the subscription agent; or
o wire transfer of immediately available funds, to the
subscription account maintained by the subscription agent at
______________________. -
RECEIPT OF PAYMENT
Your payment will be considered received by the subscription agent
only upon:
o receipt and clearance of any uncertified check,
o receipt by the subscription agent of any certified check or bank
draft drawn upon a United States bank, any money order or any
funds transferred by wire transfers, or
o receipt of good funds in the subscription agent's account
designated above.
15
Please note that funds paid by uncertified personal check may take
at least five business days to clear. Accordingly, if you wish to pay by means
of an uncertified personal check, we urge you to make payment sufficiently in
advance of the expiration date of the rights offering to ensure that the
subscription agent receives cleared funds before that date. We also urge you to
consider payment by means of a certified or cashier's check or money order.
CALCULATION OF SUBSCRIPTION RIGHTS EXERCISED
If you do not indicate the number of subscription rights being
exercised, or do not forward full payment of the total subscription price for
the number of subscription rights that you indicate are being exercised, then
you will be deemed to have exercised your basic subscription privilege with
respect to the maximum number of rights that may be exercised with the aggregate
subscription price payment you delivered to the subscription agent.
YOUR FUNDS WILL BE HELD BY THE SUBSCRIPTION AGENT UNTIL SHARES OF COMMON STOCK
ARE ISSUED
The subscription agent will hold your payment of the subscription
price payment in a segregated account with other payments received from other
rights holders until we issue your shares to you. If the rights offering is not
completed, or we do not apply your full subscription price payment to your
purchase of shares of our common stock, the subscription agent will return
promptly, without interest, all excess subscription payments.
NO REVOCATION
Once you have exercised your subscription privileges, you may not
revoke your exercise. Subscription Rights not exercised prior to the expiration
date of the rights offering will expire.
NON-TRANSFERABILITY OF THE SUBSCRIPTION RIGHTS
Except in the limited circumstances described below, only you may
exercise the basic subscription privilege and the over-subscription privilege.
You may not sell, give away or otherwise transfer the basic subscription
privilege or the over-subscription privilege.
Notwithstanding the foregoing, you may transfer your rights to any
affiliate of yours and your rights also may be transferred by operation of law;
for example a transfer of rights to the estate of the recipient upon the death
of the recipient would be permitted. As used in this paragraph, an affiliate of
yours shall mean any person (for this purpose, a person includes a partnership,
corporation or other legal entity such as a trust or estate) which controls, is
controlled by or is under common control with you. If the rights are transferred
as permitted, evidence satisfactory to us that the transfer was proper must be
received by us prior to the expiration date of the rights offering.
ISSUANCE OF STOCK CERTIFICATES
Stock certificates for shares purchased in this rights offering will
be issued as soon as practicable after the expiration date. Our subscription
agent will deliver subscription payments to us only after consummation of this
rights offering and the issuance of stock certificates to our stockholders that
exercised rights. Unless you instruct otherwise in your subscription certificate
form, shares purchased by the exercise of subscription rights will be registered
in the name of the person exercising the rights.
GUARANTEED DELIVERY PROCEDURES
If you wish to exercise your subscription rights, but you do not
have sufficient time to deliver the rights certificate evidencing your rights to
the subscription agent on or before the time your subscription rights expire,
you may exercise your subscription rights by the following guaranteed delivery
procedures:
o deliver your subscription price payment in full for each share
you subscribed for under your subscription privileges in the
manner set forth in "Method of Payment" on page 15 to the
subscription agent on or prior to the expiration date;
o deliver the form entitled "Notice of Guaranteed Delivery,"
substantially in the form provided with the "Instructions as to
Use of Rights Certificates" distributed with your rights
certificates, at or prior to the expiration date; and
o deliver the properly completed rights certificate evidencing
your rights being exercised and the related nominee holder
certification, if applicable, with any required signatures
guaranteed, to the subscription agent within three business days
following the date of your Notice of Guaranteed Delivery.
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Your Notice of Guaranteed Delivery must be delivered in
substantially the same form provided with the Instructions as to the Use of
Rights Certificates, which will be distributed to you with your rights
certificate. Your Notice of Guaranteed Delivery must come from an eligible
institution, or other eligible guarantee institutions which are members of, or
participants in, a signature guarantee program acceptable to the subscription
agent.
In your Notice of Guaranteed Delivery, you must state:
o your name;
o the number of subscription rights represented by your rights
certificates and the number of shares of our common stock you
are subscribing for under your basic subscription privilege; and
o your guarantee that you will deliver to the subscription agent
any rights certificates evidencing the subscription rights you
are exercising within three business days following the date the
subscription agent receives your Notice of Guaranteed Delivery.
You may deliver your Notice of Guaranteed Delivery to the
subscription agent in the same manner as your rights certificates at the address
set forth above under " - Delivery of Subscription Materials and Payment."
Alternatively, you may transmit your Notice of Guaranteed Delivery to the
subscription agent by facsimile transmission (Facsimile No.: (___) ____-_____).
To confirm facsimile deliveries, you may call (___) ____________________.
The information agent will send you additional copies of the form of
Notice of Guaranteed Delivery if you need them. Please call (__) __________ to
request any copies of the form of Notice of Guaranteed Delivery. Banks and
brokerage firms please call (___) _____________ to request any copies of the
form of Notice of Guaranteed Delivery.
DETERMINATIONS REGARDING THE EXERCISE OF YOUR SUBSCRIPTION RIGHTS
We will decide all questions concerning the timeliness, validity,
form and eligibility of your exercise of your subscription rights and our
determinations will be final and binding. We, in our sole discretion, may waive
any defect or irregularity, or permit a defect or irregularity to be corrected
within such time as we may determine. We may reject the exercise of any of your
subscription rights because of any defect or irregularity. We will not receive
or accept any subscription until all irregularities have been waived by us or
cured by you within such time as we decide, in our sole discretion.
Neither we nor the subscription agent will be under any duty to
notify you of any defect or irregularity in connection with your submission of
rights certificates and we will not be liable for failure to notify you of any
defect or irregularity. We reserve the right to reject your exercise of
subscription rights if your exercise is not in accordance with the terms of the
rights offering or in proper form. We will also not accept your exercise of
rights if our issuance of shares of our common stock to you could be deemed
unlawful under applicable law or is materially burdensome to us.
If you are given notice of a defect in your subscription, you will
have five business days after the giving of notice to correct it. You will not,
however, be allowed to cure any defect later than 5:00 p.m., New York City time,
on _______, 2003. We will not consider an exercise to be made until all defects
have been cured or waived.
NOTICE TO BANKERS, TRUSTEES OR OTHER DEPOSITARIES
If you are a broker, a trustee or a depositary for securities who
holds shares of our common stock for the account of others at the close of
business on _______________ 2003, the record date for the rights offering, you
should notify the respective beneficial owners of such shares of the rights
offering as soon as possible to find out their intentions with respect to
exercising their subscription rights. You should obtain instructions from the
beneficial owners with respect to the subscription rights, as set forth in the
instructions we have provided to you for your distribution to beneficial owners.
If the beneficial owner so instructs, you should complete the appropriate rights
certificates and submit them to the subscription agent with the proper payment.
If you hold shares of our common stock for the account(s) of more than one
beneficial owner, you may exercise the number of subscription rights to which
all such beneficial owners in the aggregate otherwise would have been entitled
had they been direct record holders of our common stock on the record date for
the rights offering, provided that, you, as a nominee record holder, make a
proper showing to the subscription agent by submitting the form entitled
"Nominee Holder Certification" which we will provide to you with your rights
offering materials.
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NOTICE TO BENEFICIAL OWNERS
If you are a beneficial owner of shares of our common stock or will
receive your subscription rights through a broker, custodian bank or other
nominee, we will ask your broker, custodian bank or other nominee to notify you
of this rights offering. If you wish to exercise your subscription rights, you
will need to have your broker, custodian bank or other nominee act for you. If
you hold certificates of our common stock directly and would prefer to have your
broker, custodian bank or other nominee exercise your subscription rights, you
should contact your nominee and request it to effect the transaction for you. To
indicate your decision with respect to your subscription rights, you should
complete and return to your broker, custodian bank or other nominee the form
entitled "Beneficial Owners Election Form." You should receive this form from
your broker, custodian bank or other nominee with the other rights offering
materials. If you wish to obtain a separate rights certificate, you should
contact the nominee as soon as possible and request that a separate rights
certificate be issued to you.
SHARES OF COMMON STOCK OUTSTANDING AFTER THE RIGHTS OFFERING
Upon the issuance of the shares of common stock offered in the
rights offering, _________ shares of common stock will be issued and
outstanding. This would represent an approximate ___% increase in the number of
outstanding shares of common stock.
EFFECTS OF RIGHTS OFFERING ON OUR STOCK OPTION PLANS AND OTHER PLANS
As of March 14, 2003, there were outstanding options to purchase
2,378,000 shares of our common stock issued or committed to be issued pursuant
to stock options granted by us. None of the outstanding options have
anti-dilution or other provisions for adjustment to exercise price or number of
shares which will be automatically triggered by the rights offering. Each
outstanding and unexercised option will remain unchanged and will be exercisable
for the same number of shares of common stock and at the same exercise price as
before the rights offering.
RELATIONSHIP WITH NEWCASTLE
On November 1, 2002, Newcastle Partners, L.P., an affiliate of Mark
E. Schwarz, our Chairman of the Board, provided an interim financing facility to
us, whereby we could borrow up to $9,000,000. On November 1, 2002, we borrowed
$6,500,000 to purchase a note receivable from a major bank. The purchase price
of such note receivable was determined by arm's-length negotiations between us
and the bank. There is no material relationship between the bank and us or any
of our affiliates, directors or officers. On December 3, 2002, we borrowed an
additional $2,100,000 to purchase the Commercial Lines Group from Millers
Insurance Company. The note agreement provides for a fixed interest rate of
11.75%. The unpaid principal balance and accrued and unpaid interest is due and
payable on demand at any time after September 30, 2003.
Newcastle Partners, L.P. also currently owns 5,334,001 shares of our
common stock (including currently exercisable options to purchase 50,000 shares
of common stock), which is equal to approximately 48.1% of our outstanding
shares of common stock. Newcastle has been offered its pro rata portion of the
subscription rights (including over-subscription privilege). If our other
stockholders purchase all of the shares offered to them for sale, Newcastle will
purchase its pro rata amount and would continue to beneficially own
approximately 48.1% of our common stock outstanding. If no stockholders other
than Newcastle exercise their subscription rights, Newcastle will purchase up to
__________ shares in the offering. In that case, Newcastle's ownership interest
could be approximately __%, and the aggregate ownership interest of the other
outstanding stockholders could decrease to approximately __%. Even if some
stockholders other than Newcastle exercise their rights, Newcastle could still
obtain a majority ownership interest pursuant to its subscription rights. As a
result, Newcastle may have the voting power to control the election of our board
of directors and the approval of other matters presented for consideration by
the stockholders, which could include mergers, acquisitions, amendments to our
charter and various corporate governance actions.
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INFORMATION AGENT
We have appointed ________________ as information agent for the
rights offering. We will pay the fees and certain expenses of the information
agent, which we estimate will total $___________. Under certain circumstances,
we may indemnify the information agent from certain liabilities that may arise
in connection with the rights offering.
SUBSCRIPTION AGENT
We have appointed _________________ as subscription agent for the
rights offering. We will pay the fees and certain expenses of the subscription
agent, which we estimate will total $_________. Under certain circumstances, we
may indemnify the subscription agent from certain liabilities that may arise in
connection with the rights offering.
FEES AND EXPENSES
Other than for fees charged by the information agent and the
subscription agent, you are responsible for paying any other commissions, fees,
taxes or other expenses incurred in connection with the exercise of the
subscription rights. Neither us, the information agent nor the subscription
agent will pay such expenses.
OTHER MATTERS
We are not making this rights offering in any state or other
jurisdiction in which it is unlawful to do so, nor are we selling or accepting
any offers to purchase any shares of our common stock from rights holders who
are residents of those states or other jurisdictions. We may delay the
commencement of the rights offering in those states or other jurisdictions, or
change the terms of the rights offering, in order to comply with the securities
law requirements of those states or other jurisdictions. We may decline to make
modifications to the terms of the rights offering requested by those states or
other jurisdictions, in which case, if you are a resident in those states or
jurisdictions, you will not be eligible to participate in the rights offering.
We will not be required to issue to you shares of common stock
pursuant to the rights offering if, in our opinion, you would be required to
obtain prior clearance or approval from any state or federal regulatory
authority to own or control such shares if, at the time the subscription rights
expire, you have not obtained such clearance or approval.
NO BOARD RECOMMENDATION
An investment in shares of our common stock must be made according
to each investor's evaluation of its own best interests. Accordingly, our board
of directors makes no recommendation to rights holders regarding whether they
should exercise their rights.
IF YOU HAVE QUESTIONS ABOUT EXERCISING RIGHTS
If you have questions or need assistance concerning the procedure
for exercising subscription rights, or if you would like additional copies of
this prospectus, the Instructions as to the Use of Rights Certificates or the
Notice of Guaranteed Delivery, you should contact the information agent or the
subscription agent at the following addresses and telephone numbers:
The Information Agent:
_______________________
_______________________
________________________
E-mail: _______________________
Telephone for Stockholders: _______________________
Telephone for Banks and Brokerage Firms: _______________________
or
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The Subscription Agent:
_______________________
_______________________
________________________
E-mail: _______________________
Telephone: _______________________
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a summary of certain U.S. federal income
tax consequences of the rights offering to holders of common stock that hold
such stock as a capital asset for federal income tax purposes. This discussion
is based on laws, regulations, rulings and decisions in effect on the date of
this prospectus, all of which are subject to change (possibly with retroactive
effect) and to differing interpretations. This discussion applies only to
holders that are U.S. persons, which is defined as a citizen or resident of the
United States, a domestic partnership, a domestic corporation, any estate (other
than a foreign estate), and any trust so long as a court within the United
States is able to exercise primary supervision over the administration of the
trust and one or more U.S. persons have the authority to control all substantial
decisions of the trust. Generally, for federal income tax purposes an estate is
classified as a "foreign estate" based on the location of the estate assets, the
country of the estate's domiciliary administration, and the nationality and
residency of the domiciliary's personal representative.
This discussion does not address all aspects of federal income
taxation that may be relevant to holders in light of their particular
circumstances or to holders who may be subject to special tax treatment under
the Internal Revenue Code of 1986, as amended, including holders of options or
warrants, holders who are dealers in securities or foreign currency, foreign
persons (defined as all persons other than U.S. persons), insurance companies,
tax-exempt organizations, banks, financial institutions, broker-dealers, holders
who hold common stock as part of a hedge, straddle, conversion or other risk
reduction transaction, or who acquired common stock pursuant to the exercise of
compensatory stock options or warrants or otherwise as compensation.
We have not sought, and will not seek, an opinion of counsel or a
ruling from the Internal Revenue Service regarding the federal income tax
consequences of the rights offering or the related share issuance. The following
summary does not address the tax consequences of the rights offering or the
related share issuance under foreign, state, or local tax laws. ACCORDINGLY,
EACH HOLDER OF COMMON STOCK SHOULD CONSULT ITS OWN TAX ADVISOR WITH RESPECT TO
THE PARTICULAR TAX CONSEQUENCES OF THE RIGHTS OFFERING OR THE RELATED SHARE
ISSUANCE TO SUCH HOLDER.
The federal income tax consequences for a holder of common stock on
the receipt of subscription rights under the rights offering are as follows:
o A holder will not recognize taxable income for federal income
tax purposes in connection with the receipt of subscription
rights in the rights offering.
o Except as provided in the following sentence, the tax basis of
the subscription rights received by a holder in the rights
offering will be zero. If either (i) the fair market value of
the subscription rights on the date such subscription rights are
distributed is equal to at least 15% of the fair market value on
such date of the common stock with respect to which the
subscription rights are received or (ii) the holder irrevocably
elects, by attaching a statement to its federal income tax
return for the taxable year in which the subscription rights are
received, to allocate part of the tax basis of such common stock
to the subscription rights, then upon exercise of the
subscription rights, the holder's tax basis in the common stock
will be allocated between the common stock and the subscription
rights in proportion to their respective fair market values on
the date the subscription rights are distributed. A holder's
holding period for the subscription rights received in the
rights offering will include the holder's holding period for the
common stock with respect to which the subscription rights were
received. We believe that the fair market value of the
subscription rights will not exceed 15% of the fair market value
of the common stock to which the subscription rights relate.
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o A holder that allows the subscription rights received in the
rights offering to expire will not recognize any gain or loss,
and the tax basis of the common stock owned by such holder with
respect to which such subscription rights were distributed will
be equal to the tax basis of such common stock immediately
before the receipt of the subscription rights in the rights
offering.
o A holder will not recognize any gain or loss upon the exercise
of the subscription rights received in the rights offering.
o The tax basis of the common stock acquired through exercise of
the subscription rights will equal the sum of the subscription
price for the common stock and the holder's tax basis, if any,
in the subscription rights as described above.
o The holding period for the common stock acquired through
exercise of the subscription rights will begin on the date the
subscription rights are exercised.
PLAN OF DISTRIBUTION
We are offering shares of our common stock directly to you pursuant
to this rights offering. We have not employed any brokers, dealers or
underwriters in connection with the solicitation or exercise of subscription
rights in this rights offering and no commissions, fees or discounts will be
paid in connection with it. Certain of our officers and other employees may
solicit responses from you, but such officers and other employees will not
receive any commissions or compensation for such services other than their
normal employment compensation.
We are distributing to the holders of record of our common stock, at
the close of business on _________, 2003, at no charge, one nontransferable
subscription right for each share of our common stock they own. Each
subscription right is a right to purchase ____ shares of our common stock and
carries with it a basic subscription privilege and an over-subscription
privilege. The basic subscription privilege of each right entitles you to
purchase _____ shares of our common stock at a subscription price of $_____ per
right (or $_____ per share). You may exercise any number of your subscription
rights, or you may choose not to exercise any subscription rights. We will not
distribute any fractional shares, but will round up the aggregate number of
shares you are entitled to receive to the nearest whole number.
We do not expect that all of our stockholders will exercise all of
their basic subscription rights. By extending over-subscription privileges to
our stockholders, we are providing stockholders that exercise all of their basic
subscription privileges with the opportunity to purchase those shares that are
not purchased by other stockholders.
If you wish to exercise your over-subscription privilege, you should
indicate the number of additional shares that you would like to purchase in the
space provided on your subscription certificate. When you send in your
subscription certificate, you must also send the full purchase price for the
number of additional shares that you have requested to purchase (in addition to
the payment due for shares purchased through your basic subscription privilege).
If the number of shares remaining after the exercise of all basic subscription
privileges is not sufficient to satisfy all requests for shares pursuant to
over-subscription privileges, you will be allocated additional shares pro-rata
(subject to elimination of fractional shares), based on the number of shares you
purchased through the basic subscription privilege in proportion to the total
number of shares that you and other over-subscribing stockholders purchased
through the basic subscription privilege. However, if your pro-rata allocation
exceeds the number of shares you requested on your subscription certificate,
then you will receive only the number of shares that you requested, and the
remaining shares from your pro-rata allocation will be divided among other
rights holders exercising their over-subscription privileges.
As soon as practicable after the expiration date, ________________,
acting as our subscription agent, will determine the number of shares of common
stock that you may purchase pursuant to the over-subscription privilege. You
will receive certificates representing these shares as soon as practicable after
the expiration date. If you request and pay for more shares than are allocated
to you, we will refund that overpayment, without interest. In connection with
the exercise of the over-subscription privilege, banks, brokers and other
nominee holders of subscription rights who act on behalf of beneficial owners
will be required to certify to us and to the subscription agent as to the
aggregate number of subscription rights that have been exercised, and the number
21
of shares of common stock that are being requested through the over-subscription
privilege, by each beneficial owner on whose behalf the nominee holder is
acting.
If any shares of common stock offered in the rights offering remain
unsubscribed after the rights offering, Timothy A. Bienek, our President and
Chief Operating Officer, Scott K. Billings, our Chief Financial Officer, and
James C. Epstein, one of the director nominees in our upcoming board of
directors election, have agreed to purchase such shares, up to an aggregate
subscription price of $100,000, $50,000 and $125,000, respectively, pursuant to
standby purchase agreements.
We will pay _____________, the information agent, a fee of $_____
plus expenses, and _____________, the subscription agent, a fee of $_____ plus
expenses, for their services in connection with this rights offering. We also
have agreed to indemnify under certain circumstances the information agent and
the subscription agent from any liability they may incur in connection with this
rights offering.
We expect that shares of our common stock received through the
exercise of subscription rights will be traded on the American Stock Exchange
Emerging Company Marketplace under the symbol "HAF," the same symbol our
currently outstanding shares of common stock now trade.
LEGAL MATTERS
The validity of the shares of common stock offered hereby, and the
description in this prospectus of the U.S. federal income tax consequences of
the rights offering, will be passed upon for us by Olshan Grundman Frome
Rosenzweig & Wolosky LLP, New York, New York.
EXPERTS
The consolidated financial statements of Hallmark Financial
Services, Inc. at December 31, 2002 and 2001, and for the years then ended,
appearing in our annual report on Form 10-KSB for the year ended December 31,
2002 have been audited by PricewaterhouseCoopers LLP, independent accountants,
as set forth in their report thereon included therein. Such consolidated
financial statements are incorporated herein by reference in reliance upon such
report given on the authority of such firm as experts in accounting and
auditing.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Securities
Exchange Act of 1934. Accordingly, we file reports, proxy statements and other
information with the SEC. You may read and copy any materials that we file with
the SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549 upon payment of the prescribed fees. You may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC also maintains an Internet site that contains reports,
proxy and information statements and other materials that are filed through the
SEC's Electronic Data Gathering, Analysis, and Retrieval, or EDGAR, system. You
can access this web site at HTTP://WWW.SEC.GOV. Our common stock is listed on
the American Stock Exchange Emerging Capital Markets. These reports, proxy
statements and other information can also be read and copied at the offices of
the American Stock Exchange at 86 Trinity Place, New York, New York 10006.
The SEC allows us to "incorporate by reference" the information we
file with the SEC. This permits us to disclose important information to you by
referencing these filed documents. Any information referenced this way is
considered part of this prospectus, and any information filed with the SEC after
the date on the cover of this prospectus will automatically be deemed to update
and supercede this information. We incorporate by reference the documents listed
below and any future filings made by us with the SEC under Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act of 1934, as amended, until all of the
securities described in this prospectus are sold:
o our annual report on Form 10-KSB for the year ended December 31,
2002,
o our current report on Form 8-K dated January 27, 2003, filed
with the SEC on January 29, 2003, and
22
o the description of our common stock contained in our resignation
statement on Form 8-A filed with the SEC on July 8, 1992,
including all amendments and reports filed for purposes of
updating such description.
This prospectus is part of a registration statement filed with the
SEC. This prospectus does not contain all the information contained in the
registration statement. The full registration statement can be obtained from the
SEC. This prospectus contains a general description of our company and the
securities being offered for sale. You should read this prospectus together with
the additional information incorporated by reference.
You can request a copy of any document incorporated by reference in
this prospectus, at no cost, by writing or telephoning us at the following:
Hallmark Financial Services, Inc.
14651 Dallas Parkway, Suite 900
Dallas, Texas 75254
Attention: Timothy A. Bienek, President and COO
Telephone: (972) 404-1637
FORWARD-LOOKING STATEMENTS
We believe that certain statements contained or incorporated by
reference in this prospectus are "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995 and are considered
prospective. The following statements are or may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995:
o statements before, after or including the words "may," "will,"
"could," "should," "believe," "expect," "future," "potential,"
"anticipate," "intend," "plan," "estimate" or "continue" or the
negative or other variations of these words, and
o other statements about matters that are not historical facts.
We may be unable to achieve the future results covered by the
forward-looking statements. The statements are subject to risks, uncertainties
and other factors that could cause actual results to differ materially from the
future results that the statements express or imply. See "Risk Factors" on page
6. Please do not put undue reliance on these forward-looking statements, which
speak only as of the date of this prospectus.
23
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The following is an itemization of all expenses (subject to future
contingencies) incurred or to be incurred by us in connection with the issuance
and distribution of the securities being offered. All items below are estimates
other than the Securities and Exchange Commission registration fee and the AMEX
listing fee. Hallmark Financial Services, Inc. will pay all of such expenses.
Securities and Exchange Commission registration fee $ 809.00
AMEX listing fee..................................... *
Printing and engraving expenses...................... *
Accounting fees and expenses......................... *
Legal fees and expenses.............................. *
Subscription Agent fees and expenses................. *
Information Agent fees and expenses.................. *
Miscellaneous........................................ *
------------
Total.................................... $ *
============
* To be completed by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Nevada General Corporation Law ("NGCL") provides that a director
or officer of a corporation will not be personally liable for monetary damages
for breach of that individual's fiduciary duties as a director or officer except
for liability for (1) any act or omission constituting a breach of fiduciary
duties as a director or officer and when (2) breach of those duties involved
intentional misconduct, fraud or a knowing violation of law. Under the NGCL, a
corporation may indemnify directors and officers, as well as other employees and
individuals, to any threatened, pending or completed action, suit or proceeding,
except an action by or in the right of the corporation, by reason of the fact
that he is or was a director, officer, employee or agent of the corporation. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction or upon a plea of nolo contendere or its equivalent, does not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, or that, with respect to any criminal action or
proceeding, he had reasonable cause to believe that his conduct was unlawful.
The NGCL further provides that indemnification may not be made for
any claim as to which such a person has been adjudged by a court of competent
jurisdiction, after exhaustion of all appeals therefrom, to be liable to the
corporation or for amounts paid in settlement to the corporation, unless and
only to the extent that the court in which the action or suit was brought or
other court of competent jurisdiction determines upon application that in view
of all the circumstances of the case, the person is fairly and reasonably
entitled to indemnity for such expenses as the court deems proper. To the extent
that a director, officer, employee or agent of a corporation has been successful
on the merits or otherwise in defense of any action, suit or proceeding or in
defense of any claim, issue or matter therein, the corporation shall indemnify
him against expenses, including attorneys' fees, actually and reasonably
incurred by him in connection with the defense. The NGCL provides that this is
not exclusive of other rights to which those seeking indemnification may be
entitled under any bylaw, agreement, vote of stockholders or disinterested
directors or otherwise.
The Registrant's articles of incorporation provide that the
directors and officers will not be personally liable to the Registrant or its
stockholders for monetary damages for breach of their fiduciary duty as a
director or officer, except for liability of a director or officer for acts or
omissions involving intentional misconduct, fraud or a knowing violation of law,
or the payment of dividends in violation of the NGCL. The Registrant's bylaws
provide that the Registrant is required to indemnify its directors and officers
to the fullest extent permitted by law. The Registrant's bylaws also require the
Registrant to advance expenses incurred by a director or officer in connection
with the defense of any proceeding upon receipt of an undertaking by or on
II-1
behalf of the director or officer to repay the amount if it is ultimately
determined by a court of competent jurisdiction that he or she is not entitled
to be indemnified by the Registrant. The Registrant's bylaws also permit the
Registrant to purchase and maintain errors and omissions insurance on behalf of
any director or officer for any liability arising out of his or her actions in a
representative capacity.
ITEM 16. EXHIBITS.
Exhibit # Description
- --------- -----------
3.1 Articles of Incorporation of the Registrant, as amended
(incorporated by reference to Exhibit 3(a) to the
Registrant's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1993).
3.2 By-Laws of the Registrant, as amended (incorporated by
reference to Exhibit 3(b) to the Registrant's Annual Report
on Form 10-KSB for the fiscal year ended December 31, 1993).
4.1 Specimen certificate for Common Stock, $.03 par value, of the
Registrant (incorporated by reference to Exhibit 4 to the
Registrant's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1991).
5.1** Opinion of Olshan Grundman Frome Rosenzweig & Wolosky LLP.
23.1* Consent of PricewaterhouseCoopers LLP.
23.2** Consent of Olshan Grundman Frome Rosenzweig & Wolosky LLP
(included in opinion filed as Exhibit 5.1).
24.1* Power of Attorney (included on signature page hereto).
99.1** Form of Instructions as to Use of Rights Certificates.
99.2** Form of Notice of Guaranteed Delivery for Rights Certificate.
99.3** Form of Letter to Security Holders Who Are Record Holders.
99.4** Form of Letter to Securities Dealers, Commercial Banks, Trust
Companies and Other Nominees.
99.5** Form of Letter to Clients of Security Holders Who Are
Beneficial Holders.
99.6** Form of Nominee Holder Certification Form.
99.7** Substitute Form W-9 for Use with the Rights Offering.
99.8** Form of Beneficial Owner Election Form.
99.9** Subscription Agency Agreement between Hallmark Financial
Services, Inc. and ______
99.10** Information Agent Agreement between Hallmark Financial
Services, Inc. and ______.
- ------------------------
* Filed herewith
** To be filed by amendment
ITEM 17. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration
Statement to include any material information with respect to the
plan of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement;
II-2
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof; and
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold
at the termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes
of determining any liability under the Securities Act of 1933, each filing of
the registrant's annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in this
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of an action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Dallas, State of Texas, on the 2nd day of April,
2003.
HALLMARK FINANCIAL SERVICES, INC.
By: /s/ Mark E. Schwarz
-------------------------------
Mark E. Schwarz
Chairman and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Mark E. Schwarz, Chairman and CEO,
and Timothy A. Bienek, President and COO, and each of them individually, as his
true and lawful attorneys-in-fact and agents, with full power of substitution,
for him in his name, place and stead, in any and all capacities, in connection
with this Registration Statement, including to sign and file in the name and on
behalf of the undersigned as director or officer of the Registrant (i) any and
all amendments or supplements (including any and all stickers and post-effective
amendments) to this Registration Statement, with all exhibits thereto, and other
documents in connection therewith, and (ii) any and all additional registration
statements, and any and all amendments thereto, relating to the same offering of
securities as those that are covered by this Registration Statement that are
filed pursuant to Rule 462(b) promulgated under the Securities Act of 1933 with
the Securities and Exchange Commission and any applicable securities exchange or
securities self-regulatory body, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite or necessary to be done in and about the premises,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or their
substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
Signature Title Date
- --------- ----- ----
/s/ Mark E. Schwarz Chairman, Chief Executive Officer and April 2, 2003
- -------------------------- Director (principal executive officer)
Mark E. Schwarz
/s/ Timothy A. Bienek President, Chief Operating Officer April 2, 2003
- ------------------------- and Director
Timothy A. Bienek
/s/ Scott K. Billings Vice President (principal financial April 2, 2003
- ------------------------- and accounting officer)
Scott K. Billings
/s/ James H. Graves Director April 2, 2003
- ------------------------
James H. Graves
/s/ George R. Manser Director April 2, 2003
- ------------------------
George R. Manser
/s/ Scott T. Berlin Director April 2, 2003
- ------------------------
Scott T. Berlin
